E16-4

Schedule to Allocate Partnership Income for 2011

Balance Dan Hen Bai

Income to distribute $28,000

Salary allocation (42,000) $ --- $ 18,000 $24,000

Interest on capital* (52,000) 21,000 16,000 15,000

Loss to divide (66,000)

Divided equally 66,000 (22,000) (22,000) (22,000)

Income to partners 0 $(1,000) $12,000 $17,000

* Interest on average capital:

January 1, 2011 Average Interest

Balances Capital on Capital

Dan $200,000 × 1/2 year = $ 100,000

240,000 ×1/4 year = 60,000

200,000 × 1/4 year = 50,000

210,000 × 10% = $21,000

Hen $ 160,000 × 1 year = $160,000 × 10% = 16,000

Bai $ 150,000 × 1 year = $150,000 ×10% = 15,000

$52,000

E16-7
1. Capital balances after Rob is admitted when assets are not revalued:
Old Capital Capital Transfer New Capital

Fax capital $140,000 x 40% $(56,000) $ 84,000

Bel capital 60,000 x 40% (24,000) 36,000
Rob capital 80,000 80,000
Total capital $200,000 0 $200,000
2. If the existing partners are selling 40% of a business that is valued at $300,000 then they first
divide $100,000 of goodwill by their capital ratio.

Capital
adjusted for
FMV Capital Transfer New Capital

Fax capital $210,000 x 40% $(84,000) $126,000

Bel capital 90,000 x 40% (36,000) 54,000
Rob capital 120,000 120,000
Total capital $300,000 0 $300,000

E16-8
Journal entries to admit Joh to the Bow/Mon partnership:
Goodwill $ 45,000
Bow capital $ 27,000
Mon capital 18,000
To record goodwill computed as follows:
New capital = $75,000 ÷ 1/3 = $225,000
Goodwill = $225,000 new capital - $180,000 old capital = $45,000

Bow capital $ 39,000

Mon capital 36,000
Joh capital $75,000
To record capital transfer to Joh: ($90,000 + $27,000)/3 from Bow and ($90,000 + $18,000)/3
from Mon.

E16-11
Retirement of Nix with revaluation:
Goodwill $140,000
Nix capital (30%) $42,000
Man capital (30%) 42,000
Per capital (40%) 54,000
To record goodwill implied by the excess payment to Nix computed as: ($170,000 -
$128,000)/30% = $140,000.

Nix capital $170,000

Cash $170,000
To record payment to Nix upon his retirement.

Solution E16-14
1. Valuation of assets and liabilities as implied by excess payment to Box:
Building $10,000
Goodwill 40,000
Byd capital $ 15,000
Box capital 10,000
Dar capital 20,000
Fus capital 5,000
 To record revaluation of building and goodwill implied by the excess payment to Box on his
retirement ($10,000 20% = $50,000 revaluation).

Box capital $35,000

Cash $ 35,000
To record cash payment to Box on his retirement from the business.

2. No revaluation; bonus to retiring partner:

Box capital $25,000
Byd (30/80) 3,750
Dar (40/80) 5,000
Fus(10/80) 1,250
Cash $ 35,000
To record a $10,000 bonus to Box upon retirement.

Solution E16-15
1. a
Bill’s contribution ($20,000 + $60,000 + $15,000 - $30,000) $ 65,000
Ken’s contribution 50,000
Total tangible contributions $115,000

Ken’s contribution $50,000/.4 interest = $125,000 total capital

Total capital based on Ken’s contribution $125,000 less amount contributed by Ken and Bill
$115,000 = $10,000 goodwill.

2. c
Jay’s investment of $65,000 is greater than his capital credit of 1/3 of $175,000; thus, there is
goodwill to the old partners.

New capital = $65,000 × 1/3 = $195,000

New capital of $195,000 - (old capital $110,000 + $65,000 investment) = $20,000 goodwill.

Revaluation is recorded:
Goodwill (other assets) $20,000
Thomas capital (50%) $ 10,000
Mark capital (50%) 10,000
Mark’s capital = $60,000 + $10,000 goodwill = $70,000

3. c
Total capital ($170,000 + $200,000 + $200,000) = $570,000
Zen’s interest $570,000 × 1/3 = $190,000
Therefore, Tina and Warren receive a $10,000 bonus, shared equally.

