299904942 Basic Accounting

Chapter 2 Partnerships: Organization Organization and Operation Operation

True/False Tr ue/False Questions

1. A limite limited d liability liability partnersh partnership ip is a taxable taxable entity under under federal federal income tax laws. laws. Answer: False 2. The balances balances of limited limited liability liability partners partners'' drawing ledger ledger accounts accounts are closed closed to the partners' capital accounts at the end of an accounting period. Answer: True 3. The nterest nterest !xpense !xpense ledger ledger account is debited debited when interes interestt on partners' partners' capital capital account balances is credited to partners in the distribution of limited liability partnership net income. Answer: False ". A limited limited liability liability partnersh partnership ip generally generally is considered considered to be an association association of persons rather than a separate accounting entity. Answer: False #. A limited limited liability liability partnersh partnership ip contract contract pro$ision pro$ision for the allowance allowance of interest interest on partners' capital account balances in the allocation of net income must be applied when the partnership has a net loss. Answer: True %. From a legal standpoin standpoint& t& the admissio admission n or withdrawal withdrawal of a partner partner does not terminate terminate the existence of a limited liability partnership. Answer: False . The ac(uisiti ac(uisition on of an ownership ownership interes interestt by a new partner partner directly directly from from an existing existing partner does not change either total assets or net assets of a limited limited liability partnership. Answer: True ). A bonus bonus to a partner partner based based on income income after the bonus bonus is recogni recogni*ed *ed as an expense expense by the limited liability partnership. Answer: True

Larsen, Modern Modern Advanced Accounting, Accounting, Tenth Tenth Edition Edition

7

Chapter 2 Partnerships: Organization and Operation +. n a limited partnership& the personal liability of one or more of the partners for the unpaid debts of the partnership is limited to the amounts those partners had in$ested in the partnership. Answer: True 1,. The $alue assigned to noncash assets in$ested by partners in a limited liability partnership is the cost of the assets or the current fair $alue of the assets at the time of in$estment& whiche$er is lower. Answer: False 11. A guarantee of a minimum income of -1#&,,, or a salary allowance of -1#&,,, to a partner will gi$e the partner the same share of partnership net income& whether the limited liability partnership has a net income or a net loss. Answer: False 12. oodwill may be recogni*ed as part of the in$estment of a new partner only when the new partner in$ests the identifiable net assets of a business enterprise that are expected to generate superior earnings for the limited liability partnership. Answer: True 13. /imited partnerships may be re(uired to file registration statements with the 0ecurities and !xchange ommission. Answer: True 1". artners' drawings are displayed in a limited liability partnership's statement of cash flows as cash flows from operating acti$ities. Answer: False

Multiple Choice Questions

1#. A partner's withdrawal of assets from a limited liability partnership that is considered a permanent reduction in that partner's e(uity is debited to the partner's: A 4rawing account 5 6etained !arnings account  apital account 4 /oan 6ecei$able account Answer:  8

Larsen, Modern Advanced Accounting, Tenth Edition

Chapter 2 Partnerships: Organization and Operation

1%. The drawing ledger accounts of limited liability partners are used: A To record the partners' salaries 5 To reduce the partners' capital account balances at the end of an accounting period  n the same manner as the partners' loan accounts 4 To record the partners' share of net income or loss for an accounting period Answer: 5 1. The partnership contract for ole 7 4ane // pro$ides that ole is to recei$e a bonus of 2,8 of net income 9after the bonus and that the remaining net income is to be di$ided e(ually. f the partnership income before the bonus for ear 2,,% is -#&%,,& ole's share of the pre;bonus income is: A -2)&),, 5 -33&%,,  -3"&#%, 4 -"3&2,, ! 0ome other amount Answer: 5 6ationale: <9-#&%,, x 1=% > 9-")&,,, x 1=2 ? -33&%,,@ 1). ay goodwill appropriately be recogni*ed in the Bournal entry to record the admission of a new partner to an existing limited liability partnership for an in$estment of:

