•
Solution E16-1
The partners’ contributions can be valued at anything the partnership
agrees on. In this case they are forming an equal partnership in equity
and recording the assets at fair value. If they feel that the combined
partnership assets are worth $280,000, then they would select the
bonus method. If it was agreed that Lam was bringing an additional
$40,000 in added intangible benefits they would select the goodwill
method.
Cost
Car fair
value
Lam Fair
value
Cash
60,000
60,000
Delivery equipment
80,000
60,000
Furniture inventory
120,000
160,000
_______
Total
260,000
160,000
120,000
If using the bonus method:
Bonus adjustment
(20,000)
20,000
Bonus capital balances
140,000
140,000
If using the goodwill method:
Goodwill adjustment
Goodwill capital balances
Solution E16-2
Computation of Beverly’s bonus:
Let B = bonus
B = 10% ($198,000 - B)
B = $19,800 - .1B
1.1B = $19,800
40,000
160,000
160,000
B = $18,000
Schedule to Allocate Partnership Income
Arnold
Net income to distribute
Carolyn
$198,000
Bonus to Beverly
(18,000)
Remainder to divide
180,000
Divided 40:40:20
Beverly
$ 18,000
(180,000)
Income allocation
0
$72,000
72,000
$ 36,000
$72,000
$100,000
$ 36,000
Solution E16-3
Mel
Dav
2012 income to divide
($25,000 - $4,000)
Salary to Mel
$21,000
(18,000)
Remainder to divide
3,000
Divided equally
(3,000)
$18,000
1,500
$ 1,500
2,400
1,600
$21,900
$ 3,100
0
2011 income understatement
Divided in the 2011 60:40 ratio
Income allocation
$ 4,000
(4,000)
0
Solution E16-6
1
Ben capital
Pet capital
$350,000
$350,000
To record assignment of half of Ben’s capital account to
Peters.
2
The total capital of BIG Entertainment Galley remains at
$1,480,000. The amount paid by Pet to Ben does not affect the
partnership and Pet does not become a partner with the
assignment of half of Ben’s interest.
Solution E16-7
Capital balances after Rob is admitted when assets are not
revalued:
Old
Capital
Fax capital
$140,000
Bel capital
60,000
Capital Transfer
New
Capital
$(56,000)
$ 84,000
(24,000)
36,000
80,000
80,000
0
$200,000
x
40%
x
40%
Rob capital
Total capital
$200,000
If the existing partners are selling 40% of a business that is valued
at $300,000 then they first divide $100,000 of goodwill by their
capital ratio.
Capital
adjusted
for FMV
Fax capital
Bel capital
Rob capital
Total capital
$210,000 x 40%
90,000 x 40%
$300,000
Capital Transfer
New
Capital
$(84,000)
(36,000)
120,000
$126,000
54,000
120,000
0
Solution E16-8
Journal entries to admit Joh to the Bow/Mon partnership:
$300,000
Goodwill
$ 45,000
Bow capital
$ 27,000
Mon capital
18,000
To record goodwill computed as follows:
New capital = $75,000 1/3 = $225,000
Goodwill = $225,000 new capital - $180,000 old capital = $45,000
Bow capital
$ 39,000
Mon capital
36,000
Joh capital
$75,000
To record capital transfer to Joh: ($90,000 + $27,000)/3 from Bow
and ($90,000 + $18,000)/3 from Mon.
Solution E16-9
1
Investment of $100,000 in partnership with revaluation:
Cash
Goodwill
$100,000
20,000
Walk capital
$120,000
The new partnership valuation is computed as: old capital
of $480,000/80% retained interest = $600,000 new capital.
Goodwill is computed as: new capital of $600,000 $580,000 (the old capital plus investment) = $20,000
goodwill.
2
Investment of $140,000 in partnership with revaluation:
Goodwill
$80,000
Sprint capital
Jog capital
Run capital
$24,000
40,000
16,000
New partnership capital is computed on the basis of new
investment of $140,000/20% interest = $700,000 new
capital. New capital of $700,000 - ($480,000 old capital +
$140,000 investment) = $80,000 goodwill.
Cash
$140,000
Walk capital
To record Walk’s investment in the partnership.
