_ch12 principles of accounting

CHAPTER 12

ACCOUNTING FOR PARTNERSHIPS

SUMMARY OF QUESTIONS BY STUDY OBJECTIVES AND BLOOMS TAXONOMY Item SO BT Item SO BT Item SO BT Item SO BT Item SO BT

True-False Statements 1. 1 K 9. 2 C 17. 3 K 25. 5 K sg33. 2 K2. 1 K 10. 2 C 18. 3 K a26. 6 K sg34. 3 C 3. 1 K 11. 2 K 19. 4 C a27. 6 C sg35. 5 K 4. 1 K 12. 2 K 20. 4 C a28. 6 C sg,a36. 6 K 5. 1 K 13. 2 K 21. 4 K a29. 6 C sg,a37. 7 K 6. 2 K 14. 2 K 22. 4 K a30. 7 C 7. 2 AP 15. 2 C 23. 4 K sg31. 1 K 8. 2 K 16. 3 K 24. 5 K sg32. 1 K

Multiple Choice Questions 38. 1 K 61. 2 C 84. 4 K 107. 5 K a130. 6 C39. 1 K 62. 2 K 85. 4 K 108. 5 C a131. 6 C 40. 1 K 63. 2 K 86. 4 K 109. 5 AP a132. 7 AP 41. 1 K 64. 2 C 87. 4 C 110. 5 AP a133. 7 AP 42. 1 K 65. 2 AP 88. 4 AP 111. 5 AP a134. 7 C 43. 1 K 66. 2 AP 89. 4 AP 112. 5 AP a135. 7 K 44. 1 K 67. 2 AP 90. 4 AP a113. 6 AP a136. 7 AP 45. 1 K 68. 2 AP 91. 4 AP a114. 6 AP a137. 7 AP 46. 1 K 69. 3 AP 92. 4 K a115. 6 AP a138. 7 AP 47. 1 K 70. 3 AP 93. 4 K a116. 6 AP st139. 1 K 48. 1 K 71. 3 AP 94. 4 K a117. 6 AP sg140. 1 C 49. 1 K 72. 3 AP 95. 5 K a118. 6 AP st141. 2 K 50. 1 K 73. 3 C 96. 5 K a119. 6 AP sg142. 3 C 51. 1 K 74. 3 K 97. 5 K a120. 6 AP st143. 3 K 52. 1 C 75. 3 K 98. 5 AP a121. 6 C sg144. 5 K 53. 1 K 76. 3 AP 99. 5 AP a122. 6 C st145. 5 K 54. 1 K 77. 3 C 100. 5 AP a123. 6 AP sg146. 5 K 55. 1 K 79. 3 C 101. 5 AP a124. 6 AP st147. 5 K 56. 2 K 79. 3 C 102. 5 K a125. 6 AP sg,a148. 6 C 57. 2 AP 80. 3 C 103. 5 C a126. 6 C sg.a149. 6 AP 58. 2 AP 81. 3 AP 104. 5 K a127. 6 C 59. 2 AP 82. 3 AP 105. 5 K a128. 6 C 60. 2 K 83. 3 AP 106. 5 K a129. 6 K

Brief Exercises 150. 2 AP 152. 3 AP 154. 5 AP a156. 6 AP a158. 7 AP151. 2 AP 153. 4 AP 155. 5 AP a167. 6 AP a159. 7 AP

sg This question also appears in the Study Guide. st This question also appears in a self-test at the student companion website. a This question covers a topic in an appendix to the chapter.

Test Bank for Accounting Principles, Eighth Edition

12 - 2

SUMMARY OF QUESTIONS BY STUDY OBJECTIVES AND BLOOMS TAXONOMY Exercises

160. 2 AP 164. 3 AP 168. 5 AP 172. 5 AP a176. 6 AP161. 2 AP 165. 3 AP 169. 5 AP 173. 3 AP a177. 6 AP 162. 3 AP 166. 3 AP 170. 5 AP a174. 6 AP a178. 7 AP 163. 3 AP 167. 3,4 AP 171. 5 AP a175. 6 AP a179. 7 AP

Completion Statements 180. 1 K 183. 3 K 186. 3 K a189. 6 K 181. 1 K 184. 3 K 187. 5 K a190. 6 K 182. 1 K 185. 3 K 188. 5 K a191. 6 K

SUMMARY OF STUDY OBJECTIVES BY QUESTION TYPE Item Type Item Type Item Type Item Type Item Type Item Type Item Type

Study Objective 1 1. TF 31. TF 41. MC 46. MC 51. MC 139. MC 2. TF 32. TF 42. MC 47. MC 52. MC 140. MC 3. TF 38. MC 43. MC 48. MC 53. MC 180. C 4. TF 39. MC 44. MC 49. MC 54. MC 181. C 5. TF 40. MC 45. MC 50. MC 55. MC 182. C

Study Objective 2 6. TF 11. TF 33. TF 60. MC 65. MC 150. BE 7. TF 12. TF 56. MC 61. MC 66. MC 151. BE 8. TF 13. TF 57. MC 62. MC 67. MC 160. Ex 9. TF 14. TF 58. MC 63. MC 68. MC 161. Ex

10. TF 15. TF 59. MC 64. MC 141. MC Study Objective 3

16. TF 70. MC 75. MC 80. MC 143. MC 165. Ex 184. C 17. TF 71. MC 76. MC 81. MC 152. BE 166. Ex 185. C 18. TF 72. MC 77. MC 82. MC 162. Ex 167. Ex 186. C 34. TF 73. MC 78. MC 83. MC 163. Ex 173. Ex 69. MC 74. MC 79. MC 142. MC 164. Ex 183. C

Study Objective 4 19. TF 22. TF 85. MC 88. MC 91. MC 94. MC 20. TF 23. TF 86. MC 89. MC 92. MC 153. BE 21. TF 84. MC 87. MC 90. MC 93. MC 167. Ex

Study Objective 5 24. TF 97. MC 102. MC 107. MC 112. MC 154. BE 171. Ex 25. TF 98. MC 103. MC 108. MC 144. MC 155. BE 172. Ex 35. TF 99. MC 104. MC 109. MC 145. MC 168. Ex 187. C 95. MC 100. MC 105. MC 110. MC 146. MC 169. Ex 188. C 96. MC 101. MC 106. MC 111. MC 147. MC 170. Ex

Accounting for Partnerships

12 - 3

SUMMARY OF STUDY OBJECTIVES BY QUESTION TYPE Study Objective a6

a26. TF a113. MC a118. MC a123. MC a128. MC a149. MC a176. Ex a27. TF a114. MC a119. MC a124. MC a129. MC 156. BE a177. Ex a28. TF a115. MC a120. MC a125. MC a130. MC 157. BE a189. C a29. TF a116. MC a121. MC a126. MC a131. MC a174. Ex a190. C a36. TF a117. MC a122. MC a127. MC a148. MC a175. Ex a191. C

Study Objective a7 a30. TF a132. MC a134. MC a136. MC a138. MC a159. BE a179. Ex a37. TF a133. MC a135. MC a137. MC a158. BE a178. Ex

Note: TF = True-False BE = Brief Exercise C = Completion MC = Multiple Choice Ex = Exercise The chapter also contains one set of ten Matching questions and four Short-Answer Essay questions.

CHAPTER STUDY OBJECTIVES 1. Identify the characteristics of the partnership form of business organization. The

principal characteristics of a partnership are: (a) association of individuals, (b) mutual agency, (c) limited life, (d) unlimited liability, and (e) co-ownership of property.

2. Explain the accounting entries for the formation of a partnership. When formed, a partnership records each partner's initial investment at the fair market value of the assets at the date of their transfer to the partnership.

3. Identify the bases for dividing net income or net loss. Partnerships divide net income or net loss on the basis of the income ratio, which may be (a) a fixed ratio, (b) a ratio based on beginning or average capital balances, (c) salaries to partners and the remainder on a fixed ratio, (d) interest on partners' capital and the remainder on a fixed ratio, and (e) salaries to partners, interest on partners' capital, and the remainder on a fixed ratio.

4. Describe the form and content of partnership financial statements. The financial statements of a partnership are similar to those of a proprietorship. The principal differences are: (a) The partnership shows the division of net income on the income statement. (b) The owners' equity statement is called a partners' capital statement. (c) The partnership reports each partner's capital on the balance sheet.

5. Explain the effects of the entries to record the liquidation of a partnership. When a partnership is liquidated, it is necessary to record the (a) sale of noncash assets, (b) allocation of the gain or loss on realization, (c) payment of partnership liabilities, and (d) distribution of cash to the partners on the basis of their capital balances.

a6. Explain the effects of the entries when a new partner is admitted. The entry to record the admittance of a new partner by purchase of a partner's interest affects only partners' capital accounts. The entries to record the admittance by investment of assets in the partnership (a) increase both net assets and total capital and (b) may result in recognition of a bonus to either the old partners or the new partner.


12 - 4

a7. Describe the effects of the entries when a partner withdraws from the firm. The entry to record a withdrawal from the firm when the partners pay from their personal assets affects only partners' capital accounts. The entry to record a withdrawal when payment is made from partnership assets (a) decreases net assets and total capital and (b) may result in recognizing a bonus either to the retiring partner or the remaining partners.

