Final answer:
To record Karl's retirement from the LMK partnership where he is paid $38,000 and no goodwill is recorded, a set of journal entries is made that involves debiting Karl's capital and crediting cash, then debiting the other partners' capital accounts according to their income sharing ratio.
Step-by-step explanation:
The subject of this question is the accounting procedure for a partner's withdrawal in a partnership within the field of Business. When Karl retires from the LMK partnership, there are a few journal entries that need to be recorded. Since the partnership does not record goodwill and Karl is paid $38,000, the entries would look something like this:
- Debit Karl's Capital Account for the book value of his capital, which is $30,000.
- Credit Cash for the amount paid to Karl, which is $38,000.
- The difference of $8,000 ($38,000 paid minus $30,000 book value) represents Karl's share of the unrecorded goodwill. As no goodwill is being recorded, this amount needs to be allocated to the remaining partners based on their income sharing ratio, which is 4:1 for Luis and Marty respectively. Luis would absorb a higher amount due to the higher ratio. Therefore, the remaining $8,000 is split into $6,400 for Luis (4/5 of $8,000) and $1,600 for Marty (1/5 of $8,000).
- Debit Luis's and Marty's Capital Accounts for $6,400 and $1,600, respectively, to account for the decrease in their capital due to the allocation of unrecorded goodwill.
The complete journal entries would be:
- Debit Karl's Capital Account $30,000
- Credit Cash $38,000
- Debit Luis's Capital Account $6,400
- Debit Marty's Capital Account $1,600