Chapter 12, Problem 5APSA

To determine

Concept Introduction:

Admission and Withdrawal of Partner

When a new partner is admitted to the existing partnership then it is called a admission of a partner. Partnership is reconstituted after admission of the partner with new agreement.

When a partner leaves a partnership firm then it is called withdrawal of the partner, He may be permitted to withdraw assets either equal to or less than his share from the firm.

Requirement 1-

To prepare:

Journal entries to record Benson’s withdrawal.

Answer to Problem 5APSA

Solution:

S. No.	Accounts titles and Description	Debit ($)	Credit ($)
1	B's Capital	160,000
	N's Capital		160,000
	(To record the sale of Interest of B to N)
2	B's Capital	138,000
	S's Capital		138,000
	(To record the B's Interest to S)
3	B's Capital	138,000
	Cash		138,000
	(To record withdrawal of B)
4	B's Capital	138,000
	M's Capital	28,500
	L's Capital	47,500
	Cash		214,000
	(To record withdrawal of B with bonus)
5	B's Capital	138,000
	Accumulated Depreciation- Equipment	23,200
	M's Capital		22,950
	L's Capital		38,250
	Equipment		70,000
	Cash		30,000
	(To record the withdrawal of B with bonus to old partners)

Explanation of Solution

Entry 1- Benson sells her interest to North worth $160,000.

In this entry, Benson had sold her interest so her capital account will be debited with $160,000. And North is new partner in the partnership firm so his capital will be added in partnership, thus, his capital account will be credited.

Entry 2 $–$ Benson gives her interest to son-in law Schmidt.

In this entry, Benson gives her interest so her capital will be debited with $138,000. And Schmidt is new partner in the partnership firm so his capital will be added in partnership, thus, his capital account will be credited.

Entry 3 $–$ Benson is paid in cash.

In this entry, Benson is paid her share in cash so her capital will be debited with $138,000 and cash will be credited.

Entry 4 $–$ Benson is paid in cash with bonus.

In this entry Benson is paid her share along with bonus in cash. So in this case her share amount i.e. $138,000 will be debited with her capital account and remaining amount i.e. $78,000 ($216,000-$138,000) will be taken from other partner’s capital in their profit sharing ratio.

Amount to be withdrawal from other partner’s capital is calculated as follows-

M’s capital-

$\begin{array}{l}M’sCapital=\left(\$214,000-\$138,000\right)\times \frac{3}{8}\\ M’sCapital=\$76,000\times \frac{3}{8}\\ M’sCapital=\$28,500\end{array}$

L’s Capital-

$\begin{array}{l}L’sCapital=\left(\$214,000-\$138,000\right)\times \frac{5}{8}\\ L’sCapital=\$76,000\times \frac{5}{8}\\ L’sCapital=\$47,500\end{array}$

Entry 5 $–$ Benson is paid in cash with bonus to other partners.

In this entry Benson is paid her share in cash along with equipment. So in this case her share amount i.e. $138,000 will be debited with her capital account and equipment will also be debited.

Given:

B’s Capital Account - $138,000

Accumulated Depreciation $–$ Equipment - $23,200

Equipment - $70,000

Cash - $30,000

Bonus to other partners is calculated as follows-

M’s Capital-

$\begin{array}{l}M’sCapital=\text{ [\$138,000-}\left(\$70,000-\$23,200+\$30,000\right)\text{] }\times \frac{3}{8}\\ M’sCapital=\$61,200\times \frac{3}{8}\\ M’sCapital=\$22,950\end{array}$

L’s Capital-

$\begin{array}{l}L’sCapital=\text{ [\$138,000-}\left(\$70,000-\$23,200+\$30,000\right)\text{] }\times \frac{5}{8}\\ L’sCapital=\$61,200\times \frac{5}{8}\\ L’sCapital=\$38,250\end{array}$

To determine

Requirement 2-

To prepare:

Journal Entry to record Rhode’s Entry

Answer to Problem 5APSA

Solution:

S. No.	Accounts titles and Description	Debit ($)	Credit ($)
1	Cash	200,000
	R's Capital		200,000
	(To record admission of partner R)
2	Cash	145,000
	M's Capital	12,375
	B's Capital	8,250
	L's Capital	20,625
	R Capital		186,250
	(To record R's admission and Bonus)
3	Cash	262,000
	M's Capital		13,950
	B's Capital		9,300
	L's Capital		23,250
	R Capital		215,500
	(To record R's admission and Bonus to old)

Explanation of Solution

Entry 1- Rhode invests $200,000.

Rhode is new partner in the partnership firm so his capital will be added in partnership, thus, his capital account will be credited, and cash will be debited.

$\begin{array}{l}Totalamountofcapital=M’sCapital+B’sCapital+L’sCapital\hfill \\ Totalamountofcapital=\$168,000+\$138,000+\$294,000\hfill \\ Totalamountofcapital=\$600,000\hfill \end{array}$

$\begin{array}{l}NewcapitalafteradmissionofRhode=\$600,000+\$200,000\hfill \\ NewcapitalafteradmissionofRhode=\$800,000\hfill \\ \begin{array}{l}\\ Rhode’sShare=\$800,000\times 25\%\end{array}\hfill \\ Rhode’sShare=\$200,000\hfill \end{array}$

Entry 2- Rhode invests $145,000.

$\begin{array}{l}R’sshareofcapital=\left(\$600,000+\$145,000\right)\times 25\%\\ R’sshareofcapital=\$745,000\times 25\%\\ R’sshareofcapital=\$186,250\end{array}$

Rhode is new partner in the partnership firm so his capital will be added in partnership, thus, his capital account will be credited with $186,250.

Remaining amount is bonus part which will be taken from old partners in their profit sharing ratio.

Remaining amount = ($186,250 - $145,000) = $41,250

Calculation of bonus from other partners-

$\begin{array}{l}\begin{array}{l}M’Capital=\$41,250\times \frac{3}{10}=\$12,375\hfill \\ B’Capital=\$41,250\times \frac{2}{10}=\$8,250\hfill \end{array}\\ L’Capital=\$41,250\times \frac{5}{10}=\$20,625\end{array}$

Entry 3- Rhode invests $262,000.

$\begin{array}{l}R’sshareofcapital=\left(\$600,000+\$262,000\right)\times 25\%\\ R’sshareofcapital=\$862,000\times 25\%\\ R’sshareofcapital=\$215,500\end{array}$

Rhode is new partner in the partnership firm so his capital will be added in partnership, thus, his capital account will be credited with $215,500.

Remaining amount is bonus part which will be given to old partners in their profit sharing ratio.

Remaining amount = ($262,000 - $215,500) = $46,500

Calculation of bonus to other partners-

$\begin{array}{l}\begin{array}{l}M’Capital=\$46,500\times \frac{3}{10}=\$13,950\hfill \\ B’Capital=\$46,500\times \frac{2}{10}=\$9,300\hfill \end{array}\\ L’Capital=\$46,500\times \frac{5}{10}=\$23,250\end{array}$

Conclusion

Thus, other partners receive Bonus.