Question

A B and C share profits in the ratio 2:3:5 in a partnership and have capital balance of $100000, 60000 and 40000 respectively prepare the journal entries necessary to admit D to the partnership under each of the following separete cases:

A. D buy 40% of A for 50000

B. D invests sufficient cash to receive a 20% interest

C. D invests $80000for a 1/4 interest. goodwill is to be rcorded

D. D invests 40000 for a 1/4 interest. The bonus method is to be used

E. D. invests 120000 for a 120,000 fir a 1/4 interest. the bonus method is to be used

Answer 1

When a new partner joins a partnership the old partnership is dissolved and a new partnership is formed. Accounting for admission of new partner depends on the nature of arrangement between the existing partners and the new partner.

Part A.

When a new partner purchases interest from existing partners at book value, the transaction is recorded by crediting the capital account of the new partner and debiting the capital account of existing partners. The transaction is reported in the books for the partnership at the book value of the share transferred and it has nothing to do with the price which the new partner has paid to the existing partner. It means that whatever the consideration paid to other partners for purchase of share is not important. So, the journal entry would be as follows:

A's Capital A/c Debit $ 40,000

D's Capital A/c Credit $ 40,000

So, the new capital structure now is A: $ 60,000 B: $ 60,000 C: $ 40,000 D: $ 40,000

Part B

In this part D wants to introduce sufficient cash in order to get 20% interest in the firm, that is, 20% of the total existing capital share. The total existing capital is $ 200,000 ($ 100,000 + $ 60,000 + $ 40,000). Therefore, D's Capital contribution shall be :

$ 200,000 * 0.20 = $ 40,000

So the journal entry would be as follows:

   Cash A/c Debit $ 40,000

   D's Capital A/c Credit $ 40,000

Part C

When a partnership has good reputation and a profitable client base, new partners are normally required to pay a hefty bonus for goodwill that is, they introduce assets (can be cash or kind) in excess of the book value of the share they get in the firm. In such a situation, the goodwill (which equals the assets they introduce minus the book value of the share they get in the partnership) is credited to the existing partners capital accounts either equally or in the proportion of internally decided profit sharing ratio. In this case the ratio is given hence the same would be used.

Calculation of Goodwill : Investment of D= $ 80,000

D's Share in capital = $ 200,000 * 1/4 = $ 50,000

Therefore, goodwill = $ 80,000 - $ 50,000 = $ 30,000 Now, this amount shall be distributed among partners in the ratio of profits that is, 2:3:5. So, the respective share shall be A = 30,000 * 2/10 = $ 6,000

B = 30,000 * 3/10 = $ 9,000

C = 30,000 * 5/10 = $ 15,000

The journal entry shall be as follows:

   Cash A/c Debit $ 80,000

   D's Capital A/c Credit $ 50,000

   A's Capital A/c Credit $ 6,000

   B's Capital A/c Credit $ 9,000

   C's Capital A/c Credit $ 15,000

Part D:

The concept of this part is similar to the previous part just the difference is that the loss (difference between the amount invested and the capital share entitled to the new partner) is borne by the existing partners in the profit sharing ratio.

Investment of D= $ 40,000

D's Share in capital = $ 200,000 * 1/4 = $ 50,000

Therefore, Loss = $ 50,000 - $ 40,000 = $ 10,000 Now, this amount shall be borne by the partners in the ratio of profits that is, 2:3:5. So, the respective share shall be A = 10,000 * 2/10 = $ 2,000

B = 10,000 * 3/10 = $ 3,000

C = 10,000 * 5/10 = $ 5,000

The journal entry shall be as follows:

   Cash A/c Debit $ 40,000

   A's Capital A/c Debit $ 2,000

   B's Capital A/c Debit $ 3,000

   C's Capital A/c Debit $ 5,000

   D's Capital A/c Credit $ 50,000