Question

In: Accounting

On March 1, 2017, Eckert and Kelley formed a partnership. Eckert contributed $73,000 cash and Kelley...

On March 1, 2017, Eckert and Kelley formed a partnership. Eckert contributed $73,000 cash and Kelley contributed land valued at $58,400 and a building valued at $88,400. The partnership also assumed responsibility for Kelley’s $63,000 long-term note payable associated with the land and building. The partners agreed to share income as follows: Eckert is to receive an annual salary allowance of $30,000, both are to receive an annual interest allowance of 9% of their beginning-year capital investment, and any remaining income or loss is to be shared equally. On October 20, 2017, Eckert withdrew $29,000 cash and Kelley withdrew $22,000 cash. After the adjusting and closing entries are made to the revenue and expense accounts at December 31, 2017, the Income Summary account had a credit balance of $100,000.

Required:
1a. & 1b. Prepare journal entries to record the partners' initial investments and their subsequent cash withdrawals.
1c. Determine the partners' shares of income, and then prepare journal entries to close Income Summary and the partners' Withdrawals accounts.
2. Determine the balances of the partners’ capital accounts as of December 31, 2017.

Solutions

Expert Solution

  • All working forms part of the answer
  • Requirement 1 ‘a’ and 1 ‘b’

Date

Accounts title

Debit

Credit

Part 1 ‘a’

Mar-01

Cash

$                         73,000.00

Eckert Capital

$                                       73,000.00

(Capital contributed by Eckert)

Mar-01

Land

$                         58,400.00

Building

$                        88,400.00

Long Term Notes payable

$                                       63,000.00

Kelley Capital

$                                       83,800.00

(Capital contributed by Kelley)

Part 1 ‘b’

Oct-20

Eckert's Withdrawals (or Drawings)

$                         29,000.00

Cash

$                                       29,000.00

(withdrawals by Eckert)

Oct-20

Kelly's Withdrawals (or Drawings)

$                         22,000.00

Cash

$                                       22,000.00

(withdrawals by Kelly)

Part 1 ‘b’: Above Oct 20 entries can be combined as one entry as:

Oct-20

Eckert's Withdrawals (or Drawings)

$                         29,000.00

Kelly's Withdrawals (or Drawings)

$                         22,000.00

Cash

$                                       51,000.00

(Withdrawals by partner)

  • Working for Requirement 1 ‘c’

Working

Eckert

Kelly

A

Beginning Capital balance

$           73,000.00

$             83,800.00

B

Interest on capital rate

9%

9%

C=A x B

Interest on Capital

$             6,570.00

$                7,542.00

D

Salary Allowances

$           30,000.00

$                             -  

E= C + D

Total Distributions

$           36,570.00

$                7,542.00

Partner's Share of Income

Undistributed Profits

Eckert

Kelly

Net Income

$           100,000.00

Interest on Capital

$           6,570.00

$             7,542.00

$           (14,112.00)

Remaining balance

$             85,888.00

Salary Allowance

$         30,000.00

$                          -  

$           (30,000.00)

Remaining balance

$             55,888.00

Remaining profits distributed equally

$         27,944.00

$           27,944.00

$           (55,888.00)

Total

$         64,514.00

$           35,486.00

$                             -  

  • Requirement 1 ‘c’ based on above workings

Partners' Share of Income:

Eckert

$           64,514.00

Kelly

$           35,486.00

Total Net Income

$        100,000.00

----Entries to close Income Summary and Drawings accounts

Date

Accounts title

Debit

Credit

31-Dec

Income Summary

$        100,000.00

Eckert Capital

$             64,514.00

Kelley Capital

$             35,486.00

(Income summary closed)

31-Dec

Eckert Capital

$           29,000.00

Eckert's Withdrawals (or Drawings)

$             29,000.00

(Eckert drawings closed)

31-Dec

Kelley Capital

$           22,000.00

Kelly's Withdrawals (or Drawings)

$             22,000.00

(Kelly's drawings closed)

  • Requirement 2, answer values, along with workings

Working

Eckert

Kelly

A

Beginning Capital balances

$                         73,000.00

$                                       83,800.00

B

Interest on Capital

$                           6,570.00

$                                         7,542.00

C

Salary Allowance

$                         30,000.00

$                                                      -  

D

Share of Profits

$                         27,944.00

$                                       27,944.00

E

Drawings

$                         29,000.00

$                                       22,000.00

F = A+B+C+D - E

Balances on 31 Dec 2017

$                      108,514.00

$                                       97,286.00


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