Accounting Principles 7Th Canadian Edition Volume 2 By Jerry J. Weygandt – Test Bank

 

Instant Download – Complete Test Bank With Answers

 

 

Sample Questions Are Posted Below

 

CHAPTER 12

 

ACCOUNTING FOR PARTNERSHIPS

 

CHAPTER STUDY OBJECTIVES

 

 

1. Describe the characteristics of the partnership form of business organization. The main characteristics of a partnership are (1) the association of individuals, (2) mutual agency, (3) co-ownership of property, (4) limited life, and (5) unlimited liability for a general partnership.

 

 

2. Account for the formation of a partnership. When a partnership is formed, each partner’s initial investment should be recorded at the assets’ fair value at the date of their transfer to the partnership. If accounts receivable are contributed, both the gross amount and an allowance for doubtful accounts should be recorded. Accumulated depreciation is not carried forward into a partnership.

 

 

3. Allocate and record profit or loss to partners. Profit or loss is divided based on the profit and loss ratio, which may be any of the following: (1) a fixed ratio; (2) a ratio based on beginning, ending, or average capital balances; or (3) salary and interest allowances and the remainder in a fixed ratio.

 

 

4. Prepare partnership financial statements. The financial statements of a partnership are similar to those of a proprietorship. The main differences are that (1) the statement of owners’ equity is called the statement of partners’ equity, and (2) each partner’s capital account is usually reported on the balance sheet or in a supporting schedule.

 

 

5. Account for the admission of a partner. The entry to record the admission of a new partner by purchase of a partner’s interest affects only partners’ capital accounts. The entry to record the admission by investment of assets in the partnership (1) increases both net assets and total capital, and (2) may result in the recognition of a bonus to either the old partners or the new partner.

 

 

6. Account for the withdrawal of a partner. The entry to record a withdrawal from the firm when payment is made from partners’ personal assets affects only partners’ capital accounts. The entry to record a withdrawal when payment is made from partnership assets (1) decreases net assets and total capital, and (2) may result in recognizing a bonus to either the departing partner or the remaining partners.

 

 

7. Account for the liquidation of a partnership. When a partnership is liquidated, it is necessary to record (1) the sale of noncash assets, (2) the allocation of the gain or loss on realization based on the profit and loss ratio, (3) the payment of partnership liabilities, (4) the removal of any capital deficiency either by repayment or by allocation to the other partners, and (5) the distribution of cash to the partners based on their capital balances.

 

 

TRUE-FALSE STATEMENTS

 

 

1. All provinces in Canada have a Partnership Act that sets out the basic rules for the forming and operating of partnerships.

 

Answer: True

 

Bloomcode: Knowledge

Difficulty: Easy

Learning Objective: Describe the characteristics of the partnership form of business organization.

Section Reference: Partnership Form of Organization

CPA: Financial Reporting

 

 

2. A partnership is a relationship between people who do business with the intention of making a profit.

 

Answer: True

 

Bloomcode: Knowledge

Difficulty: Easy

Learning Objective: Describe the characteristics of the partnership form of business organization.

Section Reference: Partnership Form of Organization

CPA: Financial Reporting

 

 

3. A partnership must make a profit.

 

Answer: False

 

Bloomcode: Comprehension

Difficulty: Easy

Learning Objective: Describe the characteristics of the partnership form of business organization.

Section Reference: Partnership Form of Organization

CPA: Financial Reporting

 

 

4. A partnership may be based on a handshake.

 

Answer: True

 

Bloomcode: Knowledge

Difficulty: Medium

Learning Objective: Describe the characteristics of the partnership form of business organization.

Section Reference: Partnership Form of Organization

CPA: Financial Reporting

 

 

5. A partnership must have a legal written agreement.

 

Answer: False

 

Bloomcode: Knowledge

Difficulty: Medium

Learning Objective: Describe the characteristics of the partnership form of business organization.

Section Reference: Partnership Form of Organization

CPA: Financial Reporting

 

 

6. A partnership is NOT an accounting entity for financial reporting purposes.

 

Answer: False

 

Bloomcode: Knowledge

Difficulty: Easy

Learning Objective: Describe the characteristics of the partnership form of business organization.

Section Reference: Partnership Form of Organization

CPA: Financial Reporting

 

 

7. Two proprietorships CANNOT combine and form a partnership.

 

Answer: False

 

Difficulty: Medium

Bloomcode: Application

Learning Objective: Describe the characteristics of the partnership form of business organization.

Section Reference: Partnership Form of Organization

CPA: Financial Reporting

 

 

8. A partnership is taxed as a single legal entity.

 

Answer: False

 

Bloomcode: Comprehension

Difficulty: Medium

Learning Objective: Describe the characteristics of the partnership form of business organization.

Section Reference: Partnership Form of Organization

CPA: Financial Reporting

 

 

9. In a limited liability partnership, all the partners have limited liability for the debts of the partnership.

 

Answer: False

 

Bloomcode: Comprehension

Difficulty: Medium

Learning Objective: Describe the characteristics of the partnership form of business organization.

Section Reference: Partnership Form of Organization

CPA: Financial Reporting

 

 

10. A partner pays income tax on the amount of money he or she withdrew from the partnership during the year.

 

Answer: False

 

Bloomcode: Comprehension

Difficulty: Medium

Learning Objective: Describe the characteristics of the partnership form of business organization.

Section Reference: Partnership Form of Organization

CPA: Financial Reporting

 

 

11. A partnership has unlimited life.

 

Answer: False

 

Bloomcode: Knowledge

Difficulty: Easy

Learning Objective: Describe the characteristics of the partnership form of business organization.

Section Reference: Partnership Form of Organization

CPA: Financial Reporting

 

 

12. Mutual agency means that each partner acts for the partnership when he or she does partnership business.

 

Answer: True

 

Bloomcode: Knowledge

Difficulty: Easy

Learning Objective: Describe the characteristics of the partnership form of business organization.

Section Reference: Partnership Form of Organization

CPA: Financial Reporting

 

 

13. When a partner exceeds his or her authority and the act looks appropriate for the partnership, the act is NOT binding on the other partners and the partnership.

 

Answer: False

 

Bloomcode: Knowledge

Difficulty: Medium

Learning Objective: Describe the characteristics of the partnership form of business organization.

Section Reference: Partnership Form of Organization

CPA: Financial Reporting

 

 

14. Each partner is jointly and severally liable for only their portion of the partnership liabilities.

 

Answer: False

 

Bloomcode: Comprehension

Difficulty: Medium

Learning Objective: Describe the characteristics of the partnership form of business organization.

Section Reference: Partnership Form of Organization

CPA: Financial Reporting

 

 

15. In a limited partnership, the amount of debt that a partner is liable for is the amount of capital that they have contributed to the partnership.

 

Answer: True

 

Bloomcode: Knowledge

Difficulty: Medium

Learning Objective: Describe the characteristics of the partnership form of business organization.

Section Reference: Partnership Form of Organization

CPA: Financial Reporting

 

 

16. Because of the unlimited liability of partners in a partnership, it is easier for a partnership to gain large amounts of investment capital.

 

Answer: False

 

Bloomcode: Comprehension

Difficulty: Easy

Learning Objective: Describe the characteristics of the partnership form of business organization.

Section Reference: Partnership Form of Organization

CPA: Financial Reporting

 

 

17. A partnership is more difficult to form than a corporation.

 

Answer: False

 

Bloomcode: Knowledge

Difficulty: Easy

Learning Objective: Describe the characteristics of the partnership form of business organization.

Section Reference: Partnership Form of Organization

CPA: Financial Reporting

 

 

18. A corporation is subject to less government restrictions than a partnership.

 

Answer: False

 

Bloomcode: Knowledge

Difficulty: Easy

Learning Objective: Describe the characteristics of the partnership form of business organization.

Section Reference: Partnership Form of Organization

CPA: Financial Reporting

 

 

19. When assets are rolled into a partnership, the value that they are allocated in the partnership is the same as the value in the previous entity.

 

Answer: False

 

Bloomcode: Knowledge

Difficulty: Medium

Learning Objective: Account for the formation of a partnership.

Section Reference: Basic Partnership Accounting

CPA: Financial Reporting

 

 

20. When a long-lived asset is contributed to a partnership by a partner, the entry will record the fair value of the asset and the accumulated depreciation which has accumulated on it.

 

Answer: False

 

Bloomcode: Knowledge

Difficulty: Easy

Learning Objective: Account for the formation of a partnership.

Section Reference: Basic Partnership Accounting

CPA: Financial Reporting

 

 

21. When accounts receivable are contributed to a partnership, they are valued at their expected realizable value.

 

Answer: True

 

Bloomcode: Knowledge

Difficulty: Medium

Learning Objective: Account for the formation of a partnership.

Section Reference: Basic Partnership Accounting

CPA: Financial Reporting

 

 

22. The investment of an asset into a partnership should be recorded at the higher value of the asset’s original cost or the asset’s fair value.

 

Answer: False

 

Bloomcode: Application

Difficulty: Medium

Learning Objective: Account for the formation of a partnership.

Section Reference: Basic Partnership Accounting

CPA: Financial Reporting

 

 

23. Partnership profit or loss must be divided equally in a partnership.

 

Answer: False

 

Bloomcode: Knowledge

Difficulty: Easy

Learning Objective: Allocate and record profit or loss to partners.

Section Reference: Dividing Partnership Profit or Loss

CPA: Financial Reporting

 

 

24. Partnership profit or loss must be divided according to the formulas which are outlined in the partnership agreement.

 

Answer: True

 

Bloomcode: Comprehension

Difficulty: Easy

Learning Objective: Allocate and record profit or loss to partners.

Section Reference: Dividing Partnership Profit or Loss

CPA: Financial Reporting

 

 

25. A profit allocation in a partnership may be allocated in a different ratio than a loss allocation.

 

Answer: False

 

Bloomcode: Comprehension

Difficulty: Easy

Learning Objective: Allocate and record profit or loss to partners.

Section Reference: Dividing Partnership Profit or Loss

CPA: Financial Reporting

 

 

26. When profit is allocated in a 2:1 ratio, it means that one partner will get 2/3 of the profit.

 

Answer: True

 

Bloomcode: Comprehension

Difficulty: Medium

Learning Objective: Allocate and record profit or loss to partners.

Section Reference: Dividing Partnership Profit or Loss

CPA: Financial Reporting

 

 

27. When profit is allocated in a 3:2:1 ratio, it means that one partner will get 50% of the profit.

 

Answer: True

 

Bloomcode: Comprehension

Difficulty: Hard

Learning Objective: Allocate and record profit or loss to partners.

Section Reference: Dividing Partnership Profit or Loss

CPA: Financial Reporting

 

 

28. Partners are NEVER allocated a salary in a partnership.

 

Answer: False

 

Bloomcode: Comprehension

Difficulty: Medium

Learning Objective: Allocate and record profit or loss to partners.

Section Reference: Dividing Partnership Profit or Loss

CPA: Financial Reporting

 

 

29. A partner may receive interest on their partnership account.

 

Answer: True

 

Bloomcode: Knowledge

Difficulty: Medium

Learning Objective: Allocate and record profit or loss to partners.

Section Reference: Dividing Partnership Profit or Loss

CPA: Financial Reporting

 

 

30. Salaries to partners and interest on partner’s capital balances are expenses of the partnership.

 

Answer: False

 

Bloomcode: Knowledge

Difficulty: Medium

Learning Objective: Allocate and record profit or loss to partners.

Section Reference: Dividing Partnership Profit or Loss

CPA: Financial Reporting

 

 

31. Partnership profit/loss allocation is determined in accordance with the partnership agreement.

 

Answer: True

 

Bloomcode: Knowledge

Difficulty: Easy

Learning Objective: Allocate and record profit or loss to partners.

Section Reference: Dividing Partnership Profit or Loss

CPA: Financial Reporting

 

 

32. On the financial statement of a partnership, a separate statement of the division of partnership profit or loss is prepared.

 

Answer: False

 

Bloomcode: Knowledge

Difficulty: Medium

Learning Objective: Prepare partnership financial statements.

Section Reference: Partnership Financial Statements

CPA: Financial Reporting

 

 

33. A detailed listing of all the assets invested by a partner in a partnership appears on the Statement of Partners’ Equity.

 

Answer: False

 

Bloomcode: Knowledge

Difficulty: Medium

Learning Objective: Prepare partnership financial statements.

Section Reference: Partnership Financial Statements

CPA: Financial Reporting

 

 

34. The balance sheet for a partnership is the same as for a proprietorship.

 

Answer: False

 

Bloomcode: Knowledge

Difficulty: Easy

Learning Objective: Prepare partnership financial statements.

Section Reference: Partnership Financial Statements

CPA: Financial Reporting

 

 

35. If a new partner is purchasing the interests of an existing partner, the purchase price passes directly from the new partner to the old partner and does NOT flow through the partnership.

 

Answer: True

 

Bloomcode: Comprehension

Difficulty: Medium

Learning Objective: Account for the admission of a partner.

Section Reference: Admission and Withdrawal of a Partner

CPA: Financial Reporting

 

 

36. The admission of a new partner may result in a bonus to the existing partners.

 

Answer: True

 

Bloomcode: Knowledge

Difficulty: Easy

Learning Objective: Account for the admission of a partner.

Section Reference: Admission and Withdrawal of a Partner

CPA: Financial Reporting

 

 

37. The admission of a new partner may result in a bonus to the new partner from the existing partners.

 

Answer: True

 

Bloomcode: Knowledge

Difficulty: Easy

Learning Objective: Account for the admission of a partner.

Section Reference: Admission and Withdrawal of a Partner

CPA: Financial Reporting

 

 

38. A withdrawal of a partner may result in a payment from remaining partners’ personal assets.

 

Answer: True

 

Bloomcode: Comprehension

Difficulty: Medium

Learning Objective: Account for the withdrawal of a partner.

Section Reference: Withdrawal of a Partner

CPA: Financial Reporting

 

 

39. A partner may only withdraw from a partnership on a voluntary basis.

 

Answer: False

 

Bloomcode: Comprehension

Difficulty: Easy

Learning Objective: Account for the withdrawal of a partner.

Section Reference: Withdrawal of a Partner

CPA: Financial Reporting

 

 

40. In the withdrawal of a partner, a payment from the partnership assets will affect only the remaining partners’ personal assets.

 

Answer: False

 

Bloomcode: Comprehension

Difficulty: Medium

Learning Objective: Account for the withdrawal of a partner.

Section Reference: Withdrawal of a Partner

CPA: Financial Reporting

 

 

41. When a partner withdraws from a partnership, asset revaluations should be recorded for the remaining assets in the partnership.

 

Answer: False

 

Bloomcode: Knowledge

Difficulty: Medium

Learning Objective: Account for the withdrawal of a partner.

Section Reference: Withdrawal of a Partner

CPA: Financial Reporting

 

 

42. A bonus to the departing partner may be paid if the fair value of the partnership assets is less than their carrying amount.

 

Answer: False

 

Bloomcode: Comprehension

Difficulty: Medium

Learning Objective: Account for the withdrawal of a partner.

Section Reference: Withdrawal of a Partner

CPA: Financial Reporting

 

 

43. The departing partner may have to pay a bonus to the partnership if the remaining partners are anxious to remove the partner.

 

Answer: False

 

Bloomcode: Comprehension

Difficulty: Medium

Learning Objective: Account for the withdrawal of a partner.

Section Reference: Withdrawal of a Partner

CPA: Financial Reporting

 

 

44. A bonus to a departing partner maybe paid if there is unrecorded goodwill resulting from the partnership’s superior earnings record.

 

Answer: True

 

Bloomcode: Comprehension

Difficulty: Medium

Learning Objective: Account for the withdrawal of a partner.

Section Reference: Withdrawal of a Partner

CPA: Financial Reporting

 

 

45. A bonus to the remaining partners may be paid if the recorded assets are overvalued.

 

Answer: True

 

Bloomcode: Knowledge

Difficulty: Medium

Learning Objective: Account for the withdrawal of a partner.

Section Reference: Withdrawal of a Partner

CPA: Financial Reporting

 

 

46. If a partnership is dissolved, an asset does NOT legally return to the partner who originally contributed it.

 

Answer: True

 

Bloomcode: Comprehension

Difficulty: Medium

Learning Objective: Account for the withdrawal of a partner.

Section Reference: Withdrawal of a Partner

CPA: Financial Reporting

 

 

47. The procedures for withdrawal of a partner from a partnership must be specified in the partnership agreement.

 

Answer: False

 

Bloomcode: Comprehension

Difficulty: Medium

Learning Objective: Account for the withdrawal of a partner.

Section Reference: Withdrawal of a Partner

CPA: Financial Reporting

 

 

48. At the death of a partner, the partnership is dissolved.

 

Answer: True

 

Bloomcode: Knowledge

Difficulty: Easy

Learning Objective: Account for the withdrawal of a partner.

Section Reference: Withdrawal of a Partner

CPA: Financial Reporting

 

 

49. The liquidation of a partnership is done to ensure that the fair value of the remaining assets is recorded accurately.

 

Answer: False

 

Bloomcode: Comprehension

Difficulty: Medium

Learning Objective: Account for the liquidation of a partnership.

