Phil Thomas and Mary Martin, sole proprietor of Art Innovations, have decided to form a partnership. All the assets and liabilities of Art Innovations will be contributed by Mary to the new partnership. Phil is an art broker with valuable relationships, which he will bring to the new partnership, along with $100,000 in cash. The new partnership will continue doing business as Art Innovations.
Existing book and fair market values for the assets and liabilities are as follows:
Account Book Value Fair Market Value
|
Cash
|
$55,000.00
|
$55,000.00
|
|
Accounts Receivable
|
14,000.00
|
12,000.00
|
|
Allowance for Doubtful Accounts
|
1,100.00
|
|
Inventory
|
94,000.00
|
120,000.00
|
|
Equipment
|
70,000.00
|
12,000.00
|
|
Accumulated Depreciation
|
47,000.00
|
|
Accounts Payable
|
4,500.00
|
4,500.00
|
|
Loan Payable
|
28,500.00
|
28,500.00
|
Phil and Mary have agreed to use the bonus method to begin the partnership with each partner having an equal capital balance. Mary will contribute significantly more than Phil in physical assets and liabilities but Phil will bring his expertise and client relationships.
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Create an opening balance sheet for the new Art Innovations partnership. Assume the new partnership will be created on June 1, 2012.
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Identify the elements that should be addressed in the partnership agreement both from a business standpoint and from an accounting standpoint.