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TRUE-FALSE STATEMENTS

1. The personal assets, liabilities, and personal transactions of partners are excluded from

the accounting records of the partnership.

2. The act of any partner is binding on all other partners if the act appears to be appropriate

for the partnership.

3. A major advantage of the partnership form of organization is that the partners have

unlimited liability.

4. Partnership creditors may have a claim on the personal assets of any of the partners if the

partnership assets are not sufficient to settle claims.

5. The partnership agreement between partners must be in writing.

6. If a partner invests noncash assets in a partnership, they should be recorded by the

partnership at their fair market value.

7. L. Hill invests the following assets in a new partnership: $15,000 in cash, and equipment

that cost $30,000 but has a book value of $17,000 and fair market value of $20,000. Hill,

Capital will be credited for $32,000.

8. Two proprietorships cannot combine and form a partnership.

9. If a partner's investment in a partnership consists of equipment that has accumulated

depreciation of $8,000, it would not be appropriate for the partnership to record the

accumulated depreciation.

10. If a partner's investment in a partnership consists of Accounts Receivable of $25,000 and

an Allowance for Doubtful Accounts of $7,000, it would not be appropriate for the

partnership to record the Allowance for Doubtful Accounts.

 

11. Unless stated otherwise in the partnership contract, profits and losses are shared among

the partners in the ratio of their capital equity balances.

12. If salary allowances and interest on capital are stipulated in the partnership profit and losssharing agreement, they are implemented only if income is sufficient to cover the amounts required by these features.

13. Unless the partnership agreement specifically indicates an income ratio, partnership net

income or loss is not allocated to the partners.

14. Partnership income or loss need not be closed to partners' capital accounts each period

because of the unlimited life characteristic of partnerships.

15. If a partnership has a loss for the period, the closing entry to transfer the loss to the

partners will require a credit to the Income Summary account.

 

16. The partners' drawing accounts are closed each period into the Income Summary

account.

17. Salary allowances to partners are a major expense on most partnership income

statements.

18. An interest allowance in sharing partnership net income (or net loss) is related to the

amount of partners' invested capital during the period.

19. The financial statements of a partnership are similar to those of a proprietorship.

20. The income earned by a partnership will always be greater than the income earned by a

proprietorship because in a partnership there is more than one owner contributing to the

success of the business.

 

21. The function of the Partners' Capital Statement is to explain the changes in partners'

capital account balances during a period.

22. A detailed listing of all the assets invested by a partner in a partnership appears on the

Partners' Capital Statement.

23. Total partners' equity of a partnership is equal to the sum of all partners' capital account

balances.

24. The distribution of cash to partners in a partnership liquidation is always made based on

the partners' income sharing ratio.

25. The liquidation of a partnership means that a new partner has been admitted to the

partnership.

 

a26. The admission of a new partner results in the legal dissolution of the existing partnership

and the beginning of a new partnership.

a27. If a new partner is admitted into a partnership by investment, the total assets and total

capital will change.

a28. A bonus to old partners results when the new partner's capital credit on the date of

admittance is greater than his or her investment in the firm.

a29. If a new partner invests in a partnership at book value and acquires a 1/4 interest in total

partnership capital, it indicates that a bonus was paid to the original partners.

a30. A bonus to the remaining partners results when a retiring partner receives partnership

assets which are less than his or her capital balance on the date of withdrawal.

 

31. A partnership is an association of no more than two persons to carry on as co-owners of a business for profit.

32. Once assets have been invested in the partnership, they are owned jointly by all partners.

33. Each partner's initial investment in a partnership should be recorded at book value.

34. Partnership income is shared in proportion to each partner's capital equity interest unless

the partnership contract specifically indicates the manner in which net income or net loss

is to be divided.

35. In a liquidation, the final distribution of cash to partners should be on the basis of their

income ratios.

 

a36. In an admission of a partner by investment of assets, the total net assets and total capital of the partnership do not change.

a37. The withdrawal of a partner legally dissolves the partnership.

MULTIPLE CHOICE QUESTIONS

38. A hybrid form of business organization with certain features like a corporation is a(n)

a. limited liability partnership.

b. limited liability company.

c. "S" corporation.

d. sub-chapter "S" corporation.

39. A partnership

a. has only one owner.

b. pays taxes on partnership income.

c. must file an information tax return.

d. is not an accounting entity for financial reporting purposes.

40. A general partner in a partnership

a. has unlimited liability for all partnership debts.

b. is always the general manager of the firm.

c. is the partner who lacks a specialization.

d. is liable for partnership liabilities only to the extent of that partner's capital equity.

41. The individual assets invested by a partner in a partnership

a. revert back to that partner if the partnership liquidates.

b. determine that partner's share of net income or loss for the year.

c. are jointly owned by all partners.

d. determine the scope of authority of that partner.

 

 

 

42. Which one of the following would not be considered a disadvantage of the partnership

form of organization?

a. Limited life

b. Unlimited liability

c. Mutual agency

d. Ease of formation

43. The partnership form of business is

a. restricted to law and medical practices.

b. restricted to firms having fewer than 10 partners.

c. not restricted to any particular type of business.

d. most often used in relatively large companies.

44. Which of the following is not a principal characteristic of the partnership form of business

organization?

a. Mutual agency

b. Association of individuals

c. Limited liability

d. Limited life

45. The partnership agreement should include each of the following except the

a. date of the partnership inception.

b. principal location of the firm.

c. surviving family members in the event of a partner's death.

d. Each of these should be included.

 

46. Which of the following statements is true regarding the form of a legally binding

partnership contract?

a. The partnership contract must be in writing.

b. The partnership contract may be based on a handshake.

c. The partnership contract may be implied.

d. The partnership contract cannot be oral.

47. Which of the following statements about a partnership is correct?

a. The personal assets of a partner are included in the partnership accounting records.

b. A partnership is not required to file an information tax return.

c. Each partner's share of income is taxable to the partnership.

d. A partnership represents an accounting entity for financial reporting purposes.

48. In a partnership, mutual agency means

a. each partner acts on his own behalf when engaging in partnership business.

b. the act of any partner is binding on all other partners, only if partners act within their

scope of authority.

c. an act by a partner is judged as binding on other partners depending on whether the

act appears to be appropriate for the partnership.

d. that partners must pay taxes on a mutual or combined basis.

49. A partnership

a. is dissolved only by the withdrawal of a partner.

b. is dissolved upon the acceptance of a new partner.

c. dissolution means the business must liquidate.

d. has unlimited life.

50. The partner in a limited partnership that has unlimited liability is referred to as the

a. lead partner.

b. head partner.

c. general partner.

d. unlimited partner.

51. Limited partnerships

a. must have at least one general partner.

b. guarantee that a partner will receive a return.

c. guarantee that a partner will get back his original investment.

d. are limited to only three partners.

52. The Polen-James partnership is terminated when creditor claims exceed partnership

assets by $40,000. James is a millionaire and Polen has no personal assets. Polen's

partnership interest is 75% and James's is 25%. Creditors

a. must collect their claims equally from Polen and James.

b. may collect the entire $40,000 from James.

c. must collect their claims 75% from Polen and 25% from James.

d. may not require James to use his personal assets to satisfy the $40,000 in claims.

53. Which of the following statements about partnerships is incorrect?

a. Partnership assets are co-owned by partners.

b. If a partnership is terminated, the assets do not legally revert to the original contributor.

c. If the partnership agreement does not specify the manner in which net income is to be

shared, it is distributed according to capital contributions.

d. Each partner has a claim on assets equal to the balance in the partner's capital

account.

54. Which of the following is not an advantage of the partnership form of business?

a. Mutual agency

b. Ease of formation

c. Ease of decision making

d. Freedom from governmental regulations and restrictions

55. The largest companies in the United States are primarily organized as

a. limited partnerships.

b. partnerships.

c. corporations.

d. proprietorships.

56. The basis for dividing partnership net income or net loss is referred to as any of the

following except the

a. income ratio.

b. income and loss ratio.

c. profit and loss ratio.

d. income sharing ratio.

57. Which of the following statements is incorrect regarding partnership agreements?

a. It may be referred to as the “articles of co-partnership.”

b. Oral agreements are preferable to written articles.

c. It should specify the different relationships that are to exist among the partners.

d. It should state procedures for submitting disputes to arbitration.

58. Horton invests personally owned equipment, which originally cost $110,000 and has

accumulated depreciation of $30,000 in the Horton and Matile partnership. Both partners

agree that the fair market value of the equipment was $60,000. The entry made by the

partnership to record Horton's investment should be

a. Equipment .......................................................................... 110,000

Accumulated Depreciation—Equipment ..................... 30,000

Horton, Capital ........................................................... 80,000

b. Equipment .......................................................................... 80,000

Horton, Capital ........................................................... 80,000

c. Equipment .......................................................................... 60,000

Loss on Purchase of Equipment ......................................... 20,000

Accumulated Depreciation—Equipment.............................. 30,000

Horton, Capital ........................................................... 110,000

d. Equipment .......................................................................... 60,000

Horton, Capital ........................................................... 60,000

59. Bob is investing in a partnership with Andy. Bob contributes as part of his initial

investment, Accounts Receivable of $80,000; an Allowance for Doubtful Accounts of

$12,000; and $8,000 cash. The entry that the partnership makes to record Bob's initial

contribution includes a

a. credit to Bob, Capital for $88,000.

b. debit to Accounts Receivable for $68,000.

c. credit to Bob, Capital for $76,000.

d. debit to Allowance for Doubtful Accounts for $12,000.

