Chapter 14 Partnerships Formation and Operation

Chapter 14 Partnerships: Formation and Operation

File: Chapter 14 Partnerships: Partnerships: Formation and Operation Operation Multiple Choice [QUESTION] 1. Cherryhill and Hace had been partners for several years, and they they decided to admit admit Quincy to the partnership. The accountant for the partnership believed that the dissolved partnership and the newly formed partnership were two separate separate entities. What method would the accountant have used for recording the admission of Quincy to the partnership? A) the bonus bonus method. method. B) the equity equity method. method. C) the goodwil goodwilll method. method. D) the proportionate proportionate method. E) the cost cost method. method. Answer Answer:: C Difficulty: Easy [QUESTION] 2. When When the the hybrid method is used to record the withdrawal of a partner, the partnership A) revalues assets and liabilities and records goodwill goodwill to the continuing continuing partner but not to the withdrawing partner. B) revalues liabilities liabilities but not assets, and no goodwill goodwill is recorded. recorded. C) can recognize goodwill goodwill but does not revalue assets assets and liabilities. liabilities. D) revalues assets but not liabilities, liabilities, and records goodwill to the continuing partner partner but not to the withdrawing partner. E) revalues assets and liabilities liabilities but does not not record goodwill. Answer Answer:: E Difficulty: Easy [QUESTION] 3. The The disadvantages of the partnership form of business organization, compared to corporations, include A) the legal requirements for formation. B) unlimited liability for the partners. C) the requirement for for the partnership to pay income income taxes. D) the extent of governmental governmental regulation. E) the complexity complexity of operations. Answer Answer:: B Difficulty: Easy [QUESTION] 4. The The advantages of the partnership form of business organization, compared to corporations, include A) single single taxation taxation.. B) ease of raising raising capita capital. l. C) mutual mutual agency. agency. D) Limited Limited liabilit liability. y. E) difficult difficulty y of formation. formation. Answer Answer:: A Difficulty: Easy [QUESTION] 5. The The dissolution of a partnership occurs

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A) only when the partnership sells its assets assets and permanently closes its books. B) only when a partner leaves the partnership. C) at the end of each year, when income income is allocated allocated to the partners. partners. D) only when a new partner is admitted to the partnership. partnership. E) when there is any change change in the individuals individuals who make up the partnership. partnership. Answer Answer:: E Difficulty: Easy [QUESTION] 6. The partnership of Clapton, Seidel, and Thomas was insolvent insolvent and will be unable to pay $30,000 in liabilities currently due. What recourse was available to the partnership's partnership's creditors? A) they must present equal claims claims to the three partners as individuals. individuals. B) they must try obtain a payment payment from the partner with the the largest capital account account balance. C) they cannot seek remuneration remuneration from the partners as individuals. individuals. D) they may seek remuneration from any partner they choose. choose. E) they must present their their claims to the three partners in the order of the partners' capital account balances. Answer Answer:: D Difficulty: Easy REFERENCE: Ref. 14_01 Cleary, Wasser, and Nolan formed a partnership on January 1, 2007, with investments of $100,000, $150,000, and $200,000, $200,000, respectively. respectively. For division of income, they agreed to (1) interest of 10% 10% of the beginning capital balance each year, (2) annual compensation of $10,000 to Wasser, and (3) sharing the remainder of the income or loss in a ratio of 20% for Cleary, and 40% each for Wasser and Nolan. Net $180,000 in 2008. Each partner withdrew $1,000 for personal use income was $150,000 in 2007 and $180,000 every month during 2007 and 2008. [QUESTION] REFER TO: Ref.14_01 7. What was Wasser's Wasser's share of income income for 2007? A) $63,000. $63,000. B) $53,000. $53,000. C) $58,000. $58,000. D) $29,000. $29,000. E) $51,000. $51,000. Answer: A Difficulty: Easy [QUESTION] REFER TO: Ref.14_01 8. What was Nolan's Nolan's share of income income for 2007? A) $63,000. $63,000. B) $53,000. $53,000. C) $58,000. $58,000. D) $29,000. $29,000. E) $51,000. $51,000. Answer: C Difficulty: Easy [QUESTION]

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REFER TO: Ref.14_01 9. What was Cleary's share of income for 2007? A) $63,000. B) $53,000. C) $58,000. D) $29,000. E) $51,000. Answer: D Difficulty: Easy [QUESTION] REFER TO: Ref.14_01 10. What was Nolan's capital balance at the end of 2007? A) $200,000. B) $224,000. C) $238,000. D) $246,000. E) $254,000. Answer: D Difficulty: Medium [QUESTION] REFER TO: Ref.14_01 11. What was Wasser's capital balance at the end of 2007? A) $150,000. B) $160,000. C) $165,000. D) $213,000. E) $201,000. Answer: E Difficulty: Medium [QUESTION] REFER TO: Ref.14_01 12. What was Cleary's capital balance at the end of 2007? A) $100,000. B) $117,000. C) $119,000. D) $129,000. E) $153,000. Answer: B Difficulty: Medium [QUESTION] REFER TO: Ref.14_01 13. What was Wasser's share of income for 2008? A) $34,420. B) $75,540. C) $65,540. D) $70,040. E) $61,420.

