Question

The Prince-Robbins partnership has the following capital account balances on January 1, 2018: Prince, Capital $ 90,000 Robbins, Capital 80,000 Prince is allocated 60 percent of all profits and losses with the remaining 40 percent assigned to Robbins after interest of 9 percent is given to each partner based on beginning capital balances. On January 2, 2018, Jeffrey invests $49,000 cash for a 20 percent interest in the partnership. This transaction is recorded by the goodwill method. After this transaction, 9 percent interest is still to go to each partner. Profits and losses will then be split as follows: Prince (50 percent), Robbins (30 percent), and Jeffrey (20 percent). In 2018, the partnership reports a net income of $19,000. Prepare the journal entry to record Jeffrey’s entrance into the partnership on January 2, 2018. Determine the allocation of income at the end of 2018.

Answer 1

Solution 1:

Ratio of profit between Prince and robbin = 3:2

Capital Introduced by Jeffrey = $49,000

Jeffery share in Partnership = 20%

Therefore required partnership capital on the basis of capital introduced by Jeffery = $49,000/20% = $245,000

Total capital after new capital introduced by Smith = $90,000 + $80,000 + $49,000 = $219,000

Therefore Goodwill = $245,000 - $219,000 = $26,000

Goodwill will be distributed in Prince and robbin in old profit sharing ratio of 3:2

Prince share = 26000/5*3 = $15,600

Robbin Share = 26000/5*2 = $10,400

Journal Entries
Date	Particulars	Debit	Credit
2-Jan-18	Goodwill Dr	$26,000.00
	To Prince's capital		$15,600.00
	To Robbin's capital		$10,400.00
	(To record goodwill on admission of new partner)
2-Mar-18	Cash Dr	$49,000.00
	To Jeffrey's capital		$49,000.00
	(To record capital contribution by Jeffrey in partnership)

Solution 2:

Division of income - 2018
Particulars	Total	Prince	Robbin	Jeffrey
Net Income	$19,000.00
Interest on capital	$22,050.00	$9,504.00	$8,136.00	$4,410.00
Remaining income (5:3:2)	-$3,050.00	-$1,525.00	-$915.00	-$610.00
Total share of income	$19,000.00	$7,979.00	$7,221.00	$3,800.00