Two sole proprietors, L and M, agreed to form a partnership on January 1, 20X9. The trial balance for each proprietorship is shown below as of January 1, 20X9. L M On Booksof LFairValues On Booksof MFairValuesCash$40,000 $40,000 $30,000 $30,000 Accounts Receivable (net) 60,000 52,000 70,000 56,000 Merchandise Inventory 100,000 94,000 100,000 114,000 Buildings (net) 280,000 320,000 250,000 280,000 Furniture and Fixtures (net) 60,000 64,000 40,000 44,000 Accounts Payable 110,000 110,000 80,000 80,000 Mortgage Payable 200,000 200,000 150,000 150,000 L, Capital 230,000 M, Capital 260,000 The LM partnership will take over the assets and assume the liabilities of
the proprietors as of January 1, 20X9.Required:a) Prepare a balance sheet, for financial accounting purposes, for the LM partnership as of January 1, 20X9.b) In addition, assume that M agreed to recognize the goodwill generated by L's business. Accordingly, M agreed to recognize an amount for L's goodwill such that L's capital equaled M's capital on January 1, 20X9. Given this alternative, how does the balance sheet prepared for requirement A change?
What will be an ideal response?
a)
| LM Partnership | |||||||
| Balance Sheet | |||||||
| January 1, 20X9 ? | |||||||
| Assets | Liabilities and Capital | ||||||
| Cash | $ | 70,000 | Liabilities | ||||
| Accounts Receivable (net) | 108,000 | Accounts Payable | $ | 190,000 | |||
| Merchandise Inventory | 208,000 | Mortgage Payable | 350,000 | ||||
| Building (net) | 600,000 | Total Liabilities | $ | 540,000 | |||
| Furniture and Fixtures (net) | 108,000 | Capital: | |||||
| Accounts Payable | L, Capital | $ | 260,000 | ||||
| Mortgage Payable | M, Capital | 294,000 | |||||
| Total Capital | 554,000 | ||||||
| Total Assets | $ | 1,094,000 | Total Liabilities and Capital | $ | 1,094,000 | ||
Assets change due to the addition of goodwill of $34,000. Total assets are now $1,128,000 ($1,094,000 + $34,000 goodwill).
L, Capital and M, Capital are each $294,000 if L's goodwill is recognized. Total capital is $588,000, and total liabilities and capital amount to $1,128,000.
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