Question

On December 31, 2014 Grace and Rita agreed to form a partnership named GR Company. Shown below

are the balances of their accounts:
Grace Rita
Cash 100,000 150,000
Accounts Receivable 180,000 250,000
Allowance for doubtful accounts 5,000 10,000
Merchandise 200,000 190,000
Prepaid insurance 20,000 30,000
Equipment 150,000 200,000
Accumulated Depreciation 50,000 70,000
Accounts payable 260,000 280,000
The partners agreed to make the following valuation of their contributions:
Grace:
a. Account receivable should have a net realizable value of 160,000.
b. Merchandise should be valued at 220,000.
c. Expired portion of prepaid insurance is 5,000.
d. Equipment should have a net book value of 80,000.
e. An accrued expense is 10,000.
Rita:
a. Account receivable should have a net realizable value of 230,000.
b. Merchandise should be valued at 200,000.
c. Expired portion of prepaid insurance is 8,000.
d. Equipment should have a net book value of 150,000.
e. An accrued expense is 10,000.
Compute the capital account balance of Grace and Rita prior to partnership formation.

Answer 1

The capital account balances of Grace and Rita are calculated by adjusting their individual accounts to the agreed valuations before forming the partnership. Grace's opening capital balance is $305,000, while Rita's opening capital balance is $462,000 after making necessary adjustments and deductions.

Step-by-step explanation:

Calculation of Capital Account Balances

To determine the capital account balances of Grace and Rita before forming their partnership, we adjust their individual account balances based on their agreed valuations. Here are the adjusted values for Grace and Rita's respective accounts:

• Grace's Adjusted Accounts:
  
• Rita's Adjusted Accounts:
  

Now, let's calculate the capital for each partner:

1. Grace's Capital = (Cash + Accounts Receivable (Net) + Merchandise + Prepaid Insurance + Equipment (Net)) - (Accounts Payable + Accrued Expense)
   = ($100,000 + $160,000 + $220,000 + $15,000 + $80,000) - ($260,000 + $10,000) = $305,000
2. Rita's Capital = (Cash + Accounts Receivable (Net) + Merchandise + Prepaid Insurance + Equipment (Net)) - (Accounts Payable + Accrued Expense)
   = ($150,000 + $230,000 + $200,000 + $22,000 + $150,000) - ($280,000 + $10,000) = $462,000

Therefore, the opening capital account balance for Grace is $305,000 and for Rita it is $462,000.