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Module 9 Demonstration Problem Conway and Lawrence form a partnership by combining the assets and liabilities of their respective sole proprietorships. The following are the assets and liabilities of each partner and their market values. (NOTE: I left the partners names the same for this demonstration, so don't confuse this with the actual homework problem!) Asset Cash Accounts receivable Note payable Inventory Conway Book value $15,000 $4,000 $8,000 $28,000 Market value Asset Cash Equipmnet Accumulated Depreciation Accounts Payable $3,000 $25,000 $35,000 Lawrence Book Value $12,000 $45,000 $15,000 $10,000 Market value $30,000 NOTE: We do nothing with the accu Lawrence to deal with on his old co $32,000 Requirements: 1 Journalize the formation of the partnership. Journal Accounts Cash Accounts Receivable Inventory Equipment Accounts Payable Note Payable Conway, Capital Lawrence, Capital Debit Credit 27,000 3,000 25,000 30,000 Cash placed into the new partnership is the total book value of all cash being provided. Accounts Receivable comes from MARKET value, indicating this is the whole amount expecte Inventory comes from the MARKET value, because this is what the partnership would have to Equipment comes from the MARKET value, because this is what the partnership would have Accounts payable comes from its book value, due to what the amount owed is at this time. Note payable comes from its book value, due to what the amount owed is at this time. Conway, Capital is a result of all the assets being brought into the partnership less the liabiliti Lawrence, Capital is a result of all the assets being brought into the partnership less the liabil 10,000 8,000 35,000 32,000 85,000 85,000 Half way through the first year of operations Conway and Lawrence admit Korman to the partnership. Korman buys a 1/2 share for $25,000 in cash. 2 Journalize Korman's admission to the partnership. Journal Accounts Cash Korman, Capital Debit Credit 25,000 25,000 Korman gains entrance into the partnership simply by "buying in" with cash. No portions of the existing partner's share of the company have been sold, they simply allowed Kornan to give the company cash and gain entrance. The net income for the first year of oprations was $60,000. After giving Conway a salary allowance of $15,000, the rest of the net income is split evenly among the partners. 3 Prepare an income distribution worksheet. Income Distribution Conway Salary Allowance Remainder Split Total to close to capital accts 4 Korman 15,000 15,000 30,000 0 15,000 15,000 Journalize the closing of the income summary accounts to the capital accounts. Journal Accounts Debit Income Summary 60,000 Conway, Capital Korman, Capital Lawrence, Capital Net Income Lawrence 0 15,000 15,000 In this step, we separate the amount of net income to go to each part just go to Retained Earnings, but since this company is organized as a $60,000 each partners capital account. 15,000 Since Conway is given a salary allowane of 15,000, we take that off th 45,000 60,000 net income - 15,000 salary allowance to Conway = 45,000, div 60,000 Make sure this total in the last column MATCHES the total amount of income summary account, and into the partner's capital accounts! So At this time, Income Summary (a temporary account used to close revenues and expenses in a partnersh close that account, so we will DEBIT Income Summary for the amount of net income, and we will CREDIT to their capital accounts based on the amounts calculated in part 3. Credit 30,000 15,000 15,000 After 5 years of operation Conway, Korma, and Lawrence decide to dissolve their partnership. The following are the account balances before liquidation begins: Cash Equipment Note Payable Capital, Conway Capital,Korman Capital, Lawrence 125,000 22,000 The equipment is sold for $7,000 8,000 61,000 44,000 34,000 147,000 147,000 5 Now the pa partnership and pay out account bal Complete the liquidating worksheet. Cash Beginning Balances Sale of Equipment Division of Loss on Sale Balance After Sale and Division of Loss Payment of Note Balance After Note Payment Distribution of cash to ptrs 125,000 7,000 Liquidation Equipment Note payable 22,000 8,000 -22,000 Conway Korman 0 0 8,000 -8,000 0 44,000 -5,000 132,000 -8,000 124,000 -124,000 61,000 -5,000 56,000 39,000 56,000 -56,000 39,000 -39,000 Lawrence 34,000 Enter beginning balance Sale of equipment- We -5,000 Since we received less c 29,000 Check for balance in the Now, we pay off the no 29,000 Again, use accounting e -29,000 Cut a check from the ca Ending Balances 0 0 0 0 0 0 All balances should hav The chart in part 5 is great for organizing what happens in the liquidation process, but we still need to jo 6 Journalize each step of the closing. Journal Accounts Cash Loss on Sale of Equipment Equipment Conway, Capital Korman, Capital Lawrence, Capital Loss on Sale of Equipment Note Payable Cash Conway, Capital Korman, Capital Lawrence, Capital Cash Debit Credit 7,000 15,000 First, we sold the equipment for 7000 cash, so we record the cash received, the loss incurred, and take th 22,000 5,000 5,000 5,000 Then, we record the decrease to the partner's capital accounts due to the loss. Since the loss account ne account, we will decrease the loss account here as we would in the closing process of a normal year. 15,000 8,000 Record payment of the note payable, like any note payment would be recorded. 8,000 56,000 39,000 29,000 Record the payment of cash to each of the partners based on their account balances. 124,000 umulated depreciation for the new partnership- this is for ompany's books, not a concern for us here. ed to be received of the receivables. o pay to repurchase the inventory at this time. to pay to repurchase the equipment at this time. ties being brought into the partnership by Conway. lities being brought into the partnership by Lawrence. tners capital account. If this was a corporation, it would all partnership, we need to separate out how much goes to he net income being split, leaving 45,000 left to be split among the three partners. vided by 3 partners = 15,000 each for the remainder split. net income- this is how we get net income out of the o they must match! hip) has a credit balance of 60,000 for net income. We need to T the amount of each partner's share of that net income artners have decided its time to part ways and dissolve the p. Follow the steps below to close out the accounting books t the remaining cash to the partners as per their capital lances. ces from the chart above. received 7000 in cash, so that increases cash, but we have to decrease equipment for its full book value of 22,000. cash than book value, we experience a loss. We divide that loss evenly among the partners, and decrease their capital account balances as such. (22000 BV - 7000 cash = 15,000 loss, divided by 3 = 5000 loss each) he accounting equation: Assets equal 132,000, Liabilities + Capital accounts = 132,000. ote payable balance by decreasing cash and decreasing note payable for its balance. equation to check for balance: Assets = 124,000. Liabilities (0 balance) plus capital account balances = 124,000. ash account for each partner in the amount of their capital account balance. ve an ending amount of 0 at this time. The business is closed, the lights are off. The partnership is over. ournalize those occurrences to get them into the books. he equipment off the books. eeds to be closed, similar to an expense Module 9 Assignment: Conway and Lawrence form a partnership by combining the assets and liabilities of their respective sole proprietorships. The following are the assets and liabilities of each partner and their market values. Asset Cash Accounts receivable Note payable Inventory Conway Book value $20,000 $5,000 $10,000 $25,000 Market value Asset Cash Equipmnet Accumulated Depreciation Accounts Payable $3,000 $28,000 Lawrence Book Value $10,000 $50,000 $15,000 $7,000 Market value $30,000 Requirements: 1 Journalize the formation of the partnership. Journal Accounts Debit Credit Half way through the first year of operations Conway and Lawrence admit Korman to the partnership. Korman buys a 1/2 share for $37,000 in cash. 2 Journalize Korman's admission to the partnership. Journal Accounts Debit Credit The net income for the first year of oprations was $50,000. After giving Conway a salary of $20,000, the rest of the net income is split evenly among the partners. 