On June 30,the balance sheet for the partnership of Williams,Brown and Lowe,together with their respective profit and loss ratios,was as follows:

Williams has decided to retire from the partnership and by mutual agreement the assets are to be adjusted to their fair value of $360,000 at June 30.It was agreed that the partnership would pay Williams $102,000 cash for his partnership interest exclusive of his loan which is to be repaid in full.No goodwill is to be recorded in this transaction.After William's retirement,and before the loan is repaid,what are the capital account balances of Brown and Lowe,respectively?

Question

On June 30,the balance sheet for the partnership of Williams,Brown and Lowe,together with their respective profit and loss ratios,was as follows:

Williams has decided to retire from the partnership and by mutual agreement the assets are to be adjusted to their fair value of $360,000 at June 30.It was agreed that the partnership would pay Williams $102,000 cash for his partnership interest exclusive of his loan which is to be repaid in full.No goodwill is to be recorded in this transaction.After William's retirement,and before the loan is repaid,what are the capital account balances of Brown and Lowe,respectively?

Quizplus · Accepted Answer

First, we need to adjust the assets to their fair value of $360,000. This means we need to increase the value of the assets by $14,000 (360,000 - 346,000). Now, we calculate the new capital balances:

Williams' capital balance before retirement = 120,000
Williams' share in the fair value adjustment = (1/3) x 14,000 = 4,666.67
Williams' capital balance after retirement = 120,000 - 102,000 + 4,666.67 = 22,666.67

Brown's profit and loss ratio = 40%
Lowe's profit and loss ratio = 60%

Brown's capital balance after retirement = (40% x (346,000 + 14,000) - 22,666.67) = $72,000
Lowe's capital balance after retirement = (60% x (346,000 + 14,000) - 22,666.67) = $171,000

Therefore, the answer is B) $72,000 and $171,000.

On June 30,the Balance Sheet for the Partnership of Williams,Brown