Following is the current balance sheet for a local partnership of doctors:
Cash and current | Liabilities.................. $ 40,000 |
assets................... $ 30,000 | A, capital.................. 20,000 |
Land...................... 180,000 | B, capital.................. 40,000 |
Building and equipment | C,capital.................. 90,000 |
(net)..................... 100,000 | D, capital.................. 120,000 |
Totals................... $310,000 | Totals................... $310,000 |
The following questions represent independent situations:
- a. E is going to invest enough money in this partnership to receive a 25 percent interest. No
goodwill or bonus is to be recorded. How much should E invest? - b. E contributes $36,000 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? - c. E contributes $42,000 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?
- d. E contributes $55,000 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?
- e. C retires from the partnership and, as per the original partnership agreement, is to receive cash equal to 125 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?
a.
Find the amount that E should invest to receive a 25 percent interest.
Answer to Problem 27P
E should invest $90,000 to receive a 25 percent interest.
Explanation of Solution
Calculate E’s investment
Now, further calculation
E should invest $90,000 to receive a 25 percent interest.
b.
Find the individual capital balances after E makes the investment of $36,000.
Explanation of Solution
Individual capital balances after E makes the investment of $36,000
Particulars | A | B | C | D | E |
Original Capital | $ 20,000 | $ 40,000 | $ 90,000 | $ 120,000 | $ 0 |
Goodwill | $ 16,200 | $ 5,400 | $ 21,600 | $ 10,800 | $ 0 |
Investment | $ - | $ - | $ - | $ 0 | $ 36,000 |
Capital balance | $ 36,200 | $ 45,400 | $ 111,600 | $ 130,800 | $ 36,000 |
Working note
Calculate the implied value of the partnership
Calculate total capital after investment of E
Calculate goodwill
Calculate distribution of goodwill
Now, goodwill share of other partners
c.
Find the individual capital balances after E makes the investment of $42,000.
Explanation of Solution
Individual capital balances after E makes the investment of $42,000
Particulars | A | B | C | D | E |
Original Capital | $ 20,000 | $ 40,000 | $ 90,000 | $ 120,000 | $ - |
Goodwill | $ 6,375 | $ 6,375 | $ 6,375 | $ 6,375 | $ - |
Investment | $ - | $ - | $ - | $ 0 | $ 42,000 |
Capital balance | $ 26,375 | $ 46,375 | $ 96,375 | $ 126,375 | $ 42,000 |
Working note
Calculate the implied value of the partnership
Calculate total capital after investment of E
Calculate goodwill
Now, further calculate goodwill
Goodwill is distributed equally among all the partners
d.
Find the individual capital balances after E makes the investment of $55,000.
Explanation of Solution
Individual capital balances after E makes the investment of $55,000
Particulars | A | B | C | D | E |
Original Capital | $ 20,000 | $ 40,000 | $ 90,000 | $ 120,000 | $ - |
Investment | $ - | $ - | $ - | $ - | $ 55,000 |
Bonus | $ (1,000) | $ (3,000) | $ (2,000) | $ (4,000) | $ 10,000 |
Capital balance | $ 19,000 | $ 37,000 | $ 88,000 | $ 116,000 | $ 65,000 |
Working note
Calculate the implied value of the partnership
Calculate total capital after investment of E
Calculate E’s share in total capital
Capital share of E is $65,000 and he invested $55,000. The difference of $10,000 is bonus invested by all the other partners in their profit sharing ratios.
Calculate distribution of bonus
Now, goodwill share of other partners
e.
Find the individual capital balances of the remaining partners after the withdrawal of C.
Explanation of Solution
Calculate individual capital balances of the remaining partners after the withdrawal of C
Particulars | A | B | C | D |
Original Capital | $ 20,000 | $ 40,000 | $ 90,000 | $ 120,000 |
Bonus | $ (7,500) | $ (7,500) | $ 22,500 | $ (7,500) |
Payment | $ - | $ - | $ - | |
Total | $ 12,500 | $ 32,500 | $ (112,500) | $ 112,500 |
Capital balance of C is $90,000 and he has to collect cash equal to 125% of final capital, balance.
Working note
Calculate cash to be collected
No goodwill is recognised means bonus method is followed and bonus amount will be given to C
Calculate bonus
Profits and losses are equally distributed. Hence, contribution of bonus is also equal.
Calculate distribution of bonus by each partner
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Chapter 9 Solutions
EBK FUNDAMENTALS OF ADVANCED ACCOUNTING
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