Question

Anna and Bess share partnership profits and losses at 60% and 40%, respectively. The partners agree to admit Cal into the partnership for a 50% interest in capital and earnings. Capital accounts immediately before the admission of Cal are: Anna (60%) $ 300,000 Bess (40%) 300,000 Total $ 600,000

Part 1: Prepare the journal entry(s) for the admission of Cal to the partnership, assuming Cal invested $400,000 for the ownership interest and that this is a fair price for that share of the partnership to be acquired. Cal paid the money directly to Anna and to Bess for 50% of each of their respective capital interests. The partnership records goodwill.

Part 2: Prepare the journal entry(s) for the admission of Cal to the partnership, assuming Cal invested $500,000 for the ownership interest. Cal paid the money to the partnership for a 50% interest in capital and earnings. Assume the valuation is based on the capital of the current partnership, which is fairly valued. The partnership records goodwill.

Part 3: Prepare the journal entry(s) for the admission of Cal to the partnership, assuming Cal invested $700,000 for the ownership interest and that this is a fair price for that share of the partnership to be acquired. Cal paid the money to the partnership for a 50% interest in capital and earnings. The partnership records goodwill.

Answer 1

Answer :                                                Part-1 Working

Current Partner Profit Sharing and Capital Contribution ratio and Value :

Partner           Share Pattern            Capital

Anna                60 %            $ 300000

Bess            40 %                      $ 300000

          Total     100 %               $ 600000

After New Partner Mr. Cal entered , New Partner Profit Sharing and Capital Contribution ratio and Value :

Partner           Share    Add/(Minus)    New Share      Capital    Goodwill     Investment Redemption Capital

Anna                60 %        -30%          30 %            $ 300000    $ 120000*       -    - $ 210000*    $210000

Bess            40 %        -20 %            20 %            $ 300000     $ 80000*       -                - $190000*       $190000

Cal                                   50 %             50 %              -                  -             $ 400000       -                    $400000

          Total                                          100 %            $ 600000     $ 200000      $ 400000 - $ 400000 $ 800000

* Computation of Goodwill

Cal Investment for 50 % of capital interest is $ 400000.

Hence, 100 % capital be $ 400000/50% be $ 800000, Current Partner Capital is $ 600000, Then, Excess over current capital recognized as goodwill $ 200000, to be divided in the existing profit sharing ration as $ 120000 and $ 80000 to Anna and Bess respectively.

* Total Capital interest becomes $ 420000 and $ 380000 after goodwill share distribution, Redemption of 50 % each partner is transfer to New partner, Therefore $ 210000 and $ 190000 is reduced from current partner share value, becomes $ 210000, $190000 becomes Anna and Bess new share.

Journal Entry (part 1)

Goodwill   A/c Debit   $200,000
Anna capital A/c   Credit    $120,000
Bess capital A/c    Credit    $80,000

(being goodwill amount distributed among anna and bess in the 60:40 ratio)

Anna, capital A/c Debit   $210,000
Bess, capital A/c Debit   $190,000
Cal, capital A/c    Credit $400,000

(being new partner cal introduced capital )

Journal Entry (part 2)

Goodwill A/c    Debit $100,000
Cash A/c          Debit $ 500,000
Cal, capital A/c Credit $600,000

(being new partner cal introduced capital )

Current capital of the partnership, $600,000, and say that it is fairly valued, then, if it represents 50% of final capital after Cal's investment, final capital should be $1,200,000 ($600,000/50%). Cal's share of final capital will be $600,000, and, if Cal invests $500,000 for this interest, there must be $100,000 of goodwill that is allocated to Cal.

Journal Entry (part 3)

Goodwill A/c      Debit $100,000
Anna, capital A/c Debit $ 60,000
Bess, capital A/c Credit $40,000

(being goodwill amount distributed among anna and bess in the 60:40 ratio)

Cash A/c            Debit $700,000
Cal, capital A/c Credit $700,000

(being new partner cal introduced capital )

If Cal invests $700,000 for a 50% interest, it implies that total partnership capital should be $1,400,000 ($700000/50%). After Cal's investment, total capital will be $1,300,000 ($600000 + $ 700000), and goodwill is therefore $100,000. The goodwill is allocated to Anna and Bess.