Certified Internal Auditor (CIA) Part 3: Business Knowledge for Internal Auditing — Question 256

An internal auditor was asked to review an equal equity partnership. In one sampled transaction, Partner A transferred equipment into the partnership with a self- declared value of $10,000, and Partner B contributed equipment with a self-declared value of $15,000. The capital accounts of each partner were subsequently credited with $12,500. Which of the following statements is true regarding this transaction?

Answer options

• A. The capital accounts of the partners should be increased by the original cost of the contributed equipment.
• B. The capital accounts should be increased using a weighted average based on the current percentage of ownership.
• C. No action is needed, as the capital account of each partner was increased by the correct amount.
• D. The capital accounts of the partners should be increased by the fair market value of their contribution.

Correct answer: C

Explanation

The correct answer is C because the capital accounts were credited appropriately based on the partnership agreement. Option A is incorrect because the original cost of the equipment is not the basis for adjustment. Option B is also incorrect as ownership percentages do not dictate the credit amount in this case, and option D is wrong since the capital accounts were not adjusted based on fair market value, but rather, an agreed amount.