Question

In: Accounting

The Prince-Robbins partnership has the following capital account balances on January 1, 2018: Prince, Capital $...

The Prince-Robbins partnership has the following capital account balances on January 1, 2018:

Prince, Capital $ 85,000
Robbins, Capital 75,000

Prince is allocated 80 percent of all profits and losses with the remaining 20 percent assigned to Robbins after interest of 8 percent is given to each partner based on beginning capital balances.

On January 2, 2018, Jeffrey invests $46,000 cash for a 20 percent interest in the partnership. This transaction is recorded by the goodwill method. After this transaction, 8 percent interest is still to go to each partner. Profits and losses will then be split as follows: Prince (50 percent), Robbins (30 percent), and Jeffrey (20 percent). In 2018, the partnership reports a net income of $18,000.

  1. Prepare the journal entry to record Jeffrey’s entrance into the partnership on January 2, 2018.

  2. Determine the allocation of income at the end of 2018.

Solutions

Expert Solution

Capital after admission of Jeffrey = 85,000 + 75,000 + 46,000 = 206,000

Implied value of firm based on the capital braught in by Jeffrey = 46,000 * 100/20 = 230,000

Goodwill = 230,000 - 206,000 = 24,000

Goodwill amount is transferred to old partners capital in the old ratio.

New balance after Jeffrey's admission :

Prince - 85,000 + (24,000 * 80%) = 104,200

Robbins - 75,000 + (24,000 * 20%) = 79,800

Jeffrey - 46,000

a) $ $

Cash 46,000

To Jeffrey capital 46,000

Goodwill 24,000

To Prince capital 19,200

  To Robbins capital 4,800

b)

Particulars Prince capital Robbinson capital Jeffrey capital Total
Interest @ 8 % on capital

8,336

(104,200 * 8%)

6,384

(79,800 * 8%)

3,680

(46,000 * 8%)

18,400
Loss in the ratio 50 : 30 : 20

(200)

(400* 50/100)

(120)

(400* 30/100)

(80)

(400* 20/100)

(400)
Allocated income 8,136 6,264 3,600 18,000

Net income - 18,000

Interest on capital - 230,000 * 8% = 18,400

remaining loss = 18,400 - 18,000 = 400


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