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Answer: B Difficulty: Medium [QUESTION] REFER TO: Ref.14_01 14. What was Nolan's share of income for 2008? A) $34,420. B) $75,540. C) $65,540. D) $70,040. E) $61,420. Answer: D Difficulty: Medium [QUESTION] REFER TO: Ref.14_01 15. What was Cleary's share of income for 2008? A) $34,420. B) $75,540. C) $65,540. D) $70,040. E) $61,420. Answer: A Difficulty: Medium [QUESTION] REFER TO: Ref.14_01 16. What was Nolan's capital balance at the end of 2008? A) $139,420. B) $246,000. C) $276,540. D) $279,440. E) $304,040. Answer: E Difficulty: Medium [QUESTION] REFER TO: Ref.14_01 17. What was Wasser's capital balance at the end of 2008? A) $201,000. B) $263,520. C) $264,540. D) $304,040. E) $313,780. Answer: C Difficulty: Medium [QUESTION] REFER TO: Ref.14_01 18. What is Cleary's capital account balance at the end of 2008? A) $163,420.

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B) $151,420. C) $139,420. D) $100,000. E) $142,000. Answer: C Difficulty: Medium [QUESTION] 19. Jell and Dell were partners with capital balances of $600 and $800 and an income sharing ratio of 2:3. They admitted Zell to a 30% interest in the partnership, and the total amount of goodwill credited to the original partners was $700. What amount did Zell contribute to the business? A) $560. B) $570. C) $600. D) $590. E) $630. Answer: E Difficulty: Hard REFERENCE: Ref. 14_02 A partnership began its first year of operations with the following capital balances: Young, Capital: $143,000 Eaton, Capital: $104,000 Thurman, Capital: $143,000 The Articles of Partnership stipulated that profits and losses be assigned in the following manner: Young was to be awarded an annual salary of $26,000 with $13,000 salary assigned to Thurman. Each partner was to be attributed with interest equal to 10% of the capital balance as of the first day of the year. The remainder was to be assigned on a 5:2:3 basis, respectively. Each partner was allowed to withdraw up to $13,000 per year. Assume that the net loss for the first year of operations was $26,000 with net income of $52,000 in the second year. Assume further that each partner withdrew the maximum amount from the business each year. [QUESTION] REFER TO: Ref.14_02 20. What was Young's share of income or loss for the first year? A) $3,900 loss. B) $11,700 loss. C) $10,400 loss. D) $24,700 loss. E) $9,100 loss. Answer: B Difficulty: Easy [QUESTION] REFER TO: Ref.14_02 21. What was Eaton's share of income or loss for the first year? A) $3,900 loss. B) $11,700 loss. C) $10,400 loss.

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D) $24,700 loss. E) $9,100 loss. Answer: C Difficulty: Easy [QUESTION] REFER TO: Ref.14_02 22. What was Thurman's share of income or loss for the first year? A) $3,900 loss. B) $11,700 loss. C) $10,400 loss. D) $24,700 loss. E) $9,100 loss. Answer: A Difficulty: Easy [QUESTION] REFER TO: Ref.14_02 23. What was the balance in Young's Capital account at the end of the first year? A) $120,900. B) $118,300. C) $126,100. D) $80,600. E) $111,500. Answer: B Difficulty: Medium [QUESTION] REFER TO: Ref.14_02 24. What was the balance in Eaton's Capital account at the end of the first year? A) $120,900. B) $118,300. C) $126,100. D) $80,600. E) $111,500. Answer: D Difficulty: Medium [QUESTION] REFER TO: Ref.14_02 25. What was the balance in Thurman's Capital account at the end of the first year? A) $120,900. B) $118,300. C) $126,100. D) $80,600. E) $111,500. Answer: C Difficulty: Medium [QUESTION] REFER TO: Ref.14_02

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26. What was Young's share of income or loss for the second year? A) $17,160 income. B) $4,160 income. C) $19,760 income. D) $17,290 income. E) $28,080 income. Answer: E Difficulty: Hard [QUESTION] REFER TO: Ref.14_02 27. What was Eaton's share of income or loss for the second year? A) $17,160 income. B) $4,160 income. C) $19,760 income. D) $17,290 income. E) $28,080 income. Answer: B Difficulty: Hard [QUESTION] REFER TO: Ref.14_02 28. What was Thurman's share of income or loss for the second year? A) $17,160 income. B) $4,160 income. C) $19,760 income. D) $17,290 income. E) $28,080 income. Answer: C Difficulty: Hard [QUESTION] REFER TO: Ref.14_02 29. What was the balance in Young's Capital account at the end of the second year? A) $133,380. B) $84,760. C) $105,690. D) $132,860. E) $71,760. Answer: A Difficulty: Medium [QUESTION] REFER TO: Ref.14_02 30. What was the balance in Eaton's Capital account at the end of the second year? A) $133,380. B) $84,760. C) $105,690. D) $132,860. E) $71,760. Answer: E

