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 $105,000 and $55,000 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 $7,000 was to go to Hugh with a $19,000 amount assigned to Jacobs.
• Any remaining income would be split on a 4:6 basis to Hugh and Jacobs, respectively.

  

In 2017, revenues totaled $130,000, and expenses were $96,000 (not including the partners’ compensation allowance). Hugh withdrew cash of $6,000 during the year, and Jacobs took out $11,000. In addition, the business paid $9,000 for repairs made to Hugh’s home and charged it to repair expense.

On January 1, 2018, the partnership sold a 15 percent interest to Thomas for $58,000 cash. This money was contributed to the business with the bonus method used for accounting purposes.

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

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

Answer 1

Calculation of Bonus	Hugs	Jacob	Thomas10	Total
Opening Capital	105,000.00	55,000.00	58,000.00	218,000.00
Net Income				$        34,000
Less: Drawing				-17000
Net Capital				235,000.00
Existing Profit Ratio	4	6
Thomas Share			15%
Thomas Getting share	15% of $235,000	$        35,250
Thomas paying		$        58,000
Bonus		$        22,750
Bonus to be allocated to Hugs and Jacob in 4:6
Hugs	9,100.00
Jacob	13,650.00
Entries
Cash Debit	58,000.00
to Hugs Capital		9,100.00
to Jacob Capital		13,650.00
to Thomas Capital		35,250.00

Part C		Hugs	Jacob	Total
	Compensation Allowance	$        7,000	$      19,000	$     26,000
	Interest	$      10,500	$        5,500	$     16,000
	Total	$      17,500	$      24,500	$     42,000
	Remainder income (4:6)	$            400	$            600	$       1,000
	Net Income	$     17,900	$     25,100	$    43,000
	1. Reclassification of Repair
	Hugs Drawing Account Debit	$        9,000
	Repair Account Credit		$        9,000
	2. Close Drawing Account
	Hugs Capital Account Debit*	$      15,000
	Jacob Capital Account Debit	$      11,000
	Hugs Drawing Account Credit*		$      15,000
	Jacob Drawing Account Credit		$      11,000
	3. Close Revenue and Exp
	Income Summary A/c Debit	$      87,000
	Expense account Credit		$      87,000
	(close exp account) Income-$6,000
	Income account debit	$   130,000
	Income Summary A/c Credit		$   130,000
	(close revenue account)
	4. Distribution of net income
	Income summary a/c debit	$      43,000
	Hugs Capital A/c Credit		$      17,900
	Jacobs Capital A/c Credit		$      25,100