Ans: C,

60. Which of the following would not be recorded in the entry for the formation of a

partnership?

a. Accumulated depreciation

b. Allowance for doubtful accounts

c. Accounts receivable

d. All of these would be recorded.

61. Sam is investing in a partnership with Jerry. Sam contributes equipment that originally

cost $63,000, has a book value of $30,000, and a fair market value of $39,000. The entry

that the partnership makes to record Sam's initial contribution includes a

a. debit to Equipment for $33,000.

b. debit to Equipment for $63,000.

c. debit to Equipment for $39,000.

d. credit to Accumulated Depreciation for $33,000.

62. Amber contributes, as part of her initial investment, accounts receivable with an allowance

for doubtful accounts. Which of the following reflects a proper treatment?

a. The balance of the accounts receivable account should be recorded on the books of

the partnership at its net realizable value.

b. The allowance account may be set up on the books of the partnership because it

relates to the existing accounts that are being contributed.

c. The allowance account should not be carried onto the books of the partnership.

d. The accounts receivable and allowance should not be recorded on the books of the

partnership because a partner must invest cash in the business.

63. Which one of the following would not be considered an expense of a partnership in

determining income for the period?

a. Expired insurance

b. Salary allowance to partners

c. Supplies used

d. Freight-out

64. A partner invests into a partnership a building with an original cost of $90,000 and

accumulated depreciation of $40,000. This building has a $70,000 fair market value. As a

result of the investment, the partner’s capital account will be credited for

a. $70,000.

b. $50,000.

c. $90,000.

d. $120,000.

65. Danny and Vicky are forming a partnership. Danny will invest a truck with a book value of

$10,000 and a fair market value of $14,000. Vicky will invest a building with a book value

of $30,000 and a fair market value of $42,000 with a mortgage of $15,000. At what

amount should the building be recorded?

a. $30,000

b. $27,000

c. $42,000

d. $45,000

 

66. Danny and Vicky are forming a partnership. Danny will invest a truck with a book value of

$10,000 and a fair market value of $14,000. Vicky will invest a building with a book value

of $30,000 and a fair market value of $42,000 with a mortgage of $15,000. What amount

should be recorded in Vicky’s capital account?

a. $30,000

b. $27,000

c. $42,000

d. $14,000

67. Danny and Vicky are forming a partnership. Danny will invest a truck with a book value of

$10,000 and a fair market value of $14,000. Vicky will invest a building with a book value

of $30,000 and a fair market value of $42,000 with a mortgage of $15,000. What amount

should be recorded in Danny’s capital account?

a. $30,000

b. $27,000

c. $42,000

d. $14,000

68. Rosen and Noble decide to organize a partnership. Rosen invests $15,000 cash, and

Noble contributes $12,000 cash and equipment having a book value of $6,000. Choose

the entry to record Noble’s investment in the partnership assuming the equipment has a

fair market value of $9,000.

a. Cash................................................................................... 12,000

Equipment ......................................................................... 6,000

Noble, Capital ........................................................... 18,000

b. Equipment ......................................................................... 6,000

Noble, Capital ........................................................... 6,000

c. Cash................................................................................... 12,000

Noble, Capital ........................................................... 12,000

d. Cash................................................................................... 12,000

Equipment ......................................................................... 9,000

Noble, Capital ........................................................... 21,000

69. L. Trevino and B. Hogan combine their individual sole proprietorships to start the Trevino-

Hogan partnership. L. Trevino and B. Hogan invest in the partnership as follows:

Book Value Market Value

Trevino Hogan Trevino Hogan

Cash $21,000 $6,000 $21,000 $6,000

Accounts Receivable 9,000 3,000 9,000 3,000

Allowance for Doubtful

Accounts (1,500) (600) (2,100) (900)

Equipment 15,000 24,000 13,500 9,000

Accumulated Depreciation (3,000) (9,000)

The entries to record the investment will include a credit to:

a. Trevino, Capital of $40,500.

b. Hogan, Capital of $17,100.

c. Trevino, Capital of $42,000.

d. Hogan, Capital of $23,100.

70. Partners Don and Ron have agreed to share profits and losses in an 80:20 ratio

respectively, after Don is allowed a salary allowance of $80,000 and Ron is allowed a

salary allowance of $40,000. If the partnership had net income of $80,000 for 2010, Ron’s

share of the income would be

a. $40,000

b. $32,000

c. $48,000

d. $8,000

 

71. The partnership agreement of Nieto, Keller, and Pickert provides for the following income

ratio: (a) Nieto, the managing partner, receives a salary allowance of $36,000, (b) each

partner receives 15% interest on average capital investment, and (c) remaining net

income or loss is divided equally. The average capital investments for the year were:

Nieto $200,000, Keller $400,000, and Pickert $600,000. If partnership net income is

$240,000, the amount distributed to Keller should be:

a. $60,000

b. $62,000

c. $68,000

d. $80,000

72. The partnership agreement of Nieto, Keller, and Pickert provides for the following income

ratio: (a) Nieto, the managing partner, receives a salary allowance of $36,000, (b) each

partner receives 15% interest on average capital investment, and (c) remaining net

income or loss is divided equally. The average capital investments for the year were:

Nieto $200,000, Keller $400,000, and Pickert $600,000. If partnership net income is

$180,000, the amount distributed to Nieto should be:

a. $30,000

b. $54,000

c. $60,000

d. $66,000

73. Partners Acer and Barr have capital balances in a partnership of $40,000 and $60,000,

respectively. They agree to share profits and losses as follows:

Acer Barr

As salaries $10,000 $12,000

As interest on capital at the beginning of the year 10% 10%

Remaining profits or losses 50% 50%

If income for the year was $50,000, what will be the distribution of income to Barr?

a. $23,000

b. $27,000

c. $20,000

d. $10,000

74. Partners Acer and Barr have capital balances in a partnership of $40,000 and $60,000,

respectively. They agree to share profits and losses as follows:

Acer Barr

As salaries $10,000 $12,000

As interest on capital at the beginning of the year 10% 10%

Remaining profits or losses 50% 50%

If income for the year was $30,000, what will be the distribution of income to Acer?

a. $13,000

b. $77,000

c. $10,000

d. $14,000

75. Partners Acer and Barr have capital balances in a partnership of $40,000 and $60,000,

respectively. They agree to share profits and losses as follows:

Acer Barr

As salaries $10,000 $12,000

As interest on capital at the beginning of the year 10% 10%

Remaining profits or losses 50% 50%

If net loss for the year was $2,000, what will be the distribution to Barr?

a. $12,000 income

b. $1,000 income

c. $1,000 loss

d. $2,000 loss

76. Partners Bob and Don have agreed to share profits and losses in an 80:20 ratio

respectively, after Bob is allowed a salary allowance of $140,000 and Don is allowed a

salary allowance of $70,000. If the partnership had net income of $140,000 for 2010,

Don’s share of the income would be

a. $70,000.

b. $56,000.

c. $84,000.

d. $14,000.

77. The most appropriate basis for dividing partnership net income when the partners do not

plan to take an active role in daily operations is

a. on a fixed ratio.

b. interest on capital balances and salaries to the partners.

c. on a ratio based average capital balances.

d. salaries to the partners and the remainder on a fixed ratio.

78. The Raney and Kiser partnership agreement stipulates that profits and losses will be

shared equally after salary allowances of $160,000 for Raney and $80,000 for Kiser. At

the beginning of the year, Raney's Capital account had a balance of $320,000, while Kiser'

Capital account had a balance of $280,000. Net income for the year was $200,000. The

balance of Kiser' Capital account at the end of the year after closing is

a. $380,000.

b. $80,000.

c. $340,000.

d. $360,000.

79. A partner's share of net income is recognized in the accounts through

a. adjusting entries.

b. closing entries.

c. correcting entries.

d. accrual entries.

80. The partnership of Lane and Starr reports net income of $60,000. The partners share

equally in income and losses. The entry to record the partners' share of net income will

include a

a. credit to Income Summary for $60,000.

b. credit to Lane, Capital for $30,000.

c. debit to Starr, Capital for $30,000.

d. credit to Starr, Drawing for $30,000.

81. Mel receives $210,000 and Norm receives $140,000 in a split of $350,000 net income.

Which expression does not reflect the income splitting arrangement?

a. 3:2

b. 3/5 & 2/5

c. 6:4

d. 2:1

82. An income ratio based on capital balances might be appropriate when

a. service is a primary consideration.

b. some, but not all, partners plan to work in the business.

c. funds invested in the partnership are considered the critical factor.

d. little net income is expected.

