Sadhil Rao and Lauren Sails have operated a successful firm for many years, sharing net income and net losses equally. Paige Hancock is to be admitted to the partnership on May 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 April 30, except for the following:

• Accounts receivable amounting to $2,800 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 $65,480.

• Equipment is to be valued at $194,000.

b. Hancock is to purchase $55,000 of the ownership interest of Sails for $60,000 cash and to contribute another $30,000 cash to the partnership for a total ownership equity of $85,000.

c. The income-sharing ratio of Rao, Sails, and Hancock is to be 2:1:1.

The post-closing trial balance of Rao and Sails as of April 30 is as follows:

Instructions
1. Journalize the entries as of April 30 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 May 1.
3. Present a balance sheet for the new partnership as of May 1,2010.

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Rao and Sails Post-Closing Trial Balance April 30, 2010 Debit Balances Credit Balances Cash 7,500 38,400 Accounts Receivable Allowance for Doubtful Accounts 1,400 Merchandise Inventory Prepaid Insurance Equipment 59,000 2,200 165,000 Accumulated Depreciation-Equipment Accounts Payable Notes Payable Sadhil Rao, Capital Lauren Sails, Capital 51,700 9,000 10,000 110,000 90,000 272,100 272,100