The capital accounts of Jonathan Faber and Faheem Ahmad have balances of $150,00

Question

The capital accounts of Jonathan Faber and Faheem Ahmad have balances of $150,000 and $110,000, respectively. Lauren Wells and Rachel Lee are to be admitted to the partnership. Wells buys one-fifth of Faber's interest for $35,000 and one-fourth of Ahmad's interest for $25,000. Lee contributes $70,000 cash to the partnership, for which she is to receive an ownership equity of $70,000. a. Journalize the entries to record the admissions of the following. (For a compound transaction, if an amount box does not require an entry, leave it blank or enter "0"). (2) Admission of Lee: b. What are the capital balances of each partner after the admission of the new partners? Partner Capital Balance Jonathan Faber $ Faheem Ahmad $ Lauren Wells $ Rachel Lee $

Explanation / Answer

Journal entries on Admission: 2. Lee's admission Cash A/c Dr $70,000 To Lee's Capital A/c $70,000 (Being Lee admitted as a new partner) Faber's Capital A/c Dr $ 30000 To Wells Capital A/c $30000 (Being 1/5th interest acquired from Faber ) Faber gets a bonus of $5000(35000-30000) Ahmed's Capital A/c Dr $27500 To Wells capital A/c $27500 (Being 1/4th interest acquired from Ahmed ) Wells gets a bonus of 2500(25000-27500) Capital Balances of each partner after admission: Faber: 120,000 Ahmed: 82,500 Wells: 55,000 Lee: 70,000 The bonus is a personal gain from the negotiation and will not affect the total capital of the firm. Thus, the entries only reflect the actual value of the interest acquired and not the exchange price. The difference between the actual value and exchange value is a bonus to the old partner or the new partner ( as seen above)

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