Soren-Lindross Partnership 1. The case I.I Formation of the partnership Wendy So

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Soren-Lindross Partnership 1. The case I.I Formation of the partnership Wendy Soren and Tom Lindross have agreed to form a general partnership, TriGate Partners, to own and operate apartment complexes in Rhode Island. As of January 1, 2004, the partnership takes legal title to the contributed property and commences operations. At the time of formation, Wendy contributed $280,000 cash and an apartment complex, Park Shores Apartments, valued at S2 million. Wendy purchased the complex on April 12, 2001 for $1.6 million dollars and has been operating the property as a sole proprietorship. The property is subject to debt of S600,000 that is assumed by the partnership. Tom contributed $680,000 cash and an apartment complex, Lake View Apartments, valued at $2.9 million and investment land valued at S300,000. Tom purchased the complex on November 7, 2002 for $2.5 million and has been operating the property as a sole proprietorship. The complex is subject to debt of S2.4 million. The land was purchased on August 28, 2002 for S280,000 In November and December 2003, Wendy and Tom paid $25,000 for expenses that qualify as organizational costs. During this time, they also paid S15,000 for costs that meet the definition of start-up expenses. The $40,000 expense was paid for evenly by the two partners. 1.2 Partnership operations The partnership agreement states that Wendy and Tom are to each receive 10 percent interest on beginning capital balances, in addition, Wendy will receive a salary of $60,000 per year. Each will share profits and losses equally. Partnership income in 2004 was $656,000. On December 31, 2004 the partnership admitted Sally Scott to the partnership, giving her a 10 percent interest for $420,000. Prior to admitting Sally, the partnership assets were revalued at $35,000 below their current value. 2. Case requirements Prepare the journal entry to record the partnership formation. Prepare a Schedule of Distribution of Partnership Income for 1. 2.

Explanation / Answer

Answer: 1.

Journal Entry in the books of firm at the time of formation

(a) Cash a/c dr. $280000

To wendy Account $280000

( Being cash bring by wendy as a capital contribution)

(b) Apartment A/c dr. $2000000

To wendy Account $200000

(Being apartment contributed by wendy in the form of capital)

(c) Wendey A/c dr. $600000

To debt A/c $600000

(Being debt of wndey recorded in the books of patnership firm)

(d) cash A/c dr. $680000

To Tom A/c $680000

(being capital contributed by Tom in the form of cash)

(e) apartment & Land A/c dr. $3200000

To Tom A/c $3200000

(Being capital contributed by Mr. Tom in the form of other than Cash 2900000+300000=3200000)

(f) Tom A/c dr. $2400000

To debt A/c $2400000

(Being debt of Mr. Tom is recognised the debt of firm)

Note: In the absence of information it is assumed that now firm will pay the debt which is created my Tom against property.

(g) Expenses A/c dr. $120000

To Tom and Wendey A/c $120000

( Being expenses incurred by both partner in the behalf of firm)

Answer: 2.

(a) Profit & Loss A/c dr. $656000

To Tom capital A/c $328000

To Wendey Capital A/c $328000

(Being income as given in question is distrbuted as per given sharing ratio i.e. 1:1)

Answer: 3.

(a) Revaluation Reserve A/c dr. $35000

To Assest A/c $35000

(Being assets undervalued by $35000)

(b) Bank A/c Dr. $420000

To Sally Scott Capital A/c $420000

(Being Sally Scott Admitted as a partner)

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