Thirty years ago, five mechanics formed a partnership andestablished an automobile repair shop. Two of the partners, Deckerand Groth, are now retiring. The other three partners, Farmer,Wang, and Lux, are continuing the partnership. The originalagreement called for an equal division of income. The remainingpartners plan to continue this arrangement. The following balancesheet is prepared for the partnership as of the retirementdate:
| Cash | $130,000 | Accounts payable | $175,000 |
| Accounts receivable | 210,000 | Loan payable | 100,000 |
| Inventory of parts | 120,000 | Capital - Decker | 250,000 |
| Equipment, net | 300,000 | Capital - Groth | 150,000 |
| Building, net | 210,000 | Capital - Farmer | 225,000 |
| Land | 90,000 | Capital - Wang | 25,000 |
| | Capital - Lux | 135,000 |
| Total assets | $1,060,000 | Total liabilities and capital | $1,060,000 |
All partners agreed that Decker should receive $287,500 for hisinterest in the business and Groth should receive $187,500. Farmerproposed the bonus method for recording the retirements. Wangobjects to this method and suggests the partial goodwillapproach.
(a) Prepare the journal entry to record the retirements underthe bonus method.
(b) Prepare the journal entry to record the retirements underthe partial goodwill approach.
c) Why does Wang object to the bonus method of accounting?
Under the bonus method, Wang's capital balance is reduced tozero.
Under the bonus method, Wang must pay cash to the otherremaining partners.
Under the bonus method, Wang pays more cash to the retiredpartners.
Under the bonus method, no goodwill is attributed to Wang.
(d) Regardless of the accounting method employed, what immediateproblem for the business can you identify at the time ofretirement?
The firm's total debts exceed the assets available to pay thosedebts.
The firm is insolvent.
The firm is not profitable.
The firm does not have sufficient cash to pay the retirees.
