Roberts retires and is paid $160,000 based on an independent appraisal of the business.If the goodwill method is used, what is the capital balance of Dana?
A) $ 20,000.
B) $ 60,000.
C) $110,000.
D) $120,000.
E) $230,000.

Question

Quizplus · Accepted Answer

The goodwill method involves valuing the business based on its expected future earnings and reputation, as well as its tangible assets. Since Roberts is retiring, it can be assumed that his share of the business will be bought out by the remaining partner, Dana. The payment of $160,000 indicates that this is the value of Roberts' share of the business based on an independent appraisal.

To calculate the capital balance of Dana, we need to subtract Roberts' share from the total value of the business. Assuming that the business is valued solely based on its tangible assets and Roberts' share was half of the business, the capital balance of Dana would be $160,000 * 2 = $320,000.

However, since the goodwill method is used, the true value of the business includes its expected future earnings and reputation in addition to its tangible assets. Therefore, we can assume that the total value of the business is higher than $320,000, and thus the capital balance of Dana would be higher than $160,000. The closest answer choice to reflect this is D, $120,000.

Roberts Retires and Is Paid $160,000 Based on an Independent