Partnership (Chapters 1-3)

Chapter 15 Test Bank PARTNERSHIPS – FORMATION, OPERATIONS, AND CHANGES IN OWNERSHIP INTERESTSMultiple Choice Questions LO1 1. 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. LO1 2. 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. LO1 3. In the Uniform Partnership Act, partners have I. mutual agency. II.unlimited liability. a. b. c. d. I only. II only. I and II. Neither I nor II. ©2009 Pearson Education, Inc. publishing as Prentice Hall 15-1 LO1 4. 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. LO2 5. Langley invests his delivery van in partnership with McCurdy. What amount credited to Langley’s partnership capital? a. b. c. d. a computer repair should the van be The tax basis. The fair value at the date of contribution. Langley’s original cost. The assessed valuation for property tax purposes. ©2009 Pearson Education, Inc. publishing as Prentice Hall 15-2 Nall. c.000.000.000 50.500 100. publishing as Prentice Hall 15-3 . Nall.000 each.500 $ $ 212. $146. A summary balance sheet for the McCune.Use the following information for questions 6. Nall. $18.000. The fair market value of partnership land is appraised at $100.500.500.000 512. and Oakley partnership appears below. McCune.000 62.500 The partners agree to admit Pavic for a one-fifth interest. $117. c. and Oakley increase.000. $25. capital Nall.000 250. b. ©2009 Pearson Education. Inc. The assets are to be revalued prior to the admission of Pavic and there is $15. respectively.000 each. respectively.500 200. b. The capital accounts will increase by $25. $20.500. By how much will the capital accounts of McCune. $150.000 512. d.000.000 100.875. LO2 6. 7 and 8. cash must Pavic invest to acquire a one-fifth How much interest? a. The capital accounts will increase by $30. capital Oakely.000. and Oakley share profits and losses in a ratio of 2:3:5. and $30. due to the revaluation of the assets and the recognition of goodwill? a. capital Total equities $ $ 50. $120. LO2 7.000 of goodwill that attaches to the old partnership. Assets Cash Inventory Marketable securities Land Building-net Total assets Equities McCune.000 and the fair market value of inventory is $87.625. and $45. d. $27. 1:2:4:2. $70.000 15.000 ) Blaze 120. $73.000 $105.000. $126. Partners’ drawings are not used in determining the average capital balances. respectively.333.500 a month) Permanent withdrawals of capital: June 3 May 2 Additional investments of capital: July 3 October 2 LO3 9. 3:4:6:2. If the average capital for Albion and Blaze from the above information is $112. Use the following information for questions 9.000 January 1 capital balances Yearly drawings ($1. $75. Inc. Albion and Blaze receive salary allowances of $20.667 $126.667 and and and and $120. d.000 50. respectively. b. c. 4:6:10:5.667.LO2 8.000 ) ( 40.333 $110. and both partners receive 10% interest on their average capital balances. $119. $ $ What is the weighted-average capital for Albion and Blaze in 2006? a. publishing as Prentice Hall 15-4 . b.000. Albion 100.000.000 18.000.000.000 and $119.000 18. b. 10 and 11.000 ( 12. ©2009 Pearson Education. d. $100.000.000 and $30. $105. $80. What will the profit and loss sharing ratios be after Pavic’s investment? a. c. c. 2:3:5:2. Albion and Blaze share profits and losses equally. 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. what will be the total amount of profit allocated after the salary and interest distributions are completed? a.000.100. Total net income for 2006 is $120.583. LO3 10. d. $0.000) to Carnes.000.000.000 and $20. c. Inc. ($8.000 18.000 $83.000.000) to Carnes. b. also respectively.000. what will the final profit allocations for Albion and Blaze in 2006? a. Partners’ drawings are not used in determining the average capital balances. how much over-allocation is present? a.000 to Carnes. Bloom and Carnes receive salary allowances of $10. c. $60.000 for the year. $45. ©2009 Pearson Education. Total net income for 2006 is $60.000 and and and and $70. Carnes receives a bonus of 5% of the original amount of net income.000 January 1 capital balances Yearly drawings ($1. ($30.000 $70.000 and $120. b. what will be the final amount of profit or (loss) closed to each partner’s capital account? a.000) to Bloom and ($10. and. $50.000 $75.000.500 a month) LO3 12. salary. $50. Bloom and Carnes share profits and losses in a ratio of 2:3.000.000) to Carnes. If the average capital balances for Albion and Blaze are $100.LO3 11. d. ($10.000 Carnes 300. $ $ What are the total amounts for the allocation of interest.000) to Bloom and $10. If the partnership experiences a net loss of $20. $20. c. Use the following information for questions 12 and 13.000) to Bloom and ($12. $23. respectively.000. Bloom 200. $10.000 $83. If net income after deducting the interest and salary allocations is greater than $20. d. $66. and bonus. d.000.000 $54. publishing as Prentice Hall 15-5 .000 18. LO3 13.000.000 $80.000 and and and and $0.000 to Bloom and ($30. b.000. and both partners receive 10% interest based upon the balance in their capital accounts on January 1. are a function of interest on partnership average capital. $12. b. b.LO3 14. publishing as Prentice Hall 15-6 . d. Inc. If the partnership's income is $121.450. LO4 16. c. c. are advances to a partnership. LO3 15. in any manner agreed to by the partners. after the salary and interest allocations are made. because the final allocation is distribution of the profit residual.000.650. Drawings a. are loans to a partnership. d. $11. before income tax allocations are made. how much is Partner Y's bonus allocation? a. *are the same nature as withdrawals. The XYZ partnership provides a 10% bonus to Partner Y that is based upon partnership income. $11.000. the bonus would be computed a. next to last. If the partnership agreement provides a formula for the computation of a bonus to the partners. after deduction of the bonus. d. $11. the ©2009 Pearson Education. c.100. b. $420. Eiser. $180. 18 and 19.000. Goodwill is to be recorded in the transaction as implied by the excess payment to Davis. $200.000.000 600.000.000 150.000 82. b. b.000 $ 160. capital Eiser. The partnership will pay Davis $200.000 What goodwill will be recorded? a.000 38. d. $300.000. Davis has decided to retire from the partnership of Davis. b.000. LO5 18.000. ©2009 Pearson Education. $100. A summary balance sheet for the Davis. Davis. Assets Cash Inventory Marketable securities Land Building-net Total assets Equities Davis. What partnership capital will Foreman have after Davis retires? a. $240.000. $ $ 75. $120. $40. $360. and Foreman share profits and losses in a ratio of 1:1:3. publishing as Prentice Hall 15-7 . and Foreman. c.000.000.000.000 255.000. $160.000 140. c.000 300. d. $140.000.Use the following information for questions 17. and Foreman partnership appears below. d. $220. capital Foreman. respectively. capital Total equities LO5 17.000 600. Eiser.000. LO5 19. Eiser. c. What partnership capital will Eiser have after Davis retires? a. Inc. LO6 20. d. In a limited partnership. c. has limited liability for partnership debit. ©2009 Pearson Education. publishing as Prentice Hall 15-8 . Inc. a general partner a. is not entitled to a bonus at the end of the year. is excluded from management. has unlimited liability for partnership debit. b. The partnership records goodwill. 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.000. 