83. If the partnership agreement specifies salaries to partners, interest on partners' capital,

and the remainder on a fixed ratio, and partnership net income is not sufficient to cover

both salaries and interest,

a. only salaries are allocated to the partners.

b. only interest is allocated to the partners.

c. the entire net income is shared on a fixed ratio.

d. both salaries and interest are allocated to the partners.

84. Which of the following would not be considered an expense of a partnership in

determining income for the period?

a. Expired insurance

b. Income tax expense

c. Rent expense

d. Utilities expense

85. The net income of the Rice and Nance partnership is $180,000. The partnership

agreement specifies that Rice and Nance have a salary allowance of $48,000 and

$72,000, respectively. The partnership agreement also specifies an interest allowance of

10% on capital balances at the beginning of the year. Each partner had a beginning

capital balance of $120,000. Any remaining net income or net loss is shared equally.

What is Rice's share of the $180,000 net income?

a. $48,000

b. $60,000

c. $66,000

d. $78,000

86. The net income of the Rice and Nance partnership is $180,000. The partnership

agreement specifies that Rice and Nance have a salary allowance of $48,000 and

$72,000, respectively. The partnership agreement also specifies an interest allowance of

10% on capital balances at the beginning of the year. Each partner had a beginning

capital balance of $120,000. Any remaining net income or net loss is shared equally.

What is the balance of Nance's Capital account at the end of the year after net income

has been distributed?

a. $204,000

b. $192,000

c. $222,000

d. $210,000

87. The net income of the Linder and Hill partnership is $250,000. The partnership agreement

specifies that profits and losses will be shared equally after salary allowances of $200,000

(Linder) and $150,000 (Hill) have been allocated. At the beginning of the year, Linder 's

Capital account had a balance of $500,000 and Hill's Capital account had a balance of

$650,000. What is the balance of Hill's Capital account at the end of the year after profits

and losses have been distributed?

a. $650,000

b. $100,000

c. $750,000

d. $775,000

88. A partners' capital statement explains

a. the amount of legal liability of each of the partners.

b. the types of assets invested in the business by each partner.

c. how the partnership will be capitalized if a new partner is admitted to the partnership.

d. the changes in each partner's capital account and in total partnership capital during a

period.

89. Each of the following is used in preparing the partners’ capital statement except the

a. balance sheet.

b. income statement.

c. partners’ capital accounts.

d. partners’ drawing accounts.

90. The owners' equity statement for a partnership is called the

a. partners' proportional statement.

b. partners' capital statement.

c. statement of shareholders' equity.

d. capital and drawing statement.

91. Which of the following would not cause an increase in partnership capital?

a. Drawings

b. Net income

c. Additional capital investment by the partners

d. Initial capital investment by the partners

92. Mary Janane's capital statement reveals that her drawings during the year were $50,000.

She made an additional capital investment of $25,000 and her share of the net loss for the

year was $10,000. Her ending capital balance was $200,000. What was Mary Janane's

beginning capital balance?

a. $225,000

b. $185,000

c. $235,000

d. $260,000

93. Jeff Lake started the year with a capital balance of $180,000. During the year, his share of

partnership net income was $160,000 and he withdrew $30,000 from the partnership for

personal use. He made an additional capital contribution of $50,000 during the year. The

amount of Jeff Lake's capital balance that will be reported on the year-end balance sheet

will be

a. $160,000.

b. $390,000.

c. $300,000.

d. $360,000.

94. The Partners' Capital Statement for the United Center reported the following information in

total:

Capital, January 1 ................................................ $120,000

Additional investment ........................................... 40,000

Drawings.............................................................. 80,000

Net income........................................................... 100,000

The partnership has three partners: Kent, Hall, and Penn with ending capital balances in a

ratio 40:20:40. What are the respective ending balances of the three partners?

a. Kent, $80,000; Hall, $40,000; Penn, $80,000.

b. Kent, $72,000: Hall, $36,000; Penn, $72,000.

c. Kent, $136,000; Hall, $68,000; Penn, $136,000.

d. Kent, $90,000; Hall, $48,000; Penn, $90,000.

95. The total column of the Partners' Capital Statement for Orson Company is as follows:

Capital, January 1 ................................................ $150,000

Additional investment ........................................... 60,000

Drawings.............................................................. 90,000

Net income........................................................... 180,000

The partnership has three partners. The first two partners have ending capital balances

that are equal. The ending balance of the third partner is half of the ending balance of the

first partner. What is the ending capital balance of the third partner?

a. $72,000

b. $48,000

c. $60,000

d. $66,000

 

96. The partners' drawing accounts are

a. reported on the income statement.

b. reported on the balance sheet.

c. closed to Income Summary.

d. closed to the partners' capital accounts.

97. The Uniform Partnership Act provides that

a. a purchaser of a partnership interest is not a partner until he or she is accepted into

the firm by the continuing partners.

b. a partner must obtain the approval of other partners before selling his or her interest.

c. the price paid in a purchase of partner's interest must be equal to the capital equity

acquired.

d. the price paid in a purchase of partner's interest must be greater than the capital

equity acquired.

98. The balance sheet of a partnership will

a. report retained earnings below the partnership capital accounts.

b. show a separate capital account for each partner.

c. show a separate drawing account for each partner.

d. show the amount of income that was distributed to each partner.

99. The liquidation of a partnership may result from each of the following except the

a. bankruptcy of the partnership.

b. death of a partner.

c. retirement of a partner.

d. sale of the business by the partners.

100. In the liquidation of a partnership, any gain or loss on the realization of noncash assets

should be allocated

a. first to creditors and the remainder to partners.

b. to the partners on the basis of their capital balances.

c. to the partners on the basis of their income-sharing ratio.

d. only after all creditors have been paid.

101. In the liquidation of a partnership, any partner who has a capital deficiency

a. has a personal debt to the partnership for the amount of the deficiency.

b. is automatically terminated as a partner.

c. will receive a cash distribution only on the basis of his or her income-sharing ratio.

d. is not obligated to make up the capital deficiency.

102. Partners Audrey, Betty, and Charles have capital account balances of $120,000 each.

The income and loss ratio is 5:2:3, respectively. In the process of liquidating the

partnership, noncash assets with a book value of $100,000 are sold for $40,000. The

balance of Betty's Capital account after the sale is

a. $90,000.

b. $102,000.

c. $108,000.

d. $132,000.

103. The partners' income and loss sharing ratio is 2:3:5, respectively.

CINDI, JENNI, AND BECKI PARTNERSHIP

Balance Sheet

December 31, 2010

Assets Liabilities and Owners' Equity

Cash $ 90,000 Liabilities $300,000

Noncash assets 570,000 Cindi, Capital 120,000

Jenni, Capital 180,000

Becki, Capital 60,000

Total $660,000 Total $660,000

If the Cindi, Jenni, and Becki Partnership is liquidated by selling the noncash assets for

$390,000 and creditors are paid in full, what is the amount of cash that can be safely

distributed to each partner?

a. Cindi, $72,000; Jenni, $108,000; Becki, $0.

b. Cindi, $84,000; Jenni, $126,000; Becki, $30,000.

c. Cindi, $69,000; Jenni, $111,000; Becki, $0.

d. Cindi, $66,000; Jenni, $114,000; Becki, $0.

104. The partners' income and loss sharing ratio is 2:3:5, respectively.

CINDI, JENNI, AND BECKI PARTNERSHIP

Balance Sheet

December 31, 2010

Assets Liabilities and Owners' Equity

Cash $ 90,000 Liabilities $300,000

Noncash assets 570,000 Cindi, Capital 120,000

Jenni, Capital 180,000

Becki, Capital 60,000

Total $660,000 Total $660,000

If the Cindi, Jenni, and Becki Partnership is liquidated by selling the noncash assets for

$750,000, and creditors are paid in full, what is the total amount of cash that Cindi will

receive in the distribution of cash to partners?

a. $36,000

b. $234,000

c. $156,000

d. $150,000

105. The partners' income and loss sharing ratio is 2:3:5, respectively.

CINDI, JENNI, AND BECKI PARTNERSHIP

Balance Sheet

December 31, 2010

Assets Liabilities and Owners' Equity

Cash $ 90,000 Liabilities $300,000

Noncash assets 570,000 Cindi, Capital 120,000

Jenni, Capital 180,000

Becki, Capital 60,000

Total $660,000 Total $660,000

If the Cindi, Jenni, and Becki Partnership is liquidated and the noncash assets are

worthless, the creditors will look to what partner's personal assets for settlement of the

creditors' claims?

a. The personal assets of Partner Jenni.

b. The personal assets of Partners Cindi and Becki.

c. The personal assets of Partners Cindi, Jenni, and Becki.

d. The personal assets of the partners are not available for partnership debts.