3 Prepare an income distribution worksheet. Income Distribution Conway 4 Net Income Lawrence Korman Journalize the closing of the income summary accounts to the capital accounts. Journal Accounts Debit $50,000 Credit After 5 years of operation Conway, Korma, and Lawrence decide to dissolve their partnership. The following are the account balances before liquidation begins: Cash Equipment Note Payable Capital, Conway Capital,Korman Capital, Lawrence 5 127,000 20,000 The equipment is sold for $8,000 6,000 65,000 40,000 36,000 Complete the liquidating worksheet. Cash Equipment Liquidation Note payable Conway Korman Lawrence 6 Journalize each step of the closing. Journal Accounts Debit Credit SolutionBy agreement, a partner may retire and be permitted to withdraw assets equal to, less than, or greater than the amount of his interest in the partnership. The book value of a partner's interest is shown by the credit balance of the partner's capital account. The balance is computed after all profits or losses have been allocated in accordance with the partnership agreement, and the books closed. If a retiring partner withdraws cash or other assets equal to the credit balance of his capital account, the transaction will have no effect on the capital of the remaining partners. To illustrate, assume that several years after the formation of "A,B, & C" partnership Partner C decided to retire. The partners agreed to the withdrawal of cash equal to the amount of Partner C's equity in the assets of the partnership. Assume that the partners' capital accounts had credit balances as follows: Partner A $60,000 Partner B $40,000 Partner C $30,000 If Partner C withdraws $30,000 in cash, the entry on the books is as follows: Debit Credit Partner C, Capital 30,000 Cash 30,000 If a retiring partner agrees to withdraw less than the amount in his capital account, the transaction will increase the capital accounts of the remaining partners. For example, if Partner C withdraws only $20,000 in settlement of the interest, the difference between Partner C's equity in the assets of the partnership and the amount of cash withdrawn is $10,000 ($30,000 - $20,000) This difference is divided between the remaining partners on the basis stated in the partnership agreement. Assume that the partnership agreement specifies that in such a case the difference is divided according to the ratio of their capital interests after allocating net income and closing their drawing accounts. On this basis, Partner A's capital account is credited for $6,000 and Partner B's is credited for $4,000. The entry in the books of the partnership is as follows: Debit Credit Partner C, Capital 30,000 Cash 20,000 Partner A, Capital 6,000 Partner B, Capital 4,000 If a retiring partner withdraws more than the amount in his capital account, the transaction will decrease the capital accounts of the remaining partners. The excess of the amount withdrawn over retiring partner's equity in the partnership is divided between the remaining partners on the basis stated in the partnership agreement. Module 9 Assignment: Conway and Lawrence form a partnership by combining the assets and liabilities of their respective sole proprietorships. The following are the assets and liabilities of each partner and their market values. Asset Cash Accounts receivable Note payable Inventory Conway Book value $20,000 $5,000 $10,000 $25,000 Market value Asset Cash Equipmnet Accumulated Depreciation Accounts Payable $3,000 $28,000 Lawrence Book Value $10,000 $50,000 $15,000 $7,000 Market value $30,000 Requirements: 1 Journalize the formation of the partnership. Journal Accounts Cash Accounts Receivable Inventory Note Payable Accounts Payable Equipment Capital, Conway Capital, Lawrence Debit Credit 30,000 3,000 28,000 10,000 7,000 12,000 Remember, equipment comes in at market value, and is an asset, so how do asse How do equity accounts increase? With debits or credits? 41,000 33,000 Half way through the first year of operations Conway and Lawrence admit Korman to the partnership. Korman buys a 1/2 share for $37,000 in cash. 2 Journalize Korman's admission to the partnership. Journal Accounts Cash Capital Korman Debit Credit 37,000 37,000 Same idea here as above- how do equity accounts increase? Also remember, tota The net income for the first year of oprations was $50,000. After giving Conway a salary of $20,000, the rest of the net income is split evenly among the partners. 