Adjusting Entries for Partner Admission The CAB Partnership, although operating
ID: 2492534 • Letter: A
Question
Adjusting Entries for Partner Admission The CAB Partnership, although operating profitably, has had a cash flow problem. Unable to meet its current commitments, the firm borrowed $34,000 from a bank giving a long-term note. During a recent meeting, the partners decided to obtain additional cash by admitting a new partner to the firm. They feel that the firm is an attractive investment, but that proper management of their liquid assets will be required. Meyers agrees to invest cash in the firm if her chief accountant can review the accounting records of the partnership. The balance sheet for CAB Partnership as of December 31, 2008, is as follows: Assets Cash $ 8,000 Accounts Receivable 33,600 Inventory (at cost) 35,750 Land 27,000 Building (net of depreciation) 41,600 Equipment (net of depreciation) 27,250 Total $173,200 Liabilities and Capital Accounts Payable $ 32,450 Other Current Liabilities 6,750 Long-Term Note (8% due 2008) 34,000 Cox, Capital 37,500 Andrews, Capital 25,000 Bennet, Capital 37,500 Total $173,200 The review of the accounts resulted in the accumulation of the following information:
1. Approximately 5% of the accounts receivable are uncollectible. The old partnership had been using the direct write-off method of accounting for bad debts.
2. Current replacement cost of the inventory is $41,250.
3. The market value of the land based on a current appraisal is $65,000.
4. The partners had been using an unreasonably long estimated life in establishing a depreciation policy for the building. On the basis of sound value (current replacement cost adjusted for use), the value of the building is $32,750.
5. There are unrecorded accrued liabilities of $3,275. The partners agree to recognize the foregoing adjustments to the accounts. Cox, Andrews, and Bennet share profits 40:30:30.
After the admission of Meyers, the new profit agreement is to be 30:20:30:20. Meyers is to receive a 25% capital interest in the partnership after she invests sufficient cash to increase the total capital interest to $150,000. Because of the uncertainty of the business, no goodwill is to be recognized before or after Meyers is admitted. Required:
A. Prepare the necessary journal entries on the books of the old partnership to adjust the accounts.
B. Record the admission of Meyers.
C. Prepare a new balance sheet giving effect to the foregoing requirements.
Explanation / Answer
JOURNAL ENTRIES:
___________________________________________________________________________________________
DATE PARTICULARS REF DEBIT ($) CREDIT ($)
1 Revaluation a/c 1,680
Bad Debts a/c 1,680
2. Inventory a/c 5,500
Revalueation a/c 5,500
3. Land a/c 38,000
Revaluation a/c 38,000
4 Revaluation a/c 8,850
Building a/c 8,850
5 Revaluation a/c 3,275
Liability a/c 3,275
6 Revaluation a/c 29,695
Cox capital a/c 11,878
Andrews capital a/c 8,908
Bennet capital a/c 8,909
7 Cash a/c 30,000
Meyers capital a/c 30,000
8. Cox capital a/c 4,378
Andrew capital a/c 3,908
Bennet capital a/c 1,409
Cash a/c 9,695
C. BALANCE SHEET OF COX,ANDREW,BENNET AND MEYERS AS ON DECEMBER 31,2008
________________________________________________________________________________________
ASSETS $ LIABILITIES & CAPITAL $
226,475 226,475
WORKING NOTES:
CAPITAL BALANCES OF COX,ANDREW,BENNET AND MEYERS:
_________________________________________________________________________________________
COX ANDREW BENNET MEYERS
Excess cash 4,378 3,908 1,409 ----
TOTAL CAPITAL $150,000
DISTRIBUTED IN THE NEW RATIO :30:20:30:20 AMONG COX,ANDREWS,BENNET AND MEYERS
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