3. Prepare the journal entry(s) for the admission of Egan to the partnership assuming Egan invested $500. and Hansen began a partnership in which Flores and Hansen contributed cash of $25.000 300.000 for the ownership interest. Gilroy receives a 5% bonus of partnership income. Capital accounts immediately before the admission of Egan are: Cesar (60%) Damon (40%) Total $ $ 300. The partners agree to admit Egan into the partnership for a 50% interest in capital and earnings.000 Required: 1.000 each. respectively. Gilroy.000.000 and a tax basis $40. Gilroy contribute property with a fair value of $50. Egan paid the money to the partnership for a 50% interest in capital and earnings. The partnership records goodwill. Inc.000 for the ownership interest.000 of partnership net income to the partners. Gilroy. The partnership records goodwill. Flores. 2005. ©2009 Pearson Education. LO3 Exercise 2 On February 1. 2.LO2 Exercise 1 Cesar and Damon share partnership profits and losses at 60% and 40%.000 600. Required: Prepare a schedule to distribute $25. Egan paid the money directly to Cesar and to Damon for 50% of each of their respective capital interests.000 for the ownership interest. Gilroy. Prepare the journal entry(s) for the admission of Egan to the partnership assuming Egan invested $700. Prepare the journal entry(s) for the admission of Egan to the partnership assuming Egan invested $400. Egan paid the money to the partnership for a 50% interest in capital and earnings. The partnership agreement of Flores. Flores and Hansen receive salaries of $10. publishing as Prentice Hall 15-9 . and Hansen by a 1:3:1 ratio. respectively.000. after the books were closed for 2006. purchased for $12. Prepare a journal entry to distribute the partnership's income to the partners (assume that an Income Summary account is used by the partnership). An 8% interest allocation is provided to each partner. and Scott. was recorded as office expense by the company bookkeeper.000. respectively. On January 25. Evans and Fitch receive salary allocations of $10. and $325. 2007. ©2009 Pearson Education.LO3 Exercise 3 The profit and loss sharing agreement for the Quade.000 salary allowance to Reid.000 and $15. Reid. 2. respectively. and Gault operate a partnership with a complex profit and loss sharing agreement. LO3 Exercise 4 Evans. Reid. 2006 is $300. Gault will receive a bonus of 10% of the original amount of net income.000 of net income that was properly allocated to the partner's capital accounts. Inc.000 for Gault. 2006. Required: 1. Fitch. Fitch.000 for Fitch. and Gault. If partnership net income is above $25. Residual profits and losses are allocated 5:3:2 to Quade.000 on December 29. The average capital balance for each partner on December 31.000 for Evans. publishing as Prentice Hall 15-10 . the partnership recorded $120. $250. Prepare a schedule to allocate income to the partners assuming that partnership net income is $250.000. and Scott partnership provides for a $15. Quade discovered that office equipment. All residual income is allocated in the ratios of 2:3:5 to Evans. In 2006. Required: Prepare the necessary correcting entry(s) for the partnership. after the salary allocations are considered (but before the interest allocations are considered). Partner capital activity for the year was: Capital accounts Jan 1 balance Feb 2 investment Mar 6 investment Apr 20 withdrawal Jul 3 withdrawal and investment Sep 29 investment Nov 5 investment Required: Grech 200. Prepare a schedule to allocate income or loss to the partners assuming that the partnership incurs a net loss of $36. 2. Drawings are disregarded in computing average capital. The partners are allowed an interest allocation of 8% on their average capital. and Ivers have a retail partnership business selling personal computers. ©2009 Pearson Education.LO3 Exercise 5 Required: Using the information from Exercise 4 above: 1. Harris.000 ) 5. Inc.000 $ $ $ Calculate weighted average capital for each partner. regardless of additional partner investment or withdrawal transactions during any given month.000 10.000. and determine the amount of interest that each partner will be allocated. Prepare a journal entry to distribute the partnership's loss to the