At the start of 2014, Santana Rey is considering adding a partner to her business. She envisions the new partner taking the lead in generating sales of both services and merchandise for Business Solutions. S. Rey’s equity in Business Solutions as of January 1, 2014, is reflected in the following capital balance. S. Rey, Capital $ 80,580 Required: 2. Prepare the January 1, 2014, journal entries necessary to admit a new partner to Business Solutions through the purchase of a partnership interest for each of the following two separate cases: (a) 1:1 sharing agreement.(b) 4:1 sharing agreement with Rey retaining four-fifths interest. (C) Prepare the January 1, 2014, journal entry required to admit a new partner if the new partner invests cash of $20,145.(D) After posting the entry in part C, what would be the new partner's equity percentage?

a. see a. below for the explanation

b. see b. below for the explanation

C. see C. below for the explanation

D. 20%

Explanation:

a. For a 1:1 sharing agreement

The implication of a 1:1 sharing agreement is that the new partner will contribute an amount equal to the amount of equity for Santana Rey in Business Solutions as at January 1, 2018. This means that the new contribute $80,640 as equity.

As a result, the total equity is now $161,280 (i.e. $80,640 + $80,640)

The Journal entries are given below:

In the book of the new partner:

                                                                  Dr                         Cr

Cash book of Business Solutions                                    $80,640

Cash book of the New Partner              $80,640

Being equity amount contribution of the new partner to Business Solutions

In the book of Business Solution:

                                                                  Dr                         Cr

Cash book                                              $80,640

Equity account of the New Partner                                   $80,640

Being equity amount contribution of the new partner to Business Solutions

(b) For 4:1 sharing agreement

The implication of a 4:1 sharing agreement is that the equity contribution of the new partner is one-quarter of $80,640 equity of Santana Rey in Business Solutions as of January 1, 2018. The calculation is provided below:

New partner's equity amount contribution = $80,640/4 =  $20,160

The total equity is now $100,800 (i.e. $80,640 + $20,160)

The following presents the journal entries:

In the book of the new partner:

                                                                  DR                         CR

Cash book of Business Solutions                                       $20,160

Cash book of the New Partner             $20,160

Being equity amount contribution of the new partner to Business Solutions

In the book of Business Solution:

                                                                  DR                         CR

Cash book                                              $20,160

Equity account of the New Partner                                    $20,160

Being equity amount contribution of the new partner to Business Solutions

(C) Prepare the January 1, 2018, journal entry required to admit a new partner if the new partner invests cash of $20,160.

There will not be a difference in the the journal entry prepared in b above which is represented as follows:

In the book of the new partner:

                                                                  DR                         CR

Cash book of Business Solutions                                       $20,160

Cash book of the New Partner             $20,160

Being equity amount contribution of the new partner to Business Solutions

In the book of Business Solution:

                                                                  DR                         CR

Cash book                                              $20,160

Equity account of the New Partner                                    $20,160

Being equity amount contribution of the new partner to Business Solutions

(D). After posting the entry in part 3, what would be the new partner's equity percentage?

If $20,160 is contributed by the new partner, the total equity will increase to $100,800 (i.e. $80,640 + $20,160). Therefore, the percentage of the equity of the new partner can be calculated as the equity of the new partner divided by the new total equity of Business Solution multiply by 100. The calculation is presented below:

The %age of the equity of the new partner = ($20,160 ÷ $100,800) * 100

                                                                       = 0.20 × 100

                                                                       = 20%

I wish you the best of luck.

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