TRUE-FALSE STATEMENTS 1. The personal assets, liabilities, and personal transactions of partners are excluded from

the accounting records of the partnership. 2. The act of any partner is binding on all other partners if the act appears to be appropriate

for the partnership. 3. A major advantage of the partnership form of organization is that the partners have

unlimited liability. 4. Partnership creditors may have a claim on the personal assets of any of the partners if the

partnership assets are not sufficient to settle claims. 5. The partnership agreement between partners must be in writing. 6. If a partner invests noncash assets in a partnership, they should be recorded by the

partnership at their fair market value. 7. L. Hill invests the following assets in a new partnership: $15,000 in cash, and equipment

that cost $30,000 but has a book value of $17,000 and fair market value of $20,000. Hill, Capital will be credited for $32,000.

8. Two proprietorships cannot combine and form a partnership. 9. If a partner's investment in a partnership consists of equipment that has accumulated

depreciation of $8,000, it would not be appropriate for the partnership to record the accumulated depreciation.

10. If a partner's investment in a partnership consists of Accounts Receivable of $25,000 and

an Allowance for Doubtful Accounts of $7,000, it would not be appropriate for the partnership to record the Allowance for Doubtful Accounts.

11. Unless stated otherwise in the partnership contract, profits and losses are shared among

the partners in the ratio of their capital equity balances. 12. If salary allowances and interest on capital are stipulated in the partnership profit and loss

sharing agreement, they are implemented only if income is sufficient to cover the amounts required by these features.

13. Unless the partnership agreement specifically indicates an income ratio, partnership net

income or loss is not allocated to the partners.


12 - 5

14. Partnership income or loss need not be closed to partners' capital accounts each period because of the unlimited life characteristic of partnerships.

15. If a partnership has a loss for the period, the closing entry to transfer the loss to the

partners will require a credit to the Income Summary account. 16. The partners' drawing accounts are closed each period into the Income Summary

account. 17. Salary allowances to partners are a major expense on most partnership income

statements. 18. An interest allowance in sharing partnership net income (or net loss) is related to the

amount of partners' invested capital during the period. 19. The financial statements of a partnership are similar to those of a proprietorship. 20. The income earned by a partnership will always be greater than the income earned by a

proprietorship because in a partnership there is more than one owner contributing to the success of the business.

21. The function of the Partners' Capital Statement is to explain the changes in partners'

capital account balances during a period. 22. A detailed listing of all the assets invested by a partner in a partnership appears on the

Partners' Capital Statement. 23. Total partners' equity of a partnership is equal to the sum of all partners' capital account

balances. 24. The distribution of cash to partners in a partnership liquidation is always made based on

the partners' income sharing ratio. 25. The liquidation of a partnership means that a new partner has been admitted to the

partnership. a26. The admission of a new partner results in the legal dissolution of the existing partnership

and the beginning of a new partnership. a27. If a new partner is admitted into a partnership by investment, the total assets and total

capital will change. a28. A bonus to old partners results when the new partner's capital credit on the date of

admittance is greater than his or her investment in the firm. a29. If a new partner invests in a partnership at book value and acquires a 1/4 interest in total

partnership capital, it indicates that a bonus was paid to the original partners. a30. A bonus to the remaining partners results when a retiring partner receives partnership

assets which are less than his or her capital balance on the date of withdrawal.


12 - 6

Additional True-False Questions 31. A partnership is an association of no more than two persons to carry on as co-owners of a

business for profit. 32. Once assets have been invested in the partnership, they are owned jointly by all partners. 33. Each partner's initial investment in a partnership should be recorded at book value. 34. Partnership income is shared in proportion to each partner's capital equity interest unless

the partnership contract specifically indicates the manner in which net income or net loss is to be divided.

35. In a liquidation, the final distribution of cash to partners should be on the basis of their

income ratios. a36. In an admission of a partner by investment of assets, the total net assets and total capital

of the partnership do not change. a37. The withdrawal of a partner legally dissolves the partnership. Answers to True-False Statements

Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.1. T 7. F 13. F 19. T 25. F 31. F a37. T 2. T 8. F 14. F 20. F a26. T 32. T 3. F 9. T 15. T 21. T a27. T 33. F 4. T 10. F 16. F 22. F a28. F 34. F 5. F 11. F 17. F 23. T a29. F 35. F 6. T 12. F 18. T 24. F a30. T a36. F

MULTIPLE CHOICE QUESTIONS 38. A hybrid form of business organization with certain features like a corporation is a(n)

a. limited liability partnership. b. limited liability company. c. "S" corporation. d. sub-chapter "S" corporation.

39. A partnership

a. has only one owner. b. pays taxes on partnership income. c. must file an information tax return. d. is not an accounting entity for financial reporting purposes.

40. A general partner in a partnership

a. has unlimited liability for all partnership debts. b. is always the general manager of the firm. c. is the partner who lacks a specialization. d. is liable for partnership liabilities only to the extent of that partner's capital equity.


12 - 7

41. The individual assets invested by a partner in a partnership a. revert back to that partner if the partnership liquidates. b. determine that partner's share of net income or loss for the year. c. are jointly owned by all partners. d. determine the scope of authority of that partner.

42. Which one of the following would not be considered a disadvantage of the partnership

form of organization? a. Limited life b. Unlimited liability c. Mutual agency d. Ease of formation

43. The partnership form of business is

a. restricted to law and medical practices. b. restricted to firms having fewer than 10 partners. c. not restricted to any particular type of business. d. most often used in relatively large companies.

44. Which of the following is not a principal characteristic of the partnership form of business

organization? a. Mutual agency b. Association of individuals c. Limited liability d. Limited life

45. The partnership agreement should include each of the following except the

a. date of the partnership inception. b. principal location of the firm. c. surviving family members in the event of a partner's death. d. Each of these should be included.

46. Which of the following statements is true regarding the form of a legally binding

partnership contract? a. The partnership contract must be in writing. b. The partnership contract may be based on a handshake. c. The partnership contract may be implied. d. The partnership contract cannot be oral.

47. Which of the following statements about a partnership is correct?

a. The personal assets of a partner are included in the partnership accounting records. b. A partnership is not required to file an information tax return. c. Each partner's share of income is taxable to the partnership. d. A partnership represents an accounting entity for financial reporting purposes.

48. In a partnership, mutual agency means

a. each partner acts on his own behalf when engaging in partnership business. b. the act of any partner is binding on all other partners, only if partners act within their

cope of authority. c. an act by a partner is judged as binding on other partners depending on whether the

act appears to be appropriate for the partnership. d. that partners must pay taxes on a mutual or combined basis.


12 - 8

49. A partnership a. is dissolved only by the withdrawal of a partner. b. is dissolved upon the acceptance of a new partner. c. dissolution means the business must liquidate. d. has unlimited life.

50. The partner in a limited partnership that has unlimited liability is referred to as the

a. lead partner. b. head partner. c. general partner. d. unlimited partner.

51. Limited partnerships

a. must have at least one general partner. b. guarantee that a partner will receive a return. c. guarantee that a partner will get back his original investment. d. are limited to only three partners.

52. The Maris-Crane partnership is terminated when creditor claims exceed partnership

assets by $40,000. Crane is a millionaire and Maris has no personal assets. Maris' partnership interest is 75% and Crane's is 25%. Creditors a. must collect their claims equally from Maris and Crane. b. may collect the entire $40,000 from Crane. c. must collect their claims 75% from Maris and 25% from Crane. d. may not require Crane to use his personal assets to satisfy the $40,000 in claims.

53. Which of the following statements about partnerships is incorrect?

a. Partnership assets are co-owned by partners. b. If a partnership is terminated, the assets do not legally revert to the original contributor. c. If the partnership agreement does not specify the manner in which net income is to be

shared, it is distributed according to capital contributions. d. Each partner has a claim on assets equal to the balance in the partner's capital

account. 54. Which of the following is not an advantage of the partnership form of business?

a. Mutual agency b. Ease of formation c. Ease of decision making d. Freedom from governmental regulations and restrictions

55. The largest companies in the United States are primarily organized as

a. limited partnerships. b. partnerships. c. corporations. d. proprietorships.

56. The basis for dividing partnership net income or net loss is referred to as any of the

following except the a. income ratio. b. income and loss ratio. c. profit and loss ratio. d. income sharing ratio.


12 - 9

57. Which of the following statements is incorrect regarding partnership agreements? a. It may be referred to as the articles of co-partnership. b. Oral agreements are preferable to written articles. c. It should specify the different relationships that are to exist among the partners. d. It should state procedures for submitting disputes to arbitration.

58. Norton invests personally owned equipment, which originally cost $110,000 and has

accumulated depreciation of $30,000 in the Norton and Kennett partnership. Both partners agree that the fair market value of the equipment was $60,000. The entry made by the partnership to record Norton's investment should be a. Equipment ............................................................................ 110,000 Accumulated DepreciationEquipment...................... 30,000 Norton, Capital............................................................. 80,000 b. Equipment ............................................................................ 80,000 Norton, Capital............................................................. 80,000 c. Equipment ............................................................................ 60,000 Loss on Purchase of Equipment .......................................... 20,000 Accumulated DepreciationEquipment............................... 30,000 Norton, Capital............................................................. 110,000 d. Equipment ............................................................................ 60,000 Norton, Capital............................................................. 60,000

59. Partner B is investing in a partnership with Partner A. B contributes as part of his initial

investment, Accounts Receivable of $80,000; an Allowance for Doubtful Accounts of $12,000; and $8,000 cash. The entry that the partnership makes to record B's initial contribution includes a a. credit to B, Capital for $88,000. b. debit to Accounts Receivable for $68,000. c. credit to B, Capital for $76,000. d. debit to Allowance for Doubtful Accounts for $12,000.

