At the start of 2012, Santana Rey is considering adding a partner to her busines
ID: 2476964 • Letter: A
Question
At the start of 2012, Santana Rey is considering adding a partner to her business. She envisions the new partner taking the lead in generating sales of both services and merchandise for Business Solutions. S. Rey’s equity in Business Solutions as of January 1, 2012, is reflected in the following capital balance. S. Rey, Capital $80,360 Required 1. S. Rey is evaluating whether the prospective partner should be an equal partner with respect to capital investment and profit sharing (1:1) or whether the agreement should be 4:1 with Rey retaining four-fifths interest with rights to four-fifths of the net income or loss. What factors should she consider in deciding which partnership agreement to offer? 2. Prepare the January 1, 2012, journal entry(ies) necessary to admit a new partner to Business Solutions through the purchase of a partnership interest for each of the following two separate cases: (a) 1:1 Sharing agreement (b) 4:1 Sharing agreement 3. Prepare the January 1, 2012, journal entry(ies) required to admit a new partner if the new partner invests cash of $20,090. 4. After posting the entry in part 3, what would be the new partnerâs equity percentage?
Explanation / Answer
Factors to be considered under (1:1) ownership
Factors to be considered under (4:1) ownership
1. On the other hand, at a 4:1 ownership, she will only have to share one fifth of the profits with the partner.
2. Under 4:1 ownership S,. Ray have to share more losses than the partner.
3. S. ray will have more right on how to run the business and partner will have less voice in the business.
It would likely be better to attract a partner if there is a lower amount of investment
required by the new partner at the 4:1 level. On the other hand, a partner may wish to
be more of an equal partner and might wish to invest at the 1:1 level.
Date Description Debit Credit
Jan 1st 2012 cash a/c $80,360
To capital a/c $ 80,360
( Capital invested by the new partner under 1:1 partnership agreement)
Jan 1st 2012 Cash $ 20,090
To capital a/c $ 20,090
( capital invested by the new partner under 4:1 partnership agreement $80,360 x ¼)
Jan 1st 2012 Cash $ 20,090
To capital a/c $ 20,090
( capital invested by the new partner under 4:1 partnership agreement $80,360 x ¼)
Equity Percentage = New partner’s capital investment /Total capital
= $20,090 / $ 1,00,450 *($80,360 +20,090)
= 0.2 or 20 %
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