Professional Documents
Culture Documents
Multiple Choice
[QUESTION]
1. Cherryhill and Hace had been partners for several years, and they decided to admit Quincy to the
partnership. The accountant for the partnership believed that the dissolved partnership and the newly
formed partnership were two separate entities. What method would the accountant have used for
recording the admission of Quincy to the partnership?
A) the bonus method.
B) the equity method.
C) the goodwill method.
D) the proportionate method.
E) the cost method.
Answer: C
Difficulty: Easy
[QUESTION]
2. When the hybrid method is used to record the withdrawal of a partner, the partnership
A) revalues assets and liabilities and records goodwill to the continuing partner but not to the
withdrawing partner.
B) revalues liabilities but not assets, and no goodwill is recorded.
C) can recognize goodwill but does not revalue assets and liabilities.
D) revalues assets but not liabilities, and records goodwill to the continuing partner but not to the
withdrawing partner.
E) revalues assets and liabilities but does not record goodwill.
Answer: E
Difficulty: Easy
[QUESTION]
3. The disadvantages of the partnership form of business organization, compared to corporations, include
A) the legal requirements for formation.
B) unlimited liability for the partners.
C) the requirement for the partnership to pay income taxes.
D) the extent of governmental regulation.
E) the complexity of operations.
Answer: B
Difficulty: Easy
[QUESTION]
4. The advantages of the partnership form of business organization, compared to corporations, include
A) single taxation.
B) ease of raising capital.
C) mutual agency.
D) Limited liability.
E) difficulty of formation.
Answer: A
Difficulty: Easy
[QUESTION]
5. The dissolution of a partnership occurs
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Chapter 14 Partnerships: Formation and Operation
A) only when the partnership sells its assets and permanently closes its books.
B) only when a partner leaves the partnership.
C) at the end of each year, when income is allocated to the partners.
D) only when a new partner is admitted to the partnership.
E) when there is any change in the individuals who make up the partnership.
Answer: E
Difficulty: Easy
[QUESTION]
6. The partnership of Clapton, Seidel, and Thomas was insolvent and will be unable to pay $30,000 in
liabilities currently due. What recourse was available to the partnership's creditors?
A) they must present equal claims to the three partners as individuals.
B) they must try obtain a payment from the partner with the largest capital account balance.
C) they cannot seek remuneration from the partners as individuals.
D) they may seek remuneration from any partner they choose.
E) they must present their claims to the three partners in the order of the partners' capital account
balances.
Answer: D
Difficulty: Easy
[QUESTION]
REFER TO: Ref.14_01
7. What was Wasser's share of income for 2007?
A) $63,000.
B) $53,000.
C) $58,000.
D) $29,000.
E) $51,000.
Answer: A
Difficulty: Easy
[QUESTION]
REFER TO: Ref.14_01
8. What was Nolan's share of income for 2007?
A) $63,000.
B) $53,000.
C) $58,000.
D) $29,000.
E) $51,000.
Answer: C
Difficulty: Easy
[QUESTION]
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Chapter 14 Partnerships: Formation and Operation
[QUESTION]
REFER TO: Ref.14_01
10. What was Nolan's capital balance at the end of 2007?
A) $200,000.
B) $224,000.
C) $238,000.
D) $246,000.
E) $254,000.
Answer: D
Difficulty: Medium
[QUESTION]
REFER TO: Ref.14_01
11. What was Wasser's capital balance at the end of 2007?
A) $150,000.
B) $160,000.
C) $165,000.
D) $213,000.
E) $201,000.
Answer: E
Difficulty: Medium
[QUESTION]
REFER TO: Ref.14_01
12. What was Cleary's capital balance at the end of 2007?
A) $100,000.
B) $117,000.
C) $119,000.
D) $129,000.
E) $153,000.
Answer: B
Difficulty: Medium
[QUESTION]
REFER TO: Ref.14_01
13. What was Wasser's share of income for 2008?
A) $34,420.
B) $75,540.
C) $65,540.
D) $70,040.
E) $61,420.
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Chapter 14 Partnerships: Formation and Operation
Answer: B
Difficulty: Medium
[QUESTION]
REFER TO: Ref.14_01
14. What was Nolan's share of income for 2008?
A) $34,420.
