Question

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.

Answer 1

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