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 above.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 above.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 is $675,000 ($375,000 + $225,000 + $75,000). Since Donkey is purchasing one-fourth of the total capital, he is paying $168,750 ($675,000 / 4).

Each partner will receive one-fourth of this payment ($42,187.50), which they will add to their capital account.

Shrek's new capital balance will be $195,000 ($375,000 / 4 + $42,187.50).
Fiona's new capital balance will be $123,750 ($225,000 / 4 + $42,187.50).
Muffin's new capital balance will be $56,250 ($75,000 / 4 + $42,187.50).

Therefore, the correct choice is B.

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