60. Which of the following would not be recorded in the entry for the formation of a

partnership? a. Accumulated depreciation b. Allowance for doubtful accounts c. Accounts receivable d. All of these would be recorded.

61. Bob is investing in a partnership with Jerry. Bob contributes equipment that originally cost

$63,000, has a book value of $30,000, and a fair market value of $39,000. The entry that the partnership makes to record Bob's initial contribution includes a a. debit to Equipment for $33,000. b. debit to Equipment for $63,000. c. debit to Equipment for $39,000. d. credit to Accumulated Depreciation for $33,000.

62. A partner contributes, as part of her initial investment, accounts receivable with an

allowance for doubtful accounts. Which of the following reflects a proper treatment?


12 - 10

a. The balance of the accounts receivable account should be recorded on the books of the partnership at its net realizable value.

b. The allowance account may be set up on the books of the partnership because it relates to the existing accounts that are being contributed.

c. The allowance account should not be carried onto the books of the partnership. d. The accounts receivable and allowance should not be recorded on the books of the

partnership because a partner must invest cash in the business. 63. Which one of the following would not be considered an expense of a partnership in

determining income for the period? a. Expired insurance b. Salary allowance to partners c. Supplies used d. Freight-out

64. A partner invests into a partnership a building with an original cost of $90,000 and

accumulated depreciation of $40,000. This building has a $70,000 fair market value. As a result of the investment, the partners capital account will be credited for a. $70,000. b. $50,000. c. $90,000. d. $120,000.

Use the following information for questions 6567. James and Laura are forming a partnership. James will invest a truck with a book value of $10,000 and a fair market value of $14,000. Laura will invest a building with a book value of $30,000 and a fair market value of $42,000 with a mortgage of $15,000. 65. At what amount should the building be recorded?

a. $30,000 b. $27,000 c. $42,000 d. $45,000

66. What amount should be recorded in Lauras capital account?

a. $30,000 b. $27,000 c. $42,000 d. $14,000

67. What amount should be recorded in James capital account?

a. $30,000 b. $27,000 c. $42,000 d. $14,000

68. Speir and Pablo decide to organize a partnership. Speir invests $15,000 cash, and Pablo

contributes $12,000 cash and equipment having a book value of $6,000. Choose the entry to record Pablos investment in the partnership assuming the equipment has a fair market value of $9,000.


12 - 11

a. Cash..................................................................................... 12,000 Equipment ........................................................................... 6,000 Pablo, Capital ............................................................. 18,000 b. Equipment ........................................................................... 6,000 Pablo, Capital ............................................................. 6,000 c. Cash..................................................................................... 12,000 Pablo, Capital ............................................................. 12,000 d. Cash..................................................................................... 12,000 Equipment ........................................................................... 9,000 Pablo, Capital ............................................................. 21,000

Use the following information for questions 6971. Partners Abel and Cain have capital balances in a partnership of $40,000 and $60,000, respectively. They agree to share profits and losses as follows: Abel Cain

As salaries $10,000 $12,000 As interest on capital at the beginning of the year 10% 10% Remaining profits or losses 50% 50%

69. If income for the year was $50,000, what will be the distribution of income to Cain?

a. $23,000 b. $27,000 c. $20,000 d. $10,000

70. If income for the year was $30,000, what will be the distribution of income to Abel?

a. $13,000 b. $77,000 c. $10,000 d. $14,000

71. If net loss for the year was $2,000, what will be the distribution to Cain?

a. $12,000 income b. $1,000 income c. $1,000 loss d. $2,000 loss

72. Partners Jim and Joe have agreed to share profits and losses in an 80:20 ratio

respectively, after Jim is allowed a salary allowance of $140,000 and Joe is allowed a salary allowance of $70,000. If the partnership had net income of $140,000 for 2008, Joes share of the income would be a. $70,000. b. $56,000. c. $84,000. d. $14,000.


12 - 12

73. The most appropriate basis for dividing partnership net income when the partners do not plan to take an active role in daily operations is a. on a fixed ratio. b. interest on capital balances and salaries to the partners. c. on a ratio based average capital balances. d. salaries to the partners and the remainder on a fixed ratio.

74. The Smith and Jones partnership agreement stipulates that profits and losses will be

shared equally after salary allowances of $160,000 for Smith and $80,000 for Jones. At the beginning of the year, Smith's Capital account had a balance of $320,000, while Jones' Capital account had a balance of $280,000. Net income for the year was $200,000. The balance of Jones' Capital account at the end of the year after closing is a. $380,000. b. $80,000. c. $340,000. d. $360,000.

75. A partner's share of net income is recognized in the accounts through

a. adjusting entries. b. closing entries. c. correcting entries. d. accrual entries.

76. The partnership of Nott and Reese reports net income of $60,000. The partners share

equally in income and losses. The entry to record the partners' share of net income will include a a. credit to Income Summary for $60,000. b. credit to Nott, Capital for $30,000. c. debit to Reese, Capital for $30,000. d. credit to Reese, Drawing for $30,000.

77. Partner A receives $210,000 and Partner B receives $140,000 in a split of $350,000 net

income. Which expression does not reflect the income splitting arrangement? a. 3:2 b. 3/5 & 2/5 c. 6:4 d. 2:1

78. An income ratio based on capital balances might be appropriate when

a. service is a primary consideration. b. some, but not all, partners plan to work in the business. c. funds invested in the partnership are considered the critical factor. d. little net income is expected.

79. If the partnership agreement specifies salaries to partners, interest on partners' capital,

and the remainder on a fixed ratio, and partnership net income is not sufficient to cover both salaries and interest, a. only salaries are allocated to the partners. b. only interest is allocated to the partners. c. the entire net income is shared on a fixed ratio. d. both salaries and interest are allocated to the partners.


12 - 13

80. Which of the following would not be considered an expense of a partnership in determining income for the period? a. Expired insurance b. Income tax expense c. Rent expense d. Utilities expense

Use the following information for questions 8182.

The net income of the Pine and Miles partnership is $180,000. The partnership agreement specifies that Pine and Miles have a salary allowance of $48,000 and $72,000, respectively. The partnership agreement also specifies an interest allowance of 10% on capital balances at the beginning of the year. Each partner had a beginning capital balance of $120,000. Any remaining net income or net loss is shared equally. 81. What is Pine's share of the $180,000 net income?

a. $48,000 b. $60,000 c. $66,000 d. $78,000

82. What is the balance of Miles' Capital account at the end of the year after net income has

been distributed? a. $204,000 b. $192,000 c. $222,000 d. $210,000

83. The net income of the Torrey and Gore partnership is $250,000. The partnership

agreement specifies that profits and losses will be shared equally after salary allowances of $200,000 (Torrey) and $150,000 (Gore) have been allocated. At the beginning of the year, Torrey's Capital account had a balance of $500,000 and Gore's Capital account had a balance of $650,000. What is the balance of Gore's Capital account at the end of the year after profits and losses have been distributed? a. $650,000 b. $100,000 c. $750,000 d. $775,000

84. A partners' capital statement explains

a. the amount of legal liability of each of the partners. b. the types of assets invested in the business by each partner. c. how the partnership will be capitalized if a new partner is admitted to the partnership. d. the changes in each partner's capital account and in total partnership capital during a

period. 85. Each of the following is used in preparing the partners capital statement except the

a. balance sheet. b. income statement. c. partners capital accounts. d. partners drawing accounts.


12 - 14

86. The owners' equity statement for a partnership is called the a. partners' proportional statement. b. partners' capital statement. c. statement of shareholders' equity. d. capital and drawing statement.

87. Which of the following would not cause an increase in partnership capital?

a. Drawings b. Net income c. Additional capital investment by the partners d. Initial capital investment by the partners

88. Jill Grier's capital statement reveals that her drawings during the year were $50,000. She

made an additional capital investment of $25,000 and her share of the net loss for the year was $10,000. Her ending capital balance was $200,000. What was Jill Grier's beginning capital balance? a. $225,000 b. $185,000 c. $235,000 d. $260,000

89. Bill Wren started the year with a capital balance of $180,000. During the year, his share of

partnership net income was $160,000 and he withdrew $30,000 from the partnership for personal use. He made an additional capital contribution of $50,000 during the year. The amount of Bill Wren's capital balance that will be reported on the year-end balance sheet will be a. $160,000. b. $390,000. c. $300,000. d. $360,000.

