Question

In the JK partnership, Jacob's capital is $140,000, and Katy's is $40,000. They share income in a 3:2 ratio, respectively. They decide to admit Erin to the partnership. Each of the following questions is independent of the others.

Refer to the information provided above. Erin invests $52,000 for a one-fifth interest. What amount of goodwill will be recorded?
A. $7,000
B. $28,000
C. $50,000
D. $80,000

Answer 1

The correct option is (B)

Step-by-step explanation:

Given:

Existing partner's total capital is $180,000 (140,000 + 40,000)

New partner, Erin's contribution is $52,000

So new paid in capital is $232,000 (180,000 + 52,000)

Required capital =
`(Investment\ by\ Erin)/(interest)`

Interest in % is 20%
`\left (\left ( (1)/(5) \right )* 100  \right )`

Required capital =
`(52,000)/(0.2)`

= $260,000

Goodwill = Required capital - paid in capital

= 260,000 - 232,000

=$28,000

So, amount of goodwill is $28,000.