Section Reference: Liquidation of a Partnership

CPA: Financial Reporting

 

 

50. No capital deficiency means that all partners have credit balances prior to the final distribution of cash.

 

Answer: True

 

Bloomcode: Comprehension

Difficulty: Medium

Learning Objective: Account for the liquidation of a partnership.

Section Reference: Liquidation of a Partnership

CPA: Financial Reporting

 

 

51. In liquidation of a partnership, the sale of noncash assets for cash is called revaluation.

 

Answer: False

 

Bloomcode: Knowledge

Difficulty: Easy

Learning Objective: Account for the liquidation of a partnership.

Section Reference: Liquidation of a Partnership

CPA: Financial Reporting

 

 

MULTIPLE CHOICE QUESTIONS

 

 

52. A partnership
53. a) is an association of one or more individuals.
54. b) pays income tax on partnership profit.
55. c) has a limited life.
56. d) is not an accounting entity for financial reporting purposes.

 

Answer: c

 

Bloomcode: Knowledge

Difficulty: Easy

Learning Objective: Describe the characteristics of the partnership form of business organization.

Section Reference: Partnership Form of Organization

CPA: Financial Reporting

 

 

53. A general partner in a limited partnership
54. a) has unlimited liability for all partnership debts.
55. b) is always the general manager of the firm.
56. c) is the partner who lacks a specialization.
57. d) is liable for partnership liabilities only to the extent of that partner’s capital equity.

 

Answer: a

 

Bloomcode: Knowledge

Difficulty: Easy

Learning Objective: Describe the characteristics of the partnership form of business organization.

Section Reference: Partnership Form of Organization

CPA: Financial Reporting

 

 

54. The individual assets invested by a partner in a partnership
55. a) revert back to that partner if the partnership liquidates.
56. b) determine that partner’s share of profit or loss for the year.
57. c) are jointly owned by all partners.
58. d) determine the scope of authority of that partner.

 

Answer: c

 

Bloomcode: Knowledge

Difficulty: Easy

Learning Objective: Describe the characteristics of the partnership form of business organization.

Section Reference: Partnership Form of Organization

CPA: Financial Reporting

 

 

55. Which one of the following would NOT be considered a disadvantage of the partnership form of organization?
56. a) limited life
57. b) unlimited liability
58. c) mutual agency
59. d) ease of formation

 

Answer: d

 

Bloomcode: Knowledge

Difficulty: Medium

Learning Objective: Describe the characteristics of the partnership form of business organization.

Section Reference: Partnership Form of Organization

CPA: Financial Reporting

 

 

56. A limited liability partnership is designed to
57. a) protect innocent partners from the negligent acts of employees working on behalf of the partners.
58. b) ensure all partners get an equal share of partnership earnings.
59. c) allow partners to enter into several different partnerships simultaneously.
60. d) protect partners from the negligence claims resulting from the acts of other partners.

 

Answer: d

 

Bloomcode: Knowledge

Difficulty: Medium

Learning Objective: Describe the characteristics of the partnership form of business organization.

Section Reference: Partnership Form of Organization

CPA: Financial Reporting

 

 

57. Which of the following is NOT a principal characteristic of the partnership form of business organization?
58. a) mutual agency
59. b) association of individuals
60. c) limited liability
61. d) limited life

 

Answer: c

 

Bloomcode: Knowledge

Difficulty: Easy

Learning Objective: Describe the characteristics of the partnership form of business organization.

Section Reference: Partnership Form of Organization

CPA: Financial Reporting

 

 

58. Which of the following statements is true regarding the form of a legally binding partnership contract?
59. a) The partnership contract must be in writing.
60. b) The partnership contract may be based on a handshake.
61. c) The partnership contract may be implied.
62. d) The partnership contract cannot be oral.

 

Answer: b

 

Bloomcode: Knowledge

Difficulty: Medium

Learning Objective: Describe the characteristics of the partnership form of business organization.

Section Reference: Partnership Form of Organization

CPA: Financial Reporting

 

 

59. Which of the following statements is true regarding a partnership?
60. a) A partnership is taxed as a separate entity.
61. b) Only professionals, such as doctors and lawyers may form a partnership.
62. c) A partnership must file an information return that reports the partnership profit and the partners’ share in that profit.
63. d) A partner’s income tax is based on the amount of money the partner withdrew from the partnership during the year.

 

Answer: c

 

Bloomcode: Knowledge

Difficulty: Medium

Learning Objective: Describe the characteristics of the partnership form of business organization.

Section Reference: Partnership Form of Organization

CPA: Financial Reporting

 

 

60. Which of the following statements about a partnership is correct?
61. a) The personal assets of a partner are included in the partnership accounting records.
62. b) A partnership is required to file an income tax return.
63. c) Each partner’s share of profit is taxable to the partnership.
64. d) A partnership represents an accounting entity for financial reporting purposes.

 

Answer: d

 

Bloomcode: Knowledge

Difficulty: Easy

Learning Objective: Describe the characteristics of the partnership form of business organization.

Section Reference: Partnership Form of Organization

CPA: Financial Reporting

 

 

61. In a partnership, mutual agency means
62. a) each partner acts on his own behalf when engaging in partnership business.
63. b) the act of any partner is binding on all other partners, only if partners act within their scope of authority.
64. 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.
65. d) that partners are mutually respectful of each other.

 

Answer: c

 

Bloomcode: Knowledge

Difficulty: Medium

Learning Objective: Describe the characteristics of the partnership form of business organization.

Section Reference: Partnership Form of Organization

CPA: Financial Reporting

 

 

62. A partnership agreement generally contains all of the following EXCEPT
63. a) the names and capital contributions of all the partners.
64. b) the expected life of the partnership.
65. c) the rights and duties of all partners.
66. d) the basis for sharing profit or loss among the partners.

 

Answer: b

 

Bloomcode: Knowledge

Difficulty: Easy

Learning Objective: Describe the characteristics of the partnership form of business organization.

Section Reference: Partnership Form of Organization

CPA: Financial Reporting

 

 

63. The partner in a limited partnership that has unlimited liability is referred to as the
64. a) lead partner.
65. b) head partner.
66. c) general partner.
67. d) unlimited partner.

 

Answer: c

 

Bloomcode: Knowledge

Difficulty: Easy

Learning Objective: Describe the characteristics of the partnership form of business organization.

Section Reference: Partnership Form of Organization

CPA: Financial Reporting

 

 

64. Limited partnerships
65. a) must have at least one general partner.
66. b) guarantee that a partner will receive a return.
67. c) guarantee that a partner will get back his original investment.
68. d) are only permitted in Ontario.

 

Answer: a

 

Bloomcode: Knowledge

Difficulty: Medium

Learning Objective: Describe the characteristics of the partnership form of business organization.

Section Reference: Partnership Form of Organization

CPA: Financial Reporting

 

 

65. Which of the following statements about partnerships is INCORRECT?
66. a) Partnership assets are co-owned by partners.
67. b) If a partnership is terminated, the assets do not legally revert to the original contributor.
68. c) If the partnership agreement does not specify the manner in which profit is to be shared, it is distributed according to capital contributions.
69. d) Each partner has a claim on assets equal to the balance in the partner’s capital account.

 

Answer: c

 

Bloomcode: Knowledge

Difficulty: Hard

Learning Objective: Describe the characteristics of the partnership form of business organization.

Section Reference: Partnership Form of Organization

CPA: Financial Reporting

 

 

66. All of the following are correct EXCEPT
67. a) a partnership is a legal entity.
68. b) the partnership can sue or be sued.
69. c) the personal assets, liability and transactions of the partners are recorded in the partnership.
70. d) the partnership must file an information tax return.

 

Answer: c

 

Bloomcode: Knowledge

Difficulty: Medium

Learning Objective: Describe the characteristics of the partnership form of business organization.

Section Reference: Partnership Form of Organization

CPA: Financial Reporting

 

 

67. If division of profits in a partnership is NOT specified, profit (loss) is assumed to be
68. a) allocated to general partners first.
69. b) allocated based on capital contribution.
70. c) held within the partnership.
71. d) allocated equally.

 

Answer: d

 

Bloomcode: Knowledge

Difficulty: Medium

Learning Objective: Describe the characteristics of the partnership form of business organization.

Section Reference: Partnership Form of Organization

CPA: Financial Reporting

 

 

68. Which of the following is NOT an advantage of the partnership form of business?
69. a) mutual agency
70. b) ease of formation
71. c) ease of decision making
72. d) freedom from governmental regulations and restrictions

 

Answer: a

 

Bloomcode: Comprehension

Difficulty: Medium

Learning Objective: Describe the characteristics of the partnership form of business organization.

Section Reference: Partnership Form of Organization

CPA: Financial Reporting

 

 

69. Which of the following statements is INCORRECT regarding partnership agreements?
70. a) Common law provinces are governed by the Partnership Act.
71. b) Oral agreements are preferable to written articles.
72. c) It should specify the different relationships that are to exist among the partners.
73. d) It should state procedures for submitting disputes to arbitration.

 

Answer: b

 

Bloomcode: Knowledge

Difficulty: Easy

Learning Objective: Describe the characteristics of the partnership form of business organization.

Section Reference: Partnership Form of Organization

CPA: Financial Reporting

 

 

70. Which of the following is considered an advantage of a general partnership?
71. a) Partnerships have an indefinite life.
72. b) Partners cannot make routine business decisions without consent from other partners.
73. c) Partnerships allow for combining skills and resources.
74. d) Partners have limited liability.

 

Answer: c

 

Bloomcode: Comprehension

Difficulty: Easy

Learning Objective: Describe the characteristics of the partnership form of business organization.

Section Reference: Partnership Form of Organization

CPA: Financial Reporting

 

 

71. Which of the following is a factor that should be included in a partnership agreement?
72. a) the basis for sharing profit or loss
73. b) procedures for the withdrawal, or addition, of a partner
74. c) the rights and duties of all partners
75. d) all of the above

 

Answer: d

 

Bloomcode: Comprehension

Difficulty: Easy

Learning Objective: Describe the characteristics of the partnership form of business organization.

Section Reference: Partnership Form of Organization

CPA: Financial Reporting

 

 

72. Each partner’s initial noncash investment in the partnership should be recorded at the
73. a) fair value of the assets at the date of their transfer into the business.
74. b) fair value of the assets at the date the partnership begins operations.
75. c) original cost of the assets at the time they were purchased by the contributing partner.
76. d) carrying amount of the assets at the date of their transfer into the partnership.

 

Answer: a

 

Bloomcode: Knowledge

Difficulty: Medium

Learning Objective: Account for the formation of a partnership.

Section Reference: Basic Partnership Accounting

CPA: Financial Reporting

 

 

73. Sam Kirby invests personally owned equipment, which originally cost $30,000 and has accumulated depreciation of $6,000 in the Kirby and Gosse partnership. Both partners agree that the fair value of the equipment was $25,000. The entry made by the partnership to record Kirby’s investment should be
74. a) Equipment……………………………………………………………………………. 30,000
    Accumulated Depreciation—Equipment……………………………..                              6,000
    Kirby, Capital……………………………………………………………….                            24,000
75. b) Equipment……………………………………………………………………………. 24,000
    Kirby, Capital……………………………………………………………….                            24,000
76. c) Equipment……………………………………………………………………………. 25,000
    Accumulated Depreciation—Equipment……………………………..           6,000
    Gain on Purchase of Equipment………………………………………..                              1,000
    Kirby, Capital……………………………………………………………….                            30,000
77. d) Equipment……………………………………………………………………………. 25,000
    Kirby, Capital……………………………………………………………….                            25,000

 

Answer: d

 

Bloomcode: Application

Difficulty: Medium

Learning Objective: Account for the formation of a partnership.

Section Reference: Basic Partnership Accounting

CPA: Financial Reporting

 

 

74. O’Brien is investing in a partnership with Skanes. O’Brien contributes equipment that originally cost $21,000, has a carrying amount of $14,000, and a fair value of $16,000. The entry that the partnership makes to record O’Brien’s initial contribution includes a
75. a) debit to Equipment for $14,000.
76. b) debit to Equipment for $21,000.
77. c) debit to Equipment for $16,000.
78. d) credit to Accumulated Depreciation for $7,000.

 

Answer: c

 

Bloomcode: Application

Difficulty: Medium

Learning Objective: Account for the formation of a partnership.

Section Reference: Basic Partnership Accounting

CPA: Financial Reporting

 

 

75. 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?
76. a) The allowance for doubtful accounts should be recorded at its fair value.
77. 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.
78. c) The allowance account should not be carried onto the books of the partnership.
79. 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.

 

Answer: b

 

Bloomcode: Comprehension

Difficulty: Medium

Learning Objective: Account for the formation of a partnership.

Section Reference: Basic Partnership Accounting

CPA: Financial Reporting

 

 

76. In a limited liability partnership, a partner has unlimited liability
77. a) for the negligent acts of the other partners.
78. b) for only his or her share of capital contributed.
79. c) for the actions of employees whom they directly supervise and control.
80. d) only during the first 5 years of the partnership.

 

Answer: c

 

Bloomcode: Knowledge

Difficulty: Easy

Learning Objective: Account for the formation of a partnership.

Section Reference: Basic Partnership Accounting

CPA: Financial Reporting

 

 

77. There are three accounting issues where there are some differences between partnerships and proprietorships. Which one of the following is NOT a difference?
78. a) private partnerships may follow ASPE
79. b) formation of a partnership
80. c) preparing partnership financial statements
81. d) dividing the partnership profit and loss

 

Answer: a

 

Bloomcode: Knowledge

Difficulty: Medium

Learning Objective: Account for the formation of a partnership.

Section Reference: Basic Partnership Accounting

CPA: Financial Reporting

 

 

78. Partnerships are sometimes publicly accountable enterprises and these entities must follow
79. a) ASPE.
80. b) IFRS.
81. c) partnership accounting standards.
82. d) public sector accounting standards.

 

Answer: b

 

Bloomcode: Knowledge

Difficulty: Easy

Learning Objective: Account for the formation of a partnership.

Section Reference: Basic Partnership Accounting

CPA: Financial Reporting

 

 

79. Barry Sanders and Chris Carter formed a partnership on September 1. Barry contributed cash of $100,000 and a furniture with a cost of $50,000 and fair value of $28,000. Chris contributed cash of $70,000 and equipment with a cost of $75,000 and a fair value of $50,000. The appropriate amount to be credited to each partner’s capital account on September 1 is
80. a) Sanders, Capital = $128,000; C. Carter, Capital = $120,000.
81. b) B. Sanders, Capital = $150,000; C. Carter, Capital = $145,000.
82. c) Sanders, Capital = $150,000; C. Carter, Capital = $120,000.
83. d) Sanders, Capital = $128,000; C. Carter, Capital = $145,000.

 

Answer: a

 

Bloomcode: Application

Difficulty: Medium

Learning Objective: Account for the formation of a partnership.

Section Reference: Basic Partnership Accounting

CPA: Financial Reporting

 

 

80. The Cliff and Saha partnership agreement stipulates that profits and losses will be shared equally after salary allowances of $80,000 for Cliff and $40,000 for Saha. At the beginning of the year, Cliff’s capital account had a balance of $80,000, while Saha’s capital account had a balance of $70,000. Profit for the year was $100,000. The balance of Saha’s capital account at the end of the year after closing is
81. a) $70,000.
82. b) $40,000.
83. c) $120,000.
84. d) $100,000.

 

Answer: d

 

Bloomcode: Application

Difficulty: Hard

Learning Objective: Allocate and record profit or loss to partners.

Section Reference: Dividing Partnership Profit or Loss

CPA: Financial Reporting

 

 

81. Ms. Manchester, Mr. Robertson, and Ms. Allison formed a partnership with a 4:2:1 partnership on profit. Mr. Robertson will receive what percentage of the profit at the end of the year?
82. a) 20%
83. b) 33%
84. c) 50%
85. d) 29%

 

Answer: d

 

Bloomcode: Application

Difficulty: Hard

Learning Objective: Allocate and record profit or loss to partners.

Section Reference: Dividing Partnership Profit or Loss

CPA: Financial Reporting

 

 

82. At the end of December 2017, Rod Clarke, a partner in Boyde-Clarke Company, had a balance in his drawings account of $18,000. Rod’s capital account at the beginning of 2017 was $80,000. $5,000 of partnership profit was allocated to Rod in 2017. The entry to close Rod’s drawings account at the end of 2017 would include a
83. a) debit to Income Summary for $18,000.
84. b) credit to Clarke, Capital for $13,000.
85. c) debit to Clarke, Capital for $18,000.
86. d) credit to Clarke, Capital for $5,000.

 

Answer: c

 

Bloomcode: Application

Difficulty: Medium

Learning Objective: Allocate and record profit or loss to partners.

Section Reference: Dividing Partnership Profit or Loss

CPA: Financial Reporting

 

 

83. The partnership of Ezekiel and Gibbons reports profit of $30,000. The partners share equally in profit and losses. The entry to record the partners’ share of profit will include a
84. a) credit to Income Summary for $30,000.
85. b) credit to Ezekiel, Capital for $15,000.
86. c) debit to Gibbons, Capital for $15,000.
87. d) credit to Ezekiel, Drawings for $15,000.

 

Answer: b

 

Bloomcode: Application

Difficulty: Medium

Learning Objective: Allocate and record profit or loss to partners.

