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1. • CommentAuthorwildchild
   • CommentTimeJan 4th 2008

    
   A and B are partners in a business. Their capital balances are 150,000 and 100,000 respectively.
   They share profits and losses in a ratio of 3:2
   Because the partners are facing financial problems, they decided to admit C as a new partner into the partnership.
   
   Required:
   - Prepare journal entries to record the admission of C.
   C acquires 1/5 of total capital of the partnership which becomes 150,000 after admission of C
   
   
   Can anyone please help on this one? .. it was in my final last week.
2. • CommentAuthorbtllc
   • CommentTimeJan 11th 2008 edited

    
   Hey there. I believe the way to handle this one is as follows:
   
   A + B capital = 250,000 and you need to find out how much money is required by C to be admitted and obtain 1/5 or 20% of the total capital of the partnership. The standard equation is:
   
   STEP 1: (A,Capital + B,Capital) + New Partner Contribution = Total Capital
   STEP 2: Total Capital x 20% (or 1/5) = $150,000
   
   Since you can't complete STEP 1 because you don't know how much A and B require that C contributes to join the partnership, you can't find the Total Capital and therefore you can't finish STEP 2 either. You must work backwards from STEP 2.
   
   Total Capital x 20% = $150,000 ... can be reworked using basic algebra to be...
   Total Capital = $150,000 x 20% ... complete the equation ...
   Total Capital = $750,000 ... Now that you know the total capital, plug it into STEP 1
   
   (A,Capital + B, Capital) + New Partner Contribution = Total Capital
   (150,000 + 100,000) + New Partner Contribution = $750,000
   250,000 + New Partner Contribution = $750,000
   New Partner Contribution = $750,000 - $250,000
   New Partner Contribution = $500,000
   
   If Partner C has to contribute $500,000 to get into the partnership, but only receives $150,000 (or 20% or 1/5) total equity, then A and B each get a bonus according to the income sharing ratio of 3:2.
   
   Partner A gets $300,000 ($500,000 x 3/5)
   Partner B gets $200,000 ($500,000 x 2/5)
   
   The journal entry should like like this:
   
   Debit:
   Cash 500,000
   
   Credit
   A, Capital 300,000
   B, Capital 200,000
   C, Capital 150,000
   
   Memo: To admit new partner C into partnership with 20% or 1/5 ownership and give bonuses to A and B
   
   Hope that helps!
   Pete--