Chapter 14, Problem 14.6P

To determine

Concept introduction

Partnership firm

It is a form of a business in which a group of people shares all the profit and losses with each other which are often called as partners comes together and runs a partnership firm.

To prepare: A worksheet that shows the various partners’ capital balances from the December 31, 2015.

Answer to Problem 14.6P

The required worksheet to shows the various partners’ capital balances.

Explanation of Solution

Year	Transactions	M$(\$)$	R$(\$)$	H$(\$)$	P$(\$)$	Total$(\$)$
2016	Starting balance Profit allocation Distribution Balance at the year end	$54,000$$\begin{array}{l}127,000\\ (100,000)\\ 81,600\\ \end{array}$	$\begin{array}{l}76,000\\ 102,4000\\ (100,000)\\ 78,400\\ \end{array}$			$\begin{array}{l}130,000\\ 230,000\\ (200,000)\\ 160,000\end{array}$
2017	Starting balance Admission of Mr.H Allocation of profits Distribution Balance at the year end	$\begin{array}{l}81,600\\ 30,000\\ 145,250\\ (80,000)\\ 176,850\end{array}$	$\begin{array}{l}78,400\\ 20,000\\ 98,875\\ (80,000)\\ 117,275\end{array}$	$\begin{array}{l}70,000\\ 85,875\\ (80,000)\\ 75,875\end{array}$		$160,000$$120,000$$330,000$$(240,000)$$370,000$
2019	Beginning balance Net asset adjustment Recognition of r goodwill Partnership interest sold by Mr.R		$334,125$$(5,000)$$20,875$$(350,000)$	$95,875$$(5,000)$		$370,000$$(10,000)$$20,875$$(350,000)$
	Subtotal			$90,875$		$90,875$
	Admission of Mr.P			$21,625$	$75,000$	$96,625$
	Balance in the end			$112,500$	$75,000$	$187,500$

Allocation of profit for Mr.M and Mr.R in the year 2016:

Transactions	Mr.M $(\$)$	Mr.R $(\$)$	Total $(\$)$
Salary	$80,000$	$100,000$	$180,000$
Bonus	$46,000$		$46,000$
Total	$126,000$	$100,000$	$226,000$
Net income			$230,000$
Balance available for sharing profit			$4,000$
Profit and loss percentage	$40\%$	$60\%$
Calculated profit	$1,600$	$2,400$
Allocation of profit	$127,000$	$102,400$

Allocation of profit for Mr.M, Mr.R and Mr.H in the year 2017:

Transactions	Mr.M $(\$)$	Mr.R $(\$)$	Mr.H $(\$)$	Total $(\$)$
salary	$80,000$	$100,000$	$70,000$	$250,000$
Bonus	$66,000$		$16,500$	$82,500$
Total	$146,000$	$100,000$	$86,500$	$332,500$
Deduct: net income				$330,000$
Balance available for sharing profit				$(2,500)$
Profit and loss percentage	$30\%$	$45\%$	$25\%$
Calculated profit	$(750)$	$(1,125)$	$(625)$
Allocation of profit	$145,250$	$98,875$	$85,875$

The capital share for existing partners at the time of admission of the new partner Mr.H.

The new partnership has a value of $\$280,000$ as that the new partner paid $\$70,000$ for an $25\%$ interest in the capital.

So, the total available capital among the partners is $\$230,000$ and the total value of new capital $\$280,000$ which results in additional requires capital of $\$50,000$ .

This additional required capital should be shared by Mr. M and Mr.R based on their profit and loss percentage that is $30\%$ and $45\%$ respectively.

The starting balance of Mr. R and Mr.H is $\$334,125$ and $\$95,875$ .

Now the goodwill for MR.R:

Transactions	Amount $(\$)$
Beginning balance of MR.R for 2019	$334,125$
Deduct: decrease in the net asset	$5,000$
Capital balance after adjustment	$329,125$
Deduct: sales of interest by MR.R	$350,000$
Recognition of Mr.R’s goodwill	$20,875$