Question

Problem 11-6A Partnership entries, profit allocation, admission of a partner LO2, 3, 4

On June 1, 2020, Jill Bow and Aisha Adams formed a partnership to open a gluten-free commercial bakery, contributing $296,000 cash and $392,000 of equipment, respectively. The partnership also assumed responsibility for a $56,000 note payable associated with the equipment. The partners agreed to share profits as follows: Bow is to receive an annual salary allowance of $166,000, both are to receive an annual interest allowance of 5% 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 $116,000. At year-end, May 31, 2021, the Income Summary account had a credit balance of $540,000. On June 1, 2021, Peter Williams invested $136,000 and was admitted to the partnership for a 20% interest in equity.

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

a. June 1, 2020

b. November 20, 2020

c. May 31, 2021

d. June 1, 2021

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	01-Jun-20	Cash	286000
		Equipment	392000
		J. Bow, Capital		286000
		A. Adams, Capital		336000
		Notes Payable		56000
		To record formation of partnership
b	20-Nov-20	A. Adams, Withdrawals	116000
		Cash		116000
		To record withdrawal by partner.
c	31-May-21	Income summary	540000
		J. Bow, Capital		317760
		A. Adams, Capital		222240
		To record closing of net income to capital
d	01-Jun-21	Cash	136000
		J. Bow, Capital (211200-136000)*40%	30080
		A. Adams, Capital (211200-136000)*60%	45120
		P. Williams, Capital (1192000*20%)		211200
		To record the admission of new partner
			J. Bow	A. Adams	Total
		Net income			540000
		Salary allowance:
		Bow	166000
		Interest allowances:
		Bow (5% on $296,000)	14800
		Adams (5% on $336,000)		16800
		Total salaries and interest allocation	180800	16800	197600
		Balance of income to be allocated			342400
		Balance allocated 40/60:
		Bow (40% × $342400)	136960
		Adams (60% × $342400)		205440
		Total allocated 40/60			-342400
		Balance of income			0
		Shares of the partners	317760	222240	540000
Total equity prior to admission of new partner = (296000+317760)+(336000-116000+222240) = 1056000
Total equity after admission of new partner = 1056000+136000 = 1192000
Part 2
		J. Bow, Capital (296000+317760-30080)	$583,680
		A. Adams, Capital (336000-116000+222240-45120)	$397,120
		P. Williams, Capital	$980,800