Concept explainers
a.
Prepare the
a.
Explanation of Solution
Person P decides to sell half of its share to person DA with the consent of all other partners for $50,000 in cash.
Calculate the amount of half of share of person P
Person P is receiving $50,000 hence; it will not affect the company’s capital.
Journal entry will be
Date | Accounts and Explanation | Post Ref. | Debit ($) | Credit ($) |
Person P's Capital | $ 35,000 | |||
Person DA's Capital | $ 35,000 | |||
(To record the sale of half share of person P) | ||||
Table: (1)
b.
Prepare the journal entry or entries to be recorded by the partnership for the given transaction.
b.
Explanation of Solution
Three partners sell their 10 % partnership interest to the person DA for $25,000 cash.
Journal entry can be
Date | Accounts and Explanation | Post Ref. | Debit ($) | Credit ($) |
$ 50,000 | ||||
Person AT's Capital | $ 25,000 | |||
Person P's Capital | $ 15,000 | |||
Person | $ 10,000 | |||
(To record the goodwill) | ||||
Person AT's Capital | $ 10,500 | |||
Person P's Capital | $ 8,500 | |||
Person AR's Capital | $ 6,000 | |||
Person DA's Capital | $ 25,000 | |||
(To record the capital taken from other partners by person DA) | ||||
Table: (2)
Working note
Calculate the implied value of the business
Calculate the total current capital of the business
Calculate goodwill
Calculate distribution of goodwill
Now, goodwill share for other partners
c.
Prepare the journal entry or entries to be recorded by the partnership for the given transaction.
c.
Explanation of Solution
Person DA is allowed to join the partnership with 10 % ownership interest by paying cash $30,000 directly to the business. Hence, the total capital for the business is $230,000.
The person DA requires 10% interest of the total capital. Bonus method is followed.
Journal entry can be
Date | Accounts and Explanation | Post Ref. | Debit ($) | Credit ($) |
Cash | $ 30,000 | |||
Person AT's Capital | $ 3,500 | |||
Person P's Capital | $ 2,100 | |||
Person AR's Capital | $ 1,400 | |||
Person DA's Capital | $ 23,000 | |||
(To record the admission of person DA) | ||||
Table: (3)
Working note
Calculate person DA share in total capital
Person DA has paid $30,000 hence, $7,000 excess is the bonus which is distributed to other partners in their profit sharing ratio
Calculate distribution of bonus to other partners
Now, bonus to other partners
d.
Prepare the journal entry or entries to be recorded by the partnership for the given transaction.
d.
Explanation of Solution
Person DA is allowed to join the partnership with 10 % ownership interest by paying cash $30,000 directly to the business. Hence, the total capital for the business is $230,000.
The person DA requires 10% interest of the total capital. Goodwill method is followed.
Journal entry can be
Date | Accounts and Explanation | Post Ref. | Debit ($) | Credit ($) |
Cash | $ 30,000 | |||
Goodwill | $ 70,000 | |||
Person AT's Capital | $ 35,000 | |||
Person P's Capital | $ 21,000 | |||
Person AR's Capital | $ 14,000 | |||
Person DA's Capital | $ 30,000 | |||
(To record the admission of new partner through goodwill method) | ||||
Table: (4)
Working note
Calculate the implied value of the business
Total capital of the business is $230,000
Calculate goodwill
Calculate distribution to other partners
Now, goodwill share to other partners
e.
Prepare the journal entry or entries to be recorded by the partnership for the given transaction.
e.
Explanation of Solution
Person DA is joining new partnership with the cash payment of $12,222 and goodwill method is followed.
Journal entry can be
Date | Accounts and Explanation | Post Ref. | Debit ($) | Credit ($) |
Cash | $ 12,222 | |||
Goodwill | $ 10,000 | |||
Person DA's Capital | $ 22,222 | |||
(To record the admission of partner DA through goodwill method) | ||||
Table: (5)
Working note
Calculate total value of business
Total capital of the business is $212,222. The new partner brings goodwill along with him.
Calculate goodwill
Now, further calculation of goodwill
f.
Prepare the journal entry or entries to be recorded by the partnership for the given transaction.
f.
Explanation of Solution
The current fair value of the business is $280,000 and the total capital of three partners is $200,000. This means that $80,000 in the business is the goodwill of the business. The goodwill is distributed among the partners in their profit sharing ratios. Retiring partner is paid cash after recording the goodwill.
Journal entry can be
Date | Accounts and Explanation | Post Ref. | Debit ($) | Credit ($) |
Goodwill | $ 80,000 | |||
Person AT's Capital | $ 40,000 | |||
Person P's Capital | $ 24,000 | |||
Person AR's Capital | $ 16,000 | |||
(To record the goodwill of the business) | ||||
Person AR's Capital | $ 66,000 | |||
Cash | $ 66,000 | |||
(To record cash paid to the retiring partner) | ||||
Table: (6)
Working note
Calculate distribution of goodwill to partners
Now, goodwill to other partners
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Chapter 14 Solutions
LooseLeaf for Advanced Accounting (Irwin Accounting) - Standalone book
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