E 16-11 : Partner retirement entries

Capital balances and profit and loss sharing ratios for the Nix, Man, and Per
partnership on December 31, 2011 before the retirement of Nix, are as follows:
Nix capital (30%) $128,000
Man capital (30%) $140,000
Per capital (40%) $160,000
On January 2, 2012, Nix is paid $170,000 cash upon his retirement.
R E Q U I R E D : Prepare the journal entry or entries to record Nix’s retirement
assuming that goodwill, as implied by the payment to Nix, is recorded on the
partnership books

Solution :
Retirement of Nix with revaluation:
Goodwill $140,000
Nix capital (30%) $42,000
Man capital (30%) 42,000
Per capital (40%) 54,000
Untuk mencatat goodwill yang tersirat oleh kelebihan pembayaran ke Nix
dihitung sebagai berikut :
($170,000 - $128,000)/30% = $140,000.
Nix capital $170,000
Cash $170,000
( Untuk mencatat pembayaran ke Nix saat pensiun.)

E16-12 : Partner retirement entries—Fair value adjustment

A balance sheet at December 31, 2011, for the Beck, Dee, and Lynn partnership is
summarized as follows:
Assets $800,000 Liabilities $200,000
Loan to Dee 100,000 Beck capital (50%) 300,000
$900,000 Dee capital (40%) 300,000
Lynn capital (10%) 100,000
$900,000
Dee is retiring from the partnership. The partners agree that partnership assets,
excluding Dee’s loan, should be adjusted to their fair value of $1,000,000 and that
Dee should receive $310,000 for her capital balance net of the $100,000 loan. The
bonus approach is used; therefore, no goodwill is recorded.

R E Q U I R E D : Determine the capital balances of Beck and Lynn immediately

after Dee’s retirement.

Solution :
Entry to write-up assets to fair value
Assets $200,000
Beck capital $100,000
Dee capital 80,000
Lynn capital 20,000
Entry to record settlement with Dee :
Dee capital $380,000
Beck capital (5/6 $30,000 excess payment) 25,000
Lynn capital (1/6 $30,000 excess payment) 5,000
Dee loan $100,000
Cash 310,000
Beck capital ($300,000 + $100,000 - $25,000) $375,000
Lynn capital ($100,000 + $20,000 - $5,000) $115,000

E 16-13 : Partnership income allocation—Salary allowance, bonus, and

additional contributions during the year
Kathy and Eddie formed the K & E partnership several years ago. Capital account
balances on January 1, 2011, were as follows:

Kathy $496,750

Eddie $268,250

The partnership agreement provides Kathy with an annual salary of $10,000 plus
a bonus of 5 percent of partnership net income for managing the business. Eddie
is provided an annual salary of $15,000 with no bonus. The remainder is shared
evenly. Partnership net income for 2011 was $30,000. Eddie and Kathy each
invested an additional $5,000 during the year to finance a special purchase. Year-
end drawing account balances were $15,000 for Kathy and $10,000 for Eddie.

REQUIRED
1. Prepare an income allocation schedule.
2. Create the journal entries to update the equity accounts at the end of the year.
3. Determine the capital balances as of December 31, 2011.

Solution :
1. Income Allocation Schedule
Kathy Eddie Total
Net income $30,000
Bonus to Kathy (1,500) 1,500 1,500
Remainder 28,500
Salary allowance (25,000) 10,000 15,000 25,000
Remainder 3,500
50/50 split (3,500) 1,750 1,750 3,500

Remainder -0- $13,250 $16,750 $30,000

2. The journal entries to update the equity accounts at the end of the year
Revenue and Expense Summary $30,000
Kathy Capital $13,250
Eddie Capital $16,750
( Allocate partnership net income for the year to the partners.)

Kathy Capital $15,000

Kathy Drawing $15,000
Eddie Capital $10,000
Eddie Drawing $10,000
( Close the drawing accounts to the capital accounts.)
 3. Capital Account
K & E Partnership
Statement of Partners’ Capital
For the year ended December 31 2011

Kathy Eddie
Capital balances January 1, 2011 $496,750 $268,250

Add: Additional investments 5,000 5,000

Deduct: Drawings (15,000) (10,000)

Add: Net income 13,250 16,750

Capital balances December 31, 2011 $500,000 $280,000

E 16-14 : Partnership retirement—Revaluation and bonus approaches

The capital account balances and profit and loss sharing ratios of the Byd, Box,
Dar, and Fus partnership on December 31, 2011, after closing entries are as
follows:

Byd (30%) $ 30,000

Box (20%) 25,000
Dar (40%) 25,000
Fus (10%) 20,000
Total capital $100,000
Box is retiring from the partnership, and the partners agree that he will receive a
cash payment of $35,000 in final settlement of his interest. The book values of
partnership assets and liabilities are equal to fair values, except for a building with
a book value of $15,000 and a fair value of $25,000.

