Question

Following is the condensed balance sheet of Martinez, O'Neill and Clemens, partners who share profits or losses in the ratio of 2 : 3 : 5.

Cash	$50,000	Liabilities	$200,000
Other assets	1,050,000	Capital - Martinez	100,000
		Capital - O'Neill	300,000
		Capital - Clemens	500,000
Total assets	$1,100,000	Total liabilities and capital	$1,100,000

Required

(a) Assume that the partnership’s assets and liabilities are fairly valued as shown. The partners wish to admit Jeter as a partner with a 40 percent interest in capital, profits, and losses. They require Jeter to invest an amount such that bonus or goodwill adjustments are not needed. How much should Jeter invest for the 40 percent share?
$Answer

(b) Assume instead that the existing partners, all of whom contemplate retirement relatively soon, decide to sell Jeter 40 percent of their respective partnership interests for a total payment of $480,000. This payment will be made proportionately to Martinez, O’Neill, and Clemens. The partners agree that implied goodwill is to be recorded prior to the transaction with Jeter. What are the capital balances of the four partners after the transaction with Jeter?

Balances After
AcquisitionMartinez$Answer

O'NeillAnswer

ClemensAnswer

JeterAnswer

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Total$Answer

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Answer 1

1. Computation of Amount jeter has to bring into the partnership firm

it is mentioned that the goodwll adjustments are not need and new partner will take 40% share in partnership. it means the current partnership value will be equal to 60%.

Thus Amount Jeter has to bring = Total current capital * Jeter share / Current capital share

Thus Amount Jeter has to bring = (100000 + 300000 + 500000) * 40 / 60

Thus Amount Jeter has to bring = $600000

b. Capital Balances of Four partners under given scenario

Implied Goodwill = Amount brought by jeter / Jeter share - TOtal Current Capital

Implied Goodwill = 480000 / 0.40 - 900000

Implied Goodwill = $300000

Balance after acquisition:

Jeter Balance = $480000

Total balance = $1200000 (96000 + 234000 + 390000 + 480000)