A Co. and B Co. formed a partnership on December 31, 2016,

Example: Forming a partnership

A Co. and B Co. formed a partnership on December 31, 2016, named AB Co. Following are partial balance sheets of A Co. and B Co. prior to forming the partnership:

A Co. Balance Sheet
December 31, 2016

Assets    $    $
Cash        20,000
Accounts receivable    12,000
Less: Allowance for doubtful account    (3,000)
Net        9,000
Inventory        5,000
Equipment     14,000
Less: Accumulated depreciation    (6,000)
Net        8,000
Liabilities
Accounts payable        3,000

B Co. Balance Sheet
December 31, 2016

Assets    $    $
Cash        10,000
Prepaid expenses        2,000
Accounts receivable    5,000
Less: Allowance for doubtful account    (1,000)
Net        4,000
Inventory        3,000
Equipment (net)        4,000

Liabilities
Accounts payable        2,000

According to partnership agreement, following issues had been agreed.

1. AB Co. will take over A Co.’s assets at following fair values:
Accounts receivable: 12,000; Allowance for doubtful account: $4,000; Inventory: 3,000; Equipment: 6,000.
2. AB Co. will take over B Co.’s assets and liabilities at following fair values:
Accounts receivable: 5,000; Allowance for doubtful account: $500; Inventory: 3,000; Equipment: 5,000; Accounts payable: $2,000.
3. Each partner agreed to contribute and maintain equal capital balance in the partnership business. So, if needed, the partner(s) will contribute additional cash to make the contribution equal.

Required: Show necessary journals for AB Co. on December 31, 2016 and prepare the balance sheet on December 31, 2016 immediately after the formation of partnership.

Here’s the SOLUTION

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