Question

Assume that two individuals agree to form a partnership. Partner A is contributing an operating business that reports the following balance sheet: Cash $14,000 Accounts payable $42,000 Receivables 28,000 Accrued liabilities $28,000 Inventories 56,000 Total liabilities $70,000 Total assets $98,000 Net assets $28,000 Partner B is contributing cash of $77,000. The partners agree that the initial capital of the partnership should be shared equally. Prepare the journal entry to record the capital contributions of the partners using both the Bonus Method and the Goodwill Method.

Answer 1

Step-by-step explanation:

By using the Bonus method for the initial investment:

The overall total capital contributed that can be identified as:

= $28,000 + $77,000

= $105,000

If the unidentifiable assets are not registered, each partner will begin with:

=
`( \$ 105,000)/(2)`

= $52,500

Journal Entry: For Bonus Method

Description Debit Credit

Cash 91,000

Receivables 28,000

Inventories 56,000

Accounts Payable 42,000

Accrued Liabilities 28,000

Capital for Partner A, 52,500

Capital for Partner B, 52,500

[The business began with a small initial investment]

Using the Goodwill method for the initial investment:

The value of A's unrecognizable assets is calculated using B's allocation (50 percent)

Total partnership capital
`=(\$77000 * (100)/(50)) - ( 28000 + 77000)`

= $49,000

Thus, Goodwill = $49,000

Journal Entry : For Goodwill Method

Description Debit Credit

Cash 91,000

Receivables 28,000

Inventories 56,000

Goodwill 49,000

Accounts Payable 42,000

Accrued Liabilities 28,000

Capital for Partner A, 77,000

Capital for Partner A, 77,000

[The business began with a small initial investment]