Floyd and Merriam start a partnership business on June 12, 2019. Their capital account balances as of December 31, 2020 stood as follows: Floyd agrees to sell off half of his share to Ramelow in exchange for $30,000 cash. Which of the following is the correct journal entry in the books of the firm for the above transfer of interest?

Question

Floyd and Merriam start a partnership business on June 12, 2019. Their capital account balances as of December 31, 2020 stood as follows:  Floyd agrees to sell off half of his share to Ramelow in exchange for $30,000 cash. Which of the following is the correct journal entry in the books of the firm for the above transfer of interest?

Quizplus · Accepted Answer

Since Floyd is selling off half of his share to Ramelow, his capital account will decrease by half of the original balance, which is $80,000/2=$40,000. Ramelow is giving $30,000 cash in exchange for half of Floyd's share, so his capital account will increase by $30,000.

The journal entry to record this transfer is:
Debit: Cash $30,000
Credit: Floyd's Capital Account $40,000
Credit: Ramelow's Capital Account $30,000

Option B is the correct journal entry to record this transfer.

Floyd and Merriam Start a Partnership Business on June 12