Question

Question 1:

Please explain why we did not adjust the ratio since there is one person left, 3:3:2:2? Shouldn't be 3:3:2 that is 3/8, 3/8 and 2/8?

The E.N.D. partnership has the following capital balances as of the end of the current year: Pineda $ 140,000 Adams 120,000 Fergie 110,000 Gomez 100,000 Total capital $ 470,000 Answer each of the following independent questions: Assume that the partners share profits and losses 3:3:2:2, respectively. Fergie retires and is paid $140,000 based on the terms of the original partnership agreement. If the goodwill method is used, what is the capital balance of the remaining three partners?

Assume that the partners share profits and losses 4:3:2:1, respectively. Pineda retires and is paid $340,000 based on the terms of the original partnership agreement. If the bonus method is used, what is the capital balance of the remaining three partners? (Do not round your intermediate calculations. Round your final answers to the nearest dollar amounts.)

Answer 1

Answer (1)

The Capital Balance Remaining for three Partners is:

Pineda = $185,000

Adams = $165,000

Gomez = $130,000

Working notes:

Goodwill Paid = Amount paid to Fergie - Capital balance of Fergie

                       = $140,000 - $110,000

                       = $30,000

Total Goodwill = $30,000*10/2

                       = $150,000

Pineda's share = $150,000*3/10

                         = $45,000

Adams's share = $150,000*3/10

                         = $45,000

Gomez's share = $150,000*2/10

                          = $30,000

Capital Balances of Remaining Partners using the Goodwill Method:

Pineda = Capital balance + Share of goodwill

            = $140,000 + $45000

            = $185,000

Adams =Capital balance + Share of goodwill
            = $120,000 + $45000

            = $165,000

Gomez = Capital balance + Share of goodwill

            = $100,000 + $30,000

           = $130,000

Total Remaining Capital balance = $130,000 + $165,000 + $185,000

                                                    = $480,000

Answer (2)

The Capital Balance of the Remaining three Partners is:

Adams = $20,000

Fergie = $43,333

Gomez = $66,667

Working notes:

Bonus Paid = Amount paid to Pineda - Capital balance of Pineda
= $340,000 - $140,000

                   = $200,000

Bonus to be shared by remaining Partners in the ratio 3:2:1

Adam's share = $200,000*3/6

                        = $100,000

Fergie's share = $200,000*2/6

                        = $66,667

Gomez's share = $200,000*1/6

                        = $33,333

Remaining Capitals:

Adams = Existing capital - Bonus paid

              = $120,000 - $100,000

              = $20,000

Fergie= Existing capital - Bonus paid

           = $110,000 - $66,667

          = $43,333

Gomez = Existing capital - Bonus paid

   = $100,000 - $33,333.33

              = $66,667

Important note:

The remaining partner compensate the retiring partner in the sacrifising ratio that why we used old profit sharing ratio.