Chapter 14, Problem 30P

a.

To determine

Prepare the journal entry or entries to be recorded by the partnership for the given transaction.

Explanation of Solution

Person P decides to sell half of its share to person DA with the consent of all other partners for $50,000 in cash.

Calculate the amount of half of share of person P

$\begin{array}{c}\text{Half}\text{share}\text{of}\text{person}\text{P}=\$70,000\times 50\%\\ =\$35,000\end{array}$

Person P is receiving $50,000 hence; it will not affect the company’s capital.

Journal entry will be

Date	Accounts and Explanation	Post Ref.	Debit ($)	Credit ($)
	Person P's Capital		$   35,000
	Person DA's Capital			$   35,000
	(To record the sale of half share of person P)

Table: (1)

b.

To determine

Prepare the journal entry or entries to be recorded by the partnership for the given transaction.

Explanation of Solution

Three partners sell their 10 % partnership interest to the person DA for $25,000 cash.

Journal entry can be

Date	Accounts and Explanation	Post Ref.	Debit ($)	Credit ($)
	Goodwill		$   50,000
	Person AT's Capital			$   25,000
	Person P's Capital			$   15,000
	Person AR's Capital			$   10,000
	(To record the goodwill)
	Person AT's Capital		$   10,500
	Person P's Capital		$     8,500
	Person AR's Capital		$     6,000
	Person DA's Capital			$   25,000
	(To record the capital taken from other partners by person DA)

Table: (2)

Working note

Calculate the implied value of the business

$\begin{array}{c}\text{Implied}\text{value}=\frac{\$25,000}{10\%}\\ =\$25,000\times \frac{100}{10}\\ =\frac{\$2,500,000}{10}\\ =\$250,000\end{array}$

Calculate the total current capital of the business

$\begin{array}{c}\text{Total}\text{current}\text{capital}=\$80,000+\$70,000+\$50,000\\ =\$200,000\end{array}$

Calculate goodwill

$\begin{array}{c}\text{Goodwill}=\text{Implied}\text{value}-\text{Total}\text{capital}\\ =\$250,000-\$200,000\\ =\$50,000\end{array}$

Calculate distribution of goodwill

$\begin{array}{c}\text{Goodwill}\text{share}\text{to}\text{person}\text{AT}=\$50,000\times 50\%\\ =\$25,000\\ \text{Goodwill}\text{share}\text{to}\text{person}\text{P}=\$50,000\times 30\%\\ =\$15,000\end{array}$

Now, goodwill share for other partners

$\begin{array}{c}\text{Goodwill}\text{share}\text{to}\text{person}\text{AR}=\$50,000\times 20\%\\ =\$10,000\end{array}$

c.

To determine

Prepare the journal entry or entries to be recorded by the partnership for the given transaction.

Explanation of Solution

Person DA is allowed to join the partnership with 10 % ownership interest by paying cash $30,000 directly to the business. Hence, the total capital for the business is $230,000.

The person DA requires 10% interest of the total capital. Bonus method is followed.

Journal entry can be

Date	Accounts and Explanation	Post Ref.	Debit ($)	Credit ($)
	Cash		$   30,000
	Person AT's Capital			$     3,500
	Person P's Capital			$     2,100
	Person AR's Capital			$     1,400
	Person DA's Capital			$   23,000
	(To record the admission of person DA)

Table: (3)

Working note

Calculate person DA share in total capital

$\begin{array}{c}\text{Person}\text{DA}\text{share}=\$230,000\times 10\%\\ =\$23,000\end{array}$

Person DA has paid $30,000 hence, $7,000 excess is the bonus which is distributed to other partners in their profit sharing ratio

Calculate distribution of bonus to other partners

$\begin{array}{c}\text{Bonus}\text{share}\text{of}\text{person}\text{AT}=\$7,000\times 50\%\\ =\$3,500\\ \text{Bonus}\text{share}\text{of}\text{person}\text{P}=\$7,000\times 30\%\\ =\$2,100\end{array}$

Now, bonus to other partners

$\begin{array}{c}\text{Bonus}\text{share}\text{of}\text{person}\text{AR}=\$7,000\times 20\%\\ =\$1,400\end{array}$

d.

To determine

Prepare the journal entry or entries to be recorded by the partnership for the given transaction.

Explanation of Solution

Person DA is allowed to join the partnership with 10 % ownership interest by paying cash $30,000 directly to the business. Hence, the total capital for the business is $230,000.