90. The Partners' Capital Statement for the United Center reported the following information in

total: Capital, January 1.................................................. $120,000 Additional investment............................................. 40,000 Drawings................................................................ 80,000 Net income............................................................. 100,000

The partnership has three partners: Moon, Garr, and Rice with ending capital balances in a ratio 40:20:40. What are the respective ending balances of the three partners? a. Moon, $80,000; Garr, $40,000; Rice, $80,000. b. Moon, $72,000: Garr, $36,000; Rice, $72,000. c. Moon, $136,000; Garr, $68,000; Rice, $136,000. d. Moon, $90,000; Garr, $48,000; Rice, $90,000.


12 - 15

91. The total column of the Partners' Capital Statement for North Company is as follows: Capital, January 1 ................................................. $150,000 Additional investment ............................................ 60,000 Drawings ............................................................... 90,000 Net income ............................................................ 180,000

The partnership has three partners. The first two partners have ending capital balances that are equal. The ending balance of the third partner is half of the ending balance of the first partner. What is the ending capital balance of the third partner? a. $72,000 b. $48,000 c. $60,000 d. $66,000

92. The partners' drawing accounts are

a. reported on the income statement. b. reported on the balance sheet. c. closed to Income Summary. d. closed to the partners' capital accounts.

93. The Uniform Partnership Act provides that

a. a purchaser of a partnership interest is not a partner until he or she is accepted into the firm by the continuing partners.

b. a partner must obtain the approval of other partners before selling his or her interest. c. the price paid in a purchase of partner's interest must be equal to the capital equity

acquired. d. the price paid in a purchase of partner's interest must be greater than the capital

equity acquired. 94. The balance sheet of a partnership will

a. report retained earnings below the partnership capital accounts. b. show a separate capital account for each partner. c. show a separate drawing account for each partner. d. show the amount of income that was distributed to each partner.

95. The liquidation of a partnership may result from each of the following except the

a. bankruptcy of the partnership. b. death of a partner. c. retirement of a partner. d. sale of the business by the partners.

96. In the liquidation of a partnership, any gain or loss on the realization of noncash assets

should be allocated a. first to creditors and the remainder to partners. b. to the partners on the basis of their capital balances. c. to the partners on the basis of their income-sharing ratio. d. only after all creditors have been paid.

97. In the liquidation of a partnership, any partner who has a capital deficiency

a. has a personal debt to the partnership for the amount of the deficiency. b. is automatically terminated as a partner. c. will receive a cash distribution only on the basis of his or her income-sharing ratio. d. is not obligated to make up the capital deficiency.


12 - 16

98. Partners A, B, and C have capital account balances of $120,000 each. The income and loss ratio is 5:2:3, respectively. In the process of liquidating the partnership, noncash assets with a book value of $100,000 are sold for $40,000. The balance of Partner B's Capital account after the sale is a. $90,000. b. $102,000. c. $108,000. d. $132,000.

Use the following information for questions 99101. The partners' income and loss sharing ratio is 2:3:5, respectively.

D, E, AND F PARTNERSHIP Balance Sheet

December 31, 2008 Assets Liabilities and Owners' Equity Cash $ 90,000 Liabilities $300,000 Noncash assets 570,000 D, Capital 120,000 E, Capital 180,000 F, Capital 60,000 Total $660,000 Total $660,000 99. If the D, E, and F Partnership is liquidated by selling the noncash assets for $390,000 and

creditors are paid in full, what is the amount of cash that can be safely distributed to each partner? a. D, $72,000; E, $108,000; F, $0. b. D, $84,000; E, $126,000; F, $30,000. c. D, $69,000; E, $111,000; F, $0. d. D, $66,000; E, $114,000; F, $0.

100. If the D, E, and F Partnership is liquidated by selling the noncash assets for $750,000,

and creditors are paid in full, what is the total amount of cash that Partner D will receive in the distribution of cash to partners? a. $36,000 b. $234,000 c. $156,000 d. $150,000

101. If the D, E, and F Partnership is liquidated and the noncash assets are worthless, the

creditors will look to what partner's personal assets for settlement of the creditors' claims? a. The personal assets of Partner E. b. The personal assets of Partners D and F. c. The personal assets of Partners D, E, and F. d. The personal assets of the partners are not available for partnership debts.


12 - 17

102. If a partner has a capital deficiency and does not have the personal resources to eliminate it, a. the creditors will have to absorb the capital deficiency. b. the other partners will absorb the capital deficiency on the basis of their respective

capital balances. c. the other partners will have to absorb the capital deficiency on the basis of their

respective income sharing ratios. d. neither the creditors nor the other partners will have to absorb the capital deficiency.

103. When a partnership terminates business, the sale of noncash assets is called

a. liquidation. b. realization. c. recognition. d. disposition.

104. The liquidation of a partnership

a. cannot be a voluntary act of the partners. b. terminates the business. c. eliminates those partners with a capital deficiency. d. cannot occur unless all partners approve.

105. The liquidation of a partnership is a process containing the following steps:

1. Pay partnership liabilities in cash. 2. Allocate the gain or loss on realization to the partners on their income 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. a. 3, 2, 4, 1. b. 3, 2, 1, 4. c. 1, 3, 2, 4. d. 1, 4, 3, 2.

106. In the final step of the liquidation process, remaining cash is distributed to partners

a. on an equal basis. b. on the basis of the income ratios. c. on the basis of the remaining capital balances. d. regardless of capital deficiencies.

107. In the liquidation process, if a capital account shows a deficiency

a. the partner with a deficiency has an obligation to the partnership for the amount of the deficiency.

b. it may be written off to a "Loss" account. c. it is disregarded until after the partnership books are closed. d. it can be written off to a "Gain" account.

108. Before distributing any remaining cash to partners in a partnership liquidation, it is

necessary to do each of the following except a. sell noncash assets for cash. b. recognize a gain or loss on realization. c. allocate the gain or loss to the partners based on their capital balances. d. pay partnership liabilities in cash.


12 - 18

109. Kate, Sue, and Tina formed a partnership with income-sharing ratios of 50%, 30%, and 20%, respectively. Cash of $180,000 was available after the partnerships assets were liquidated. Prior to the final distribution of cash, Kates capital balance was $200,000, Sues capital balance was $150,000, and Tina had a capital deficiency of $50,000. Based upon a cash payments schedule, Kate should receive a. $175,000. b. $168,750. c. $131,250. d. $200,000.

110. A, B and C are partners, sharing income 2:1:2. After selling all of the assets for cash,

dividing gains and losses on realization, and paying liabilities, the balances in the capital accounts are as follows: A, $10,000 Cr; B, $10,000 Cr; and C, $30,000 Cr. How much cash should be distributed to A? a. $6,000 b. $20,000 c. $10,000 d. $16,667

111. In liquidation, balances prior to the distribution of cash to the partners are: Cash $300,000;

Moorman, Capital $140,000; Simpson, Capital $130,000, and Kelton, Capital $30,000. The income ratio is 6:2:2, respectively. How much cash should be distributed to Moorman? a. $125,000 b. $136,250 c. $140,000 d. $150,000

112. Assume the same facts in question 111 above, except that there is only $255,000 in cash

and Kelton has a capital deficiency of $15,000. How much cash should be distributed to Simpson if Kelton does not pay his deficiency? a. $122,500 b. $126,250 c. $118,750 d. $130,000

a113. D. Givens purchases a 25% interest for $30,000 when the Suppan, Porter, James

partnership has total capital of $270,000. Prior to the admission of Givens, each partner has a capital balance of $90,000. Each partner relinquishes an equal amount of his capital balance to Givens. The amount to be relinquished by James is a. $15,000. b. $19,000. c. $22,500. d. $37,500.

a114. Bryant is admitted to a partnership with a 25% capital interest by a cash investment of

$90,000. If total capital of the partnership is $390,000 before admitting Bryant, the bonus to Bryant is a. $30,000. b. $15,000. c. $45,000. d. $60,000.


12 - 19

Use the following information for questions 115116. Carley and Kingman are partners who share income and losses in the ratio of 3:2, respectively. On August 31, their capital balances were: Carley, $175,000 and Kingman, $150,000. On that date, they agree to admit Lerner as a partner with a one-third capital interest. a115. If Lerner invests $125,000 in the partnership, what is Carley's capital balance after

Lerner's admittance? a. $150,000 b. $158,333 c. $160,000 d. $175,000

a116. If Lerner invests $200,000 in the partnership, what is Kingman's capital balance after

Lerner's admittance? a. $175,000 b. $160,000 c. $157,500 d. $150,000

a117. King and Nott are partners who share profits and losses equally and have capital

balances of $560,000 and $490,000, respectively. Starr is admitted into the partnership by investing $490,000 for 30% capital interest. The account balance of Nott, Capital after the admission of Starr would be a. $462,000. b. $476,000. c. $504,000. d. $490,000.

a118. Stine and Watson have partnership capital balances of $320,000 and $240,000,

respectively. Watson negotiates to sell his partnership interest to Leary for $280,000. Stine agrees to accept Leary as a new partner. The partnership entry to record this transaction is a. Cash..................................................................................... 280,000 Leary, Capital .............................................................. 280,000 b. Watson, Capital .................................................................... 280,000 Leary, Capital .............................................................. 280,000 c. Cash..................................................................................... 40,000 Watson, Capital .................................................................... 240,000 Leary, Capital .............................................................. 280,000 d. Watson, Capital .................................................................... 240,000 Leary, Capital .............................................................. 240,000

a119. Hill and Eddy share partnership profits and losses in the ratio of 6:4. Hill's Capital account

balance is $320,000 and Eddys Capital account balance is $200,000. Porter is admitted to the partnership by investing $360,000 and is to receive a one-fourth ownership interest. Hill, Eddy and Porter's capital balances after Porter's investment will be Hill Eddy Porter a. $320,000 $200,000 $360,000 b. $404,000 $256,000 $220,000 c. $396,000 $264,000 $220,000 d. $390,000 $270,000 $220,000


