In the early part of 2018, the partners of Hugh, Jacobs, and Thomas sought assis
ID: 2562661 • 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 $155,000 and $105,000 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 $8,000 was to go to Hugh with a $25,000 amount assigned to Jacobs.
Any remaining income would be split on a 4:6 basis to Hugh and Jacobs, respectively.
In 2017, revenues totaled $180,000, and expenses were $149,000 (not including the partners’ compensation allowance). Hugh withdrew cash of $9,000 during the year, and Jacobs took out $14,000. In addition, the business paid $8,000 for repairs made to Hugh’s home and charged it to repair expense.
On January 1, 2018, the partnership sold a 10 percent interest to Thomas for $42,000 cash. This money was contributed to the business with the bonus method used for accounting purposes.
c. What journal entries should the partnership have recorded on December 31, 2017?
d.What journal entry should the partnership have recorded on January 1, 2018?
Explanation / Answer
31/12/2017 Hugh Jacobs Thoms Total Capital 1,55,000 1,05,000 - 2,60,000 Withdrawal (9,000) (14,000) (23,000) Repair of Hugh House (8,000) (8,000) Interest at 10% 15,500 10,500 26,000 Compensation Allowance 8,000 25,000 33,000 Residual Loss in ratio (8,000) (12,000) (20,000) 01/01/2018 1,53,500 1,14,500 - 2,68,000 Cash 10% 42,000 42,000 Total Capital 1,53,500 1,14,500 42,000 3,10,000 42000-310000*10% 4,400 6,600 (11,000) - Capital After New Partner 1,57,900 1,21,100 31,000 3,10,000 Division of 42000 under bonus method Capital before new admission 2,68,000 Thomas Brought 42,000 3,10,000 Thomas Share of 10% 31,000 Thomas Brought excess 11,000 i.e. 42000-31000 11000 divided in ratio of 4:6 Hugh Partner capital 4,400 Jacob Partner capital 6,600 Calculation of Division of Profit for 2017: - Sales 1,80,000 Expenses 1,49,000 Less: Hugh Personal Expenses 8,000 1,41,000 Net Income 39,000 Hugh Jacobs Thoms Total Total Income 39,000 Interest at 10% 15,500 10,500 26,000 Compensation Allowance 8,000 25,000 33,000 (20,000) Residual Earning in ratio (8,000) (12,000) (20,000) Journal 31/12/2017 Debit Credit Hugh Partner capital 9,000 Jacob Partner capital 14,000 Cash 23,000 Cash Withdrawal Hugh Partner capital 8,000 R&M account 8,000 Personal Exp of Hugh wrongly debited to Hugh account now rectified Interest 26,000 Hugh Partner capital 15,500 Jacob Partner capital 10,500 Compensation Allowance 33,000 Hugh Partner capital 8,000 Jacob Partner capital 25,000 Hugh Partner capital 8,000 Jacob Partner capital 12,000 Residual Earning 20,000 01/01/2018 Cash 42,000 Thomas Capital Account 31,000 Hugh Partner capital 4,400 Jacob Partner capital 6,600 Cash Bring by Thomas Distributed under bonus method