May Cheng and Hannah Webster are partners who share in the income equally and have
capital balances of $207,000 and $62,500, respectively. Cheng, with the consent of
Webster, sells one-third of her interest to Michael Cross. What entry is required by the
partnership if the sales price is (a) $60,000? (b) $80,000?
a) If the sales price is $60,000:
The new capital balance for May Cheng after selling one-third of her interest is 1/3 * $207,000 = $<<1/3*207000=69000>>69,000.
The new capital balance for Michael Cross after purchasing one-third of May Cheng's interest is $60,000.
The total capital balance for the partnership after the transaction is $207,000 (May Cheng) + $62,500 (Hannah Webster) + $60,000 (Michael Cross) = $<<207000+62500+60000=329500>>329,500.
The entry required by the partnership is:
Partner Capital Accounts:
- Decrease May Cheng's capital by $138,000 (2/3 * $207,000)
- Decrease Hannah Webster's capital by $41,250 (2/3 * $62,500)
- Increase Michael Cross's capital by $60,000
- Increase Partner Capital Accounts by $119,250 ($138,000 + $41,250)
Total Capital Accounts:
- Decrease by $119,250
b) If the sales price is $80,000:
The new capital balance for May Cheng after selling one-third of her interest is 1/3 * $207,000 = $<<1/3*207000=69000>>69,000.
The new capital balance for Michael Cross after purchasing one-third of May Cheng's interest is $80,000.
The total capital balance for the partnership after the transaction is $207,000 (May Cheng) + $62,500 (Hannah Webster) + $80,000 (Michael Cross) = $<<207000+62500+80000=349500>>349,500.
The entry required by the partnership is:
Partner Capital Accounts:
- Decrease May Cheng's capital by $138,000 (2/3 * $207,000)
- Decrease Hannah Webster's capital by $41,250 (2/3 * $62,500)
- Increase Michael Cross's capital by $80,000
- Increase Partner Capital Accounts by $98,250 ($138,000 + $41,250)
Total Capital Accounts:
- Decrease by $98,250