In the early part of 2018, the partners of Hugh, Jacobs, and Thomas sought assis
ID: 2391345 • Letter: I
Question
In the early part of 2018, the partners of Hugh, Jacobs, and Thomas sought assistance from a local accountant. They had begun a new business in 2017 but had never used an accountant's services. Hugh and Jacobs began the partnership by contributing $170,000 and $120,000 in cash, respectively. Hugh was to work occasionally at the business, and Jacobs was to be employed full-time. They decided that year-end profits and losses should be assigned as follows: Each partner was to be allocated 10 percent interest computed on the beginning capital balances for the period. A compensation allowance of $5,000 was to go to Hugh with a $27,000 amount assigned to Jacobs. .Any remaining income would be split on a 4:6 basis to Hugh and Jacobs, respectively. In 2017, revenues totaled $195,000, and expenses were $158,000 (not including the partners' compensation allowance). Hugh withdrew cash of $10,000 during the year, and Jacobs took out $15,000. In addition, the business paid $6,500 for repairs made to Hugh's home and charged it to repair expense. On January 1, 2018, the partnership sold a 15 percent interest to Thomas for $58,000 cash. This money was contributed to the business with the bonus method used for accounting purposesExplanation / Answer
Answer 1. Journal Entry Date Particulars Dr. Amt. Cr. Amt. 2017 1 Hugh, Drawings 6,500.00 Repair Expenses 6,500.00 (To record the reclassification of payment made to repair personal residence) 2 Hugh, Capital 16,500.00 Jacobs, Capital 15,000.00 Hugh, Drawings ($10,000 + $6,500) 16,500.00 Jacobs, Drawings 15,000.00 (To close the drawings accounts) 3 Revenues 195,000.00 Expenses ($158,000 - $6,500) 151,500.00 Income Summary ($195,000 - $151,500) 43,500.00 (To record close of Revenue & Expenses Account) 4 Income Summary 43,500.00 Hugh, Capital 15,000.00 Jacobs, Capital 28,500.00 (To record the distribution of Income) Hugh Jacob Total Net Income (Loss) 43,500.00 Interest Allowance - 10% 17,000.00 12,000.00 29,000.00 Balance of Income (Loss) 14,500.00 Compensation allowance 5,000.00 27,000.00 32,000.00 Balance of Income (Loss) (17,500.00) Balance allocated - 4:6 (7,000.00) (10,500.00) (17,500.00) Balance of Income (Loss) - Shares to partners 15,000.00 28,500.00 Answer 2. Hugh Jacob Total Capital Introduced 170,000.00 120,000.00 290,000.00 Add: Income 15,000.00 28,500.00 43,500.00 Less: Drawings (16,500.00) (15,000.00) (31,500.00) Balance as on Dec 31, 2017 168,500.00 133,500.00 302,000.00 Total Capital After Thomas Admission = $168,500 + $133,500 + $58,000 Total Capital After Thomas Admission = $360,000 As per Bonus Method, Thomas Capital = $360,000 X 15% = $54,000 Balance = $58,000 - $54,000 = $4,000 is a divided between the old partners in the old sharing ratio Hugh Capital Account = $4,000 X 40% = $1,600 Jacob Capital Account = $4,000 X 60% = $2,400 Journal Entry Date Particulars Dr. Amt. Cr. Amt. 2018 1 Cash 58,000.00 Thomas Capital 54,000.00 Hugh, Capital 1,600.00 Jacobs, Capital 2,400.00 (To record the payment made by Thomas)