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

SOLUTION

(A) Goodwill Method

Calculate the firm's Goodwill as follows-

Particulars	Amount ($)
Paid to F	211,000
Less: F's capital balance at the end of the year	(180,000)
Goodwill paid to F	31,000
F's share in the firm's profit and losses (2/(3+3+2+2)= 20%)	20%
Firm's Goodwill (31,000/20%)	155,000

Firm's goodwill is $155,000. It will be shared among the partners in their profit and loss sharing ratio.

Capital balances-

Particulars	P ($)	A ($)	F ($)	G ($)	Total ($)
Existing capital balance	210,000	190,000	180,000	170,000	750,000
Goodwill shared between the partners (3:3:2:2)	46,500	46,500	31,000	31,000	155,000
New capital balances	256,500	236,500	211,000	201,000	905,000
Paid to F			(211,000)
Captal balances of the remaining partners	256,500	236,500	0	201,000	694,000

(B) Bonus Method

Calculate the amount of Bonus paid to P-

Particulars	Amount ($)
Amount paid to P	335,000
Less: P's capital balance	(210,000)
Bonus paid to P	125,000

Bonus paid to P is $125,000. It will be deducted from the remaining partner's capital balances in their profit and loss sharing ratio.

Capital balances-

Particulars	P ($)	A ($)	F ($)	G ($)	Total ($)
Existing capital balances	210,000	190,000	180,000	170,000	750,000
Adjustment for bonus (4:3:2:1)	125,000	(62,500)	(41,667)	(20,833)	0
New capital balances	335,000	127,500	138,333	149,167	750,000
Paid to P	(335,000)
Capital balances of the remaining partners	0	127,500	138,333	149,167	415,000