Chapter 15 SmartBook

Assume Linda retires from the MBL Partnership. Linda has a credit balance of $25,000 in her capital account, and all the partners agree to a buyout price of $35,000. Mike has a 20 percent interest and Betty has a 40 percent interest in the MBL Partnership's income and net assets. What is the amount of capital adjustment bonus given to Linda?

$10,000 reason: Capital adjustment bonus = $35,000 - $25,000 = $10,000.

On January 1, 20X1, Sarah and Laura formed SL Partnership. Both partners made capital contributions of $120,000. During the year, Laura's drawings account shows a withdrawal of $20,000 on June 1 and a withdrawal of $25,000 on September 30, and her capital account indicates an additional capital contribution of $40,000 on August 1. Assume that drawings are closed to the capital account and that drawings during the year are included in the calculation of average capital balances as of the date of withdrawal and now when they are closed to capital accounts. What is Laura's weighted-average capital balance for 20X1?

$118,750 Reason: Balance of $120,000 used for 5 months (Jan 1-May 31) = $120,000 × 5 = $600,000; Balance of $100,000 used for 2 months (Jun 1-Jul 31) = $100,000 × 2 = $200,000; Balance of $140,000 used for 2 months (Aug 1-Sep29) = $140,000 × 2 = $280,000; Balance of $115,000 used for 3 months (Sep 30-Dec 31) = $115,000 × 3 = $345,000; Weighted-average = ($600,000 + $200,000 + $280,000 + $345,000) ÷ 12 = $118,750.

Sophie and Andrew formed the SA Partnership, and their profit and loss-sharing ratio is 25:75. The book value of the partnership's net assets is $100,000. Sophie and Andrew decide to invite Tim to become a partner in their business with a 20 percent share for a capital contribution of only $10,000. What is the amount of bonus the original partners give to Tim?

$12,000 reason: Tim's share of the partnership's new net assets = ($100,000 + $10,000) × 20% = $22,000; Tim's contribution = $10,000; Bonus = $22,000 - $10,000 = $12,000.

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 reason: 80% of the total resulting capital = $500,000 + $50,000 = $550,000; Total resulting capital = $550,000/80% = $687,500; Cash contribution required by Susan = $687,500 - $550,000 = $137,500.

Sarah and Mark formed the SM Partnership. Their profit and loss-sharing ratio is 30:70, and the book value of the partnership's net assets is $180,000. The book value of the equipment is recorded at $80,000, but it has a fair value of $75,000. They decide to invite Robert to become a partner in their business and agree to recognize an impairment loss and write down the equipment to its fair value before Robert's admission. For a $50,000 investment, Robert will have a 20 percent interest in the partnership's net assets. What is Robert's share of the new partnership's total resulting capital, after the write-down?

$45,000 reason: Total capital = $180,000 + $50,000 - ($80,000 - $75,000) = $225,000; Robert's share = $225,000 × 20% = $45,000.

Robert and Steven formed RS Partnership. They invite Linda to join their business as a partner. Linda pays $10,000 for a 20% capital interest. If Linda's investment is equal to her proportionate book value, implying that the net assets are fairly valued, what is the partnership's book value after Linda's admission into the partnership?

$50,000 reason: Linda's contribution = $10,000; Linda's capital interest = 20%; Partnership's book value after Linda's admission = $10,000/20% = $50,000.

Maria invests $35,000 for a 10 percent capital interest in PQ Partnership. The partnership's total book value before Maria's admission is $255,000. What is the difference in Maria's proportionate book value and her investment in the partnership?

$6,000 reason: Partnership's book value = $255,000 + $35,000 = $290,000; Maria's share = $290,000 × 10% = $29,000; Maria's investment = $35,000; Difference = $35,000 - $29,000 = $6,000.

Which mathematical expression calculates the new partner's proportion of the partnership's net book value?

(Prior capital of existing partners + Investment of new partner) × Percentage of capital to new partner

Which of the following statements are true of partnerships?

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

Which of the following statements are true regarding the financial reporting requirements for partnerships?

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

Which of the following statements are true when an individual acquires a partnership interest directly from one or more of the existing partners?

- Cash or other assets are exchanged outside the partnership. - Reclassification of the partnership's total capital is necessary on its books.

Which of the following are included in a partnership's total resulting capital when the admission of a new partner is accounted for using the bonus method?

