Alan anticipates admission to the partnership on July 1 of this year. The senior managing partner, Jane Butler, has had preliminary discussions with Alan in which the senior partner proposed the following:
| 1. | A 5% interest in BSM capital and profits in recognition of Alan’s commitment to the firm and in exchange for a capital investment by Alan of $150,000. This 5% interest would be acquired from the other partners. | |
| 2. | Alan’s compensation will consist of a monthly withdrawal of $18,000 and benefits valued at $5,000 annually. Monthly withdrawals approximate firm profits, but any unpaid profits will be distributed as a bonus to Alan after the end of each partnership year. |
On March 1, only one month prior to Alan’s final negotiation meeting for entry into the partnership, Mary, one of the junior associates, discreetly informed Alan that the firm was drawing up documents for Hugh Starns’ retirement. Hugh has a 5% interest in the firm’s capital and profits with a book value of $125,000. The partners have agreed upon a $75,000 cash settlement of the interest held by Mr. Starns. (Of the other 10 partners, numbers 1 through 9 hold 10% interests, and number 10 holds a 5% interest).
a. Assume Mr. Starns retires with his $75,000 settlement, and Alan is admitted to the partnership as proposed.
Prepare journal entries to record the retirement and admission.
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Account Titles and Explanation |
Debit |
Credit |
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(To record cash settlement by Starns) |
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(To record admission of Norwood) |