A 5  4

Cash? es es Co Co

Net assets of a single proprietorship? es Co es Co

Answer: 


9


1+. orse and Ciguel& partners of orse 7 Ciguel /imited /iability artnership& shared net income and losses e(ually. Dn arch 1& 2,,%& DdmarE was admitted to the partnership the new ratio for sharing net income and losses was orse& 2#8 Ciguel& 2#8 and DdmarE& #,8. DdmarE in$ested the net assets of a single proprietorship. The $alue of DdmarE's proprietorship as a going concern was -12,&,,,& and the current fair $alue of the proprietorship's identifiable net assets was -+,&,,,. The difference of -3,&,,, between the going;concern $alue and the identifiable net assets $alue is recogni*ed as: A oodwill credited to DdmarE's capital account 5 oodwill credited -1#&,,, each to the capital accounts of orse and Ciguel  A bonus of -1#&,,, each to orse and Ciguel 4 A bonus of -3,&,,, to DdmarE with offsetting debits of -1#&,,, each to the capital accounts of orse and Ciguel Answer: A 2,. The partnership contract for yle 7 Guan // pro$ided that yle was to recei$e a salary of -12&,,, a year& Guan was to recei$e a salary of -1#&,,, a year& and the resultant net income or loss after partners' salaries expense was to be di$ided %,8 to yle and ",8 to Guan. A partnership income of -2,&,,, before partners' salaries expense for the fiscal year ended ay 31& 2,,%& is allocated: A -12&,,, to yle and -)&,,, to Guan 5 -)&))+ to yle and -11&111 to Guan  -&),, to yle and -12&2,, to Guan 4 n some other amounts Answer:  21. 5ruce hapman was admitted to the Adams 7 5ye /imited /iability artnership on ay 31& 2,,%& by an in$estment of -",&,,, cash for a 2,8 interest in partnership net assets. rior to the admission of hapman& the capital accounts of Adams and 5ye& who shared net income and losses e(ually& had balances of -,&,,, and -3,&,,,& respecti$ely. The preferable accounting method for the admission of hapman includes credits of: A -%&,,, each to the capital accounts of Adams and 5ye 5 -3,&,,, each to the capital accounts of Adams and 5ye  -2)&,,, and -12&,,,& respecti$ely& to the capital accounts of Adams and 5ye 4 0ome other amounts to the capital accounts of Adams and 5ye Answer: A

10



22. Dn Hanuary 31& 2,,%& Amy 6eid withdrew from 6eid& 0ayle 7 Todd //& whose partners had an income;sharing ratio of ",8& 3#8& and 2#8& respecti$ely& for a cash payment of -121&,,,& despite 6eid's ha$ing a capital account balance of -1,,&,,, o n that date. The preferable method of accounting for 6eid's withdrawal includes a: A -12&2#, debit to 0ayle& apital 5 -21&,,, debit to oodwill  -#2&#,, debit to oodwill 4 -#&2#, debit to Todd& apital Answer: A 6ationale: <9-121&,,, − -1,,&,,, x 3#=%, ? -12&2#,@ 23. The partners of Ames& 5rod& and han // had capital account balances of -#&,,,& -"#&,,,& add -3,&,,,& respecti$ely& and shared net income and losses e(ually. For an in$estment of -#&,,, cash& 4ell was admitted to the partnership with a 2#8 interest in capital and net income. 5ased on this information& which of the following may Bustify the amount of in$estmentI A 4ell recei$ed a bonus from Ames& 5rod& and han. 5 artnership net assets were o$er$alued immediately prior to 4ell's admission to the partnership.  The carrying amount of the partnership's net assets was less than their current fair $alue immediately prior to 4ell's admission to the partnership. 4 4ell apparently in$ested goodwill in the partnership. Answer:  2". f a partner who retires from a limited liability partnership recei$es an amount of cash less than the partner's capital account balance: A dentifiable net assets of the partnership should be written down 5 5onuses should be allocated to the continuing partners  JCegati$e goodwillJ should be recogni*ed by the partnership 4 Cone of the foregoing should taEe place Answer: 5


