Question

Ipo and Man, partners in the Karate Company have capital balances of P300, 000 and P120,000 respectively. Lee is to be admitted into the partnership with 20% interest in the business.

Required:

Record the admission of Lee for each of the following independent situations:

a. Lee invests P180, 000, and recognized the undervaluation of inventory.

b. Lee invest P180, 000, Total capital is to be P600, 000.

c. Lee purchases 20% of Ip and Man by paying P100, 000.

d. Lee invests P96, 000 and total capital is to be P 516,000.

e. Lee invests P96, 000 and recognized overvaluation of land.

f. Ip and Man assign 20% of their interest to Lee.

Show the solution

Answer 1

a. Lee invests P180,000 and recognizes the undervaluation of inventory:

Cash P180,000
Inventory P 20,000
Goodwill (computed as P60,000 x 20%) P 12,000
Lee, capital P172,000
Ipo, capital P300,000
Man, capital P120,000

b. Lee invests P180,000, Total capital is to be P600,000:

Cash P180,000
Lee, capital P120,000
Ipo, capital P300,000
Man, capital P120,000
Goodwill (Computed as P600,000 - P540,000) P 60,000

c. Lee purchases 20% of Ip and Man by paying P100,000:

Cash P100,000
Ipo, capital P 60,000
Man, capital P 40,000
Lee, capital P100,000

d. Lee invests P96,000 and total capital is to be P516,000:

Cash P 96,000
Lee, capital P 96,000
Ipo, capital P258,000
Man, capital P102,000
Goodwill (Computed as P516,000 - P576,000) P 60,000

e. Lee invests P96,000 and recognizes overvaluation of land:

Cash P 96,000
Lee, capital P 36,000
Ipo, capital P270,000
Man, capital P108,000
Land (Computed as P60,000 / 20%) P 12,000
Goodwill (Computed as P60,000 x 20%) P 12,000

f. Ip and Man assign 20% of their interest to Lee:

No journal entry is required. A legal agreement or contract needs to be made to formalize the assignment of interest.