Renata is the sole proprietor of a company with the following balance sheet:
Assets |
Liabilities |
||||
Cash |
$ 100,000 |
Accounts payable |
$ 50,000 |
||
Inventory |
300,000 |
Loan payable |
100,000 |
||
Plant and equipment, net |
600,000 |
Total liabilities |
150,000 |
||
________ |
Capital |
850,000 |
|||
Total assets |
$1,000,000 |
Total liabilities and capital |
$1,000,000 |
||
The cash and inventory are carried at fair value, and plant and equipment has a fair value of $650,000.
Renata enters into a partnership with Santiago. Renata contributes her company, and the partnership assumes the company’s liabilities. Santiago contributes cash of $250,000. The partners agree to share capital and profits in a 3:2 ratio.
Required
Prepare the balance sheet of the partnership at the date of formation using:
a. The bonus approach
b. The goodwill approach
Valuation of Business:
Particulars | Amount |
Cash | 100000 |
Inventory | 300000 |
Plant and equipment, net | 650000 |
Total | 1050000 |
Accounts Payable | 50000 |
Loan Payable | 100000 |
Net Assets Taken over | 900000 |
2) Ratio of sharing capital:
Renata : 3
Santiago : 2.
Goodwill brought in by Santiago will be calculated as follows:
Required capital contribution for 2/5th share = 900000/3*2 = $ 600000
Capital brought in by Santiago = $ 250000
Goodwill brought in by Santiago = $ 350000
Balance Sheet Under Goodwill Approach:
Assets | Amount | Liabilities | Amount |
Cash | 350000 | Accounts Payable | 50000 |
Inventory | 300000 | Loan Payable | 100000 |
Plant and Equipment, Net | 650000 | Capital | |
Goodwill | 350000 | Renata | 900000 |
Santiago | 600000 | ||
Total | 1650000 | Total | 1650000 |
Balance Sheet Under Bonus Approach:
In this method, goodwill does not appear in the books of account and bonus is shared between all the partners in the new ratio by all partners.
Particulars | Amount |
Cash | 350000 |
Inventory | 300000 |
Plant Equipment, Net | 650000 |
Total | 1300000 |
Accounts Payable | 50000 |
Loan Payable | 100000 |
Net Assets | 1150000 |
Reneta (3) | 690000 |
Santiago (2) | 460000 |
Passing the entries for capital brought in by Santiago and allocating share in capital:
Cash A/c________________Dr. 250000
Reneta's Capital A/c_______Dr. 210000
To Santiago's Capital A/c - 460000
(Being capital brought in by incoming partner)
Assets | Amount | Liabilities | Amount |
Cash | 350000 | Accounts Payable | 50000 |
Inventory | 300000 | Loan Payable | 100000 |
Plant and Equipment, Net | 650000 | Capital | |
Renata | 690000 | ||
Santiago | 460000 | ||
Total | 1300000 | Total | 1300000 |
Renata is the sole proprietor of a company with the following balance sheet: Assets Liabilities Cash...
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