ADVANCEDWEEK3SOLUTIONS08 - CHAPTER 14 SOLUTIONS 4 D The...

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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
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partners based on their profit and loss ratio: Messalina – $6,000 (60%) and Romulus – $4,000 (40%). The increase raises Messalina's capital balance from $210,000 to $216,000 and Romulus's capital balance from $140,000 to $144,000. 9. D ASSIGNMENT OF INCOME—2007 ARTHUR BAXTER CARTWRIGHT TOTAL Interest—10% of beginning capital ............... $ 6,000 $ 8,000 $10,000 $24,000 Salary ........................................ 20,000 20,000 Allocation of remaining income ($6,000 divided on a 3:3:4 basis) 1,800 1,800 2,400 6,000 Totals ............................. $ 7,800 $29,800 $12,400 $50,000 STATEMENT OF CAPITAL—2007 ARTHUR BAXTER CARTWRIGHT TOTAL Beginning capital .................... $60,000 $80,000 $100,000 $240,000 Net income (above) ................. 7,800 29,800 12,400 50,000 Drawings (given) ..................... (5,000 ) (5,000 ) (5,000 ) (15,000 ) Ending capital ......................... $62,800 $104,800 $107,400 $275,000 10.A ASSIGNMENT OF INCOME—YEAR ONE WINSTON DURHAM SALEM TOTAL Interest—10% of beginning capital ............... $11,000 $ 8,000 $11,000 $30,000 Salary ........................................ 20,000 -0- 10,000 30,000 Allocation of remaining loss ($80,000 divided on a 5:2:3 basis) (40,000 ) (16,000 ) (24,000 ) (80,000 ) Totals ............................. $(9,000 ) $ (8,000 ) $ (3,000 ) $(20,000 ) STATEMENT OF CAPITAL—YEAR ONE WINSTON DURHAM SALEM TOTAL
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Beginning capital .................... $110,000 $80,000 $110,000 $300,000 Net loss (above) ...................... (9,000) (8,000) (3,000) (20,000) Drawings (given) ..................... (10,000 ) (10,000 ) (10,000 ) (30,000 ) Ending capital .................... $ 91,000 $62,000 $ 97,000 $250,000
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10 . (continued) ASSIGNMENT OF INCOME—YEAR TWO WINSTON DURHAM SALEM TOTAL Interest—10% of beginning capital ............... $ 9,100 $ 6,200 $ 9,700 $25,000 Salary ........................................ 20,000 -0- 10,000 30,000 Allocation of remaining loss
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