12 - 20

a120. Judy and Deb have partnership capital account balances of $600,000 and $450,000, respectively and share profits and losses equally. Anne is admitted to the partnership by investing $250,000 for a one-fourth ownership interest. The balance of Deb's Capital account after Anne is admitted is a. $412,500. b. $450,000. c. $487,500. d. $325,000.

a121. The admission of a new partner to an existing partnership

a. may be accomplished only by investing assets in the partnership. b. requires purchasing the interest of one or more existing partners. c. causes a legal dissolution of the existing partnership. d. is almost always accompanied by the liquidation of the business.

a122. When a partnership interest is purchased

a. every partners capital account is affected. b. the transaction is a personal transaction between the purchaser and the selling

partner(s). c. the buyer receives equity equal to the amount of cash paid. d. all partners will receive some part of the purchase price.

a123. Adler and Lynn each sell 1/3 of their partnership interest to Sele, receiving $140,000 each.

At the time of the admission, each partner has a $420,000 capital balance. The entry to record the admission of Sele will show a a. debit to Cash for $280,000. b. credit to Sele, Capital for $420,000. c. debit to Lynn, Capital for $420,000. d. debit to Adler, Capital for $140,000.

a124. Ball and Gant sell 1/4 of their partnership interest to Ives receiving $200,000 each. At the

time of admission, Ball and Gant each had a $350,000 capital balance. The admission of Ives will cause the net partnership assets to a. increase by $400,000. b. remain at $700,000. c. decrease by $400,000. d. remain at $1,100,000.

a125. Cole and Glenn sell to Nabb a 1/3 interest in the Cole-Glenn partnership. Nabb will pay

Cole and Glenn each $70,000 for admission into the organization. Before this transaction, Cole and Glenn show capital balances of $105,000 each. The journal entry to record the admission of Nabb will a. show a debit to Cash for $140,000. b. not show a debit to Cash. c. show a debit to Glenn, Capital for $70,000. d. show a credit to Nabb, Capital for $140,000.


12 - 21

a126. Foxx invests $20,000 in cash (admission by investment) in the Massey-Dix partnership to acquire a 1/4 interest. In this case a. the accounting will be the same as a purchase of an interest. b. the total net assets of the new partnership are unchanged from the previous partnership. c. the total capital of the new partnership is greater than the total capital of the old

partnership. d. Foxx's income ratio will automatically be 1/4.

a127. Which of the following is correct when admitting a new partner into an existing

partnership? Purchase of an Interest Admission by Investment a. Total net assets unchanged unchanged b. Total capital increased unchanged c. Total net assets unchanged increased d. Total capital unchanged unchanged

a128. When admitting a new partner by investment, a bonus to old partners

a. is usually unjustified because book values clearly reflect partnership net worth. b. is sometimes justified because goodwill may exist and it is not reflected in the accounts. c. results if the debit to cash is less than the new partner's capital credit. d. results if the debit to cash is equal to the new partner's capital credit.

a129. When admitting a new partner by investment, a bonus to old partners is allocated on

a. the basis of capital balances. b. the basis of the original investment of the old partners. c. the basis of income ratios before the admission of the new partner. d. a seniority basis.

a130. A bonus to a new partner

a. is prohibited by GAAP. b. results when the new partner's capital credit is less than his or her investment of

assets in the firm. c. may occur when recorded book values are lower than market values. d. results when the new partner's capital credit is greater than his or her investment of

assets in the firm. a131. A bonus to a new partner will

a. increase the capital balances of existing partners based on their income ratios before the admission of the new partner.

b. increase the capital balances of existing partners based on their income ratios after the admission of the new partner.

c. decrease the capital balances of existing partners based on their income ratios before the admission of the new partner.

d. decrease the capital balances of existing partners based on their capital balances before the admission of the new partner.

a132. Jane, Ken, and Mark have partnership capital account balances of $225,000, $450,000

and $105,000, respectively. The income sharing ratio is Jane, 50%; Ken, 40%; and Mark, 10%. Jane desires to withdraw from the partnership and it is agreed that partnership assets of $195,000 will be used to pay Jane for her partnership interest. The balances of Ken's and Mark's Capital accounts after Jane's withdrawal would be


12 - 22

a. Ken, $450,000; Mark, $105,000. b. Ken, $474,000; Mark, $111,000. c. Ken, $426,000; Mark, $99,000. d. Ken, $435,000; Mark, $90,000.

a133. Ace, Bell, and Cole have partnership capital account balances of $400,000 each. Income

and losses are shared equally. Cole agrees to sell three-fourths of his ownership interest to Ace for $350,000 and one-fourth to Bell for $125,000. Ace and Bell will use personal assets to purchase Cole's interest. The partnership's entry to record Cole's withdrawal from the partnership would be a. Cole, Capital ....................................................................... 475,000 Cash .......................................................................... 475,000 b. Cole, Capital ....................................................................... 475,000 Ace, Capital ............................................................... 350,000 Bell, Capital ................................................................ 125,000 c. Cole, Capital ....................................................................... 400,000 Ace, Capital ............................................................... 300,000 Bell, Capital ................................................................ 100,000 d. Ace, Capital ........................................................................ 356,250 Bell, Capital ......................................................................... 118,750 Cole, Capital ............................................................. 475,000

a134. When a partner withdraws from the firm, which of the following reflects the correct

partnership effects? Payment from Payment from Partners' Personal Assets Partnership Assets a. Total net assets decreased decreased b. Total capital decreased decreased c. Total net assets unchanged decreased d. Total capital unchanged unchanged

a135. Which of the following is not a necessary action that the partnership must take upon the

death of a partner? a. Determine the net income or net loss for the year to date. b. Discontinue business operations. c. Close the books. d. Prepare financial statements.

Use the following information for questions 136138. On November 30, capital balances are Gray $90,000, Carr $75,000 and Melton $75,000. The income ratios are 20%, 20% and 60%, respectively. Gray decides to retire from the partnership. a136. The partnership pays Gray $105,000 cash for her partnership interest. After Gray's

retirement, what is the balance of Carr's capital account? a. $71,250 b. $72,000 c. $75,000 d. $97,500


12 - 23

a137. The partnership pays Gray $75,000 cash for her partnership interest. After Gray's retirement, what is the balance of Melton's capital account? a. $66,000 b. $75,000 c. $84,000 d. $86,250

a138. In order for Carr and Melton to have equal capital interests after the retirement of Gray,

how much partnership cash would have to be paid to Gray for her partnership interest? a. $0 b. $80,000 c. $90,000 d. Any amount paid to Gray will cause Carr and Melton to still have equal capital

balances. Additional Multiple Choice Questions 139. All of the following are characteristics of partnerships except

a. co-ownership of property. b. mutual agency. c. unlimited life. d. association of individuals.

140. The Butkus, Sayers, and Halas partnership is terminated when the claims of company

creditors exceed partnership assets by $50,000. The capital balances for Butkus, Sayers, and Halas are $35,000, $5,000, and $0, respectively. The original claims of the creditors were negotiated by Sayers and Halas. Which partner(s) is(are) personally and individually liable for all partnership liabilities? a. Butkus b. Sayers c. Sayers and Halas d. Butkus, Sayers, and Halas

141. When a partner invests noncash assets in a partnership, the assets should be recorded at

their a. book value. b. carrying value. c. fair market value. d. original cost.

142. The partnership agreement of Rossi and Petry provides for salary allowances of $45,000

to Rossi and $35,000 to Petry, with the remaining income or loss to be divided equally. During the year, Rossi and Petry each withdraw cash equal to 80% of their salary allowances. If partnership net income is $100,000, Rossi's equity in the partnership would a. increase more than Petrys. b. decrease more than Petry's. c. increase the same as Petry's. d. decrease the same as Petry's.


12 - 24

143. Which of the following statements is correct? a. Salaries to partners and interest on partners' capital are expenses of the partnership. b. Salaries to partners are expenses of the partnership but not interest on partners'

capital. c. Interest on partners' capital is an expense of the partnership but not salaries to

partners. d. Neither salaries to partners nor interest on partners' capital are expenses of the

partnership. 144. In the liquidation of a partnership, the gains and losses from assets sold are

a. divided equally among the partners. b. divided among the partners in the stated income ratio. c. divided among the partners in proportion to their capital equity interests. d. ignored.

145. If a partner with a capital deficiency is unable to pay the amount owed to the partnership,

the deficiency is allocated to the partners with credit balances a. equally. b. on the basis of their income ratios. c. on the basis of their capital balances. d. on the basis of their original investments.

