Reference no: EM132773461
Question - Frank, Mike and Wilson decided to form a partnership. On 01/01/2007, the partnership was formed. Frank contributed cash in the amount of $ 40,000, Mike contributed in inventory with book value of $20,000 and fair market value of $30,000, Wilson contributed a piece land with book value of 30,000 and fair value of $50,000, note that the land is encumbered by a loan (due in 2020) of $20,000 that the partnership agrees to assume. Due to the different expertise and capital contribution, the partnership states that future profit/loss should be allocated in the following manner:
1. Each partner receives 2% interest of their beginning capital balance every year, note that if the partnership generates a loss, then no interest shall be paid; if the partnership fails to generate enough income to pay interest in full amount, then the income should be divided according to partners' capital contribution.
2. Frank, Mike and Wilson then claims, respectively, 30%, 30% and 40% of remaining of the profit/loss every year.
a. Write down the journal entries to record the creation of the partnership.
After operating for a year, the partnership earns a net income (in cash) of $20,000. Due to the growth of the business, the partners agrees the following for the 2007 profit:
1. Each partner will claim the interests in cash.
2. Partners will keep 50% of the remaining income in the company to reinvest.
b. Write down the journal entries to record the income allocation.
c. What is the ending balance of 2007 capital account for each partner after distributing the income among partners?
On 01/01/2008, seeing the good performance of the partnership, Nick wants to be part of the partnership, he agrees to pay 40,000 in exchange for 20% of the new partnership and Frank, Mike and Wilson all agreed.
d. Record the transaction using bonus method.
e. Record the transaction using Goodwill method.
2008 was a bad year for the partnership, the partnership lost $10,000.
f. What are the balances of capital accounts after year 2008 operation? please state the balances use bonus and goodwill method respectively?
12/31/2008 Wilson sensed the incoming of crisis and decided to quit, and the partnership agreed. The partnership has a fair value of 150,000 at 12/31/2008 and Wilson quit on that day
g. Use bonus and good will methods to record the transaction and calculate each partner's capital balance after the transaction.