4. c
$90,000 investment > 25% × ($100,000 + $80,000 + $90,000), thus, there is goodwill to the old
partners.
 New capital $90,000/25% $360,000
Old capital + new investment $180,000 + $90,000 (270,000)
Goodwill $ 90,000

Finney capital $100,000 + (50% × $90,000 goodwill) $145,000

Rhoads capital $80,000 + (50% × $90,000 goodwill) 125,000
Chesterfield capital 90,000
Total capital $360,000

5. b
Payment to Gini at retirement $200,000
Capital account before recording share of goodwill 170,000
Gini’s share of goodwill $ 30,000

Total goodwill for partnership ($30,000/.3) $100,000

Total assets before Gini’s retirement ($240,000 cash +

$360,000 other assets + $100,000 goodwill) $700,000
Less: Payment to Gini on retirement 200,000
Total assets after Gini retires $500,000

P16-2
1. Mortin, Oscar, and Trent Partnership
Balance Sheet
at January 2, 2011

Cash ($20,000 + $95,000) $115,000

Accounts receivable — net 100,000
Inventories 200,000
Plant assets — net ($120,000 + $120,000) 240,000
Goodwill 40,000
Total assets $695,000

Accounts payable $ 50,000

Mortin capital (1/3 interest)
($120,000 + $85,000b + $20,000) 225,000
Oscar capital (1/3 interest)
($100,000 + $85,000b + $20,000) 205,000
Trent capital (1/3 interest) 215,000
Total equities $695,000

a Trent’s $215,000 ÷ 1/3 = $645,000 total capitalization $645,000 - $605,000 fv of old assets +
Trent’s investment = $40,000 goodwill. $40,000 goodwill is divided equally between Mortin and
Oscar
b Revaluation of assets to fair value ($170,000 divided equally between Mortin and Oscar)
c Trent’s investment ($95,000 cash + $120,000 building) = $215,000
2. Mortin, Oscar, and Trent Partnership
Balance Sheet
at January 2, 2011

Cash ($20,000 + $95,000) $115,000

Accounts receivable — net 100,000
Inventories 50,000
Plant assets — net ($100,000 + $120,000) 220,000
Total assets $485,000
Accounts payable $ 50,000
Mortin capital (1/3 interest)
($120,000 + $35,000a) 155,000
Oscar capital (1/3 interest)
($100,000 + $35,000a) 135,000
Trent capital (1/3 interest) 145,000
Total equities $485,000

a Trent is paying a bonus to Mortin and Oscar because his investment of $215,000 ($95,000 cash and
$120,000 building) is worth more than a 1/3 interest in the book value of the combined assets
($215,000 + $220,000). The $70,000 bonus is evenly divided between Mortin and Oscar based on
their profit sharing ratios. The journal entry to record Trent’s admission in the partnership is:
Cash 95,000
Building 120,000
Trent Capital 145,000
Mortin Capital 35,000
Oscar Capital 35,000

b. Trent’s investment ($95,000 cash + $120,000 building) = $215,000

Book value plus Trents investment is $220,000 + $215,000 = $435,000
Trent gets a 1/3 interest or $145,000.

P16-4
1 Profit allocation schedule

Alex Carl Erika

Net loss for 2011 $(12,000)
Salary to Alex (10,000) $ 10,000
Loss to divide (22,000)
Interest allowances:
Alex $60,000 × 10% (6,000) 6,000
Carl $100,000 × 10% (10,000) $ 10,000
Erika $110,000 × 10% (11,000) $ 11,000
Loss to divide (49,000)
Divided 30 : 30 : 40 49,000 (14,700) (14,700) (19,600)
Allocation of loss 0 $ 1,300 $ (4,700) $ (8,600)
2 Alex, Carl, and Erika Partnership
Statement of Partnership Capital
for the year ended December 31, 2011

Alex Carl Erika Total

Capital January 1, 2011 $ 60,000 $ 90,000 $110,000 $260,000

Add: Additional
Investments 30,000 20,000 50,000
60,000 120,000 130,000 310,000
Deduct: Withdrawals (10,000) (10,000)
Deduct: Drawings (8,000) (8,000)
Net contributed capital 52,000 120,000 120,000 292,000
Net loss for 2011 1,300 (4,700) (8,600) (12,000)
Capital
December 31, 2011 $ 53,300 $115,300 $111,400 $280,000

3 Correcting entry:

Erika capital $1,200

Alex capital $1,100
Carl capital 100
To correct capital accounts for error in loss allocation:

Alex Carl Erika

Correct loss allocation $ 1,300 $(4,700) $(8,600)
Less: Actual loss allocation (200) 4,800 7,400
Adjustment $ 1,100 $ 100 $(1,200)