REQUIRED:

1. Prepare the journal entry or entries to record Box’s retirement assuming that
assets are revalued to the basis implied by the excess payment to Box.
2. Prepare the journal entry or entries to record Box’s retirement assuming the
bonus approach is used

Solution :
1. Valuation of assets and liabilities as implied by excess payment to Box:
 Building $10,000
Goodwill 40,000
Byd capital $ 15,000
Box capital 10,000
Dar capital 20,000
Fus capital 5,000
To record revaluation of building and goodwill implied by the excess payment to
Box on his retirement ($10,000/0.2 = $50,000 revaluation)
Box capital $35,000
Cash $ 35,000
To record cash payment to Box on his retirement from the business.
2. No revaluation; bonus to retiring partner:
Box capital $25,000
Byd (30/80) 3,750
Dar (40/80) 5,000
Fus(10/80) 1,250
Cash $ 35,000
To record a $10,000 bonus to Box upon retirement.

E 16-15 : Recording new partner investment and partner retirements-

Various situations

1. Bill and Ken enter into a partnership agreement in which Bill is to have a 60%
interest in capital and profits and Ken is to have a 40% interest in capital and
profits. Bill contributes the following:
Cost Fair Value
Land $ 10,000 $20,000
Building 100,000 60,000
Equipment 20,000 15,000
There is a $30,000 mortgage on the building that the partnership agrees to assume.
Ken contributes $50,000
cash to the partnership. Bill and Ken agree that Ken’s capital account should equal
Ken’s $50,000 cash contribution and that goodwill should be recorded. Goodwill
should be recorded in the amount of:
a. $10,000
b. $15,000
 c. $16,667
d. $20,000
2. Thomas and Mark are partners having capital balances of $50,000 and $60,000,
respectively. They admit Jay to a one-third interest in partnership capital and
profits for an investment of $65,000. If the goodwill procedure is used in
recording Jay’s admission to the partnership:
a. Jay’s capital will be $58,333
b. Total capital will be $175,000
c. Mark’s capital will be $70,000
d. Goodwill will be recorded at $15,000

3. On December 31, 2011, Tina and Webb, who share profits and losses equally,
have capital balances of $170,000 and $200,000, respectively. They agree to
admit Zen for a one-third interest in capital and profits for his investment of
$200,000. Partnership net assets are not to be revalued. Capital accounts of
Tina, Webb, and Zen, respectively, immediately after Zen’s admission to the
partnership are:
a. $170,000, $200,000, and $200,000
b. $165,000, $195,000, and $200,000
c. $175,000, $205,000, and $190,000
d. $185,000, $215,000, and $200,000

4. Finney and Rhoads have capital balances of $100,000 and $80,000,

respectively, and they share profits equally. The partners agree to accept
Chesterfield for a 25 percent interest in capital and profits for her investment of
$90,000. If goodwill is recorded, the capital account balances of Finney and
Rhoads immediately after Chesterfield’s admittance to the partnership will be:
a. Finney, $100,000; Rhoads, $120,000
b. Finney, $111,250; Rhoads, $91,250
c. Finney, $145,000; Rhoads, $125,000
d. Finney, $120,000; Rhoads, $120,000

Solution :
1. Bill’s contribution ($20,000 + $60,000 + $15,000 - $30,000) $ 65,000
Ken’s contribution 50,000
Total tangible contributions $115,000
Ken’s contribution $50,000/.4 interest = $125,000 total capital
Total capital based on Ken’s contribution $125,000 less amount contributed by
Ken and Bill $115,000 = $10,000 goodwill
2. Jay’s investment of $65,000 is greater than his capital credit of 1/3 of
$175,000; thus, there is goodwill to the old partners.
New capital = $65,000 : 1/3 = $195,000
New capital of $195,000 - (old capital $110,000 + $65,000 investment) =
$20,000 goodwill.
 Revaluation is recorded:
Goodwill (other assets) $20,000
Thomas capital (50%) $ 10,000
Mark capital (50%) 10,000
Mark’s capital = $60,000 + $10,000 goodwill = $70,000

3. Total capital ($170,000 + $200,000 + $200,000) = $570,000

Zen’s interest $570,000 : 1/3 = $190,000 Therefore, Tina and Warren receive
a $10,000 bonus, shared equally.

Tina Capital $175,000,

Warren Capital $205,000,

Zen Capital $190,000

4. $90,000 investment > 25% ($100,000 + $80,000 + $90,000), thus, there is

goodwill to the old partners.

New capital $90,000/25% $360,000

Old capital + new investment $180,000 + $90,000 (270,000)

Goodwill $ 90,000

Finney capital $100,000 + (50% x $90,000 goodwill) $145,000

Rhoads capital $80,000 + (50% x $90,000 goodwill) 125,000

Chesterfield capital 90,000

Total capital $360,000