SB In the AD partnership, Allen's capital is...
In the AD partnership, Allen's capital is $140,000 and Daniel's is $40,000 and they share income in a 3:1 ratio, respectively. They decide to admit David to the partnership. Each of the following questions is independent of the others.
TB MC Qu. 15-43 Refer to the information provided above. Allen and Daniel agree that some...
Refer to the information provided above. Allen and Daniel agree
that some of the inventory is obsolete. The inventory account is
decreased before David is admitted. David invests $40,000 for a
one-fifth interest. What are the capital balances of Allen and
Daniel after David is admitted into the partnership?
| Allen | Daniel | |||||
| A) | $ | 140,000 | $ | 40,000 | ||
| B) | $ | 125,000 | $ | 35,000 | ||
| C) | $ | 120,000 | $ | 36,000 | ||
| D) | $ | 137,000 | $ | 39,000 | ||
I bolded the correct answer please explain using clear math steps how to arrive at that. Thank you
Solution:
Captial contribution by David = $40,000
Interest of david in partnership = 20%
Total capital of the partnership on the basis of capital and interest of new partner = $40,000 / 20% = $200,000
Total capital of partnership before decreasing of obsolete inventory = $140,000 + $40,000 + $40,000 = $220,000
Therfore value of decrease in inventory = Total capital before decrease - Total capital after decrease
= $220,000 - $200,000 = $20,000
The reduction in value of inventory will be distributed in old partners in ratio of 3:1
Therefore
Captal balance of Allen after admission of David = $140,000 - ($20,000*3/4) = $125,000
Capital balance of Daniel after admission of David = $40,000 - ($20,000 * 1/4) = $35,000
Hence option B is correct.
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