Partnership Accounting Final
Hayes and Jenkins formed a partnership, each contributing assets to the business. Hayes contributed inventory with a current fair value in excess of its carrying amount. Jenkins contributed real estate with a carrying amount in excess of its current fair value. At what amount should the partnership record each of the following assets? Inventory/Real Estate A. Carrying amount/Fair value B. Fair value/Fair value C. Carrying amount/Carrying amount D. Fair value/Carrying amount
Answer B is correct. Fair value/Fair value When partners invest nonmonetary assets in the business, those assets should be recorded at their current fair value at the date they are contributed.
Gow and Cubb formed a partnership on March 1 and contributed the following assets: Gow- Cash $80,000 Cubb- Equipment (fair value) $50,000 The equipment was subject to a chattel mortgage of $10,000 that was assumed by the partnership. The partners agreed to share profits and losses equally. Cubb's capital balance at March 1 should be a. $40,000 b. $45,000 c. $60,000 d. $50,000
Answer A is correct. $40,000 Cubb's capital balance should represent the fair value of the assets contributed. The equipment is measured net of the mortgage for this purpose. Thus, Cubb's capital balance should be $40,000 ($50,000 fair value of equipment - $10,000 mortgage assumed by the partnership).
The Low and Rhu partnership agreement provides special compensation to Low for managing the business. Low receives a bonus of 15% of partnership net income before salary and bonus, and also receives a salary of $45,000. Any remaining profit or loss is to be allocated equally. During the current year, the partnership had net income of $50,000 before the bonus and salary allowance. As a result of these distributions, Rhu's equity in the partnership will a. decrease b. Not change. c. Increase. d. Decrease the same as Low's.
Answer A is correct. Decrease As indicated below, the special compensation provided by the partnership agreement to Low for managing the business results in initial distributions of a $7,500 bonus ($50,000 × 15%) and salary of $45,000. The effect is a residual loss of $2,500 ($52,500 initial distribution to Low - $50,000 net income before bonus and salary). Because the remaining (residual) profit or loss is to be allocated equally, a $1,250 loss ($2,500 × 50%) is allocated to each partner. Thus, Low's equity in the partnership will increase by $51,250 and Rhu's will decrease by $1,250. Low Bonus-$ 7,500 Salary- 45,000 Residual-(1,250) Rhu Residual-(1,250) Change in equity $51,250/$(1,250)
When Mill retired from the partnership of Mill, Yale, and Lear, the final settlement of Mill's interest exceeded Mill's capital balance. Under the bonus method, the excess A. Reduced the capital balances of Yale and Lear. B. Was recorded as an expense. C. Had no effect on the capital balances of Yale and Lear. D. Was recorded as goodwill.
Answer A is correct. Reduced the capital balances of Yale and Lear. The bonus method reduces the capital accounts of the other partners because the bonus, that is, the excess of settlement value over the retiring partner's capital balance, is deemed to be paid to the withdrawing partner by the remaining partners.
On February 1, Tory began a service proprietorship with an initial cash investment of $2,000. The proprietorship provided $5,000 of services in February and received full payment in March. The proprietorship incurred expenses of $3,000 in February, which were paid in April. During March, Tory drew $1,000 against the capital account. In the proprietorship's financial statements for the 2 months ended March 31, prepared under the cash-basis method of accounting, what amount should be reported as capital? A. $6,000 B. $7,000 C. $3,000 D. $1,000
Answer A is correct. $6,000 Under the cash basis, the capital on March 31 is $6,000 ($2,000 beginning capital + $5,000 payment received in March - $1,000 withdrawal).
Beck, the active partner in Beck & Cris, receives an annual bonus of 25% of partnership net income after deducting the bonus. For the year ended December 31, partnership net income before the bonus amounted to $300,000. Beck's bonus for the year should be A. $75,000 B. $60,000 C. $56,250 D. $62,500
Answer B is correct. 60,000 Calculating the bonus requires formulating an equation with one unknown. The bonus (B) is equal to 25% of net income ($300,000) minus the bonus. B= .25(NI - B) B= .25($300,000 - B) B= $75,000 - .25B 1.25B=$75,000 B= $60,000
On January 2, Smith purchased the net assets of Jimmy's Cleaning, a sole proprietorship, for $350,000 and commenced operations of Spiffy Cleaning, a sole proprietorship. The assets had a carrying amount of $375,000 and a market value of $360,000. In Spiffy's cash-basis financial statements for the year ended December 31, Spiffy reported revenues in excess of expenses of $60,000. Smith's distributions during the year were $20,000. In Spiffy's financial statements, what amount should be reported as Capital -- Smith? A. $390,000 B. $400,000 C. $415,000 D. $410,000
Answer A is correct $390,000. In accordance with the historical-cost principle, the assets should be recorded at their $350,000 cost. Given that Spiffy had a net cash inflow of $40,000 ($60,000 excess of revenues over expenses - $20,000 of drawings), Smith's capital balance should be reported as $390,000 ($350,000 + $40,000).
