Answered step by step
Verified Expert Solution
Question
1 Approved Answer
P 15-5 Adjusting Entries for Partner Admisson The CAB Partnership, although operating profitably, has had a cash flow problem. Unable to meet its current commitments,
P 15-5 | Adjusting Entries for Partner Admisson | |||||||||
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 additonal cash by admiting 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 reiew the accounting records of the partnership. | ||||||||||
The balance sheet for CAB Partnership as of Decemer 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 | |||||||||
Libalities and Capital | ||||||||||
Accounts Payable | 32,450 | |||||||||
Other Current liabilites | 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 unreasnably long estimated life in establishing a depreciation policy | ||||||||||
for the building. On the basis of sound value (current replacement cost adjustment for use.), the value | ||||||||||
of the building is $32,750. | ||||||||||
5) There are unrecorded accrued liabilities of $3,275. | ||||||||||
The parthners agree to recognize the foregoing adjustments to the account. Cox, Andrews, and | ||||||||||
Bennet share profits 40.30.30. After the admission of Meyers, the new profit agrement is to be 30.20.30.20. | ||||||||||
Meyers is to recive a 25% capital interest in the partnership after she invest sufficient cas 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 admisson of Meyers. | ||||||||||
C) Prepare a new balance sheet giving effect to the foregoing requirements. | ||||||||||
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access with AI-Powered Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started