On March 1, 2011, Abbey and Dames formed a partnership. Abbey contributed $83,00

Question

On March 1, 2011, Abbey and Dames formed a partnership. Abbey contributed $83,000 cash and Dames contributed land valued at $66,400 and a building valued at $96,400. The partnership also assumed responsibility for Dames’s $73,000 long-term note payable associated with the land and building. The partners agreed to share income as follows: Abbey is to receive an annual salary allowance of $32,000, both are to receive an annual interest allowance of 9% of their beginning-year capital investment, and any remaining income or loss is to be shared equally. On October 20, 2011, Abbey withdrew $31,000 cash and Dames withdrew $24,000 cash. After the adjusting and closing entries are made to the revenue and expense accounts at December 31, 2011, the Income Summary account had a credit balance of $87,000. 1(a) Prepare journal entries to record the partners' initial capital investments. 1(b) Prepare journal entries to record their cash withdrawals 1(c) Prepare journal entries to record the December 31 closing of both the Withdrawals and Income Summary accounts. 2. Determine the balances of the partners' capital accounts as of December 31, 2011.

Explanation / Answer

1a. Cash, Debit 83,000 Abbey Capital, Credit 83,000 To record Abbey's cash contribution to the company Land, Debit 66,400 Building, Debit 96,400 Note Payable, Credit 73,000 (This is a liability so it has the opposite effect of contributing as asset) Dames Capital, Credit 89,800 1b. Draw, Abbey, Debit 31,000 Cash, Credit 31,000 (The company is losing cash) Draw, Dames, Debit 24,000 Cash, Credit 24,000 1.c Income Summary, Debit 55,000 Withdrawals (Draw), Credit 55,000 (31,000 + 24,000) To close the Draw account. (Because Draw has a normal debit balance) 2. Now, before salary is given at year end: Abbeys Capital Account balance is: 83000 - 31000 = 52,000 Dames balance is: 89,800 - 24,000 = 65,800 The Net Income is 32,000 (87000 - minus draw of 55,000) and it given as follows. IMPORTANT: there is not enough money for each agreed upon salary so, money will be given via the rules of the partnership agreement and then the loss with be subtracted per the agreement, in this case it states any loss is split 50/50. Abbey's income: 32,000 salary + 9% of original investment 7,470 (83,000 X 9%) - 7,776 LOSS* = $31,694 Dames income:9% of original investment 8,082 - 7,776 LOSS* = $306 *32,000 Salary plus 7470 plus 8082 - net income of 32,000 equals a loss of 15,552 / 2 =7,776. Please RATE me! Any questions, comment.

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