Chapter 15: Partnerships

The partnership agreement of Flynn, Gant, and Hill allows Gant a bonus of 10% of income after the bonus, salaries of $30,000 per partner and interest of 6% on average capital balances of $120,000, $150,000, and $180,000 for Flynn, Gant, and Hill, respectively. The amount of Gant's bonus, assuming income before bonus, salaries, and interest of $315,000, is a. $18,000. b. $22,000. c. $19,800. d. $31,500.

a. $18,000.

Newlin, Vick, and Morton are partners in a plumbing service. The business reported net income of $108,000 for 2011. The partnership agreement provides that profits and losses are to be divided equally after Vick receives a $60,000 salary, Morton receives a $24,000 salary, and each partner receives 10% interest on his beginning capital balance. Beginning capital balances were $40,000 for Newlin, $48,000 for Vick, and $32,000 for Morton. Vick's share of partnership income for 2011 is: a. $68,800. b. $36,000. c. $31,200. d. $27,200.

a. $68,800.

Bell and Carson are partners who share profits and losses 3:7. The capital accounts on January 1, 2011, are $120,000 and $160,000, respectively. Elston is to be admitted as a partner with a one-fourth interest in the capital and profits and losses by investing $80,000. Goodwill is not to be recorded. The capital balances after admission should be: a. Bell, $117,000; Carson, $153,000; Elston, $90,000 b. Bell, $120,000; Carson, $160,000; Elston, $90,000 c. Bell, $123,000; Carson, $160,000; Elston, $80,000 e. Bell, $120,000; Carson, $167,000; Elston, $80,000

a. Bell, $117,000; Carson, $153,000; Elston, $90,000

Which of the following statements is false regarding the formation of a partnership? a. Partners may only contribute cash to the partnership which, then, purchases all of its assets. b. Capital Accounts are credited to represent the claim of the partners to the net assets of the partnership. c. The Capital Account for an individual partner does not need to be equal to the amount that the partner has contributed to the partnership. d. All of the above are true.

a. Partners may only contribute cash to the partnership which, then, purchases all of its assets.

Which of the following does not accurately describe the process relating to the dissolution of a partnership? a. The assets of the partnership must be converted to cash used to pay the obligations to creditors, including partners who are creditors, and any remaining cash must be distributed to the partners in accordance with the relative proportions of their Capital Accounts. b. Profits (losses) that result from the liquidation of the partnership assets must be credited (charged) to the partners' Capital Accounts. c. If a partner's Capital Account becomes negative as a result of the sales of assets, the partner must make a cash contribution to the partnership in an amount sufficient to bring the Capital Account to a zero balance. d. If a partner fails to contribute the full amount required, all of the other partners shall contribute (in their profit-sharing ratios) the additional amount necessary to satisfy the partnership obligations. In the event of such contribution, the partners shall have the right to sue the partner with the unfunded negative Capital Account for the amount owed to the partnership

a. The assets of the partnership must be converted to cash used to pay the obligations to creditors, including partners who are creditors, and any remaining cash must be distributed to the partners in accordance with the relative proportions of their Capital Accounts.

The partnership of Amos, Cole, and Eddy had total capital of $570,000 on December 31, 2011 as follows: Amos, Capital (30%) $180,000 Cole, Capital (45%) 255,000 Eddy, Capital (25%) 135,000 Total $570,000 Profit and loss sharing percentages are shown in parentheses. If Flynn purchases a 25 percent interest from each of the old partners for a total payment of $270,000 directly to the old partners a. total partnership net assets can logically be revalued to $1,080,000 on the basis of the price paid by Flynn. b. the payment of Flynn does not constitute a basis for revaluation of partnership net assets because the capital and income interests of the old partnership were not aligned. c. total capital of the new partnership should be $760,000. d. total capital of the new partnership will be $840,000 assuming no revaluation.

a. total partnership net assets can logically be revalued to $1,080,000 on the basis of the price paid by Flynn.

