Question

The Distance Plus partnership has the following capital balances at the beginning of the current year: Tiger (40% of profits and losses) $ 150,000 Phil (30%) 120,000 Ernie (30%) 135,000 Each of the following questions should be viewed independently.

Required:
a. If Sergio invests $190,000 in cash in the business for a 20 percent interest, what journal entry is recorded?
b. If Sergio invests $100,000 in cash in the business for a 20 percent interest, what journal entry is recorded? Assume that the bonus method is used.
c. If Sergio invests $102,000 in cash in the business for a 20 percent interest, what journal entry is recorded? Assume that the goodwill is used.

Answer 1

Answer:

A. Total Capital After Investment = 150000+120000+135000+190000 = 595000

Sergio's Share = 595000*20% = 119000

Bonus Distributed to Existing Partners = 190000 - 119000 = 71,000

                                Journal Entry

Particulars                                  Debit     Credit

Cash                                          190,000

Sergio, Capital                                          119,000

Tiger, Capital  (71,000*40%)                    28,400

Phil, Capital  (71,000*30%)                       21,300

Ernie, Capital (71,000*30%)                      21,300

B. Total Capital After Investment = 150000+120000+135000+100000 = 505000

Sergio's Share = 505000*20% = 101000

Bonus Taken from Existing Partners = 101000 - 100000 = 100

                                Journal Entry

Particulars                                Debit     Credit

Cash                                        100000  

Tiger, Capital (1000*40%)         400  

Phil, Capital (1000*30%)            300  

Ernie, Capital (1000*30%)         300  

Sergio, Capital                                          101000

C. Total Capital After Investment = 150000+120000+135000+102000 = 507000

Implied Value of Business = 102000/20% = 510000

Goodwill = 510000 - 507000 = 3000

                                Journal Entry

Particulars                            Debit    Credit

Goodwill                               3000  

Tiger, Capital (3000*40%)                  1200

Phil, Capital (3000*30%)                     900

Ernie, Capital (3000*30%)                   900

                                Journal Entry

Particulars               Debit     Credit

Cash                       102000

Sergio, Capital                      102000