Question

A summary balance sheet for the Ash, Brown, and Curly partnership on December 31, 2014 is shown below. Partners Ash, Brown, and Curly allocate profit and loss in their respective ratios of 2:1:1. The partnership agreed to pay partner Brown $135,000 for his partnership interest upon his retirement from the partnership on January 1, 2015. The partnership financials on January 1, 2015 are:

Assets

Cash                                                              $ 75,000

Marketable securities                                       60,000

Inventory                                                         85,000

Land                                                                 90,000

Building-net                                                    110,000

Total assets                                                 $420,000

Equities

Ash, capital                                               $210,000

Brown, capital                                             105,000

Curly, capital                                               105,000

Total equities                                             $420,000

Required:

Prepare the journal entry to reflect Brown's retirement from the partnership. Assume a revaluation of total partnership capital based on excess payment. What is the debit to Brown's account?

	A.	120,000
	B.	135,000
	C.	30,000
	D.	60,000

Answer 1

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Revalue the total partnership capital to reflect the value implied by Brown's retirement
Excess payment of $30,000.
Excess payment of $30,000 for 1/4 ownership implies goodwill of $30,000 / 25% = $120,000.
Goodwill	$       120,000
Ash, capital	$          60,000
Curly, capital	$          30,000
Brown, capital	$          30,000
Account	Debit	Credit
Brown, capital	$       135,000
Cash		$       135,000