In the GMP partnership (to which Elan seeks admittance), the capital balances of Mary, Gene, and Pat, who share income in the ratio of 6:3:1, are Mary $266,400
Gene 133,200
Pat 44,400

Required:
a. If no goodwill or bonus is recorded, how much must Elan invest for a one-third interest?
b. Prepare journal entry for the admission of Elan if she invests $80,000 for a 20 percent interest and goodwill is recorded.
c. Prepare journal entry for the admission of Elan if she invests $200,000 for a 20 percent interest. Total capital will be $600,000; the partners use the bonus method.

A. $222,000

B. Dr Cash $80,000

Dr Goodwill $31,000

Cr Elan, Capital $111,000

C. Dr Cash $200,000

Cr Mary, Capital $40,080

Cr Gene, Capital $20,040

Cr Pat, Capital $6,680

Cr Elan, Capital $133,200

Explanation:

A. Calculation to determine how much must Elan invest for a one-third interest

FIRST STEP is to calculate the 2/3 of the total resulting capital balance of Mary, Gene, and Pat

Mary $266,400

Gene $133,200

Pat $44,400

Total $444,000

Total resulting capital balance=($444,000÷2/3)

Total resulting capital balance= $444,000 ÷ .666666

Total resulting capital balance=$ 666,000

SECOND STEP is to calculate how much must Elan invest for a one-third interest

Investment for one-third interest= $666,000 x 1/3

Investment for one-third interest=$666,000 x .333333

Investment for one-third interest=$221,999.9

Investment for one-third interest=$222,000 (Approximately)

Therefore how much must Elan invest for a one-third interest is $222,000

B. Preparation of the journal entry for the admission of Elan if she invests $80,000 for a 20 percent interest and goodwill is recorded.

First step is to calculate the goodwill Estimated amount to the new partner

Estimated total capital $ 555,000

[($444,000÷(100%-20%)]

Less Total net assets ($524,000)

($444,000 + $80,000)

Estimated goodwill to the new partner $31,000

($ 555,000-$524,000)

Preparation of the journal entry

Dr Cash $80,000

Dr Goodwill $31,000

Cr Elan, Capital $111,000

[(444,,000÷(100%-20%)*20%)]

=($444,000/80%*20%=$111,000)

C. Preparation of journal entry for the admission of Elan if she invests $200,000 for a 20 percent interest while the Total capital will be $600,000.

FIRST STEP

Amount Invested in partnership $ 20,000

Less New partner's book value ($133,200)

[($444,000 + $222,000) x .20]

Difference $66,800

($200,000-$133,200)

Preparation of the journal entry using ratio 6:3:1

Dr Cash $200,000

Cr Mary, Capital $40,080

($66,800 x .60)

Cr Gene, Capital $20,040

($66,800 x .30)

Cr Pat, Capital $6,680

($66,800 x .10)

Cr Elan, Capital $133,200

($666,000 x .20)

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