Cor-Eng Partnership was formed on January 2, 2007.  Under the partnership agreement, each partner has an equal initial capital balance accounted for under the goodwill method.  Partnership net income or loss is allocated 60% to Cor and 40% to Eng.  To form the partnership, Cor originally contributed assets costing $30,000 with a fair value of $60,000 on January 2, 2007, while Eng contributed $20,000 in cash.  Drawings by the partners during 2007 totaled $3,000 by Cor and $9,000 by Eng.  Cor-Eng’s 2007 net income was $25,000.  Eng’s initial capital balance in Cor-Eng is:

20,000

25,000

40,000

60,000

answer: 60,000

explanation:

D.        Answer D is correct.  Upon the formation of the partnership, the contributed assets should be recorded at their fair values, and liabilities assumed by the partnership should be valued at the present value of the remaining cash flow.  The individual partners must agree to the percentage of equity that each will have in the net assets of the partnership.  Generally, the capital balance is determined by the proportionate share of each partner's capital contribution.  However, in recognition of intangible factors such as expertise, partners may agree to any proportion of capital.  In this problem, the total fair value of the contributed capital is $80,000 ($60,000 from Cor and $20,000 from Eng).  Under the goodwill method, it is assumed that the actual value of the partnership is $120,000 (Cor's contribution of $60,000 ÷ 50%).  Resulting goodwill of the partnership must therefore be $40,000 ($120,000 – $80,000).  Eng's initial capital is $60,000 (either $120,000 x 50%, or $20,000 + $40,000).

**I don't understand the part that I bolded.  Can someone help?

So you just assume that each partner's cap. account is now equal to the person who contributes the HIGHEST under goodwill method.  I mean how do you know that each partner's account doesn't just equal the $20K in cash.  I mean I know that would screw the other guy over, but how do you know which to choose?

Thanks!

This is how I would approach it. First, do the jounal entry:

Account	Debit	Credit
Assets	80000
Goodwill (plug)	40000
A Cap		60000
B Cap		60000

Yes - the partner who contributed the HIGHEST will be the capital balance of both partners upon formation of the partnership under the goodwill method.

To get the 120,000 simply create the journal entry and just add the credits of A Cap and B Cap or like the solution says (60000 / 50%).