B) $75,540.
C) $65,540.
D) $70,040.
E) $61,420.
Answer: D
Difficulty: Medium
[QUESTION]
REFER TO: Ref.14_01
15. What was Cleary's share of income for 2008?
A) $34,420.
B) $75,540.
C) $65,540.
D) $70,040.
E) $61,420.
Answer: A
Difficulty: Medium
[QUESTION]
REFER TO: Ref.14_01
16. What was Nolan's capital balance at the end of 2008?
A) $139,420.
B) $246,000.
C) $276,540.
D) $279,440.
E) $304,040.
Answer: E
Difficulty: Medium
[QUESTION]
REFER TO: Ref.14_01
17. What was Wasser's capital balance at the end of 2008?
A) $201,000.
B) $263,520.
C) $264,540.
D) $304,040.
E) $313,780.
Answer: C
Difficulty: Medium
[QUESTION]
REFER TO: Ref.14_01
18. What is Cleary's capital account balance at the end of 2008?
A) $163,420.
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Chapter 14 Partnerships: Formation and Operation
B) $151,420.
C) $139,420.
D) $100,000.
E) $142,000.
Answer: C
Difficulty: Medium
[QUESTION]
19. Jell and Dell were partners with capital balances of $600 and $800 and an income sharing ratio of
2:3. They admitted Zell to a 30% interest in the partnership, and the total amount of goodwill credited to
the original partners was $700. What amount did Zell contribute to the business?
A) $560.
B) $570.
C) $600.
D) $590.
E) $630.
Answer: E
Difficulty: Hard
[QUESTION]
REFER TO: Ref.14_02
20. What was Young's share of income or loss for the first year?
A) $3,900 loss.
B) $11,700 loss.
C) $10,400 loss.
D) $24,700 loss.
E) $9,100 loss.
Answer: B
Difficulty: Easy
[QUESTION]
REFER TO: Ref.14_02
21. What was Eaton's share of income or loss for the first year?
A) $3,900 loss.
B) $11,700 loss.
C) $10,400 loss.
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Chapter 14 Partnerships: Formation and Operation
D) $24,700 loss.
E) $9,100 loss.
Answer: C
Difficulty: Easy
[QUESTION]
REFER TO: Ref.14_02
22. What was Thurman's share of income or loss for the first year?
A) $3,900 loss.
B) $11,700 loss.
C) $10,400 loss.
D) $24,700 loss.
E) $9,100 loss.
Answer: A
Difficulty: Easy
[QUESTION]
REFER TO: Ref.14_02
23. What was the balance in Young's Capital account at the end of the first year?
A) $120,900.
B) $118,300.
C) $126,100.
D) $80,600.
E) $111,500.
Answer: B
Difficulty: Medium
[QUESTION]
REFER TO: Ref.14_02
24. What was the balance in Eaton's Capital account at the end of the first year?
A) $120,900.
B) $118,300.
C) $126,100.
D) $80,600.
E) $111,500.
Answer: D
Difficulty: Medium
[QUESTION]
REFER TO: Ref.14_02
25. What was the balance in Thurman's Capital account at the end of the first year?
A) $120,900.
B) $118,300.
C) $126,100.
D) $80,600.
E) $111,500.
Answer: C
Difficulty: Medium
[QUESTION]
REFER TO: Ref.14_02
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Chapter 14 Partnerships: Formation and Operation
26. What was Young's share of income or loss for the second year?
A) $17,160 income.
B) $4,160 income.
C) $19,760 income.
D) $17,290 income.
E) $28,080 income.
Answer: E
Difficulty: Hard
[QUESTION]
REFER TO: Ref.14_02
27. What was Eaton's share of income or loss for the second year?
A) $17,160 income.
B) $4,160 income.
C) $19,760 income.
D) $17,290 income.
E) $28,080 income.
Answer: B
Difficulty: Hard
[QUESTION]
REFER TO: Ref.14_02
28. What was Thurman's share of income or loss for the second year?
A) $17,160 income.
B) $4,160 income.
C) $19,760 income.
D) $17,290 income.
E) $28,080 income.
Answer: C
Difficulty: Hard
[QUESTION]
REFER TO: Ref.14_02
29. What was the balance in Young's Capital account at the end of the second year?
A) $133,380.
