Question

Adam (A), Betsy (B) and Cathy (C) decided to form a partnership, which was founded on 01/01/2015. Adam contributed cash $20,000 and inventory with market value of $30,000. B contributed a piece of land with market value of $80,000 with unpaid mortgage in the amount of $30,000. C contributed PPE with market value of $50,000 and C’s expertise is deemed to be worth of $50,000 by all the 3 partners.

A: If ABC decided to use goodwill method to document the creation of the partnership, what are the journal entries and what are the values of capital under respective partners’ names?

B: If ABC decided to use bonus method to document the foundation of the partnership, what are the journal entries and what are the values of capital under respective partners’ names?

C: Assuming that every year the profit among different partners will be shared in the ration of 10%, 30% and 60%, and partners have to retain 75% of their share profits in the partnership in the case of profit. What are the balances of each partner’s capital by the end of each year using both goodwill and bonus method (2015 and 2016)?

c.1. The partnership made $10,000 in 2015 and had a loss of $20,000 in 2016 (Goodwill method).

c.2:The partnership made $15,000 in 2015 and had a loss of $25,000 in 2016 (bonus method).

                   

Answer 1

A. GOODWILL METHOD - JOURNAL ENTRIES

1. Cash a/c Dr. 20,000

Inventory a/c Dr. 30,000

To Adam's Capital a/c 50,000

(Being amount invested by Adam)

2. Land a/c Dr. 50,000

To Betsy's Capital a/c 50,000

(Being market value of land recorded as capital infusion after unpaid mortgage amount)

3. PPE a/c Dr. 50,000

Asset a/c Dr. 50,000

To Cathy's Capital a/c 100,000

(Being PPE bought by Cathy and capital contributed in other form)

VALUE OF CAPITAL -

A - 50,000

B - 50,000

C - 100,000

B. BONUS METHOD

same as above

C. BALANCES OF EACH CAPITAL

2015 - CASE 1

A - 51,750 (Initial amt - 50,000 + amount to be retained by partner (10,000*10%*75%=750) + profit allocated in P/L ration (10,000*10%=1000))

B - 55,250 (Initial amt - 50,000+ (10,000*30%*75%=2250) retained amount + profit (10,000*30%=3000)

C - 110,500(Initial amt - 100,000 + (10,000*60%*75%=4500) retained amt + profit (10,000*60%= 6000)

In case 2, the amount to be retained and added to capital will be replaced as per profit in 2nd case i.e.,15000. Accordingly, the retention amount is calculated as -

A - 15,000*10%*75% = 1125

B - 15,000*30%*75% = 3375

C - 15,000*60%*75% = 6750

2016 - CASE 1

A - 46,500 (Initial amt - 50,000 (-) loss (20,000*10%=2000) (-) loss amount to be reduced from capital (20,000*10%*75%=1500)

B - 39,500 (50,000 - (20,000*30%=6000) - (20,000*30%*75%=4500)

C - 79,000 (50,000 - (20,000*60% = 12000) - (20,000*60%*75% = 9000)

In case 2, the amount will be reduced by following as retention from capital

A - 1875 (25000*10%*75%)

B - 5625 (25000*30%*75%)

C - 11250 (25000*.75*.60)