Question

In June 1, 2020, Jill Bow and Aisha Adams formed a partnership to open a gluten-free commercial bakery, contributing $297,000 cash and $394,000 of equipment, respectively. The partnership also assumed responsibility for a $57,000 note payable associated with the equipment. The partners agreed to share profits as follows: Bow is to receive an annual salary allowance of $167,000, both are to receive an annual interest allowance of 10% of their original capital investments, and any remaining profit or loss is to be shared 40/60 (to Bow and Adams, respectively). On November 20, 2020, Adams withdrew cash of $117,000. At year-end, May 31, 2021, the Income Summary account had a credit balance of $550,000. On June 1, 2021, Peter Williams invested $137,000 and was admitted to the partnership for a 20% interest in equity. Required: 1. Prepare journal entries for the following dates.

Required: 1. Prepare journal entries for the following dates.

a. June 1, 2020 Record the formation of partnership

b. November 20, 2020 Record the withdrawal by partner

c. May 31, 2021 Record the closing of profit to capital.

d. June 1, 2021 Record the admission of Williams for a 20% interest.

2. Calculate the balance in each partner’s capital account immediately after the June 1, 2021, entry.

Answer 1

No.	Date	Account titles and explanation	Debit	Credit
a	June 1, 2020	Cash	297000
		Equipment	394000
		Bow, Capital		297000
		Adams, Capital [394000-57000]		337000
		Notes Payable		57000
		(To record formation of partnership)
b	Nov 20, 2020	Adams, Withdrawals	117000
		Cash		117000
		(To record withdrawal by partner.)
c	May 31, 2021	Income summary	550000
		Bow, Capital		324540
		Adams, Capital		225460
		(To record closing of net income to capital)
d	June 1, 2021	Cash	137000
		Bow, Capital (240800-137000)*40%	41520
		Adams, Capital (240800-137000)*60%	62280
		Williams, Capital (1204000*20%)		240800

working note for part c

	Bow	Adams	Total
Net income			550000
Salary allowance:
Bow	167000
Interest allowances: (10% on $297,000 & 337000)	29700	33700
Total salaries and interest allocation	196700	33700	230400
Balance of income to be allocated			319600
Balance allocated 40/60:	127840	191760	(319600)
Shares of the partners	324540	225460

working note for part d

New capital of Bow = 297000 +324540 = 621540

New capital of adams = 337000 + 225460 -117000 = 445460

New equity = 621540 + 445460 + 137000 = 1204000

Requirement #2)

Bow, Capital (621540 -41520)	$580020
Adams, Capital [ 445460 -62280 ]	$383180
Williams, Capital	$240800