A Sole Proprietor and an Individual with No Business Form a Partnership

Mulles,the owner of a successful fertilizer business, felt that it is time to expand operations.
Mulles offered to form a partnership with Lucena, the owner of a nearby warehouse. The
Partnership would be called Mulles & Lucena Storage and Sales. Lucena accepted Mulles' offer
and the Partnership was formed on July 1, 2011.

Presented below is the trial balance for Mulles Fertiizer Supply on June 30,2011:

Cash P229,500
Accounts Receivable 2,103,000
Allowance for Uncollectible Accounts P117,000
Inventory 1,012,500
Prepaid Rent 29,250
Store Equipment 390,000
Accumulated Depreciation 97,500
Notes Payable 330,000
Accounts Payable 505,500
Mulles,Capital 2,714,250
Total P3,764,250 P3,764,250

The partners agreed to share profits and looses equally and decided to invest an equal amount in
thepartnership. Lucena and Mulles agreed that Lucena's land is worth P500,000 and his Building
P1,450,000.Lucena is to contribute cash in an amount sufficient to make his capital account
balance equal to Mulles.

An agreement is reached by the two partners on the following terms:

a. The accounts receivable are to be valued at P1,799,000 and the allowance for
uncollectible accounts will be eliminated.
b. Inventory is to be decreased by P112,500.
c. The prepaid rent is for the warehouse used by Mulles. All merchandise will be
transferred to Lucena's building. No refund will be received on the unused rent paid in
advance.
d. The store equipment has a fair value of P300,000.
e. A the other assets and liabilities are to be transferred at their book values.

REQUIRED:
1. Prepare the necessary journal entries in the books of Mulles.
2. Prepare the opening journal entries in the books of the partnership and record the
formation of the partnership in a new set of books.

1. Prepare the necessary journal entries in the books of Mulles.

a. The accounts receivable are to be valued at P1,799,000 and the allowance for
uncollectible accounts will be eliminated.
Adjusting
Accounts Receivable 2,103,000
1,799,000
Collectible 304,000
Journal Entry
Mulles,Capital 304,00
Accounts Recievable 304,000
Allowance Account Adjustment
Allowance for Doubtful Accounts 117,000
Mulles,Capital 117,000
b. Inventory is to be decreased by P112,500.
Journal Entry
Mulles,Capital 112,000

Inventory 112,000

c. The prepaid rent is for the warehouse used by Mulles. All merchandise will be
transferred to Lucena's building. No refund will be received on the unused rent paid
in advance.
Journal Entry
Mulles,Capital 29,250
Prepaid Rent 29,250
d. The store equipment has a fair value of P300,000.
Adjusting
Store Equipment 390,000
Fair Value 300,000
90,000
Journal Entry
Mulles,Capital 90,000
Store Equipment 90,000
Accumulated Depreciation Adjustment
Accumulated Depreciation 97,500
Mulles,Capital 97,500
e.No entries necessary

2. Prepare the opening journal entries in the books of the partnership and record
the formation of the partnership in a new set of books.

Mulles

Cash P229,500
Accounts Receivable 1,799,000
Inventory 900,000
Store Equipment 300,000
P3,228,500
Notes Payable P330,000
Accounts Payable 505,500
Mulles,Capital 2,393,000
P3,228,500
Lucena

Cash P2,393,000
Land 1,450,000
Building 500,000
P443,000-cash to be contributed by Lucena

Cash P443,000
Bulding 1,450,000
Land 500,000
P2,393,000

Lucena,Capital P2,393,000
P2,393,000