A local partnership has two partners, Jim and Pam. Jim has a capital balance of $150,000 and Pam has a capital balance of $125,000. These two partners share profits and losses 60 percent (Jim)and 40 percent (Pam). Cece invests $75,000 in cash in the partnership for a 25 percent ownership. The bonus method will be used. What is Cece's capital balance after this new investment?

Question

Quizplus · Accepted Answer

Cece's capital balance after the investment is calculated using the bonus method. With a $75,000 investment for a 25% ownership, the total implied value of the partnership is $300,000 ($75,000 / 25%). Before Cece's investment, the total capital was $275,000 ($150,000 for Jim + $125,000 for Pam). The bonus of $25,000 ($300,000 - $275,000) is allocated to Jim and Pam based on their profit and loss sharing ratio (60% for Jim and 40% for Pam), not affecting Cece's capital balance. Thus, Cece's capital balance remains at her initial investment of $75,000. However, the correct calculation for Cece's capital balance should consider the adjustment for the bonus to existing partners, which seems to have been overlooked in the explanation. The correct approach involves adjusting the existing partners' capital accounts to reflect Cece's investment and her ownership percentage, but without the specific calculations provided in the choices, the explanation inaccurately justifies the selection of choice A. The correct answer should reflect the outcome of applying the bonus method, where Cece's investment is compared to the value of the percentage of the partnership she acquires, and the excess (if any) is distributed as a bonus to the existing partners based on their profit and loss sharing ratios.

A Local Partnership Has Two Partners, Jim and Pam