Peter, Roberts, and Dana have the following capital balances; $80,000, $100,000 and $60,000, respectively. The partners share profits and losses 20%, 40%, and 40% respectively. Roberts retires and is paid $160,000 based on an independent appraisal of the business. If the goodwill method is used, what is the capital balance of Dana?
A) $20,000.
B) $60,000.
C) $110,000.
D) $120,000.
E) $230,000.
Roberts receives an additional $60,000 above her capital balance. Since she is assigned 40 percent of all profits and losses, this extra allocation indicates total goodwill of $150,000, which must be split among all partners.
40% of Goodwill = $60,000
)40 G = $60,000
G = $150,000 and Dana receives 40% = $60,000.
Dana's balance = $60,000 + $60,000 = $120,000.

Question

Quizplus · Accepted Answer

Using the goodwill method, Roberts receives $60,000 above her capital balance which implies that the total goodwill is $150,000. Therefore, Dana receives 40% of the goodwill which is $60,000. Thus, Dana's capital balance after Roberts' retirement will be her initial capital balance of $60,000 plus her share of the goodwill which is $60,000. Hence, Dana's capital balance will be $120,000 (Option D).

Peter, Roberts, and Dana Have the Following Capital Balances; $80,000