Question

P, R, and D have the following capital balances; $80,000, $100,000 and $60,000, respectively. The partners share profits and losses 20%, 40%, and 40%, respectively.

Required (show all your calculations):

3. What is the total partnership capital after R retires receiving $160,000 and using the goodwill method (assume all capital accounts are revalued)? (3.5 points)

4. R retires and is paid $160,000 based on an independent appraisal of the business. If the bonus method is used, what is the capital balance of P? (3.5 points)

5. R retires and is paid $160,000 based on an independent appraisal of the business. If the bonus method is used, what is the capital balance of D? (3 points)

6. What is the total partnership capital after R retires receiving $160,000 and using the bonus method? (3.5 point)

Answer 1

Solution 3:

R will receive additional $60,000 above his capital balance. R share of profit is 40%, therefore extra payment of $60,000 indicated Goodwill share of R.

Therefore total goodwill of partnership = $60,000/40% = $150,000

Share of goodwill for P = $150,000*20% = $30,000

Share of Goodwill for D = $150,000*40% = $60,000

New capital of P = $80,000 + $30,000 = $110,000

New Capital of D = $60,000 + $60,000 = $120,000

Total Partnership capital after R retirement = $110,000 + $120,000 = $230,000

Solution 4:

The $60,000 bonus will be deducted from remaining partners P & D in their profit sharing ratio i.e. 1:2

Captial balance of P after R retires = $80,000 - ($60,000*1/3) = $60,000

Solution 5:

Captial balance of D after R retires = $60,000 - ($60,000*2/3) = $20,000

Solution 6:

Total Partnership capital after R retires = $60,000 + $20,000 = $80,000