Garber, Williams, and George are partners with present capital balances of $63,2
ID: 2447601 • Letter: G
Question
Garber, Williams, and George are partners with present capital balances of $63,200, 64,400 and $24,400 respectively. the partners share profits and losses according to the following percentages: 60% for Garber, 20% for Williams, and 20% for George. Larsen is to join the partnership upon contributing $56,000 to the partnership in exchange for a 25% interest in capital and a 20% interest in profits and losses.
Required:
Calculate the capital balances for each individual in the new partnership assuming use of the bonus and goodwill methods.
Explanation / Answer
PRESENT TOTAL CAPITAL=CAPITAL OF GARBER+CAPITAL OF WILLIAMS+CAPITAL OF GEORGE=$63,200+$64,400+$24,400=$1,52,000
CONTRIBUTION OF LARSEN=$56,000
CALCULATION OF CAPITAL BALANCE OF EACH INDIVIDUAL IN NEW PARTNERSHIP ASSUMING BONUS METHOD
TOTAL CAPITAL AFTER ADMISSION=$1,52,000+$56,000=$2,08,000
LARSEN HAS 25% INTEREST IN CAPITAL
SHARE OF LARSEN IN TOTAL CAPITAL=$2,08,000*25%=$52,000
BONUS=$56,000-$52,000=$4,000
BONUS DIVIDED AMONG GARBER,WILLIAMS AND GEORGE IN THE PROFIT SHARING RATIO OF 60:20:20
SHARE OF GARBER=$4,000*60%=$2,400
SHARE OF WILLIAMS=$4,000*20%=$800
SHARE OF GEORGE=$4,000*20%=$800
NEW CAPITAL BALANCE OFGARBER=$63,200+$2,400=$65,600
NEW CAPITAL BALANCE OF WILLIAMS=$64,400+$800=$65,200
NEW CAPITAL BALANCE OF GEORGE=$24,400+$800=$25,200
CAPITAL OF LARSEN=$52,000
CALCULATION OF CAPITAL BALANCE OF EACH INDIVIDUAL IN NEW PARTNERSHIP ASSUMING GOODWILL METHOD
WORTH OF THE BUSINESS =CAPITAL CONTRIBUTED BY LARSEN / LARSEN INTEREST IN CAPITAL=$56,000/25%=$2,24,000
WITHOUT ADJUSTMENT TOTAL CAPITAL=$1,52,000+$56,000=$2,08,000
GOODWILL=$2,24,000-$2,08,000=$16,000
GOODWILL OF $16,000 MUST BE RECOGNISED TO INCREASE THE CAPITAL TO IMPLIED VALUE OF $2,24,000
GOODWILL OF $16,000 IS DIVIDED AMONG OLD PARTNER IN OLD PROFIT SHARING RATIO
SHARE OF GARBER=$16,000*60%=$9,600
SHARE OF WILLIAMS=$16,000*20%=$3,200
SHARE OF GEORGE=$16,000*20%=$3,200
NEW CAPITAL OF GARBER=$63,200+$9,600=$72,800
NEW CAPITAL OF WILLIAMS=$64,400+$3,200=$67,600
NEW CAPITAL OF GEORGE=$24,400+$3,200=$27,600
CAPITAL OF LARSEN=$56,000
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