Question

3. Johnston and Dune have the following capital balances of $160,000 and 130,000. After operating for five years on their own, they decide to let Smith join the partnership for $80,000 and 20% ownership. In addition, the Articles of partnership state that Johnston and Dune will split proceeds on a 70 percent (Johnston) and 30 percent (Dune) basis. The cash paid by Smith with go directly to the business. Create the journal entry using the goodwill method, show your work. 4. The following partners began a partnership and have the following capital balances: Spartan, $80,000, David, $150,000, and Franklin, $40,000. The articles of partnership stipulate that profits and losses be assigned in the following manner: • Each partner is allocated 10 percent of their total capital balance. Spartan is granted a compensation allowance of $10,000 for work done at the business. Any remaining profits and losses are allocated on a 3:5:2 basis (Spartan, 30%, David 50%, and Franklin 20%). Assume net income is $220,000. • Required: Create an allocation of net income schedule.

Answer 1

First Question

Given:

Johnston capital             160,000

Dune Capital                   130,000

Smith capital                   80,000 for 20 %ownership

Total New capital 160,000+130,000+80000

                                         =370,000

20 percent of the new capital  370,000*20/100

To the smith Capital Account  = 74,000

Premium Goodwill Paid by Smith 80,000-74,000

= 6000

Goodwill to be distributed according to articles of partnership

Johnston capital a/c       4200 that is 70 percent of proceeds

Dune capital A/c             1800 that is 30 percent of the proceeds

Journal Entries

When Cash is brought by Smith

	Dr	Cr
Cash	80,000
Smith Capital Account		74,000
Goodwill Premium		6000

Journal entry to Distribute goodwill
	Dr	Cr
Goodwill Premium	6000
Johnston Capital A/c		4200
Dune Capital A/c		1800