© Tracy L.
Bundy, 2025
This file is not to be shared outside of the ACCT 426
5
side of the ACCT 426 class of Spring 2025.
Cash Liabilities Pay, K Krups Lindau
- 9,000 6,000 (20,000) (30,000)
(6,000) 6,000
14,000 (6,000)
36,000 36,000
(9,000) (9,000)
27,000 - - - -
Riedel Schnee
15,000 20,000
(4,000) (4,000)
11,000 16,000
Admission of new partner by purchase of existing interest:
Bonus method -- the amount paid by the incoming partner is irrelevant. We simply transfer the
appropriate amount (which might be the entire balance or the percentage being sold) from the e
partner's capital account to the new partner's capital account. Bear in mind that the firm may n
even know how much it was sold for.
Goodwill method -- the payment amount, while a private matter between the old and new part
is still used to calculate an implied value of the firm. Divide the payment by the old partner's inc
allocation percentage to determine the value of the firm. The difference between this number an
current book value is unrecorded goodwill. Debit Goodwill and credit each of the existing partne
their share, then simply transfer the payment amount (which should now be equal to the percen
purchased) from the old partner to the new.
Withdrawal of a partner
Bonus method -- If the exiting partner is being paid more than his existing capital balance, there is
being paid by the remaining partners, allocated according to their income allocation agreement. Deb
exiting partner's account for his balance, debit the remaining partners' accounts for their respective
the bonus, and credit cash.
Goodwill method -- What's supposed to happen when a firm uses the goodwill method and a partn
to leave is that the firm is appraised. This makes it pretty straightforward: specifically identifiable as
written up according to the appraisal (we didn't have any examples of this in the problems we worke
text shows an example), then goodwill is recorded to bring the total value of the company to the app
value. The increase in assets is credited to all partner accounts according to their allocation agreem
the exiting partner is paid his balance, however much that is.
We can't use the total payment to the exiting partner to calculate an implied value for the company
the capital balances usually do not reflect their allocation agreement. This is because of differing co
amounts, drawings, etc. A partner can receive 50% of allocations yet have a capital balance that is s
more or less than 50% of total capital. In this case, we have to use the excess payment made to calc
goodwill. So the difference in the amount paid and the amount in his capital account is divided by hi
percentage to get total goodwill, which is then credited to all of the partners' accounts. Once that's d
balance should be equal to the amount he's being paid, so debit his account and credit Cash.
: Admission of new partner by contribution to the firm:
t. We simply transfer the Bonus method -- Add payment amount to existing capital balances
ge being sold) from the existing the new partner is receiving for his contribution. This amount is cred
mind that the firm may not contributed, the bonus is going to the new partner from the old and
agreement. If the amount received is less than the cash contributed
and is allocated according to the original allocation agreement.
een the old and new partners,
nt by the old partner's income Goodwill method -- Again, add the payment amount to the existing
e between this number and the This time, we're only doing this to get a feel for where things are. Is
ach of the existing partners with
w be equal to the percentage If he's paying more, it implies that there is unrecorded goodwill in th
percentage he's receiving. This is the implied value of the company.
and subtract the total from the implied value. Debit Goodwill and cr
agreement. Then debit Cash and credit the new guy's capital accou
percentage he was to receive.
If he's paying less, it suggests that he's bringing the goodwill in hims
[Contribution + Goodwill = % received (Total existing capital + Cont
Then debit Cash for the contribution amount, debit Goodwill for the a
total.
capital balance, there is a bonus
llocation agreement. Debit the
unts for their respective shares of
dwill method and a partner decides
specifically identifiable assets are
n the problems we worked, but the
of the company to the appraised
o their allocation agreement. Then
d value for the company because
s because of differing contribution
a capital balance that is significantly
ess payment made to calculate total
l account is divided by his
s' accounts. Once that's done, his
t and credit Cash.
bution to the firm:
existing capital balances to find the new total capital amount. Multiply that by the percentage
ution. This amount is credited to his capital account. If the amount received is more than the cash
partner from the old and is allocated among the old partners according to their original allocation
han the cash contributed, the bonus is going to the existing partners from the entering partner,
ocation agreement.
ent amount to the existing balances, then multiply by the percentage the new guy is receiving.
l for where things are. Is the new guy paying more or less than the amount calculated?
unrecorded goodwill in the company. To determine how much, divide his contribution by the
ed value of the company. Add up the existing capital accounts and the amount of the contribution
ue. Debit Goodwill and credit the existing partners' capital accounts according to their allocation
new guy's capital account for the contribution amount, which should now be equal to the
nging the goodwill in himself and the amount must be calculated algebraically.
al existing capital + Contribution + Goodwill)]
nt, debit Goodwill for the amount just calculated, and credit the new guy's capital account for the
rcentage
an the cash
allocation
g partner,
ceiving.
