Accounting Partnerships.docx

Accounting Partnerships 1) Mutual agency in a partnership means that partnership decisions may be made by any one of the partners. Answer: TRUE 2) Accounting for a partnership is similar to accounting for a proprietorship. Answer: TRUE 3) A partnership agreement may be oral. Answer: TRUE 4) Partners can share in net income or loss in any manner they choose. Answer: TRUE 5) A partnership has a life limited by the length of time that all partners continue to own the business. Answer: TRUE 6) The resignation of a partner dissolves the partnership. Answer: TRUE 7) In a limited liability partnership, all the partners have limited liability for the debts of the partnership. Answer: FALSE 8) One of the events that cause a partnership to dissolve is the death of a partner. Answer: TRUE 9) A partnership balance sheet will show the ending capital balance for each partner. Answer: TRUE 10) Partnerships have tax advantages over proprietorships. Answer: FALSE 11) One of the advantages of a partnership is unlimited personal liability. Answer: FALSE 12) For income tax purposes the income of the partnership flows through to become the taxable income of the partners. Answer: TRUE 13) To make certain that each partner fully understands how a particular partnership will operate in the future, partners should draw up the: A) articles of liability B) written partnership agreement C) articles of incorporation D) articles of partnership Answer: B 14) All of the following are items that should be outlined in a partnership agreement except: A) procedures for settling disputes among partners B) method of sharing profits and losses among the partners C) the chart of accounts for the partnership D) procedures for admitting a new partner Answer: C 15) Advantages of a partnership include all of the following except: A) ease of formation B) limited liability C) combined resources D) combined experience and talent Answer: B 16) A limited partnership: A) must have at least two general partners B) is illegal in most provinces C) must have at least one general partner D) pays income taxes Answer: C 17) All of the following are characteristics of a general partnership except: A) mutual agency B) limited liability C) limited life D) co-ownership of property Answer: B 18) The characteristic of partnerships that states that every partner can bind the business to a contract within the scope of the partnership's regular business operations is called: A) limited life B) mutual agency C) unlimited liability D) co-ownership of property Answer: B 19) The profits of a general partnership: A) are not taxable to anyone B) pass through the business to the partners C) are not taxable unless the partnership has over $100,000 in net income D) cannot exist unless the partnership has a limited partner Answer: B 20) The partnership characteristic of co-ownership of property states that: A) all partnership assets are co-owned by any banks making loans to the partnership B) general partners co-own all assets, but limited partners do not C) general partners own a larger percentage of the assets of a partnership than do limited partners D) any asset a partner invests in the partnership becomes the joint property of all the partners Answer: D 21) An individual partner's signing of a contract to buy coffee for a doughnut shop that the partnership owns and operates falls under which characteristic of partnerships? A) unlimited liability B) limited life C) mutual agency D) co-ownership of property Answer: C 22) A partnership balance sheet includes: A) a category for assets contributed by each partner B) a category for liabilities incurred by each partner C) an ending capital account balance for each partner D) an ending drawing account balance for each partner Answer: C Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements 23) A partnership income statement includes: A) a listing of all of the partners' capital account balances B) a listing of all of the partners' drawing account balances C) a listing of all revenues and assets D) a section showing the division of net income to the partners Answer: D 24) Which of the following BEST describes the term mutual agency? A) When all partners of a partnership share profits equally B) When each partner has the authority to act on behalf of the partnership C) When only one partner has the authority to contractually bind the partnership D) When each partner has the power to draw on the investment accounts of the others Answer: B 25) Each partner in a partnership: A) has limited liability for the debts of the business B) pays his or her share of the partnership business income tax C) has co-ownership of the assets of the partnership D) shares in a jointly held capital account Answer: C 26) Which of the following statements is TRUE about a limited partnership? A) The general partner takes on greater liability than the limited partners. B) The partners all share equally in the income or losses of the partnership. C) In a limited partnership, all partners are considered to be limited partners. D) The general partner has first claim on the income of the partnership. Answer: A Match the following. A) unlimited liability B) general partnership C) partnership agreement D) partnership E) dissolution F) mutual agency G) death of a partner H) limited liability partnership 27) Agreement that is the contract between partners Learning Outcome: A-03 Analyze and record transactions and their effect on the financial statements 28) Ending of a partnership 29) A voluntary association of two or more persons who co-own a business for profit 30) Every partner can bind the business to a contract within the scope of the partnership's regular business operations 31) When a partnership cannot pay its debts with business assets, the partners must use personal assets to meet the debt 32) A partnership in which each partner's personal liability for the business's debts is limited to a certain dollar amount. 33) Causes the dissolution of a partnership 34) The basic form of partnership organization Answers: 27) C 28) E 29) D 30) F 31) A 32) H 33) G 34) B 35) What is a partnership? List three advantages and three disadvantages of the partnership form of business organization. Answer: A partnership is a voluntary association of two or more persons to co-own a business for profit. Advantages: Unlike a corporation, it is easy to form, involving no legal procedures, and it is less expensive to form. It brings together capital, expertise, and labour of two or more individuals. Finally, partnerships pay no income taxes as corporations do. Disadvantages: Some disadvantages of a partnership are mutual agency, which allows each partner to sign contracts in the name of the partnership, and unlimited liability, which makes each partner individually liable for all the debts of the partnership. Additionally, the limited life of a partnership requires a new agreement whenever there is a change to the existing partnership. 36) Describe four of the items that should be covered in a partnership agreement. Answer: The partnership agreement should include the following points: ? name, location, and nature of the business ? name, capital investment, and duties of each partner ? method of sharing profits and losses among the partners ? withdrawals of assets allowed to the partners ? procedures for settling disputes between the partners ? procedures for admitting new partners ? procedures for settling up with a partner who withdraws from the business ? procedures for liquidating the partnership ? procedures for removing a partner who will not withdraw or retire voluntarily 37) Most professionals such as doctors, lawyers and public accounting firms in Canada are organized as limited liability partnerships (LLPs). Explain the fundamental concept that governs an LLP. Answer: An LLP is designed to protect innocent partners from negligence damages that result from another partner's actions. This means that each partner's personal liability for other partners' negligence is limited to a certain dollar amount, although liability for a partner's own negligence is still unlimited. 38) List four of the characteristics of a partnership. Answer: Co-ownership; ease of formation; limited life; mutual agency; unlimited liability; no partnership income taxes Objective 12-2 1) Contributions to a partnership are entered in the books in the same way that a proprietor's assets and liabilities are recorded. Answer: TRUE Objective: 12-2 Account for partners' initial investments in a partnership 2) A partner cannot invest an asset with an outstanding obligation into a partnership. Answer: FALSE Objective: 12-2 Account for partners' initial investments in a partnership 3) An outside person may become a partner by purchasing a current partner's interest or by investing in the partnership. Answer: TRUE Objective: 12-2 Account for partners' initial investments in a partnership 4) When a partnership is formed, each partner's initial investment should be recorded at the fair market value of the assets at the date of their transfer to the partnership. Answer: TRUE Objective: 12-2 Account for partners' initial investments in a partnership 5) The partnership records receipt of the partners' initial investments at their current market values. Answer: TRUE Objective: 12-2 Account for partners' initial investments in a partnership 6) Often partners hire an independent firm to appraise their assets and liabilities at current market value. Answer: TRUE Objective: 12-2 Account for partners' initial investments in a partnership 7) The asset and liability sections on the balance sheet are the same for a proprietorship and a partnership. Answer: TRUE Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements Objective: 12-2 Account for partners' initial investments in a partnership 8) When a partner receives a salary as part of their share of the income the partner has status both as a partner and as an employee. Answer: FALSE Objective: 12-2 Account for partners' initial investments in a partnership 9) Lucy Roberts and Vera Miles decide to form a partnership. Lucy invests cash of $5,000 while Vera invests inventory valued at $7,000 and cash of $2,000. The balance in Vera's capital account after formation is: A) $9,000 B) $7,000 C) $5,000 D) $14,000 Answer: A Objective: 12-2 Account for partners' initial investments in a partnership 10) Investments of assets into a partnership are recorded at their: A) original cost B) book value C) current market value D) original cost plus a percentage adjustment to account for inflation Answer: C Objective: 12-2 Account for partners' initial investments in a partnership 11) Brown invests cash of $20,000 and a building with a cost of $350,000 and accumulated amortization to date of $195,000 in the Brown and Winter Partnership. The building has a current market value of $325,000. A mortgage payable of $105,000 is outstanding on the building and will be assumed by the partnership. Brown's capital account would be credited for: A) $165,000 B) $175,000 C) $240,000 D) $70,000 Answer: C Objective: 12-2 Account for partners' initial investments in a partnership 12) Equipment with a cost of $100,000 and accumulated amortization of $30,000 is contributed to a new partnership by Barnes. The current market value of the equipment is $95,000. The replacement value of the equipment is $125,000. The equipment would be recorded on the partnership books at: A) $70,000 B) $65,000 C) $125,000 D) $95,000 