Endra, Cogley, and Mei share income and loss in a 3:2:1 ratio (in ratio form: Kendra, 3/6; Cogley, 2/6; and Mei, 1/6). The partners have decided to liquidate their partnership. On the day of liquidation, their balance sheet appears as follows.
Balance Sheet
Assets Liabilities
Cash $ 180,800 Accounts payable $ 245,500
Inventory 537,200 Equity
Kendra, Capital 93,000
Cogley, Capital 212,500
Mei, Capital 167,000
Total assets $ 718,000 Total liabilities and equity $ 718,000
Required:
For each of the following scenarios, complete the schedule allocating the gain or loss on the sale of inventory. Prepare journal entries to record the below transactions.
Note: Do not round intermediate calculations. Enter losses and partner deficits, if any, as negative amounts.
Inventory is sold for $600,000.
Inventory is sold for $500,000.
Inventory is sold for $320,000 and partners with deficits pay their deficits in cash.
Inventory is sold for $250,000 and partners with deficits do not pay their deficits.
Inventory sold for $600,000:
Gross gain on sale of inventory: $600,000 - $537,200 = $62,800
Allocation of gain/loss:
Kendra: (3/6) * $62,800 = $31,400 credit
Cogley: (2/6) * $62,800 = $20,933.33 credit
Mei: (1/6) * $62,800 = $10,466.67 credit
Journal entries:
1. To record the sale of inventory:
Cash $600,000
Inventory $537,200
Gain on sale of inventory $62,800
2. To allocate the gain on the sale of inventory:
Kendra, Capital $31,400
Cogley, Capital $20,933.33
Mei, Capital $10,466.67
Inventory sold for $500,000:
Gross loss on sale of inventory: $500,000 - $537,200 = -$37,200
Allocation of gain/loss:
Kendra: (3/6) * -$37,200 = -$18,600 debit
Cogley: (2/6) * -$37,200 = -$12,400 debit
Mei: (1/6) * -$37,200 = -$6,200 debit
Journal entries:
1. To record the sale of inventory:
Cash $500,000
Inventory $537,200
Loss on sale of inventory $-37,200
2. To allocate the loss on the sale of inventory:
Kendra, Capital $-18,600
Cogley, Capital $-12,400
Mei, Capital $-6,200
Inventory sold for $320,000 and partners with deficits pay their deficits in cash:
Gross gain on sale of inventory: $320,000 - $537,200 = -$217,200
Allocation of gain/loss:
Kendra: (3/6) * -$217,200 = -$108,600 debit
Cogley: (2/6) * -$217,200 = -$72,400 debit
Mei: (1/6) * -$217,200 = -$36,200 debit
Journal entries:
1. To record the sale of inventory:
Cash $320,000
Inventory $537,200
Loss on sale of inventory $-217,200
2. To allocate the loss on the sale of inventory:
Kendra, Capital $-108,600
Cogley, Capital $-72,400
Mei, Capital $-36,200
3. To record the payment of partners' deficits:
Kendra, Capital $108,600
Cogley, Capital $72,400
Mei, Capital $36,200
Cash $217,200
Inventory sold for $250,000 and partners with deficits do not pay their deficits:
Gross loss on sale of inventory: $250,000 - $537,200 = -$287,200
Allocation of gain/loss:
Kendra: (3/6) * -$287,200 = -$143,600 debit
Cogley: (2/6) * -$287,200 = -$95,733.33 debit
Mei: (1/6) * -$287,200 = -$47,866.67 debit
Journal entries:
1. To record the sale of inventory:
Cash $250,000
Inventory $537,200
Loss on sale of inventory $-287,200
2. To allocate the loss on the sale of inventory:
Kendra, Capital $-143,600
Cogley, Capital $-95,733.33
Mei, Capital $-47,866.67
1. Inventory is sold for $600,000.
As per the given ratio, the distribution of the gain or loss on the sale of inventory will be:
- Kendra: 3/6 = 1/2
- Cogley: 2/6 = 1/3
- Mei: 1/6 = 1/6
To calculate each partner's share of the gain or loss:
1. Calculate the total capital of all partners:
Total capital = Kendra's capital + Cogley's capital + Mei's capital
= $93,000 + $212,500 + $167,000
= $472,500
2. Calculate each partner's share of the gain or loss:
Kendra's share = Kendra's capital / Total capital
= $93,000 / $472,500
= 1/5
Cogley's share = Cogley's capital / Total capital
= $212,500 / $472,500
= 2/5
Mei's share = Mei's capital / Total capital
= $167,000 / $472,500
= 1/3
3. Calculate each partner's share of the gain on sale of inventory:
Kendra's share = Kendra's share * Sale price
= 1/5 * $600,000
= $120,000
Cogley's share = Cogley's share * Sale price
= 2/5 * $600,000
= $240,000
Mei's share = Mei's share * Sale price
= 1/3 * $600,000
= $200,000
Therefore, the schedule allocating the gain on the sale of inventory will be:
Kendra: $120,000
Cogley: $240,000
Mei: $200,000
Journal entry to record the sale of inventory:
Cash (600,000) Dr.
Inventory (537,200) Dr.
Gain on Sale of Inventory Cr. 120,000
Kendra, Capital Cr. 120,000
Cogley, Capital Cr. 240,000
Mei, Capital Cr. 200,000
2. Inventory is sold for $500,000.
Using the same calculations as above, the schedule allocating the gain on the sale of inventory will be:
Kendra: $100,000
Cogley: $200,000
Mei: $166,667
Journal entry to record the sale of inventory:
Cash (500,000) Dr.
Inventory (537,200) Dr.