11


2#. The partners of Kohl& La$ier& and epp // shared net income and losses in a #:3:2 ratio& respecti$ely. The capital account balances on April 3,& 2,,%& were as follows: Kohl& capital La$ier& capital epp& capital Total partners' capital

- 3&,,, %#&,,, ")&,,, -1#,&,,,

The carrying amounts of the assets and liabilities of the partnership were the same as their current fair $alues. Mabb was to be admitted to the partnership with a 2,8 capital interest and a 2,8 share of net income and losses in exchange for a cash in$estment. Co goodwill or bonus was to be recogni*ed. The amount of cash that artner Mabb should in$est in the partnership is: A -3,&,,, 5 -3%&,,,  -3&#,, 4 -",&,,, ! 0ome other amount Answer:  6ationale: 9-1#,&,,, x 1=" ? -3&#,, 2%. The appropriate format of the Hanuary 31& 2,,%& closing entry for App 7 5rie /imited /iability artnership& whose two partners had withdrawn their salaries from the partnership during Hanuary& 2,,%& is 9explanation omitted: A App& 4rawing 5rie& 4rawing 0alaries !xpense 5 ncome 0ummary App& 4rawing 5rie& 4rawing  App& apital 5rie& apital 0alaries !xpense 4 App& apital 5rie& apital App& 4rawing 5rie& 4rawing

LLL LLL LLL LLL LLL LLL LLL LLL LLL LLL LLL LLL LLL

Answer: 4

12


Chapter 2 Partnerships: Organization and Operation 2. Alf and 5en& partners in Alf 7 5en // who share net income and losses e(ually& had capital account balances of -",&,,, and -%,&,,,& respecti$ely& on 0eptember 2#& 2,,%& on which date the following Bournal entry was prepared for the partnership: ash oodwill <9-%2&,,, x 3 − 9-1,,&,,, > -%2&,,,@ Alf& apital 9-2"&,,, x ,.#, 5en& apital 9-2"&,,, x ,.#, am& apital

%2&,,, 2"&,,, 12&,,, 12&,,, %2&,,,

To record in$estment by am for a one;third interest in capital& with goodwill of -2"&,,, di$ided e(ually between Alf and 5en. The foregoing Bournal entry: A s acceptable 5 0hould be replaced by an entry allocating an -)&,,, bonus e(ually to Alf and to 5en  0hould be replaced by an entry allocating a -2"&,,, bonus e(ually to Alf and to 5en 4 0hould not reflect either a bonus or goodwill Answer: 5 2). Dn Hune 3,& 2,,%& the balance sheet for oll& aduro 7 rieto // 9together with the income;sharing ratio was as follows: Assets /oan payable to oll oll& capital 92,8 aduro& capital 92,8 rieto& capital 9%,8 Total

-1),&,,, - +&,,, "2&,,, 3+&,,, +,&,,, -1),&,,,

oll decided to retire from the partnership. 5y mutual agreement& the partnership assets were to be adBusted to their current fair $alue of -21%&,,, on Hune 3,& 2,,%. t was agreed that the partnership would pay oll -%1&2,, cash for oll's partnership interest& including oll's loan that was to be repaid in full. Co goodwill was to be recogni*ed. After oll's retirement& the balance of aduro's capital account is: A -3%&"#, 5 -3+&,,,  -"#&"#, 4 -"%&2,, ! 0ome other amount Answer:  Larsen, Modern Advanced Accounting, Tenth Edition

13

Chapter 2 Partnerships: Organization and Operation 6ationale: 9-3+&,,, > -&2,, − -#, ? -"#&"#,

14



2+. Are per unit amounts disclosed in a limited partnership's:

