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.

18. 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, Rao’s initial capital balance is:

a.            $410,000

b.            $350,000

c.             $400,000

d.            $450,000

19.       Assume the partners specify an agreed-upon percentage in the initial partner capital, as follows: 60% to Patel, and 40% 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.            $150,000

c.             $225,000

d.            $375,000

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

a.            $425,000

b.            $375,000

c.             $525,000

d.            $350,000

Answer 1

	Patel Contribution	$ 3,00,000
	Roa Contribution
	Building & equipment	$ 5,00,000
	mortgage	$ 1,50,000
Answer -18	Initial Partner Capital Ratio is
	Patel	40%
	Rao	60%
	Total Capital of the Firm	Patel Contribution/Patel Share in Capital
		300000/40%
	Total Capital of the Firm	$ 7,50,000	A
	Patel Contribution is	$ 3,00,000	B
	So Rao Contribution would be (A-B)	$ 4,50,000
	Final Answer -18	Option D
Answer -19	Initial Partner Capital Ratio is
	Patel	60%
	Rao	40%
	Total Capital of the Firm	Rao Contribution/Rao Share in Capital
		(500000-150000)/40%
	Total Capital of the Firm	875000	A
	Rao Contribution is	$ 3,50,000	B
	So PAtel Contribution would be (A-B)	$ 5,25,000
	However Patel contributed	$ 3,00,000
	Cash A/C Dr.	300000
	Building & Equipment A/c Dr	500000
	Goodwill A/c Dr	225000
	To Morgtgae		150000
	To Patel Capital		350000
	To Rao Capital		525000
	Final Answer -19	Option - C
Answer -20	Rao Capital would be -
	Building & Equipment	$ 5,00,000
	(Mortgage)	$ 1,50,000
	Rao Capital	$ 3,50,000
	Final Answer -20	Option - D