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Chapter 15 Test Bank

PARTNERSHIPS – FORMATION, OPERATIONS, AND CHANGESIN OWNERSHIP INTERESTS

Multiple Choice Questions

LO11. Under the Uniform Partnership Act, loans made by a partner to

the partnership are treated as

a. advances to the partnership for which interest shall be paid from the date of the advance.

b. advances to the partnership that are carried in the partners' capital accounts.

c. Accounts Payable of the partnership for which interest is paid.

d. advances to the partnership for which interest does not have to be paid.

LO12. A partner assigned his partnership interest to a third party.

Which statement best describes the legal ramifications to the assignee?

a. The assignment of the partnership interest does not entitle the assignee to partnership assets upon a liquidation.

b. The assignment dissolves the partnership.c. The assignee has the right to share in the management of

the partnership.d. The assignee does not become a partner but has the right to

share in future partnership profits and to receive the proper share of partnership assets upon liquidation.

LO13. In the Uniform Partnership Act, partners have

I. mutual agency.II.unlimited liability.

a. I only.b. II only.c. I and II.d. Neither I nor II.

©2009 Pearson Education, Inc. publishing as Prentice Hall15-1

LO14. Partnerships

a. are required to prepare annual reports.b. are required to file income tax returns but do not pay

Federal taxes.c. are required to file income tax returns and pay Federal

income taxes.d. are not required to file income tax returns or pay Federal

income taxes.

LO25. Langley invests his delivery van in a computer repair

partnership with McCurdy. What amount should the van be credited to Langley’s partnership capital?

a. The tax basis.b. The fair value at the date of contribution.c. Langley’s original cost.d. The assessed valuation for property tax purposes.


Use the following information for questions 6, 7 and 8.

A summary balance sheet for the McCune, Nall, and Oakley partnership appears below. McCune, Nall, and Oakley share profits and losses in a ratio of 2:3:5, respectively.

AssetsCash $ 50,000Inventory 62,500Marketable securities 100,000Land 50,000Building-net 250,000Total assets $ 512,500

EquitiesMcCune, capital $ 212,500Nall, capital 200,000Oakely, capital 100,000Total equities $ 512,500

The partners agree to admit Pavic for a one-fifth interest. The fair market value of partnership land is appraised at $100,000 and the fair market value of inventory is $87,500. The assets are to be revalued prior to the admission of Pavic and there is $15,000 of goodwill that attaches to the old partnership.

LO26. By how much will the capital accounts of McCune, Nall, and

Oakley increase, respectively, due to the revaluation of the assets and the recognition of goodwill?

a. The capital accounts will increase by $25,000 each.b. The capital accounts will increase by $30,000 each.c. $18,000, $27,000, and $45,000.d. $20,000, $25,000, and $30,000.

LO27. How much cash must Pavic invest to acquire a one-fifth

interest?

a. $117,500.b. $120,500.c. $146,875.d. $150,625.


LO28. What will the profit and loss sharing ratios be after Pavic’s

investment?

a. 1:2:4:2.b. 2:3:5:2.c. 3:4:6:2.d. 4:6:10:5.


Albion and Blaze share profits and losses equally. Albion and Blaze receive salary allowances of $20,000 and $30,000, respectively, and both partners receive 10% interest on their average capital balances. Average capital balances are calculated at the beginning of each month balance regardless of when additional capital contributions or permanent withdrawals are made subsequently within the month. Partners’ drawings are not used in determining the average capital balances. Total net income for 2006 is $120,000.

Albion BlazeJanuary 1 capital balances $ 100,000 $ 120,000Yearly drawings ($1,500 a month) 18,000 18,000Permanent withdrawals of capital: June 3 ( 12,000 ) May 2 ( 15,000 )Additional investments of capital: July 3 40,000 October 2 50,000

LO39. What is the weighted-average capital for Albion and Blaze in

2006?

a. $100,000 and $120,000.b. $105,333 and $126,667.c. $110,667 and $119,583.d. $126,667 and $105,333.

