Admission of new partner—Goodwill Method Assume that Partners A and B each repor

Question

Admission of new partner—Goodwill Method
Assume that Partners A and B each report a Capital Account of $300,000. Partner C wants to join the partnership as an equal one-third partner. Because the partnership has been very profitable, Partners A and B require Partner C to contribute $600,000 in cash to the partnership in return for a one-third interest. Assume that Partners A and B share profits 60% and 40%, respectively, prior to the admission of Partner C. Assume that the partners believe that the payment by Partner C provides evidence of a previously unrecorded intangible asset in the partnership and the partners wish to record the intangible on the post-realignment partnership balance sheet. After admission of Partner C, Partners A and B retain their relative proportion of profit allocation after granting Partner C a 30% profit-allocation interest. Use the Goodwill Method to record the journal entry on the books of the partnership to reflect the admission of Partner C.

Fill in for all ? symbols:

Cash Debit:? Credit: 0

Goodwill Debit: ? Credit: 0

Capital Account, Partner A Debit: 0 Credit:?

Capital Account, Partner B Debit: 0 Credit:?

Capital Account, Partner C Debit: 0 Credit: ?

Explanation / Answer

1. Calculation of goodwill:

= Total Capital based on 33% brought in by partner C - Actual Capital

= [6,00,000 / 33.33%] - [3,00,000 + 3,00,000 + 6,00,000]

= 18,00,000 - 12,00,000

= 6,00,000

Journal Entry

1. Dr. Bank a/c       $6,00,000

     Cr. Goodwill a/c   $6,00,000

[ Being cash brought in by Partner C to record Goodwill]

2. Dr. Goodwill a/c    $6,00,000

     Cr. Partner A a/c $3,60,000

     Cr. Partner B a/c $ 2,40,000

[Being goodwill brought in by Partner C distributed among Patner A and Partner B in exsting profit / loss sharing ratio (60:40) ]

Part 2

Cash Debit: $6,00,000

Goodwill: Nil

Capital Account, Partner A Credit : $ 3,60,000

Capital Account, Partner B Credit : $ 2,40,000

Capital Account, Partner C : Nil

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