Advanced Accounting - Standalone book
Advanced Accounting - Standalone book
12th Edition
ISBN: 9780077862220
Author: Joe Ben Hoyle, Thomas Schaefer, Timothy Doupnik
Publisher: McGraw-Hill Education
Question
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Chapter 14, Problem 31P

a.

To determine

Prepare journal entries to record the preceding transactions on the assumption that the bonus method is used.

a.

Expert Solution
Check Mark

Explanation of Solution

Journal entries to record the preceding transactions on the assumption that the bonus method is used

DateAccounts and ExplanationPost Ref.Debit ($)Credit ($)
2013    
1-JanBuilding  $   52,000 
 Equipment  $   16,000 
 Cash  $   12,000 
 Person R's Capital   $   40,000
 Person OD's Capital   $   40,000
     
 (To record the initial investment)   
     
31-DecPerson R's Capital  $   22,000 
 Income Statement   $   10,000
 Person OD's Capital   $   12,000
     
 (To record the transfer of interest and partnership income to person D)   
     
2014    
1-JanCash  $   15,000 
 Person OD's Capital  $        300 
 Person R's Capital  $     1,700 
 Person TD's Capital   $   17,000
     
 (To record the admission of new partner)   
     
31-DecPerson OD's Capital  $   10,340 
 Person R's Capital  $     5,000 
 Person TD's Capital  $     5,000 
 Person OD's Drawings   $   10,340
 Person R's Drawings   $     5,000
 Person TD's Drawings   $     5,000
     
 (To record the closing entry of drawings by reducing the amount from capital accounts)   
     
31-DecIncome Statement  $   44,000 
 Person OD's Capital   $   16,940
 Person R's Capital   $   16,236
 Person TD's Capital   $   10,824
     
 (To record the allocation of net income)   
     
2015    
1-JanPerson TD's Capital  $   22,824 
 Person JP's Capital   $   22,824
     
 (To record the sale of person TD's share to person JP)   
     
31-DecPerson OD's Capital  $   11,660 
 Person R's Capital  $     5,507 
 Person JP's Capital  $     5,000 
 Person OD's Drawings   $   11,660
 Person R's Drawings   $     5,507
 Person JP's Drawings   $     5,000
     
 (To record the closing entry of drawings by reducing the amount from capital accounts)   
     
31-DecIncome Statement  $   61,000 
 Person OD's Capital   $   20,810
 Person R's Capital   $   24,114
 Person JP's Capital   $   16,076
     
 (To record the allocation of net income)   
     
2016    
1-JanPerson JP's Capital  $   33,900 
 Person OD's Capital  $        509 
 Person R's Capital  $     2,881 
 Cash   $   37,290
     
 (To record the withdrawal of person JP)   
     

Table: (1)

Person OD is entitled to interest on capital of $8,000 which is 20% of $40,000. Person OD is entitled to have 15% of $10,000 which is $1,500 or $4,000. The larger amount is preferred so the larger amount is $4,000. Hence, total income for person OD is $12,000.

On January 1, 2014, a new partner person TD joined the firm by contributing cash of $15,000 with 20% interest in the firm. Partners are allowed to withdraw drawings as $5,000 or 20% of beginning capital balance of the year, whichever is larger. Net income for 2014 is $44,000 distributed among the partners after providing interest and salary in their profit sharing ratios.

The drawings are deducted from the capital balances of the partners.

On Jan 1, 2015, person TD sells his partnership to person JP. Person JP directly pays $46,000 to person TD. Drawings are reduced from capital balances and accounts are closed. Net income of $61,000 is distributed among the partners after deducting the salary and interest.

Person JP withdraws from the partnership and is paid the capital balance plus 10%. 10% is contributed by the partners in their profit sharing ratio.

Working note

Calculate total capital of the firm after the loss and new admission:

Totalcapital=$80,000$10,000+$15,000=$95,000$10,000=$85,000

Person TD has 20% share in the business.

Calculate the amount of share of person TD in the total capital:

ShareofpersonTD=$85,000×20%=$17,000

Person TD is bringing $15,000 in cash. $2,000 of his share is contributed by all other partners in their profit sharing ratios.

Calculate distribution of bonus from the partners:

BonusshareofpersonOD=$2,000×15%=$300BonusshareofpersonR=$2,000×85%=$1,700

Calculate the beginning capital balance for person OD:

BeginningcapitalbalanceforpersonOD=Initialcapital+InterestandsalaryBonustopersonTD=$40,000+$12,000$1,700=$52,000$300=$51,700

Calculate the amount of drawings of person OD:

Drawings=$51,700×20%=$10,340

Income allocation for the year 2014

ParticularsPerson ODPerson RPerson TDTotal
     
Net income    $          44,000
Interest on capital $       10,340   $          10,340
Net income after interest    $          33,660
Salary $         6,600   $            6,600
Net income after salary    $          27,060
Distributed among partners  $        16,236 $       10,824 $          27,060
Total $       16,940 $        16,236 $       10,824 $                   0

Table: (2)

Calculate ending capital balances of the partners in the year 2014:

ParticularsPerson ODPerson RPerson TDTotal
     
Beginning balance $    40,000 $  40,000  $    80,000
Interest and salary $    12,000 $ (22,000)  $  (10,000)
Person TD's investment $        (300) $  (1,700) $   17,000 $    15,000
Drawings $   (10,340) $  (5,000) $   (5,000) $  (20,340)
Income allocation $    16,940 $  16,236 $   10,824 $    44,000
Ending balances $    58,300 $  27,536 $   22,824 $  108,660

Table: (3)

Income allocation for 2015

ParticularsPerson ODPerson RPerson JPTotal
     
Net income    $          61,000
Interest on capital $       11,660   $          11,660
Net income after interest    $          49,340
Salary $         9,150   $            9,150
Net income after salary    $          40,190
Distributed among partners  $        24,114 $       16,076 $          40,190
Total $       20,810 $        24,114 $       16,076 $                   0

Table: (4)

Calculate ending capital balance of person JP:

Endingcapitalbalance=$22,824$5,000+$16,076=$17,824+$16,076=$33,900

b.

