Question

The E.N.D. partnership has the following capital balances as of the end of the current year:

Pineda	$	220,000
Adams		200,000
Fergie		190,000
Gomez		180,000
Total capital	$	790,000

Answer each of the following independent questions:

1. Assume that the partners share profits and losses 3:3:2:2, respectively. Fergie retires and is paid $226,000 based on the terms of the original partnership agreement. If the goodwill method is used, what is the capital balance of the remaining three partners?

2. Assume that the partners share profits and losses 4:3:2:1, respectively. Pineda retires and is paid $350,000 based on the terms of the original partnership agreement. If the bonus method is used, what is the capital balance of the remaining three partners? (Do not round your intermediate calculations. Round your final answers to the nearest dollar amounts.)

Answer 1

When Goodwill Method is used

Fergie receives $36,000 more than her capital balance. Because Fergie is assigned 20 percent of all profits and losses, this extra allocation indicates total goodwill of $180,000 (36000/20*100), which must be split among all partners

CAPITAL BALANCE AFTER WITHDRAWLS
	ORIGINAL BALANCE	GOODWILL	WITHDRAWL	FINAL BALANCE
Pineda	220,000	54000		274,000
Adams	200,000	54000		254,000
Fergie	190,000	36,000	(226,000)	0
Gomez	180,000	36,000		216,000
Total	790,000	180,000		744,000

When Bonus method is used:

A $130000 bonus is paid to Pineda ($350,000 is paid rather than the $220,000 capital balance). This bonus is deducted from the three remaining partners according to their relative profit and loss ratio (3:2:1). A reduction of 50 percent (3/6) is assigned to Adams or a decrease of $65,000 which drops this partner's capital balance from $200,000 to $135,000. A reduction of 33.3 percent (2/6) is assigned to Fergie or a decrease of $43,333 which drops this partner's capital balance from $190,000 to $146,666. A reduction of 16.7 percent (1/6) is assigned to Gomez or a decrease of $21,666 which drops this partner's capital balance from $180,000 to $158,334.