Sleepy, Grumpy and Happy are partners. Grumpy received ½ of profits and losses w

Question

Sleepy, Grumpy and Happy are partners. Grumpy received ½ of profits and losses with Happy and Sleepy each receiving 1/4.   On 1/1/2014 they have the following capital balances

                        Grumpy     $100,000

                       Happy          $50,000

                       Sleepy         $50,000

On 1/2/2014 Grumpy sells ½ of his share of the partnership to Dopey for $80,000. Now all 4 partners will by ¼ owners.

Using the Goodwill method, show the capital accounts of the 4 partners on 1/2/2014.

Using the bonus method, show the capital accounts of the 4 partners on 1/2/2014

It is now 2017 and the capital accounts are as follows:

Grumpy $80,000

Happy $2,000

Sleepy $50,000

Dopey $90,000

The partners decide to a) ‘pay’ interest of 10% on beginning capital balances, b) ‘pay’ Dopey $12,000 for his extra work in the partnership and c) continue to share profits equally but losses are 10% Dopey and 30% each of the other partners.

In 2017 the partnership had the following:

          Sales $400,000

          Expenses $285,000 (ignoring any expenses to partners)

In 2018 the partnership had the following

          Sales $500,000

          Expenses $590,000

DOPEY took his ‘salary’   from the partnership in both years but no other distributions to owners occurred in either 2017 or 2018.

          REQUIRED:

DETERMINE THE INCOME DISTRIBUTION FOR 2017

          DETERMINE THE CAPITAL ACCOUNTS ON 12/31/17

DETERMINE THE INCOME DISTRIBUTION FOR 2018

          DETERMINE THE CAPITAL ACCOUNTS ON 12/31/18

Explanation / Answer

Before grumpy sold 1/2 of his share

Grumpy=$100,000
Happy =$50,000
Sleepy=$50,000

Bonus method:

Total capital=prior capital plus or minus any change in net assets
=200,000-50,000+80,000= 230,000

All four share 25% each so each will have $57,500 each in their capital account

Goodwill Method:

total capital is found by applying the price paid to the business as a whole.
Total Capital=80,000/0.25=$320,000
Here there is a good will of =320,000-230,000= 90,000 should go to dopey account

Grumpy=$50,000
Happy =$50,000
Sleepy=$50,000
Dopley=$170,000

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