Problem

Profit allocations, admission and withdrawal of partners under the goodwill method. Murp...

Profit allocations, admission and withdrawal of partners under the goodwill method. Murphy and Reinartz have been partners for several years and critical values related to their partnership are as follows:

In 2016, the partnership reported net income of $230,000, and each partner received a $100,000 distribution at year-end. After much discussion, Hepburn was admitted as a partner on January 1, 2017. Hepburn paid $70,000 for a 25% interest in capital. The profit-sharing agreement was modified to also include a salary of $70,000 and a bonus of 5% of net income for Hepburn. The profit and loss percentages were also revised to 30%, 45%, and 25% for Murphy, Reinartz, and Hepburn, respectively. The partnership recognized income of $330,000 during 2017 and distributed $80,000 to each partner during the year. During 2017, Murphy became disappointed with the performance of the company and disagreed with Hepburn’s management style. On January 1, 2018, Murphy sold its interest in the partnership to Reinartz for $200,000. The year 2018 was a transition year for the partnership, and Reinartz and Hepburn agreed to share annual profits of $200,000 equally between themselves. In 2018, Reinartz and Hepburn withdrew $60,000 and $80,000, respectively, from the partnership.

At the beginning of 2019, Reinartz decided to sell its interest in the partnership to the partnership for $350,000. It was agreed that net assets would be adjusted to reflect their fair value and that the sale would be recorded by the method whereby only goodwill traceable to Reinartz would be recognized. It was agreed that the following net asset adjustments should be made:

Immediately after Reinartz sold its interest, Pioso purchased a 40% interest in the partnership by contributing to the partnership land and cash with a combined fair value of $75,000.

Develop a worksheet that shows the various partners’ capital balances from December 31, 2015, through the admission of Pioso. Note that if income is not sufficient to satisfy all provisions of the profit agreement, the profit and loss percentages are to be used to absorb any deficiencies.

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Solutions For Problems in Chapter 14