LO310. If the average capital for Albion and Blaze from the above

information is $112,000 and $119,000, respectively, what will be the total amount of profit allocated after the salary and interest distributions are completed?

a. $70,000.b. $73,100.c. $75,000.d. $80,000.


LO311. If the average capital balances for Albion and Blaze are

$100,000 and $120,000, what will the final profit allocations for Albion and Blaze in 2006?

a. $50,000 and $70,000.b. $54,000 and $66,000.c. $70,000 and $50,000.d. $75,000 and $45,000.

Use the following information for questions 12 and 13.

Bloom and Carnes share profits and losses in a ratio of 2:3, respectively. Bloom and Carnes receive salary allowances of $10,000 and $20,000, also respectively, and both partners receive 10% interest based upon the balance in their capital accounts on January 1. Partners’ drawings are not used in determining the average capital balances. Total net income for 2006 is $60,000. If net income after deducting the interest and salary allocations is greater than $20,000, Carnes receives a bonus of 5% of the original amount of net income.

Bloom CarnesJanuary 1 capital balances $ 200,000 $ 300,000Yearly drawings ($1,500 a month) 18,000 18,000

LO312. What are the total amounts for the allocation of interest,

salary, and bonus, and, how much over-allocation is present?

a. $60,000 and $0.b. $80,000 and $20,000.c. $83,000 and $0.d. $83,000 and $23,000.

LO313. If the partnership experiences a net loss of $20,000 for the

year, what will be the final amount of profit or (loss) closed to each partner’s capital account?

a. ($30,000) to Bloom and $10,000 to Carnes. b. ($10,000) to Bloom and ($10,000) to Carnes.c. ($8,000) to Bloom and ($12,000) to Carnes.d. $10,000 to Bloom and ($30,000) to Carnes.


LO314. The XYZ partnership provides a 10% bonus to Partner Y that is

based upon partnership income, after deduction of the bonus. If the partnership's income is $121,000, how much is Partner Y's bonus allocation?

a. $11,000.b. $11,450.c. $11,650.d. $12,100.

LO315. Drawings

a. are advances to a partnership.b. are loans to a partnership.c. are a function of interest on partnership average capital.d. *are the same nature as withdrawals.

LO416. If the partnership agreement provides a formula for the

computation of a bonus to the partners, the bonus would be computed

a. next to last, because the final allocation is the distribution of the profit residual.

b. before income tax allocations are made.c. after the salary and interest allocations are made.d. in any manner agreed to by the partners.



Davis has decided to retire from the partnership of Davis, Eiser, and Foreman. The partnership will pay Davis $200,000. Goodwill is to be recorded in the transaction as implied by the excess payment to Davis. A summary balance sheet for the Davis, Eiser, and Foreman partnership appears below. Davis, Eiser, and Foreman share profits and losses in a ratio of 1:1:3, respectively.


EquitiesDavis, capital 160,000Eiser, capital 140,000Foreman, capital 300,000Total equities $ 600,000

LO517. What goodwill will be recorded?

a. $40,000.b. $120,000.c. $160,000.d. $200,000.

LO518. What partnership capital will Eiser have after Davis retires?

a. $100,000.b. $140,000.c. $180,000.d. $220,000.

LO519. What partnership capital will Foreman have after Davis retires?

a. $240,000.b. $300,000.c. $360,000.d. $420,000.


LO620. In a limited partnership, a general partner

a. is excluded from management.b. is not entitled to a bonus at the end of the year.c. has limited liability for partnership debit.d. has unlimited liability for partnership debit.


LO2Exercise 1

Cesar and Damon share partnership profits and losses at 60% and 40%, respectively. The partners agree to admit Egan into the partnership for a 50% interest in capital and earnings. Capital accounts immediately before the admission of Egan are:

Cesar (60%) $ 300,000Damon (40%) 300,000Total $ 600,000

Required:

1. Prepare the journal entry(s) for the admission of Egan to the partnership assuming Egan invested $400,000 for the ownership interest. Egan paid the money directly to Cesar and to Damon for 50% of each of their respective capital interests. The partnership records goodwill.

