Benton and Orton are partners who share income in the ratio of 1:3 and have capital balances of $70,000 and $30,000, respectively. Ramsey is admitted to the partnership and is given a 40% interest by investing $20,000. What is Benton's capital balance after admitting Ramsey?

Question

Quizplus · Accepted Answer

First, we need to determine the new profit sharing ratio. 
Benton’s share: 1 / (1+3+2) = 1/6 
Orton’s share: 3 / (1+3+2) = 3/6 = 1/2 
Ramsey’s share: 2 / (1+3+2) = 2/6 = 1/3

Next, we can calculate Ramsey’s capital balance: 
Ramsey’s investment = 40% x Total capital after admitting Ramsey 
$20,000 = 0.4 x ($70,000 + $30,000 + Ramsey’s capital balance) 
$20,000 = $40,000 + 0.4Ramsey 
0.4Ramsey = -$20,000 
Ramsey’s capital balance = -$50,000 
(Note: Ramsey has a negative capital balance because the total capital before admitting him was only $100,000, but he is being given a 40% interest with a $20,000 investment. Therefore, the total capital after admitting him is $120,000. Since Ramsey’s investment only covers $20,000 of this, he must have a negative balance in order to balance out the equation.)

Using the profit sharing ratios, we can determine how much of the total capital belongs to Benton: 
Benton’s share = 1/6 x ($70,000 + $30,000 + (-$50,000)) 
Benton’s share = $10,000 
Therefore, Benton's capital balance after admitting Ramsey is $70,000 + $10,000 = $80,000.

Benton and Orton Are Partners Who Share Income in the Ratio