$140,000
Solution E16-12
Entry to write-up assets to fair value
Assets
$200,000
Beck capital
Dee capital
Lynn capital
$100,000
80,000
20,000
Entry to record settlement with Dee
Dee capital
Beck capital (5/6 $30,000 excess
payment)
Lynn capital (1/6 $30,000 excess
payment)
Dee loan
Cash
$380,000
25,000
5,000
$100,000
310,000
Beck capital ($300,000 + $100,000 - $25,000)
$375,000
Lynn capital ($100,000 + $20,000 - $5,000)
$115,000
Solution E16-14
1
Valuation of assets and liabilities as implied by excess payment
to Box:
Building
$10,000
Goodwill
40,000
Byd capital
$ 15,000
Box capital
Dar capital
Fus capital
10,000
20,000
5,000
To record revaluation of building and goodwill implied by
the excess payment to Box on his retirement ($10,000
20% = $50,000 revaluation).
Box capital
Cash
$35,000
$ 35,000
To record cash payment to Box on his retirement from the
business.
2
No revaluation; bonus to retiring partner:
Box capital
Byd (30/80)
Dar (40/80)
Fus(10/80)
Cash
$25,000
3,750
5,000
1,250
$ 35,000
To record a $10,000 bonus to Box upon retirement.
Solution E16-15
1
a
Bill’s contribution ($20,000 + $60,000 + $15,000 $30,000)
Ken’s contribution
Total tangible contributions
$ 65,000
50,000
$115,000
Ken’s contribution $50,000/.4 interest = $125,000 total capital
Total capital based on Ken’s contribution $125,000 less amount
contributed by Ken and Bill $115,000 = $10,000 goodwill
2
c
Jay’s investment of $65,000 is greater than his capital credit of
1/3 of $175,000; thus, there is goodwill to the old partners.
New capital = $65,000 1/3 = $195,000
New capital of $195,000 - (old capital $110,000 + $65,000
investment) = $20,000 goodwill.
Revaluation is recorded:
Goodwill (other assets)
$20,000
Thomas capital (50%)
$ 10,000
Mark capital (50%)
10,000
Mark’s capital = $60,000 + $10,000 goodwill = $70,000
3
c
Total capital ($170,000 + $200,000 + $200,000) = $570,000
Zen’s interest $570,000 1/3 = $190,000
Therefore, Tina and Warren receive a $10,000 bonus, shared
equally.
4
c
$90,000 investment > 25% ($100,000 + $80,000 + $90,000), thus,
there is goodwill to the old partners.
5
New capital $90,000/25%
Old capital + new investment $180,000 + $90,000
Goodwill
$360,000
(270,000)
$ 90,000
Finney capital $100,000 + (50% $90,000 goodwill)
Rhoads capital $80,000 + (50% $90,000 goodwill)
Chesterfield capital
Total capital
$145,000
125,000
90,000
$360,000
b
Payment to Gini at retirement
Capital account before recording share of goodwill
Gini’s share of goodwill
$200,000
170,000
$ 30,000
Total goodwill for partnership ($30,000/.3)
$100,000
Total assets before Gini’s retirement ($240,000 cash +
$360,000 other assets + $100,000 goodwill)
$700,000
Less: Payment to Gini on retirement
200,000
Total assets after Gini retires
$500,000
Solution E16-16
1
a
Tony capital
Olga capital
$ 30,000
70,000
$100,000
Capital Interest Income Interest
30%
50%
70%
50%
Since capital and income interests were not aligned at the time
of Shirley’s purchase, the $40,000 payment to Tony does not
provide a basis for revaluation. Thus, half of Tony’s $30,000
capital balance should be transferred to Shirley.
2
a
Implied total valuation of partnership based on
Dun’s $60,000 payment to partners ($60,000/.4)
$150,000
Entry to record goodwill:
Goodwill
$30,000
Lin capital
Que capital
$ 15,000
15,000
Entry to transfer equal capital amounts to Dun:
Lin capital
Que capital
Dun capital
$30,000
30,000
$ 60,000
Capital accounts after admission of Dun:
Lin capital ($50,000 + $15,000 - $30,000)
$ 35,000
Que capital ($70,000 + $15,000 - $30,000)
Dun capital
Total capital
55,000
60,000
$150,000
Solution E16-16 (continued)
3
c
Old capital of $120,000 2/3 interest retained by old partners =
$180,000 capitalization. $180,000 - $170,000 old capital and new
investment = $10,000 goodwill.
