In the early part of 2018, the partners of Hugh, Jacobs, and Thomas sought assis
ID: 2575445 • 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?
question c:
1
Record entry to reclassify payment made to repair personal residence.
2
Record entry to close drawings accounts for 2017.
3
Record entry to close revenue and expense accounts for 2017.
4
Record the distribution of net income to partners.
question d:
1
Record the payment made by Thomas using the bonus method.
Explanation / Answer
Answer for question no.C.1:
Drawing -Hugh a/c Dr -----$8,000
To Repairs expense a/c Cr-----------$8,000.
(Being the amount spent on repairs charged to Drawings a/c)
Answer for question no.C.2:
Already drawings a/c of Hugh has a debit balance of $9000 and adding the repairs expense of perseonal residence $8,000 totalling to $17,000. Drawings of $14,000.
Closing entry for drawings a/c is
Capital a/c --Jacob a/c Dr-----$14,000
Capital a/c --Hugh a/c Dr------$17,000
To Drawings - Jacob a/c Cr-------$14,000
To Drawings-Hugh a/c Cr-----------$17,000.
(Being drawings closed to capital accounts)
Answer for question no.C.3:
Revenue a/c Dr $180,000
To Profit and Loss a/c Cr $180,000.
(Being revenue transferred to profit and loss a/c )
Expenses a/c Dr -----------$149,000
To Profit and loss a/c Cr--------$149,000.
(Being expenses transferred to Profit and loss a/c )
Answer for question no.4:
Assuming interest on capital accounts is already charged as expense.
Profit and loss a/c Dr ---------$31,0000
To Profit and Loss appropriation a/c Cr --------$31,000
(Being excess revenue closed to profit and loss appropriation a/c)
Profit and Loss appropriation a/c Dr -----------$33,000
To Salary to Hugh a/c Cr -------------------------------$8,000
To Salary to Jacob a/c Cr---------------------------------$25,000
(Being salary paid to Partners posted to P&L Appropriation a/c)
Capital a/c ------Hugh a/c Dr------$800.
Capital a/c ----------Jacob a/c Dr----------$1,200
To Profit and Loss Appropriation a/c Cr 2000
(Being loss transferred to capital accounts)
Answer for question no.D1.
Capital account balances are determined as follows:
Total capita before adminssion of new partner=Capital balance of Hugh and Jocab=$160,700+$125,300
=$286,000.
Cash brought in by new partner=$42,000.
Capital after admission of new partner=$286,000.+$42,000.
=$328,000.
New partner share is 10%.
Capital of new partner=10%*$328,000.
=$32,800.
Difference of $42,000 and $32,800 is bonus=$9,200.
Share of Hughs in bonus=$9,200*4/10=$3,680.
Share of Jocabs=$9,200*6/10=$5,520.
Therefore, journal entry at the time of joining is as follows:
Cash a/c Dr------$42,000
To Capital a/c -Hughs a/c Cr--------$3,680
To Capital a/c -Jocobs a/c Cr--------$5,520.
To Capital a/c - Thomas a/c Cr--------$32,800.
(being new partner admitted to the firm and resultant bonus allcoated)
Particulars Amount Particulars Amount Capital a/c ---Hugh 155000 Capital a/c -Jacob 105000 Add: Add: Salary 8000 Salary 25000 Interest on capital account 15500 Interest on capital account 10500 Minus: Minus: Drawings 17000 Drawings 14000 Loss distributed 800 Loss distributed 1200 Closing balance 160700 Closing balance 125300