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Difficulty: Medium [QUESTION] REFER TO: Ref.14_02 31. What was the balance in Thurman's Capital account at the end of the second year? A) $133,380. B) $84,760. C) $105,690. D) $132,860. E) $71,760. Answer: D Difficulty: Medium [QUESTION] 32. Which of the following is not a characteristic of a partnership? A) The partnership itself pays no income taxes. B) It is easy to form a partnership. C) Any partner can be held personally liable for all debts of the business. D) A partnership requires written Articles of Partnership. E) Each partner has the power to obligate the partnership for liabilities. Answer: D Difficulty: Easy [QUESTION] 33. Partnerships have alternative legal forms including all of the following except: A) Partnership. B) Limited Partnership. C) Subchapter S Corporation. D) Limited Liability Partnership. E) Limited Liability Company. Answer: C Difficulty: Easy [QUESTION] 34. Which of the following type of organization is classified as a partnership, or similar to a partnership, for tax purposes? (I.) Limited Liability Company (II.) Limited Liability Partnership (III.) Subchapter S Corporation A) II only. B) II and III. C) I and II. D) I and III. E) I, II, and III. Answer: E Difficulty: Medium [QUESTION] 35. Which of the following statements is correct regarding the admission of a new partner? A) A new partner must purchase a partnership interest directly from the business. B) The right of co-ownership in the business property can be transferred to a new partner without the

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consent of other existing partners. C) The right to participate in management of the business can be conveyed without the consent of other existing partners. D) The right to share in profits and losses can be sold to a new partner without the consent of other existing partners. E) A new partner always pays book value. Answer: B Difficulty: Medium [QUESTION] 36. Withdrawals from the partnership accounts are typically not used A) to record compensation for work performed in the business. B) to reduce the partners' capital account balances at the end of an accounting period. C) to record interest earned on a partner’s capital balance. D) to reduce the basic investment that has been made in the business.to record a reward for ownership in the partnership. Answer: C Difficulty: Medium [QUESTION] 37. The partnership contract for Hanes and Jones LLP provides that Hanes is to receive a bonus of 20% of net income (after the bonus) and that the remaining net income is to be divided equally. If the partnership income before the bonus for the year is $57,600, Hanes’ share of this pre-bonus income is: A) $28,800. B) $33,600. C) $34,560. D) $43,200. E) $57,600. Answer: B Feedback: Bonus = .20(NI-Bonus)= (.20NI)-(.20Bonus). 1.2Bonus=$11,520. Bonus=$9,600. Remainder to share equally = $48,000. Hanes receives $24,000+$9,600 = $33,600 Difficulty: Medium [QUESTION] 38. The partners of Apple, Bere, and Carroll LLP share net income and losses in a 5:3:2 ratio, respectively. The capital account balances on January 1, 2008, were as follows:

The carrying amounts of the assets and liabilities of the partnership are the same as their current fair values. Dorr will be admitted to the partnership with a 20% capital interest and a 20% share of net income and losses in exchange for a cash investment. The amount of cash that Dorr should invest in the partnership is: A) $25,000. B) $30,000. C) $37,500.

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D) $75,000. E) $90,000. Answer: C Feedback: ($150,000/.8=$187,500. $187,500 – $150,000 = $37,500 to invest) Difficulty: Medium [QUESTION] 39. The appropriate format of the January 31, 2008 closing entry for John & Hope Limited Liability Partnership, whose two partners had withdrawn their salaries from the partnership during January is

A) A Above. B) B Above. C) C Above. D) D Above. Answer: D Difficulty: Medium [QUESTION] 40. When Danny withdrew from John, Daniel, Harry, and Danny LLP, he was paid $80,000, although his capital account balance was only $60,000. The four partners shared net income and losses equally. The journal entry of the partnership to record Danny's withdrawal preferably should include : A) $6,667 debit to John, Capital. B) $6,667 credit to John, Capital. C) $6,667 debit to John, Drawing. D) $5,000 debit to John, Capital. E) $5,000 credit to John, Capital. Answer: A Feedback: ($80,000  $60,000)  3 = $6,667 Difficulty: Medium [QUESTION] 41. Max, Jones and Waters shared profits and losses 20%, 40%, and 40% respectively and their partnership capital balance is $10,000, $30,000 and $50,000 respectively. Max has decided to withdraw from the partnership. An appraisal of the business and its property estimates the fair value to be $ 200,000. Land with a book value of $30,000 has a fair value of $45,000. Max has agreed to receive $20,000 in exchange for her partnership interest. What amount should land be recorded on the partnership books?

