Problem - Adjusting Entries for Partner Admission
The CAB partnership, although operating profitably, has had a cash flow problem. Unable to meet its current commitments, the firm borrowed $34,000 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, 2008, is as follows:
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Assets
|
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Cash
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$8,000
|
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Accounts Receivable
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33,600
|
|
Inventory (at cost)
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35,750
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Land
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27,000
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|
Building (net of depreciation)
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41,600
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Equipment (net of depreciation)
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27,250
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Total
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$173,200
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|
|
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Liabilities and Capital
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Accounts Payable
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$32,450
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Other Current Liabilities
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6,750
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Long-term Note (8% due 2008)
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34,000
|
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Cox, Capital
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37,500
|
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Andrews, Capital
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25,000
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Bennet, Capital
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37,500
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Total
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$173,200
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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 $41,250
3. The market value of the land based on a current appraisal is $65,000
4. The partner had been using an unreasonably long estimated life in establishing a depreciation policy for the building. On the basis for sound value (current replacement cost adjusted for use), the value of the building is #32,750
5. There are unrecorded accrued liabilities of $3,275
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 $150,000. Because of the uncertainty of the business, no goodwill is to be recognized before or after Meyers is admitted.
Required:
A. Prepare the necessary journal entries on the books of the old partnership to adjust the accounts.
B. Record the admission of Meyers.
C. Prepare a new balance sheet giving effect to the foregoing requirements.