Question

Item4 10 points eBookPrintReferences Check my work Check My Work button is now disabledItem 4Item 4 10 points Item Skipped Bishop has a capital balance of $120,000 in a local partnership, and Cotton has a $90,000 balance. These two partners share profits and losses by a ratio of 60 percent to Bishop and 40 percent to Cotton. Lovett invests $60,000 in cash in the partnership for a 20 percent ownership. The goodwill method will be used. What is Cotton’s capital balance after this new investment?

Answer 1

Answer:

Cotton’s capital balance after this new investment is $102,000

Explanation:

In order to calculate Cotton’s capital balance after this new investment we would have to calculate first the goodwill as follows:

Lovett invests $60,000, therefore, Actual value of partnership= $60,000

                                                                                                               20%

Actual value of partnership=$300,000

Partnershio capital=$120,000+ $90,000+$60,000

Partnershio capital=$270,000

Therefore, goodwill=$300,000-$270,000

goodwill=$30,000

Therefore, distribution of goodwill would be as follows:

Bishop=$30,000×60%=$18,000

Cotton=$30,000×40%=$12,000

Therefore, Cotton's capital=$90,000+12,000

Cotton's capital=$102,000

Cotton’s capital balance after this new investment is $102,000