Sole Proprietors, Johnny and Simon, Decide to Form a Partnership

question 29

Multiple Choice

Sole proprietors, Johnny and Simon, decide to form a partnership. Johnny contributes inventory with a fair value of $20 000, machinery with a fair value of $120 000 and it is agreed that the partnership will take over Johnny's bank loan of $50 000. Assuming the partnership agreement states that the balance of partnership capital will be equal to the fair value of the net assets contributed, what is the amount recorded in Johnny's capital account?

• A) $70 000
• B) $90 000
• C) $120 000
• D) $140 000

---

Definitions:

Accumulated Depreciation

The total amount of a company's asset value that has been allocated as depreciation expense since the asset was put into use.

Closing Entries

Journal entries made at the end of an accounting period to transfer temporary account balances to permanent accounts, thus preparing the books for the next period.

Income Summary

An account used in the closing process that summarizes revenues and expenses for a period, transferring the net amount to retained earnings.

Sales Returns

Transactions where customers return defective, unsatisfactory or unwanted products back to the seller, resulting in a reversal of revenue.