McC
New
Oak
Total
4
$120,000
Admission
of Oak
$60,000
$60,000
New
Capital
$ 70,000
50,000
60,000
$180,000
b
Bonus to Oak = ($170,000/3) - $50,000 = $6,667 bonus
McC
New
Oak
Total
5
Old
Capital
$ 70,000
50,000
Old
Capital
$ 70,000
50,000
$120,000
Admission
of Oak
$(3,333)
(3,334)
56,667
$50,000
New
Capital
$ 66,667
46,666
56,667
$170,000
Total
$500,000
100,000
600,000
a
Capital balances
Revalue assets
Adjusted balances
Excess payment to
Car 20/50
Ending balances
Ben
$100,000
20,000
120,000
Car
$200,000
30,000
230,000
Das
$200,000
50,000
250,000
(4,000)
$116,000
14,000
$244,000
(10,000)
$240,000
Solution E16-19
Kray, Lam, and Mann Partnership
Statement of Partners’ Capital
for the year ended December 31, 2011
Capital January 1, 2011
Additional investment
Withdrawals
Kray
Lam
Mann
Total
$65,000
4,000
$75,000
$70,000
(5,000)
(4,000)
$210,000
4,000
(9,000)
Net contributed capital
Net income (see schedule)
69,000
11,500
70,000
23,500
66,000
12,000
205,000
47,000
Capital December 31, 2011
$80,500
$93,500
$78,000
$252,000
Kray, Lam, and Mann Partnership
Schedule of Income Allocation
for the year ended December 31, 2011
Net
Income
Kray
Lam
Mann
$ 7,000
Income to divide
Salary to Lam
Interest allowances
$47,000
(11,000)
(21,000)
$ 6,500
$11,000
7,500
Remainder to divide
Divided equally
15,000
(15,000)
5,000
5,000
5,000
$11,500
$23,500
$12,000
Income allocation
Solution E16-20
0
1
If assets are not revalued:
Before Admission
of Iot
Gro
Ham
Iot
$ 45,000
65,000
$110,000
Transfers on
Capital
Balances
Admission of Iot After Admission
$(22,500)
(32,500)
55,000
0
$ 22,500
32,500
55,000
$110,000
If assets are revalued:
Capital
Capital
Capital
Balances
Balances
Balances
Before
Revaluation
After
Transfers After
Revaluation ($30,000) Revaluatio
to Iot Admissio
n
n
Gro
$ 45,000
Ham
Iot
$13,500
65,000
16,500
$110,000
$30,000
$ 58,500
$ 29,250
$(29,250)
81,500
(40,750) 40,750
70,000
70,000
$140,000
0 $140,000
2
Since old partners transferred 50% of their interests in future
profits, profits should be divided: 22.5% to Gro, 27.5% to Ham,
and 50% to Iot. The partners can, of course, agree to any profit
and loss sharing arrangement that they choose.
3
In the absence of a new partnership agreement, profits will be
divided equally.
Solution E16-21
Method 1: Bonus to retiring partner
Cas capital
Don capital
Ear capital
Cash
$140,000
9,000
12,000
$161,000
To record Cas’s retirement with a $21,000 bonus, shared by
Don and Ear in their relative profit and loss sharing ratios
(3/7 and 4/7, respectively).
Method 2: Goodwill to retiring partner only
Cas capital
Goodwill
Cash
$140,000
21,000
$161,000
To record Cas’s retirement and to record the $21,000
excess payment to Cas as goodwill.
Method 3: Goodwill implied by excess payment
Goodwill
$ 70,000
Cas capital
Don capital
Ear capital
$ 21,000
21,000
28,000
To record goodwill implied by the excess payment to Cas
on her retirement. Goodwill is computed as the excess
payment divided by Cas’s profit and loss sharing ratio
($21,000/30%).
Cas capital
Cash
To record retirement of Cas.