- Existing capital balances - New partner's investment

Which of the following statements are true about the revaluation method of accounting for the admission of a new partner? Assume that the new partner's investment is less than his/her proportionate share of the partnership's net assets.

- Goodwill or other intangible benefits brought in by the new partner should be recorded. - The book value of net assets should decrease.

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?

- Interest on capital balances - Salaries - Limits on withdrawals

Which of the following statements are true of the bonus method of accounting for a new partner's admission? Assume that the new partner's investment is more than his/her proportion of the partnership's book value.

- It increases the existing partners' capital accounts for their respective shares of the bonus received from the new partner. - It is a transfer of capital balances among the partners.

Which of the following statements are true about the revaluation method of accounting for a new partner's admission? Assume that the new partner's investment is more than their proportion of the partnership's book value.

- It records the unrecognized goodwill. - It increases the book values of existing net assets to their market values. - It results in increasing the existing partners' capital accounts

Identify true statements about small and medium-size entities (SMEs) and/or joint ventures.

- Many joint ventures are accounted as partnerships. - SMEs have no public accountability. - SMEs publish general-purpose financial statements for external users.

Identify the items affecting a statement of partners' capital.

- Net income distribution - Additional investment

Which of the following are included in the partnership's total resulting capital under the revaluation method for the admission of a new partner? Assume that the new partner's investment is more than the proportion of the partnership's book value

- New partner's investment - Amount of asset revaluation - Existing capital balances

Which of the following are included in the partnership's total resulting capital under the revaluation method for the admission of a new partner? Assume that the new partner's investment is more than the proportion of the partnership's book value.

- New partner's investment - Existing capital balances - Amount of asset revaluation

What are some of the reasons that a partnership may choose to use accrual accounting and GAAP to maintain their books?

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

Which of the following conclusions may be indicated when a new partner's investment is less than his or her proportionate share of the partnership's new net assets?

- The new partner brings additional value to the table associated with his or her expertise or skills. - The partnership's net assets are overvalued.

Which of the following are features of partnerships as per the UPA 1997, Section 202?

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

Which of the following are true when a new partner's investment is more than his or her proportion of the partnership's book value?

- The recognition of goodwill increases the partnership's total resulting capital. - Under the bonus method, the partnership's total resulting capital is the sum of the existing partnership's capital plus the new partner's investment. - The revaluation of an asset increases the partnership's total resulting capital.

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

Which of the following statements are true of general partners in a limited partnership?

- They have management responsibility. - They are personally liable for the partnership's obligations.

After operations and partners' withdrawals during 20X1 and 20X2, the book value of PR Partnership's net assets is $200,000 on January 1, 20X3. On that date, Paul and Ronald invite Margaret to become a partner in their business. The partnership's fair value is $300,000. Which of the following are potential reasons for the difference between the partnership's fair value and its book value?

- Understated assets - Unrecognized goodwill

Which of the following methods are available to account for the admission of a new partner when there is a difference between the new partner's investment and his or her proportion of the partnership's book value?

- Use the bonus method. - Revalue existing net assets.

A partnership agreement should include:

- a description of the business to be conducted by the partnership. - the duration of the partnership agreement. - the name of the partnership and the names of the partners.

The "entity concept" means

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

Changes in a partnership's membership occur with the

- addition of new partners - disassociation of present partners

Which of the following items are recorded in a partner's capital account?

- any withdrawals of capital - the partner's initial investment - any profit or loss distribution

Which of the following are true of total partnership capital?

- it is the total amount of the individual partner's capital account balances - it is the partnership's total assets minus total liabilities

Which of the following statements are true regarding the accounting errors found when an audit is performed on the change in partners?

- the partners' capital accounts should be adjusted based on the profit and loss ratio that existed in the period in which the errors were made - errors should be corrected

If a new partner's investment is less than the new partner's proportion of the partnership's book value, this could indicate that

- the partnership's prior net assets are overvalued on its books. - the new partner is contributing goodwill in addition to other assets.

Before recording the initial capital contribution, all partners must agree on

- the valuation of the net assets. - each partner's capital share.

