Question

The capital account balances for Donald & Hanes LLP on January 1, 2011, were as follows:

Donald, capital : $200000

Henes, capital: $100000

Donald and Hanes shared net income and losses in the ratio of 3:2, respectively. The partners agreed to admit May to the partnership with a 35% interest in partnership capital and net income. May invested $100,000 cash, and no goodwill was recognized.

Question :

What is the balance of Donald's capital account after the new partnership is created?
A. $84,000.
B. $100,000.
C. $140,000.
D. $176,000.
E. $200,000.

 

Answer 1

After the new investment of $100000 by May, the total capital becomes $400,000 ($200,000 + $100000 + $100000) . As May's portion is to be 35 percent, the capital balance of May would be $140000 ($400,000 × 35%). Since only $100000 has been paid by May, a bonus of $40000 ($140000 - $100000) must be taken from the two original partners based on their profit and loss ratio of 3:2.

Amount that will be withdrawn by Donald = $40000 x (3/5) = $24000 and,

Amount withdrawn by Henes = $40000 x (2/5) = $16000

The reduction drops Donald's capital balance from $200,000 to $200000 - $24000 = $176000