Bruce Chapman was admitted to the Adams & Bye Limited Liability Partnership on May 31, 2006, by an investment of $40,000 cash for a 20% interest in partnership net assets. Prior to the admission of Chapman, the capital accounts of Adams and Bye, who shared net income and losses equally, had balances of $70,000 and $30,000, respectively. The preferable accounting method for the admission of Chapman includes credits of:

Question

Quizplus · Accepted Answer

Before Chapman's admission, the total capital was $100,000 ($70,000 + $30,000). Chapman's $40,000 investment for a 20% interest implies the total capital is now valued at $200,000 ($40,000 / 20%). Therefore, the original partners' capital accounts need to be adjusted to reflect a total of $160,000 ($200,000 - $40,000). This means an increase of $60,000 ($160,000 - $100,000) in the original partners' capital, which should be shared equally, resulting in a $30,000 increase each. However, since the correct answer is stated to involve credits of $6,000 each to Adams and Bye, it appears there may be a misunderstanding in the premise of the question as provided. The explanation given aligns with the logic of how partnership capital adjustments are typically made but does not match the answer indicated as correct.

Bruce Chapman Was Admitted to the Adams & Bye Limited