Question

"Peter, Tom, and Jason have capital balances and profit-and-loss sharing ratios as follows:

Peter (10%): 100,000

Tom (50%): 400,000

Jason (40%): 200,000

Required (show all your calculations):

1-Tom retires and is paid $450,000 based on the terms of the original partnership agreement. If the bonus method is used, what is the capital of the remaining partners? (4 points)

2-Tom retires and is paid $500,000 based on the terms of the original partnership agreement. If the goodwill method is used, what is the capital of the remaining partners (assume the excess payment is used to revalue the whole partnership capital)? (3 points)

3-Peter retires and is paid $91,000. If the bonus method is used what is the capital of the remaining partners? (4 points)

4-Jason retires and is paid $150,000. If overvalued assets are written down before the payment, what is the balance of the remaining partners? (4 points)"

Answer 1

1-Tom retires and is paid $450,000 based on the terms of the original partnership agreement. If the bonus method is used, what is the capital of the remaining partners? (4 points)

Solution :

Under Bonus Method, the Bonus paid to retiring partner will be incurred by remaining partners.

Tom's Capital = 4,00,000

Paid to tom = 450,000

Bonus = 450,000 - 4,00,000 = 50,0000

This cost of bonus of 50,000 will be beared by remaining partners Peter and Jason in the ratio 10:40 respectively.

Partner Peter bonus Share	10% / ( 10% + 40%)	10,000
Partner Jason Bonus Share	40% / ( 10% + 40%)	40,000

Capital of Remaining Partners will be :

Peter = 1,00,000 - 10,000 = 90,000

Jason = 2,00,000 - 40,000 = 1,60,000

2-Tom retires and is paid $500,000 based on the terms of the original partnership agreement. If the goodwill method is used, what is the capital of the remaining partners (assume the excess payment is used to revalue the whole partnership capital)? (3 points)

Solution :

Under Goodwill Method, goodwill is calculated and is recorded either for retiring partners or for all partners.

Goodwill = Amount Paid to Tom - Value of their share of net assets

Retiring Partner Goodwill = 5,00,000 - 4,00,000 = 1,00,000

Retiring Partner share = 50%

Goodwill of all partners = 1,00,000 / 50% = 2,00,000

Goodwill Allocation between the partners would be :

Peter Goodwill	10% of 2,00,000	20,000
Tom Goodwill	50% of 2,00,000	1,00,000
Jason goodwill	40% of 2,00,000	80,000

Capital of Remaining Partners would be :

Peter's Capital = 20,000+ 1,00,000 = 120,000

Jason's Capital = 80,000 + 2,00,000 = 2,80,000

3-Peter retires and is paid $91,000. If the bonus method is used what is the capital of the remaining partners? (4 points)

Solution :

Under Bonus Method,

Peter's Capital =100,000

Paid to Peter = 91,000

Paid less to Peter = 9,000

This profit will be shared among remaining partners in Profit and Loss Ratio i.e.,50 % : 40%

Tom's Share =9,000 *{50 / (50 + 40)} = 5,000

Jason's Share = 9,000 *{40 / (50 + 40)} = 4,000

Capital of Remaining Partners will be :

Tom = 4,00,000 + 5,000 = 4,05,000

Jason = 200,000 + 4,000 = 2,04,000

4-Jason retires and is paid $150,000. If overvalued assets are written down before the payment, what is the balance of the remaining partners? (4 points)"

Solution :

Jason's Capital = 2,00,000

Paid to Jason = 150,000

Paid less to Jason = 50,000

This profit will be shared among remaining partners Peter and Tom in the profit sharing Ratio 10% : 50%

Peter's Share =50,000 * {10 / (10 + 50)} = 8,333

Tom's Share= 50,000 * {50 / (10 + 50)} =  41,667

Capital of Remaining Partners will be :

Peter = 1,00,000 + 8,333 = 108,333

Tom = 4,00,000 + 41,667 = 4,41,667