Answer:
The Prince-Robbins-Jeffrey Partnership
a) Journal entry to record Jeffrey entrance into the partnership on January 2, 2015:
Debit Capital Account - Prince $72,000
Debit Capital Account - Robbins $18,000
Credit Goodwill $90,000
To record the negative goodwill arising at Jeffry entrance into the partnership.
Debit Cash Account $40,000
Credit Capital Account - Jeffrey $40,000
To record the investment by Jeffrey into the partnership.
b) Allocation of income at the end of 2015:
Prince Robbins Jeffrey Total
Interest 6% $3,480 $6,120 $2,400 $12,000
on new capital
Loss sharing -1,000 -600 -400 -2,000
Net income $2,480 $5,520 $2,000 $10,000
Explanation:
a) Data and Calculations:
January 1, 2015: Capital Old Profit sharing ratio
Prince, Capital $130,000 80%
Robbins, Capital 120,000 20%
Total $250,000 100%
Interest on capital = 7% based on beginning capital balances.
b) Calculation of Negative Goodwill arising from Jerry's admission:
New capital after Jerry's admission = $290,000
Implied capital at Jerry's admission = $40,000/20% = $200,000
Negative goodwill arising = $200,000 - $290,000 = -$90,000
This negative goodwill will be shared by Prince and Robbins to reduce their capital:
Prince = $72,000 ($90,000 * 80%)
Robbins - $18,000 ($90,000 * 20%)
c) New Capital on January 2, 2015:
Capital Negative Goodwill New Profit sharing ratio
Jerry, Capital $40,000 20%
Prince, Capital $58,000 ($130,000 - 72,000) 50%
Robbins, Capital $102,000 ($120,000 - 18,000) 30%
Total capital $200,000 100%
Interest on capital = 6%
d) Jeffrey's admission and ownership of 20% reduced the capital balances of Prince and Robbins by $90,000. There was a negative goodwill arising from his admission into the partnership. This negative goodwill is shared between the old partners in their old profit-sharing ratio.