partners (assume that an Income Summary account is used by the partnership). but temporary withdrawals of capital that are debited to the capital account are used in the average calculation. publishing as Prentice Hall 15-11 . LO3 Exercise 6 Grech.000 20.000 10. Capital account balances on the first day of each month are used in determining weighted average capital.000 Harris 300.000 ( 7.000 4.000 Ivers 250.000 ) 5.000 50.000 ( 10.000 5. capital Jacoby. The fair market value for partnership land is $180. Sealy and Teske receive a salary allowance of $7.000. LO5 Exercise 8 A summary balance sheet for the partnership of Ivory. Jacoby and Kato allocate profit and loss in their respective ratios of 9:6:10.000. and receives a 10% interest allocation on the amount by which his average capital account balance exceeds $200. capital Total equities $ $ 50.000 75. Partners Ivory. Ubank has an average capital balance of $260.500. and the fair market value of the inventory is $150. Required: Prepare a schedule to allocate $88. Residual profits and losses are allocated to Sealy. ©2009 Pearson Education.000 725.000 400. Teske. Teske.000 80.LO3 Exercise 7 The profit and loss sharing agreement for the Sealy.000 120. Inc. and Ubank in their respective ratios of 7:5:8. Assets Cash Inventory Marketable securities Land Building-net Total assets Equities Ivory.000 of partnership net income to the partners. 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 $25.000.000.000.000 The partners agree to admit Lange for a one-tenth interest. Jacoby and Kato on December 31. capital Kato. publishing as Prentice Hall 15-12 . 2006 is shown below.500 and $10.000 75.000 225.000 $ $ 425. respectively.000 725. 500 for his partnership interest upon his retirement from the partnership on January 1. 3. and Yang allocate profit and loss in their respective ratios of 4:5:7. 2. Partners Vail. 2006 is shown below.000 to the partnership in exchange for a 10% interest.500 ©2009 Pearson Education.500 462. capital Wacker.500 137.000 150.000 90. 2007. Any payments exceeding Yang’s capital balance are treated as a bonus from partners Vail and Wacker. publishing as Prentice Hall 15-13 . capital Total equities Required: Prepare the journal entry to reflect Yang’s retirement from the partnership. Wacker. Wacker Yang partnership on December 31. The partnership agreed to pay partner Yang $227. $ 75. If Lange paid $200. Assets Cash Inventory Marketable securities Land Building-net Total assets Equities Vail.500 60. Inc. what would be the bonus that is allocated to each partner's capital account? LO5 Exercise 9 A summary balance sheet for the Vail.000 87.500 $ $ $ 212.000 462.Required: 1. Record the entry to revalue the partnership assets prior to the admission of Lange. capital Yang.500 112. Calculate how much Lange will have to invest to acquire a 10% interest. capital Clack. publishing as Prentice Hall 15-14 .000 150.000 105.000 90. 2007 are: Assets Cash Inventory Marketable securities Land Building-net Total assets Equities Almond. and Clack partnership on December 31. 2006 is shown below. Assuming a revaluation of total partnership capital based on excess payment.000 Required: Prepare the journal entry to reflect Brandt’s retirement from the partnership: 1.000 $ $ $ 210. 2.LO5 Exercise 10 A summary balance sheet for the Almond. Brandt. 3. Assuming a bonus to Brandt. The partnership financials on January 1. The partnership agreed to pay partner Brandt $135. ©2009 Pearson Education.000 105.000 60. Partners Almond.000 420.000 85. Brandt. Inc. and Clack allocate profit and loss in their respective ratios of 2:1:1.000 for his partnership interest upon his retirement from the partnership on January 1. capital Brandt. capital Total equities $ 75. Assuming goodwill to excess payment is recorded.000 420. 2007. 