Question

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

Prince, Capital	$	155,000
Robbins, Capital		145,000

Prince is allocated 70 percent of all profits and losses with the remaining 30 percent assigned to Robbins after interest of 7 percent is given to each partner based on beginning capital balances.

On January 2, 2018, Jeffrey invests $88,000 cash for a 20 percent interest in the partnership. This transaction is recorded by the goodwill method. After this transaction, 7 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 $28,000.

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

total capital of firm taking jeffrey's capital as base = $88000*100/20 = $440000

total capital less jeffrey's capital less prince's capital less robbin's capital = goodwill amount

$440000 - ($88000) - (155000) - (145000) = $52000

This goodwill amount has to be allocated to robbin and prince in their profit and loss ratio.

the entry will be - goodwill A/c ...........dr $52000

To robbin's capital $15600

To prince's capital $36400

Jeffrey’s entrance into the partnership - Cash A/c ........dr $88000

To jeffrey's capital A/c $88000

Allocation of income

Profit/loss A/c ............Dr $28000

To robbin's capital $8400

To prince's capital $14000

To jeffrey's capital $5600