4) Smith, White, and Saint are partners owning the Book Nook. The equities of th

Question

4) Smith, White, and Saint are partners owning the Book Nook. The equities of the partners are $60,000, $50,000, and $40,000, respectively. They share profits and losses equally White wishes to retire on May 31, 20XX. Prepare the general journal entries to record White's retirement under each independent assumption. a. White is paid $50,000 in partnership cash. b. White is paid $40,000 in partnership cash. c. White is paid $55,000 in partnership cash. 5)Hall and Mason share profits and losses equally and have capital balances of $60,000 and $40,000, respectively. Taylor is to be admitted on January 2, 20XX, and is to receive a one-third interest in the firm. Prepare the general journal entries to record the addition of Taylor as a partner under the following unrelated circumstances. a. Taylor invests $50,000 b. Taylor invests $62,000. c. Taylor invests $47.000.

Explanation / Answer

A Partnership Agreement is based on a contractual agreement between individuals, and ends when an old partner retires, or a new partner is admitted into the partnership. The partnership may continue, albeit with a new partnership agreement.

The partnership agreement is also the basis for distributing the net income among partners. A key component of any distribution plan is the profit and loss sharing ratio. However, if the partnership agreement does not contain such a ratio, the Partnership Act stipulates that the ratio will be one that provides an equal distribution to each partner. The equal distribution will only be enforced if there is a disagreement between the partners, and they refer the matter to the Courts.

In the present cases, the Partners, Smith, White and Saint share profits or losses equally.

Retirement of a partner gives rise to three independent situations, viz.,

1) Retiring partner accepts cash equal to his/ her equity;

2) Retiring partner accepts cash less than the balance in his/ her capital account; and

3) Remaining partners agree to give the retiring partners more than his / her equity.

In the given problem, White is the partner who is retiring. The following journal entries record the abovementioned three independent situations.

1) White is paid cash equal to his share equal to his equity

2) Retiring partner accepts cash less than the balance in his/ her capital account

In this event, the profit sharing ratio is used to adjust the capital accounts of the remaining partners. Since, the problem states that the profit and losses are to shared equally, and White has agreed to accept less than his equity, the journal entries will be:

3) White receives cash in excess of his equity from the remaining partners

Q 5)

The admission of a new partner is based on an unianimous consent by the existing partners. A new partner may be admitted either by:

a) acquisition of interests of existing partners; or

b) investment of additional net assets into the partnership.

In the given problem, Taylor bring in investment:

i) Same as Equity;

ii) More than his Equity; and

iii) Less than his Equity

One of two methods are normally used for admission of a Partner. They are:

i) Bonus Method; or

ii) Revaluation Method

The Bonus method is used in the solution as it is preferred by Accountants for the reason that assets are not revalued, and only a transfer of capital balances between partners is involved.

In order to arrive at a solution for each category of investment mentioned above, we use the following formula:

Existing Capital + New Capital = Potential Capital

(1) (2) (3)

Situation 1: Taylor Invests $ 50,000 for his 1/3 share:

The Bonus Method uses only Column 3 ( Potential Capital)

GENERAL JOURNAL Date Description Posting Reference Debit Amount $ Credit Amount $ 20XX May-31 White, Capital             50,000               Cash              50,000 (Being the entry passed to record the retirement of White who receives cash equivalent to his equity)

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