20-D: Partnership Accounting
4. When property other than cash is invested in a partnership, at what amount should the noncash property be credited to the contributing partner's capital account? a. Fair value at the date of contribution. b. Contributing partner's original cost. c. Assessed valuation for property tax purposes. d. Contributing partner's tax basis.
Correct Answer: A) Fair value at the date of contribution. Notes (a) Noncash assets contributed to an entity should be recorded at fair market value at the date of contribution. The creation of a new entity creates a new accountability for these assets. The partner's original cost relates to a previous accountability. The assessed valuation and the tax basis may differ from fair market value.
11. Kern and Pate are partners with capital balances of $60,000 and $20,000, respectively. Profits and losses are divided in the ratio of 60:40. Kern and Pate decided to form a new partnership with Grant, who invested land valued at $15,000 for a 20% capital interest in the new partnership. Grant's cost of the land was $12,000. The partnership elected to use the bonus method to record the admission of Grant into the partnership. Grant's capital account should be credited for a. $12,000 b. $15,000 c. $16,000 d. $19,000
Correct Answer: D) $19,000 Notes (d) The requirement is to determine the balance in the new partner's capital account after admission using the bonus method. In this case, Grant is investing land with a FV of $15,000 for a 1/5 interest in the new total capital of $95,000. Using the bonus method, the new capital $95,000 equals the total of the old capital plus Grant's investment ($60,000 + $20,000 + $15,000). Thus, a bonus of $4,000 is being credited to Grant's capital account because his interest (1/5 of $95,000, or $19,000) exceeds his investment ($15,000). The bonus to the new partner is charged to the old partners' capital accounts in their profit and loss ratios.
21. The following condensed balance sheet is presented for the partnership of Smith and Jones, who share profits and losses in the ratio of 60:40, respectively: Other Assets: $ 450,000 Smith, loan: $ 20,000 Total: $470,000 Accounts Payable: $ 120,000 Smith, capital: $ 195,000 Jones, capital: $ 155,000 Total: $470,000 The partners have decided to liquidate the partnership. If the other assets are sold for $385,000, what amount of the available cash should be distributed to Smith? a. $136,000 b. $156,000 c. $159,000 d. $195,000
Correct Answer: A) $136,000 Notes (a) This situation represents a simple liquidation since all assets are distributed at one point in time rather than in installments. In a simple liquidation all of the noncash assets are sold and the proceeds from their sale are compared to their book value to compute the gain or loss. The gain or loss on the assets is then distributed to the partners' accounts before any of the cash is distributed. The partner loan should not be considered a noncash asset for the purpose of determining gain or loss, thus, Smith is responsible to the partnership for the repayment of the entire amount of the loan. The repayment of the loan reduces that partner's (Smith) distribution as follows: (image)
6. Fox, Greg, and Howe are partners with average capital balances during year 1 of $120,000, $60,000, and $40,000, respectively. Partners receive 10% interest on their average capital balances. After deducting salaries of $30,000 to Fox and $20,000 to Howe, the residual profit or loss is divided equally. In year 1 the partnership sustained a $33,000 loss before interest and salaries to partners. By what amount should Fox's capital account change? a. $7,000 increase. b. $11,000 decrease. c. $35,000 decrease. d. $42,000 increase.
Correct Answer: A) $7,000 increase. Notes (a) When dividing the partnership loss of $33,000, first interest and salaries are allocated to the partners, increasing their capital balances. This allocation of interest and salaries will also increase the amount of loss. This increased loss amount would then be allocated to the partners, decreasing their capital accounts. The computations are shown below. (image)
22. On January 1, year 1, the partners of Cobb, Davis, and Eddy, who share profits and losses in the ratio of 5:3:2, respectively, decided to liquidate their partnership. On this date the partnership condensed balance sheet was as follows: Assets: Cash: $ 50,000 Other Assets: $250,000 Total: $300,000 Liabilities & Capital: Liabilities: $ 60,000 Cobb, capital: $ 80,000 Davis, capital: $ 90,000 Eddy, capital: $ 70,000 Total: $300,000 On January 15, year 1, the first cash sale of other assets with a carrying amount of $150,000 realized $120,000. Safe installment payments to the partners were made the same date. How much cash should be distributed to each partner? I. Cobb II. Davis III. Eddy a. I. $15,000 ; II. $51,000 ; III. $44,000 b. I. $40,000 ; II. $45,000 ; III. $35,000 c. I. $55,000 ; II. $33,000 ; III. $22,000 d. I. $60,000 ; II. $36,000 ; III. $24,000
Correct Answer: A) I. $15,000 ; II. $51,000 ; III. $44,000 Notes (a) A schedule of safe payments must be prepared to determine the amount of cash to be distributed to each partner at January 15, year 1. The first cash sale of other assets with a total book value of $150,000 realized $120,000 in cash, resulting in a $30,000 loss. This loss is allocated among the partners based upon their profit and loss ratios. The schedule is completed based upon the assumption that the remaining other assets are totally worthless, and their book values are distributed to the partners as losses, based upon the partners' profit and loss ratios. The cash payments to each partner can be found at the bottom of the schedule. (image) Thus, the cash should be distributed as follows: $15,000 to Cobb, $51,000 to Davis, and $44,000 to Eddy.
