Corporate Restructuring
Unruh Grey and Carter are partners with capital balances of $80,000, $200,000, and $120,000, respectively. Profits and losses are shared in a 3:2:1 ratio. Grey decided to withdraw and the partnership revalue its assets. The value of inventory was decreased by $20,000 and the value of land was increased by $50,000. Unruh and Carter then agreed to pay Grey $230,000 for his withdrawal from the partnership.
Required:
Prepare the journal entry to record Grey's withdrawal under the
A. bonus method.
B. full goodwill method
Ans.
Journal Entry to Record Revaluation of Partnership' s Assets
Net Revaluation: = -20000 +50000 = $30,000
Net Assets = $30,000
Ulysses, Capital = $15,000
Grey, Capital = $10,000
Carter Capital =$5,000
Or
Land = $50,000
Ulysses, Capital = $10,000
Grey, Capital = $6,667
Carter Capital = $3,333
Inventory = $20,000
Ulysses, Capital = $25,000
Grey, Capital = $16,667
Carter Capital = $8,333
A) Journal Entry to record Withdrawel using bonus Method
Grey, Capital = $210,000
Ulysses, Capital = $15,000
Carter Capital = $5,000
Cash = $230,000
B) Journal Entry to record withdrawal using full goodwill method:
Good Will (20000/(2/6)) = $60,000
Ulysses, Capital = $30,000
Grey, Capital = $20,000
Carter Capital = $10,000
2. Distinguish among a statutory merger, a statutory consolidation, and a stock acquisition.
3. How might a partner withdrawing in violation of the partnership agreement and without the con-sent of the other partners be treated? What about a partner who is forced to withdraw?
4. Peterson Corporation purchased the net assets of Scarberry Corporation on January 2, 2011 for $560,000 and also paid $20,000 in direct acquisition costs. Scarberry's balance sheet on January 1, 2011 was as follows:
Accounts receivable-net $ 180,000 Current liabilities $ 70,000
Inventory 360,000 Long term debt 160,000
Land 40,000 Common stock ($1 par) 20,000
Building-net 60,000 Paid-in capital 430,000
Equipment-net 80,000 Retained earnings 40,000
Total assets $ 720,000 Total liab. & equity $ 720,000
Fair values agree with book values except for inventory, land, and equipment, which have fair values of $400,000, $50,000 and $70,000, respectively. Scarberry has patent rights valued at $20,000.
Required:
A. Prepare Peterson's general journal entry for the cash purchase of Scarberry's net assets.
B. Assume Peterson Corporation purchased the net assets of Scarberry Corporation for $500,000 rather than $560,000, prepare the general journal entry.
5. To what extent can personal creditors seek recovery from partnership assets?
6. The stockholders' equities of P Corporation and S Corporation were as follows on January 1, 2011:
P Corp. S Corp.
Common Stock, $1 par $1,000,000 $ 600,000
Other Contributed Capital 2,800,000 1,100,000
Retained Earnings 600,000 340,000
Total Stockholders' Equity $4,400,000 $2,040,000
On January 2, 2011 P Corp. issued 100,000 of its shares with a market value of $14 per share in exchange for all of S's shares, and S Corp. was dissolved. P Corp. paid $10,000 to register and issue the new common shares.
Required:
Prepare the stockholders' equity section of P Corp. balance sheet after the business combination on January 2, 2011.
7. The partnership agreement of Stone, Miles, and Kiney provides for annual distribution of profit and loss in the following sequence:
- Miles, the managing partner, receives a bonus of 10% of net income.
- Each partner receives 5% interest on average capital investment.
- Residual profit or loss is to be divided 4:2:4.
Average capital investments for 2011 were:
Stone $270,000
Miles $180,000
Kiney $120,000
Required:
A. Prepare a schedule to allocate net income, assuming operations for the year resulted in:
1. Net income of $75,000.
2. Net income of $15,000.
3. Net loss of $30,000.
B. Prepare the journal entry to close the Income Summary account for each situation above.
8. The NOR Partnership is being liquidated. A balance sheet prepared prior to liquidation is presented below:
Assets Liabilities & Equities
Cash $240,000 Liabilities $ 160,000
Other Assets 300,000 Reese, Loan 60,000
Nen, Capital 180,000
Ott, Capital 60,000
Reese, Capital 80,000
Total Assets $540,000 Total Equities $540,000
Nen, Ott, and Reese share profits and losses in a 40:40:20 ratio. All partners are personally insolvent.
Required: A. Prepare the journal entries necessary to record the distribution of the available cash.
B. Prepare the journal entries necessary to record the completion of the liquidation process, assuming the other assets are sold for $120,000.
9. The partnership of Hall, Jones, and Otto has been dissolved and is in the process of liquidation. On July 1, 2011, just before the second cash distribution, the assets and equities of the partnership along with residual profit sharing ratios were as follows:
Assets Liabilities & Equities
Cash $ 200,000 Liabilities $ 150,000
Receivables-net 50,000 Hall, Capital 50% 100,000
Inventories 150,000 Jones, Capital 30% 175,000
Equipment-net 100,000 Otto, Capital 20% 75,000
Total assets $ 500,000 Total Lia & Equity 500,000
Assume that the available cash is distributed immediately, except for a $25,000 contingency fund that is withheld pending complete liquidation of the partnership. How much cash should be paid to each of the partners?
10. How would a company determine whether goodwill has been impaired?
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