Question

Melanie Sherby and Nancy Libby operate a partnership. Sherby’s capital account balance is $47,000 and Libby’s is $36,000. Sherby and Libby have decided to admit a new partner to their business- Jim Fittro.

Fittro will contribute $20,000 cash to receive a one-third interest in the partnership. Prior to admitting Fittro, Sherby and Libby hired a certified public accountant to determine the current market values of the partnership assets. The CPA determined that the building owned by the partnership has a market value $15,000 greater than the book value shown on the financial statements. In addition the partnership’s inventory is undervalued by $2,000 in the accounting records.

According to existing partnership agreement, Sherby and Libby share any income/lose equally.

A. Revalue the partnership assets.

B. Determine the total equity of the partnership after the new partner is admitted.

C. Determine the new partner’s share of the total equity.

D. Compare the new partner’s equity to his contribution.

Answer 1

A.

Revaluation entry would be

Building	$ 15,000
Merchandise Inventory	$    2,000
Sherby. Capital		$    8,500
Libby, Capital		$    8,500

B.

Sherby, Capital	(47,000 + 8,500)	$         55,500
Libby, Capital	(36,000 + 8,500)	$         44,500
Fittro's contribution		$         20,000
Total		$       120,000

C.

Total Equity is $ 120,000

New partner's share is 1/3rd

So it would be 120,000 X 1/3 = $ 40,000

D.

Fittro's equity in the partnership	$             40,000
contribution	$             20,000
Bonus paid to Fittro	$             20,000
Cash	$             20,000
Sherby. Capital	$             10,000
Libby, Capital	$             10,000
Fittro, Capital		$         40,000