Answer: D Objective: 12-2 Account for partners' initial investments in a partnership 13) Canfield invests cash of $20,000 and inventory with a cost of $20,000 and a current value of $25,000 in the Canfield and Roose Partnership. In addition, Canfield invests land with a cost of $75,000, a current market value of $170,000, and a $60,000 mortgage on the property assumed by the partnership. Roose invests equipment with a cost of $100,000 and accumulated amortization of $40,000. Roose's equipment has a current market value of $100,000. Roose also invests inventory with a current market value of $30,000. How much cash must be invested by Roose so that the two partners have equal balances in their capital accounts? A) $25,000 B) $75,000 C) $15,000 D) $35,000 Answer: A Objective: 12-2 Account for partners' initial investments in a partnership 14) Canfield invests cash of $20,000 and inventory with a cost of $20,000 and a current value of $25,000 in the Canfield and Roose Partnership. In addition, Canfield invests land with a cost of $75,000 and a current market value of $120,000. The partnership agrees to assume the existing $40,000 mortgage on the property. Roose invests equipment with a cost of $100,000 and accumulated amortization of $40,000. Roose's equipment has a current market value of $90,000. How much cash must be invested by Roose so that the two partners have equal balances in their capital accounts? A) $55,000 B) $75,000 C) $15,000 D) $35,000 Answer: D Objective: 12-2 Account for partners' initial investments in a partnership Table 12-1 Hanna contributes $45,000 cash, land that she bought for $55,000, and a building that cost her $140,000 and has been amortized $40,000, to the newly formed partnership of H & B Company. The building is valued at $190,000 and has an outstanding mortgage of $100,000. The land is valued at $95,000. Barbara contributes $20,500 cash, equipment valued at $50,000 with an outstanding note payable of $15,000, and an automobile valued at $20,000. Barbara originally paid $60,000 for the equipment, which has been amortized $20,000. The partners have agreed to share profits and losses equally. 15) Referring to Table 12-1, the entry to record the investment by Hanna includes a debit to: A) building for $100,000 B) various asset accounts for a total of $270,000 C) building for $140,000 D) various asset accounts for a total of $330,000 Answer: D Objective: 12-2 Account for partners' initial investments in a partnership 16) Referring to Table 12-1, the entry to record the investment by Barbara includes a debit to: A) various asset accounts for a total of $75,500 B) various asset accounts for a total of $90,500 C) various asset accounts for a total of $55,500 D) various asset accounts for a total of $80,500 Answer: B Objective: 12-2 Account for partners' initial investments in a partnership 17) Referring to Table 12-1, immediately after the investments by Hanna and Barbara, the balance sheet of H & B Company shows total liabilities of: A) $100,000 B) $15,000 C) $115,000 D) $305,500 Answer: C Objective: 12-2 Account for partners' initial investments in a partnership 18) Referring to Table 12-1, the entry to record the investment by Barbara includes a credit to her capital account for: A) $95,500 B) $55,500 C) $80,500 D) $75,500 Answer: D Objective: 12-2 Account for partners' initial investments in a partnership 19) Referring to Table 12-1, the entry to record the investment by Hanna includes a credit to her capital account for: A) $230,000 B) $330,000 C) $185,000 D) $200,000 Answer: A Objective: 12-2 Account for partners' initial investments in a partnership 20) Referring to Table 12-1, immediately after the investments by Hanna and Barbara, the balance sheet of H & B Company shows total assets of: A) $320,500 B) $305,500 C) $420,500 D) $280,500 Answer: C Objective: 12-2 Account for partners' initial investments in a partnership 21) Carl Alvarez joined a partnership and donated the following assets: Cash $5,000 Equipment Original cost: $42,000 Accumulated amortization: $20,000 Current market value: $30,000 Land Original cost: $110,000 Current market value: $200,000 On the partnership books, the assets will be recorded at a total value of: A) $137,000. B) $157,000. C) $235,000. D) $147,000. Answer: C Explanation: C) $5,000 + $30,000 + $200,000 = $235,000 Objective: 12-2 Account for partners' initial investments in a partnership 22) Carl Alvarez joined a partnership and donated the following assets: Cash $5,000 Equipment Original cost: $42,000 Accumulated amortization: $20,000 Current market value: $30,000 Land Original cost: $110,000 Current market value: $200,000 On the partnership books, Alvarez's capital account will be recorded at the amount of: A) $137,000. B) $235,000. C) $157,000. D) $147,000. Answer: B Explanation: B) $5,000 + $30,000 + $200,000 = $235,000 Objective: 12-2 Account for partners' initial investments in a partnership 23) Mary Cox entered into a partnership and transferred assets and liabilities from her prior business over to the partnership comprised of the following: Cash $10,000 Notes Payable $2,000 Inventory Original cost $12,000 Current market value $8,000 On the partnership books, the assets and liabilities will be recorded at a combined net value of: A) $22,000. B) $20,000. C) $32,000. D) $16,000. Answer: D Explanation: D) $10,000 - $2,000 + $8,000 = $16,000 Objective: 12-2 Account for partners' initial investments in a partnership 24) Mary Cox entered into a partnership and transferred assets and liabilities from her prior business over to the partnership comprised of the following: Cash $10,000 Notes Payable $2,000 Inventory Original cost $12,000 Current market value $8,000 On the partnership books, her capital account will be recorded at the amount of: A) $16,000. B) $20,000. C) $32,000. D) $22,000. Answer: A Explanation: A) $10,000 - $2,000 + $8,000 = $16,000 Objective: 12-2 Account for partners' initial investments in a partnership Match the following. A) current market value 25) The assets invested by a partner are recorded on the books of the partnership at this value Objective: 12-2 Account for partners' initial investments in a partnership Answers: 25) A 26) Jack and Will decide to form the JW Partnership. On January 1, 2014, they combine their assets with the following current market values and book values: Jack's assets Will's assets Book Market Book Market value value value value Cash $100,000 $100,000 $95,000 $95,000 Net accounts receivable 39,000 37,000 28,000 23,000 Inventory 60,000 75,000 55,000 72,000 Land 50,000 80,000 75,000 90,000 Buildings 80,000 70,000 90,000 75,000 Accumulated amortization 25,000 ---- 30,000 ---- Accounts payable 18,000 18,000 25,000 25,000 Journalize the entries on January 1, 2014, to record the partners' initial investments. Answer: Date Accounts Debit Credit Jan. 1 Cash 100,000 Accounts Receivable 37,000 Inventory 75,000 Land 80,000 Buildings 70,000 Accounts Payable 18,000 Jack, Capital 344,000 1 Cash 95,000 Accounts Receivable 23,000 Inventory 72,000 Land 90,000 Buildings 75,000 Accounts Payable 25,000 Will, Capital 330,000 Objective: 12-2 Account for partners' initial investments in a partnership 27) Jill and Sue decide to form the JS Partnership. On February 1, 2013, they combine their assets with the following current market values and book values: Jill's assets Sue's assets Book Market Book Market value value value value Cash $40,000 $40,000 $50,000 $50,000 Net accounts receivable 39,500 37,000 28,000 27,000 Inventory 69,000 75,000 55,000 72,000 Land 50,000 85,000 75,000 90,000 Equipment 80,000 70,000 90,000 75,000 Accumulated amortization 25,000 ---- 30,000 ---- Accounts payable 28,000 28,000 ------ ---- Notes payable ----- ----- 10,000 10,000 Journalize the entries on February 1, 2013, to record the partners' initial investments. Answer: Date Accounts Debit Credit Feb. 1 Cash 40,000 Accounts Receivable 37,000 Inventory 75,000 Land 85,000 Equipment 70,000 Accounts Payable 28,000 Jill, Capital 279,000 1 Cash 50,000 Accounts Receivable 27,000 Inventory 72,000 Land 90,000 Equipment 75,000 Notes Payable 10,000 Sue, Capital 304,000 Objective: 12-2 Account for partners' initial investments in a partnership 28) Jill and Sue decide to form the JS Partnership. On February 1, 2014, they combine their assets except for the land with the following current market values and book values: Jill's assets Sue's assets Book Market Book Market value value value value Cash $40,000 $40,000 $50,000 $50,000 Net accounts receivable 39,500 37,000 28,000 27,000 Inventory 69,000 75,000 55,000 72,000 Land 50,000 85,000 75,000 90,000 Equipment 80,000 70,000 90,000 75,000 Accumulated amortization 25,000 ---- 30,000 ---- Accounts payable 28,000 28,000 ------ ---- Notes payable ----- ----- 10,000 10,000 Journalize the entries on February 1, 2014, to record the partners' initial investments. Answer: Date Accounts Debit Credit Feb. 1 Cash 40,000 Accounts Receivable 37,000 Inventory 75,000 Equipment 70,000 Accounts Payable 28,000 Jill, Capital 194,000 1 Cash 50,000 Accounts Receivable 27,000 Inventory 72,000 Equipment 75,000 Notes Payable 10,000 Sue, Capital 214,000 Objective: 12-2 Account for partners' initial investments in a partnership 29) Jack and Will formed the JW Partnership on January 1, 2013, by combining the separate assets of their respective proprietorships. Information relating to their assets and liabilities are as follows: Jack's assets Will's assets Book Market Book Market value value value value Cash $100,000 $100,000 $95,000 $95,000 Net accounts receivable 39,000 37,000 28,000 36,000 Inventory 60,000 75,000 55,000 66,000 Land 50,000 80,000 75,000 82,000 Buildings 80,000 70,000 90,000 90,000 Accumulated amortization 25,000 ---- 30,000 ---- Accounts payable 18,000 18,000 25,000 25,000 Prepare the balance sheet for JW Partnership on January 1, 2013, immediately after the partnership entries are prepared. Answer: JW Partnership Balance Sheet January 1, 2013 Assets Liabilities Current assets Current liabilities Cash $195,000 Accounts payable $ 43,000 Accounts receivable 73,000 Inventory 141,000 Capital Total current assets $409,000 Jack, capital $344,000 Will, capital 344,000 Property, plant and equipment Total capital 688,000 Land $162,000 Buildings 160,000 Total Property, plant and equipment 322,000 Total liabilities Total assets $731,000 and capital $731,000 Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements Objective: 12-2 Account for partners' initial investments in a partnership 30) Tracy and Jack formed the TJ Partnership on March 1, 2014 by combining the separate assets of their respective proprietorships. Information relating to their assets and liabilities are as follows: Tracy's assets Jack's assets Book Market Book Market value value value value Cash $10,000 $10,000 $85,000 $85,000 Net accounts receivable 39,000 37,000 28,000 23,000 Inventory 60,000 75,000 55,000 72,000 Land 50,000 90,000 75,000 90,000 Buildings 80,000 70,000 90,000 75,000 Accumulated amortization 25,000 ---- 30,000 ---- Accounts payable 18,000 18,000 25,000 25,000 Prepare the balance sheet for TJ Partnership on March 1, 2014, immediately after the partnership entries are prepared. Answer: TJ Partnership Balance Sheet March 1, 2014 Assets Liabilities Current assets Current liabilities Cash $95,000 Accounts payable $ 43,000 Accounts receivable 60,000 Inventory 147,000 Capital Total current assets $302,000 Tracy, capital $264,000 Jack, capital 320,000 Property, plant and equipment Total capital 584,000 Land $180,000 Buildings 145,000 Total Property, plant and equipment 325,000 Total liabilities Total assets $627,000 and capital $627,000 Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements Objective: 12-2 Account for partners' initial investments in a partnership Table 12-12 On January 1, 2013, Ruben Ho and Clay Runnerup formed the Ruben and Clay Partnership by investing the following assets and liabilities in the business: Ruben's Clay's Book value Book value Cash $12,000 $18,500 Equipment 38,000 53,500 Accumulated amort.