Advanced Accounting 11th Edition by Paul Fischer,William Tayler, Rita Cheng

Exercise 5

Entry of a new partner under the goodwill method. Pearson andMurphy have partner capital balances, at book value, of $45,000 and $65,000 as of December 31. Pearson is allocated 60% of profits or losses, and Murphy is allocated the balance. The partners believe that tangible net assets have a market value in excess of book value in the amount of $30,000 net. The $30,000 is allocated as follows:
They are considering admitting Warner to the partnership in exchange for total consideration of $84,000 cash. In exchange for the consideration, Warner will receive a 30% interest in capital and a 35% interest in profits.
1. Prepare the entries associated with the admission of Warner to the partnership under the goodwill method.
2. If the goodwill suggested by the admission of Warner proved to be worthless, determine by how much Warner would be harmed.