Admitting New Partners Who Buy an Interest and Contribute Assets The capital acc

Question

Admitting New Partners Who Buy an Interest and Contribute Assets The capital accounts of Trent Henry and Tim Chou have balances of $155,000 and $111,600, respectively. LeAnne Gilbert and Becky Clarke are to be admitted to the partnership. Gilbert buys one-fifth of Henry’s interest for $35,700 and one-fourth of Chou’s interest for $24,600. Clarke contributes $37,800 cash to the partnership, for which she is to receive an ownership equity of $37,800. a1. Journalize the entry to record the admission of Gilbert. For a compound transaction, if an amount box does not require an entry, leave it blank. Trent Henry, Capital Tim Chou, Capital LeAnne Gilbert, Capital Feedback a1. Calculate the interest Gilbert is purchasing from both partners. Record Gilbert’s Capital interest purchased, and decrease Henry, Capital and Chou, Capital. a2. Journalize the entry to record the admission of Clarke. Cash 37,800 Becky Clarke, Capital 37,800 Feedback a2. Clarke's contribution of cash equals the Capital interest purchased. b. What are the capital balances of each partner after the admission of the new partners? Partner Capital Balance Trent Henry $ Tim Chou $ LeAnne Gilbert $ Becky Clarke $

Explanation / Answer

a1) When a new partner buy the partnership share from existing partners then transaction is between new and existing partners as individuals. The existing partners transfer their portion of capital to new partner's capital account therefore the net capital remains same as prior to admission of new partner.

Any gain or loss from selling their interest of partnership will be borne by existing partners because they have entered into the transaction as individuals and it does not affect partnership.

Given in question that Trent Henry and Tim Chou have capital account balance of $155,000 and $111,600 respectively. LeAnne Gilbert buys 1/5th of Henry’s interest i.e. $31,000 (1/5 of $155,000) and 1/4th of Chou’s interest i.e. $27,900(1/4 of $111,600). Therefore, total balance of LeAnne Gilbert’s capital account will be

LeAnne Gilbert’s capital account balance = $31,000 + $27,900

LeAnne Gilbert’s capital account balance = $58,900

Therefore, Gilbert has purchased interest worth $58,900 from both partners.

Now, journal entry to record admission of Gilbert will be as follows:

Trent Henry, capital

$31,000

Tim Chou, capital

$27,900

LeAnne Gilbert capital

$58,900

Trent Henry and Tim Chou have transferred $31,000 and $27,900 to LeAnne Gilbert's capital account respectively. The amount paid by LeAnne Gilbert to both of them for buying interest in partnership will be their individual gain or loss.

a2) When a new partner is admitted to partnership and he contributes some cash or assets to it then it increases total owner’s equity and total assets of partnership. The case is same when an individual starts a business and contributes cash to run the same. On one hand, assets in form of cash increases and on other hand liability in form of owner’s equity increases.

The admission of new partner by contributing cash does not affect the capital balance of existing partners. It will remain as it was prior to the admission of new partner.

Given in question that Becky Clarke contributes $37,800 in cash to partnership and receives ownership equity worth $37,800.Now, jo urnal entry to record admission of Clarke will be as follows:

Cash

$37,800

Becky Clarke, capital

$37,800

b) The capital balances of each partner after the admission of the new partners will be as follows:

1) Trent Henry capital balance = $124,000 ($155,000 - $31,000)

2) Tim Chou capital balance = $83,700 ($111,600 - $27,900)

3) LeAnne Gilbert capital balance = $58,900

4) Becky Clarke capital balance = $37,800

Trent Henry, capital

$31,000

Tim Chou, capital

$27,900

LeAnne Gilbert capital

$58,900

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