P16-6
1 Computation of reported capital balances:
Jones Keller Glade Total
Capital January 2, 2011 $30,000 $30,000 $30,000 $ 90,000
Add: Investments for 2011 5,000 5,000
Less: Withdrawals for 2011 (5,000) (4,000) (9,000)
Net contributed capital 25,000 26,000 35,000 86,000
Income allocation — Schedule A 11,000 4,000 4,000 19,000
Capital December 31, 2011 36,000 30,000 39,000 105,000
Add: Investments for 2012 5,000 5,000
Less: Withdrawals for 2012 (3,000) (8,000) (11,000)
Net contributed capital 41,000 27,000 31,000 99,000
Income allocation — Schedule B 12,100 4,500 5,400 22,000
Capital December 31, 2012 53,100 31,500 36,400 121,000
Add: Investments for 2013 6,000 6,000
Less: Withdrawals for 2013 (4,000) (2,000) (6,000)
Net contributed capital 53,100 27,500 40,400 121,000
Income allocation — Schedule C 15,610 6,450 6,940 29,000
Capital January 1, 2014 $68,710 $33,950 $47,340 $150,000
Schedule A Net Income Jones Keller Glade

Income to allocate $19,000

Interest allowances:
Jones ($30,000 × 10%) (3,000) $ 3,000
Keller ($30,000 × 10%) (3,000) $ 3,000
Glade ($30,000 × 10%) (3,000) $ 3,000
Remainder to divide 10,000
Salary to Jones (7,000) 7,000
Remainder to divide 3,000
Divided equally (3,000) 1,000 1,000 1,000
Income allocation 0 $11,000 $ 4,000 $ 4,000

Schedule B Net Income Jones Keller Glade

Income to allocate $22,000

Interest allowances:
Jones ($36,000 × 10%) (3,600) $ 3,600
Keller ($30,000 × 10%) (3,000) $ 3,000
Glade ($39,000 × 10%) (3,900) $ 3,900
Remainder to divide 11,500
Salary to Jones (7,000) 7,000
Remainder to divide 4,500
Divided equally (4,500) 1,500 1,500 1,500
Income allocation 0 $12,100 $ 4,500 $ 5,400

Schedule C Net Income Jones Keller Glade

Income to allocate $29,000

Interest allowances:
Jones ($53,100 × 10%) (5,310) $ 5,310
Keller ($31,500 × 10%) (3,150) $ 3,150
Glade ($36,400 × 10%) (3,640) $ 3,640
Remainder to divide 16,900
Salary to Jones (7,000) 7,000
Remainder to divide 9,900
Divided equally (9,900) 3,300 3,300 3,300
Income allocation 0 $15,610 $ 6,450 $ 6,940

2 Correct income and capital account balances:

2011 2012 2013
Reported income $19,000 $22,000 $29,000
Understatement of depreciation (2,000) (2,000) (2,000)
Understatement of inventory
at December 31, 2013 8,000
Corrected income $17,000 $20,000 $35,000
 Jones Keller Glade Total
Capital per books $68,710 $33,950 $47,340 $150,000
Understatement 666 667 667 2,000
Capital as corrected $69,376 $34,617 $48,007 $152,000

3 Correcting entry on January 1, 2014:

Inventory $ 8,000
Jones capital $ 666
Keller capital 667
Glade capital 667
Accumulated depreciation 6,000
To correct prior years’ profits and adjust inventory and accumulated depreciation.

Note: Since residual income is divided equally, it is not necessary to recompute the income
allocation and capital balances for each of the three years.

P16-12
1 Closing entries for Parker and Boone Partnership
Service revenue $50,000
Supplies expense $17,000
Utilities expense 4,000
Other miscellaneous expenses 5,000
Income summary 24,000
To close revenue and expense to profit and loss summary account.

Parker capital $ 8,000

Boone capital 10,000
Salaries to partners $18,000
To close salaries to partners (drawings) to partners’ capital accounts.

Income summary $24,000

Parker capital $12,000
Boone capital 12,000
To close income summary and to divide profits equally as required in the absence of a profit
sharing agreement.