A 5  4

Incoe !tateent? es es es Co

!tateent of Partners" Capital? es Co Co Co

#alance !heet? es es Co Co

Answer: 5 3,. Khen !lsa artin withdrew from /ewis& artin& Coll 7 Drdway // on Hanuary 31& 2,,%& she was paid -),&,,,& although her capital account balance was only -%,&,,,. The four partners shared net income and losses e(ually. The Bournal entry of the partnership to record artin's withdrawal on Hanuary 31& 2,,%& preferably should include a debit of: A -%&%% to /ewis& apital 5 -2,&,,, to oodwill  -),&,,, to oodwill 4 -),&,,, to artin& 4rawing Answer: A 6ationale: <9-),&,,, − -%,&,,, ÷ 3 > -%&%%@ 31. The owners' e(uity ledger accounts for a limited liability partnership are: A apital accounts 5 4rawing accounts  /oans payable to partners 4 a and $ only ! a and c only Answer: 4


15


Pro$les

32. Dn 0eptember 1& 2,,#& Fox 7 eorge // admitted /ucille Nayes to a 2,8 interest in net assets for an in$estment of -#,&,,, cash. rior to the admission of Nayes& Fox 7 eorge // had net assets of -1,,&,,, and an income;sharing ratio of Fox  2#8& eorge  #8. After the admission of Nayes& the partnership contract included the following pro$isions: 0alary of -",&,,, a year to Nayes& to be recogni*ed as partnership expense 6esultant net income in ratio Fox  2,8& eorge  %,8& Nayes  2,8 4uring the fiscal year ended August 31& 2,,%& Fox& eorge 7 Nayes // had an income of -+,&,,, prior to recognition of salary to Nayes. repare Bournal entries for Fox& eorge 7 Nayes // to record the admission of Nayes on 0eptember 1& 2,,#& and the di$ision of income among the partners on August 31& 2,,%. Answer: 2,,# 0ept. 1

2,,% Aug. 31

31

16

ash Fox& apital 9-2,&,,, x ,.2# eorge& apital 9-2,&,,, x ,.# Nayes& apital 9-1#,&,,, x ,.2, To record admission of Nayes.

#,&,,,

artners' 0alaries !xpense Nayes& apital To allocate salary to Nayes.

",&,,,

#&,,, 1#&,,, 3,&,,,

",&,,,

ncome 0ummary 9-+,&,,, − -",&,,, #,&,,, Fox& apital 9-#,&,,, x ,.2, eorge& apital 9-#,&,,, x ,.%, Nayes& apital 9-#,&,,, x ,.2, To close net income to partners' capital accounts.

1,&,,, 3,&,,, 1,&,,,



33. 6oe& 0oh& 7 Tow /imited /iability artnership was organi*ed and began operations on February 1& 2,,#& with the following capital account balances: 6oe& -#,&,,, 0oh& -,&,,, Tow& -),&,,,. The income;sharing arrangement pro$ided for the following: %oe

Annual salary 9to be recogni*ed as partnership expense and withdrawable in cash -",&,,, nterest on beginning;of;year capital account balances %8 6esidual income or loss 2#8

!oh

To&

-%,&,,, %8 ",8

-#,&,,, %8 3#8

For the fiscal year ended Hanuary 31& 2,,%& 6oe& 0oh& 7 Tow /imited /iability artnership had income of -1),&,,,& before recognition of salaries expense& and the partners withdrew their authori*ed salaries in cash. repare Bournal entries 9omit explanations for 6oe& 0oh& 7 Tow /imited /iability artnership on Hanuary 31& 2,,%. Answer: 2,,% Han. 31

31

artners' 0alaries !xpense 6oe& apital 0oh& apital Tow& apital ncome 0ummary 9-1),&,,, − -1#,&,,, 6oe& apital 9-3&,,, > -"&#,, 0oh& apital 9-"&2,, > -&2,, Tow& apital 9-"&),, > -%&3,,


