James Cavanaugh, proprietor, has agreed to take on a partner. The market value of his net assets are $105,000 with book assets having a net value of $95,000. In the newly created partnership, Cavanaugh's capital will reflect the $95,000 book value of existing assets contributed to the new organization.

Question

Quizplus · Accepted Answer

In a partnership, capital accounts should reflect the fair market value of assets contributed, not the book value. Therefore, Cavanaugh's capital should reflect the $105,000 market value.

James Cavanaugh, Proprietor, Has Agreed to Take on a Partner