The Prince-Robbins partnership has the following capital account balances on January 1, 2018:
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.
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|
To Jeffrey's capital
|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
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