Partners' capital accounts with changes in partners
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Ruth and Bob decide to form a partnership along with Tribbs Holding Company to purchase an office building. They give you the following facts:
? Tribbs invested $45,000 and is a limited partner. Tribbs receives interest at 6% on its investment.
? Ruth provides $35,000 in computer equipment as a limited partner.
? Bob provides $15,000 as the general partner and receives a salary of $15,000 per year.
? Profits during the year are $60,000 after all expenses.
? At the end of the year, Ruth retires from the partnership. The partnership pays her $50,000. Profit allocation is 45% for Tribbs, 30% for Ruth, and 25% for Bob.
? After Ruth retires, the partnership admits Paul who invests $50,000 and will receive 30% of the partnership's gains and losses.
? Using a worksheet, calculate the partners' balances once Paul is admitted and make the journal entries to update the books.
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Solution Summary
The solution explains how to tackle the problem in order to develop the answers; it provides a spreadsheet with a format and amounts from journal entries and a spread by partner. Further included is a narrative with possible alternative treatments for some amounts and the consequences of those treatments.
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I think it is easier to understand the problem if the journal entries are made first. Next I analyzed capital by partner to determine their respective amounts of capital in the entity.
There is a question about whether Bob's salary of $15000 is a true expense of the entity or a distribution. Because the problem states that 'profits during the year are $60,000 after all expenses', I assume the $15,000 has been deducted as an expense. I could be wrong and you might wish to clarify that point with your instructor.
Profits for ...
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