Two partnerships of A & B and C&D began businesson Jan 1st 2017; each partnership owns one retailappliance store. The two partnerships agree to combine as of April1st 2017 to form a new partnership, ABCD DiscountStores. The two businesses agreed upon the followingpoints:
- Profit and loss ratios.
| A | B | C | D |
Old Business Ratios | 40% | 60% | 30% | 70% |
New Business Ratios | 20% | 30% | 15% | 35% |
- Capital investments. The opening capitalinvestments for the new partnership are to be in the same ratio asthe profit and loss sharing ratios for the new partnership. Ifnecessary, certain partners may have to contribute additional cash,and others may have to withdraw cash to bring the capitalinvestments into the proper ratio.
- Accounts receivable. The partners agreed toset the new partnership’s allowance for bad debts at 3% of theaccounts receivable contributed by A&B and 12% of the accountsreceivable contributed by C&D.
- Inventory. The new partnership’sopening inventory is to be valued by the FIFO method.B&M used the FIFO method to value inventory (which approximatesits current value), and A&J used the LIFO method. The LIFOinventory represents 85% of its FIFO value.
- Property and equipment. The partners agreethat the building’s current value is approximately 70% of thebuilding’s historical cost, as recorded on each partnership’sbooks.
- Unpaid liability. After each partnership’sbooks were closed on 31st March 2017, an unrecordedmerchandise purchase of $1,500 by A&B was discovered. Themerchandise had been sold by 31st March 2017.
- The 31st March 2017 post closing trial balances ofthe partnerships was as follow.
Account | A&B Balance – 31st March 2017 | C&D Balance – 31st March 2017 |
Cash | 25,000 | | 22,000 | |
Accounts Receivable | 200,000 | | 250,000 | |
Allowance for doubtful accounts | | 4,000 | | 15,000 |
Inventory | 175,000 | | 119,000 | |
Building & Equipment | 107,000 | | 169,000 | |
Accumulated Depreciation | | 24,000 | | 61,000 |
Accounts Payable | | 140,000 | | 160,000 |
Notes Payable | | 100,000 | | 120,000 |
A’s Capital | | 95,000 | | |
B’s, Capital | | 144,000 | | |
C’s Capital | | | | 65,000 |
D’s Capital | | | | 139,000 |
Totals | 507,000 | 507,000 | 560,000 | 560,000 |
Required:
- Prepare the journal entries to record the initialcapital contribution after considering the effect of thisinformation. Use separate entries for each of the combiningpartnerships.
- Prepare a schedule computing the cash contributed orwithdrawn by each partner to bring the initial capital balancesinto the profit and los sharing ratio.