Section Reference: Dividing Partnership Profit or Loss

CPA: Financial Reporting

 

 

84. Partner A receives $60,000 and Partner B receives $40,000 in a split of $100,000 profit. Which expression does NOT reflect the profit splitting arrangement?
85. a) 3:2
86. b) 3/5 and 2/5
87. c) 6:4
88. d) 2:1

 

Answer: d

 

Bloomcode: Application

Difficulty: Medium

Learning Objective: Allocate and record profit or loss to partners.

Section Reference: Dividing Partnership Profit or Loss

CPA: Financial Reporting

 

 

85. Ms. Drew, Mr. Fraser, and Ms. Percy had a 1:2:3 partnership split on profit in their partnership. In 2017, the partnership had a profit of $150,000. How much would Ms. Drew receive as her share of the profit?
86. a) $15,000
87. b) $50,000
88. c) $75,000
89. d) $25,000

 

Answer: d

 

Bloomcode: Application

Difficulty: Medium

Learning Objective: Allocate and record profit or loss to partners.

Section Reference: Dividing Partnership Profit or Loss

CPA: Financial Reporting

 

 

86. A profit ratio based on capital balances might be appropriate when
87. a) service is a primary consideration.
88. b) some, but not all, partners plan to work in the business.
89. c) funds invested in the partnership are considered the critical factor.
90. d) little profit is expected.

 

Answer: c

 

Bloomcode: Knowledge

Difficulty: Medium

Learning Objective: Allocate and record profit or loss to partners.

Section Reference: Dividing Partnership Profit or Loss

CPA: Financial Reporting

 

 

87. The profit of the Miskell and Leblanc partnership is $30,000. The partnership agreement specifies that Miskell and Leblanc have a salary allowance of $8,000 and $12,000, 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 $20,000. Any remaining profit or loss is shared equally. What is Miskell’s share of the $30,000 profit?
88. a) $8,000
89. b) $10,000
90. c) $11,000
91. d) $13,000

 

Answer: d

 

Bloomcode: Application

Difficulty: Medium

Learning Objective: Allocate and record profit or loss to partners.

Section Reference: Dividing Partnership Profit or Loss

CPA: Financial Reporting

 

 

88. The profit of the Miskell and Leblanc partnership is $30,000. The partnership agreement specifies that Miskell and Leblanc have a salary allowance of $8,000 and $12,000, 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 $20,000. Any remaining profit or loss is shared equally. What is the balance of Leblanc’s Capital account at the end of the year after profit has been distributed?
89. a) $34,000
90. b) $32,000
91. c) $37,000
92. d) $35,000

 

Answer: c

 

Bloomcode: Application

Difficulty: Hard

Learning Objective: Allocate and record profit or loss to partners.

Section Reference: Dividing Partnership Profit or Loss

CPA: Financial Reporting

 

 

89. The profit of the Busch and Ford partnership is $45,000. The partnership agreement specifies that profits and losses will be shared equally after salary allowances of $25,000 (Busch) and $10,000 (Ford) have been allocated. At the beginning of the year, Busch’s Capital account had a balance of $50,000 and Ford’s Capital account had a balance of $65,000. What is the balance of Ford’s Capital account at the end of the year after profits and losses have been distributed?
90. a) $65,000
91. b) $10,000
92. c) $75,000
93. d) $80,000

 

Answer: d

 

Bloomcode: Application

Difficulty: Hard

Learning Objective: Allocate and record profit or loss to partners.

Section Reference: Dividing Partnership Profit or Loss

CPA: Financial Reporting

 

 

90. Lesley Arsenault and Darcy Campbell formed a partnership by contributing $80,000 and $100,000 respectively. The company reported net income of $78,000 in its first year of operations. Assuming the partners share profits and losses based on the beginning of year capital balances, how much would be distributed to each partner?
91. a) Arsenault = $34,667; D. Campbell = $43,333
92. b) L. Arsenault = $80,000 D. Campbell = $100,000
93. c) Arsenault = $39,000; D. Campbell = $39,000
94. d) L. Arsenault = $78,000; D. Campbell = $78,000

 

Answer: a

 

Bloomcode: Application

Difficulty: Medium

Learning Objective: Allocate and record profit or loss to partners.

Section Reference: Dividing Partnership Profit or Loss

CPA: Financial Reporting

 

 

91. The Statement of Partners’ Equity explains
92. a) the amount of legal liability of each of the partners.
93. b) the types of assets invested in the business by each partner.
94. c) how the partnership will be capitalized if a new partner is admitted to the partnership.
95. d) the changes in each partner’s capital account and in total partnership capital during a period.

 

Answer: d

 

Bloomcode: Knowledge

Difficulty: Easy

Learning Objective: Prepare partnership financial statements.

Section Reference: Partnership Financial Statements

CPA: Financial Reporting

 

 

92. All of the following are required to prepare a statement of partners’ equity EXCEPT
93. a) a list of all assets initially transferred into the partnership.
94. b) the partnership income statement.
95. c) the opening balance in the partners’ capital accounts.
96. d) the balance in the partners’ drawings accounts.

 

Answer: a

 

Bloomcode: Knowledge

Difficulty: Easy

Learning Objective: Prepare partnership financial statements.

Section Reference: Partnership Financial Statements

CPA: Financial Reporting

 

 

93. Which of the following would NOT cause an increase in partnership capital?
94. a) drawings
95. b) profit
96. c) additional capital investment by the partners
97. d) initial capital investment by the partners

 

Answer: a

 

Bloomcode: Comprehension

Difficulty: Medium

Learning Objective: Prepare partnership financial statements.

Section Reference: Partnership Financial Statements

CPA: Financial Reporting

 

 

94. Barbara Elliott is one of the partners in Elliott & Wan. Her drawings during the year were $10,000. She made an additional capital investment of $5,000 and her share of the loss for the year was $2,000. Her ending capital balance was $40,000. What was Barbara’s beginning capital balance?
95. a) $45,000
96. b) $37,000
97. c) $47,000
98. d) $52,000

 

Answer: c

 

Bloomcode: Application

Difficulty: Hard

Learning Objective: Prepare partnership financial statements.

Section Reference: Partnership Financial Statements

CPA: Financial Reporting

 

 

95. Kelly Chaytor started the year with a capital balance of $28,000. During the year, her share of partnership profit was $16,000 and she withdrew $4,000 from the partnership for personal use. She made an additional capital contribution of $5,000 during the year. The amount of Kelly Chaytor’s capital balance that will be reported on the year-end balance sheet will be
96. a) $33,000.
97. b) $49,000.
98. c) $29,000.
99. d) $45,000.

 

Answer: d

 

Bloomcode: Application

Difficulty: Medium

Learning Objective: Prepare partnership financial statements.

Section Reference: Partnership Financial Statements

CPA: Financial Reporting

 

 

96. The Statement of Partners’ Equity for the Allied Centre reported the following information in total:
    Capital, January 1…………………………………………………….. $60,000
    Additional investment………………………………………………..         20,000
    Drawings………………………………………………………………….         40,000
    Profit    …………………………………………………………………….         50,000
    The partnership has three partners: Hum, Pippy, and Collis with ending capital balances in a ratio 40:20:40. What are the respective ending balances of the three partners?
97. a) Hum, $40,000; Pippy, $20,000; Collis, $40,000
98. b) Hum, $36,000: Pippy, $18,000; Collis, $36,000
99. c) Hum, $68,000; Pippy, $34,000; Collis, $68,000
100. d) Hum, $48,000; Pippy, $24,000; Collis, $48,000

 

Answer: b

 

Bloomcode: Application

Difficulty: Medium

Learning Objective: Prepare partnership financial statements.

Section Reference: Partnership Financial Statements

CPA: Financial Reporting

 

 

97. On January 1, 2017, the opening balances in the Ho-Hum partnership were Ho, $12,000 and Hum, $14,000. During the year, the partnership earned $80,000. Profit is split equally between the partners. Ho worked a significant amount during the year and withdrew $50,000. Hum was mainly a silent partner and withdrew only $10,000. At the end of the year, after all accounts have been closed, the balance in Hum’s capital account was
98. a) $19,000.
99. b) $44,000.
100. c) $54,000.
101. d) $4,000.

 

Answer: b

 

Bloomcode: Application

Difficulty: Medium

Learning Objective: Prepare partnership financial statements.

Section Reference: Partnership Financial Statements

CPA: Financial Reporting

 

 

98. The partners’ drawings accounts are
99. a) reported on the income statement.
100. b) reported on the balance sheet.
101. c) closed to income summary.
102. d) closed to the partners’ capital accounts.

 

Answer: d

 

Bloomcode: Knowledge

Difficulty: Easy

Learning Objective: Prepare partnership financial statements.

Section Reference: Partnership Financial Statements

CPA: Financial Reporting

 

 

99. A change in total partners’ capital may occur from all of the following EXCEPT
100. a) additional capital investments in the partnership.
101. b) the sale of a partnership interest by a partner to an outside party.
102. c) the use of partnership cash to pay salaries to the partners.
103. d) the use of partnership cash to purchase new office equipment for a new partner.

 

Answer: d

 

Bloomcode: Comprehension

Difficulty: Medium

Learning Objective: Prepare partnership financial statements.

Section Reference: Partnership Financial Statements

CPA: Financial Reporting

 

 

100. As in a proprietorship, changes in capital for a partnership may result from three causes. Which one of the following is NOT a cause for change?
101. a) additional investments by owner
102. b) drawings
103. c) allocating profit to the owner or owners
104. d) collection of account receivable

 

Answer: d

 

Bloomcode: Knowledge

Difficulty: Easy

Learning Objective: Prepare partnership financial statements.

Section Reference: Partnership Financial Statements

CPA: Financial Reporting

 

 

101. All of the following will result in a change in capital EXCEPT for
102. a) additional investments by owner.
103. b) drawings.
104. c) partner share of the profit or loss.
105. d) acquisition of land.

 

Answer: d

 

Bloomcode: Comprehension

Difficulty: Easy

Learning Objective: Prepare partnership financial statements.

Section Reference: Partnership Financial Statements

CPA: Financial Reporting

 

 

102. Rich and Poore have partnership capital balances of $160,000 and $120,000, respectively. Poore negotiates to sell his partnership interest to Claudio for $140,000. Rich agrees to accept Claudio as a new partner. The partnership entry to record this transaction is
103. a) Cash……………………………………………………………………………………. 140,000
     Claudio, Capital……………………………………………………………….                          140,000
104. b) Poore, Capital……………………………………………………………………….. 140,000
     Claudio, Capital……………………………………………………………….                          140,000
105. c) Cash……………………………………………………………………………………. 20,000
     Poore, Capital………………………………………………………………………..       120,000
     Claudio, Capital……………………………………………………………….                          140,000
106. d) Poore, Capital……………………………………………………………………….. 120,000
     Claudio, Capital……………………………………………………………….                          120,000

 

Answer: d

 

Bloomcode: Application

Difficulty: Medium

Learning Objective: Account for the admission of a partner.

Section Reference: Admission and Withdrawal of a Partner

CPA: Financial Reporting

 

 

103. Frodo and Merry share partnership profits and losses in the ratio of 6:4. Frodo’s capital account balance is $80,000 and Merry’s capital account balance is $50,000. Pippen is admitted to the partnership by investing $90,000 and is to receive a 25% ownership interest. Frodo, Merry, and Pippen’s capital balances after Pippen’s investment will be
     Frodo  Merry          Pippen
104. a) $80,000 $50,000      $90,000.
105. b) $101,000 $64,000      $55,000.
106. c) $99,000 $66,000      $55,000.
107. d) $97,500 $67,500      $55,000.

 

Answer: b

 

Bloomcode: Application

Difficulty: Hard

Learning Objective: Account for the admission of a partner.

Section Reference: Admission and Withdrawal of a Partner

CPA: Financial Reporting

 

 

104. Sung and Ping have partnership capital account balances of $180,000 and $140,000 respectively and share profits and losses equally. Luing is admitted to the partnership by investing $80,000 for a one-fourth ownership interest. The balance of Ping’s capital account after Luing is admitted is
105. a) $150,000.
106. b) $130,000.
107. c) $160,000.
108. d) $175,000.

 

Answer: b

 

Bloomcode: Application

Difficulty: Hard

Learning Objective: Account for the admission of a partner.

Section Reference: Admission and Withdrawal of a Partner

CPA: Financial Reporting

 

 

105. The admission of a new partner to an existing partnership from an existing partner
106. a) may be accomplished only by investing assets in the partnership.
107. b) requires purchasing the interest of one or more existing partners.
108. c) causes a legal dissolution of the existing partnership.
109. d) is almost always accompanied by the liquidation of the business.

 

Answer: c

 

Bloomcode: Knowledge

Difficulty: Medium

Learning Objective: Account for the admission of a partner.

Section Reference: Admission and Withdrawal of a Partner

CPA: Financial Reporting

 

 

106. When a partnership interest is purchased from an existing partner
107. a) each partner’s capital account is affected.
108. b) the transaction is a personal transaction between the purchaser and the selling partner(s).
109. c) the buyer receives equity equal to the amount of cash paid.
110. d) all partners will receive some part of the purchase price.

 

Answer: b

 

Bloomcode: Knowledge

Difficulty: Medium

Learning Objective: Account for the admission of a partner.

Section Reference: Admission and Withdrawal of a Partner

CPA: Financial Reporting

 

 

107. Wooley and Murley each sell 1/3 of their partnership interest to Downer, receiving $20,000 each. At the time of the admission, each partner has a $60,000 capital balance. The entry to record the admission of Downer will show a
108. a) debit to Cash for $40,000.
109. b) credit to Downer, Capital for $60,000.
110. c) debit to Murley, Capital for $60,000.
111. d) debit to Wooley, Capital for $20,000.

 

Answer: d

 

Bloomcode: Application

Difficulty: Hard

Learning Objective: Account for the admission of a partner.

Section Reference: Admission and Withdrawal of a Partner

CPA: Financial Reporting

 

 

108. Eaton and Fields sell 1/4 of their partnership interest to O’Reilly receiving $25,000 each. At the time of admission, Eaton and Fields each had a $45,000 capital balance. The admission of O’Reilly will cause the net partnership assets to
109. a) increase by $50,000.
110. b) remain at $90,000.
111. c) decrease by $50,000.
112. d) remain at $140,000.

 

Answer: b

 

Bloomcode: Application

Difficulty: Medium

Learning Objective: Account for the admission of a partner.

Section Reference: Admission and Withdrawal of a Partner

CPA: Financial Reporting

 

 

109. Crosby and Malkin sell to Staal a 1/3 interest in the Crosby-Malkin partnership. Staal will pay Crosby and Malkin each personally, $60,000 for admission into the organization. Before this transaction, Crosby and Malkin show capital balances of $45,000 each. The journal entry to record the admission of Staal will
110. a) show a debit to Cash of $120,000.
111. b) not show a debit to Cash.
112. c) show a debit to Malkin, Capital for $60,000.
113. d) show a credit to Staal, Capital for $120,000.

 

Answer: b

 

Bloomcode: Comprehension

Difficulty: Medium

Learning Objective: Account for the admission of a partner.

Section Reference: Admission and Withdrawal of a Partner

CPA: Financial Reporting

 

 

110. Hill invests $30,000 in cash (admission by investment) in the Morgan-Carr partnership to acquire a 1/4 interest. In this case
111. a) the accounting will be the same as a purchase of an interest.
112. b) the total net assets of the new partnership are unchanged from the previous partnership.
113. c) the total capital of the new partnership is greater than the total capital of the old partnership.
114. d) Hill’s profit ratio will automatically be 1/4.

 

Answer: c

 

Bloomcode: Knowledge

Difficulty: Medium

Learning Objective: Account for the admission of a partner.

Section Reference: Admission and Withdrawal of a Partner

CPA: Financial Reporting

 

 

111. Which of the following is correct when admitting a new partner into an existing partnership?
     Purchase of an Interest Admission by Investment
112. a) Total net assets unchanged unchanged
113. b) Total capital increased unchanged
114. c) Total net assets unchanged increased
115. d) Total capital unchanged unchanged

 

Answer: c

 

Bloomcode: Comprehension

Difficulty: Hard

Learning Objective: Account for the admission of a partner.

Section Reference: Admission and Withdrawal of a Partner

CPA: Financial Reporting

 

 

112. When admitting a new partner by investment, a bonus to old partners
113. a) is usually unjustified because carrying amounts clearly reflect partnership net worth.
114. b) is sometimes justified because goodwill may exist and it is not reflected in the accounts.
115. c) results if the debit to cash is less than the new partner’s capital credit.
116. d) results if the debit to cash is equal to the new partner’s capital credit.

 

Answer: b

 

Bloomcode: Comprehension

Difficulty: Medium

Learning Objective: Account for the admission of a partner.

Section Reference: Admission and Withdrawal of a Partner

CPA: Financial Reporting

 

 

113. When admitting a new partner by investment, a bonus to old partners is allocated on
114. a) the basis of capital balances.
115. b) the basis of the original investment of the old partners.
116. c) the basis of profit ratios before the admission of the new partner.
117. d) the basis of the salaries of the old partners.

 

Answer: c

 

Bloomcode: Comprehension

Difficulty: Medium

Learning Objective: Account for the admission of a partner.

Section Reference: Admission and Withdrawal of a Partner

CPA: Financial Reporting

 

 

114. A bonus to a new partner
115. a) is prohibited by IFRS.
116. b) results when the new partner’s capital credit is less than his or her investment of assets in the firm.
117. c) may occur when recorded carrying amounts are lower than fair values.
118. d) results when the new partner’s capital credit is greater than his or her investment of assets in the firm.

