In January, 1918, B and C arranged with D to come into the firm with $5,000. The good-will is, by agreement, to be valued at $3,000. The new firm, consisting of B, C, and D, takes over the business and good-will in equal shares, subject to an allowance of 2½% on the notes and accounts receivable. It pays the estate of A $5,000, with the understanding that the balance due A’s estate shall remain as a loan at the rate of 5% interest.
Prepare the balance sheet and the capital accounts of B, C, and D as they should appear at the beginning of the new business, writing off the purchase of good-will in equal proportions to the amount of capital invested.
Corporation—Opening the Books
4. C, D, and E are partners sharing profits in accordance with capital investments. At end of the fiscal year, after all nominal accounts are closed, the books show the following:
| Cash | $ 20,051.00 | |
| Plant | 60,422.00 | |
| Inventory of Merchandise | 41,300.00 | |
| Bills Receivable | 18,028.00 | |
| Book Accounts Receivable | 70,402.00 | |
| C, Drawings | 8,400.00 | |
| D, Drawings | 6,000.00 | |
| E, Drawings | 4,800.00 | |
| Bills Payable | $ 5,211.00 | |
| C, Capital | 100,000.00 | |
| D, Capital | 50,000.00 | |
| E, Capital | 50,000.00 | |
| Profit and Loss, Undivided Profits | 24,192.00 | |
| $229,403.00 | $229,403.00 |
The partners thereupon incorporate a company with an authorized capital of $250,000. The company so formed purchased the partnership assets and good-will, not including the cash, for $250,000, payable $200,000 in stock and $50,000 in cash, the last-mentioned cash being the proceeds of sale of stock to F.
It is the intention to divide the purchase-money stock among the vendors in proportion to their former capital and to adjust their accounts by the division of the cash shown in trial balance, which will then be placed to their credit as loans to the company at 6% interest and remain as working capital. The bills payable are to be settled by the partners. As the drawings of the partners are not in proportion to their respective shares in the profits, the partners are charged with the interest thereon in the following amounts, viz.: C $231, D $165, and E $132.
(a) Frame the necessary entries to close the partnership books and show the amount of cash received by each partner.
(b) Referring to question (a), frame the necessary entries to open the books of the company and prepare a balance sheet showing the condition of the company at the beginning of its operations.
5. The Frost Manufacturing Co. was incorporated April 10, 1918, with a capital stock of $200,000, divided into 2,000 shares of a par value of $100 each.