Question

The Distance Plus partnership has the following capital balances at the beginning of the current year: Tiger (50% of profits and losses) $ 175,000 Phil (30%) 145,000 Ernie (20%) 160,000 Each of the following questions should be viewed independently. a. If Sergio invests $190,000 in cash in the business for a 25 percent interest, what journal entry is recorded? Assume that the bonus method is used b. If Sergio invests $150,000 in cash in the business for a 25 percent interest, what journal entry is recorded? Assume that the bonus c. If Sergio invests $170,000 in cash in the business for a 25 percent interest, what journal entry is recorded? Assume that the goodwill method is used

Answer 1

Solution:

Ratio of profit between Tiger, Phil and Ernie = 5:3:2

Total capital after new capital introduced by Sergio = $175,000 + $145,000 + $160,000 + $190,000 = $670,000

Sergio share in Partnership = 25%

Therefore required share of capital by Sergio = 670000 * 25% = $167,500

Bonus Capital introduced by Sergio = $190,000 - $167,500 = $22,500

Bonus capital will be distributed in Tiger, Phil and Ernie in ratio of 5:3:2

Journal Entries - Distance Plus Partnership
S. No.	Particulars	Debit	Credit
1	Cash Dr	$190,000.00
	To Sergio's Capital		$190,000.00
	(Being capital introduced by new partner)
2	Sergio's Capital Dr	$22,500.00
	To Tiger's Capital ($22,500*5/10)		$11,250.00
	To Phil's Capital ($22,500*3/10)		$6,750.00
	To Ernie's Capital ($22,500*2/10)		$4,500.00
	(Being bonus capital of new partner distributed in old partners)

Solution b:

Ratio of profit between Tiger, Phil and Ernie = 5:3:2

Total capital after new capital introduced by Sergio = $175,000 + $145,000 + $160,000 + $150,000 = $630,000

Sergio share in Partnership = 25%

Therefore required share of capital by Sergio = 630000 * 25% = $157,500

As capital introduced by Sergio is lesser by $7,500 therefore old partner capital share will be given to Sergio in their profit sharing ratio i.e. 5:3:2

Journal Entries - Distance Plus Partnership
S. No.	Particulars	Debit	Credit
1	Cash Dr	$150,000.00
	To Sergio's Capital		$150,000.00
	(Being capital introduced by new partner)
2	Tiger's Capital Dr ($7,500*5/10)	$3,750.00
	Phil's Capital Dr ($7,500*3/10)	$2,250.00
	Ernie's Capital Dr ($7,500*2/10)	$1,500.00
	To Sergio's Capital		$7,500.00
	(Being old partner share of capital given to new partner)

Solution 3:

Ratio of profit between Tiger, Phil and Ernie = 5:3:2

Capital Introduced by Sergio = $170,000

Smith share in Partnership = 25%

Therefore required partnership capital on the basis of capital introduced by Sergio = $170,000/25% = $680,000

Total capital after new capital introduced by Smith = $175,000 + $145,000 + $160,000 + $170,000 = $650,000

Therefore Goodwill = $680,000 - $650,000 = $30,000

Goodwill will be distributed to Tiger, Phil and Ernie in ratio of 5:3:2

Journal Entries - Distance Plus Partnership
S. No.	Particulars	Debit	Credit
1	Cash Dr	$170,000.00
	To Sergio's Capital		$170,000.00
	(Being capital introduced by new partner)
2	Goodwill Dr	$30,000.00
	To Tiger's Capital ($30,000*5/10)		$15,000.00
	To Phil's Capital ($30,000*3/10)		$9,000.00
	To Ernie's Capital ($30,000*2/10)		$6,000.00
	(Being recording of goodwill at the time of admission of new partner.)