Question

Renata is the sole proprietor of a company with the following balance sheet:

Assets			Liabilities
Cash	$   100,000		Accounts payable	$     50,000
Inventory	300,000		Loan payable	100,000
Plant and equipment, net	600,000		Total liabilities	150,000
	________		Capital	850,000
Total assets	$1,000,000		Total liabilities and capital	$1,000,000

The cash and inventory are carried at fair value, and plant and equipment has a fair value of $650,000.

Renata enters into a partnership with Santiago. Renata contributes her company, and the partnership assumes the company’s liabilities. Santiago contributes cash of $250,000. The partners agree to share capital and profits in a 3:2 ratio.

Required

Prepare the balance sheet of the partnership at the date of formation using:

a.            The bonus approach

b.            The goodwill approach

Answer 1

Valuation of Business:

Particulars	Amount
Cash	100000
Inventory	300000
Plant and equipment, net	650000
Total	1050000
Accounts Payable	50000
Loan Payable	100000
Net Assets Taken over	900000

2) Ratio of sharing capital:

Renata : 3

Santiago : 2.

Goodwill brought in by Santiago will be calculated as follows:

Required capital contribution for 2/5th share = 900000/3*2 = $ 600000

Capital brought in by Santiago = $ 250000

Goodwill brought in by Santiago = $ 350000

Balance Sheet Under Goodwill Approach:

Assets	Amount	Liabilities	Amount
Cash	350000	Accounts Payable	50000
Inventory	300000	Loan Payable	100000
Plant and Equipment, Net	650000	Capital
Goodwill	350000	Renata	900000
		Santiago	600000
Total	1650000	Total	1650000

Balance Sheet Under Bonus Approach:

In this method, goodwill does not appear in the books of account and bonus is shared between all the partners in the new ratio by all partners.

Particulars	Amount
Cash	350000
Inventory	300000
Plant Equipment, Net	650000
Total	1300000
Accounts Payable	50000
Loan Payable	100000
Net Assets	1150000
Reneta (3)	690000
Santiago (2)	460000

Passing the entries for capital brought in by Santiago and allocating share in capital:

Cash A/c________________Dr. 250000

Reneta's Capital A/c_______Dr. 210000

To Santiago's Capital A/c - 460000

(Being capital brought in by incoming partner)

Assets	Amount	Liabilities	Amount
Cash	350000	Accounts Payable	50000
Inventory	300000	Loan Payable	100000
Plant and Equipment, Net	650000	Capital
		Renata	690000
		Santiago	460000
Total	1300000	Total	1300000