Question

H & M begin a partnership on January 1, 2017, each partner contributes the following: Partner H Contributes: BV FMV Cash 40,000 40,000 Inventory 15,000 12,000 Partner M Contributes: BV FMV 48,000 (10,000) The partners agree to begin operations with equal capital balances. The articles of partnership also provide that at each year-end profits and losses are allocated as follows: 1) For managing the business, H is credited with a bonus of 10 percent of partnership income after subtracting the bonus. No bonus is accrued if the partnership records a loss. 2) Both partners are entitled to interest equal to 10 percent of the average monthly capital balance for the year without regard for the income or drawings of that year. 3) Any remaining profit or loss is divided 60 percent to H and 40 percent to M. 4) Each partner is allowed to withdraw $800 per month in cash from the business. On October 1, 2017, H invested an additional $12,000 cash in the business. For 2017, the partnership reported income of $33,000. L, an employee, is allowed to join the partnership on January 1, 2018. The new partner invests $66,000 directly into the business for a one-third interest in the partnership property. The revised partnership agreement still allows for both the bonus to H and the 10 percent interest, but all remaining profits and losses are now split 40 percent each to H and L with the remaining 20 percent to M. L is also entitled to $800 per month in drawings. M chooses to withdraw from the partnership a few years later. After negotiations, all parties agree that M should be paid a $90,000 settlement. The capital balances on that date were as follows: H, capital M, capital L, capital $88,000 $78,000 $72,000 Required: 1) Assuming that this partnership uses the bonus method exclusively, make all necessary journal entries. 2) Assuming that this partnership uses the goodwill method exclusively, make all necessary journal entries.

Answer 1

Solution: In the given above question, required two methods. First we have calculate Bonus method and next calculate Goodwill method.

1) Bonus method:

Date	Particulars	Debit	Credit
2017
Jan 1	Cash	40000
	Inventory	12000
	Building	48000
	Notes payable		10000
	H, capital (50%)		45000
	M, capital (50%)		45000
	(To record initial contributions to partnership along with equal capital balances)
Oct. 1	Cash	12000
	H, capital		12000
	(To record additional investment by partner.)

Computation of Bouns:

Bonus =0.10 ($33,000 − Bonus)

1.10 Bonus= $3,300

Bonus = $3,300/1.10

Bonus= $3,000

Computation of interest on average capital: H

Beginning capital (45000 X 9 months) = 405,000

New balance (57000 X 3 months) = 171,000

Total = 576000

Average capital = 576000/12 = 48000

Interest rate = 10%

Interest for H = 4800

Interest for M (45000 X 10%) = 4500

Allocation of $33000 profit

Particulars	H	M	Total ( H&M)
Bonus	3000	-	3000
Interest	4800	4500	9300
Balance of income (60:40) (330,00-3000-9,300) = 207,00	12420 (20700 X 60%)	8280 (20700 X 40%)	20700
Total	20220	12780	33000

Date	Particulars	Debit	Credit
2017
	Closing entries:
Dec 31	H, capital	9600
	M, capital	9600
	H, drawings		9600
	M, drawings (12 X 800)		9600
	(To close $800 per month drawing accounts for the year)
Dec 31	Income summary	33000
	H, capital		20220
	M, capital		12780
	(To close profit for the year.)

Statement of Changes in Partner’s Equity

Particulars	H	M	Total (H&M)
Capital balances, beginning	45000	45000	90000
Additional investment	12000	-	12000
Net income	20220	12780	33000
Drawings	(9600)	(9600)	(19200)
Capital balances, end	67620	48180	115800

Admission of L.

Particulars	Amount
Total agreed capital of the new partnership (115800+66000)	181800
L’s interest	(1/3)
L’s agreed capital	60600
L’s contributed capital	66000
Bonus to H and M (60:40)	5400

Date	Particulars	Debit	Credit
2017
Jan. 1	Cash	66000
	L, capital		60600
	H, capital		3240
	M, capital		2160
	(To record admission of L with bonus to original partners)

Withdrawal of M:

Particulars	Amount
M capital balance	78000
Settlement	90000
Bonus to M, from H and L	12000

Date	Particulars	Debit	Credit
	M, capital	78000
	H, capital	6000
	L, capital	6000
	Cash		90000
	(To record withdrawal of M with bonus from the Remaining partners split equally.)

2) Goodwill Method:

Date	Particulars	Date	Credit
2018
Jan 1	Cash	40000
	Inventory	12000
	Building	48000
	Goodwill	14000
	Notes payable		10000
	H, capital (50%)		52000
	M, capital (50%)		52000
	(To record investments of the partners with goodwill attributed to H)
Oct. 1	Cash	12000
	H, capital		12000
	(To record additional investment by partner.)

Bonus to H (the same)= $3,000

Beginning capital (52000 X 9/12 months) = 39000

New balance (64000 X 3/12 months) = 16000

Average capital = 55000

Interest rate = 10%

Interest for H = 5500

Interest for M (52000 X 10%) = 5200

Allocation of $33000 profit

Particulars	H	M	Total (H&M)
Bonus	3000	-	3000
Interest	5500	5200	10200
Balance of income (60:40) (33000-3000-10200) = 19300	11580 (19300 X 60%)	7720 (19300 X 40%)	19300
Total	20080	12920	33000

Date	Particulars	Debit	Credit
2017
	Closing entries:
Dec 31	H, capital	9600
	M, capital	9600
	H, drawings		9600
	M, drawings (12 X 800)		9600
	(To close $800 per month drawing accounts for the year)
Dec 31	Income summary	33000
	H, capital		20080
	M, capital		12920
	(To close profit for the year.)

Statement of Changes in Partner’s Equity

Particulars	H	M	Total
Capital balances, beginning	52000	52000	104000
Additional investment	12000	-	12000
Net income	20080	12920	33000
Drawings	(9600)	(9600)	(19200)
Capital balances, end	74480	55320	129800

Admission of L.

Particulars	Amount
Total agreed capital of the new partnership (66000/(1/3)	198000
Total contributed capital (129,800 + 66,000)	195800
Goodwill to old partners	2200

Date	Particulars	Debit	Credit
2018
Jan. 1	Goodwill	2200
	H, capital (60%)		1320
	M, capital (40%)		880
	(To recognize goodwill based on M investment.)
	Cash	66000
	M, capital		66000
	(To record admission of M)

Withdrawal of M:

Particulars	Amount
M capital balance	78000
Settlement	90000
Bonus to M, from H and L	12000
Total goodwill (12000/20%)	60000

Date	Particulars	Debit	Credit
	Goodwill	60000
	H, capital (40%)		24000
	L, capital (20%)		12000
	M, capital (20%)		12000
	(To recognize total goodwill.)
	M, capital	90000
	Cash		90000
	(To record cash settlement to M)

THE END