Question

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

Cash and current assets	$	60,000	Liabilities	$	72,000
Land		230,000	A, capital		52,000
Building and equipment (net)		180,000	B, capital		72,000
			C, capital		122,000
			D, capital		152,000
Totals	$	470,000	Totals	$	470,000

The following questions represent independent situations:

1. E contributes $105,000 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?

2. E contributes $50,000 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?

3. E contributes $70,000 in cash to the business to receive a 20 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?

4. C retires from the partnership and, as per the original partnership agreement, is to receive cash equal to 112 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

Partnership business is a relationship between two or more persons to share the profits or losses of a business. The partners will share the income as per a ratio mutually decided by all the partners.

a) Given that,
E invested $105,000

Implied value of partnership = ($105,000 ÷ 20%) = $525,000
Total capital after investment by E ($52,000 + $72,000 + $122,000 + $152,000 + $105,000) = $503,000

Hence, Goodwill = $525,000 - $503,000 = $22,000

Allocation of Goodwill:

(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.)

A(30%) = $22,000 × 30% = $6,600
B(10%) = $22,000 × 10% = $2,200
C(40%) = $22,000 × 40% = $8,800
D(20%) = $22,000 × 20% = $4,400

After E's investment individual capital balances are,

b)

E's investment of $50,000 is less than 20% of the total resulting capital.
That is,
$52,000 + $72,000 + $122,000 + $152,000 + $50,000 = $448,000

E is bringing some other attribute to the partnership, that is, goodwill, that must be computed:

E's investment = 20% of (original capital + E's investment)

$50,000 + Goodwill = 20/100 × ($398,000 + $50,000 + Goodwill)

$50,000 + Goodwill = 0.20 × ($448,000 + Goodwill)

$50,000 + Goodwill = $89,600 + 0.20 Goodwill

0.80 Goodwill = $89,600 - $50,000 = $39,600
Goodwill = $39,600 / 0.80 = $49,500

Hence, E's investment is $50,000 in cash and $49,500 in goodwill. His total capital balance is $99,500 which 20% of new total capital $497,500 ($398,000 + $99,500). The other capital accounts will remain unchanged.

c)

Total capital after E's investment = $398,000 + $70,000 = $468,000
Amount acquired by E = 20%
E's capital balance = $468,000 × 20% = $93,600
E's payment = $70,000
Bonus to E = $93,600 - $70,000 = $23,600

Bonus from

(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.)

A(10%) = $23,600 × 10% = $2,360
B(30%) = $23,600 × 30% = $7,080
C(20%) = $23,600 × 20% = $4,720
D(40%) = $23,600 × 40% = $9,440

After E's investment individual capital balances are,

d)

C's capital balance = $122,000
C's collection = 112%of $122,000 = $136,640

Hence, bonus paid to C on retirement = $136,640 - $122,000 = $14,640

Bonus from

(Partners share profits and losses equally)

A(1/3) = $14,640 × 1/3 = $4,880
B(1/3) = $14,640 × 1/3 = $4,880
D(1/3) = $14,640 × 1/3 = $4,880

After C's retirement, individual capital balances are,