Reference no: EM13342393
Heyman and Mullins begin a partnership on January 1, 2010. Heyman invests $40,000 cash and inventory costing $15,000 but with a current appraised value of only $12,000. Mullins contributes a building with a $40,000 book value and a $48,000 fair value. The partnership also accepts responsibility for a $10,000 note payable owed in connection with this building. The partners agree to begin operations with equal capital balances. The articles of partnership also provide that at each year-end, profits and losses are allocated as follows:
1. For managing the business, Heyman is credited with a bonus of 10 percent of partnership income after subtracting the bonus. No bonus is accrued if the partnership records a loss.
2. Both partners are entitled to interest equal to 10 percent of the average monthly capital balance for the year without regard for the income or drawings of that year.
3. Any remaining profit or loss is divided 60 percent to Heyman and 40 percent to Mullins.
4. Each partner is allowed to withdraw $800 per month in cash from the business.
On October 1, 2010, Heyman invested an additional $12,000 cash in the business. For 2010, the partnership reported income of $33,000.
Lewis, an employee, is allowed to join the partnership on January 1, 2011. The new partner invests $66,000 directly into the business for a one-third interest in the partnership property. The revised partnership agreement still allows for both the bonus to Heyman and the 10 percent interest, but all remaining profits and losses are now split 40 percent each to Heyman and Lewis with the remaining 20 percent to Mullins. Lewis is also entitled to $800 per month in drawings.
Mullins chooses to withdraw from the partnership a few years later. After negotiations, all parties agree that Mullins should be paid a $90,000 settlement. The capital balances on that date were as follows:
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Heyman, capital
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$88,000
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Mullins, capital
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78,000
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Lewis, capital
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72,000
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Required
a. Assuming that this partnership uses the bonus method exclusively, make all necessary journal entries. Entries for the monthly drawings of the partners are not required.
b. Assuming that this partnership uses the goodwill method exclusively, make all necessary journal entries. Again, entries for the monthly drawings are not required.