Question

Wallace and Simpson formed a partnership with Wallace contributing $60,000 and Simpson contributing $40,000. Their partnership agreement calls for the income (loss) division to be based on the ratio of capital investments. Wallace sold one-half of his partnership interest to Prince for $55,000 when his capital balance was $78,000. The partnership would record the admission of Prince into the partnership as:
Debit Wallace, Capital $39,000; debit Cash $16,000; credit Prince, Capital $55,000.

Debit Wallace, Capital $39,000; credit Prince, Capital $39,000.

Debit Prince, Capital $55,000; credit Wallace, Capital $55,000.

Debit Wallace, Capital $30,000; credit Prince, Capital $30,000.

Debit Wallace, Capital $55,000; credit Prince, Capital $55,000.

Answer 1

Answer: The correct answer is "Debit Wallace, Capital $39,000; credit Prince, Capital $39,000.".

Explanation:

The company must record the part of the Prince partner for the value of half of Wallace's capital, the difference between the price paid and the portion of capital, is a result for sale that corresponds only to Wallace, not the company.

Therefore half of Wallace's capital is 78000/2 = 39000.

The registration would be:

-------------------------------------------------------------------------

Wallace Capital            39 000

         Prince Capital                    39000

-------------------------------------------------------------------------