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3 July, 05:10

Joe Keho and Mike McLain share income on a 6:4 basis. They have capital balances of $90,000 and $70,000, respectively, when Linda Ronstadt is admitted to the partnership. Prepare journal entries to record the admission of Linda Ronstadt under each of the following assumptions:Investment of $100,000 cash for a 25% ownership interest with bonuses to the existing partners.

Investment of $36,000 cash for a 25% ownership with a bonus to the new partner.

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  1. 3 July, 05:23
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    A.

    Joe's Capital (existing partner) = $90,000

    Mike's Capital (existing partner) = $70,000

    Profit-sharing ratio = 6:4

    Admission of Linda (new partner) with bonus to existing partners:

    $100,000 cash contributed for 25% share

    So, implied value of partnership firm after admission = $100,000 / 25% = $400,000

    However, actual value of partnership firm after admission will be = $90,000 + $70,000 + $100,000 = $260,000

    Linda's Capital in new partnership = 25% * $260,000 = $65,000

    However, Linda is contributing $100,000

    So, bonus accruing to existing partners = $100,000 - $65,000 = $35,000

    Bonus to be split in profit sharing ratio

    Bonus accruing to Joe = $35,000 * 6/10 = $21,000

    Bonus accruing to Mike = $35,000 * 4/10 = $14,000

    Joe'sCapital

    $21,000

    Mike'sCapital

    $14,000

    Lindia's Capital

    $65,000

    b. Admission of Linda (new partner) with bonus to the new partner:

    $36,000 cash contributed for 25% share

    So, implied value of partnership firm after admission = $36,000 / 25% = $144,000

    However, actual value of partnership firm after admission will be = $90,000 + $70,000 + $36,000 = $196,000

    Linda's Capital in new partnership = $196,000 * 25% = $49,000

    However, contribution by Linda = $36,000

    So, bonus accruing to Linda = $49,000 - $36,000 = $13,000

    Joe's share in bonus to Linda = $13,000 * 6/10 = $7,800

    Mike's share = $13,000 * 4/10 = $5,200

    Joe'sCapital

    $7,800

    Mike'sCapital

    $5,200

    Lindia's Capital

    $49,000
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