CHAPTER 14 SOLUTIONS
4.
D
The implied value of the company based on the new contribution is
only $233,333 ($70,000/30%) which is below the total of the capital
balances ($280,000 in original capital plus $70,000 to be invested).
Thus, either the assets are overvalued or the new partner is also
contributing goodwill. Since the problem indicates that goodwill is
being recognized, that figure must be computed. Note that the
$70,000 is going into the business and, thus, increases capital.
Danville's investment
= 30
% (Original Capital Plus Danville's
Investment)
$70,000 + Goodwill
=
.30 ($280,000 + $70,000 + Goodwill)
$70,000 + Goodwill
=
$105,000 + .30 Goodwill
.70 Goodwill
= $35,000
Goodwill = $50,000
Danville's Investment (Capital)
=
$70,000 + $50,000 or $120,000
5.
C
The implied value of the company is $800,000 ($200,000/25%). Since
the current capital total is only $600,000, goodwill of $200,000 must
be recognized. Oscar's investment is going to the partners so that it
does not affect the capital total directly. Of the $200,000 in goodwill,
30 percent or $60,000 is attributed to Jethro which brings that capital
balance to $260,000. Since a 25 percent interest is being conveyed to
the new partner, Jethro's balance will then decrease by 25% or
$65,000—a drop to $195,000.
6.
B
Total capital is $200,000 ($110,000 + $40,000 + $50,000) after the new
investment. As Kansas's portion is to be 30 percent, the capital
balance would be $60,000 ($200,000 × 30%). Since only $50,000 was
paid, a bonus of
$10,000 must be
taken from the two original partners based on their profit and
loss
ratio: Bolcar – $7,000 (70%) and Neary – $3,000 (30%). The reduction
drops Neary's capital balance from $40,000 to $37,000.
7.
B
Total capital is $270,000 ($120,000 + $90,000 + $60,000) after the new
investment. However, the implied value of the business based on the
new investment is $300,000 ($60,000/20%). Thus, goodwill of $30,000
must be recognized with the offsetting allocation to the original
partners based on their profit and loss ratio: Bishop – $18,000 (60%)
and Cotton $12,000 (40%). The increase raises Cotton's capital from
$90,000 to $102,000.
8.
A
Total capital is $450,000 ($210,000 + $140,000 + $100,000) after the
new investment. As Claudius's portion is to be 20 percent, the new
capital balance would be $90,000 ($450,000 × 20%). Since $100,000
was paid, a bonus of $10,000 is being given to the two original