a
Prepare
a
Explanation of Solution
Journal entries to record the preceding transactions on the assumption that the bonus method is used
Date | Accounts and Explanation | Post Ref. | Debit ($) | Credit ($) |
2016 | ||||
1-Jan | Building | $ 52,000 | ||
Equipment | $ 16,000 | |||
Cash | $ 12,000 | |||
Person R's Capital | $ 40,000 | |||
Person OD's Capital | $ 40,000 | |||
(To record the initial investment) | ||||
31-Dec | Person R's Capital | $ 22,000 | ||
Income Statement | $ 10,000 | |||
Person OD's Capital | $ 12,000 | |||
(To record the transfer of interest and | ||||
2017 | ||||
1-Jan | Cash | $ 15,000 | ||
Person OD's Capital | $ 300 | |||
Person R's Capital | $ 1,700 | |||
Person TD's Capital | $ 17,000 | |||
(To record the admission of new partner) | ||||
31-Dec | Person OD's Capital | $ 10,340 | ||
Person R's Capital | $ 5,000 | |||
Person TD's Capital | $ 5,000 | |||
Person OD's Drawings | $ 10,340 | |||
Person R's Drawings | $ 5,000 | |||
Person TD's Drawings | $ 5,000 | |||
(To record the closing entry of drawings by reducing the amount from capital accounts) | ||||
31-Dec | Income Statement | $ 44,000 | ||
Person OD's Capital | $ 16,940 | |||
Person R's Capital | $ 16,236 | |||
Person TD's Capital | $ 10,824 | |||
(To record the allocation of net income) | ||||
2018 | ||||
1-Jan | Person TD's Capital | $ 22,824 | ||
Person JP's Capital | $ 22,824 | |||
(To record the sale of person TD's share to person JP) | ||||
31-Dec | Person OD's Capital | $ 11,660 | ||
Person R's Capital | $ 5,507 | |||
Person JP's Capital | $ 5,000 | |||
Person OD's Drawings | $ 11,660 | |||
Person R's Drawings | $ 5,507 | |||
Person JP's Drawings | $ 5,000 | |||
(To record the closing entry of drawings by reducing the amount from capital accounts) | ||||
31-Dec | Income Statement | $ 61,000 | ||
Person OD's Capital | $ 20,810 | |||
Person R's Capital | $ 24,114 | |||
Person JP's Capital | $ 16,076 | |||
(To record the allocation of net income) | ||||
2019 | ||||
1-Jan | Person JP's Capital | $ 33,900 | ||
Person OD's Capital | $ 509 | |||
Person R's Capital | $ 2,881 | |||
Cash | $ 37,290 | |||
(To record the withdrawal of person JP) | ||||
Table: (1)
Person OD is entitled to interest on capital of $8,000 which is 20% of $40,000. Person OD is entitled to have 15% of $10,000 which is $1,500 or $4,000. The larger amount is preferred so the larger amount is $4,000. Hence, total income for person OD is $12,000.
On January 1, 2017, a new partner person TD joined the firm by contributing cash of $15,000 with 20% interest in the firm. Partners are allowed to withdraw drawings as $5,000 or 20% of beginning capital balance of the year, whichever is larger. Net income for 2017 is $44,000 distributed among the partners after providing interest and salary in their profit sharing ratios.
The drawings are deducted from the capital balances of the partners.
On Jan 1, 2018, person TD sells his partnership to person JP. Person JP directly pays $46,000 to person TD. Drawings are reduced from capital balances and accounts are closed. Net income of $61,000 is distributed among the partners after deducting the salary and interest.
Person JP withdraws from the partnership and is paid the capital balance plus 10%. 10% is contributed by the partners in their profit sharing ratio.
Working note
Calculate total capital of the firm after the loss and new admission:
Person TD has 20% share in the business.
Calculate the amount of share of person TD in the total capital:
Person TD is bringing $15,000 in cash. $2,000 of his share is contributed by all other partners in their profit sharing ratios.
Calculate distribution of bonus from the partners:
Calculate the beginning capital balance for person OD:
Calculate the amount of drawings of person OD:
Income allocation for the year 2017
Particulars | Person OD | Person R | Person TD | Total |
Net income | $ 44,000 | |||
Interest on capital | $ 10,340 | $ 10,340 | ||
Net income after interest | $ 33,660 | |||
Salary | $ 6,600 | $ 6,600 | ||
Net income after salary | $ 27,060 | |||
Distributed among partners | $ 16,236 | $ 10,824 | $ 27,060 | |
Total | $ 16,940 | $ 16,236 | $ 10,824 | $ 0 |
Table: (2)
Calculate ending capital balances of the partners in the year 2017:
Particulars | Person OD | Person R | Person TD | Total |
Beginning balance | $ 40,000 | $ 40,000 | $ 80,000 | |
Interest and salary | $ 12,000 | $ (22,000) | $ (10,000) | |
Person TD's investment | $ (300) | $ (1,700) | $ 17,000 | $ 15,000 |
Drawings | $ (10,340) | $ (5,000) | $ (5,000) | $ (20,340) |
Income allocation | $ 16,940 | $ 16,236 | $ 10,824 | $ 44,000 |
Ending balances | $ 58,300 | $ 27,536 | $ 22,824 | $ 108,660 |
Table: (3)
Income allocation for 2018
Particulars | Person OD | Person R | Person JP | Total |
Net income | $ 61,000 | |||
Interest on capital | $ 11,660 | $ 11,660 | ||
Net income after interest | $ 49,340 | |||
Salary | $ 9,150 | $ 9,150 | ||
Net income after salary | $ 40,190 | |||
Distributed among partners | $ 24,114 | $ 16,076 | $ 40,190 | |
Total | $ 20,810 | $ 24,114 | $ 16,076 | $ 0 |
Table: (4)
Calculate ending capital balance of person JP:
b.
