Reference no: EM133090725

Question - Arnold and Edward decided to enter into a partnership agreement as of 1 July 2020, some of the provisions of which were as follows:

1. Arnold to contribute $20,000 cash and other assets that have the following fair values: inventory $42,500, Plant and machinery $78,600, and Accounts receivable $12,700.

2. Edward to contribute $16,500 cash, land $120,000, equipment $160,000, motor vehicles $31,500 (the values are market values). A mortgage of $95,000 secured over the land is outstanding and the partnership agreed to assume the mortgage.

3. Interest on advance to be 7% per annum.

4. Interest to be allowed at 8% per annum on the capital contribution by partners.

5. Profits or losses of the firm to be divided between or borne by Arnold and Edward in the proportion of 6:4 respectively.

During the year ended 30 June 2021, the income of the partnership totalled $75,000, and the total expenses (excluding interest expense on advances) amounted to $49,000.

On 1 February 2021, Arnold had made an advance of $68,000 to the partnership, to contribute further to the business.

Arnold withdrew $15,000 on 1 October 2020 and Edward withdrew $10,000 on 30 April 2021.

Required -

1. Calculate the value of Arnold and Edward's initial capital when the partnership was formed on 1 July 2020.

2. Prepare a Profit Distribution account for the year ended 30 June 2021.

3. Prepare the Capital accounts for each partner at 30 June 2021.