?
y the
contribution
allocation
the
unt for the
Exist cap 130,000
Contribution 37,000
New total 167,000
33,400 Jeffrey is paying more than this, imp
unrecorded goodwill in the firm
185,000 Divide the contribution by the perce
(167,000) The difference between the implied
18,000 Allocate it among the old partners, t
Goodwill
Prince
Robbins
Cash
Jeffrey
Allocatio
Interest allowance
Remainder
Net income
g more than this, implying there is
odwill in the firm
tribution by the percentage to be received to get the implied value of the company
between the implied value and the new capital total is goodwill.
ng the old partners, then record Jeffrey's admission for the amount contributed
18,000
14,400
3,600
37,000
37,000
Allocation of Income - 2024
Prince Robbins Jeffrey Total
8,440 6,360 3,700 18,500
(1,750) (1,050) (700) (3,500)
6,690 5,310 3,000 15,000
Nichols investment:
N contributes an amount equal N = .25(714,000 + N)
to 25% of the firm's book value N = 178,500 + .25N
including his contribution. Since .75N = 178,500
the contribution is included in the 238,000
total book value, we have to use
algebra, but note that there is no
goodwill in this.
Bonus
Bonus = 20% (Net income - allowanc
B = 20% (477,000 - 451,128 - B)
B = 5174 - .2B
1.2B = 5174
4,312
Note: the total bonus is 20%. Each g
25(714,000 + N)
78,500 + .25N
= 178,500
=N
= 20% (Net income - allowances - Bonus)
0% (477,000 - 451,128 - B)
174 - .2B
the total bonus is 20%. Each gets 10%
Allocation of Income - '22
Kimble Sykes Gerard
Salary allowance 93,500 79,200 71,500
Interest allowance 24,960 21,600 11,040
Bonus
Remainder (6,600) (6,600) (6,600)
Net income 111,860 94,200 75,940
Partners' Capital - '22
Kimble Sykes Gerard
Beginning - - -
Investments 208,000 180,000 92,000
Net income 111,860 94,200 75,940
Drawings (20,800) (18,000) (9,200)
Ending 299,060 256,200 158,740
Allocation of Income - '23
Kimble Sykes Gerard
Salary allowance 99,000 82,500 75,900
Interest allowance 35,887 30,744 19,049
Bonus
Remainder (117,460) (117,460) (117,460)
Net income 17,427 (4,216) (22,511)
Partners' Capital - '23
Kimble Sykes Gerard
Beginning 299,060 256,200 158,740
Investments
Net income 17,427 (4,216) (22,511)
Drawings (29,906) (25,620) (15,874)
Ending 286,581 226,364 120,355
Allocation of Income - '24
Kimble Sykes Gerard
Salary allowance 103,400 89,100 72,050
Interest allowance 34,390 27,164 14,443
Bonus 2,156 2,156
Remainder 5,390 5,390 5,390
Net income 145,336 123,810 91,883
Partners' Capital - '24
Kimble Sykes Gerard
Beginning 286,581 226,364 120,355
Investments
Net income 145,336 123,810 91,883
Drawings (28,658) (22,636) (12,036)
Ending 403,259 327,538 200,202
22
Total
244,200 Billable hours * $55
57,600 Beginning capital * 12%
None because the allowances created a negative remainder.