 

106. If a partner has a capital deficiency and does not have the personal resources to eliminate

it,

a. the creditors will have to absorb the capital deficiency.

b. the other partners will absorb the capital deficiency on the basis of their respective

capital balances.

c. the other partners will have to absorb the capital deficiency on the basis of their

respective income sharing ratios.

d. neither the creditors nor the other partners will have to absorb the capital deficiency.

107. When a partnership terminates business, the sale of noncash assets is called

a. liquidation.

b. realization.

c. recognition.

d. disposition.

108. The liquidation of a partnership

a. cannot be a voluntary act of the partners.

b. terminates the business.

c. eliminates those partners with a capital deficiency.

d. cannot occur unless all partners approve.

109. The liquidation of a partnership is a process containing the following steps:

1. Pay partnership liabilities in cash.

2. Allocate the gain or loss on realization to the partners on their income ratios.

3. Sell noncash assets for cash and recognize a gain or loss on realization.

4. Distribute remaining cash to partners on the basis of their remaining capital balances.

Identify the proper sequencing of the steps in the liquidation process.

a. 3, 2, 4, 1.

b. 3, 2, 1, 4.

c. 1, 3, 2, 4.

d. 1, 4, 3, 2.

110. In the final step of the liquidation process, remaining cash is distributed to partners

a. on an equal basis.

b. on the basis of the income ratios.

c. on the basis of the remaining capital balances.

d. regardless of capital deficiencies.

 

111. In the liquidation process, if a capital account shows a deficiency

a. the partner with a deficiency has an obligation to the partnership for the amount of the

deficiency.

b. it may be written off to a "Loss" account.

c. it is disregarded until after the partnership books are closed.

d. it can be written off to a "Gain" account.

112. Before distributing any remaining cash to partners in a partnership liquidation, it is

necessary to do each of the following except

a. sell noncash assets for cash.

b. recognize a gain or loss on realization.

c. allocate the gain or loss to the partners based on their capital balances.

d. pay partnership liabilities in cash.

113. Mary, Ann, and Tina formed a partnership with income-sharing ratios of 50%, 30%, and

20%, respectively. Cash of $300,000 was available after the partnership’s assets were

liquidated. Prior to the final distribution of cash, Mary’s capital balance was $200,000,

Ann’s capital balance was $150,000, and Tina had a capital deficiency of $50,000.

Assuming Tina contributes cash to match her capital deficiency, Mary should receive

a. $175,000.

b. $168,750.

c. $131,250.

d. $200,000.

114. Arlene, Brad, and Chick are partners, sharing income 2:1:2. After selling all of the assets

for cash, dividing gains and losses on realization, and paying liabilities, the balances in the

capital accounts are as follows: Arlene, $10,000 Cr; Brad, $10,000 Cr; and Chick, $30,000

Cr. How much cash should be distributed to Arlene?

a. $6,000

b. $20,000

c. $10,000

d. $16,667

115. In liquidation, balances prior to the distribution of cash to the partners are: Cash $300,000;

Presley, Capital $140,000; Laswell, Capital $130,000, and Hunter, Capital $30,000. The

income ratio is 6:2:2, respectively. How much cash should be distributed to Presley?

a. $125,000

b. $136,250

c. $140,000

d. $150,000

116. In liquidation, balances prior to the distribution of cash to the partners are: Cash $255,000;

Presley, Capital $140,000; Laswell, Capital $130,000, and Hunter, Capital $15,000

deficiency. The income ratio is 6:2:2, respectively. How much cash should be distributed

to Laswell if Hunter does not pay his deficiency?

a. $122,500

b. $126,250

c. $118,750

d. $130,000

117. In liquidation, balances prior to the distribution of cash to the partners are: Cash $360,000;

Peterson, Capital $168,000; Staley, Capital $156,000, and Klugman, Capital $36,000. The

income ratio is 6:2:2, respectively. How much cash should be distributed to Peterson?

a. $150,000.

b. $163,500.

c. $168,000.

d. $180,000.

118. In liquidation, balances prior to the distribution of cash to the partners are: Cash $306,000;

Peterson, Capital $168,000; Staley, Capital $156,000, and Klugman, Capital $18,000

deficiency. The income ratio is 6:2:2, respectively. How much cash should be distributed

to Staley if Klugman does not pay his deficiency?

a. $147,000.

b. $151,500.

c. $142,500.

d. $156,000.

119. Use the following account balance information for Grinotfin Partnership with income ratios

of 2:4:4 for Grigsby, Nott, and Fine, respectively.

Assets Liabilities and Owner’s Equity

Cash $ 18,000 Accounts payable $ 42,000

Accounts Grigsby, Capital 46,000

receivable 44,000 Nott, Capital 16,000

Inventory 146,000 Fine, Capital 104,000

$208,000 $208,000

Assume that, as part of liquidation proceedings, Grinotfin sells its noncash assets for

$170,000. The amount of cash that would ultimately be distributed to Fine would be:

a. $104,000.

b. $96,000.

c. $68,000.

d. $172,000.

120. Use the following account balance information for Grinotfin Partnership with income ratios

of 2:4:4 for Grigsby, Nott, and Fine, respectively.

Assets Liabilities and Owner’s Equity

Cash $ 18,000 Accounts payable $ 42,000

Accounts Grigsby, Capital 46,000

receivable 44,000 Nott, Capital 16,000

Inventory 146,000 Fine, Capital 104,000

$208,000 $208,000

Assume that, as part of liquidation proceedings, Grinotfin sells its noncash assets for

$120,000. As a result, one of the partners has a capital deficiency which that partner

decides not to repay. The amount of cash that would ultimately be distributed to Fine

would be:

a. $104,000.

b. $76,000.

c. $48,000.

d. $68,000.

 

a121. D. Dieker purchases a 25% interest for $30,000 when the Reeves, Porter, Kiner

partnership has total capital of $270,000. Prior to the admission of Dieker, each partner

has a capital balance of $90,000. Each partner relinquishes an equal amount of his capital

balance to Dieker. The amount to be relinquished by Kiner is

a. $15,000.

b. $19,000.

c. $22,500.

d. $37,500.

a122. Finney is admitted to a partnership with a 25% capital interest by a cash investment of

$90,000. If total capital of the partnership is $390,000 before admitting Finney, the bonus

to Finney is

a. $30,000.

b. $15,000.

c. $45,000.

d. $60,000.

a123. Eberle and Lankton are partners who share income and losses in the ratio of 3:2,

respectively. On August 31, their capital balances were: Eberle, $175,000 and Lankton,

$150,000. On that date, they agree to admit Newman as a partner with a one-third capital

interest. If Newman invests $125,000 in the partnership, what is Eberle's capital balance

after Newman's admittance?

a. $150,000

b. $158,333

c. $160,000

d. $175,000

a124. Eberle and Lankton are partners who share income and losses in the ratio of 3:2,

respectively. On August 31, their capital balances were: Eberle, $175,000 and Lankton,

$150,000. On that date, they agree to admit Newman as a partner with a one-third capital

interest. If Newman invests $200,000 in the partnership, what is Lankton's capital balance

after Newman's admittance?

a. $175,000

b. $160,000

c. $157,500

d. $150,000

Ans: B

a125. King and Otto are partners who share profits and losses equally and have capital

balances of $560,000 and $490,000, respectively. Pitts is admitted into the partnership by

investing $490,000 for a 30% capital interest. The account balance of Otto, Capital after

the admission of Pitts would be

a. $462,000.

b. $476,000.

c. $504,000.

d. $490,000.

 

a126. Roper and Walton have partnership capital balances of $320,000 and $240,000,

respectively. Walton negotiates to sell his partnership interest to Molle for $280,000.

Roper agrees to accept Molle as a new partner. The partnership entry to record this

transaction is

a. Cash ................................................................................... 280,000

Molle, Capital ............................................................. 280,000

b. Walton, Capital.................................................................... 280,000

Molle, Capital ............................................................. 280,000

c. Cash ................................................................................... 40,000

Walton, Capital.................................................................... 240,000

Molle, Capital ............................................................. 280,000

d. Walton, Capital.................................................................... 240,000

Molle, Capital ............................................................. 240,000

a127. Gore and Dean share partnership profits and losses in the ratio of 6:4. Gore's Capital

account balance is $320,000 and Dean’s Capital account balance is $200,000. Naylor is

admitted to the partnership by investing $360,000 and is to receive a one-fourth ownership

interest. Gore, Dean and Naylor's capital balances after Naylor's investment will be

Gore Dean Naylor

a. $320,000 $200,000 $360,000

b. $404,000 $256,000 $220,000

c. $396,000 $264,000 $220,000

d. $390,000 $270,000 $220,000

a128. Judy and Sue have partnership capital account balances of $600,000 and $450,000,

respectively and share profits and losses equally. Sara is admitted to the partnership by

investing $250,000 for a one-fourth ownership interest. The balance of Sue's Capital

account after Sara is admitted is

a. $412,500.

b. $450,000.

c. $487,500.

d. $325,000.

a129. The admission of a new partner to an existing partnership

a. may be accomplished only by investing assets in the partnership.

b. requires purchasing the interest of one or more existing partners.

c. causes a legal dissolution of the existing partnership.

d. is almost always accompanied by the liquidation of the business.

a130. When a partnership interest is purchased

a. every partner’s capital account is affected.

b. the transaction is a personal transaction between the purchaser and the selling

partner(s).

c. the buyer receives equity equal to the amount of cash paid.

d. all partners will receive some part of the purchase price.

