Exercise 1 (LO 3, 4) Entry of a new partner under the goodwill method. Pearson and Murphy have partner capital balances, at book value, of $45,000 and $65,000 as of Decem- ber 31. Pearson is allocated 60% of profits or losses, and Murphy is allocated the balance. The partners believe that tangible net assets have a market value in excess of book value in the amount of $30,000 net. The $30,000 is allocated as follows: Book Value Market Value $120,000 $102,000 258,000 30,000 Accounts receivable 200,000 20,000 Inventory .... Warranty obligations They are considering admitting Warner to the partnership in exchange for total considera- tion of $84,000 cash. In exchange for the consideration, Warner will receive a 30% interest in capital and a 35% interest in profits. 1. Prepare the entries associated with the admission of Warner to the partnership under the goodwill method. 2. If the goodwill suggested by the admission of Warner proved to be worthless, determine by how much Warner would be harmed.
Exercise 1 (LO 3, 4) Entry of a new partner under the goodwill method. Pearson and Murphy have partner capital balances, at book value, of $45,000 and $65,000 as of Decem- ber 31. Pearson is allocated 60% of profits or losses, and Murphy is allocated the balance. The partners believe that tangible net assets have a market value in excess of book value in the amount of $30,000 net. The $30,000 is allocated as follows: Book Value Market Value $120,000 $102,000 258,000 30,000 Accounts receivable 200,000 20,000 Inventory .... Warranty obligations They are considering admitting Warner to the partnership in exchange for total considera- tion of $84,000 cash. In exchange for the consideration, Warner will receive a 30% interest in capital and a 35% interest in profits. 1. Prepare the entries associated with the admission of Warner to the partnership under the goodwill method. 2. If the goodwill suggested by the admission of Warner proved to be worthless, determine by how much Warner would be harmed.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Concept explainers
Partnership Accounting
A partnership is a kind of arrangement between two or more people whereby they agree to manage the business operations and share its profits and losses in an agreed ratio between them. The agreement that is drafted and signed by the partners of the firm is termed as partnership deed and contains various important clauses agreed between the partners such as profit/loss sharing, interest on capital, remuneration allocation of each partner, drawings, admission of a new partner, etc.
Partner Admission and Withdrawal
A partnership is a kind of arrangement between two or more people whereby they agree to manage the business operations and share its profits and losses in an agreed ratio between them. The agreement that is drafted and signed by the partners of the firm is termed as a partnership deed and contains various important clauses agreed between the partners such as profit/loss sharing, interest on capital, remuneration allocation of each partner, drawings of a partner, etc.
Question
Transcribed Image Text:Exercise 1 (LO 3, 4) Entry of a new partner under the goodwill method. Pearson
and Murphy have partner capital balances, at book value, of $45,000 and $65,000 as of Decem-
ber 31. Pearson is allocated 60% of profits or losses, and Murphy is allocated the balance. The
partners believe that tangible net assets have a market value in excess of book value in the
amount of $30,000 net. The $30,000 is allocated as follows:
Book Value
Market Value
Accounts receivable
Inventory ....
Warranty obligations
$120,000
200,000
20,000
$102,000
258,000
30,000
They are considering admitting Warner to the partnership in exchange for total considera-
tion of $84,000 cash. In exchange for the consideration, Warner will receive a 30% interest in
capital and a 35% interest in profits.
1. Prepare the entries associated with the admission of Warner to the partnership under the
goodwill method.
2. If the goodwill suggested by the admission of Warner proved to be worthless, determine by
how much Warner would be harmed.
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