PR 12-1A Entries and balance sheet for partnership

On March 1, 2014, Eric Keene and Abigail McKee form a partnership. Keene agrees to invest $21,100 in cash and merchandise inventory valued at $55,900. McKee invests certain business assets at valuations agreed upon, transfers business liabilities, and contributes sufficient cash to bring her total capital to $60,000. Details regarding the book values of the business assets and liabilities, and the agreed valuations, follow:


McKee’s Ledger
Balance
Agreed-Upon
Valuation
Accounts Receivable $18,900 $18,000
Allowance for Doubtful Accounts 1,200 1,500
Equipment 83,500 54,900 Accumulated Depreciation—Equipment 29,800
Accounts Payable 15,000 15,000
Notes Payable (current) 36,000 36,000




The partnership agreement includes the following provisions regarding the division of net income: interest on original investments at 10%, salary allowances of $22,500 (Keene) and $30,400 (McKee), and the remainder equally.

Instructions
1. Journalize the entries to record the investments of Keene and McKee in the partnership accounts.
2. Prepare a balance sheet as of March 1, 2014, the date of formation of the partnership of Keene and McKee.
3. After adjustments and the closing of revenue and expense accounts at February 28, 2015, the end of the first full year of operations, the income summary account has a credit balance of $90,000, and the drawing accounts have debit balances of $28,000 (Keene) and $30,400 (McKee). Journalize the entries to close the income summary account and the drawing accounts at February 28, 2015.


Answer:


1. Mar. 1 Cash 21,100
Merchandise Inventory 55,900
Eric Keene, Capital 77,000
1 Cash 39,600
Accounts Receivable 18,000
Equipment 54,900
Allowance for Doubtful Accounts 1,500
Accounts Payable 15,000
Notes Payable 36,000
Abigail McKee, Capital 60,000

2. KEENE AND MCKEE
Balance Sheet
March 1, 2014
Assets
Current assets:
Cash $60,700
Accounts receivable $18,000
Less allowance for doubtful accounts 1,500 16,500
Merchandise inventory 55,900
Total current assets $133,100
Plant assets:
Equipment 54,900
Total assets $188,000
Liabilities
Current liabilities:
Accounts payable $15,000
Notes payable 36,000
Total liabilities $ 51,000
Partners’ Equity
Eric Keene, capital $77,000
Abigail McKee, capital 60,000
Total partners’ equity 137,000
Total liabilities and partners’ equity $188,000

3. Feb. 28 Income Summary 90,000
Eric Keene, Capital* 41,900
Abigail McKee, Capital* 48,100
28 Eric Keene, Capital 28,000
Abigail McKee, Capital 30,400
Eric Keene, Drawing 28,000
Abigail McKee, Drawing 30,400

* Computations:
Keene McKee
1 2
Total
Interest allowance……………… $ 7,700 $ 6,000 $13,700
Salary allowance……………… 22,500 30,400 52,900
Remaining income (1:1)………
3
11,700
3
11,700 23,400
Net income……………………… $41,900 $48,100 $90,000
1 10% × $77,000
2 10% × $60,000
3 ($90,000 – $13,700 – $52,900) × 1/2