B) $84,760.
C) $105,690.
D) $132,860.
E) $71,760.
Answer: A
Difficulty: Medium
[QUESTION]
REFER TO: Ref.14_02
30. What was the balance in Eaton's Capital account at the end of the second year?
A) $133,380.
B) $84,760.
C) $105,690.
D) $132,860.
E) $71,760.
Answer: E
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Chapter 14 Partnerships: Formation and Operation
Difficulty: Medium
[QUESTION]
REFER TO: Ref.14_02
31. What was the balance in Thurman's Capital account at the end of the second year?
A) $133,380.
B) $84,760.
C) $105,690.
D) $132,860.
E) $71,760.
Answer: D
Difficulty: Medium
[QUESTION]
32. Which of the following is not a characteristic of a partnership?
A) The partnership itself pays no income taxes.
B) It is easy to form a partnership.
C) Any partner can be held personally liable for all debts of the business.
D) A partnership requires written Articles of Partnership.
E) Each partner has the power to obligate the partnership for liabilities.
Answer: D
Difficulty: Easy
[QUESTION]
33. Partnerships have alternative legal forms including all of the following except:
A) Partnership.
B) Limited Partnership.
C) Subchapter S Corporation.
D) Limited Liability Partnership.
E) Limited Liability Company.
Answer: C
Difficulty: Easy
[QUESTION]
34. Which of the following type of organization is classified as a partnership, or similar to a partnership,
for tax purposes?
(I.) Limited Liability Company
(II.) Limited Liability Partnership
(III.) Subchapter S Corporation
A) II only.
B) II and III.
C) I and II.
D) I and III.
E) I, II, and III.
Answer: E
Difficulty: Medium
[QUESTION]
35. Which of the following statements is correct regarding the admission of a new partner?
A) A new partner must purchase a partnership interest directly from the business.
B) The right of co-ownership in the business property can be transferred to a new partner without the
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Chapter 14 Partnerships: Formation and Operation
[QUESTION]
36. Withdrawals from the partnership accounts are typically not used
A) to record compensation for work performed in the business.
B) to reduce the partners' capital account balances at the end of an accounting period.
C) to record interest earned on a partners capital balance.
D) to reduce the basic investment that has been made in the business.to record a reward for ownership in
the partnership.
Answer: C
Difficulty: Medium
[QUESTION]
37. The partnership contract for Hanes and Jones LLP provides that Hanes is to receive a bonus of 20% of
net income (after the bonus) and that the remaining net income is to be divided equally. If the partnership
income before the bonus for the year is $57,600, Hanes share of this pre-bonus income is:
A) $28,800.
B) $33,600.
C) $34,560.
D) $43,200.
E) $57,600.
Answer: B
Feedback: Bonus = .20(NI-Bonus)= (.20NI)-(.20Bonus).
1.2Bonus=$11,520. Bonus=$9,600. Remainder to share equally = $48,000. Hanes receives
$24,000+$9,600 = $33,600
Difficulty: Medium
[QUESTION]
38. The partners of Apple, Bere, and Carroll LLP share net income and losses in a 5:3:2 ratio,
respectively. The capital account balances on January 1, 2008, were as follows:
The carrying amounts of the assets and liabilities of the partnership are the same as their current fair
values. Dorr will be admitted to the partnership with a 20% capital interest and a 20% share of net income
and losses in exchange for a cash investment. The amount of cash that Dorr should invest in the
partnership is:
A) $25,000.
B) $30,000.
C) $37,500.
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Chapter 14 Partnerships: Formation and Operation
D) $75,000.
E) $90,000.
Answer: C
Feedback: ($150,000/.8=$187,500. $187,500 $150,000 = $37,500 to invest)
Difficulty: Medium
[QUESTION]
39. The appropriate format of the January 31, 2008 closing entry for John & Hope Limited Liability
Partnership, whose two partners had withdrawn their salaries from the partnership during January is
A) A Above.
B) B Above.
C) C Above.
D) D Above.
Answer: D
Difficulty: Medium
[QUESTION]
40. When Danny withdrew from John, Daniel, Harry, and Danny LLP, he was paid $80,000, although his
capital account balance was only $60,000. The four partners shared net income and losses equally. The
journal entry of the partnership to record Danny's withdrawal preferably should include :
A) $6,667 debit to John, Capital.
