Reference no: EM132821617
Question - On July 1, 2020, Royal and Blue decided to pool their assets and form a partnership. After the formation, the partners will participate in the profits and loss ratio of 55% and 45% for Royal and Blue, respectively. Their balance sheets on June 30, 2020, before the required fair value adjustments, were as follows:
|
Royal
|
Blue
|
Cash
|
13,200
|
21,120
|
Accounts receivable
|
86,400
|
96,000
|
Allowance for doubtful accounts
|
(2,160)
|
(2,400)
|
Notes receivable
|
24,000
|
|
Inventories
|
7,680
|
7,200
|
Prepaid insurance
|
|
2,400
|
Machinery
|
48,000
|
|
Accumulated depreciation
|
(4,800)
|
|
Fixed and fixtures
|
38,400
|
|
Accumulated depreciation
|
|
(2,880)
|
Total Assets
|
172,320
|
159,840
|
Accounts payable
|
2,400
|
2,880
|
Notes payable
|
|
24,000
|
Capital
|
169,920
|
132,960
|
Total Liabilities and Capital
|
172,320
|
159,840
|
The firm is to take over the business assets and assume business liabilities. Capitals are to be added based on net assets transferred after the following adjustments:
a. The accounts receivable of Royal and Blue are both fairly valued.
b. Interest at 12% on notes receivable dated June 11, 2020 should be accrued. (Use 360 days)
c. The inventory of Royal should be valued at 7,200, while that of Blue is 6,400.
d. The prepaid insurance of Blue still amounted to 640.
e. The machinery is under-depreciated by 960.
f. The furniture and fixture is overstated by 1,280.
g. Interest at 15% on notes payable dated May 17, 2020 should be accrued. (Use 360 days)
h. Accrued rent receivable of 1,200 is to be recognized in the books of Blue.
Required - Compute the Capital of each partner under the following:
I. Net Investment Method
II. Bonus Method (Assume that capital interest ratio is 60:40 to Royal and Blue, respectively).