CH 15 Partnerships: Formation, Operation, and Changes in Membership

The partnership purchases the disassociated partner's interest in the partnership for a ______. profit payout revalued asset cost bonus payment buyout price

buyout price

A partnership allows several individuals to ______ in a particular business venture. combine their talents and skills use their talents and skills individually eliminate all risks avoid using talents and skills use their talents and skills individually eliminate all risks avoid using talents and skills

combine their talents and skills

Select all that apply Which of the following statements are true of partnerships? A partnership allows for maximum earnings compared to all other business forms. A partnership can obtain more equity capital than a single individual can. A partnership allows risks to be shared in rapidly growing businesses. A partnership is easy to form.

A partnership can obtain more equity capital than a single individual can. A partnership allows risks to be shared in rapidly growing businesses. A partnership is easy to form.

Which of the following statements is true of a partnership? It is an entity which changes with the withdrawal of old partners. It is an entity which changes with the addition of new partners. It is an entity which takes responsibility for all the negligence and malpractices of the individual partners. It is an entity separate from the individual partners.

It is an entity separate from the individual partners.

A partnership following GAAP would account for a change in its membership in the same manner as a corporate entity would account for changes in its investors. bills receivable. outstanding debts. customers.

investors.

Sandra, a sole proprietor, is an interior designer and has the following account balances on December 31, 20X0: Cash $2,500, Inventory $9,000, Equipment $25,000, Accumulated depreciation $5,000, Liabilities $14,000. In preparation for the formation of a partnership with a friend in which Sandra will contribute all of her net assets to the partnership, Sandra's business is audited, and its net assets are appraised. The audit and appraisal disclose that $1,000 of liabilities have not been recorded, inventory has a market value of $12,000, and the equipment has a fair value of $24,000. Assuming Sandra revalues her assets and liabilities based on the audit and the appraisal, what is Sandra's capital after revaluation? $12,500 $38,500 $23,500 36,000

$23,500 Reason: All accounts are recorded at FV amounts from appraisal, but A/D is not included when new partnership formed. [Total Assets = 38,500; Total Liabilities & Capital = 38,500 minus liabilities of 15,000 = Remainder 23,500 capital]

Henry, a sole proprietor and a general physician, has the following account balances on December 31, 20X0: Cash $1,500, Inventory $5,000, Equipment $15,000, Accumulated depreciation $3,000, Liabilities $12,000. What is Henry's capital balance? $21,500 $18,500 $1,650 $6,500

$6,500 Reason: Total Assets = $18,500 (sum: cash, inventory, equip (less A/D) Total Liabilities & Capital = $18,500 (must match Assets) minus liabilities of $12,000 [ Remainder is capital (6,500)]

Select all that apply Identify the items affecting a statement of partners' capital. Additional investment Net income distribution Purchase on credit Income tax paid

Additional investment Net income distribution

Which of the following is a true statement about liability in a partnership? All partners are prohibited from making contributions to the partnership if the partnership fails and its assets are insufficient to pay obligations. All new partners are personally liable for partnership debts incurred prior to their admission to the firm. All partners are liable jointly and severally for all the partnership's obligations. All partners are prohibited by law to be liable for any partnership obligations.

All partners are liable jointly and severally for all the partnership's obligations.

Select all that apply Which of the following statements are true regarding the financial reporting requirements for partnerships? The financial reporting format for partnerships is similar to the format used by corporations. An independent auditor can issue an opinion that the statements are in accordance with GAAP. The financial statements should be prepared in accordance with GAAP if they are issued for external users. The partnership can use non-GAAP accounting methods for internal reporting needs.

An independent auditor can issue an opinion that the statements are in accordance with GAAP. The financial statements should be prepared in accordance with GAAP if they are issued for external users. The partnership can use non-GAAP accounting methods for internal reporting needs.

During 20X1, Allen and Barbara formed AB Partnership. Allen maintains a $100,000 capital balance during the year, but Barbara's capital investment varies during the year. Barbara's drawing account shows $15,000 in total debits and her capital account shows a $5,000 credit during the year. Which of the following journal entries will close Barbara's drawing account? Debit Barbara, Capital for $15,000; Credit Barbara, Drawing for $15,000 Debit Barbara, Capital for $20,000; Credit Barbara, Drawing for $20,000 Debit Barbara, Drawings for $15,000; Credit Barbara, Investments for $15,000 Debit Barbara, Investment for $20,000; Credit Barbara, Drawing for $20,000

Debit Barbara, Capital for $15,000; Credit Barbara, Drawing for $15,000 Reason: Sum of all debits to drawing account during the year are closed with a credit and debited to Capital account. * The capital account has a normal credit balance.

