Question

Admission of New Partner
Following is the condensed balance sheet of Martinez, O'Neill and Clemens, partners who share profits or losses in the ratio of 2 : 3 : 5.

Cash	$28,800	Liabilities	$120,000
Other assets	451,200	Capital - Martinez	64,800
		Capital - O'Neill	105,600
		Capital - Clemens	189,600
Total assets	$480,000	Total liabilities and capital	$480,000

(a) Assume that the partnership's assets and liabilities are fairly valued as shown. The partners wish to admit Jeter as a partner with a 30 percent interest in capital, profits, and losses. They require Jeter to invest an amount such that bonus or goodwill adjustments are not needed. How much should Jeter invest for the 30 percent share? (Round your answer to two decimal places.)
$Answer

(b) Assume instead that the existing partners, all of whom contemplate retirement relatively soon, decide to sell Jeter 30 percent of their respective partnership interests for a total payment of $126,000. This payment will be made proportionately to Martinez, O'Neill, and Clemens. The partners agree that implied goodwill is to be recorded prior to the transaction with Jeter. What are the capital balances of the four partners after the transaction with Jeter?

Balances After Acquisition
Martinez	Answer
O'Neill	Answer
Clemens	Answer
Jeter	Answer

Answer 1

Solution :

a)  Assume that the partnership's assets and liabilities are fairly valued as shown. The partners wish to admit Jeter as a partner with a 30 percent interest in capital, profits, and losses. They require Jeter to invest an amount such that bonus or goodwill adjustments are not needed. How much should Jeter invest for the 30 percent share? (Round your answer to two decimal places.)

Answer

Capital Structure Before Admission Of Jeter Partners Amt In $ Martinez 64,800 O'Neill 105,600 Clemens 189,600 Total 360,000 New Partnership Proportion Jeter Others Total 30 154,285.71 (30% of 514,285.71) 70 360,000.00 100 514,285.71 Total 360000*100/70 514,285.71 Capital Structure After Admission Of Jeter Partners Amt in $ Martinez 64,800.00 O'Neill 105,600.00 Clemens 189,600.00 Jeter 154,285.71 Total 514,285.71

b) Assume instead that the existing partners, all of whom contemplate retirement relatively soon, decide to sell Jeter 30 percent of their respective partnership interests for a total payment of $126,000. This payment will be made proportionately to Martinez, O'Neill, and Clemens. The partners agree that implied goodwill is to be recorded prior to the transaction with Jeter. What are the capital balances of the four partners after the transaction with Jeter?

Answer

Capital Structure Before Admission Of Jeter Partners Amt in $ 30% Share Martinez 64,800 19,440 O'Neill 105,600 31,680 Clemens 189,600 56,880 Total 360,000 108,000 70% Share 45,360 73,920 132,720 252,000 Jeter Share 30% Jeter Paid 108,000 126,000 (18,000) Excess towards goodwill which is proportionately distributed in ratio of 2:3:5 among old partners Goodwill share : Partners Goodwill in $ Martinez 3,600 O'Neill 5,400 Clemens 9,000 Total 18,000 Capital Structure After Admission of Jeter Before Jeter 30% Sold To Jeter Goodwill Net Capital Partners Admission (i) (ii) (i-ii-iii) Martinez 64,800 19,440 3,600 48,960 O'Neill 105,600 31,680 5,400 79,320 Clemens 189,600 56,880 9,000 141,720 Jeter (108,000) 108,000 Total 360,000 18,000 378,000