ACCTG 5130 Ch 15 Review
Michael and John formed the MJ partnership. They decide to invite Parker to become a partner in their business. They will retain a 70% interest in the partnership and give Parker a 30% capital interest. The original partners' net assets have a book value of $210,000. Parker's investment of 80,000 plus goodwill makes up the remaining 30%. The estimated fair value based on the new partner's investment is 266,667. The estimated fair value based on old partners' capital accounts is 300,000. What is the amount of implied goodwill brought into the partnership by Mike?
$10,000 210,000 + 80,000 = 290,000 300,00 - 290,000 = 10,000
On January 1, 20X3, Edward and James invite Mary to become a partner in their business. The partnership's total BV before Mary's admission is $350,000. The resulting partnership will be called EJM Partnership. For a $60,000 investment, Mary will have a 10% interest in the partnership. What is Mary's capital account balance at the time of admission if EJM Partnership uses the bonus method to account for a new partner's admission? -41,000 -25,000 -10,000 -35,000
-41,000 (350,000 + 60,000) x 10% = 41,000
When a new partner brings in aspects of goodwill, the negotiated goodwill is.... Choose one -recognized and added to all partners' capital -not recognized -recognized as revenue -recognized and added to the new partner's investment
-recognized and added to the new partner's investment
Brian and Spencer wish to form the B&S partnership. Brian contributes land with a book value of $65,000 and a current value of $150,000 and a building with a book value of 142,000 and a current value of 175,000. Spencer will contribute cash. If the partners plan to share profits and losses equally after the formation of the partnership and assuming they have agreed to equal capital contributions, how much cash will Spencer have to contribute to form the partnership?
150,000 + 175,000 = 325,000
Admitting Partner at Book Value (91) Partner A and B each have Capital Accounts of $50K each and they share Profits and Losses 50/50. They want to admit C into the partnership at 30% for $50K. How much goodwill will be recognized by the Partnership under the Revaluation Method?
16,667 GW (100,000 + 50,000)x30% = 45,000 50,000 - 45,000 = 5,000 5,000/30% = 16,667 GW
Karen retires from the KLN Partnership when her capital account has a balance of 15,000 after recording all increases in the partnership's net assets. This balance has also been adjusted for her share of income earned and her drawings up to her retirement date. All partners agree to a buyout price of 15,000. What is the journal entry to record Karen's retirement?
Debit Karen, capital for 15,000; credit cash for 15,000
New Partner Invests in Partnership - Case 2 (93) Case 2 with bonus method: - Record a portion of the new partner's investment as a bonus to the existing partners to align the capital balances properly at the time of the new partner's admission. - The $750 excess Cha is paid is a bonus allocated to the original partners in their profit and loss ratio of 60% to Alt and 40% to Blue. - ABC's total resulting capital consists of $30,000 existing capital plus the $11,000 investment of Cha. - Cha will have 25% - No additional capital is recognized by revaluing assets.
JE: DR Cash 11,000 CR Alt, Cap 450 CR Blue, cap 300 CR Cha, cap 10,250 Work: (30,000+11,000)x0.25= 10,250 11,000-10,250 = 750 750x40%= 300 750x60%= 450
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? -$10,000 - 50,000 - 40,000 - 45,000
50,000 10,000/20% = 50,000
A new partner's proportionate interest in the net assets of a partnership pis compared with the new partner's investment to determine the: - procedures to follow in accounting for his or her admission - historical cost bases of the partnership's net assets - increases in the fair value of non-financial assets at the time of admission of a new partner. - market value and earning power of the partnership's net assets
procedures to follow in accounting for his or her admission
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? Check all that apply: - revalue existing net assets - use the equity method - use the bonus method - revalue non-financial assets
- revalue existing net assets - use the bonus method
Changes in a partnership's membership occur with the -disassociation of present partners -addition of new partners -distribution of profit to partners -non-repayment of a loan taken from the partnership
-disassociation of present partners -addition of new partners
Linda, Sarah, and Jason are partners in the LSJ Partnership, sharing profits and losses in the ratio of 25:25:50. On Dec 31, 20X3, Linda retires from the partnership when her capital account has a 150,000 balance after recording all increases in the partnership's net assets and including her share of income earned and drawings up to her retirement date. The continuing partners agree to a buyout price of $165,000 for Linda's partnership interest. What is the journal entry to record Linda's retirement?
Debit Linda cap 150,000; debit Sarah cap 5,000; debit Jason cap for 10,000; credit cash for 165,000 165,000 - 150,000 = 15,000 15,000 x 1/3 = 5,000 150,000 x 2/3 = 10,000
New Partner Invests in Partnership - Case 2 (89) Case 2 with revaluation method: -Cha invests $11,000 into the partnership. -No other identified asset to allocate the increase. -Alt's cap is 20,000, Blue's is 10,000, total is 30,000. -Alt and Blue ratio is 60:40 -Cha will get 25% What are the journal entries to record the revaluation with goodwill?
