Donkey desires to purchase a one-fourth capital and profit and loss interest in the partnership of Shrek, Fiona, and Muffin.The three partners agree to sell Donkey one-fourth of their respective capital and profit and loss interests in exchange for a total payment of $125,000.The payment is made directly to the individual partners.The capital accounts and the respective percentage interests in profits and losses immediately before the sale to Donkey follow All other assets and liabilities are fairly valued by Donkey.Immediately after Donkey's acquisition, what should be the capital balances of Shrek, Fiona, and Muffin, respectively?

Question

Donkey desires to purchase a one-fourth capital and profit and loss interest in the partnership of Shrek, Fiona, and Muffin.The three partners agree to sell Donkey one-fourth of their respective capital and profit and loss interests in exchange for a total payment of $125,000.The payment is made directly to the individual partners.The capital accounts and the respective percentage interests in profits and losses immediately before the sale to Donkey follow  All other assets and liabilities are fairly valued by Donkey.Immediately after Donkey's acquisition, what should be the capital balances of Shrek, Fiona, and Muffin, respectively?

Quizplus · Accepted Answer

Before the sale to Donkey, the total capital was $600,000 ($300,000 + $200,000 + $100,000). Each partner had a percentage interest in profits and losses as follows: Shrek 50%, Fiona 33 1/3%, and Muffin 16 2/3%.

After the sale to Donkey, each partner will have one-fourth of their original capital and profit and loss interest remaining. Therefore, Shrek will have $150,000 ($300,000 x 1/4) remaining in his capital account and a 37.5% interest in profits and losses (50% x 3/4), Fiona will have $100,000 ($200,000 x 1/4) remaining in her capital account and a 25% interest in profits and losses (33 1/3% x 3/4), and Muffin will have $50,000 ($100,000 x 1/4) remaining in his capital account and a 12.5% interest in profits and losses (16 2/3% x 3/4).

The total remaining capital is $300,000 ($150,000 + $100,000 + $50,000). Therefore, the correct answer is B, with Shrek's remaining capital balance being $195,000 ($150,000 + $45,000), Fiona's remaining capital balance being $123,750 ($100,000 + $23,750), and Muffin's remaining capital balance being $56,250 ($50,000 + $6,250).

Donkey Desires to Purchase a One-Fourth Capital and Profit and Loss