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Accounting Final Exam – Question # 2?
Johnson and Smith are partners sharing profits and losses at a ratio of 3:2. Its capital balances are $ 10,000 and $ 20.00 respectively. The partners agree to accept gift of $ 10,000 for a 30% share in the partnership. capital balance after to admit Mr. Smith is a …… – $ 12,000 b – c $ 19,200 – $ 20,000 d – $ 20,800 Please help!
When a partnership share bought by less than worth (discount), we have to account for the differences between purchase price and the actual value. The purchase price is $ 10k. The real value is $ 10K + $ 20K + $ 10K = $ 40k. If Don is getting a share of 30% in theory that should pay $ 0.3 or $ 40k x 12k, but was asked to put in only $ 10k, ie Johnson and Smith are giving a discount of $ 2k. Now, Johnson and Smith should share the discount rate of 3:2. 3 / 5 of $ 2k is $ 1,200 (share of Johnson's) and 2 / 5 $ 2K is $ 800 (share of Smith). The journal entries would be: Dr Cash $ 10,000 Dr Johnson, capital $ 1,200 Dr. Smith, Cr Don $ 800 capital, capital $ 12,000 After admitting Don Johnson's capital would be $ 10,000 less $ 1,200 or $ 8,800 capital and Smith would be $ 20,000 less $ 800 or $ 19,200. So the answer is (b) – $ 19,200
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