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The Prince-Robbins partnership has the following capital account balances on January 1, 2021:
Prince, Capital $ 120,000
Robbins, Capital 110,000
Prince is allocated 60 percent of all profits and losses with the remaining 40 percent assigned to Robbins after interest of 10 percent is given to each partner based on beginning capital balances.
On January 2, 2021, Jeffrey invests $67,000 cash for a 20 percent interest in the partnership. This transaction is recorded by the goodwill method. After this transaction, 10 percent interest is still to go to each partner. Profits and losses will then be split as follows: Prince (50 percent), Robbins (30 percent), and Jeffrey (20 percent). In 2021, the partnership reports a net income of $25,000.
a. Prepare the journal entry to record Jeffrey’s entrance into the partnership on January 2, 2021.
-Record the entry for goodwill allocation, during the admission of a new partner.
Record the cash received from new partner.
b. Prepare a schedule showing how the 2021 net income allocation to the partners should be determined.

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anthougo

Answer:

The Prince-Robbins Partnership

a. Journal Entries:

To record Jeffrey's entrance into the partnership on January 2, 2021:

1. January 2, 2021:

Debit Goodwill $38,000

Credit Capital, Prince $22,800

Credit Capital, Robbins $15,200

To record the allocation of goodwill arising from Jeffrey's admission.

2. January 2, 2021:

Debit Cash $67,000

Credit Capital, Jeffrey $67,000

To record the admission of Jeffrey and receipt of cash contribution.

b. Schedule of 2021 Net Income Allocation:

                                                   Prince     Robbins    Jeffrey       Total

Net income                                                                                    $25,000

Interest on capital (10%)         $16,750     $10,050    $6,700      $33,500

Profit shortfall                           (4,250)       (2,550)     (1,700)         (8,500)

Share of net income             $12,500       $7,500    $5,000     $25,000

Explanation:

a) Data and Calculations:

                                                   Prince     Robbins    Jeffrey

January 1, 2021, Capital         $120,000  $110,000

Profit-sharing ratio                       60%        40%

Interest on capital                        10%         10%

January 2, 2021, Capital                                           $67,000

Profit-sharing ratio                      50%        30%           20%

Interest on capital                        10%         10%           10%

New Capital Structure:

New capital = $67,000/20% = $335,000

Goodwill arising = $38,000    ($335,000 - $120,000 - $110,000 - $67,000)

January 1, 2021, Capital         $120,000    $110,000                     $230,000

Share of goodwill                       22,800       15,200                          38,000

Total capital after goodwill    $142,800   $125,200    $67,000   $335,000

New capital (based on new

profit/loss sharing ratio        $167,500   $100,500  $67,000    $335,000

(Shortfall)/Capital withdrawal   (24,700)      24,700        0            0

New capital                            $167,500   $100,500  $67,000    $335,000

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