In the AD partnership, Allen's capital is $140,000 and Daniel's is $40,000 and they share income in a 3:1 ratio, respectively. They decide to admit David to the partnership. Each of the following questions is independent of the others.

Refer to the information provided above. David invests $50,000 for a one-fifth interest. What amount of goodwill will be recorded?

A. $20,000

B. $4,000

C. $40,000

D. $15,000

A. $20,000

Explanation:

For computing the goodwill amount we have to apply the formula which is shown below:

= Required capital - actual capital

where,

We know that David invested $50,000 for one-fifth interest

So, Required capital = David investment amount * 5

= $50,000 * 5

= $250,000

And, the actual capital would be

= Allen capital + Daniel capital + David investment

= $140,000 + $40,000 + $ 50,000

= $230,000

So, the goodwill would be

= $250,000 - $230,000 = $20,000