Question

An allowance for bad debt of 3% of accounts receivable must be established.

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

Note: Working Notes are given after Journal Entries

   Adjustment Enries in the books of Angel,a sole proprietor

Journal