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Problem 1.

Assume partners A, B, and C have beginning capital balances of $20,000, $30,000, and $50,000, respectively. The partners have agreed to allocate income by first crediting each partner with an amount equal to 10% of their beginning capital balance. They have also agreed to allocate Partner A $20,000 as a compensation allowance in recognition of her participation in the daily operations of the partnership. Any remaining profit or loss will be split equally among the three partners.

If partnership income for the year is $60,000, how would income be allocated among the three partners?

What is journal entry?

Problem 2.

When partners leave a partnership, they typically receive payment for their share. The payment should (will) be at fair market value. Since this transaction establishes or reaffirms a value for the partnership, the partnership may record goodwill on its books.

Suppose again that we have the following capital balances relating to a partnership:

Partner Capital Balance Profit/Loss Ratio

A $ 40,000 50%

B $ 40,000 25%

C $ 20,000 25%

$100,000

The partnership has agreed that when a partner leaves the partnership, s/he will receive cash (or other assets) equal to their current capital balance plus their share of any adjustment indicated by the fair value at the time the partner leaves.

Partner C leaves the partnership when the partnership has an appraised value of $140,000.

1. the bonus method

2. the goodwill method

Now assume that the appraised value of $140,000 includes land that is worth $20,000 more than its original cost.

1. the goodwill method

2. the hybrid method

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