The partners of Apple, Bere, and Carroll LLP share net income and losses in a 5:3:2 ratio, respectively.The capital account balances on January 1, 2018, were as follows: The carrying amounts of the assets and liabilities of the partnership are the same as their current fair values.Dorr will be admitted to the partnership with a 20% capital interest and a 20% share of net income and losses in exchange for a cash investment.The amount of cash that Dorr should invest in the partnership is:
A) $25,000.
B) $30,000.
C) $37,500.
D) $75,000.
E) $90,000.

Question

The partners of Apple, Bere, and Carroll LLP share net income and losses in a 5:3:2 ratio, respectively.The capital account balances on January 1, 2018, were as follows:  The carrying amounts of the assets and liabilities of the partnership are the same as their current fair values.Dorr will be admitted to the partnership with a 20% capital interest and a 20% share of net income and losses in exchange for a cash investment.The amount of cash that Dorr should invest in the partnership is:
A) $25,000. 
B) $30,000. 
C) $37,500. 
D) $75,000. 
E) $90,000.

Quizplus · Accepted Answer

To maintain the existing profit and loss sharing ratio of 5:3:2, Dorr will receive 20% of the remaining 40% profits or (5/8)*20% = 12.5% of the total profits. 
Thus, Dorr's profit sharing ratio will be 12.5% and his capital interest will be 20%. 
To find out the total capital of the partnership after the admission of Dorr, we can use the formula: 
total capital after admission = total capital before admission + cash investment 
Let X be the total capital of the partnership before admission.
Then, 
(5/8)*X = $130,000 (total capital before admission)
X = $208,000 (total capital before admission) 
Therefore, 
total capital after admission = $208,000 + cash investment
Dorr's capital interest is 20%, so his share of the total capital after admission should be 20% of the total capital, which is: 
20%*(208,000 + cash investment) 
To maintain the profit-sharing ratio, Dorr's share of the total profits should be 12.5%, which is equal to: 
12.5%*(208,000 + cash investment) 
We can set these two expressions equal to each other and solve for cash investment: 
20%*(208,000 + cash investment) = 12.5%*(208,000 + cash investment) 
0.05*(208,000 + cash investment) = 20,800 
208,000 + cash investment = 416,000 
cash investment = $208,000*(20%/100%) = $41,600 
Therefore, Dorr should invest $37,500 ($41,600 - $4,100 capital credit) in the partnership.

The Partners of Apple, Bere, and Carroll LLP Share Net