Question

In the early part of 2018, the partners of Hugh, Jacobs, and Thomas sought assistance from a local accountant. They had begun a new business in 2017 but had never used an accountant’s services.

Hugh and Jacobs began the partnership by contributing $95,000 and $45,000 in cash, respectively. Hugh was to work occasionally at the business, and Jacobs was to be employed full-time. They decided that year-end profits and losses should be assigned as follows:

• Each partner was to be allocated 10 percent interest computed on the beginning capital balances for the period.
• A compensation allowance of $8,000 was to go to Hugh with a $17,000 amount assigned to Jacobs.
• Any remaining income would be split on a 4:6 basis to Hugh and Jacobs, respectively.

  

In 2017, revenues totaled $120,000, and expenses were $90,000 (not including the partners’ compensation allowance). Hugh withdrew cash of $6,000 during the year, and Jacobs took out $11,000. In addition, the business paid $8,000 for repairs made to Hugh’s home and charged it to repair expense.

On January 1, 2018, the partnership sold a 15 percent interest to Thomas for $37,000 cash. This money was contributed to the business with the bonus method used for accounting purposes.

1. What journal entries should the partnership have recorded on December 31, 2017?

2. What journal entry should the partnership have recorded on January 1, 2018?

Answer 1

Journal of Partnership as on Dec'31, 2017
Particulars	Debit	Credit
Cash	$1,40,000.00
Hugh's Capital		$95,000.00
Jacob's Capital		$45,000.00
(Being Capital Contributed by Hugh and Jacob in Cash
Interest on Capital	$14,000.00
Hugh's Capital		$9,500.00
Jacob's Capital		$4,500.00
(Being Interest on Capital made due at 10%)
Compensation Allowance	$25,000.00
Hugh's Capital		$8,000.00
Jacob's Capital		$17,000.00
(Being Compensation Allowance transfer to Partner's Capital Account)
Revenue	$1,20,000.00
Expenses		$90,000.00
Profit & Loss		$30,000.00
(Being Revenue and Expenses other than Compensation Allowance charged to P&L account)
Profit & Loss	$25,000.00
Compensation Allowance		$25,000.00
(Being Compensation Allowance Charged to P&L Account
Hugh's Capital	$6,000.00
Jacob's Capital	$11,000.00
Cash		$17,000.00
(Being Cash withdrawn by Partners)
Hugh's Capital	$8,000.00
Profit & Loss		$8,000.00
(Being Repairs t o Hugh's home charged to Repair now Rectified)
Profit & Loss	$13,000.00
Hugh's Capital		$5,200.00
Jacob's Capital		$7,800.00
(Being Profit transferred to Partner's Capital Account)

Calculation for Capital

	Hugh	Jacob
Capital Before Profit share	$98,500.00	$55,500.00
	4	6
Profit Share	$5,200.00	$7,800.00
Total Capital as at Dec'31,2017	$1,03,700.00	$63,300.00
Total Capital	$1,67,000.00

Calculation of Bonus

	Hugh	Jacob	Thomas	Total
Capital Before Profit share	$98,500.00	$55,500.00
	4	6
Profit Share	$5,200.00	$7,800.00
Total Capital as at Dec'31,2017	$1,03,700.00	$63,300.00
Total Capital				$1,67,000.00
Capital of Thomas			$37,000.00
Total Capital of New Firm				$2,04,000.00
Value of Thomas's Capital			$30,600.00
Bonus			$6,400.00
Reduction in Capital	$2,560.00	$3,840.00

Journal of Partnership as on Jan''01, 2018
Particulars	Debit	Credit
Cash	$30,600.00
Hugh's Capital	$2,560.00
Jacobs's Capital	$3,840.00
Thomas's Capital		$37,000.00
(Being capital introduced by Thomas for 15% interest at $37000, the Bonus being adjusted by Cash payment to the existing partners in the old profit sharing ration of 4:6)