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.

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Explanation:

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

1Pinkson, Capital                7,500  

Terrell, Capital                                 7,500

2Lamar, Capital               16,000  

Terrell, Capital                                16,000

3Cash                                60,200  

Terrell, Capital                                 51,360

Donley, Capital                                 4,420

Lamar, Capital                                 3,536

Pinkston, Capital                                  884

4Cash                            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

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