Quinn, Rob, Sam, and Tod are partners sharing profits and losses equally. The partnership is insolvent and is to be liquidated. The status of the partnership and each partner is as follows: Partnership Capital Balance Personal Assets (Exclusive of Partnership Interest) Personal Liabilities (Exclusive of Partnership Interest) Quinn $ 15,000/$100,000/$40,000 Rob 10,000/30,000/60,000 Sam (20,000)/80,000/5,000 Tod (30,000)/1,000/28,000 Total Partnership Capital Balance- (25,000) Assuming traditional partnership law applies, the partnership creditors A. Will not be paid in full regardless of how they proceed legally because the partnership assets are less than the partnership liabilities. B. Will have to share Rob's interest in the partnership on a pro rata basis with his personal creditors. C. Must first seek recovery against Sam because he is solvent personally and he has a negative capital balance. D. Have first claim to the partnership assets before any partner's personal creditors have rights to the partnership assets.
D. Have first claim to the partnership assets before any partner's personal creditors have rights to the partnership assets. Traditional partnership law follows the legal concept of marshaling of assets. Accordingly, the assets of the partnership are made available first to the partnership creditors. Only after their claims are fully satisfied will the personal creditors of the partners be able to proceed against partnership assets. Similarly, the personal creditors of each general partner have first claim to the personal assets of that general partner. Bankruptcy law, however, alters the marshaling of assets concept with regard to the personal assets of a bankrupt partner when the partnership is also bankrupt. The trustee of a bankrupt partnership shares pro rata with the other general unsecured creditors of a bankrupt general partner. The Revised Uniform Partnership Act (RUPA) reflects this provision of the bankruptcy law.
During the current year, Young and Zinc maintained average capital balances in their partnership of $160,000 and $100,000, respectively. The partners receive 10% interest on average capital balances, and residual profit or loss is divided equally. Partnership profit before interest was $4,000. By what amount should Zinc's capital balance change for the year? A. $2,000 increase. B. $11,000 decrease. C. $12,000 increase. D. $1,000 decrease.
Answer D is correct. $1,000 decrease. The partners are to receive 10% interest and then split the residual profit or loss. Because interest exceeds partnership profit before interest, the residual loss is $22,000 {[($160,000 + $100,000) × 10%] - $4,000}. Zinc's capital balance is increased by $10,000 ($100,000 × 10%) and decreased by $11,000 ($22,000 loss × 50%), a net decrease of $1,000.
On June 30, the condensed balance sheet for the partnership of Eddy, Fox, and Grimm, together with their respective profit and loss sharing percentages, was as follows: Assets, net of liabilities $320,000 Eddy, capital (50%) $160,000 Fox, capital (30%) 96,000 Grimm, 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? Fox/Grimm A. $84,000/$56,000 B. $120,000/$80,000 C. $102,000/$68,000 D. $108,000/$72,000
Answer D is correct. Fox 108/Grimm 72 The $180,000 paid to Eddy represents Eddy's 50% interest in the partnership. The total fair value of the partnership is therefore $360,000 ($180,000 ÷ 50%), and the goodwill implicit in the retirement agreement is $40,000 ($360,000 total value - $320,000 net assets prior to the recording of goodwill). This $40,000 should be allocated 50% ($20,000) to Eddy, 30% ($12,000) to Fox, and 20% ($8,000) to Grimm. Fox's capital balance following the recording of goodwill is $108,000 ($96,000 + $12,000), and Grimm's is $72,000 ($64,000 + $8,000).
