CHAPTER 12 ACCOUNTING FOR PARTNERSHIPS SUMMARY OF QUESTIONS BY STUDY OBJECTIVES AND BLOOM’S TAXONOMY Item
SO
BT
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SO
BT
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SO
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SO
BT
Item
SO
BT
5 6 6 6 6 7 1 1
K K C C C C K K
sg
2 3 5 6 7
K C K K K
107. 108. 109. 110. 111. 112. a 113. a 114. a 115. a 116. a 117. a 118. a 119. a 120. a 121. a 122. a 123. a 124. a 125. a 126. a 127. a 128. a 129.
5 5 5 5 5 5 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6
K C AP AP AP AP AP AP AP AP AP AP AP AP C C AP AP AP C C C K
6 6 7 7 7 7 7 7 7 1 1 2 3 3 5 5 5 5 6 6
C C AP AP C K AP AP AP K C K C K K K K K C AP
a
6 6
AP AP
7 7
AP AP
True-False Statements 1. 2. 3. 4. 5. 6. 7. 8.
1 1 1 1 1 2 2 2
K K K K K K AP K
9. 10. 11. 12. 13. 14. 15. 16.
2 2 2 2 2 2 2 3
C C K K K K C K
17. 18. 19. 20. 21. 22. 23. 24.
3 3 4 4 4 4 4 5
K K C C K K K K
25. a 26. a 27. a 28. a 29. a 30. sg 31. sg 32.
33. 34. sg 35. sg,a 36. sg,a 37. sg
Multiple Choice Questions 38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57. 58. 59. 60.
1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 2 2 2 2 2
K K K K K K K K K K K K K K C K K K K AP AP AP K
61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77. 79. 79. 80. 81. 82. 83.
2 2 2 2 2 2 2 2 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3
C K K C AP AP AP AP AP AP AP AP C K K AP C C C C AP AP AP
84. 85. 86. 87. 88. 89. 90. 91. 92. 93. 94. 95. 96. 97. 98. 99. 100. 101. 102. 103. 104. 105. 106.
4 4 4 4 4 4 4 4 4 4 4 5 5 5 5 5 5 5 5 5 5 5 5
K K K C AP AP AP AP K K K K K K AP AP AP AP K C K K K
a
130. 131. a 132. a 133. a 134. a 135. a 136. a 137. a 138. st 139. sg 140. st 141. sg 142. st 143. sg 144. st 145. sg 146. st 147. sg,a 148. sg.a 149. a
Brief Exercises 150. 151. sg st a
2 2
AP AP
152. 153.
3 4
AP AP
154. 155.
5 5
AP AP
156. 167.
a
This question also appears in the Study Guide. This question also appears in a self-test at the student companion website. This question covers a topic in an appendix to the chapter.
a
158. 159.
a
12 - 2
Test Bank for Accounting Principles, Eighth Edition
SUMMARY OF QUESTIONS BY STUDY OBJECTIVES AND BLOOM’S TAXONOMY Exercises 160. 161. 162. 163.
2 2 3 3
AP AP AP AP
164. 165. 166. 167.
3 3 3 3,4
AP AP AP AP
180. 181. 182.
1 1 1
K K K
183. 184. 185.
3 3 3
K K K
168. 169. 170. 171.
5 5 5 5
AP AP AP AP
172. 173. a 174. a 175.
5 3 6 6
AP AP AP AP
6 6 6
K K K
a
176. 177. a 178. a 179. a
6 6 7 7
AP AP AP AP
Item
Type
184. 185. 186.
C C C
171. 172. 187. 188.
Ex Ex C C
Completion Statements 186. 187. 188.
3 5 5
K K K
a
189. 190. a 191. a
SUMMARY OF STUDY OBJECTIVES BY QUESTION TYPE Item
Type
Item
Type
Item
1. 2. 3. 4. 5.
TF TF TF TF TF
31. 32. 38. 39. 40.
TF TF MC MC MC
41. 42. 43. 44. 45.
6. 7. 8. 9. 10.
TF TF TF TF TF
11. 12. 13. 14. 15.
TF TF TF TF TF
33. 56. 57. 58. 59.
16. 17. 18. 34. 69.
TF TF TF TF MC
70. 71. 72. 73. 74.
MC MC MC MC MC
75. 76. 77. 78. 79.
19. 20. 21.
TF TF TF
22. 23. 84.
TF TF MC
85. 86. 87.
24. 25. 35. 95. 96.
TF TF TF MC MC
97. 98. 99. 100. 101.
MC MC MC MC MC
102. 103. 104. 105. 106.
Type
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Type
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Study Objective 1 MC 46. MC 51. MC 47. MC 52. MC 48. MC 53. MC 49. MC 54. MC 50. MC 55. Study Objective 2 TF 60. MC 65. MC 61. MC 66. MC 62. MC 67. MC 63. MC 68. MC 64. MC 141. Study Objective 3 MC 80. MC 143. MC 81. MC 152. MC 82. MC 162. MC 83. MC 163. MC 142. MC 164. Study Objective 4 MC 88. MC 91. MC 89. MC 92. MC 90. MC 93. Study Objective 5 MC 107. MC 112. MC 108. MC 144. MC 109. MC 145. MC 110. MC 146. MC 111. MC 147.
Type
Item
Type
MC MC MC MC MC
139. 140. 180. 181. 182.
MC MC C C C
MC MC MC MC MC
150. 151. 160. 161.
BE BE Ex Ex
MC BE Ex Ex Ex
165. 166. 167. 173. 183.
Ex Ex Ex Ex C
MC MC MC
94. 153. 167.
MC BE Ex
MC MC MC MC MC
154. 155. 168. 169. 170.
BE BE Ex Ex Ex
Accounting for Partnerships
12 - 3
SUMMARY OF STUDY OBJECTIVES BY QUESTION TYPE a
26. 27. a 28. a 29. a 36.
TF TF TF TF TF
a
113. 114. a 115. a 116. a 117.
MC MC MC MC MC
a
a
TF TF
a
MC MC
a
a
30. 37.
a
a
132. 133.
a
118. 119. a 120. a 121. a 122. a
134. 135.
a
Note: TF = True-False MC = Multiple Choice
Study Objective a6 MC a123. MC a128. MC a124. MC a129. MC a125. MC a130. MC a126. MC a131. MC a127. MC a148. Study Objective a7 MC a136. MC a138. MC a137. MC a158.
MC MC MC MC MC
a
149. 156. 157. a 174. a 175.
MC BE BE Ex Ex
a
176. 177. a 189. a 190. a 191.
Ex Ex C C C
MC BE
a
BE Ex
a
Ex
BE = Brief Exercise Ex = Exercise
159. 178.
a
a
179.
C = Completion
The chapter also contains one set of ten Matching questions and four Short-Answer Essay questions.
CHAPTER STUDY OBJECTIVES 1. Identify the characteristics of the partnership form of business organization. The principal characteristics of a partnership are: (a) association of individuals, (b) mutual agency, (c) limited life, (d) unlimited liability, and (e) co-ownership of property. 2. Explain the accounting entries for the formation of a partnership. When formed, a partnership records each partner's initial investment at the fair market value of the assets at the date of their transfer to the partnership. 3. Identify the bases for dividing net income or net loss. Partnerships divide net income or net loss on the basis of the income ratio, which may be (a) a fixed ratio, (b) a ratio based on beginning or average capital balances, (c) salaries to partners and the remainder on a fixed ratio, (d) interest on partners' capital and the remainder on a fixed ratio, and (e) salaries to partners, interest on partners' capital, and the remainder on a fixed ratio. 4. Describe the form and content of partnership financial statements. The financial statements of a partnership are similar to those of a proprietorship. The principal differences are: (a) The partnership shows the division of net income on the income statement. (b) The owners' equity statement is called a partners' capital statement. (c) The partnership reports each partner's capital on the balance sheet. 5. Explain the effects of the entries to record the liquidation of a partnership. When a partnership is liquidated, it is necessary to record the (a) sale of noncash assets, (b) allocation of the gain or loss on realization, (c) payment of partnership liabilities, and (d) distribution of cash to the partners on the basis of their capital balances. a
6. Explain the effects of the entries when a new partner is admitted. The entry to record the admittance of a new partner by purchase of a partner's interest affects only partners' capital accounts. The entries to record the admittance by investment of assets in the partnership (a) increase both net assets and total capital and (b) may result in recognition of a bonus to either the old partners or the new partner.
12 - 4
Test Bank for Accounting Principles, Eighth Edition
a
7. Describe the effects of the entries when a partner withdraws from the firm. The entry to record a withdrawal from the firm when the partners pay from their personal assets affects only partners' capital accounts. The entry to record a withdrawal when payment is made from partnership assets (a) decreases net assets and total capital and (b) may result in recognizing a bonus either to the retiring partner or the remaining partners.
TRUE-FALSE STATEMENTS 1.
The personal assets, liabilities, and personal transactions of partners are excluded from the accounting records of the partnership.
2.
The act of any partner is binding on all other partners if the act appears to be appropriate for the partnership.
3.
A major advantage of the partnership form of organization is that the partners have unlimited liability.
4.
Partnership creditors may have a claim on the personal assets of any of the partners if the partnership assets are not sufficient to settle claims.
5.
The partnership agreement between partners must be in writing.
6.
If a partner invests noncash assets in a partnership, they should be recorded by the partnership at their fair market value.
7.
L. Hill invests the following assets in a new partnership: $15,000 in cash, and equipment that cost $30,000 but has a book value of $17,000 and fair market value of $20,000. Hill, Capital will be credited for $32,000.
8.
Two proprietorships cannot combine and form a partnership.
9.
If a partner's investment in a partnership consists of equipment that has accumulated depreciation of $8,000, it would not be appropriate for the partnership to record the accumulated depreciation.
10.
If a partner's investment in a partnership consists of Accounts Receivable of $25,000 and an Allowance for Doubtful Accounts of $7,000, it would not be appropriate for the partnership to record the Allowance for Doubtful Accounts.
11.
Unless stated otherwise in the partnership contract, profits and losses are shared among the partners in the ratio of their capital equity balances.
12.
If salary allowances and interest on capital are stipulated in the partnership profit and loss sharing agreement, they are implemented only if income is sufficient to cover the amounts required by these features.
13.
Unless the partnership agreement specifically indicates an income ratio, partnership net income or loss is not allocated to the partners.
Accounting for Partnerships
12 - 5
14.
Partnership income or loss need not be closed to partners' capital accounts each period because of the unlimited life characteristic of partnerships.
15.
If a partnership has a loss for the period, the closing entry to transfer the loss to the partners will require a credit to the Income Summary account.
16.
The partners' drawing accounts are closed each period into the Income Summary account.
17.
Salary allowances to partners are a major expense on most partnership income statements.
18.
An interest allowance in sharing partnership net income (or net loss) is related to the amount of partners' invested capital during the period.
19.
The financial statements of a partnership are similar to those of a proprietorship.
20.
The income earned by a partnership will always be greater than the income earned by a proprietorship because in a partnership there is more than one owner contributing to the success of the business.
21.
The function of the Partners' Capital Statement is to explain the changes in partners' capital account balances during a period.
22.
A detailed listing of all the assets invested by a partner in a partnership appears on the Partners' Capital Statement.
23.
Total partners' equity of a partnership is equal to the sum of all partners' capital account balances.
24.
