Question

The E.N.D. partnership has the following capital balances as of the end of the current year:

Pineda	$	290,000
Adams		260,000
Fergie		250,000
Gomez		240,000
Total capital	$	1,040,000

Answer each of the following independent questions:

a. Assume that the partners share profits and losses 3:3:2:2, respectively. Fergie retires and is paid $280,000 based on the terms of the original partnership agreement. If the goodwill method is used, what is the capital balance of the remaining three partners?

b. Assume that the partners share profits and losses 4:3:2:1, respectively. Pineda retires and is paid $320,000 based on the terms of the original partnership agreement. If the bonus method is used, what is the capital balance of the remaining three partners?

Answer 1

Solution a:

Fergie will receive additional $30,000 above his capital balance. Fergie share of profit is 20%, therefore extra payment of $30,000 indicated Goodwill share of Fergie.

Therefore total goodwill of partnership = $30,000/20% = $150,000

Share of goodwill for Pineda = $150,000*3/10 = $45,000

Share of Goodwill for Adams = $150,000*3/10 = $45,000

Share of Goodwill for Gomez = $150,000*2/10 = $30,000

New capital of Pineda = $290,000 + $45,000 = $335,000

New Capital of Adams = $260,000 + $45,000 = $305,000

New Capital of Gomez = $240,000 + $30,000 = $270,000

Solution b:

Captial balance of Fergie = $250,000

Total amount paid on retirement = $320,000

Bonus payment to fregie = $320,000 - $250,000 = $70,000

The $70,000 bonus paid will be deducted from remaining partners in their profit sharing ratio i.e. 4:3:1

New capital balance of Pineda = $290,000 - $70,000*4/8 = $255,000

New Capital balance of Adams = $260,000 - $70,000*3/8 = $233,750

New Capital balance of Gomez = $240,000 - $70,000*1/8 = $231,250