A summary balance sheet for the McCune, Nall, and Oakley partnership

appears below. McCune, Nall, and Oakley share profits and losses in a
ratio of 2:3:5, respectively.

Assets
Cash $ 50,000
Inventory 62,500
Marketable securities 100,000
Land 50,000
Building-net 250,000
Total assets $ 512,500

Equities
McCune, capital $ 212,500
Nall, capital 200,000
Oakely, capital 100,000
Total equities $ 512,500

The partners agree to admit Pavic for a one-fifth interest. The fair
market value of partnership land is appraised at $100,000 and the
fair market value of inventory is $87,500. The assets are to be
revalued prior to the admission of Pavic and there is $15,000 of
goodwill that attaches to the old partnership.

LO2
6. By how much will the capital accounts of McCune, Nall, and
Oakley increase, respectively, due to the revaluation of the
assets and the recognition of goodwill?

a. The capital accounts will increase by $25,000 each.

b. The capital accounts will increase by $30,000 each.
c. $18,000, $27,000, and $45,000.
d. $20,000, $25,000, and $30,000.

LO2
7. How much cash must Pavic invest to acquire a one-fifth
interest?

a. $117,500.
b. $120,500.
c. $146,875.
d. $150,625.

ANSWER:

6. c The assets will be valued upward by $90,000 which,

allocated on a 2:3:5 basis, yields $18,000 to McCune,
$27,000 to Nall, and $45,000 to Oakely.
7. d After the revaluation, the assets will be recorded at
$602,500. If Pavic is admitted for a one-fifth
interest, the $602,500 represents 80% of the total
implied capital. Dividing $602,500 by 80% gives a total
capitalization of $753,150 for which $150,625 is
required from Pavic for a 20% interest.