George Lewis and Anna Marlin are partners of Lewis & Marlin LLP, who share net income and losses equally. They offer to admit Betty Naylor to Lewis, Marlin & Naylor LLP for a one-third interest in net assets and in net income or losses for an investment of

$50,000 cash. The total capital of Lewis & Marlin LLP prior to Naylor’s admission was

$110,000. Naylor makes a counteroffer of $40,000, explaining that her investigation of Lewis & Marlin LLP indicates that many trade accounts receivable are past due and that a significant amount of the inventories is obsolete. Lewis and Marlin deny both of these allegations. They contend that inventories are valued in accordance with generally accepted accounting principles and that the accounts receivable are fully collectible. However, after prolonged negotiations, the admission price of $40,000 proposed by Naylor is agreed upon.

Instructions Explain two ways in which the admission of Naylor might be recorded by Lewis, Marlin &

Naylor LLP, and indicate which method is preferable.