Question

At year-end, the Circle City partnership has the following capital balances:

Manning, Capital	$	170,000
Gonzalez, Capital		150,000
Clark, Capital		120,000
Freeney, Capital		110,000

Profits and losses are split on a 3:3:2:2 basis, respectively. Clark decides to leave the partnership and is paid $138,000 from the business based on the original contractual agreement.

The payment made to Clark beyond his capital account was for Clark's share of previously unrecognized goodwill. After recognizing partnership goodwill, what is Manning’s capital balance after Clark withdraws?

Multiple Choice

• $188,000

• $183,500

• $197,000

• $175,400

Answer 1

$ 197000

Calculation:

Clark capital balance before retirement= $ 120000

On the time of retirement Clark got additional amount of $ 18000($ 138000- $ 120000) as goodwill amount

Clark profit and loss share ratio in the business= 2/10

So the total amount of goodwill= $ 18000/20%= $ 90000

Manning profit and loss sharing ratio in the business= 3/10

Manning capital before goodwill recognition= $ 170000

Manning share of goodwill = $ 90000*3/10= $ 27000

So,Manning capital after Clark's retirement= $ 170000+$ 27000 = $ 197000.