B) $6,667 credit to John, Capital.
C) $6,667 debit to John, Drawing.
D) $5,000 debit to John, Capital.
E) $5,000 credit to John, Capital.
Answer: A
Feedback: ($80,000 $60,000) 3 = $6,667
Difficulty: Medium
[QUESTION]
41. Max, Jones and Waters shared profits and losses 20%, 40%, and 40% respectively and their
partnership capital balance is $10,000, $30,000 and $50,000 respectively. Max has decided to withdraw
from the partnership. An appraisal of the business and its property estimates the fair value to be $
200,000. Land with a book value of $30,000 has a fair value of $45,000. Max has agreed to receive
$20,000 in exchange for her partnership interest. What amount should land be recorded on the
partnership books?
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Chapter 14 Partnerships: Formation and Operation
A) $20,000.
B) $30,000.
C) $45,000.
D) $50,000.
E) $200,000.
Answer: C
Feedback: Land will be recorded at the fair value of $45,000
Difficulty: Easy
Donald and Hanes shared net income and losses in the ratio of 3:2, respectively. The partners agreed to
admit May to the partnership with a 35% interest in partnership capital and net income. May invested
$100,000 cash, and no goodwill was recognized.
[QUESTION]
REFER TO: Ref.14_03
42. What is the balance of Mays capital account after the new partnership is created?
A) $84,000.
B) $100,000.
C) $140,000.
D) $176,000.
E) $200,000.
Answer: C
Difficulty: Medium
[QUESTION]
REFER TO: Ref.14_03
43. What is the balance of Donalds capital account after the new partnership is created?
A) $84,000.
B) $100,000.
C) $140,000.
D) $176,000.
E) $200,000.
Answer: D
Difficulty: Medium
[QUESTION]
REFER TO: Ref.14_03
44. What is the balance of Hanes capital account after the new partnership is created?
A) $84,000.
B) $100,000.
C) $140,000.
D) $176,000.
E) $200,000.
Answer: A
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Chapter 14 Partnerships: Formation and Operation
Difficulty: Medium
[QUESTION]
REFER TO: Ref.14_03
45. What is the new total balance of the partnership accounts?
A) $84,000.
B) $140,000.
C) $176,000.
D) $200,000.
E) $400,000.
Answer: E
Difficulty: Medium
[QUESTION]
46. Which of the following could be used as a basis to allocate profits among partners who are active in
the management of the partnership?
1) allocation of salaries.
2) the number of years with the partnership.
3) the amount of time each partner works.
4) the average capital invested.
A) 1 and 2.
B) 1 and 3.
C) 1, 2, and 3.
D) 1, 3, and 4.
E) 1, 2, 3, and 4.
Answer: E
Difficulty: Easy
REFERENCE: Ref.14_04
Peter, Roberts, and Dana have the following capital balances; $80,000, $100,000 and $60,000
respectively. The partners share profits and losses 20%, 40%, and 40% respectively.
[QUESTION]
REFER TO: Ref.14_04
47. Roberts retires and is paid $160,000 based on the terms of the original partnership agreement. If the
goodwill method is used, what is the capital balance of Peter?
A) $20,000.
B) $60,000.
C) $110,000.
D) $120,000.
E) $230,000.
Answer: C
Feedback: Roberts receives an additional $60,000 above her capital balance. Since she is assigned 40
percent of all profits and losses, this extra allocation indicates total goodwill of $150,000, which must be
split among all partners.
40% of Goodwill = $60,000
.40 G = $60,000
G = $150,000 and Peter receives 20% = $30,000.
Peters balance = $80,000 + $30,000 = $110,000.
Difficulty: Medium
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Chapter 14 Partnerships: Formation and Operation
[QUESTION]
REFER TO: Ref.14_04
48. Roberts retires and is paid $160,000 based on the terms of the original partnership agreement. If the
goodwill method is used, what is the capital balance of Dana?
A) $20,000.
B) $60,000.
C) $110,000.
D) $120,000.
E) $230,000.
