In: Accounting
A summary balance sheet for Abdullah, Mohammed, and Meshal partnership on January 1, 2018 is shown below. Partners Abdullah, Mohammed, and Meshal allocate profit/loss in their respective ratios of 2:1:1. The partnership agreed to pay partner Mohammed $135,000 for his partnership interest upon his retirement from the partnership on January 1, 2018.
Assets
Cash $75,000
Marketable securities 60,000
Inventory 85,000
Land 90,000
Building-net 110,000
Total assets $420,000
Equities
Abdullah, capital $210,000
Mohammed, capital 105,000
Meshal, capital 105,000
Total equities $420,000
Required:
Prepare the journal entry to reflect Mohammed's retirement from the partnership:
1. Assuming a bonus to Mohammed.
2. Assuming a revaluation of total partnership capital based on the excess payment.
3. Assuming goodwill equal to the excess payment is recorded.
Journal entry
Date | Accounts & Description | Debit $ | Credit $ |
1218 Jan. 1 |
Abdullah's Capital A/C Dr. Meshal's Capital A/C Dr. To Mohammed's Capiatl A/C (being Goodwill on retirement of mohammed's retirement is shared by continuing partners.) |
20,000 10,000 |
30,000 |
1218 Jan. 1 |
Mohammed's Capiatl A/C Dr. To Cash To Marketable securities (being payment made to Mohammed by giving cash and marketable securities) |
1,35000 |
75,000 60,000 |
Note.
1. Amount paid Mohammed $ 1,35,000
Amount of Capital due to Mohammed $ 1,05,000
Excess payment( treated as goodwill) $ 30,000
2. The goodwill 30,000 is debited others capital in the Gaining ratio which same as the new ratio = 2:1
Gaining ratio = New ratio - Old ratio
Abdulla = 2/3 - 2/4 = 8/12 - 6/12 = 2/12
Meshal = 1/3 - 1/4 = 4/12 - 3/12 = 1/12
So gainining ratio is = 2/12 : 1/12 = 2:1
3. As cash is only 75,000, the marketable securities are assumed also used to pay Mohammed.