Question

Floyd and Merriam start a partnership business on June? 12, 2019. Their capital account balances as of December? 31, 2020 stood as? follows:

Floyd	?$54,000
Merriam	?$22,000

Floyd agrees to sell half of his share to Ramelow in exchange for? $32,000 cash. Which of the following is the correct journal entry in the books of the firm for the above transfer of? interest?

A.

Cash	?32,000
?????????? Ramelow, Capital		?32,000

B.

?Floyd, Capital	?27,000
?????????? Ramelow, Capital		?27,000

C.

Cash	?32,000
?Floyd, Capital	?27,000
?????????? Ramelow, Capital		?59,000

D.

Cash	?32,000
?????????? Floyd, Capital		?5,000
?????????? Ramelow, Capital		?27,000

Answer 1

Answer is option (B).

?Floyd, Capital	$27000
Ramelow, Capital		$27000

Explanation;

As, it is given in the question that Floyd agrees to sell half share ($54000 / 2) to Ramelow in exchange of $32000. It means Floyd capital account should be reduced by debiting it and Ramelow capital should be introduced through crediting it. Treatment of $32000 will not be done in the books of firm because it is not given in the question that $32000 is given to the firm that means $32000 is directly given to Floyd.

Only capital account will be adjusted in the books of firm. And total ending capital of the firm will be same because capital of Floyd is decreased wheras capital of Ramelow is increased.