 

Answer: d

 

Bloomcode: Comprehension

Difficulty: Medium

Learning Objective: Account for the admission of a partner.

Section Reference: Admission and Withdrawal of a Partner

CPA: Financial Reporting

 

 

115. A bonus to a new partner will
116. a) increase the capital balances of existing partners based on their profit ratios before the admission of the new partner.
117. b) increase the capital balances of existing partners based on their profit ratios after the admission of the new partner.
118. c) decrease the capital balances of existing partners based on their profit ratios before the admission of the new partner.
119. d) decrease the capital balances of existing partners based on their capital balances before the admission of the new partner.

 

Answer: c

 

Bloomcode: Comprehension

Difficulty: Medium

Learning Objective: Account for the admission of a partner.

Section Reference: Admission and Withdrawal of a Partner

CPA: Financial Reporting

 

 

116. The investment of assets in a partnership by a partner increases both the partnership’s
117. a) total assets and current liabilities.
118. b) net assets and total capital.
119. c) total capital and revenue.
120. d) current assets and non-current liabilities.

 

Answer: b

 

Bloomcode: Comprehension

Difficulty: Medium

Learning Objective: Account for the admission of a partner.

Section Reference: Admission and Withdrawal of a Partner

CPA: Financial Reporting

 

 

117. Accounting for the admission of a new partner by purchase of a partner’s interest will
118. a) not affect total assets, liabilities and capital.
119. b) increase total assets and total capital.
120. c) increase total capital.
121. d) decrease total capital.

 

Answer: a

 

Bloomcode: Comprehension

Difficulty: Medium

Learning Objective: Account for the admission of a partner.

Section Reference: Admission and Withdrawal of a Partner

CPA: Financial Reporting

 

 

118. Dana Peters was admitted to partnership with a 20% ownership interest after investing $30,000 cash. The partnership capital before the admission of Peters was $130,000. Which of the following best describes the impact on the capital accounts from this transaction?
119. a) Peters will pay a bonus of $4,000 to the old partners.
120. b) Peters will pay a bonus of $2,000 to the old partners.
121. c) Peters will receive a bonus of $2,000 from the old partners.
122. d) Peters will receive a bonus of $4,000 from the old partners.

 

Answer: c

 

Bloomcode: Application

Difficulty: Medium

Learning Objective: Account for the admission of a partner.

Section Reference: Admission and Withdrawal of a Partner

CPA: Financial Reporting

 

 

119. Travis, Jennifer, and Henry have partnership capital account balances of $150,000, $300,000 and $70,000, respectively. The profit-sharing ratio is Travis, 50%; Jennifer, 40%; and Henry, 10%. Travis wishes to withdraw from the partnership and it is agreed that partnership assets of $120,000 will be used to pay Travis for her partnership interest. The balances of Jennifer’s and Henry’s Capital accounts after Travis’s withdrawal would be
120. a) Jennifer, $300,000; Henry, $70,000.
121. b) Jennifer, $324,000; Henry, $76,000.
122. c) Jennifer, $276,000; Henry, $64,000.
123. d) Jennifer, $285,000; Henry, $55,000.

 

Answer: b

 

Bloomcode: Application

Difficulty: Hard

Learning Objective: Account for the withdrawal of a partner.

Section Reference: Withdrawal of a Partner

CPA: Financial Reporting

 

 

120. Ace, Bell, and Cole have partnership capital account balances of $90,000 each. Profit and losses are shared on a basis of 3:2:1 for Ace, Bell, and Cole respectively. Cole agrees to sell three-fourths of his ownership interest to Ace for $55,000 and one-fourth to Bell for $20,000. 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
121. a) Cole, Capital…………………………………………………………………………. 75,000
     Cash    …………………………………………………………………………..                            75,000
122. b) Cole, Capital…………………………………………………………………………. 75,000
     Ace, Capital…………………………………………………………………….                            55,000
     Bell, Capital…………………………………………………………………….                            20,000
123. c) Cole, Capital…………………………………………………………………………. 90,000
     Ace, Capital…………………………………………………………………….                            67,500
     Bell, Capital…………………………………………………………………….                            22,500
124. d) Ace, Capital………………………………………………………………………….. 56,250
     Bell, Capital…………………………………………………………………………..         18,750
     Cole, Capital……………………………………………………………………                            75,000

 

Answer: c

 

Bloomcode: Application

Difficulty: Hard

Learning Objective: Account for the withdrawal of a partner.

Section Reference: Withdrawal of a Partner

CPA: Financial Reporting

 

 

121. 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
122. a) Total net assets decreased decreased
123. b) Total capital decreased decreased
124. c) Total net assets unchanged decreased
125. d) Total capital unchanged unchanged

 

Answer: c

 

Bloomcode: Knowledge

Difficulty: Medium

Learning Objective: Account for the withdrawal of a partner.

Section Reference: Withdrawal of a Partner

CPA: Financial Reporting

 

 

122. Which of the following is NOT a necessary action that the partnership must take upon the death of a partner?
123. a) Determine the profit or loss for the year to date.
124. b) Discontinue business operations.
125. c) Close the books.
126. d) Prepare financial statements.

 

Answer: b

 

Bloomcode: Knowledge

Difficulty: Easy

Learning Objective: Account for the withdrawal of a partner.

Section Reference: Withdrawal of a Partner

CPA: Financial Reporting

 

 

123. When a partner withdraws by payment from the other partner’s personal assets, the impact on net assets is
124. a) no change in net assets.
125. b) net assets will increase by the buyout amount.
126. c) net assets will decrease by the buyout amount.
127. d) net assets will decrease by the removal departed partner’s capital amount.

 

Answer: a

 

Bloomcode: Knowledge

Difficulty: Easy

Learning Objective: Account for the withdrawal of a partner.

Section Reference: Withdrawal of a Partner

CPA: Financial Reporting

 

 

124. The Jackson-Chan partnership is terminated when creditor claims exceed partnership assets by $30,000. Chan is a millionaire and Jackson has no personal assets. Jackson’s partnership interest is 75% and Chan’s is 25%. Creditors
125. a) must collect their claims equally from Chan and Jackson.
126. b) may collect the entire $30,000 from Chan.
127. c) must collect their claims 75% from Jackson and 25% from Chan.
128. d) may not require Chan to use his personal assets to satisfy the $30,000 in claims.

 

Answer: b

 

Bloomcode: Comprehension

Difficulty: Hard

Learning Objective: Account for the liquidation of a partnership.

Section Reference: Liquidation of a Partnership

CPA: Financial Reporting

 

 

125. In the liquidation of a partnership, any gain or loss on the realization of noncash assets should be allocated
126. a) first to creditors and the remainder to partners.
127. b) to the partners on the basis of their capital balances.
128. c) to the partners on the basis of their profit-sharing ratio.
129. d) only after all creditors have been paid.

 

Answer: c

 

Bloomcode: Knowledge

Difficulty: Easy

Learning Objective: Account for the liquidation of a partnership.

Section Reference: Liquidation of a Partnership

CPA: Financial Reporting

 

 

126. In the liquidation of a partnership, any partner who has a capital deficiency
127. a) has a personal debt to the partnership for the amount of the deficiency.
128. b) is automatically terminated as a partner.
129. c) will receive a cash distribution only on the basis of his or her profit-sharing ratio.
130. d) is not obligated to make up the capital deficiency.

 

Answer: a

 

Bloomcode: Comprehension

Difficulty: Easy

Learning Objective: Account for the liquidation of a partnership.

Section Reference: Liquidation of a Partnership

CPA: Financial Reporting

 

 

127. Partners A, B, and C have capital account balances of $60,000 each. The profit and loss ratio is 5:2:3 respectively. In the process of liquidating the partnership, noncash assets with a carrying amount of $50,000 are sold for $20,000. The balance of Partner B’s Capital account after the sale is
128. a) $45,000.
129. b) $51,000.
130. c) $54,000.
131. d) $66,000.

 

Answer: c

 

Bloomcode: Application

Difficulty: Medium

Learning Objective: Account for the liquidation of a partnership.

Section Reference: Liquidation of a Partnership

CPA: Financial Reporting

 

 

128. The partners’ profit and loss sharing ratio is 2:3:5, respectively.

     D, E, AND F PARTNERSHIP
     Balance Sheet
     December 31, 2017
     Assets                                                          Liabilities and Partners’ Equity
     Cash                                           $  35,000            Liabilities                                       $  40,000
     Equipment                                       90,000            D, Capital                                          30,000
     Accum.dep.—equipment             (15,000)            E, Capital                                          25,000
     F, Capital                                          15,000
     Total                                   $110,000                          Total                                $110,000

     If the D, E, and F Partnership is liquidated by selling the equipment for $45,000 and creditors are paid in full, what is the amount of cash that can be safely distributed to each partner?

129. a) D, $24,000; E, $16,000; F, $0
130. b) D, $14,000; E, $21,000; F, $5,000
131. c) D, $20,000; E, $25,000; F, $5,000
132. d) D, $30,000; E, $25,000; F, $15,000

 

Answer: a

 

Bloomcode: Application

Difficulty: Hard

Learning Objective: Account for the liquidation of a partnership.

Section Reference: Liquidation of a Partnership

CPA: Financial Reporting

 

 

129. The partners’ profit and loss sharing ratio is 2:3:5, respectively.

     D, E, AND F PARTNERSHIP
     Balance Sheet
     December 31, 2017
     Assets                                                        Liabilities and Partners’ Equity
     Cash                                           $  35,000            Liabilities                                       $  40,000
     Equipment                                       90,000            D, Capital                                          30,000
     Accum.dep.—equipment             (15,000)            E, Capital                                          25,000
     F, Capital                                          15,000
               Total                                   $110,000                        Total                                  $110,000

     If the D, E, and F Partnership is liquidated by selling the equipment for $125,000, 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?

130. a) $10,000
131. b) $39,000
132. c) $40,000
133. d) $25,000

 

Answer: c

 

Bloomcode: Application

Difficulty: Hard

Learning Objective: Account for the liquidation of a partnership.

Section Reference: Liquidation of a Partnership

CPA: Financial Reporting

 

 

130. The partners’ profit and loss sharing ratio is 2:3:5, respectively.

     D, E, AND F PARTNERSHIP
     Balance Sheet
     December 31, 2017
     Assets                                                        Liabilities and Partners’ Equity
     Cash                                           $  35,000            Liabilities                                       $  40,000
     Equipment                                       90,000            D, Capital                                          30,000
     Accum.dep.—equipment             (15,000)            E, Capital                                          25,000
     F, Capital                                          15,000
               Total                                   $110,000                        Total                                  $110,000

     If the D, E, and F Partnership is liquidated and the equipment is worthless, the creditors will look to what partner’s personal assets for settlement of the creditors’ claims?

131. a) the personal assets of Partner E
132. b) the personal assets of Partners D and F
133. c) the personal assets of Partners D, E, and F
134. d) The personal assets of the partners are not available for partnership debts.

 

Answer: c

 

Bloomcode: Knowledge

Difficulty: Easy

Learning Objective: Account for the liquidation of a partnership.

Section Reference: Liquidation of a Partnership

CPA: Financial Reporting

 

 

131. If a partner has a capital deficiency and does NOT have the personal resources to eliminate it,
132. a) the creditors will have to absorb the capital deficiency.
133. b) the other partners will absorb the capital deficiency on the basis of their respective capital balances.
134. c) the other partners will have to absorb the capital deficiency on the basis of their respective profit-sharing ratios.
135. d) neither the creditors nor the other partners will have to absorb the capital deficiency.

 

Answer: c

 

Bloomcode: Knowledge

Difficulty: Medium

Learning Objective: Account for the liquidation of a partnership.

Section Reference: Liquidation of a Partnership

CPA: Financial Reporting

 

 

132. The liquidation of a partnership
133. a) cannot be a voluntary act of the partners.
134. b) terminates the business.
135. c) eliminates those partners with a capital deficiency.
136. d) cannot occur unless all partners approve.

 

Answer: b

 

Bloomcode: Comprehension

Difficulty: Medium

Learning Objective: Account for the liquidation of a partnership.

Section Reference: Liquidation of a Partnership

CPA: Financial Reporting

 

 

133. The liquidation of a partnership is a process containing the following steps:
     1. Pay partnership liabilities in cash.
     2.    Allocate the gain or loss on realization to the partners on their profit ratios.
     3.    Sell noncash assets for cash and recognize a gain or loss on realization.
     4.    Distribute remaining cash to partners on the basis of their remaining capital balances.
     Identify the proper sequencing of the steps in the liquidation process.
134. a) 3, 2, 4, 1
135. b) 3, 2, 1, 4
136. c) 1, 3, 2, 4
137. d) 1, 4, 3, 2

 

Answer: b

 

Bloomcode: Comprehension

Difficulty: Medium

Learning Objective: Account for the liquidation of a partnership.

Section Reference: Liquidation of a Partnership

CPA: Financial Reporting

 

 

134. In the final step of the liquidation process, remaining cash is distributed to partners
135. a) on an equal basis.
136. b) on the basis of the profit ratios.
137. c) on the basis of the remaining capital balances.
138. d) regardless of capital deficiencies.

 

Answer: c

 

Bloomcode: Knowledge

Difficulty: Medium

Learning Objective: Account for the liquidation of a partnership.

Section Reference: Liquidation of a Partnership

CPA: Financial Reporting

 

 

135. In the liquidation process, if a capital account shows a deficiency
136. a) the partner with a deficiency has an obligation to the partnership for the amount of the deficiency.
137. b) it may be written off to a “Loss” account.
138. c) it is disregarded until after the partnership books are closed.
139. d) it can be written off to a “Gain” account.

 

Answer: a

 

Bloomcode: Knowledge

Difficulty: Medium

Learning Objective: Account for the liquidation of a partnership.

Section Reference: Liquidation of a Partnership

CPA: Financial Reporting

 

 

136. The liquidation of a partnership ends the business. It involves
137. a) selling noncash assets.
138. b) paying liabilities.
139. c) distributing any remaining assets to partners.
140. d) all of the above

 

Answer: d

 

Bloomcode: Knowledge

Difficulty: Easy

Learning Objective: Account for the liquidation of a partnership.

Section Reference: Liquidation of a Partnership

CPA: Financial Reporting

 

 

137. A capital deficiency exists when
138. a) two or more partners have a credit balance in their capital accounts.
139. b) at least one partner has a debit balance in their capital account.
140. c) all partners have a zero balance in their capital accounts.
141. d) at least one partner has a credit balance in their capital account.

 

Answer: b

 

Bloomcode: Knowledge

Difficulty: Easy

Learning Objective: Account for the liquidation of a partnership.

Section Reference: Liquidation of a Partnership

CPA: Financial Reporting

 

 

138. A capital deficiency may be caused by
139. a) recurring losses.
140. b) excess drawings.
141. c) losses from realization during liquidation.
142. d) all of the above

 

Answer: d

 

Bloomcode: Knowledge

Difficulty: Easy

Learning Objective: Account for the liquidation of a partnership.

Section Reference: Liquidation of a Partnership

CPA: Financial Reporting

 

 

139. In a partnership liquidation situation where one or more of the partners’ capital accounts have a debit balance, this is referred to as
140. a) capital deficiency.
141. b) no capital deficiency.
142. c) gain on realization.
143. d) loss on realization.

 

Answer: a

 

Bloomcode: Knowledge

Difficulty: Easy

Learning Objective: Account for the liquidation of a partnership.

Section Reference: Liquidation of a Partnership

CPA: Financial Reporting

 

 

MATCHING QUESTIONs

 

 

140. Match the items below by entering the appropriate code letter in the space provided.

 

1. Mutual agency                                   F.     Admission by investment
2. Unlimited liability                                G.    Purchase of an interest
3. Partnership agreement                      H.    Partnership liquidation
4. Profit ratio                                           I.      Capital deficiency
5. Statement of Partners’ Equity            J.     Realization

 

 

____    1.    Each partner is personally and individually liable for partnership debts.

 

 

____    2.    Each partner can bind the partnership so long as the action appears to be appropriate for the partnership.

 

 

____    3.    Written or verbal contract establishing duties and responsibilities of partners

 

 

____    4.    The basis for sharing profit and losses

 

 

____    5.    Explains changes in individual partner’s capital accounts during a period.

 

 

____    6.    Results in an increase in total net assets and total capital of the partnership.

 

 

____    7.    Total net assets and total capital of the partnership do NOT change.

 

 

____    8.    The sale of noncash assets

 

 

____    9.    Ends both the legal and economic life of the entity.

 

 

____ 10.    Capital account with a debit balance

 

 

ANSWERS TO MATCHING QUESTIONS

 

1. B

 

2. A

 

3. C

 

4. D

 

5. E

 

6. F

 

7. G

 

8. J

 

9. H

 

10. I

 

Bloomcode: Knowledge

Difficulty: Easy

Learning Objective: Describe the characteristics of the partnership form of business organization.

Section Reference: Partnership Form of Organization

Learning Objective: Allocate and record profit or loss to partners.

Section Reference: Dividing Partnership Profit or Loss

Learning Objective: Prepare partnership financial statements.

Section Reference: Partnership Financial Statements

Learning Objective: Account for the admission of a partner.

