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iheartpeter
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| Posted: 30 Mar 2010 at 18:36 | IP Logged
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The capital accounts of the partnership of Newton, Sharman, and Jackson on June 1, 2007, are presented below with their respective profit and loss ratios
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Newton |
$139,200 |
1/2 |
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Sharman |
208,800 |
1/3 |
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Jackson |
96,000 |
1/6 |
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$444,000 |
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On June 1, 2007, Sidney was admitted to the partnership when he purchased, for $132,000, a proportionate interest from Newton and Sharman in the net assets and profits of the partnership. As a result of this transaction, Sidney acquired a one-fifth interest in the net assets and profits of the firm. Assuming that implied goodwill is not to be recorded, what is the combined gain realized by Newton and Sharman upon the sale of a portion of their interests in the partnership to Sidney?
$0
$43,200
$62,400
$82,00
Explanation:
B. Answer B is correct. Under the bonus method, the excess of a new partner's contribution over that partner's purchased share (percent of equity) is allocated to the original partners' capital accounts as if they had been paid a bonus. The book value of 1/5 of the partnership purchased by Sidney is $88,800 ($444,000/5). Thus the gain to be recognized is $43,200 ($132,000 selling price – $88,800 book value). Note there is no need to allocate gains or losses and capital balances between Newton and Sharman, as the requirement is in terms of the combined gain.
I'm confused...why wouldn't they include the $132,000 in the total book value of the partnership? Wouldn't it be 132,000+444,000 = 576,000/5 = $115,200 ??
Help
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iheartpeter
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| Posted: 30 Mar 2010 at 18:42 | IP Logged
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See this is so dumb...this next question totally contridicts what the previous explanation says:
At December 31, 2007, Reed and Quinn are partners with capital balances of $40,000 and $20,000, and they share profit and loss in the ratio of 2:1, respectively. On this date Poe invests $17,000 cash for a one fifth interest in the capital and profit of the new partnership. Assuming that goodwill is not recorded, how much should be credited to Poe’s capital account on December 31, 2007?
Answer is $15,400 explained as:
C. Answer C is correct. If goodwill is not recorded upon admission of a new partner, the bonus method is used to record the transaction. Poe receives credit for a 1/5 interest in the total partnership equity of $77,000 ($40,000 + $20,000 + $17,000). Therefore, his capital account is credited for $15,400 (1/5 x $77,000). The difference between his cash contribution ($17,000) and his capital credit ($15,400) is the bonus to the old partners and is credited to their capital accounts, as indicated in the entry below.
WHICH ONE IS CORRECT?? Did Wiley make an error in the first one???
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cpa_guy
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| Posted: 31 Mar 2010 at 21:10 | IP Logged
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The difference between the two questions is that question 1 relates to a cash payment into the partnership and question 2 relates to an investment into the partnership.
The journal entry to question 1 is:
| Account |
Debit |
Credit |
| A Cap |
27,840 |
|
| B Cap |
41,760 |
|
| D Cap |
19,200 |
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| C Cap |
|
88,800 |
| To record Payment of Cash to current Partners |
The journal entry to question 2 is:
| Account |
Debit |
Credit |
| Assets |
17000 |
|
| A Cap |
|
800 |
| B Cap |
|
800 |
| C Cap |
|
15400 |
| To record investment of New Partner |
As you can see the accounting for both multiple choice questions are different.
Make sense?
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iheartpeter
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| Posted: 01 Apr 2010 at 10:11 | IP Logged
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How do you notice that in the question? It is because it's phrased this way in the first question:
when he purchased, for $132,000, a proportionate interest
And this way in the second question:.
Poe invests $17,000 cash
In the first question, the new partner is purchasing part of the $444,000 that is already in capital?
In the second question, the new partner is ADDING an additional $17,000 to the capital that's already there?
If so, that makes more sense....
Tricky tricky.
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danion8
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| Posted: 01 Apr 2010 at 12:06 | IP Logged
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The key word in the 1st question is 1/5 of the net assets which is provided as $444,000.00. In Q1 the 132,00.00 is already included in the computation of the net assets because he is getting a portion of interests from newton and Sherman. If you add it back you will be overstating the net assets.
In the second question he is buying into the partnership by contributing cash for partnership. Net assets is not given instead they say he invests into the new partnership in which case his portion will be added in the computation of net assets at the end of the year.
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