Accounting for Partnerships - Section No PDF

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Accounting for Partnerships – Section No.7 Question No.1 Mohamed and Ahmed admit Sarah to their partnership forming a new partnership named “MAS”. Just before the admission of Sarah, the capital of Mohamed and Ahmed after introducing revaluation of tangible assets was LE75,000 and LE50,000 respectively. The old partners were sharing profit and loss in a ratio based on their capital balances. Required: (A) Record the admission of Sarah under each of the following independent conditions: 1. Sarah purchases 20% of the interest of each of the old partners for total cash payment of LE30,000. 2. Sarah invests sufficient cash to receive 20% interest in capital without recognizing any goodwill or allowing any bonus. 3. Sarah invests LE40,000 cash for 20% interest in capital. Total capital after admission is to be LE165,000. 4. Sarah invests land in the partnership as a site for the new office building. The land, which originally cost Sarah LE25,000, now has a current market value of LE50,000. Sarah is admitted with 20% capital interest. 5. Sarah invests LE40,000 in cash for a one-third interest in capital without decreasing capital accounts of old partners. (B) Ahmed’s Capital is LE54,000 after admitting Sarah to the partnership by investment. If Ahmed’s ownership interest is 30% of total partnership capital, what were? (1) Sarah’s cash investment (2) the total bonus to the old partners

Solution (A) Recording the admission of Sarah under each independent condition:

Date

Condition (1) Mohamed, Capital (20% × 75000) Ahmed, Capital (20% × 50000) Sarah, Capital (15000 + 10000) (To record the admission of Sarah)

15000 10000 25000

Condition (2) If Sarah is to invest sufficient cash for 20% capital interest, then the two old partners must have 80% of total capital after admitting Sarah (T). This condition will be solved as follows: 80%T = (75000 + 50000) 80% T = 125,000 T = 125,000 ÷ 80% = 156,250 Then, Sarah’s capital interest and cash investment = 156,250 × 20% = 31,250 Date

Cash

31,250

Sarah, Capital (To record the admission of Sarah) Condition (3) Problem test: Capital interest to be acquired by Sarah = 20% (75000 + 50000 + 40000) = 20% × 165000 Less: investments by Sarah Difference

= 33000 (40000) (7000)

Therefore, a bonus is to be given to old partners. 1

31,250

Date

Cash

40000

Mohamed, Capital (7000 × 75/125) Ahmed, Capital (7000 × 50/125) Sarah, capital (To record the admission of Sarah under the bonus method)

4200 2800 33000

Condition (4) Problem test: Capital interest to be acquired by Sarah = 20% (75000 + 50000 + 50000) = 20% × 175000 Less: investments by Sarah Difference

= 35000 (50000) (15000)

Therefore, a bonus or goodwill is to be given to old partners. Note: any fixed assets investments made by the new partner should be recorded according to its fair, agreed, current or market value. While, its book value and accumulated depreciation are to be ignored. Under the bonus method Date

Land

50000

Mohamed, Capital (15000 × 75/125) Ahmed, Capital (15000 × 50/125) Sarah, capital (To record the admission of Sarah under the bonus method)

9000 6000 35000

Under the goodwill method Goodwill recognized for the old partners = 15000 ÷ 20% = 75000 Date

Goodwill Mohamed, Capital (75000 × 75/125) Ahmed, Capital (75000 × 50/125) (to record goodwill recognized for old partners)

75000

Land

50000 Sarah, Capital (to record land invested by Sarah) Condition (5)

Problem test: Capital interest to be acquired by Sarah = 1/3 (75000 + 50000 + 40000) = 1/3 × 165000 = 55000 Less: investments by Sarah (40000) Difference 15000 Therefore, a goodwill is to be given to old partners. Goodwill recognized for the new partner Sarah = 15000 ÷ 2/3 = 22500

2

45000 30000

50000

Date

Goodwill Sarah, Capital (to record goodwill recognized for Sarah)

22500

Cash

40000

22500

Sarah, Capital (to record cash invested by Sarah)