JE: DR GW 3,000 CR Alt, Cap 1,800 CR Blue, Cap 1,200 (3,000x60%=1,800) (3,000x40%=1,200) DR Cash 11,000 CR Cha, cap 11,000 Work: 11,000/0.25 = 44,000 30,000+11,000 = 41,000 44,000-41,000 = 3,000
Ch 15 Quiz #2 Blank, a partner in the Financial Brokers Partnership, has a 80 percent share in partnership profits and losses. Blank's capital account had a net increase of $350,000 during 20X8. During 20X8, Blank withdrew $250,000 as withdrawals and contributed equipment with a book value of $175,000 and a Fair Value of $300,000 to the partnership. What was the net income of the Financial Brokers Partnership for 20X8?
Answer: 375K -250K + 300K + X = 350K X = 300K 300K/80% = 375K
Admitting Partner at Book Value (77) Partner A and B each have Capital Accounts of $50K each and they share Profits and Losses 50/50. They want to admit C into the partnership at 30%. However, they want C's capital account to reflect a 30% interest in the partnership. How much must C contribute to the partnership?
Answer: 42.8K 100,000/70%x30% = 42,857
What's the difference between the bonus method and revaluation method?
Bonus method is used when partners do not wish to record adjustments in asset and liability accounts or recognize goodwill. Revaluation adjusts assets/liabilities and unrecognized GW.
What are the advantages of partnerships?
Ease of formation, lack of formality, single taxation
Admitting Partner at Book Value (97) Partner A and B each have Capital Accounts of $50K each and they share Profits and Losses 60/40. They want to admit C into the partnership at 30% for $50K. What journal entry will be made by the Partnership under the Bonus Method to record admitting C into the Partnership?
JE: DR Cash 50,000 CR A 3,000 CR B 2,000 CR C 45,000 Work: (100,000+50,000)x30% = 45,000 50,000 (paid) - 45,000 (BV) = 5,000 (excess) 5,000x60% = 3,000 5,000x40% = 2,000
Ch 15 Quiz #1 What are 1 advantages and 2 disadvantage of a Partnership?
Advantages: Ease to Form Flexibility Single Tax Disadvantages: Mutual AgencyUnlimited Liability Transferability
New Partner Invests in Partnership - Case 2 (85) Case 2 with revaluation method: -Cha invests $11,000 into the partnership. -Assume that Cha paid a $750 excess over her proportionate book value because the partnership owns land on which it has constructed warehouse buildings. -The land has a book value of $4,000, but a recent appraisal indicates that it has a market value of $7,000. -Alt's cap is 20,000, Blue's is 10,000, total is 30,000. - Before Cha, Alt's ratio is 60, and Blue's is 40. -Cha will get 25% What are the journal entries to record the revaluation of land?
JE: DR Land 3,000 CR Alt, cap 1,800 (60%x3,000) CR Blue, cap 1,200 (40% x 3,000) Jan 1: DR Cash 11,000 CR Cha, cap 11,000 Work: 7,000-4,000 = 3,000 Land = 3,000 Small pie = 30,000+11,000 = 41,000 11,000/0.25 = 44,000 44,000-41,000 = 3,000 750/0.25% = 3,000
Illustration of Profit Allocation (45): Alt, a sole proprietor, has been developing software for several types of computers. The business has the following account balances as of December 31, 20X0: During 20X1, the AB Partnership earned $45,000 of revenue and incurred $35,000 in expenses, leaving a profit of $10,000 for the year. Alt maintains a capital balance of $20,000 during the year, but Blue's capital investment varies during the year as follows: Jan 1: $10,000 Balance May 1: 3,000 Debit Sept 1: 500 credit Nov 1: 1,000 debit Dec 31: 6,500 balance What are the JEs on May 1, Sept 1, and Nov 1?
May 1: DR Drawing Blue 3,000 CR Cash 3,000 Sept 1: DR Cash 500 CR Cap, Blue 500 Nov 1: DR Drawing Blue 1,000 CR Cash 1,000
What are the disadvantages of partnerships?
Unlimited liability (for general partnerships), difficulty in disposing of partnership interests, mutual agency
Which of the following would result in a reduction to a partner's capital account? a. the initial investment b. the allocation of a profit c. additional capital contributions d. a withdrawal e. a loan to a partner
d. a withdrawal
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 equals the new partner's proportion of the partnership's book value - the new partner's investment is more than the new partner's proportion of the partnership's book value. - the new partner's investment depends on the proportion of equity in the partnership's book value - the new partner's investment is less than the new partner's proportion of the partnership's book value
- the new partner's investment is more than the new partner's proportion of the partnership's book value.
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% 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?
