Question

On June 1, 2020, Jill Bow and Aisha Adams formed a partnership to open a gluten-free commercial bakery, contributing $283,000 cash and $366,000 of equipment, respectively. The partnership also assumed responsibility for a $43,000 note payable associated with the equipment. The partners agreed to share profits as follows: Bow is to receive an annual salary allowance of $153,000, both are to receive an annual interest allowance of 10% of their original capital investments, and any remaining profit or loss is to be shared 40/60 (to Bow and Adams, respectively). On November 20, 2020, Adams withdrew cash of $103,000. At year-end, May 31, 2021, the Income Summary account had a credit balance of $410,000. On June 1, 2021, Peter Williams invested $123,000 and was admitted to the partnership for a 20% interest in equity.

Required:
1. Prepare journal entries for the following dates.

a. June 1, 2020

• Record the formation of partnership

b. November 20, 2020

• Record the withdrawal by partner

c. May 31, 2021

• Record the closing of profit to capital.  
  
  
  d. June 1, 2021
• Record the admission of Williams for a 20% interest.
  
  2. Calculate the balance in each partner’s capital account immediately after the June 1, 2021, entry.
  
  Bow, capital Aisha Adams, capital Williams, capital
  

Answer 1

Requirement #1)

No.	Date	Account titles and explanation	Debit	Credit
a	June 1, 2020	Cash	283000
		Equipment	366000
		Bow, Capital		283000
		Adams, Capital		323000
		Notes Payable		43000
		(To record formation of partnership)
b	Nov 20, 2020	Adams, Withdrawals	103000
		Cash		103000
		(To record withdrawal by partner.)
c	May 31, 2021	Income summary	410000
		Bow, Capital		259860
		Adams, Capital		150140
		(To record closing of net income to capital)
d	June 1, 2021	Cash	123000
		Bow, Capital (207200-123000)*40%	33680
		Adams, Capital (207200-123000)*60%	50520
		Williams, Capital (1036000*20%)		207200
		(To record the admission of new partner)

	Bow	Adams	Total
Net income			410000
Salary allowance:
Bow	153000
Interest allowances:
Bow (10% on $283,000)	28300
Adams (10% on $323,000)		32300
Total salaries and interest allocation	181300	32300	213600
Balance of income to be allocated			196400
Balance allocated 40/60:
Bow (40% × $196400)	78560
Adams (60% × $196400)		117840
Total allocated 40/60			(196400)
Balance of income			0
Shares of the partners	259860	150140	410000

Total equity prior to admission of new partner:

=(283000+259860)+(323000-103000+150140)

= 913000

Total equity after admission of new partner:

= 913000+123000

= 1036000

Requirement #2)

Bow, Capital (283000+259860-33680)	$509180
Adams, Capital (323000-103000+150140-50520)	$319620
Williams, Capital	$207200

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