On January 1, 2014, Jackson and Kendall formed a partnership. Jackson, who has m

Question

On January 1, 2014, Jackson and Kendall formed a partnership. Jackson, who has many years of experience in this line of business, contributed $100,000 in cash. Kendall contributed assets that have the following book values and fair market values:
Book Value Market Value
Merchandise $15,000 $25,000
Building 40,000 150,000
Equipment 60,000 85,000

The partnership assumed a mortgage of $40,000 on the Building.

Prepare the entry to record the formation of the partnership, under the following methods:
a. Capital accounts are set to equal net assets invested
b. The partners have equal interest in the initial total partnership capital, and the bonus method is used.
c. The partners have equal interest in the initial total partnership capital, and the goodwill method is used.

Explanation / Answer

a. Cash Debit - $100,000

Jacknson capital-$100,000

Merchandise Dr - $25000

Building Dr - $150000

Equipment Dr- $85000

Kendall capital cr -$26000

(asset contributed by partners to partnership are recorded at their market values)

b. Capital by jackson - $100000 and capital by kendall = $260000

Total capital - $360000

Interest of partners = equal

Therfore, jackson contribution should be $360000*0.50 =$180000 and he must bring $80000 more in cash and kendall contribution should be same and he can withdraw the balance.

c. Goodwill method:

Cash Dr $100000

Goodwill Dr - $80000

Jackson capital cr - $180000

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