$31,250 150,000-5,000 = 145,000 145,000/80% = 181,250 181,250-145,000 = 36,250 36,250-5,000 = 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% interest. The implied fair value of the partnership is: - $22,500 - 12,500 - 35,000 - 5,400
- 35,000 7,000/20% = 35,000
Identify true statements about small and medium-size entities (SMEs) and/or joint ventures Choose all that apply -SMEs publish general-purpose financial statements for external users -SMEs must issue stocks or bonds in a public capital market at least once per year -Many joint ventures are accounted as partnerships -SMEs have no public accountability
-SMEs publish general-purpose financial statements for external users -Many joint ventures are accounted as partnerships -SMEs have no public accountability
In forming a partnership Choose all that apply: -all partners are required to withdraw their share of the profits every year -an entity distinct from its partners comes into existence -contributed assets are recorded at their fair values -an item contributed by a partner becomes partnership property
-an entity distinct from its partners comes into existence -contributed assets are recorded at their fair values -an item contributed by a partner becomes partnership property
Which of the following statements are true when an individual acquires a partnership interest directly from one or more of the existing partners? Chooseallthatapply -a new partner is required to recognize the previously unrecorded goodwill -the partnership entity recognizes the increase in the fair value of the partnership's existing non-financial assets -cash or other assets are exchanged outside the partnership -reclassification of the partnership's total capital is necessary on its books
-cash or other assets are exchanged outside the partnership -reclassification of the partnership's total capital is necessary on its books
A partner in a limited liability partnership -is personally liable for negligence or malpractice committed by other partners -is personally liable for other partners' obligations -consolidates the investment on his or her books -has limited legal liability
-has limited legal liability
A partnership following GAAP would account for a change in its membership in the same manner as a corporate entity would account for changes in its -outstanding debts -bills receivable -investors -customers
-investors
Which of the following statements is most likely to be true when a retiring partner's buyout price is less than the partner's capital balance? Chooseone -liquidation values of the net assets are more than their book values -unrecognized goodwill value is more than its book value -liquidation values of the net assets are less than their book values -unrecognized goodwill value is less than its book value
-liquidation values of the net assets are less than their book values
Which of the following statements are true regarding the accounting errors found when an audit is performed on the change in partners? Chooseallthatapply -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 in the future financial statements -errors should be corrected -the partners' capital accounts should be adjusted based on the profit and loss ratio that existed on the balance sheet date
-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
Which of the following statements are true regarding the items included in a partnership agreement? Choose all that apply: -the partnership agreement includes accounting methods to use -the partnership agreement includes the amount of revenues earned by the partnership and tax payable -the partnership agreement includes the initial capital contribution of each partner -the partnership agreement includes procedures used for admission of new partners
-the partnership agreement includes accounting methods to use -the partnership agreement includes the initial capital contribution of each partner -the partnership agreement includes procedures used for admission of new partners
Which of the following statements are true regarding the financial reporting requirements for partnerships? Choose all that apply -the partnership can use non-GAAP accounting methods for internal reporting needs -an independent auditor can issue an opinion that the statements are in accordance with GAAP -the financial reporting format for partnerships is similar to the format used by the corporations -the financial statements should be prepared in accordance with GAAP if they are issued for external users
-the partnership can use non-GAAP accounting methods for internal reporting needs -an independent auditor can issue an opinion that the statements are in accordance with GAAP -the financial statements should be prepared in accordance with GAAP if they are issued for external users
What is the definition of a partnership?
1. An association of two or more persons 2. to carry on as co-owners 3. who attempt to make a profit
Illustration of Profit Allocation (53) Bonuses Assume that the partnership agreement provides a bonus of 10% income in excess of $5,000, after subtracting the bonus, before distributing the remaining profit by a profit and loss-sharing ratio of 60:40. How will the $10,000 profit be distributed between the partners?
Alt: 5,700 Blue: 4,300 Profit-sharing percentage: Alt (60%), Blue (40%), Total (100%) Net income: 10,00 Bonus to partner: Blue (500), total (500) Residual income: 9,500 Work: 10,000 - 500 = 9,500 Allocate 60:40: Alt (5,700), Blue (3,800), Total (9,500) Work: 9,500x60% = 5,700 9,500x40% = 3,800 Total: Alt (5,700), Blue (4,300), total (0) Work: 500+3,800 = 4,300
In a partnership, what counts as a person?
