Question

The E.N.D. partnership has the following capital balances as of the end of the current year:

Pineda	$	310,000
Adams		270,000
Fergie		240,000
Gomez		220,000
Total capital	$	1,040,000

Answer each of the following independent questions:

Assume that the partners share profits and losses 3:3:2:2, respectively. Fergie retires and is paid $285,000 based on the terms of the original partnership agreement. If the goodwill method is used, what is the capital balance of the remaining three partners?

Assume that the partners share profits and losses 4:3:2:1, respectively. Pineda retires and is paid $365,000 based on the terms of the original partnership agreement. If the bonus method is used, what is the capital balance of the remaining three partners? (Do not round your intermediate calculations. Round your final answers to the nearest dollar amounts.)

Answer 1

Part 1

Fergie receives $45,000 (285000-240000) more than her capital balance. Because Fergie is assigned 20 percent of all profits and losses, this extra allocation indicatestotal total goodwill of $225,000,(45000/20%) which must be split among all partners.

Therefore capital balance of remaining partners will be as follows :

Pinede = 310000+(225000*30%) = 377500

Adams = 270000+(225000*30%) = 337500

Gomez = 220000+(225000*20%) = 265000

Part 2

A $55,000 bonus is paid to Pineda ($365,000 is paid rather than the $310,000capital balance). This bonus is deducted from the three remaining partners according to their relative profit and loss ratio (3:2:1). A reduction of 50 percent (3/6) is assigned to Adams or a decrease of $27500 which drops this partner's capital balance from $270,000 to $242500. A reduction of 33.3 percent (2/6) is assigned to Fergie or a decrease of $18333 which drops thispartner's capital balance from $240,000 to $221667. A reduction of 16.7 percent (1/6) is assigned to Gomez or a decrease of $9167 which drops this partner's capital balance from $220,000 to $210833

Therefore, the capital balance of remaining partners will be as follows :

Adams = 242500

Fergie = 221667

Gomez = 210833