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Retirement of Two Partners

Thirty years ago, five mechanics formed a partnership and established an automobile repair shop. Two of the partners, Decker and Groth, are now retiring. The other three partners, Farmer, Wang, and Lux, are continuing the partnership. The original agreement called for an equal division of income. The remaining partners plan to continue this arrangement. The following balance sheet is prepared for the partnership as of the retirement date:

Cash	$156,000	Accounts payable	$216,000
Accounts receivable	192,000	Loan payable	96,000
Inventory of parts	96,000	Capital - Decker	120,000
Equipment, net	216,000	Capital - Groth	96,000
Building, net	72,000	Capital - Farmer	168,000
Land	60,000	Capital - Wang	18,000
		Capital - Lux	78,000
Total assets	$792,000	Total liabilities and capital	$792,000

All partners agreed that Decker should receive $150,000 for his interest in the business and Groth should receive $120,000. Farmer proposed the bonus method for recording the retirements. Wang objects to this method and suggests the partial goodwill approach. (a) Prepare the journal entry to record the retirements under the bonus method.

General Journal
Description	Debit	Credit
Capital - Decker
Capital - Groth
Capital - Farmer
Capital - Wang
Capital - Lux
Cash and other assets

(b) Prepare the journal entry to record the retirements under the partial goodwill approach.

General Journal
Description	Debit	Credit
GoodwillI
Capital - Decker
Capital - Groth
To record goodwill prior to retirement of Decker and Groth.
Capital - Decker
Capital - Groth
Cash and other assets
To record retirement of Decker and Groth.

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