Question

Algood and Gaw began a partnership on January 2 of the current year. Algood invested cash of $150,000 as well as inventory costing $30,000, but with a current appraised value of $50,000. Gaw contributed land with a $60,000 book value and a $90,000 fair market value. The partnership also accepted responsibility for a $70,000 note payable owed in connection with the land. The partners agreed to begin operations with equal capital balances.

Assuming that the bonus method was used by this partnership, what was Algood's initial capital balance?
a. $200,000
b. $145,000
c. $110,000
d. $120,000
e. $85,000

Answer 1

Algood's initial capital balance is $200,000 since Gaw's net contribution after adjusting for the note payable is $20,000, and to equalize the capital balances, no additional bonus is required to Algood.

Step-by-step explanation:

To determine Algood's initial capital balance using the bonus method, we need to calculate the total capital contributions of both partners based on the agreed values and then adjust for equal capital balances. Algood contributed $150,000 in cash and inventory with an appraised value of $50,000, totaling $200,000. Gaw contributed land with a fair market value of $90,000, but the partnership assumed a $70,000 note payable related to the land. To start with equal capital balances, the excess value contributed by Gaw over Algood's initial contribution would be given as a bonus to Algood.

Gaw's net contribution (after adjusting for the note payable) is $90,000 - $70,000 = $20,000. Algood's total contribution is $200,000. To equalize their capital balances, Algood's contribution receives a bonus from Gaw's contribution. Since both should have equal balances and Algood already contributed $200,000, no bonus is needed and Algood's initial capital balance remains at $200,000.