The distribution of cash to partners in a partnership liquidation is always made based on the partners' income sharing ratio.
25.
The liquidation of a partnership means that a new partner has been admitted to the partnership.
a
The admission of a new partner results in the legal dissolution of the existing partnership and the beginning of a new partnership.
a
If a new partner is admitted into a partnership by investment, the total assets and total capital will change.
a
A bonus to old partners results when the new partner's capital credit on the date of admittance is greater than his or her investment in the firm.
a
If a new partner invests in a partnership at book value and acquires a 1/4 interest in total partnership capital, it indicates that a bonus was paid to the original partners.
a
A bonus to the remaining partners results when a retiring partner receives partnership assets which are less than his or her capital balance on the date of withdrawal.
26.
27.
28.
29.
30.
12 - 6
Test Bank for Accounting Principles, Eighth Edition
Additional True-False Questions 31.
A partnership is an association of no more than two persons to carry on as co-owners of a business for profit.
32.
Once assets have been invested in the partnership, they are owned jointly by all partners.
33.
Each partner's initial investment in a partnership should be recorded at book value.
34.
Partnership income is shared in proportion to each partner's capital equity interest unless the partnership contract specifically indicates the manner in which net income or net loss is to be divided.
35.
In a liquidation, the final distribution of cash to partners should be on the basis of their income ratios.
36.
In an admission of a partner by investment of assets, the total net assets and total capital of the partnership do not change.
a
The withdrawal of a partner legally dissolves the partnership.
a
37.
Answers to True-False Statements Item
1. 2. 3. 4. 5. 6.
Ans.
T T F T F T
Item
7. 8. 9. 10. 11. 12.
Ans.
F F T F F F
Item
13. 14. 15. 16. 17. 18.
Ans.
F F T F F T
Item
19. 20. 21. 22. 23. 24.
Ans.
Item
Ans.
Item
Ans.
T F T F T F
25. a 26. a 27. a 28. a 29. a 30.
F T T F F T
31. 32. 33. 34. 35. a 36.
F T F F F F
Item a
37.
MULTIPLE CHOICE QUESTIONS 38.
A hybrid form of business organization with certain features like a corporation is a(n) a. limited liability partnership. b. limited liability company. c. "S" corporation. d. sub-chapter "S" corporation.
39.
A partnership a. has only one owner. b. pays taxes on partnership income. c. must file an information tax return. d. is not an accounting entity for financial reporting purposes.
40.
A general partner in a partnership a. has unlimited liability for all partnership debts. b. is always the general manager of the firm. c. is the partner who lacks a specialization. d. is liable for partnership liabilities only to the extent of that partner's capital equity.
Ans.
T
Accounting for Partnerships
12 - 7
41.
The individual assets invested by a partner in a partnership a. revert back to that partner if the partnership liquidates. b. determine that partner's share of net income or loss for the year. c. are jointly owned by all partners. d. determine the scope of authority of that partner.
42.
Which one of the following would not be considered a disadvantage of the partnership form of organization? a. Limited life b. Unlimited liability c. Mutual agency d. Ease of formation
43.
The partnership form of business is a. restricted to law and medical practices. b. restricted to firms having fewer than 10 partners. c. not restricted to any particular type of business. d. most often used in relatively large companies.
44.
Which of the following is not a principal characteristic of the partnership form of business organization? a. Mutual agency b. Association of individuals c. Limited liability d. Limited life
45.
The partnership agreement should include each of the following except the a. date of the partnership inception. b. principal location of the firm. c. surviving family members in the event of a partner's death. d. Each of these should be included.
46.
Which of the following statements is true regarding the form of a legally binding partnership contract? a. The partnership contract must be in writing. b. The partnership contract may be based on a handshake. c. The partnership contract may be implied. d. The partnership contract cannot be oral.
47.
Which of the following statements about a partnership is correct? a. The personal assets of a partner are included in the partnership accounting records. b. A partnership is not required to file an information tax return. c. Each partner's share of income is taxable to the partnership. d. A partnership represents an accounting entity for financial reporting purposes.
48.
In a partnership, mutual agency means a. each partner acts on his own behalf when engaging in partnership business. b. the act of any partner is binding on all other partners, only if partners act within their cope of authority. c. an act by a partner is judged as binding on other partners depending on whether the act appears to be appropriate for the partnership. d. that partners must pay taxes on a mutual or combined basis.
12 - 8
Test Bank for Accounting Principles, Eighth Edition
49.
A partnership a. is dissolved only by the withdrawal of a partner. b. is dissolved upon the acceptance of a new partner. c. dissolution means the business must liquidate. d. has unlimited life.
50.
The partner in a limited partnership that has unlimited liability is referred to as the a. lead partner. b. head partner. c. general partner. d. unlimited partner.
51.
Limited partnerships a. must have at least one general partner. b. guarantee that a partner will receive a return. c. guarantee that a partner will get back his original investment. d. are limited to only three partners.
52.
The Maris-Crane partnership is terminated when creditor claims exceed partnership assets by $40,000. Crane is a millionaire and Maris has no personal assets. Maris' partnership interest is 75% and Crane's is 25%. Creditors a. must collect their claims equally from Maris and Crane. b. may collect the entire $40,000 from Crane. c. must collect their claims 75% from Maris and 25% from Crane. d. may not require Crane to use his personal assets to satisfy the $40,000 in claims.
53.
Which of the following statements about partnerships is incorrect? a. Partnership assets are co-owned by partners. b. If a partnership is terminated, the assets do not legally revert to the original contributor. c. If the partnership agreement does not specify the manner in which net income is to be shared, it is distributed according to capital contributions. d. Each partner has a claim on assets equal to the balance in the partner's capital account.
54.
Which of the following is not an advantage of the partnership form of business? a. Mutual agency b. Ease of formation c. Ease of decision making d. Freedom from governmental regulations and restrictions
55.
The largest companies in the United States are primarily organized as a. limited partnerships. b. partnerships. c. corporations. d. proprietorships.
56.
The basis for dividing partnership net income or net loss is referred to as any of the following except the a. income ratio. b. income and loss ratio. c. profit and loss ratio. d. income sharing ratio.
Accounting for Partnerships
12 - 9
57.
Which of the following statements is incorrect regarding partnership agreements? a. It may be referred to as the “articles of co-partnership.” b. Oral agreements are preferable to written articles. c. It should specify the different relationships that are to exist among the partners. d. It should state procedures for submitting disputes to arbitration.
58.
Norton invests personally owned equipment, which originally cost $110,000 and has accumulated depreciation of $30,000 in the Norton and Kennett partnership. Both partners agree that the fair market value of the equipment was $60,000. The entry made by the partnership to record Norton's investment should be a. Equipment ............................................................................ 110,000 Accumulated Depreciation—Equipment...................... 30,000 Norton, Capital............................................................. 80,000 b. Equipment ............................................................................ 80,000 Norton, Capital............................................................. 80,000 c. Equipment ............................................................................ 60,000 Loss on Purchase of Equipment .......................................... 20,000 Accumulated Depreciation—Equipment............................... 30,000 Norton, Capital............................................................. 110,000 d. Equipment ............................................................................ 60,000 Norton, Capital............................................................. 60,000
59.
Partner B is investing in a partnership with Partner A. B contributes as part of his initial investment, Accounts Receivable of $80,000; an Allowance for Doubtful Accounts of $12,000; and $8,000 cash. The entry that the partnership makes to record B's initial contribution includes a a. credit to B, Capital for $88,000. b. debit to Accounts Receivable for $68,000. c. credit to B, Capital for $76,000. d. debit to Allowance for Doubtful Accounts for $12,000.
60.
Which of the following would not be recorded in the entry for the formation of a partnership? a. Accumulated depreciation b. Allowance for doubtful accounts c. Accounts receivable d. All of these would be recorded.
61.
Bob is investing in a partnership with Jerry. Bob contributes equipment that originally cost $63,000, has a book value of $30,000, and a fair market value of $39,000. The entry that the partnership makes to record Bob's initial contribution includes a a. debit to Equipment for $33,000. b. debit to Equipment for $63,000. c. debit to Equipment for $39,000. d. credit to Accumulated Depreciation for $33,000.
62.
A partner contributes, as part of her initial investment, accounts receivable with an allowance for doubtful accounts. Which of the following reflects a proper treatment?
12 - 10 Test Bank for Accounting Principles, Eighth Edition a. The balance of the accounts receivable account should be recorded on the books of the partnership at its net realizable value. b. The allowance account may be set up on the books of the partnership because it relates to the existing accounts that are being contributed. c. The allowance account should not be carried onto the books of the partnership. d. The accounts receivable and allowance should not be recorded on the books of the partnership because a partner must invest cash in the business. 63.
Which one of the following would not be considered an expense of a partnership in determining income for the period? a. Expired insurance b. Salary allowance to partners c. Supplies used d. Freight-out
64.
A partner invests into a partnership a building with an original cost of $90,000 and accumulated depreciation of $40,000. This building has a $70,000 fair market value. As a result of the investment, the partner’s capital account will be credited for a. $70,000. b. $50,000. c. $90,000. d. $120,000.
Use the following information for questions 65–67. James and Laura are forming a partnership. James will invest a truck with a book value of $10,000 and a fair market value of $14,000. Laura will invest a building with a book value of $30,000 and a fair market value of $42,000 with a mortgage of $15,000. 65.
At what amount should the building be recorded? a. $30,000 b. $27,000 c. $42,000 d. $45,000
66.
What amount should be recorded in Laura’s capital account? a. $30,000 b. $27,000 c. $42,000 d. $14,000
67.
What amount should be recorded in James’ capital account? a. $30,000 b. $27,000 c. $42,000 d. $14,000
68.
Speir and Pablo decide to organize a partnership. Speir invests $15,000 cash, and Pablo contributes $12,000 cash and equipment having a book value of $6,000. Choose the entry to record Pablo’s investment in the partnership assuming the equipment has a fair market value of $9,000.
Accounting for Partnerships a. Cash ..................................................................................... Equipment ........................................................................... Pablo, Capital ............................................................. b. Equipment ........................................................................... Pablo, Capital ............................................................. c. Cash ..................................................................................... Pablo, Capital ............................................................. d. Cash ..................................................................................... Equipment ........................................................................... Pablo, Capital .............................................................
12 - 11
12,000 6,000 18,000 6,000 6,000 12,000 12,000 12,000 9,000 21,000
Use the following information for questions 69–71. Partners Abel and Cain have capital balances in a partnership of $40,000 and $60,000, respectively. They agree to share profits and losses as follows: Abel Cain As salaries $10,000 $12,000 As interest on capital at the beginning of the year 10% 10% Remaining profits or losses 50% 50% 69.
If income for the year was $50,000, what will be the distribution of income to Cain? a. $23,000 b. $27,000 c. $20,000 d. $10,000
70.
If income for the year was $30,000, what will be the distribution of income to Abel? a. $13,000 b. $77,000 c. $10,000 d. $14,000
71.
If net loss for the year was $2,000, what will be the distribution to Cain? a. $12,000 income b. $1,000 income c. $1,000 loss d. $2,000 loss
72.
Partners Jim and Joe have agreed to share profits and losses in an 80:20 ratio respectively, after Jim is allowed a salary allowance of $140,000 and Joe is allowed a salary allowance of $70,000. If the partnership had net income of $140,000 for 2008, Joe’s share of the income would be a. $70,000. b. $56,000. c. $84,000. d. $14,000.