An individual, a corporation, another partnership
Group Exercise 1: Allocating Profit and Loss, No Restrictions (62) The partnership of Alex and James has the following provisions: • Alex and James receive salary allowances of $37,000 and $18,000, respectively. • Interest is imputed at 10% on the average capital investment. • Any remaining profit or loss is shared between Alex and James in a 3:2 ratio, respectively. • Average Capital investments: Alex, $50,000; James, $130,000. REQUIRED 1. Prepare a schedule showing how the profit would be divided, assuming the partnership profit or loss is: a. $ 102,000 2. What journal entry should be made to allocate the profit or loss
1. Total Profit: A (0), J (0), Total (102,000) Salary: A (37,000), J (18,000), Total (-37,000-18,000 = -55,000) Interest on Capital: A (50,000x10%=5,000), J (130,000x10%=13,000), total (-5,000-13,000=-18,000) Residual profit: A (29,000x60%=17,400), J (29,000x40%=11,600), Total (-17,400-11,600=-29,000) Allocate Profit: A (37,000+5,000+17,400=59,400), J (18,000+13,000+11,600=42,600), Total (102,000-59,400-42,600=0) 2. JE DR Inc Summary 102,000 CR Cap, Alex 59,400 CR Cap, James 42,600
Under Section 701 of the UPA 1997, a partnership may purchase the disassociated partner's interest at a(n) ..... price
Buyout
Group Exercise 1: Allocating Profit and Loss, No Restrictions (62) The partnership of Alex and James has the following provisions: • Alex and James receive salary allowances of $37,000 and $18,000, respectively. • Interest is imputed at 10% on the average capital investment. • Any remaining profit or loss is shared between Alex and James in a 3:2 ratio, respectively. • Average Capital investments: Alex, $50,000; James, $130,000. REQUIRED 1. Prepare a schedule showing how the profit would be divided, assuming the partnership profit or loss is: b. $ 57,000 2. What journal entry should be made to allocate the profit or loss
1. Total Profit: A (0), J (0), Total (57,000) Salary: A (37,000), B (18,000), Total (-37,000-18,000=-55,000) Interest on Capital: A (50,000x10%=5,000), J (130,000x10%=13,000), Total (-5,000-13,000=18,000) Residual Profit: Total (57,000-55,000-18,000=-16,000) Allocate Profit: A (-16,000x60%=-9,600), J (-16,000x40%=6,400), Total (9,600+6,400=16,000) Ending bal: A (37,000+5,000-9,600=32,400), J (18,000+13,000-6,400=24,600) 2. DR Inc Sum 57,000 CR Cap, A 32,400 CR Cap, J 24,600
What are the 4 major distribution methods used by partnerships:
1. Preselected ratio 2. Interest on capital balances 3. Salaries to partners 4. Bonuses to partners
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% share for capital contribution of only 10,000. What is the amount of bonus the original partners give to Tim?
12,000 (100,000+10,000) x 20% = 22,000 22,000-10,000 = 12,000
Illustration of Profit Allocation (51) Salaries Assume that the partnership agreement provides for fixed allocations of $2,000 to Alt and $5,000 to Blue. Any remainder is to be distributed in the profit and loss-sharing ratio of 60:40 percent. How will the $10,000 profit be distributed between the partners?
Alt: 3,800 Blue: 6,200 Profit-sharing percentage: Alt (60%), Blue (40%), total (100%) Net income: 10,000 Salary: Alt (2,000), Blue (5,000), total (-7,000) Residual income: 3,000 Work: 10,000 - 7,000 = 3,000 Allocate 60:40: Alt (1,800), Blue (1,200), total (-3,000) Work: 3,000x60% = 1,800 3,000x40% = 1,200 Total: Alt (3,800), Blue (6,200), Total: 0 Work: 2,000+1,800=3,800 5,000+1,200 = 6,200
New Partner Invests in Partnership - Case 2 (90) Case 2 with Revaluation Method: -Land has been identified to have an excess value over book of $2,000 -Cha invests $11,000 into the partnership. -No other identified asset to allocate the increase. -Alt's cap is 20,000, Blue's is 10,000, total is 30,000 - Alt and Blue's old ratio was 60:40 -Cha will get 25% What are the journal entries to record the revaluation with goodwill?
JE: DR Land 2,000 DR GW 1,000 CR Alt, cap 1,800 CR Blue, cap 1,200 DR Cash 11,000 CR Cha, cap 11,000 Work: 11,000/0.25 = 44,000 30,000 + 11,000 = 41,000 44,000 - 41,000 = 3,000 3,000 - 2,000 (land) = 1,000 (GW)
Alt needs additional technical assistance to meet the increasing sales and offers Blue an interest in the business. Alt and Blue agree to form a partnership. Alt's business is audited, and its net assets are appraised. The audit resulted in the following adjustments to net assets of Alt's business: Cash: 3,000 Inv: 7,000 Equip: 20,000 Less Acc dep: (5,000) Total assets: 25,000 Liab: 10,000 Alt, Cap: 15,000 Total liab and cap: 25,000 FMV of inv is 10,000 FMV of equip is 23,000 Liab has 1,000 missing. Alt and Blue prepare and sign a partnership agreement that includes all significant operating policies. Blue will contribute $10,000 cash for a one-third capital interest. The AB Partnership is to acquire all of Alt's business and assume its debts. The entry to record the initial capital contribution on the partnership's books is?
