CH 07

Chapter 09 - Partnerships: Formation and Operations
Chapter 09
Partnerships: Formation and Operations
Multiple Choice Questions
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.
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.
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.
9-1
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.
5. The dissolution of a partnership occurs

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.
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.
Cleary, Wasser, and Nolan formed a partnership on January 1, 2010, with investments of
$100,000, $150,000, and $200,000, respectively. For division of income, they agreed to (1)
interest of 10% of the beginning capital balance each year, (2) annual compensation of
$10,000 to Wasser, and (3) sharing the remainder of the income or loss in a ratio of 20% for
Cleary, and 40% each for Wasser and Nolan. Net income was $150,000 in 2010 and $180,000
in 2011. Each partner withdrew $1,000 for personal use every month during 2010 and 2011.
9-2
7. What was Wasser's total share of net income for 2010?

A. $63,000.
B. $53,000.
C. $58,000.
D. $29,000.
E. $51,000.
8. What was Nolan's total share of net income for 2010?

A. $63,000.
B. $53,000.
C. $58,000.
D. $29,000.
E. $51,000.
9. What was Cleary's total share of net income for 2010?

A. $63,000.
B. $53,000.
C. $58,000.
D. $29,000.
E. $51,000.
10. What was Nolan's capital balance at the end of 2010?

A. $200,000.
B. $224,000.
C. $238,000.
D. $246,000.
E. $254,000.
11. What was Wasser's capital balance at the end of 2010?

A. $150,000.
B. $160,000.
C. $165,000.
D. $213,000.
E. $201,000.
9-3
12. What was Cleary's capital balance at the end of 2010?

A. $100,000.
B. $117,000.
C. $119,000.
D. $129,000.
E. $153,000.
13. What was the total capital balance for the partnership at December 31, 2010?
A. $600,000
B. $564,000
C. $535,000
D. $523,000
E. $545,000
14. What was the amount of interest attributed to Wasser for 2011?
A. $17,600
B. $18,800
C. $20,100
D. $17,800
E. $30,100
A. $34,420.
B. $75,540.
C. $65,540.
D. $70,040.
E. $61,420.
16. What was the remainder portion of net income allocated to Nolan for 2011?
A. $45,440
B. $58,040
C. $70,040
D. $72,000
E. $82,040
9-4
A. $34,420.
B. $75,540.
C. $65,540.
D. $70,040.
E. $61,420.
A. $34,420.
B. $75,540.
C. $65,540.
D. $70,040.
E. $61,420.