12 - 12 Test Bank for Accounting Principles, Eighth Edition 73.
The most appropriate basis for dividing partnership net income when the partners do not plan to take an active role in daily operations is a. on a fixed ratio. b. interest on capital balances and salaries to the partners. c. on a ratio based average capital balances. d. salaries to the partners and the remainder on a fixed ratio.
74.
The Smith and Jones partnership agreement stipulates that profits and losses will be shared equally after salary allowances of $160,000 for Smith and $80,000 for Jones. At the beginning of the year, Smith's Capital account had a balance of $320,000, while Jones' Capital account had a balance of $280,000. Net income for the year was $200,000. The balance of Jones' Capital account at the end of the year after closing is a. $380,000. b. $80,000. c. $340,000. d. $360,000.
75.
A partner's share of net income is recognized in the accounts through a. adjusting entries. b. closing entries. c. correcting entries. d. accrual entries.
76.
The partnership of Nott and Reese reports net income of $60,000. The partners share equally in income and losses. The entry to record the partners' share of net income will include a a. credit to Income Summary for $60,000. b. credit to Nott, Capital for $30,000. c. debit to Reese, Capital for $30,000. d. credit to Reese, Drawing for $30,000.
77.
Partner A receives $210,000 and Partner B receives $140,000 in a split of $350,000 net income. Which expression does not reflect the income splitting arrangement? a. 3:2 b. 3/5 & 2/5 c. 6:4 d. 2:1
78.
An income ratio based on capital balances might be appropriate when a. service is a primary consideration. b. some, but not all, partners plan to work in the business. c. funds invested in the partnership are considered the critical factor. d. little net income is expected.
79.
If the partnership agreement specifies salaries to partners, interest on partners' capital, and the remainder on a fixed ratio, and partnership net income is not sufficient to cover both salaries and interest, a. only salaries are allocated to the partners. b. only interest is allocated to the partners. c. the entire net income is shared on a fixed ratio. d. both salaries and interest are allocated to the partners.
Accounting for Partnerships 80.
12 - 13
Which of the following would not be considered an expense of a partnership in determining income for the period? a. Expired insurance b. Income tax expense c. Rent expense d. Utilities expense
Use the following information for questions 81–82. The net income of the Pine and Miles partnership is $180,000. The partnership agreement specifies that Pine and Miles have a salary allowance of $48,000 and $72,000, respectively. The partnership agreement also specifies an interest allowance of 10% on capital balances at the beginning of the year. Each partner had a beginning capital balance of $120,000. Any remaining net income or net loss is shared equally. 81.
What is Pine's share of the $180,000 net income? a. $48,000 b. $60,000 c. $66,000 d. $78,000
82.
What is the balance of Miles' Capital account at the end of the year after net income has been distributed? a. $204,000 b. $192,000 c. $222,000 d. $210,000
83.
The net income of the Torrey and Gore partnership is $250,000. The partnership agreement specifies that profits and losses will be shared equally after salary allowances of $200,000 (Torrey) and $150,000 (Gore) have been allocated. At the beginning of the year, Torrey's Capital account had a balance of $500,000 and Gore's Capital account had a balance of $650,000. What is the balance of Gore's Capital account at the end of the year after profits and losses have been distributed? a. $650,000 b. $100,000 c. $750,000 d. $775,000
84.
A partners' capital statement explains a. the amount of legal liability of each of the partners. b. the types of assets invested in the business by each partner. c. how the partnership will be capitalized if a new partner is admitted to the partnership. d. the changes in each partner's capital account and in total partnership capital during a period.
85.
Each of the following is used in preparing the partners’ capital statement except the a. balance sheet. b. income statement. c. partners’ capital accounts. d. partners’ drawing accounts.
12 - 14 Test Bank for Accounting Principles, Eighth Edition 86.
The owners' equity statement for a partnership is called the a. partners' proportional statement. b. partners' capital statement. c. statement of shareholders' equity. d. capital and drawing statement.
87.
Which of the following would not cause an increase in partnership capital? a. Drawings b. Net income c. Additional capital investment by the partners d. Initial capital investment by the partners
88.
Jill Grier's capital statement reveals that her drawings during the year were $50,000. She made an additional capital investment of $25,000 and her share of the net loss for the year was $10,000. Her ending capital balance was $200,000. What was Jill Grier's beginning capital balance? a. $225,000 b. $185,000 c. $235,000 d. $260,000
89.
Bill Wren started the year with a capital balance of $180,000. During the year, his share of partnership net income was $160,000 and he withdrew $30,000 from the partnership for personal use. He made an additional capital contribution of $50,000 during the year. The amount of Bill Wren's capital balance that will be reported on the year-end balance sheet will be a. $160,000. b. $390,000. c. $300,000. d. $360,000.
90.
The Partners' Capital Statement for the United Center reported the following information in total: Capital, January 1.................................................. $120,000 Additional investment............................................. 40,000 Drawings................................................................ 80,000 Net income............................................................. 100,000 The partnership has three partners: Moon, Garr, and Rice with ending capital balances in a ratio 40:20:40. What are the respective ending balances of the three partners? a. Moon, $80,000; Garr, $40,000; Rice, $80,000. b. Moon, $72,000: Garr, $36,000; Rice, $72,000. c. Moon, $136,000; Garr, $68,000; Rice, $136,000. d. Moon, $90,000; Garr, $48,000; Rice, $90,000.
Accounting for Partnerships
12 - 15
91.
The total column of the Partners' Capital Statement for North Company is as follows: Capital, January 1 ................................................. $150,000 Additional investment ............................................ 60,000 Drawings ............................................................... 90,000 Net income ............................................................ 180,000 The partnership has three partners. The first two partners have ending capital balances that are equal. The ending balance of the third partner is half of the ending balance of the first partner. What is the ending capital balance of the third partner? a. $72,000 b. $48,000 c. $60,000 d. $66,000
92.
The partners' drawing accounts are a. reported on the income statement. b. reported on the balance sheet. c. closed to Income Summary. d. closed to the partners' capital accounts.
93.
The Uniform Partnership Act provides that a. a purchaser of a partnership interest is not a partner until he or she is accepted into the firm by the continuing partners. b. a partner must obtain the approval of other partners before selling his or her interest. c. the price paid in a purchase of partner's interest must be equal to the capital equity acquired. d. the price paid in a purchase of partner's interest must be greater than the capital equity acquired.
94.
The balance sheet of a partnership will a. report retained earnings below the partnership capital accounts. b. show a separate capital account for each partner. c. show a separate drawing account for each partner. d. show the amount of income that was distributed to each partner.
95.
The liquidation of a partnership may result from each of the following except the a. bankruptcy of the partnership. b. death of a partner. c. retirement of a partner. d. sale of the business by the partners.
96.
In the liquidation of a partnership, any gain or loss on the realization of noncash assets should be allocated a. first to creditors and the remainder to partners. b. to the partners on the basis of their capital balances. c. to the partners on the basis of their income-sharing ratio. d. only after all creditors have been paid.
97.
In the liquidation of a partnership, any partner who has a capital deficiency a. has a personal debt to the partnership for the amount of the deficiency. b. is automatically terminated as a partner. c. will receive a cash distribution only on the basis of his or her income-sharing ratio. d. is not obligated to make up the capital deficiency.
12 - 16 Test Bank for Accounting Principles, Eighth Edition 98.
Partners A, B, and C have capital account balances of $120,000 each. The income and loss ratio is 5:2:3, respectively. In the process of liquidating the partnership, noncash assets with a book value of $100,000 are sold for $40,000. The balance of Partner B's Capital account after the sale is a. $90,000. b. $102,000. c. $108,000. d. $132,000.
Use the following information for questions 99–101. The partners' income and loss sharing ratio is 2:3:5, respectively. D, E, AND F PARTNERSHIP Balance Sheet December 31, 2008 Assets
Liabilities and Owners' Equity
Cash Noncash assets
$ 90,000 570,000
Total
$660,000
Liabilities D, Capital E, Capital F, Capital Total
$300,000 120,000 180,000 60,000 $660,000
99.
If the D, E, and F Partnership is liquidated by selling the noncash assets for $390,000 and creditors are paid in full, what is the amount of cash that can be safely distributed to each partner? a. D, $72,000; E, $108,000; F, $0. b. D, $84,000; E, $126,000; F, $30,000. c. D, $69,000; E, $111,000; F, $0. d. D, $66,000; E, $114,000; F, $0.
100.
If the D, E, and F Partnership is liquidated by selling the noncash assets for $750,000, and creditors are paid in full, what is the total amount of cash that Partner D will receive in the distribution of cash to partners? a. $36,000 b. $234,000 c. $156,000 d. $150,000
101.
If the D, E, and F Partnership is liquidated and the noncash assets are worthless, the creditors will look to what partner's personal assets for settlement of the creditors' claims? a. The personal assets of Partner E. b. The personal assets of Partners D and F. c. The personal assets of Partners D, E, and F. d. The personal assets of the partners are not available for partnership debts.
Accounting for Partnerships
12 - 17
102.
If a partner has a capital deficiency and does not have the personal resources to eliminate it, a. the creditors will have to absorb the capital deficiency. b. the other partners will absorb the capital deficiency on the basis of their respective capital balances. c. the other partners will have to absorb the capital deficiency on the basis of their respective income sharing ratios. d. neither the creditors nor the other partners will have to absorb the capital deficiency.
103.
When a partnership terminates business, the sale of noncash assets is called a. liquidation. b. realization. c. recognition. d. disposition.
104.
The liquidation of a partnership a. cannot be a voluntary act of the partners. b. terminates the business. c. eliminates those partners with a capital deficiency. d. cannot occur unless all partners approve.
105.
The liquidation of a partnership is a process containing the following steps: 1. 2. 3. 4.
Pay partnership liabilities in cash. Allocate the gain or loss on realization to the partners on their income ratios. Sell noncash assets for cash and recognize a gain or loss on realization. Distribute remaining cash to partners on the basis of their remaining capital balances.
Identify the proper sequencing of the steps in the liquidation process. a. 3, 2, 4, 1. b. 3, 2, 1, 4. c. 1, 3, 2, 4. d. 1, 4, 3, 2. 106.
In the final step of the liquidation process, remaining cash is distributed to partners a. on an equal basis. b. on the basis of the income ratios. c. on the basis of the remaining capital balances. d. regardless of capital deficiencies.
107.
In the liquidation process, if a capital account shows a deficiency a. the partner with a deficiency has an obligation to the partnership for the amount of the deficiency. b. it may be written off to a "Loss" account. c. it is disregarded until after the partnership books are closed. d. it can be written off to a "Gain" account.
108.
Before distributing any remaining cash to partners in a partnership liquidation, it is necessary to do each of the following except a. sell noncash assets for cash. b. recognize a gain or loss on realization. c. allocate the gain or loss to the partners based on their capital balances. d. pay partnership liabilities in cash.
12 - 18 Test Bank for Accounting Principles, Eighth Edition 109.
Kate, Sue, and Tina formed a partnership with income-sharing ratios of 50%, 30%, and 20%, respectively. Cash of $180,000 was available after the partnership’s assets were liquidated. Prior to the final distribution of cash, Kate’s capital balance was $200,000, Sue’s capital balance was $150,000, and Tina had a capital deficiency of $50,000. Based upon a cash payments schedule, Kate should receive a. $175,000. b. $168,750. c. $131,250. d. $200,000.