Which of the following business enterprises are distinct legal entities separate from their owners? Corporations/Sole Proprietorships/Partnerships A. No/No/No B. Yes/Yes/No C. Yes/Yes/Yes D. Yes/No/Yes
Answer D is correct. Y/N/Y Sole proprietorships are business entities owned by individuals. A sole proprietorship is not a legal entity in and of itself. It is an extension of its owner. A sole proprietorship has unlimited liability for business debts. Corporations and partnerships, however, have a distinct legal existence.
Max Blau and Harry Rubi are partners who share profits and losses in the ratio of 6:4, respectively. On May 1, their respective capital accounts were as follows: Blau- $60,000 Rubi- 50,000 On that date, Joe 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. $46,000 b. $50,000 c. $60,000 d. $54,000
Answer D is correct. 54000 Following the entrance of Lind, the partnership began with total capital of $150,000, the sum of the capital balances of Blau and Rubi and Lind's investment. Thus, no goodwill was recognized. Lind received a one-third interest, and his capital balance must be credited for $50,000 ($150,000 × 33 1/3). But Lind contributed only $40,000, so the $10,000 bonus ($50,000 - $40,000) must be allocated to the existing partners in the ratio of 6:4. The result will be debits to the capital accounts of Blau and Rubi of $6,000 ($10,000 × 60%) and $4,000 ($10,000 × 40%), respectively. Consequently, immediately after Lind's admission, Blau's capital is $54,000 ($60,000 - $6,000).
The Flat and Iron partnership agreement provides for Flat to receive a 20% bonus on profits before the bonus. Remaining profits and losses are divided between Flat and Iron in the ratio of 2 to 3, respectively. Which partner has a greater advantage when the partnership has a profit and when it has a loss? Profit/Loss A. Iron/Iron B. Flat/Iron C. Iron/Flat D. Flat/Flat
Answer D is correct. Flat/Flat When the partnership has a loss, Iron is allocated 60% and Flat 40%. Hence, Flat has the advantage when the partnership has a loss. When the partnership has a profit, Flat receives 20% plus 40% of the remaining 80%, a total of 52% [20% + (40% × 80%)]. Thus, Flat also has the advantage in this situation.
Which of the following would be reported in the income statement of a proprietorship? Proprietor's Draw/Depreciation a. Yes/Yes b. No/No c. Yes/No d. No/Yes
Answer D is correct. no/yes Depreciation expense is an expense of the proprietorship and should be recorded on the income statement.
The following condensed balance sheet is presented for the partnership of Axel, Barr, and Cain, who share profits and losses in the ratio of 4:3:3, respectively: Cash $100,000 Other assets 300,000 Total $400,000 Liabilities-$150,000 Axel, capital-40,000 Barr, capital-180,000 Cain, capital 30,000 Total $400,000 The partners agreed to dissolve the partnership after selling the other assets for $200,000. Upon dissolution of the partnership, Axel should have received A. $0 B. $40,000 C. $150,000 D. $60,000
Answer A is correct. $0 When the other assets with a carrying amount of $300,000 were sold for $200,000, a loss of $100,000 resulted. When this loss is distributed in the ratio of 4:3:3 to the capital balances, Axel's and Cain's capital balances are eliminated. Thus, upon dissolution of the partnership, neither Axel nor Cain will receive any cash. Of the $300,000 available ($100,000 cash on hand + $200,000 proceeds from the sale of other assets), $150,000 will be distributed to creditors (liabilities) and $150,000 will be distributed to Barr. Axel/Barr/Cain Beginning capital $ 40,000/$180,000/$30,000 Loss on sale (40,000)/(30,000)/(30,000) Distribution of cash $0/$150,000/$0
The following condensed balance sheet is presented for the partnership of Smith and Johnson, who share profits and losses in the ratio of 60:40, respectively: Other assets- $450,000 Smith, loan- 20,000 $470,000 Accounts payable-$120,000 Smith, capital-195,000 Johnson, capital-155,000 $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. $195,000 D. $159,000
Answer A is correct. $136,000 When the partnership sells the other assets, it must recognize a loss of $65,000 ($450,000 - $385,000). This loss must be allocated to the partners based on their loss ratio of 60:40. Thus, Smith's capital account is reduced to $156,000 [$195,000 - ($65,000 × 60%)] and Johnson's to $129,000 [$155,000 - ($65,000 × 40%)]. The accounts payable are then paid, leaving assets of $265,000. Finally, the balance of the loan is subtracted from Smith's capital account balance, and each partner receives the balance in his/her capital account. Thus, Smith should receive $136,000 in cash ($156,000 - $20,000).
