ACAE 14 Activity – Partnership Dissolution

P1 Partners Admission
A condensed balance sheet for the Elmer, Martin and Kevin partnership at December 31, 2019, and their
profit and loss sharing percentages in that date are as follows:
Cash 15,000 Liabilities 50,000
Other assets 185,000 Elmer, capital (50%) 75,000
Martin, capital (30%) 50,000
Kevin, capital (20%) 25,000

On January 1, 2020 the partners decided to bring Daren into the partnership under the following
independent assumptions:
1. Assuming that Daren would purchase 1/2 of Elmer’s capital and right to future profits directly from
Elmer for 60,000, how much capital is to be credited to Daren?
2. Assuming that Daren would purchase 1/4 of each of the partner’s capital and rights to future profits
by paying total of 50,000 directly to the partners, the partnership net assets are not to be revalued.
How much will be the capital balances of each partner?
3. Assuming that Daren would purchase 1/4 of each of the partner’s capital and rights to future profits
by paying total of 45,000 directly to the partners, the partnership net assets are to be revalued. How
much will be the capital balances of each partner?
4. Assuming that Daren would invest 50,000 cash in the partnership for a 20% interest and capital.
Partnership net assets are not to be revalued. How much will be the capital balances of each partner?
5. Assuming that Daren would invest 50,000 cash in the partnership for a 20% interest and capital.
Partnership net assets are to be revalued. How much will be the capital balances of each partner?

(1)
75,000 x 1/2 = 37,500

(2)
Partners TCC Change TAC
Elmer 75,000 (18,750) 56,250
Martin 50,000 (12,500) 37,500
Kevin 25,000 (6,250) 18,750
Daren 37,500 37,500
Total 150,000 0 150,000

(3)
Partners TCC Goodwill Change TAC
Elmer 75,000 15,000 (22,500) 67,500
Martin 50,000 9,000 (14,750) 44,250
Kevin 25,000 6,000 (7,750) 23,250
Daren 45,000 45,000
Total 150,000 30,000 0 180,000

45,000 / 25% = 180,000

(4)
Partners TCC Change TAC
Elmer 75,000 5,000 80,000
Martin 50,000 3,000 53,000
Kevin 25,000 2,000 27,000
Daren 50,000 (10,000) 40,000
Total 200,000 0 200,000

(5)
Partners TCC Change TAC
Elmer 75,000 25,000 100,000
Martin 50,000 15,000 65,000
Kevin 25,000 10,000 35,000
Daren 50,000 50,000
Total 200,000 50,000 250,000

50,000 / 20% = 250,000

Problem 2 Partner Death or Withdrawal or Retirement

Francis, Leo and Marcos are partners sharing profits in the ratio of 3:2:1, respectively. Capital accounts
are 500,000, 300,000 and 200,000 on December 31, 2019, when Marcos decides to withdraw. It is agreed
to pay 300,000 for Marcos’s interest. Profits after the withdrawal of Marcos are to be shared equally.

1. Using bonus method approach, how much are the capital balances of Francis and Leo after Marcos’s
withdrawal?
2. Using full goodwill method approach, how much are the capital balances of Francis and Leo after
Marcos’s withdrawal?
3. Using partial goodwill approach, how much are the capital balances of Francis and Leo after
Marcos’s withdrawal?

(1)
Partners Adj. Capital Settlement Change End, Capital
Francis 500,000 (60,000) 440,000
Leo 300,000 (40,000) 260,000
Marcos 200,000 (300,000) 100,000
Total 1,000,000 (300,000) 0 700,000

(2)
Partners Adj. Capital Settlement Change End, Capital
Francis 500,000 300,000 800,000
Leo 300,000 200,000 500,000
Marcos 200,000 (300,000) 100,000
Total 1,000,000 (300,000) 600,000 1,300,000

100,000 / 1/6 = 600,000

(3)
Partners Adj. Capital Settlement Change End, Capital
Francis 500,000 500,000
Leo 300,000 300,000
Marcos 200,000 (300,000) 100,000
Total 1,000,000 (300,000) 100,000 800,000