In: Accounting
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.
Prepare the journal entry to record Jeffrey’s entrance into the partnership on January 2, 2018.
Determine the allocation of income at the end of 2018.
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