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1. Complete one of the required elements of the Comprehensive Illustration beginning on page 443 and check your work against the provided solution. Explain the

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1. Complete one of the required elements of the Comprehensive Illustration beginning on page 443 and check your work against the provided solution. Explain the process to the class in your own words and then show us your work, worksheets, and entries. Review the work of one other student who prepared an answer on a different element of the problem and provide a critique (TCO 5). 2. Select one entry presented in the textbook, dealing with the dissolution of partnerships, and explain that entry to the class. Please try to use an entry not already explained by your classmates. Be ready to answer all questions concerning that entry using what you have learned from your reading, lecture, and Becker materials (TCO 5). image text in transcribed

Comprehensive Illustration Problem (Estimated Time: 30 to 55 Minutes) Heyman and Mullins begin a partnership on January 1, 2012. Heyman invests $40,000 cash and inventory costing $15,000 but with a current appraised value of only $12,000. Mullins contributes a building with a $40,000 book value and a $48,000 fair value. The partnership also accepts responsibility for a $10,000 note payable owed in connection with this building. The partners agree to begin operations with equal capital balances. The articles of partnership also provide that at each year-end, profits and losses are allocated as follows: 1. For managing the business, Heyman is credited with a bonus of 10 percent of partnership income after subtracting the bonus. No bonus is accrued if the partnership records a loss. 2. Both partners are entitled to interest equal to 10 percent of the average monthly capital balance for the year without regard for the income or drawings of that year. 3. Any remaining profit or loss is divided 60 percent to Heyman and 40 percent to Mullins. 4. Each partner is allowed to withdraw $800 per month in cash from the business. On October 1, 2012, Heyman invested an additional $12,000 cash in the business. For 2012, the partnership reported income of $33,000. Lewis, an employee, is allowed to join the partnership on January 1, 2013. The new partner invests $66,000 directly into the business for a one-third interest in the partnership property. The revised partnership agreement still allows for both the bonus to Heyman and the 10 percent interest, but all remaining profits and losses are now split 40 percent each to Heyman and Lewis with the remaining 20 percent to Mullins. Lewis is also entitled to $800 per month in drawings. Mullins chooses to withdraw from the partnership a few years later. After negotiations, all parties agree that Mullins should be paid a $90,000 settlement. The capital balances on that date were as follows: Heyman capital 88,000 Lewis capital 72,000 Mullins capital 78,000 Required a. Assuming that this partnership uses the bonus method exclusively, make all necessary journal entries. Entries for the monthly drawings of the partners are not required. b. Assuming that this partnership uses the goodwill method exclusively, make all necessary journal entries. Again, entries for the monthly drawings are not required. Solution a. Bonus Method According to the articles of partnership, the interest allocation is based on a monthly average figure. Mullins's capital balance of $45,000 did not change during the year; therefore $4,500 (10%) is the appropriate interest accrual for that partner. However, because of the October 1, 2012, contribution, Heyman's interest must be determined as follows: Beginning balance 45,000 X 9 months=405,000 New Balance 57,000 X 3 months=171,000 576,000 x 1/12= MONTH;Y AVERAGE CAPITAL BALANCE 48,000 INTEREST RATE x 10% INTEREST CREDITED TO HEYMAN =4,800 Following the bonus and interest computations, the $33,000 income earned by the business is allocated according to the previously specified arrangement: Heyman Mullins Totals Bonus $ 3,000 -0- $ 3,000 Interest 4,800 $ 4,500 9,300 Remaining income: $33,000 (3,000) (9,300) $20,700 12,420 (60%) 8,280 (40%) 20,700 Income allocation $20,220 $12,780 $33,000 The partnership's closing entries for the year would be recorded as follows: Heyman, Capital 9,600 Mullins, Capital 9,600 Heyman, Drawing 9,600 Mullins, Drawing 9,600 To close out $800 per month drawing accounts for the year. Income Summary 33,000 Heyman, Capital 20,220 Mullins, Capital 12,780 To close out profit for year to capital accounts as computed above. At the end of this initial year of operation, the partners' capital accounts hold these balances: Heyman Mullins Totals Beginning balance $45,000 $45,000 $ 90,000 Additional investment 12,000 -0- 12,000 Drawing (9,600) (9,600) (19,200) Net income (above) 20,220 12,780 33,000 Total capital $67,620 $48,180 $115,800 2013 