110.
A, B and C are partners, sharing income 2:1:2. After selling all of the assets for cash, dividing gains and losses on realization, and paying liabilities, the balances in the capital accounts are as follows: A, $10,000 Cr; B, $10,000 Cr; and C, $30,000 Cr. How much cash should be distributed to A? a. $6,000 b. $20,000 c. $10,000 d. $16,667
111.
In liquidation, balances prior to the distribution of cash to the partners are: Cash $300,000; Moorman, Capital $140,000; Simpson, Capital $130,000, and Kelton, Capital $30,000. The income ratio is 6:2:2, respectively. How much cash should be distributed to Moorman? a. $125,000 b. $136,250 c. $140,000 d. $150,000
112.
Assume the same facts in question 111 above, except that there is only $255,000 in cash and Kelton has a capital deficiency of $15,000. How much cash should be distributed to Simpson if Kelton does not pay his deficiency? a. $122,500 b. $126,250 c. $118,750 d. $130,000
a
D. Givens purchases a 25% interest for $30,000 when the Suppan, Porter, James partnership has total capital of $270,000. Prior to the admission of Givens, each partner has a capital balance of $90,000. Each partner relinquishes an equal amount of his capital balance to Givens. The amount to be relinquished by James is a. $15,000. b. $19,000. c. $22,500. d. $37,500.
113.
a
114. Bryant is admitted to a partnership with a 25% capital interest by a cash investment of $90,000. If total capital of the partnership is $390,000 before admitting Bryant, the bonus to Bryant is a. $30,000. b. $15,000. c. $45,000. d. $60,000.
Accounting for Partnerships
12 - 19
Use the following information for questions 115–116. Carley and Kingman are partners who share income and losses in the ratio of 3:2, respectively. On August 31, their capital balances were: Carley, $175,000 and Kingman, $150,000. On that date, they agree to admit Lerner as a partner with a one-third capital interest. a
115. If Lerner invests $125,000 in the partnership, what is Carley's capital balance after Lerner's admittance? a. $150,000 b. $158,333 c. $160,000 d. $175,000
a
116. If Lerner invests $200,000 in the partnership, what is Kingman's capital balance after Lerner's admittance? a. $175,000 b. $160,000 c. $157,500 d. $150,000
a
117. King and Nott are partners who share profits and losses equally and have capital balances of $560,000 and $490,000, respectively. Starr is admitted into the partnership by investing $490,000 for 30% capital interest. The account balance of Nott, Capital after the admission of Starr would be a. $462,000. b. $476,000. c. $504,000. d. $490,000.
a
118. Stine and Watson have partnership capital balances of $320,000 and $240,000, respectively. Watson negotiates to sell his partnership interest to Leary for $280,000. Stine agrees to accept Leary as a new partner. The partnership entry to record this transaction is a. Cash ..................................................................................... 280,000 Leary, Capital .............................................................. 280,000 b. Watson, Capital .................................................................... 280,000 Leary, Capital .............................................................. 280,000 c. Cash ..................................................................................... 40,000 Watson, Capital .................................................................... 240,000 Leary, Capital .............................................................. 280,000 d. Watson, Capital .................................................................... 240,000 Leary, Capital .............................................................. 240,000
a
119. Hill and Eddy share partnership profits and losses in the ratio of 6:4. Hill's Capital account balance is $320,000 and Eddy’s Capital account balance is $200,000. Porter is admitted to the partnership by investing $360,000 and is to receive a one-fourth ownership interest. Hill, Eddy and Porter's capital balances after Porter's investment will be Hill Eddy Porter a. $320,000 $200,000 $360,000 b. $404,000 $256,000 $220,000 c. $396,000 $264,000 $220,000 d. $390,000 $270,000 $220,000
12 - 20 Test Bank for Accounting Principles, Eighth Edition a
120. Judy and Deb have partnership capital account balances of $600,000 and $450,000, respectively and share profits and losses equally. Anne is admitted to the partnership by investing $250,000 for a one-fourth ownership interest. The balance of Deb's Capital account after Anne is admitted is a. $412,500. b. $450,000. c. $487,500. d. $325,000.
a
121. The admission of a new partner to an existing partnership a. may be accomplished only by investing assets in the partnership. b. requires purchasing the interest of one or more existing partners. c. causes a legal dissolution of the existing partnership. d. is almost always accompanied by the liquidation of the business.
a
122. When a partnership interest is purchased a. every partner’s capital account is affected. b. the transaction is a personal transaction between the purchaser and the selling partner(s). c. the buyer receives equity equal to the amount of cash paid. d. all partners will receive some part of the purchase price.
a
123. Adler and Lynn each sell 1/3 of their partnership interest to Sele, receiving $140,000 each. At the time of the admission, each partner has a $420,000 capital balance. The entry to record the admission of Sele will show a a. debit to Cash for $280,000. b. credit to Sele, Capital for $420,000. c. debit to Lynn, Capital for $420,000. d. debit to Adler, Capital for $140,000.
a
124. Ball and Gant sell 1/4 of their partnership interest to Ives receiving $200,000 each. At the time of admission, Ball and Gant each had a $350,000 capital balance. The admission of Ives will cause the net partnership assets to a. increase by $400,000. b. remain at $700,000. c. decrease by $400,000. d. remain at $1,100,000.
a
125. Cole and Glenn sell to Nabb a 1/3 interest in the Cole-Glenn partnership. Nabb will pay Cole and Glenn each $70,000 for admission into the organization. Before this transaction, Cole and Glenn show capital balances of $105,000 each. The journal entry to record the admission of Nabb will a. show a debit to Cash for $140,000. b. not show a debit to Cash. c. show a debit to Glenn, Capital for $70,000. d. show a credit to Nabb, Capital for $140,000.
Accounting for Partnerships
12 - 21
a
126. Foxx invests $20,000 in cash (admission by investment) in the Massey-Dix partnership to acquire a 1/4 interest. In this case a. the accounting will be the same as a purchase of an interest. b. the total net assets of the new partnership are unchanged from the previous partnership. c. the total capital of the new partnership is greater than the total capital of the old partnership. d. Foxx's income ratio will automatically be 1/4.
a
127. Which of the following is correct when admitting a new partner into an existing partnership? Purchase of an Interest Admission by Investment a. Total net assets unchanged unchanged b. Total capital increased unchanged c. Total net assets unchanged increased d. Total capital unchanged unchanged
a
128. When admitting a new partner by investment, a bonus to old partners a. is usually unjustified because book values clearly reflect partnership net worth. b. is sometimes justified because goodwill may exist and it is not reflected in the accounts. c. results if the debit to cash is less than the new partner's capital credit. d. results if the debit to cash is equal to the new partner's capital credit.
a
129. When admitting a new partner by investment, a bonus to old partners is allocated on a. the basis of capital balances. b. the basis of the original investment of the old partners. c. the basis of income ratios before the admission of the new partner. d. a seniority basis.
a
130. A bonus to a new partner a. is prohibited by GAAP. b. results when the new partner's capital credit is less than his or her investment of assets in the firm. c. may occur when recorded book values are lower than market values. d. results when the new partner's capital credit is greater than his or her investment of assets in the firm.
a
131. A bonus to a new partner will a. increase the capital balances of existing partners based on their income ratios before the admission of the new partner. b. increase the capital balances of existing partners based on their income ratios after the admission of the new partner. c. decrease the capital balances of existing partners based on their income ratios before the admission of the new partner. d. decrease the capital balances of existing partners based on their capital balances before the admission of the new partner.
a
132. Jane, Ken, and Mark have partnership capital account balances of $225,000, $450,000 and $105,000, respectively. The income sharing ratio is Jane, 50%; Ken, 40%; and Mark, 10%. Jane desires to withdraw from the partnership and it is agreed that partnership assets of $195,000 will be used to pay Jane for her partnership interest. The balances of Ken's and Mark's Capital accounts after Jane's withdrawal would be
12 - 22 Test Bank for Accounting Principles, Eighth Edition a. b. c. d.
Ken, $450,000; Mark, $105,000. Ken, $474,000; Mark, $111,000. Ken, $426,000; Mark, $99,000. Ken, $435,000; Mark, $90,000.
a
133. Ace, Bell, and Cole have partnership capital account balances of $400,000 each. Income and losses are shared equally. Cole agrees to sell three-fourths of his ownership interest to Ace for $350,000 and one-fourth to Bell for $125,000. Ace and Bell will use personal assets to purchase Cole's interest. The partnership's entry to record Cole's withdrawal from the partnership would be a. Cole, Capital ....................................................................... 475,000 Cash .......................................................................... 475,000 b. Cole, Capital ....................................................................... 475,000 Ace, Capital ............................................................... 350,000 Bell, Capital ................................................................ 125,000 c. Cole, Capital ....................................................................... 400,000 Ace, Capital ............................................................... 300,000 Bell, Capital ................................................................ 100,000 d. Ace, Capital ........................................................................ 356,250 Bell, Capital ......................................................................... 118,750 Cole, Capital ............................................................. 475,000
a
134. When a partner withdraws from the firm, which of the following reflects the correct partnership effects? Payment from Payment from Partners' Personal Assets Partnership Assets a. Total net assets decreased decreased b. Total capital decreased decreased c. Total net assets unchanged decreased d. Total capital unchanged unchanged
a
135. Which of the following is not a necessary action that the partnership must take upon the death of a partner? a. Determine the net income or net loss for the year to date. b. Discontinue business operations. c. Close the books. d. Prepare financial statements.
Use the following information for questions 136–138. On November 30, capital balances are Gray $90,000, Carr $75,000 and Melton $75,000. The income ratios are 20%, 20% and 60%, respectively. Gray decides to retire from the partnership. a
136. The partnership pays Gray $105,000 cash for her partnership interest. After Gray's retirement, what is the balance of Carr's capital account? a. $71,250 b. $72,000 c. $75,000 d. $97,500
Accounting for Partnerships
12 - 23
a
137. The partnership pays Gray $75,000 cash for her partnership interest. After Gray's retirement, what is the balance of Melton's capital account? a. $66,000 b. $75,000 c. $84,000 d. $86,250
a
138. In order for Carr and Melton to have equal capital interests after the retirement of Gray, how much partnership cash would have to be paid to Gray for her partnership interest? a. $0 b. $80,000 c. $90,000 d. Any amount paid to Gray will cause Carr and Melton to still have equal capital balances.
Additional Multiple Choice Questions 139.
All of the following are characteristics of partnerships except a. co-ownership of property. b. mutual agency. c. unlimited life. d. association of individuals.
140.
The Butkus, Sayers, and Halas partnership is terminated when the claims of company creditors exceed partnership assets by $50,000. The capital balances for Butkus, Sayers, and Halas are $35,000, $5,000, and $0, respectively. The original claims of the creditors were negotiated by Sayers and Halas. Which partner(s) is(are) personally and individually liable for all partnership liabilities? a. Butkus b. Sayers c. Sayers and Halas d. Butkus, Sayers, and Halas
141.
When a partner invests noncash assets in a partnership, the assets should be recorded at their a. book value. b. carrying value. c. fair market value. d. original cost.
142.