Edward, Brian, and Ryan are partners in EBR Partnership, sharing profit and loss in the ratio of 20:50:30. On December 31, 20X3, Brian retires from EBR Partnership when his capital account has a balance of $50,000 after recording all increases in the partnership's net assets, including income earned up to his retirement date. All partners agree to $62,000 as the buyout price of Brian's partnership interest. Calculate the ratio in which the capital adjustment bonus to Brian is accounted from the remaining partner's capital accounts.

40:60 (Edward: Ryan) reason: Original profit sharing ratio = 20:50:30; Total of the remaining shares of the existing partners = 20 + 30 = 50; Edward's share in the new profit sharing ratio = 20/50 =40/100; Ryan's share in the new profit sharing ratio = 30/50 = 60/100; New ratio = 40:60.

Which of the following statements is true regarding the bonus method of accounting for a new partner's admission?

A portion of the new partner's investment may be recorded as a bonus to the existing partners.

Which of the following is a true statement about liability in a partnership?

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

Linda, a sole proprietor, is a financial consultant and has the following account balances on December 31, 20X0: Cash $4,000, Inventory $10,000, Equipment $20,000, Accumulated depreciation $4,000, and Liabilities $25,000. In preparation for the formation of a partnership (into which Linda will contribute all of her net assets) with a friend, John, Linda's business is audited, and its net assets are appraised. The audit and appraisal disclose that $2,000 of liabilities have not been recorded, inventory's market value is $18,000, and the equipment's fair value is $25,000. Linda and John prepare and sign a partnership agreement that includes all significant operating policies. John will contribute $10,000 cash for a one-third capital interest. Which of the following statements is true about the journal entry to record the formation of LJ Partnership by Linda and John's capital contributions?

Credit Linda's capital for $20,000; Credit John's capital for $10,000 Reason: Linda's capital = $14,000 + $18,000 + $25,000 - $25,000 - $2,000 - $10,000 = $20,000; John's capital = $10,000.

Kevin and George formed KG Partnership. On January 1, 20X3, Kevin and George invite Patricia to become a partner in their business. For a $22,000 investment, Patricia will have a 20 percent interest in the partnership. The partnership's total book value before Patricia's admission is $80,000. The original partners decide to use Patricia's admission to recognize the increase in their land's value. The land has a book value of $25,000, but a recent appraisal indicates that it has a market value of $33,000. What is the new partner's share of the partnership's total resulting capital?

$22,000 reason: Increase in the value of land = $33,000 - $25,000 = $8,000; Total capital of KGP Partnership = $80,000 + $8,000 + $22,000 = $110,000; Patricia's share of the new capital = $110,000 × 20% = $22,000.

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?

$23,500 Reason: Sandra's capital= $2,500 + $12,000 + $24,000 - $15,000 = $23,500.

On January 1, 20X3, Maria and Jeff invite Susan to become a partner in their business. The resulting partnership will be called MJS Partnership. Susan invests $25,000 for a 10 percent interest. The book value of the partnership's net assets before Susan's admission is $200,000. What is MJS Partnership's implied goodwill?

$25,000 reason: Estimated fair value based on new partner's investment = $25,000/10% = $250,000; Book value of net assets = $200,000 + 25,000 = $225,00. Implied goodwill = $250,000 - $225,000 = $25,000.

Joseph and Charles formed JC Partnership. Their profit and loss-sharing ratio is 30:70. On January 1, 20X3, Joseph and Charles invite Sandra to become a partner in their business. For a $50,000 investment, Sandra receives a 20 percent interest in the partnership. The partnership's total book value before Sandra's admission is $190,000. The original partners decide to use Sandra's admission to recognize the increase in their land's value. The land has a book value of $30,000, but a recent appraisal indicates that it has a market value of $40,000. What is the total resulting capital of JCS Partnership?

$250,000 reason: Revaluation of land to market value= $40,000 - $30,000 = $10,000; Total capital of JCS Partnership = $190,000 + $10,000 + $50,000 = $250,000.

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?

$26,000 Reason: Total interest on capital = 10% × ($100,000 + $50,000) = $15,000; Total salary = $3,000 + $6,000 = $9,000; Amount available after interest and salary = $50,000 - $15,000 - $9,000 = $26,000.

