Compute the Capital of each partner

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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).

Reference no: EM132821617

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