On May 1, Fine and Max formed a partnership. Fine contributed cash of $90,000 an
ID: 2426930 • Letter: O
Question
On May 1, Fine and Max formed a partnership. Fine contributed cash of $90,000 and equipment valued at $152,000. Max contributed land valued at $120,000 and a building valued at $250,000. The partnership also assumed responsibility for Max's $110,000 long-term note payable associated with the land and building. The partners agreed to share income as follows: Fine is to receive a salary allowance of $38,000, both are to receive an annual interest allowance of 8% of their beginning-year capital investments, and any remaining income or loss is to be shared equally. During the year. Fine withdrew S40.000 and Max withdrew $42,000 cash. After the adjusting and closing entries are made to the revenue and expense accounts at the end of the year, the Income Summary account had a credit balance of $ 140,000. Prepare the journal entries to record (a) the partners' initial capital investments, (b) their cash withdrawals, and (c) closing of both the Withdrawals and Income Summary accounts.Explanation / Answer
1) Journal entries:
partners initial capital investment:
Cash A/c
Equipment A/c
To Fine capital A/c
(To record investment of Fine)
90,000
152,000
242,000
Land A/c
Buliding A/c
To Long-term note payable A/c (given)
To Max Capital A/c (bal Fig.)
(To record investment of Fine)
120,000
250,000
110,000
260,000
Cash withdrawals
Fine Drawing A/c
Max Drawing A/c
To Cash A/c
40,000
42,000
82,000
closing of withdrawls
Fine capital A/c
Max capital A/c
To Fine Drawing A/c
To Max Drawing A/c
(To close drawing accounts to capital accounts)
40,000
42,000
40,000
42,000
and income summary
Income summary A/c
To Fine capital A/c (140,000 * 50%)
To Max capital A/c (140,000 * 50%)
(To transfer net income to partners' capital accounts)
140,000
83,880
56,120
2) income distribution:
Interest in initial investment 8%
fine = (90,000 +152,000) *8%
Max = (120,000 +250,000) *8%
29,600
entry Debit Creditpartners initial capital investment:
Cash A/c
Equipment A/c
To Fine capital A/c
(To record investment of Fine)
90,000
152,000
242,000
Land A/c
Buliding A/c
To Long-term note payable A/c (given)
To Max Capital A/c (bal Fig.)
(To record investment of Fine)
120,000
250,000
110,000
260,000
Cash withdrawals
Fine Drawing A/c
Max Drawing A/c
To Cash A/c
40,000
42,000
82,000
closing of withdrawls
Fine capital A/c
Max capital A/c
To Fine Drawing A/c
To Max Drawing A/c
(To close drawing accounts to capital accounts)
40,000
42,000
40,000
42,000
and income summary
Income summary A/c
To Fine capital A/c (140,000 * 50%)
To Max capital A/c (140,000 * 50%)
(To transfer net income to partners' capital accounts)
140,000
83,880
56,120
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