Problem 12-04A a-b At April 30, partners’ capital balances in Ivanhoe Company are G. Donley $48,000, C. Lamar $48,000, and J. Pinkston $15,000. The income sharing ratios are 5 : 4 : 1, respectively. On May 1, the PDLT Company is formed by admitting J. Terrell to the firm as a partner.

a. Journalize the admission of Terrell under each of the following independent assumptions.

(1) Terrell purchases 50% of Pinkston's ownership interest by paying Pinkston $15,400 in cash.

(2) Terrell purchases 33 1/3% of Lamar's ownership interest by paying Lamar $15,600 in cash.

(3) Terrell invests $60,200 for a 30% ownership interest, and bonuses are given to the old partners.

(4) Terrell invests $41,400 for a 30% ownership interest, which includes a bonus to the new partner.

b. Lamar's capital balance is $38,200 after admitting Terrell to the partnership by investment. If Lamar's ownership interest is 20 % of total partnership capital, what were (1) Terrell's cash investment and (2) the bonus to the new partner?

Solution

a. Journal Entries:

No. Account Titles Debit Credit

1 Pinkson, Capital 7,500

Terrell, Capital 7,500

2 Lamar, Capital 16,000

Terrell, Capital 16,000

3 Cash 60,200

Terrell, Capital 51,360

Donley, Capital 4,420

Lamar, Capital 3,536

Pinkston, Capital 884

4 Cash 41,400

Donley, Capital 2,160

Lamar, Capital 1,728

Pinkston, Capital 432

Terrell, Capital 45,720

Computation:

a.(1) Capital of Terrell = $15000 x 0.50 =$ 7500

a.(2) Capital of Terrell = $48,000 x 1/3 = $16,000

a.(3) Capital of Terrell = $171,200 x 0.30 = $51,360

Old Partners bonus = $60,200 - $51,360 = $8,440

Capital of Donley = $8,440 x 5/10 = $4420

Capital of Lamar = $8,840 x 4/10 = $3,536

Capital of Pinkston = $8,840 x 1/10 = $884

a.(4) Terrel Capital = $152,400 x 0.30 = $45,720

New Partner Bonus = $45,720 - $41,400 = $4,320

Donley Capital = $4,320 x 5/10 = $2,160

Lamar Capital = $4,320 x 4/10 = $1,728

Pinkston Capital = $4,320 x 1/10 = $432

b.(1) Total Capital after Admission = $38,200 / 0.20 = $191,000

Total Capital before Admission = $48000 + $48000 + $15000 = $110,000

Cash Investment by Terrell = $191,000 - $111,000 = $80,000

b.(2) Decrease in Lamar's Capital = $48,000 - $38,200 = $9,800

Bonus to New Partner = $9,800 / 0.40 = $24,500