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A) $20,000. B) $30,000. C) $45,000. D) $50,000. E) $200,000. Answer: C Feedback: Land will be recorded at the fair value of $45,000 Difficulty: Easy REFERENCE: Ref. 14_03 The capital account balances for Donald & Hanes LLP on January 1, 2008, were as follows:

Donald and Hanes shared net income and losses in the ratio of 3:2, respectively. The partners agreed to admit May to the partnership with a 35% interest in partnership capital and net income. May invested $100,000 cash, and no goodwill was recognized. [QUESTION] REFER TO: Ref.14_03 42. What is the balance of May’s capital account after the new partnership is created? A) $84,000. B) $100,000. C) $140,000. D) $176,000. E) $200,000. Answer: C Difficulty: Medium [QUESTION] REFER TO: Ref.14_03 43. What is the balance of Donald’s capital account after the new partnership is created? A) $84,000. B) $100,000. C) $140,000. D) $176,000. E) $200,000. Answer: D Difficulty: Medium [QUESTION] REFER TO: Ref.14_03 44. What is the balance of Hane’s capital account after the new partnership is created? A) $84,000. B) $100,000. C) $140,000. D) $176,000. E) $200,000. Answer: A

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Difficulty: Medium [QUESTION] REFER TO: Ref.14_03 45. What is the new total balance of the partnership accounts? A) $84,000. B) $140,000. C) $176,000. D) $200,000. E) $400,000. Answer: E Difficulty: Medium [QUESTION] 46. Which of the following could be used as a basis to allocate profits among partners who are active in the management of the partnership? 1) allocation of salaries. 2) the number of years with the partnership. 3) the amount of time each partner works. 4) the average capital invested. A) 1 and 2. B) 1 and 3. C) 1, 2, and 3. D) 1, 3, and 4. E) 1, 2, 3, and 4. Answer: E Difficulty: Easy REFERENCE: Ref.14_04 Peter, Roberts, and Dana have the following capital balances; $80,000, $100,000 and $60,000 respectively. The partners share profits and losses 20%, 40%, and 40% respectively. [QUESTION] REFER TO: Ref.14_04 47. Roberts retires and is paid $160,000 based on the terms of the original partnership agreement. If the goodwill method is used, what is the capital balance of Peter? A) $20,000. B) $60,000. C) $110,000. D) $120,000. E) $230,000. Answer: C Feedback: Roberts receives an additional $60,000 above her capital balance. Since she is assigned 40 percent of all profits and losses, this extra allocation indicates total goodwill of $150,000, which must be split among all partners. 40% of Goodwill = $60,000 .40 G = $60,000 G = $150,000 and Peter receives 20% = $30,000. Peter’s balance = $80,000 + $30,000 = $110,000. Difficulty: Medium

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[QUESTION] REFER TO: Ref.14_04 48. Roberts retires and is paid $160,000 based on the terms of the original partnership agreement. If the goodwill method is used, what is the capital balance of Dana? A) $20,000. B) $60,000. C) $110,000. D) $120,000. E) $230,000. Answer: D Feedback: Roberts receives an additional $60,000 above her capital balance. Since she is assigned 40 percent of all profits and losses, this extra allocation indicates total goodwill of $150,000, which must be split among all partners. 40% of Goodwill = $60,000 .40 G = $60,000 G = $150,000 and Dana receives 40% = $60,000. Dana’s balance = $60,000 + $60,000 = $120,000. Difficulty: Medium [QUESTION] REFER TO: Ref.14_04 49. What is the total partnership capital after Roberts retires receiving $160,000 and using the goodwill method? A) $20,000. B) $60,000. C) $80,000. D) $120,000. E) $230,000. Answer: E Feedback: Roberts receives an additional $60,000 above her capital balance. Since she is assigned 40 percent of all profits and losses, this extra allocation indicates total goodwill of $150,000, which must be split among all partners. 40% of Goodwill = $60,000 .40 G = $60,000 G = $150,000 Total capital is $240,000 + goodwill $150,000 = $390,000. Roberts receives $160,000 and partnership capital is then $390,000-$160,000 = $230,000. Difficulty: Medium REFERENCE: Ref. 14_05 Donald, Anne, and Todd have the following capital balances; $40,000, $50,000 and $30,000 respectively. The partners share profits and losses 20%, 40%, and 40% respectively. [QUESTION] REFER TO: Ref.14_05 50. Anne retires and is paid $80,000 based on the terms of the original partnership agreement. If the goodwill method is used, what is the capital of the remaining partners? A) Donald, $55,000; Todd, $60,000 B) Donald, $40,000; Todd, $30,000 C) Donald, $65,000; Todd, $55,000 D) Donald, $15,000; Todd, $30,000

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Answer: A Feedback: Anne receives an additional $30,000 above her capital balance. Since she is assigned 40 percent of all profits and losses, this extra allocation indicates total goodwill of $75,000, which must be split among all partners. 40% of Goodwill = $30,000 .40 G = $30,000 G = $75,000Donald = 20% Goodwill = $15,000. $40,000 + $15,000 = $55,000. Todd = 40% Goodwill = $30,000. $30,000 + $30,000 = $60,000.

