Question

A partnership of attorneys in the St. Louis, Missouri, area has the following balance sheet accounts as of January 1, 2021:

Assets	$	498,000	Liabilities	$	148,000
			Athos, capital		130,000
			Porthos, capital		120,000
			Aramis, capital		100,000

According to the articles of partnership, Athos is to receive an allocation of 50 percent of all partnership profits and losses, while Porthos receives 30 percent, and Aramis, 20 percent. The book value of each asset and liability should be considered an accurate representation of fair value.

For each of the following independent situations, prepare the journal entry or entries to be recorded by the partnership.

1. Porthos, with permission of the other partners, decides to sell half of his partnership interest to D’Artagnan for $88,000 in cash. No asset revaluation or goodwill is to be recorded by the partnership.

2. All three of the present partners agree to sell 10 percent of each partnership interest to D'Artagnan for a total cash payment of $40,000. Each partner receives a negotiated portion of this amount. Goodwill is recorded as a result of the transaction.

3. D'Artagnan is allowed to become a partner with a 10 percent ownership interest by contributing $52,000 in cash directly into the business. The bonus method is used to record this admission.

4. Use the same facts as in requirement (c) except that the entrance into the partnership is recorded by the goodwill method.

5. D'Artagnan is allowed to become a partner with a 15 percent ownership interest by contributing $60,000 in cash directly to the business. The goodwill method is used to record this transaction.

6. Aramis decides to retire and leave the partnership. An independent appraisal of the business and its assets indicates a current fair value of $426,000. Goodwill is to be recorded. Aramis will then be given the exact amount of cash that will close out his capital account.

Answer 1

Transaction	Account Title & Explanation	Debit ($)	Credit($)
a	Porthos,Capital	61,600
	D'Artagnan,Capital [88,000*70%]		61,600
	(to reclassify Porthos's capital balnace to reflect transfer of interest to D'Artagnan)
b	Goodwill	50,000
	Athos,capital (50%)		25,000
	Porthos,capital (30%)		15,000
	Aramis (20%)		10,000
	(to record goodwill baed on $400,000[40,000/10%] implied value of the partnership ) .(The current total capital adds up to $350,000, Goodwill of $50,000 has to be recorded and allocated amongst the partners' in their sharing ratio and the amount will directly go to the partners)
	Athos,capital [130,000+25,000]*10%	15,500
	Porthos,capital [120,000+15,000]*10%	13,500
	Aramis,capital [100,000+10,000]*10%	11,000
	D'Artagnan,capital		40,000
	(to reclassify 10% of each partner's capital to reflect transfer of interest to D"Artagnan)
c	Cash	52,000
	D'Artagnan,capital [350,000+52,000]*10%		40,200
	Athos,capital [52,000-40,200]*50%		5,900
	Porthos,capital [52,000-40,200]*30%		3,540
	Aramis,capital [52,000-40,200]*20%		2,360
	(to record payment by D'Artagnan which in total increases the capital to $402,000 from $350,000. D'Artagnan is credited only for 10% of that balance and the extra payment $11,800 is recorded as a bonus to original partners)
d)	Cash	52,000
	Goodwill	118,000
	D'Artagnan,capital		52,000
	Athos,capital [118,000*50%]		59,000
	Porthos,capital [118,000*30%]		35,400
	Aramis,capital [118,000*20%		23,600
	(to record D'Artagnan payment of $52,000 which will increase capital to $402,000. Now, the $52,000 payment for 10% interest indicates a $520,000 value for business . Thus $118,000 difference is recorded as goodwill and assigned to original partners' in their sharing ratio)
e	Cash	60,000
	Goodwill (NOTE 1)	1,765
	D'Artagnan,capital		61,765
f	Goodwill [$426,000 - $350,000]	76,000
	Athos,capital [76,000*50%]		38,000
	Porthos,capital [76,000*30%]		22,800
	Aramis,capital [76,000*20%]		15,200
	Aramis,capital [100,00+15,200]	115,200
	Cash		115,200

(NOTE 1: Calculation of Goodwill in transaction e)

60,000 + Goodwill = 15%(Original capital + 60,000 + Goodwill)

60,000 + Goodwill = 15%(350,000 + 60,000 + Goodwill)

60,000 + Goodwill = (52,500 + 9,000 + 0.15Goodwill)

60,000 + Goodwill = 61,500 + 0.15 Goodwill

0.85 Goodwill = 1,500

Goodwill = 1,500 / 0.85 = $1,765