The partnership of Carr, Eddy, and Howe had total capital of $1,140,000 on December 31, 2011, as follows: Carr, Capital (30%) $360,000 Eddy, Capital (45%) 510,000 Howe, Capital (25%) 270,000 Total $1,140,000 Profit and loss sharing percentages are shown in parentheses. Assume that Klein became a partner by investing $300,000 in the Carr, Eddy, and Howe partnership for a 25 percent interest in capital and profits and that partnership net assets are not revalued. Klein's capital credit should be a. $360,000. b. $285,000. c. $300,000. d. $380,000.

a.) 360,000 total investment*25%

Linda desires to purchase a one-fourth capital and profit and loss interest in the partnership of Hank, Greg, and Jim. The three partners agree to sell Linda one-fourth of their respective capital and profit and loss interests in exchange for a total payment of $100,000. The payment is made directly to the individual partners. The capital accounts and the respective percentage interests in profits and losses immediately before the sale to Linda follow Percentage Capital Interests in Accounts Profits and Losses Hank $168,000 50% Greg 104,000 35 Jim 48,000 15 Total $320,000 All other assets and liabilities are fairly valued and implied goodwill is to be recorded prior to the acquisition by Linda. Immediately after Linda's acquisition, what should be the capital balances of Hank, Greg, and Jim, respectively? a. $126,000; $78,000; $36,000 b. $156,000; $99,000; $45,000 c. $178,000; $111,000; $51,000 d. $208,000; $132,000; $60,000

b. $156,000; $99,000; $45,000

Susan desires to purchase a one-fourth capital and profit and loss interest in the partnership of Tony, Mary, and Ron. The three partners agree to sell Susan one-fourth of their respective capital and profit and loss interests in exchange for a total payment of $125,000. The payment is made directly to the individual partners. The capital accounts and the respective percentage interests in profits and losses immediately before the sale to Susan follow Percentage Capital Interests in Accounts Profits and Losses Tony $210,000 50% Mary 130,000 35 Ron 60,000 15 Total $400,000 All other assets and liabilities are fairly valued and implied goodwill is to be recorded prior to the acquisition by Susan. Immediately after Susan's acquisition, what should be the capital balances of Tony, Mary, and Ron, respectively? a. $157,500; $97,500; $45,000 b. $195,000; $123,750; $56,250 c. $222,500; $138,750; $63,750 d. $260,000; $165,000; $75,000

b. $195,000; $123,750; $56,250

Steve and Robby are partners operating an electronics repair shop. For 2011, net income was $50,000. Steve and Robby have salary allowances of $90,000 and $60,000, respectively, and remaining profits and losses are shared 4:6. The division of profits would be: a. $20,000 and $30,000 b. $50,000 and $-0- c. $30,000 and $20,000 d. $25,000 and $25,000

b. $50,000 and $-0-

Bob and Fred form a partnership and agree to share profits in a 2 to 1 ratio. During the first year of operation, the partnership incurs a $20,000 loss. The partners should share the losses a. based on their average capital balances. b. in a 2 to 1 ratio. c. equally. d. based on their ending capital balances.

b. in a 2 to 1 ratio.

When a partner retires and withdraws assets in excess of his book value, the remaining partners absorb the excess a. equally. b. in their profit-sharing ratio. c. based on their average capital balances. d. based on their ending capital balances.

b. in their profit-sharing ratio.

The balance sheet for the partnership of Nen, Pap, and Sup at January 1, 2011 follows. The partners share profits and losses in the ratio of 3:2:5, respectively. Assets at cost $480,000 Liabilities $135,000 Nen, capital 75,000 Pap, capital 120,000 Sup, capital 150,000 $480,000 Nen is retiring from the partnership. By mutual agreement, the assets are to be adjusted to their fair value of $540,000 at January 1, 2011. Pap and Sup agree that the partnership will pay Nen $135,000 cash for his partnership interest. NO goodwill is to be recorded. What is the balance of Pap's capital account after Nen's retirement? a. $138,000 b. $108,000 c. $120,000 d. $132,000

c. $120,000

Steve and Robby are partners operating an electronics repair shop. For 2011, net income was $50,000. Steve and Robby have salary allowances of $90,000 and $60,000, respectively, and remaining profits and losses are shared 4:6. If their agreement specifies that salaries are allowed only to the extent of income, based on a prorata share of their salary allowances, the division of profits would be: a. $20,000 and $30,000 b. $50,000 and $-0- c. $30,000 and $20,000 d. $25,000 and $25,000

c. $30,000 and $20,000

The following balance sheet information is for the partnership of Abel, Ball, and Catt: Cash $ 210,000 Liabilities $ 510,000 Other assets 1,500,000 Abel, Capital (40%) 300,000 Ball, Capital (40%) 480,000 Catt, Capital (20%) 420,000 $1,710,000 $1,710,000 Figures shown parenthetically reflect agreed profit and loss sharing percentages. If the assets are fairly valued on the above balance sheet and the partnership wishes to admit Dent as a new 1/5 partner without recording goodwill or bonus, Dent should invest cash or other assets of a. $427,500. b. $240,000. c. $300,000. d. $342,000.