2. Prepare the journal entry(s) for the admission of Egan to the partnership assuming Egan invested $500,000 for the ownership interest. Egan paid the money to the partnership for a 50% interest in capital and earnings. The partnership records goodwill.

3. Prepare the journal entry(s) for the admission of Egan to the partnership assuming Egan invested $700,000 for the ownership interest. Egan paid the money to the partnership for a 50% interest in capital and earnings. The partnership records goodwill.

LO3Exercise 2

On February 1, 2005, Flores, Gilroy, and Hansen began a partnership in which Flores and Hansen contributed cash of $25,000; Gilroy contribute property with a fair value of $50,000 and a tax basis $40,000. Gilroy receives a 5% bonus of partnership income. Flores and Hansen receive salaries of $10,000 each. The partnership agreement of Flores, Gilroy, and Hansen provides all partners to receive a 5% interest on capital and that profits and losses be divided of the remaining income be distributed to Flores, Gilroy, and Hansen by a 1:3:1 ratio.

Required:

Prepare a schedule to distribute $25,000 of partnership net income to the partners.


LO3Exercise 3

The profit and loss sharing agreement for the Quade, Reid, and Scott partnership provides for a $15,000 salary allowance to Reid. Residual profits and losses are allocated 5:3:2 to Quade, Reid, and Scott, respectively. In 2006, the partnership recorded $120,000 of net income that was properly allocated to the partner's capital accounts. On January 25, 2007, after the books were closed for 2006, Quade discovered that office equipment, purchased for $12,000 on December 29, 2006, was recorded as office expense by the company bookkeeper.

Required:

Prepare the necessary correcting entry(s) for the partnership.

LO3Exercise 4

Evans, Fitch, and Gault operate a partnership with a complex profit and loss sharing agreement. The average capital balance for each partner on December 31, 2006 is $300,000 for Evans, $250,000 for Fitch, and $325,000 for Gault. An 8% interest allocation is provided to each partner. Evans and Fitch receive salary allocations of $10,000 and $15,000, respectively. If partnership net income is above $25,000, after the salary allocations are considered (but before the interest allocations are considered), Gault will receive a bonus of 10% of the original amount of net income. All residual income is allocated in the ratios of 2:3:5 to Evans, Fitch, and Gault, respectively.

Required:

1. Prepare a schedule to allocate income to the partners assuming that partnership net income is $250,000.

2. Prepare a journal entry to distribute the partnership's income to the partners (assume that an Income Summary account is used by the partnership).


LO3Exercise 5

Required:

Using the information from Exercise 4 above:

1. Prepare a schedule to allocate income or loss to the partners assuming that the partnership incurs a net loss of $36,000.

2. Prepare a journal entry to distribute the partnership's loss to the partners (assume that an Income Summary account is used by the partnership).

LO3Exercise 6

Grech, Harris, and Ivers have a retail partnership business selling personal computers. The partners are allowed an interest allocation of 8% on their average capital. Capital account balances on the first day of each month are used in determining weighted average capital, regardless of additional partner investment or withdrawal transactions during any given month. Drawings are disregarded in computing average capital, but temporary withdrawals of capital that are debited to the capital account are used in the average calculation. Partner capital activity for the year was:

Capital accounts Grech Harris IversJan 1 balance $ 200,000 $ 300,000 $ 250,000Feb 2 investment 50,000Mar 6 investment 10,000 20,000Apr 20 withdrawal ( 10,000 )Jul 3 withdrawal and investment ( 7,000 ) 10,000Sep 29 investment 5,000 4,000 5,000Nov 5 investment 5,000Required:

Calculate weighted average capital for each partner, and determine the amount of interest that each partner will be allocated.


