Question

On March 1, 2016, Eric Keene and Abigail McKee form a partnership. Keene agrees to invest $21,300 in cash and merchandise inventory valued at $56,390. McKee invests certain business assets at valuations agreed upon, transfers business liabilities, and contributes sufficient cash to bring her total capital to $59,940. Details regarding the book values of the business assets and liabilities, and the agreed valuations, follow:

	McKee’s Ledger	Agreed-Upon
	Balance	Valuation
Accounts Receivable	$18,470	$17,510
Allowance for Doubtful Accounts	1,130	1,420
Equipment	83,500	54,650
Accumulated Depreciation	29,900	–
Accounts Payable	14,810	14,810
Notes Payable (current)	36,170	36,170

The partnership agreement includes the following provisions regarding the division of net income: interest on original investments at 10%, salary allowances of $22,330 (Keene) and $30,500 (McKee), and the remainder equally.

	Required:
1.	Journalize the entries on March 1 to record the investments of Keene and McKee in the partnership accounts.*
2.	Prepare a balance sheet as of March 1, 2016, the date of formation of the partnership of Keene and McKee.*
3.	After adjustments and the closing of revenue and expense accounts at February 28, 2017, the end of the first full year of operations, the income summary account has a credit balance of $90,350, and the drawing accounts have debit balances of $27,850 (Keene) and $30,820 (McKee). Journalize the entries on February 28 to close the income summary account and the drawing accounts at February 28, 2017.* *Refer to the Chart of Accounts and the list of Labels and Amount Descriptions provided for the exact wording of the answer choices for text entries.

Answer 1

Solution 1:

Journal Entries - Eric Keene & Abigain Mckee
Date	Particulars	Debit	Credit
1-Mar-16	Cash A/c Dr	$21,300.00
	Inventory A/c Dr	$56,390.00
	To Keene's Capital		$77,690.00
1-Mar-16	Accounts receivables Dr	$17,510.00
	Equipment A/c Dr	$54,650.00
	Cash A/c Dr (Balancing Figure)	$40,180.00
	To Accounts Payable		$14,810.00
	To Notes Payable		$36,170.00
	To Allowance for doubtful accounts		$1,420.00
	To Mckee's Capital		$59,940.00

Solution 2:

Balance Sheet - Eric Keene & Abigain Mckee
As on 01.03.2016
Liabilities	Amount	Assets	Amount
Partner's Equity:		Property Plant & Equipment:
Keene's Capital	$77,690.00	Equipment	$54,650.00
Mckee's Capital	$59,940.00
		Current Assets:
Current Liabilities:		Cash	$61,480.00
Accounts Payable	$14,810.00	Inventories	$56,390.00
Notes Payable	$36,170.00	Accounts Receivables (Net of Allowance for doubtful accounts)	$16,090.00
Total Equity & Liabilities	$188,610.00	Total Assets	$188,610.00

Solution 3:

Division of Income to Partners	$90,350
Particulars	Keene	Mckee
Interest of 10% on original investment, Salary Allowances and remainder in the ratio of 1:1
Interest Amount (Opening Capital * 10%) Keenee (77690*10%) Mckee (59940*10%)	$7,769.00	$5,994.00
Salary Allowance	$22,330.00	$30,500.00
Distribution of remaining income (1:1) Keene - [($90,350 - $7,769 - $5,994 - $22,330 - $30500)*1/2] Mckee - [($90,350 - $7,769 - $5,994 - $22,330 - $30500)*1/2]	$11,878.50	$11,878.50
Total Share of Income (Interest + Salary + Remaining Distribution)	$41,977.50	$48,372.50

Journal Entries - Eric Keene & Abigain Mckee
Date	Particulars	Debit	Credit
28-Feb-17	Profit & Loss A/c Dr	$90,350.00
	To Keene's Capital		$41,977.50
	To Mckee's Capital		$48,372.50
	(Being income division to partners)
28-Feb-17	Keene's Capital A/c Dr	$27,850.00
	Mckee's Capital A/c Dr	$30,820.00
	To Keene's Drawings		$27,850.00
	To Mckee's Drawings		$30,820.00
	(Being drawings accounts balance transferred to partner's capital)