In: Accounting
Admitting a New LLC Member With Bonus
Excel Medical, LLC, consists of two doctors, Douglass and Finn, who share in all income and losses according to a 2:3 income-sharing ratio. Dr. Lindsey Koster has been asked to join the LLC. Prior to admitting Koster, the assets of Excel Medical were revalued to reflect their current market values. The revaluation resulted in medical equipment being increased by $21,000. Prior to the revaluation, the equity balances for Douglass and Finn were $202,000 and $231,000, respectively.
a. Provide the journal entry for the asset revaluation. For a compound transaction, if an amount box does not require an entry, leave it blank.
b. Provide the journal entry for the bonus under the following independent situations:
1. Koster purchased a 30% interest in Excel Medical, LLC, for $259,000. For a compound transaction, if an amount box does not require an entry, leave it blank.
2. Koster purchased a 25% interest in Excel Medical, LLC, for $132,000. For a compound transaction, if an amount box does not require an entry, leave it blank.
Solution a:
Journal Entries - Excel Medical | |||
S. No. | Particulars | Debit | Credit |
1 | Medical Equipment Dr | $21,000.00 | |
To Revaluation A/c | $21,000.00 | ||
(To record increase in value of equipment) | |||
2 | Revaluation A/c Dr | $21,000.00 | |
To Douglass's Capital ($21,000*2/5) | $8,400.00 | ||
To Finn's Capital ($21,000*3/5) | $12,600.00 | ||
(to record distribution of profit on revaluation) |
Solution b1:
Ratio of profit between Douglass and Finn = 2:3
Total capital after new capital introduced by Koster = ($202,000 + $231,000 + $21,000) + $259,000 = $713,000
Koster share in Partnership = 30%
Therefore required share of capital by Koster = $713,000 * 30% = $213,900
Bonus Capital introduced by Koster = $259,000 - $213,900 = $45,100
Bonus capital will be distributed in Douglass and Finn in ratio of 2:3
Journal Entries - Excel Medical | |||
S. No. | Particulars | Debit | Credit |
1 | Cash Dr | $259,000.00 | |
To Koster's Capital | $259,000.00 | ||
(Being capital introduced by new partner) | |||
2 | Koster's Capital Dr | $45,100.00 | |
To Douglass's Capital ($45,100*2/5) | $18,040.00 | ||
To Finn's Capital ($45,100*3/5) | $27,060.00 | ||
(Being bonus capital of new partner distributed in old partners) |
Solution b-2:
Ratio of profit between Douglass and Finn = 2:3
Total capital after new capital introduced by Koster = ($202,000 + $231,000 + $21,000) + $132,000 = $586,000
Koster share in Partnership = 25%
Therefore required share of capital by Koster = $586,000 * 25% = $146,500
As capital introduced by Koster is lesser by $14,500 therefore old partner capital share will be given to Koster in their profit sharing ratio i.e. 2:3
Journal Entries - Excel Medical | |||
S. No. | Particulars | Debit | Credit |
1 | Cash Dr | $132,000.00 | |
To Koster's Capital | $132,000.00 | ||
(Being capital introduced by new partner) | |||
2 | Douglass's Capital Dr ($14,500*2/5) | $5,800.00 | |
Finn's Capital Dr ($14,500*3/5) | $8,700.00 | ||
To Koster's Capital | $14,500.00 | ||
(Being old partner share of capital given to new partner) |