Jan. 1Lewis contributed $66,000 to the business for a one-third interest in the partnership property. Combined with the $115,800 balance previously computed, the partnership now has total capital of $181,800. Because no revaluation is recorded under the bonus approach, a onethird interest in the partnership equals $60,600 ($181,800 ). Lewis has invested $5,400 in excess of this amount, a balance viewed as a bonus accruing to the original partners: Cash 66,000 Lewis, Capital 60,600 Heyman, Capital (60% of bonus) 3,240 Mullins, Capital (40% of bonus) 2,160 To record Lewis's entrance into partnership with bonus to original partners. Several years laterThe final event in this illustration is Mullins's withdrawal from the partnership. Although this partner's capital balance reports only $78,000, the final distribution is set at $90,000.The extra $12,000 payment represents a bonus assigned to Mullins, an amount that decreases the capital of the remaining two partners. Because Heyman and Lewis have previously accrued equal 40 percent shares of all profits and losses, the reduction is split evenly between the two. Mullins, Capital 78,000 Heyman, Capital ( of bonus payment) 6,000 Lewis, Capital ( of bonus payment) 6,000 Cash 90,000 To record withdrawal of Mullins with a bonus from remaining partners. Page 446 2. Goodwill Method o 2012 o Jan. 1The fair value of Heyman's contribution is $52,000, whereas Mullins is investing only a net $38,000 (the value of the building less the accompanying debt). Because the capital accounts are initially to be equal, Mullins is presumed to be contributing goodwill of $14,000. Cash 40,000 Inventory 12,000 Building 48,000 Goodwill 14,000 Note payable 10,000 Heyman, Capital 52,000 Mullins, Capital 52,000 Creation of partnership with goodwill attributed to Mullins. o Oct. 1 Cash 12,000 Heyman, Capital 12,000 To record additional contribution by partner. o Dec. 31Although Heyman's bonus is still $3,000 as derived in requirement (a), the interest accruals must be recalculated because the capital balances are different. Mullins's capital for the entire year was $52,000; thus, interest of $5,200 (10%) is appropriate. However, Heyman's balance changed during the year so that a monthly average must be determined as a basis for computing interest: Beginning balance: $52,000 9 months = $468,000 New balance: $64,000 3 months = 192,000 660,000 Monthly averagecapital balance 55,000 Interest rate 10% Interest credited to Heyman $5,500 o The $33,000 partnership income is allocated as follows: Heyman Mullins Totals Bonus (above) $ 3,000 -0- $ 3,000 Interest (above) 5,500 $ 5,200 10,700 Remaining income: $33,000 (3,000) (10,700) $19,300 11,580 (60%) 7,720 (40%) 19,300 Income allocation $20,080 $12,920 $33,000 o The closing entries made under the goodwill approach would be as follows: Heyman, Capital 9,600 Mullins, Capital 9,600 Heyman, Drawing 9,600 Mullins, Drawing 9,600 To close out drawing accounts for the year. Income Summary 33,000 Heyman, Capital 20,080 Mullins, Capital 12,920 To assign profits per allocation schedule. o Page 447 o After the closing process, the capital balances are composed of the following items: Heyman Mullins Totals Beginning balance $52,000 $52,000 $104,000 Additional investment 12,000 -0- 12,000 Drawing (9,600) (9,600) (19,200) Net income 20,080 12,920 33,000 Total capital $74,480 $55,320 $129,800 o 2013 o Jan. 1 Lewis's investment of $66,000 for a one-third interest in the partnership property implies that the business as a whole is worth $198,000 ($66,000 divided by ). After adding Lewis's contribution to the present capital balance of $129,800, the business reports total net assets of only $195,800. Thus, a $2,200 increase in value ($198,000 $195,800) is indicated and will be recognized at this time. Under the assumption that all partnership assets and liabilities are valued appropriately, this entire balance is attributed to goodwill. Goodwill 2,200 Heyman, Capital (60%) 1,320 Mullins, Capital (40%) 880 To recognize goodwill based on Lewis's acquisition price. Cash 66,000 Lewis, Capital 66,000 To admit Lewis to the partnership. o Several years later To conclude this illustration, Mullins's withdrawal must be recorded. This partner is to receive a distribution that is $12,000 more than the corresponding capital balance of $78,000. Because Mullins is entitled to a 20 percent share of profits and losses, the additional $12,000 payment indicates that the partnership as a whole is undervalued by $60,000 ($12,000/20%). Only in that circumstance would the extra payment to Mullins be justified. Therefore, once again, goodwill is recognized and is followed by the final distribution. Goodwill 60,000 Heyman, Capital (40%) 24,000 Mullins, Capital (20%) 12,000 Lewis, Capital (40%) 24,000 Recognition of goodwill based on withdrawal amount paid to Mullins. Mullins, Capital 90,000 Cash 90,000 To distribute money to partner

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