Select all that apply Which of the following are characteristics of partnerships? Each partner is an agent of the partnership for transactions carried on in the ordinary course of the partnership business. A partner is personally liable for partnership liabilities incurred prior to that partner's admission. A partnership is a separate business entity, distinct from its partners. All partners are liable jointly and severally for all obligations of the partnership unless otherwise provided by law.

Each partner is an agent of the partnership for transactions carried on in the ordinary course of the partnership business. A partnership is a separate business entity, distinct from its partners. All partners are liable jointly and severally for all obligations of the partnership unless otherwise provided by law.

T/F: Not-for-profit entities may be organized as partnerships.

FALSE

Select all that apply Which of the following are true of total partnership capital? It is equal to total assets minus goodwill. It is the fair value of the partnership's existing nonfinancial assets. It is the total amount of the individual partners' capital account balances. It is the partnership's total assets minus total liabilities.

It is the total amount of the individual partners' capital account balances. It is the partnership's total assets minus total liabilities.

What does it imply about the partnership's net assets when a new partner's investment is greater than the that partner's portion of the P/S book value?

New partner investment > BV proportion indicates that the P/S's prior net assets are undervalued on the books or that unrecorded goodwill exists.

Which of the following are true of the profit allocation methods available to partnerships? One advantage of the partnership form of organization is the flexibility it allows for partners to distribute profits. GAAP requires that partnerships split profits evenly among all partners GAAP requires that partnership profits be allocated based on a partner's length of time with the partnership. Partnerships can only allocate profits to partners that work for the partnership at least 35 hours per week.

One advantage of the partnership form of organization is the flexibility it allows for partners to distribute profits.

Select all that apply A partnership agreement should include a complete specification of the profit or loss distribution. Which of the following are components of the profit or loss distribution? Salaries Maximum number of partners allowed Required minimum capital account balances Interest on capital balances Limits on withdrawals

Salaries Interest on capital balances Limits on withdrawals

Which financial statement is used by partnerships to present the changes in the partners' capital accounts for a period of time? Statement of partners' capital Income statement Statement of cash flows Statement of retained earnings

Statement of partners' capital

Which of the following statements is true regarding a new partner's investment if the partnership's prior net assets are undervalued on the books? The new partner's investment is less than the new partner's proportion of the partnership's book value. The new partner's investment depends on the proportion of equity in the partnership's book value. The new partner's investment equals the new partner's proportion of the partnership's book value. The new partner's investment is more than the new partner's proportion of the partnership's book value.

The new partner's investment is more than the new partner's proportion of the partnership's book value.

Select all that apply What are some of the reasons that a partnership may choose to use accrual accounting and GAAP to maintain their books? The use of accrual accounting and GAAP have simplified record-keeping requirements. The use of accrual accounting and GAAP can allow for better comparability with companies in the same line of business. Partnerships can get an unqualified opinion on audited financial statements. The use of accrual accounting and GAAP provides better measures of income over time.

The use of accrual accounting and GAAP can allow for better comparability with companies in the same line of business. Partnerships can get an unqualified opinion on audited financial statements. The use of accrual accounting and GAAP provides better measures of income over time.

What is the formula used to calculate a new partner's proportion of the P/S's book value?

[(Existing Capital Balance + Investment of new partner) * New Partner's %]= New partner's proportion of the P/S's net BV] e.g. New partner invests $10K for a 25% interest. Existing total capital before admitting new partner = $30K. So... [(30,000 + 10,000) * 25% = 10,000] *In this case the investment = the BV e.g. New partner invests 11K, all other amounts same as above. [(30,000 + 11,000) * 25% = 10,250] *In this case the investment > BV

In partnership profit distribution, a salary is not allowed. a portion of profits allocated to a partner based on a predetermined performance formula. required to be paid to all partners regardless of the partnership agreement. a fixed amount of profits allocated to a given partner.

a fixed amount of profits allocated to a given partner.

Select all that apply The "entity concept" means a partner is an agent of the other partners in their personal and family decisions. a partnership is a separate business entity, distinct from its partners. partners cannot transact specific types of business on behalf of the partnership. a partnership can sue or be sued.

a partnership is a separate business entity, distinct from its partners. a partnership can sue or be sued.

