Question

The Sandhill’s Partnership consists of two partners- Kim and Doug. Their capital balances just before acceptance of a third partner, Sandy, was $100,000 and $100,000 respectively. Kim and Doug share net income or loss equally. Sandy’s contribution was $100,000 for assumption A and $120,000 for assumption B. Prepare the two journal entries for each of the independent situations on the partnership books for the new partner’s capital account reflecting

A) 20% ownership based on capital balances before and after Sandy’s contribution

B) 60% ownership based on capital balances before and after Sandy’s contribution

Answer 1

A) 20% ownership based on capital balances before and after Sandy’s contribution

Given Details:

Kim’s Capital before the admission of Sandy= $1,00,000

Doug’s Capital before the admission of Sandy= $1,00,000

Net Income and Loss sharing ratio of Kim’s Capital = 1:1

Sandy’s contribution = $100,000 (for assumption A)

Journal Entries;

Scenario i.20% ownership based on capital balances before Sandy’s contribution

Cash ………………………$100,000

      To Sandy’s Capital……………………….$40,000

      To Kim’s Capital…………………………..$30,000

      To Doug’s Capital…………………………$30,000

(To record Admission of Sandy with Bonus to Kim and Doug)

Explanations and Calculations to above Journal entry:

Capital balances before Sandy’s contribution

                                              = Kim’s Capital + Doug’s Capital

                                             = $1,00,000 + $1,00,000

                                            =$ 2,00,000

Therefore, ownership interest of Sandy based 20% on capital balances before Sandy’s contribution will calculated as follows;

Ownership interest         = 20 % of $ 200,000

                                       = $40000 (Book value of Sandy’s Capital)

In this assumption, $40000 of ownership Interest of Sandy is less than the $100,000 of Sandy’s contribution. So, the difference in these of $60000 ($100,000 - $40000), is considered as Bonus, will be added (when Ownership interest > Amount Contributed) to the existing partners Kim’s Capital and Doug’s Capital accounts according to their existing Net Income and Loss sharing ratio i.e, 1:1

Kim’s share of Bonus of $60,000 = $60000 *1/2 = $30000

Doug’s share of Bonus of $60,000 = $60000 *1/2 = $30000

Therefore, We Debit “Cash” account with $1,00,000 (contribution by Sandy), Credit “Sandy’s Capital” account with $40,000 (Book value of Sandy’s Capital), Credit “Kim’s Capital” and “Doug’s Capital” accounts with their respective share of Bonus ($30,000 each).

……………………………………………………………………………………………………………………………………………………

Scenario ii.20% ownership based on capital balances after Sandy’s contribution

Cash ………………………$100,000

      To Sandy’s Capital……………………….$60,000

      To Kim’s Capital…………………………..$20,000

      To Doug’s Capital…………………………$20,000

(To record Admission of Sandy with Bonus to Kim and Doug)

Explanations and Calculations to above Journal entry:

Capital balances After Sandy’s contribution

                                              = Kim’s Capital + Doug’s Capital + Sandy’s Capital

                                             = $1,00,000 + $1,00,000 + $100,000

                                            =$ 3,00,000

Therefore, ownership interest of Sandy based 20% on capital balances before Sandy’s contribution will calculated as follows;

Ownership interest         = 20 % of $ 300,000

                                       = $60000 (Book value of Sandy’s Capital)

In this assumption, $60000 of ownership Interest of Sandy is less than the $100,000 of Sandy’s contribution. So, the difference in these of $40000 ($100,000 - $60000), is considered as Bonus, will be added (when Ownership interest > Amount Contributed) to the existing partners Kim’s Capital and Doug’s Capital accounts according to their existing Net Income and Loss sharing ratio i.e, 1:1

Kim’s share of Bonus of $40,000 = $40000 *1/2 = $20000

Doug’s share of Bonus of $40,000 = $40000 *1/2 = $20000

Therefore, We Debit “Cash” account with $1,00,000 (contribution by Sandy), Credit “Sandy’s Capital” account with $60,000 (Book value of Sandy’s Capital), Credit “Kim’s Capital” and “Doug’s Capital” accounts with their respective share of Bonus ($20,000 each).

B) 60% ownership based on capital balances before and after Sandy’s contribution

Given Details:

Kim’s Capital before the admission of Sandy= $1,00,000

Doug’s Capital before the admission of Sandy= $1,00,000

Net Income and Loss sharing ratio of Kim’s Capital = 1:1

Sandy’s contribution = $120,000 (for assumption B)

Journal Entries;

Scenario i.60% ownership based on capital balances before Sandy’s contribution

Cash ………………………$120,000

      To Sandy’s Capital……………………….$120,000

     

(To record Admission of Sandy with 60% of ownership interest)

Explanations and Calculations to above Journal entry:

Capital balances before Sandy’s contribution

                                              = Kim’s Capital + Doug’s Capital

                                             = $1,00,000 + $1,00,000

                                            =$ 2,00,000

Therefore, ownership interest of Sandy based 60% on capital balances before Sandy’s contribution will calculated as follows;

Ownership interest         = 60 % of $ 200,000

                                       = $120,000 (Book value of Sandy’s Capital)

In this assumption, $120,000 of ownership Interest of Sandy is equals the $120,000 of Sandy’s contribution. So, the entire amount contributed by Sandy will be going to his “Capital account” and there will be “no allocation” to existing partners Kim’s Capital and Doug’s Capital

Therefore, We Debit “Cash” account with $1,20,000 (contribution by Sandy), Credit “Sandy’s Capital” account with $120,000 (Book value of Sandy’s Capital).

……………………………………………………………………………………………………………………………………………………

Scenario ii.60% ownership based on capital balances after Sandy’s contribution

Cash …………………………….………$120,000

Kim’s Capital…………………………..$36,000

Doug’s Capital…………………………$36,000

      To Sandy’s Capital……………………….$192,000

     

(To record Admission of Sandy with Bonus to Kim and Doug)

Explanations and Calculations to above Journal entry:

Capital balances After Sandy’s contribution

                                              = Kim’s Capital + Doug’s Capital + Sandy’s Capital

                                             = $1,00,000 + $1,00,000 + $120,000

                                            =$ 3,20,000

Therefore, ownership interest of Sandy based 60% on capital balances before Sandy’s contribution will calculated as follows;

Ownership interest         = 60 % of $ 320,000

                                       = $192,000 (Book value of Sandy’s Capital)

In this assumption, $192,000 of ownership Interest of Sandy is more than the $120,000 of Sandy’s contribution. So, the difference in these of $72,000 ($192,000 - $120,000), is considered as Bonus, will be deducted (when Ownership interest > Amount Contributed) to the existing partners Kim’s Capital and Doug’s Capital accounts according to their existing Net Income and Loss sharing ratio i.e, 1:1

Kim’s share of Bonus of $72,000 = $72,000 *1/2 = $36,000

Doug’s share of Bonus of $72,000 = $72,000 *1/2 = $36,000

Therefore, We Debit “Cash” account with $1,20,000 (contribution by Sandy), Credit “Sandy’s Capital” account with $194,000 (Book value of Sandy’s Capital), Debit “Kim’s Capital” and “Doug’s Capital” accounts with their respective share of Bonus ($36,000 each).