Section Reference: Admission and Withdrawal of a Partner

Learning Objective: Account for the liquidation of a partnership.

Section Reference: Liquidation of a Partnership

CPA: Financial Reporting

 

 

 

 

Legal Notice

 

 

 

Copyright © 2016 by John Wiley & Sons Canada, Ltd. or related companies. All rights reserved.

 

 

The data contained in these files are protected by copyright. This manual is furnished under licence and may be used only in accordance with the terms of such licence.

 

The material provided herein may not be downloaded, reproduced, stored in a retrieval system, modified, made available on a network, used to create derivative works, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise without the prior written permission of John Wiley & Sons Canada, Ltd.

CHAPTER 12

 

Accounting for partnerships

 

CHAPTER STUDY OBJECTIVES

 

 

1. Describe the characteristics of the partnership form of business organization. The main characteristics of a partnership are (1) the association of individuals, (2) mutual agency, (3) co-ownership of property, (4) limited life, and (5) unlimited liability for a general partnership.

 

 

2. Account for the formation of a partnership. When a partnership is formed, each partner’s initial investment should be recorded at the assets’ fair value at the date of their transfer to the partnership. If accounts receivable are contributed, both the gross amount and an allowance for doubtful accounts should be recorded. Accumulated depreciation is not carried forward into a partnership.

 

 

3. Allocate and record profit or loss to partners. Profit or loss is divided based on the profit and loss ratio, which may be any of the following: (1) a fixed ratio; (2) a ratio based on beginning, ending, or average capital balances; or (3) salary and interest allowances and the remainder in a fixed ratio.

 

 

4. Prepare partnership financial statements. The financial statements of a partnership are similar to those of a proprietorship. The main differences are that (1) the statement of owners’ equity is called the statement of partners’ equity, and (2) each partner’s capital account is usually reported on the balance sheet or in a supporting schedule.

 

 

5. Account for the admission of a partner. The entry to record the admission of a new partner by purchase of a partner’s interest affects only partners’ capital accounts. The entry to record the admission by investment of assets in the partnership (1) increases both net assets and total capital, and (2) may result in the recognition of a bonus to either the old partners or the new partner.

 

 

6. Account for the withdrawal of a partner. The entry to record a withdrawal from the firm when payment is made from partners’ personal assets affects only partners’ capital accounts. The entry to record a withdrawal when payment is made from partnership assets (1) decreases net assets and total capital, and (2) may result in recognizing a bonus to either the departing partner or the remaining partners.

 

 

7. Account for the liquidation of a partnership. When a partnership is liquidated, it is necessary to record (1) the sale of noncash assets, (2) the allocation of the gain or loss on realization based on the profit and loss ratio, (3) the payment of partnership liabilities, (4) the removal of any capital deficiency either by repayment or by allocation to the other partners, and (5) the distribution of cash to the partners based on their capital balances.

 

Exercises

 

 

Exercise 1

Three types of partnerships were described in the text. Explain how limited partnerships (LP) and limited liability partnerships (LLP) differ from each other and from a traditional partnership.

 

Solution 1 (5 min.)

The differences among the three types of partnerships are with respect to the roles of the partners and their liability for losses:

Traditional partnership – All partners have equal authority to conduct business on behalf of the partnership, and all partners have equal liability for losses that may be incurred. Thus, if there is insufficient partnership assets to settle liabilities, individual partners may be required to pay the debts out of their personal assets.

Limited partnership – A general partner manages the business of the partnership and has unlimited liability. The other (limited) partners are primarily investors, and are not active in the management of the business. If losses occur, the limited partners’ liability and losses are restricted to the amount which they initially invested in the partnership.

Limited liability partnership – All partners may conduct business on behalf of the partnership. However, if losses occur that are a result of a specific partner’s negligence, the liability of the other partners is limited to their share of partnership assets. Only the partner whose negligence caused the loss is personally liable beyond his or her share of partnership assets.

 

Bloomcode: Comprehension

Difficulty: Easy

Learning Objective: Describe the characteristics of the partnership form of business organization.

Section Reference: Partnership Form of Organization

CPA: Financial Reporting

Exercise 2

Jim Steele and John Rich operate separate auto repair shops as proprietorships. On January 1, 2017, they decide to combine their separate businesses to form Steele Rich Auto Repair, a partnership. Information from their separate balance sheets is presented below:

Steele Auto Repair       Rich Auto Repair

Cash……………………………………………………………………       $  5,000               $10,000

Accounts receivable………………………………………………           8,000                   5,000

Allowance for doubtful accounts……………………………..           1,000                      500

Accounts payable………………………………………………….           3,000                   6,000

Notes payable………………………………………………………                —                   5,000

Salaries payable……………………………………………………           1,000                      500

Equipment……………………………………………………………         12,000                 26,000

Accumulated depreciation—equipment……………………           2,000                   4,000

 

It is agreed that the expected realizable value of Steele’s accounts receivable is $5,000 and Rich’s receivables is $4,000. The fair value of Steele’s equipment is $15,000 and Rich’s equipment is $24,000. It is further agreed that the new partnership will assume all liabilities of the proprietorships with the exception of the notes payable on Rich’s balance sheet that he will pay himself.

 

Instructions

Prepare the journal entries necessary to record the formation of the partnership.

 

Solution 2 (15 min.)

Cash…………………………………………………………………………………………..           5,000

Accounts Receivable……………………………………………………………………           8,000

Equipment…………………………………………………………………………………..         15,000

Allowance for Doubtful Accounts……………………………………………..                              3,000

Salaries Payable……………………………………………………………………                              1,000

Accounts Payable………………………………………………………………….                              3,000

1. Steele, Capital…………………………………………………………………… 21,000

To record J. Steele’s investment

 

Cash…………………………………………………………………………………………..         10,000

Accounts Receivable……………………………………………………………………           5,000

Equipment…………………………………………………………………………………..         24,000

Allowance for Doubtful Accounts……………………………………………..                              1,000

Salaries Payable……………………………………………………………………                                 500

Accounts Payable………………………………………………………………….                              6,000

1. Rich, Capital……………………………………………………………………… 31,500

To record J. Rich’s investment

 

Bloomcode: Application

Difficulty: Medium

Learning Objective: Account for the formation of a partnership.

Section Reference: Basic Partnership Accounting

CPA: Financial Reporting

 

 

Exercise 3

On January 1, 2016, Steve Furlong and Mark Pippy agreed to pool their assets and form a partnership called F&P Computing. They agree to share all profits equally and make the following initial investments:

  Pippy                   Furlong

……….. Cash………………………………………     $  10,000                $30,000

……….. Accounts receivable…………………           6,000                    4,000

……….. Allowance for doubtful accounts..           1,500                       500

……….. Office furniture………………………..         24,000                  29,000

 

On December 31, 2016, the partnership reported a loss for the year of $19,500. On January 1, 2017, Furlong and Pippy agreed to accept Nicholas Adams into the partnership by purchasing 20% of Pippy’s interest in the partnership and 30% of Furlong’s interest. The partnership agreement is amended to provide for the following sharing of profit and losses:

 Adams                Pippy                 Furlong

…… Salary allowance…………………       $20,000             $30,000             $60,000

…… Remaining ratio…………………..            5                        3                         2

 

For the year ended December 31, 2017, profit was $350,000.

 

Instructions

1. a) Journalize the following transactions:

(1)   the initial contributions to the partnership by Furlong and Pippy on January 1, 2016.

(2)   the allocation of the loss to the partners at the end of December 2016.

(3)   the purchase of the partnership interest by Adams on January 1, 2017.

2017. b) Prepare a schedule to show the division of profit at December 31, 2017.

 

Solution 3 (10 min.)

a)

(1)   2016

Jan    1     Cash……………………………………………………………………..         30,000

Accounts Receivable……………………………………………….           4,000

Office Furniture………………………………………………………         29,000

Allowance for Doubtful Accounts………………………                                 500

1. Furlong, Capital………………………………………….                            62,500

 

1     Cash……………………………………………………………………..         10,000

Accounts Receivable……………………………………………….           6,000

Office Furniture………………………………………………………         24,000

Allowance for Doubtful Accounts………………………                              1,500

1. Pippy, Capital……………………………………………. 38,500

 

(2)

Dec  31     S. Furlong, Capital…………………………………………………..           9,750

1. Pippy, Capital……………………………………………………. 9,750

Income Summary…………………………………………..                            19,500

 

(3)   2017

Jan    1     S. Furlong, Capital [$62,500 – $9,750) × 30%]…………..         15,825

1. Adams, Capital………………………………………….. 15,825

 

1     M. Pippy, Capital [($38,500 – $9,750) × 20%]…………….           5,750

1. Adams, Capital………………………………………….. 5,750

 

b)

Division of Profit

Year Ended December 31, 2017

  Adams               Pippy             Furlong           Total   

Profit                                                                                                                             $350,000

Salary allowance                                   $  20,000          $30,000           $60,000           110,000

Profit remaining for allocation                                                                                        240,000

Fixed ratio

Adams ($240,000 × 5 ÷ 10)              120,000

Pippy ($240,000 × 3 ÷ 10)                                          72,000

Furlong ($240,000 × 2 ÷ 10)                                                              48,000           240,000

Profit remaining for allocation                _______         _______          _______          ______0

Division of profit                                     $140,000        $102,000         $108,000         $350,000

 

Bloomcode: Application

Difficulty: Medium

Learning Objective: Account for the formation of a partnership.

Section Reference: Basic Partnership Accounting

Learning Objective: Allocate and record profit or loss to partners.

Section Reference: Dividing Partnership Profit or Loss

Learning Objective: Account for the admission of a partner.

Section Reference: Admission and Withdrawal of a Partner

CPA: Financial Reporting

 

 

Exercise 4

On January 1, 2016, Bonnie Nero and Randy Piper decided to form a partnership, dividing all profits and losses equally and by making the following investments:

  Nero                        Piper

……….. Cash………………………………………   $  150,000                         $0

……….. Land……………………………………….                  0                  65,000

……….. Building…………………………………..                  0                120,000

……….. Furniture…………………………………         35,000                           0

 

On December 31, 2016, the partnership reported a profit for the year of $28,000. On January 1, 2017, Nero and Piper agreed to accept Jody Smith into the partnership by purchasing 25% of partnership interest for $165,000 cash. The partnership agreement is amended to provide for the following sharing of profit and losses:

 Nero                   Piper                  Smith

…… Salary allowance…………………       $60,000             $60,000             $30,000

…… Remaining ratio…………………..          1/3                     1/3                       1/3

 

For the year ended December 31, 2017, profit was $330,000.

 

Instructions

1. a) Journalize the following transactions:

(1)   the initial contributions to the partnership by Nero and Piper on January 1, 2016.

(2)   the allocation of the profit to the partners at the end of December 2016.

(3)   the purchase of the partnership interest by Smith on January 1, 2017.

2017. b) Prepare a schedule to show the division of profit at December 31, 2017.

 

Solution 4 (10 min.)

a)

(1)   2016

Jan    1     Cash……………………………………………………………………..       150,000

Land                                                                                          65,000

Building………………………………………………………………….       120,000

Furniture………………………………………………………………..         35,000

1. Nero, Capital……………………………………………… 185,000
2. Piper, Capital…………………………………………….. 185,000

 

(2)

Dec  31     Income Summary……………………………………………………         28,000

1. Nero, Capital………………………………………………                            14,000
2. Piper, Capital…………………………………………….. 14,000

 

(3)   Partnership capital balance after admission of Smith = $185,000 + $185,000 + $28,000 + $165,000 = $563,000.  J. Smith, Capital = $563,000 x 25% = $140,750. Bonus to old partners = $165,000 – $140,750 = $24,250.

 

2017

Jan    1     Cash                                                                                       165,000

1. Smith, Capital…………………………………………….. 140,750
2. Nero, Capital………………………………………………                            12,125
3. Piper, Capital…………………………………………….. 12,125

 

b)

Division of Profit

Year Ended December 31, 2017

  Nero                  Piper             Smith              Total   

Profit                                                                                                                             $330,000

Salary allowance                                   $  60,000          $60,000           $30,000           150,000

Profit remaining for allocation                                                                                        180,000

Fixed ratio

Nero ($180,000 × 1/3)                        60,000

Piper ($180,000 × 1/3)                                               60,000

Smith ($180,000 × 1/3)                                                                      60,000           180,000

Profit remaining for allocation                _______         _______          _______          ______0

Division of profit                                     $120,000        $120,000           $90,000         $330,000

 

Bloomcode: Application

Difficulty: Medium

Learning Objective: Account for the formation of a partnership.

Section Reference: Basic Partnership Accounting

Learning Objective: Allocate and record profit or loss to partners.

Section Reference: Dividing Partnership Profit or Loss

Learning Objective: Account for the admission of a partner.

Section Reference: Admission and Withdrawal of a Partner

CPA: Financial Reporting

 

 

Exercise 5

Max Baer and Jimmy Choo are two proprietors who decide to merge their businesses into a partnership on January 1, 2017. The assets each contributed to the partnership are as follows:

 

	Max Baer		Jimmy Choo
	Book Value	Fair Value	Book Value	Fair Value
Cash	$3,000	$3,000	$      500	$     500
Accounts receivable	8,000	7,500	0	0
Allowance for doubtful accounts	(500)		0	0
Equipment			30,000	10,000
Accumulated depreciation			(18,000)

 

During the year ended December 31, 2017, the business, Bear-Chew Pet Services, had revenues of $180,000, rent expenses of $12,000, depreciation expense of $2,500, and other operating expenses of $8,400. Other than depreciation expense, all revenues and expenses incurred by the business were for cash. As well, cash of $7,500 was collected on the accounts receivable, with the remainder of the accounts receivable written off. The partnership agreement specifies that Max and Jimmy will share the partnership profit equally. During the year, Max withdrew $40,000 for personal use, and Jimmy withdrew $28,000.

 

Instructions

2017. a) Prepare the journal entry to record the two partners’ contributions on January 1, 2017.
2018. b) Prepare the partnership’s income statement, statement of partners’ equity, and balance sheet at December 31, 2017.

 

Solution 5 (25 min.)

a)

January 1, 2017

Cash ($3,000 + $500)…………………………………………………………………..           3,500

Accounts Receivable……………………………………………………………………           8,000

Equipment…………………………………………………………………………………..         10,000

Allowance for Doubtful Accounts……………………………………………..                                 500

1. Baer, Capital…………………………………………………………………….. 10,500
2. Choo, Capital…………………………………………………………………….. 10,500

 

1. b)

Bear-Chew Pet Services Income Statement Year ended December 31, 2017
Revenue			$ 180,000
Expenses
Rent expense		$ 12,000
Depreciation expense		2,500
Other operating expenses		8,400	22,900
Profit			$ 157,100

 

Bear-Chew Pet Services Statement of Partners’ Equity Year ended December 31, 2017
		M. Baer	J. Choo	Total
Capital, January 1, 2017		$           –	$            –	$            –
Add: Investments		10,500	10,500	21,000
Profit		78,550	78,550	157,100
		89,050	89,050	178,100
Less: Drawings		40,000	28,000	68,000
Capital, December 31, 2017		$  49,050	$   61,050	$ 110,100

 

Bear-Chew Pet Services Balance Sheet December 31, 2017
Assets
Current assets
Cash				$  102,600
Equipment			$  10,000
Less: Accumulated depreciation			2,500	7,500
Total assets				$ 110,100
Liabilities and Partners’ Equity
Partners’ equity
M. Baer, capital			$   49,050
J. Choo, capital			61,050	$  110,100

 

Cash: $102,600 = $3,500 + $7,500 + $180,000 – $12,000 – $8,400 – $40,000 – $28,000

 

Bloomcode: Application

Difficulty: Medium

Learning Objective: Account for the formation of a partnership.

Section Reference: Basic Partnership Accounting

Learning Objective: Prepare partnership financial statements.

Section Reference: Partnership Financial Statements

CPA: Financial Reporting

 

 

Exercise 6

Brewer and Tony have a partnership agreement that includes the following provisions regarding sharing profit or loss:

1. A salary allowance of $30,000 to Brewer and $15,000 to Tony.
2. An interest allowance of 10% on capital balances at the beginning of the year.
3. The remainder to be divided 30% to Brewer and 70% to Tony.

 

The capital balances on January 1, 2017, for Brewer and Tony were $80,000 and $100,000, respectively. During 2017, the Brewer and Tony Merchandising Partnership had sales of $330,000, cost of goods sold of $190,000, and operating expenses of $60,000.

 

Instructions

Prepare an income statement for the Brewer and Tony Merchandising Partnership for the year ended December 31, 2017. As a part of the income statement, include a division of profit to each of the partners.

 

Solution 6 (15 min.)