3 Prepare an income distribution worksheet. Income Distribution Conway Salary Net Income Total 4 Net Income Lawrence Korman 20,000 10,000 30,000 10,000 10,000 Journalize the closing of the income summary accounts to the capital accounts. Journal Accounts Debit Income summary 50,000 Capital Conway Capital Lawrence Capital Korman $50,000 20,000 30,000 50,000 10,000 10,000 Credit 30,000 10,000 10,000 After 5 years of operation Conway, Korma, and Lawrence decide to dissolve their partnership. The following are the account balances before liquidation begins: Cash Equipment Note Payable Capital, Conway Capital,Korman Capital, Lawrence 5 127,000 20,000 The equipment is sold for $8,000 6,000 65,000 40,000 36,000 Complete the liquidating worksheet. Cash Beginning Balances Equipment sold at a loss,split eve 127,000 8,000 New balances Liabilities New balances 135,000 -6,000 129,000 Liquidation Equipment Note payable 20,000 6,000 -20,000 0 0 6,000 -6,000 0 Conway Korman 65,000 -4,000 40,000 -4,000 Lawrence 36,000 -4,000 61,000 36,000 32,000 61,000 36,000 32,000 Distribution of the remaining cash Balance at closure 6 -129,000 0 0 0 Journalize each step of the closing. Journal Accounts Cash Loss on Sale of Equipment Equipment Capital Conway Capital Korman Capital Lawrence Loss on sale of equipment Note payable Cash Capital Conway Capital Korman Capital Lawrence Cash Debit Credit 8,000 12,000 20,000 4,000 4,000 4,000 12,000 6,000 6,000 61,000 36,000 32,000 129,000 -61,000 0 -36,000 0 -32,000 0 ets increase? al debits and total credits must balance in every journal entry. Module 9 Assignment: Conway and Lawrence form a partnership by combining the assets and liabilities of their respective sole proprietorships. The following are the assets and liabilities of each partner and their market values. Asset Cash Accounts receivable Note payable Inventory Conway Book value $20,000 $5,000 $10,000 $25,000 Market value Asset Cash Equipmnet Accumulated Depreciation Accounts Payable $3,000 $28,000 Lawrence Book Value $10,000 $50,000 $15,000 $7,000 Market value $30,000 Requirements: 1 Journalize the formation of the partnership. Journal Accounts Cash Accounts Receivable Inventory Equipment Note Payable Accounts Payable Capital, Conway Capital, Lawrence Debit Credit 30,000 3,000 28,000 30,000 10,000 7,000 41,000 How do equity accounts increase? With debits or credits? 33,000 Half way through the first year of operations Conway and Lawrence admit Korman to the partnership. Korman buys a 1/2 share for $37,000 in cash. 2 Journalize Korman's admission to the partnership. Journal Accounts Cash Capital Korman Debit Credit 37,000 37,000 Same idea here as above- how do equity accounts increase? Also remember, tot The net income for the first year of oprations was $50,000. After giving Conway a salary of $20,000, the rest of the net income is split evenly among the partners. 3 Prepare an income distribution worksheet. Income Distribution Conway Salary Net Income Total 4 Net Income Lawrence Korman 20,000 10,000 30,000 10,000 10,000 Journalize the closing of the income summary accounts to the capital accounts. Journal Accounts Debit Income summary 50,000 Capital Conway Capital Lawrence Capital Korman 10,000 10,000 $50,000 20,000 30,000 50,000 Credit 30,000 10,000 10,000 After 5 years of operation Conway, Korma, and Lawrence decide to dissolve their partnership. The following are the account balances before liquidation begins: Cash Equipment Note Payable Capital, Conway Capital,Korman Capital, Lawrence 5 127,000 20,000 The equipment is sold for $8,000 6,000 65,000 40,000 36,000 Complete the liquidating worksheet. Cash Beginning Balances Equipment sold at a loss,split ev 127,000 8,000 New balances Liabilities New balances 135,000 -6,000 129,000 Liquidation Equipment Note payable 20,000 6,000 -20,000 0 0 6,000 -6,000 0 Conway 65,000 -4,000 Korman 40,000 -4,000 Lawrence 36,000 -4,000 61,000 36,000 32,000 61,000 36,000 32,000 Distribution of the remaining cash Balance at closure 6 -129,000 0 0 0 Journalize each step of the closing. Journal Accounts Cash Loss on Sale of Equipment Equipment Capital Conway