Question

Following is the current balance sheet for a local partnership of doctors:

Cash and current assets	$	43,000	Liabilities	$	60,000
Land		202,000	A, capital		40,000
Building and equipment (net)		165,000	B, capital		60,000
			C, capital		110,000
			D, capital		140,000
Totals	$	410,000	Totals	$	410,000

The following questions represent independent situations:

E is going to invest enough money in this partnership to receive a 20 percent interest. No goodwill or bonus is to be recorded. How much should E invest?

E contributes $90,000 in cash to the business to receive a 20 percent interest in the partnership. Goodwill is to be recorded. Profits and losses have previously been split according to the following percentages: A, 30 percent; B, 10 percent; C, 40 percent; and D, 20 percent. After E makes this investment, what are the individual capital balances?

E contributes $64,000 in cash to the business to receive a 20 percent interest in the partnership. Goodwill is to be recorded. The four original partners share all profits and losses equally. After E makes this investment, what are the individual capital balances?

E contributes $58,000 in cash to the business to receive a 18 percent interest in the partnership. No goodwill or other asset revaluation is to be recorded. Profits and losses have previously been split according to the following percentages: A, 10 percent; B, 30 percent; C, 20 percent; and D, 40 percent. After E makes this investment, what are the individual capital balances?

C retires from the partnership and, as per the original partnership agreement, is to receive cash equal to 130 percent of her final capital balance. No goodwill or other asset revaluation is to be recognized. All partners share profits and losses equally. After the withdrawal, what are the individual capital balances of the remaining partners?

******FOR B-E*******

	Individuals (b) Capital Balances (c) Capital Balances (d) Capital Balances (e) Capital Balances A B C D E

Answer 1

1. E Investment:

Since E is to receive 20% interest in partnership, and no goodwill or bonus is to be recorded.

E Investment = 20% (Original Capital + E Investment)

E Investment = 0.2 ($350,000 + E Investment)

0.8 * E Investment = $70,000

E Investment = $87,500          

1. Ans:

Implied value of Partnership ($90,000 / 20%) = $450,000

Total capital ($350,000 + $90,000)                            = $440,000

Goodwill ($450,000 - $440,000)                                   = $10,000

Allocation of Goodwill: Allocation of goodwill to old partners in their old profit sharing ratio

A (30%) = $3,000

B (10%) = $1,000

C (40%) = $4,000

D (20%) = $2,000

Capital balances:

                                                A                             B C                             D                             E

Original Balances              $40,000 $60,000 $110,000 $140,000 0

Add: Goodwill                   $3,000                   $1,000                   $4,000                   $2,000 0

Add: Investment              $0                           $0                           $0                           $0                           $45,000

New Balances $43,000 $61,000 $114,000              $142,000 $45,000

1. Ans:

Because E’s Investment of $64,000 is less than 20% of the resulting capital. E is apparently bring some other attribute to the partnership (Goodwill) that must be computed:

E Investment = 20% (Original capital + E Investment)

$64,000 + Goodwill = 0.2 ($350,000 + $64,000 + Goodwill)

$64,000 + Goodwill = $82,800 + 0.2 Goodwill

0.8 Goodwill = $18,800

Goodwill = $23,500

E’s investment is, therefore $64,000 in cash and $23,500 in goodwill for a total capial balance of $87,500, the other capital accounts remain unchanged.

Note that E’s capital of $87,500 is 20% of the new total capital $437,500($350,000 + $87,500)

1. Ans:

Total Capital ($350,000 + $58,000)             = $408,000

Amount acquired by E 18%

E’s Capital balance ($408,000 * 0.18)        = $73,440

E’s Payment                                                       = $58,000

Bonus being given to E                                  = $15,440

Bonus from:

A (10%) = $1,544

B (30%) = $4,632

C (20%) = $3,088

D (40%) = $6,176

Capital Balances:

                                                A                             B                             C                             D                             E

Original Balances              $40,000 $60,000 $110,000 $140,000 0

Less: Bonus                        ($1,544)                ($4,632) ($3,088) ($6,176)             $15,440

Add: Investment $0                           $0                           $0                           $0 $58,000

New Balances                   $38,456 $55,368 $106,912 $133,824 $73,440

1. Ans:

C’s Capital Balance           = $110,000

C’s Collection (130%)      = $143,000

Bonus being paid to C    = $33,000

Bonus from:

A (1/3) = $11,000

B (1/3) = $11,000

D (1/3) = $11,000

Capital Balances:

                                                A                             B                             C                             D

Original Balances              $40,000 $60,000 $110,000              $140,000             

Less: Bonus                        ($11,000)             ($11,000)             $33,000 ($11,000)            

Payment                              $0                           $0 ($143,000) $0                          

New Balances                   $29,000 $49,000 $0 $129,000