 

a131. Baker and Mays each sell 1/3 of their partnership interest to Pool, receiving $140,000

each. At the time of the admission, each partner has a $420,000 capital balance. The

entry to record the admission of Pool will show a

a. debit to Cash for $280,000.

b. credit to Pool, Capital for $420,000.

c. debit to Mays, Capital for $420,000.

d. debit to Baker, Capital for $140,000.

a132. Bell and Herr sell 1/4 of their partnership interest to Ives receiving $200,000 each. At the

time of admission, Bell and Herr each had a $350,000 capital balance. The admission of

Ives will cause the net partnership assets to

a. increase by $400,000.

b. remain at $700,000.

c. decrease by $400,000.

d. remain at $1,100,000.

a133. Diaz and Helms sell to Mayo a 1/3 interest in the Diaz-Helms partnership. Mayo will pay

Diaz and Helms each $70,000 for admission into the organization. Before this transaction, Diaz

and Helms show capital balances of $105,000 each. The journal entry to record the

admission of Mayo will

a. show a debit to Cash for $140,000.

b. not show a debit to Cash.

c. show a debit to Helms, Capital for $70,000.

d. show a credit to Mayo, Capital for $140,000.

a134. Garr invests $20,000 in cash (admission by investment) in the Massey-Dix partnership to

acquire a 1/4 interest. In this case

a. the accounting will be the same as a purchase of an interest.

b. the total net assets of the new partnership are unchanged from the previous partnership.

c. the total capital of the new partnership is greater than the total capital of the old

partnership.

d. Garr's income ratio will automatically be 1/4.

a135. Which of the following is correct when admitting a new partner into an existing

partnership?

Purchase of an Interest Admission by Investment

a. Total net assets unchanged unchanged

b. Total capital increased unchanged

c. Total net assets unchanged increased

d. Total capital unchanged unchanged

a136. When admitting a new partner by investment, a bonus to old partners

a. is usually unjustified because book values clearly reflect partnership net worth.

b. is sometimes justified because goodwill may exist and it is not reflected in the accounts.

c. results if the debit to cash is less than the new partner's capital credit.

d. results if the debit to cash is equal to the new partner's capital credit.

a137. When admitting a new partner by investment, a bonus to old partners is allocated on

a. the basis of capital balances.

b. the basis of the original investment of the old partners.

c. the basis of income ratios before the admission of the new partner.

d. a seniority basis.

a138. A bonus to a new partner

a. is prohibited by GAAP.

b. results when the new partner's capital credit is less than his or her investment of

assets in the firm.

c. may occur when recorded book values are lower than market values.

d. results when the new partner's capital credit is greater than his or her investment of

assets in the firm.

a139. A bonus to a new partner will

a. increase the capital balances of existing partners based on their income ratios before

the admission of the new partner.

b. increase the capital balances of existing partners based on their income ratios after

the admission of the new partner.

c. decrease the capital balances of existing partners based on their income ratios before

the admission of the new partner.

d. decrease the capital balances of existing partners based on their capital balances

before the admission of the new partner.

a140. On November 30, capital balances are Gast $120,000, Cook $100,000 and Irving

$100,000. The income ratios are 20%, 20% and 60% respectively. Gast decides to retire

from the partnership. The partnership pays Gast $100,000 cash for her partnership

interest. After Gast’s retirement, what is the balance of Irving’s capital account?

a. $88,000.

b. $100,000.

c. $112,000.

d. $115,000.

 

a141. On November 30, capital balances are Gast $120,000, Cook $100,000 and Irving

$100,000. The income ratios are 20%, 20% and 60% respectively. Gast decides to retire

from the partnership. In order for Cook and Irving to have equal capital interests after the

retirement of Gast, how much partnership cash would have to be paid to Gast for her

partnership interest?

a. $0.

b. $106,666.

c. $120,000.

d. Any amount paid to Gast will cause Cook and Irving to still have equal capital

balances.

a142. Mary, Jim, and Mike have partnership capital account balances of $225,000, $450,000

and $105,000, respectively. The income sharing ratio is Mary, 50%; Jim, 40%; and Mike,

10%. Mary desires to withdraw from the partnership and it is agreed that partnership

assets of $195,000 will be used to pay Mary for her partnership interest. The balances of

Jim's and Mike's Capital accounts after Mary's withdrawal would be

a. Jim, $450,000; Mike, $105,000.

b. Jim, $474,000; Mike, $111,000.

c. Jim, $426,000; Mike, $99,000.

d. Jim, $435,000; Mike, $90,000.

a143. Ard, Ball, and Dole have partnership capital account balances of $400,000 each. Income

and losses are shared equally. Dole agrees to sell three-fourths of his ownership interest

to Ard for $350,000 and one-fourth to Ball for $125,000. Ard and Ball will use personal

assets to purchase Dole's interest. The partnership's entry to record Dole's withdrawal

from the partnership would be

a. Dole, Capital ...................................................................... 475,000

Cash .......................................................................... 475,000

b. Dole, Capital ...................................................................... 475,000

Ard, Capital ............................................................... 350,000

Ball, Capital ............................................................... 125,000

c. Dole, Capital ...................................................................... 400,000

Ard, Capital ............................................................... 300,000

Ball, Capital ............................................................... 100,000

d. Ard, Capital ........................................................................ 356,250

Ball, Capital ........................................................................ 118,750

Dole, Capital ............................................................. 475,000

a144. When a partner withdraws from the firm, which of the following reflects the correct

partnership effects?

Payment from Payment from

Partners' Personal Assets Partnership Assets

a. Total net assets decreased decreased

b. Total capital decreased decreased

c. Total net assets unchanged decreased

d. Total capital unchanged unchanged

a145. Which of the following is not a necessary action that the partnership must take upon the

death of a partner?

a. Determine the net income or net loss for the year to date.

b. Discontinue business operations.

c. Close the books.

d. Prepare financial statements.

a146. On November 30, capital balances are Howe $90,000, Doss $75,000 and Newlin $75,000.

The income ratios are 20%, 20% and 60%, respectively. Howe decides to retire from the

partnership. The partnership pays Howe $105,000 cash for her partnership interest. After

Howe's retirement, what is the balance of Doss's capital account?

a. $71,250

b. $72,000

c. $75,000

d. $97,500

a147. On November 30, capital balances are Howe $90,000, Doss $75,000 and Newlin $75,000.

The income ratios are 20%, 20% and 60%, respectively. Howe decides to retire from the

partnership. The partnership pays Howe $75,000 cash for her partnership interest. After

Howe's retirement, what is the balance of Newlin's capital account?

a. $66,000

b. $75,000

c. $84,000

d. $86,250

a148. On November 30, capital balances are Howe $90,000, Doss $75,000 and Newlin $75,000.

The income ratios are 20%, 20% and 60%, respectively. Howe decides to retire from the

partnership. In order for Doss and Newlin to have equal capital interests after the

retirement of Howe, how much partnership cash would have to be paid to Howe for her

partnership interest?

a. $0

b. $80,000

c. $90,000

d. Any amount paid to Howe will cause Doss and Newlin to still have equal capital

balances.

149. All of the following are characteristics of partnerships except

a. co-ownership of property.

b. mutual agency.

c. unlimited life.

d. association of individuals.

150. The Butkus, Sayers, and Halas partnership is terminated when the claims of company

creditors exceed partnership assets by $50,000. The capital balances for Butkus, Sayers,

and Halas are $35,000, $5,000, and $0, respectively. The original claims of the creditors

were negotiated by Sayers and Halas. Which partner(s) is(are) personally and individually

liable for all partnership liabilities?

a. Butkus

b. Sayers

c. Sayers and Halas

d. Butkus, Sayers, and Halas

 

151. When a partner invests noncash assets in a partnership, the assets should be recorded at

their

a. book value.

b. carrying value.

c. fair market value.

d. original cost.

152. The partnership agreement of Rossi and Petry provides for salary allowances of $45,000

to Rossi and $35,000 to Petry, with the remaining income or loss to be divided equally.

During the year, Rossi and Petry each withdraw cash equal to 80% of their salary

allowances. If partnership net income is $100,000, Rossi's equity in the partnership would

a. increase more than Petry’s.

b. decrease more than Petry's.

c. increase the same as Petry's.

d. decrease the same as Petry's.

