At the start of 2018, Santana Rey is considering adding a partner to her business. She envisions the new partner taking the lead in generating sales of both services and merchandise for Business Solutions. S. Rey's equity in Business Solutions as of January 1, 2018, is $80,640. Required: 2. Prepare the January 1, 2018, journal entries necessary to admit a new partner to Business Solutions through the purchase of a partnership interest for each of the following two separate cases: (a) 1:1 sharing agreement and (b) 4:1 sharing agreement. 3. Prepare the January 1, 2018, journal entry required to admit a new partner if the new partner invests cash of $20,160. 4. After posting the entry in part 3, what would be the new partner's equity percentage?

a. see a. under the explanation below

b. see b. under the explanation below

c. 20%

Explanation:

a. 1:1 sharing agreement

A 1:1 sharing agreement implies that the new partner is also contributing the same amount which is the amount standing as equity for Santana Rey in Business Solutions as of January 1, 2018. That is, the new partner is to contribute $80,640 as capital.

The total capital will now be equal to $161,280 (i. e. $80,640 + $80,640)

The Journal entries is as follows:

In the book of the new partner:

DR CR

Business Solutions' Cash book $80,640

New Partner's bank account $80,640

Being capital contributed to join Business Solution

In the book of Business Solution:

DR CR

Cash book $80,640

New Partner's Capital account $80,640

Being capital contributed by the new partner to join Business Solution

(b) 4:1 sharing agreement

A 4:1 sharing agreement implies that the new partner will contribute one-quarter of $80,640 standing as equity for Santana Rey in Business Solutions as of January 1, 2018. This is calculated as follows:

Amount to contribute by the new partner = $80,640/4 = $20,160

This will make the total equity be $100,800 (i. e. $80,640 + $20,160)

The journal entries are presented as follows:

In the book of the new partner:

DR CR

Business Solutions' Cash book $20,160

New Partner's bank account $20,160

Being capital contributed to join Business Solution

In the book of Business Solution:

DR CR

Cash book $20,160

New Partner's Capital account $20,160

Being capital contributed by the new partner to join Business Solution

3. Prepare the January 1, 2018, journal entry required to admit a new partner if the new partner invests cash of $20,160.

(The journal entry will be the same as what we have in b above as presented below:

In the book of the new partner:

DR CR

Business Solutions' Cash book $20,160

New Partner's bank account $20,160

Being capital contributed to join Business Solution

In the book of Business Solution:

DR CR

Cash book $20,160

New Partner's Capital account $20,160

Being capital contributed by the new partner to join Business Solution

4. After posting the entry in part 3, what would be the new partner's equity percentage?

A contribution of $20,160 will make the total equity be equal to $100,800 (i. e. $80,640 + $20,160). As a result, the new partner's equity percentage is the new partner equity contributed divided by the new total of Business Solution's equity multiply by 100. This is calculated as follows:

The new partner's equity percentage = ($20,160/$100,800) * 100

= 0.20 * 100

= 20%

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