1#,&,,, ",&,,, %,&,,, #,&,,, 3,&,,, &#,, 11&",, 11&1,,

17

Chapter 2 Partnerships: Organization and Operation 3". For the fiscal year ended ay 31& 2,,%& Ace& 5ay 7 ap /imited /iability artnership had an operating loss of -12,&,,, before recognition of partners' salaries expense. The partnership contract pro$ided for the following: 0alaries of -2,&,,, to Ace& -3,&,,, to 5ay& and -",&,,, to ap& to be recogni*ed as expense by the partnership 5onus of 2,8 of income after the bonus to Ace 6esidual income or loss 2,8 to Ace& #,8 to 5ay& and 3,8 to ap repare Bournal entries 9omit explanations for Ace& 5ay 7 ap /imited /iability artnership on ay 31& 2,,%. Answer: 2,,% ay 31

artners' 0alaries !xpense Ace& apital 5ay& apital ap& apital

+,&,,, 2,&,,, 3,&,,, ",&,,,

31

Ace& apital 9-21,&,,, x ,.2, 5ay& apital 9-21,&,,, x ,.#, ap& apital 9-21,&,,, x ,.3, ncome 0ummary 9-12,&,,, > -+,&,,, 9Cote: the bonus pro$ision does not apply to a loss.

"2&,,, 1,#&,,, %3&,,, 21,&,,,

3#. The partners of 6ann 7 0loe // shared net income and losses in a 3:2 ratio and had capital account balances of -)&,,, and -")&,,,& respecti$ely. Trey was admitted to the partnership with the in$estment of a single proprietorship ha$ing identifiable net assets with a current fair $alue of -"&2#, and was gi$en a one;third interest in the net income or losses and the net assets of the new partnership. repare a Bournal entry to record the admission of Trey to 6ann& 0loe 7 Trey //. Answer: dentifiable Cet Assets oodwill Trey& apital <9-)&,,, > -")&,,, ÷ 2@ To record admission of Trey to partnership.

18

"&2#, 2,&2#, %&#,,


Chapter 2 Partnerships: Organization and Operation 3%. The partners of 5entsen 7 ole // had capital account balances of -"#&,,, and -2#&,,,& respecti$ely. They shared net income and losses in a 3:1 ratio. repare Bournal entries to record the admission of 4ia* to the limited liability partnership under the 91 bonus method& and 92 goodwill method for each of the following assumptions: a. 4ia* in$ested a single proprietorship with identifiable assets ha$ing a current fair $alue of -",&,,, and liabilities ha$ing a current fair $alue of -1,&,,, for a 2#8 interest in the net assets of the partnership. b. 4ia* in$ested a single proprietorship with identifiable assets ha$ing a current fair $alue of -",&,,, and liabilities ha$ing a current fair $alue of -1,&,,, for a 33 1=38 interest in the net assets of the partnership. Answer: a. 91 5onus method: dentifiable Assets /iabilities 5entsen& apital 9-#&,,, x ,.# ole& apital 9-#&,,, x ,.2# 4ia*& apital <9-,&,,, > -3,&,,, x ,.2#@ To record admission of 4ia* to partnership. 92 oodwill method: dentifiable Assets oodwill <9-3,&,,, x " − 9-,&,,, > -3,&,,,@ /iabilities 5entsen& apital 9-2,&,,, x ,.# ole& apital 9-2,&,,, x ,.2# 4ia*& apital 9-",&,,, − -1,&,,, To record admission of 4ia* to partnership. b. 91 5onus method: dentifiable Assets 5entsen& apital 9-3&333 x ,.# ole& apital 9-3&333 x ,.2# /iabilities 4ia*& apital <9-,&,,, > -3,&,,, ÷ 3@ To record admission of 4ia* to partnership. 92 oodwill method: dentifiable Assets oodwill <9-,&,,, ÷ 2=3 − -1,,&,,,@ /iabilities 4ia*& apital 9-3,&,,, > -#&,,, To record admission of 4ia* to partnership. Larsen, Modern Advanced Accounting, Tenth Edition

