Question

Following is the current balance sheet for a local partnership of doctors:

Cash and current assets	$	43,000	Liabilities	$	60,000
Land		202,000	A, capital		40,000
Building and equipment (net)		165,000	B, capital		60,000
			C, capital		110,000
			D, capital		140,000
Totals	$	410,000	Totals	$	410,000

The following questions represent independent situations:

E is going to invest enough money in this partnership to receive a 20 percent interest. No goodwill or bonus is to be recorded. How much should E invest?

E contributes $90,000 in cash to the business to receive a 20 percent interest in the partnership. Goodwill is to be recorded. Profits and losses have previously been split according to the following percentages: A, 30 percent; B, 10 percent; C, 40 percent; and D, 20 percent. After E makes this investment, what are the individual capital balances?

E contributes $64,000 in cash to the business to receive a 20 percent interest in the partnership. Goodwill is to be recorded. The four original partners share all profits and losses equally. After E makes this investment, what are the individual capital balances?

E contributes $58,000 in cash to the business to receive a 18 percent interest in the partnership. No goodwill or other asset revaluation is to be recorded. Profits and losses have previously been split according to the following percentages: A, 10 percent; B, 30 percent; C, 20 percent; and D, 40 percent. After E makes this investment, what are the individual capital balances?

C retires from the partnership and, as per the original partnership agreement, is to receive cash equal to 130 percent of her final capital balance. No goodwill or other asset revaluation is to be recognized. All partners share profits and losses equally. After the withdrawal, what are the individual capital balances of the remaining partners?

Answer 1

1	How much should E Invest
	E Investment = 20% (Original capital + E investment)
	= 20% (40000+60000+110000+140000+E Investment)
	= 20% (350000+E Investment)
	= $70000 + 0.20 E Investment
	0.80 E Investment = $70000
	E Investment = $70000/0.80
	= $87500
2	Implied value = Contribution/interest in partnership
	= 90000/20%
	= $450000
	Goodwill = Implied value - total capital after investment
	= $450000+(350000+90000)
	= $10000
	Individual capital balances
		A	B	C	D	E
	Original Capital balance	$40,000	$60,000	$110,000	$140,000
	Goodwill	$3,000	$1,000	$4,000	$2,000
	Investment					$90,000
	Capital Balances	$43,000	$61,000	$114,000	$142,000	$90,000
3	Implied Value = $64000/20%	320000
	Implied value is less than the original value, thus goodwill be calculated as follow:
	E Investment = 20% (Original capital + E investment)
	$64000+Goodwill = 20%($350000+$64000+Goodwill)
	$64000+Goodwill = $82800 +0.20Goodwill
	0.80 Goodwill = $18800
	Goodwill = $18800/0.80
	Goodwill = $23500
	The investment made by E is $64000+$23500 for goodwill, thus the total investment will be $87500 for 20% interest.
4	Total Capital after investment = $350000+$58000 = $408000
	Percentage acquired = 18%
	E's capital balance = 408000 x 18% = $73440
	E's investment = $58000
	Bonus given to E = $15440
	Individual capital balances
		A	B	C	D	E
	Original Capital balance	$40,000	$60,000	$110,000	$140,000
	Goodwill	($4,632)	($1,544)	($6,176)	($3,088)	$15,440
	Investment					$58,000
	Capital Balances	$35,368	$58,456	$103,824	$136,912	$73,440
5	C's Capital balance	$110,000
	Cash to be received-130%	$143,000
	Bonus amount	$33,000
	Amount to be contributed by each partner (33000/3)	$11,000
	Individual capital balances
		A	B	C	D
	Original Capital balance	$40,000	$60,000	$110,000	$140,000
	Bonus	($11,000)	($11,000)	$33,000	($11,000)
	Payment			($143,000)
	Capital Balances	$29,000	$49,000	$0	$129,000