Question

Angel, a sole proprietor dealing with buy and sell of used car needed additional funding for her
business and accepted Luis as a partner in business on January 1 of the current year. Accounts
in the ledger for Angel on December 31 of the most recent year, just before the admission of
Luis, show the following balances:
Cash
P 52,000 Accounts Payable
P 124,000
Accounts Receivable
240,000 Angel, Capital
528,000
Inventories
360,000
It is agreed that for purposes of establishing Luis’ interest, the following adjustments and
agreement must be made:
a. An allowance for bad debts of 3% of accounts receivable must be established.
b. The inventories of used cars for sale is to be valued at their current fair market value
amounting to P404,000.
c. Prepaid insurance of P13,000 and accrued utilities of P8,000 are to be recognized.
d. Luis is to invest sufficient cash to give him 40% interest in the new partnership.
Instruction: Prepare adjusting and closing entries in the books of the sole proprietor, and the
entries in the new partnership books assuming new books will be used for the partnership.

Answer 1

The given Balance Sheet of Sole proprietorship is as below:

Assets	Amount
Cash	52000
Accounts Receivable	240000
Inventories	360000
Total	652000
Liabilities	Amount
Accounts payable	124000
Angel, Capital	528000
Total	652000

The Adjustment entries in the books of Sole proprietorship would be as follows:

Adjustment Entries	Debit	Credit
a.
Bad Debts Expense	7200
Allowance for Doubtful Accounts		7200
(240000 x 3% =7200)
b.
Inventories	44000
Gain on inventory Valuation		44000
(404000 - 360000 = 44000)
c.
Prepaid Insurance	13000
Cash		13000
Utilities Expense	8000
Accrues Utilities		8000

d.
Net Impact of adjustments on Capital:
Bad Debt Expense	-7200
Gain on inventory Valuation	44000
Utilities Expense	-8000
Net effect of adjustments	28800
Capital of Angel
Balance	528000
Net effect of adjustments	28800
New Balance	556800
Share of Luis in Partnership	40%
Share of Angel in Partnership	60%
Cash to be brought by Luis for 40% partnership	371200
	(268800/60% x 40%)
Cash Balance in books of partnership:
Balance	52000
Less: pre-paid insurance	-13000
Add: Capital brought in by Luis	371200
Balance	410200

Entry in books of partnership	Debit	Credit
Cash	410200
Accounts Receivable	240000
Inventories	404000
Prepaid Insurance	13000
Accounts Payable		124000
Allowance for Doubtful accounts		7200
Accrued Utilities		8000
Capital - Luis		371200
Capital - Angel		556800