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On January 2, year 1, Smith purchased the net assets of Jones’ Cleaning, a sole proprietorship, for $350,000, and commenced operations of Spiffy Cleaning, a sole proprietorship. The assets had a carrying amount of $375,000 and a market value of $360,000. In Spiffy’s cash-basis financial statements for the year ended December 31, year 1, Spiffy reported revenues in excess of expenses of $60,000. Smith’s drawings during year 1 were $20,000. In Spiffy’s financial statements, what amount should be reported as Capital-Smith?
A. $415,000

B. $400,000

C. $410,000

D. $390,000

答案解析：

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D is corrent. The ending balance in Smith’s capital account on either the accrual or cash basis is computed as follows:

Beginning capital	+	Investments	+	Income	–	Drawings	=	Ending capital
Beginning capital								Ending capital

Smith’s beginning capital balance is measured as the cost of the assets purchased to establish the business ($350,000). The previously recorded value ($375,000) and estimated market value ($360,000) are irrelevant and do not affect beginning capital. No additional investments were made; cash basis income was $60,000 and drawings were $20,000. Therefore, the ending capital balance is $390,000 ($350,000 + $60,000 − $20,000).

A is incorrect. The ending balance in Smith’s capital account on either the accrual or cash basis is computed as follows:

Beginning capital	+	Investments	+	Income	–	Drawings	=	Ending capital
Beginning capital								Ending capital

Smith’s beginning capital balance is measured as the cost of the assets purchased to establish the business ($350,000). The previously recorded value ($375,000) and estimated market value ($360,000) are irrelevant and do not affect beginning capital. No additional investments were made; cash basis income was $60,000 and drawings were $20,000. Therefore, the ending capital balance is $390,000 ($350,000 + $60,000 − $20,000).
B is incorrect. The ending balance in Smith’s capital account on either the accrual or cash basis is computed as follows:

Beginning capital	+	Investments	+	Income	–	Drawings	=	Ending capital
Beginning capital								Ending capital

Smith’s beginning capital balance is measured as the cost of the assets purchased to establish the business ($350,000). The previously recorded value ($375,000) and estimated market value ($360,000) are irrelevant and do not affect beginning capital. No additional investments were made; cash basis income was $60,000 and drawings were $20,000. Therefore, the ending capital balance is $390,000 ($350,000 + $60,000 − $20,000).

C is incorrect. The ending balance in Smith’s capital account on either the accrual or cash basis is computed as follows:

Beginning capital	+	Investments	+	Income	–	Drawings	=	Ending capital
Beginning capital								Ending capital

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