-equipment 8,200 9,900 Buildings 84,000 95,000 Accumulated amort.-buildings 25,000 35,000 Land 60,000 66,000 Accounts payable 35,000 35,000 Note payable 17,000 29,000 An independent appraiser believes that Ruben's equipment has a market value of $29,000 and Clay's equipment has a market value of $47,500. The appraiser indicates Ruben's building has a current value of $90,000 and Clay's building has a current value of $110,000. The appraiser further indicates that Ruben's land has a current value of $78,000 and Clay's land has a current value of $80,000. Ruben and Clay agree to share profits and losses in a 60:40 ratio. During the first year of operations, the business net income income of $74,000. Each partner withdrew $30,000 cash. 31) a) Refer to Table 12-12. Prepare the journal entries to record the initial investments in the business by Ruben and Clay. b) Refer to Table 12-12. Prepare a balance sheet dated January 1, 2013, after the completion of the initial journal entries. Answer: a) General Journal Date Accounts Debit Credit Jan. 1 Cash 12,000 Equipment 29,000 Buildings 90,000 Land 78,000 Accounts Payable 35,000 Note Payable 17,000 Ruben Ho, Capital 157,000 1 Cash 18,500 Equipment 47,500 Buildings 110,000 Land 80,000 Accounts Payable 35,000 Note Payable 29,000 Clay Runnerup, Capital 192,000 b) Ruben and Clay Partnership Balance Sheet January 1, 2013 Assets Liabilities Current Assets Current Liabilities Cash $ 30,500 Accounts payable $ 70,000 Note payable 46,000 Total current liabilities $116,000 Property Plant and Equipment Capital Equipment $ 76,500 Ruben Ho, capital $157,000 Buildings 200,000 Clay Runnerup, capital 192,000 Land 158,000 Total capital 349,000 Total Property, plant and equipment 434,500 Total assets $465,000 Total liabilities and capital $465,000 Objective: 12-2 Account for partners' initial investments in a partnership 32) On June 30, William Tellman, Wendy Carlos, and David Wu started a partnership. Their investments were as follows: Please use the format below to prepare a balance sheet at June 30. Assets Liabilities Owners' Equity Answer: Assets Liabilities Cash $180,000 Accounts payable $50,000 Inventory 240,000 Land 200,000 Owners' Equity Tellman, capital 200,000 Carlos, capital 180,000 Wu, capital 190,000 Total equity $570,000 Total assets $620,000 Total liabilities & owners' equity $620,000 Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements Objective: 12-2 Account for partners' initial investments in a partnership Objective 12-3 1) If the partnership agreement specifies a method for allocating profits but not losses, then losses are shared in the same proportion as profits. Answer: TRUE Objective: 12-3 Allocate profits and losses to the partners by different methods 2) It is not possible to share partnership income purely on the basis of a partner's service to the partnership. Answer: FALSE Objective: 12-3 Allocate profits and losses to the partners by different methods 3) It is not possible to share partnership income purely on the basis of a partner's investments. Answer: FALSE Objective: 12-3 Allocate profits and losses to the partners by different methods 4) The balance in the partner's capital account consists of the partner's initial investment less the partner's share of partnership net income plus the partner's withdrawals. Answer: FALSE Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements Objective: 12-3 Allocate profits and losses to the partners by different methods 5) Partnership agreements typically do not allow partners to withdraw assets from the business. Answer: FALSE Objective: 12-3 Allocate profits and losses to the partners by different methods 6) It is not possible for the withdrawals account of a partner to be nil before closing entries. Answer: FALSE Objective: 12-3 Allocate profits and losses to the partners by different methods 7) Partnership profits and losses may be allocated based on capital investments and on service. Answer: TRUE Objective: 12-3 Allocate profits and losses to the partners by different methods 8) Unless the partnership agreement specifically indicates an income ratio, partnership net income or loss is not allocated to the partners. Answer: FALSE Objective: 12-3 Allocate profits and losses to the partners by different methods 9) The balance in the partner's capital account consists of the partner's initial investment plus the partner's share of partnership net income minus the partner's withdrawals. Answer: TRUE Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements Objective: 12-3 Allocate profits and losses to the partners by different methods 10) The journal entry to close a partner's withdrawals account involves a debit to the partner's capital account. Answer: TRUE Objective: 12-3 Allocate profits and losses to the partners by different methods 11) John and Mary share profits and losses in a 6:9 ratio, respectively. Mary's share of a $60,000 profit would be $24,000. Answer: FALSE Objective: 12-3 Allocate profits and losses to the partners by different methods 12) Assume the partnership agreement specifies net income is to be divided as follows: "salary" of $30,000 to A and $40,000 to B with any remaining profit or loss divided equally between the partners. If net income for the current year is $65,000, A's distributive share of net income would be: A) $27,500 B) $37,500 C) $30,000 D) $40,000 Answer: A Objective: 12-3 Allocate profits and losses to the partners by different methods 13) Jen, Brad, and George formed a partnership with Jen contributing $50,000, Brad contributing $60,000 and George investing $90,000. Their partnership agreement called for the net income division to be based on the ratio of capital investments. If the partnership net income for the first year of operations was $75,000, what amount of net income would be credited to Jen's capital account? A) $18,750 B) $22,500 C) $37,500 D) $43,500 Answer: A Objective: 12-3 Allocate profits and losses to the partners by different methods 14) Hugh and Liz formed a partnership with capital contributions of $80,000 and $120,000, respectively. Their partnership agreement called for 1) Hugh to receive a $20,000 "salary", 2) each partner to receive 10% of their initial capital contributions, and 3) the remaining income or loss to be divided equally. If net income for the current year is $70,000, what amount is credited to Hugh's capital account? A) $27,000 B) $43,000 C) $35,000 D) $18,750 Answer: B Objective: 12-3 Allocate profits and losses to the partners by different methods 15) Hugh and Liz formed a partnership with capital contributions of $80,000 and $120,000, respectively. Their partnership agreement called for 1) Hugh to receive a $20,000 "salary", 2) each partner to receive 10% of their initial capital contributions, and 3) the remaining income or loss to be divided equally. If net loss for the current year is $44,000, what amount is debited to Hugh's capital account? A) $30,000 B) $14,000 C) $22,000 D) $43,000 Answer: B Objective: 12-3 Allocate profits and losses to the partners by different methods 16) Hugh and Liz formed a partnership with capital contributions of $80,000 and $120,000, respectively. Their partnership agreement called for 1) Hugh to receive a $20,000 "salary", 2) each partner to receive 10% of their initial capital contributions, and 3) the remaining income or loss to be divided in a ratio of 5:3. If net income for the current year is $54,000, what amount is credited to Hugh's capital account? A) $27,000 B) $17,250 C) $36,750 D) $20,250 Answer: C Objective: 12-3 Allocate profits and losses to the partners by different methods 17) Assume the partnership agreement specifies net income is to be divided in the ratio of capital investments. A's capital account has a balance of $50,000 and B's capital account has a balance of $60,000. If net income for the current year is $25,000, B's distributive share of net income would be: A) $13,636 B) $11,364 C) $12,500 D) $20,500 Answer: A Objective: 12-3 Allocate profits and losses to the partners by different methods 18) Assume the partnership agreement states that net income is to be divided as follows: 20% interest on investments with the remaining net income divided in a 3:2 ratio. C has a capital balance of $55,000 and D has a capital balance of $75,000. If net income for the current year is $10,000, partner D's share would be: A) $8,600 B) $6,400 C) $1,400 D) $15,000 Answer: A Objective: 12-3 Allocate profits and losses to the partners by different methods 19) If A's share of net income is $25,000 and B's share of net income is $40,000, the closing entry would involve a: A) credit to A's capital account for $40,000 B) credit to B's capital account for $25,000 C) debit to A's capital account for $25,000 D) debit to Income Summary for $65,000 Answer: D Objective: 12-3 Allocate profits and losses to the partners by different methods 20) If a net loss of $25,000 is divided equally between Candy Kane and Brandy Brown, the closing entry would involve a: A) debit to Income Summary for $25,000 B) credit to Kane's capital account for $12,500 C) debit to Brown's capital account for $12,500 D) credit to Cash for $25,000 Answer: C Objective: 12-3 Allocate profits and losses to the partners by different methods 21) If the partnership agreement does not stipulate how profits and losses will be divided, then by law, partners must share profits and losses: A) equally B) in the ratio of their capital balances C) based on a ratio of time devoted to the business D) in the same proportion as their initial investments Answer: A Objective: 12-3 Allocate profits and losses to the partners by different methods 22) Ross, Joey, Chandler, and Brad formed a partnership agreeing to divide profits and losses in a 2:3:4:1 relationship, respectively. Assuming that the business earned a profit of $165,000, Ross's share is ________ and Brad's share is ________. A) $33,000, $49,500 B) $49,500, $16,500 C) $60,000, $33,000 D) $33,000, $16,500 Answer: D Objective: 12-3 Allocate profits and losses to the partners by different methods 23) Brittney and Cheryl formed a partnership and agreed to share profits and losses 1/3 to Brittney and 2/3 to Cheryl. If the business incurred a loss of $45,500, then the entry to close out the income summary account would include a: A) credit to Brittney, Capital for $15,167 B) debit to Brittney, Capital for $15,167 C) debit to Brittney, Capital for $30,333 D) credit to Brittney, Capital for $30,333 Answer: B Objective: 12-3 Allocate profits and losses to the partners by different methods 24) The Partnership of Raymond, Chabot and Grant divides profits in the ratio of 4:5:3. There is no provision for dividing losses. During 2014, the business earned $40,000. Grant's share of the income is: A) $13,333 B) $10,000 C) $16,000 D) $16,667 Answer: B Objective: 12-3 Allocate profits and losses to the partners by different methods 25) The Partnership of Raymond, Chabot and Grant divides profits in the ratio of 4:5:3. There is no provision for dividing losses. During 2014, the business experienced a loss of $40,000. Grant's share of the loss is: A) $(13,333) B) $(10,000) C) $(16,000) D) $(16,667) Answer: B Objective: 12-3 Allocate profits and losses to the partners by different methods 26) The Partnership of Raymond, Chabot and Grant divides profits in the ratio of 4:5:3. There is no provision for dividing losses. During 2014, the business experienced a loss of $40,000. Chabot's share of the loss is: A) $(13,333) B) $(10,000) C) $(16,000) D) $(16,667) Answer: D Objective: 12-3 Allocate profits and losses to the partners by different methods Table 12-2 Tic, Tac, and Toe have year-end capital balances, before closing entries, of $202,000, $182,000, and $116,000, respectively. They have agreed to share profits and losses in the ratio of their capital balances. 