Exercise 12-3 Suzy Vopat has owned and operated a proprietorship for several yea
ID: 2580668 • Letter: E
Question
Exercise 12-3 Suzy Vopat has owned and operated a proprietorship for several years. On January 1, she decides to terminate this business and become a partner in the firm of Vopat and Sigma. Vopat's investment in the partnership consists of $11,300 in cash, and the following assets of the proprietorship: accounts receivable $14,900 less allowance for doubtful accounts of $2,500, and equipment $20,400 less accumulated depreciation of $4,500. It is agreed that the allowance for doubtful accounts should be $3,750 for the partnership. The fair value of the equipment is s13,300 Journalize Vopat's admission to the firm of Vopat and Sigma. (Credit account titles are automatically indented when amount is entered, Do not indent manually.) Date Account Titles and Explanation Debit Credit Jan. 1 LINK TO TEXTExplanation / Answer
Sole proprietorship is form of business which is owned and run by single individual. All profits and losses are borne by the proprietor itself. It is easy to become sole proprietor and there are less legal formalities to be done to form it. Also complete control of operation is in the hands of proprietor. But the biggest disadvantage is that losses are to be borne by proprietor and no sharing is possible.
Partnership is the association of two or more persons who come together to do a business and agree to share profits and losses as per the terms and condition mentioned in partnership agreement. The advantage of partnership over sole proprietorship is that losses are not borne by single individual. Rather as per agreement they get divided between partners.
When sole proprietorship is dissolved and partnership is formed then all assets and liabilities are transferred at fair market value on that date.
In new partnership, Vopat has paid cash worth $11,300 which will be debited because cash is an asset and all assets are debited.
As per proprietorship, the value of accounts receivables is $14,900 and allowance for doubtful debts is $2,500. But for partnership it is agreed that allowance for doubtful debts should be $3,750. Therefore, accounts receivables being assets will be debited by $14,900 while allowance for doubtful debts will be credited by $3,750 as per partnership agreement.
The value of equipment as per proprietorship was $20,400 less accumulated depreciation $4,500. But while sole proprietorship is dissolved and partnership is formed then all assets and liabilities are transferred at fair market value on that date. The fair value of equipment is $13,300 so it will be debited by that amount.
Now, the capital of Vomat and sigma will be calculated as follows:
Capital = Cash + Accounts receivables + Equipment -Allowance for doubtful debts
Capital = $11,300 + $14,900 + $13,300 - $3,750
Capital = $35,750
The journal entry to record the admission of Vopat to the firm of Vopta and Sigma will be as follows:
Date Account titles and explanation Debit Credit Jan 1 Cash $11,300 Accounts Receivables $14,900 Equipment $13,300 Allowance for doubtful debts $3,750 Capital $35,750Related Questions
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