Thank you for visiting Dominic and Morgan are partners Dominic has a capital balance of 360 000 and Morgan has a capital balance of 265 000 Morgan sells 125. This page is designed to guide you through key points and clear explanations related to the topic at hand. We aim to make your learning experience smooth, insightful, and informative. Dive in and discover the answers you're looking for!
Answer :
Answer:
D. The total equity remains unchanged
Explanation:
Two partners are Dominic and Morgan. Their capital are $360,000 and $265,000. Total is $625,000. Now Morgan has decided to sell $125,000 of his ownership to Lance. So Lance will pay this money To Morgan. After admission capital of Morgan will be reduced to $140,000 and new partner Lance's capital is $125,000. Thus there will be no change in asset or total equity. However it has been assumed that new partner will not bring any goodwill.
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Rewritten by : Jeany
The transaction of Morgan selling a portion of his capital to Lance does not affect the total equity, assets, or liabilities of the business; it is merely an internal reallocation of equity among partners. The total equity remains unchanged, making option D the correct answer.
When Morgan sells part of his ownership interest in the partnership to Lance, there is a transfer of equity between partners, but the total equity in the business remains unchanged. If we examine a balance sheet, we are looking at a financial statement that reflects a company’s assets, liabilities, and equity at a specific point in time. Since Morgan is selling part of his capital account to Lance, Morgan’s capital account decreases by $125,000, and Lance’s capital account increases by $125,000. The total equity in the partnership does not change because the transaction is within equity accounts. Therefore, the correct answer is D. The total equity remains unchanged.
It is essential to understand that this transaction does not affect the total assets of the partnership. Lance would pay $125,000 to Morgan directly, and there would not be any change in the partnership's assets nor its liabilities; only the individual capital accounts of the partners are affected. So, answers (A) Assets will decrease by $125,000, and (B) Assets will increase by $125,000, are incorrect because the transaction doesn't involve the partnership's assets. Answer (C) The total equity decreases by $125,000 is incorrect because the total equity does not decrease; it is simply reallocated from Morgan to Lance.