Mary and Paul formed MP Partnership. After operations and partners' withdrawals during 20X1 and 20X2, MP Partnership's net assets have a book value of $20,000. Their profit and loss-sharing ratio is 30:70. On January 1, 20X3, Mary and Paul invite Jennifer to become a partner in their business. The resulting partnership will be called MPJ Partnership. Jennifer purchases a 15% interest in the partnership's capital directly from Mary and Paul for a total cost of $10,000, paying $6,500 to Mary and $3,500 to Paul. Jennifer will have a capital credit of

$3,000 Reason: Jennifer's capital credit = $20,000 × 15% = $3,000.

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?

$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

On January 1, 20X3, Maria and Susan invite Jones to become a partner in their partnership. The resulting partnership will be called MSJ Partnership. On the reclassification of the partnership capital, the capital credit to Jones is only $4,500, although he paid $7,000 for a 20 percent interest. The implied fair value of the partnership is

$35,000 reason: Fair value of the partnership = $7,000/20% = $35,000.

Carol and Sandra formed the CS Partnership. The book value of the partnership's net assets before a new partner's admission is $255,000. The new partner, Lisa, agrees to purchase a 15% capital interest in the new net assets. If Lisa's investment is equal to her proportionate book value, implying that the net assets are fairly valued, what is Lisa's capital contribution?

$45,000 reason: Let Lisa's share = X; X = 15% × ($255,000 + X); 0.85X = $38,250; X=$45,000.

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. Reason: Amount available after interest and salary = $60,000 - $13,000 - $12,000 ($6,000 salary each) = $35,000; Profit distributed to David = $35,000 × 30/100 = $10,500; Profit distributed to Harry = $35,000 × 70/100 = $24,500.

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

For a $15,000 investment, Sharon purchased a 20% interest in a partnership. Which of the following journal entries records the admission of Sharon into the partnership? Assume the investment cost equals the new partner's proportion of the partnership's book value.

Debit Cash for $15,000; Credit Sharon, Capital for $15,000

Laura and Maria formed the LM Partnership, and their profit and loss-sharing ratio is 25:75. The partnership's existing total net assets are $120,000. Laura and Maria decide to invite Sarah to become a partner in their business with a 30 percent ownership interest for a capital contribution of only $40,000. Which of the following journal entries records Sarah's admission to the partnership?

Debit Cash for $40,000; Debit Laura, Capital for $2,000; Debit Maria, Capital for $6,000; Credit Sarah, Capital for $48,000 reason: Bonus = [($120,000 + $40,000) × 30%] - $40,000 = $8,000; Laura's share = $8,000 × 25% = $2,000; Maria's share = $8,000 × 75% = $6,000.

On January 1, 20X3, Karen and Sarah invite Jason to become a partner in their business. The resulting partnership will be called KSJ Partnership. Karen and Sarah's profit and loss-sharing ratio is 40:60 percent. The partnership's total book value before Jason's admission is $180,000. For a $50,000 investment, Jason will have a 20 percent interest in the partnership. Which of the following journal entries will record Jason's admission and the bonus payment to Karen and Sarah?

Debit Cash for $50,000; Credit Karen, Capital for $1,600; Credit Sarah, Capital for $2,400; Credit Jason, Capital for $46,000 reason: Total capital = $180,000 + $50,000 = $230,000; Jason's share = $230,000 × 20% = $46,000; Karen's bonus = ($50,000 - $46,000) × 40% = $1,600; Sarah's bonus = ($50,000 - $46,000) × 60% = $2,400.

Joseph and Charles formed JC Partnership. Their profit and loss-sharing ratio is 30:70. On January 1, 20X3, Joseph and Charles invite Sandra to become a partner in their business. The tangible capital of JC Partnership is $350,000 and the estimated fair value of JC Partnership's net assets is $364,000. Which of the following journal entries will recognize the unrecorded goodwill?

Debit Goodwill for $14,000: Credit Joseph, Capital for $4,200; Credit Charles, Capital for $9,800 reason: Goodwill = $364,000 - $350,000 = $14,000; Goodwill allocated to Joseph = $14,000 × 30% = $4,200; Goodwill allocated to Charles = $14,000 × 70% = $9,800.

Ronald, Laura, and Karen are partners in RLK Partnership, sharing profit and loss in the ratio of 20:40:40. On December 31, 20X3, Ronald retires from the partnership when the unrecognized goodwill is $40,000. All of the partners decide to record Ronald's share of the goodwill prior to his retirement. Which of the following journal entries recognizes Ronald's share of goodwill?

