[Wanna_B_TXCPA2014]

How can Eng’s capital balance be credited with the entire amount of Goodwill?

Question:

Cor-Eng Partnership was formed on Jan 2 Year1 . Under the partnership agreement, each partner has an equal initial capital balance accounted for under the goodwill method. Partnership net income or loss is allocated 60% to Cor and 40% to Eng. To form the partnership, Cor originally contributed assets costing $30,000 w/a fair value of $60,000 on Jan 2 Year 1, while Eng contributed $20,000 in cash. Drawings by partner during Yr1 totaled $3,000 by Cor and $9,000 by Eng. Cor-Eng’s year 1 net income was $25,000. Eng’s initial capital balance in Cor- Eng is?

Answer

In this problem, the total fair value of the contributed capital is $80,000 ($60,000 from Cor and $20,000 from Eng). Under the goodwill method, it is assumed that the actual value of the partnership is $120,000 (Cor’s contribution of $60,000 ÷ 50%). Resulting goodwill of the partnership must therefore be $40,000 ($120,000 – $80,000). Eng’s initial capital is $60,000 (either $120,000 × 50%, or $20,000 + $40,000)

[jeff]

According to the problem, “each partner has an equal initial capital balance…”

Since Cor contributed assets valued at $60,000, Eng's total contribution must also equal $60,000—goodwill valued at $40,000 in addition to the $20,000 cash.

From the partnership perspective, the goodwill may be recorded since it was purchased in the admission of Eng.

Journal entry to form partnership:

Dr. Cash 20,000

Dr. Other Assets (at fair value) 60,000

Dr. Goodwill 40,000

Cr. Cor (Capital) 60,000

Cr. Eng (Capital) 60,000

Jeff Elliott, CPA (KS) | Another71 | NINJA CPA | NINJA CMA | NINJA CPE

[jeff]

According to the problem, “each partner has an equal initial capital balance…”

Since Cor contributed assets valued at $60,000, Eng's total contribution must also equal $60,000—goodwill valued at $40,000 in addition to the $20,000 cash.

From the partnership perspective, the goodwill may be recorded since it was purchased in the admission of Eng.

Journal entry to form partnership:

Dr. Cash 20,000

Dr. Other Assets (at fair value) 60,000

Dr. Goodwill 40,000

Cr. Cor (Capital) 60,000

Cr. Eng (Capital) 60,000

Jeff Elliott, CPA (KS) | Another71 | NINJA CPA | NINJA CMA | NINJA CPE

[Wanna_B_TXCPA2014]

Jeff,

Thanks for getting back with me on this. My reading comprehension has not kicked in yet.

[Wanna_B_TXCPA2014]

Jeff,

Thanks for getting back with me on this. My reading comprehension has not kicked in yet.

[Author]

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