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. $19,000 B. $16,000 C. $12,000 D. $15,000
Answer A is correct. $19,000 This transaction is to be accounted for under the bonus method. The incoming partner invests $15,000 fair value of land for a 20% interest in the capital of the new partnership. Hence, the incoming partner's capital account should be credited for 20% of the total capital following the investment. The total capital following the investment by the new partner equals $95,000 ($60,000 + $20,000 + $15,000). Because 20% of this amount is $19,000, Grant's capital account should be credited for $19,000.
Abel and Carr formed a partnership and agreed to divide initial capital equally, even though Abel contributed $100,000 and Carr contributed $84,000 in identifiable assets. Under the bonus approach to adjust the capital accounts, Carr's unidentifiable asset should be debited for A. $8,000 B. $0 C. $16,000 D. $46,000
Answer B is correct. 0 The goodwill and the bonus methods are two means of adjusting for differences between the carrying amount and the fair value of partnership net assets. Under the goodwill method, assets are revalued. Under the bonus method, assets are not revalued. Instead, adjustments are made to partnership capital accounts. Consequently, total partnership capital differs between the two methods, and an unidentifiable asset may be debited under the goodwill but not the bonus method.
The partnership agreement of Axel, Berg & Cobb provides for the year-end allocation of net income in the following order: First, Axel is to receive 10% of net income up to $100,000 and 20% over $100,000. Second, Berg and Cobb are to receive 5% each of the remaining income over $150,000. The balance of income is to be allocated equally among the three partners. The partnership's net income for the year was $250,000 before any allocations to partners. What amount should be allocated to Axel? a. $106,667 b. $108,000 c. $110,000 d. $101,000
Answer B is correct. 108,000 Axel initially receives $40,000 {($100,000 × 10%) + [($250,000 - $100,000) × 20%]}. The remaining income is $210,000 ($250,000 - $40,000). Of this amount, Berg and Cobb receive $3,000 each [($210,000 - $150,000) × 5%], a total of $6,000. The balance is allocated equally [($250,000 - $40,000 - $6,000) ÷ 3 = $68,000]. Thus, Axel receives a total of $108,000 ($40,000 + $68,000).
On May 1, Cobb and Mott formed a partnership and agreed to share profits and losses in the ratio of 3:7, respectively. Cobb contributed a parcel of land that cost $10,000. Mott contributed $40,000 cash. The land was sold for $18,000 on May 1 immediately after formation of the partnership. What amount should be recorded in Cobb's capital account on formation of the partnership? A. $17,400 B. $18,000 C. $10,000 D. $15,000
Answer B is correct. 18000 The capital contributed by Cobb should be recorded at its fair value on the date of contribution. The land was sold for $18,000 on the day it was contributed to the partnership. Accordingly, this price is a reasonable measure of the fair value at that date. Cobb's capital account should therefore be credited for $18,000.
The December 31, Year 7, condensed balance sheet of Moore and Daughter, a partnership, follows: Current assets-$280,000 Equipment (net-)260,000 $540,000 Liabilities-$140,000 Moore and Daughter, capital-400,000 $540,000 Fair values at December 31, Year 7, are as follows: Current assets-$320,000 Equipment- 420,000 Liabilities- 140,000 On January 2, Year 8, Moore and Daughter was incorporated, with 10,000 shares of $10 par value common stock issued. How much should be credited to additional contributed capital? A. $600,000 B. $500,000 C. $640,000 D. $400,000
Answer B is correct. 500,000 When assets of a partnership are contributed to a corporation in exchange for par value common stock, the contributed capital account should be credited for the fair value of the net assets. The fair value of the net assets equals $600,000 ($320,000 + $420,000 - $140,000). Of this amount, $100,000 (10,000 shares × $10 par value) should be credited to the capital stock account, with the remaining $500,000 credited to additional contributed capital.
