The Prince-Robbins partnership has the following capital account balances on January 1, 2015: Prince, Capital $130,000
Robbins, Capital 120,000

Prince is allocated 80 percent of all profits and losses with the remaining 20 percent assigned to Robbins after interest of 7 percent is given to each partner based on beginning capital balances. On January 2, 2021, Jeffrey invests $40,000 cash for a 20 percent interest in the partnership. This transaction is recorded by the goodwill method. After this transaction, 6 percent interest is still to go to each partner. Profits and losses will then be split as follows: Prince (50 percent), Robbins (30 percent), and Jeffrey (20 percent). In 2021, the partnership reports a net income of $10,000.

Required:
a. Prepare the journal entry to record Jeffrey entrance into the partnership on January 2, 2015.
b. Determine the allocation of income at the end of 2015.

The Prince-Robbins-Jeffrey Partnership

a) Journal entry to record Jeffrey entrance into the partnership on January 2, 2015:

Debit Capital Account - Prince $72,000

Debit Capital Account - Robbins $18,000

Credit Goodwill $90,000

To record the negative goodwill arising at Jeffry entrance into the partnership.

Debit Cash Account $40,000

Credit Capital Account - Jeffrey $40,000

To record the investment by Jeffrey into the partnership.

b) Allocation of income at the end of 2015:

                              Prince       Robbins    Jeffrey     Total

Interest 6%          $3,480       $6,120      $2,400   $12,000

on new capital

Loss sharing        -1,000           -600         -400       -2,000

Net income        $2,480      $5,520     $2,000     $10,000

Explanation:

a) Data and Calculations:

January 1, 2015:  Capital     Old Profit sharing ratio      

Prince, Capital  $130,000     80%

Robbins, Capital 120,000    20%

Total                 $250,000  100%

Interest on capital = 7% based on beginning capital balances.

b) Calculation of Negative Goodwill arising from Jerry's admission:

New capital after Jerry's admission = $290,000

Implied capital at Jerry's admission = $40,000/20% = $200,000

Negative goodwill arising = $200,000 - $290,000 = -$90,000

This negative goodwill will be shared by Prince and Robbins to reduce their capital:

Prince = $72,000 ($90,000 * 80%)

Robbins - $18,000 ($90,000 * 20%)

c) New Capital on January 2, 2015:      

                               Capital  Negative Goodwill    New Profit sharing ratio

Jerry, Capital         $40,000                                     20%

Prince, Capital      $58,000 ($130,000 - 72,000)     50%

Robbins, Capital $102,000  ($120,000 - 18,000)    30%

Total capital       $200,000                                     100%

Interest on capital = 6%

d) Jeffrey's admission and ownership of 20% reduced the capital balances of Prince and Robbins by $90,000.  There was a negative goodwill arising from his admission into the partnership.  This negative goodwill is shared between the old partners in their old profit-sharing ratio.