The Distance Plus partnership has the following capital balances at the beginnin
ID: 2580123 • Letter: T
Question
The Distance Plus partnership has the following capital balances at the beginning of the current year: Tiger (40% of profits and losses) Phil (30%) Ernie (30%) $ 90,000 60,000 75,000 Each of the following questions should be viewed independently a. If Sergio invests $70,000 in cash in the business for a 20 percent interest, what journal entry is recorded? Assume that the bonus method is used. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.) View transaction list Journal entry worksheet Record the admission of new partner under bonus method. Note: Enter debits before credits. Transaction General Journal Debit CreditExplanation / Answer
a. Sergio investment = 70000
Interest @ 20 %
As per bonus method :-
Book value of capital of original partner = 225000
Investment by new partner = 70000
Total Capital = 295000
New partner :- Interest in capital @20%
Interest in profit @20%
Bonus = Total capital * Interest of new partner
= 295000 * 20%
= 59000
Contribution to new partner's capital :- (as per the profit sharing ratio of old partner's)
Tiger's contribution =59000 * 40% = 23600
Phil's contribution = 59000 * 30% = 17700
Ernie's contribution = 59000 * 30% = 17700
Journal entries :-
b.Sergio investment = 50000
Interest @ 20 %
As per bonus method :-
Existing partner
Capital balances
Capital Ratio
Profit sharing ratio
Tiger
90000
40
40
Phil
60000
27
30
Ernie
75000
33
30
Total
225000
100
100
Book value of capital of original partner = 225000
Investment by new partner = 50000
Total Capital = 275000
New partner :- Interest in capital @20%
Interest in profit @20%
Bonus = Total capital * Interest of new partner
= 275000 * 20%
= 55000
Contribution to new partner's capital :- (as per the profit sharing ratio of old partner's)
Tiger's contribution =55000 * 40% = 22000
Phil's contribution = 55000 * 30% = 16500
Ernie's contribution = 55000 * 30% = 16500
Journal entries :-
Sr.no.
Journal entry
Debit
Credit
Tiger's Capital
22000
Phil's Capital
16500
Ernie's capital
16500
To Sergio's capital
55000
2.
Cash
50000
To Sergio's capital
50000
c. Sergio investment = 60000
Interest @ 20 %
As per bonus method :-
Existing partner
Capital balances
Capital Ratio
Profit sharing ratio
Tiger
90000
40
40
Phip
60000
27
30
Ernie
75000
33
30
Total
225000
100
100
Calculation of the fair value of partnership:
New partner invests $60000 for 20% interest
Fair value of partnership = 60000/ 0.20 = $300000
Calculation of goodwill :-
Book value of capital of original partner = 225000
Investment by new partner = 60000
Total Capital = 285000
Less : Fair value of partnership = (300000)
Goodwill = 15000
This goodwill is assumed to be apreciation in the assets value.
Distribution of the appreciation to the old partner's account in profit sharing ratio :-
Tiger's capital (40%) = 6000
Phil's capital (30%) = 4500
Ernie's capital (30%) = 4500
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