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, 2011, 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. ($150,000/.8=$187,500. $187,500 - $150,000 = $37,500 to invest)

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, 2011, 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. ($150,000/.8=$187,500. $187,500 - $150,000 = $37,500 to invest)

Quizplus · Accepted Answer

To calculate the amount of cash Dorr should invest, we first need to calculate the total capital of the partnership after Dorr's admission. Dorr will have a 20% capital interest, so the remaining partners will have 80%. We can set up the following equation:

Total capital = Dorr's capital / 0.2 = (Initial total capital + Dorr's investment) / 1.2

Plugging in the numbers, we get:

Total capital = 0.2x / 0.2 = (450,000 + x) / 1.2

where x is Dorr's investment.

Solving for x, we find that Dorr should invest $37,500. Therefore, the answer is (C).

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