Question

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

Cash and current
assets . . . . . . . . . . . . . . . . . . . . .	$ 30,000
Land . . . . . . . . . . . . . . . . . . . . . . .	180,000
Building and equipment
(net) . . . . . . . . . . . . . . . . . . . . . .	100,000
Totals ?. . . . . . . . . . . . . . . . . . .	$ 310,000
Liabilities . . . . . . . . . . . . . . . . . . .	$ 40,000
A, capital . . . . . . . . . . . . . . . . . . .	20,000
B, capital. . . . . . . . . . . . . . . . . . . .	40,000
C, capital . . . . . . . . . . . . . . . . . . . .	90,000
D, capital . . . . . . . . . . . . . . . . . . .	120,000
Totals . . . . . . . . . . . . . . . . . . . . . .	$ 310,000

The following questions represent independent situations:

a.E is going to invest enough money in this partnership to receive a 25 percent interest. No goodwill or bonus is to be recorded. How much should E invest?

b.E contributes $36,000 in cash to the business to receive a 10 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?

c.E contributes $42,000 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?

d.E contributes $55,000 in cash to the business to receive a 20 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?

e.C retires from the partnership and, as per the original partnership agreement, is to receive cash equal to 125 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?

Answer 1

A:- Exact amount of investment can only be computed algebraically:

E Investment = 25% (Original Capital + E Investment)

El = .25 ($270,000 + El)

El = $67,500 + .25 El

.75El = $67,500

E Investment = $90,000

B:- Implied value of partnership ($36,000 ÷ 10%) $360,000 Total capital after investment by E ($270,000 + $36,000) 306,000 Goodwill. $ 54,000 Allocation of Goodwill:

A(30%) $16,200

B(10%) 5,400

C(40%) 21,600

D(20%) 10,800

Total. $54,000

CAPITAL BALANCES

A B. C . D. E Original balances $20,000 $40,000 $ 90,000 $120,000 $-0-Goodwill (above) 16,200. 5,400 21,600 10,800 -0-Investment. -0- -0- -0- -0- 36,000 Capital balances

$36,200 $45,400 $111,600 $130,800 $36,000

C:- because E's investment of $42,000 is less than 20% of the resulting capital ($312,000). E is apparently bringing some other attribute to thepartnership (goodwill) that must be computed:

E Investment = 20% (Original Capital + E Investment) $42,000 + Goodwill = .20 ($270,000 + $42,000 + Goodwill) $42,000 + Goodwill = $62,400 + .20 Goodwill

.80 Goodwill = $20,400

Goodwill = $25,500

E's investment is, therefore, $42,000 in cash and $25,500 in goodwill for atotal capital balance of $67,500; the other capital accounts remainunchanged. Note that E's capital of $67,500 is 20% of the new total capital$337,500 ($270,000 + $67,500).

D:-

Total capital after investment ($270,000 + $55,000) $325,000 Amount acquired by E. 20% E's capital balance. $ 65,000. E's payment. 55,000. Bonus being given to E. $ 10,000

Bonus from: A(10%) $1,000

B(30%) 3,000

C(20%) 2,000

D(40%) 4,000. $10,000

CAPITAL BALANCES

A. B. C D. E Original balances $20,000 $40,000 $90,000. $120,000. $-0-Investment. -0- -0- -0- 0- 55,000 Bonus (above) (1,000) (3,000) (2,000) (4,000) 10,000 Capital balances $19,000 $37,000 $88,000 $116,000 $65,000

E :-