Question

A partnership has the following account balances: Cash $50,000; Other Assets $600,000; Liabilities $240,000; Nixon, Capital (50 percent of profits and losses) $200,000; Hoover, Capital (20 percent) $120,000; and Polk, Capital (30 percent) $90,000. Each of the following questions should be viewed as an independent situation: Grant invests $80,000 in the partnership for an 18 percent capital interest. Goodwill is to be recognized. What are the capital accounts thereafter? Grant invests $100,000 in the partnership to get a 20 percent capital balance. Goodwill is not to be recorded. What are the capital accounts thereafter?

Answer 1

Answer:

a) Nixon 200,000

  Hoover 120,000

  Polk       90,000

  Grant    90,000

              500,000

b)

Nixon  $ 195,000.00  

Polk  $  117,000.00  

Hoover  $  88,000.00  

Grant  $ 100,000.00  

         $ 500,000.00  

Explanation:

Nixon Capital         200,000

Hoover Capital       120,000

Polk Capital             90,000

If grants invest for 80,000 and get 18% then:

80,000 / 0.18 = 444,444 value of the company

200,000 + 120,000 + 90,000 + 80,000 = 490,000 capital after

As the value of the company is lower the new partner is providing goodwill to the company that's why there is a goodwill to be recognized.

Grant investemnt = 18% ( original capital + contribution + goodwill)

80,000 + goodwill = 0.18(410,000 + 80,000 + goodwill)

goodwill - 0.18 goodwill = 88,200 - 80,000

goodwill = 8,200 / (1 - 0.18) = 10,000

Grant investment: 80,000 cash + 10,000 goodwill

If invest 100,000 and no goodwill:

100,000 / 0.20 = 500,000

then new capital:

410,000 + 100,000 = 510,000

Difference: 10,000

As no goodwill is recognized the assets weere overvalued and we must recognize a loss:

10,000 x 50% =  5,000 Nixon

           x 30% =   3,000 Polk

           x 20% =   2,000 Hoover