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 $80,000 and $30,000 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 $5,000 was to go to Hugh with a $20,000 amount assigned to Jacobs.

Any remaining income would be split on a 4:6 basis to Hugh and Jacobs, respectively.

  

In 2017, revenues totaled $90,000, and expenses were $64,000 (not including the partners’ compensation allowance). Hugh withdrew cash of $8,000 during the year, and Jacobs took out $11,000. In addition, the business paid $5,000 for repairs made to Hugh’s home and charged it to repair expense.

On January 1, 2018, the partnership sold a 20 percent interest to Thomas for $43,000 cash. This money was contributed to the business with the bonus method used for accounting purposes.

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

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

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.

Answer 1

Date	Account Title / Explanation	Debit	Credit
Dec 31,2017	Revenues a/c	90000
	Income Summary A/c		90000
	to record Revenue closing entry
Dec 31,2017	Compensarion Allowances A/c	25000
	Hugh Capital a/c		5000
	Jocobs Capital A/c		20000
	to record compensation all. for the year
Dec 31,2017	Income Summary A/c	89000
	Hugh Capital A/c		5000
	Expenses a/c		84000
	To record Home repair exp$5000 to Hugh Cap. a/c and balance Expenses(including interest paid to partners) trfd to Income summary
Dec31 2017	Hugh Capital a/c	8000
	Jocobs Capital A/c	11000
	Cash		19000
	cash withdrew by both partners during the year
Dec 31,2017	Income summary a/c	6000
	Hugh Capital A/c		2400
	Jacobs Capital A/c		3600
	Net profit distribution to Hugh 4/10, Jacobs 6/10
Jan1,2018	Cash	43000
	Thomas Capital A/c		25600
	Hugh Capital A/c		11200
	jacobs Capital A/c		6200
	To record the sale of 20% business interest toThomas to 25600 and the Balance of Bonus Trfd, to Existing Partners according to their Capital to date

The Following Working are useful to record the closing entries:

	Hugh 40%	Jacob 60%	Total Capital
Capital as on 1.1.2017	80000	30000	110000
Withdrawals	8000	11000	19000
10% Interst on Capital	8000	3000	11000
Compensation allowance	5000	20000	25000
Repair Exp	5000		5000
	80000	42000	122000
	2400	3600	6000	20% of interest	Sold to Thomas
Capital as on 1.1.2018	82400	45600	128000	25600	43000
Profit on sale of 20% interest				17400
Bonus to Each partner	11200	6200		17400	Jacobs Capital	Total Capital
	Hugh Capital	Jacobs Capital			Thomas Capital
Capital as on 1.1.2018	93600	51800			25600	171000
	32%	48%			20%	100%