Question

A partnership of attorneys in the St. Louis, Missouri, area has the following balance sheet accounts as of January 1, 2018:

Assets	$	370,000	Liabilities	$	116,000
			Athos, capital		98,000
			Porthos, capital		88,000
			Aramis, capital		68,000

According to the articles of partnership, Athos is to receive an allocation of 50 percent of all partnership profits and losses while Porthos receives 30 percent and Aramis, 20 percent. The book value of each asset and liability should be considered an accurate representation of fair value.

For each of the following independent situations, prepare the journal entry or entries to be recorded by the partnership.

1. Porthos, with permission of the other partners, decides to sell half of his partnership interest to D’Artagnan for $56,000 in cash. No asset revaluation or goodwill is to be recorded by the partnership.

2. All three of the present partners agree to sell 10 percent of each partnership interest to D'Artagnan for a total cash payment of $32,000. Each partner receives a negotiated portion of this amount. Goodwill is recorded as a result of the transaction.

3. D'Artagnan is allowed to become a partner with a 10 percent ownership interest by contributing $42,000 in cash directly into the business. The bonus method is used to record this admission.

4. Use the same facts as in requirement (c) except that the entrance into the partnership is recorded by the goodwill method.

5. D'Artagnan is allowed to become a partner with a 10 percent ownership interest by contributing $28,000 in cash directly to the business. The goodwill method is used to record this transaction.

6. Aramis decides to retire and leave the partnership. An independent appraisal of the business and its assets indicates a current fair value of $340,000. Goodwill is to be recorded. Aramis will then be given the exact amount of cash that will close out his capital account.

Answer 1

1. Porthos, with permission of the other partners, decides to sell half of his partnership interest to D’Artagnan for $56,000 in cash. No asset revaluation or goodwill is to be recorded by the partnership.

Solution: Journal Entry-

                        Porthos, Capital         Dr        $44,000

                                    D’Artagnan, Capital   Cr        $44,000

(To reclassify half of Porthos's capital balance to reflect transfer of interest to D'Artagnan.)

                        Porthos Capital = $88,000 / 2 = $44,000

1. All three of the present partners agree to sell 10 percent of each partnership interest to D'Artagnan for a total cash payment of $32,000. Each partner receives a negotiated portion of this amount. Goodwill is recorded as a result of the transaction.

Solution:        

General Journal	Debit	Credit
Goodwill	66,000
Athos, Capital (50%)		33,000
Porthos, Capital (30%)		19,800
Aramis, Capital (20%)		13,200

(To record goodwill based on $320,000 implied value of partnership[$32,000 ÷ 10%]. Because current capital is only $254,000 [the $32,000 goes directly to the partners], goodwill of $66,000 has to be recorded and allocated using profit and loss ratio.)

Calculation of Goodwill:

            Implied Value of Partnership = $32,000 / 10% = $320,000

            Current capital = $254,000

            Goodwill = $66,000

General Journal	Debit	Credit
Athos, Capital	13,100
Porthos, Capital	10,780
Aramis, Capital	8,120
D'Artagnan, Capital		32,000

(To reclassify 10% of each partner's capital to reflect transfer of interest to D'Artagnan.)

1. D'Artagnan is allowed to become a partner with a 10 percent ownership interest by contributing $42,000 in cash directly into the business. The bonus method is used to record this admission.

Solution:

            Cash    Dr        $42,000

                        D’Artagnan Capital (10% of total Capital) Cr        $29,600

                        Athos, Capital (50% of excess payment)     Cr        $6,200

                        Porthos, Capital (30% of excess payment) Cr        $3,720

                        Aramis, Capital (20% of excess payment)    Cr        $2,480

(To record $42,000 payment by D'Artagnan which increases total capital to $296,000. D'Artagnan is credited for only 10% of that balance with the extra $12,400 payment being recorded as a bonus to the original partners.)

1. Use the same facts as in requirement (c) except that the entrance into the partnership is recorded by the goodwill method.

Solution:

Cash                Dr        $42,000

Goodwill         Dr        $88,000

                        D’Artagnan Capital                            Cr        $42,000

                        Athos, Capital (50% of Goodwill)     Cr        $44,000

                        Porthos, Capital (30% of Goodwill) Cr        $26,400

                        Aramis, Capital (20% of Goodwill)   Cr        $17,600

(To record D'Artagnan's contribution to the partnership. The $42,000 payment for 10% interest indicates a $420,000 value for the business although the capital balances would only increase to $296,000. The $88,000 difference is recorded as goodwill, an amount assigned to the original partners.)