The Prince-Robbins partnership has the following capital account balances on Jan

Question

The Prince-Robbins partnership has the following capital account balances on January 1 2015 75,000 Prince, Capital$ Robbins, Capital 65,000 Prince is allocated 60 percent of all profits and losses with the remaining 40 percent assigned to Robbins after interest of 6 percent is given to each partner based on beginning capital balances. On January 2, 2015, Jeffrey invests $40,000 cash for a 20 percent interest in the partnership. This transaction is recorded by the goodwill method. After this transaction, 6 percent interest is still to go to each partner. Profits and losses will then be split as follows: Prince (50%), Robbins (30%), and Jeffrey (20%). In 2015, the partnership reports a net income of $10,000 a. Prepare the journal entry to record Jeffrey entrance into the partnership on January 2, 2015. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.) Answer is not complete Transaction General Journal Debit Credit Cash 40,000 Jeffrey, Capital 40,000 Goodwil 20,000 16,000 Prince, Capital Robbins, Capital 4,000 b. Determine the allocation of income at the end of 2015 Answer is complete but not entirely correct Income Allocation $ 4,460 Prince Robbins$3,540 Jeffrey $ 2,000

Explanation / Answer

- calculation of partnership's valuation :

Jeffrey invests $40000 for a 20% share in the partnership -

Therefore, Implied Partnership Valuation = 40000 ÷ 20% = $200000

- calculation of the goodwill :

Total Capital of the partnership after admission of new partner = 75000 + 65000 + 40000 = $180000

Required capital as per the above valuation = $200000

Therefore, goodwill = 200000 - 180000 = $20000.

- calculation of distribution of goodwill between existing partners :

Goodwill will be distributed in their previous ratio i.e. 60-40

Prince's share of goodwill = 20000 × 60% = 12000

Robbins's share of goodwill = 20000 × 40% = 8000

- journal entry to record Jeffrey's admission into the partnership :

DR. Cash 40000 -

DR. Goodwill 20000 -

CR. Prince's capital - 12000

CR. Robbins's capital - 8000

CR. Jeffrey's capital - 40000

- calculation of allocation of income at the end of 2015 :

Jeffrey's share = 10000 × 20% = 2000

- calculation of Prince's and Robbins's share :

Net income remaining to be distributed = 10000 - 2000 = $8000

Add back interest on capital deducted = (75000 × 6%) + (65000×6%) = 4500 + 3900 = 8400.

Total available profit to be distributed in the ratio 60-40 = $16400

Prince's share(before interest on capital) = 16400÷100×60 = $9840

Robbins's share (before interest on capital) = 16400÷100×40 = $6560

Prince's share (after interest) = 9840 - 4500 = 5340

Robbins's share (after interest) = 6560 - 3900 = 2660

Please provide feedback.

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