153. Which of the following statements is correct?

a. Salaries to partners and interest on partners' capital are expenses of the partnership.

b. Salaries to partners are expenses of the partnership but not interest on partners'

capital.

c. Interest on partners' capital is an expense of the partnership but not salaries to

partners.

d. Neither salaries to partners nor interest on partners' capital are expenses of the

partnership.

154. In the liquidation of a partnership, the gains and losses from assets sold are

a. divided equally among the partners.

b. divided among the partners in the stated income ratio.

c. divided among the partners in proportion to their capital equity interests.

d. ignored.

155. If a partner with a capital deficiency is unable to pay the amount owed to the partnership,

the deficiency is allocated to the partners with credit balances

a. equally.

b. on the basis of their income ratios.

c. on the basis of their capital balances.

d. on the basis of their original investments.

156. An entry is not required in the liquidation of a partnership to record the

a. payment of cash to creditors.

b. distribution of cash to the partners.

c. sale of noncash assets.

d. allocation of a capital deficiency to partners with credit balances when the deficient

partner is expected to pay the deficiency.

157. The first step in the liquidation of a partnership is to

a. allocate a gain or loss on realization to the partners.

b. distribute remaining cash to the partners.

c. pay partnership liabilities.

d. sell noncash assets and recognize a gain or loss on realization.

158. Lance joins the partnership of Kubek and Musial by paying $30,000 in cash. If the net

assets of the partnership are still the same amount after Lance has been admitted as a

partner, then Lance

a. must have been admitted by investment of assets.

b. must have been admitted by purchase of a partner's interest.

c. must have received a bonus upon being admitted.

d. could have been admitted by an investment of assets or by a purchase of a partner's

interest.

159. Mock is admitted to a partnership with a 25% capital interest by a cash investment of

$120,000. If total capital of the partnership is $520,000 before admitting Mock, the bonus

to Mock is

a. $40,000.

b. $20,000.

c. $60,000.

d. $80,000.

BRIEF EXERCISES

BE 160

Dauber and Jackson decide to organize a partnership. Dauber invests $25,000 cash, and

Jackson contributes $5,000 and equipment having a book value of $3,500 and a fair market value

of $10,000.

Instructions

Prepare the entry to record each partner’s investment.

BE 161

Santo Company and Renfro Company decide to merge their proprietorships into a partnership

called Crestwood Company. The balance sheet of Renfro Company shows:

Accounts Receivable $15,000

Less: Allowance for doubtful accounts 1,500 $13,500

Equipment $20,000

Less: Accumulated depreciation 10,000 $10,000

The partners agree that the net realizable value of the receivables is $12,500 and that the fair

market value of the equipment is $15,000.

Instructions

Indicate how the four accounts should appear in the opening balance sheet of the partnership.

BE 162

The Frick & Frack Co. reports net income of $28,000. Interest allowances are Frick $3,000 and

Frack $5,000; partner salary allowances are Frick $18,000 and Frack $10,000 and the remainder

is shared equally.

Instructions

Indicate the division of net income to each partner, and prepare the entry to distribute the net

income.

 

 

BE 163

Northern Co. had beginning capital balances on January 1, 2010, as follows: Andy Golic $30,000

and Jim Carney $25,000. During the year, drawings were Golic $15,000 and Carney $8,000. Net

income was $50,000, and the partners share income equally.

Instructions

Prepare the partners’ capital statement for the year.

BE 164

After liquidating noncash assets and paying creditors, account balances in the Main Co. are Cash

$29,000, A Capital (Cr.) $11,000, B Capital (Cr,) $8,000 and C Capital (Cr.) $10,000. The

partners share income equally.

Instructions

Journalize the final distribution of cash to the partners.

BE 165

Dailey Company at December 31 has cash $40,000, noncash assets $200,000, liabilities

$110,000, and the following capital balances: Dickinson $90,000 and Meierhoff $40,000. The firm

is liquidated, and $240,000 in cash is received for the noncash assets. Dickinson and Meierhoff

income ratios are 60% and 40%, respectively.

Instructions

Prepare a cash distribution schedule.

aBE 166

In Taylor Co., capital balances are Oscor $60,000 and Glenda $75,000. The partners share

income equally. Jared is admitted to the firm with a 40% interest by an investment of cash of

$65,000. Journalize the admission of Jared.

aBE 167

Ron and Linda are partners who share profits 60% and 40%. Their capital balances were both

$90,000 before Kelly was admitted to the partnership. Kelly contributed $120,000 in cash to the

partnership for a 30% interest.

Instructions

Compute the capital balances of Ron and Linda after Kelly is admitted to the partnership.

aBE 168

Capital balances in Carson Co. are Donald $50,000, Anne $38,000, and Harry $25,000. The

partners share income equally. Harry receives $35,000 from partnership assets in withdrawing

from the firm.

Instructions

Journalize the withdrawal of Harry.

aBE 169

Nick, Alan, and Tim are partners who share profits 40%, 20%, and 40%. Their capital balances

were $630,000, $420,000, and $210,000, respectively, before Tim’s retirement. Tim was paid

$270,000 from partnership assets to buy his interest.

Instructions

Compute the capital balances of Nick and Alan after Tim has withdrawn.

EXERCISES

Ex. 170

Mark Bahr and Robert Engler decide to form a partnership. Bahr invests $25,000 cash and

accounts receivable of $30,000 less allowance for doubtful accounts of $2,000. Engler

contributes $20,000 cash and equipment having a $6,000 book value. It is agreed that the

allowance account should be $3,000 and the fair market value of the equipment is $10,000.

Instructions

Prepare the necessary journal entry to record the formation of the partnership.

 

Ex. 171

Joe Mann and Sam Trane operate separate auto repair shops. On January 1, 2010, they decide

to combine their separate businesses which were operated as proprietorships to form M & S Auto

Repair, a partnership. Information from their separate balance sheets is presented below:

Mann Auto Repair Trane Auto Repair

Cash $10,000 $12,000

Accounts receivable 9,000 10,000

Allowance for doubtful accounts 1,000 500

Accounts payable 5,000 6,000

Notes payable — 3,000

Salaries payable 1,000 1,500

Equipment 12,000 24,000

Accumulated amortization—Equipment 2,000 4,000

It is agreed that the expected realizable value of Mann's accounts receivable is $8,000 and

Trane's receivables is $7,000. The fair market value of Mann's equipment is $13,000 and the

value of Trane's equipment is $20,000. It is further agreed that the new partnership will assume

all liabilities of the proprietorships with the exception of the notes payable on Trane's balance

sheet which he will pay himself.

Instructions

Prepare the journal entries necessary to record the formation of the partnership.

Ex. 172

M. Flaherty, P. Denny, and G. Newman are forming a partnership. Flaherty is transferring

$75,000 of personal cash to the partnership. Denny owns land worth $22,000 and a small

building worth $120,000, which she transfers to the partnership. Newman transfers to the

partnership cash of $14,000, accounts receivable of $48,000 and equipment worth $28,000. The

partnership expects to collect $43,000 of the accounts receivable.

Instructions

(a) Prepare the journal entries to record each of the partners’ investments.

(b) What amount would be reported as total owners’ equity immediately after the investments?

Ex. 173

L. Pinella (beginning capital, $80,000) and H. Johnston (beginning capital $120,000) are partners.

During 2010, the partnership earned net income of $90,000, and Pinella made drawings of

$24,000 while Johnston made drawings of $32,000.

Instructions

(a) Assume the partnership income-sharing agreement calls for income to be divided 45% to

Pinella and 55% to Johnston. Prepare the journal entry to record the allocation of net income.

(b) Assume the partnership income-sharing agreement calls for income to be divided with a

salary of $40,000 to Pinella and $35,000 to Johnston, with the remainder divided 45% to

Pinella and 55% to Johnston. Prepare the journal entry to record the allocation of net income.

(c) Assume the partnership income-sharing agreement calls for income to be divided with a

salary of $55,000 to Pinella and $45,000 to Johnston, interest of 10% on beginning capital,

and the remainder divided 50%-50%. Prepare the journal entry to record the allocation of net

income.

(d) Compute the partners’ ending capital balances under the assumption in part (c).

Ex. 174

The Jones and Yancey partnership reports net income of $45,000. Partner salary allowances are

Jones $18,000 and Yancey $12,000. Any remaining income is shared 60:40.

Instructions

Determine the amount of net income allocated to each partner.

 

 

Ex. 175

Cain, Foley, and Hardy formed a partnership on January 1, 2010. Cain invested $60,000, Foley

$60,000 and Hardy $140,000. Cain will manage the store and work 40 hours per week in the

store. Foley will work 20 hours per week in the store, and Hardy will not work. Each partner

withdrew 30 percent of his income distribution during 2010. If there was no income distribution to

a partner, there were no withdrawals of cash.

Instructions

Compute the partners' capital balances at the end of 2010 under the following independent

conditions: (Hint: Use T accounts to determine each partner's capital balances.) (1) Net income is $120,000 and the income ratio is Cain 40%, Foley 35%, and Hardy 25%.

