Question

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

Prince, Capital	$	105,000
Robbins, Capital		95,000

Prince is allocated 60 percent of all profits and losses with the remaining 40 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 $58,000 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 $18,000.

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

Determine the allocation of income at the end of 2018.

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

2. Record the cash received from new partner.

Determine the allocation of income at the end of 2018.

	Income Allocation Prince Robbins Jeffrey

Answer 1

Calculation of goodwill is shown below

Value of business = Capital contribution of Jeffrey / 20%

                                = $ 58000 / 20%

                                = $290000

Total Capital = Capital of Prince + Capital of Robbins + Capital of Jeffrey

                         = $105000 + $95000 + $58000

                        = $258000

Good will = Value of business – Total Capital

                    = $290000 - $258000

= $32000            

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

To recognize goodwill based on Jeffrey’s acquisition price

	Debit	Credit
Goodwill	32000
Prince, Capital		19200
Robbins, Capital		12800

  

To admit Jeffrey to the partnership

Cash                                                               58000

                Jeffrey, Capital                                                                                           58000

Determine the allocation of income at the end of 2018.

	Prince	Robbins	Jeffrey
Interest—7% of beginning capital	$7,350	$6,650	$4,060
Allocation of remaining income	9000	5400	3600
($18,000 divided on a 5:3:2 basis)
Total	16350	12050	7660