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Problem 2 The capital accounts of the Lee, Monroe and Newport partnership at December 31, 2018,...

Problem 2

The capital accounts of the Lee, Monroe and Newport partnership at December 31, 2018, together with profit and loss sharing ratios are as follows:

                        Lee (20%)                  130,000

                        Monroe (30%)                       200,000

                        Newport (50%)                     170,000

The partners agree to admit Olson into the partnership.

REQUIRED: Prepare the journal entry or entries to admit Olson into the partnership under each of the following independent assumptions.

  1. Monroe and Newport sell 30% of each of their interests to Olson for $120,000 paid directly to Monroe and Newport.
  2. Olson invests $120,000 cash in the partnership for a 25% interest in capital and profits and the partnership assets are not revalued.
  3. Same situation as Number 2 except partnership assets are revalued.
  4. Olson invests $100,000 cash in the partnership for a 15% interest in the capital and profits and partnership assets are revalued.

Solutions

Expert Solution

case 1. New partnership ratio:

Partners lee Monroe Newport Olson
Present share 20 30 50 0
Transferred to oslon 0 (30% of 30) =9 (30% of 50) = 15 24
New ratio 20 21 35 24

Consideration of profit share = $120000

Received by Monroe = 120000*9/24 =45000

Received by Newport = 120000*15/24 =75000

If received personally, then no entry wll be passed because only profit sharing ratio will be changed but capital will be same.

Case 2. paid 120000 for 25% share

Partners lee Monroe Newport Olson
Present share 20 30 50 0
Transferred to oslon (25*20/100) =5 (25*30/100) =7.5 (25*50/100) =12.5 25
New ratio 15 22.5 37.5 25

Consideration of profit share = $120000

Received by lee = 120000*5/25 =24000

Received by Monroe = 120000*7.5/25 =36000

Received by Newport = 120000*12.5/25 =60000

Journal entry:

Lee capital a/c                                       24000

Monroe capital a/c                                 36000

Newport capital a/c                                60000

     To olson capital a/c                                            120000

(Being capital contribution by new partner adjusted with old partner capital in their sacrificing ratio)

CAse 3: If revaluation done:

Present total net assets = 130000+200000+170000 =$500000

As per contribution by new partner capital should be = 120000/25% =$480000

So revaluation of 20000 downwards should be done. revaluation loss to be borne in old profit sharing ratio

Received by lee = 20000*20/100 =4000

Received by Monroe = 20000*30/100 =6000

Received by Newport = 20000*50/100 =10000

Now, the capital contribution by new partner will be $120000. So,

Partners lee Monroe Newport Olson
Present share 20 30 50 0
Transferred to oslon (25*20/100) =5 (25*30/100) =7.5 (25*50/100) =12.5 25
New ratio 15 22.5 37.5 25

Received by lee = 120000*5/25 =24000

Received by Monroe = 120000*7.5/25 =36000

Received by Newport = 120000*12.5/25 =60000

Journal entry:

Lee capital a/c                                       24000

Monroe capital a/c                                 36000

Newport capital a/c                                60000

     To olson capital a/c                                            120000

(Being capital contribution by new partner adjusted with old partner capital in their sacrificing ratio)

Case 4: For 15 % profits he is paying, $100000, value of firm will be (100000/15%) =$666.667

New profit sharing ratio:

Partners lee Monroe Newport Olson
Present share 20 30 50 0
Transferred to oslon (15*20/100) =3 (15*30/100) =4.5 (15*50/100) =7.5 15
New ratio 17 25.5 42.5 15
New capital should be (666,667*17%)=113333 (666,667*25.5%)=170000 (666,667*42.5%)=283334 (666,667*15%)=100000
Present capital 130000 200000 170000 0
Capital to be introduced/(withdrawn) (16667) (30000) 113334 100000

Journal entry:

Lee capital a/c                                       16667

Monroe capital a/c                                 30000

       To Cash a/c                                                    46667  

(Being cash paid for adjusting capital)

Cash a/c                                                213334

      To Newport capital a/c                                  113334

     To olson capital a/c                                            100000

(Being cash received for adjusting capital and capital contribution)

ekkarill92 answered 1 year ago
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