Cash: 13,000 Inv: 10,000 Equip: 23,000 Liab: 11,000 Alt, cap: 25,000 Blue, cap: 10,000
The existence of unrecorded goodwill may be indicated when the new partner's investment: - equals the new partner's proportion of the partnership's NBV - is more than the new partner's proportion of the partnership's NBV - equals the new partner's proportion of the partnership's fair value - is less than the new partner's proportion of the partnership's NBV
is more than the new partner's proportion of the partnership's NBV
Sandra and Lauren formed SL Partnership. Their profit and loss-sharing ratio is 40:60. On Jan 1, 20X3, Sandra and Lauren 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 BV, 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 Sanda, Capital for 2,000; Debit Laura, Capital for 2,000; Debit land for 4,000 - Debit Sanda, cap for 1,600; Debit Laura, Cap for 2,400; Debit Land for 4,000 - Debit land for 4,000; Credit Sandra, cap for 2,000; Credit Laura, cap for 2,000 - Debit land for 4,000; Credit Sandra, cap for 1,600; Credit Laura, cap for 2,400
Debit land for 4,000; Credit Sandra, cap for 1,600; Credit Laura, cap for 2,400 14,000 - 10,000 = 4,000 Increase in Sandra: 4,000 x 40% = 1,600 Increase in Laura: 4,000 x 60% = 2,400
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% 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? - E:L:A = 25:65:10 - E:L:A = 35:65:10 - E:L:A = 30:70:10 - E:L:A = 27:63:10
- E:L:A = 27:63:10 A = 10% EL = 90% 90% x 30% = 27% E 90% x 70% = 63% L
Sarah and Mark formed the SM Partnership. Their profit and loss-sharing ratio is 30:70, and the BV of the partnership's net assets is $180,000. The BV of the equipment is recorded at 80,000, but it has a FV 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% interest in the partnership's net assets. What is Robert's share of the new partnership's total resulting capital, after the write-down? -22,500 -25,000 -45,000 -18,000
-45,000 180,000 + 50,000 - (80,000 - 75,000) = 225,000 225,000 x 20% = 45,000
Which of the following statements are true when the buyout price is higher than the retiring partner's capital balance? Chooseallthatapply -the payment above the outgoing partner's capital balance is accounted for as a bonus from the remaining partners' capital accounts -the difference should be reclassified in the capital accounts of the outgoing partner -a liability is recognized for the difference in the buyout price and partner's capital credit -the payment will result in a decrease of the remaining partners' capital accounts
-the payment above the outgoing partner's capital balance is accounted for as a bonus from the remaining partners' capital accounts -the payment will result in a decrease of the remaining partners' capital accounts
Group Exercise 1: Allocating Profit and Loss, No Restrictions (62) The partnership of Alex and James has the following provisions: • Alex and James receive salary allowances of $37,000 and $18,000, respectively. • Interest is imputed at 10% on the average capital investment. • Any remaining profit or loss is shared between Alex and James in a 3:2 ratio, respectively. • Average Capital investments: Alex, $50,000; James, $130,000. REQUIRED 1. Prepare a schedule showing how the profit would be divided, assuming the partnership profit or loss is: c. $(34,000) 2. What journal entry should be made to allocate the profit or loss
1. Total Profit: A (0), J (0), Total (-34,000) Salary: A (37,000), B (18,000), Total (-37,000-18,000=-55,000) Interest on Capital: A (50,000x10%=5,000), J (130,000x10%=13,000), Total (-5,000-13,000=18,000) Residual Profit: Total (-34,000-55,000-18,000=-107,000) Allocate Profit: A (-107,000x60%=-64,200), J (-107,000x40%=42,800), Total (64,200+42,800=107,000) Ending bal: A (37,000+5,000-64,200=-22,200), J (18,000+13,000-42,800=-11,800) 2. DR Cap, A 22,200 DR Cap, J 11,800 CR Inc Sum 34,000
Match the different possible partnership situations with the appropriate accounting treatments. 1. New partner's investment equals his or her proportion of the partnership's net assets 2. New partner's investment is more than his or her proportion of the partnership's net assets 3. New partner's investment is less than his or her proportion of the partnership's net assets a) the increase on the revaluation of an asset is allocated to the existing partners in their profit and loss ratio b) the new partner's capital is credited for his or her percentage interest in the partnership's total resulting capital c) the new partner's capital credit equals his or her investment
1. c 2. a 3. b
New Partner Invests in Partnership (79) 1. The January 1, 20X3, capital of the AB Partnership is $30,000. Alt's balance is $20,000, and Blue's balance is $10,000. Alt and Blue share profits in the ratio of 60:40. 2. Cha is invited into the partnership. Cha will have a 25% capital interest and a 25% share of the profits. Alt and Blue will share the remaining 75% of profits in the ratio of 60:40, resulting in Alt having a 45% share of any profits and Blue having a 30% share. Case 1: Investment equals proportion of the partnership's book value. Assume Cha invests $10,000 into the partnership. What is Cha's NBV? What's the difference between Cha's investment and Cha's book value What is the journal entry?