Cor-Eng Partnership was formed on January 2 of the current year. Under the partnership agreement, each partner has an equal initial capital balance accounted for under the goodwill method. Partnership net income or loss is allocated 60% to Cor and 40% to Eng. To form the partnership, Cor originally contributed assets costing $30,000 with a fair value of $60,000 on January 2 of the current year, while Eng contributed $20,000 in cash. Drawings by the partners during the current year totaled $3,000 by Cor and $9,000 by Eng. The partnership's current-year net income was $25,000. Eng's initial capital balance in the partnership is a. $40,000 b. $60,000 c. $25,000 d. $20,000
Answer B is correct. 60,000 If $60,000 (the fair value of Cor's original contribution) is 50% of the partnership capital, the total initial capital is $120,000, and goodwill of $40,000 should be recognized ($120,000 - $60,000 - $20,000 cash contributed by Eng). Thus, Eng's initial capital is $60,000.
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. Contributing partner's tax basis. b. Fair value at the date of contribution. c. Assessed valuation for property tax purposes. d. Contributing partner's original cost.
Answer B is correct. Fair value at the date of contribution. The capital account should be credited for the current fair value of the assets at the date of the contribution.
The partnership agreement of Donn, Eddy, and Farr provides for annual distribution of profit or loss in the following sequence: 1. Donn, the managing partner, receives a bonus of 10% of profit. 2. Each partner receives 6% interest on average capital investment. 3. Residual profit or loss is divided equally. Average capital investments for the current year were Donn/$80,000 Eddy/$50,000 Farr/$30,000 What portion of the $100,000 partnership profit for the year should be allocated to Farr? a. $29,800 b. $34,933 c. $28,600 d. $41,600
Answer C is correct. The partnership agreement provides for a bonus to one partner and payment of interest on each partner's average capital investment. The bonus and the interest must be allocated and included in the calculation of the residual profit or loss. Donn's bonus is $10,000 ($100,000 × 10%), and total interest is $9,600 ($160,000 total capital × 6%). Hence, the residual profit following the allocation of bonus and interest is $80,400 ($100,000 partnership profits - $10,000 bonus - $9,600 of interest on capital). Sharing the residual profit equally among the partners results in an allocation to Farr of $28,600 [($30,000 × 6%) interest + ($80,400 ÷ 3) residual profit]. Donn/Eddy/Farr Bonus-Donn $10,000 Interest on capital 4,800/3,000/1,800 Residual 26,800/26,800/26,800 Totals $41,600/$29,800/$28,600
On January 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 $300,000 Liabilities and Capital Liabilities $60,000 Cobb, capital 80,000 Davis, capital 90,000 Eddy, capital 70,000 $300,000 On January 15, 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? Cobb/Davis/Eddy A. $60,000/$36,000/$24,000 B. $40,000/$45,000/$35,000 C. $15,000/$51,000/$44,000 D. $55,000/$33,000/$22,000
Answer C is correct. $15,000/$51,000/$44,000 When the liquidation of a partnership proceeds over time, a conservative approach must be taken to the distribution of assets (cash) to partners. This conservative approach incorporates three steps. In the first step, a gain or loss realized from the actual sale of assets ($120,000 - $150,000 = $30,000 loss) is allocated to the partners' capital accounts in accordance with the profit-and-loss ratio. In the second step, remaining assets are assumed to have a fair value of $0, which results in an assumed loss equal to their carrying amount. For this partnership, an assumed loss of $100,000 ($250,000 of other assets - $150,000 of other assets sold) results. This assumed loss is also allocated to the partners' accounts in accordance with the profit-and-loss ratio. The third step is taken only if at least one of the partners' capital accounts has a deficit balance. If a deficit results, the conservative approach requires allocation of the deficit to the remaining partners' accounts. This step is not necessary in this example. The final balances in the partnership accounts equal the amounts of cash that may be distributed in a safe installment payment schedule.
