Question

Following is the current balance sheet for a local partnership of doctors:

Cash and current assets	$	78,000	Liabilities	$	70,000
Land		212,000	A, capital		50,000
Building and equipment (net)		170,000	B, capital		70,000
			C, capital		120,000
			D, capital		150,000
Totals	$	460,000	Totals	$	460,000

The following questions represent independent situations:

E is going to invest enough money in this partnership to receive a 25 percent interest. No goodwill or bonus is to be recorded. How much should E invest?

E is going to invest enough money in this partnership to receive a 25 percent interest. No goodwill or bonus is to be recorded. How much should E invest?

	E investment

b. E contributes $45,000 in cash to the business to receive a 10 percent interest in the partnership. Goodwill is to be recorded. Profits and losses have previously been split according to the following percentages: A, 30 percent; B, 10 percent; C, 40 percent; and D, 20 percent. After E makes this investment, what are the individual capital balances?

c. E contributes $56,000 in cash to the business to receive a 20 percent interest in the partnership. Goodwill is to be recorded. The four original partners share all profits and losses equally. After E makes this investment, what are the individual capital balances?

d. E contributes $68,000 in cash to the business to receive a 20 percent interest in the partnership. No goodwill or other asset revaluation is to be recorded. Profits and losses have previously been split according to the following percentages: A, 10 percent; B, 30 percent; C, 20 percent; and D, 40 percent. After E makes this investment, what are the individual capital balances?

e.

C retires from the partnership and, as per the original partnership agreement, is to receive cash equal to 115 percent of her final capital balance. No goodwill or other asset revaluation is to be recognized. All partners share profits and losses equally. After the withdrawal, what are the individual capital balances of the remaining partners?

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	Individuals (b) Capital Balances (c) Capital Balances (d) Capital Balances (e) Capital Balances A B C D E

Answer 1

A. E is going to invest enough money in this partnership to receive a 25 percent interest. No goodwill or bonus is to be recorded. How much should E invest?

E investment = 25% [original investment + E investment]

EI = 25%[390000+EI]

0.75EI =$ 97,500

EI = $130,000

b. E contributes $36,000 in cash to the business to receive a 10 percent interest in the partnership

	$
Implied value of Partnership	450000
Total capital after investment	435000
[45000+390000]
Goodwill	15000
Allocation of Goodwill
A -30%	4500
B - 10%	1500
C - 40%	6000
D -20%	3000

	A	B	C	D	E
Capital Balances	50000	70000	120000	150000	0
Goodwill	4500	1500	6000	3000	0
Investment	0	0	0		45000
Capital Balances	54500	71500	126000	153000	45000

c. E contributes $56,000 in cash to the business to receive a 20 percent interest in the partnership. Goodwill is to be recorded. The four original partners share all profits and losses equally. After E makes this investment, what are the individual capital balances?

E investment = 20% (original investment + E investment)

$56000 + goodwill = 20% (390000+56000+E investment)

0.80 goodwill = 33200

goodwill = $41500

E investment = $56000 +$41500 = $97500. Other capital accounts remains unchanged.

d. E contributes $68,000 in cash to the business to receive a 20 percent interest in the partnership. No goodwill or other asset revaluation is to be recorded. Profits and losses have previously been split according to the following percentages: A, 10 percent; B, 30 percent; C, 20 percent; and D, 40 percent. After E makes this investment, what are the individual capital balances?

	$
Total capital after investment [390000+68000]	458000
Amount acquired by E	20%
E Capital balance	91600
E payment	68000
Bonus being given to E	23600

Allocation of Goodwill
A -10%	2360
B - 30%	7080
C - 20%	4720
D -40%	9440

	A	B	C	D	E
Capital Balances	50000	70000	120000	150000	0
Bonus	-2360	-7080	-4720	-9440	0
Investment	0	0	0		68000
Capital Balances	47640	62920	115280	140560	68000