Jordan Cates and LaToya Orr have operated a successful firm for many years, sharing net income and net losses equally. Caleb Webster is to be admitted to the partnership on June 1 of the current year, in accordance with the following agreement:

a. Assets and liabilities of the old partnership are to be valued at their book values as of May 31, except for the following:

• Accounts receivable amounting to $2,000 are to be written off, and the allowance for doubtful accounts is to be increased to 5% of the remaining accounts.

• Merchandise inventory is to be valued at $63,870.

• Equipment is to be valued at $90,000.

b. Webster is to purchase $30,000 of the ownership interest of Orr for $37,500 cash and to contribute $35,000 cash to the partnership for a total ownership equity of $65,000.

c. The income-sharing ratio of Cates, Orr, and Webster is to be 2:1:1. The post-closing trial balance of Cates and Orr as of May 31 follows.

Instructions
1. Journalize the entries as of May 31 to record the revaluations, using a temporary account entitled Asset Revaluations. The balance in the accumulated depreciation account is to be eliminated.
2. Journalize the additional entries to record the remaining transactions relating to the formation of the new partnership. Assume that all transactions occur on June 1.
3. Present a balance sheet for the new partnership as of June 1,2010.

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Cates and Orr Post-Closing Trial Balance May 31, 2010 Debit Balances Credit Balances 9,400 21,400 Cash Accounts Receivable Allowance for Doubtful Accounts 500 Merchandise Inventory Prepaid Insurance Equipment Accumulated Depreciation-Equipment Accounts Payable Notes Payable Jordan Cates, Capital LaToya Orr, Capital 58,600 3,500 95,000 25,700 14,700 12,000 75,000 60,000 187,900 187,900