One more. I just don't understand the explanation:
On July 1, year 1, Motta and Puleo formed a partnership, agreeing to share profits and losses in the ratio of 4:6, respectively. Motta contributed a parcel of land that cost him $25,000. Puleo contributed $50,000 cash. The land was sold for $50,000 on July 1, year 1, four hours after formation of the partnership. How much should be recorded in Motta’s capital account on formation of the partnership?
Answer: 50,000.
Now I originally thought the answer would be 40% of the 50,000 because of the profit loss ratio. Can someone explain to me in layman's terms this answer:
This answer is correct. As is the case with all entities, investments in the capital of a partnership should be measured at the fair market value of the assets contributed. In this case, the FV of the land would be measured by its sales price on the date of sale ($50,000) which is also the date of the partnership formation. Recording the land at Motta’s cost would result in the partners sharing the gain from the sale in accordance with their profit and loss ratio. This is not equitable since the gain accrued while the land was held by Motta.
I guess I'm hung up on the last part. Since the partnership was already formed, why would the entire 50 go to Motta's account, and not the 4:6 split?
.