27) Refer to Table 12-2. Assuming the business earns a profit of $72,500, the amount allocated to Tic is: A) $29,290 B) $26,390 C) $24,167 D) $16,820 Answer: A Objective: 12-3 Allocate profits and losses to the partners by different methods 28) Refer to Table 12-2. Assuming the company earns a profit of $146,500, the balance of Tac's capital account after closing out the income summary account is: A) $235,326 B) $348,833 C) $348,500 D) $149,988 Answer: A Objective: 12-3 Allocate profits and losses to the partners by different methods 29) Refer to Table 12-2. Assuming the business incurs a loss of $87,000, Toe's share of the loss is: A) $35,148 B) $20,184 C) $29,000 D) $31,668 Answer: B Objective: 12-3 Allocate profits and losses to the partners by different methods 30) Refer to Table 12-2. Assuming the partnership incurs a loss of $105,000, the balance in Tic's capital account after closing out the income summary account is: A) $159,580 B) $42,420 C) $139,580 D) $73,580 Answer: A Objective: 12-3 Allocate profits and losses to the partners by different methods Table 12-3 Mariah and Brittney have formed a partnership and invested $140,000 and $160,000, respectively. They have agreed to share profits as follows: 1) The first $30,000 is to be allocated according to their original capital contributions to the partnership. 2) Mariah is to receive a "salary" of $40,000 and Brittney is to receive a "salary" of $45,000. 3) The remainder is to be allocated 5:3, respectively. 31) Refer to Table 12-3. If the business earns a net income of $118,000, Mariah's share is: A) $62,125 B) $61,000 C) $55,875 D) $54,000 Answer: C Objective: 12-3 Allocate profits and losses to the partners by different methods 32) Refer to Table 12-3. Assuming the business incurs a net loss of $36,000, Brittney's capital account will be: A) debited for $56,625 B) debited for $94,375 C) credited for $4,375 D) credited for $40,375 Answer: C Objective: 12-3 Allocate profits and losses to the partners by different methods 33) Refer to Table 12-3. If the partnership incurred a loss of $18,000, Mariah's capital account would be ________, and Brittney's capital account would be ________. A) debited for $83,125, debited for $49,875 B) credited for $49,875, debited for $83,125 C) debited for $29,125, credited for $11,125 D) unaffected, unaffected Answer: C Objective: 12-3 Allocate profits and losses to the partners by different methods Table 12-4 Jana Jones, Jill Jacks, and Carolle Cann formed a partnership by investing $250,000, $200,000, and $150,000, respectively. They agreed to share profits as follows: 1) Annual "salary" allowance of $40,000 to Jana, $20,000 to Jill, and $30,000 to Carolle. 2) Interest on their original capital balances of 10%. 3) Any remainder equally. 34) Refer to Table 12-4. If the partnership earns a profit of $150,000 its first year, then Jana's capital account would be credited for: A) $40,000 B) $45,000 C) $65,000 D) $42,000 Answer: C Objective: 12-3 Allocate profits and losses to the partners by different methods 35) Refer to Table 12-4. Assuming the business has income of $60,000 during its first year, the amount allocated to Jill is: A) $20,000 B) $15,000 C) $35,000 D) $10,000 Answer: D Objective: 12-3 Allocate profits and losses to the partners by different methods 36) Refer to Table 12-4. If during the first year of business, the company incurs a net loss of $20,000, the capital account of Carolle would: A) increase $56,667 B) increase $11,667 C) decrease $56,667 D) decrease $11,667 Answer: D Objective: 12-3 Allocate profits and losses to the partners by different methods 37) The net income agreement for Crosby and Stills states net income and net loss shall be divided in a ratio of 4:6, respectively. The net loss for the current year is $50,000. On January 1 of the current year, the capital balances were as follows: Crosby, $55,000; and Stills, $65,000. During the current year Crosby withdrew $40,000 and Stills withdrew $25,000. Compute the capital balances as of December 31 of the current year. Crosby, capital Stills, capital A) debit of $5,000 credit of $10,000 B) credit of $35,000 credit of $70,000 C) credit of $5,000 credit of $10,000 D) debit of $35,000 credit of $5,000 Answer: A Objective: 12-3 Allocate profits and losses to the partners by different methods 38) The net income agreement for Crosby and Stills states net income and net loss shall be divided in a ratio of beginning capital balances. The net loss for the current year is $50,000. On January 1 of the current year, the capital balances were as follows: Crosby, $55,000; and Stills, $65,000. During the current year Crosby withdrew $40,000 and Stills withdrew $25,000. Compute the capital balances as of December 31 of the current year. Crosby, capital Stills, capital A) debit of $7,917 debit of $12,917 B) credit of $7,917 credit of $12,917 C) debit of $7,917 credit of $12,917 D) debit of $12,917 credit of $7,917 Answer: C Objective: 12-3 Allocate profits and losses to the partners by different methods 39) Rogers and Reese have agreed to share profits in a 3:2 ratio, respectively. Assuming the business incurred a loss of $70,000, Roger's share of the loss is: A) the same as Reese's share of the loss B) $42,000 C) $28,000 D) $28,000 to each and balance split evenly Answer: B Objective: 12-3 Allocate profits and losses to the partners by different methods 40) B. Lincoln, R. Stallings, and J. Savoie formed a partnership. The partnership agreement specified that the profits and losses will be shared in a ratio of 3:1:1, respectively. At the end of the first year of operations, the partnership had $400,000 of revenue and $320,000 of expenses. The amount that will be credited to R. Stalling's capital account is: A) $12,000 B) $16,667 C) $48,000 D) $16,000 Answer: D Explanation: D) $400,000 - $320,000 = $80,000 $80,000 × (1/5) = $16,000 Objective: 12-3 Allocate profits and losses to the partners by different methods 41) A partnership is formed with 4 partners named Wells, Bates, McCollum and Zhang. The partnership agreement specifies that profits and losses are shared in a ratio of 1:1:2:4, respectively. At the end of the first year, the partnership earned net income of $290,000. What amount will be credited to the capital account for Wells? A) $145,000 B) $ 32,222 C) $ 72,500 D) $ 36,250 Answer: D Explanation: D) $290,000 × (1/8) = $36,250 Objective: 12-3 Allocate profits and losses to the partners by different methods 42) B. Jones and R. Tate began a partnership in 2014. Jones would do a larger portion of the partnership work, and Tate would make a larger cash contribution, and so the partnership agreement specified a profit split to recognize that situation. Profits will be split in a two-step allocation. The first step will allocate partnership profits based on 5% of each partner's capital balance. The second step will allocate remaining amounts in a ratio of 4:1. Data at the end of the first year are as follows: Partnership profits to allocate: $ 24,000 Jones's capital balance: $ 36,000 Tate's capital balance: $120,000 How much of the partnership income will be allocated to Jones? A) $12,960 B) $24,000 C) $12,900 D) $14,760 Answer: D Explanation: D) Jones Tate Total Total to be allocated $24,000 Capital balance $36,000 $120,000 times 5% 5% 5% first allocation $1,800 $6,000 $7,800 Remainder $16,200 second allocation 80% 20% $12,960 $3,240 Total allocated $14,760 $9,240 $24,000 Objective: 12-3 Allocate profits and losses to the partners by different methods 43) W. Bell and C. Quirk started a partnership in 2014. Because Bell contributed a larger amount toward the partnership at inception, the partnership agreement specified the following split of profits and losses in a two-phase allocation. The first allocation would split profits and losses in proportion to the partners' relative capital balances up to 20% of those balances. The remainder would be split evenly. At the end of the first year, the partnership had a net loss of $40,000. Partners' capital balances were as follows: How much of the net loss was allocated to W. Bell? A) ($20,400) B) ($28,400) C) ($20,000) D) ($26,900) Answer: B Explanation: B) Bell Quirk Total Capital balance $102,000 $18,000 $120,000 20% Amt to be alloc - 1st phase $24,000 1st phase allocation * ($20,400) ($3,600) ($24,000) Amt to be alloc - 2nd phase ($16,000) times 20% 50% 50% 2nd phase allocation ($8,000) ($8,000) ($16,000) Total allocated ($28,400) ($11,600) ($40,000) * Capital balance $102,000 $18,000 $120,000 Relative % 85.0% 15.0% 100% Objective: 12-3 Allocate profits and losses to the partners by different methods Match the following. A) equally 44) Without an agreement, the law will stipulate this method of sharing profits and losses Objective: 12-3 Allocate profits and losses to the partners by different methods Answers: 44) A Table 12-12 On January 1, 2013, Ruben Ho and Clay Runnerup formed the Ruben and Clay Partnership by investing the following assets and liabilities in the business: Ruben's Clay's Book value Book value Cash $12,000 $18,500 Equipment 38,000 53,500 Accumulated amort.-equipment 8,200 9,900 Buildings 84,000 95,000 Accumulated amort.