Answer: D
Feedback: Roberts receives an additional $60,000 above her capital balance. Since she is assigned 40
percent of all profits and losses, this extra allocation indicates total goodwill of $150,000, which must be
split among all partners.
40% of Goodwill = $60,000
.40 G = $60,000
G = $150,000 and Dana receives 40% = $60,000.
Danas balance = $60,000 + $60,000 = $120,000.
Difficulty: Medium
[QUESTION]
REFER TO: Ref.14_04
49. What is the total partnership capital after Roberts retires receiving $160,000 and using the goodwill
method?
A) $20,000.
B) $60,000.
C) $80,000.
D) $120,000.
E) $230,000.
Answer: E
Feedback: Roberts receives an additional $60,000 above her capital balance. Since she is assigned 40
percent of all profits and losses, this extra allocation indicates total goodwill of $150,000, which must be
split among all partners.
40% of Goodwill = $60,000
.40 G = $60,000
G = $150,000
Total capital is $240,000 + goodwill $150,000 = $390,000.
Roberts receives $160,000 and partnership capital is then $390,000-$160,000 = $230,000.
Difficulty: Medium
[QUESTION]
REFER TO: Ref.14_05
50. Anne retires and is paid $80,000 based on the terms of the original partnership agreement. If the
goodwill method is used, what is the capital of the remaining partners?
A) Donald, $55,000; Todd, $60,000
B) Donald, $40,000; Todd, $30,000
C) Donald, $65,000; Todd, $55,000
D) Donald, $15,000; Todd, $30,000
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Chapter 14 Partnerships: Formation and Operation
Answer: A
Feedback: Anne receives an additional $30,000 above her capital balance. Since she is assigned 40
percent of all profits and losses, this extra allocation indicates total goodwill of $75,000, which must be
split among all partners.
40% of Goodwill = $30,000
.40 G = $30,000
G = $75,000Donald = 20% Goodwill = $15,000. $40,000 + $15,000 = $55,000.
Todd = 40% Goodwill = $30,000. $30,000 + $30,000 = $60,000.
Difficulty: Medium
[QUESTION]
REFER TO: Ref.14_05
51. Anne retires and is paid $80,000 based on the terms of the original partnership agreement. If the
bonus method is used, what is the capital of the remaining partners?
A) Donald, $40,000; Todd, $30,000
B) Donald, $30,000; Todd, $10,000
C) Donald, $50,000; Todd, $50,000
D) Donald, $80,000; Todd, $70,000
Answer: B
Feedback: The $30,000 bonus is deducted from the remaining partners according to their relative profit
and loss ratio. Donald = 20% and Todd = 40% which is a 1/3, 2/3 split.
Donald = $40,000 (1/3 x $30,000) = $30,000.
Todd = $30,000 - (2/3 x $30,000) = $10,000.
Difficulty: Medium
[QUESTION]
REFER TO: Ref.14_05
52. What is the total partnership capital after Anne retires receiving $80,000 and using the bonus method?
A) $20,000.
B) $40,000.
C) $60,000.
D) $80,000.
E) $100,000.
Answer: B
Difficulty: Medium
Essay
[QUESTION]
53. What is the dissolution of a partnership?
Answer: The dissolution of a partnership is the breakup of the partnership caused by any change in the
members that make up the partnership.
Difficulty: Easy
[QUESTION]
54. By what methods can a person gain admittance to a partnership?
Answer: A person can gain admittance to a partnership by purchasing all or part of a current partner's
interest or by investing assets in the partnership.
Difficulty: Easy
[QUESTION]
Page 14
Chapter 14 Partnerships: Formation and Operation
[QUESTION]
56. For what events or conditions should the Articles of Partnership make provision?
Answer: The Articles of Partnership should be a comprehensive document that is fair to all the partners.
It should contain the following provisions:
(A.) The amounts that will be invested in the partnership by the founding partners.
(B.) The amounts of withdrawals that partners can make. Limiting the amount of withdrawals causes the
partners to maintain a reasonable investment in the partnership.
(C.) The division of income or loss between the partners.
(D.) Guidelines for admission of new partners or withdrawal or retirement of partners.
(E.) In some cases, guidelines for division of assets when the partnership liquidates.