146. An entry is not required in the liquidation of a partnership to record the

a. payment of cash to creditors. b. distribution of cash to the partners. c. sale of noncash assets. d. allocation of a capital deficiency to partners with credit balances when the deficient

partner is expected to pay the deficiency. 147. The first step in the liquidation of a partnership is to

a. allocate a gain or loss on realization to the partners. b. distribute remaining cash to the partners. c. pay partnership liabilities. d. sell noncash assets and recognize a gain or loss on realization.

148. Baker joins the partnership of Kubek and Musial by paying $30,000 in cash. If the net

assets of the partnership are still the same amount after Baker has been admitted as a partner, then Baker a. must have been admitted by investment of assets. b. must have been admitted by purchase of a partner's interest. c. must have received a bonus upon being admitted. d. could have been admitted by an investment of assets or by a purchase of a partner's

interest. 149. Lowe is admitted to a partnership with a 25% capital interest by a cash investment of

$120,000. If total capital of the partnership is $520,000 before admitting Lowe, the bonus to Lowe is a. $40,000. b. $20,000. c. $60,000. d. $80,000.


12 - 25

Answers to Multiple Choice Questions Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.

38. b 54. a 70. a 86. b 102. c a118. d a134. c39. c 55. c 71. b 87. a 103. b a119. b a135. b 40. a 56. d 72. b 88. c 104. b a120. a a136. a 41. c 57. b 73. c 89. d 105. b a121. c a137. d 42. d 58. d 74. c 90. b 106. c a122. b a138. c 43. c 59. c 75. b 91. c 107. a a123. d 139. c 44. c 60. a 76. b 92. d 108. c a125. b 140. d 45. c 61. c 77. d 93. a 109. b a125. b 141. c 46. b 62. b 78. c 94. b 110. c a126. c 142. a 47. d 63. b 79. d 95. c 111. c a127. c 143. d 48. c 64. a 80. b 96. c 112. b a128. b 144. b 49. b 65. c 81. d 97. a a113. a a129. c 145. b 50. c 66. b 83. c 98. c a114. a a130. d 146. d 51. a 67. d 83. c 99. a a115. c a131. c 147. d 52. b 68. d 84. d 100. c a116. b a132. b a148. b 53. c 69. b 85. a 101. c a117. c a133. c a149. a

BRIEF EXERCISES BE 150 Brandy and Johnson decide to organize a partnership. Brandy invests $25,000 cash, and Johnson contributes $5,000 and equipment having a book value of $3,500 and a fair market value of $10,000. Instructions Prepare the entry to record each partners investment. Solution 150 (5 min.) Cash..... ............................................................................ 25,000 Brandy, Capital. 25,000 Cash.. ........................................................................... 5,000 Equipment............................................................................ 10,000 Johnson, Capital. ........................................................................ 15,000


12 - 26

BE 151 Tonto Company and Ranger Company decide to merge their proprietorships into a partnership called Westward Ho Company. The balance sheet of Ranger Company shows:

Accounts Receivable $15,000 Less: Allowance for doubtful accounts 1,500 $13,500 Equipment $20,000 Less: Accumulated depreciation 10,000 $10,000 The partners agree that the net realizable value of the receivables is $12,500 and that the fair market value of the equipment is $15,000. Instructions Indicate how the four accounts should appear in the opening balance sheet of the partnership. Solution 151 (4 min.)

WESTWARD HO COMPANY Balance Sheet (partial)

Assets Accounts Receivable $15,000 Less: Allowance for Doubtful Accounts 2,500 $12,500

Equipment 15,000 BE 152 The Jill & Frill Co. reports net income of $28,000. Interest allowances are Jill $3,000 and Frill $5,000; partner salary allowances are Jill $18,000 and Frill $10,000 and the remainder is shared equally. Instructions Indicate the division of net income to each partner, and prepare the entry to distribute the net income. Solution 152 (6 min.) Division of Net Income Jill Frill Total Salary allowance $18,000 $10,000 $28,000 Interest allowance on partners capital 3,000 5,000 8,000 Total salaries and interest 21,000 15,000 36,000 Remaining income, ($8,000) ($28,000 $36,000) Jill ($8,000 50%) (4,000) Frill ($8,000 50%) (4,000) Total remainder (8,000) Total division of net income $17,000 $11,000 $28,000


12 - 27

Solution 152 (cont.) The entry to record the division of net income is: Income Summary ............................................................................. 28,000 Jill, Capital ............................................................................... 17,000 Frill, Capital ............................................................................. 11,000 BE 153 Debauge Co. had beginning capital balances on January 1, 2008, as follows: Nick Foley $30,000 and Tom Wenger $25,000. During the year, drawings were Foley $15,000 and Wenger $8,000. Net income was $50,000, and the partners share income equally. Instructions Prepare the partners capital statement for the year. Solution 153 (4 min.) DEBAUGE COMPANY Partners Capital Statement Foley Wenger Total Beginning Capital $30,000 $25,000 $55,000 Add: Net Income 25,000 25,000 50,000 55,000 50,000 105,000 Less: Drawings 15,000 8,000 23,000 Ending Capital $40,000 $42,000 $82,000 BE 154 After liquidating noncash assets and paying creditors, account balances in the Main Co. are Cash $29,000, A Capital (Cr.) $11,000, B Capital (Cr,) $8,000 and C Capital (Cr.) $10,000. The partners share income equally. Instructions Journalize the final distribution of cash to the partners. Solution 154 (4 min.) A, Capital ............................................................................................... 11,000 B, Capital ............................................................................................... 8,000 C, Capital ............................................................................................... 10,000 Cash........................................................................................ 29,000


12 - 28

BE 155 Barnes Company at December 31 has cash $40,000, noncash assets $200,000, liabilities $110,000, and the following capital balances: Carpenter $90,000 and Pendleton $40,000. The firm is liquidated, and $240,000 in cash is received for the noncash assets. Carpenter and Pendleton income ratios are 60% and 40%, respectively. Instructions Prepare a cash distribution schedule. Solution 155 (5 min.) BARNES COMPANY Schedule of Cash Payments

Noncash Carpenter Pendelton Cash + Assets = Liabilities + Capital + Capital Balances before Liquidation $ 40,000 $200,000 $110,000 $ 90,000 $40,000 Sale of noncash assets and allocation of losses 240,000 (200,000) 24,000 16,000 New balances 280,000 -0- 110,000 114,000 56,000 Pay liabilities (110,000) _____ (110,000) New balances 170,000 -0- -0- 114,000 56,000 Cash distribution $170,000 $ -0- $ -0- $114,000 $56,000 aBE 156 In Nelson Co., capital balances are Ozzie $60,000 and Harriet $75,000. The partners share income equally. Denny is admitted to the firm with a 40% interest by an investment of cash of $65,000. Journalize the admission of Denny. aSolution 156 (3 min.) Cash...................................................................................................... 65,000 Ozzie, Capital (50% $15,000) ............................................................ 7,500 Harriet, Capital (50% $15,000)........................................................... 7,500 Denny, Capital (40% $200,000) ............................................. 80,000

*[(60,000 + $75,000 + $65,000) 40%] $65,000 = $15,000. aBE 157 Bob and Kathy are partners who share profits 60% and 40%. Their capital balances were both $90,000 before Betty was admitted to the partnership. Betty contributed $120,000 in cash to the partnership for a 30% interest. Instructions Compute the capital balances of Bob and Kathy after Betty is admitted to the partnership.


12 - 29

aSolution 157 (4 min.) Bobs capital balance: $90,000 + {$120,000 [($180,000 + $120,000) .30]} .60 = $108,000 Kathys capital balance: $90,000 + {$120,000 [($180,000 + $120,000) .30]} .40 = $102,000 aBE 158 Capital balances in Jetson Co. are George $50,000, Jane $38,000, and Frank $25,000. The partners share income equally. Frank receives $35,000 from partnership assets in withdrawing from the firm. Instructions Journalize the withdrawal of Frank. aSolution 158 (3 min.) Frank, Capital......................................................................................... 25,000 George, Capital (50% $10,000) .......................................................... 5,000 Jane, Capital (50% $10,000) .............................................................. 5,000 Cash.............................................................................................. 35,000 aBE 159 Mike, Andy, and Joe are partners who share profits 40%, 20%, and 40%. Their capital balances were $630,000, $420,000, and $210,000, respectively, before Joes retirement. Joe was paid $270,000 from partnership assets to buy his interest. Instructions Compute the capital balances of Mike and Andy after Joe has withdrawn. aSolution 159 (4 min.) Mikes capital balance: $630,000 [($270,000 $210,000) X 40/60] = $590,000 Andys capital balance: $420,000 [($270,000 $210,000) X 20/60] = $400,000


12 - 30

EXERCISES Ex. 160 Dick Acer and George Dooley decide to form a partnership. Acer invests $25,000 cash and accounts receivable of $30,000 less allowance for doubtful accounts of $2,000. Dooley contributes $20,000 cash and equipment having a $6,000 book value. It is agreed that the allowance account should be $3,000 and the fair market value of the equipment is $10,000.

