Chapter 1: Partnership Formation

On January 1, 2015, Ernie and Bert both sole proprietors decided to form a partnership to expand both of their businesses. According to their agreement, they will split profits and losses 75:25 and their initial capital will also reflect that ratio. The following are Ernie and Bert’s Statement of Financial Position: Ernie Proprietor Statement of Financial Position December 31, 2014 ASSETS LIABILITIES AND EQUITY Cash 50,000 Accounts payable 65,000 Accounts Receivable 100,000 Accrued expenses 55,000 Inventories 75,000 Notes payable 80,000 Equipment 250,000 Ernie, capital 90,000 Accumulated depreciation- Equipment (185,000) TOTAL ASSETS 290,000 TOTAL LIABILITIES&EQUITY 290,000 Bert Proprietor Statement of Financial Position December 31, 2014 ASSETS LIABILITIES AND EQUITY Cash 30,000 Accounts Payable 75,000 Accounts receivable 110,000 Accrued expenses 90,000 Inventories 85,000 Notes Payable 100,000 Equipment 300,000 Bert, Capital 160,000 Accumulated Depreciation- Equipment (100,000) TOTAL ASSETS 425,000 TOTAL LIABILITIES&EQUITY 425,000 The values reflected in the Statement of Financial Position are already at fair values except fo the following accounts: Ernie’s Accounts Receivable is now 20,000 less than what is stated in his Statement of Financial Position. Both inventories of Ernie and Bert are now 90,000 and 70,000 respectively. Equipment for Bert has an assessed value of 275,000, appraised value of 250,000 and book value of 200,000. Additional accrued expenses are to be established in the amount of 10,000 for Bert only while additional accounts payable in the amount of 5,000 for Ernie. It is also agreed that all liabilities will be assumed by the partnership, except for the notes payable of Bert which will be personally paid by him. 1. How much is the adjusted capital balance of Bert upon formation? A. 91,250 B. 185,000 C. 285,000 D. 310,000 Answer: ( C ) 2. How much is the capital credit to Ernie upon formation? A. 80,000 B. 273,750 C. 292,000 D. 255,500 Answer: ( B ) 3. How much should Ernie invest as additional cash to be in conformity with their initial capital agreement