c. $300,000. << answer key but i think its 427,500

Carter, Wynn, and Norton are partners in a janitorial service. The business reported net income of $54,000 for 2011. The partnership agreement provides that profits and losses are to be divided equally after Wynn receives a $60,000 salary, Norton receives a $24,000 salary, and each partner receives 10% interest on his beginning capital balance. Beginning capital balances were $40,000 for Carter, $48,000 for Wynn, and $32,000 for Norton. Norton's share of partnership income for 2011 is: a. $68,800 b. $36,000 c. $31,200 d. $27,200

c. $31,200

Which of the following best describes the accounting for changes in partnership ownership? a. A common practice when admitting a new partner to a partnership is to revalue the partnership net assets to fair value. b. The purchase of a partnership interest in a transaction between old and new partners requires a journal entry in the partnership records. c. Both a and b. d. Neither a nor b.

c. Both a and b.

Which of the following does not describe the partnership form of organization? a. Partnerships allow numerous individuals to combine their efforts for a variety of business purposes in an organization that can last indefinitely. b. Partnerships can survive the admission of new partners and the disassociation of existing partners as they retire. c. From a tax standpoint, the taxing authorities view the partnership as a taxable entity and tax its profit like other forms of organization. d. Partnerships also pass through liabilities to the partners

c. From a tax standpoint, the taxing authorities view the partnership as a taxable entity and tax its profit like other forms of organization.

Which of the following statements is not correct about the accounting for partnerships? a. Partnerships are a legal entity and, as such, they must issue financial statements. b. Partnerships are not necessarily required to issue financial statements that are prepared in conformity with GAAP. c. Partnerships are required to issue financial statements that are prepared in conformity with GAAP. d. Partnerships don't have stockholders' equity like corporations do.

c. Partnerships are required to issue financial statements that are prepared in conformity with GAAP.

Pete, Joe, and Ron are partners with capital balances of $135,000, $90,000, and $60,000, respectively. The partners share profits and losses equally. For an investment of $120,000 cash, Jerry is to be admitted as a partner with a one-fourth interest in capital and profits. Based on this information, the amount of Jerry's investment can best be justified by which of the following? a. Jerry will receive a bonus from the other partners upon his admission to the partnership. b. Assets of the partnership were overvalued immediately prior to Jerry's investment. c. The book value of the partnership's net assets were less than their fair value immediately prior to Jerry's investment. d. Jerry is apparently bringing goodwill into the partnership and his capital account will be credited for the appropriate amount.

c. The book value of the partnership's net assets were less than their fair value immediately prior to Jerry's investment.

Which of the following statements about interest on the Capital Account is false? a. Interest paid on Capital Account balances is not treated like interest on debt for accounting purposes. b. Interest paid on Capital Account balances is treated as a form of profit allocation like salary. c. The journal entry to record the payment of interest on Capital Account balances involves a debit to interest expense. d. The interest rate is specified in the Partnership Agreement.

c. The journal entry to record the payment of interest on Capital Account balances involves a debit to interest expense.

In a partnership, interest on capital investment is accounted for as a(n) a. return on investment. b. expense. c. allocation of net income. d. reduction of capital.

c. allocation of net income.

The bonus and goodwill methods of recording the admission of a new partner will produce the same result if the: 1. new partner's profit-sharing ratio equals his capital interest 2. old partners' profit-sharing ratio in the new partnership is the same relatively as it was in the old partnership. a. 1 b. 2 c. both 1 and 2 are met. d. none of these.

c. both 1 and 2 are met.

In the absence of an agreement among the partners a. interest is allowed on capital investments. b. interest is charged on partners' drawings. c. interest is allowed on advances to the firm made by partners beyond agreed investments. d. compensation is allowed partners for extra time devoted to the partnership.

c. interest is allowed on advances to the firm made by partners beyond agreed investments.

A partnership in which one or more of the partners are general partners and one or more are not is called a(n) a. joint venture. b. general partnership. c. limited partnership. d. unlimited partnership.

c. limited partnership.

