Question

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

Cash and current assets	$	81,000	Liabilities	$	78,000
Land		236,000	A, capital		58,000
Building and equipment (net)		183,000	B, capital		78,000
			C, capital		128,000
			D, capital		158,000
Totals	$	500,000	Totals	$	500,000

The following questions represent independent situations:

1. E is going to invest enough money in this partnership to receive a 20 percent interest. No goodwill or bonus is to be recorded. How much should E invest?

2. E contributes $120,000 in cash to the business to receive a 20 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?

3. E contributes $58,000 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?

4. E contributes $76,000 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?

5. 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?

Answer 1

first 4 requirements are solved-

1. E is going to invest enough money in this partnership to receive a 20 percent interest. No goodwill or bonus is to be recorded. How much should E invest?

Exact amount of investment can only be computed algebraically:

E Investment = 20% (Original total Capital + E Investment)

El = 0.20 ($422,000 + El), where EI = E investment

El = $84400 + .20 El

.80 El = $84400

E Investment = $105500

2. E contributes $120,000 in cash to the business to receive a 20 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?

Implied value of partnership ($120,000 ÷ 20%)	$600,000
Total capital after investment by E ($422,000 + $120,000)	$542,000
Goodwill	$58,000
Allocation of Goodwill:
A(30%)	$17,400
B(10%)	$5,800
C(40%)	$23,200
D(20%)	$11,600

CAPITAL BALANCES	A	B	C	D	E
Original balances	58000	78000	128000	158000	0
Goodwill (above)	17400	5800	23200	11600	0
Investment	0	0	0	0	120000
Capital balances	75400	83800	151200	169600	120000

3. E contributes $58,000 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?

Because E's investment of $58,000 is less than 20% of the resulting capital ($422,000+58000= $480000)

E is apparently bringing some other attribute to the partnership (goodwill) that must be Computed.

E Investment = 20% (Original Capital + E Investment)

$58,000 + Goodwill = .20 ($422,000 + $58,000 + Goodwill)

$58,000 + Goodwill = $96,000 + .20 Goodwill

.80 Goodwill = $38000

Goodwill = $47,500

E's investment is, therefore, $58,000 in cash and $47,500 in goodwill for a total capital balance of $105,500; the other capital accounts remain unchanged. Note that E's capital of $105,500 is 20% of the new total capital $527,500 ($422,000 + $105,500).

4. E contributes $76,000 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 ($422,000 + $76,000)		498000
Amount acquired by E				20%
E's capital balance					99600
E's payment					76000
Bonus being given to E				23600
Bonus from:
A(10%)	2360
B(30%	7080
C(20%)	4720
D(40%)	9440
CAPITAL BALANCES	A	B	C	D	E
Original balances	58000	78000	128000	158000	0
Investment	0	0	0	0	76000
Bonus (above)	-2360	-7080	-4720	-9440	23600
Capital balances	55640	70920	123280	148560	99600