$161,000
Solution E17-1
Schedule of Capital Balances
$161,000
Capital balances January 1, 2011
January losses: Lumber
($40,000 book value- $25,000 sales
price)
Receivables
($25,000 - $21,000 collection)
Capital balances before distribution
$15,000
4,000
60% Folly 40% Frill
$40,000
$20,000
(9,000)
(6,000)
(2,400)
(1,600)
$28,600
$12,400
Cash distribution:
Accounts payable
Folly
Frill
Total cash
$15,000
28,600
12,400
$56,000
Cash balance: Beginning balance, $10,000 + $25,000 + $21,000 =
$56,000
Solution E17-2
Sale of inventory
Cash
$10,000
Inventory
To record sale of inventory items.
$10,000
Distribution of cash
Accounts payable
Cash
To record payment to creditors.
$ 5,000
$ 5,000
Mike capital
$12,600
Nan capital
6,200
Okey capital
25,200
Cash
$44,000
To record distribution of available cash to partners
computed as follows:
Capital
Balance
Mike capital $15,000
Nan capital
8,000
Okey capital 27,000
Totals
$50,000
-
Possible Loss from
Unsold Inventory = Balance
$2,400
$12,600
1,800
6,200
1,800
25,200
$6,000
$44,000
Solution E17-3
30% Fred 30% Ethel 40% Lucy
$85,000
$25,000
$90,000
(3,000)
(3,000)
(4,000)
January 1 balances
Contingency fund of $10,000
Possible losses on
asset disposal ($120,000)
Loss on Ethel’s possible
defaulta divided 3/7 and 4/7
Available cash is distributed
(36,000)
46,000
(36,000)
(14,000)
(48,000)
38,000
(6,000)
40,000
14,000
0
(8,000)
30,000
Notice that Ethel would have a debit balance in her capital account if
the contingencies occurred and if the assets were a total loss. In
order to determine how much cash is available for distribution, Fred
and Lucy’s balances must absorb Ethel’s debit balance.
Solution E17-4
Beginning balances
Offset Kim’s loan
Loss on sale of assets
($180,000 - $120,000)
Additional liability
Distribute Kim’s debit
balance 5/7, 2/7
Cash distribution
Creditors 50% Jan
$60,000 $59,000
30% Kim
$29,000
(20,000)
20% Lee
$52,000
5,000
65,000
(30,000)
(2,500)
26,500
(18,000)
(1,500)
(10,500)
(12,000)
(1,000)
39,000
$65,000
(7,500)
$19,000
10,500
0
(3,000)
$36,000
Kim owes $7,500 to Jan and $3,000 to Lee.
Solution E17-5
Schedule to Correct Capital Accounts
December 31, 2011
balance
Undervalued inventory
Corrected balances
($15,000)
Ali
Capital
(40%)
$60,000
Bart
Capital
(20%)
$25,000
Carrie
Capital
(40%)
$65,000
6,000
$66,000
3,000
$28,000
6,000
$71,000
The capital balances are adjusted for the error in computing net
income in the partners’ residual equity ratios.
Solution E17-6
Evers, Freda, and Grace Partnership
Safe Payment Schedule
Partner equities
40% Evers 40% Freda 20%
Grace
$100,000 $250,000 $170,000
Total
$520,000
Loss on sale of assets
(52,000)
(52,000)
(26,000)
(130,000)
Possible lossesa
48,000
(84,000)
198,000
(84,000)
144,000
(42,000)
390,000
(210,000)a
114,000
(24,000)
102,000
(12,000)
180,000
Allocate Evers’ loss
(36,000)
36,000
$ 90,000
$ 90,000
$180,000
0
Remaining noncash assets of $200,000 plus contingency fund of
$10,000 equals $210,000 possible losses.
Cash to distribute: Beginning cash balance of $100,000 plus $170,000
from sale of assets less $10,000 contingency fund equals $260,000.
