Question

The partnership of Matteson, Richton, and O’Toole has existed for a number of years. At the present time the partners have the following capital balances and profit and loss sharing percentages:

Partner	Capital Balance			Profit and Loss Percentage
Matteson	$	88,550			30	%
Richton		141,450			45
O’Toole		120,000			25

O’Toole elects to withdraw from the partnership, leaving Matteson and Richton to operate the business. Following the original partnership agreement, when a partner withdraws, the partnership and all of its individual assets are to be reassessed to current fair values by an independent appraiser. The withdrawing partner will receive cash or other assets equal to that partner’s current capital balance after including an appropriate share of any adjustment indicated by the appraisal. Gains and losses indicated by the appraisal are allocated using the regular profit and loss percentages.

An independent appraiser is hired and estimates that the partnership as a whole is worth $640,000. Regarding the individual assets, the appraiser finds a building with a book value of $200,000 has a fair value of $260,000. The book values for all other identifiable assets and liabilities are the same as their appraised fair values.

Accordingly, the partnership agrees to pay O’Toole $160,000 upon withdrawal. Matteson and Richton, however, do not wish to record any goodwill in connection with the change in ownership.

Prepare the journal entry to record O’Toole’s withdrawal from the partnership. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Do not round your intermediate calculations.)

Transaction 1 Record the building appreciation to old partners.

Transaction 2 Record O'Toole's withdrawal from the partnership.

Answer 1

Following will be journal entries for transaction 1 :-

Accounts title	debit	credit
Building To Matteson.   To richton To O'Toole (Being value of building appreciated and profit arising thereon distributed amount partners in their profit sharing ratio)	60000	18000 27000 15000

Note :-

1. Profit in appreciation of building amounting to $60000 to be distributed among partners in their respective profit sharing ratios

Matteson :- 60000x30% = 18000

Richton :- 60000x45% = 27000

O' Toole :- 60000x25% = 15000.

Transaction 2. Journal entry for withdrawal of O'Toole = Here total credit balance of O'Toole is $120000+$15000= $135000

However he will be given $160000 on withdrawal

Therefore bonus to be given to him on his withdrawal = $160000-$135000= $25000

This amount of bonus is to be borne by reianing partners in proportion to their profit sharing ratios as follows :-

Matteson : 25000x30/75 = $10000

Richton : 25000x45/75 = $15000

Accordingly journal entry will be as follows :-

Accounts title	debit	credit
O'Toole capital Matteson capital Richton capital To cash (Being Cash paid to retiring partner and bonus in excess of his capital account borne by ramaining partner )	135000 10000 15000	160000