PROBLEM 1

Capital balances before formation

1.) Merchandise inventory
2.) Unrecorded interest expense
3.) Notes payable paid with personal assets
4.) Allowance for bad debts
Total adjusted or contributed capital
Agreed capital
Withdrawal (Contribution)

Cash
Liza
Enrique
Total partnership cash
Less: Allowed cash withdrawal of Liza
Payable to Liza

Liza Enrique
1) Net Adjustments 39,500 (44,500) (280,000)

2) Withdrawal (Contribution) 319,500 (104,500)

3) Agreed capital 700,000

4.) Total partnership liabilities

Accounts payable
Notes payable
Interest payable
Payable to Liza
Total partnership liabilities

5.) Partnership capital

Add: Liabilities
Total partnership assets

Alternative solution:
Accounts receivable - net
Merchandise inventory
Equipment
Other assets
Total partnership assets
 Liza Enrique
630,000 290,000
(30,000)
(1,500) (4,500)
51,500
(10,500) (10,000)
669,500 245,500
350,000 350,000
319,500 (104,500)

80,000
154,500
234,500
319,500
85,000

60,000

180,000
100,000
4,500
85,000
369,500

700,000
369,500
1,069,500

319,500
210,000
450,000
90,000
1,069,500
 Capital
Adjustments

Reported Net income

a.) Overstated depreciation 6,000.00
b.) Merchadise inventory
2019 Understated 85,000.00
2020 Understated
c.) Purchases
2019 - Purchase is understated; Ending inventory is understated (offset) -
2020 - Beginning inventory is undestated; Purchase is overstated (offset)
d.) 2019 Understated expense [11,100 - (11,100 * .25/9.25)] (10,800.00)
2020 Overstated expense
8) Balance 80,200.00
Tax effect 25,664.00
Adjustments 54,536.00

Computation of correct beginning capital: Jackson Simpson

Unadjusted capital 154,000.00 198,000.00
Add: Net capital adjustments 10,907.20 21,814.40
Adjusted beginning capital 164,907.20 219,814.40

Computation of interest on average capital: Jackson

Beginning capital - adjusted 164,907.20
Additional investment:
Jackson - April 1 (300,000 x 9/12) 225,000.00
Simpson - August 1 (150,000 x 5/12)
Withdrawals:
Oct. 1 (120,000 x 3/12) (30,000.00)
Oct. 1 (20,000 x 3/12)
6) Average capital 359,907.20
Interest rate 12%
 Interest on average capital 43,188.86

Compuation of Jackson's Bonus

Corrected net income 798,180.00
Less: Salaries 540,000.00
Interest 108,844.32 648,844.32
Net income after salaries and interest but before bonus 149,335.68
Net income after all 135,759.71
7) Bonus 13,575.97

9) Distribution of Net income Jackson Simpson

Salaries 240,000.00 180,000.00
Interest 43,188.86 33,277.73
Bonus 13,575.97
Remainder 27,151.94 54,303.88
323,916.78 267,581.61

10) Computation of capital balances - December 31 ,2020:

Jackson Simpson
Beginning capital 164,907.20 219,814.40
Additional investment 300,000.00 150,000.00
Withdrawals - 360,000.00 - 200,000.00
Share in net income 323,916.78 267,581.61
428,823.98 437,396.01

8) Net adjustments on 2019 Income 80,200.00

Net income Total

800,000.00
6,000.00

(85,000.00)
75,000.00

-
Annual Depreciation 1,200.00 Correct Repairs Expense 11,100.00
1,200.00 Depreciation for 2019 300.00 Expense Recorded (2019) - 300.00
(2,800.00) 10,800.00
(980.00) (1,820.00)
798,180.00

Dela Cruz Total

248,000.00 600,000.00
21,814.40 54,536.00
269,814.40 654,536.00

Simpson Dela Cruz

219,814.40 269,814.40

62,500.00

(5,000.00)
277,314.40 269,814.40
12% 12%
 33,277.73 32,377.73

Dela Cruz Total

120,000.00 540,000.00
32,377.73 108,844.32
13,575.97
54,303.88 135,759.71
206,681.61 798,180.00

Dela Cruz Total

269,814.40 654,536.00
450,000.00
- 100,000.00 - 660,000.00
206,681.61 798,180.00
376,496.01 1,242,716.00
 Capital
Adjustments
Reported Net income
a.) Overstated depreciation 6,000.00
b.) Merchadise inventory
2019 Understated 85,000.00
2020 Understated
c.) Purchases
2019 - Purchase is understated; Ending inventory is understated (offset) -
2020 - Beginning inventory is undestated; Purchase is overstated (offset)
d.) 2019 Understated expense [11,100 - (11,100 * .25/9.25)] (10,800.00)
2020 Overstated expense
8) Balance 80,200.00
Tax effect 25,664.00
Adjustments 54,536.00

Computation of correct beginning capital: Jackson Simpson

Unadjusted capital 154,000.00 198,000.00
Add: Net capital adjustments 10,907.20 21,814.40
Adjusted beginning capital 164,907.20 219,814.40

Computation of interest on average capital: Jackson

Beginning capital - adjusted 164,907.20
Additional investment:
Jackson - April 1 (300,000 x 9/12) 225,000.00
Simpson - August 1 (150,000 x 5/12)
Withdrawals:
Oct. 1 (120,000 x 3/12) (30,000.00)
Oct. 1 (20,000 x 3/12)
6) Average capital 359,907.20
Interest rate 12%
Interest on average capital 43,188.86
Compuation of Jackson's Bonus
Corrected net income 518,180.00
Less: Salaries 540,000.00
Interest 108,844.32 648,844.32
Net income after salaries and interest but before bonus - 130,664.32
Net income after all - 118,785.75
7) Bonus - 11,878.57

9) Distribution of Net income Jackson Simpson

Salaries 240,000.00 180,000.00
Interest 43,188.86 33,277.73
Bonus - 11,878.57
Remainder - 23,757.15 - 47,514.30
247,553.14 165,763.43

10) Computation of capital balances - December 31 ,2020:

Jackson Simpson
Beginning capital 164,907.20 219,814.40
Additional investment 300,000.00 150,000.00
Withdrawals - 360,000.00 - 200,000.00
Share in net income 247,553.14 165,763.43
352,460.34 335,577.83

8) Net adjustments on 2019 Income 80,200.00

Net income Total

800,000.00
6,000.00

(85,000.00)
75,000.00

1,200.00
(2,800.00)
279,020.00 (281,820.00)
518,180.00

Dela Cruz Total

248,000.00 600,000.00
21,814.40 54,536.00
269,814.40 654,536.00

Simpson Dela Cruz

219,814.40 269,814.40

62,500.00

(5,000.00)
277,314.40 269,814.40
12% 12%
33,277.73 32,377.73
 Dela Cruz Total
120,000.00 540,000.00
32,377.73 108,844.32
- 11,878.57
- 47,514.30 - 118,785.75
104,863.43 518,180.00

Dela Cruz Total

269,814.40 654,536.00
450,000.00
- 100,000.00 - 660,000.00
104,863.43 518,180.00
274,677.83 962,716.00