The partnership agreement of Rossi and Petry provides for salary allowances of $45,000 to Rossi and $35,000 to Petry, with the remaining income or loss to be divided equally. During the year, Rossi and Petry each withdraw cash equal to 80% of their salary allowances. If partnership net income is $100,000, Rossi's equity in the partnership would a. increase more than Petry’s. b. decrease more than Petry's. c. increase the same as Petry's. d. decrease the same as Petry's.
12 - 24 Test Bank for Accounting Principles, Eighth Edition 143.
Which of the following statements is correct? a. Salaries to partners and interest on partners' capital are expenses of the partnership. b. Salaries to partners are expenses of the partnership but not interest on partners' capital. c. Interest on partners' capital is an expense of the partnership but not salaries to partners. d. Neither salaries to partners nor interest on partners' capital are expenses of the partnership.
144.
In the liquidation of a partnership, the gains and losses from assets sold are a. divided equally among the partners. b. divided among the partners in the stated income ratio. c. divided among the partners in proportion to their capital equity interests. d. ignored.
145.
If a partner with a capital deficiency is unable to pay the amount owed to the partnership, the deficiency is allocated to the partners with credit balances a. equally. b. on the basis of their income ratios. c. on the basis of their capital balances. d. on the basis of their original investments.
146.
An entry is not required in the liquidation of a partnership to record the a. payment of cash to creditors. b. distribution of cash to the partners. c. sale of noncash assets. d. allocation of a capital deficiency to partners with credit balances when the deficient partner is expected to pay the deficiency.
147.
The first step in the liquidation of a partnership is to a. allocate a gain or loss on realization to the partners. b. distribute remaining cash to the partners. c. pay partnership liabilities. d. sell noncash assets and recognize a gain or loss on realization.
148.
Baker joins the partnership of Kubek and Musial by paying $30,000 in cash. If the net assets of the partnership are still the same amount after Baker has been admitted as a partner, then Baker a. must have been admitted by investment of assets. b. must have been admitted by purchase of a partner's interest. c. must have received a bonus upon being admitted. d. could have been admitted by an investment of assets or by a purchase of a partner's interest.
149.
Lowe is admitted to a partnership with a 25% capital interest by a cash investment of $120,000. If total capital of the partnership is $520,000 before admitting Lowe, the bonus to Lowe is a. $40,000. b. $20,000. c. $60,000. d. $80,000.
Accounting for Partnerships
12 - 25
Answers to Multiple Choice Questions Item
38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53.
Ans.
b c a c d c c c b d c b c a b c
Item
54. 55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69.
Ans.
a c d b d c a c b b a c b d d b
Item
70. 71. 72. 73. 74. 75. 76. 77. 78. 79. 80. 81. 83. 83. 84. 85.
Ans.
a b b c c b b d c d b d c c d a
Item
86. 87. 88. 89. 90. 91. 92. 93. 94. 95. 96. 97. 98. 99. 100. 101.
Ans.
b a c d b c d a b c c a c a c c
Item
102. 103. 104. 105. 106. 107. 108. 109. 110. 111. 112. a 113. a 114. a 115. a 116. a 117.
Ans.
c b b b c a c b c c b a a c b c
Item a
118. 119. a 120. a 121. a 122. a 123. a 125. a 125. a 126. a 127. a 128. a 129. a 130. a 131. a 132. a 133. a
Ans.
d b a c b d b b c c b c d c b c
Item a
134. 135. a 136. a 137. a 138. 139. 140. 141. 142. 143. 144. 145. 146. 147. a 148. a 149. a
Ans.
c b a d c c d c a d b b d d b a
BRIEF EXERCISES BE 150 Brandy and Johnson decide to organize a partnership. Brandy invests $25,000 cash, and Johnson contributes $5,000 and equipment having a book value of $3,500 and a fair market value of $10,000. Instructions Prepare the entry to record each partner’s investment.
Solution 150
(5 min.)
Cash……...………….. ............................................................................ Brandy, Capital………………………………………………………….
25,000
Cash………………….. ........................................................................... Equipment……………............................................................................ Johnson, Capital…. ........................................................................
5,000 10,000
25,000
15,000
12 - 26 Test Bank for Accounting Principles, Eighth Edition BE 151 Tonto Company and Ranger Company decide to merge their proprietorships into a partnership called Westward Ho Company. The balance sheet of Ranger Company shows: Accounts Receivable Less: Allowance for doubtful accounts
$15,000 1,500
$13,500
Equipment Less: Accumulated depreciation
$20,000 10,000
$10,000
The partners agree that the net realizable value of the receivables is $12,500 and that the fair market value of the equipment is $15,000. Instructions Indicate how the four accounts should appear in the opening balance sheet of the partnership.
Solution 151
(4 min.) WESTWARD HO COMPANY Balance Sheet (partial)
Assets Accounts Receivable Less: Allowance for Doubtful Accounts
$15,000 2,500
Equipment
$12,500 15,000
BE 152 The Jill & Frill Co. reports net income of $28,000. Interest allowances are Jill $3,000 and Frill $5,000; partner salary allowances are Jill $18,000 and Frill $10,000 and the remainder is shared equally.
Instructions Indicate the division of net income to each partner, and prepare the entry to distribute the net income.
Solution 152
(6 min.)
Division of Net Income Salary allowance Interest allowance on partners’ capital Total salaries and interest Remaining income, ($8,000) ($28,000 – $36,000) Jill ($8,000 × 50%) Frill ($8,000 × 50%) Total remainder Total division of net income
Jill $18,000 3,000 21,000
Frill $10,000 5,000 15,000
Total $28,000 8,000 36,000
(4,000) (4,000) $17,000
$11,000
(8,000) $28,000
Accounting for Partnerships Solution 152
12 - 27
(cont.)
The entry to record the division of net income is: Income Summary ............................................................................. Jill, Capital ............................................................................... Frill, Capital .............................................................................
28,000 17,000 11,000
BE 153 Debauge Co. had beginning capital balances on January 1, 2008, as follows: Nick Foley $30,000 and Tom Wenger $25,000. During the year, drawings were Foley $15,000 and Wenger $8,000. Net income was $50,000, and the partners share income equally. Instructions Prepare the partners’ capital statement for the year.
Solution 153
(4 min.) DEBAUGE COMPANY Partners’ Capital Statement
Beginning Capital Add: Net Income Less: Drawings Ending Capital
Foley $30,000 25,000 55,000 15,000 $40,000
Wenger $25,000 25,000 50,000 8,000 $42,000
Total $55,000 50,000 105,000 23,000 $82,000
BE 154 After liquidating noncash assets and paying creditors, account balances in the Main Co. are Cash $29,000, A Capital (Cr.) $11,000, B Capital (Cr,) $8,000 and C Capital (Cr.) $10,000. The partners share income equally. Instructions Journalize the final distribution of cash to the partners.
Solution 154
(4 min.)
A, Capital ............................................................................................... B, Capital ............................................................................................... C, Capital ............................................................................................... Cash ........................................................................................
11,000 8,000 10,000 29,000
12 - 28 Test Bank for Accounting Principles, Eighth Edition BE 155 Barnes Company at December 31 has cash $40,000, noncash assets $200,000, liabilities $110,000, and the following capital balances: Carpenter $90,000 and Pendleton $40,000. The firm is liquidated, and $240,000 in cash is received for the noncash assets. Carpenter and Pendleton income ratios are 60% and 40%, respectively. Instructions Prepare a cash distribution schedule.
Solution 155
(5 min.) BARNES COMPANY Schedule of Cash Payments Cash
Balances before Liquidation $ 40,000 Sale of noncash assets and allocation of losses 240,000 New balances 280,000 Pay liabilities (110,000) New balances 170,000 Cash distribution
$170,000
+
Noncash Assets = $200,000
Liabilities +
Carpenter Capital +
Pendelton Capital
$110,000
$ 90,000
$40,000
24,000 114,000
16,000 56,000
114,000
56,000
$114,000
$56,000
(200,000) -0_____ -0-
110,000 (110,000) -0-
$
$
-0-
-0-
a
BE 156
In Nelson Co., capital balances are Ozzie $60,000 and Harriet $75,000. The partners share income equally. Denny is admitted to the firm with a 40% interest by an investment of cash of $65,000. Journalize the admission of Denny. a
Solution 156
(3 min.)
Cash ...................................................................................................... Ozzie, Capital (50% × $15,000) ............................................................ Harriet, Capital (50% × $15,000)........................................................... Denny, Capital (40% × $200,000) .............................................
65,000 7,500 7,500 80,000
*[(60,000 + $75,000 + $65,000) × 40%] – $65,000 = $15,000. a
BE 157
Bob and Kathy are partners who share profits 60% and 40%. Their capital balances were both $90,000 before Betty was admitted to the partnership. Betty contributed $120,000 in cash to the partnership for a 30% interest. Instructions Compute the capital balances of Bob and Kathy after Betty is admitted to the partnership.
Accounting for Partnerships a
Solution 157
12 - 29
(4 min.)
Bob’s capital balance: $90,000 + {$120,000 – [($180,000 + $120,000) × .30]} × .60 = $108,000 Kathy’s capital balance: $90,000 + {$120,000 – [($180,000 + $120,000) ×.30]} × .40 = $102,000
a
BE 158
Capital balances in Jetson Co. are George $50,000, Jane $38,000, and Frank $25,000. The partners share income equally. Frank receives $35,000 from partnership assets in withdrawing from the firm. Instructions Journalize the withdrawal of Frank.
a
Solution 158
(3 min.)
Frank, Capital......................................................................................... George, Capital (50% × $10,000) .......................................................... Jane, Capital (50% × $10,000) .............................................................. Cash..............................................................................................
25,000 5,000 5,000 35,000
a
BE 159
Mike, Andy, and Joe are partners who share profits 40%, 20%, and 40%. Their capital balances were $630,000, $420,000, and $210,000, respectively, before Joe’s retirement. Joe was paid $270,000 from partnership assets to buy his interest. Instructions Compute the capital balances of Mike and Andy after Joe has withdrawn. a
Solution 159 (4 min.)
Mike’s capital balance: $630,000 – [($270,000 – $210,000) X 40/60] = $590,000 Andy’s capital balance: $420,000 – [($270,000 – $210,000) X 20/60] = $400,000
12 - 30 Test Bank for Accounting Principles, Eighth Edition
EXERCISES Ex. 160 Dick Acer and George Dooley decide to form a partnership. Acer invests $25,000 cash and accounts receivable of $30,000 less allowance for doubtful accounts of $2,000. Dooley contributes $20,000 cash and equipment having a $6,000 book value. It is agreed that the allowance account should be $3,000 and the fair market value of the equipment is $10,000. Instructions Prepare the necessary journal entry to record the formation of the partnership.
Solution 160
(6 min.)
Cash ($25,000 + $20,000) .................................................................... Accounts Receivable............................................................................. Equipment ............................................................................................. Allowance for Doubtful Accounts.................................................. Acer, Capital ($25,000 + $30,000 – $3,000) ................................ Dooley, Capital ($20,000 + $10,000)............................................