LO3Exercise 7

The profit and loss sharing agreement for the Sealy, Teske, and Ubank partnership provides that each partner receive a bonus of 5% on the original amount of partnership net income if net income is above $25,000. Sealy and Teske receive a salary allowance of $7,500 and $10,500, respectively. Ubank has an average capital balance of $260,000, and receives a 10% interest allocation on the amount by which his average capital account balance exceeds $200,000. Residual profits and losses are allocated to Sealy, Teske, and Ubank in their respective ratios of 7:5:8.

Required:

Prepare a schedule to allocate $88,000 of partnership net income to the partners.

LO5Exercise 8

A summary balance sheet for the partnership of Ivory, Jacoby and Kato on December 31, 2006 is shown below. Partners Ivory, Jacoby and Kato allocate profit and loss in their respective ratios of 9:6:10.


EquitiesIvory, capital $ 425,000Jacoby, capital 225,000Kato, capital 75,000Total equities $ 725,000

The partners agree to admit Lange for a one-tenth interest. The fair market value for partnership land is $180,000, and the fair market value of the inventory is $150,000.


Required:

1. Record the entry to revalue the partnership assets prior to the admission of Lange.

2. Calculate how much Lange will have to invest to acquire a 10% interest.

3. If Lange paid $200,000 to the partnership in exchange for a 10% interest, what would be the bonus that is allocated to each partner's capital account?

LO5Exercise 9

A summary balance sheet for the Vail, Wacker Yang partnership on December 31, 2006 is shown below. Partners Vail, Wacker, and Yang allocate profit and loss in their respective ratios of 4:5:7. The partnership agreed to pay partner Yang $227,500 for his partnership interest upon his retirement from the partnership on January 1, 2007. Any payments exceeding Yang’s capital balance are treated as a bonus from partners Vail and Wacker.


EquitiesVail, capital $ 212,500Wacker, capital 112,500Yang, capital 137,500Total equities $ 462,500

Required:

Prepare the journal entry to reflect Yang’s retirement from the partnership.


LO5Exercise 10

A summary balance sheet for the Almond, Brandt, and Clack partnership on December 31, 2006 is shown below. Partners Almond, Brandt, and Clack allocate profit and loss in their respective ratios of 2:1:1. The partnership agreed to pay partner Brandt $135,000 for his partnership interest upon his retirement from the partnership on January 1, 2007. The partnership financials on January 1, 2007 are:


EquitiesAlmond, capital $ 210,000Brandt, capital 105,000Clack, capital 105,000Total equities $ 420,000

Required:

Prepare the journal entry to reflect Brandt’s retirement from the partnership:1. Assuming a bonus to Brandt.2. Assuming a revaluation of total partnership capital based on excess payment.3. Assuming goodwill to excess payment is recorded.


SOLUTIONS

Multiple Choice Questions

1. a

2. d

3. c

4. b

5. b

6. c The assets will be valued upward by $90,000 which, allocated on a 2:3:5 basis, yields $18,000 to McCune, $27,000 to Nall, and $45,000 to Oakely.

7. d After the revaluation, the assets will be recorded at $602,500. If Pavic is admitted for a one-fifth interest, the $602,500 represents 80% of the total implied capital. Dividing $602,500 by 80% gives a total capitalization of $753,150 for which $150,625 is required from Pavic for a 20% interest.

8. d Each of the original partners has given up 20% of their interest to Pavic. Their profit and loss sharing ratios will therefore be 80% of what they were before the admission of Pavic.

