Question

Tinkers, Evers and Chance are partners with capital balances of $75,000, $126,000, and $61,500, respectively on January 26, 2018. All nominal accounts have been adjusted and closed as of January 26, 2018. The partners share profits and losses according to the following percentages: 35% for Tinkers, 40% for Evers, and 25% for Chance. On January 26, 2018, Aparicio is to join the partnership upon contributing $67,500 in cash and some equipment with a book value of $14,500 and a fair value of $16,500 to the partnership, in exchange for a 20% interest in capital and a 20% interest in profits and losses. The existing assets of the original partnership are undervalued by $42,600, of which $31,500 relates to land and $11,100 relates to inventory. If necessary, the partnership will recognize goodwill. The original partners will share the balance of profits and losses in proportion to their original percentages.

REQUIRED:

1.Prepare the journal entries necessary to record the above events.

2. February 21, 2018

3. The partnership suffered a hurricane loss of $180,000. The partnership insurance policy includes a 15% deductible. How must of this loss should be absorbed by each partner.

Answer 1

Using goodwill method:

Share of New Partner (Aparicio) = 20%

Share Capital of New Partner = (67,500 + 16,500) = $84,000

Total Capital Base of New Partnership = 84,000/20% = $420,000

Hidden Goodwill= 420,000 – (75,000 + 126,000 + 61,500 + 42,600 + 84,000) = $30,900

	Tinker	Evers	Chance	Aparicio
Original Capital	75000	126000	61500
Asset Revaluation (in old ratio)	14910	17040	10650
Goodwill (in old ratio)	10815	12360	7725
Investment of New Partner				84000
Total	100725	155400	79875	84000

Answer- A: Journal Entries:

Date	Accounts Title	Debit	Credit
1	Assets	42600
	Tinker's Capital		14910
	Evers’s Capital		17040
	Chance's Capital		10650
	(To distribute the gain on revaluation of assets)
2	Equipment- Asset	16500
	Cash	67500
	Aparicio's Capital		84000
	(To record the admission of new partner)
3	Goodwill	30900
	Tinker's Capital		10815
	Evers’s Capital		12360
	Chance's Capital		7725
	(To record the goodwill)

Answer- B:

Calculate new profit sharing ratio

Share of Aparicio = 20%

Share left for old partners to be shared in old ratio= 80%

    Tinkers = 80 * 35% = 28%

     Evers = 80 * 40% = 32%

     Chance = 80 * 25% = 20%

Loss by Hurricane = $180,000

To be borne by Members = 180,000 * 15% = $27,000

Partner	Share	Loss
Tinker	28%	7560
Evers	32%	8640
Chance	20%	5400
Aparicio	20%	5400
Total		27000