I was just wondering if anyone could help me with the following problem. I am not sure even where to start.
Reed, Sharp, and Tucker were partners with capital account balances of $80,000, $100,000, and $70,000, respectively. They agreed to admit Upton to the partnership. Upton purchased 30% of each partner's interest, with payments to Reed, Sharp, and Tucker of $32,000, $40,000, and $28,000,respectively. The partners agreed to use the bonus method to account for the admission of Upton to the partnership.
Prepare the journal entry to record the admission of Upton to the partnership.
reed 24
sharp 30
tucker 21
upton 75
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To prepare the journal entry to record the admission of Upton to the partnership, we need to follow these steps:
1. Determine the bonus to be given to the existing partners.
a. Calculate the total capital of the existing partners: $80,000 + $100,000 + $70,000 = $250,000.
b. Calculate Upton's total purchase amount: 30% of $250,000 = $75,000.
c. Calculate the bonus for each existing partner:
- Reed's bonus: $75,000 x 30% = $22,500.
- Sharp's bonus: $75,000 x 30% = $22,500.
- Tucker's bonus: $75,000 x 30% = $22,500.
2. Adjust the capital accounts of the existing partners.
a. Reduce the capital accounts of Reed, Sharp, and Tucker by the bonus amounts:
- Reed's capital account: $80,000 - $22,500 = $57,500.
- Sharp's capital account: $100,000 - $22,500 = $77,500.
- Tucker's capital account: $70,000 - $22,500 = $47,500.
3. Record Upton's purchase of the partnership interest.
a. Debit Upton's capital account for the total purchase amount: $75,000.
b. Credit the capital accounts of Reed, Sharp, and Tucker for their respective payments:
- Reed's capital account: $32,000.
- Sharp's capital account: $40,000.
- Tucker's capital account: $28,000.
The journal entry to record the admission of Upton to the partnership would be as follows:
Date | Account | Debit | Credit
------------------------------------------------
| Upton’s Capital | $75,000 |
| Reed’s Capital | | $32,000
| Sharp’s Capital | | $40,000
| Tucker’s Capital | | $28,000
| Reed’s Capital | $22,500 |
| Sharp’s Capital | $22,500 |
| Tucker’s Capital | $22,500 |
Please note that this entry reflects the initial entry related to Upton's admission to the partnership. Additional entries will be required to adjust the capital accounts further, depending on any profit/loss sharing agreements or other partnership arrangements.