",&,,, 1,&,,, 3&#, 1&2#, 2#&,,,

",&,,, 2,&,,, 1,&,,, 1#&,,, #&,,, 3,&,,,

",&,,, 2&#,, )33 1,&,,, 33&333

",&,,, #&,,, 1,&,,, 3#&,,, 19


3. n 2,,#& the partners of Hulio 7 Fong // shared net income and losses e(ually& but in 2,,% the income;sharing ratio was changed to %,8 for Hulio and ",8 for Fong. Dn 4ecember 31& 2,,#& in$entories were understated by -12&,,,. Dn 4ecember 31& 2,,%& employees' salaries payable in the amount of -#&",, and short;term prepayments of -2&,, had not been recogni*ed in the accounting records. repare a correcting Bournal entry on 4ecember 31& 2,,%& assuming that the accounting records had been closed for 2,,%. 0how supporting computations. Answer: 0hort;term prepayments Hulio& apital Fong& apital 0alaries ayable To correct accounting records on 4ec. 31& 2,,3. The correction to partners' capital accounts is computed as follows:

2&,, 2&)2, 12, #&",,

'ulio( Capital

n$entories understated by -12&,,,& 4ec. 31& 2,,# n$entories understated by -12&,,,& Han. 1& 2,,% Accrued salaries of -#&",, not recorded& 4ec. 31& 2,,% 0hort;term prepayments of -2&,, not recorded& 4ec. 31& 2,,% Cet corrections to partners' capital accounts

20

- %&,,,

Fong( Capital

- %&,,,

9&2,,

9"&),,

93&2",

92&1%,

1&%2,

1&,),

-92&)2,

-

12,



3). The capital account balances for 6ay 7 6andall // on ay 31& 2,,%& were as follows: 6ay& capital 6andall& capital

-21,&,,, 11,&,,,

6ay and 6andall shared net income and losses in the ratio of 3:2& respecti$ely. The partners agreed to admit Appleton to the partnership with a 3#8 interest in partnership capital and net income. Appleton in$ested -),&,,, cash& and no goodwill was recogni*ed. repare a worEing paper to compute the capital account balance for each partner immediately after Appleton was admitted to 6ay& 6andall 7 Appleton // on ay 31 & 2,,3. Answer: omputations of capital account balances: *ppleton 5alances before Appleton is admitted Admission of Appleton to partnershipObonus method 5alances after Appleton is admitted

%a) Co$ined -21,&,,, -11,&,,,

93%&,,, 92"&,,, -1"&,,, - )%&,,,

-32,&,,, -1",&,,, ),&,,, -1",&,,, -",,&,,,

Case

3+. The balance sheet of !lsa /aing& A 9a single proprietorship had total assets of -2,,&,,,& including unimpaired goodwill of -1#&,,, recogni*ed when /aing had ac(uired the accounting practice of another sole practitioner& and total liabilities of -3,&,,,. n /aing's negotiations with the partners of 5urns 7 4amon // for the ac(uisition of her proprietorship by the limited liability partnership& she insists on a capital account balance of -1+,&,,,& pointing out her higher;than;typical earnings o$er the past fi$e years. artners 6alph 5urns and /inda 4amon maintain that the current fair $alue of /aing's proprietorship identifiable net assets is -1##&,,, 9their carrying amount they offer to admit /aing to 5urns& 4amon 7 /aing // for a capital account balance of -1#&,,,. 4o you support the position of !lsa /aing or of 6alph 5urns and /inda 4amonI !xplain. Answer: The position of 6alph 5urns and /inda 4amon is supportable that of !lsa /aing is not. oodwill is recogni*ed only when one business enterprise ac(uires another enterprise at a cost in excess of the current fair $alue of the ac(uired enterprise's identifia$le net assets. The goodwill carried in /aing's proprietorship's balance sheet Larsen, Modern Advanced Accounting, Tenth Edition

21

Chapter 2 Partnerships: Organization and Operation is an unidentifia$le asset it would ha$e no $alue to 5urns& 4amon 7 /aing //.

22


299904942 Basic Accounting

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