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College Accounting, Chapters 1-27

23rd Edition
HEINTZ + 1 other
ISBN: 9781337794756

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Chapter
Section
BuyFindarrow_forward

College Accounting, Chapters 1-27

23rd Edition
HEINTZ + 1 other
ISBN: 9781337794756
Textbook Problem

On December 31, 20-8, the partners decided to liquidate The Bogey Men. The balance sheet reported the following information:

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From January 1 through 18, 20-9, partners sold off the inventory for $600,000 and then distributed the cash in proportion to their capital balances. At this time, the partners’ shares in profits and losses are as follows:

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Prepare the journal entries to record the sale of inventory for $600,000 and the allocation of the gain or loss.

To determine

Prepare the journal entry to record the sale of inventory for $600,000 and the allocation of the gain or loss.

Explanation

Partnership:

A partnership is an unincorporated form of business which is formed by an agreement, owned and managed mutually by two or more individuals, who invest their assets in the business and share the liabilities and profits among themselves.

Prepare the journal entry:

DateAccount titles and ExplanationDebitCredit
January 1Cash$600,000 
      Inventory$400,000
      Gain on sale of assets $200,000
 (To record sale of inventory)  

Table (1)

  • Cash is an asset and it is increased. Therefore, debit cash account by $600,000.
  • Inventory is an asset and it is decreased. Therefore, credit inventory account by $400,000.
  • Gain on sale of assets is a component of partners’ equity and it is increased. Therefore, credit gain on sale of assets account by $200,000.
DateAccount titles and ExplanationDebitCredit
January 1Gain on sale of assets$200,000 
      Partner P, Capital(1) $60,000
      Partner JM, Capital (2) $60,000
      Partner JS, Capital (3) $40,000
      Partner M, Capital (4) $40,000
 (To record allocation of gain)  

Table (2)

  • Gain on sale of assets is a component of partners’ equity and it is decreased. Therefore, debit gain on sale of assets account by $200,000.
  • Partner P, Capital is a component of partners’ equity and it is increased. Therefore, debit Partner P account by $60,000.
  • Partner JM, Capital is a component of partners’ equity and it is increased. Therefore, debit Partner JM account by $60,000.
  • Partner JS, Capital is a component of partners’ equity and it is increased. Therefore, debit Partner JS account by $40,000.
  • Partner M, Capital is a component of partners’ equity and it is increased. Therefore, debit Partner M account by $40,000.

Working notes:

(1) Calculate the share of gain on sale of assets for Partner D:

ShareofgainonsaleofassetsforPartnerD}=(Gainonsaleofinventory×Percentageofshareinprofitandlosses)=$200,000×30100=$60,000

(2) Calculate the share of gain on sale of assets for Partner JM:

Shareofgain&

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