Asked by Amanda Drennen on May 11, 2024
Verified
On November 30 capital balances are Forsyth $720000 Lagassi $600000 and Kelly $600000. The income ratios are 20% 20% and 60% respectively. Forsytha decides to retire from the partnership. The partnership pays Forsyth $600000 cash for her partnership interest. After Forsyth's retirement what is the balance of Kelly's capital account?
A) $528000
B) $600000
C) $672000
D) $690000
Capital Balances
The amounts recorded in the equity section of a company's balance sheet or partnership's accounts, representing the owners' stakes.
Income Ratios
Financial metrics that compare various aspects of a company's income, such as profit margin or return on assets, to evaluate its financial performance.
Partnership Interest
Represents an individual's or entity's ownership share in a partnership, including rights to its profits and assets.
- Evaluate the financial positions of capital in a partnership preceding and succeeding the entry of a new partner.
- Evaluate the impact of partner retirement or withdrawal on partnership capital balances and the redistribution of capital interests.
Verified Answer
Forsyth = $720000 x 20% = $144000
Lagassi = $600000 x 20% = $120000
Kelly = $600000 x 60% = $360000
Total capital = $144000 + $120000 + $360000 = $624000
2. Then, we need to calculate Kelly's capital balance after Forsyth's retirement:
Forsyth receives $600000, which is deducted from the total capital:
$624000 - $600000 = $240000
Now we need to redistribute Forsyth's share according to the income ratios:
Lagassi = 20%/(20%+60%) x $240000 = $48000
Kelly = 60%/(20%+60%) x $240000 = $192000
Finally, we need to add each partner's new amount to their previous balance:
Lagassi = $120000 + $48000 = $168000
Kelly = $360000 + $192000 = $552000
Therefore, the balance of Kelly's capital account after Forsyth's retirement is $552000.
Learning Objectives
- Evaluate the financial positions of capital in a partnership preceding and succeeding the entry of a new partner.
- Evaluate the impact of partner retirement or withdrawal on partnership capital balances and the redistribution of capital interests.
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