Presented below is the condensed balance sheet of the partnership of Kane, Clark, and Lane, who share profits and losses in the ratio of 6:3:1, respectively: Cash- 85,000 Other assets- 415,000 $500,000 Liabilities- $80,000 Kane, capital- 252,000 Clark, capital- 126,000 Lane, capital- 42,000 $500,000 Assume that the partners agree to sell to Bayer 20% of their respective capital and profit and loss interests for a total payment of $90,000. The payment by Bayer is to be made directly to the individual partners. The partners agree that implied goodwill is to be recorded prior to the acquisition by Bayer. What are the capital balances of Kane, Clark, and Lane, respectively, after the acquisition by Bayer? A. $198,000; $99,000; $33,000 B. $270,000; $135,000; $45,000 C. $216,000; $108,000; $36,000 D. $201,600; $100,800; $33,600
Answer C is correct. $216,000; $108,000; $36,000 If Bayer is to purchase a 20% interest in the partnership for $90,000, the partnership is estimated to be worth $450,000 ($90,000 ÷ 20%). But the sum of the original capital balances is only $420,000. Because goodwill is to be recognized prior to the purchase, $30,000 must be allocated to the capital accounts of the original partners. This amount will be shared in the profit and loss ratio of 6:3:1. The final step is to debit the capital accounts of the original partners for 20% of their respective interests and to credit the new partner's account for $90,000. Kane/Clark/Lane/Bayer Beginning capital $252/$126/$42/X Goodwill 18/9/3/X TOTAL $270/$135/$45 Minus 20% sold (54)/(27)/(9)/90 Ending capital $216/$108/$36/$90
The following condensed balance sheet is presented for the partnership of Alfa and Beda, who share profits and losses in the ratio of 60:40, respectively: Cash-45,000 Other assets- 625,000 Beda, loan- 30,000 $700,000 Accounts payable- 120,000 Alfa, capital- 348,000 Beda, capital- 232,000 $700,000 Instead of admitting a new partner, Alfa and Beda decide to liquidate the partnership. If the other assets are sold for $500,000, what amount of the available cash should be distributed to Alfa? A. $255,000 B. $348,000 C. $273,000 D. $327,000
Answer C is correct. $273,000 When the partnership sells the other assets, it must recognize a loss of $125,000 ($625,000 - $500,000). This loss must be allocated to the partners based on their loss ratio of 60:40. Thus, Alfa's capital balance is reduced to $273,000 [$348,000 - ($125,000 × 60%)], and Beda's capital balance is reduced to $182,000 [$232,000 - ($125,000 × 40%)]. The accounts payable are then paid, leaving assets of $455,000. Finally, the balance of the loan is subtracted from Beda's capital balance, and each partner receives the balance in his/her capital account. Thus, Alfa should receive $273,000 in cash.
Roberts and Smith drafted a partnership agreement that lists the following assets contributed at the partnership's formation: Contributed by Roberts/Smith Cash $20,000/$30,000 Inventory --/15,000 Building --/40,000 Furniture and equipment 15,000/-- 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? Roberts/Smith A. $60,000/$60,000 B. $35,000$85,000 C. $35,000/$75,000 D. $55,000/$55,000
Answer C is correct. $35,000/$75,000 The balances should reflect the fair values of the assets contributed. The building should be valued net of the mortgage. Hence, the capital balances for Roberts and Smith are $35,000 ($20,000 + $15,000) and $75,000 ($30,000 + $15,000 + $40,000 - $10,000), respectively.
Jay & Kay partnership's balance sheet at December 31, Year 3, reported the following: Total assets- $100,000 Total liabilities- 20,000 Jay, capital- 40,000 Kay, capital- 40,000 On January 2, Year 4, 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. 68000 b. 77000 c. 82000 d. 70000
Answer C is correct. $82,000 The net assets of the partnership, including goodwill, are transferred at fair value. Hence, the $92,000 fair value of the net assets ($100,000 carrying amount of partnership assets + $12,000 excess of fair value over carrying amount - $20,000 liabilities) measures the amount credited to contributed capital. The credit to common stock is $10,000 (5,000 shares × $1 par × 2), and the credit to additional paid-in capital is $82,000 ($92,000 - $10,000).
In the Adel-Brick partnership, Adel and Brick had a capital ratio of 3:1 and a profit and loss ratio of 2:1, respectively. The bonus method was used to record Colter's admittance as a new partner. What ratio would be used to allocate, to Adel and Brick, the excess of Colter's contribution over the amount credited to Colter's capital account? A. Adel and Brick's new relative capital ratio. B. Adel and Brick's new relative profit and loss ratio. C. Adel and Brick's old profit and loss ratio. D. Adel and Brick's old capital ratio.
Answer C is correct. Adel and Brick's old profit and loss ratio. The bonus method makes no changes in existing asset accounts. Capital accounts of existing partners are adjusted in accordance with the old profit and loss ratio to reflect the bonus. The entry will be to debit cash (or the fair value of the property) contributed and to credit Colter's capital account for a lesser amount. The excess will be credited in the ratio of 2:1 to the original partners' capital balances.
