Question

New Partner Admission: Purchase of Existing Interest
The capital balances for the partnership of Ajeet, Rahul, and Suresh are as follows:
Capital—Ajeet	400,000.00
Capital—Rahu	350,000.00
Capital—Suresh	500,000.00
The partnership profit-sharing ratio is 3:2:5. A new partner, Harish, enters the partnership by purchasing existing interests in the partnership.
Required
Prepare the journal entry to record Harish’s admission to the partnership, and compute the new capital balances, in each of the following cases.
a. Harish pays Ajeet $450,000 for his entire interest in the partnership. There is no revaluation of partnership assets.
Journal entry to record Harish’s admission to the partnership:
	Debit	Credit
Capital—Ajeet	$
Capital—Harish		$
New Capital Balance
Capital—Ajeet	$
Capital—Harish	$
Capital—Rahu	$
Capital—Suresh	$
b. Harish pays the three partners a total of $420,000 for 20 percent of each of the partners’ interests. There is no revaluation of partnership assets.
Journal entry to record Harish’s admission to the partnership:
	Debit	Credit
Capital—Ajeet	$	$
Capital—Rahu	$	$
Capital—Suresh	$	$
Capital—Harish	$	$
New Capital Balance
Capital—Ajeet	$
Capital—Harish	$
Capital—Rahu	$
Capital—Suresh	$
c. Repeat part b, assuming revaluation of partnership assets by recording goodwill.
Journal entry to record Harish’s admission to the partnership:
	Debit	Credit
Capital—Ajeet	$	$
Capital—Rahu	$	$
Capital—Suresh	$	$
Goodwill/Cash	$	$
New Capital Balance
Capital—Ajeet	$
Capital—Harish	$
Capital—Rahu	$
Capital—Suresh	$

Answer 1

Answer to Question a:

As Harish pays $4,50,000 for 3/10 interest of Ajeet, therefore total Capital of firm after admission tends to be $4,50,000*10/3 =$15,00,000

Journal Entries to record Harish's admission to the partnership:

Date	Particulars	Debit	Credit
	Ajeet Capital A/c	$4,50,000
	To, Harish Capital A/c		$4,50,000

New Capital Balance after admission of Harish:

Ajeet - = $4,00,000

Rahu - = $3,50,000

Suresh- = $5,00,000

Harish - = $2,50,000

Total Capital Balance = $15,00,000

Harish will bring in (i.e pay Ajeet) $4,50,000 for interest of $2,50,000

Answer to Question b:-

Existing Partners	(a)Capital Balance	(b)Capital(as %)[b/a]	Profit(%)
Ajeet	$4,00,000	32%	30%
Rahu	$3,50,000	28%	20%
Suresh	$5,00,000	40%	50%
Total Balance	$12,50,000

New Partner Harish pays $4,20,000 for 20% of each of partner's interest:

Ajeet ($4,00,000*20%) = $80,000

Rahu ($3,50,000*20%) = $70,000

Suresh($5,00,000*20%) = $1,00,000

Total = $2,50,000

We understand that new partner Hari will pay $4,20,000 for a $2,50,000 capital interest.

Journal Entries to record Harish's admission to the partnership:

Date	Particulars	Debit	Credit
	Ajeet Capital A/c	$80,000
	Rahu Capital A/c	$70,000
	Suresh Capital A/c	$1,00,000
	To, Harish Capital A/c		$2,50,000

New Capital Balance after admission of Harish:

Ajeet - ($4,00,000- $80,000) = $3,20,000

Rahu - ($3,50,000- $70,000) = $2,80,000

Suresh- ($5,00,000- $1,00,000) = $4,00,000

Harish - =$2,50,000

Total Capital Balance =$12,50,000

Answer to Question c:

New Partner Harish pays $4,20,000 for 20% of each of partner's interest:

Imputed Fair Value Of Partnership firm = $4,20,000/.20

= $21,00,000

Book Value of Partnership firm i.e Capital balance before admission = $12,50,000

Excess Consideration of ($21,00,000- $12,50,000) = $8,50,000 to be represented as Goodwill.

Goodwill to be apportioned between Existing partners :

Ajeet: $8,50,000*30% = $2,55,000

Rahu:  $8,50,000*20% = $1,70,000

Suresh:$8,50,000*50% = $4,25,000

Journal Entries for Goodwill apportionment :

Goodwill A/c Dr. $8,50,000

To, Ajeet's Capital A/c . $2,55,000

To, Rahu's Capital A/c $1,70,000

To, Suresh's Capital A/c $4,25,000

Existing Partners	(a)Capital Balance	Goodwill	Total Capital Balance
Ajeet	$4,00,000	$2,55,000	$6,55,000
Rahu	$3,50,000	$1,70,000	$5,20,000
Suresh	$5,00,000	$4,25,000	$9,25,000
Total Balance	$12,50,000

Journal Entries to record Harish's admission to the partnership:

Date	Particulars	Debit	Credit
	Ajeet Capital A/c($6,55,000*20%)	$1,31,000
	Rahu Capital A/c($5,20,000*20%)	$1,04,000
	Suresh Capital A/c($9,25,000*20%)	$1.85,000
	To, Harish Capital A/c		$4,20,000

New Capital Balance after admission of Harish:

Ajeet - ($6,55,000- $1,31,000) = $5,24,000

Rahu - ($5,20,000- $1,04,000) = $4,16,000

Suresh- ($9,25,000- $1,85,000) = $7,40,000

Harish - = $4,20,000

Total Capital Balance = $21,00,000