Question

The Distance Plus partnership has the following capital balances at the beginning of the current year: Tiger (40% of profits and losses) $ 110,000 Phil (40%) 80,000 Ernie (20%) 95,000 Each of the following questions should be viewed independently. If Sergio invests $130,000 in cash in the business for a 30 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 30 percent interest, what journal entry is recorded? Assume that the bonus method is used. If Sergio invests $75,000 in cash in the business for a 20 percent interest, what journal entry is recorded? Assume that the goodwill method is used.

Answer 1

Solution a:

Total capital of partnership after admission of Sergio = ($110,000 + $80,000 + $95,000) + $130,000

= $415,000

Share of Sergio = 30%

Required capital by Sergio = $415,000*30% = $124,500

Capital contribution by Sergio = $130,000

Bonus capital contributed by Sergio = $130,000 - $124,500 = $5,500

Journal Entries - Distance Plus Partnership
S. No.	Particulars	Debit	Credit
1	Cash Dr	$130,000.00
	To Sergio's Capital		$130,000.00
	(Being capital introduced by new partner)
2	Sergio's Capital Dr	$5,500.00
	To Tiger's Capital ($5,500*4/10)		$2,200.00
	To Phil's Capital ($5,500*4/10)		$2,200.00
	To Ernie's Capital ($5,500*2/10)		$1,100.00
	(Being bonus capital of new partner distributed in old partners)

Solution b:

Total capital of partnership after admission of Sergio = ($110,000 + $80,000 + $95,000) + $120,000

= $405,000

Share of Sergio = 30%

Required capital by Sergio = $405,000*30% = $121,500

Capital contribution by Sergio = $120,000

Bonus capital to be given to Sergio = $121,500 - $120,000 = $1,500

Journal Entries - Distance Plus Partnership
S. No.	Particulars	Debit	Credit
1	Cash Dr	$120,000.00
	To Sergio's Capital		$120,000.00
	(Being capital introduced by new partner)
2	Tiger's Capital Dr ($1,500*4/10)	$600.00
	Phil's Capital Dr ($1,500*4/10)	$600.00
	Ernie's Capital Dr ($1,500*2/10)	$300.00
	To Sergio's Capital		$1,500.00
	(Being old partner share of capital given to new partner)

Solution c:

Capital contribution by Sergio = $75,000

Share of sergio = 20%

Total required capital of partnership = $75,000 / 20% = $375,000

existing capital of partnership = ($110,000 + $80,000 + $95,000) + $75,000 = $360,000

Goodwill = $375,000 - $360,000 = $15,000

Journal Entries - Distance Plus Partnership
S. No.	Particulars	Debit	Credit
1	Cash Dr	$75,000.00
	To Sergio's Capital		$75,000.00
	(Being capital introduced by new partner)
2	Goodwill Dr	$15,000.00
	To Tiger's Capital ($15,000*4/10)		$6,000.00
	To Phil's Capital ($15,000*4/10)		$6,000.00
	To Ernie's Capital ($15,000*2/10)		$3,000.00
	(Being recording of goodwill at the time of admission of new partner.)