Question

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

Prince, Capital	$	50,000
Robbins, Capital		40,000

Prince is allocated 70 percent of all profits and losses with the remaining 30 percent assigned to Robbins after interest of 6 percent is given to each partner based on beginning capital balances. On January 2, 2018, Jeffrey invests $25,000 cash for a 20 percent interest in the partnership. This transaction is recorded by the goodwill method. After this transaction, 6 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 $6,000. Prepare the journal entry to record Jeffrey’s entrance into the partnership on January 2, 2018. Determine the allocation of income at the end of 2018.

Answer 1

Value estimated by Jeffrey of existing partnership= $25000/20% =$125000.....(A)

Book value of partnership after considerating Jeffrey's admission =$(50000+40000+25000) =$115000....(B)

Hence goodwill amount contributed by new partner Jeffrey = (A-B) =$10000.

Hence journal entry for Jeffrey entrance into the partnership on 2nd January, 2018 will be :

Particulars	Amount ($)--Debit	Amount ($)--Credit
Cash A/c.....Dr	25000
Goodwill A/c....Dr	10000
To Jeffrey's capital		25000
To Prince's capital		10000
(Being Jeffrey admitted as a new partner with 20% share of profit and Prince share of profit reduced from 70% to 50% recorded under goodwill method).

2. Allocation of net income to all three partners at the end of 2018:

Net income = $6000

Prince share of income (50%) = $3000

Robbin's share of income (30%) = $1800

Jeffrey's share of income (20%) = $1200