Difficulty: Medium [QUESTION] REFER TO: Ref.14_05 51. Anne retires and is paid $80,000 based on the terms of the original partnership agreement. If the bonus method is used, what is the capital of the remaining partners? A) Donald, $40,000; Todd, $30,000 B) Donald, $30,000; Todd, $10,000 C) Donald, $50,000; Todd, $50,000 D) Donald, $80,000; Todd, $70,000 Answer: B Feedback: The $30,000 bonus is deducted from the remaining partners according to their relative profit and loss ratio. Donald = 20% and Todd = 40% which is a 1/3, 2/3 split. Donald = $40,000 – (1/3 x $30,000) = $30,000. Todd = $30,000 - (2/3 x $30,000) = $10,000. Difficulty: Medium [QUESTION] REFER TO: Ref.14_05 52. What is the total partnership capital after Anne retires receiving $80,000 and using the bonus method? A) $20,000. B) $40,000. C) $60,000. D) $80,000. E) $100,000. Answer: B Difficulty: Medium Essay [QUESTION] 53. What is the dissolution of a partnership? Answer: The dissolution of a partnership is the breakup of the partnership caused by any change in the members that make up the partnership. Difficulty: Easy [QUESTION] 54. By what methods can a person gain admittance to a partnership? Answer: A person can gain admittance to a partnership by purchasing all or part of a current partner's interest or by investing assets in the partnership. Difficulty: Easy [QUESTION]

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55. What events cause the dissolution of a partnership? Answer: The dissolution of a partnership occurs whenever there is a change in the members that make up the partnership. Dissolution does not mean going out of business, although, on occasion, dissolution would be accompanied by liquidation of assets and termination of the business. Dissolution would occur whenever a new partner is admitted to the partnership, dissolving one partnership and forming a new one. Dissolution also occurs when a partner leaves the partnership or when a partner dies or retires. The Articles of Partnership may allow the partners to force dissolution under some circumstances. Difficulty: Easy [QUESTION] 56. For what events or conditions should the Articles of Partnership make provision? Answer: The Articles of Partnership should be a comprehensive document that is fair to all the partners. It should contain the following provisions: (A.) The amounts that will be invested in the partnership by the founding partners. (B.) The amounts of withdrawals that partners can make. Limiting the amount of withdrawals causes the partners to maintain a reasonable investment in the partnership. (C.) The division of income or loss between the partners. (D.) Guidelines for admission of new partners or withdrawal or retirement of partners. (E.) In some cases, guidelines for division of assets when the partnership liquidates. In addition, the Articles of Partnership should specify how much time each partner will spend in the business; the responsibilities of each partner; and procedures for resolution of disputes between partners. Difficulty: Medium [QUESTION] 57. How is accounting for a partnership different from accounting for a corporation? Answer: Financial accounting for a partnership differs from corporate accounting only in accounting for owners' equity. A partnership does not sell capital stock and does not have a retained earnings account. Each partner will have a capital account and a drawing account. On the balance sheet, the balance in each of the partner's capital accounts should be reported. The accountant for a partnership must divide income or loss among partners, following the provisions of the Articles of Partnership . Income tax accounting differs between corporations and partnerships. A corporation is a taxable entity and must file an income tax return. A partnership is not a taxable entity but is required to file an informational return that reports the various amounts of revenues and expenses attributed to each partner. Difficulty: Medium [QUESTION] 58. Why are the terms of the Articles of Partnership important to partners? Answer: The Articles of Partnership contain terms that help to protect the interests of each partner and the longevity and profitability of the business. One of the most important terms in the Articles of Partnership is the provision for division of income or loss. The amount of income or loss assigned to partners affects the balances in their capital accounts and may affect the amount of withdrawals the partners can make and the assets they receive upon the liquidation of the partnership. The terms in the Articles of Partnership help to prevent one partner from taking advantage of other partners. Difficulty: Medium [QUESTION] 59. Brown and Green are forming a business as partners. If they do not create a formal written partnership agreement, what risks are they exposing themselves to? Answer: The Articles of Partnership should help every partner protect his or her interests. Because of mutual agency and unlimited liability, being a partner involves some risk. If a partnership becomes insolvent, any or all of the partners may be required to use personal assets to settle partnership liabilities.