8. The partnership agreement of Reid and Simm provides that interest at 10% per year is to be credited to each partner on the basis of weighted-average capital balances. A summary of Simm's capital account for the year ended December 31, year 1, is as follows: Balance, Jan. 1: $140,000 Additional Investment, July 1: $40,000 Withdrawal, Aug. 1: ($15,000) Balance, Dec. 31: $165,000 What amount of interest should be credited to Simm's capital account for year 1? a. $15,250 b. $15,375 c. $16,500 d. $17,250
Correct Answer: B) $15,375 Notes (b) We must first determine Simm's weighted-average capital balance for year 1 as follows: $140,000 X 6/12 = $70,000 $180,000 X 1/12 = $15,000 $165,000 X 5/12 = $68,750 Total: $153,750 The problem states that interest of 10% per year is to be credited to each partner's capital account, and 10% of Simm's weighted-average capital balance of $153,750 is $15,375.
10. Blau and Rubi are partners who share profits and losses in the ratio of 6:4, respectively. On May 1, year 1, their respective capital accounts were as follows: Blau: $60,000 Rubi: $50,000 On that date, Lind was admitted as a partner with a one-third interest in capital and profits for an investment of $40,000. The new partnership began with total capital of $150,000. Immediately after Lind's admission, Blau's capital should be a. $50,000 b. $54,000 c. $56,667 d. $60,000
Correct Answer: B) $54,000 Notes (b) The requirement is to calculate the balances in the capital accounts of a partnership after the admission of a new partner. In this case, the new partner is investing $40,000 for a 1/3 interest in the new total capital of $150,000. No goodwill is recorded because the new capital ($150,000) equals the total of the old capital ($110,000) and Carter's investment ($40,000). However, a bonus of $10,000 is being credited to the new partner's capital account because his interest (1/3 of $150,000, or $50,000) exceeds his investment ($40,000). The bonus to the new partner is charged to the old partners in their profit and loss ratios as shown below.
1. Roberts and Smith drafted a partnership agreement that lists the following assets contributed at the partnership's formation: Roberts Contributions: Cash: $20,000 Furniture & Equipment: $ 15,000 Smith Contributions: Cash: $30,000 Inventory: $15,000 Building: $40,000 The building is subject to a mortgage of $10,000, which the partnership has assumed. The partnership agreement also specifies that profits and losses are to be distributed evenly. What amounts should be recorded as capital for Roberts and Smith at the formation of the partnership? I. Roberts II. Smith a. I. $35,000 ; II. $85,000 b. I. $35,000 ; II. $75,000 c. I. $55,000 ; II. $55,000 d. I. $60,000 ; II. $60,000
Correct Answer: B) I. $35,000 ; II. $75,000 Notes (b) The requirement is to determine the amounts to be recorded as capital for Roberts and Smith at the formation of the partnership. Unless otherwise agreed upon by the partners, individual capital accounts should be credited for the fair market value (on the date of contribution) of the net assets contributed by that partner. It is necessary to assume that the amounts listed are fair market values. The amount of net assets that Roberts contributed is $35,000 ($20,000 + $15,000). The fair market value of the net assets Smith contributed is $75,000 ($30,000 + $15,000 + $40,000 - $10,000). The partners' profit and loss sharing ratio does not affect the initial recording of the capital accounts.
5. Red and White formed a partnership in year 1. The partnership agreement provides for annual salary allowances of $55,000 for Red and $45,000 for White. The partners share profits equally and losses in a 60/40 ratio. The partnership had earnings of $80,000 for year 1 before any allowance to partners. What amount of these earnings should be credited to each partner's capital account? a. Red: $40,000 ; White: $40,000 b. Red: $43,000 ; White: $37,000 c. Red: $44,000 ; White: $36,000 d. Red: $45,000 ; White: $35,000
Correct Answer: B) Red: $43,000 ; White: $37,000 Notes (b) Credits to partners' capital accounts are based upon earnings after allowance for interest, salary and bonus. The earnings before any allowance of $80,000 is reduced by the salary allowances of $100,000 and results in a loss of $20,000. The $20,000 loss is then distributed to the partners in relation to their profit and loss ratios as follows: Profit before allowance: $80,000 Salary Allowances: ($100,000) Loss after allowances: ($20,000) 60% of loss to Red: ($12,000) 40% of loss to White: ($8,000) Red: $55,000 - $12,000 = $43,000 White: $45,000 - $8,000 = $37,0oo It is important to note that the losses are distributed 60/40 while profits are shared equally.
