Badger and Fox are forming a partnership. Badger invests a building that has a market value of $350,000; the partnership assumes responsibility for a $125,000 note secured by a mortgage on the property. Fox invests $100,000 in cash and equipment that has a market value of $75,000. For the partnership, the amounts recorded for the building and for Badger's Capital account are:
A) Building $350,000; Badger, Capital $350,000.
B) Building $225,000; Badger, Capital $225,000.
C) Building $225,000; Badger, Capital $125,000.
D) Building $350,000; Badger, Capital $225,000.
E) Building $350,000; Badger, Capital $300,000.

Question

Quizplus · Accepted Answer

The building has a market value of $350,000, which is recorded as the value of the asset on the partnership's balance sheet. However, because the partnership assumes responsibility for the $125,000 note secured by a mortgage on the property, the value of Badger's contribution is reduced by that amount. Therefore, Badger's capital account is credited with only $225,000 ($350,000 - $125,000).

Badger and Fox Are Forming a Partnership