Ajax Architects is a partnership with three partners. On January 31, 2021, the three partners, Tova Radzik, Sela Kopel, and Etti Falkenberg, have capital balances of $98,000, $79,000, and $47,000, respectively. The profit and loss ratio is 4:3:1. On February 1, 2021, Radzik withdraws from the partnership and they agree to pay her $90,000 cash from the partnership assets.

After Radzik leaves, Kopel and Falkenberg agree to a 2:1 profi t ratio. During the year ended January 31, 2022, the partnership recognizes profit of $45,000. Neither Kopel nor Falkenberg makes any withdrawals because the partnership is short of cash after paying Radzik. On March 1, 2022, Kopel and Falkenberg agree to admit Devra Malkin to the partnership with a 45% interest for $110,000 cash. After Malkin is admitted, the new profi t ratio will be 4:2:5 for Kopel, Falkenberg, and Malkin, respectively.

Instructions

a. Journalize the withdrawal of Radzik from the partnership.

b. What are the balances in Kopel’s and Falkenberg’s capital accounts after Radzik leaves the partnership?

c. Prepare the journal entry to close the Income Summary account on January 31, 2022.

d. What is the total partnership capital on February 1, 2022, prior to admitting Malkin?

e. Prepare the journal entry to record the admission of Malkin into the partnership.

f. What is the balance in each of the partners’ capital accounts after Malkin is admitted to the partnership?

Taking It Further

Why might a partner who is withdrawing from a partnership agree to a cash payment that results in a bonus to the remaining partners?