Capital Korman Capital Lawrence Loss on sale of equipment Note payable Cash Capital Conway Capital Korman Capital Lawrence Cash Debit Credit 8,000 12,000 20,000 4,000 4,000 4,000 12,000 6,000 6,000 61,000 36,000 32,000 129,000 -61,000 0 -36,000 0 -32,000 0 tal debits and total credits must balance in every journal entry. SolutionBy agreement, a partner may retire and be permitted to withdraw assets equal to, less than, or greater than the amount of his interest in the partnership. The book value of a partner's interest is shown by the credit balance of the partner's capital account. The balance is computed after all profits or losses have been allocated in accordance with the partnership agreement, and the books closed. If a retiring partner withdraws cash or other assets equal to the credit balance of his capital account, the transaction will have no effect on the capital of the remaining partners. To illustrate, assume that several years after the formation of "A,B, & C" partnership Partner C decided to retire. The partners agreed to the withdrawal of cash equal to the amount of Partner C's equity in the assets of the partnership. Assume that the partners' capital accounts had credit balances as follows: Partner A $60,000 Partner B $40,000 Partner C $30,000 If Partner C withdraws $30,000 in cash, the entry on the books is as follows: Debit Credit Partner C, Capital 30,000 Cash 30,000 If a retiring partner agrees to withdraw less than the amount in his capital account, the transaction will increase the capital accounts of the remaining partners. For example, if Partner C withdraws only $20,000 in settlement of the interest, the difference between Partner C's equity in the assets of the partnership and the amount of cash withdrawn is $10,000 ($30,000 - $20,000) This difference is divided between the remaining partners on the basis stated in the partnership agreement. Assume that the partnership agreement specifies that in such a case the difference is divided according to the ratio of their capital interests after allocating net income and closing their drawing accounts. On this basis, Partner A's capital account is credited for $6,000 and Partner B's is credited for $4,000. The entry in the books of the partnership is as follows: Debit Credit Partner C, Capital 30,000 Cash 20,000 Partner A, Capital 6,000 Partner B, Capital 4,000 If a retiring partner withdraws more than the amount in his capital account, the transaction will decrease the capital accounts of the remaining partners. The excess of the amount withdrawn over retiring partner's equity in the partnership is divided between the remaining partners on the basis stated in the partnership agreement. Module 9 Assignment: Conway and Lawrence form a partnership by combining the assets and liabilities of their respective sole proprietorships. The following are the assets and liabilities of each partner and their market values. Asset Cash Accounts receivable Note payable Inventory Conway Book value $20,000 $5,000 $10,000 $25,000 Market value Asset Cash Equipmnet Accumulated Depreciation Accounts Payable $3,000 $28,000 Lawrence Book Value $10,000 $50,000 $15,000 $7,000 Market value $30,000 Requirements: 1 Journalize the formation of the partnership. Journal Accounts Cash Accounts Receivable Inventory Note Payable Accounts Payable Equipment Capital, Conway Capital, Lawrence Debit Credit 30,000 3,000 28,000 10,000 7,000 12,000 Remember, equipment comes in at market value, and is an asset, so how do asse How do equity accounts increase? With debits or credits? 41,000 33,000 Half way through the first year of operations Conway and Lawrence admit Korman to the partnership. Korman buys a 1/2 share for $37,000 in cash. 2 Journalize Korman's admission to the partnership. Journal Accounts Cash Capital Korman Debit Credit 37,000 37,000 Same idea here as above- how do equity accounts increase? Also remember, tota The net income for the first year of oprations was $50,000. After giving Conway a salary of $20,000, the rest of the net income is split evenly among the partners. 