Question

Uruguay and Argentina, who were operating separate businesses, decided on 1 July 2018 to form a...

Uruguay and Argentina, who were operating separate businesses, decided on 1 July 2018 to form a partnership by contributing cash, assets and liabilities of their respective businesses. At that date the fair value of the assets and liabilities were as set out below:

The profit for the year ended 30 June 2019 was $76,000. Uruguay and Argentina agreed to allocate the profits based on the ratio of their initial capital account balances at 1 July 2018. Assume that they use the capital accounts method (Method 1).
Required:
Prepare the required journal entries to record establishing the partnership and allocating the profit. Narrations are not required. Ignore GST. Show supporting calculations.


Uruguay   Argentina

Carrying Amount Fair Value Carrying Amount Fair Value
Cash at Bank 100000 100000 110000 110000
Accounts Receivable 15000 14000 9000 8500
Accounts Payable 9000 9000 6000 6000
Plant & Equipment 170000 150000 95000 80000
Business   Accounting   
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Homework Answers

Answer #1

Assets and liabilities must be valued at carrying amount or fair value whichever is lower.

Journal entry to record capital introduction by Uruguay:

Ledger name and description Debit Credit
Cash at bank 100000
Accounts receivable 14000
Plant & Equipment 150000
Accounts payable 9000
Uruguay's capital 255000

Journal entry to record capital introduction by Argentina:

Ledger name and description Debit Credit
Cash at bank 110000
Accounts receivable 8500
Plant & Equipment 80000
Accounts payable 6000
Argentina's capital 192500

Ratio for division of profit = 255000:192500 or 102:77

Journal entry to record division of profit:

Ledger name and description Debit Credit
Profit and loss 76000
Uruguay's capital 43307
Argentina's capital 32693

Hope this helps :)

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