Question

Bob Arnold is a well-known real estate developer in Santa Fe, New Mexico. He wants to remodel a building and convinces George Mitchell, a local businessperson, to contribute the capital to form a partnership. On January 1, 2020, Mitchell invests a building worth $162,000 and equipment valued at $32,000 as well as $25,000 in cash. Although Arnold makes no tangible contribution to the partnership, he will operate the business and be an equal partner in the beginning capital balances.

Required:

(A). Prepare the January 1, 2020 journal entry to record the formation of the partnership assuming the bonus method is used.

(B). Prepare the January 1, 2020 journal entry to record the formation of the partnership assuming the goodwill method is used.

Answer 1

1

Under bonus method fair value of assets contributed is shared equally between both partners. Total fair value of assets = $219,000

It is treated as such that each of them contributed $109,500 worth of assets each. Entry will be:

Particulars	Debit	Credit
Cash	$          25,000
Equipment	$          32,000
Building	$        162,000
Bob capital		$        109,500
George capital		$        109,500
(Formation of partnership under bonus method)

2

Under goodwill method it is assumed that market value of assets contributed by each partner as equal. Any real difference between market value of assets contributed by each partner is debited to goodwill account.

George contributed $219,000 worth of assets. It is assumed that bob contributed $219,000 worth of assets. But bob contribution is $0. Hence, good will is debited with $219,000 to balance. Entry will be:

Particulars	Debit	Credit
Cash	$          25,000
Equipment	$          32,000
Building	$        162,000
Goodwill	$        219,000
Bob capital		$        219,000
George capital		$        219,000
(Formation of partnership under goodwill method)

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