Problem 6: Kirk and Spock are equal partners in a dress shop. At the end of 2015
ID: 2475503 • Letter: P
Question
Problem 6: Kirk and Spock are equal partners in a dress shop. At the end of 2015 their partnership had the following balance sheet: Cash $50,000 A/R $50,000 Inventory $500,000 Equipment (net) $500,000 A/P 100,000 Kirk capital $100,000 Spock capital $900,000 At the beginning of 2016, Kirk and Spock agree to accept Klingon as a new partner so that each of them will be 1/3 partners. Klingon agrees to pay $800,000 to join the partnership. Required: 1) Make the journal entry the partner makes when Klingon makes the $800,000 contribution to the partnership in exchange for a 1/3 ownership interest if the partnership uses The bonus method The goodwill method 2) what is the ending capital accounts of Kirk, Spock and Klingon under each of these methods?
Explanation / Answer
Under The Bonus Method :
Existing Capital= 100,000 + 900,000 = 1,000,000
New Investment = 800,000
Total Capital = 1,000,000 + 800,000 = 1,800,000
Klingon caiptal = 600,000 (1,800,000 * 1/3)
Journal entry to record this is
Cash 800,000
Kirk Capital (200,000*50%) 100,000
Spock Capital (200,000*50%) 100,000
Klingon Capital 600,000
Ending Capital balance are :
Kirk 200,000
Spock 1,000,000
Klingon 600,000
Under The Goodwill Method :
Klingon is making a contribution of $800,000 for 1/3 share.
So, Business Worth = 800,000 * 3 = $2400,000
Total Capital = 100,000 + 900,000 + 800,000 = 1,800,000
Goodwill = Business Worth - Total Capital
= 2,400,000 - 1,800,000 = 600,000
Klingon Share of goodwill = 600,000 * 1/3 = 200,000
Journal entry is
Cash 800,000
Klingon Capital 600,000
Kirk Capital (200,000 * 1/2) 100,000
Spock Capital (200,000 * 1/2) 100,000
Ending Capital balance are :
Kirk 200,000
Spock 1,000,000
Klingon 600,000