-buildings 25,000 35,000 Land 60,000 66,000 Accounts payable 35,000 35,000 Note payable 17,000 29,000 An independent appraiser believes that Ruben's equipment has a market value of $29,000 and Clay's equipment has a market value of $47,500. The appraiser indicates Ruben's building has a current value of $90,000 and Clay's building has a current value of $110,000. The appraiser further indicates that Ruben's land has a current value of $78,000 and Clay's land has a current value of $80,000. Ruben and Clay agree to share profits and losses in a 60:40 ratio. During the first year of operations, the business net income income of $74,000. Each partner withdrew $30,000 cash. 45) Refer to Table 12-12. Determine the capital balances of Ruben Ho and Clay Runnerup, on December 31, 2013, after the completion of their first year of operations. Answer: Ruben Ho, capital balance on December 31, 2013 $157,000 + $44,400 - $30,000 = $171,400 Clay Runnerup, capital balance on December 31, 2013 $192,000 + $29,600 - $30,000 = $191,600 Objective: 12-3 Allocate profits and losses to the partners by different methods 46) Copps, Rock, and Grey have recently formed a partnership by investing $50,000, $70,000, and $40,000, respectively. They are considering several methods of allocating income and losses. Compute the partners' shares of profits and losses under each of the following plans: a) Net income is $60,000 and the partners could not agree on a plan for net income/loss division. b) The net loss is $24,000 and the partners agreed to share in the profits based on a 2:2:1 ratio. The agreement did not address losses. c) Net income is $75,000 and the partners agreed to share profits based on the relationship of their initial capital balances. d) The net loss is $30,000 and the partners agreed to share profits and losses based on 15% to Copps, 50% to Rock, and 35% to Grey. Round all answers to the nearest whole dollar. Answer: Item Copps Rock Grey Total a) $20,000 $20,000 $20,000 $60,000 b) $(9,600) $(9,600) $(4,800) $(24,000) c) $23,437 $32,813 $18,750 $75,000 d) $(4,500) $(15,000) $(10,500) $(30,000) Objective: 12-3 Allocate profits and losses to the partners by different methods 47) The Stewart and Smith Partnership earned a net income of $90,000 for the current year. Beginning capital balances were $70,000 for Scott Stewart and $140,000 for Rick Smith. Prepare the closing entries to transfer net income to the partners' capital accounts based on the following independent net income agreements. a) No mention of net income agreement. b) Interest on beginning capital balances of 12%, balance divided in a ratio of 3:2, respectively. c) Interest on beginning capital balances of 10%, "salary" of $45,000 to Stewart and $50,000 to Smith, balance divided equally. Answer: General Journal Date Accounts Debit Credit a) Income Summary 90,000 Scott Stewart, Capital 45,000 Rick Smith, Capital 45,000 b) Income Summary 90,000 Scott Stewart, Capital 47,280 Rick Smith, Capital 42,720 c) Income Summary 90,000 Scott Stewart, Capital 39,000 Rick Smith, Capital 51,000 Objective: 12-3 Allocate profits and losses to the partners by different methods 48) The Clancy and Flanagan Partnership incurred a net loss of $40,000 for the current year. The beginning capital balances of the partners were respectively, $35,000 and $45,000. Prepare journal entries to transfer the net loss to the partners' capital accounts based on the following agreements. a) No mention of net income/loss agreement. b) "Salary" of $30,000 to Clancy and $10,000 to Flanagan, balance divided in the ratio of 3:2. c) Interest of 10% on beginning capital balances, balance divided in the ratio of 2:3. Answer: General Journal Date Accounts Debit Credit a) Clancy Capital 20,000 Flanagan Capital 20,000 Income Summary 40,000 b) Clancy Capital 18,000 Flanagan Capital 22,000 Income Summary 40,000 c) Clancy Capital 15,700 Flanagan Capital 24,300 Income Summary 40,000 Objective: 12-3 Allocate profits and losses to the partners by different methods Table 12-13 Burns and Allan have formed a partnership and invested $40,000 and $60,000, respectively. They have agreed to share profits as follows: 1) Burns is to receive a "salary" of $20,000 and Allan is to receive a "salary" of $10,000. 2) $15,000 is to be allocated according to their original capital contributions to the partnership. 3) The remainder is to be allocated 5:4 respectively 49) Refer to Table 12-13 Assuming that the business earns $35,000, allocate the income to Burns and Allan. Answer: Burns Allan Total Total income to be allocated 35,000 Salary allocation 20,000 10,000 (30,000) 5,000 Interest on capital accounts 6,000 9,000 (15,000) (10,000) Balance divided 5:4 ratio: (5,556) (4,444) 10,000 20,444 14,556 Objective: 12-3 Allocate profits and losses to the partners by different methods 50) Refer to Table 12-13 Assuming that the business earns $135,000, allocate the income to Burns and Allan. Answer: Burns Allan Total Total income to be allocated 135,000 Salary allocation 20,000 10,000 (30,000) 105,000 Interest on capital accounts 6,000 9,000 (15,000) 90,000 Balance divided 5:4 ratio: 50, 000 40,000 90,000 76,000 59,000 Objective: 12-3 Allocate profits and losses to the partners by different methods 51) Refer to Table 12-13 Assuming that the business had a loss of $9,000, allocate the loss to Burns and Allan. Answer: Burns Allan Total Total income to be allocated (9,000) Salary allocation 20,000 10,000 (30,000) (39,000) Interest on capital accounts 6,000 9,000 (15,000) (54,000) Balance divided 5:4 ratio: (30, 000) (24,000) 54,000 (4,000) (5,000) Objective: 12-3 Allocate profits and losses to the partners by different methods 52) Refer to Table 12-13 Assuming that the business earns $135,000: 1) allocate the income to Burns and Allan. 2) calculate the balance of each partner's capital account. Answer: Burns Allan Total Total income to be allocated 135,000 Salary allocation 20,000 10,000 (30,000) 105,000 Interest on capital accounts 6,000 9,000 (15,000) 90,000 Balance divided 5:4 ratio: 50,000 40,000 90,000 76,000 59,000 Opening capital account balances 40,000 60,000 Ending capital account balances 116,000 119,000 Objective: 12-3 Allocate profits and losses to the partners by different methods 53) Refer to Table 12-13 Assuming that the business earns $135,000 and that each partner withdrew $1,000 per month during the year: 1) allocate the income to Burns and Allan. 2) calculate the balance of each partner's capital account. Answer: Burns Allan Total Total income to be allocated 135,000 Salary allocation 20,000 10,000 (30,000) 105,000 Interest on capital accounts 6,000 9,000 (15,000) 90,000 Balance divided 5:4 ratio: 50,000 40,000 90,000 76,000 59,000 Opening capital account balances 40,000 60,000 116,000 119,000 Less withdrawals during the year 12,000 12,000 Ending capital account balances 104,000 107,000 Objective: 12-3 Allocate profits and losses to the partners by different methods 54) Describe the methods that partnerships can use to allocate profits and losses. Answer: Common sharing agreements base the profit-and-loss ratio on a stated fraction, partners' capital investments, and/or their service to the partnership. Another allocation of partnership method is based on what is called "salaries" and "interest" which, despite their names, are not expenses of the business. Objective: 12-3 Allocate profits and losses to the partners by different methods 55) On August 1, 2014, Larry Goldstein and Rafi Hassan created a partnership to produce software for online advertising. Goldstein was a lawyer and would handle all the legal matters, but Hassan was the technical whiz and would do all of the production and sales. Because most of the work would be done by Hassan, the partnership agreement specified that the yearly income would be split in a two-phase allocation. The first $100,000 of annual income would be split among Goldstein and Hassan in a 1:4 ratio (one part to Goldstein, four parts to Hassan). Any income above $100,000 would be split evenly. At the onset, both men contributed $200,000 to the partnership and made no draws during 2014. At the end of 2014, the partnership earned $175,000 of net income. At the end of 2012, after the year's income was distributed, what was the balance in owners' capital accounts? Answer: 1st phase allocation $100,000 2nd phase allocation $75,000 Total income $175,000 Goldstein Hassan Total Capital balance $200,000 $200,000 $400,000 Amt to be alloc - 1st phase 20% 80% 100% 1st phase allocation $20,000 $80,000 $100,000 Amt to be alloc - 2nd phase times 20% 50% 50% 2nd phase allocation $37,500 $37,500 $75,000 Total allocated $57,500 $117,500 $175,000 Ending capital balance $257,500 $317,500 $575,00 Objective: 12-3 Allocate profits and losses to the partners by different methods Objective 12-4 1) Prior to the admission of a new partner, the new partner's capital account is nil. Answer: TRUE Objective: 12-4 Account for the admission of a new partner 2) A bonus may result when a new partner is admitted by making an investment directly into the partnership. Answer: TRUE Objective: 12-4 Account for the admission of a new partner 3) If there is no bonus on the admission of a new partner, this means that there is no cash changing hands. Answer: FALSE Objective: 12-4 Account for the admission of a new partner 4) A new partner may be admitted to a partnership by purchasing an existing partner's interest. Answer: TRUE Objective: 12-4 Account for the admission of a new partner 5) A bonus paid to the old partners by a new partner increases the old partners' capital accounts. Answer: TRUE Objective: 12-4 Account for the admission of a new partner 6) When there is an admission of a new partner and a bonus is given to the old partners, cash is always obtained by the old partners at the admission of the new partner. Answer: FALSE Objective: 12-4 Account for the admission of a new partner 7) Williams and Creech agree to admit Kelley to their partnership. Kelley will purchase one-half of Williams' interest for $110,000. The current balance in Williams' capital account is $200,000. Williams' capital account will be debited for $110,000. Answer: FALSE Objective: 12-4 Account for the admission of a new partner 8) Williams and Creech agree to admit Kelley to their partnership. Kelley will purchase one-half of Williams' interest for $110,000. The current balance in Williams' capital account is $200,000. Williams' capital account will be debited for $100,000. Answer: TRUE Objective: 12-4 Account for the admission of a new partner 9) When a new partner investing in a partnership receives an equity interest greater than the size of their investment the assets of the partnership must be adjusted upward. Answer: FALSE Objective: 12-4 Account for the admission of a new partner 10) An equity bonus awarded to a new partner is reflected by reductions in the existing partner capital accounts. Answer: TRUE Objective: 12-4 Account for the admission of a new partner 11) Red, White, and Blue have capital balances immediately after closing entries of $80,000, $100,000, and $120,000, respectively. They have agreed to share all profits equally. Blue is selling his interest to Black for $135,000 cash. The entry on the books of the partnership to record this event includes a: A) debit to Cash for $135,000 B) debit to Black, Capital for $120,000 C) credit to Black, Capital for $135,000 D) credit to Black, Capital for $120,000 Answer: D Objective: 12-4 Account for the admission of a new partner 12) Black and Blue formed a partnership, agreeing to share profits equally. After closing entries, the balances in their capital accounts are $36,000 and $45,000, respectively. Blue sells her interest in the partnership to White for $52,000. The entry on the partnership books to record this event includes a: A) debit to Cash for $52,000 B) credit to White, Capital for $45,000 C) credit to White, Capital for $52,000 D) debit to Blue, Capital for $3,500 Answer: B Objective: 12-4 Account for the admission of a new partner Table 12-5 Jim and Joe are partners agreeing to share profits and losses in a 2:6 ratio, respectively. Business has been profitable and they have decided to admit Jewel to the partnership for a cash investment. The balances in Jim and Joe's capital accounts are presently $240,000 and $260,000, respectively. 