Debit Goodwill for $8,000; Credit Ronald, Capital for $8,000 reason: Ronald's share of goodwill= $40,000 × 20% = $8,000

Sandra and Laura formed SL Partnership. Their profit and loss-sharing ratio is 40:60. On January 1, 20X3, Sandra and Laura invite Steven to become a partner in their business. The original partners want to recognize the increase in their land's value prior to Steven's admission. The land has a $10,000 book value, but a recent appraisal indicates that it has a market value of $14,000. Which of the following journal entries will revalue the partnership land to market value?

Debit Land for $4,000; Credit Sandra, Capital for $1,600; Credit Laura, Capital for $2,400 reason: Increase in land's value = $14,000 - $10,000 = $4,000; Increase in Sandra's share = $4,000 × 40% = $1,600; Increase in Laura's share = $4,000 × 60% = $2,400.

During 20X1, Baker and Carter formed BC Partnership and earned $125,000 of revenue and incurred $80,000 in expenses. The revenue and expenses are closed to an income summary account. Identify the journal entry needed to close the revenue and expense accounts at the end of the year.

Debit Revenue for $125,000; Credit Expenses for $80,000; Credit Income Summary for $45,000 Reason: Amount to be credited in the income summary = $125,000 - $80,000 = $45,000.

Ronald, Laura, and Karen are partners in the RLK Partnership, sharing profits and losses in the ratio of 20:40:40. On December 31, 20X3, Ronald retires from RLK Partnership when his capital account has a $20,000 balance after recording all increases in the partnership's net assets, his share of income earned, and drawings up to his retirement date. The remaining partners agree to a buyout price of $35,000 for Ronald's partnership interest. Which of the following journal entries records Ronald's retirement?

Debit Ronald, Capital for $20,000; Debit Laura, Capital for $7,500; Debit Karen, Capital for $7,500; Credit Cash for $35,000 reason: Bonus = $35,000 - $20,000 = $15,000; Laura's share = $15,000 × 1/2 = $7,500; Karen's share = $15,000 × 1/2 = $7,500.

Ruth and Laura formed the RL Partnership. Their profit and loss-sharing ratio is 25:75. The equipment is recorded at a book value of $25,000, but has a fair value of only $21,000. Ruth and Laura decide to invite Jason to become a partner in their business and agree to recognize an impairment loss and write down the equipment to its fair value before Jason's admission. Which of the following journal entries recognize the impairment loss on equipment?

Debit Ruth, Capital for $1,000; Debit Laura, Capital for $3,000; Credit Equipment for $4,000 reason: Decrease in equipment's value = $25,000 - $21,000 = $4,000; Decrease in Ruth's share = $4,000 × 25% = $1,000; Decrease in Laura's share = $4,000 × 75% = $3,000.

During 20X1, Andrea and Nancy contributed $100,000 and $150,000, respectively, to form AN Partnership. The profit distribution agreement provides for a salary of $2,500 per month to each partner. Which of the following statements is true regarding the salary paid to each partner?

Each partner's salary is a form of profit distribution

On January 1, 20X1, Edward and Garcia formed EG Partnership. Both agreed to allocate profits first based on 10 percent of the weighted-average capital balances and then to allocate any remaining profit based on a 40:60 ratio. The weighted-average capital balance at the year-end for Edward was $120,000 and Garcia's was $80,000, resulting in a first profit allocation of $12,000 and $8,000 respectively. Calculate the partners' share in the distribution of the $40,000 profit on December 31, 20X1. (Hint: after the first profit allocation, the remaining profit to be allocated is $20,000.)

Edward's share = $20,000; Garcia's share = $20,000 Reason: Edward's share in the remaining profit = $20,000 × (4/10) = $8,000; Garcia's share in the remaining profit = $20,000 × (6/10) = $12,000; Edward's total share = $12,000 + $8,000 = $20,000; Garcia's total share = $8,000 + $12,000 = $20,000.

Evans and Laura formed EL Partnership. Their profit and loss-sharing ratio is 30:70. On January 1, 20X3, Evans and Laura invite Allen to become a partner in their business. The resulting partnership will be called ELA Partnership. Allen purchases a 10 percent interest in the partnership capital directly from Evans and Laura. Which of the following ratios is the revised profit-sharing ratio of the ELA Partnership?