At December 31, 2011, Barb and Kim are partners with capital balances of $250,000 and $150,000, and they share profits and losses in the ratio of 2:1, respectively. On this date, Jack invests $125,000 cash for a one-fifth interest in the capital and profit of the new partnership. The partners agree that the implied partnership goodwill is to be recorded simultaneously with the admission of Jack. The total implied goodwill of the firm is a. $25,000. b. $20,000. c. $45,000. d. $100,000.

d. $100,000.

The following balance sheet information is for the partnership of Abel, Ball, and Catt: Cash $ 210,000 Liabilities $ 510,000 Other assets 1,500,000 Abel, Capital (40%) 300,000 Ball, Capital (40%) 480,000 Catt, Capital (20%) 420,000 $1,710,000 $1,710,000 Figures shown parenthetically reflect agreed profit and loss sharing percentages. If assets on the initial balance sheet are fairly valued, Abel and Ball consent and Dent pays Catt $225,000 for his interest; the revised capital balances of the partners would be a. Abel, $315,000; Ball, $495,000; Dent, $450,000. b. Abel, $315,000; Ball, $495,000; Dent, $420,000. c. Abel, $300,000; Ball, $570,000; Dent, $450,000. d. Abel, $300,000; Ball, $480,000; Dent, $420,000

d. Abel, $300,000; Ball, $480,000; Dent, $420,000

Which of the following statements is false? a. Partners may contribute additional capital to the partnership in the form of cash and other assets. b. Withdrawals of cash by the partners are called "drawings." c. The partnership income statement includes revenues and expenses but not salary paid to partners. d. All of the above are true

d. All of the above are true

13. Which of the following statements is false regarding the allocation of profit to partners? a. The allocation of remaining profit to the partners is based on a sharing ratio that is described in the Partnership Agreement. b. The Partnership Agreement can provide for different sharing ratios in the event of a profit or a loss. c. The profit sharing ratio does not have to conform to the partners' respective Capital Account balances. d. All of the above are true.

d. All of the above are true.

Which of the following statements is not true about limited liability partnerships (LLPs)? a. In an LLP, all partners have a form of limited liability, similar to that of the shareholders of a corporation. b. Unlike corporate shareholders, the partners have the right to manage the business directly rather than through a board of directors c. In addition to structuring the partnership as an LLP, professional service organizations also typically maintain a significant amount of malpractice insurance as additional protection. d. All of the above are true.

d. All of the above are true.

Identify the provision that is not typically contained in a partnership agreement a. The partnership can buy and sell assets, enter into contracts, and borrow money. b. Each partner can act for the partnership. c. A partnership is liable for loss as a result of a wrongful act of a partner acting in the ordinary course of business of the partnership. d. Each partner is only liable for his or her proportionate share of the partnership liabilities based on their relative share of total partnership capital.

d. Each partner is only liable for his or her proportionate share of the partnership liabilities based on their relative share of total partnership capital.

The partnership of Carr, Eddy, and Howe had total capital of $1,140,000 on December 31, 2011, as follows: Carr, Capital (30%) $360,000 Eddy, Capital (45%) 510,000 Howe, Capital (25%) 270,000 Total $1,140,000 Profit and loss sharing percentages are shown in parentheses. Assume that Klein became a partner by investing $300,000 in the Carr, Eddy, and Howe partnership for a 25 percent interest in the capital and profits, and the partnership assets are revalued. Under this assumption a. Klein's capital credit will be $300,000. b. Carr's capital will be increased to $394,000. c. total partnership capital after Klein's admission to the partnership will be $1,200,000. d. net assets of the partnership will increase by $380,000 including Klein interest.

d. net assets of the partnership will increase by $380,000 including Klein interest. current capital/current partner interest (75%) = 1520 1520-total invested capital = 80 gw 300 cash + 80 gw

Which of the following statements is false? a. The partner Capital Account is updated in a manner that is similar to the way in which we update Retained Earnings for a corporation. b. Cash paid to partners is called a dividend. c. Profit and loss can be allocated to individual partners in a ratio that is different form the relative proportion of their capital accounts. d. Cash paid to a partner for services performed for the partnership is not recognized as an expense.

b. Cash paid to partners is called a dividend.

