Question

Partnership Formation

Max, Nat and Roberta formed a partnership to operate a dry-cleaning business. They agreed to share initial capital and subsequent income in a 5:3:2 ratio. Each partner’s contributions to the new venture are listed next.

Max: $25,000 cash, dry-cleaning equipment worth $180,000 and the ability to keep the equipment in good operating condition.

Nat: $15,000 cash and extensive experience in the dry-cleaning business.

Roberta: $20,000 cash and a 2-year $75,000 note, payable to the firm, with 3 percent interest on the unpaid balance.

Required

(a) Record the formation using the goodwill approach.

General Journal
Description	Debit	Credit
AnswerCapital - MaxInvestmentNote payableCash	Answer	Answer
Note receivable	Answer	Answer
Equipment	Answer	Answer
Goodwill	Answer	Answer
AnswerInvestmentNote payableCapital - MaxCash	Answer	Answer
Capital - Nat	Answer	Answer
Capital - Roberta	Answer	Answer

(b) Record the formation using the bonus approach.

General Journal
Description	Debit	Credit
AnswerCashInvestmentNote payableCapital - Max	Answer	Answer
Note receivable	Answer	Answer
Equipment	Answer	Answer
AnswerCapital - MaxNote payableInvestmentCash	Answer	Answer
Capital - Nat	Answer	Answer
Capital - Roberta	Answer	Answer

Answer 1

(a) Formation using the goodwill approach is as recorded below:

Roberta contributed cash and note receivable so no goodwill came with him so the value of the firm will be calculated taking his share.

95,000*10/2 = 475,000

Now Total assets contributed are Cash 60,000, Equipment 180,000, Note Receivable 75,000

Total tangible assets = 315,000

So Goodwill is (475,000-315,000) = 160,000

Entry will be:

Date	Description	L.F	Debit	Credit
1	Cash (25,000+15,000+20,000)		60,000
	Equipment		180,000
	Note Receivable		75,000
	Goodwill		160,000
	Capital-Max (475,000*5/10)			237,500
	Capital -Nat (475,000*3/10)			142,500
	Capital-Roberta (475,000*2/10)			95000
	(For partnership formed)

(b)

Formation using the bonus approach is as recorded below:

Total tangible assets contributed by all three partners are Cash 60,000, Equipment 180,000, Note Receivable 75,000

Total tangible assets = 315,000

So share of Mat is 315,000*5/10 = 157,500

share of Nat is 315,000*3/10 = 94,500

Share of Roberta is 315,000*2/10 = 63,000

So bonus will flow from mat and Roberta to nat

	Max	Nat	Roberta
	5	3	2
Cash	25,000	15,000	20,000
Equipment	180,000
Note Payable			75,000
Total contribution done	205,000	15,000	95,000
Tangible assets	205,000	15,000	95,000
Share of each partner	315,000*5/10	315,000*3/10	315,000*2/10
	157,500	94,500	63,000
Bonus Flow	47,500	-79,500	32,000

Entry will be:

Date	Description	L.F	Debit	Credit
1	Cash (25,000+15,000+20,000)		60,000
	Equipment		180,000
	Note Receivable		75,000
	Capital-Max			157,500
	Capital -Nat			94,500
	Capital-Roberta			63,000
	(For partnership formed)