40000

(B) (1) If Ahmed’s Capital after admitting Sarah is LE54000 representing 30% of the total capital after the admission, then  The total capital after admitting Sarah = Ahmed’s Capital’s ÷ Ahmed’s ratio or % of capital interest = 54000 ÷ 30% = 180000  Total capital before admitting Sarah = 75000 + 50000 = 125000 Therefore, Sarah’ cash investment = 180000 – 125000 = LE55000 (2) If Ahmed’s capital before admitting Sarah was 50000, while Ahmed’s capital after admitting Sarah is 54000, then a bonus of 4000 is allowed to Ahmed. This bonus is given to Ahmed according to his profit or loss ratio. Therefore, The total bonus allowed to old partners = Ahmed’s bonus ÷ Ahmed’s profit or loss ratio = 4000 ÷ 50/125 = LE10000

Question No.2 On January 1, 2013, Eman was admitted to the partnership of Hala and Rola, i.e. “H&R Co.”. Just before the admission of Eman, the capital account of each of Hala and Rola showed a credit balance of LE150,000. To be admitted, the new partner Eman had to purchase one-third of the capital account of each of the two old partners, paying them directly together outside the partnership LE112,000 cash. On January 2, 2013, Allam was to be admitted where the capital account of each of Hala, Rola and Eman showed a credit balance of LE100,000. All partners including Allam agreed to continue sharing equally the income of their partnership. To admit Allam, three alternative options were negotiated as under: First Option: Allam had to invest in the partnership sufficient cash to be admitted with a 25% capital interest of the total capital after his admission without allowing any bonuses or recognizing any goodwill amounts. Second Option: To be admitted, Allam had to invest in the partnership LE90,000 cash to have a one-fifth capital interest of the total capital after his admission. Third Option: To be admitted with a one-fourth capital interest of the total capital after his admission, Allam had to invest in the partnership LE90,000 cash. Required: Prepare one Journal entry only to record the admission of Eman and draft the necessary entry or entries to record the admission of Allam under each alternative option. If any option permits the application of the bonus and the goodwill methods, then apply each method independently. (Support your answer with clear computations)

3

Solution Admission of Eman: 2013 Jan.1

Hala, Capital(1/3×150000) Rola, Capital(1/3×150000) Eman, Capital (to record the admission of Eman)

50000 50000 100000

Admission of Allam: First Option: 75% T = 100000+100000+100000 75% T = 30000 Total capital after admission (T) = 300000 ÷ 75% = 400000 Capital interest and cash investment of Allam = 400000 × 25% = 100000 2013 Jan.2

Cash

100000

Allam, Capital ( to record the admission of Allam)

100000

Second Option Problem Test: Capital Interest to be acquired by Allam = 1/5 (100000+100000+100000+90000) = 78000 Less: Investments by Allam

= (90000)

Difference

(12000)

Therefore, a bonus or goodwill will be given to old partners. Using the bonus method Bonus to each old partner = 12000 ÷ 3 = 4000

2013 Jan.2

Cash

90000

Hala, Capital Rola, Capital Eman, Capital Allam, Capital (to record the admission of Allam under the bonus method) Using the goodwill method

Goodwill to old partners = 12000 ÷ 1/5 = 60000

4

4000 4000 4000 78000

2013 Jan.2

Jan. 2

Goodwill Hala, Capital Rola, Capital Eman, Capital (to record goodwill for old partners) Cash Allam, Capital (to record cash invested by Allam)

60000 20000 20000 20000

90000 90000

Third Option Problem Test: Capital Interest to be acquired by Allam = 1/4 (100000+100000+100000+90000) = 97500 Less: Investments by Allam Difference

= (90000) 7500

Therefore, a bonus or goodwill will be given to the new partner Allam Using the bonus method 2013 Jan.2

Cash Hala, Capital Rola, Capital Eman, Capital Allam, Capital (to record the admission of Allam under the bonus method)

90000 2500 2500 2500 97500

Using the goodwill method Goodwill to new partner = 7500 ÷ 3/4 = 10000 2013 Jan.2

Jan. 2

Goodwill Allam, Capital (to record goodwill recognized for Allam) Cash Allam, Capital (to record cash invested by Allam)

5

10000 10000

90000 90000...