Question: The partnership of Cain Gallo and Hamm engaged you to

The partnership of Cain, Gallo, and Hamm engaged you to adjust its accounting records and convert them uniformly to the accrual basis in anticipation of admitting Kerns as a new partner. Some accounts are on the accrual basis and some are on the cash basis. The partnership’s books were closed at December 31, 2008, by the bookkeeper, who prepared the general ledger trial balance that appears as follows:

Your inquiries disclose the following:
1. The partnership was organized on January 1, 2007. No provision was made in the partnership agreement for the allocation of partnership profits and losses. During 2007, profits were allocated equally among the partners. The partnership agreement was amended, effective January 1, 2008, to provide for the following profit and loss ratio: Cain, 40%; Gallo, 40%; and Hamm, 20%. The amended partnership agreement also stated that the accounting records were to be maintained on the accrual basis and that any adjustments necessary for 2007 should be allocated according to the 2007 profit allocation agreement.
2. The following amounts were not recorded as prepayments or accruals.

The advances from customers were recorded as sales in the year the cash was received.
3. In 2008, the partnership recorded a provision of $8,000 for anticipated declines in inventory prices. You convinced the partners that the provision was unnecessary and should be removed from the books.
4. The partnership charged equipment purchased for $4,400 on January 1, 2008, to expense. This equipment has an estimated life of 10 years and an estimated salvage value of $400. The partnership depreciates its capitalized equipment using the declining balance method at twice the straight-line depreciation rate.
5. The partners agreed to establish an allowance for doubtful accounts at 2% of current accounts receivable and 5% of past-due accounts. At December 31, 2007, the partnership had $54,000 of accounts receivable, of which only $4,000 was past due. At December 31,
2008, 20% of accounts receivable was past due, of which $4,000 represented sales made in 2007 and was considered collectible. The partnership had written off uncollectible accounts in the year the accounts became worthless as follows:

6. Goodwill was recorded on the books in 2008 and credited to the partners’ capital accounts in the profit and loss ratio in recognition of an increase in the value of the business resulting from improved sales volume. The partners agreed to write off the goodwill before admitting the new partner.

Prepare a worksheet showing the adjustments and the adjusted trial balance for the partnership on the accrual basis at December 31, 2008. All adjustments affecting income should be made directly to partners’ capital accounts. Supporting computations should be in good form. (Do not prepare formal financial statements or formal journalentries.)

Sale on SolutionInn
  • CreatedMarch 16, 2015
  • Files Included
Post your question