 

BREWER AND TONY MERCHANDISING PARTNERSHIP

Income Statement

Year Ended December 31, 2017

Sales……………………………………………………………………………………………………………… $330,000

Cost of goods sold……………………………………………………………………………………………   190,000

Gross profit………………………………………………………………………………………………………. 140,000

Operating expenses………………………………………………………………………………………….     60,000

Profit………………………………………………………………………………………………………………. $  80,000

 

Division of Profit

  Brewer                       Tony                          Total  

Profit…………………………………………………                                                                         $80,000

Salary allowance………………………………..       $30,000                    $15,000                      45,000

Profit remaining for allocation………………                                                                           35,000

Interest allowance

Brewer ($80,000 × 10%)……………….           8,000

Tony ($100,000 × 10%)………………..                                          10,000                      18,000

Profit remaining for allocation………………                                                                           17,000

Fixed ratio

Brewer ($17,000 × 30%)……………….           5,100

Tony ($17,000 × 70%)………………….                                          11,900                      17,000

Profit remaining for allocation………………        ______                     ______                               0

Profit allocated to partners…………………..       $43,100                    $36,900                    $80,000

 

Bloomcode: Application

Difficulty: Medium

Learning Objective: Allocate and record profit or loss to partners.

Section Reference: Dividing Partnership Profit or Loss

CPA: Financial Reporting

 

 

Exercise 7

Pac-link Technologies is a partnership owned and operated by Tom Kennedy and Mike McConnell. To recognize the fact that the partners have invested significantly different amounts of capital and that Tom works full time, while Mike works only part time, the partnership agreement states that the profit will be allocated as follows: An interest allowance of 3% of each partner’s beginning capital balance plus a salary allowance of $85 per hour worked. Any remaining profit or loss after calculation of these allowances will be allocated equally. At January 1, 2017, Tom’s capital account balance was $15,000 and Mike’s was $20,000. During the year ended December 31, 2017, Tom worked 1,200 hours and Mike worked 550 hours.

 

Instructions

1. a) Calculate each partner’s share of profit assuming that profit for the year ended December 31, 2017 is $196,000.
2. b) Calculate each partner’s share of profit assuming that profit for the year ended December 31, 2017 is $88,000.

 

Solution 7 (15 min.)

a)

	Kennedy	McConnell	Total
Profit			$196,000
Interest allowance
$15,000 x 3%	450
$20,000 x 3%		$600	1,050
Profit remaining for allocation			194,950
Salary allowance
1,200 hours x $85	102,000
550 hours x $85		46,750	148,750
Profit remaining for allocation			46,200
Fixed ratio
$46,200 ÷ 2	23,100	23,100	46,200
Profit remaining for allocation			0
Profit allocated to partners	$125,550	$70,450	$196,000

 

b)

	Kennedy	McConnell	Total
Profit			$ 88,000
Interest allowance
$15,000 x 3%	$       450
$20,000 x 3%		$   600	1,050
Profit remaining for allocation			86,950
Salary allowance
1,200 hours x $85	102,000
550 hours x $85		46,750	148,750
Profit (deficiency) remaining for allocation			(61,800)
Fixed ratio
($61,800) ÷ 2	(30,900)	(30,900)	(61,800)
Profit remaining for allocation			0
Profit allocated to partners	$   71,550	$  16,250	$  88,000

 

Bloomcode: Application

Difficulty: Hard

Learning Objective: Allocate and record profit or loss to partners.

Section Reference: Dividing Partnership Profit or Loss

CPA: Financial Reporting

 

 

Exercise 8

Laroche, Kennedy, and White formed a partnership on January 1, 2017. Laroche invested $40,000, Kennedy $30,000 and White $50,000. Laroche will manage the store and work 40 hours per week in the store. Kennedy will work 20 hours per week in the store, and White will not work. Each partner withdrew 30 percent of his profit distribution during 2017. If there was no profit distribution to a partner, there were no withdrawals of cash.

 

Instructions

Calculate the partners’ capital balances at the end of 2017 under the following independent conditions: (Hint: use T accounts to determine each partner’s capital balance.)

1. a) Profit is $80,000 and the profit ratio is Laroche 40%, Kennedy 35%, and White 25%.
2. b) Profit is $100,000 and the partnership agreement specifies a salary of $35,000 to Laroche and $20,000 to Kennedy. Any remaining amount is to be shared equally among the partners.
3. c) Profit is $35,000 and the partnership agreement provides for (a) a salary of $20,000 to Laroche and $20,000 to Kennedy, (b) interest on beginning capital balances at the rate of 6%, and (c) any remaining profit or loss is to be shared by Laroche 50%, Kennedy 35%, and White 15%.

Solution 8 (25 min.)

a)

Laroche, Capital                           Kennedy, Capital                             White, Capital

9,600                40,000                  8,400                 30,000                   6,000               50,000

                             32,000                                            28,000                                           20,000

62,400                                            49,600                                           64,000

 

Profit               %             Distribution      %      Drawings

Laroche        $80,000   ×   40                 $32,000   ×  30      $  9,600

Kennedy         80,000   ×   35                   28,000   ×  30          8,400

White              80,000   ×   25                   20,000   ×  30          6,000

$80,000                 $24,000

 

b)

Laroche, Capital                           Kennedy, Capital                              White, Capital

15,000                40,000                10,500                 30,000                   4,500               50,000

                             50,000                                             35,000                                            15,000

75,000                                            54,500                                           60,500

 

Laroche                  Kennedy                 White                    Total

Salary                           $35,000                 $20,000                 $         0               $  55,000

Remainder                      15,000                   15,000                   15,000                   45,000

Total                              $50,000                 $35,000                 $15,000               $100,000

 

× 30% = Drawings        $15,000                 $10,500                 $  4,500                 $30,000

 

c)

Laroche, Capital                            Kennedy, Capital                              White, Capital

4,890                40,000                  5,259                 30,000                       351               50,000

                             16,300                                             17,530                                              1,170

51,410                                            42,271                                           50,819

 

Laroche                  Kennedy                 White                     Total

Salary                           $20,000                 $20,000                   $       0                 $40,000

Interest                              2,400                     1,800                     3,000                     7,200

Remainder ($12,200)      (6,100)                  (4,270)                  (1,830)                (12,200)

Total                              $16,300                 $17,530                   $1,170                 $35,000

 

× 30% = Drawings        $  4,890                 $  5,259                   $   351                 $10,500

 

Bloomcode: Application

Difficulty: Hard

Learning Objective: Allocate and record profit or loss to partners.

Section Reference: Dividing Partnership Profit or Loss

CPA: Financial Reporting

 

 

Exercise 9

The condensed, adjusted trial balance of the Kirby and Simon Partnership as at December 31, 2017, appears below:

KIRBY AND SIMON PARTNERSHIP

Adjusted Trial Balance

December 31, 2017

   Debit            Credit

Current assets……………………………………………………………………………..     $  25,000

Property, plant, and equipment………………………………………………………         80,000

Current liabilities…………………………………………………………………………..                        $    7,000

Long-term debt…………………………………………………………………………….                            44,000

Kirby, capital………………………………………………………………………………..                            26,000

Kirby, drawings…………………………………………………………………………….       270,000

Simon, capital………………………………………………………………………………                            18,000

Simon, drawings…………………………………………………………………………..       245,000

Service revenue…………………………………………………………………………..                          593,000

Operating expenses …………………………………………………………………….         68,000                  

$688,000    $688,000

 

The partnership agreement stipulates that a division of partnership profit or loss is to be made as follows:

1. A salary allowance of $310,000 to Kirby and $250,000 to Simon.
2. The remainder is to be divided equally.

 

Instructions

1. a) Prepare a schedule which shows the division of profit to each partner.
2. b) Prepare the closing entries for the division of profit and for the drawings accounts at December 31, 2017.

 

Solution 9 (15 min.)

1. a) Schedule for division of profit:

Sales…………………………………………………………………………………….     $593,000

Less: Operating expenses………………………………………………………         68,000

Profit…………………………………………………………………………………….     $525,000

 

   Kirby                  Simon                   Total   

Profit                                                                                                                         $525,000

Salary allowance                                             $310,000             $250,000               560,000

Deficiency remaining for allocation                                                                           (35,000)

Fixed ratio

Kirby ($35,000) × 50%                              (17,500)

Simon ($35,000) × 50%                                                         (17,500)               (35,000)

Deficiency remaining for allocation                                                                                        0

Division of profit                                               $292,500              $232,500             $525,000

 

1. b) Dec 31     Income Summary……………………………………………………       525,000

Kirby, Capital……………………………………………………                          292,500

Simon, Capital………………………………………………….                          232,500

To close profit to capital

31     Kirby, Capital………………………………………………………….       270,000

Simon, Capital………………………………………………………..       245,000

Kirby, Drawings………………………………………………..                          270,000

Simon, Drawings………………………………………………                          245,000

To close drawings accounts to capital

 

Bloomcode: Application

Difficulty: Medium

Learning Objective: Allocate and record profit or loss to partners.

Section Reference: Dividing Partnership Profit or Loss

CPA: Financial Reporting

 

 

Exercise 10

Bob Spade and Ken Lundy have formed the partnership Art World, and have capital balances of $120,000 and $105,000 respectively on January 1, 2017. On June 1, 2017, Lundy invested an additional $20,000. Also during the year, Spade withdrew $16,000 and Lundy withdrew $22,000. Sales for the year amounted to $850,000 and expenses were $520,000. After taking salary allowances of $60,000 and $90,000 respectively, Spade and Lundy share any remaining profit and losses on a 40% and 60% ratio respectively.

 

Instructions

1. a) Prepare a schedule that shows the division of profit to each partner.
2. b) Prepare the closing entries at December 31, 2017, for the Art World partnership.
3. c) Prepare a statement of partners’ equity for 2017.

 

Solution 10 (15 min.)

1. a) Division of Profit

Spade              Lundy                Total

Profit ($850,000 – $520,000)…………………………………………..                                 $330,000

Salary allowance………………………………………………. $60,000          $90,000          150,000

Profit remaining for allocation………………………………………….                                   180,000

Fixed ratio

Spade ($180,000 × 40%)………………………………. 72,000

Lundy ($180,000 × 60%)………………………………………….           108,000          180,000

Profit remaining for allocation………………………………. ______           ______          ______0

Division of profit………………………………………………. $132,000        $198,000         $330,000

 

1. b) Sales……………………………………………………………………………………. 850,000

Expenses……………………………………………………………………….                          520,000

Income Summary……………………………………………………………                          330,000

Income Summary………………………………………………………………….       330,000

1. Spade, Capital……………………………………………………………. 132,000
2. Lundy, Capital…………………………………………………………….. 198,000
3. Spade, Capital………………………………………………………………….. 16,000
4. Lundy, Capital…………………………………………………………………… 22,000
5. Spade, Drawings………………………………………………………… 16,000
6. Lundy, Drawings…………………………………………………………. 22,000

 

c)

Art World Partnership

Statement of Partners’ Equity

Year Ended December 31, 2017

1. Spade               K. Lundy                 Totals

Capital, January 1……………………………….. . $  120,000           $  105,000              $225,000

Add:  Additional Investment………………….. ………………                  20,000                  20,000

Profit…………………………………………. …   132,000               198,000                330,000

….. 252,000               323,000                575,000

Less: Drawings……………………………………. …     16,000                 22,000                  38,000

Capital, December 31………………………….. … $236,000             $301,000              $537,000

 

Bloomcode: Application

Difficulty: Medium

Learning Objective: Allocate and record profit or loss to partners.

Section Reference: Dividing Partnership Profit or Loss

Learning Objective: Prepare partnership financial statements.

Section Reference: Partnership Financial Statements

CPA: Financial Reporting

 

 

Exercise 11

Jane Zhou, Ron Higgins and Liz O’Neill are three partners who operate ZHO Consulting, which has a June 30 year end. For the year ended June 30, 2017, the partnership had revenue of $380,000 and operating expenses of $176,000. Information about the partnership accounts is as follows:

Partner	J. Zhou	R. Higgins	L. O’Neill
Capital account, July 1, 2016	$40,000	$35,000	$20,000
Additional investment January 1, 2017	10,000	10,000	5,000
Drawings during year ended June 30, 2017	70,000	50,000	25,000
Profit allocation percentage	40%	30%	30%

 

Instructions

2017. a) Prepare the Statement of Partners’ Equity for the year ended June 30, 2017.
2018. b) Prepare a partial balance sheet at June 30, 2017, showing the Partners’ Equity section.
2019. c) Prepare closing entries for the June 30, 2017 year end.

 

Solution 11 (25 min.)

a)

ZHO Consulting Statement of Partners’ Equity Year ended June 30, 2017
	J. Zhou		R. Higgins		L. O’Neill		Total
Capital, July 1, 2016	$       40,000		$       35,000		$      20,000		$      95,000
Add: Investments	10,000		10,000		5,000		25,000
Profit	81,600		61,200		61,200		204,000
	131,600		106,200		86,200		324,000
Less: Drawings	70,000		50,000		25,000		145,000
Capital, June 30, 2017	$       61,600		$       56,200		$      61,200		$    179,000
Calculations:
Profit: $380,000 – 176,000 = $204,000
$204,000 x 40% = $81,600; $204,000 x 30% = $61,200

 

b)

ZHO Consulting Partial Balance Sheet June 30, 2017
Liabilities and Partners’ Equity
Partners’ equity
J. Zhou, capital			$      61,600
R. Higgins, capital			56,200
L. O’Neill, capital			61,200	179,000

 

c)

Revenue……………………………………………………………………………………..       380,000

Income Summary…………………………………………………………………..                          380,000

 

Income Summary………………………………………………………………………..       176,000

Operating Expenses……………………………………………………………….                          176,000

 

Income Summary………………………………………………………………………..       204,000

1. Zhou, Capital……………………………………………………………………..         81,600
2. Higgins, Capital…………………………………………………………………         61,200
3. O’Neill, Capital…………………………………………………………………..         61,200

 

1. Zhou, Capital…………………………………………………………………………… 70,000
2. Higgins, Capital………………………………………………………………………. 50,000
3. O’Neill, Capital………………………………………………………………………… 25,000
4. Zhou, Drawings………………………………………………………………….         70,000
5. Higgins, Drawings……………………………………………………………..         50,000
6. O’Neill, Drawings……………………………………………………………….         25,000

 

Bloomcode: Application

Difficulty: Medium

Learning Objective: Allocate and record profit or loss to partners.

Section Reference: Dividing Partnership Profit or Loss

Learning Objective: Prepare partnership financial statements.

Section Reference: Partnership Financial Statements

CPA: Financial Reporting

 

 

Exercise 12

Marty Cummerford and Jane Wheeler have formed the MCJW partnership, and have capital balances of $65,000 and $50,000 respectively on January 1, 2017. On June 1, 2017, Wheeler invested an additional $35,000. Also during the year, Cummerford withdrew $30,000 and Wheeler withdrew $34,000. Sales for the year amounted to $300,000 and expenses were $220,000. After taking salary allowances of $30,000 and $20,000 respectively, Cummerford and Wheeler share any remaining profit and losses on a 3:1 basis.

 

Instructions

1. a) Prepare a schedule that shows the division of profit to each partner.
2. b) Prepare the closing entries at December 31, 2017, for the MCJW partnership.
3. c) Prepare a statement of partners’ equity for 2017.

 

Solution 12 (15 min.)

1. a) Division of Profit

Cummerford          Wheeler                Total

Profit……………………………………………………………………………                                   $80,000

Salary allowance………………………………………………. $30,000          $20,000             50,000

Profit remaining for allocation………………………………………….                                     30,000

Fixed ratio

Cummerford ($30,000 × 75%)……………………….. 22,500

Wheeler ($30,000 × 25%)………………………………………..               7,500             30,000

Profit remaining for allocation………………………………. ______           ______          ______0

Division of profit………………………………………………… $52,500          $27,500           $80,000

 

1. b) Sales……………………………………………………………………………………. 300,000

Expenses……………………………………………………………………….                          220,000

Income Summary……………………………………………………………                            80,000

Income Summary………………………………………………………………….         80,000

1. Cummerford, Capital………………………………………………….. 52,500
2. Wheeler, Capital………………………………………………………….. 27,500
3. Cummerford, Capital…………………………………………………………. 30,000
4. Wheeler, Capital………………………………………………………………… 34,000
5. Cummerford, Drawings………………………………………………. 30,000
6. Wheeler, Drawings………………………………………………………. 34,000

 

c)

MCJW Partnership

Statement of Partners’ Equity

Year Ended December 31, 2017

1. Cummerford          J. Wheeler                  Totals

Capital, January 1……………………………….. … $  65,000             $  50,000              $115,000

Add:  Additional Investment………………….. ………………                  35,000                  35,000

Profit…………………………………………. …     52,500                 27,500                  80,000

….. 117,500               112,500                230,000

Less: Drawings……………………………………. …     30,000                 34,000                  64,000

Capital, December 31………………………….. … $  87,500             $  78,500              $166,000

 

Bloomcode: Application

Difficulty: Medium

Learning Objective: Allocate and record profit or loss to partners.

Section Reference: Dividing Partnership Profit or Loss

Learning Objective: Prepare partnership financial statements.

Section Reference: Partnership Financial Statements

CPA: Financial Reporting

 

 

Exercise 13

Julie Harris, William Gosse, and Regina Ryan started a partnership to provide mobile tax services. The partners’ capital account at the beginning of 2017 was Harris, $120,000; Gosse, $180,000; and Ryan, $90,000. The partnership agreement states that the partners will share profit equally.

 

On December 31, 2017, the partnership reported a loss of $21,000 for the year. During the year, Harris withdrew $80,000 and Gosse withdrew $140,000. Ryan did not make any withdrawals.