45,000 30,000 10,000 3,000 52,000 30,000
Ex. 161 Ken Lott and Jim Stine operate separate auto repair shops. On January 1, 2008, they decide to combine their separate businesses which were operated as proprietorships to form L & S Auto Repair, a partnership. Information from their separate balance sheets is presented below: Cash Accounts receivable Allowance for doubtful accounts Accounts payable Notes payable Salaries payable Equipment Accumulated amortization—Equipment
Lott Auto Repair $10,000 9,000 1,000 5,000 — 1,000 12,000 2,000
Stine Auto Repair $12,000 10,000 500 6,000 3,000 1,500 24,000 4,000
It is agreed that the expected realizable value of Lott's accounts receivable is $8,000 and Stine's receivables is $7,000. The fair market value of Lott's equipment is $13,000 and the value of Stine's equipment is $20,000. It is further agreed that the new partnership will assume all liabilities of the proprietorships with the exception of the notes payable on Stine's balance sheet which he will pay himself. Instructions Prepare the journal entries necessary to record the formation of the partnership.
Accounting for Partnerships Solution 161
12 - 31
(15 min.)
Cash....................................................................................................... Accounts Receivable ............................................................................. Equipment.............................................................................................. Allowance for Doubtful Accounts .................................................. Salaries Payable ........................................................................... Accounts Payable ......................................................................... K. Lott, Capital............................................................................... (To record K. Lott's investment)
10,000 9,000 13,000
Cash....................................................................................................... Accounts Receivable ............................................................................. Equipment.............................................................................................. Allowance for Doubtful Accounts .................................................. Salaries Payable ........................................................................... Accounts Payable ......................................................................... J. Stine, Capital ............................................................................. (To record J. Stine's investment)
12,000 10,000 20,000
1,000 1,000 5,000 25,000
3,000 1,500 6,000 31,500
Ex. 162 The Smith and Wilson partnership reports net income of $45,000. Partner salary allowances are Smith $18,000 and Wilson $12,000. Any remaining income is shared 60:40. Instructions Determine the amount of net income allocated to each partner.
Solution 162
(5 min.)
Salary allowance Remaining income, $15,000 Smith ($15,000 × 60%) Wilson ($15,000 × 40%) Total division
Smith $18,000
Wilson $12,000
Total $30,000
6,000 $18,000
15,000 $45,000
9,000 $27,000
Ex. 163 Bass, Ellis, and Goren formed a partnership on January 1, 2008. Bass invested $60,000, Ellis $60,000 and Goren $140,000. Bass will manage the store and work 40 hours per week in the store. Ellis will work 20 hours per week in the store, and Goren will not work. Each partner withdrew 30 percent of his income distribution during 2008. If there was no income distribution to a partner, there were no withdrawals of cash. Instructions Compute the partners' capital balances at the end of 2008 under the following independent conditions: (Hint: use T accounts to determine each partner's capital balances.)
12 - 32 Test Bank for Accounting Principles, Eighth Edition Ex. 163 (1) (2) (3)
(cont.)
Net income is $120,000 and the income ratio is Bass 40%, Ellis 35%, and Goren 25%. Net income is $140,000 and the partnership agreement only specifies a salary of $50,000 to Bass and $30,000 to Ellis. Net income is $86,000 and the partnership agreement provides for (a) a salary of $40,000 to Bass and $40,000 to Ellis, (b) interest on beginning capital balances at the rate of 10%, and (c) any remaining income or loss is to be shared by Bass 40%, Ellis 35%, and Goren 25%.
Solution 163
(15 min.)
(1) Bass, Capital 14,400
Bass Ellis Goren
Ellis, Capital 60,000 48,000 93,600
12,600
Net Income % $120,000 × 40 120,000 × 35 120,000 × 25
Goren, Capital 60,000 42,000 89,400
Distribution % $ 48,000 × 30 42,000 × 30 30,000 × 30 $120,000
9,000
140,000 30,000 161,000
Drawings $14,400 12,600 9,000 $36,000
(2) Bass, Capital 21,000
Ellis, Capital
60,000 70,000 109,000
15,000
Goren, Capital 60,000 50,000 95,000
6,000
140,000 20,000 154,000
Salary Remainder Total
Bass $50,000 20,000 $70,000
Ellis $30,000 20,000 $50,000
Goren $ 0 20,000 $20,000
Total $ 80,000 60,000 $140,000
× 30% = Drawings
$21,000
$15,000
$ 6,000
$ 42,000
(3) Bass, Capital 11,400
Ellis, Capital 60,000 38,000 86,600
11,700
Goren, Capital 60,000 39,000 87,300
2,700
140,000 9,000 146,300
Bass Salary $40,000 Interest 6,000 Remainder ($20,000) (8,000) Total $38,000
Ellis $40,000 6,000 (7,000) $39,000
Goren $ 0 14,000 (5,000) $ 9,000
Total $80,000 26,000 (20,000) $86,000
× 30% = Drawings
$11,700
$ 2,700
$25,800
$11,400
Accounting for Partnerships
12 - 33
Ex. 164 Carlin and Larve have a partnership agreement which includes the following provisions regarding sharing net income or net loss: 1. A salary allowance of $54,000 to Carlin and $36,000 to Larve. 2. An interest allowance of 10% on capital balances at the beginning of the year. 3. The remainder to be divided 60% to Carlin and 40% to Larve. The capital balance on January 1, 2008, for Carlin and Larve was $90,000 and $120,000, respectively. During 2008, the Carlin and Larve Partnership had sales of $495,000, cost of goods sold of $290,000, and operating expenses of $75,000. Instructions Prepare an income statement for the Carlin and Larve Partnership for the year ended December 31, 2008. As a part of the income statement, include a Division of Net Income to each of the partners.
Solution 164
(15 min.) CARLIN AND LARVE PARTNERSHIP Income Statement For the Year Ended December 31, 2008
Sales ....................................................................................................................... Cost of goods sold .................................................................................................. Gross profit ............................................................................................................. Operating expenses................................................................................................ Net income .............................................................................................................
$495,000 290,000 205,000 75,000 $130,000
Division of Net Income Salary allowance Interest allowance ($90,000 × 10%) ($120,000 × 10%) Total interest Total salaries and interest Remaining income, $19,000 Carlin ($19,000 × 60%) Larve ($19,000 × 40%) Total remainder Total division
Carlin $54,000
Larve $36,000
Total $ 90,000
9,000 12,000 63,000
48,000
21,000 111,000
11,400 7,600 $74,400
$55,600
19,000 $130,000
Ex. 165 Hope & Crosby Co. reports net income of $34,000. The partnership agreement provides for annual salaries of $24,000 for Hope and $15,000 for Crosby and interest allowances of $4,000 to Hope and $6,000 to Crosby. Any remaining income or loss is to be shared 70% by Hope and 30% by Crosby. Instructions Compute the amount of net income distributed to each partner.
12 - 34 Test Bank for Accounting Principles, Eighth Edition Solution 165
(8 min.)
Salary allowance Interest allowance Total salaries and interest Remaining deficiency ($15,000) Hope ($15,000 × 70%) Crosby ($15,000 × 30%) Total division
Hope $24,000 4,000 28,000
Crosby $15,000 6,000 21,000
Total $39,000 10,000 49,000
(4,500) $16,500
(15,000) $34,000
(10,500) $17,500
Ex. 166 The adjusted trial balance of the Karris and Watts Partnership for the year ended December 31, 2008, appears below: KARRIS AND WATTS PARTNERSHIP Adjusted Trial Balance For the Year Ended December 31, 2008 Current Assets....................................................................................... Plant Assets .......................................................................................... Current Liabilities................................................................................... Long-term Debt ..................................................................................... Karris, Capital........................................................................................ Karris, Drawing...................................................................................... Watts, Capital ........................................................................................ Watts, Drawing ...................................................................................... Sales ..................................................................................................... Cost of Goods Sold ............................................................................... Operating Expenses..............................................................................
Debit 19,000 80,000
Credit
7,000 50,000 20,000 4,000 18,000 7,000 100,000 62,000 23,000 195,000
195,000
The partnership agreement stipulates that a division of partnership net income or net loss is to be made as follows: 1. A salary allowance of $12,000 to Karris and $23,000 to Watts. 2. The remainder is to be divided equally. Instructions (a) Prepare a schedule which shows the division of net income to each partner. (b) Prepare the closing entries for the division of net income and for the drawing accounts at December 31, 2008.
Solution 166 (a)
(15 min.)
Schedule for Division of Net Income Sales Cost of goods sold Gross profit Operating expenses Net income
$100,000 62,000 38,000 23,000 $ 15,000
Accounting for Partnerships Solution 166
(cont.)
Salary allowance Remaining deficiency, ($20,000) Karris ($20,000) × 50% Watts ($20,000) × 50% Total remainder Total division (b)
Dec. 31
31
12 - 35
Karris $12,000
Watts $23,000
Total $35,000
(10,000) (10,000) $ 2,000
$13,000
Income Summary ........................................................ Karris, Capital....................................................... Watts, Capital....................................................... (To close net income to capital)
15,000
Karris, Capital .............................................................. Watts, Capital .............................................................. Karris, Drawing..................................................... Watts, Drawing..................................................... (To close drawing accounts to capital)
4,000 7,000
(20,000) $15,000
2,000 13,000
4,000 7,000
Ex. 167 Kim Carey and Mary Hall have formed the CH Partnership, and have capital balances of $130,000 and $100,000, respectively, on January 1, 2008. On June 1, 2008, Hall invested an additional $30,000. Also during the year, Carey withdrew $60,000 and Hall withdrew $48,000. Sales for the year amounted to $360,000 and expenses were $260,000. Carey and Hall share income and losses on a 3:1 basis. Instructions (a) Prepare the closing entries at December 31, 2008, for the CH Partnership. (b) Prepare a partners' capital statement for 2008.
Solution 167 (a)
(15 min.)
Sales ............................................................................................. Expenses.............................................................................. Income Summary .................................................................
360,000
Income Summary .......................................................................... Carey, Capital ($100,000 × 75%) ......................................... Hall, Capital ($100,000 × 25%) ............................................
100,000
Carey, Capital ............................................................................... Hall, Capital................................................................................... Carey, Drawing..................................................................... Hall, Drawing ........................................................................
60,000 48,000
260,000 100,000
75,000 25,000
60,000 48,000
12 - 36 Test Bank for Accounting Principles, Eighth Edition Solution 167
(cont.)
(b)
CH Partnership Partners' Capital Statement For the Year Ended December 31, 2008
Capital, January 1, 2008 Add: Additional Investment Net Income Less: Drawings Capital, December 31, 2008
Carey $130,000 75,000 205,000 60,000 $145,000
Hall $100,000 30,000 25,000 155,000 48,000 $107,000
Totals $230,000 30,000 100,000 360,000 108,000 $252,000
Ex. 168 Prepare a partners' capital statement for Crestwood Company based on the following information. Crest Wood Beginning capital $30,000 $27,000 Drawings during year 15,000 8,000 Net income was $35,000, and the partners share income 60% to Crest and 40% to Wood.
Solution 168
(8 min.) CRESTWOOD COMPANY Partners' Capital Statement
Beginning capital Add: Net income Less: Drawings Ending capital
Crest $30,000 21,000 51,000 15,000 $36,000
Wood $27,000 14,000 41,000 8,000 $33,000
Total $57,000 35,000 92,000 23,000 $69,000
Ex. 169 On December 31, Thompson Company has cash $30,000, noncash assets $150,000, and liabilities $80,000. Capital balances were Terry $55,000 and Nott $45,000. The firm is liquidated, and the noncash assets are sold for $125,000. Terry and Nott share income in a 60:40 ratio. Instructions Prepare entries to record (a) the sale of noncash assets and (b) the allocation of the gain (loss) on liquidation to the partners.
