Question

Following his decision not to go ahead with either of the expansion plans you discussed with him before, Mark has clarified with you that financial position of the business has remained unchanged and is outlined below.

Assets                 – 298,000

Liabilities                   – 148,000 (this consists 116,000 borrowed from the bank and the remainder being existing liabilities held by the studio)

Owners Equity           – 150,000

Mark’s cousin Randy is still very keen to be involved in the business and thinks the idea of going into partnership would be great. From Randy’s point of view he thinks he and Mark should be equal partners with a half share each in the business. Randy has told Mark that he will contribute the following assets and this should allow him to obtain his half share.

All assets are listed at their fair value

Cash - $40,000, Motor Vehicle - $27,000, Equipment - $68,000.

Required

Determine the impact of allowing Randy to have a half share of the business by contributing these assets and show the journal entries if this was to take place.

Also comment on whether you think this is a reasonable offer for Mark to accept and why you have come to this conclusion

Answer 1

Understanding the Current Situation

Mark has Net Worth( i.e., Assets - External Liabilities) of $150000, which is his Capital Contribution.

A 50% share in the business shall imply a Contribution of Assets worth $150000 to equalize the Capital Contribution between both the partners.

Whereas, Randy is ready to contribute the following for 50% share:

Cash	$     40,000.00
Motor vehicle	$     27,000.00
Equipment	$     68,000.00
TOTAL	$ 1,35,000.00

Journal Entry:

Cash A/c Dr $40000

Motor vehicle A/c Dr $27000

Equipment A/c Dr $68000

To Owner's Equity A/c $135000

(Being Assets brought in by new partner for 50% share)

CONCLUSION:

Since the Contribution by Randy is less than $150000, it is very clear that Mark will suffer reduction in share of profits if he accepts Randy's Offer of Partnership. The offer is not reasonable from Mark's point of view.