Question

At April 30, partners’ capital balances in PDL Company are G. Donley $52,000, C. Lamar $48,000, and J. Pinkston $18,000. The income sharing ratios are 5 : 4 : 1, respectively. On May 1, the PDLT Company is formed by admitting J. Terrell to the firm as a partner. Journalize the admission of Terrell under each of the following independent assumptions. (Credit account titles are automatically indented when amount is entered. Do not indent manually. Round answers to 0 decimal places, e.g. 5,275.) (1) Terrell purchases 50% of Pinkston’s ownership interest by paying Pinkston $16,000 in cash. (2) Terrell purchases 331/3% of Lamar’s ownership interest by paying Lamar $15,000 in cash. (3) Terrell invests $62,000 for a 30% ownership interest, and bonuses are given to the old partners. (4) Terrell invests $42,000 for a 30% ownership interest, which includes a bonus to the new partner.

Answer 1

Answer:

See the explanation below

Explanation:

(1) Terrell purchases 50% of Pinkston’s ownership interest by paying Pinkston $16,000 in cash.

Amount to debit and credit = $18,000 × 50% = $9,000

Debit: Pinkston's capital account - $9,000  

Credit: Terrell's Capital account - $9,000

Being the purchase of ownership interest from Pinkston by Terrell

Note that the $16,000 paid by Terrell to Pinkston does not affect the partnership since it is an indirect transaction.

(2) Terrell purchases 331/3% of Lamar’s ownership interest by paying Lamar $15,000 in cash.

Amount to debit and credit = $52,000 × 331/3% = $17,333

Debit: Lamar's capital account - $16,667  

Credit: Terrell's Capital account - $16,667

Being the purchase of ownership interest from Lamar by Terrell

Note that the $15,000 paid by Terrell to Lamar does not affect the partnership since it is an indirect transaction.

(3) Terrell invests $62,000 for a 30% ownership interest, and bonuses are given to the old partners.

Terrel's Capital = ($52,000 + $48,000 + $18,000 + $62,000) × 30% = $54,000  

Bonus paid to old partners = $62,000 - $54,000 = $8,000  

Donley's Capital = $8,000 × (5 ÷ 10) = $4,000  

Lamar Capital = $8,000 × (4 ÷ 10) = $3,200

Pinkston Capital = $8,000 × (1 ÷ 10) = $800

The entries are therefore as follows:

Debit: Cash - $62,000

Credit: Terrel's Capital - $54,000  

Credit: Donley's Capital - $4,000  

Credit: Lamar's Capital - $3,200

Credit: Pinkston's Capital - $800

Being the purchase of ownership interest by Terrel and bonus shared to old partners.

(4) Terrell invests $42,000 for a 30% ownership interest, which includes a bonus to the new partner.

Terrel's Capital = ($52,000 + $48,000 + $18,000 + $42,000) × 30% = $48,000

New partner's bonus = $48,000 - $42,000 = $6,000

Donley's Capital = $6,000 × (5 ÷ 10) = $3,000

Lamar's Capital = $6,000 * 4/10 = $2,400

Pinkston's Capital = $6,000 * 1/10 = $600

The entries are therefore as follows:

Debit: Cash - $42,000

Debit: Donley's Capital - $3,000  

Debit: Lamar's Capital - $2,400

Debit: Pinkston's Capital - $600

Credit: Terrel's Capital - $48,000  

Being the purchase of ownership interest by Terrel and bonus from old partners to him.