Question

The Prince-Robbins partnership has the following capital account balances on January 1, 2018:

Prince, Capital	$	80,000
Robbins, Capital		70,000

Prince is allocated 70 percent of all profits and losses with the remaining 30 percent assigned to Robbins after interest of 7 percent is given to each partner based on beginning capital balances.

On January 2, 2018, Jeffrey invests $43,000 cash for a 20 percent interest in the partnership. This transaction is recorded by the goodwill method. After this transaction, 7 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 $12,000.

Prepare the journal entry to record Jeffrey’s entrance into the partnership on January 2, 2018.

(Record the entry for goodwill allocation, during the admission of a new partner.)

(record the cash received from new partner)

Determine the allocation of income at the end of 2018.

Prince?

Robbins?

Jeffrey?

Answer 1

1. Cash account Dr 43,000

Goodwill account Dr 22,000

To Prince, Capital 15,862

To Robbins Capital 6,138

To Jeffrey, Capital 43,000

(To record cash received from new partner, Jeffrey and Goodwil)

Workings:

Jeffrey Capital	43,000
Ratio	20%
Value of partnership (43,000/20%)	215,000
Less:
Existing capital	150,000
+Jeffrey	43,000
Total	193,000
Goodwill (Unrecorded appreciation)	22,000

Workings:

Profit sharing ratio:

	Old ratio	New
Prince	72.10%	7.00%	39.50%	46.50%
Robbins	27.90%	7.00%	23.70%	30.70%
Jeffrey	0.00%	7.00%	15.80%	22.80%
	100.00%	21.00%	79.00%	100.00%

Prince share of goodiwll = 22,000*72.1% =  15,862

Robbins =22,000*27.90% = 6,138

Income Allocation:

Income Allocation	Prince	Robbins	Jeffrey	Total
Interest @7%	6,710	5,330	3,010	15,050
Income (50:30:20)	(1,525)	(915)	(610)	(3,050)
Net	5,185	4,415	2,400	12,000

Ratio calculation: Old profit sharing ratio

Prince = 70%+((100%-70%)*7%) = 72.1%

Robbins = 100%-72.1 = 27.90%

Goodwill calculation:

Jeffrey Capital	43,000
Ratio	20%
Value of partnership (43,000/20%)	215,000
Less:
Existing capital	150,000
+Jeffrey	43,000
Total	193,000
Goodwill (Unrecorded appreciation)	22,000