10,000(investment in partnership)-10,000(Cha's book value) = 0 difference 30,000/75%x25% = 10,000 JE: Jan 1 DR Cash 10,000 CR Cha, Capital 10,000
Jeff and Jason formed JJ Partnership. Their profit and loss-sharing ratio is 30:70. After operations and partners' withdrawals during 20X1 and 20X2, JJ Partnership's net assets have a $120,000 book value. On January 1, 20X3, Jeff and Jason invite Ronald to become a partner in their business. Ronald purchases a 15% interest in the partnership capital directly from Jeff and Jason for a total cost of $40,000, paying $25,000 to Jeff and $15,000 to Jason. The partnership revalues its assets at the time of Ronald's admission and finds that the land is undervalued by $15,000. What is the partnership's total resulting capital? - $95,000 - 105,000 - 80,000 - 135,000
135,000 120,000 + 15,000 = 135,000
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% interest in the partnership. The partnership's total BV 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 - 23,200 - 39,000 - 25,000
22,000 Land: 33,000 - 25,000 = 8,000 Total partnership: 80,000 + 8,000 + 22,000 = 110,000 110,000 x 20% = 22,000
Arbitrary Profit-Sharing Ratio Alt and Blue share profits in a ratio of 60% to Alt and 40% to Blue (a 3:2 ratio). Using this ratio, how will the net income (+$10,000) be distributed to each partner's capital account? Rev: 45,000 Expenses: 35,000 What are the JEs for Dec 31?
Alt: 6,000 Blue: 4,000 Work: 10,000 x 60% = 6,000 10,000 x 40% = 4,000 JEs: Dec 31: DR Blue, cap 4,000 CR Blue, drawing 4,000 DR Rev 45,000 CR Exp 35,000 CR Income summary 10,000 DR Income summary 10,000 CR Alt, cap 6,000 CR Blue, cap 4,000
Illustration of Profit Allocation (50) Interest on Capital Balances: Assuming Alt and Blue agree to allocate profits first based on 15% of weighted-average capital balances and then to any remaining profit based on a 60:40 ratio, how will the $10,000 profit be distributed between the partners? Blue Average Capital: 8,000 Alt's capital: 20,000
Alt: 6,480 Blue: 3,520 Profit sharing percentages: Alt (60%), Blue (40%), Total (100%) Average Capital: Alt (20,000), Blue (8,000) Net income: 10,000 Interest on average capital: Alt (3,000), Blue (1,200), total (-4,200) Work: 20,000x15% = 3,000 8,000x15%=1,200 Residual income: 5,800 10,000 - 4,200 = 5,800 Allocate 60:40 Alt (3,480), Blue (2,320), total (-5,800) Work: 5,800x60% = 3,480 5,800x40% = 2,320 Total: Alt (6,480), Blue (3,250), total (0) Work: 3,000+3,480 = 6,480 1,200+2,320 = 3,520
Multiple Profit Allocation Bases - Example (55) During 20X1, AB Partnership earned $45,000 of revenue and incurred $35,000 in expenses, leaving a profit of $10,000 for the year. Alt's capital is 20,000. Blue's average capital is 8,000. Assume that the AB partnership profit and loss agreement specifies the following allocation process: 1. Interest of 15% on weighted-average capital balances. 2. Salaries of $2,000 for Alt and $5,000 for Blue. 3. A bonus of 10% of profits to be paid to Blue on partnership income exceeding $5,000 before subtracting the bonus, partners' salaries, and interest on capital balances. 4. Any residual to be allocated in the ratio of 60% to Alt and 40% to Blue. Using this allocation process, how will the net income be distributed to each partner's capital accounts?
