Question

Following is the current balance sheet for a local partnership of doctors:Cash and current assets $ 78,000 Liabilities $ 82,000 Land 242,000 A, capital 62,000 Building and equipment (net) 200,000 B, capital 82,000 C, capital 132,000 D, capital 162,000 Totals $ 520,000 Totals $ 520,000 The following questions represent independent situations: 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? E contributes $50,000 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? E contributes $40,000 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? E contributes $80,000 in cash to the business to receive a 22 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? C retires from the partnership and, as per the original partnership agreement, is to receive cash equal to 130 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

Part A

E Investment = 25% (Original Capital + E investment) = 25% (438,000 + E investment) = 0.75 E Investment = $109500

E Investment = $146000

Original capital = 62000+82000+132000+162000 = 438000

In order for (E) to receive a 25% interest share, (E) needs to invest $146,000

Part B

Implied value of partnership ($50,000 ÷ 10%)	500000
Total capital after investment by E ($438,000 + $50,000)	488000
Goodwill	$12000

Allocation of Goodwill:
A (30%)	3600
B (10%)	1200
C (40%)	4800
D (20%)	2400

	A	B	C	D	E
Original balances	62000	82000	132000	162000
Goodwill (above)	3600	1200	4800	2400
Investment	0	0	0	0	50000
Capital balances	$65600	$83400	$136800	$164400	$50000

Part C

40000+ Goodwill   =20% (Original Capital + E investment + Goodwill)

40000+ Goodwill   = 20% (438000 + 40000 + Goodwill)

40000+ Goodwill = 95600 + 0.2 Goodwill

0.8 Goodwill = 55600

Goodwill = $69500

E’s capital = 40000+69500 = $109500

Part D

Total capital after investment by E ($438,000 + $80,000)	518000
Amount acquired by E	22%
E's capital balance	113960
E's payment	80000
Bonus being given to E	$33960

Allocation of bonus:
A (10%)	3396
B (30%)	10188
C (20%)	6792
D (40%)	13584

	A	B	C	D	E
Original balances	62000	82000	132000	162000
Bonus (above)	(3396)	(10188)	(6792)	(13584)
Investment	0	0	0	0	80000
Capital balances	$58604	$71812	$125208	$148416	$80000

Part E

C's capital balance	132000
C's payment	171600
Bonus being paid to C	$39600

Allocation of bonus:
A (1/3)	13200
B (1/3)	13200
D (1/2)	13200

	A	B	C	D
Original balances	62000	82000	132000	162000
Bonus (above)	(13200)	(13200)	39600	(13200)
payment	0	0	(171600)	0
Capital balances	$48800	$68800	0	$148800