In addition, the Articles of Partnership should specify how much time each partner will spend in the
business; the responsibilities of each partner; and procedures for resolution of disputes between partners.
Difficulty: Medium
[QUESTION]
57. How is accounting for a partnership different from accounting for a corporation?
Answer: Financial accounting for a partnership differs from corporate accounting only in accounting for
owners' equity. A partnership does not sell capital stock and does not have a retained earnings account.
Each partner will have a capital account and a drawing account. On the balance sheet, the balance in each
of the partner's capital accounts should be reported. The accountant for a partnership must divide income
or loss among partners, following the provisions of the Articles of Partnership. Income tax accounting
differs between corporations and partnerships. A corporation is a taxable entity and must file an income
tax return. A partnership is not a taxable entity but is required to file an informational return that reports
the various amounts of revenues and expenses attributed to each partner.
Difficulty: Medium
[QUESTION]
58. Why are the terms of the Articles of Partnership important to partners?
Answer: The Articles of Partnership contain terms that help to protect the interests of each partner and
the longevity and profitability of the business. One of the most important terms in the Articles of
Partnership is the provision for division of income or loss. The amount of income or loss assigned to
partners affects the balances in their capital accounts and may affect the amount of withdrawals the
partners can make and the assets they receive upon the liquidation of the partnership. The terms in the
Articles of Partnership help to prevent one partner from taking advantage of other partners.
Difficulty: Medium
[QUESTION]
59. Brown and Green are forming a business as partners. If they do not create a formal written
partnership agreement, what risks are they exposing themselves to?
Answer: The Articles of Partnership should help every partner protect his or her interests. Because of
mutual agency and unlimited liability, being a partner involves some risk. If a partnership becomes
insolvent, any or all of the partners may be required to use personal assets to settle partnership liabilities.
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Chapter 14 Partnerships: Formation and Operation
The Articles of Partnership can require each partner to maintain his or her investment in the partnership
and to meet other responsibilities, such as working in the business. With a formal written agreement,
each partner would have recourse if another partner does not fulfill the terms in the Articles of
Partnership.
Difficulty: Medium
[QUESTION]
60. What theoretical argument could be made against the recognition of goodwill when there is a change
in the ownership of a partnership?
Answer: Goodwill should be recognized only when a business is purchased in an arms-length transaction
a transaction between independent parties. Generally, partners are not independent parties.
Transactions between partners or between a partner and the partnership may be influenced by factors
other than fair value and bargaining between independent parties. For example, if one partner has been
causing trouble for a partnership, the other partners might agree to pay more than fair value to convince
that partner to leave the business. The amount of goodwill that could be calculated for such a transaction
would not be an indication of the fair value of the business.
Difficulty: Medium
[QUESTION]
61. Under what circumstances does a partner's balance in his or her capital account have practical
consequences for the partner?
Answer: The most direct practical consequence of a partner's capital account balance occurs when the
partnership is liquidated. After assets are sold and liabilities are paid, each partner receives the balance in
his or her capital account. The balance in the capital account may also influence the division of income
or loss each year and could affect the amount of cash each partner is allowed to withdraw from the
partnership.
Difficulty: Easy
[QUESTION]
62. Reed, Sharp, and Tucker were partners with capital account balances of $80,000, $100,000, and
$70,000, respectively. They agreed to admit Upton to the partnership. Upton purchased 30% of each
partner's interest, with payments to Reed, Sharp, and Tucker of $32,000, $40,000, and $28,000,
respectively. Before the admission of Upton, the profit and loss sharing ratio was 2:3:2. The partners
agreed to use the bonus method to account for the admission of Upton to the partnership.
Required:
Prepare the journal entry to record the admission of Upton to the partnership.
Answer:
Reed, Capital 24,000
Sharp, Capital 30,000
Tucker, Capital 21,000
Upton, Capital 75,000
Difficulty: Medium
[QUESTION]
63. Jipsom and Klark were partners with capital account balances of $80,000 and $100,000, respectively.
Looney paid $32,000 to Jipsom and $40,000 to Klark for 30% of their interests in the partnership. Jipsom
and Klark shared income in the ratio of 2:3. They believed that revaluation of the partnership was
appropriate when a new partner was admitted.
Required:
Prepare the journal entries to record the admission of Looney to the partnership.
