Question

A partnership has the following capital balances with partners' profit and loss percentages indicated parenthetically: Burks (35%) $ 280,000 Donovan (40%) 300,000 Watkins (25%) 170,000 Ranzilla agrees to pay a total of $245,000 directly to these three partners to acquire a 25 percent ownership interest from each. The partnership will record goodwill based on the new partner's payment. What is Donovan’s capital balance after the transaction?

• $398,000

• $392,000

• $294,000

• $225,000

Answer 1

Solution:

Capital invested by Ranzilla for 25% interest = $245,000

Total capital of partnership = $245,000 / 25% = $980,000

Existing capital of partnership = $280,000 + $300,000 + $170,000 = $750,000

Goodwill to be recorded = $980,000 - $750,000 = $230,000

Donovan share in goodwill = $230,000*40% = $92,000

Donovan capital after recording the goodwill = $300,000 + $92,000 =$392,000

Donovan’s capital balance after the transaction of admission of new partner = $392,000 - ($392,000*25%) = $294,000

Hence 3rd option is correct.