Question

Dave, Allen and Matt share profits and losses in the ratio of 50:30:20. Allen withdrew from the partnership December 31. 2014. Capital account balances are as follows:

Dave, Capital $ 80,000

Allen, Capital $ 80,000

Matt, Capital $ 62,000

Required: Prepare the journal entry or entries to record the withdrawal of Allen, given each of the following situations. Assume the bonus method is used to account for the withdrawal.

1. Allen receives $35,000 cash and a $75,000 note from the partnership for his interest.

2. The partnership gives Allen $35,000 cash and equipment with a book value and a fair value of $40,000 for his interest.

3. The partnership gives Allen $100,000 cash for his interest.

Answer 1

Profit sharing ratio of Dave, Allen, and Matt = 50:30:20

After the withdrawal of Allen from partnership, the ratio between Dave and Matt would be 50:20 i.e. 5:2.

Case 1)

Total capital of Allen = $80,000

Allen will receive $35,000 cash and $75,000 note for his partnership interest. Thus, Bonus paid to Allen will be:

Bonus = $35,000 + $70,000 – $80,000

           = $25,000

The bonus given to Allen will be distributed between Dave and Matt in their new ratio i.e. 5:2.

Dave = $25,000*5/7

         = $17,857 (approx.)

Matt = $25,000*2/7

        = $7,143

The entry will be:

Allen Capital A/c                    Dr. $80,000

Dave’s capital A/c                  Dr. $17,857

Matt’s capital A/c                   Dr. $7,143

          To Cash A/c                                          Cr. $35,000

          To Note payable A/c                             Cr. $75,000

(Being bonus paid to Allen)

Case 2)

In this case, Allen is getting $35,000 and equipment of $40,000 while his capital account is $80,000. Thus, he is taking only $75,000 from the partnership and the remaining $5,000 from his stake will be distributed to existing partners in new ratio.

Profit distributed to existing partners = $80,000 – $35,000 – $40,000

                                                            = $5,000

Dave’s share = $5,000*5/7

                     = $3,571 (approx.)

Matt’s share = $5,000*2/7

                    = $1,429

The entry will be:

Allen’s capital A/c                  Dr. $80,000

         To Cash A/c                                                       Cr. $35,000

         To Equipment A/c                                             Cr. $40,000

         To Dave’s capital A/c                                        Cr. $3,571

         To Matt’s capital A/c                                         Cr. $1,429

(Being recording bonus by Allen)

Case 3)

Bonus to Allen = $100,000 – $80,000

                          = $20,000

The bonus will be distributed in the profit-sharing ratio i.e. 5:2

Dave = $20,000*5/7

         = $14,286 (approx.)

Matt = $20,000*2/7

        = $5,714 (approx.)

The entry will be:

Allen’s capital A/c                  Dr. $80,000

Dave’s capital A/c                  Dr. $14,286

Matt’s capital A/c                   Dr. $5,714

                 To Cash A/c                                   Cr. $100,000

(Being recording bonus paid to Allen)