McCune 20% x 80% = 16%Nall 30% x 80% = 24%Oakely 50% x 80% = 40%Pavic = 20%

Expressed as: 4:6:10:5

9. c Albion: [($100,000 x 6) + ($88,000 x 1) + ($128,000 x 5)]/12 = $110,667

Blaze: [($120,000 x 5) + ($105,000 x 5) + ($155,000 x 2)]/12 = $119,583

10. b Capital: ($112,000 + $119,000)x(10%) = $23,100Salary: ($20,000 + $30,000) = $50,000Total: $23,100 + $50,000 = $73,100


11. b Albion: ($100,000 x 10%) + $20,000 + $24,000 = $54,000Blaze: ($120,000 x 10%) + $30,000 + $24,000 = $66,000

12. b Interest: ($500,000 x 10%) = $50,000Salary: ($10,000 + $20,000) = $30,000Bonus: Condition not met = $0

Total allocations = $80,000 and over-allocations =$80,000 - $60,000 = $20,000

13. b Bloom:Interest allocation: $20,000Salary allocation: $10,000

Carnes:Interest allocation: $30,000Salary allocation: $20,000

There is a total of $80,000 for positive allocations. To bring them down to a $20,000 loss, a residual adjustment of ($100,000) is needed which is allocated ($40,000) to Bloom and ($60,000) to Carnes. After these amounts are assigned to the partners, each partner’s capital account will be reduced by a net $10,000.

14. a B = .1x($121,000 - B)B = $12,100 - .1B1.1B = $12,100B = $11,000

15. d

16. d

17. d

18. c

19. c

20. d


Exercise 1

Requirement 1

Goodwill 200,000 Cesar, capital 120,000 Damon, capital 80,000

Cesar, capital 210,000Damon, capital 190,000 Egan, capital 400,000

If a $400,000 payment represents 50% of total capital, then twice that amount, or $800,000, is the implied total capital including goodwill. If the present total capital is $600,000, and the implied total capital is $800,000, the amount of goodwill to record is $200,000. This goodwill is allocated 60% to Cesar and 40% to Damon.

After the first entry is posted, the balances in the Cesar and Damon capital accounts will be $420,000 and $380,000, respectively. If one-half of each partner’s interest is given to Egan, Cesar’s capital account is reduced by $210,000, and Damon’ capital account is reduced by $190,000.

Requirement 2

Goodwill 100,000Cash 500,000 Egan, capital 600,000

If we focus on the current capital of the partnership, $600,000, and say that it is fairly valued, then, if it represents 50% of final capital after Egan’s investment, final capital should be $1,200,000. Egan’s share of final capital will be $600,000, and, if Egan invests $500,000 for this interest, there must be $100,000 of goodwill that is allocated to Egan.

Requirement 3

Goodwill 100,000 Cesar, capital 60,000 Damon, capital 40,000

Cash 700,000 Egan, capital 700,000

If Egan invests $700,000 for a 50% interest, it implies that total partnership capital should be $1,400,000. After Egan’s investment, total capital will be $1,300,000, and goodwill is therefore $100,000. The goodwill is allocated to Cesar and Damon.


Exercise 2

Income Flores Gilroy HansenNet income $ 25,000Bonus to Gilroy ( 1,250 ) $ 1,250Salaries ( 20,000 ) $ 10,000 $ 10,000Interest ( 5,000 ) 1,250 2,500 1,250Residual loss ( 1,250 )Loss allocation 1,250 $( 250 ) ( 750 ) ( 250 )Allocation $ 0 $ 11,000 $ 3,000 $ 11,000

Exercise 3

1/25/07 Office Equipment 12,000 Quade, capital 6,000 Reid, capital 3,600 Scott, capital 2,400

Correction of journal entry error from 12/29/03. To record office equipment and to adjust partner capital accounts.

Exercise 4

Requirement 1

Income Evans Fitch GaultNet income $ 250,000Bonus to Gault ( 25,000 ) $ 25,000Salary allocation ( 25,000 ) $ 10,000 $ 15,000Interest allocation ( 70,000 ) 24,000 20,000 26,000Residual ( 130,000 ) 26,000 39,000 65,000Final allocation $ 0 $ 60,000 $ 74,000 $ 116,000

Requirement 2

Income summary 250,000 Evans, capital 60,000 Fitch, capital 74,000 Gault, capital 116,000


