In: Accounting
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
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.) |