12. Dunn and Grey are partners with capital account balances of $60,000 and $90,000, respectively. They agree to admit Zorn as a partner with a one-third interest in capital and profits, for an investment of $100,000, after revaluing the assets of Dunn and Grey. Goodwill to the original partners should be a. $0 b. $33,333 c. $50,000 d. $66,667
Correct Answer: C) $50,000 Notes (c) The requirement is to determine the amount of goodwill implied by Zorn's investment. Zorn is investing $100,000 for a 1/3 interest in the partnership. Therefore, $100,000 represents 1/3 of the value of the equity of the new partnership ($100,000 ÷ 1/3 = $300,000). The tangible portion of the equity is $250,000 ($60,000 + $90,000 + $100,000). Thus, the total implied goodwill is $50,000 ($300,000 - $250,000).
2. On April 30, year 1, Algee, Belger, and Ceda formed a partnership by combining their separate business proprietorships. Algee contributed cash of $50,000. Belger contributed property with a $36,000 carrying amount, a $40,000 original cost, and $80,000 fair value. The partnership accepted responsibility for the $35,000 mortgage attached to the property. Ceda contributed equipment with a $30,000 carrying amount, a $75,000 original cost, and $55,000 fair value. The partnership agreement specifies that profits and losses are to be shared equally but is silent regarding capital contributions. Which partner has the largest April 30, year 1 capital account balance? a. Algee. b. Belger. c. Ceda. d. All capital account balances are equal.
Correct Answer: C) Ceda. Notes (c) The requirement is to determine which partner has the largest capital account balance. Use the solutions approach to solve the problem. Algee: $50,000 Belger: $80,000 - $35,000 = $45,000 Ceda: $55,000 Each partner values his contribution to the partnership at its fair market value. The fair market value becomes the partner's balance in his capital account and is basis to the partnership under generally accepted accounting principles. Any liabilities assumed by the partnership, reduces the partners' capital balance by the amount assumed.
16. On June 30, year 1, the condensed balance sheet for the partnership of Eddy, Fox, and Grimm, together with their respective profit and loss sharing percentages were as follows: Assets, net of liabilities: $320,000 Eddy, capital (50%): $ 160,000 Fox, capital (30%): $ 96,000 Eddy, capital (20%): $ 64,000 Total: $320,000 Eddy decided to retire from the partnership and by mutual agreement is to be paid $180,000 out of partnership funds for his interest. Total goodwill implicit in the agreement is to be recorded. After Eddy's retirement, what are the capital balances of the other partners? I. Fox II. Grimm a. I. $84,000 ; II. $56,000 b. I. $102,000 ; II. $68,000 c. I. $108,000 ; II. $72,000 d. I. $120,000 ; II. $80,000
Correct Answer: C) I. $108,000 ; II. $72,000 Notes (c) Eddy is to be paid $180,000 for his 50% interest in the partnership. This implies that the net assets of the partnership are worth $360,000 ($180,000 ÷ 50%). Since the net assets are currently reported at $320,000, implied goodwill is $40,000 ($360,000 - $320,000). When goodwill is recorded, the goodwill account is debited and the partners' capital accounts are credited for their share of the goodwill. Therefore, the capital balances of Fox and Grimm are $108,000 and $72,000, as computed below. (image)
23. Jay & Kay partnership's balance sheet at December 31, year 1, reported the following: Total Assets: $100,000 Total Liabilities: $20,000 Jay, capital: $40,000 Kay, capital: $40,000 On January 2, year 2, Jay and Kay dissolved their partnership and transferred all assets and liabilities to a newly formed corporation. At the date of incorporation, the fair value of the net assets was $12,000 more than the carrying amount on the partnership's books, of which $7,000 was assigned to tangible assets and $5,000 was assigned to goodwill. Jay and Kay were each issued 5,000 shares of the corporation's $1 par value common stock. Immediately following incorporation, additional paid-in capital in excess of par should be credited for a. $68,000 b. $70,000 c. $77,000 d. $82,000
Correct Answer: D) $82,000 Notes (d) When a partnership incorporates, assets and liabilities must be revalued to their fair market values on the date of incorporation. In this case, the net assets have a fair market value of $92,000 ($80,000 + $12,000) and the amount to be credited to Additional Paid-in Capital is $82,000 ($92,000 - $10,000 par value).