13) Refer to Table 12-5. If Jewel is given a 20% interest in the partnership in exchange for $90,000 cash, the entry to record her investment includes a: A) credit to Jim, Capital for $7,000 B) credit to Cash for $90,000 C) credit to Jewel, Capital for $90,000 D) credit to Jewel, Capital for $118,000 Answer: D Objective: 12-4 Account for the admission of a new partner 14) Refer to Table 12-5. If Jewel is given a 25% interest in the partnership in exchange for $200,000, the entry to record her investment includes a: A) credit to Jim, Capital for $6,250 B) debit to Joe, Capital for $18,750 C) credit to Jewel, Capital for $200,000 D) debit to Jewel, Capital for $175,000 Answer: A Objective: 12-4 Account for the admission of a new partner 15) Refer to Table 12-5. If Jewel is given a 15% interest in the partnership in exchange for $100,000, the entry to record her investment includes a: A) credit to Jewel, Capital for $100,000 B) debit to Jim, Capital for $6,250 C) credit to Jim, Capital for $6,250 D) credit to Joe, Capital for $7,500 Answer: D Objective: 12-4 Account for the admission of a new partner Table 12-6 Donna, Rick, and Daisy are partners sharing profits in a 3:3:4 ratio, respectively. They have been overwhelmed by the amount of work recently and have agreed to admit Bud to the partnership for a cash investment. The current balances in their capital accounts are $60,000, $80,000, and $120,000, respectively. 16) Refer to Table 12-6. Assuming Bud is given a 12.5% interest in the partnership for a $60,000 cash investment, the entry to record his investment includes a: A) credit to Bud, Capital for $40,000 B) debit to Donna, Capital for $6,000 C) credit to Rick, Capital for $8,000 D) credit to Bud, Capital for $60,000 Answer: A Objective: 12-4 Account for the admission of a new partner 17) Refer to Table 12-6. Assuming Bud is given a 20% interest in the partnership for an $80,000 cash investment, the entry to record his investment includes a: A) credit to Bud, Capital for $80,000 B) debit to loss on sale of partnership interest for $12,000 C) debit to Daisy, Capital for $4,800 D) credit to Donna, Capital for $3,600 Answer: D Objective: 12-4 Account for the admission of a new partner 18) Refer to Table 12-6. Assuming Bud is given a 15% interest in the partnership for a $70,000 cash investment, the entry to record his investment includes a: A) credit to Donna, Capital for $6,150 B) credit to Bud, Capital for $70,000 C) debit to Rick, Capital for $6,150 D) credit to gain on sale of partnership interest for $20,500 Answer: A Objective: 12-4 Account for the admission of a new partner Table 12-7 Bill, Bob, and Bo, are partners in the Trendy Company, a retailer of inexpensive kids' wear. They share profits and losses in a 1:4:5 ratio and have decided to expand their business territory. They have agreed to admit Burt to the partnership for a cash investment. Their capital balances are currently $60,000, $100,000, and $140,000, respectively. 19) Refer to Table 12-7. Assuming Burt contributes $80,000 for a 20% interest, the entry to record his investment in the partnership includes a: A) credit to Burt, Capital for $76,000 B) debit to Bill, Capital for $2,000 C) debit to Bob, Capital for $8,000 D) credit to Bo, Capital, for $10,000 Answer: A Objective: 12-4 Account for the admission of a new partner 20) Refer to Table 12-7. Burt has been offered a 25% interest in the firm for $60,000 cash investment. Assuming Burt takes the offer, the entry to record his investment in the partnership includes a: A) debit to Cash for $75,000 B) debit to loss on sale of partnership interest for $46,000 C) credit to Bill, Capital for $1,500 D) debit to Bob, Capital for $12,000 Answer: D Objective: 12-4 Account for the admission of a new partner 21) Refer to Table 12-7. Burt has been offered a 15% interest in the firm for $130,000. Assuming Burt takes the offer, the entry to record his investment in the partnership includes a: A) credit to gain on sale of partnership interest for $85,000 B) debit to Burt, Capital for $45,000 C) credit to Burt, Capital for $45,000 D) debit to Cash for $130,000 Answer: D Objective: 12-4 Account for the admission of a new partner 22) Frank Evans and Barbara Baker have a partnership that splits profits equally and that has become very successful. They are considering admitting a new partner, Pete Zhang, for an equal share - a 1/3 interest in the new partnership. Based on the value of the partnership's success, they have negotiated an amount of $118,000, which Zhang will invest to obtain a 1/3 share. The balances in the existing partner capital accounts are: Evans $60,000 Baker $62,000 What journal entry would be made for Zhang's investment and admittance to the new partnership? A) Debit Cash $118,000; credit Zhang, Capital $118,000 B) Debit Evans, Capital $59,000; debit Baker, Capital $59,000; credit Zhang, Capital $118,000 C) Debit Zhang, Capital $38,000; credit Evans, Capital $18,000; credit Baker, Capital $19,000 D) Debit Cash $118,000; credit Evans, Capital $19,000; credit Baker, Capital $19,000; credit Zhang, Capital $80,000 Answer: D Explanation: D) $60,000 + $62,000 + $118,000 = $240,000 $240,000/3 = $80,000 $118,000 - $80,000 = $38,000 $38,000/2 = $19,000 Objective: 12-4 Account for the admission of a new partner 23) Ricardo Ruiz and Thomas Mann have a partnership that shares profits equally. They have approached Shinichi Kumura to join their partnership as an equal partner due to his diplomatic and business contacts. Based on Kumura's value to the business, they have agreed that he will invest $40,000 for a 1/3 share. What journal entry is required to record the transaction? The balances in the existing partner capital accounts are: Ruiz $100,000 Mann $112,000 A) Debit Cash $40,000; credit Kumuru, Capital $40,000 B) Debit Cash $40,000; debit Kumuru, Capital $40,000 C) Debit Ruiz, Capital $20,000; debit Mann, Capital $20,000; credit Kumuru, Capital $40,000 D) Debit Cash $40,000; debit Ruiz, Capital $22,000; debit Mann, Capital $22,000; credit Kumuru, Capital $84,000 Answer: D Explanation: D) $100,000 + $112,000 + $40,000 = $252,000 $252,000/3 = $84,000 $84,000 - $40,000 = $44,000 $44,000/2 = $22,000 Objective: 12-4 Account for the admission of a new partner Match the following. A) bonus to old partners B) bonus to new partner 24) New partner invests assets with a market value greater than the equity received Objective: 12-4 Account for the admission of a new partner Answers: 24) A 25) Cornell and Roberts are partners who agree to admit Stanley to their partnership. Cornell has a capital balance of $51,000 and Roberts has a capital balance of $70,000. Cornell and Roberts share net income in the ratio of 2:8. Prepare journal entries to admit Stanley to the partnership based on the following independent agreements. Round all amounts to the nearest dollar. a) Stanley invests $50,000 cash into the partnership for a 20% interest. b) Stanley invests $50,000 cash into the partnership for a 30% interest. c) Stanley purchases one-third of Cornell's capital for $20,000. d) Stanley purchases one-half of Robert's capital for $31,000. Answer: General Journal Date Accounts Debit Credit a) Cash 50,000 Cornell, Capital 3,160 Roberts, Capital 12,640 Stanley, Capital 34,200 b) Cash 50,000 Cornell, Capital 260 Roberts, Capital 1,040 Stanley, Capital 51,300 c) Cornell, Capital 17,000 Stanley, Capital 17,000 d) Roberts, Capital 35,000 Stanley, Capital 35,000 Objective: 12-4 Account for the admission of a new partner 26) Monica Turner and Anna Frost have capital balances of $200,000 and $250,000, respectively and have no net income/net loss agreement. On January 1, 2013, they agree to admit Emma Brown into their partnership and give her a 30% interest in the business. Determine the balance in each partners' capital account immediately following the admission of Emma in each of the following independent cases: a) Emma contributes $250,000 cash to the business. b) Emma contributes equipment valued at $275,000 to the business. c) Emma contributes land valued at $180,000 to the business. Answer: Item Turner, Capital Frost, Capital Brown, Capital a) $220,000 $270,000 $210,000 b) $228,750 $278,750 $217,500 c) $195,500 $245,500 $189,000 a) $200,000 + $250,000 + $250,000 = $700,000 $700,000 × 0.30 = $210,000 $250,000 - $210,000 = $40,000 bonus to current partners $40,000/2 = $20,000 bonus to each current partner Turner = $200,000 + $20,000 = $220,000 Frost = $250,000 + $20,000 = $270,000 Brown = $210,000 b) $200,000 + $250,000 + $275,000 = $725,000 $725,000 × 0.30 = $217,500 $275,000 - $217,500 = $57,500 bonus to current partners $57,500/2 = $28,750 bonus to each current partner c) $200,000 + $250,000 + $180,000 = $630,000 $630,000 × 0.30 = $189,000 $180,000 - $189,000 = ($9,000) bonus to new partner ($9,000)/2 = ($4,500) bonus from each current partner to new partner Turner = $200,000 - $4,500 = $195,500 Frost = $250,000 - $4,500 = $245,500 Brown = $189,000 Objective: 12-4 Account for the admission of a new partner 27) Sandra Budd and Frank Elm have a partnership that splits profits equally and that has become very successful. They are considering admitting a new partner, Sally Lee, for an equal share—a 1/3 interest in the new partnership. Based on the value of the partnership's business, they have negotiated an amount of $10,000, which Lee will invest to obtain a 1/3 share. The balances in the existing partner capital accounts are: Budd $40,000 Elm $70,000 What journal entry would be made for Lee's investment and admittance to the new partnership? Answer: Cash 10,000 Budd, capital 15,000 Elm, capital 15,000 Lee, capital 40,000 Calculations: $60,000 + $70,000 + $10,000 = 120,000 $120,000/3 = $40,000 $10,000 - $40,000 = $30,000 $30,000/2 = $15,000 Objective: 12-4 Account for the admission of a new partner Objective 12-5 1) When a partner withdraws from the partnership, his capital account is always debited for the amount of cash taken. Answer: FALSE Objective: 12-5 Account for the withdrawal of a partner 2) When a partner withdraws from a partnership, it is possible that he may receive assets worth more than the book value of his equity. Answer: TRUE Objective: 12-5 Account for the withdrawal of a partner 3) If a partner leaves the partnership in the middle of the fiscal year, he must wait until the year end to determine his capital account balance. Answer: FALSE Objective: 12-5 Account for the withdrawal of a partner 4) At the withdrawal of a partner where a bonus is paid to the withdrawing partner, cash must be paid personally by the remaining partners. Answer: FALSE Objective: 12-5 Account for the withdrawal of a partner 5) The entry to record a withdrawal of a partner from the firm when payment is made from partners' personal assets affects only partners' capital accounts. Answer: TRUE Objective: 12-5 Account for the withdrawal of a partner 6) When a partner withdraws from the partnership during the year they will lose their entitlement of the profits for that portion of the year. Answer: FALSE Objective: 12-5 Account for the withdrawal of a partner Table 12-8 Jimmy, Johnny, and Joey are partners in the 3J Company sharing profits and losses equally. Joey has decided to leave the partnership. After all accounts have been updated, the capital balances of the partners are currently $90,000, $120,000, and $70,000, respectively. 7) Refer to Table 12-8. Assume Joey takes $50,000 in cash and a promissory note for $20,000. The entry to record his withdrawal includes a: A) credit to Joey, Capital for $70,000 B) debit to Joey, Capital for $50,000 C) credit to Joey, Capital for $50,000 D) debit to Joey, Capital for $70,000 Answer: D Objective: 12-5 Account for the withdrawal of a partner 8) Refer to Table 12-8. Assume Joey takes $100,000 in cash. The entry to record his withdrawal from the partnership includes a: A) debit to Jimmy, Capital for $30,000 B) credit to Johnny, Capital for $15,000 C) debit to Johnny, Capital for $15,000 D) debit to Joey, Capital for $100,000 Answer: C Objective: 12-5 Account for the withdrawal of a partner Table 12-9 Wally, Willie, and Watson formed a partnership several years ago. Wally has decided to withdraw from the partnership. The current capital balances are: Wally, capital, $50,000; Willie, capital, $65,000; and Watson, capital, $100,000. Prior to the withdrawal of Wally, the partners agree to revalue some of the partnership assets. Inventory with a cost of $120,000 has a current market value of $150,000; land with a cost of $50,000 has a current market value of $125,000. Wally, Willie, and Watson share net income and losses in a 3:3:4 ratio. Willie and Watson will share net income in a 3:4 ratio. 