Question

The partnership of Matteson, Richton, and O’Toole has existed for a number of years. At the present time the partners have the following capital balances and profit and loss sharing percentages:

Partner	Capital Balance			Profit and Loss Percentage
Matteson	$	215,600			30	%
Richton		224,400			45
O’Toole		225,000			25

O’Toole elects to withdraw from the partnership, leaving Matteson and Richton to operate the business. Following the original partnership agreement, when a partner withdraws, the partnership and all of its individual assets are to be reassessed to current fair values by an independent appraiser. The withdrawing partner will receive cash or other assets equal to that partner’s current capital balance after including an appropriate share of any adjustment indicated by the appraisal. Gains and losses indicated by the appraisal are allocated using the regular profit and loss percentages.

An independent appraiser is hired and estimates that the partnership as a whole is worth $640,000. Regarding the individual assets, the appraiser finds a building with a book value of $305,000 has a fair value of $470,000. The book values for all other identifiable assets and liabilities are the same as their appraised fair values.

Accordingly, the partnership agrees to pay O’Toole $370,000 upon withdrawal. Matteson and Richton, however, do not wish to record any goodwill in connection with the change in ownership.

Prepare the journal entry to record O’Toole’s withdrawal from the partnership

Answer 1

Journal Entry of Withdrawal :-

Building A/c Dr. ($470000-$305000)*100%	165000
To Matteson's Capital A/c ($470000-$305000)*30%		49500
To Richton's Capital A/c ($470000-$305000)*45%		74250
To O'toole's Capital A/c ($470000-$305000)*25%		41250

O'toole's Total Capital Inventment = Capital Investment + Share from Building

= $225000 + $41250

= $266250

Goodwill = Pay to O'toole - O'toole's Capital

= $370000 - $266250

= $103750

Journal Entry of Pay to O'toole :-

O'toole's Capital A/c Dr.	$266250
Matteson's Capital A/c Dr. ($103750*(2/5))	$41500
Richton's Capital A/c Dr. ($103750*(3/5))	$62250
To Cash A/c		$370000

Goodwill Distribution Ratio :- 2 : 3

Matteson's Capital	Richton's Capital
30%	45%
2	3