Kathy, Laura, and Maureen have capital balances of $120,000, $180,000 and $70,000 respectively when Kathy and Laura agree to buy Maureen’s share of the business using partnership assets. The current profit or loss ratio is 4:2:4, respectively. Maureen is paid $70,000. Which statement is FALSE once the transaction has been recorded?
The statement that is FALSE once the transaction has been recorded is that the remaining partners' capital balances will be equal.
To determine which statement is false once the transaction has been recorded, we need to analyze the changes in the capital balances and the profit or loss ratio.
Initially, Kathy's capital balance is $120,000, Laura's is $180,000, and Maureen's is $70,000.
The profit or loss ratio is 4:2:4, which can be simplified to 2:1:2. This means that for every $5 of profit or loss, Kathy would receive $2, Laura would receive $1, and Maureen would receive $2.
Maureen is paid $70,000 from the partnership assets. Since Maureen's share of the business is bought by Kathy and Laura, her capital balance of $70,000 is removed from the partnership.
To calculate the new capital balances, we need to consider the profit or loss ratio. Let's assume the total profit or loss is 'P.'
Kathy's capital balance after the transaction: $120,000 - (2/5)P
Laura's capital balance after the transaction: $180,000 - (1/5)P
To maintain the profit or loss ratio, Maureen's capital balance should also be adjusted:
Maureen's capital balance after the transaction: $70,000 - (2/5)P
Now, let's examine the statements one by one:
Statement 1: Kathy and Laura's new capital balances add up to $300,000 ($120,000 + $180,000). This statement is TRUE.
Statement 2: The partnership assets are decreased by $70,000 as they are used to pay Maureen. This statement is TRUE.
Statement 3: The total capital balances after the transaction add up to $230,000 ($120,000 + $180,000 - $70,000). This statement is FALSE. The total capital balances after the transaction should be $230,000 - (2/5)P - (1/5)P - (2/5)P = $230,000 - (5/5)P = $230,000 - P.
So, the correct FALSE statement is that the total capital balances after the transaction add up to $230,000.
To determine which statement is FALSE once the transaction has been recorded, we need to analyze the impact of the transaction on the capital balances of Kathy, Laura, and Maureen.
First, let's calculate the total profit or loss of the partnership using the profit ratio:
Total profit or loss = total capital x profit ratio
Total profit or loss = ($120,000 + $180,000 + $70,000) x (4 + 2 + 4) / (4 + 2 + 4)
Total profit or loss = $370,000 x 10 / 10
Total profit or loss = $370,000
Since the total profit or loss is not given in the question, let's assume that it's 0 for simplicity. Therefore, each partner's share of the profit or loss would also be 0.
Next, let's calculate the new capital balances after Maureen is paid $70,000:
Kathy's new capital balance = $120,000 - $70,000 = $50,000
Laura's new capital balance = $180,000 - $70,000 = $110,000
Maureen's new capital balance = $0 (since she is leaving the partnership)
Now, we can evaluate the given statements:
Statement 1: Kathy's capital balance is $50,000.
This statement is TRUE based on our calculations.
Statement 2: Laura's capital balance is $110,000.
This statement is TRUE based on our calculations.
Statement 3: Maureen's capital balance is $0.
This statement is FALSE since Maureen's capital balance after the transaction is not $0. It is important to note that Maureen received $70,000 as payment for her share, but this does not mean her capital balance is reduced to $0.
Statement 4: The profit or loss ratio is 4:2:4.
Since the total profit or loss is assumed to be 0 in our calculations, the profit or loss ratio cannot be determined. Thus, this statement is FALSE.
Therefore, the FALSE statement once the transaction has been recorded is Statement 3: Maureen's capital balance is $0.