9) Refer to Table 12-9. What is the balance in Wally's capital account after revaluing the assets? A) $81,500 B) $18,500 C) $92,000 D) $8,000 Answer: A Objective: 12-5 Account for the withdrawal of a partner 10) Refer to Table 12-9. What is total capital for the partnership after revaluing the assets? A) $215,000 B) $320,000 C) $110,000 D) $275,000 Answer: B Objective: 12-5 Account for the withdrawal of a partner 11) Refer to Table 12-9. Wally withdraws from the partnership and accepts $80,000 cash. Assuming the assets have been properly revalued, the entry to withdraw Wally from the partnership includes a: A) debit to Wally, Capital for $80,000 B) credit to Watson, Capital for $857 C) debit to Watson, Capital for $857 D) debit to Willie, Capital for $643 Answer: B Objective: 12-5 Account for the withdrawal of a partner 12) Refer to Table 12-9. Wally withdraws from the partnership and accepts $60,000 cash. Assuming the assets have been properly revalued, the entry to withdraw Wally from the partnership would include a debit to: A) Wally, Capital for $60,000 B) Willie,Capital for $9,214 C) Wally, Capital for $81,500 D) Watson, Capital for $12,286 Answer: C Objective: 12-5 Account for the withdrawal of a partner 13) Krishnamurti, Patel, and Hamilton had a long-standing partnership with equal profit sharing. Hamilton desired to withdraw from the partnership. Partnership assets were revalued and the partners' capital accounts were adjusted. Afterwards, the partner balances were: Krishnamurti $250,000 Patel $290,000 Hamilton: $220,000 Due to legal complications, the partners agreed that Hamilton would withdraw for an amount that was less than book value. The agreed cash payment was $160,000. The journal entry for this transaction would be: A) debit Hamilton, Capital $220,000; credit Krishnamurti, Capital $30,000; credit Patel, Capital $30,000; credit Cash $160,000. B) debit Hamilton, Capital $220,000; credit Krishnamurti, Capital $110,000; credit Patel, Capital $110,000. C) debit Hamilton, Capital $160,000; credit Cash $160,000. D) debit Cash $160,000; debit Krishnamurti, Capital $30,000; debit Patel, Capital $30,000; credit Hamilton, Capital $220,000. Answer: A Explanation: A) $220,000 - $160,000 = $60,000 $60,000/2 = $30,000 Objective: 12-5 Account for the withdrawal of a partner 14) Abraham, Bland, and Ahmadi have a partnership and share profits equally. All partnership assets are financial assets and are carried on the books at their market value. At the end of the year, Ahmadi announces that he will retire and withdraw from the partnership. Partnership data are as follows: Net assets of partnership: $620,000 Abraham, capital balance: 280,000 Bland, capital balance: 200,000 Ahmadi, capital balance: 140,000 The partnership will make a final cash settlement with Ahmadi at book value. Which of the following is the correct entry? A) Debit Cash $140,000; credit Ahmadi, Capital $140,000 B) Debit Ahmadi, Capital $140,000; credit Abraham, Capital $140,000 C) Debit Ahmadi, Capital $140,000; credit Cash $140,000 D) Debit Abraham, Capital $70,000; debit Bland, Capital $70,000; credit Cash $140,000 Answer: C Objective: 12-5 Account for the withdrawal of a partner 15) Glass, Falk, and Fayed had a partnership that splits profits and losses equally. Fayed declared his intention to withdraw from the partnership. Partnership assets were revalued and partner capital balances were adjusted to the following amounts: Glass $100,000 Falk $115,000 Fayed $ 90,000 Due to a set of unusual legal circumstances, it was mutually agreed that the partnership would settle with Fayed for a cash payment of $100,000. Which of the following statements accurately describes the transaction? A) The remaining partners' capital accounts were credited $5,000 each. B) The withdrawing partner's capital account was credited for $90,000. C) The withdrawing partner's account was debited for $100,000. D) The remaining partners' capital accounts were debited for $5,000 each. Answer: D Explanation: D) $100,000 - $90,000 = $10,000 $10,000/2 = $5,000 Objective: 12-5 Account for the withdrawal of a partner 16) Dowker, Cross, and Rowe are partners in the DCR Company. They share profits and losses in a 3:5:2 ratio and have just closed their books for the period. The current balances in their capital accounts are $63,000, $49,000, and $94,000, respectively. Dowker has decided to withdraw from the partnership. The partners agreed, prior to the withdrawal of Dowker, that the assets needed to be revalued. Land with a cost of $55,000 has a current market value of $75,000. Inventory with a cost of $75,000 has a current market value of $70,000. Cross and Rowe have agreed to share net income in a 2:3 ratio. a) Prepare the journal entries required to revalue the assets. b) Prepare the journal entry to record the withdrawal of Dowker under each of the following independent assumptions: 1) The partnership gives cash to Dowker equal to his capital balance. 2) The partnership gives $76,000 cash to Dowker. 3) The partnership gives $56,000 cash to Dowker. Answer: General Journal Date Accounts Debit Credit a) Land 20,000 Dowker, Capital 6,000 Cross, Capital 10,000 Rowe, Capital 4,000 Dowker, Capital 1,500 Cross, Capital 2,500 Rowe, Capital 1,000 Inventory 5,000 b1) Dowker, Capital 67,500 Cash 67,500 b2) Dowker, Capital 67,500 Cross, Capital 3,400 Rowe, Capital 5,100 Cash 76,000 b3) Dowker, Capital 67,500 Cross, Capital 4,600 Rowe, Capital 6,900 Cash 56,000 Objective: 12-5 Account for the withdrawal of a partner 17) Frasier, Niles, and Daffney are partners in the Lots A Laughs Company and share profits and losses in a ratio of 3:2:1, respectively. Frasier has been contemplating retirement. The partners' current capital account balances, after closing entries, are $147,000, $98,000, and $49,000, respectively. The new net income agreement for Niles and Daffney will be 1:3. Prepare entries for the following transactions involving the retirement of Frasier. Round to the nearest dollar if necessary. a) The partners agree to revalue the assets. Land with a cost of $90,000 has a current market value of $120,000. Inventory with a cost of $50,000 has a current market value of $35,000. b) After the assets are revalued, the partnership agrees to give Frasier $75,000 cash and a note payable for $65,000. Answer: General Journal Date Accounts Debit Credit a) Land 30,000 Frasier, Capital 15,000 Niles, Capital 10,000 Daffney, Capital 5,000 Frasier, Capital 7,500 Niles, Capital 5,000 Daffney, Capital 2.500 Inventory 15,000 b) Frasier, Capital 154,500 Niles, Capital 3,625 Daffney, Capital 10,875 Cash 75,000 Note Payable 65,000 Objective: 12-5 Account for the withdrawal of a partner 18) Jensen, Zhang, and Singh had a partnership that splits profits and losses equally. Singh declared his intention to withdraw from the partnership. Partnership assets were revalued and partner capital balances were adjusted to the following amounts: Jensen $90,000 Zhang $70,000 Singh $ 100,000 Due to a set of unusual legal circumstances, it was mutually agreed that the partnership would settle with Singh for a cash payment of $120,000. Please provide the journal entry for that transaction: Answer: Singh, capital 100,000 Glass, capital 10,000 Falk, capital 10,000 Cash 120,000 Calculations: $120,000 - $100,000 = 210,000 $20,000/2 = $10,000 Objective: 12-5 Account for the withdrawal of a partner 19) Arthur Carlson, Maria Perez and Andrew Li have a partnership with equal profit sharing. Andrew Li has decided to withdraw from the partnership. The current balance sheet of the partnership appears as follows: Assets Liabilities & Owner's Equity Cash $ 180,000 Accounts payable $ 50,000 Inventory 240,000 Carlson, capital 200,000 Land 200,000 Perez, capital 180,000 Li, capital 190,000 Total assets $ 620,000 Total liabilities & owner's equity $ 620,000 Prior to the final settlement, the assets have been appraised to determine their current fair market value. Fair values are as follow: Inventory: $204,000 Land: $440,000 Required: Provide the journal entries to revalue the inventory; and, record the withdrawal of Li assuming he receives $160,000 cash, and $90,000 inventory, for his equity. Answer: Carlson, capital 12,000 Perez, capital 12,000 Li, capital 12,000 Inventory 36,000 Land 240,000 Carlson, capital 80,000 Perez, capital 80,000 Li, capital 80,000 Li, capital 258,000 Cash 160,000 Inventory 90,000 Carlson, capital 4,000 Perez, capital 4,000 Inventory Calculations: $240,000 - $204,000 = $36,000 $36,000/3 = $12,000 $440,000 - $200,000 = $240,000 $240,000/3 = $80,000 Land Calculations: $240,000 - $204,000 = $36,000 $36,000/3 = $12,000 $440,000 - $200,000 = $240,000 $240,000/3 = $80,000 Explanation: $240,000 - $204,000 = $36,000 $36,000/3 = $12,000 $440,000 - $200,000 = $240,000 $240,000/3 = $80,000 Objective: 12-5 Account for the withdrawal of a partner Objective 12-6 1) When a partnership is liquidated, it is not necessary to sell all of the assets of the partnership. Answer: FALSE Objective: 12-6 Account for the liquidation of a partnership 2) Cash is distributed to partners in accordance with the net income agreement in the partnership liquidation process. Answer: FALSE Objective: 12-6 Account for the liquidation of a partnership 3) At the completion of the liquidation of a partnership, all accounts in the general ledger have a nil balance. Answer: TRUE Objective: 12-6 Account for the liquidation of a partnership 4) Gains and losses on the sale of noncash assets in a partnership liquidation are shared by the partners on the basis of their profit-and-loss-sharing ratio. Answer: TRUE Objective: 12-6 Account for the liquidation of a partnership 5) In a partnership liquidation partners are entitled to assets before unsecured creditors. Answer: FALSE Objective: 12-6 Account for the liquidation of a partnership Table 12-10 M, N, and O are partners in the Drain Company and share profits in a 3:3:2 ratio, respectively. They have decided to liquidate their business. At the start of the liquidation, their capital account balances were $50,000, $25,000, and $25,000, respectively. After the disposal of all noncash assets and the payment of all debts, cash of $90,000 remains to be distributed to the partners. 