Answer:
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Chapter 14 Partnerships: Formation and Operation
Goodwill 60,000
Jipsom, Capital 24,000
Klark, Capital 36,000
[QUESTION]
REFER TO: Ref. 14_06
64. Determine the amount of income allocated to each partner for 2007.
Answer:
Distribution of income for 2007:
Difficulty:
Medium
[QUESTION]
REFER TO: Ref. 14_06
65. Determine the balance in both capital accounts at the end of 2007.
Answer:
Capital account balances at the end of 2007:
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Chapter 14 Partnerships: Formation and Operation
Norr Caylor
Beginning capital balances $ 100,000 $ 80,000
Share of income 36,640 33,360
Withdrawals ( 12,000) ( 12,000)
Ending capital balances $ 124,640 $ 101,360
Difficulty: Medium
[QUESTION]
REFER TO: Ref. 14_06
66. Determine the amount of income allocated to each partner for 2008 to the nearest dollar.
Answer:
Distribution of income for 2008:
Difficulty: Medium
[QUESTION]
REFER TO: Ref. 14_06
67. Determine the balance in both capital accounts at the end of 2008 to the nearest dollar.
Answer:
Capital account balances at the end of 2008:
Norr Caylor
Beginning capital balances $ 124,640 $ 101,360
Share of income 9,085 14,915
Withdrawals ( 12,000) ( 12,000)
Ending capital balances $ 121,725 $ 104,275
Difficulty: Medium
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Chapter 14 Partnerships: Formation and Operation
[QUESTION]
REFER TO: Ref. 14_07
68. Eden contributes $49,000 into the partnership for a 25% interest. The four original partners share
profits and losses equally. Using the bonus method, determine the balances for each of the five partners
after Eden joins the partnership.
Answer:
Eden's contribution of $49,000 into the partnership, raises the total partnership net assets to $400,000.
Eden's capital account is credited, by agreement, for 25% of the partnership's total tangible assets, or
$100,000.
The journal entry to record the admission of Eden is:
Cash 49,000
Adams, Capital 12,750
Barnes, Capital 12,750
Cordas, Capital 12,750
Davis, Capital 12,750
Eden, Capital 100,000
The capital balances of each of the five partners after Edens entry into the partnership are as follows:
[QUESTION]
REFER TO: Ref. 14_07
69. Eden contributed $124,000 in cash to the business to receive a 20% interest in the partnership.
Goodwill was to be recorded. The four original partners shared all profits and losses equally. After Eden
made his investment, what were the individual capital balances?
Answer:
Eden's contribution of $124,000 to the partnership increases the partnership's net assets to $475,000. The
implied value of the partnership is $620,000 ($124,000 20%). Goodwill of $145,000 ($620,000 -
$475,000) resulted from this transaction.
The first entry requires that the goodwill be allocated to each of the original four partners according to
their profit and loss sharing percentages. As indicated in the problem, the four original partners share
profits and losses equally.
Goodwill 145,000
Adams, Capital 36,250
Barnes, Capital 36,250
Cordas, Capital 36,250
Davis, Capital 36,250
After allocating the goodwill to each of the original four partners, their partnership capital
balances are as follows:
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Chapter 14 Partnerships: Formation and Operation
The second step is to record Edens cash contribution and to record Edens capital account
balance:
Cash 124,000
Eden, Capital 124,000
Difficulty: Medium
[QUESTION]
REFER TO: Ref. 14_07
70. Eden acquired a 20% interest in the partnership by contributing a total of $71,500 directly to the other
four partners. No goodwill is to be recorded. Profits and losses have previously been split according to
the following percentages: Adams, 15%, Barnes, 35%, Cordas, 30%, and Davis, 20%. After Eden made
his investment, what were the individual capital balances?
Answer:
The partnership's total net assets are still $351,000, because Eden's $71,500 went to the partners. Using
the book value method, each of the original partners will give up 20% of their current capital balance to
Eden. The journal entry is:
Difficulty: Medium
[QUESTION]
REFER TO: Ref. 14_07
71. Eden acquired a 20% interest in the partnership by contributing a total of $71,500 directly to the other
four partners. Goodwill is to be recorded. Profits and losses have previously been split according to the
following percentages: Adams, 15%, Barnes, 35%, Cordas, 30%, and Davis, 20%. After Eden made his
investment, what were the individual capital balances?
