Assume that Janel and Khay, partners of Janel & Khay Partnership. Who share net income and loss in a ratio 4:1 ratio, organize J & K Corporation to take over the net assets of the partnership. The balance sheet of the partnership on June 30, 20x4, the date the incorporation, is as follows:

Jane & Khay Partnership

Balance Sheet

June 30, 20x4

Assets

Cash 12,000

Accounts receivable 28,100

Less: Allowance for doubtful accounts 600 27,500

Inventories 25,500

Equipment at cost 60,000

Less: Accumulated depreciation of equipment 26,000 34,000

Total assets 99,000

Liabilities and Partner’s Capital

Liabilities:

Accounts payable 35,000

Partner’s capital:

Janel, capital 47,990

Khay, capital 16,010 64,000

Total liabilities 99,000

After an appraisal of the equipment and an audit of the partnership’s financial statements, the partners agree that the following adjustments are required to restate the net assets of the partnership to current fair value:

a. Increase the allowance for doubtful accounts to P1,000.

b. Increase the inventories to the current replacement cost of P30,000.

c. Increase the equipment to its reproduction cost new, P70,00, less

accumulated on this basis, P30,500; That is, to current fair value, P39,500.

d. Recognize accrued liabilities of P1,100.

e. Recognize goodwill of P10,000

J & Corporation is authorized to issue 10,000 shares of P10 par common stock. It issues 7,500 shares of common stock valued at P11 a share to the partnership in exchange for the partnership's net assets. The 7,500 shares received by the partnership are divided between the partners based on the adjusted balances of their capital accounts. (Partners may withdraw small amounts of cash to round their capital account balances to even amounts, thus avoiding the issuance of fractional shares of common stock). This procedure completes the dissolution and liquidation of the partnership.

The corporation will use new sets of books.

Required:

In accounting Records of Partnership

1. Prepare journal entries for revaluation of assets, including recognition of goodwill.

2. Journal entry to record the transfer of assets and liabilities to J & K Corporation, the receipt of the corporation’s common stock by the partnership, and distribution of the common stock to the partners in settlement of the balances of their capital accounts.

In the Accounting records of the Corporation

1. Record the acquisition of assets and liabilities (including the obligation to pay for the net assets) from the partnership at current fair values.

2. Record the issuance of common stock at current fair value in payment of the obligation to the partnership.

3. Prepare the balance sheet of J & K Corporation on June 30, 20x4.