6) Refer to Table 12-10. The amount of cash O should receive in the liquidation of the Drain Company is: A) $21,250 B) $46,250 C) $22,500 D) $21,250 to each and remainder split evenly Answer: C Objective: 12-6 Account for the liquidation of a partnership 7) Refer to Table 12-10. The amount of cash M should receive in the liquidation of the Drain Company is: A) $37,500 B) $50,000 C) $46,667 D) $46,250 Answer: D Objective: 12-6 Account for the liquidation of a partnership Table 12-11 Doug, Davis, and Dwight are in the process of liquidating their partnership. They share profits and losses in a 3:2:1 ratio. Following is the current balance sheet for the partnership: Cash $100,000 Liabilities $ 55,000 Other assets 225,000 Doug, capital 145,000 Davis, capital 50,000 Dwight, capital 75,000 Total assets $325,000 Total liabilities and capital $325,000 8) Refer to Table 12-11. If the other assets are sold for $250,000, the total amount of cash to be distributed to the partners is: A) $295,000 B) $250,000 C) $350,000 D) $195,000 Answer: A Objective: 12-6 Account for the liquidation of a partnership 9) Refer to Table 12-11. If the other assets are sold for $180,000, the total amount of cash to be distributed to the partners is: A) $280,000 B) $225,000 C) $180,000 D) $270,000 Answer: B Objective: 12-6 Account for the liquidation of a partnership 10) Other assets were sold during a partnership liquidation for $300,000, which involved a $27,000 gain. Assuming the three partners have an equal net income division agreement, the journal entry would involve: A) debits to the three partners' capital accounts for $9,000 each B) a credit to other assets for $300,000 C) a credit to other assets for $273,000 D) a debit to Cash for $273,000 Answer: C Objective: 12-6 Account for the liquidation of a partnership 11) Capital balances for Hold and Held are $225,000 and $350,000 immediately before liquidation. Noncash assets with a book value of $500,000 are sold for $560,000 cash. Total liabilities of $270,000 are paid by the partnership. The amount of cash available for distribution to the partners is: A) $635,000 B) $905,000 C) $75,000 D) $560,000 Answer: A Objective: 12-6 Account for the liquidation of a partnership 12) It is possible for a partner's capital account to have a negative balance. This is known as a: A) capital deficiency B) capital requirement C) capital recovery D) capital efficiency Answer: A Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements Objective: 12-6 Account for the liquidation of a partnership 13) Ivey and Balzac had a partnership that distributed profits in a ratio of 1:3 respectively. At the end of 2014, they agreed to liquidate the partnership. Prior to liquidation, the partnership had Cash of $50,000, Inventory of $75,000, Equipment (net) of $235,000, and no payables. Partner capital balances were: Ivey: $100,000 Balzac: $260,000 The inventory was sold for $59,000 and the equipment was sold for $243,000. After the assets were sold, what was Balzac's capital balance? A) $176,000 B) $106,000 C) $ 98,000 D) $254,000 Answer: D Explanation: D) Dr/(Cr) Prelim Bal Sell inv Sell equip Balance Cash $50,000 $59,000 $243,000 $352,000 Inventory 75,000 (75,000) 0 Equipment 235,000 (235,000) 0 Accts pay 0 0 Ivey (100,000) 4,000 (2,000) (98,000) Balzac (260,000) 12,000 (6,000) (254,000) 0 0 0 0 Objective: 12-6 Account for the liquidation of a partnership 14) Ivey and Balzac had a partnership that distributed profits in a ratio of 1:3 respectively. At the end of 2014, they agreed to liquidate the partnership. Prior to liquidation, the partnership had Cash of $50,000, Inventory of $75,000, Equipment (net) of $235,000, and no payables. Partner capital balances were: Ivey: $100,000 Balzac: $260,000 The inventory was sold for $59,000 and the equipment was sold for $243,000. How much cash was paid to Ivey in the final settlement? A) $176,000 B) $106,000 C) $ 98,000 D) $254,000 Answer: C Explanation: C) Dr/(Cr) Prelim Bal Sell inv Sell equip Balance Cash $50,000 $59,000 $243,000 $352,000 Inventory 75,000 (75,000) 0 Equipment 235,000 (235,000) 0 Accts pay 0 0 Ivey (100,000) 4,000 (2,000) (98,000) Balzac (260,000) 12,000 (6,000) (254,000) 0 0 0 0 Objective: 12-6 Account for the liquidation of a partnership 15) Which of the following statements about the liquidation of a partnership is TRUE? A) Gains and losses from the disposal of assets are always distributed to the partner's capital accounts based on their respective percentage of total capital. B) The final cash distribution is always based on equal shares. C) The final cash distribution is based on the partners' capital account balances. D) The final cash distribution is always based on the profit sharing formula specified in the partnership agreement. Answer: C Objective: 12-6 Account for the liquidation of a partnership Match the following. A) pay all the partnership liabilities B) liquidation C) distribution of remaining cash to partners D) sell the assets 16) The process of going out of business by selling the entity's assets and paying its liabilities Learning Outcome: A-03 Analyze and record transactions and their effect on the financial statements Objective: 12-6 Account for the liquidation of a partnership 17) The final step in the liquidation of a partnership Objective: 12-6 Account for the liquidation of a partnership 18) The first step in partnership liquidation Objective: 12-6 Account for the liquidation of a partnership Answers: 16) B 17) C 18) D 19) On August 1, 2014, Salt, Pepper, and Spice agree to liquidate their partnership. Salt has a capital balance of $90,000, Pepper has a capital balance of $37,500, and Spice has a capital balance of $30,000. The partners share net income/net loss in a ratio of 4:3:3. Accounts payable amount to $60,000. Assets are shown on the balance sheet at $40,000 of cash and $177,500 of noncash assets. All the noncash assets are sold for $159,500. Prepare entries to sell the noncash assets, pay the liabilities, and distribute the remaining cash to the partners. Answer: General Journal Date Accounts Debit Credit a) Cash 159,500 Salt, Capital 7,200 Pepper, Capital 5,400 Spice, Capital 5,400 Noncash Assets 177,500 b) Liabilities 60,000 Cash 60,000 c) Salt, Capital 82,800 Pepper Capital 32,100 Spice Capital 24,600 Cash 139,500 Objective: 12-6 Account for the liquidation of a partnership 20) Define liquidation and describe the steps followed to liquidate a partnership. How is the cash distributed to the partners? Answer: Liquidation is the process of going out of business by selling the entity's assets and paying its liabilities. Before the business is liquidated, its accounts must be adjusted and closed. The process of liquidating a partnership begins with the sale of all noncash assets, continues with the payment of all debts, and ends with the distribution of the remaining cash to the partners. The remaining cash is distributed to the partners based on their capital balances after selling these assets, dividing any gains or losses, and paying the entity's liabilities. Objective: 12-6 Account for the liquidation of a partnership Table 12-14 Sammy, Davis, and Junior are in the process of liquidating their partnership. They share profits and losses in a 4:3:1 ratio. Following is the current balance sheet for the partnership: Cash $290,000 Liabilities $ 65,000 Other assets 335,000 Sammy, capital 100,000 Davis, capital 400,000 Junior, capital 60,000 Total assets $625,000 Total liabilities and capital $625,000 21) Refer to Table 12-14 If the other assets are sold for $320,000 calculate the amount that will be received by each of the partners upon the liquidation of the partnership. Answer: Opening Allocate Ending Cash Balance Loss Balance Distribution Sammy, capital 100,000 (7,500) 92,500 92,500 Davis, capital 400,000 (5,625) 394,375 394,375 Junior, capital 60,000 (1,875) 58,125 58,125 Objective: 12-6 Account for the liquidation of a partnership 22) Refer to Table 12-14 If the other assets are sold for $385,000 calculate the amount that will be received by each of the partners upon the liquidation of the partnership. Answer: Opening Allocate Ending Cash Balance Income Balance Distribution Sammy, capital 100,000 25,000 125,000 125,000 Davis, capital 400,000 18,750 418,750 418,750 Junior, capital 60,000 6,250 66,250 66,250 Objective: 12-6 Account for the liquidation of a partnership Table 12-15 Martha, Queen and Stuart are in the process of liquidating their partnership. They share profits and losses in a 2:3:1 ratio. Following is the current balance sheet for the partnership: Cash $90,000 Liabilities $ 80,000 Other assets 200,000 Martha, capital 60,000 Queen, capital 110,000 Stuart, capital 40,000 Total assets $290,000 Total liabilities and capital $290,000 23) Refer to Table 12-15 If the other assets are sold for $230,000 calculate the amount that will be received by each of the partners upon the liquidation of the partnership. Answer: Opening Allocate Ending Cash Balance Income Balance Distribution Martha, capital 60,000 10,000 70,000 70,000 Queen, capital 110,000 15,000 125,000 125,000 Stuart, capital 40,000 5,000 45,000 45,000 Objective: 12-6 Account for the liquidation of a partnership 24) Refer to Table 12-15 If the other assets are sold for $191,000 calculate the amount that will be received by each of the partners upon the liquidation of the partnership. Answer: Opening Allocate Ending Cash Balance Loss Balance Distribution Martha, capital 60,000 (3,000) 57,000 57,000 Queen, capital 110,000 (4,500) 105,500 105,500 Stuart, capital 40,000 (1,500) 38,500 38,500 Objective: 12-6 Account for the liquidation of a partnership 25) When a partnership liquidates, there may not be enough cash from the sale of the assets to pay the liabilities. What happens in this situation? Answer: When there is not enough cash to pay the liabilities, the partners who are personally liable for the partnerships debts must contribute cash on the basis of their profit-and-loss ratio to cover unpaid debts. Objective: 12-6 Account for the liquidation of a partnership 26) Rahman, Ganesh and Malik had a long-standing and highly profitable accounting business organized as a partnership with equal sharing of profits and losses. At the end of 2014, all partners agreed to liquidate the partnership. At that time, the balance sheet was as follows: Assets Liabilities & Owner's Equity Cash $ 51,000 Accounts payable $ 5,000 Inventory 60,000 Rahman, capital 51,600 Land 100,000 Ganesh, capital 64,400 Malik, capital 90,000 Total assets $ 211,000 Total liabilities & owner's equity $ 211,000 The inventory was sold for $54,000 and the land was sold for $220,000 cash. After sale of the assets and settlement of accounts payable, how much were the balances in the partners' capital accounts? Answer: Dr/(Cr) Prelim balance Sell inv Sell land Pay A/P Balance Cash $51,000 $54,000 $220,000 $(5,000) $320,000 Inven 60,000 (60,000) 0 Land 100,000 (100,000) 0 Accts pay (5,000) 5,000 0 Rahman (51,600) 2,000 (40,000) (89,600) Ganesh (64,400) 2,000 (40,000) (102,400) Malik (90,000) 2,000 (40,000) (128,000) 0 0 0 0 0 Objective: 12-6 Account for the liquidation of a partnership 1) International financial reporting standards (IFRS) do not include specific guidance on how to account for partnerships. Answer: TRUE Objective: 12-7 Identify the impact on partnerships of IFRS 2) International Financial Reporting Standards (IFRS) require that partnerships disclose information equivalent to that provided by limited companies. Answer: TRUE Objective: 12-7 Identify the impact on partnerships of IFRS 3) Which of the following is a true statement? A) International financial reporting standards (IFRS) include specific guidance on accounting for partnerships B) International financial reporting standards (IFRS) require that partnerships disclose information equivalent to that provided by limited companies C) International financial reporting standards (IFRS) do not require that partnerships disclose information equivalent to that provided by limited companies D) International financial reporting standards (IFRS) include a standard equivalent to that set out in the CICA Handbook for unincorporated businesses. Answer: B Objective: 12-7 Identify the impact on partnerships of IFRS