Accounting for Partnerships Solution 169
12 - 37
(6 min.)
(a) Cash ............................................................................................... Loss on Realization ........................................................................ Noncash Assets ...................................................................
125,000 25,000
(b) Terry, Capital ($25,000 × 60%) ...................................................... Nott, Capital ($25,000 × 40%) ........................................................ Loss on Realization ..............................................................
15,000 10,000
150,000
25,000
Ex. 170 The ABC Partnership is to be liquidated and you have been hired to prepare a Schedule of Cash Payments for the partnership. Partners A, B, and C share income and losses in the ratio of 4:3:3, respectively. Assume the following: 1. The noncash assets were sold for $75,000. 2. Liabilities were paid in full. 3. The remaining cash was distributed to the partners. (If any partner has a capital deficiency, assume that the partner is unable to make up the capital deficiency.) Instructions Using the above information, complete the Schedule of Cash Payments below: ABC PARTNERSHIP Schedule of Cash Payments
Item Cash + Balances before liquidation 25,000 +
Solution 170
Noncash Assets =
Liabilities +
150,000 =
50,000
+
A Capital +
B Capital +
C Capital
25,000
35,000
65,000
+
+
(20 min.) ABC PARTNERSHIP Schedule of Cash Payments
Item Cash Balances before liquidation 25,000 Sale of noncash assets (1) 75,000 New balance 100,000 Pay liabilities (2) (50,000) New balances 50,000 Allocate capital deficiency New balances 50,000 Cash distribution (3) (50,000) Final balances -0-
+
Noncash Assets = Liabilities +
+ 150,000
=
+ (150,000) = + -0= = + -0=
+
-0-0-
= =
50,000
+
+ 50,000 + (50,000) -0+
-0-0-
+
A Capital
+
B Capital
+
C Capital
25,000
+
35,000
+
65,000
(30,000) (5,000)
+ +
(22,500) 12,500
+ +
(22,500) 42,500
(5,000)
+
12,500
+
42,500
5,000 -0-
+ +
(2,500) 10,000 (10,000) -0-
+ + +
(2,500) 40,000 (40,000) -0-
-0-
12 - 38 Test Bank for Accounting Principles, Eighth Edition Ex. 171 The ODS Partnership is to be liquidated when the ledger shows the following: Cash Noncash Assets Liabilities Oslo, Capital Decker, Capital Silas, Capital
$ 50,000 200,000 50,000 75,000 100,000 25,000
Oslo, Decker, and Silas' income ratios are 6:3:1, respectively. Instructions Prepare separate entries to record the liquidation of the partnership assuming that the noncash assets are sold for $150,000 in cash.
Solution 171
(15 min.)
1. Cash ................................................................................................ Loss on Realization ......................................................................... Noncash Assets......................................................................
150,000 50,000
2. Oslo, Capital ($50,000 × 6/10) ........................................................ Decker, Capital ($50,000 × 3/10) .................................................... Silas, Capital ($50,000 × 1/10) ........................................................ Loss on Realization ................................................................
30,000 15,000 5,000
3. Liabilities.......................................................................................... Cash .......................................................................................
50,000
4. Oslo, Capital ($75,000 – $30,000) .................................................. Decker, Capital ($100,000 – $15,000)............................................. Silas, Capital ($25,000 – $5,000) .................................................... Cash ($50,000 + $150,000 – $50,000)...................................
45,000 85,000 20,000
200,000
50,000
50,000
150,000
Ex. 172 Prior to the distribution of cash to the partners, the accounts of ABC Company are: Cash $30,000, Alt Capital (Dr.) $10,000, Bell Capital (Cr.) $25,000, and Cole Capital (Cr.) $15,000. They share income on a 5:3:2 basis. Instructions Prepare entries to record (a) the absorption of Alt's capital deficiency by the other partners and (b) the distribution of cash to the partners with credit balances.
Accounting for Partnerships Solution 172 (a)
(b)
12 - 39
(8 min.)
Bell, Capital ($10,000 × 3/5) ......................................................... Cole, Capital ($10,000 × 2/5) ........................................................ Alt, Capital ............................................................................
6,000 4,000
Bell, Capital ($25,000 – $6,000).................................................... Cole, Capital ($15,000 – $4,000) .................................................. Cash .....................................................................................
19,000 11,000
10,000
30,000
Ex. 173 The GF Partnership is liquidated when the ledger shows: Cash Noncash Assets Liabilities Grant, Capital Fleming, Capital
$60,000 90,000 44,000 100,000 6,000
Grant and Fleming's income ratios are 3:2, respectively. Instructions Prepare a schedule of cash payments, assuming that the noncash assets were sold for $70,000. Assume that any partner’s capital deficiencies cannot be paid to the partnership.
Solution 173
(10 min.) GF Partnership Schedule of Cash Payments
Cash Balances before liquidation $ 60,000 Sale of noncash assets and allocation of losses 70,000 New Balances 130,000 Pay Liabilities (44,000) New Balances 86,000 Allocate capital deficiency Cash Distribution $(86,000)
+
Noncash Assets
= Liabilities +
Grant Capital
$90,000
$44,000
$100,000
(90,000) -0-0$
-0-
44,000 (44,000) -0$
-0-
+
Fleming Capital $6,000
(12,000) 88,000
(8,000) (2,000)
88,000 (2,000) $(86,000)
(2,000) 2,000 $ -0-
12 - 40 Test Bank for Accounting Principles, Eighth Edition a
Ex. 174
The Howell and Parks Partnership has partner capital account balances as follows: Howell, Capital Parks, Capital
$550,000 250,000
The partners share income and losses in the ratio of 60% to Howell and 40% to Parks. Instructions Prepare the journal entry on the books of the partnership to record the admission of Tyler as a new partner under the following three independent circumstances. 1. Tyler pays $350,000 to Howell and $150,000 to Parks for one-half of each of their ownership interest in a personal transaction. 2. Tyler invests $850,000 in the partnership for a one-third interest in partnership capital. 3. Tyler invests $175,000 in the partnership for a one-third interest in partnership capital.
a
Solution 174
1.
(20 min.)
Howell, Capital.............................................................................. Parks, Capital ............................................................................... Tyler, Capital........................................................................ (To record admission of Tyler by purchase)
275,000 125,000 400,000
Total net assets and total capital of the partnership do not change. 2.
Cash ............................................................................................. Howell, Capital..................................................................... Parks, Capital ...................................................................... Tyler, Capital........................................................................ (To record admission of Tyler and bonus to old partners) Total capital of existing partnership Investment by new partner, Tyler Total capital of new partnership Tyler's capital credit = $1,650,000 × 1/3 = $550,000 Tyler's investment Tyler's capital credit Bonus to old partners Allocation to old partners Howell (60% × $300,000) Parks (40% × $300,000)
3.
Cash ............................................................................................. Howell, Capital.............................................................................. Parks, Capital ............................................................................... Tyler, Capital........................................................................ (To record Tyler's admission and bonus)
850,000 180,000 120,000 550,000
$ 800,000 850,000 $1,650,000
$850,000 550,000 $300,000 $180,000 120,000 $300,000 175,000 90,000 60,000 325,000
Accounting for Partnerships a
Solution 174
12 - 41
(cont.)
Total capital of existing partnership Investment by new partner, Tyler Total capital of new partnership
$800,000 175,000 $975,000
Tyler's capital credit = $975,000 × 1/3 = $325,000 Bonus to Tyler ($325,000 – $175,000) = $150,000 Reduction of old partners' capital Howell ($150,000 × 60%) Parks ($150,000 × 40%)
$ 90,000 60,000 $150,000
a
Ex. 175
Key, Riser, and Stone share income on a 6:3:1 basis. They have capital balances of $80,000, $60,000, and $45,000, respectively, when Horton is admitted to the partnership. Instructions Prepare the journal entry to record the admission of Horton into the partnership if Horton purchases one-half of Key's equity for $45,000; one-half of Riser's equity for $22,000; and onethird of Stone's equity for $18,000.
Solution 175
(5 min.)
Key, Capital............................................................................................ Riser, Capital ......................................................................................... Stone, Capital ........................................................................................ Horton, Capital ..............................................................................
40,000 30,000 15,000 85,000
a
Ex. 176
Tom Rosen and Joe Finney share partnership income on a 3:2 basis. They have capital balances of $560,000 and $280,000, respectively, when Ed Vann is admitted to the partnership. Instructions Prepare the journal entry to record the admission of Vann under each of the following assumptions: (a) Vann invests $340,000 for a 25% ownership interest. (b) Vann invests $200,000 for a 25% ownership interest. (c) Vann invests an amount that gives him a 25% ownership interest.
12 - 42 Test Bank for Accounting Principles, Eighth Edition a
Solution 176
(a)
(20 min.)
Cash ............................................................................................. Vann, Capital ....................................................................... Rosen, Capital (3/5 × $45,000)............................................ Finney (2/5 × $45,000) ........................................................ Total capital of existing partnership Investment by new partner, Vann Total capital of new partnership
$295,000
Investment by new partner, Vann Vann's capital credit Bonus to existing partners
$340,000 295,000 $ 45,000
(b) Cash ............................................................................................. Rosen, Capital ($60,000 × 3/5) .................................................... Finney ($60,000 × 2/5) ................................................................. Vann, Capital .......................................................................
(c)
295,000 27,000 18,000
$ 840,000 340,000 $1,180,000
Vann's capital credit ($1,180,000 × 25%)
Total capital of existing partnership Investment by new partner, Vann Total capital of new partnership
340,000
200,000 36,000 24,000 260,000
$ 840,000 200,000 $1,040,000
Vann's capital credit ($1,040,000 × 25%)
$260,000
Investment by new partner, Vann Vann's capital credit Reduction of existing partners
$200,000 260,000 $ (60,000)
Cash ............................................................................................. Vann, Capital .......................................................................
280,000 280,000
$840,000 ÷ .75 = $1,120,000; $1,120,000 – $840,000 = $280,000
a
Ex. 177
Cindy Mills and Amy Peters have capital accounts of $480,000 and $420,000, respectively. Bill Denny and Mark Morgan are to join the partnership. Denny invests $450,000 in the partnership for which he receives a capital credit of $450,000. Morgan purchases a one-half interest from Mills for $300,000 and a one-fourth interest from Peters for $90,000. Instructions (a) Prepare the journal entries to record the admission of Denny and Morgan to the partnership. (b)
Determine the capital balances of the partners after the admission of Denny and Morgan.
Accounting for Partnerships a
Solution 177
(a)
(b)
12 - 43
(10 min.)
Cash.............................................................................................. Denny, Capital......................................................................
450,000
Mills, Capital.................................................................................. Peters, Capital............................................................................... Morgan, Capital ....................................................................
240,000 105,000
Mills ($480,000 – $240,000) Peters ($420,000 – $105,000) Denny Morgan Total Capital
450,000
345,000
$ 240,000 315,000 450,000 345,000 $1,350,000
a
Ex. 178
Adel, Gaines, and Yockey share income and losses in a ratio of 3:2:5, respectively. The capital account balances of the partners are as follows: Adel, Capital Gaines, Capital Yockey, Capital
$600,000 360,000 240,000
Instructions Prepare the journal entry on the books of the partnership to record the withdrawal of Yockey under the following independent circumstances: 1. The partners agree that Yockey should be paid $280,000 by the partnership for his interest. 2. The partners agree that Yockey should be paid $180,000 by the partnership for his interest. 3. Adel agrees to pay Yockey $180,000 for one-half of his capital interest and Gaines agrees to pay Yockey $180,000 for one-half of his capital interest in a personal transaction among the partners.
a
Solution 178
(15 min.)
