My MDS Review book states...Each partner’s equity is accounted for in a capital account.  Each partner’s capital account is maintained as follows:  Cash, and FMV of property or services contributed...Assets and liabilities are transferred from sole proprietorships to partnerships or corporations are valued at FMV.

Based on the answer, I assume Smith contributed $350,000 to Spiffy Cleaning as capital.  Spiffy Cleaning then purchased the assets from Jones’ Cleaning which would be recorded at FMV.