Answer: Alt: 3,980 Blue: 6,020 Work: Profit-sharing percentage: Alt (60%), Blue (40%), Total (100%) Average capital: Alt (20,000), Blue (8,000) Net income: 10,000 Step 1 Interest on avg cap: Alt (20,000x15%=3,000) Blue (8,000x15% = 1,200), Total (-3,000-1,200 = -4,200) Remaining after step 1: 10,000 - 4,200 = 5,800 Step 2 Salary: Alt (2,000), Blue (5,000), Total (-2,000-5,000 = -7,000) Deficiency after step 2: 5,800 - 7,000 = -1,200 Step 3 Bonus: Blue (500), Total (-500) Deficiency after step 3: -1,200 - 500 = -1,700 Step 4 Allocate 60:40: Alt (-1,700x60%=-1,020), Blue (1,700x40%=-680), Total (1,020+680=1,700) Total: Alt (3,000+2,000-1,020=3,980) Blue (1,200+5,000+500-680=6,020), Total (-1,700+1,700=0)
Illustration of Profit Allocation (52) Bonuses Normally, a bonus is a percentage of income either (1) before or (2) after subtracting the bonus. Assume a bonus of 10% of income in excess of $5,000 is to be credited to Blue's capital account before distributing the rest of the profit. What will be the bonus computation? Income: 10,000
Answer: 500 10,000 - 5,000 = 5,000 in excess 5,000*10% = 500
New Partner Invests in Partnership (79) 1. The January 1, 20X3, capital of the AB Partnership is $30,000. Alt's balance is $20,000, and Blue's balance is $10,000. Alt and Blue share profits in the ratio of 60:40. 2. Cha is invited into the partnership. Cha will have a 25% capital interest and a 25% share of the profits. Alt and Blue will share the remaining 75% of profits in the ratio of 60:40, resulting in Alt having a 45% share of any profits and Blue having a 30% share. Case 2: New partner investment > new partner's proportion of the partnership's book value. Assume Cha invests $11,000 into the partnership. What is Cha's NBV? What's the difference between Cha's investment and Cha's book value What is the journal entry?
BV: 10,250 Difference: 750 (30,000+11,000)x0.25 = 10,250 11,000-10,250 = 750 JE: DR Cash 11,000 CR Alt, cap 450 CR Blue, cap 300 CR Cha, cap 10,250
Alt a sole proprietor, has been developing software for several types of computers. The business has the following account balances as of Dec 31, 20X0: Cash: 3,000 Inventory: 7,000 Equipment: 20,000 Less Acc dep: (5,000) Total assets = 25,000 Liab: 10,000 Alt, Cap: 15,000 Total liab and cap = 25,000 Alt needs additional technical assistance to meet the increasing sales and offers Blue an interest in the business. Alt and Blue agree to form a partnership. Alt's business is audited, and its net assets are appraised. The audit resulted in the following adjustments to net assets of Alt's business: FMV of inventory is 9,000 FMV of equipment is 19,000 Liabilities is missing 1,000 Alt and Blue prepare and sign a partnership agreement that includes all significant operating policies. Blue will contribute $10,000 cash for a one-third capital interest. The AB Partnership is to acquire all of Alt's business and assume its debts. What is the portion for Alt and what is the portion for Blue?
Cash: 13,000 Inventory: 9,000 Equip: 19,000 Liab: 11,000 Alt, Cap: 20,000 Blue, Cap: 10,000 (2/3) x (41,000 - 11,000) Alt (1/3) x (41,000 - 11,000) Blue
On Jan 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 BV before Jason's admission is 180,000. For a 50,000 investment, Jason will have a 20% interest in the partnership. Which of the following JE will record Jason's admission and the bonus payment to Karen and Sarah? - Debit cash for 180,000; Credit Karen, cap for 70,000; Credit Sarah, cap 70,000; Credit Jason, cap for 40,000 - Debit cash for 50,000; Credit Karen, cap for 1,600; Credit Sarah, cap for 2,400; Credit Jason, cap for 46,000 - Debit Karen, cap for 1,600; debit Sarah, cap for 2,400; debit Jason, cap for 46,000; credit cash for 50,000 - debit cash for 50,000; credit Karen, cap for 23,000; credit Sarah, cap for 23,000; credit Jason, cap for 4,000
Debit cash for 50,000; Credit Karen, cap for 1,600; Credit Sarah, cap for 2,400; Credit Jason, cap for 46,000 Total capital: 180,000 + 50,000 = 230,000 Jason's share: 230,000 x 20% = 46,000 Karen's bonus: 50,000 - 46,000 = 4,000 x 40% = 1,600 Sarah's bonus: 4,000 x 60% = 2,400
Is the bonus method: a. non GAAP b. GAAP
b. GAAP
Which of the following is not one of the advantages of general partnerships? a. ease of formation b. unlimited liability c. lack of formality d. single taxation
b. unlimited liability
Practice Quiz Question #4 (71) Matt and Chad created a partnership (M&C) on 12/31/X8 (sharing profits 50/50). Matt contributed equipment from his sole proprietorship having a carrying value of $4,000 and a fair value of $8,000. In 20X9, M&C had profits of $96,000 and borrowed $20,000 from a bank. In 2009, Matt withdrew $35,000 cash. Matt's Y/E capital balance is a. $11,000. b. $17,000. c. $21,000. d. $56,000.