The partnership of Metcalf, Petersen, and Russell shared profits and losses equally. When Metcalf withdrew from the partnership, the partners agreed that there was unrecorded goodwill in the partnership. Under the bonus method, the capital balances of Petersen and Russell were a. Each reduced by one-third of the total amount of the unrecorded goodwill. b. Not affected. c. Each reduced by one-half of Metcalf's share of the total amount of the unrecorded goodwill. d. Each reduced by one-half of the total amount of the unrecorded goodwill.
Answer C is correct. Each reduced by one-half of Metcalf's share of the total amount of the unrecorded goodwill. If the partnership had unrecorded goodwill, Metcalf would have received the balance in her capital account plus one-third of the unrecorded goodwill. Under the bonus method, revaluation of assets to reflect goodwill is not permitted. Hence, given that the partners shared profits and losses equally, the payment to Metcalf of one-third of the unrecorded goodwill would have resulted in equal reductions of the capital balances of the remaining partners, that is, in the payment of a bonus to Metcalf. Thus, one-sixth [(1 ÷ 3) × (1 ÷ 2)] of the unrecorded goodwill would have been subtracted from both Petersen's and Russell's accounts.
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 current year ended December 31 is as follows: Balance, January 1- $140,000 Additional investment, July 1- 40,000 Withdrawal, August 1- (15,000) Balance, December 31- 165,000 What amount of interest should be credited to Simm's capital account for the current year? A. $16,500 B. $17,250 C. $15,250 D. $15,375
Answer D is correct. $15,375 Simm's balance was $140,000 for 6 months, $180,000 for 1 month, and $165,000 for 5 months. Consequently, the weighted-average balance was $153,750, as shown below, and interest was $15,375 ($153,750 × 10%). $140,000 × (6 ÷ 12)=$ 70,000 $180,000 × (1 ÷ 12)=15,000 $165,000 × (5 ÷ 12)=68,750 =$153,750
presented below is the condensed balance sheet for the partnership of Lever, Polen, and Quint, who share profits and losses in the ratio of 4:3:3, respectively. Cash- 90,000 Other assets- 830,000 Lever, loan- 20,000 $940,000 Accounts payable- 210,000 Quint, loan- 30,000 Lever, capital- 310,000 Polen, capital- 200,000 Quint, capital- 190,000 $940,000 Assume that the assets and liabilities are fairly valued on the balance sheet and that the partnership decides to admit Fahn as a new partner with a 20% interest. No goodwill or bonus is to be recorded. How much should Fahn contribute in cash or other assets? a. $177,500 b. $142,000 c. $140,000 d. $175,000
Answer D is correct. $175,000 The carrying amount of the partnership is the sum of the capital accounts of Lever, Polen, and Quint, i.e., $700,000. If Fahn is to have a 20% interest without recording goodwill or bonus, the current sum of the capital accounts will be equal to 80% of the carrying amount after the admission of Fahn. Dividing the original carrying amount of $700,000 by 80% yields the new carrying amount after Fahn's admission ($875,000). The difference between the respective carrying amounts is the amount the new partner must contribute. New partnership ($700,000 ÷ 80%) $875,000 Old partnership (700,000) Fahn's contribution $175,000
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. $66,667 D. $50,000
Answer D is correct. $50,000 If a one-third interest is worth an investment of $100,000, the fair value of the partnership must be $300,000 ($100,000 ÷ 33 1/3%). The total of the existing capital balances and Zorn's investment is $250,000 ($60,000 + $90,000 + $100,000). Thus, goodwill is $50,000 ($300,000 - $250,000). The entry will be to debit cash (or property at fair value) for $100,000 and goodwill for $50,000, and to credit Zorn's capital balance for $100,000 and the capital balances of Dunn and Grey for a total of $50,000.
Avers and Smith formed a partnership on July 1. Avers contributed cash of $50,000. Smith contributed property with a $36,000 carrying amount, a $40,000 original cost, and a fair value of $80,000. The partnership assumed the $35,000 mortgage attached to the property. What should Smith's capital balance be on July 1? a. $40,000 b. $80,000 c. $36,000 d. $45,000
Answer D is correct. 45000 At the formation of a partnership, a partner's capital balance equals the fair value of the assets contributed minus any third-party interests, such as mortgages. The fair value of the property contributed by Smith is $80,000. Reducing the fair value of the property by the mortgage attached to the property gives Smith a capital balance of $45,000 ($80,000 - $35,000).