J, K and L have been partners for many years. J and K acquire L's partnership interest for $300,000, using their personal assets. J contributes $100,000 and K contributes $200,000 for the transaction. The partners' capital balances before L's retirement and their income/loss sharing percentages are as follows:
$$\begin{array} { | c | c | c | }
\hline \text { Partner } & \text { Capital Balance } & \text { Income Share } \
\hline \text { J } & \$ 80,000 & 15 \% \
\hline \text { K } & 140,000 & 25 \% \
\hline \text { L } & \underline { 225,000 } & \underline { 60 \% } \
\hline \text { Totals } & \$ 445,000 & \underline { 100 \% } \
\hline
\end{array}$$ Assuming J and K maintain their relative income sharing ratio, after L's departure, J's capital balance will be:

Question

J, K and L have been partners for many years. J and K acquire L's partnership interest for $300,000, using their personal assets. J contributes $100,000 and K contributes $200,000 for the transaction. The partners' capital balances before L's retirement and their income/loss sharing percentages are as follows:
$$\begin{array} { | c | c | c | } 
\hline \text { Partner } & \text { Capital Balance } & \text { Income Share } \
\hline \text { J } & \$ 80,000 & 15 \% \
\hline \text { K } & 140,000 & 25 \% \
\hline \text { L } & \underline { 225,000 } & \underline { 60 \% } \
\hline \text { Totals } & \$ 445,000 & \underline { 100 \% } \
\hline
\end{array}$$ Assuming J and K maintain their relative income sharing ratio, after L's departure, J's capital balance will be:

Quizplus · Accepted Answer

J's new capital balance is calculated by adding his contribution to buy out L's interest to his original capital balance. J's original capital balance is $80,000, and he contributes $100,000 to buy out L, making his total $180,000. However, the question specifies maintaining their relative income sharing ratio, which is 15% for J and 25% for K, a 3:5 ratio. To maintain this ratio without L, the capital contributions for buying out L's share must be adjusted to reflect this ratio. The total capital after L's departure is $445,000 (original total) + $300,000 (buyout) - $225,000 (L's capital) = $520,000. J's share of the total capital, maintaining the 3:8 ratio (since 3+5=8, reflecting J and K's new total share of income), is 3/8 of $520,000, which equals $195,000. Subtracting J's contribution of $100,000 to buy L's share, J's original capital must be adjusted to $95,000 (not $180,000 as initially calculated without considering the income sharing adjustment). Therefore, with the adjustment for maintaining the income sharing ratio, J's capital balance is recalculated, leading to the correct answer of $164,375, considering the need to maintain the income sharing ratio and the error in the initial explanation.

J, K and L Have Been Partners for Many Years