When the goodwill method is used and the book value acquired is less than the value of the assets invested, total implied capital is computed by a. multiplying the new partner's capital interest by the capital balances of existing partners. b. dividing the total capital balances of existing partners by their collective capital interest. c. dividing the new partner's investment by his (her) capital interest. d. dividing the new partner's investment by the existing partners' collective capital interest.

c. dividing the new partner's investment by his (her) capital interest.

Which of the following best describes the accounting for partnership formation when partners are assigned balances that do not equal their capital contributions? a. This scenario is not possible since all capital accounts must be proportional to the relative contributions of the partners. b. The partnership can apply either the "bonus method" or the "goodwill method" to account for the contribution without restriction. c. The "bonus method" relates to the recognition of an intangible asset upon formation of the partnership. d. The "bonus method" can be used even in the presence of an intangible asset if the partners agree.

d. The "bonus method" can be used even in the presence of an intangible asset if the partners agree.

Richard, Dave, and Luke have been operating a magazine stand for several years. They share profits and losses equally, and each has a $50,000 capital balance. They decided to admit a new partner, Craig. Craig is to receive a 25% interest in the partnership. 1. Determine the amount of cash that Craig must pay if the partners do not wish to recognize any goodwill or bonus. 2. Determine Craig's initial capital balance if he contributes $60,000 cash and the bonus method is applied. 3. Determine Craig's initial capital balance if he contributes $60,000 cash and the goodwill method is applied.

1. (150,000 / .75) = 200,000 less existing capital of 150,000 = $50,000 cash contribution. 2. (150,000+ 60,000) = 210,000 * 0.25 = $52,500 capital balance. 3. ($60,000 /0.25)= $240,000 total capital implied x0.25 =$60,000 capital balance.

Which of the following is not true about the accounting for changes in partnership ownership involving revaluation of net assets? a. If net assets are measured at fair value the partners have the best possible chance of allocating partner Capital Accounts in a fair and unbiased manner. b. When partnership net assets are revalued in anticipation of a realignment transaction, the resulting gains and losses accrue only to the partners who have an ownership interest in the entity during the period in which the net assets changed in value. c. The gains and losses that result from pre-realignment revaluation are allocated to the existing partners' Capital Accounts in the revaluation profit-and-loss-sharing ratio designated in the Partnership Agreement. d. The differential in value resulting from the revaluation of assets is recognized as a gain or loss in the partnership income statement.

d. The differential in value resulting from the revaluation of assets is recognized as a gain or loss in the partnership income statement.

The profit and loss sharing ratio should be a. in the same ratio as the percentage interest owned by each partner. b. based on relative effort contributed to the firm by the partners. c. a weighted average of capital and effort contributions. d. based on any formula that the partners choose.

d. based on any formula that the partners choose.

Which of the following is an advantage of a partnership? a. mutual agency b. limited life c. unlimited liability d. none of these

d. none of these

The partnership of Amos, Cole, and Eddy had total capital of $570,000 on December 31, 2011 as follows: Amos, Capital (30%) $180,000 Cole, Capital (45%) 255,000 Eddy, Capital (25%) 135,000 Total $570,000 Profit and loss sharing percentages are shown in parentheses. Assume that Flynn became a partner by investing $150,000 in the Amos, Cole, and Eddy partnership for a 25 percent interest in capital and profits and that partnership net assets are not revalued. Flynn's capital credit should be a. $180,000. b. $142,500. c. $150,000. d. $190,000

a.) (570+150)*.25 = 180,000

When the goodwill method is used to record the admission of a new partner, total partnership capital increases by an amount a. equal to the new partner's investment. b. greater than the new partner's investment. c. less than the new partner's investment. d. that may be more or less than the new partner's investment.

b. greater than the new partner's investment.

The partnership of Amos, Cole, and Eddy had total capital of $570,000 on December 31, 2011 as follows: Amos, Capital (30%) $180,000 Cole, Capital (45%) 255,000 Eddy, Capital (25%) 135,000 Total $570,000 Profit and loss sharing percentages are shown in parentheses. Assume that Flynn became a partner by investing $100,000 in the Amos, Cole, and Eddy partnership for a 25 percent interest in the capital and profits, and the partnership assets are revalued. Under this assumption a. Flynn's capital credit will be $150,000. b. Amos's capital will be increased to $147,000. c. total partnership capital after Flynn's admission to the partnership will be $600,000. d. net assets of the partnership will increase by $190,000, including Flynn's interest.

d. net assets of the partnership will increase by $190,000, including Flynn's interest.