Question

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

Prince, Capital	$	110,000
Robbins, Capital		100,000

Prince is allocated 70 percent of all profits and losses with the remaining 30 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 $61,000 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 $23,000.

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

Determine the allocation of income at the end of 2018.

Answer 1

A)

Journal	debit	credit
Goodwill	34000
To price, capital		23800
To Robbins, capital		10200
Cash	61000
To jeffrey, capital		61000

Calculation of goodwill:

Total capital is $271,000 ($110,000 + $100,000 + $61000) after the new investment. However, the implied value ofthe business based on the new investment is $305000 ($61000 ÷ 20%). Consequently, goodwill of $34000 must be recognized with the offsetting allocation to the original two partners based on their profit and loss ratio: prince —$23800 (70%) and robbins—$10200 (30%).

B)

Capitals of partner =

Prince = 110000 + 23800 = 133800

Robbins = 100000 + 10200 = 110200

Jeffrey = 97000

Allocation of income =

	Prince	robbins	jeffrey
Interest - 8% of beg. Capital	10704	8816	7760
Profit/loss allocated: 23000 - (10704+8816+7760) = -4280	(2140)	(1284)	(856)
Income at the end of 2018	8564	7532	6904

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