Question

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.
Refer to the information provided above. David directly purchases a one-fifth interest by paying Allen $34,000 and Daniel $10,000. The land account is increased before David is admitted. What are the capital balances of Allen and Daniel after David is admitted into the partnership?
Allen Daniel
A) 136000 34000
B) 160000 60000
C) 170000 50000
D) 140000 40000

A. Option A
B. Option B
C. Option C
D. Option D
C

Answer 1

Answer:

C) 170000 50000

Explanation:

David spend in total 44,000 to acquire a fifth of the company

So the partnership after increasing the land accont had a value for:

44,000 / 0.2 = 220,000

Previously it had 140,000 + 40,000 = 180,000

Increase for 40,000

This increase will be allocate in a share ratio of 3:1

Allen 40,000 x 3/4 = 30,000

Daniel 10,000 x 1/4 = 10,000

Capital balance:

140,000 + 30,000 = 170,000

40,000 + 10,000 = 50,000

The cash from David was directly to Allen and Daniel it do not go through the company