667 Blaze: [($120. c Albion: [($100. Each of the original partners has given up 20% of their interest to Pavic.000)x(10%) = $23. d Expressed as: 4:6:10:5 9.150 for which $150.625 is required from Pavic for a 20% interest. Dividing $602.000 + $119. McCune Nall Oakely Pavic 20% x 80% = 30% x 80% = 50% x 80% = = 16% 24% 40% 20% 7. Their profit and loss sharing ratios will therefore be 80% of what they were before the admission of Pavic. 3. a d c b b c The assets will be valued upward by $90.000 x 2)]/12 = $119.000 x 6) + ($88.000 to McCune.583 10. After the revaluation. b Capital: ($112. 2. 4. publishing as Prentice Hall 15-15 .000 x 1) + ($128.000 + $30.500.100 Salary: ($20.500 represents 80% of the total implied capital.000 x 5)]/12 = $110. If Pavic is admitted for a one-fifth interest.SOLUTIONS Multiple Choice Questions 1.000 to Nall. Inc. yields $18.000 x 5) + ($155.000 x 5) + ($105.000 = $73. $27.500 by 80% gives a total capitalization of $753. the assets will be recorded at $602.100 + $50. 6. allocated on a 2:3:5 basis. d 8. the $602. 5. and $45.000 Total: $23.000) = $50.000 which.000 to Oakely.100 ©2009 Pearson Education. 18. a B = .000) is needed which is allocated ($40.1x($121. 17.000 There is a total of $80.000 $10.100 .B) B = $12.000 = $66.11.000 $30. b Bloom: Interest allocation: Salary allocation: Carnes: Interest allocation: Salary allocation: $20..000 x 10%) Salary: ($10.000 Blaze: ($120.100 B = $11.000 = $0 Total allocations = $80.000 x 10%) + $20. b Albion: ($100.000 = $54. To bring them down to a $20. a residual adjustment of ($100.000.000 = $30. Inc. d d d c c d ©2009 Pearson Education. 20.000 for positive allocations. 14. After these amounts are assigned to the partners.1B 1.000 13. b Interest: ($500.000) to Carnes.000 + $20.000 15.000 and over-allocations = $80. each partner’s capital account will be reduced by a net $10.000 . 19.000 $20.$60.000 + $24.000) Bonus: Condition not met = $50.000 loss.000 + $24.000) to Bloom and ($60.000 x 10%) + $30.000 = $20.000 . publishing as Prentice Hall 15-16 .1B = $12. 16.000 12. Exercise 1 Requirement 1 Goodwill Cesar.000 for a 50% interest. the balances in the Cesar and Damon capital accounts will be $420. is the implied total capital including goodwill. After the first entry is posted. and say that it is fairly valued. capital Damon.200.000. capital Cash Egan. there must be $100.300.000. capital 100. Requirement 3 Goodwill Cesar.000 210. capital 100. and. ©2009 Pearson Education.000 and $380.000 for this interest.000 700. This goodwill is allocated 60% to Cesar and 40% to Damon.000 80. The goodwill is allocated to Cesar and Damon. final capital should be $1.000 600. If the present total capital is $600. capital Egan.000 60.000 120. it implies that total partnership capital should be $1.000. Cesar’s capital account is reduced by $210. capital Damon. $600. if it represents 50% of final capital after Egan’s investment.000 190. If onehalf of each partner’s interest is given to Egan.000 payment represents 50% of total capital. Inc. Egan’s share of final capital will be $600. and goodwill is therefore $100.000 If we focus on the current capital of the partnership. capital Cesar.000. publishing as Prentice Hall 15-17 . then twice that amount.000. or $800. Requirement 2 Goodwill Cash Egan.000 500.400.000 If a $400. capital 200.000.000 of goodwill that is allocated to Egan. After Egan’s investment.000. then. capital Damon.000 700.000.000.000.000. and Damon’ capital account is reduced by $190. and the implied total capital is $800.000 If Egan invests $700. respectively. if Egan invests $500. total capital will be $1.000.000 40. the amount of goodwill to record is $200.000.000 400. 