Dan and Ellie share partnership profits and losses at 70% and 30%, respectively. The partners agree to admit Fran into the partnership for a 50% interest in capital and earnings

Capital accounts immediately before the admission of Fran are:

Dan (70%) $ 800,000
Ellie (30%) 400,000
Total $ 1,200,000

Required:
1. Prepare the journal entry(s) for the admission of Fran to the partnership assuming Fran invested $800,000 for the ownership interest, and that this is a fair price for that share of the partnership to be acquired. Fran paid the money directly to Dan and to Ellie for 50% of each of their respective capital interests. The partnership records goodwill.

2. Prepare the journal entry(s) for the admission of Fran to the partnership assuming Fran invested $1,000,000 for the ownership interest. Fran paid the money to the partnership for a 50% interest in capital and earnings. Assume the valuation is based on the capital of the current partnership, which is fairly valued. The partnership records goodwill.

3. Prepare the journal entry(s) for the admission of Fran to the partnership assuming Fran invested $1,400,000 for the ownership interest, and that this is a fair price for that share of the partnership to be acquired. Fran paid the money to the partnership for a 50% interest in capital and earnings. The partnership records goodwill.

Requirement 1

Goodwill 400,000
Dan, capital 280,000
Ellie, capital 120,000

Dan, capital 540,000
Ellie, capital 260,000
Fran, capital 800,000

If an $800,000 payment represents 50% of total capital, then twice that amount, or $1,600,000, is the implied total capital including goodwill. If the present total capital is $1,200,000, then the amount of goodwill to record is $400,000. This goodwill is allocated 70% to Dan and 30% to Ellie.

After the first entry is posted, the balances in the Dan and Ellie capital accounts will be $1,080,000 and $520,000, respectively. If one-half of each partner's interest is given to Fran, Dan's capital account is reduced by $540,000, and Ellie' capital account is reduced by $260,000.

Requirement 2

Goodwill 200,000
Cash 1,000,000
Fran, capital 1,200,000

If we focus on the current capital of the partnership, $1,200,000, and say that it is fairly valued, then, if it represents 50% of final capital after Fran's investment, final capital should be $2,400,000. Fran's share of final capital will be $1,200,000, and, if Fran invests $1,000,000 for this interest, there must be $200,000 of goodwill that is allocated to Fran.

Requirement 3

Goodwill 200,000
Dan, capital 140,000
Ellie, capital 60,000

Cash 1,400,000
Fran, capital 1,400,000

If Fran invests $1,400,000 for a 50% interest, it implies that total partnership capital should be $2,800,000. After Fran's investment, total capital will be $2,600,000, and goodwill is therefore $200,000. The goodwill is allocated to Dan and Ellie.