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 $105,000 and $55,000 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 $7,000 was to go to Hugh with a $19,000 amount assigned to Jacobs.
• Any remaining income would be split on a 4:6 basis to Hugh and Jacobs, respectively.

  

In 2017, revenues totaled $130,000, and expenses were $96,000 (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 $9,000 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 $58,000 cash. This money was contributed to the business with the bonus method used for accounting purposes.

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

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

Required C:

1-. Record entry to reclassify payment made to repair personal residence

2-.Record entry to close drawings accounts for 2017.

3.-Record entry to close revenue and expense accounts for 2017.

4-.Record the distribution of net income to partners.

Required D:

1-.Record the payment made by Thomas using the bonus method.

Answer 1

Part C

No.	Date	Account titles and explanation	Debit	Credit
1	December 31, 2017	Hugh, Drawings	9000
		Repair Expense		9000
		(To reclassify payment made to repair personal residence.)
2	December 31, 2017	Hugh, Capital (9000+6000)	15000
		Jacobs, Capital	11000
		Hugh, Drawings		15000
		Jacobs, Drawings		11000
		(To close drawings accounts for 2017.)
3	December 31, 2017	Revenues	130000
		Expenses (96000-9000)		87000
		Income Summary		43000
		(To close revenue and expense accounts for 2017.)
4	December 31, 2017	Income summary	43000
		Hugh, Capital		17900
		Jacobs, Capital		25100
		(To close net income to partners' capital)

Allocation of Income	Hugh	Jacobs
Interest (10% of beginning balance)	10500	5500
Salary allowances	7000	19000
Remaining income (loss): (43000-10500-5500-7000-19000 = 1000)	400 (1000*40%)	600 (1000*60%)
	17900	25100

Part D

No.	Date	Account titles and explanation	Debit	Credit
1	December 31, 2018	Cash	58000
		Thomas, Capital		35250
		Hugh, Capital		9100
		Jacobs, Capital		13650

Total capital (original balances of $160,000 plus 2017 net income less drawings) (160000+43000-26000)	177000
Investment by Thomas	58000
Total capital after investment	235000
Ownership portion acquired by Thomas	15%
Thomas Capital	35250
Amount paid	58000
Bonus paid by Thomas—assigned to original partners	22750
Bonus to Hugh (40%)	9100
Bonus to Jacobs (60%)	13650