c. $21,000. Work: M (50%), C (50%) M: +8,000 96,000x50%=48,000 -35,000 = 21,000
What is the formula for computing the new partner's proportion of the partnership's net book value
New partner's proportion of the partnership's net book value = (Prior capital of existing partners + investment of new partner) x Percentage of capital to new partner
Brad an Austin each owns one retail appliance store. The two individuals agree to combine as of 7/1/X8 to form a new partnership, Brad & Austin Discount Stores. 1. Profit and loss ratios. Brad and Mike have agreed to share profits and losses 50/50. 2. Capital investments. The opening capital investments for the new partnership are to be in the same ratio as the profit and loss sharing ratios for the new partnership. If necessary, certain partners may have to contribute additional cash, and others may have to withdraw cash to bring the capital investments into the proper ratio. 3. Accounts receivable. The partners agreed to set the new partnership's allowance for bad debts at 3% of the accounts receivable contributed by B&M and 12% of the accounts receivable contributed by A&J. 4. Inventory. The new partnership's opening inventory is to be valued by the FIFO method. B&M used the FIFO method to value inventory (which approximates its current value), and A&J used the LIFO method. The LIFO inventory represents 85% of its FIFO value. 5. Property and equipment. The partners agree that the building's current value is approximately 70% of the building's historical cost, as recorded on each partnership's books. 6. Unpaid liability. After each partnership's books were closed on 6/30/X8, an unrecorded merchandise purchase of $1,500 by A&J was discovered. The merchandise had been sold by 6/30/X8. 7. The 6/30/X8 post-closing trial balances of the partnerships follow: CASH: B - DR 25,000; A - DR 22,000 A/R: B - DR 100,000; A - DR 150,000 ADA: B - CR 2,000; A - CR 6,000 INVENTORY: B - DR 175,000; A - DR 119,000 B&E: B - DR 105,000; A - DR 160,000 ACC DEP: B - CR 24,000; A - CR 61,000 A/P: B - CR 40,000; A - CR 60,000 N/P: B - CR 100,000; A - CR 120,000 BRAD, CAP: B - CR 239,000 Part 1: Prepare journal entries to record the initial capital contribution after considering the effect of this information. Use separate entries for each of the combining partnerships. Part 2: Prepare a schedule computing the cash contributed or withdrawn by each partner to bring the initial capital balances into the profit and loss sharing ratio. What if the split is 60/40?
Part 1: Brad JE: DR Cash: 25,000 DR A/R: 100,000 CR ADA: 3,000 DR Inv: 175,000 DR B&E: 73,500 CR A/P: 40,000 CR N/P: 100,000 CR Brad, cap: 230,500 Austin JE: DR Cash: 22,000 DR A/R: 150,000 CR ADA: 18,000 DR Inv: 140,000 DR B&E: 112,00 CR A/P: 61,500 CR N/P: 120,000 CR Brad, cap: 224,500 Part 2: 50/50 split Profit sharing percentage: B- 50%; A- 50% Capital balances: B- 230,500; A- 224,500; total - 455,000 Capital balances required using profit and loss sharing percentages: B- 227,500; A - 227,500 Capital contribution or (withdrawal): B - (3,000); A - 3,000 60/40 split Profit sharing percentage: B- 60%; A- 40% Capital balances: B- 230,500; A- 224,500; total - 455,000 Capital balances required using profit and loss sharing percentages: B- 273,000; A - 182,000 Capital contribution or (withdrawal): B - 42,500; A - (42,500)
Explain single taxation
Partnerships are not taxed, they only report their earnings. Partnerships allocate profits among partners. Partners then share their portion of profits on their individual tax returns.
Ch 15 Quiz #4 Two sole proprietors, L and M, agreed to form a partnership on January 1, 20X9. The trial balance for each proprietorship is shown below as of January 1, 20X9. Look at quiz 15 #4 for the chart The LM partnership will take over the assets and assume the liabilities of the proprietors as of January 1, 20X9.Required: a) If the Partnership Agreement states that the Partnerships Capital Percentage will be based on their FV Net Asset Contribution, what Percentage of the Total Capital will be allocated to M? b) If the partners agreed on a 90%/10% capital ratio with M owning 90%, what is the "true up" payment required?
a) 294/554 = 53% b) (554,000*90%)-294,000=204.6
Ch 15 Quiz #3 Roberts and Smith drafted a partnership agreement that lists the following FV assets contributed at the partnership's formation: Cash: R: 80,00 S: 30,000 Inventory: R: 10,000 S: 55,000 Building: R: 130,000 S: 80,000 Furniture & equip: R: 15,000 S: 0 The building Robert contributed is subject to a mortgage of $50,000, which the partnership has assumed. The partnership agreement also specifies that profits and losses are to be distributed evenly. a) What amounts should be recorded as capital for Roberts and Smith at the formation of the partnership without a true up for the 50/50 profit and loss allocation? b) If the partners agreed on a 50%/50% capital ratio, what is the "true up" payment required by Smith?
a) R: 185,000 S: 165,000 b) 185K + 165K = 350K 350Kx50% = 175K 175K - 165K = 10K
Is revaluation method: a. non GAAP b. GAAP
a. non GAAP
