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).