Exercise 5

Requirement 1

Loss Evans Fitch GaultNet loss $ ( 36,000 )Bonus to Gault ( 0 ) $ 0Salary allocation ( 25,000 ) $ 10,000 $ 15,000Interest allocation ( 70,000 ) 24,000 20,000 $ 26,000Subtotal ( 131,000 ) 34,000 35,000 26,000Residual allocation 131,000 ( 26,200 ) ( 39,300 ) ( 65,500 )Totals $ 0 $ 7,800 $( 4,300 ) $( 39,500 )

Requirement 2

Fitch, capital 4,300Gault, capital 39,500 Evans, capital 7,800 Income summary 36,000

Exercise 6

GrechJan, Feb $ 200,000 x 2 = $ 400,000Mar 250,000 x 1 = 250,000Apr, May, Jun, Jul 260,000 x 4 = 1,040,000Aug, Sep 253,000 x 2 = 506,000Oct, Nov, Dec 258,000 x 3 = 774,000Total capital $ 2,970,000Average capital $ 247,500Interest allocation $ 19,800

HarrisJan, Feb, Mar $ 300,000 x 3 = $ 900,000Apr, May, Jun, Jul 320,000 x 4 = 1,280,000Aug, Sep 330,000 x 2 = 660,000Oct, Nov, Dec 334,000 x 3 = 1,002,000Total capital $ 3,842,000Average capital $ 320,167Interest allocation $ 25,613


Ivers

Jan, Feb, Mar, Apr $ 250,000 x 4 = $ 1,000,000May, Jun, Jul, Aug, Sep 240,000 x 5 = 1,200,000Oct, Nov 245,000 x 2 = 490,000Dec 250,000 x 1 = 250,000Total capital $ 2,940,000Average capital $ 245,000Interest allocation $ 19,600

Exercise 7

Income Sealy Teske UbankNet income $ 88,000Bonus ( 13,200 ) $ 4,400 $ 4,400 $ 4,400Salary ( 18,000 ) 7,500 10,500Interest ( 6,000 ) 6,000Subtotal 50,800 11,900 14,900 10,400Balance ( 50,800 ) 17,780 12,700 20,320Totals $ 0 $ 29,680 $ 27,600 $ 30,720

Exercise 8

Requirement 1

The assets of the partnership must be adjusted to fair market value. Land will increase by $100,000, and Inventory by $75,000. The profit and loss ratio elements add up to 25. Partner Ivory will then be allocated 9/25 of the $175,000, etc.

Land 100,000Inventory 75,000 Ivory, capital 63,000 Jacoby, capital 42,000 Kato, capital 70,000

Requirement 2

The partnership's total assets after revaluation are $900,000. If Lange acquires a 10% interest, it implies that the $900,000 represents 90% of the partnership’s value after Lange's investment. Therefore, $900,000/90% = $1,000,000, and $1,000,000 x 10% = $100,000. The entry to record Lange’s investment would be:

Cash 100,000 Lange, capital 100,000


Requirement 3

Cash 200,000 Lange, capital 100,000 Ivory, capital 36,000 Jacoby, capital 24,000 Kato, capital 40,000

Exercise 9

1/1/04 Yang, capital 137,500 Vail, capital ($90,000 x 4/9) 40,000 Wacker, capital ($90,000 x 5/9) 50,000 Cash 227,500

Exercise 10

Requirement 1

Almond and Clack give a bonus to Brand which reduces their capital in a 2 to 1 ratio.

Brandt, capital 105,000Almond, capital 20,000Clack, capital 10,000 Cash 135,000

Requirement 2

Revalue the total partnership capital to reflect the value at Brandt’s retirement’s excess payment of $30,000.

Goodwill 60,000Almond, capital 20,000Clack, capital 10,000Brandt, capital 30,000

Brandt, capital 135,000 Cash 135,000


Requirement 3

Add goodwill equal to the excess payment

Brandt, capital 105,000Goodwill 30,000 Cash 135,000


ch15 beams10e tb

Documents

summary balance sheet

income summary account

uniform partnership act

capital total equities

average capital balances

average capital balance

loss sharing agreement

total net income