Question

Bishop has a capital balance of $120,000 in a local partnership, and Cotton has a $90,000 balance. These two partners share profits and losses by a ratio of 60 percent to Bishop and 40 percent to Cotton. Lovett invests $60,000 in cash in the partnership for a 20 percent ownership. The goodwill method will be used. What is Cotton's capital balance after this new investment?

a) $99,600
b) $102,000
c) $112,000
d) $126,000

Answer 1

b) $102,000

Step-by-step explanation:

Calculation of goodwill

Lovett investment $60,000

Actual value of partnership = $60,000/20% = 300,000

Partnership capital = $120,000 + $90,000 + $60,000 = $270,000

Goodwill = $300,000 - $270,000 = $30,000

Distribution of Goodwill

Bishop = $30,000 * 60% = $18,000

Cotton = $30,000 * 40% = $12,000

Cotton's Capital = $90,000 + $12,000 = $102,000. Thus, Cotton's capital balance after this new investment is $102,000