Question

In: Accounting

Trump, Clinton, and Mueller are forming a partnership. &n

Trump, Clinton, and Mueller are forming a partnership.

Trump and Clinton are each contributing $100,000 while Mueller is contributing $70,000 and his expertise.

They will be equal partners and each will show the same beginning capital account.

REQUIRED: A) MAKE THE JOURNAL ENTRY USING THE BONUS METHOD

B) MAKE THE JOURNAL ENTRY USING THE GOODWILL METHOD

Expert Solution

In the books of Partnership firm

Answer to A) Under bonus method, Mueller's expertise will be valued and allocated from remaining partners Trump & Clinton. As they will maintain equal partnership, capital contribution will be equal.

Total Tangible contribution is $ 270,000, which will be divided equally 270000/3 = $90000

Name	Tangible Capital Invested	Equal Contribution
Trump	100000	90000
Clinton	100000	90000
Mueller	70000	90000
Total	270000	270000

While Mueller has only contributed $ 70000, additional contribution will be made by Trump & Clinton equally i.e $ 10000 each to make his capital $ 90000

Journal Entry

General Journal	Debit	Credit
Cash	$ 2,70,000
Capital Trump		$90,000
Capital Clinton		$90,000
Capital Mueller		$90,000
Being capital contribution as per Bonus method

Answer to B) Under Goodwill method, additional value of capital in form of goodwill will be recorded and there will be no loss of in capital contribution value from Trump & Clinton.

For $ 100000 as Tangible contribution by Trump & Clinton each, they are individually contributing 1/3rd in partnership.

Therefore, Total Capital based on Trump & Clinton' s individual contribution is 100000/(1/3) = $ 300000

As Mueller has contributed $ 70000 (tangible) only as against $ 100000, Goodwill Value = $ 30000 (100000 - 70000)

Journal Entry

General Journal	Debit	Credit
Cash	$ 2,70,000
Goodwill	$ 30,000
Capital Trump		$ 1,00,000
Capital Clinton		$ 1,00,000
Capital Mueller		$ 1,00,000
Being capital contribution as per Goodwill method

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