Question

The Prince Robbins partnership has the following capital account balances on January 1, 2018 $140,000 Prince, Capital Robbins Capital 130,000 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 $79,000 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 spilt as follows: Prince (50 percent), Robbins (30 percent), and Jeffrey 120 percent). In 2018, the partnership reports a net income of $29,000. 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.

Answer 1

Solution:

A. Journal Entry to record Jeffrey’s entrance into the partnership

            Cash A/c          Dr.                            $ 79,000

            Goodwill A/c    Dr.                            $ 46,000

                        To Prince Capital A/c                                  $ 32,200

                        To Robbins Capital A/c                               $ 13,800

                        To Jeffrey’s Capital A/c                               $ 79,000

            (Being Jeffrey’s entrance into partnership has been made)

Working Note: Computation of Goodwill and its appropriation:

Capital required to bring by Jeffrey                      $ 79,000

Jeffrey’s proposed share in partnership                   0.20

Implied Partnership Valuation                               $ 79,000/ 0.20 = $ 3,95,000

Total Paid-up Capital of Firm                                 $ 140,000+$ 130,000+$ 79,000

                                                                                    = $ 349,000

Goodwill        =          Implied Firm Valuation – Total Paid-up Capital

                        =          $ 395,000 - $ 349,000

                        =          $ 46,000

B. Allocation of Income at the end of 2018:

Particulars		Amount ($)
Net Income		29,000
Less: Interest Prince Share ($ 140,000 x 9%) Robbins Share ($ 130,000 x 9%) Jeffrey Share ($79,000 x 9%)	12,600 11,700 7,110	(31,410)
Loss after Interest		2,410
Distribution of Loss Prince’s Capital A/c ($ 2,410 x 50%) Robbin’s Capital A/c ($ 2,410 x 30%) Jeffrey’s Capital A/c ($ 2,410 x 20%)		1,205 723 482