Question

Norton invested $20,000 in the partnership of Maxwell and Slade. The capital balance of Maxwell and Slade were $40,000 and $60,000, respectively. Income and loss is shared according to the ratio of equity balances. Norton was to receive 25% interest in the new partnership. Prepare journal entry to record this transaction.

Answer 1

Journal Entry:

Date	Particulars	DR.$	CR.$
XXX	Cash	$ 20,000
	Maxwell's Capital Account		$   4,000
	Slade's Capital Account		$   6,000
	Norton's Capital Account		$ 10,000

Workings;

*Norton-New Partner entering into partnership.

*Investing $20,000. Cash bringing into the business. Hence,Debit, Cash account is increasing,

*Maxwell and Slade- Existing partners;The Existing Capital is $40,000+$60,000=$100,000;

*The New Equity BAlance [ $20,000+40,000+60,000] = $120,000;

*25% interest is $30,000 [ $120,000*25%].

*It creates additional amount of $10,000 [ $30,000-20,000] for Maxwell and Slade.

*The Additional amount is divided between Maxwell and Slade in proportion to their previous sharing ratio = 4:6

* Hence,Credit; Maxwell capital account = {$10,000*4/[4+6]}=[$10,000*4/10]=$4,000;

* Hence,Credit; Slade capital account = {$10,000*6/[4+6]}=[$10,000*6/10]=$6,000;

*Balance amount, Credit into Norton capital account for $10,000.

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