The Clinton-Obama partnership has the following balance sheet on January 1, 2018
ID: 2529137 • Letter: T
Question
The Clinton-Obama partnership has the following balance sheet on January 1, 2018 Clinton and Obama are equal partners rS. cash inventory land building 500,000 500,000 1,000,000 1,000,000 total assets 3,000,000 note payable 1,000,000 Clinton capital Obama capital1,700,000 300,000 Trump is becoming a new partner in the firm for $2,000,000. After Trump joins the partnership all 3 will be equal partners required: make the journal entry the partnership makes when Trump joins if the partnership uses a) bonus method b) goodwill methodExplanation / Answer
Investment at greater than book value then it is Goodwill or Bonus Method. Please find the details below of the capital invested in the ratio.
Current profit sharing ratio of Obama and Clintion is: 85:15
Goodwill Method:
Amount Invested: $ 2,000,000, New partner share: 33.33%, Implied partnership valuation= 2,000,000/33.33% = 6000600
Existing partner capital: $2,000,000 New partner Investment: $2,000,000 Paid in capital: $4,000,000 Required capital: $6,000,000 (rounded off) Goodwill: $6,000,000- $4,000,000 = $2,000,000
Journal Entry: Goodwill Method
Cash A/C Dr. $2,000,000 Goodwill A/C Dr. $2,000,000 Capital- Partner Trump A/C $2,000,000 Capital Partner Clinton A/C $300,000 Capital- Partner Obama A/C $1,700,000
Bonus Method:
Existing partner capital: $2,000,000 New partner Investment: $2,000,000 Paid in capital after admission of new partner: $4,000,000
The new partner comes and gets a share of 33.33%. The new partners capital to be calculated as follows: New Partner capital: $4,000,000*33.33%= $1,333,200
Bonus Calculation: New Partner Investment= $2,000,000 New partner capital allocation: $1,333,200 Bonus: $2,000,000- $1,333,200= $666,800
The bonus is then allocated to the existing partners in their profit sharing ratio: Obama: 85%, Clinton:15% Bonus Obama: 666800*85%= $566,780 Bonus Clinton: 666800*15%= $100,020
Journal Entry Bonus Method:
Cash A/C Dr. $2,000,000 Capital- Partner Trump A/C $1,333,200 Capital Partner Clinton A/C $100,020 Capital- Partner Obama A/C $566,780