Question

Patel and Rao decide to form a partnership. Patel contributes $300,000 in cash. Rao contributes buildings and equipment with a fair market value of $500,000, subject to a mortgage of $150,000, which the partnership assumes.

15.       If each partner's capital account is initially set equal to net assets invested at fair market value, the entry to record the partnership formation includes the following:

a.            A credit to Patel’s capital account for $150,000.

b.            A credit to Patel’s capital account for $325,000.

c.             A credit to Rao’s capital account for $500,000.

d.            A credit to Rao’s capital account for $350,000.

16.          Assume the partners specify an agreed-upon percentage in the initial partner capital, as follows: 40% to Patel, and 60% to Rao. If the bonus approach to partnership formation is used, Rao’s initial capital balance will be:

a.            $350,000

b.            $390,000

c.             $325,000

d.            $480,000

17.       Assume the partners specify an agreed-upon percentage in the initial partner capital, as follows: 40% to Patel, and 60% to Rao. If the goodwill approach to partnership formation is used, the initial entry to record the formation of the partnership will recognize goodwill of:

a.            $400,000

b.            $250,000

c.             $100,000

d.            $150,000

Answer 1

Answer to Q15:

d) A Credit to Rao's Capital Account for $350,000.

Reason: Rao has contributed, Building and Equipment with Fair Market Value of $500,000 and subject to a mortgage of $150,000. Therefore his Net Contribution towards Capital is $500,000-$150,000=$350,000.

Answer to Q16:

b) $390,000

Reason: Bonus Approach to partnership formation:

Total Capital of Firm is Patel's Contribution $300,000 and Rao's Contribution $350,000=$650,000

Rao's Share=60%. Therefore his initial Capital balance will be $650,000*0.60=$390,000.

Answer to Q17:

C)100,000.

Reason: Total Capital is $650,000

40% share of Patel Indicates that total capital is ($300,000/0.40)=$750,000.

Capital without adjustment=$650,000.

Therefore the Goodwill part is $750,000-$650,000=$100,000