Chapter 14, Problem 18P

a.

To determine

Identify the journal entry which should be recorded if person S invests $100,000 in cash in the business for a 25 percent interest when bonus method is used.

Explanation of Solution

Journal entry for the transaction

Date	Accounts and Explanation	Post Ref.	Debit ($)	Credit ($)
	Cash		$ 100,000
	Person T's Capital			$   12,500
	Person P's Capital			$     7,500
	Person E's Capital			$     5,000
	Person S's Capital			$   75,000
	(To record admission of person S)

Working note

Calculate total capital for new partnership

$\begin{array}{c}\text{Total}\text{capital}=\$85,000+\$60,000+\$55,000+\$100,000\\ =\$300,000\end{array}$

Calculate capital balance of person S

$\begin{array}{c}\text{Capital}\text{balance}\text{of}\text{}\text{person}\text{S}=\$300,000\times 25\%\\ =\$75,000\end{array}$

Capital balance of person S is $75,000 and he has invested $100,000. So, $25,000 is the bonus amount which is distributed among the existing partners.

Calculation of distribution of bonus share among existing partners

$\begin{array}{c}\text{Bonus}\text{share}\text{of}\text{person}\text{T}=\$25,000\times 50\%\\ =\$12,500\\ \text{Bonus}\text{share}\text{of}\text{person}\text{P}=\$25,000\times 30\%\\ =\$7,500\end{array}$

Now

$\begin{array}{c}\text{Bonus}\text{share}\text{of}\text{person}\text{E}=\$25,000\times 20\%\\ =\$5,000\end{array}$

b.

To determine

Identify the journal entry which should be recorded if person S invests $60,000 in cash in the business for a 25 percent interest when bonus method is used.

Explanation of Solution

Journal entry for the transaction

Date	Accounts and Explanation	Post Ref.	Debit ($)	Credit ($)
	Cash		$   60,000
	Person T's Capital		$     2,500
	Person P's Capital		$     1,500
	Person E's Capital		$     1,000
	Person S's Capital			$   65,000
	(To record admission of person S)

Working note

Calculate total capital for new partnership

$\begin{array}{c}\text{Total}\text{capital}=\$85,000+\$60,000+\$55,000+\$60,000\\ =\$260,000\end{array}$

Calculate capital balance of person S

$\begin{array}{c}\text{Capital}\text{balance}\text{of}\text{}\text{person}\text{S}=\$260,000\times 25\%\\ =\$65,000\end{array}$

Capital balance of person S is $65,000 and he has invested $60,000. So, $5,000 is the loss amount which is distributed among the existing partners.

Calculation of distribution of loss share among existing partners

$\begin{array}{c}\text{Loss}\text{share}\text{of}\text{person}\text{T}=\$5,000\times 50\%\\ =\$2,500\\ \text{Loss}\text{share}\text{of}\text{person}\text{P}=\$5,000\times 30\%\\ =\$1,500\end{array}$

Now

$\begin{array}{c}\text{Loss share}\text{of}\text{person}\text{E}=\$5,000\times 20\%\\ =\$1,000\end{array}$

c.

To determine

Identify the journal entry which should be recorded if person S invests $72,000 in cash in the business for a 25 percent interest when goodwill method is used.

Explanation of Solution

Journal entry for the transaction

Date	Accounts and Explanation	Post Ref.	Debit ($)	Credit ($)
	Goodwill		$   16,000
	Person T's Capital			$     8,000
	Person P's Capital			$     4,800
	Person E's Capital			$     3,200
	(To distribution of goodwill)
	Cash		$   72,000
	Person S's capital			$   72,000
	(To record admission of person S)

Working note

Calculate total capital for new partnership

$\begin{array}{c}\text{Total}\text{capital}=\$85,000+\$60,000+\$55,000+\$72,000\\ =\$272,000\end{array}$

Calculate implied capital of the business

$\begin{array}{c}\text{Implied capital}\text{=}\frac{\$72000}{25\%}\\ =\$72,000\times \frac{100}{25}\\ =\frac{\$7,200,000}{25}\\ =\$288,000\end{array}$

Calculate goodwill

$\begin{array}{c}\text{Goodwill}=\text{Implied}\text{value}-\text{Total}\text{capital}\\ =\$288,000-\$272,000\\ =\$16,000\end{array}$

Goodwill is $16,000 and it is distributed among the existing partners in their profit sharing ratios.

Calculation of distribution of goodwill share among existing partners

$\begin{array}{c}\text{Goodwill}\text{share}\text{of}\text{person}\text{T}=\$16,000\times 50\%\\ =\$8,000\\ \text{Goodwill}\text{share}\text{of}\text{person}\text{P}=\$16,000\times 30\%\\ =\$4,800\end{array}$

Now

$\begin{array}{c}\text{Goodwill}\text{share}\text{of}\text{person}\text{E}=\$16,000\times 20\%\\ =\$3,200\end{array}$