Partnership Formation, Operation, and Changes in Ownership

The partnership of Teresa and Noel began business on January 1. 2018. Each partner contributed
the following a (the noncash assets are stated at their fair values on January 1, 2019):
Teresa Noel
Cash 60,000 50,000
Inventory 80,000 0
Land 0 130,000
Equipment 100,000 0

The land was subject to a 50,000 mortgage, which the partnership assumed on January I, 2018_
The equipment was Subject to an installment note payable that had unpaid principal amount of
20,000 on January 1, 2018. The partnership also assumed this note payable. Teresa and Noel
agreed to share partnership income and losses in the following manner:
Teresa Noel
Interest on Beginning Capital 3% 3%
Balances
Salaries 12,000 12,000
Remainder 60% 40%

During 2018, the following events occurred:

1. Inventory was acquired at a cost of 30,000 at December 31, 2018. the partnership owed
6,000 to its suppliers
2. Principal of 5,000 was paid on mortgage. Interest expense incurred on mortgage was
2,000, all of which was paid by December 31. 2018.
3. Principal of 3,500 was on installment note. Interest expense incurred on the installment
note was 2,000, all of which was paid by December 31. 2018.
4. Sales on account amounted to 155,000. At December 31, 2018. Customers owed the
partnership 21,000.
5. Selling and general expenses, excluding depreciation, amounted to 34,000. At December
31, 2018, the partnership owed 6,200 Of accrued expenses which are included in the
Selling and General Expenses. Depreciation expense was 6,000.
6. Each partner withdrew 200 each week in anticipation of partnership profits
7. The partnership's inventory at December 31. 2018, was 20,000
8. The partners allocated the net income for 2018 and closed the accounts.

Additional Information
On January 2019, the partnership decided to admit Chona to the partnership. On that date, Chona
invested 99,800 of cash into the partnership for 20 percent capital interest. Total partnership
capital after Chona was admitted totaled 450,000.
Required
a. Prepare journal entries to record the formation of the partnership on January 1, 2018, and
to record the events that occurred during 2018.
b. Prepare the income statement for the Teresa-Noel Partnership for the year ended
December 31, 2018.
c. Prepare balance sheet for the Teresa-Noel Partnership at December 31, 2018.
d. Prepare the journal entry for the admission of Chona on January 1, 2019, using bonus and
asset revaluation method.
1
Page
 Date Particulars Debit Credit
2018
Jan. 1 Cash 110,000
Inventory 80,000
Equipment 100,000
Land 130,000
Notes Payable 20,000
Mortgage Payable 50,000
Teresa, Capital 220,000
Noel, Capital 130,000

Dec. 31 (NOTE: WRITE THE NUMBER IN THE EXPLANATION)

Ex. (1) To record the inventory, no need to write the
date since all transactions are dated December 31, just
write the number before the explanation
1 Inventory 30,000
Accounts Payable 6,000
Cash 24,000

2 Mortgage Payable 5,000

Interest Expense 2,000
Cash 7,000

3 Notes Payable 3,500

Interest Expense 2,000
Cash 5,500

4 Cash 134,000
Accounts Receivable 21,000
Sales 155,000

5 Selling and general expenses 34,000

Depreciation 6,000
Cash 27,800
Accounts Payable 6,200
Accumulated Depreciation 6,000

6 Teresa, Capital 10,400

Noel, Capital 10,400
Cash 20,800

7 Cost of goods sold 90,000

Inventory 90,000
80,000+30,000-20,0000=90,000

8 Sales 155,000
Interest Expense 4,000
Selling and general expenses 34,000
Depreciation Expense 6,000
Cost of goods sold 90,000
Income Summary (squeezed) 21,000

Income Summary 21,000

Teresa, Capital 10,500
Noel, Capital 10,500
2
Page
b.

Teresa and Noel Partnership

Income Statement
December 31, 2018
Sales 155,000
Less: Cost of Sales 90,000
Gross Profit from sales 65,000
Less: Operating Expenses
Interest Expense 4,000
Selling and general expenses 34,000
Depreciation Expense 6,000 44,000
Net Income from operation 21,000

c.

Teresa and Noel Partnership

Balance Sheet
December 31, 2018
Assets
Cash 158,900
Accounts Receivable 21,000
Inventory 20,000
Equipment 100,000
Less: Accumulated Depreciation 6,000 94,000
Land 130,000 423,900

Liabilities
Accounts Payable 6,000
Accrued Expenses Payable 6,200
Notes Payable 16,500
Mortgage Payable 45,000 73,700

Capital
Teresa, Capital 220,100
Noel, Capital 130,100 350,200 423,900

d.

Date Particulars Debit Credit

2019
Jan. 1 Cash 99,800
Teresa, Capital 5,880
Noel, Capital 3,920
Chona, Capital 90,000
3
Page

Computation of Capital Investment

 Actual Contributed Agreed Bonus to old Actual Capital
Capital Capital partners after
admission of
Chona
Teresa 220,100 5,880 225,980
Noel 130,100 3,920 134,020
Chona 99,800 (9,800) 90,000
Totals 450,000 450,000 450,000

Bonus:

Teresa- 9,800x60%= 5,880

Noel- 9,800x40%= 3,920

4
Page