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The Articles of Partnership can require each partner to maintain his or her investment in the partnership and to meet other responsibilities, such as working in the business. With a formal written agreement, each partner would have recourse if another partner does not fulfill the terms in the Articles of Partnership. Difficulty: Medium [QUESTION] 60. What theoretical argument could be made against the recognition of goodwill when there is a change in the ownership of a partnership? Answer: Goodwill should be recognized only when a business is purchased in an arms-length transaction — a transaction between independent parties. Generally, partners are not independent parties. Transactions between partners or between a partner and the partnership may be influenced by factors other than fair value and bargaining between independent parties. For example, if one partner has been causing trouble for a partnership, the other partners might agree to pay more than fair value to convince that partner to leave the business. The amount of goodwill that could be calculated for such a transaction would not be an indication of the fair value of the business. Difficulty: Medium [QUESTION] 61. Under what circumstances does a partner's balance in his or her capital account have practical consequences for the partner? Answer: The most direct practical consequence of a partner's capital account balance occurs when the partnership is liquidated. After assets are sold and liabilities are paid, each partner receives the balance in his or her capital account. The balance in the capital account may also influence the division of income or loss each year and could affect the amount of cash each partner is allowed to withdraw from the partnership. Difficulty: Easy [QUESTION] 62. Reed, Sharp, and Tucker were partners with capital account balances of $80,000, $100,000, and $70,000, respectively. They agreed to admit Upton to the partnership. Upton purchased 30% of each partner's interest, with payments to Reed, Sharp, and Tucker of $32,000, $40,000, and $28,000, respectively. Before the admission of Upton, the profit and loss sharing ratio was 2:3:2. The partners agreed to use the bonus method to account for the admission of Upton to the partnership. Required: Prepare the journal entry to record the admission of Upton to the partnership. Answer: Reed, Capital 24,000 Sharp, Capital 30,000 Tucker, Capital 21,000 Upton, Capital 75,000 Difficulty: Medium [QUESTION] 63. Jipsom and Klark were partners with capital account balances of $80,000 and $100,000, respectively. Looney paid $32,000 to Jipsom and $40,000 to Klark for 30% of their interests in the partnership. Jipsom and Klark shared income in the ratio of 2:3. They believed that revaluation of the partnership was appropriate when a new partner was admitted. Required: Prepare the journal entries to record the admission of Looney to the partnership. Answer:

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Goodwill Jipsom, Capital Klark, Capital

60,000

Jipsom, Capital Klark, Capital Looney, Capital Difficulty: Hard

31,200 40,800

24,000 36,000

72,000

REFERENCE: Ref 14_06 Norr and Caylor established a partnership on January 1, 2007. Norr invested cash of $100,000 and Caylor invested $30,000 in cash and equipment with a book value of $40,000 and fair value of $50,000. For both partners, the beginning capital balance was to equal the initial investment. Norr and Caylor agreed to the following procedure for sharing profits and losses: - 12% interest on the yearly beginning capital balance - $10 per hour of work that can be billed to the partnership's clients - the remainder divided in a 3:2 ratio The Articles of Partnership specified that each partner should withdraw no more than $1,000 per month. For 2007, the partnership's income was $70,000. Norr had 1,000 billable hours, and Caylor worked 1,400 billable hours. In 2008, the partnership's income was $24,000, and Norr and Caylor worked 800 and 1,200 billable hours respectively. Each partner withdrew $1,000 per month throughout 2007 and 2008. [QUESTION] REFER TO: Ref. 14_06 64. Determine the amount of income allocated to each partner for 2007. Answer: Distribution of income for 2007:

Interest Compensation Subtotals Allocation of remainder Totals

Norr $ 12,000 10,000 $ 22,000 14,640 $ 36,640

Cay or $ 9,600 14,000 $ 23,600 9,760 $ 33,360

Tota $ 21,600 24,000 $ 45,600 24,400 $ 70,000 Difficulty:

Medium

[QUESTION] REFER TO: Ref. 14_06 65. Determine the balance in both capital accounts at the end of 2007. Answer: Capital account balances at the end of 2007:

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Beginning capital balances Share of income Withdrawals Ending capital balances

Norr $ 100,000 36,640 ( 12,000) $ 124,640

Cay or $ 80,000 33,360 ( 12,000) $ 101,360

Difficulty: Medium [QUESTION] REFER TO: Ref. 14_06 66. Determine the amount of income allocated to each partner for 2008 to the nearest dollar. Answer: Distribution of income for 2008:

Interest Compensation Subtotals Allocation of remainder Totals

Norr $ 14,957 8,000 $ 22,957 ( 13,872) $ 9,085

Caylor $ 12,163 12,000 $ 24,163 ( 9,248) $ 14,915

Total $ 27,120 20,000 $ 47,120 ( 23,120) $ 24,000

Difficulty: Medium [QUESTION] REFER TO: Ref. 14_06 67. Determine the balance in both capital accounts at the end of 2008 to the nearest dollar. Answer: Capital account balances at the end of 2008:

Beginning capital balances Share of income Withdrawals Ending capital balances

Norr $ 124,640 9,085 ( 12,000) $ 121,725

Caylor $ 101,360 14,915 ( 12,000) $ 104,275

Difficulty: Medium REFERENCE: Ref. 14_07

Cash and current assets Land Building and equipment

Total

$

39,000 234,000 130,000

$ 403,000

Liabilities Adams, capital Barnes, capital Cordas, capital Davis, capital Total

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$

52,000 26,000 52,000 117,000 156,000 $ 403,000


[QUESTION] REFER TO: Ref. 14_07 68. Eden contributes $49,000 into the partnership for a 25% interest. The four original partners share profits and losses equally. Using the bonus method, determine the balances for each of the five partners after Eden joins the partnership. Answer: Eden's contribution of $49,000 into the partnership, raises the total partnership net assets to $400,000. Eden's capital account is credited, by agreement, for 25% of the partnership's total tangible assets, or $100,000. The journal entry to record the admission of Eden is: Cash 49,000 Adams, Capital 12,750 Barnes, Capital 12,750 Cordas, Capital 12,750 Davis, Capital 12,750 Eden, Capital 100,000 The capital balances of each of the five partners after Eden’s entry into the partnership are as follows:

