Sole proprietors, Johnny and Simon, decide to form a partnership. Johnny contributes inventory with a fair value of $20 000, machinery with a fair value of $120 000 and it is agreed that the partnership will take over Johnny's bank loan of $50 000. Assuming the partnership agreement states that the balance of partnership capital will be equal to the fair value of the net assets contributed, what is the amount recorded in Johnny's capital account?
A) $70 000
B) $90 000
C) $120 000
D) $140 000

Question

Quizplus · Accepted Answer

Johnny contributed inventory worth $20,000 and machinery worth $120,000, so his total contribution is $140,000. However, the partnership is taking over his bank loan of $50,000, so his net contribution is $90,000 ($140,000 - $50,000). Therefore, the amount recorded in Johnny's capital account is $90,000.

Sole Proprietors, Johnny and Simon, Decide to Form a Partnership