To determine

Prepare journal entries to record the preceding transactions on the assumption that the goodwill method is used.

b.

Expert Solution
Check Mark

Explanation of Solution

Journal entries to record the preceding transactions on the assumption that the goodwill method is used

DateAccounts and ExplanationPost Ref.Debit ($)Credit ($)
2013    
1-JanBuilding  $   52,000 
 Equipment  $   16,000 
 Cash  $   12,000 
 Goodwill  $   80,000 
 Person R's Capital   $   80,000
 Person OD's Capital   $   80,000
     
 (To record the initial investment)   
     
31-DecPerson R's Capital  $   30,000 
 Income Statement   $   10,000
 Person OD's Capital   $   20,000
     
 (To record the transfer of interest and partnership income to person D)   
     
2014    
1-JanCash  $   15,000 
 Goodwill  $   22,500 
 Person TD's Capital   $   37,500
     
 (To record the admission of new partner)   
     
31-DecPerson OD's Capital  $   20,000 
 Person R's Capital  $   10,000 
 Person TD's Capital  $     7,500 
 Person OD's Drawings   $   20,000
 Person R's Drawings   $   10,000
 Person TD's Drawings   $     7,500
     
 (To record the closing entry of drawings by reducing the amount from capital accounts)   
     
31-DecIncome Statement  $   44,000 
 Person OD's Capital   $   26,600
 Person R's Capital   $   10,440
 Person JP's Capital   $     6,960
     
 (To record the allocation of net income)   
     
2015    
1-JanGoodwill  $   26,588 
 Person D's Capital   $     3,988
 Person R's Capital   $   13,560
 Person TD's Capital   $     9,040
    
 (To record the goodwill by purchase of person TD's share)   
     
1-JanPerson TD's Capital  $   46,000 
 Person JP's Capital   $   46,000
     
(To record the sale of person TD's share to person JP)   
    
31-DecPerson OD's Capital  $   22,118 
 Person R's Capital  $   12,800 
 Person JP's Capital  $     9,200 
 Person OD's Drawings   $   22,118
 Person R's Drawings   $   12,800
 Person JP's Drawings   $     9,200
     
 (To record the closing entry of drawings by reducing the amount from capital accounts)   
     
31-DecIncome Statement  $   61,000 
 Person OD's Capital   $   31,268
 Person R's Capital   $   17,839
 Person JP's Capital   $   11,893
     
 (To record the allocation of net income)   
     
2016    
1-JanPerson JP's Capital  $   53,562 
 Cash   $   53,562
     
 (To record the withdrawal of person JP)   
     

Table: (5)

Working note

Calculate implied value of the business:

Impliedvalue=$15,00020%=$15,000×10020=$1,500,00020=$75,000

Calculate total value of the business:

Totalvalue=$80,000+$20,000+$80,000$30,000=$100,000+$50,000=$150,000

Calculate goodwill:

$15,000+Goodwill=20%($150,000+$15,000+Goodwill)$15,000+Goodwill=20%($165,000+Goodwill)$15,000+Goodwill=$33,000+0.20GoodwillGoodwill0.20Goodwill=$33,000$15,000

Now, goodwill is calculated as:

0.8Goodwill=$18,000Goodwill=$18,0000.8Goodwill=$22,500

Calculate the capital of person OD:

CapitalofpersonOD=$80,000+$16,000+$4,000=$100,000

Income allocation for the year 2014:

ParticularsPerson ODPerson RPerson TDTotal
     
Net income    $          44,000
Interest on capital $       20,000   $          20,000
Net income after interest    $          24,000
Salary $         6,600   $            6,600
Net income after salary    $          17,400
Distributed among partners  $        10,440 $         6,960 $          17,400
Total $       26,600 $        10,440 $         6,960 $                   0

Table: (6)

Calculate ending capital balances:

ParticularsPerson ODPerson RPerson TDTotal
     
Beginning balance $    80,000 $  80,000  $  160,000
Interest and salary $    20,000 $ (30,000)  $  (10,000)
Person TD's investment   $   37,500 $    37,500
Drawings $   (20,000) $ (10,000) $   (7,500) $  (37,500)
Income allocation $    26,600 $  10,440 $     6,960 $    44,000
Ending balances $  106,600 $  50,440 $   36,960 $  194,000

Table: (7)

Calculate the excess amount paid by person JP:

Excessamount=$46,000$36,960=$9,040

Now, person TD is getting the profit share of 40% of 85% which is 34%.

Calculate goodwill:

Goodwill=$9,04034%=$9,040×10034=$904,00034=$26,588

Goodwill is distributed to partners in their profit sharing ratio.

Calculate capital of person OD after goodwill:

CapitalofpersonOD=$106,600+$3,988=$110,588CapitalofpersonR=$50,440+$13,560=$64,000

Now, capital of person JP after goodwill:

CapitalofpersonJP=$36,960+$9,040=$46,000

Income allocation of the year 2015:

ParticularsPerson ODPerson RPerson JPTotal
     
Net income    $          61,000
Interest on capital $       22,118   $          22,118
Net income after interest    $          38,882
Salary $         9,150   $            9,150
Net income after salary    $          29,732
Distributed among partners  $        17,839 $       11,893 $          29,732
Total $       31,268 $        17,839 $       11,893 $                   0

Table: (8)

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