Hey all,

I don't understand this question from my Wiley CD.

Cor-Eng Partnership was formed on January 2, 2007.  Under the partnership agreement, each partner has an equal initial capital balance accounted for under the goodwill method.  Partnership net income or loss is allocated 60% to Cor and 40% to Eng.  To form the partnership, Cor originally contributed assets costing $30,000 with a fair value of $60,000 on January 2, 2007, while Eng contributed $20,000 in cash.  Drawings by the partners during 2007 totaled $3,000 by Cor and $9,000 by Eng.  Cor-Eng’s 2007 net income was $25,000.  Eng’s initial capital balance in Cor-Eng is

A.  20K

B.  25K

C.  40K

D.  60K

How is the implied value of the pship $120K?  I don't understand the explanation given which is:

Answer D is correct.  Upon the formation of the partnership, the contributed assets should be recorded at their fair values, and liabilities assumed by the partnership should be valued at the present value of the remaining cash flow.  The individual partners must agree to the percentage of equity that each will have in the net assets of the partnership.  Generally, the capital balance is determined by the proportionate share of each partner's capital contribution.  However, in recognition of intangible factors such as expertise, partners may agree to any proportion of capital.  In this problem, the total fair value of the contributed capital is $80,000 ($60,000 from Cor and $20,000 from Eng).  Under the goodwill method, it is assumed that the actual value of the partnership is $120,000 (Cor's contribution of $60,000 ÷ 50%).  Resulting goodwill of the partnership must therefore be $40,000 ($120,000 – $80,000).  Eng's initial capital is $60,000 (either $120,000 x 50%, or $20,000 + $40,000).

Please help!  Thank you!