Question & Answer: PROBLEM 15-5 Adjusting Entries for Partner Admission…..

PROBLEM 15-5 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:
Assets
Cash $ 8,000
Accounts Receivable 33,600
Inventory (at cost) 35,750
Land 27,000
Building (net of depreciation) 41,600
Equipment (net of depreciation) 27,250
Total $173,200
Liabilities and Capital
Accounts Payable $ 32,450
Other Current Liabilities 6,750
Long-Term Note (8% due 2008) 34,000
Cox, Capital 37,500
Andrews, Capital 25,000
Bennet, Capital 37,500
Total $173,200
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 partners had been using an unreasonably long estimated life in establishing a
depreciation policy for the building. On the basis of 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.