Chapter 3-2

Chapter 3
Financial transactions with partners

Learning Objectives:
1- How to change profit and loss plan
2- How to increase the capital of partners
3- How to decrease the capital of partners
Task on previous session(Exam2016)

For the fiscal year ended 31, May, 2016 ABC partnership had
an operating loss of 120,000 before recognition of salaries
expense .
A) Salaries of 20,000 to A , 30,000 to B and 40,000 to C
recognized as expense
B) Bonus of 20% to B after the bonus
C) Residual income or loss 20%:50%:30%
Required : prepare journal entries
1. Changes in profit and loss plan
‫ سهله‬.. ‫يغيوا نسبة األرباح والخسائر !! طب تفتكر نعمل كدا ازاى‬

‫ عاوزين ر‬partners ‫ال‬
: ‫ احنا نعمل الىل جاى دا‬.. ‫ياعم‬
‫ هنوزع بالنسبة القديمة‬-1
‫ هنوزع بالنسبة الجديده‬-2
‫ نحسب الفرق‬-3
entry ‫ نعمل ال‬-4
Example(1): On January 2011 , A , B and c agreed to form ABC
partnership .They agreed to share profits and losses.
On January 2014, they agreed to change profits and losses sharing ratio
to be according capital balances which are : $90,000,$90,000,$60,000
respectively .Profit for previous years were
2011= $20,000 2012=$40,000 2013=$38,000
Required:
1- Allocate the profits according to old plan.
2- Allocate the profits according to new plan.
3- Compute the difference between to plans.
4- Record the effect on the capital of partners.
Answer
1- Allocate the profits according to old plan.
Year A B C Total
2011 $6,667 $6,667 $6,666 $20,000
2012 $13,333 $13,333 $13,334 40,000
2013 $12,667 $12,667 $12,666 38,000
Total $32,667 $32,667 $32,666 98,000
2-Allocate the profits according to new plan.

90,000 : 90,000 : 60,000
3:3:2
Year A B C Total
2011 $7,500 $7,500 $5,000 $20,000
2012 $15,000 $15,000 $10,000 40,000
2013 $14,250 $14,250 $9,500 38,000
Total $36,750 $36,750 $24,500 98,000
1
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3-Compute the difference between to plans.
plan A B C Total
Old $32,667 $32,667 $32,666 98,000
New $36,750 $36,750 $24,500 98,000
Total $4,083 $4,083 ($8,166) 0
4-Record the effect on the capital of partners.
C,Capital $8,166
A,Capital $4,083
B,Capital $4,083
2-Changes in capital balances
2
3
Example(1):
E, F, and G are partners in EFG Partnership. They share profits and losses equally.
The following is the balance sheet of the partnership on December 31, 2013.
EFG partnership
Balance sheet
At December 31, 2013
Assets Liabilities and partner`s capital

Cash $30,000 Accounts payable $25,000
Accounts Receivable $15,000 Loan payable-E 25,000
Inventory $150,000 Loan payable-F 10,000
Equipment $40,000 E's capital 50,000
Loan receivable-G $5,000 F's capital 50,000
G's capital 50,000
Retained earning
30,000
Total $240,000 Total $240,000

On January 1, 2014 the partners agreed that:
1. Increase capital to $300,000 to be allocated equally between them.
2. Use partners' loans and retained earnings to cover the increase in capital balances.
3. Partners' loans to the partnership should be paid in cash.
4. Accept the equipment contributed by G to cover part of the increase in his capital
balance. The fair value of this equipment is $ 25,000.
5. Any amount due from this settlement should be paid in cash
Required:
A) Prepare the Journal entries to record the agreement between
partners and the increase of capital balances.
B) Prepare the balance sheet after recording the agreement.
4
Answer
A)
Items E F G Total
Partner's loan $25,000 $10,000 $(5,000) $30,000
Retained Earnings 10,000 10,000 10,000 30,000
Equipment -- -- 25,000 25,000
Sub total 35,000 20,000 30,000 85,000
Cash 15,000 30,000 20,000 65,000
Total $50,000 $50,000 $50,000 $150,000
B)
Loan Payable - E $25,000

Loan Payable - F 10,000
Equipment 25,000
Retained Earnings 30,000
Cash 65,000 $5,000
Loan receivable – G 50,000
E's Capital 50,000
F's Capital 50,000
G's Capital
Balance sheet
At January 1, 2014
Assets Liabilities and partners'
capital
Cash (30,000 + 65,000) $95,000 Accounts payable $25,000
Accounts Receivable 15,000 E's capital 100,000
Inventory 150,000 F's capital 100,000
Equipment (40,000 + 25,000) 40,000 G's capital 100,000
Total $325,000 Total $325,000
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2-Decreasing capital balances
The following methods are used to reduce capital:

1-withdraw part of capital
2-using partners` loans
3-Revaluation of assets
Example(2):
K and H are partners in KH Partnership. They share profits and losses equally. The
following is the balance sheet of the partnership on December 31, 2014.
KH partnership
Balance sheet
At December 31, 2013
Assets Liabilities and partner`s capital

Cash $14,000 Accounts payable $84,000
Accounts Receivable 22,000 Notes payable 70,000
Inventory 30,000 H's capital 60,000
Loan receivable-K 8,000 H's capital 60,000
Loan receivable-H 20,000
Equipment 140,000
Building 40,000
Total $274,000 Total $274,000
Partners agreed to revalue assets and liabilities to their fair values as follows:
A) Inventories $20,000.
B) Depreciation of Equipment is 5% and building 10%.
C) Unrecorded account payable $1,000.
D) Bad debt of $2,000. Allowance for doubtful accounts 10% of
accounts receivable.
Partners decided to reduce the partners' capital with $40,000. Still, total capital
will be shared equally.
6
Required:
A) Record all above transactions.
B) Prepare the revaluation account
C) Prepare the balance sheet after revaluation and execution of the agreed upon
steps.
Answer
Items K H
Partner's loan ($8,000 ) ( $20,000 ) ($28,000)
A/R (Bad debt) (1,000) (1,000) (2,000)
ADA(10%* 20,000) (1,000) (1,000) (2,000)
Inventory (5,000) (5,000) (10,000)
Equipment (A/D) (3,500) (3,500) (7,000)
Building (2,000) (2,000) (4,000)
A/P (1,000)
(500) (500)
Sub total 21,000 33,000 54,000
Cash 1,000 13,000 14,000
Total $20,000 $20,000 40,000
7
Assignment in Session
Problem 1:
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Problem2:
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Chapter 3

Financial transactions with partners

Task on previous session(Exam2016)

1. Changes in profit and loss plan

‫ سهله‬.. ‫يغيوا نسبة األرباح والخسائر !! طب تفتكر نعمل كدا ازاى‬

2-Allocate the profits according to new plan.

4-Record the effect on the capital of partners.

2-Changes in capital balances

Assets Liabilities and partner`s capital

Total $240,000 Total $240,000

Loan Payable - E $25,000

Total $325,000 Total $325,000

The following methods are used to reduce capital:

Assets Liabilities and partner`s capital

Join to the group:

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