Question

The following is the current balance sheet for a local partnership of doctors:

Cash and current assets	$	67,000	Liabilities	$	74,000
Land		232,000	A, capital		54,000
Building and equipment (net)		181,000	B, capital		74,000
			C, capital		124,000
			D, capital		154,000
Totals	$	480,000	Totals	$	480,000

The following questions represent independent situations:

1. E is going to invest enough money in this partnership to receive a 20 percent interest. No goodwill or bonus is to be recorded. How much should E invest?

2. 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?

3. E contributes $38,000 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?

4. E contributes $72,000 in cash to the business to receive a 20 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?

5. 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

Answer with explanation:

a.
E's contribution = 20% of partnership balances

Original capital balances of existing partners = A capital + B capital + C capital + D capital = $54,000 + $74,000 + $124,000 + $154,000 = $406,000

Capital balance after E's investment = $406,000 + E's investment

E's investment = 20% of ($406,000 + E's investment)
E's investment = .20 ($406,000 + E's investment)
E's investment = $81,200 + .20 E's investment
E's investment - 20 E's investment = $81,200
E's investment = $81,200/ .80 = $101,500
E must invest $101,500.

b.
E's contribution = $50,000
E's interest in partnership = 10%
Implied value of partnership based on E's contribution = $50,000/ 10% = $500,000

Capital balance after E's investment = $406,000 + $50,000 = $456,000

Goodwill = Implied value of partnership - Capital balance after E's investment = $500,000 - $456,000 = $44,000

Allocation of goodwill between existing partners, A, B, C and D.
(It is given that, profits and losses have previously been split according to the percentages: A, 30 percent; B, 10 percent; C, 40 percent; and D, 20 percent.)

A = $44,000 × 30% = $13,200
B = $44,000 × 10% = $4,400
C = $44,000 × 40% = $17,600
A = $44,000 × 20% = $8,800

Individual capital balances after E's investment:

c.
E's contribution = $38,000
E's interest in partnership = 20%
Implied value of partnership based on E's contribution = $38,000/ 20% = $190,000

Capital balance after E's investment = $406,000 + $38,000 = $446,000

Implied value of partnership is less than the Capital balance after E's investment, which means that E alps brings goodwill apart from his cash contribution.

Capital balance after E's investment = $406,000 + E's investment

E's investment = 20% of ($406,000 + E's investment)
E's investment = .20 ($406,000 + E's investment)
E's investment = $81,200 + .20 E's investment
E's investment - 20 E's investment = $81,200
E's investment = $81,200/ .80 = $101,500

Goodwill contributed by E = E's investment - E's cash contribution = $101,500 - $38,000 = $63,500

Capital balance after E's investment = $406,000 + $101,500 = $507,500

Implied value of partnership = $101,500/ 20% = $507,500

Individual capital balances after E's investment:

d.
E's contribution = $72,000
E's interest in partnership = 20%
Implied value of partnership based on E's contribution = $72,000/ 20% = $360,000

Capital balance after E's investment = $406,000 + $72,000 = $478,000

E's capital balance = $478,000 × 20% = $95,600

Bonus given to E = $95,600 - $72,000 = $23,600
(No goodwill is to be recorded. Hence, the difference is considered as bonus to E.)

Bonus given by existing partners, A, B, C and D.
(It is given that, profits and losses have previously been split according to the percentages: A, 10 percent; B, 30 percent; C, 20 percent; and D, 40 percent. After E makes this investment)

A = $23,600 × 10% = $2,360
B = $23,600 × 30% = $7,080
C = $23,600 × 20% = $4,720
A = $23,600 × 40% = $9,440

Individual capital balances after E's investment:

e.
C's original balance = $124,000
Amount collected by C on retirement = 130% of original balance = $124,000 × 130% = $161,200

Bonus given to C on retirement = $161,200 - $124,000 = $37,200
(No goodwill is to be recorded. Hence, the difference is considered as bonus to C.)

Bonus given by existing partners, A, B and D.
(It is given that, all partners share profits and losses equally)

A = $37,200 × 1/3 = $12,400
B = $37,200 × 1/3 = $12,400
D = $37,200 × 1/3 = $12,400

Individual capital balances of remaining partners: