Letterman and Conan are partners who share profits and losses 3:7. The capital accounts on January 1, 2017, are $120,000 and $160,000, respectively. Leno is to be admitted as a partner with a one-fourth interest in the capital and profits and losses by investing $80,000. Goodwill is not to be recorded. The capital balances after admission should be:

Question

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Leno's investment of $80,000 for a one-fourth interest implies a total capital of $320,000. The existing capital is $280,000 ($120,000 + $160,000). The total capital after Leno's investment is $360,000 ($280,000 + $80,000). The difference of $40,000 is the implied goodwill, which is shared by Letterman and Conan in their profit-sharing ratio (3:7). Thus, Letterman gets $12,000 and Conan gets $28,000. Adjusted balances: Letterman $120,000 - $3,000 = $117,000; Conan $160,000 - $7,000 = $153,000; Leno $80,000 + $10,000 = $90,000.

Letterman and Conan Are Partners Who Share Profits and Losses