Question

In: Accounting

A summary balance sheet for Abdullah, Mohammed, and Meshal partnership on January 1, 2018 is shown...

A summary balance sheet for Abdullah, Mohammed, and Meshal partnership on January 1, 2018 is shown below. Partners Abdullah, Mohammed, and Meshal allocate profit/loss in their respective ratios of 2:1:1. The partnership agreed to pay partner Mohammed $135,000 for his partnership interest upon his retirement from the partnership on January 1, 2018.

Assets

Cash $75,000

Marketable securities 60,000

Inventory 85,000

Land 90,000

Building-net 110,000

Total assets $420,000

Equities

Abdullah, capital                 $210,000

Mohammed, capital 105,000

Meshal, capital 105,000

Total equities $420,000

Required:

Prepare the journal entry to reflect Mohammed's retirement from the partnership:

1. Assuming a bonus to Mohammed.

2. Assuming a revaluation of total partnership capital based on the excess payment.

  

3. Assuming goodwill equal to the excess payment is recorded.

Solutions

Expert Solution

Journal entry

Date Accounts & Description Debit $ Credit $

1218

Jan. 1

Abdullah's Capital A/C                          Dr.

Meshal's Capital A/C                            Dr.

      To Mohammed's Capiatl A/C

(being Goodwill on retirement of mohammed's retirement is shared by continuing partners.)

20,000

10,000

30,000

1218

Jan. 1

Mohammed's Capiatl A/C                    Dr.

     To Cash

      To Marketable securities

(being payment made to Mohammed by giving cash and marketable securities)

1,35000

75,000

60,000

Note.

1. Amount paid Mohammed        $ 1,35,000

Amount of Capital due to Mohammed $ 1,05,000

Excess payment( treated as goodwill) $ 30,000

2. The goodwill 30,000 is debited others capital in the Gaining ratio which same as the new ratio = 2:1

Gaining ratio = New ratio - Old ratio

Abdulla = 2/3 - 2/4 = 8/12 - 6/12 = 2/12

Meshal = 1/3 - 1/4 = 4/12 - 3/12 = 1/12

So gainining ratio is = 2/12 : 1/12 = 2:1

3. As cash is only 75,000, the marketable securities are assumed also used to pay Mohammed.


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