adrian knox and lisa oaks have operated a successful firm for many years sharing net 644251

Adrian Knox and Lisa Oaks have operated a successful firm for many years, sharing net income and net losses equally. Todd Aguero is to be admitted to the partnership on June 1 of the current year, in accordance with the following agreement:

a. Assets and liabilities of the old partnership are to be valued at their book values as of May 31, except for the following:

Accounts receivable amounting to $2,500 are to be written off, and the allowance for doubtful accounts is to be increased to 5% of the remaining accounts.

Merchandise inventory is to be valued at $98,000.

Equipment is to be valued at $124,000.

b. Aguero is to purchase $30,000 of the ownership interest of Oaks for $37,500 cash and to contribute $40,000 cash to the partnership for a total ownership equity of $70,000.

c. The income sharing ratio of Knox, Oaks, and Aguero is to be 2:1:1.

The post closing trial balance of Knox and Oaks as of May 31 follows.

Knox and Oaks

Post Closing Trial Balance

May 31, 2008

 

Debit

Credit

 

Balances

Balances

Cash

12,300

 

Accounts Receivable

26,500

 

Allowance for Doubtful Accounts

 

400

Merchandise Inventory

89,000

 

Prepaid Insurance

4,200

 

Equipment

126,000

 

Accumulated Depreciation—Equipment

 

34,200

Accounts Payable

 

34,400

Notes Payable

 

30,000

Adrian Knox, Capital

 

85,000

Lisa Oaks, Capital

 

74,000

 

258,000

258,000

Instructions

1. Journalize the entries as of May 31 to record the revaluations, using a temporary account entitled Asset Revaluations. The balance in the accumulated depreciation account is to be eliminated.

2. Journalize the additional entries to record the remaining transactions relating to the formation of the new partnership. Assume that all transactions occur on June 1.

3. Present a balance sheet for the new partnership as of June 1, 2008.