Question

The Distance Plus partnership has the following capital balances at the beginning of the current year: Tiger (50% of profits and losses)$70,000Phil (40%) 40,000Ernie (10%) 55,000 Each of the following questions should be viewed independently. If Sergio invests $60,000 in cash in the business for a 25 percent interest, what journal entry is recorded

Answer 1

Cash A/c (Dr) $60,000

Sergio Capital A/c (Cr) $41,250

Tiger Capital A/c (Cr) $9,375

Phil Capital A/c (Cr) $7,500

Ernie Capital A/c (Cr) $1,875

(To record admission of new partner)

Step-by-step explanation:

The total investment by Sergio is $60,000 in cash will be debited in the journal entry recorded. His interest in the business is 25% which would be credited. So, first we calculate the total investment already made by the partners which is $165,000 (70,000 + 40,000 + 55,000).

Now, Sergio's investment is 25% of the total share of investment made by the partners which accounts to $41,250 (165,000 * 25%). This amount will be credited as Sergio Capital A/c.

The difference $18,750 (60,000 - 41,250) will credited in the capital A/c of other partners which would be divided proportionately to their business share. As done below:

Tiger Capital A/c - $9,375 (18,750 * 50%)

Phil Capital A/c - $7,500 (18,750 * 40%)

Ernie Capital A/c - $1,875 (18,750 * 10%)