(2) Net income is $140,000 and the partnership agreement only specifies a salary of $50,000 to

Cain and $30,000 to Foley.

(3) Net income is $86,000 and the partnership agreement provides for (a) a salary of $40,000 to

Cain and $40,000 to Foley, (b) interest on beginning capital balances at the rate of 10%,

and (c) any remaining income or loss is to be shared by Cain 40%, Foley 35%, and Hardy

25%.

Ex. 176

Decker and Mader have a partnership agreement which includes the following provisions

regarding sharing net income or net loss:

1. A salary allowance of $54,000 to Decker and $36,000 to Mader.

2. An interest allowance of 10% on capital balances at the beginning of the year.

3. The remainder to be divided 60% to Decker and 40% to Mader.

The capital balance on January 1, 2010, for Decker and Mader was $90,000 and $120,000,

respectively. During 2010, the Decker and Mader Partnership had sales of $495,000, cost of

goods sold of $290,000, and operating expenses of $75,000.

Instructions

Prepare an income statement for the Decker and Mader Partnership for the year ended

December 31, 2010. As a part of the income statement, include a Division of Net Income to each

of the partners.

Ex. 177

Fink & Elston Co. reports net income of $34,000. The partnership agreement provides for annual

salaries of $24,000 for Fink and $15,000 for Elston and interest allowances of $4,000 to Fink and

$6,000 to Elston. Any remaining income or loss is to be shared 70% by Fink and 30% by Elston.

Instructions

Compute the amount of net income distributed to each partner.

Ex. 178

The adjusted trial balance of the Melton and Yount Partnership for the year ended December 31,

2010, appears below:

MELTON AND YOUNT PARTNERSHIP

Adjusted Trial Balance

December 31, 2010

Debit Credit

Current Assets ..................................................................................... 19,000

Plant Assets ......................................................................................... 80,000

Current Liabilities.................................................................................. 7,000

Long-term Debt .................................................................................... 50,000

Melton, Capital ..................................................................................... 20,000

Melton, Drawing ................................................................................... 4,000

Yount, Capital....................................................................................... 18,000

Yount, Drawing..................................................................................... 7,000

Sales.................................................................................................... 100,000

Cost of Goods Sold .............................................................................. 62,000

Operating Expenses............................................................................. 23,000

195,000 195,000

The partnership agreement stipulates that a division of partnership net income or net loss is to be

made as follows:

1. A salary allowance of $12,000 to Melton and $23,000 to Yount.

2. The remainder is to be divided equally.

Instructions

(a) Prepare a schedule which shows the division of net income to each partner.

(b) Prepare the closing entries for the division of net income and for the drawing accounts at

December 31, 2010.

Ex. 179

Jan Penny and Barb Gant have formed the PG Partnership, and have capital balances of

$130,000 and $100,000, respectively, on January 1, 2010. On June 1, 2010, Gant invested an

additional $30,000. Also during the year, Penny withdrew $60,000 and Gant withdrew $48,000.

Sales for the year amounted to $360,000 and expenses were $260,000. Penny and Gant share

income and losses on a 3:1 basis.

Instructions

(a) Prepare the closing entries at December 31, 2010, for the PG Partnership.

(b) Prepare a partners' capital statement for 2010.

Ex. 180

Ace, Goran, and Notte are forming The Acgono Partnership. Ace is transferring $45,000 of

personal cash and equipment worth $38,000 to the partnership. Goran owns land worth $27,000

and a small building worth $112,000, which he transfers to the partnership. There is a long-term

mortgage of $30,000 on the land and building, which the partnership assumes. Notte transfers

cash of $10,000, accounts receivable of $54,000, supplies worth $5,000, and equipment worth

$33,000 to the partnership. The partnership expects to collect $48,000 of the accounts

receivable.

Instructions

Prepare a classified balance sheet for the partnership after the partner’s investments on

December 31, 2010.

Ex. 181

The Mago Company at December 31 has cash $50,000, noncash assets $250,000, liabilities

$138,000, and the following capital balances: Gonzalez $112,000 and Maldonado $50,000. The

firm is liquidated, and $275,000 in cash is received for the noncash assets. Gonzalez and

Maldonado income ratios are 60% and 40%, respectively.

Instructions

Prepare the entries to record:

(a) The sale of noncash assets.

(b) The allocation of the gain or loss on liquidation to the partners.

(c) Payment of creditors.

(d) Distribution of cash to the partners.

Ex. 182

Prepare a partners' capital statement for Zimmermann Company based on the following

information.

Zimmer Mann

Beginning capital $30,000 $27,000

Drawings during year 15,000 8,000

Net income was $35,000, and the partners share income 60% to Zimmer and 40% to Mann.

Ex. 183

On December 31, Thompson Company has cash $30,000, noncash assets $150,000, and

liabilities $80,000. Capital balances were Stine $55,000 and Pine $45,000. The firm is liquidated,

and the noncash assets are sold for $125,000. Stine and Pine share income in a 60:40 ratio.

Instructions

Prepare entries to record (a) the sale of noncash assets and (b) the allocation of the gain (loss)

on liquidation to the partners.

Ex. 184

The ABC Partnership is to be liquidated and you have been hired to prepare a Schedule of Cash

Payments for the partnership. Partners Andie, Becka, and Candice share income and losses in

the ratio of 4:3:3, respectively. Assume the following:

1. The noncash assets were sold for $75,000.

2. Liabilities were paid in full.

3. The remaining cash was distributed to the partners. (If any partner has a capital

deficiency, assume that the partner is unable to make up the capital deficiency.)

Instructions

Using the above information, complete the Schedule of Cash Payments below:

ABC PARTNERSHIP

Schedule of Cash Payments

Noncash Andie Becka Candice

Item Cash + Assets = Liabilities + Capital + Capital + Capital

Balances before

liquidation 25,000 + 150,000 = 50,000 + 25,000 + 35,000 + 65,000

Ex. 185

The MFP Partnership is to be liquidated when the ledger shows the following:

Cash $ 50,000

Noncash Assets 200,000

Liabilities 50,000

Moss, Capital 75,000

Fairly, Capital 100,000

Pratt, Capital 25,000

Moss, Fairly, and Pratt's income ratios are 6:3:1, respectively.

Instructions

Prepare separate entries to record the liquidation of the partnership assuming that the noncash

assets are sold for $150,000 in cash.

,

Ex. 186

Prior to the distribution of cash to the partners, the accounts of ABC Company are: Cash

$30,000, Ace, Capital (Dr.) $10,000, Ball, Capital (Cr.) $25,000, and Catt, Capital (Cr.) $15,000.

They share income on a 5:3:2 basis.

Instructions

Prepare entries to record (a) the absorption of Ace's capital deficiency by the other partners and

(b) the distribution of cash to the partners with credit balances.

Ex. 187

The HK Partnership is liquidated when the ledger shows:

Cash $60,000

Noncash Assets 90,000

Liabilities 44,000

Howell, Capital 100,000

Kenton, Capital 6,000

Howell and Kenton's income ratios are 3:2, respectively.

Instructions

Prepare a schedule of cash payments, assuming that the noncash assets were sold for $70,000.

Assume that any partner’s capital deficiencies cannot be paid to the partnership.

aEx. 188

The Dobler and Menke Partnership has partner capital account balances as follows:

Dobler, Capital $550,000

Menke, Capital 250,000

The partners share income and losses in the ratio of 60% to Dobler and 40% to Menke.

Instructions

Prepare the journal entry on the books of the partnership to record the admission of Sloan as a

new partner under the following three independent circumstances.

1. Sloan pays $350,000 to Dobler and $150,000 to Menke for one-half of each of their

ownership interest in a personal transaction.

2. Sloan invests $850,000 in the partnership for a one-third interest in partnership capital.

3. Sloan invests $175,000 in the partnership for a one-third interest in partnership capital.

Ans: N/A

aSolution 188 (20 min.)

1. Dobler, Capital............................................................................. 275,000

Menke, Capital............................................................................. 125,000

Sloan, Capital ..................................................................... 400,000

(To record admission of Sloan by purchase)

Total net assets and total capital of the partnership do not change.

2. Cash............................................................................................ 850,000

Dobler, Capital .................................................................... 180,000

Menke, Capital .................................................................... 120,000

Sloan, Capital ..................................................................... 550,000

(To record admission of Sloan and bonus to old partners)

Total capital of existing partnership $ 800,000

Investment by new partner, Sloan 850,000

Total capital of new partnership $1,650,000

Sloan's capital credit = $1,650,000 × 1/3 = $550,000

Sloan's investment $850,000

Sloan's capital credit 550,000

Bonus to old partners $300,000

Allocation to old partners

Dobler (60% × $300,000) $180,000

Menke (40% × $300,000) 120,000

$300,000

3. Cash............................................................................................ 175,000

Dobler, Capital............................................................................. 90,000

Menke, Capital............................................................................. 60,000

Sloan, Capital ..................................................................... 325,000

(To record Sloan's admission and bonus)

aEx. 189

Hoy, Lever, and Stone share income on a 6:3:1 basis. They have capital balances of $80,000,

$60,000, and $45,000, respectively, when Morton is admitted to the partnership.

