Question

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

Prince, Capital	$	160,000
Robbins, Capital		150,000

Prince is allocated 80 percent of all profits and losses with the remaining 20 percent assigned to Robbins after interest of 8 percent is given to each partner based on beginning capital balances.

On January 2, 2018, Jeffrey invests $91,000 cash for a 20 percent interest in the partnership. This transaction is recorded by the goodwill method. After this transaction, 8 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 $33,000.

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

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

Answer 1

A new partner is admitted into the existing partnership by an agreement to bring cash or an asset. The partner is allocated an agreed percentage in the profits or losses from the period as mutually agreed. The admission of partner is recorded in the books using any of the two methods. They are:

1. Bonus Method

2. Goodwill method.

Goodwill method: The goodwill method creates an intangible asset in the form of goodwill in addition to the cash or assets brought in by the new partner. At the time of the admission of partner, the goodwill account is allocated to the existing partner’s capital accounts in their old profit sharing ratio.

a.

Prepare the journal entry to record the admission of a new partner in the following manner:

Date	Account Title and Explanation	Debit	Credit
2-Jan	Goodwill	$54,000
	Capital , P		$43,200
	Capital , R		$10,800
	(To record the goodwill)

Date	Account Title and Explanation	Debit	Credit
2-Jan	Cash	$91000
	Capital ,J		$91000
	(To record the admission of new partner for $91000 at 20%)

Explanation to the journal entries:

1. The goodwill method of admitting a new partner states that the goodwill generated is allocated to the existing partners in the old profit and loss sharing ratio. Accordingly, the goodwill generated for $54,000 is debited to Goodwill account to create the intangible asset. The goodwill is then allocated between the partners P and R in the ratio of 80:20. Thus, the Capital, P account is credited by $43,200 to increase the account balance of Partner P. Also, the Capital, R account is credited by $10,800  to increase the account balance of Partner R.

2. The partner J brings in cash for $91,000. Accordingly, the Cash account s debited by $91,000 to increase the account balance. A corresponding amount of $91,000 is credited to the Capital, J account to increase the balance of the capital account.

Working note:

Compute the goodwill created on the admission of the partner in the following manner:

Therefore, the goodwill created is $54,000.

Description	Amount ($)
	Implied value of business ($91,000 ÷ 20%)		$455,000
Less :	Existing capital ($160,000+$150,000+$91,000)		($401,000)
	Goodwill		$54,000
	Allocation of goodwill
	P at 80% of $54000		$43,200
	R at 20% of $54000		$10,800

b.

Determine the allocation of the income in the following manner:

The net income reported for the year 2018 is $33,000. The interest paid on the beginning capital is 8%. Accordingly,

Therefore, the net income allocated to P, R, and J

Description	P	R	J	Total
	Capital as on	$203,200 ($160000+43200)	$160,800 (150000+10800)	$91,000	4,55,000
	Interest at 8%	$16,256	$12,864	$7,280	$36,400
	Net income reported for the year				$33,000
	Allocation of loss in 50:30:20	($1700)	($1020)	($680)	($3,400)
	Allocations	$217,756	$ 172,644	$97,600	$488,000