Shaun and Rick are partners.Shaun has a capital balance of $9000 and Rick has a capital balance of $7000.Edwin invests a building with a current market value of $5000 to acquire an interest in the new partnership.Which of the following is true of the effect of the transaction on the balance sheet? (Assume no bonus to any partner. )
A)Both assets and equity will decrease by $5000.
B)Both assets and equity will increase by $5000.
C)Both assets and liabilities will increase by $5000.
D)Both assets and liabilities will decrease by $5000.

Question

Quizplus · Accepted Answer

When Edwin invests the building with a current market value of $5000, it will increase the assets of the partnership by $5000. Edwin did not assume any liabilities or borrowings. Thus, there will be no increase in liabilities due to the investment. As Edwin is acquiring an interest in the partnership, the equity of the partnership will increase by $5000, which will be distributed among the partners according to their profit/loss sharing ratio. Therefore, both assets and equity will increase by $5000.

Shaun and Rick Are Partners