Question

Partnership Formation

Max, Nat and Roberta formed a partnership to operate a dry-cleaning business. They agreed to share initial capital and subsequent income in a 3:2:1 ratio. Each partner's contributions to the new venture are listed next.

Max: $12,000 cash, dry-cleaning equipment worth $90,000 and the ability to keep the equipment in good operating condition.
Nat: $24,000 cash and extensive experience in the dry-cleaning business.
Roberta: $9,000 cash and a 2-year $36,000 note, payable to the firm, with 12 percent interest on the unpaid balance.

Required

(a) Record the formation using the goodwill approach.

General Journal
Description	Debit	Credit
AnswerCapital - MaxInvestmentNote payableCash	Answer	Answer
Note receivable	Answer	Answer
Equipment	Answer	Answer
Goodwill	Answer	Answer
AnswerInvestmentNote payableCapital - MaxCash	Answer	Answer
Capital - Nat	Answer	Answer
Capital - Roberta	Answer	Answer

(b) Record the formation using the bonus approach.

General Journal
Description	Debit	Credit
AnswerCashInvestmentNote payableCapital - Max	Answer	Answer
Note receivable	Answer	Answer
Equipment	Answer	Answer
AnswerCapital - MaxNote payableInvestmentCash	Answer	Answer
Capital - Nat	Answer	Answer
Capital - Roberta	Answer	Answer

Answer 1

a
Cash	45,000
Note receivable	36,000
Equipment	90,000
Goodwill	99,000
Capital – Max (= 3/6 x $270,000)		135000
Capital – Nat (= 2/6 x $270,000)		90000
Capital – Roberta (= 1/6 x $270,000)		45000
Working:
Because Roberta is the only partner not contributing expertise that would support goodwill recognition, we base the apparent total value of the firm on her investment.
			total value	270000
(9000+36000)*(3+2+1)
total tangible assets invested	171000
12000+90000+24000+9000+36000
implied goodwill	99000
b.
Cash	45,000
Note receivable	36,000
Equipment	90,000
Capital – Max (= 3/6 x $171,000)		85500
Capital – Nat (= 2/6 x $171,000)		57000
Capital – Roberta (= 1/6 x $171,000)		28500