2 Parker and Boone Partnership

Statement of Partners’ Capital
for the ten months ending December 31, 2011

Parker Boone Total

Investments March 1, 2011 $30,000 $30,000 $60,000

Add additional investments:
Boone July 1 10,000 10,000
Parker October 1 4,000 4,000
34,000 40,000 74,000
Less Parker withdrawal May 2 (4,000) (4,000)
Less monthly drawings (salaries) (8,000) (10,000) (18,000)
Net contributed capital 22,000 30,000 52,000
Add: Partnership net income 10,625 13,375 24,000
Partnership capital
December 31, 2011 $32,625 $43,375 $76,000

Schedule of Profit and Loss Distribution

Net Income Parker Boone

Net income $24,000
Salary allowances (18,000) $ 8,000 $ 10,000
Remainder to divide 6,000
Divide in average capital ratios:
Parker 28/64 (or 43.75%) (2,625) 2,625
Boone 36/64 (or 56.25%) (3,375) 3,375
Distribution of income 0 $10,625 $ 13,375

Computation of Average Capital Balances

Average capital of Parker Average capital of Boone
$30,000 × 2 months = $ 60,000 $30,000 × 4 months = $120,000
$26,000 × 5 months = 130,000 $40,000 × 6 months = 240,000
$30,000 × 3 months = 90,000
Total $280,000 Total $360,000

Average capital Average capital

($280,000/10 ($360,000/10
months) $ 28,000 months) $ 36,000

3 Parker and Boone Partnership

Schedule of Profit and Loss Distribution
for the ten months ending December 31, 2011

Net Income Parker Boone

Net income $24,000
Salary allowances (18,000) $ 8,000 $ 10,000
Remainder to divide 6,000
Interest allowance:
Parker
$28,000 × 12% × 10/12 year (2,800) 2,800
Boone
$36,000 × 12% × 10/12 year (3,600) 3,600
Loss to divide (400)
Divide loss 50:50 400 (200) (200)
Distribution of income 0 $10,600 $ 13,400

P16-13
1 No revaluation of partnership assets

Proposal 1. Tom purchases one-half of Peter’s capital from Peter

Peter capital $37,500
Tom capital $37,500
 To record Tom’s admission to the partnership for a one-fourth interest in capital and profits by
direct purchase of one-half of Peter’s 50% interest. Tom’s capital credit is equal to capital
transferred from Peter to Tom ($75,000 × 50%).

Proposal 2. Tom purchases one-fourth of each partners’ capital from partners

Peter capital $18,750
Quarry capital 12,500
Sherel capital 6,250
Tom capital $37,500
To record Tom’s admission to the partnership by direct purchase of one-fourth of each partner’s
capital and future profits. Tom’s capital credit is equal to the capital transferred from the other
partners: ($75,000 × 25%) + ($50,000 × 25%) + ($25,000 × 25%).

Proposal 3. Tom invests cash in the partnership for a one-fourth interest

Cash $55,000
Peter capital $ 1,875
Quarry capital 1,125
Sherel capital 750
Tom capital 51,250
To record Tom’s $55,000 investment for a one-fourth interest in capital and future profits.
Total capital is $150,000 + $55,000. Tom’s share of total capital is $205,000 25%, or $51,250. Tom’s
investment of $55,000 less Tom’s capital credit of $51,250 equals $3,750 bonus to old partners.

2 Partnership assets are revalued

Proposal 1. Tom purchases one-half of Peter’s capital from Peter
Goodwill $90,000
Peter capital $45,000
Quarry capital 27,000
Sherel capital 18,000
To record goodwill on basis of the price paid by Tom for a onefourth interest in capital and
profits. Total capital is $240,000 ($60,000/25%). Total capital of $240,000 less recorded capital of
$150,000 equals $90,000 goodwill.

Peter capital $60,000

Tom capital $60,000
To record Tom’s purchase of one-half of Peter’s capital and right to Peter’s profits.

Proposal 2. Tom purchases one-fourth of partners’ capital from partners

Goodwill $30,000
Peter capital $15,000
Quarry capital 9,000
Sherel capital 6,000
To record goodwill on the basis of the price paid by Tom for onefourth of the capital and
profits of each of the partners. Total capital is $180,000 ($45,000/25%). Total capital of $180,000
less recorded capital of $150,000 equals $30,000 goodwill.

Peter capital $22,500

Quarry capital 14,750
Sherel capital 7,750
Tom capital $45,000
 To record Tom’s admission to a one-fourth interest in partnership capital and profits. Tom’s
capital is equal to the capital transferred after revaluation: ($90,000 × 25%) + ($59,000 × 25%) +
($31,000 × 25%).

Proposal 3. Tom invests cash in the partnership for one-fourth interest

Goodwill $15,000
Peter capital $ 7,500
Quarry capital 4,500
Sherel capital 3,000
To record goodwill based on Tom’s investment of $55,000 for a onefourth interest in
partnership capital and profit. Total capital of $220,000 - ($150,000 recorded capital +
$55,000 investment) = $15,000 goodwill.

Cash $55,000
Tom capital $55,000
To record Tom’s $55,000 investment for a one-fourth interest in capital and profits.
Total capital = $220,000; Tom’s capital is $220,000 × 25%, or $55,000.