1. Yockey, Capital ................................................................................ Adel, Capital..................................................................................... Gaines, Capital................................................................................. Cash ........................................................................................ (To record withdrawal and bonus to Yockey) Bonus to Yockey $40,000 ($280,000 – $240,000) Allocation to reduce remaining partners' capital: Adel (3/5 × $40,000) $24,000 Gaines (2/5 × $40,000) 16,000 $40,000
240,000 24,000 16,000 280,000
12 - 44 Test Bank for Accounting Principles, Eighth Edition a
Solution 178
(cont.)
2. Yockey, Capital ............................................................................... 240,000 Adel, Capital ........................................................................... Gaines, Capital ....................................................................... Cash ....................................................................................... (To record withdrawal of Yockey and bonus to remaining partners) Bonus to remaining partners $60,000 ($240,000 – $180,000) Allocation to increase remaining partners' capital: Adel (3/5 × $60,000) $36,000 Gaines (2/5 × $60,000) 24,000 $60,000 3. Yockey, Capital ............................................................................... Adel, Capital ........................................................................... Gaines, Capital ....................................................................... (To record withdrawal of Yockey)
36,000 24,000 180,000
240,000 120,000 120,000
Total net assets and total capital of the partnership do not change.
a
Ex. 179
Dixon, Larsen, and Polley have capital balances of $150,000, $100,000, and $75,000, respectively, and their income ratios are 4:2:4. Instructions Record the withdrawal of Polley from the partnership under each of the following assumptions: 1. Polley is paid $75,000 from partnership assets. 2. Polley is paid $90,000 from partnership assets. 3. Polley is paid $55,000 from partnership assets.
a
Solution 179
(10 min.)
1. Polley, Capital ................................................................................. Cash .......................................................................................
75,000
2. Polley, Capital ................................................................................. Dixon, Capital ($15,000 × 4/6)......................................................... Larsen, Capital ($15,000 × 2/6)....................................................... Cash .......................................................................................
75,000 10,000 5,000
3. Polley, Capital ................................................................................. Dixon, Capital ($20,000 × 4/6)................................................ Larsen, Capital ($20,000 × 2/6) .............................................. Cash .......................................................................................
75,000
75,000
90,000
13,333 6,667 55,000
Accounting for Partnerships
12 - 45
COMPLETION STATEMENTS 180. The ______________ Act provides the basic rules for the formation and operation of partnerships in more than 90% of the states. 181. A partnership characteristic which enables each partner to act on behalf of the partnership when engaging in partnership business is called ______________. 182. A major disadvantage of the partnership form of organization is ______________, which makes each partner personally and individually liable for all partnership liabilities. 183. The capital accounts indicate each partner's ______________ investment, while the partner's drawing accounts are ______________ owner's equity accounts. 184. The ______________ ratio specifies the basis for sharing income and losses. 185. An income ratio based on ______________ balances may be appropriate when the amount of funds invested in the partnership is critical to the partnership. 186. A ______________ allowance or ______________ on partners' capital accounts are not expenses of the partnership when they are specified as the basis for sharing income and losses. 187. In liquidating a partnership, it is necessary to convert ______________ into cash and to allocate any ______________ or ______________ to the partners based on their income ratios. 188. A debit balance in a partner's capital account is called a _____________. a
189. A new partner may be admitted to the partnership by ______________ the interest of an existing partner, or by ______________ assets in the partnership.
a
190. When a new partner's capital interest on the date of admittance is less than his or her investment in the firm, a ______________ results for the ______________ partner(s).
a
191. If a bonus is given to a new partner, the old partners' capital accounts are decreased based on their ______________ ratio prior to the admission of the new partner.
Answers to Completion Statements 180. 181. 182. 183. 184. 185.
Uniform Partnership mutual agency unlimited liability permanent, temporary income capital
186. 187. 188. a 189. a 190. a 191.
salary, interest noncash assets, gains, losses capital deficiency purchasing, investing bonus, old income
12 - 46 Test Bank for Accounting Principles, Eighth Edition
MATCHING 192. Match the items below by entering the appropriate code letter in the space provided. A. B. C. D. E. F.
Mutual agency Unlimited liability Partnership agreement Income ratio Partners' capital statement Admission by investment
G. H. I. J.
Purchase of an interest Partnership liquidation Capital deficiency Distribution of cash to partners in liquidation of a partnership.
____
1. Each partner is personally and individually liable for partnership debts.
____
2. Made on basis of partners' capital balances.
____
3. Explains changes in individual partner's capital accounts during a period.
____
4. Each partner can bind the partnership so long as the action appears to be appropriate for the partnership.
____
5. Business terminates.
____
a
6. Results in an increase in total net assets and total capital of the partnership.
____
7. Capital account with a debit balance.
____
8. The basis for sharing income and losses.
____
a
9. Total net assets and total capital of the partnership do not change.
____ 10. Written or verbal contract establishing duties and responsibilities of partners.
Answers to Matching 1. 2. 3. 4. 5.
B J E A H
a
6. 7. 8. a 9. 10.
F I D G C
Accounting for Partnerships
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SHORT-ANSWER ESSAY QUESTIONS S-A E 193 Identify and explain the principal characteristics of the partnership form of business organization.
Solution 193 The principal characteristics of a partnership form of organization are as follows: (a)
It is a voluntary association of two or more individuals based on a legally binding contract.
(b)
The partners act in a mutual agency relationship; that is, each partner acts on behalf of the partnership when engaging in partnership business.
(c)
A partnership has limited life. That is, a partnership may be ended voluntarily at any time through the acceptance of a new partner into the firm or the withdrawal of a partner. And, a partnership may be ended involuntarily by the death or incapacity of a partner.
(d)
The partners have unlimited liability. Each partner is personally and individually liable for all partnership liabilities.
(e)
All partnership assets are co-owned by the partners; that is, the assets are owned jointly by all the partners.
S-A E 194 A partnership is liquidated by selling the non-cash assets, paying the creditors in full, and distributing the remaining assets to the partners. Explain why gains and losses on the realization of non-cash assets are distributed to the partners based on their income ratios, whereas cash is distributed to the partners based on their equity as shown in their capital accounts. What effects does the payment or nonpayment of a capital deficiency have on the distribution of cash to the partners?
Solution 194 Gains and losses on the realization of non-cash assets are like income and losses; that is, they are income statement items and, therefore, are distributed to partners based on their income and loss ratios. Cash is a balance sheet item and is the basis for any residual equity after liquidation; therefore, the final asset amount cash should be distributed to partners in accordance with their equity balances. When the capital deficiency is paid, the payment is credited to the partner with the debit balance in the capital account. Then, the remaining cash is distributed to the partners with credit balances on the basis of their balances. If the capital deficiency is not paid, the deficiency is allocated to the partners with credit balances on the basis of their income ratios. The remaining cash is then distributed to these partners on the basis of their capital balances.
12 - 48 Test Bank for Accounting Principles, Eighth Edition S-A E 195 (Ethics) Three doctors, Frank White, Mark Rosen, and Steve Jenner, opened a family medicine clinic. All three doctors had been lifelong friends. All belonged to the same religious faith. All were very active in church affairs, and tried to mold their professional behavior to their religious beliefs. About a year ago, Dr. White announced that he was leaving the church. The others noticed that his personality also began to change. He began to dress in flamboyant styles, and he started wearing expensive-looking jewelry. His temper became unstable—one minute he was calm, and the next, he might be throwing charts down the hall and screaming. He started coming to the office late, and forgetting to see some of his patients before he left again. The other two at first were stunned at the changes. His wife asked them whether they thought he might have a drinking problem. After finally deciding to investigate, they found what looked to them like a large amount of cocaine, (hundreds of plastic sacks of white powder) tucked away in boxes of old medical equipment. Frightened, Drs. Rosen and Jenner decided to act quickly. Their partnership agreement said nothing about dissolving the partnership—only about what to do if one of them died. They therefore secretly rented office space across town and began to move the most necessary equipment and supplies to the new office. A month later, they changed the locks on the old office and began seeing patients in the new office without any notice to Dr. White at all. Dr. White simply came in at around ten o'clock as usual, and found himself locked out of an empty office. Required: Did Drs. Rosen and Jenner act ethically in their ending of the partnership? Explain.
Solution 195 No, Drs. Rosen and Jenner did not act ethically in the way they ended the partnership. It is important to distinguish between legal obligations and ethical obligations. The partnership may well be legally dissolved by their action. However, ethically, they had no right to act unilaterally, without giving Dr. White a chance to defend himself or to correct his behavior. It also looks like they may have had an obligation to report their apparent cocaine "find" to the appropriate authorities, or at least to determine whether the substance was, in fact, cocaine. It is clear that the doctors had the right and obligation to protect Dr. White's patients, but there is no evidence given that he was actually endangering his patients. Drs. Rosen and Jenner's actions seem to be cowardly, and an attempt to keep from facing unpleasant realities.
S-A E 196 (Communication) Matt Jones and Jerry Watson began detail work on automobiles as a hobby. First, they used a mail-order kit to add "pinstriping" to their own cars, a 1968 Mustang and a 1970 GTO Judge, respectively. Then Matt added more flourishes, including his name. Jerry practiced painting flames on his Judge. Gradually, their cars became recognized around town and others began to ask them to add a flourish here or there to their cars. They were talked into attending a "muscle car" show in a nearby large city to show off their cars. They had more requests for work than they could handle. Now, they are considering quitting their other jobs and making this a permanent business. Jerry, for example, turns down more jobs than he accepts and still gets more requests every week.
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S-A E 196 (cont.) Matt and Jerry are unsure how to proceed. They like the idea of a partnership, but they only know they work well together—things like how to split payment have just been settled individually for each job, depending on which one did more work. Matt's father suggests a written partnership agreement. Matt disagrees. He believes that it will spoil the whole arrangement by reducing it to words. Required: Write a brief note to Matt explaining why he needs a partnership agreement.
Solution 196 Dear Matt, Your dad asked me to write to you. I am an accountant with the CPA firm Clinton, Grant, and Thomas, and I do a lot of work for partnerships. I understand that you don't want a written partnership agreement. I'd like to share with you a few things you may not have considered. First, I completely agree that a written agreement won't solve all your problems. I would even say that a poorly written agreement is worse than none at all. However, I don't know any partnerships in this town that have lasted for more than a year or two that don't have a written agreement. If they didn't have one at first, they learned by hard experience exactly why they needed one. I'd say the biggest advantage is that it forces both of you to spell out what you expect of the other party. You have discussed, I understand, how profits are to be split. Do both of you agree entirely? What if you decide another method would be more fair? What do you plan to do if you want to add a partner? Who makes the decisions about which building to rent, and what kind of help to hire? All these things can be spelled out in a partnership agreement. I hope you will seriously consider drawing up a good partnership agreement. Otherwise, you may condemn yourselves to spending more time clearing up misunderstandings than on fixing up cars. Let me know if I can help. I know a couple of attorneys in town who could get the job done without charging an arm and a leg. Sincerely, (signature)
