Question
The CAB Partnership, although operating profitably, has had a cash flow problem. Unable to meet its current commitments, the firm borrowed $33,000 from a bank
The CAB Partnership, although operating profitably, has had a cash flow problem. Unable to meet its current commitments, the firm borrowed $33,000 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, 2014, is as follows:
Assets
Cash$7,200
Accounts Receivable32,600
Inventory (at cost)32,700
Land26,100
Building (net of depreciation)44,500
Equipment (net of depreciation)27,900
Total$171,000
Liabilities and Capital
Accounts Payable$30,300
Other Current Liabilities6,700
Long-Term Note (8% due 2008)33,000
Cox, Capital39,000
Andrews, Capital26,000
Bennet, Capital36,000
Total$171,000
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 $42,600.
3.The market value of the land based on a current appraisal is $60,200.
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 $31,100.
5.There are unrecorded accrued liabilities of $3,000.
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 $153,000. Because of the uncertainty of the business, no goodwill is to be recognized before or after Meyers is admitted.
(a) Prepare the necessary journal entries on the books of the old partnership to adjust the accounts. (Round answers to 0 decimal places, e.g. 5,125. Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)
(b) RecordtheadmissionofMeyers.
(c) Prepareanewbalancesheetgivingeffecttotheforegoingrequirements.
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