Question

T. Bina and M. Valley are partners with equal capital balances of $50,000 each. They agree to let R. Smith invest $20,000 in their partnership for a 25% interest, which means that Smith's beginning capital balance will equal $30,000, with each existing partner granting a $5,000 bonus to Smith. The journal entry to reflect Smith's new capital balance will include a____(debit/credit) to Smith, Capital in the amount of $________.

Answer 1

Answer:

The journal entry to reflect Smith's new capital balance will include a credit to Smith, Capital in the amount of $30,000.

Explanation:

Step 1: Determine Smith's capital balance

Smith's new capital balance can be expressed as shown;

C=I+B1+B2

where;

C=new capital balance

I=Smith's capital investment

B1=T. Bina bonus amount

B2=M. Valley bonus amount

In our case;

C=unknown, to be determined

I=$20,000

B1=$5,000

B2=$5,000

Replacing;

C=(20,000+5,000+5,000)=$30,000

New capital balance=$30,000

Step 2: Record Smith's New Capital balance

Account                                     Debit                     Credit

Cash                                          30,000

Smith                                                                       30,000

A credit to Smith, Capital in the amount of $30,000