 

On January 1, 2018, the partners had a major disagreement as to the direction of the partnership and decided to liquidate the business. The December 31, 2017 balance sheet showed the following balances:

…… Cash……………………………………………………… $  26,000

…… Machinery (net)………………………………………… 169,000

…… Accounts payable……………………………………….. 46,000

…… Partners’ capital……………………………………….. 149,000

 

On January 1, 2018, the machinery was sold for proceeds of $133,000.

 

Instructions

Prepare the journal entry to record the following:

2017. a) The allocation of the loss to the partners on December 31, 2017.
2018. b) The closing of the drawings accounts on December 31, 2017.
2019. c) The liquidation of the partnership on January 1, 2018.

 

Solution 13 (15 min.)

a)

2017

Dec    31       J. Harris, Capital……………………………………………………….           7,000

1. Gosse, Capital…………………………………………………….. 7,000
2. Ryan, Capital……………………………………………………….. 7,000

Income Summary……………………………………………..                            21,000

 

b)

Dec    31       J. Harris, Capital……………………………………………………….         80,000

1. Gosse, Capital…………………………………………………….. 140,000
2. Harris, Drawings…………………………………………… 80,000
3. Gosse, Drawings…………………………………………. 140,000

 

c)

HARRIS, GOSSE, AND RYAN PARTNERSHIP Liquidation Schedule January 1, 2018
	Cash	Noncash    Assets	Accounts Payable	Harris,  Capital*	Gosse,  Capital*	Ryan,  Capital*
Balances	$  26,000	$169,000	$46,000	$33,000	$33,000	$83,000
Sale of machinery and allocation of $36,000 loss	133,000	(169,000)	000000	(12,000)	(12,000)	(12,000)
Remaining balances	159,000	0	46,000	21,000	21,000	71,000
Payment of liabilities	(46,000)	0000000	(46,000)	000 000	000 000	00 0000
Remaining balances	$113,000	$          0	$         0	$21,000	$21,000	$71,000

 

*Capital Account Balances:    Harris      Gosse      Ryan

Balance, Jan1, 2017             120,000   180,000   90,000

Withdrawals                           (80,000) (140,000)     —

Loss                                        (7,000)      (7,000)  (7,000)  …….

Balance, Dec 31, 2017           33,000      33,000   83,000

 

Cash…………………………………………………………………………………….       133,000

Loss on Disposal …………………………………………………………………..         36,000

Machinery………………………………………………………………………                          169,000

 

Machinery (net)                                   $169,000

Sale proceeds                                       133,000

Loss on sale of machinery                  $  36,000  ÷ 3 = $12,000

 

2018

Jan      1       J. Harris, Capital……………………………………………………….         12,000

1. Gosse, Capital…………………………………………………….. 12,000
2. Ryan, Capital……………………………………………………….. 12,000

Loss on Realization……………………………………………..                            36,000

 

1       Accounts Payable……………………………………………………..         46,000

Cash………………………………………………………………….                            46,000

 

1       J. Harris, Capital……………………………………………………….         21,000

1. Gosse, Capital…………………………………………………….. 21,000
2. Ryan, Capital……………………………………………………….. 71,000

Cash………………………………………………………………….                       113,000**

** (133,000+26,000-46,000)

 

Bloomcode: Application

Difficulty: Hard

Learning Objective: Allocate and record profit or loss to partners.

Section Reference: Dividing Partnership Profit or Loss

Learning Objective: Account for the liquidation of a partnership.

Section Reference: Liquidation of a Partnership

CPA: Financial Reporting

 

 

Exercise 14

Green Solutions is a partnership owned by F. Sabac and S. Hilton. At January 1, 2017 the partner’s capital accounts were: F. Sabac, $16,500 and S. Hilton $12,300. During 2017, Hilton contributed to the business equipment with a fair value of $5,600. Each partner withdrew $50,000 during the year and profit was $141,900. The partners share profit on a 2:1 ratio (Sabac:Hilton).

 

Instructions

2017. a) Prepare the statement of partners’ equity for the year ended December 31, 2017.
2018. b) Prepare a partial balance sheet, showing the partners’ equity section.

 

Solution 14 (25 min.)

a)

Green Solutions Statement of Partners’ Equity Year ended December 31, 2017
		F. Sabac		S. Hilton		Total
Capital, January 1, 2017		$         16,500		$         12,300		$      28,800
Add: Investments		­		5,600		5,600
Profit		94,600		47,300		141,900
		111,100		65,200		176,300
Less: Drawings		50,000		50,000		100,000
Capital, December 31, 2017		$         61,100		$         15,200		$      76,300
Calculations:
Profit:
$141,900 x 2/3 = $94,600; $141,900 x 1/3 = $47,300

 

b)

Green Solutions Partial Balance Sheet December 31, 2017
Liabilities and Partners’ Equity
Partners’ equity
F. Sabac, capital			$         61,100
S. Hilton, capital			15,200	76,300

 

Bloomcode: Application

Difficulty: Medium

Learning Objective: Allocate and record profit or loss to partners.

Section Reference: Dividing Partnership Profit or Loss

CPA: Financial Reporting

 

 

Exercise 15

At September 30, 2017, C. Saber and J. Wong, the two partners of City Landscaping, had capital account balances of $25,000 each. D. Walker joined the partnership on September 30, 2017 and received a 1/3 interest in the partnership in exchange for a capital contribution of $40,000.

 

For the year ended September 30, 2018, City Landscaping had profit of $126,000, which is allocated equally to the three partners. Withdrawals during the year were $18,000 each by Saber and Wong, and $14,000 by Walker.

 

Instructions

1. a) Record the transaction on September 30, 2017 admitting Walker into the partnership.
2. b) Calculate the balance of each partner’s capital account after the transaction.
3. c) Prepare the Statement of Partners’ Equity for the year ended September 20, 2018.

 

Solution 15 (20 min.)

a)

Cash…………………………………………………………………………………………..         40,000

1. Walker, Capital…………………………………………………………………. 30,000
2. Saber, Capital…………………………………………………………………… 5,000
3. Wong, Capital……………………………………………………………………. 5,000

 

Calculations

Total capital of existing partnership ($25,000 x 2)…………………………….      $ 50,000

Investment by new partner, D. Walker……………………………………………        40,000

Total capital of new partnership……………………………………………………..      $ 90,000

 

1. Walker’s share of equity ($90,000 x 1/ 3)…………………………………… $ 30,000

 

Bonus [($40,000 – $30,000) x 50%] each to Saber and Wong…………..         $5,000  each

 

b)

Capital accounts after admission of D. Walker:

1. Walker (calculated in part a)………………………………………………. $30,000
2. Saber and J. Wong (each) ($25,000 + $5,000)…………………….. 30,000

 

c)

City Landscaping Statement of Partners’ Equity Year ended September 30, 2018
	C. Saber	J. Wong	D. Walker	Total
Capital, Oct 1, 2017	$  30,000	$ 30,000	$  30,000	$  90,000
Add: Profit	42,000	42,000	42,000	126,000
	72,000	72,000	72,000	216,000
Less: Drawings	18,000	18,000	14,000	50,000
Capital, Sep 30, 2018	$  54,000	$ 54,000	$  58,000	$ 166,000

 

Bloomcode: Application

Difficulty: Medium

Learning Objective: Prepare partnership financial statements.

Section Reference: Partnership Financial Statements

Learning Objective: Account for the admission of a partner.

Section Reference: Admission and Withdrawal of a Partner

CPA: Financial Reporting

 

 

Exercise 16

The following information is available regarding CGG Company’s partnership accounts at December 31, 2017, before completion of the closing entries:

1. Choudrey, Capital…………………………………………………………… $ 70,000
2. Gilker, Capital………………………………………………………………… 45,000
3. Godfrey, Capital……………………………………………………………… 20,000
4. Choudrey, Drawings……………………………………………………….. 50,000
5. Gilker, Drawings……………………………………………………………… 28,000
6. Godfrey, Drawings………………………………………………………….. 35,000

Income Summary (shared equally among partners)…………………       180,000

 

No new contributions were made during 2017. Godfrey wishes to withdraw from the partnership January 1, 2018.

 

Instructions

2017. a) Prepare the statement of partners’ equity for the year ended December 31, 2017.
2018. b) Prepare the January 1, 2018 entry to record Godfrey’s withdrawal under each of the following three independent alternatives:

(i)    Choudrey and Gilker each pay Godfrey $10,000 out of their personal accounts and each receives one-half of Godfrey’s equity.

(ii)   Godfrey is paid $100,000 out of partnership cash.

(iii)   Godfrey is paid $40,000 out of partnership cash.

 

Solution 16 (20 min.)

a)

CGG Company Statement of Partners’ Equity Year ended December 31, 2017
	A. Choudrey	N. Gilker	R. Godfrey	Total
Capital, Jan 1, 2017	$  70,000	$   45,000	$  20,000	$  135,000
Profit	60,000	60,000	60,000	180,000
	130,000	105,000	80,000	315,000
Less: Drawings	50,000	28,000	35,000	113,000
Capital, Dec 31, 2017	$  80,000	$   77,000	$  45,000	$  202,000

 

1. b) (i)
2. Godfrey, Capital……………………………………………………………………… 45,000
3. Choudrey ($45,000 x ½)……………………………………………………. 22,500
4. Gilker………………………………………………………………………………. 22,500

 

1. b) (ii)
2. Godfrey, Capital……………………………………………………………………… 45,000
3. Choudrey, Capital ($100,000 – 45,000) x ½……………………………….. 27,500
4. Gilker, Capital…………………………………………………………………………. 27,500

Cash…………………………………………………………………………………….                          100,000

 

1. b) (iii)
2. Godfrey, Capital……………………………………………………………………… 45,000
3. Choudrey, Capital ($40,000 – $45,000) x ½…………………………. 2,500
4. GIlker, Capital…………………………………………………………………… 2,500

Cash…………………………………………………………………………………….                            40,000

 

Bloomcode: Application

Difficulty: Medium

Learning Objective: Prepare partnership financial statements.

Section Reference: Partnership Financial Statements

Learning Objective: Account for the withdrawal of a partner.

Section Reference: Withdrawal of a Partner

CPA: Financial Reporting

 

 

Exercise 17

Connie Knox and Andrea Cardoza have capital accounts of $360,000 and $280,000, respectively. Bob Lee and Mike McClure are to join the partnership. Lee invests $55,000 in the partnership for which he receives a capital credit of $55,000. McClure purchases a one-half interest from Knox for $230,000 and a one-fourth interest from Cardoza for $100,000.

 

Instructions

1. a) Prepare the journal entries to record the admission of Lee and McClure to the partnership.
2. b) Determine the capital balances of the partners after the admission of Lee and McClure.

 

Solution 17 (10 min.)

1. a) Cash……………………………………………………………………………………. 55,000

Bob Lee, Capital……………………………………………………………..                            55,000

Connie Knox, Capital……………………………………………………………..       180,000

Andrea Cardoza, Capital…………………………………………………………         70,000

Mike McClure, Capital………………………………………………………                          250,000

 

1. b) Connie Knox ($360,000 – $180,000)……………………………………….. $180,000

Andrea Cardoza ($280,000 – $70,000)…………………………………….       210,000

Bob Lee………………………………………………………………………………..         55,000

Mike McClure………………………………………………………………………..       250,000

Total Capital……………………………………………………………………     $695,000

 

Bloomcode: Application

Difficulty: Easy

Learning Objective: Account for the admission of a partner.

Section Reference: Admission and Withdrawal of a Partner

CPA: Financial Reporting

 

 

Exercise 18

Jackie Thompson and Rick Chung are partners who share profit on a 3:2 basis, and on July 1, their capital account balances are $165,000 and $136,000 respectively. On July 1, Betty Lo is admitted to the partnership.

 

Instructions

Prepare the entry to record Betty’s admission to the partnership under the following independent situations:

1. a) Betty purchases 50% of Jackie’s partnership interest from him for $115,000.
2. b) Betty purchases a 1/3 interest in the partnership by contributing cash of $96,500.
3. c) Betty purchases a 1/3 interest in the partnership by contributing cash of $167,900.

 

Solution 18 (15 min.)

a)

1. Thompson, Capital ($165,000 × 50%)………………………………………… 82,500
2. Lo, Capital…………………………………………………………………………         82,500

To record admission of Lo by purchase

b)

Cash…………………………………………………………………………………………..         96,500

1. Thompson, Capital……………………………………………………………………   21,600
2. Chung, Capital………………………………………………………………………… 14,400
3. Lo, Capital…………………………………………………………………………       132,500

 

Calculations

Total capital of existing partnership ($165,000 + $136,000)………………                        $301,000

Investment by new partner, B. Lo…………………………………………………..                            96,500

Total capital of new partnership……………………………………………………..                        $397,500

New partner’s capital credit ($397,500 x 1/ 3)………………………………….                        $132,500

 

Bonus to new partner ($132,500 – $96,500)……………………………………                          $36,000

Allocate bonus to new partner B. Lo:

1. Thompson ($36,000 x 3÷ 5)………………………………………………… $21,600
2. Chung ($36,000 x 2÷ 5)……………………………………………………… 14,400      $36,000

 

c)

Cash…………………………………………………………………………………………..       167,900

1. Thompson, Capital……………………………………………………………..           6,960
2. Chung, Capital…………………………………………………………………..           4,640
3. Lo, Capital…………………………………………………………………………       156,300

 

Calculations:

Total capital of existing partnership ($165,000 + $136,000)………………                        $301,000

Investment by new partner, B. Lo…………………………………………………..                          167,900

Total capital of new partnership……………………………………………………..                        $468,900

New partner’s capital credit ($468,900 x 1/3)…………………………………..                        $156,300

 

Bonus to existing partners ($167,900 – $156,300)……………………………      $11,600

Allocate bonus to existing partners:

1. Thompson ($11,600 x 3÷ 5)………………………………………………… $6,960
2. Chung ($11,600x 2÷ 5)……………………………………………………….   4,640      $11,600

 

Bloomcode: Application

Difficulty: Hard

Learning Objective: Account for the admission of a partner.

Section Reference: Admission and Withdrawal of a Partner

CPA: Financial Reporting

Exercise 19

Tim Tarrant and Jim Edmonds share partnership profit on a 3:2 basis. They have capital balances of $170,000 and $90,000, respectively, when JT Ryder is admitted to the partnership.

 

Instructions

Prepare the journal entry to record the admission of Ryder under each of the following assumptions:

1. a) Ryder invests $100,000 for a 25% ownership interest.
2. b) Ryder invests $40,000 for a 25% ownership interest.
3. c) Ryder invests an amount that gives him a 20% ownership interest.

Solution 19 (20 min.)

1. a) Cash……………………………………………………………………………………. 100,000

J.T. Ryder, Capital…………………………………………………………..                            90,000

1. Tarrant, Capital (3÷ 5 × $10,000)………………………………….. 6,000
2. Edmonds (2÷ 5 × $10,000)…………………………………………… 4,000

 

Total capital of existing partnership………………………. ……………….. $260,000

Investment by new partner, Ryder………………………..   ……………… 100,000

Total capital of new partnership……………………………. ……………….. $360,000

 

Ryder ‘s capital credit ($360,000 × 25%)………………. ……………….. $  90,000

 

Investment by new partner, Ryder……………………….. ……………….. $100,000

Ryder’s capital credit…………………………………………… ………………..     90,000

Bonus to existing partners…………………………………… ……………….. $  10,000

 

1. b) Cash……………………………………………………………………………………. 40,000
2. Tarrant, Capital ($35,000 × 3÷ 5)………………………………………… 21,000
3. Edmonds ($35,000 × 2÷ 5)…………………………………………………. 14,000

J.T. Ryder, Capital…………………………………………………………..                            75,000

 

Total capital of existing partnership………………………………………….     $260,000

Investment by new partner, Ryder…………………………………………..         40,000

Total capital of new partnership……………………………………………….     $300,000

 

Ryder’s capital credit ($300,000 × 25%)……………………………………     $  75,000

 

Investment by new partner, Ryder…………………………………………..     $  40,000

Ryder’s capital credit………………………………………………………………         75,000

Bonus to Ryder……………………………………………………………………..     (35,000)

 

1. c) Cash……………………………………………………………………………………. 65,000

J.T. Ryder, Capital…………………………………………………………..                            65,000

 

$260,000 ÷ 0.80 = $325,000; $325,000 – $260,000 = $65,000

 

Bloomcode: Application

Difficulty: Hard

Learning Objective: Account for the admission of a partner.

Section Reference: Admission and Withdrawal of a Partner

CPA: Financial Reporting

 

 

Exercise 20

The Felix and Morris Partnership has capital account balances as follows:

Felix, Capital……………………………………….. … $145,000

Morris, Capital…………………………………….. ….. 160,000

 

The partners share profit and losses in the ratio of 60% to Felix and 40% to Morris.

 

Instructions

Prepare the journal entry on the books of the partnership to record the admission of Singh as a new partner under the following three independent circumstances:

1. a) Singh pays $80,000 to Felix and $95,000 to Morris for one-half of each of their ownership interests in a personal transaction.
2. b) Singh invests $150,000 in the partnership for a one-third interest in partnership capital.
3. c) Singh invests $1,000,000 in the partnership for a one-third interest in partnership capital.

 

Solution 20 (20 min.)

1. a) Felix, Capital ($145,000 × 50%)……………………………………………… 72,500

Morris, Capital ($160,000 × 50%)…………………………………………….         80,000

Singh, Capital………………………………………………………………….                          152,500

To record admission of Singh by purchase

Total net assets and total capital of the partnership do not change.

