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 $90,000 and $40,000 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 $17,000 amount assigned to Jacobs.
• Any remaining income would be split on a 4:6 basis to Hugh and Jacobs, respectively.

  

In 2017, revenues totaled $115,000, and expenses were $87,000 (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 $7,500 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 $44,000 cash. This money was contributed to the business with the bonus method used for accounting purposes.

C. What journal entries should the partnership have recorded on December 31, 2017? There are 4 JE needed, one to Record entry to reclassify payment made to repair personal residence, one to Record entry to close drawings accounts for 2017, one to Record entry to close revenue and expense accounts for 2017, and one to Record the distribution of net income to partners.

D. What journal entry should the partnership have recorded on January 1, 2018? There is one needed to Record the payment made by Thomas using the bonus method.

Answer 1

C
	Date	Journal Entries
1)	31.12.2017	Hugh,drawings……………………………………………………………							7,500
		To Repair Expense…………………………………………….								7,500
		(To reclassify payment made to repair personal residence)
									13,500
2)	31.12.2017	Hugh, capital ……………………………………………………………..							11,000
		Jacobs, capital……. ………………………………………………………								13,500
			Hugh, drawings (adjusted for home repairs)……..							11,000
			Jacobs, drawings ……………………………………………..
		(To close drawings accounts for 2017)
		Revenues ……………………………………………………………………							1,15,000
			Expenses (adjusted by first entry)……………………..............							79,500
			Income …							35,500
		(To close revenue and expense accounts for 2017)
3)	31.12.2017	Income …...…………………………………………………………………							35,500
			Hugh, capital ……………………………………………………							15,400
			Jacobs, capital……..……………………………………………							20,100
		(To close net income to partners' capital–see allocation )
		Allocation of Net income						Hugh		Jacobs
		Interest (10% of Beginning Balance)						$ 9,000		$   4,000
		Salary Allowances						$ 7,000		$ 17,000
		Remaining Income (loss)
		Net Income				35500
		Less: Interest				13,000
		Less: Salary Allowances				24,000
		Remainder				$ (1,500)		$ (600)	40%	$   (900)	60%
		Profit Allocation						$ 15,400		$ 20,100
D
			Total capital (original balances of $250,000 plus 2017 net income less drawings)								$141,000
			Investment by Thomas								$44,000
			Total capital after investment								$1,85,000
			Ownership portion acquired by Thomas								0.2
			Thomas, capital								$37,000
			Amount paid								$44,000
			Bonus paid by Thomas—assigned to original partners								$ 7,000
			Bonus to Hugh (40%) …………………………………………								$ 2,800
			Bonus to Jacobs (60%)………………………………………..								$ 4,200
	01.01.2018		Cash						44,000
				Thomas, capital (20% of total capital)						37,000
				Hugh, capital						2,800
				Jacobs, capital						4,200
			(Allocation of thomas contribution towards capital using bonus method)