Week10 HW - Exercise 15-1 Agreed Fair Values Invested by...

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Exercise 15-1 Agreed Fair Values Invested by John Invested by Jeff Invested by Jane Cash $100,000 - - - - - - Equipment 110,000 - - - Total assets 100,000 110,000 0 Note payable assumed by partnership - - - 30,000 - - - Net assets invested $100,000 $80,000 $0 Part A Bonus Method Part B Goodwill Method Cash 100,000 Cash 100,000 Equipment 110,000 Equipment 110,000 Goodwill 90,000 Note Payable 30,000 Note Payable 30,000 John, Capital 60,000 John, Capital 90,000 Jeff, Capital 60,000 Jeff, Capital 90,000 Jane, Capital 60,000 Jane, Capital 90,000 Part C The bonus method is used when John and Jeff recognize that Jane is bringing something of value to the firm other than a tangible asset, but they do not want to recognize an intangible asset. To equalize the capital accounts, $40,000 is transferred from John's capital account and $20,000 is transferred from Jeff's capital account. The goodwill method is used when the partners recognize the intangible nature of the skills Jane is bringing to the partnership. However, the capital accounts are equalized by recognizing an intangible asset and a corresponding increase in the capital accounts of the partners. Unless the intangible asset can be specifically identified, such as a patent being invested, it should not be recognized, because of a lack of justification for goodwill in a new business. Exercise 15-9 1. Cash 120,000 Mary, Capital 120,000 Calculation of investment: 000 , 720 $ 6 / 5 000 , 600 $ = - to compute total capital after investment 000 , 120 $ ) 6 / 1 ( 000 , 720 $ = × - to compute Mary's investment 2. Book value of interest acquired = ($600,000 + $160,000) ) 5 / 1 ( × = $152,000 Book value acquired ($152,000) is less than assets invested ($160,000) by $8,000
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Bonus Method Cash 160,000 Beth, Capital (0.4 × $8,000) 3,200 Steph, Capital (0.4 × $8,000) 3,200 Linda, Capital (0.2 × $8,000) 1,600 Mary, Capital 152,000 Goodwill Method Total capital implied by contract ($160,000/0.20) $800,000 Less: Current balances + Mary's investment * (760,000 ) Goodwill $40,000 * ($600,000 + $160,000)
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Goodwill 40,000 Beth, Capital 16,000 Steph, Capital 16,000 Linda, Capital (0.2 × $40,000) 8,000 Cash 160,000 Mary, Capital 160,000 3. Book value of interest acquired = ($600,000 + $160,000) × ¼ = $190,000 Book value of interest acquired ($190,000) is greater than assets invested ($160,000) by $30,000 Bonus Method Cash 160,000 Beth, Capital (0.4 × $30,000) 12,000 Steph, Capital (0.4 × $30,000) 12,000 Linda, Capital (0.2 × $30,000) 6,000 Mary, Capital 190,000 Goodwill Method Goodwill implicit in agreement: Current partners' capital balance total $600,000 Percentage interest 75% Implied total capital $800,000 Implied total capital $800,000 Less: Current balances + Mary's investment 760,000 Goodwill $40,000 Cash 160,000 Goodwill 40,000 Mary, Capital 200,000 4. Book value of interest acquired = ($600,000 + $160,000) × 0.40 = $304,000
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This note was uploaded on 07/31/2011 for the course ACCT 401 taught by Professor Bennett during the Spring '08 term at Strayer.

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Week10 HW - Exercise 15-1 Agreed Fair Values Invested by...

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