 

1. b) Cash……………………………………………………………………………………. 150,000

Felix, Capital………………………………………………………………………….           1,000

Morris, Capital……………………………………………………………………….              667

Singh, Capital………………………………………………………………….                          151,667

To record admission of Singh and bonus to old partners

 

Total capital of existing partnership ($145,000 + $160,000)………..     $305,000

Investment by new partner, Singh……………………………………………      150,000

Total capital of new partnership……………………………………………….     $455,000

 

Singh’s capital credit = $455,000 × 1/ 3 = $151,667

Singh’s investment…………………………………………………………..     $150,000

Singh’s capital credit………………………………………………………..      151,667

Bonus to new partner……………………………………………………….       $  1,667

 

Allocation bonus to new partner:

Felix (60% × $1,667)………………………………………………………..         $1,000

Morris (40% × $1,667)……………………………………………………..              667

$1,667

 

1. c) Cash……………………………………………………………………………………. 1,000,000

Felix, Capital………………………………………………………………………….                          339,000

Morris, Capital……………………………………………………………………….                          226,000

Singh, Capital………………………………………………………………….                          435,000

To record Singh’s admission and bonus

 

Total capital of existing partnership ($145,000 + $160,000)……….. $   305,000

Investment by new partner, Singh……………………………………………   1,000,000

Total capital of new partnership………………………………………………. $1,305,000

 

Singh’s capital credit = $1,305,000 × 1/ 3 =………………………………    $435,000

 

Bonus to existing partners ($1,000,000 – $435,000) =……………….     $565,000

 

Allocation to existing partners

Felix ($565,000 × 60%)……………………………………………………     $339,000

Morris ($565,000 × 40%)………………………………………………….       226,000

$565,000

 

Bloomcode: Application

Difficulty: Hard

Learning Objective: Account for the admission of a partner.

Section Reference: Admission and Withdrawal of a Partner

CPA: Financial Reporting

 

 

Exercise 21

Donna Karr, Alice Wright, and Nancy Shaffer have capital balances of $100,000, $70,000, and $50,000, respectively, and they share profit on a 4:3:3 basis.

 

Instructions

Journalize the withdrawal of Wright from the partnership under each of the following circumstances:

1. a) Wright is paid $70,000 in cash from partnership assets.
2. b) Wright is paid $77,000 in cash from partnership assets.
3. c) Wright is paid $49,000 in cash from partnership assets.

Solution 21 (10 min.)

1. a) Wright, Capital………………………………………………………………….. 70,000

Cash………………………………………………………………………………                            70,000

 

1. b) Wright, Capital………………………………………………………………….. 70,000
2. Karr, Capital (4 ÷ 7 × $7,000)……………………………………………… 4,000
3. Shaffer, Capital (3 ÷ 7 × $7,000)…………………………………………. 3,000

Cash………………………………………………………………………………                            77,000

 

1. c) Wright, Capital………………………………………………………………….. 70,000
2. Karr, Capital (4 ÷ 7 × $21,000)……………………………………… 12,000
3. Shaffer, Capital (3 ÷ 7 × $21,000)…………………………………. 9,000

Cash………………………………………………………………………………                            49,000

 

Bloomcode: Application

Difficulty: Easy

Learning Objective: Account for the withdrawal of a partner.

Section Reference: Withdrawal of a Partner

CPA: Financial Reporting

 

 

Exercise 22

Julie Ellis, Sara Lake, and Dan Madden have capital balances of $54,000, $82,000, and $36,000, respectively, and their profit ratios are 4:2:4.

 

Instructions

Record the withdrawal of Madden from the partnership under each of the following assumptions:

1. a) Madden is paid $36,000 from partnership assets.
2. b) Madden is paid $48,000 from partnership assets.
3. c) Madden is paid $27,000 from partnership assets.

 

Solution 22 (10 min.)

1. a) Madden, Capital……………………………………………………………….. 36,000

Cash………………………………………………………………………………                            36,000

 

1. b) Madden, Capital……………………………………………………………….. 36,000
2. Ellis, Capital ($12,000 × 4 ÷ 6)…………………………………………….. 8,000
3. Lake, Capital ($12,000 × 2 ÷ 6)…………………………………………… 4,000

Cash………………………………………………………………………………                            48,000

 

1. c) Madden, Capital……………………………………………………………….. 36,000
2. Ellis, Capital ($9,000 × 4 ÷ 6)……………………………………….. 6,000
3. Lake, Capital ($9,000 × 2 ÷ 6)………………………………………. 3,000

Cash………………………………………………………………………………                            27,000

 

Bloomcode: Application

Difficulty: Easy

Learning Objective: Account for the withdrawal of a partner.

Section Reference: Withdrawal of a Partner

CPA: Financial Reporting

 

 

Exercise 23

Baker, Gregg, and Stine share profit and losses in a ratio of 4:1:5 respectively. The capital account balances of the partners are as follows:

Baker, Capital……………………………………… … $150,000

Gregg, Capital…………………………………….. ……. 90,000

Stine, Capital………………………………………. ……. 60,000

 

Instructions

Prepare the journal entry on the books of the partnership to record the withdrawal of Stine under the following independent circumstances:

1. a) The partners agree that Stine should be paid $70,000 by the partnership for his interest.
2. b) The partners agree that Stine should be paid $45,000 by the partnership for his interest.
3. c) Baker agrees to pay Stine $40,000 for one-half of his capital interest and Gregg agrees to pay Stine $40,000 for one-half of his capital interest in a personal transaction among the partners.

 

Solution 23 (15 min.)

1. a) Stine, Capital………………………………………………………………………… 60,000

Baker, Capital………………………………………………………………………..           8,000

Gregg, Capital……………………………………………………………………….           2,000

Cash………………………………………………………………………………                            70,000

To record withdrawal and bonus to Stine

Bonus to Stine $10,000 ($70,000 – $60,000)

Allocation to reduce remaining partners’ capital:

Baker (4 ÷ 5 × $10,000)………………………………………………………….       $  8,000

Gregg (1 ÷ 5 × $10,000)………………………………………………………….           2,000

$10,000

 

1. b) Stine, Capital………………………………………………………………………… 60,000

Baker, Capital………………………………………………………………….                            12,000

Gregg, Capital…………………………………………………………………                              3,000

Cash………………………………………………………………………………                            45,000

To record withdrawal of Stine and bonus to remaining partners

Bonus to remaining partners $15,000 ($60,000 – $45,000)

       Allocation to increase remaining partners’ capital:

Baker (4 ÷ 5 × $15,000)………………………………………………………….       $12,000

Gregg (1 ÷ 5 × $15,000)………………………………………………………….           3,000

$15,000

 

1. c) Stine, Capital………………………………………………………………………… 60,000

Baker, Capital………………………………………………………………….                            30,000

Gregg, Capital…………………………………………………………………                            30,000

To record withdrawal of Stine

Total net assets and total capital of the partnership do not change.

 

Bloomcode: Application

Difficulty: Medium

Learning Objective: Account for the withdrawal of a partner.

Section Reference: Withdrawal of a Partner

CPA: Financial Reporting

 

 

Exercise 24

Jabar Hassan, Mohammed Badoo, and Sanji Patel have capital balances of $650,000, $500,000, and $425,000, respectively, and they share profit on a 5:3:2 basis.

 

Instructions

Journalize the withdrawal of Sanji from the partnership under each of the following circumstances:

1. a) Sanji is paid $425,000 in cash from partnership assets.
2. b) Sanji is paid $450,000 in cash from partnership assets.
3. c) Sanji is paid $400,000 in cash from partnership assets.

Solution 24 (10 min.)

1. a) Patel, Capital…………………………………………………………………….. 425,000

Cash………………………………………………………………………………                          425,000

 

1. b) Patel, Capital…………………………………………………………………….. 425,000
2. Hassan, Capital (5 ÷ 8 × $25,000)……………………………………….. 15,625
3. Badoo, Capital (3 ÷ 8 × $25,000)………………………………………… 9,375

Cash………………………………………………………………………………                          450,000

 

1. c) Patel, Capital…………………………………………………………………….. 425,000
2. Hassan, Capital (5 ÷ 8 × $25,000)…………………………………. 15,625
3. Badoo, Capital (3 ÷ 8 × $25,000)…………………………………. 9,375

Cash………………………………………………………………………………                          400,000

 

Bloomcode: Application

Difficulty: Easy

Learning Objective: Account for the withdrawal of a partner.

Section Reference: Withdrawal of a Partner

CPA: Financial Reporting

 

 

Exercise 25

At June 30, Fine Balance Partnership is liquidated. Just before the liquidation, Fine Balance has cash of $2,800, equipment of $45,000, accumulated depreciation of $31,000, accounts payable of $6,000, and the following partner capital accounts: R. Mistry $9,000; M. Mohal $1,800. Partners share in profit or losses equally. Upon liquidation, the equipment is sold for $10,000 cash, the accounts payable are paid in full, and any remaining cash is distributed to the partners. If a partner’s capital account is in a deficit balance, he or she will contribute the necessary cash to the partnership to cover it.

 

Instructions

Calculate how much cash will be paid to, or received from, each partner upon liquidation.

 

Solution 25 (5 min.)

Proceeds of sale of equipment………………………………………………………      $ 10,000

Less net book value ($45,000 – $31,000)……………………………………….      (14,000)

Loss on sale of equipment…………………………………………………………….      $(4,000)

 

Cash available for distribution:

Beginning cash…………………………………………………………………………….        $ 2,800

Sale of equipment………………………………………………………………………..         10,000

Payment of accounts payable………………………………………………………..        (6,000)

Cash available……………………………………………………………………………..         $6,800

 

Capital accounts after allocation of loss, and amounts to paid/received:

1. Mistry $9,000 – ($4,000 x ½) will receive…………………………………… $7,000
2. Mohal $1,800 – ($4,000 x ½) deficiency to be paid…………………….. (200)

Net cash distributed (received)………………………………………………………         $6,800

 

Bloomcode: Application

Difficulty: Medium

Learning Objective: Account for the liquidation of a partnership.

Section Reference: Liquidation of a Partnership

CPA: Financial Reporting

 

 

Exercise 26

The RAD Partnership is to be liquidated,  the ledger shows the following:

Cash………………………………………………….. ….. $15,000

Noncash Assets………………………………….. ……. 80,000

Liabilities…………………………………………….. ……. 20,000

Reed, Capital……………………………………… ……. 30,000

Ales, Capital……………………………………….. ……. 40,000

Dent, Capital………………………………………. ……… 5,000

Reed, Ales, and Dent’s profit 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 $50,000 in cash.

 

Solution 26 (15 min.)

Cash…………………………………………………………………………………….         50,000

Loss on Realization………………………………………………………………..         30,000

Noncash Assets………………………………………………………………                            80,000

 

Reed, Capital ($30,000 × 6 ÷ 10)…………………………………………….         18,000

Ales, Capital ($30,000 × 3 ÷ 10)………………………………………………           9,000

Dent, Capital ($30,000 × 1 ÷ 10)……………………………………………..           3,000

Loss on Realization………………………………………………………….                            30,000

 

Liabilities……………………………………………………………………………….         20,000

Cash………………………………………………………………………………                            20,000

 

Reed, Capital ($30,000 – $18,000)…………………………………………..         12,000

Ales, Capital ($40,000 – $9,000)……………………………………………..         31,000

Dent, Capital ($5,000 – $3,000)……………………………………………….           2,000

Cash ($15,000 + $50,000 – $20,000)…………………………………                            45,000

 

Bloomcode: Application

Difficulty: Medium

Learning Objective: Account for the liquidation of a partnership.

Section Reference: Liquidation of a Partnership

CPA: Financial Reporting

 

Exercise 27

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 profit and losses in the ratio of 6:2:2 respectively. Assume the following:

1. Equipment was sold for $80,000.
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.)

ABC PARTNERSHIP

Trial Balance Immediately Prior to Liquidation

 

…… Cash…………………………………………………………………………………….     $  10,000

…… Equipment ……………………………………………………………………………       120,000

…… Liabilities……………………………………………………………………………….                        $  35,000

…… A, Capital………………………………………………………………………………                            21,000

…… B, Capital………………………………………………………………………………                            38,000

…… C, Capital………………………………………………………………………………                            36,000

$130,000    $130,000

 

Instructions

Using the above information, calculate the following:

1. a) Cash available to be distributed to all partners.
2. b) Any gain or loss on sale of noncash assets.
3. c) The amount of cash to be received by each partner upon liquidation.

 

Solution 27 (15 min.)

1. a) Cash to be distributed

Beginning balance………………………………………………………………….      $10,000

Proceeds from sale of equipment……………………………………………..        80,000

90,000

Less: Payment of liabilities……………………………………………………….       35,000

Cash to be distributed to partners…………………………………………….      $55,000

 

1. b) Loss on sale of equipment

Carrying amount…………………………………………………………………….    $120,000

Proceeds……………………………………………………………………………….        80,000

Loss on disposal…………………………………………………………………….    $  40,000

 

1. c) Distribution to partners

A, Capital   B, Capital   C, Capital           Total

Beginning balance                                            $21,000      $38,000      $36,000      $95,000

Less: Share of loss of equipment                    (24,000)       (8,000)       (8,000)     (40,000)

(3,000)        30,000        28,000        55,000

Allocation of capital deficiency                              3,000        (1,500)       (1,500)     _______

Cash to be distributed to each partner          _______0      $28,500      $26,500      $55,000

 

Share of Loss     A     6/10 × $(40,000) =    $(24,000)

B     2/10 × $(40,000) =        (8,000)

C     2/10 × $(40,000) =        (8,000)

$(40,000)

 

Bloomcode: Application

Difficulty: Hard

Learning Objective: Account for the liquidation of a partnership.

Section Reference: Liquidation of a Partnership

CPA: Financial Reporting

 

 

Exercise 28

Sam Bilbo and Edmond Lewis who operate the Shire Partnership have decided to liquidate their business and retire. Sam and Edmond allocate profit and losses on a 3:2 basis respectively. At December 31, 2016, after all closing entries have been made, the trial balance of the partnership shows the following account balances:

Cash…………………………………………………………………………………………..       $  2,000

Merchandise inventory………………………………………………………………….         52,000

Accounts payable…………………………………………………………………………                          $  8,000

Bank loan……………………………………………………………………………………                            15,000

1. Bilbo, Capital…………………………………………………………………………… 26,000
2. Lewis, Capital…………………………………………………………………………. 5,000

 

The inventory is sold on January 1, 2017 for cash, and the liabilities are paid. Both partners have the resources to cover deficits (if any) in their capital accounts.

 

Instructions

For each of the following independent alternatives:

1. a) Assuming the inventory is sold for $25,000, calculate the balance in each partner’s capital account after allocating the gain or loss on sale of inventory and payment of the liabilities. Prepare the entry to record the receipt of cash from, or payment of cash to, each partner to liquidate the partnership.
2. b) Assuming the inventory is sold for $57,000, calculate the balance in each partner’s capital account after allocating the gain or loss on sale of inventory and payment of the liabilities. Prepare the entry to record the receipt of cash from, or payment of cash to, each partner to liquidate the partnership.

 

Solution 28 (20 min.)

a)

Proceeds on sale of inventory……………………………………………………….                          $25,000

Cost……………………………………………………………………………………………                          (52,000)

Loss on sale………………………………………………………………………………..                          $27,000

 

Capital account balances after recording of loss:

1. Bilbo $26,000 – (3/5 x $27,000)………………………………………….. $9,800
2. Lewis $5,000 – (2/5 x $27,000)…………………………………………… (5,800)

 

Cash available before transaction ($2,000 + 25,000 – 8,000 – 15,000 = $4,000)

 

Cash…………………………………………………………………………………………..           5,800

1. Lewis, Capital……………………………………………………………………           5,800

 

1. Bilbo, Capital…………………………………………………………………………… 9,800

Cash…………………………………………………………………………………….                              9,800

 

b)

Proceeds on sale of inventory……………………………………………………….                          $57,000

Cost……………………………………………………………………………………………                          (52,000)

Gain on sale………………………………………………………………………………..                          $  5,000

 

Capital account balances after recording of gain:

1. Bilbo $26,000 + (3/5 x $5,000)……………………………………………. $ 29,000
2. Lewis $5,000 + (2/5 x $5,000)…………………………………………….. 7,000

 

Cash available before transaction ($2,000 + 57,000 – 8,000 – 15,000) = $36,000

 

1. Bilbo, Capital…………………………………………………………………………… 29,000
2. Lewis, Capital…………………………………………………………………………. 7,000

Cash…………………………………………………………………………………….                            36,000

 

Bloomcode: Application

Difficulty: Hard

Learning Objective: Account for the liquidation of a partnership.

Section Reference: Liquidation of a Partnership

CPA: Financial Reporting

 

 

 

 

 

Legal Notice

 

 

 

Copyright © 2016 by John Wiley & Sons Canada, Ltd. or related companies.  All rights reserved.

 

 

The data contained in these files are protected by copyright. This manual is furnished under licence and may be used only in accordance with the terms of such licence.

 

The material provided herein may not be downloaded, reproduced, stored in a retrieval system, modified, made available on a network, used to create derivative works, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise without the prior written permission of John Wiley & Sons Canada, Ltd.