Question

The Prince-Robbins partnership has the following capital account balances on January 1, 2018:

Prince, Capital	$	150,000
Robbins, Capital		110,000

Prince is allocated 60 percent of all profits and losses with the remaining 40 percent assigned to Robbins after interest of 10 percent is given to each partner based on beginning capital balances.

On January 2, 2018, Jeffrey invests $76,000 cash for a 20 percent interest in the partnership. This transaction is recorded by the goodwill method. After this transaction, 10 percent interest is still to go to each partner. Profits and losses will then be split as follows: Prince (50 percent), Robbins (30 percent), and Jeffrey (20 percent). In 2018, the partnership reports a net income of $36,000.

1. Prepare the journal entry to record Jeffrey’s entrance into the partnership on January 2, 2018.

2. Determine the allocation of income at the end of 2018.

Answer 1

Step 1 :- Calculate total capital after new investment:

Total capital = $150000 + $110000 + $76000

= $ 336000

Implied value of the business based on new investment:

Implied value = $76000/20%

=$380000

Step 2 :- calculation of goodwill:-

Goodwil = $380000 - $336000

= $44000

Offsetting allocation to the original two partners based on their profit and loss ratio:

Prince = $26400 (60%)

Robbin = $17600 (40%)

A) Journal entries:-

Goodwill. $44000

Prince capital $26400

Robbin capital. $17600

B) Allocation of income at the end of 2018:-

​​​​​​

Title	Prince	Robbins	Jeffery	Total
Net income				$36000
Interest	$17640	$12760	$7600 (10%of 76000)	$38000 ($2000)
Remainder to allocate (5:3:2)	$1000	$600	$400	$2000
Total Allocation	$16640	$12160	$7200	$0