Question

Lewis, Sadie and Warren are partners with the following capital balances and profit and loss percentages: Lewis: $120,000 (60%) Sadie: $ 60,000 (20%) Warren: $ 40,000 (20%) Sadie wishes to withdraw from the partnership and it is agreed that she will receive her current capital balance plus his share of any valuation adjustments associated with the fair value of the whole business being greater than book value. Assume that the fair value of the whole business is $100,000 greater than the book value. The bonus method is being used.

Required:
What will the balance of Warren’s capital account be after the withdrawal of Sadie?

Answer 1

$35,000

Step-by-step explanation:

Sadie will receive $60,000 + ($100,000 x 20%) = $80,000

Excess distribution = $80,000 - $60,000 = $20,000

This excess distribution will be distributed between Lewis and Warren:

Lewis = (60%/80%) x $20,000 = $15,000

Warren = (20%/80%) x $20,000 = $5,000

Warren's capital account = $40,000 - $5,000 = $35,000