Adams, Capital Barnes, Capital Cordas, Capital Davis, Capital Eden, Capital Difficulty: Medium

$ 13,250 $ 39,250 $104,250 $143,250 $100,000

[QUESTION] REFER TO: Ref. 14_07 69. Eden contributed $124,000 in cash to the business to receive a 20% interest in the partnership. Goodwill was to be recorded. The four original partners shared all profits and losses equally. After Eden made his investment, what were the individual capital balances? Answer: Eden's contribution of $124,000 to the partnership increases the partnership's net assets to $475,000. The implied value of the partnership is $620,000 ($124,000 ÷ 20%). Goodwill of $145,000 ($620,000 $475,000) resulted from this transaction. The first entry requires that the goodwill be allocated to each of the original four partners according to their profit and loss sharing percentages. As indicated in the problem, the four original partners share profits and losses equally. Goodwill Adams, Capital Barnes, Capital Cordas, Capital Davis, Capital

145,000 36,250 36,250 36,250 36,250

After allocating the goodwill to each of the original four partners, their partnership capital balances are as follows:

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Adams, Capital Barnes, Capital Cordas, Capital Davis, Capital

$ 62,250 88,250 153,250 192,250

The second step is to record Eden’s cash contribution and to record Eden’s capital account balance: Cash Eden, Capital

124,000 124,000

Difficulty: Medium [QUESTION] REFER TO: Ref. 14_07 70. Eden acquired a 20% interest in the partnership by contributing a total of $71,500 directly to the other four partners. No goodwill is to be recorded. Profits and losses have previously been split according to the following percentages: Adams, 15%, Barnes, 35%, Cordas, 30%, and Davis, 20%. After Eden made his investment, what were the individual capital balances? Answer: The partnership's total net assets are still $351,000, because Eden's $71,500 went to the partners. Using the book value method, each of the original partners will give up 20% of their current capital balance to Eden. The journal entry is:

Adams, Capital Barnes, Capital Cordas, Capital Davis, Capital Eden, Capital

5,200 10,400 23,400 31,200 70,200

The partners’ balances following the admission of Eden are: Adams, Capital Barnes, Capital Cordas, Capital Davis, Capital Eden, Capital

$ 20,800 41,600 93,600 124,800 70,200

Difficulty: Medium [QUESTION] REFER TO: Ref. 14_07 71. Eden acquired a 20% interest in the partnership by contributing a total of $71,500 directly to the other four partners. Goodwill is to be recorded. Profits and losses have previously been split according to the following percentages: Adams, 15%, Barnes, 35%, Cordas, 30%, and Davis, 20%. After Eden made his investment, what were the individual capital balances? Answer: Eden's contribution of $71,500 will go to the original four partners, not into the partnership. Therefore, the partnership's total net assets remain $351,000. The implied value of the partnership, based on Eden's

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contribution, is $357,500 ($71,500 ÷ 20%). Goodwill arising out of this transaction is $6,500. First, the goodwill should be allocated to each of the original four partners:

Goodwill Adams, Capital Barnes, Capital Cordas, Capital Davis, Capital

6,500 975 2,275 1,950 1,300

The adjusted balances for the four original partners, after allocating goodwill, are: Adams, Capital Barnes, Capital Cordas, Capital Davis, Capital

$ 26,975 54,275 118,950 157,300

The next step is to allocate 20% of each of the original partners’ balances to Eden: Adams, Capital Barnes, Capital Cordas, Capital Davis, Capital Eden, Capital

5,395 10,855 23,790 31,460 71,500

The partners’ capital balances after admitting Eden are: Adams, Capital Barnes, Capital Cordas, Capital Davis, Capital Eden, Capital

$ 21,580 43,420 95,160 125,840 71,500

Difficulty: Medium REFERENCE: Ref. 14_08 Assume the partnership of Dean, Hardin, and Roth has been in existence for a number of years. Dean decides to withdraw from the partnership when the partners' capital balances are as follows:

Partner Dean Hardin Roth

Capital Balance $60,000 15,000 25,000

Profit and Loss Ratio 40% 30% 20%

An appraisal of the business and its property estimates the fair value to be $ 100,000. Dean has agreed to receive $64,000 in exchange for his partnership interest.