Answer:
Eden's contribution of $71,500 will go to the original four partners, not into the partnership. Therefore,
the partnership's total net assets remain $351,000. The implied value of the partnership, based on Eden's
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Chapter 14 Partnerships: Formation and Operation
contribution, is $357,500 ($71,500 20%). Goodwill arising out of this transaction is $6,500.
First, the goodwill should be allocated to each of the original four partners:
Goodwill 6,500
Adams, Capital 975
Barnes, Capital 2,275
Cordas, Capital 1,950
Davis, Capital 1,300
The adjusted balances for the four original partners, after allocating goodwill, are:
The next step is to allocate 20% of each of the original partners balances to Eden:
Difficulty: Medium
An appraisal of the business and its property estimates the fair value to be $ 100,000. Dean has agreed to
receive $64,000 in exchange for his partnership interest.
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Chapter 14 Partnerships: Formation and Operation
[QUESTION]
REFER TO: Ref. 14_08
72. Prepare the journal entry for the payment to Dean in the dissolution of his partnership interest,
assuming the bonus method is to be applied.
Answer:
Difficulty: Medium
[QUESTION]
REFER TO: Ref. 14_08
73. What are the remaining partners' capital balances after Dean's interest is dissolved, assuming the
bonus method is applied?
Answer:
Hardin: $12,600
Roth: 23,400
Difficulty: Medium
An appraisal of the business and its net assets estimates the fair value to be $154,000. Land with a book
value of $20,000 has a fair value of $35,000. Howell has agreed to receive $84,000 in exchange for her
partnership interest.
[QUESTION]
REFER TO: Ref. 14-09
74. Prepare the journal entries for the dissolution of Howell's partnership interest, assuming the goodwill
method is to be applied.
Answer:
Land 15,000
Goodwill 39,000
Howell, Capital 24,000
Madrid, Capital 18,000
Waldrop, Capital 12,000
Howell, Capital 84,000
Cash 84,000
Difficulty: Medium
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Chapter 14 Partnerships: Formation and Operation
[QUESTION]
REFER TO: Ref. 14_09
75. What are the remaining partners' capital balances after Howell's interest is dissolved, assuming the
goodwill method is applied?
Answer:
Madrid: 33,000; Waldrop: 37,000
Difficulty: Medium
[QUESTION]
REFER TO: Ref. 14_10
76. Record the journal entry for the admission of Noris. Goodwill is not to be recorded.
Answer:
Cash 50,000
Lamb, Capital ($20,000 x 0.25) 5,000
Mona, Capital ($20,000 x 0.75) 15,000
Norris, Capital ($150,000 x 0.20) 30,000
Difficulty: Easy
[QUESTION]
REFER TO: Ref. 14_10
77. Record the journal entry to allocate the salary of Noris.
Answer:
Income Summary 40,000
Noris, Capital 40,000
Difficulty: Easy
[QUESTION]
REFER TO: Ref. 14_10
78. Record the journal entry to record the net income to the capital accounts
Answer:
Income Summary ($90,000 $40,000) 50,000
Lamb, Capital ($50,000 x 0.20) 10,000
Mona, Capital ($50,000 x 0.60) 30,000
Noris, Capital ($50,000 x 0.20) 10,000
Difficulty: Easy
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Chapter 14 Partnerships: Formation and Operation
[QUESTION]
79. James, Keller, and Rivers have the following capital balances; $48,000, $70,000 and $90,000
respectively. Because of a cash shortage James invests an additional $12,000 on June 1st. Each partner
withdraws $1,000 per month. James, Keller, and Rivers receive a salary of $13,000, $15,000 and
$20,000, respectively, for work done during the year. Each partner receives interest of 8% on their
weighted average capital balance without regard to normal drawings. Any remaining profits are split
20%, 30%, and 50% respectively. The net income for the year is $30,000. What are the ending capital
balances for each partner?
Answer:
James Keller Rivers Totals
Interest (8%) $ 4,400 (below) $ 5,600 $ 7,200 $ 17,200
Salary 13,000 15,000 20,000 48,000
Difficulty: Hard
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