In partnership profit distribution, a bonus is required to be paid to all partners regardless of the partnership agreement. not allowed. a portion of profits allocated to a partner based on a predetermined performance formula. a fixed amount of profits allocated to a given partner.

a portion of profits allocated to a partner based on a predetermined performance formula.

IFRS for small and medium-size enterprises mandate ______ in comparison to conventional IFRS. less detail and more disclosures less detail and fewer disclosures more detail and fewer disclosures more detail and more disclosures

less detail and fewer disclosures

A partner's capital account has a debit balance when the partner's capital contribution and share of profits exceeds his or her share of losses and withdrawals. partner contributes to the tangible assets of the partnership. partner's share of losses and withdrawals exceeds his or her capital contribution and share of profits. partner makes additional capital contributions.

partner's share of losses and withdrawals exceeds his or her capital contribution and share of profits.

A partnership's legal structure requires that the admission of a new partner be subject to the unanimous approval of the existing customers. partners. financial analysts. bankers.

partners.

What should a partnership agreement include?

the name of the partnership and the names of the partners. a description of the business to be conducted by the partnership. the duration of the partnership agreement. Initial capital contributions Complete specification of profit or loss distribution Procedures used for partnership changes Other aspects of operations

When a partnership uses an accounting method that is proximate to GAAP with some adjustments and the financial statements are presented to external users, the statements should clearly identify ______. the list of debtors and creditors the accounting methods of GAAP not used why GAAP is not followed the specific accounting methods used

the specific accounting methods used

Select all that apply Section 306 of the UPA 1997 states that a person admitted as a new partner to an existing partnership may be charged for partnership liabilities existing prior to admission only up to the amount of his or her capital contribution at time of admission. is liable for acts of professional negligence or malpractice committed by other partners before his or her admission. is personally liable for any partnership obligation incurred before the new partner was admitted. is not personally liable for any partnership obligation incurred before he or she was admitted.

may be charged for partnership liabilities existing prior to admission only up to the amount of his or her capital contribution at time of admission. is not personally liable for any partnership obligation incurred before he or she was admitted.

Nancy and Mary formed the NM Partnership, and their profit and loss-sharing ratio is 30:70. The partnership's total book value is $500,000. They decide to invite Susan to become a partner in their business with a 20 percent interest. The original partners agree that the partnership's assets should be revalued up by $50,000 to recognize the increase in the value of the land the partnership holds. What is the cash contribution required by Susan on admission to the partnership? $137,500 $100,000 $55,000 $110,000

$137,500 Reason: Orig. Revalued Capital = 550,000 Total Resulting 100% Capital (550K / 80%): 687,500 Less Existing partner's capital: (550,000) Cash contrib req. from new ptnr Susan = 137,500

On January 1, 20X1, Maria and Kevin formed MK Partnership. MK Partnership earned a profit of $50,000 during the year. Both agreed to 10 percent interest on the weighted-average capital balances. Maria's weighted-average capital balance at year-end was $100,000 and Kevin's was $50,000. The partnership agreement provides Maria a $3,000 salary and Kevin a $6,000 salary. Any remainder is to be distributed in the profit and loss-sharing ratio of 30:70. What is the amount of profit available to be distributed to the partners after interest and salary distribution? $9,000 $26,000 $24,000 $15,000

$26,000 Avg Cap: Maria = 100,000; Kevin = 50,000 Total Profit = 50,000 Step 1. Interest on avg capital bal. (10%): M = 10,000; K = 5,000 = (15,000) Remainder after Step 1 = $35,000 Step 2. Salary: M = 3,000; K = 6,000 = (9,000) Remainder after Step 2 = 26,000

Brian and George formed the BG Partnership, and their profit and loss-sharing ratio is 25:75. The book value of the partnership's net assets is $150,000. They decide to invite Sarah to become a partner in their business with a 20 percent interest. Brian and George agree to give Sarah a bonus of $5,000 for joining the partnership. What is the cash contribution required by Sarah on admission to the partnership? $36,250 $25,650 $31,250 $41,250

$31,250 Reason: Prior Capital: 150,000 Bonus offered: (5,000) Capital Retained (80%) = 145,000 Total Resulting Capital (145K / 80%) = 181,250 Less orig. capital (145,000) Cap. required by new partner: 36,250 Less bonus: (5,000) Cash contribution required by new partner = $31,250

Select all that apply Which of the following are features of partnerships as per the UPA 1997, Section 202? A partnership is an association of two or more people. The partners carry on the business as co-owners. The partnership business is carried out for profit. Partners' liability is limited to their share capital.

