EX 12-12 Admitting new partner who contributes assets

After the tangible assets have been adjusted to current market prices, the capital accounts of Alex Jensen and Elon Craig have balances of $120,000 and $180,000, respectively. Marco Vega is to be admitted to the partnership, contributing $70,000 cash to the partnership, for which he is to receive an ownership equity of $78,000. All partners share equally in income.

a. Journalize the entry to record the admission of Vega, who is to receive a bonus of $8,000.
b. What are the capital balances of each partner after the admission of the new partner?
c. Why are tangible assets adjusted to current market prices, prior to admitting a new partner?


Answer:

a. Cash 70,000
Alex Jensen, Capital 4,000
Elon Craig, Capital 4,000
Marco Vega, Capital 78,000

b. Alex Jensen…………………………………………… $116,000
Elon Craig…………………………………………… 176,000
Marco Vega………………………………………… 78,000



c. Tangible assets should be adjusted to current market prices so that the new partner does not share in any gains or losses from changes in market prices prior to being admitted. For example, if the market price of land doubled prior to admitting a new partner, the existing partners should realize the increase in the value of the land in their capital accounts prior to the new partner’s admission. Otherwise, the new partner would share in the increase in the market value of the land.