Instructions Prepare the necessary journal entry to record the formation of the partnership. Solution 160 (6 min.) Cash ($25,000 + $20,000) .................................................................... 45,000 Accounts Receivable............................................................................. 30,000 Equipment ............................................................................................. 10,000 Allowance for Doubtful Accounts.................................................. 3,000 Acer, Capital ($25,000 + $30,000 $3,000) ................................ 52,000 Dooley, Capital ($20,000 + $10,000)............................................ 30,000 Ex. 161 Ken Lott and Jim Stine operate separate auto repair shops. On January 1, 2008, they decide to combine their separate businesses which were operated as proprietorships to form L & S Auto Repair, a partnership. Information from their separate balance sheets is presented below:

Lott Auto Repair Stine Auto Repair Cash $10,000 $12,000 Accounts receivable 9,000 10,000 Allowance for doubtful accounts 1,000 500 Accounts payable 5,000 6,000 Notes payable 3,000 Salaries payable 1,000 1,500 Equipment 12,000 24,000 Accumulated amortizationEquipment 2,000 4,000 It is agreed that the expected realizable value of Lott's accounts receivable is $8,000 and Stine's receivables is $7,000. The fair market value of Lott's equipment is $13,000 and the value of Stine's equipment is $20,000. It is further agreed that the new partnership will assume all liabilities of the proprietorships with the exception of the notes payable on Stine's balance sheet which he will pay himself.

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


12 - 31

Solution 161 (15 min.) Cash....................................................................................................... 10,000 Accounts Receivable ............................................................................. 9,000 Equipment.............................................................................................. 13,000 Allowance for Doubtful Accounts .................................................. 1,000 Salaries Payable ........................................................................... 1,000 Accounts Payable ......................................................................... 5,000 K. Lott, Capital............................................................................... 25,000 (To record K. Lott's investment) Cash....................................................................................................... 12,000 Accounts Receivable ............................................................................. 10,000 Equipment.............................................................................................. 20,000 Allowance for Doubtful Accounts .................................................. 3,000 Salaries Payable ........................................................................... 1,500 Accounts Payable ......................................................................... 6,000 J. Stine, Capital ............................................................................. 31,500 (To record J. Stine's investment) Ex. 162 The Smith and Wilson partnership reports net income of $45,000. Partner salary allowances are Smith $18,000 and Wilson $12,000. Any remaining income is shared 60:40. Instructions Determine the amount of net income allocated to each partner. Solution 162 (5 min.) Smith Wilson Total Salary allowance $18,000 $12,000 $30,000 Remaining income, $15,000 Smith ($15,000 60%) 9,000 Wilson ($15,000 40%) 6,000 15,000 Total division $27,000 $18,000 $45,000 Ex. 163 Bass, Ellis, and Goren formed a partnership on January 1, 2008. Bass invested $60,000, Ellis $60,000 and Goren $140,000. Bass will manage the store and work 40 hours per week in the store. Ellis will work 20 hours per week in the store, and Goren will not work. Each partner withdrew 30 percent of his income distribution during 2008. If there was no income distribution to a partner, there were no withdrawals of cash.

Instructions Compute the partners' capital balances at the end of 2008 under the following independent conditions: (Hint: use T accounts to determine each partner's capital balances.)


12 - 32

Ex. 163 (cont.) (1) Net income is $120,000 and the income ratio is Bass 40%, Ellis 35%, and Goren 25%. (2) Net income is $140,000 and the partnership agreement only specifies a salary of $50,000 to

Bass and $30,000 to Ellis. (3) Net income is $86,000 and the partnership agreement provides for (a) a salary of $40,000 to

Bass and $40,000 to Ellis, (b) interest on beginning capital balances at the rate of 10%, and (c) any remaining income or loss is to be shared by Bass 40%, Ellis 35%, and Goren 25%.

Solution 163 (15 min.) (1) Bass, Capital Ellis, Capital Goren, Capital 14,400 60,000 12,600 60,000 9,000 140,000 48,000 42,000 30,000 93,600 89,400 161,000 Net Income % Distribution % Drawings Bass $120,000 40 $ 48,000 30 $14,400 Ellis 120,000 35 42,000 30 12,600 Goren 120,000 25 30,000 30 9,000 $120,000 $36,000 (2) Bass, Capital Ellis, Capital Goren, Capital 21,000 60,000 15,000 60,000 6,000 140,000 70,000 50,000 20,000 109,000 95,000 154,000 Bass Ellis Goren Total Salary $50,000 $30,000 $ 0 $ 80,000 Remainder 20,000 20,000 20,000 60,000 Total $70,000 $50,000 $20,000 $140,000

30% = Drawings $21,000 $15,000 $ 6,000 $ 42,000 (3) Bass, Capital Ellis, Capital Goren, Capital 11,400 60,000 11,700 60,000 2,700 140,000 38,000 39,000 9,000 86,600 87,300 146,300 Bass Ellis Goren Total Salary $40,000 $40,000 $ 0 $80,000 Interest 6,000 6,000 14,000 26,000 Remainder ($20,000) (8,000) (7,000) (5,000) (20,000) Total $38,000 $39,000 $ 9,000 $86,000

30% = Drawings $11,400 $11,700 $ 2,700 $25,800


12 - 33

Ex. 164 Carlin and Larve have a partnership agreement which includes the following provisions regarding sharing net income or net loss: 1. A salary allowance of $54,000 to Carlin and $36,000 to Larve. 2. An interest allowance of 10% on capital balances at the beginning of the year. 3. The remainder to be divided 60% to Carlin and 40% to Larve.

The capital balance on January 1, 2008, for Carlin and Larve was $90,000 and $120,000, respectively. During 2008, the Carlin and Larve Partnership had sales of $495,000, cost of goods sold of $290,000, and operating expenses of $75,000.

Instructions Prepare an income statement for the Carlin and Larve Partnership for the year ended December 31, 2008. As a part of the income statement, include a Division of Net Income to each of the partners. Solution 164 (15 min.)

CARLIN AND LARVE PARTNERSHIP Income Statement

For the Year Ended December 31, 2008

Sales ....................................................................................................................... $495,000 Cost of goods sold .................................................................................................. 290,000 Gross profit ............................................................................................................. 205,000 Operating expenses................................................................................................ 75,000 Net income ............................................................................................................. $130,000

Division of Net Income Carlin Larve Total Salary allowance $54,000 $36,000 $ 90,000 Interest allowance ($90,000 10%) 9,000 ($120,000 10%) 12,000 Total interest 21,000 Total salaries and interest 63,000 48,000 111,000 Remaining income, $19,000 Carlin ($19,000 60%) 11,400 Larve ($19,000 40%) 7,600 Total remainder 19,000 Total division $74,400 $55,600 $130,000 Ex. 165 Hope & Crosby Co. reports net income of $34,000. The partnership agreement provides for annual salaries of $24,000 for Hope and $15,000 for Crosby and interest allowances of $4,000 to Hope and $6,000 to Crosby. Any remaining income or loss is to be shared 70% by Hope and 30% by Crosby.

Instructions Compute the amount of net income distributed to each partner.


12 - 34

Solution 165 (8 min.) Hope Crosby Total Salary allowance $24,000 $15,000 $39,000 Interest allowance 4,000 6,000 10,000 Total salaries and interest 28,000 21,000 49,000 Remaining deficiency ($15,000) Hope ($15,000 70%) (10,500) Crosby ($15,000 30%) (4,500) (15,000) Total division $17,500 $16,500 $34,000 Ex. 166 The adjusted trial balance of the Karris and Watts Partnership for the year ended December 31, 2008, appears below:

KARRIS AND WATTS PARTNERSHIP Adjusted Trial Balance

For the Year Ended December 31, 2008

Debit Credit Current Assets....................................................................................... 19,000 Plant Assets .......................................................................................... 80,000 Current Liabilities................................................................................... 7,000 Long-term Debt ..................................................................................... 50,000 Karris, Capital........................................................................................ 20,000 Karris, Drawing...................................................................................... 4,000 Watts, Capital ........................................................................................ 18,000 Watts, Drawing ...................................................................................... 7,000 Sales ..................................................................................................... 100,000 Cost of Goods Sold ............................................................................... 62,000 Operating Expenses.............................................................................. 23,000 195,000 195,000 The partnership agreement stipulates that a division of partnership net income or net loss is to be made as follows: 1. A salary allowance of $12,000 to Karris and $23,000 to Watts. 2. The remainder is to be divided equally.

