In the AD partnership, Allen\'s capital is $140,000 and Daniel\'s is $40,000 and
ID: 2465328 • Letter: I
Question
In the AD partnership, Allen's capital is $140,000 and Daniel's is $40,000 and they share income in a 3:1 ratio, respectively. They decide to admit David to the partnership. Each of the following questions is independent of the others.
1. David directly purchases a one-fifth interest by paying Allen $34,000 and Daniel $10,000. The land account is increased before David is admitted. By what amount is the land account increased?
2. David directly purchases a one-fifth interest by paying Allen $34,000 and Daniel $10,000. The land account is increased before David is admitted. What are the capital balances of Allen and Daniel after David is admitted into the partnership?
Explanation / Answer
1) Considering the fact that, David paid $44000 ie (34000+10000) for a 1/5th stake in the partnership, the value of the entire entity is $220000 ie 5*44000 and hence there is an upward valuation of $40000 on account of land revaluation ($220000-$180000)
2) Assuming the upward revaluation on account of land is attributable to the partners in their income sharing ratios, $30000 would be attributable to Allen and $10000 would be attributable to Daniel. However as there is a stake sale in favour of David the final balance in Allen's account would be $136000 and Daniels's account would be $40000