Question

On February 1, 2020, Tessa Williams and Audrey Xie formed a partnership in Ontario. Williams contributed $85,000 cash and Xie contributed land valued at $125,000 and a small building valued at $185,000. Also, the partnership assumed responsibility for Xie’s $135,000 long-term note payable associated with the land and building. The partners agreed to share profit or loss as follows: Williams is to receive an annual salary allowance of $95,000, both are to receive an annual interest allowance of 15% of their original capital investments, and any remaining profit or loss is to be shared equally. On November 20, 2020, Williams withdrew cash of $65,000 and Xie withdrew $50,000. After the adjusting entries and the closing entries to the revenue and expense accounts, the Income Summary account had a credit balance of $165,000.

Required:
1. Present general journal entries to record the initial capital investments of the partners, their cash withdrawals, and the December 31 closing of the Income Summary and withdrawals accounts.

2. Determine the balances of the partners’ capital accounts as of the end of 2020.

Answer 1

　

1) Journal entries to record the transaction are as follows :-

Date	Particular	Debit	Credit
Feb 1,2020	Cash A/c Dr.	$85,000
	Land A/c Dr.	$125,000
	Building A/c Dr.	$185,000
	To Long term note payable A/c		$135,000
	To Tessa William , Capital A/c		$85,000
	To Audrey Xie, Capital A/c($125,000 + $185,000 - $135,000)		$175,000
	( To record the initial capital investment ) (Explanation - It was given that William contributes cash and Xie contributes Land and building,but $135,000 amount long term note payable associated with land and building but the remaining amount is Xie Capital)
Nov 20,2020	Tessa Williams, Withdrawal A/c Dr.	$65,000
	Audrey Xie ,Withdrawal A/c Dr.	$50,000
	To Cash A/c		$115,000
	( To record the partners withdrawals)
Dec 31,2020	Income summary A/c Dr.	$165,000
	To Tessa William, Capital A/c		$127,500
	To Audrey Xie , Capital A/c		$37,500
	(To record the allocated profit and close the Income Summary account) (Note - 1)
Dec 31,2020	Tessa William, Capital A/c Dr.	$65,000
	Audrey Xie, Capital A/c Dr.	$50,000
	To Tessa William , Withdrawals A/c		$60,000
	To Audrey Xie, Withdrawals A/		$50,000
	( To record to close the withdrawal Account)

Note 1 :-

In the question it was given that the will share profit or loss as : William received an annual salary of $97,000,both received 10% of there original information and remainning is share equally.

	Tessa William	Audrey Xie	Total
Net income (Income summary Credit balance)			$165,000
Less :-
Annual salary allowance of William	$95,000
Annual interest allowance (= 10% of capital Investment William = 10% of $85,000 = $8,500 Xie = 10% of $135,000 = $13,500	$8,500	$13,500
Total of William and Audry allowance of salary and interested	$103,500	$13,500	$117,000
Remaining balance of Net income			$48,000
Remaining Net income allocating equal (= $480,00 / 2)	$24,000	$24,000	($48,000)
Total(Total of William and Audry allowance of salary and interested +Remaining net income allocating equally)	$127,500	$37500

2)The balance of the partners capital account are as follows :-

Particular	Williams	Xie
Initial Investment	$85,000	$175,000
Less :- Withdrawal	$65,000	$50,000
	$20,000	$125,000
Add :- Share of Profit	$127,500	$37,500
Capital balance as of end of 2020	$147,500	$162,5000