Evans:Laura:Allen = 27:63:10 Reason: Evan's share = (100% - 10%) × 30% = 27%; Laura's share = (100% - 10%) × 70% = 63%; Allen's share = 10%.

True or false: Not-for-profit entities may be organized as partnerships.

False

Karen and Jason formed KJ Partnership. Their profit and loss-sharing ratio is 30:70. On January 1, 20X3, Karen and Jason invite Linda to become a partner in their business. The original partners decide to recognize the increase in their land's value prior to Linda's admission. The land has a book value of $7,000, but a recent appraisal indicates that it has a market value of $12,000. What is the increase in the original partners' capital due to the increase in the land's value?

Increase in Karen's capital = $1,500; Increase in Jason's capital = $3,500 reason: Increase in Karen's capital = ($12,000 - $7,000) × 30% = $1,500; Increase in Jason's capital = ($12,000 - $7,000) × 70% = $3,500.

Which of the following statements is true of a partnership?

It is an entity separate from the individual partners.

On January 1, 20X1, Jason and Lisa formed JL Partnership. JL Partnership earned a profit of $49,000 during the year. The partnership agreement provides for $3,000 in fixed "salary" allocations to Jason and $6,000 to Lisa. Any remainder is to be distributed in the profit and loss-sharing ratio of 30:70. Which of the following statements is true about the profit distribution to Jason and Lisa?

Lisa receives a total of $34,000 from the partnership during the year. Reason: Amount of profit after fixed allocation = $49,000 - ($3,000 + $6,000) = $40,000; Jason's share in the remaining profit = $40,000 × (30/100) = $12,000; Lisa's share in the remaining profit = $40,000 × (70/100) = $28,000; Jason's total share = $3,000 + $12,000 = $15,000; Lisa's total share = $6,000 + $28,000 = $34,000.

Match the different possible partnership situations with the appropriate accounting treatments.

New partners investment equals his or her proportion of the partnerships, net asset = the new partners capital credit equals his or her investment New partners investment is more than his, or her proportion of the partnerships, net asset = the increase on the revaluation of an asset is allocated to the existing partners in their profit and loss ratio New partners investment is less than his or her proportion of the partnerships in an asset = the new partners capital is credited for his or her percentage interest in the partnerships total resulting capital

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.

When additional units are provided to a partner obtaining new clients and providing industrial expertise, identify the most probable basis of income distribution.

Partnership units

Which of the following mathematical expressions measures the partnership's total capital in the revaluation method to account for a new partner's admission? Assume that the new partner's investment is less than his/her proportionate share of the partnership's net assets.

Partnership's total capital = Prior capital balances - Net asset valuation write-down + New partner's investment and new goodwill

Which of the following statements is true regarding profit distributions from partnerships to partners?

Profit distributions are recorded directly into the partner's capital accounts.

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

Which of the following is a reason for venture capital firms to require that a private partnership company comply with GAAP?

The GAAP-based financial statement can be compared with those of other public companies.

Identify a true statement about tangible assets contributed by a partner to a partnership.

The tangible assets contributed by a partner become partnership property.

In partnership profit distribution, a bonus is

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

The partnership purchases the disassociated partner's interest in the partnership for a

buyout price

A partnership allows several individuals to ______ in a particular business venture.

combine their talents and skills

If an entity does not have a formal partnership agreement, Section 401 of the UPA 1997 indicates that all partners should share profits and losses

equally.

If a new partner invests less than his or her proportionate share of a partnership's book value, the additional value may be viewed a

goodwill

A partner in a limited liability partnership

has limited legal liability.

IFRS for small and medium-size enterprises mandate ______ in comparison to conventional IFRS

less detail and fewer disclosures

A partner's capital account has a debit balance when the

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

partners.

An excess of investment over the respective book value of the partnership interest indicates that the

partnership's prior net assets are undervalued

In accounting for admission of a new partner, a bonus may be assigned to existing partners for admission of a new partner when the amount invested by

the new partner is more than the new partner's proportionate book value.

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 more than the new partner's proportion of the partnership's book value

In accounting for a new partner's admission, the existing partners are assigned a bonus when the investment value of

the new partner's investment is more than the new partners' proportionate share of book value.

According to the proprietary concept of owner's equity,

the proprietor invests capital and personal services in pursuit of income.

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 specific accounting methods used