Reference no: EM132359600

Question

1. Adam (A), Betsy (B) and Cathy (C) decided to form a partnership, which was founded on 01/01/2015. Adam contributed cash $20,000 and inventory with market value of $30,000. B contributed a piece of land with market value of $80,000 with unpaid mortgage in the amount of $30,000. C contributed PPE with market value of $50,000 and C's expertise is deemed to be worth of $50,000 by all the 3 partners.

a. If ABC decided to use goodwill method to document the creation of the partnership, what are the journal entries and what are the values of capital under respective partners' names?

b. If ABC decided to use bonus method to document the foundation of the partnership, what are the journal entries and what are the values of capital under respective partners' names?

c. Assuming that every year the profit among different partners will be shared in the ration of 10%, 30% and 60%, and partners have to retain 75% of their share profits in the partnership in the case of profit. What are the balances of each partner's capital by the end of each year using both goodwill and bonus method (2015 and 2016)?

c.1. The partnership made $10,000 in 2015 and had a loss of $20,000 in 2016 (Goodwill method).

c.2: The partnership made $15,000 in 2015 and had a loss of $25,000 in 2016 (bonus method).

2. A, B, C and D decided to form a partnership to conduct restaurant business. On 01/01/2015, A contributed 100,000 cash. B contributed 30,000 worth of inventory and B has expertise that is worth 20,000, recognized by all the partners. C contributed by PPE with market value of 100,000 and loan of 50,000 which will be transferred to the partnership. D contributes some patents with market value of 100,000. Below are the rules to divide the profits (losses) each year.

1. Each year if the partnership generates income, each partner is entitled to 5% of their beginning balance of capital, the interests will be paid in cash. If the partnership does not generate enough profits, then the interests will be shared among partners proportionally (based on the ratio of beginning balance of capital).

2. If there if enough profit left for the next step, B and C shall receive 5,000 compensation each year, if not enough profits, then B and C's compensation shall be awarded proportionally.

3. After paying the compensation., if there is enough profits left, the remaining profits (or just loss) should be shared among A, B, C and D in the ratio of 25%, 40%, 10% and 25%.

4. Every year the partners retain 60% of their shared profits from Step 4 in the partnership as the addition to their capitals.

For 2015, the partnership announced net income of 40,000.

For 2016, the partnership announced net income of 25,000.

For 2017, the partnership announced net loss of 10,000.

a. Use Goodwill method to calculate the capital balance of each partner on 01/01/2015, 12/31/2015, 12/31/2016 and 12/31/2017.

b. Use bonus method to calculate the capital balance of each partner on 01/01/2015, 12/31/2015, 12/31/2016 and 12/31/2017.