Question

Goodwill is to be recorded. how much goodwill should be recognized, and what is darrow’s beginning capital balance?

Answer 1

$410,000  goodwill should be recognized, and $270,000 is Darrow's beginning capital balance.

The implied value of the company is $900,000 ($270,000 ÷ 30%). Because the money is going to the partners rather than into the business, the capital total is $490,000 before realigning the balances. Hence, goodwill of $410,000 is recognized based on the implied value ($900,000 - $490,000). This goodwill is assumed to represent unrealized business gains and is attributed to the original partners according to their profit and loss ratio. They will then each convey 30 percent ownership of the $900,000 partnership to Darrow for a capital balance of $270,000.

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The question is incomplete. Please read below to find the missing content.

Following are the capital account balances and profit and loss percentages (indicated parenthetically) for the William, Jennings, and Bryan partnership:

William (40%) $220,000

Jennings (40%) $160,000

Bryan (20%) $110,000

Darrow invests $270,000 in cash for a 30 percent ownership interest. The money goes to the original partners. Goodwill is to be recorded. How much goodwill should be recognized, and what is Darrow's beginning capital balance?