Question

The Distance Plus partnership has the following capital balances at the beginning of the current year:

Tiger (50% of profits and losses)	$	70,000
Phil (40%)		40,000
Ernie (10%)		55,000
If Sergio invests $60,000 in cash in the business for a 20 percent interest, what journal entry is recorded? Assume that the goodwill method is used. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Answer 1

	Account Tittle and Explaination	Debit	Credit
	Goodwill	$ 75,000
	Tiger		$    37,500
	Phil		$    30,000
	Erni		$      7,500
	(Being goodwill recognized will be allocated to the existing partners based on their profit and loss ratio)
	Cash	$ 60,000
	Sergio		$    60,000
	(Being cash received from Sergio))
	Implied value of business based on new investment	=	$3,00,000
Less:	Total capital after new investment	=	$2,25,000
	Goodwill		$    75,000
	Workings -
	Implied value of business based on new investment	=	($60,000 / 20%)
		=	$3,00,000
	Total capital after new investment:
	Tiger	=	$    70,000
	Phil	=	$    40,000
	Erni	=	$    55,000
	Sergio	=	$    60,000
		=	$2,25,000
	Goodwill allocation to existing partners:
	Tiger ($75,000 X 50%)	=	$    37,500
	Phil ($75,000 X 40%)	=	$    30,000
	Erni ($75,000 X 10%)	=	$      7,500