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The Distance Plus partnership has the following capital balances at the beginning of the current year:...

The Distance Plus partnership has the following capital balances at the beginning of the current year:

Tiger (40% of profits and losses) $ 125,000
Phil (20%) 95,000
Ernie (40%) 110,000

Each of the following questions should be viewed independently.

A.If Sergio invests $150,000 in cash in the business for a 30 percent interest, what journal entry is recorded? Assume that the bonus method is used.

B. If Sergio invests $140,000 in cash in the business for a 30 percent interest, what journal entry is recorded? Assume that the bonus method is used.

C. If Sergio invests $150,000 in cash in the business for a 30 percent interest, what journal entry is recorded? Assume that the goodwill method is used.

Solutions

Expert Solution

HONORS ACCOUNTING STUDENT

Part A:

Total Capital After Investment = 125000+95000+110000+150000 = 480000

Sergio's Share = 480000*30% = 144000

Bonus Distributed to Existing Partners = 150000 - 144000 = 6000

Journal Entry:

Cash Dr. 150000
Sergio, Capital Cr. 144000
Tiger, Capital Cr. (6000*40%) 2400
Phil, Capital Cr. (6000*20%) 1200
Ernie, Capital Cr. (6000*40%) 2400

Part B:

Total Capital After Investment = 125000+95000+110000+140000 = 470000

Sergio's Share = 470000*30% = 141000

Bonus Taken from Existing Partners = 141000 - 140000 =(1000)

Journal Entry:

Cash Dr. 140000
Tiger, Capital Dr. (1000*40%) 400
Phil, Capital Dr. (1000*20%) 200
Ernie, Capital Dr. (1000*40%) 400
Sergio, Capital Cr. 141000

Part C:

Total Capital After Investment = 125000+95000+110000+150000 = 480000

Implied Value of Business = 150000/30% = 500000

Goodwill = 500000 - 480000 = 20000

Journal Entry:

Goodwill Dr. 20000
Tiger, Capital Cr. (20000*40%) 8000
Phil, Capital Cr. (20000*20%) 4000
Ernie, Capital Cr. (20000*40%) 8000
Cash Dr. 150000
Sergio, Capital Cr. 150000

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