(19,800)
- 282,000
Total
-
480,000 Given
282,000 From schedule above
(48,000) Beginning capital * 10%
- 714,000
23
Nichols Total
85,800 343,200 Billable hours * $55
28,560 114,240 Beginning capital * 12%
None because there was a net loss
(117,460) (469,840)
(3,100) (12,400)
Nichols Total
714,000 Ending balance from last year
238,000 238,000 See explanation to the left
(3,100) (12,400) From schedule above
(23,800) (95,200) Beginning capital * 10%
211,100 844,400
24
Nichols Total
85,250 349,800 Billable hours * $55
25,332 101,328 Beginning capital * 12%
4,312 See explanation to the left
5,390 21,560
115,972 477,000
Nichols Total
211,100 844,400 Ending balance from last year
-
115,972 477,001 From schedule above
(21,110) (84,440) Beginning capital * 10%
305,962 1,236,961
ed a negative remainder.
Part a Existing capital 270,000
Contribution must
be 25% of total book
value including the
contribution
Have to use algebra: Contribution = 25% (270,000 + Contribu
C = 67,500 + .25C
.75C = 67,500
90,000
Check it: 270,000
90,000
New total capital 360,000
25%
90,000
Part b Divide the contribution by the percentage received to get the implied
value of the firm, then subtract total capital (including the contribution
to determine goodwill
$36,000 / 10% 360,000
vs.
Total capital 306,000
Goodwill to old guys: 54,000
Distribution to:
Partner A 16,200
Partner B 5,400
Partner C 21,600
Partner D 10,800
Capital balances:
Partner A 36,200
Partner B 45,400
Partner C 111,600
Partner D 130,800
Partner E 36,000
360,000
Part c If we divide the contribution by the percentage received to get the imp
value, we'll come up with a value significantly less than the actual boo
The text will tell you that this suggests a negative goodwill, which mus
mean that E is bringing in goodwill himself.
210,000
What I've been telling you is to calculate the new total capital
(270,000 + 42,000) and multiply by the percentage to be received,
which comes out to 62,400. E is paying significantly less than that;
therefore, he must be bringing in goodwill, which has to be calculated
algebraically:
42,000 + goodwill = 20% (270,000 + 42,000 + goodwill)
42,000 + G = 62,400 + .2G
.8G = 20,400
25,500 = G
Capital balances:
Partner A 20,000
Partner B 40,000
Partner C 90,000
Partner D 120,000
Partner E 67,500
Total new capital 337,500
Check:
Total new cap * 20% 67,500
Part d Existing capital 270,000
Contribution 55,000
New total 325,000
20% of new total 65,000
E is receiving more than he's paying in, so the bonus is to him from the
Bonus ($10,000):
Partner A (1,000)
Partner B (3,000)
Partner C (2,000)
Partner D (4,000)
Capital balances:
Partner A 19,000
Partner B 37,000
Partner C 88,000
Partner D 116,000
Partner E 65,000
Total new capital 325,000
Part e C's balance is $90,000, yet she will receive $112,500
This amounts to a $22,500 bonus from the remaining partners to her.
Bonus:
Partner A (7,500)
Partner B (7,500)
Partner D (7,500)
Capital balances:
Partner A 12,500
Partner B 32,500
Partner C
Partner D 112,500
Total new capital 157,500
ution = 25% (270,000 + Contribution)
500 + .25C
= required contribution
age received to get the implied
apital (including the contribution)
Check:
Orig cap: 270,000
Goodwill 54,000
Contrib. 36,000
360,000
rcentage received to get the implied
ificantly less than the actual book value.
s a negative goodwill, which must
270,000
42,000
312,000
62,400
ate the new total capital Note: We could apply this approach to p
he percentage to be received, In that case, new capital was 270,000 +
ng significantly less than that; 10% of that is 30,600, but E was paying
dwill, which has to be calculated which implied there was unrecorded goo
we'd use his payment divided by the per
receiving to get the total implied value a
42,000 + goodwill) $306,000 to determine goodwill. This is
doing it in class, largely because I don't
of "negative" goodwill.
n, so the bonus is to him from the old partners
ceive $112,500
m the remaining partners to her.
Check:
Existing total capital: 270,000
Paid to C (112,500)
New capital bal: 157,500
ly this approach to part b as well:
pital was 270,000 + 36,000 = 306,000.
0, but E was paying more than that
was unrecorded goodwill. At that point,
nt divided by the percentage he was
total implied value and subtract the
ine goodwill. This is how we've been
gely because I don't like the concept
