91Ó°ÊÓ

Todd Jost and D. Caldwell decide to form a partnership by combining the assets of their separate businesses. Jost contributes the following assets to the partnership: cash, \(\$ 6,000\); accounts receivable with a face amount of \(\$ 96,000\) and an allowance for doubtful accounts of \(\$ 6,600\); merchandise inventory with a cost of \(\$ 85,000\); and equipment with a cost of \(\$ 140,000\) and accumulated depreciation of \(\$ 90,000\). The partners agree that \(\$ 5,000\) of the accounts receivable are completely worthless and are not to be accepted by the partnership, that \(\$ 8,000\) 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 \(\$ 76,500\), and that the equipment is to be valued at \(\$ 90,000\). Journalize the partnership's entry to record Jost's investment.

Step by step solution

01

Determine the Net Accounts Receivable

First, calculate the net accounts receivable that will be recognized by the partnership. Start with the face amount of the accounts receivable, which is $96,000. Subtract $5,000, as these are deemed completely worthless and won't be accepted. This leaves $91,000. Apply the agreed-upon allowance for doubtful accounts of $8,000 to this remaining balance. Thus, the net accounts receivable is: Accounts receivable = $91,000 - $8,000 = $83,000.

02

Evaluate the Merchandise Inventory

The partnership requires the merchandise inventory to be recorded at the current market price. Thus, adjust the original cost of the inventory, $85,000, to its market value, which is $76,500.

03

Value the Equipment

The cost of the equipment is initially $140,000, with accumulated depreciation of $90,000. The partnership, however, agrees to record the equipment at a value of $90,000.

04

Prepare the Journal Entry for Jost's Investment

With the above values, we are now ready to create the journal entry for Jost's investment: - Debit: Cash $6,000 - Debit: Accounts Receivable $83,000 - Debit: Merchandise Inventory $76,500 - Debit: Equipment $90,000 - Credit: Jost's Capital $255,500 Compute the total of debits to ensure they match the capital account credit: Total Debits = $6,000 + $83,000 + $76,500 + $90,000 = $255,500

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Accounts Receivable

Accounts receivable represent the money owed to a business by its customers for goods or services delivered but not yet paid. It's a critical asset for businesses and an essential component of partnership accounting.
In the partnership formed by Todd Jost and D. Caldwell, the accounts receivable initially had a face value of $96,000, from which $5,000 was deducted as it was considered completely worthless.
Following this adjustment, we need to apply an allowance for doubtful accounts. This allowance considers the predictable non-payment risks and helps in presenting a more accurate financial position.

• Original Accounts Receivable: $96,000
• Less Worthless Receivables: $5,000
• Net Receivables Before Allowance: $91,000
• Agreed Allowance: $8,000
• Net Accounts Receivable: $91,000 - $8,000 = $83,000

This net accounts receivable value is what will ultimately be part of the partnership's accounting records.

Merchandise Inventory

Merchandise inventory refers to the goods available for sale by a business. It is crucial to accurately value inventory for financial reporting and decision-making.
For the partnership, the original inventory cost was listed at $85,000.
However, the agreed market value was $76,500. Valuing inventory at market price ensures that financial statements reflect current market conditions.

• Original Inventory Cost: $85,000
• Current Market Value: $76,500

Such adjustments are necessary for accurate accounting representation of an entity's assets, even if it appears as a 'loss' from the acquisition cost. This helps maintain consistent and realistic financial records.

Equipment Valuation

Equipment valuation in partnership accounting involves determining the worth of business equipment at the time of forming the partnership.
Jost's equipment originally valued at $140,000, had accumulated depreciation of $90,000.
Depreciation accounts for the wear and tear over time, reducing the equipment’s book value on financial records.

• Initial Equipment Cost: $140,000
• Accumulated Depreciation: $90,000
• Agreed Equipment Valuation: $90,000

The partners agreed to revalue the equipment at $90,000, recognizing its current worth rather than relying simply on historical cost minus depreciation. Actual valuation takes into account current utility and market conditions, which could differ from book values.

Journal Entry

A journal entry is a record of financial transactions in accounting. It helps in tracking all financial changes in a business on a chronological basis.
For Todd Jost's capital contribution, we utilize journal entries to document the assets given to the partnership. Here's how the journal entries translate this transaction in accounting terms:

• Debit: Cash $6,000
• Debit: Accounts Receivable $83,000
• Debit: Merchandise Inventory $76,500
• Debit: Equipment $90,000
• Credit: Jost's Capital $255,500

Each debit represents an asset contributed by Jost, increasing the partnership's assets. The credit reflects Jost's total capital contribution. The total of the debits, $255,500, must balance with the credit to Jost's Capital, maintaining the accounting equation's integrity. Balancing the journal ensures accurate financial reporting and assists in understanding the partnership's capital structure after asset combinations.