On January 1, 19x1, Joyce Chan and Kim Nichols agreed to form a partnership to o

Question

On January 1, 19x1, Joyce Chan and Kim Nichols agreed to form a partnership to operate an educational consulting business. Chan and Nichols invested cash of $90,000 and $60,000, respectively, in the partnership. The business had normal first-year problems, but during the second year the operation was very successful. For 19x1, they reported a $30,000 loss; for 19x2, an $80,000 income. Prepare the journal entry to record the investment of both partners in the partnership. Determine Chan's and Nichol's share of the income and loss for each year, assuming each of the following methods of sharing income and losses: The partners agreed to share income and losses equally. The partners agreed to share income and losses in the ratio of 7:3 for Chan and Nichols, respectively. The partners agreed to share income according to their original capital investment ratio, but did not mention losses.

Explanation / Answer

Journal Entry Date Particulars Dr Amount Cr Amount Answer 1. Jan.1, 19X1 Cash A/c                                                             Dr. $150,000    To Joycee Chan Capital A/c $90,000    To Kim Nichols Capital A/c $60,000 (Capital bring in the Partnership Firm) Answer 2. (a) Dec 31, 19X1 Joycee Chan Capital A/c $15,000 Kim Nichols Capital A/c $15,000    To Profit & Loss Appropriation A/c $30,000 (Lossed debited in Partners Capital A/c equally) Dec 31, 19X2 Profit & Loss Appropriation A/c                Dr. $80,000    To Joycee Chan Capital A/c $40,000    To Kim Nichols Capital A/c $40,000 (Profits credited in Partners Capital A/c equally) Answer 2. (b) Dec 31, 19X1 Joycee Chan Capital A/c $21,000 Kim Nichols Capital A/c $9,000    To Profit & Loss Appropriation A/c $30,000 (Lossed debited in Partners Capital A/c in the ratio of 7:3) Dec 31, 19X2 Profit & Loss Appropriation A/c                Dr. $80,000    To Joycee Chan Capital A/c $56,000    To Kim Nichols Capital A/c $24,000 (Profits credited in Partners Capital A/c in the ratio of 7:3) Answer 2. (c) Dec 31, 19X1 Joycee Chan Capital A/c $18,000 Kim Nichols Capital A/c $12,000    To Profit & Loss Appropriation A/c $30,000 (Lossed debited in Partners Capital A/c as per original capital investment ratio 3:2) Dec 31, 19X2 Profit & Loss Appropriation A/c                Dr. $80,000    To Joycee Chan Capital A/c $48,000    To Kim Nichols Capital A/c $32,000 (Profits credited in Partners Capital A/c as per original capital investment ratio 3:2) Note: Net income or loss is allocated to the partners in accordance with the partnership agreement. In the absence of any agreement between partners, profits and losses must be shared equally regardless of the ratio of the partners' investments. If the partnership agreement specifies how profits are to be shared, losses must be shared on the same basis as profits.

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