Feb. 14 The partners contribute assets to the partnership at the following agreed amounts — February 2016 Isabelle Moretti Aida Kam and Channade Fenandoe start operate marketing

On February 14, 2016, Isabelle Moretti, Aida Kam, and Channade Fenandoe start a partnership to operate a marketing consulting practice. They sign a partnership agreement to split profits in a 2:3:4 ratio for Isabelle, Aida, and Channade, respectively. The following are transactions for MKF Marketing:

Feb. 14 The partners contribute assets to the partnership at the following agreed amounts:

They also agree that the partnership will assume responsibility for Channade’s accounts payable of $10,000.

Dec. 20 The partners agree to withdraw a total of $72,000 cash as a “year-end bonus.” Each partner will receive a share proportionate to her profit-sharing ratio. No other withdrawals were made during the year.

31 Total profit for 2016 was $81,900.

2017

Jan. 5 The three partners agree to admit Carolyn Wells to the partnership. Carolyn will pay Channade $30,000 cash for 50% of her interest in the partnership. The profit-sharing ratio will be changed so that Carolyn is allocated 50% of what was previously allocated to Channade. The partnership’s name is changed to MKFW Marketing.

Dec. 20 The partners agree to pay another year-end bonus. The total amount withdrawn is $91,800. Each partner will receive a share proportionate to her profit-sharing ratio. No other withdrawals were made during the year.

31 Total profit for 2017 was $103,050.

2017

Jan. 2 Channade withdraws from the partnership. The partners agree the partnership will pay her $25,550 cash. The partnership’s name is changed to MKW Marketing.

Instructions

(a) Record the above transactions. For the profit earned each year, calculate how it is to be allocated and close the accounts to the Income Summary account.

(b) Prepare the statement of partners’ equity for 2017.

(c) Calculate the balance in each partner’s capital account on January 2, 2018, after Channade has withdrawn.

TAKING IT FURTHER

Moretti, Kam, and Fenandoe discuss the liquidation of a partnership. Moretti argues that all cash should be distributed to partners based on their profit and loss ratios. Is he correct? Explain.

SOLUTION

(a)

2016

Feb. 14 Cash 9,000

Furniture 15,000

I. Moretti, Capital 24,000

14 Cash 12,000

Equipment 24,000

A. Kam, Capital 36,000

14 Cash 18,000

Equipment 40,000

Accounts Payable 10,000

C. Fenandoe, Capital 48,000

Dec. 20 I. Moretti, Drawings ($72,000 × 2/9) 16,000

A. Kam, Drawings ($72,000 × 3/9) 24,000

C. Fenandoe, Drawings ($72,000 × 4/9) 32,000

Cash 72,000

31 Income Summary 81,900

I. Moretti, Capital ($81,900 × 2/9) 18,200

A. Kam, Capital ($81,900 × 3/9) 27,300

C. Fenandoe, Capital ($81,900 × 4/9) 36,400

MKF MARKETING

Capital Balances December 31, 2016

C. Fe-

I. Moretti A. Kam nandoe Total

Investments $24,000 $36,000 $48,000 $108,000

Drawings (16,000) (24,000) (32,000) (72,000)

Profit 18,200 27,300 36,400 81,900

Ending Balance $26,200 $39,300 $52,400 $117,900