The Distance Plus partnership has the following capital balances at the beginning of the current year: Tiger (40% of profits and losses) $ 110,000 Phil (40%) 80,000 Ernie (20%) 95,000 Each of the following questions should be viewed independently. If Sergio invests $130,000 in cash in the business for a 30 percent interest, what journal entry is recorded? Assume that the bonus method is used. If Sergio invests $120,000 in cash in the business for a 30 percent interest, what journal entry is recorded? Assume that the bonus method is used. If Sergio invests $75,000 in cash in the business for a 20 percent interest, what journal entry is recorded? Assume that the goodwill method is used.
Solution a:
Total capital of partnership after admission of Sergio = ($110,000 + $80,000 + $95,000) + $130,000
= $415,000
Share of Sergio = 30%
Required capital by Sergio = $415,000*30% = $124,500
Capital contribution by Sergio = $130,000
Bonus capital contributed by Sergio = $130,000 - $124,500 = $5,500
Journal Entries - Distance Plus Partnership | |||
S. No. | Particulars | Debit | Credit |
1 | Cash Dr | $130,000.00 | |
To Sergio's Capital | $130,000.00 | ||
(Being capital introduced by new partner) | |||
2 | Sergio's Capital Dr | $5,500.00 | |
To Tiger's Capital ($5,500*4/10) | $2,200.00 | ||
To Phil's Capital ($5,500*4/10) | $2,200.00 | ||
To Ernie's Capital ($5,500*2/10) | $1,100.00 | ||
(Being bonus capital of new partner distributed in old partners) |
Solution b:
Total capital of partnership after admission of Sergio = ($110,000 + $80,000 + $95,000) + $120,000
= $405,000
Share of Sergio = 30%
Required capital by Sergio = $405,000*30% = $121,500
Capital contribution by Sergio = $120,000
Bonus capital to be given to Sergio = $121,500 - $120,000 = $1,500
Journal Entries - Distance Plus Partnership | |||
S. No. | Particulars | Debit | Credit |
1 | Cash Dr | $120,000.00 | |
To Sergio's Capital | $120,000.00 | ||
(Being capital introduced by new partner) | |||
2 | Tiger's Capital Dr ($1,500*4/10) | $600.00 | |
Phil's Capital Dr ($1,500*4/10) | $600.00 | ||
Ernie's Capital Dr ($1,500*2/10) | $300.00 | ||
To Sergio's Capital | $1,500.00 | ||
(Being old partner share of capital given to new partner) |
Solution c:
Capital contribution by Sergio = $75,000
Share of sergio = 20%
Total required capital of partnership = $75,000 / 20% = $375,000
existing capital of partnership = ($110,000 + $80,000 + $95,000) + $75,000 = $360,000
Goodwill = $375,000 - $360,000 = $15,000
Journal Entries - Distance Plus Partnership | |||
S. No. | Particulars | Debit | Credit |
1 | Cash Dr | $75,000.00 | |
To Sergio's Capital | $75,000.00 | ||
(Being capital introduced by new partner) | |||
2 | Goodwill Dr | $15,000.00 | |
To Tiger's Capital ($15,000*4/10) | $6,000.00 | ||
To Phil's Capital ($15,000*4/10) | $6,000.00 | ||
To Ernie's Capital ($15,000*2/10) | $3,000.00 | ||
(Being recording of goodwill at the time of admission of new partner.) |
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