Chen and Wright are forming a partnership. Chen will invest a building that currently is being used by another business owned by Chen. The building has a market value of $90,000. Also, the partnership will assume responsibility for a $30,000 note secured by a mortgage on that building. Wright will invest $50,000 cash. For the partnership, the amounts to be recorded for the building and for Chen's Capital account are:
A) Building, $90,000 and Chen, Capital, $90,000.
B) Building, $60,000 and Chen, Capital, $60,000.
C) Building, $60,000 and Chen, Capital, $50,000.
D) Building, $90,000 and Chen, Capital, $60,000.
E) Building, $60,000 and Chen, Capital, $90,000.

Question

Quizplus · Accepted Answer

The market value of the building is $90,000, but Chen already owned the building, so the cost basis to the partnership is the original cost of the building, which may be less than its current market value. The assumption of the mortgage note does not result in a capital contribution by Chen. Therefore, the amount recorded for the building is $60,000 ($90,000 - $30,000) and the amount recorded for Chen's Capital account is $60,000 ($60,000 building investment).

Chen and Wright Are Forming a Partnership