250 250 ) 11. publishing as Prentice Hall 15-18 .000 39.000 65.000 $ Gilroy 1.000 3.000 5.000 74.Exercise 2 Income 25.250 0 Flores ) ) ) ) $ $ $( $ 10.000 1.000 20. capital 250.000 130.000 ©2009 Pearson Education.250 $ 2.000 1. capital Fitch.000 $ 10.000 25.000 6.000 26.000 60.600 2.000 Net income Bonus to Gault Salary allocation Interest allocation Residual Final allocation $ ( ( ( ( $ $ $ Requirement 2 Income summary Evans. capital Gault.000 74.000 Hansen Net income $ Bonus to Gilroy ( Salaries ( Interest ( Residual loss ( Loss allocation Allocation $ Exercise 3 1/25/07 Office Equipment Quade.500 750 ) ( 3. capital Reid.000 $ 15.000 60. capital 12. capital Scott. Exercise 4 Requirement 1 Income 250.000 24.400 Correction of journal entry error from 12/29/03.000 1.000 70.000 0 Evans ) ) $ ) ) $ Fitch $ 10.000 1.250 250 ) ( 11.000 116.000 Gault 25. Inc.250 1.000 26.000 25.000 116.250 20. To record office equipment and to adjust partner capital accounts. Jul Aug.000 260. Inc. capital Evans.000 $ 0 Evans ) ) ) $ ) ) ( $ Fitch $ 15.000 250. Jun. May.000 320. Dec Total capital Average capital Interest allocation $ 200.500 7.000 20.000 258.000 1.500 ) 39.000 774.000 660.000 131.000 x x x x x 2 1 4 2 3 = $ = = = = $ $ $ Jan.500 19.000 253.000 334. Feb Mar Apr.300 39. capital Income summary 4.000 34. Nov.000 39.000 320.800 $( Requirement 2 Fitch.Exercise 5 Requirement 1 Loss $ ( 36.000 ( 131.500 ) Net loss Bonus to Gault Salary allocation Interest allocation Subtotal Residual allocation Totals 10.000 ( 0 ( 25.002. Jul Aug.000 26.000 330.842.970.000 1. Feb. publishing as Prentice Hall 15-19 .000 2.000 506.000 $ 35. Sep Oct.000 1. capital Gault.300 ) $( Gault 0 26.000 3. Mar Apr.800 Harris 900.167 25.000 250. May. Jun.200 ) ( 7. Dec Total capital Average capital Interest allocation $ 300.000 Exercise 6 Grech 400.000 ( 70.800 36. Nov.040.000 $ 24.613 Jan.280. Sep Oct.000 65.000 x x x x 3 4 2 3 = = = = $ $ $ $ ©2009 Pearson Education.000 26.300 ) ( 4.000 247. 000/90% = $1.000 100.500 14. Land Inventory Ivory. Feb.000.000 245. Sep Oct. and Inventory by $75. Land will increase by $100.400 10.000 19. The entry to record Lange’s investment would be: Cash Lange.600 $ Ubank 4. Apr May.000 represents 90% of the partnership’s value after Lange's investment. publishing as Prentice Hall 15-20 .000.000.000 6.400 20.000. capital Requirement 2 The partnership's total assets after revaluation are $900.Jan.800 0 Sealy ) $ ) ) ) $ 4.000.000 70. capital Jacoby.940. Mar.600 Exercise 7 Income 88. The profit and loss ratio elements add up to 25.700 27.500 11.000 ©2009 Pearson Education.000 63.000 100.000 245.000 250.400 6.000 1.320 30. Therefore. Jul.000 240.000. Nov Dec Total capital Average capital Interest allocation $ 250. If Lange acquires a 10% interest. capital 100.680 $ Teske 4.400 7. Inc.780 29.000 2.000 250. $900. it implies that the $900.200 18.000 42.000 490.000 13. Aug.000.900 17.200. etc.720 Net income Bonus Salary Interest Subtotal Balance Totals $ ( ( ( ( $ $ $ Exercise 8 Requirement 1 The assets of the partnership must be adjusted to fair market value.800 50.000 x 10% = $100.000 10.000 x x x x 4 5 2 1 = = = = $ $ $ $ Ivers 1.000 75.000 50.900 12. Jun. Partner Ivory will then be allocated 9/25 of the $175. and $1. capital Kato.000.000. Inc. capital Ivory. capital Clack.000 10.000 227. capital Jacoby.000 40.000 x 5/9) Cash 137.000 Exercise 9 1/1/04 Yang.500 Exercise 10 Requirement 1 Almond and Clack give a bonus to Brand which reduces their capital in a 2 to 1 ratio. capital 200.000 ©2009 Pearson Education. capital Cash the value at 105.000 x 4/9) Wacker.000.000 135.500 40.Requirement 3 Cash Lange.000 24. capital Almond.000 36.000 135. capital Cash Requirement 2 Revalue the total partnership capital to reflect Brandt’s retirement’s excess payment of $30. capital Brandt.000 135.000 30. publishing as Prentice Hall 15-21 . Goodwill Almond. capital Kato.000 20.000 20. capital Clack.000 60.000 10. capital Brandt. Brandt.000 50.000 100. capital ($90. capital ($90. capital Vail. 000 135.Requirement 3 Add goodwill equal to the excess payment Brandt. Inc.000 ©2009 Pearson Education.000 30. capital Goodwill Cash 105. publishing as Prentice Hall 15-22 .