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[QUESTION] REFER TO: Ref. 14_08 72. Prepare the journal entry for the payment to Dean in the dissolution of his partnership interest, assuming the bonus method is to be applied. Answer: Dean, Capital Hardin, Capital Roth, Capital Cash

60,000 2,400 1,600 64,000

Difficulty: Medium [QUESTION] REFER TO: Ref. 14_08 73. What are the remaining partners' capital balances after Dean's interest is dissolved, assuming the bonus method is applied? Answer: Hardin: $12,600 Roth: 23,400 Difficulty: Medium REFERENCE: Ref. 14-09 Assume the partnership of Howell, Madrid, and Waldrop has been in existence for a number of years. Howell decides to withdraw from the partnership when the partners' capital balances are as follows:

Partner Howell Madrid Waldrop

Capital Balance $ 60,000 15,000 25,000

Profit and Loss Ratio 4 3 2

An appraisal of the business and its net assets estimates the fair value to be $154,000. Land with a book value of $20,000 has a fair value of $35,000. Howell has agreed to receive $84,000 in exchange for her partnership interest. [QUESTION] REFER TO: Ref. 14-09 74. Prepare the journal entries for the dissolution of Howell's partnership interest, assuming the goodwill method is to be applied. Answer: Land Goodwill Howell, Capital Madrid, Capital Waldrop, Capital Howell, Capital Cash

15,000 39,000 24,000 18,000 12,000 84,000 84,000

Difficulty: Medium

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[QUESTION] REFER TO: Ref. 14_09 75. What are the remaining partners' capital balances after Howell's interest is dissolved, assuming the goodwill method is applied? Answer: Madrid: 33,000; Waldrop: 37,000 Difficulty: Medium REFERENCE: Ref. 14-10 On January 1, 2008, Lamb and Mona LLP admitted Noris to a 20% interest in net assets for an investment of $50,000 cash. Prior to the admission of Noris, Lamb and Mona had net assets of $100,000 and an income-sharing ratio of Lamb  25%, Mona 75%. After the admission of Noris, the partnership contract included the following provisions: Salary of $40,000 a year to Noris. Remaining net income in ratio Lamb 20%, Mona 60%, Noris 20% During the fiscal year ended December 31, 2008, the partnership had income of $90,000 prior to recognition of salary to Noris. [QUESTION] REFER TO: Ref. 14_10 76. Record the journal entry for the admission of Noris. Goodwill is not to be recorded. Answer: Cash 50,000 Lamb, Capital ($20,000 x 0.25) 5,000 Mona, Capital ($20,000 x 0.75) 15,000 Norris, Capital ($150,000 x 0.20) 30,000 Difficulty: Easy

[QUESTION] REFER TO: Ref. 14_10 77. Record the journal entry to allocate the salary of Noris. Answer: Income Summary 40,000 Noris, Capital

40,000

Difficulty: Easy

[QUESTION] REFER TO: Ref. 14_10 78. Record the journal entry to record the net income to the capital accounts Answer: 50,000 Income Summary ($90,000  $40,000) Lamb, Capital ($50,000 x 0.20) 10,000 Mona, Capital ($50,000 x 0.60) 30,000 Noris, Capital ($50,000 x 0.20) 10,000 Difficulty: Easy

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[QUESTION] 79. James, Keller, and Rivers have the following capital balances; $48,000, $70,000 and $90,000 respectively. Because of a cash shortage James invests an additional $12,000 on June 1st. Each partner withdraws $1,000 per month. James, Keller, and Rivers receive a salary of $13,000, $15,000 and $20,000, respectively, for work done during the year. Each partner receives interest of 8% on their weighted average capital balance without regard to normal drawings. Any remaining profits are split 20%, 30%, and 50% respectively. The net income for the year is $30,000. What are the ending capital balances for each partner? Answer: James Keller Rivers Totals Interest (8%) $ 4,400 (below) $ 5,600 $ 7,200 $ 17,200 Salary 13,000 15,000 20,000 48,000 Remaining income (loss): $ 30,000 (17,200) (48,000) $(35,200) (7,040) Totals

$ 10,360

(10,560) $ 10,040

(17,600) $ 9,600

(35,200) $

30,000

CALCULATION OF JAMES INTEREST ALLOCATION Balance, January 1 - June 1 ($48,000 x 5 months) Balance, June 1 - December 31 ($60,000 x 7 months) Total ....................................................................................... Months .................................................................................... Average monthly capital balance ........................................... Interest rate ............................................................................ Interest allocation (above).......................................................

$240,000 420,000 $660,000 12  $ 55,000 x 8% $ 4,400

STATEMENT OF PARTNERS' CAPITAL James Keller Rivers Beginning balances ............... $48,000 $70,000 $90,000 Additional contribution ......... 12,000 0 0 Income (above) ...................... 10,360 10,040 9,600 Drawings ($1,000 per month) (12,000) (12,000) (12,000) Ending capital balances.......... $58,360 $68,040 $87,600 Difficulty: Hard

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Totals $208,000 12,000 30,000 (36,000) $214,000

Chapter 14 Partnerships Formation and Operation

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