Prepare journal entries to record the preceding transactions on the assumption that the
b.
Explanation of Solution
Journal entries to record the preceding transactions on the assumption that the goodwill method is used
Date | Accounts and Explanation | Post Ref. | Debit ($) | Credit ($) |
2016 | ||||
1-Jan | Building | $ 52,000 | ||
Equipment | $ 16,000 | |||
Cash | $ 12,000 | |||
Goodwill | $ 80,000 | |||
Person R's Capital | $ 80,000 | |||
Person OD's Capital | $ 80,000 | |||
(To record the initial investment) | ||||
31-Dec | Person R's Capital | $ 30,000 | ||
Income Statement | $ 10,000 | |||
Person OD's Capital | $ 20,000 | |||
(To record the transfer of interest and partnership income to person D) | ||||
2017 | ||||
1-Jan | Cash | $ 15,000 | ||
Goodwill | $ 22,500 | |||
Person TD's Capital | $ 37,500 | |||
(To record the admission of new partner) | ||||
31-Dec | Person OD's Capital | $ 20,000 | ||
Person R's Capital | $ 10,000 | |||
Person TD's Capital | $ 7,500 | |||
Person OD's Drawings | $ 20,000 | |||
Person R's Drawings | $ 10,000 | |||
Person TD's Drawings | $ 7,500 | |||
(To record the closing entry of drawings by reducing the amount from capital accounts) | ||||
31-Dec | Income Statement | $ 44,000 | ||
Person OD's Capital | $ 26,600 | |||
Person R's Capital | $ 10,440 | |||
Person JP's Capital | $ 6,960 | |||
(To record the allocation of net income) | ||||
2018 | ||||
1-Jan | Goodwill | $ 26,588 | ||
Person D's Capital | $ 3,988 | |||
Person R's Capital | $ 13,560 | |||
Person TD's Capital | $ 9,040 | |||
(To record the goodwill by purchase of person TD's share) | ||||
1-Jan | Person TD's Capital | $ 46,000 | ||
Person JP's Capital | $ 46,000 | |||
(To record the sale of person TD's share to person JP) | ||||
31-Dec | Person OD's Capital | $ 22,118 | ||
Person R's Capital | $ 12,800 | |||
Person JP's Capital | $ 9,200 | |||
Person OD's Drawings | $ 22,118 | |||
Person R's Drawings | $ 12,800 | |||
Person JP's Drawings | $ 9,200 | |||
(To record the closing entry of drawings by reducing the amount from capital accounts) | ||||
31-Dec | Income Statement | $ 61,000 | ||
Person OD's Capital | $ 31,268 | |||
Person R's Capital | $ 17,839 | |||
Person JP's Capital | $ 11,893 | |||
(To record the allocation of net income) | ||||
2019 | ||||
1-Jan | Person JP's Capital | $ 53,562 | ||
Cash | $ 53,562 | |||
(To record the withdrawal of person JP) | ||||
Table: (5)
Working note
Calculate implied value of the business:
Calculate total value of the business:
Calculate goodwill:
Now, goodwill is calculated as:
Calculate the capital of person OD:
Income allocation for the year 2017:
Particulars | Person OD | Person R | Person TD | Total |
Net income | $ 44,000 | |||
Interest on capital | $ 20,000 | $ 20,000 | ||
Net income after interest | $ 24,000 | |||
Salary | $ 6,600 | $ 6,600 | ||
Net income after salary | $ 17,400 | |||
Distributed among partners | $ 10,440 | $ 6,960 | $ 17,400 | |
Total | $ 26,600 | $ 10,440 | $ 6,960 | $ 0 |
Table: (6)
Calculate ending capital balances:
Particulars | Person OD | Person R | Person TD | Total |
Beginning balance | $ 80,000 | $ 80,000 | $ 160,000 | |
Interest and salary | $ 20,000 | $ (30,000) | $ (10,000) | |
Person TD's investment | $ 37,500 | $ 37,500 | ||
Drawings | $ (20,000) | $ (10,000) | $ (7,500) | $ (37,500) |
Income allocation | $ 26,600 | $ 10,440 | $ 6,960 | $ 44,000 |
Ending balances | $ 106,600 | $ 50,440 | $ 36,960 | $ 194,000 |
Table: (7)
Calculate the excess amount paid by person JP:
Now, person TD is getting the profit share of 40% of 85% which is 34%.
Calculate goodwill:
Goodwill is distributed to partners in their profit sharing ratio.
Calculate capital of person OD after goodwill:
Now, capital of person JP after goodwill:
Income allocation of the year 2018:
Particulars | Person OD | Person R | Person JP | Total |
Net income | $ 61,000 | |||
Interest on capital | $ 22,118 | $ 22,118 | ||
Net income after interest | $ 38,882 | |||
Salary | $ 9,150 | $ 9,150 | ||
Net income after salary | $ 29,732 | |||
Distributed among partners | $ 17,839 | $ 11,893 | $ 29,732 | |
Total | $ 31,268 | $ 17,839 | $ 11,893 | $ 0 |
Table: (8)
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Chapter 14 Solutions
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