Bruce Chapman was admitted to the Adams & Bye Limited Liability Partnership on M

Question

Bruce Chapman was admitted to the Adams & Bye Limited Liability Partnership on May 31, 2006, by an investment of $40,000 cash for a 20% interest in partnership net assets. Prior to the admission of Chapman, the capital accounts of Adams and Bye, who shared net income and losses equally, had balances of $70,000 and $30,000, respectively. The preferable accounting method for the admission of Chapman includes credits of:
$6,000 each to the capital accounts of Adams and Bye
$30,000 each to the capital accounts of Adams and Bye
$28,000 and $12,000, respectively, to the capital accounts of Adams and Bye
Some other amounts to the capital accounts of Adams and Bye

Explanation / Answer

Answer: $6,000 each to the capital accounts of Adams and Bye Total equity of partnership after investment by Chapman = 40,000 + 70,000 + 30,000 = 140,000. Chapman received a 20% interest. 20% of 140,000 = 28,000. Therefore, the old partners receive a bonus of 40,000 - 28,000 = 12,000. They will split this according to their income and loss sharing agreement which is shared equally. Adams will get 6,000. Bye will get 6,000. The journal entry is: Debit: Cash for 40,000. Credit: Adams, capital 6,000 Credit: Bye, capital 6,000 Credit: Chapman, capital 28,000

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