Instructions (a) Prepare a schedule which shows the division of net income to each partner. (b) Prepare the closing entries for the division of net income and for the drawing accounts at

December 31, 2008. Solution 166 (15 min.) (a) Schedule for Division of Net Income Sales $100,000 Cost of goods sold 62,000 Gross profit 38,000 Operating expenses 23,000 Net income $ 15,000


12 - 35

Solution 166 (cont.) Karris Watts Total Salary allowance $12,000 $23,000 $35,000 Remaining deficiency, ($20,000) Karris ($20,000) 50% (10,000) Watts ($20,000) 50% (10,000) Total remainder (20,000) Total division $ 2,000 $13,000 $15,000 (b) Dec. 31 Income Summary ........................................................ 15,000 Karris, Capital....................................................... 2,000 Watts, Capital....................................................... 13,000 (To close net income to capital) 31 Karris, Capital .............................................................. 4,000 Watts, Capital .............................................................. 7,000 Karris, Drawing..................................................... 4,000 Watts, Drawing..................................................... 7,000 (To close drawing accounts to capital) Ex. 167 Kim Carey and Mary Hall have formed the CH Partnership, and have capital balances of $130,000 and $100,000, respectively, on January 1, 2008. On June 1, 2008, Hall invested an additional $30,000. Also during the year, Carey withdrew $60,000 and Hall withdrew $48,000. Sales for the year amounted to $360,000 and expenses were $260,000. Carey and Hall share income and losses on a 3:1 basis. Instructions (a) Prepare the closing entries at December 31, 2008, for the CH Partnership. (b) Prepare a partners' capital statement for 2008. Solution 167 (15 min.) (a) Sales ............................................................................................. 360,000 Expenses.............................................................................. 260,000 Income Summary ................................................................. 100,000 Income Summary .......................................................................... 100,000 Carey, Capital ($100,000 75%)......................................... 75,000 Hall, Capital ($100,000 25%) ............................................ 25,000 Carey, Capital ............................................................................... 60,000 Hall, Capital................................................................................... 48,000 Carey, Drawing..................................................................... 60,000 Hall, Drawing ........................................................................ 48,000


12 - 36

Solution 167 (cont.) (b) CH Partnership

Partners' Capital Statement For the Year Ended December 31, 2008

Carey Hall Totals Capital, January 1, 2008 $130,000 $100,000 $230,000 Add: Additional Investment 30,000 30,000 Net Income 75,000 25,000 100,000 205,000 155,000 360,000 Less: Drawings 60,000 48,000 108,000 Capital, December 31, 2008 $145,000 $107,000 $252,000 Ex. 168 Prepare a partners' capital statement for Crestwood Company based on the following information. Crest Wood Beginning capital $30,000 $27,000 Drawings during year 15,000 8,000 Net income was $35,000, and the partners share income 60% to Crest and 40% to Wood. Solution 168 (8 min.) CRESTWOOD COMPANY Partners' Capital Statement Crest Wood Total Beginning capital $30,000 $27,000 $57,000 Add: Net income 21,000 14,000 35,000 51,000 41,000 92,000 Less: Drawings 15,000 8,000 23,000 Ending capital $36,000 $33,000 $69,000 Ex. 169 On December 31, Thompson Company has cash $30,000, noncash assets $150,000, and liabilities $80,000. Capital balances were Terry $55,000 and Nott $45,000. The firm is liquidated, and the noncash assets are sold for $125,000. Terry and Nott share income in a 60:40 ratio. Instructions Prepare entries to record (a) the sale of noncash assets and (b) the allocation of the gain (loss) on liquidation to the partners.


12 - 37

Solution 169 (6 min.) (a) Cash ............................................................................................... 125,000 Loss on Realization ........................................................................ 25,000 Noncash Assets ................................................................... 150,000 (b) Terry, Capital ($25,000 60%) ...................................................... 15,000 Nott, Capital ($25,000 40%) ........................................................ 10,000 Loss on Realization .............................................................. 25,000 Ex. 170 The ABC Partnership is to be liquidated and you have been hired to prepare a Schedule of Cash Payments for the partnership. Partners A, B, and C share income and losses in the ratio of 4:3:3, respectively. Assume the following:

1. The noncash assets were sold for $75,000. 2. Liabilities were paid in full. 3. The remaining cash was distributed to the partners. (If any partner has a capital

deficiency, assume that the partner is unable to make up the capital deficiency.) Instructions Using the above information, complete the Schedule of Cash Payments below:

ABC PARTNERSHIP Schedule of Cash Payments

Noncash A B C Item Cash + Assets = Liabilities + Capital + Capital + Capital Balances before liquidation 25,000 + 150,000 = 50,000 + 25,000 + 35,000 + 65,000 Solution 170 (20 min.)

ABC PARTNERSHIP Schedule of Cash Payments

Noncash A B C Item Cash + Assets = Liabilities + Capital + Capital + Capital Balances before liquidation 25,000 + 150,000 = 50,000 + 25,000 + 35,000 + 65,000 Sale of noncash assets (1) 75,000 + (150,000) = + (30,000) + (22,500) + (22,500) New balance 100,000 + -0- = 50,000 + (5,000) + 12,500 + 42,500 Pay liabilities (2) (50,000) = (50,000) New balances 50,000 + -0- = -0- + (5,000) + 12,500 + 42,500 Allocate capital deficiency 5,000 + (2,500) + (2,500) New balances 50,000 + -0- = -0- + -0- + 10,000 + 40,000 Cash distribution (3) (50,000) = (10,000) + (40,000) Final balances -0- -0- -0- -0- -0- -0-


12 - 38

Ex. 171 The ODS Partnership is to be liquidated when the ledger shows the following:

Cash $ 50,000 Noncash Assets 200,000 Liabilities 50,000 Oslo, Capital 75,000 Decker, Capital 100,000 Silas, Capital 25,000 Oslo, Decker, and Silas' income ratios are 6:3:1, respectively. Instructions Prepare separate entries to record the liquidation of the partnership assuming that the noncash assets are sold for $150,000 in cash. Solution 171 (15 min.) 1. Cash ................................................................................................ 150,000 Loss on Realization ......................................................................... 50,000 Noncash Assets...................................................................... 200,000 2. Oslo, Capital ($50,000 6/10) ........................................................ 30,000 Decker, Capital ($50,000 3/10) .................................................... 15,000 Silas, Capital ($50,000 1/10) ........................................................ 5,000 Loss on Realization ................................................................ 50,000 3. Liabilities.......................................................................................... 50,000 Cash ....................................................................................... 50,000 4. Oslo, Capital ($75,000 $30,000) .................................................. 45,000 Decker, Capital ($100,000 $15,000)............................................. 85,000 Silas, Capital ($25,000 $5,000) .................................................... 20,000 Cash ($50,000 + $150,000 $50,000)................................... 150,000 Ex. 172 Prior to the distribution of cash to the partners, the accounts of ABC Company are: Cash $30,000, Alt Capital (Dr.) $10,000, Bell Capital (Cr.) $25,000, and Cole Capital (Cr.) $15,000. They share income on a 5:3:2 basis. Instructions Prepare entries to record (a) the absorption of Alt's capital deficiency by the other partners and (b) the distribution of cash to the partners with credit balances.


12 - 39

Solution 172 (8 min.) (a) Bell, Capital ($10,000 3/5) ......................................................... 6,000 Cole, Capital ($10,000 2/5) ........................................................ 4,000 Alt, Capital ............................................................................ 10,000 (b) Bell, Capital ($25,000 $6,000).................................................... 19,000 Cole, Capital ($15,000 $4,000) .................................................. 11,000 Cash..................................................................................... 30,000 Ex. 173 The GF Partnership is liquidated when the ledger shows: Cash $60,000 Noncash Assets 90,000 Liabilities 44,000 Grant, Capital 100,000 Fleming, Capital 6,000 Grant and Fleming's income ratios are 3:2, respectively. Instructions Prepare a schedule of cash payments, assuming that the noncash assets were sold for $70,000. Assume that any partners capital deficiencies cannot be paid to the partnership. Solution 173 (10 min.)

GF Partnership Schedule of Cash Payments

Noncash Grant Fleming Cash + Assets = Liabilities + Capital + Capital Balances before liquidation $ 60,000 $90,000 $44,000 $100,000 $6,000 Sale of noncash assets and allocation of losses 70,000 (90,000) (12,000) (8,000) New Balances 130,000 -0- 44,000 88,000 (2,000) Pay Liabilities (44,000) (44,000) New Balances 86,000 -0- -0- 88,000 (2,000) Allocate capital deficiency (2,000) 2,000 Cash Distribution $(86,000) $ -0- $ -0- $(86,000) $ -0-


12 - 40

aEx. 174 The Howell and Parks Partnership has partner capital account balances as follows:

Howell, Capital $550,000 Parks, Capital 250,000 The partners share income and losses in the ratio of 60% to Howell and 40% to Parks. Instructions Prepare the journal entry on the books of the partnership to record the admission of Tyler as a new partner under the following three independent circumstances. 1. Tyler pays $350,000 to Howell and $150,000 to Parks for one-half of each of their ownership

interest in a personal transaction. 2. Tyler invests $850,000 in the partnership for a one-third interest in partnership capital. 3. Tyler invests $175,000 in the partnership for a one-third interest in partnership capital. aSolution 174 (20 min.) 1. Howell, Capital.............................................................................. 275,000 Parks, Capital ............................................................................... 125,000 Tyler, Capital........................................................................ 400,000 (To record admission of Tyler by purchase)

Total net assets and total capital of the partnership do not change. 2. Cash ............................................................................................. 850,000 Howell, Capital..................................................................... 180,000 Parks, Capital ...................................................................... 120,000 Tyler, Capital........................................................................ 550,000 (To record admission of Tyler and bonus to old partners) Total capital of existing partnership $ 800,000 Investment by new partner, Tyler 850,000 Total capital of new partnership $1,650,000 Tyler's capital credit = $1,650,000 1/3 = $550,000 Tyler's investment $850,000 Tyler's capital credit 550,000 Bonus to old partners $300,000 Allocation to old partners Howell (60% $300,000) $180,000 Parks (40% $300,000) 120,000 $

_ch12 principles of accounting

Documents

ap a132

ap a133

ap a134

ap a135

ap a113

ap a136

ap a114

ap a137