Kirk and Spock are equal partners in a dress shop. At the end of 2015 their part

Question

Kirk and Spock are equal partners in a dress shop. At the end of 2015 their partnership had the following balance sheet: Cash $50,000 A/R $50,000 Inventory $500,000 Equipment (net) $500,000 A/P 100,000 Kirk capital $100,000 Spock capital $900,000 At the beginning of 2016, Kirk and Spock agree to accept Klingon as a new partner so that each of them will be 1/3 partners. Klingon agrees to pay $800,000 to join the partnership. Required: 1) Make the journal entry the partner makes when Klingon makes the $800,000 contribution to the partnership in exchange for a 1/3 ownership interest if the partnership uses a) The bonus method b) The goodwill method 2) what is the ending capital accounts of Kirk, Spock and Klingon under each of these methods?

Explanation / Answer

Bonus method Partner capital balances before introducing new partner = $10,00,000 Partner capital balances after introducing new partner = $18,00,000 Klingon is entitled to 1/3 rd of this new business so his beginning capital balance is recorded as $6,00,000 ($18,00,000 *1/3) Excess cash paid by klingon = $800000 - $600000 = $200000 is to be distributed among kirk and spock equally. Journal entry Account Title Debit Credit Cash $8,00,000 Klingon Capital $8,00,000 Klingon Capital $2,00,000 Kirk capital $1,00,000 Spock capital $1,00,000 Goodwill method Klingon paid $800000 to aquire 1/3 rd share in partnership business. Hence the implied worth of partnership business = $800000 / (1/3rd) = $24,00,000 Without adjustment , total capital after introducing klingon would be $18,00,000 Hence amount paid by klingon towards Goodwill = $24,00,000 - $18,00,000 = $6,00,000 Journal entry Account Title Debit Credit Cash $8,00,000 Klingon Capital $8,00,000 Klingon Capital $6,00,000 Kirk capital $3,00,000 Spock capital $3,00,000 (Goodwill brought by klingon distributed amount kirk and spock equally) Partners capital balances under each of the method Bonus method Kirk Spock Klingon Opening balance $1,00,000 $9,00,000 $0 Capital introduced $0 $0 $8,00,000 Bonus from new partner $1,00,000 $1,00,000 -$2,00,000 closing capital balances $2,00,000 $10,00,000 $6,00,000 Goodwill method Kirk Spock Klingon Opening balance $1,00,000 $9,00,000 $0 Capital introduced $0 $0 $8,00,000 Goodwill share from new partner $3,00,000 $3,00,000 -$6,00,000 closing capital balances $4,00,000 $12,00,000 $2,00,000

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