Problem 1 - Accounting

Question

Gwen Delk and Alliesha Johnson decide to form a partnership by combining the assets of their separate businesses. Delk contributes the following assets to the partnership: cash, \(\$ 13,000\); accounts receivable with a face amount of \(\$ 136,000\) and an allowance for doubtful accounts of \(\$ 8,400\); merchandise inventory with a cost of \(\$ 90,000\); and equipment with a cost of \(\$ 155,000\) and accumulated depreciation of \(\$ 100,000\). The partners agree that \(\$ 6,000\) of the accounts receivable are completely worthless and are not to be accepted by the partnership, that \(\$ 10,200\) is a reasonable allowance for the uncollectibility of the remaining accounts, that the merchandise inventory is to be recorded at the current market price of \(\$ 84,700\), and that the equipment is to be valued at \(\$ 69,500\). Journalize the partnership's entry to record Delk's investment.

Step-by-Step Solution

Answer

Gwen Delk's total contribution to the partnership is $287,000, recorded as a debit to the assets and a credit to her capital account.

Step 1: Adjust Accounts Receivable

Calculate the accounts receivable to be recorded by subtracting the worthless portion and adjusting for the new allowance. Initial accounts receivable = $136,000 - $6,000 (worthless) = $130,000. From this, subtract the new allowance for doubtful accounts of $10,200, resulting in $119,800.

Step 2: Record Merchandise Inventory

Adjust the merchandise inventory to the current market price. The market price is $84,700, so this is the value recorded for the inventory.

Step 3: Adjust Equipment Value

Record the equipment at the new agreed-upon value of $69,500. This involves replacing the original cost minus accumulated depreciation with the new value.

Step 4: Calculate Total Contribution Value

Add up all the adjusted asset values: cash = $13,000, adjusted accounts receivable = $119,800, merchandise inventory = $84,700, and adjusted equipment = $69,500. The total value of Delk's contribution is $287,000.

Step 5: Journal Entry

Generate a journal entry to record the contribution of the assets to the partnership. Debit: - Cash $13,000 - Accounts Receivable $119,800 - Merchandise Inventory $84,700 - Equipment $69,500 Credit: - Gwen Delk, Capital $287,000 This records the assets contributed and the equivalent capital account.

Key Concepts

Asset Valuation

Asset valuation is an important process in partnership accounting. It involves determining the fair market value of the assets contributed by partners to the partnership. This ensures that each partner's contribution is accurately recorded and fairly measured in the partnership books.
In the case of Delk's contribution, several assets are involved:

• Cash is valued at its face value of $13,000.
• The accounts receivable are initially recorded at their face value, but we must consider bad debts. The partnership decided that $6,000 of the receivables are entirely irrecoverable. The remaining receivables are adjusted for a new allowance for doubtful accounts, which is now $10,200. This affects the net value recorded for this asset.
• Merchandise Inventory needs revaluation. Even though its original cost was $90,000, its market value at the time of formation was deemed to be $84,700. Thus, it is recorded at this lower amount to reflect current market conditions.
• Equipment valuation incorporates adjustments for depreciation. Originally valued at $155,000 with $100,000 depreciation, the agreed upon value for the equipment is $69,500. This agreed value better reflects its worth at the time of contribution.

These valuations ensure that the partnership books accurately represent the economic realities and understandings of the partner's contributions.

Journal Entry

Journal entries are crucial for recording financial transactions in accounting. They consist of debits and credits that must balance each other. In a partnership, journal entries document the contributions of each partner by assigning values to the assets provided.
For Delk's contribution, the journal entry is straightforward:

• The assets Debbie brings in are recorded as debits. This includes cash ($13,000), adjusted accounts receivable ($119,800), merchandise inventory ($84,700), and adjusted equipment ($69,500). Each debit specifies the value of the asset that the partnership receives.
• The total of all these debits equals Delk's total capital contribution, which is credited to her capital account. In this case, the credit is $287,000, representing the total fair value of all assets she contributes.

The journal entries in partnership organizations help maintain accurate financial records, ensuring that each partner's share of ownership is correctly accounted for based on their contributions.

Capital Contribution

Capital contribution is the process through which partners invest assets into a partnership. It is important to clearly understand and document these contributions, as they determine the shares of the partners in the partnership.
Delk is contributing to the partnership by providing a mix of cash, accounts receivable, merchandise inventory, and equipment. Each asset type holds a specific value that is agreed upon by the partners, ensuring Delk’s share in the partnership reflects the actual economic value of what she provides.
This agreement typically happens during the formation or changes in the partnership, keeping all partners aligned on the value and ownership distribution. The capital contributions, like those from Delk, are recorded in the partner's capital account, a special account class that reflects each partner's ownership stake and equity in the partnership.

Accounts Receivable Adjustment

Accounts receivable adjustment is a necessary step when forming a partnership, ensuring the receivables accurately reflect what is expected to be collected. Adjustments are made for known uncollectible amounts, and a reasonable allowance is set for doubtful accounts.
For Delk’s accounts receivable, there are several changes:

• The face value of $136,000 needs adjustment as $6,000 is deemed worthless and not accepted by the partnership. This effectively reduces the receivables to $130,000 initially.
• From the $130,000, an allowance for doubtful accounts at $10,200 is further subtracted to account for the potential non-collection of certain receivables. This results in a net valuated accounts receivable of $119,800.

These adjustments ensure the accounts receivables’ worth accurately reflects the expected cash inflows, portraying a realistic financial position of the partnership. This process of adjusting accounts receivable before recording them helps provide an accurate snapshot of the partnership's financial health right from the start.