Question

The Prince-Robbins partnership has the following capital account balances on January 1, 2018:

Prince, Capital $ 150,000

Robbins, Capital 140,000

Prince is allocated 60 percent of all profits and losses with the remaining 40 percent assigned to Robbins after interest of 6 percent is given to each partner based on beginning capital balances.

On January 2, 2018, Jeffrey invests $85,000 cash for a 20 percent interest in the partnership. This transaction is recorded by the goodwill method. After this transaction, 6 percent interest is still to go to each partner. Profits and losses will then be split as follows: Prince (50 percent), Robbins (30 percent), and Jeffrey (20 percent). In 2018, the partnership reports a net income of $24,000.

a. Prepare the journal entry to record Jeffrey’s entrance into the partnership on January 2, 2018.

b. Determine the allocation of income at the end of 2018.

Answer 1

Allocation of Partnership Income:

Partnership is an agreement between two or more people to manage and run a business with a common objective of making profit and share them in the agreed profit sharing ratios. Under the goodwill method, the new partner may directly pay the goodwill amount to the existing partners privately or through a debit to his capital account and a credit to the old partners in the ratio of their sacrifice of future profits.

Q.A) The allocation of income at the end of 2015 is made below:

Note:

Capital balance after joining Jeffrey = $150,000 + $140,000 + $85,000 = $375,000

The implied value of the business based on the investment made by Jeffrey = $85,000 / 20% = $425,000

Goodwill = $425,000 - $375,000 = $50,000 (to be shared by Prince and Robins in 60:40 ratio)

New balance of partners after this transaction is computed below:

Prince = $150,000 + ($50,000 * 60%) = $180,000

Robbins = $140,000 + ($50,000 *40%) = $160,000

Jeffrey = $85,000

Remaining loss after interest = ($24,000 - $25,500) = $1,500 ((to be shared by Prince and Robins and Jeffrey in their new ratios)