Question

On December 31,2019, the capital balances for LMK partnership are Lami $720,000, Majed $600,000 and Kamal $600,000. The income ratios are 2:2:6 respectively. Lami decides to retire from the partnership. The partnership pays Lami $600,000 cash for his partnership interest. After retirement of Lami, what is the balance of Kamal’s capital account?
Select one:
a. $690,000
b. $528,000
c. $672,000
d. $600,000

The owners' equity statement for a partnership is called the
Select one:
a. partners' capital statement.
b. partners' proportional statement.
c. statement of shareholders' equity.
d. capital and drawing statement.

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Abdul-Rahim Taysir

Answer 1

Part 1

Answer

Option (a) $690,000 is correct.

Explanation

Existing ratio is 2 : 2 : 6 i.e.. Lami share is 2/10 , Majed share is 2/10 and Kamal share is 6/10

Lami retires from the firm. His Capital balance due was $720,000 but paid $600,000.

Balance amount in capital account $120,000 (720,000 - 600,000) will be distributed among Majeed and Kamal in the new ratio.

To calculate new ratio, Lami's share 2/10 will be distributed among Majeed and Kamal in the existing ratio of 2 : 6

New ratio

Majeed's share = 2/10 * 2/8 = 4/80

Kamal's share = 2/10 * 6/8 = 12/80

i.e. 4 : 12 or 1 : 3

Therefore, new ratio of Majeed and Kamal is 1 : 3

Now, Kamal's new capital

= $600,000 + $120,000 * 3/4

= $690,000 (answer)

Also, Majeed's new capital is $630,000

Part 2

Answer

The owners' equity statement for a partnership is called Partner's capital statement. It shows the changes in each partner's capital account during the year.

Hence option (a) is correct.

Should you have any query or require further explanation, please comment.

Good luck!