Distribution of cash:
Accounts payable
Freda
Grace
$ 80,000
90,000
90,000
$260,000
Solution E17-7
Schedule for Phase-out of the Partnership
Capital balances
Creditors’ recovery
from Betty
30% Alice 40% Betty 30% Carle Total
$ 20,000 $(120,000) $ 70,000 $(30,000)
20,000
30,000
(90,000)
20,000
(35,000)
(15,000)
20,000
(70,000)
70,000
0
Partnership recovery
from Betty a
Write-off of Betty’s deficit
Partnership recovery
from Alice
Write-off of Alice’s deficit
Cash distribution to Carle
10,000
(5,000)
5,000
0
70,000
70,000
(35,000)
35,000
35,000
(5,000)
30,000
(30,000)
0
30,000
0
20,000
20,000
20,000
10,000
30,000
30,000
(30,000)
0
Betty’s personal net assets after partnership creditor recovery are
$80,000 personal assets - $60,000 personal liabilities = $20,000.
Solution E17-8
Daniel, Eric, and Fred Partnership
Schedule for Phase-out of Partnership
Capital balances
40%
Daniel
Capital
$10,000
30% Eric
30% Fred
Capital
$60,000
Capital
Total
$(90,000) $(20,000)
Fred’s payment to
creditors
20,000
10,000
60,000
Fred’s payment to the
Partnership
20,000
(70,000)
0
40,000
40,000
10,000
60,000
(30,000)
40,000
(17,143)
(7,143)
(12,857)
47,143
30,000
0
40,000
Write-off of Fred’s
deficit in the relative
profit sharing ratio of
Daniel and Eric 4/7:3/7
Daniel’s payment to the
partnership for his
Deficit
Write off of Daniel’s
deficit to Eric
Payment to Eric
5,000
(2,143)
2,143
0
47,143
(2,143)
45,000
(45,000)
5,000
45,000
0
(45,000)
0
Fred’s personal assets of $100,000 less the $40,000 owed to his
personal creditors, and less the $20,000 paid to partnership
creditors, equals $40,000 available for his debit capital account
balance.
0
Solution E17-9
Ace, Ben, Cid, and Don
Statement of Partnership Liquidation
for the period June 30 to July 31, 2011
Cash
Balances
June 30,
2011
Liabilitie
s
Ace
Ben(20
Cid (20%)
Don (10%)
(50%)
%)
Capital
Capital
Capital
$200,000 $400,000 $ 40,000
$10,000
$(170,000)
240,000
10,000
(170,000)
240,000
10,000
(170,000)
July 1, 2011
Investment of
Ace
200,000
400,000
200,000
400,000
July 1, 2011
Payment of
Liabilities
(400,000) (400,000)
Balances
July 1, 2011
0
0
July 15, 2011
Investment of
Cid
Investment of
Don
Loss on Cid’s
Insolvency a
Loss on Ben’s
Insolvency
July 31, 2011
100,000
100,000
80,000
180,000
240,000
10,000
(70,000)
180,000
(50,000)
190,000
(20,000)
(10,000)
70,000
0
180,000
(10,000)
180,000
10,000
0
$
Final
distribution
(180,000)
(180,000)
0
0
() Debit capital balance or deduct.
a
Allocating Cid’s insolvency to Ace & Ben: 70,000*5/7 = 50,000 Ace,
70,000*2/7 = 20,000 Ben
Solution E17-10
Denver, Elsie, Fannie and George Partnership
Safe Payment Schedule
January 31, 2011
Possible
Losses
Partner’s equity at 1/1
January profit/loss
transactions:
Inventory sale
Land sale
Partner’s equity at 1/31
Possible losses —
noncash
Possible losses —
contingent
Possible losses —
Fannie
Possible losses —
George
Denver
Elsie
Fannie George
(20%)
(10%)
(50%)
(20%)
$150,000 $80,000 $140,000 $78,000
(6,000) (3,000) (15,000) (6,000)
20,000 10,000
50,000 20,000
$164,000 $87,000 $175,000 $92,000
$395,00 (79,000) (39,500) (197,500) (79,000)
0
20,000
(4,000) (2,000) (10,000) (4,000)
$ 81,000 $45,500 $(32,500) $ 9,000
(13,000) (6,500)
32,500 (13,000)
$ 68,000 $39,000 $
(2,667) (1,333)
$ 65,333 $37,667
0 $(4,000)
4,000
$
0