Gain on Sale of Inventory Cr. 33,200
Kendra, Capital Cr. 100,000
Cogley, Capital Cr. 200,000
Mei, Capital Cr. 166,667
3. Inventory is sold for $320,000 and partners with deficits pay their deficits in cash.
Using the same calculations as above, the schedule allocating the loss on the sale of inventory will be:
Kendra: ($16,000)
Cogley: ($24,000)
Mei: ($32,000)
Journal entry to record the sale of inventory and payment of deficits:
Cash (528,000) Dr.
Inventory (537,200) Dr.
Loss on Sale of Inventory Dr. 9,200
Kendra, Capital Cr. 16,000
Cogley, Capital Cr. 24,000
Mei, Capital Cr. 32,000
4. Inventory is sold for $250,000 and partners with deficits do not pay their deficits.
Using the same calculations as above, the schedule allocating the loss on the sale of inventory will be:
Kendra: ($20,000)
Cogley: ($40,000)
Mei: ($33,333)
Journal entry to record the sale of inventory (no payment of deficits):
Cash (498,800) Dr.
Inventory (537,200) Dr.
Loss on Sale of Inventory Dr. 38,400
Kendra, Capital Cr. 20,000
Cogley, Capital Cr. 40,000
Mei, Capital Cr. 33,333
To solve these scenarios, we need to allocate the gain or loss on the sale of inventory according to the partners' income and loss sharing ratio. Let's go through each scenario and calculate the appropriate allocations and journal entries.
Scenario 1: Inventory is sold for $600,000.
First, let's calculate the total gain/loss on the sale of inventory:
- Total gain/loss = Sale proceeds - Cost of inventory
- Total gain/loss = $600,000 - $537,200
- Total gain/loss = $62,800 (positive gain)
Next, let's allocate the gain according to the partners' income and loss sharing ratio:
- Kendra's share = 3/6 * $62,800 = $31,400
- Cogley's share = 2/6 * $62,800 = $20,933.33 (rounded)
- Mei's share = 1/6 * $62,800 = $10,466.67 (rounded)
Now, let's prepare the journal entries:
1. To record the sale of inventory:
Debit: Cash ($600,000)
Credit: Inventory ($537,200)
Credit: Gain on sale of inventory ($62,800)
2. To allocate the gain to partners' capital accounts:
Debit: Kendra, Capital ($31,400)
Debit: Cogley, Capital ($20,933.33)
Debit: Mei, Capital ($10,466.67)
Credit: Gain on sale of inventory ($62,800)
Scenario 2: Inventory is sold for $500,000. The process is similar to Scenario 1, but with a loss this time.
- Total gain/loss = Sale proceeds - Cost of inventory
- Total gain/loss = $500,000 - $537,200
- Total gain/loss = -$37,200 (negative loss)
Allocating the loss:
- Kendra's share = 3/6 * -$37,200 = -$18,600 (negative amount)
- Cogley's share = 2/6 * -$37,200 = -$12,400 (negative amount)
- Mei's share = 1/6 * -$37,200 = -$6,200 (negative amount)
Journal entries:
1. To record the sale of inventory:
Debit: Cash ($500,000)
Credit: Inventory ($537,200)
Debit: Loss on sale of inventory ($37,200)
2. To allocate the loss to partners' capital accounts:
Debit: Kendra, Capital ($18,600)
Debit: Cogley, Capital ($12,400)
Debit: Mei, Capital ($6,200)
Credit: Loss on sale of inventory ($37,200)
Scenario 3: Inventory is sold for $320,000, and partners with deficits pay their deficits in cash.
- Total gain/loss = Sale proceeds - Cost of inventory
- Total gain/loss = $320,000 - $537,200
- Total gain/loss = -$217,200 (negative loss)
Allocating the loss:
- Kendra's share = 3/6 * -$217,200 = -$108,600 (negative amount)
- Cogley's share = 2/6 * -$217,200 = -$72,400 (negative amount)
- Mei's share = 1/6 * -$217,200 = -$36,200 (negative amount)
Since partners with deficits pay their deficits in cash, we need to adjust their capital accounts accordingly.
Journal entries:
1. To record the sale of inventory:
Debit: Cash ($320,000)
Credit: Inventory ($537,200)
Debit: Loss on sale of inventory ($217,200)
2. To allocate the loss to partners' capital accounts and adjust deficits:
Debit: Kendra, Capital ($108,600)
Debit: Cogley, Capital ($72,400)
Debit: Mei, Capital ($36,200)
Credit: Loss on sale of inventory ($217,200)
Credit: Kendra, Capital ($108,600) - to offset her deficit
Credit: Cogley, Capital ($72,400) - to offset his deficit
Scenario 4: Inventory is sold for $250,000, and partners with deficits do not pay their deficits.
- Total gain/loss = Sale proceeds - Cost of inventory
- Total gain/loss = $250,000 - $537,200
- Total gain/loss = -$287,200 (negative loss)
Allocating the loss:
- Kendra's share = 3/6 * -$287,200 = -$143,600 (negative amount)
- Cogley's share = 2/6 * -$287,200 = -$95,733.33 (rounded, negative amount)
- Mei's share = 1/6 * -$287,200 = -$47,866.67 (rounded, negative amount)
Since partners with deficits do not pay their deficits, we don't adjust their capital accounts.
Journal entries:
1. To record the sale of inventory:
Debit: Cash ($250,000)
Credit: Inventory ($537,200)
Debit: Loss on sale of inventory ($287,200)
2. To allocate the loss to partners' capital accounts:
Debit: Kendra, Capital ($143,600)
Debit: Cogley, Capital ($95,733.33)
Debit: Mei, Capital ($47,866.67)
Credit: Loss on sale of inventory ($287,200)
These are the explanations and steps to solve the given scenarios. Remember to double-check the calculations and consult with an accountant for accurate and professional advice.