Question

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

Pineda	$	210,000
Adams		190,000
Fergie		180,000
Gomez		170,000
Total capital	$	750,000

Answer each of the following independent questions:

1. Assume that the partners share profits and losses 3:3:2:2, respectively. Fergie retires and is paid $211,000 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?

2. Assume that the partners share profits and losses 4:3:2:1, respectively. Pineda retires and is paid $335,000 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

Answer 1

A). Fergie recives $31,000 ($211,000 - $180,000) more than her capital balance . Because Fergie is assigned 20 % of all profit and losses , this extra allocation indicate total goodwill of $155,000, which must be split among all partners .

20 % of Good Will = $31,000 .20 of Good Will = $31,000 Good Will = $31,000 / .20 = $155,000 Capital Balances After Withdrawal

	Orginal Balance	Goodwill Withdrawal	Balance
Pineda	$210,000	$46,500 ($155,000×30%)	$256,500
Adams	$190,000	$46,500	$236,500
Fergie	$180,000	$31,000 ($155,000 ×20%)	$211,000
Gomez	$170,000	$31,000	$201,000
Total			$905,000

B. Bonus Method

Bonus Paid to Pineda = $125,000

= $335,000 - $210,000 = $125,000 # This bonus is deducted from the three remaining partners according to their profit and loss ratio( 3:2:1) .

# A reduction of 50 % (3/6) is assigned to Adams or a decrease of $62,500 ($125,000 × 3/6) , which drop this partners capital from $190,000 to $127,500.

# A reduction of 33.3 Percent (2/6) is assigned to Fergie or a decrease of $41,667 ($125,000 × 2/6) , which drops this Partners Capital Balance from $180,000 to $138,333.

# A reduction of 16.7 % (1/6) is assigned to Homer or a decrease of $20,833 ($125,000 × 1/6), which drops this Partners Capital Balance from $170,000 to $149,167.