Derek Howat, Gina Rosales, and Amin Karem formed a partnership 10 years ago called HRK LLP, which reports under ASPE. Derek, Gina, and Amin are working on the 2020 year-end financial reporting for the partnership, and Derek announced that he would like to retire as of the year end. The partnership agreement states that upon retirement, a partner will receive $225,000 in cash for their one-third ownership interest. No revaluations to partnership assets are required before Derek’s withdrawal. Before recording the year-end adjustments for salary, interest, and income, the individual capital accounts of the partners at December 31, 2020, were as follows: Capital, Derek $155,000 Capital, Gina $215,000 Capital, Amin $130,000 HRK LLP had income for 2020 of $86,000 and according to the partnership agreement, profits should be split 2:3:1 between Derek, Gina, and Amin. A salary of $30,000 was paid to Derek during 2020, and interest is accrued on the opening capital balances at 5%. Required: Calculate the December 31, 2020, capital balances of each partner prior to Derek’s retirement. Provide the necessary journal entries to record the withdrawal of Derek from the partnership using the goodwill method. Provide the necessary journal entries to record the withdrawal of Derek from the partnership using the bonus method.
Derek Howat, Gina Rosales, and Amin Karem formed a partnership 10 years ago called HRK LLP, which reports under ASPE. Derek, Gina, and Amin are working on the 2020 year-end financial reporting for the partnership, and Derek announced that he would like to retire as of the year end. The partnership agreement states that upon retirement, a partner will receive $225,000 in cash for their one-third ownership interest. No
revaluations to partnership assets are required before Derek’s withdrawal.
Before recording the year-end adjustments for salary, interest, and income, the individual capital accounts of the partners at December 31, 2020, were as follows:
|
Capital, Derek |
$155,000 |
|
Capital, Gina |
$215,000 |
|
Capital, Amin |
$130,000 |
HRK LLP had income for 2020 of $86,000 and according to the partnership agreement, profits should be split 2:3:1 between Derek, Gina, and Amin. A salary of $30,000 was paid to Derek during 2020, and interest is accrued on the opening capital balances at 5%.
Required:
- Calculate the December 31, 2020, capital balances of each partner prior to Derek’s retirement.
- Provide the necessary
journal entries to record the withdrawal of Derek from the partnership using thegoodwill method.
Provide the necessary journal entries to record the withdrawal of Derek from the partnership using the bonus method.
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