Question

Computing initial partner investments Car and Lam establish an equal partnership in both equity and profits to operate a used-furniture business under the name of C&L Furniture. Car contributes furniture inventory that cost $120,000 and has fair value of $160,000. Lam contributes $60,000 cash and delivery equipment that cost $80,000 and has a fair value of $60,000.

	Required:
	Assume that the initial noncash contributions of the partners are recorded at fair market value. Compute the
	ending balance of each capital account under the bonus and goodwill approaches.

Answer 1

Initial capital Investments

Car (at fair value) Lam (at fair value)

Inventory Items (Cost $120,000)               $160,000                       -

Cash Contribution                                          - $60,000

Delivery Equipments (Cost $80,000)                -                      $60,000

Total   $160,000                 $120,000

Partnership of Car and Lam (50%)

Journal Entry for Adjustments of capital

Car Capital Dr.                                 $20,000

     To Lam Capital                                    $20,000

To establish equal capital interests i.e. $140,000, lam will bring the additional capital of $20,000

Statement showing Capital Balance of Partners after adjustments

                                                                                                     Car                                            Lam

Initial Capital Balance as calculated above $160,000                              $120,000

Adjustment of Capital ($20,000)                             $20,000

Capital Balance after Adjustment $140,000                              $140,000