The person DA requires 10% interest of the total capital. Goodwill method is followed.

Journal entry can be

Date	Accounts and Explanation	Post Ref.	Debit ($)	Credit ($)
	Cash		$   30,000
	Goodwill		$   70,000
	Person AT's Capital			$   35,000
	Person P's Capital			$   21,000
	Person AR's Capital			$   14,000
	Person DA's Capital			$   30,000
	(To record the admission of new partner through goodwill method)

Table: (4)

Working note

Calculate the implied value of the business

$\begin{array}{c}\text{Implied}\text{value}=\frac{\$30,000}{10\%}\\ =\$30,000\times \frac{100}{10}\\ =\frac{\$3,000,000}{10}\\ =\$300,000\end{array}$

Total capital of the business is $230,000

Calculate goodwill

$\begin{array}{c}\text{Goodwill}=\text{Implied}\text{value}-\text{Total}\text{capital}\\ =\$300,000-\$230,000\\ =\$70,000\end{array}$

Calculate distribution to other partners

$\begin{array}{c}\text{Goodwill}\text{share}\text{to}\text{person}\text{AT}=\$70,000\times 50\%\\ =\$35,000\\ \text{Goodwill}\text{share}\text{to}\text{person}\text{P}=\$70,000\times 30\%\\ =\$21,000\end{array}$

Now, goodwill share to other partners

$\begin{array}{c}\text{Goodwill}\text{share}\text{to}\text{person}\text{AR}=\$70,000\times 20\%\\ =\$14,000\end{array}$

e.

To determine

Prepare the journal entry or entries to be recorded by the partnership for the given transaction.

Explanation of Solution

Person DA is joining new partnership with the cash payment of $12,222 and goodwill method is followed.

Journal entry can be

Date	Accounts and Explanation	Post Ref.	Debit ($)	Credit ($)
	Cash		$   12,222
	Goodwill		$   10,000
	Person DA's Capital			$   22,222
	(To record the admission of partner DA through goodwill method)

Table: (5)

Working note

Calculate total value of business

$\begin{array}{c}\text{Implied}\text{value}=\frac{\$12,222}{10\%}\\ =\$12,222\times \frac{100}{10}\\ =\frac{\$12,22200}{10}\\ =\$122,220\end{array}$

Total capital of the business is $212,222. The new partner brings goodwill along with him.

Calculate goodwill

$\begin{array}{l}\$12,222+\text{Goodwill}=10\%\times \left(\text{Original}\text{capital}+\$12,222+\text{Goodwill}\right)\\ \$12,222+\text{Goodwill}=10\%\times \left(\$212,222+\text{Goodwill}\right)\\ \$12,222+\text{Goodwill}=\$21,222+0.10\text{Goodwill}\\ \text{Goodwill}-0.10\text{Goodwill}=\$21,222-\$12,222\end{array}$

Now, further calculation of goodwill

$\begin{array}{c}0.9\text{Goodwill}=\$9,000\\ \text{Goodwill}=\frac{\$9,000}{0.9}\\ \text{Goodwill}=\$10,000\end{array}$

f.

To determine

Prepare the journal entry or entries to be recorded by the partnership for the given transaction.

Explanation of Solution

The current fair value of the business is $280,000 and the total capital of three partners is $200,000. This means that $80,000 in the business is the goodwill of the business. The goodwill is distributed among the partners in their profit sharing ratios. Retiring partner is paid cash after recording the goodwill.

Journal entry can be

Date	Accounts and Explanation	Post Ref.	Debit ($)	Credit ($)
	Goodwill		$   80,000
	Person AT's Capital			$   40,000
	Person P's Capital			$   24,000
	Person AR's Capital			$   16,000
	(To record the goodwill of the business)
	Person AR's Capital		$   66,000
	Cash			$   66,000
	(To record cash paid to the retiring partner)

Table: (6)

Working note

Calculate distribution of goodwill to partners

$\begin{array}{c}\text{Goodwill}\text{share}\text{to}\text{person}\text{AT}=\$80,000\times 50\%\\ =\$40,000\\ \text{Goodwill}\text{share}\text{to}\text{person}\text{P}=\$80,000\times 30\%\\ =\$24,000\end{array}$

Now, goodwill to other partners

$\begin{array}{c}\text{Goodwill}\text{share}\text{to}\text{person}\text{AR}=\$80,000\times 20\%\\ =\$16,000\end{array}$