Instructions

Prepare the journal entry to record the admission of Morton into the partnership if Morton

purchases one-half of Hoy's equity for $45,000; one-half of Lever's equity for $22,000; and onethird

of Stone 's equity for $18,000.

aEx. 190

Jim Welch and Sam Thayer share partnership income on a 3:2 basis. They have capital balances

of $560,000 and $280,000, respectively, when Bill Ryan is admitted to the partnership.

Instructions

Prepare the journal entry to record the admission of Ron Ryan under each of the following

assumptions:

(a) Ryan invests $340,000 for a 25% ownership interest.

(b) Ryan invests $200,000 for a 25% ownership interest.

(c) Ryan invests an amount that gives him a 25% ownership interest.

aEx. 191

Donna Leeds and Ann Reeves have capital accounts of $480,000 and $420,000, respectively.

Jeff Evans and Pete Patton are to join the partnership. Evans invests $450,000 in the partnership

for which he receives a capital credit of $450,000. Patton purchases a one-half interest from

Leeds for $300,000 and a one-fourth interest from Reeves for $90,000.

Instructions

(a) Prepare the journal entries to record the admission of Evans and Patton to the partnership.

(b) Determine the capital balances of the partners after the admission of Evans and Patton.

aEx. 192

Dobson, Lancaster, and Pender are partners who share profits and losses 50%, 30%, and 20%,

respectively. Their capital balances are $150,000, $90,000, and $60,000, respectively.

Instructions

(a) Assume Shannon joins the partnership by investing $120,000 for a 25% interest with

bonuses to the existing partners. Prepare the journal entry to record his investment.

(b) Assume instead that Dobson leaves the partnership. Dobson is paid $180,000 with a bonus

to the retiring partner. Prepare the journal entry to record Dobson's withdrawal.

aEx. 193

Bale, Heller, and Winrow share income and losses in a ratio of 3:2:5, respectively. The capital

account balances of the partners are as follows:

Bale, Capital $600,000

Heller, Capital 360,000

Winrow, Capital 240,000

Instructions

Prepare the journal entry on the books of the partnership to record the withdrawal of Winrow

under the following independent circumstances:

1. The partners agree that Winrow should be paid $280,000 by the partnership for his interest.

2. The partners agree that Winrow should be paid $180,000 by the partnership for his interest.

3. Bale agrees to pay Winrow $180,000 for one-half of his capital interest and Heller agrees to

pay Winrow $180,000 for one-half of his capital interest in a personal transaction among the

partners.

Instructions

Prepare the journal entry on the books of the partnership to record the withdrawal of Winrow

under the following independent circumstances:

1. The partners agree that Winrow should be paid $280,000 by the partnership for his interest.

2. The partners agree that Winrow should be paid $180,000 by the partnership for his interest.

3. Bale agrees to pay Winrow $180,000 for one-half of his capital interest and Heller agrees to

pay Winrow $180,000 for one-half of his capital interest in a personal transaction among the

partners.

aEx. 194

Eaton, Korman, and Roland have capital balances of $150,000, $100,000, and $75,000,

respectively, and their income ratios are 4:2:4.

Instructions

Record the withdrawal of Roland from the partnership under each of the following assumptions:

1. Roland is paid $75,000 from partnership assets.

2. Roland is paid $90,000 from partnership assets.

3. Roland is paid $55,000 from partnership assets.

COMPLETION STATEMENTS

195. The ______________ Act provides the basic rules for the formation and operation of

partnerships in more than 90% of the states.

196. A partnership characteristic which enables each partner to act on behalf of the partnership when engaging in partnership business is called ______________.

197. A major disadvantage of the partnership form of organization is ______________, which makes each partner personally and individually liable for all partnership liabilities.

198. The capital accounts indicate each partner's ______________ investment, while the

partner's drawing accounts are ______________ owner's equity accounts.

199. The ______________ ratio specifies the basis for sharing income and losses.

200. An income ratio based on ______________ balances may be appropriate when the

amount of funds invested in the partnership is critical to the partnership.

 

201. A ______________ allowance or ______________ on partners' capital accounts are not expenses of the partnership when they are specified as the basis for sharing income and

losses.

202. In liquidating a partnership, it is necessary to convert ______________ into cash and to

allocate any ______________ or ______________ to the partners based on their income

ratios.

203. A debit balance in a partner's capital account is called a _____________.

a204. A new partner may be admitted to the partnership by ______________ the interest of an existing partner, or by ______________ assets in the partnership.

a205. When a new partner's capital interest on the date of admittance is less than his or her

investment in the firm, a ______________ results for the ______________ partner(s).

a206. If a bonus is given to a new partner, the old partners' capital accounts are decreased

based on their ______________ ratio prior to the admission of the new partner.

MATCHING

207. Match the items below by entering the appropriate code letter in the space provided.

A. Mutual agency G. Purchase of an interest

B. Unlimited liability H. Partnership liquidation

C. Partnership agreement I. Capital deficiency

D. Income ratio J. Distribution of cash to partners in

E. Partners' capital statement liquidation of a partnership.

F. Admission by investment

____ 1. Each partner is personally and individually liable for partnership debts.

____ 2. Made on basis of partners' capital balances.

____ 3. Explains changes in individual partner's capital accounts during a period.

____ 4. Each partner can bind the partnership so long as the action appears to be appropriate

for the partnership.

____ 5. Business terminates.

____ a6. Results in an increase in total net assets and total capital of the partnership.

____ 7. Capital account with a debit balance.

____ 8. The basis for sharing income and losses.

____ a9. Total net assets and total capital of the partnership do not change.

____ 10. Written or verbal contract establishing duties and responsibilities of partners.

SHORT-ANSWER ESSAY QUESTIONS

S-A E 208

Identify and explain the principal characteristics of the partnership form of business organization.

S-A E 209

Drift and Wood are discussing how income and losses should be divided in a partnership they

plan to form. What factors should be considered in determining the division of net income or net

loss?

.

S-A E 210

Are the financial statements of a partnership similar to those of a proprietorship? Discuss.

S-A E 211

A partnership is liquidated by selling the non-cash assets, paying the creditors in full, and

distributing the remaining assets to the partners. Explain why gains and losses on the realization

of non-cash assets are distributed to the partners based on their income ratios, whereas cash is

distributed to the partners based on their equity as shown in their capital accounts. What effects

does the payment or nonpayment of a capital deficiency have on the distribution of cash to the

partners?

S-A E 212 (Ethics)

Three doctors, Terry Black, Mike Layne, and Danny Powell, opened a family medicine clinic. All

three doctors had been lifelong friends. All belonged to the same religious faith. All were very

active in church affairs, and tried to mold their professional behavior to their religious beliefs.

About a year ago, Dr. Black announced that he was leaving the church. The others noticed that

his personality also began to change. He began to dress in flamboyant styles, and he started

wearing expensive-looking jewelry. His temper became unstable—one minute he was calm, and

the next, he might be throwing charts down the hall and screaming. He started coming to the

office late, and forgetting to see some of his patients before he left again. The other two at first

were stunned at the changes. His wife asked them whether they thought he might have a drinking

problem. After finally deciding to investigate, they found what looked to them like a large amount

of cocaine, (hundreds of plastic sacks of white powder) tucked away in boxes of old medical

equipment.

Frightened, Drs. Layne and Powell decided to act quickly. Their partnership agreement said

nothing about dissolving the partnership—only about what to do if one of them died. They

therefore secretly rented office space across town and began to move the most necessary

equipment and supplies to the new office. A month later, they changed the locks on the old office

and began seeing patients in the new office without any notice to Dr. Black at all. Dr. Black simply

came in at around ten o'clock as usual, and found himself locked out of an empty office.

Required:

Did Drs. Layne and Powell act ethically in their ending of the partnership? Explain.

S-A E 213 (Communication)

Will Kelty and Steve Harlan began detail work on automobiles as a hobby. First, they used a mailorder

kit to add "pin striping" to their own cars, a 1968 Mustang and a 1970 GTO Judge,

respectively. Then Will added more flourishes, including his name. Steve practiced painting

flames on his Judge. Gradually, their cars became recognized around town and others began to

ask them to add a flourish here or there to their cars. They were talked into attending a "muscle

car" show in a nearby large city to show off their cars. They had more requests for work than they

could handle. Now, they are considering quitting their other jobs and making this a permanent

business. Steve, for example, turns down more jobs than he accepts and still gets more requests

every week.

Will and Steve are unsure how to proceed. They like the idea of a partnership, but they only know

they work well together—things like how to split payment have just been settled individually for

each job, depending on which one did more work. Will's father suggests a written partnership

agreement. Will disagrees. He believes that it will spoil the whole arrangement by reducing it to

words.

Required:

Write a brief note to Will explaining why he needs a partnership agreement.

 

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