The Distance Plus partnership has the following capital balances at the beginnin
ID: 2492714 • Letter: T
Question
The Distance Plus partnership has the following capital balances at the beginning of the current year:
Tiger (40% of profits and losses) $ 180,000
Phil (30%) 150,000
Ernie (30%) 165,000
Each of the following questions should be viewed independently.
a. If Sergio invests $190,000 in cash in the business for a 20 percent interest, what journal entry is recorded? Assume that the bonus method is used.
If Sergio invests $120,000 in cash in the business for a 20 percent interest, what journal entry is recorded? Assume that the bonus method is used.
c. If Sergio invests $130,000 in cash in the business for a 20 percent interest, what journal entry is recorded? Assume that the goodwill method is used.
If Sergio invests $120,000 in cash in the business for a 20 percent interest, what journal entry is recorded? Assume that the bonus method is used.
c. If Sergio invests $130,000 in cash in the business for a 20 percent interest, what journal entry is recorded? Assume that the goodwill method is used.
Explanation / Answer
Total capital after the investment made by Sergio = 180000+150000+165000+190000 = $685000
20% of $685000 = $137000
Bonus = $190000 - $137000 = $53000
The bonus will be credited to the existing partners capital in their income sharing ratio.
Cash..........................Dr. $190000
Capital - Tiger (40% of $53000).....................Cr. $21200
Capital - Phil (30% of $53000)..................... Cr. $15900
Capital - Ernie (30% of $53000)....................Cr. $15900
Capital - Sergio ..........................................Cr. $137000
2)
Sergio's Investment = $130000 for 20% interest
Total capital = $130000 / 20% = $650000
Goodwill
= Total capital - [capital - Tiger + Capital -Phil + Capital-earnie + Capital - Sergio(investment) ]
= $650000 - (180000+150000+165000+130000)
= $40000
Cash.......Dr. $130000
Capital-Sergio ..Cr. $130000
Goodwill...................Dr. $40000
Capital - Tiger (40% of $40000).....................Cr. $16000
Capital - Phil (30% of $40000)..................... Cr. $12000
Capital - Ernie (30% of $40000)....................Cr. $12000
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