Question

The Distance Plus partnership has the following capital balances at the beginning of the current year: Tiger (408 of profits and Losses) Phil (408) Ernie (201) $170,000 140.000 155,000 Each of the following questions should be viewed independently. a. If Sergio Invests $210,000 In cash in the business for a 30 percent interest, what journal entry is recorded? Assume that the bonus method is used. b. If Sergio Invests $175,000 in cash in the business for a 30 percent interest, what journal entry is recorded? Assume that the bonus method is used. c. If Sergio Invests $204,000 in cash in the business for a 30 percent interest, what journal entry is recorded? Assume that the goodwill method is used. Complete this question by entering your answers in the tabs below. Required Required Required If Sergio invests $210,000 in cash in the business for a 30 percent interest, what journal entry is recorded? Assume that the bonus method is used. (If no entry is required for a transaction/event, select "No journal entry required in the first account field.) Show less

Answer 1

1
	Under Bonus method,
	Capital of new partnership is equal to	existing capital before admission of new partner+capital contributed by new partner
	Therefore,
	Tiger	170000
	Phil	140000
	Earnie	155000
	Sergio	210000
		675000
	Percentage share of Sergio	30%
	Book Value of Sergio Capital	675000*30%
		202500
	Actual Capital contributed by Sergio	210000
	Bonus	210000-202500
		7500
	Bonus of $7500, will be distributed to exisiting partners in profit sharing ratio
	Tiger(40%)	3000
	Phil(40%)	3000
	Earnie(20%)	1500
	Journal entry	Dr.	Cr.
	Cash	210000
	Capital Tiger		3000
	Capital Phil		3000
	Capital Earnie		1500
	Capital Sergio		202500
	(bonus credited to exisiting partner, new partner's capital recorded at book value)

2

Capital of new partnership is equal to	existing capital before admission of new partner+capital contributed by new partner
Therefore,
Tiger	170000
Phil	140000
Earnie	155000
Sergio	175000
	640000
Percentage share of Sergio	30%
Book Value of Sergio Capital	640000*30%
	192000
Actual Capital contributed by Sergio	175000
Bonus	-17000
In the above case, investment is made at less than book value, it means bonus paid to new partner will be absorbed by exsisting partners in p&l ratio
Tiger(40%)	-6800
Phil(40%)	-6800
Earnie(20%)	-3400
Journal entry	Dr.	Cr.
Cash	175000
Capital Tiger	6800
Capital Phil	6800
Capital Earnie	3400
Capital Sergio		192000
(bonus debited to exisiting partners, new partner's capital recorded at book value)

3.

Under goodwill method
Capital allocated to new partner in partnership should not be less than actual capital contributed by new partner
and the investment made greater than book value is recorded in goodwill account
now,
Capital contributed by Sergio	204000
Percentage interest		30%
Implied total capital of new partnership	204000/30%
				680000
actual total capital of new partnership
Tiger	170000
Phil	140000
Earnie	155000
Sergio	204000
	669000
Goodwill	680000-669000
	11000
The goodwill be allocated to exsisting partners in p$l ratio
Tiger(40%)	4400
Phil(40%)	4400
Earnie(20%)	2200
Journal entry	Dr.	Cr.
Cash	204000
Goodwill	11000
Capital Tiger		4400
Capital Phil		4400
Capital Earnie	2200
Capital Sergio	204000