The partners of Apple, Bere, and Carroll LLP share net income and losses in a 5:3:2 ratio, respectively. The capital account balances on January 1, 2011, were as follows:

The carrying amounts of the assets and liabilities of the partnership are the same as their current fair values. Dorr will be admitted to the partnership with a 20% capital interest and a 20% share of net income and losses in exchange for a cash investment. The amount of cash that Dorr should invest in the partnership is:

A) $25,000.
B) $30,000.
C) $37,500.
D) $75,000.
E) $90,000. ($150,000/.8=$187,500. $187,500 - $150,000 = $37,500 to invest)

Question

The partners of Apple, Bere, and Carroll LLP share net income and losses in a 5:3:2 ratio, respectively. The capital account balances on January 1, 2011, were as follows:

The carrying amounts of the assets and liabilities of the partnership are the same as their current fair values. Dorr will be admitted to the partnership with a 20% capital interest and a 20% share of net income and losses in exchange for a cash investment. The amount of cash that Dorr should invest in the partnership is:

A) $25,000. 
B) $30,000. 
C) $37,500. 
D) $75,000. 
E) $90,000. ($150,000/.8=$187,500. $187,500 - $150,000 = $37,500 to invest)

Quizplus · Accepted Answer

To calculate the amount of cash that Dorr should invest in the partnership, we need to first calculate the total capital balance after Dorr is admitted. Dorr's 20% capital interest would increase the total capital balance to $180,000 (150,000/0.8 x 1.2). Dorr's investment would then make up 20% of this new total, or $36,000. However, since Dorr is only required to invest cash equal to their capital interest, they would need to invest $37,500 ($180,000 x 0.20). Therefore, the correct answer is C.

The Partners of Apple, Bere, and Carroll LLP Share Net