-5 Adjusting Entries for Partner Admission

The CAB Partnership, although operating profitably, has had a cash flow problem. Unable to

meet its current commitments, the firm borrowed $34,000 from a bank giving a long-term

note. During a recent meeting, the partners decided to obtain additional cash by admitting a

new partner to the firm. They feel that the firm is an attractive investment, but that proper

management of their liquid assets will be required. Meyers agrees to invest cash in the firm if

her chief accountant can review the accounting records of the partnership.

The balance sheet for CAB Partnership as of December 31, 2008, is as follows:

Assets

Cash $ 8,000

Accounts Receivable 33,600

Inventory (at cost) 35,750

Land 27,000

Building (net of depreciation) 41,600

Equipment (net of depreciation) 27,250

Total $173,200

Liabilities and Capital

Accounts Payable $ 32,450

Other Current Liabilities 6,750

Long-Term Note (8% due 2008) 34,000

Cox, Capital 37,500

Andrews, Capital 25,000

Bennet, Capital 37,500

Total $173,200

The review of the accounts resulted in the accumulation of the following information:

1. Approximately 5% of the accounts receivable are uncollectible. The old partnership had

been using the direct write-off method of accounting for bad debts.

2. Current replacement cost of the inventory is $41,250.

3. The market value of the land based on a current appraisal is $65,000.

4. The partners had been using an unreasonably long estimated life in establishing a

depreciation policy for the building. On the basis of sound value (current replacement

cost adjusted for use), the value of the building is $32,750.

5. There are unrecorded accrued liabilities of $3,275.

The partners agree to recognize the foregoing adjustments to the accounts. Cox,

Andrews, and Bennet share profits 40:30:30. After the admission of Meyers, the new profit

agreement is to be 30:20:30:20. Meyers is to receive a 25% capital interest in the partnership

after she invests sufficient cash to increase the total capital interest to $150,000. Because

of the uncertainty of the business, no goodwill is to be recognized before or after

Meyers is admitted.

Required:

A. Prepare the necessary journal entries on the books of the old partnership to adjust the

accounts.

B. Record the admission of Meyers.

C. Prepare a new balance sheet giving effect to the foregoing requirements.