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, 2018:

Prince is allocated 60 percent of all profits and losses with the remaining 40 percent assigned to Robbins after interest of 8 percent is given to each partner based on beginning capital balances.

On January 2, 2018, Jeffrey invests $31,000 cash for a 20 percent interest in the partnership. This transaction is recorded by the goodwill method. After this transaction, 8 percent interest is still to go to each partner. Profits and losses will then be split as follows: Prince (50 percent), Robbins (30 percent), and Jeffrey (20 percent). In 2018, the partnership reports a net income of $12,000.

Prepare the journal entry to record Jeffrey’s entrance into the partnership on January 2, 2018.

Determine the allocation of income at the end of 2018.

Prince, Capital $ 60,000 Robbins, Capital 50,000

Explanation / Answer

Total capital of the partnership after Jaffrey's entrance into partnership

= 60000 + 50000 + 31000 = 141,000

But based on cash introduced by Jeffrey for 20% share, such capital might have been 31000 / 0.20 = 155000

Thus implied goodwill = 155000 - 141000 = 14000

Journal entries needed for Jeffery's Entrance into partnership

Allocation of Income at the end of 2018

Note ....... Interest is calculated as

Prince ..... ( 60000 + 8400) * 0.08

Robbins .... ( 50000 + 5600 ) * 0.08

Jeffrey ...... 31000 * 0.08

Debit Credit Goodwill 14000 Prince capital (60%) 8400 Robbins capital (40%) 5600 Cash 31000 Jeffrey's Capital 31000

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