Question

R. C. Jones and S. K. Miller are forming a partnership for a beauty salon and plan to work full-time in the salon. Jones will make an initial investment of $ 45,000; Miller, $ 35,000. They are considering the following plans for the division of net income:
a. Division in the same ratio as the balances of their Capital accounts.
b. Interest of 10 percent on the balances of their Capital accounts at the beginning of the year and the remainder of the net income to be divided equally.
c. Salary allowances of $ 42,500 to Jones and $ 33,500 to Miller based on the value of their services, interest of 10 percent on the balances of their Capital accounts at the beginning of the year, and the remainder of the net income to be divided equally.

Required
1. Using the form in the Working Papers, record the distributive shares of net income for each of the partners, assuming
(a) A net income of $ 120,000 (calculate ratio to four decimal places)
(b) A net income of $ 74,000.
2. Which plan is the fairest? Give reasons for your opinion.
3. Assume that three years later, on December 31, 20—, Jones’ Capital balance is $ 68,000. With the approval of Miller, Jones sells her interest to two new partners, J. K. Gonzalez for $ 38,000 and F. R. Harris for $ 30,000. Journalize the entry to account for the transfer of ownership.
4. (a) Assume that S. K. Miller, the remaining original partner, decides to withdraw from the partnership two years after Jones’ sale of her partnership interest. The partnership agreement stipulates that net income and net loss be shared on a 2: 1: 1 ratio (Miller, Gonzalez, and Harris, respectively) and that an examination and revaluation of assets will take place upon retirement of a partner. The revaluation shows that Merchandise Inventory is undervalued by $ 20,000 that Equipment is overvalued by $ 4,800, and that Allowance for Doubtful Accounts should be increased by $ 1,500. As of December 31, journalize the allocation of the net difference between debits and credits to the partners’ Capital accounts according to the 2 : 1 : 1 ratio.
(b) Assume that S. K. Miller’s Capital balance is $ 72,150 before the revaluation. Journalize on December 31, 20—, the withdrawal of Miller assuming that he withdraws cash.



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  • CreatedOctober 21, 2014
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