Exercises 4

Anna and Bess share partnership profits and losses at 60% and 40%, respectively. The partners agree to admit Cal into the partnership for a 50% interest in capital and earnings. Capital accounts immediately before the admission of Cal are:

Anna (60%)$300,000

Bess (40%)300,000

Total$600,000

Required:

Prepare the Schedule of New Partner Investment and the journal entry(s) for the admission of Cal to the partnership assuming Cal invested $400,000 for the ownership interest, and that this is a fair price for that share of the partnership to be acquired. Cal paid the money directly to Anna and to Bess for 50% of each of their respective capital interests. The partnership records goodwill.

Answer:

If a $400,000 payment represents 50% of total capital, then twice that amount, or $800,000, is the implied total capital including goodwill. If the present total capital is $600,000, then the amount of goodwill to record is $200,000. This goodwill is allocated 60% to Anna and 40% to Bess.

* Implied value of firm $400,000 / 50% = $ 800,000

Old Capital 600,000

Goodwill200,000

1. This goodwill is allocated 60% X 200,000 = 120,000 to Anna

and 40% X 200,000 = 80,000 to Bess.

Journal:

Goodwill200,000

Anna, capital120,000

Bess, capital80,000

2. After the first entry is posted, the balances in the Anna and Bess capital accounts will be $420,000 and $380,000, respectively. If 50% of each partner's interest is given to Cal, Anna's capital account is reduced by $210,000, and Bess' capital account is reduced by $190,000.

Schedule of New Partner Investment:

	Before	Revaluation (Goodwill)	Afterrevaluation	Transferred	Final
Anna	$300,000	+$120,000	420,000	*($210,000)	$200,000
Bess	300,000	+$80,000	380,000	*(190,000)	200,000
Cal				400,000	400,000
Total	$600,000		$120		$800,000

Journal:

Anna, capital210,000

Bess, capital190,000

Cal, capital400,000