3 Prepare an income distribution worksheet. Income Distribution Conway Salary Net Income Total 4 Net Income Lawrence Korman 20,000 10,000 30,000 10,000 10,000 Journalize the closing of the income summary accounts to the capital accounts. Journal Accounts Debit Income summary 50,000 Capital Conway Capital Lawrence Capital Korman $50,000 20,000 30,000 50,000 10,000 10,000 Credit 30,000 10,000 10,000 After 5 years of operation Conway, Korma, and Lawrence decide to dissolve their partnership. The following are the account balances before liquidation begins: Cash Equipment Note Payable Capital, Conway Capital,Korman Capital, Lawrence 5 127,000 20,000 The equipment is sold for $8,000 6,000 65,000 40,000 36,000 Complete the liquidating worksheet. Cash Beginning Balances Equipment sold at a loss,split eve 127,000 8,000 New balances Liabilities New balances 135,000 -6,000 129,000 Liquidation Equipment Note payable 20,000 6,000 -20,000 0 0 6,000 -6,000 0 Conway Korman 65,000 -4,000 40,000 -4,000 Lawrence 36,000 -4,000 61,000 36,000 32,000 61,000 36,000 32,000 Distribution of the remaining cash Balance at closure 6 -129,000 0 0 0 Journalize each step of the closing. Journal Accounts Cash Loss on Sale of Equipment Equipment Capital Conway Capital Korman Capital Lawrence Loss on sale of equipment Note payable Cash Capital Conway Capital Korman Capital Lawrence Cash Debit Credit 8,000 12,000 20,000 4,000 4,000 4,000 12,000 6,000 6,000 61,000 36,000 32,000 129,000 -61,000 0 -36,000 0 -32,000 0 ets increase? al debits and total credits must balance in every journal entry. Module 9 Assignment: Conway and Lawrence form a partnership by combining the assets and liabilities of their respective sole proprietorships. The following are the assets and liabilities of each partner and their market values. Asset Cash Accounts receivable Note payable Inventory Conway Book value $20,000 $5,000 $10,000 $25,000 Market value Asset Cash Equipmnet Accumulated Depreciation Accounts Payable $3,000 $28,000 Lawrence Book Value $10,000 $50,000 $15,000 $7,000 Market value $30,000 Requirements: 1 Journalize the formation of the partnership. Journal Accounts Cash Accounts Receivable Inventory Equipment Note Payable Accounts Payable Capital, Conway Capital, Lawrence Debit Credit 30,000 3,000 28,000 30,000 10,000 7,000 41,000 How do equity accounts increase? With debits or credits? 33,000 Half way through the first year of operations Conway and Lawrence admit Korman to the partnership. Korman buys a 1/2 share for $37,000 in cash. 2 Journalize Korman's admission to the partnership. Journal Accounts Cash Capital Korman Debit Credit 37,000 37,000 Same idea here as above- how do equity accounts increase? Also remember, tot The net income for the first year of oprations was $50,000. After giving Conway a salary of $20,000, the rest of the net income is split evenly among the partners. 3 Prepare an income distribution worksheet. Income Distribution Conway Salary Net Income Total 4 Net Income Lawrence Korman 20,000 10,000 30,000 10,000 10,000 Journalize the closing of the income summary accounts to the capital accounts. Journal Accounts Debit Income summary 50,000 Capital Conway Capital Lawrence Capital Korman 10,000 10,000 $50,000 20,000 30,000 50,000 Credit 30,000 10,000 10,000 After 5 years of operation Conway, Korma, and Lawrence decide to dissolve their partnership. The following are the account balances before liquidation begins: Cash Equipment Note Payable Capital, Conway Capital,Korman Capital, Lawrence 5 127,000 20,000 The equipment is sold for $8,000 6,000 65,000 40,000 36,000 Complete the liquidating worksheet. Cash Beginning Balances Equipment sold at a loss,split ev 127,000 8,000 New balances Liabilities New balances 135,000 -6,000 129,000 Liquidation Equipment Note payable 20,000 6,000 -20,000 0 0 6,000 -6,000 0 Conway 65,000 -4,000 Korman 40,000 -4,000 Lawrence 36,000 -4,000 61,000 36,000 32,000 61,000 36,000 32,000 Distribution of the remaining cash Balance at closure 6 -129,000 0 0 0 Journalize each step of the closing. Journal Accounts Cash Loss on Sale of Equipment Equipment Capital Conway Capital Korman Capital Lawrence Loss on sale of equipment Note payable Cash Capital Conway Capital Korman Capital Lawrence Cash Debit Credit 8,000 12,000 20,000 4,000 4,000 4,000 12,000 6,000 6,000 61,000 36,000 32,000 129,000 -61,000 0 -36,000 0 -32,000 0 tal debits and total credits must balance in every journal entry