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22 May, 14:22

A partnership has the following account balances: Cash $50,000; Other Assets $600,000; Liabilities $240,000; Nixon, Capital (50 percent of profits and losses) $200,000; Hoover, Capital (20 percent) $120,000; and Polk, Capital (30 percent) $90,000. Each of the following questions should be viewed as an independent situation: Grant invests $80,000 in the partnership for an 18 percent capital interest. Goodwill is to be recognized. What are the capital accounts thereafter? Grant invests $100,000 in the partnership to get a 20 percent capital balance. Goodwill is not to be recorded. What are the capital accounts thereafter?

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  1. 22 May, 18:10
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    a) Nixon 200,000

    Hoover 120,000

    Polk 90,000

    Grant 90,000

    500,000

    b)

    Nixon $ 195,000.00

    Polk $ 117,000.00

    Hoover $ 88,000.00

    Grant $ 100,000.00

    $ 500,000.00

    Explanation:

    Nixon Capital 200,000

    Hoover Capital 120,000

    Polk Capital 90,000

    If grants invest for 80,000 and get 18% then:

    80,000 / 0.18 = 444,444 value of the company

    200,000 + 120,000 + 90,000 + 80,000 = 490,000 capital after

    As the value of the company is lower the new partner is providing goodwill to the company that's why there is a goodwill to be recognized.

    Grant investemnt = 18% (original capital + contribution + goodwill)

    80,000 + goodwill = 0.18 (410,000 + 80,000 + goodwill)

    goodwill - 0.18 goodwill = 88,200 - 80,000

    goodwill = 8,200 / (1 - 0.18) = 10,000

    Grant investment: 80,000 cash + 10,000 goodwill

    If invest 100,000 and no goodwill:

    100,000 / 0.20 = 500,000

    then new capital:

    410,000 + 100,000 = 510,000

    Difference: 10,000

    As no goodwill is recognized the assets weere overvalued and we must recognize a loss:

    10,000 x 50% = 5,000 Nixon

    x 30% = 3,000 Polk

    x 20% = 2,000 Hoover
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