Question

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

Pineda	$	250,000
Adams		220,000
Fergie		210,000
Gomez		200,000
Total capital	$	880,000

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 $237,000 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 $315,000 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

Calculation of capital balance of the remaining three partners by using Goodwill Method:

1. Calculate the amount of the Goodwill. This is done by subtracting Fergie’s capital account balance from the cash payment: ($237,000 – $210,000) = $27,000.

2. Allocate the Goodwill amount to the remaining partners on the basis of their income ratio. In the given problem new profit sharing ratio is not given after the retirement of Fergie. So , we assume that their profit sharing ratio will be same that is 3:3:2.

3. Allocation of Goodwill amount:

Pineda Capital: 27000 * 3/8 = $ 10,125

Adams Capital: 27000 * 3/8 = $ 10,125

Gomez Capital: 27000 * 2/8 = $ 6,750

4. Capital Balance after Goodwill adjustment:

Pineda Capital: $ 250,000-$ 10,125 = $ 239,875

Adams Capital: $220,000 - $ 10,125 = $209,875

Gomez Capital: $200,000 - $ 6,750 = $ 193,250

Note: In the given problem, Goodwill is not recognized in the books and goodwill is paid to retiring partner only. So, the amount of goodwill is debited to remaining partner’s capital account.

Calculation of capital balance of the remaining three partners by using Bonus Method:

1. Calculate the amount of the Bonus. This is done by subtracting Pineda’s capital account balance from the cash payment: ($315,000 – $250,000) = $65,000.

2. Allocate the bonus amount to the remaining partners on the basis of their income ratio. In the given problem new profit sharing ratio is not given after the retirement of Pineda. So, we assume that their profit sharing ratio will be same that is 3:2:2.

3. Allocation of Bonus amount:

Fergie Capital: 65,000 * 3/7 = $ 27,858

Adams Capital: 65,000 * 2/7 = $ 18,571

Gomez Capital: 65,000 * 2/7 = $ 18,571

The journal entry to record Dale’s retirement from the partnership and the bonus payment to reflect his withdrawal is as shown:

            Pineda Capital Account    Dr.     $ 250,000

            Fergie Capital Account    Dr.      $ 27,858

            Adams Capital Account    Dr.     $ 18,571

            Gomez Capital Account    Dr.    $ 18,571

                                    To Cash account    Cr.                 $ 315,000

4. Capital Balance after Goodwill adjustment:

Fergie Capital: $ 210,000-$ 27,858= $ 182,142

Adams Capital: $220,000 - $ 18,571= $ 201,429

Gomez Capital: $200,000 - $ 18,571= $ 181,429