The Prince-Robbins partnership has the following capital account balances on Jan

Question

The Prince-Robbins partnership has the following capital account balances on January 1, 2018: Prince, Capital Robbins, Capital $65,000 55,000 Prince is allocated 70 percent of all profits and losses with the remaining 30 percent assigned to Robbins after interest of 9 percent is given to each partner based on beginning capital balances. On January 2, 2018, Jeffrey invests $34,000 cash for a 20 percent interest in the partnership. This transaction is recorded by the goodwill method. After this transaction, 9 percent interest is still to go to each partner. Profits and losses will then be split as follows: Prince (50 percent), Robbins (30 percent), and Jeffrey (20 percent). In 2018, the partnership reports a net income of $14,000 a. Prepare the journal entry to record Jeffrey's entrance into the partnership on January 2, 2018. b. Determine the allocation of income at the end of 2018. Complete this question by entering your answers in the tabs below. Required A Required B Determine the allocation of income at the end of 2018 ncome Allocation Prince Robbins Jeffrey

Explanation / Answer

Answer

1) Allocation of Income in 2018

Income - 14,000

Assuming it is pre interest

Prince capital - 76,200 *9% = 6858

Robbin capital - 59,800*9% = 5382

Jeffery capital - 34,000*9% = 3060

Total interest - 15300

Net Income/(Loss) - (1300)

To be split in ratio 5.3.2 i.e. (650), (390), (260) between prince, Robbin and jeffery

If 14000 is after interest it will also be split in 5.3.2 - 7000, 4200, 2800 between prince, Robbin and jeffery

2) Entry under goodwill method

The first step is to calculate the investment required by calculating the book value of the partnership share the new partner is purchasing.

If the new partner is to purchase 20%, then the existing partners will be left with 80% of the partnership. Since their 80% share of the partnership capital must still be equal to 120,000 after the admission of a new partner, it follows that the new partner investment can be calculated as follows.

1200000/80% = 150,000

New partner investment - 150,000 - 120,000 = 30,000

Investment by new partner - 34000 for 20% share

Implied partner valuation - 34000/20% = 170,000

Goodwill - 170000 - 120000+34000 = 16000

Allocation of goodwill should be in ratio of 70% and 30% to prince and Robbin

16000*70% = 11200

16000*30% = 4800

Account                                  Debit        Credit
Cash                                     34,000   
Goodwill                               16,000   
Capital – Prince                                     11,200
Capital – Robbin                                       4,800
Capital – Jeffery                                       34,000
Total                                    50,000        50,000

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.