1. A partnership is an association of two or more people. 2. The partners carry on the business as co-owners. 3. The partnership business is carried out for profit.

Select all that apply Wilson and Jones have been in a partnership for the last two years. A new partner, Jason, purchases Jones's partnership interest directly from him. Which of the following are true about the entry to record the change? Debit Jason, Capital Credit Jones, Capital Credit Jason, Capital Debit Jones, Capital

Credit Jason, Capital Debit Jones, Capital (Simply replace one for the other since it was a direct purchase)

On January 1, 20X1, David and Harry formed DH Partnership. DH Partnership earned a profit of $60,000 during the year. Both agreed to receive 10% interest on the weighted-average capital balances. The David's weighted-average capital balance at year-end is $50,000 and Harry's is $80,000. The total interest on capital is equal to $13,000. The partnership agreement provides for total salaries for David and Harry of $6,000 each. Any remainder is to be distributed in the profit and loss-sharing ratio of 30:70. What is the amount of profit distributed to both the partners after the interest and salary distribution? David's share = $10,500; Harry's share = $24,500. David's share = $13,000; Harry's share = $12,000. David's share = $5,000; Harry's share = $7,000. David's share = $12,000; Harry's share = $13,000.

David's share = $10,500; Harry's share = $24,500. Avg Cap: David = 50,000; Harry = 80,000 Total Profit = 60,000 Step 1. Interest on avg capital bal. (10%): D = 5,000; H = 8,000 = (13,000) Remainder after Step 1 = $47,000 Step 2. Salary: D = 6,000; H = 6,000 = (12,000) Remainder after Step 2 = 35,000 Step 3. Allocate 30:70: D = 10,800; H = 24,500 Remainder = $0

During 20X1, Nelson and Evans contributed $200,000 and $300,000, respectively, to form NE Partnership. Their ratio for profit distributions is based on partner's capital contributions. Revenues and expenses are closed to an income summary account. During the year, NE Partnership earned $250,000 of revenue and incurred $125,000 in expenses. Which of the following journal entries will distribute profit at year-end in accordance with the partnership agreement? Debit Income Summary for $125,000; Credit Nelson, Capital for $50,000; Credit Evans, Capital for $75,000 Debit Income Summary for $125,000; Credit Partners loan account for $125,000 Debit Nelson, Capital for $50,000; Debit Evans, Capital for $75,000; Credit Income Summary for $125,000 Debit Income Summary for $125,000; Credit Nelson, Drawings for $50,000; Credit Evans, Drawings for $75,000

Debit Income Summary for $125,000; Credit Nelson, Capital for $50,000; Credit Evans, Capital for $75,000

What does partnership relationships does the UPA 1997 regulation cover?

The UPA 1997 covers: •Relations of partners to one another. •Relations of partners to persons dealing with the partnership. •Dissolution and winding up of the partnership.

Select all that apply Which of the following items are recorded in a partner's capital account? The partner's initial investment Any accounts receivable of the partnership Any withdrawals of capital Any profit or loss distributions

The partner's initial investment Any withdrawals of capital Any profit or loss distributions

Identify a true statement about tangible assets contributed by a partner to a partnership. The tangible assets contributed by a partner are jointly owned by the partner and the partnership. The tangible assets contributed by a partner become joint assets of all the partners. No record should be maintained for the tangible assets contributed by a partner in the partnership records. The tangible assets contributed by a partner become partnership property.

The tangible assets contributed by a partner become partnership property.

Select all that apply What are some of the reasons that a partnership may choose to use the cash-basis method or the modified cash-basis method of accounting? These methods have simplified record-keeping requirements. These methods guarantee an unqualified audit opinion. These methods provide continuous current cash position information. These methods provide better measures of income over time.

These methods have simplified record-keeping requirements. These methods provide continuous current cash position information.

Select all that apply In forming a partnership, an item contributed by a partner becomes partnership property. all partners are required to withdraw their share of the profits every year. an entity distinct from its partners comes into existence. contributed assets are recorded at their fair values.

an item contributed by a partner becomes partnership property. an entity distinct from its partners comes into existence. contributed assets are recorded at their fair values.