A. $139,420.
B. $246,000.
C. $276,540.
D. $279,440.
E. $304,040.

A. $201,000.
B. $263,520.
C. $264,540.
D. $304,040.
E. $313,780.
21. What was Cleary's capital account balance at the end of 2011?
A. $163,420.
B. $151,420.
C. $139,420.
D. $100,000.
E. $142,000.
9-5
A. $852,000
B. $780,000
C. $708,000
D. $744,000
E. $594,000
23. What was the amount of interest attributed to Cleary for 2012?
A. $15,142
B. $13,942
C. $12,942
D. $14,142
E. $10,000
24. 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. $900.
B. $560.
C. $600.
D. $590.
E. $630.
9-6
25. Jerry, a partner in the JSK partnership, begins the year on January 1, 2011 with a capital
balance of $20,000. The JSK partnership agreement states that Jerry receives 6% interest on
this weighted average capital balance.
On March 1, 2011, when the partnership tax return for 2010 was completed, Jerry's capital
account was credited for his share of 2010 profit of $120,000.
Jerry withdrew this amount quarterly, beginning April 1.
On September 1, Jerry's capital account was credited with a special bonus of $60,000 for
business he brought to the partnership.
What amount of interest will be attributed to Jerry for year 2011 that will go toward his profit
distribution for the year? (Use a 360-day year for calculations.)
A. $5,250
B. $6,000
C. $6,400
D. $7,000
E. $7,200
A partnership began its first year of operations with the following capital balances:
Young, Capital: $143,000
Eaton, Capital: $104,000
Thurman, Capital: $143,000
The Articles of Partnership stipulated that profits and losses be assigned in the following
manner:
Young was to be awarded an annual salary of $26,000 with $13,000 salary assigned to
Thurman.
Each partner was to be attributed with interest equal to 10% of the capital balance as of the
first day of the year.
The remainder was to be assigned on a 5:2:3 basis to Young, Eaton, and Thurman,
respectively.
Each partner withdrew $13,000 per year.
Assume that the net loss for the first year of operations was $26,000 with net income of
$52,000 in the second year.
26. What was Young's total share of net 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.
9-7
27. What was Eaton's total share of net 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.
28. What was Thurman's total share of net 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.
29. 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.
30. 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.
31. 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.
9-8
32. What was Young's total share of net income for the second year?
A. $17,160 income.
B. $4,160 income.
C. $19,760 income.
D. $17,290 income.
E. $28,080 income.
33. What was Eaton's total share of net income for the second year?
A. $17,160 income.
B. $4,160 income.
C. $19,760 income.
D. $17,290 income.
E. $28,080 income.
34. What was Thurman's total share of net income for the second year?
A. $17,160 income.
B. $4,160 income.
C. $19,760 income.
D. $17,290 income.
E. $28,080 income.
35. 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.
36. 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.
9-9
37. 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.
38. 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.
39. Partnerships have alternative legal forms including all of the following except:
A. General Partnership.
B. Limited Partnership.
C. Subchapter S Partnership.
D. Limited Liability Partnership.
E. Limited Liability Company.
40. 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.
9-10
41. 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 consent of other existing partners.
C. The right to participate in management of the business can be conveyed without the
consent of other existing partners.
D. The right to share in profits and losses can be sold to a new partner without the consent of
other existing partners.
E. A new partner always pays book value.
42. Withdrawals from the partnership capital accounts are typically not used
A. to reward partners 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 partner's capital balance.
D. to reduce the basic investment that has been made in the business.
E. to record the partnership's payment of a partner's personal expense such as income tax.
43. 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. $35,520.
E. $38,400.
9-11
44. 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, 2011, 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.
D. $75,000.
E. $90,000.
45. The appropriate format of the December 31, 2010 closing entry for John & Hope Limited
Liability Partnership, whose two partners had withdrawn their salaries from the partnership
during the year is:
A. A Above.
B. B Above.
C. C Above.
D. D Above.
9-12
46. 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 to record the effect on John's capital due to Danny's
withdrawal would include :
A. $6,667 debit to John, Capital.
B. $6,667 credit to John, Capital.
C. $20,000 debit to John, Capital.
D. $5,000 debit to John, Capital.
E. $5,000 credit to John, Capital.
47. 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 after
revaluation. At what amount should land be recorded on the partnership books?
A. $20,000.
B. $30,000.
C. $45,000.
D. $50,000.
E. $200,000.
The capital account balances for Donald & Hanes LLP on January 1, 2011, were as follows:
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.
9-13
48. What is the balance of May's capital account after the new partnership is created?
A. $84,000.
B. $100,000.
C. $140,000.
D. $176,000.
E. $200,000.
49. What is the balance of Donald's capital account after the new partnership is created?
A. $84,000.
B. $100,000.
C. $140,000.
D. $176,000.
E. $200,000.
50. What is the balance of Hane's capital account after the new partnership is created?
A. $84,000.
B. $100,000.
C. $140,000.
D. $176,000.
E. $200,000.
51. 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.
9-14
52. 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 4.
D. 1, 3, and 4.
E. 1, 2, 3, and 4.
P, L, and O are partners with capital balances of $50,000, $30,000 and $20,000 and who
share in the profit and loss of the PLO partnership 30%, 20%, and 50%, respectively, when
they agree to admit C for a 20% interest.
53. If C is to contribute an amount equal to his book value share of the new partnership, how
much should C contribute?
A. $22,000
B. $20,000
C. $25,000
D. $18,000
E. $10,000
54. C contributes $38,000 to the partnership and the bonus method is used. What amount will
be credited for C's beginning capital balance?
A. $20,000
B. $25,000
C. $27,600
D. $32,600
E. $38,000
9-15
55. If C contributes $40,000 to the partnership and the goodwill method is used, what amount
will be debited for goodwill?
A. $15,000
B. $20,000
C. $25,000
D. $28,000
E. $60,000
56. C contributes $10,000 to the partnership and the goodwill method is used. What will be
the result of the goodwill calculation?
A. Goodwill of $15,000; split among the original partners.
B. Goodwill of $15,000; all to C.
C. Goodwill of $15,000; split among all four partners: P, L, O, and C.
D. Goodwill of $12,000; all to C.
E. Goodwill of $12,000; split among original partners.
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.
57. Roberts retires and is paid $160,000 based on an independent appraisal of the business. 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.
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.
9-16
59. What is the total partnership capital after Roberts retires receiving $160,000 and using the
goodwill method?
A. $290,000.
B. $176,000.
C. $80,000.
D. $120,000.
E. $230,000.
Donald, Anne, and Todd have the following capital balances; $40,000, $50,000 and $30,000
respectively. The partners share profits and losses 20%, 40%, and 40% respectively.
60. Anne retires and is paid $80,000 based on an independent appraisal of the business. 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
61. 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, $24,000; Todd, $18,000
62. What is the total partnership capital after Anne retires receiving $80,000 and using the
bonus method?
A. $70,000.
B. $40,000.
C. $60,000.
D. $80,000.
E. $42,000.
9-17
Essay Questions
63. What is the dissolution of a partnership?
64. By what methods can a person gain admittance to a partnership?
65. What events cause the dissolution of a partnership?
66. For what events or conditions should the Articles of Partnership make provision?
9-18
67. How is accounting for a partnership different from accounting for a corporation?
68. Why are the terms of the Articles of Partnership important to partners?
69. 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?
70. What theoretical argument could be made against the recognition of goodwill when there
is a change in the ownership of a partnership?
9-19
71. Under what circumstances does a partner's balance in his or her capital account have
practical consequences for the partner?
72. 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 directly 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.
73. Jipsom and Klark were partners with capital account balances of $80,000 and $100,000,
respectively. Looney directly 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.
9-20
Norr and Caylor established a partnership on January 1, 2010. Norr invested cash of
$100,000 and Caylor invested $30,000 in cash and equipment with a book value of $40,000
and fair value of $50,000. For both partners, the beginning capital balance was to equal the
initial investment. Norr and Caylor agreed to the following procedure for sharing profits and
losses:
- 12% interest on the yearly beginning capital balance
- $10 per hour of work that can be billed to the partnership's clients
- the remainder divided in a 3:2 ratio
The Articles of Partnership specified that each partner should withdraw no more than $1,000
per month.
For 2010, the partnership's income was $70,000. Norr had 1,000 billable hours, and Caylor
worked 1,400 billable hours. In 2011, the partnership's income was $24,000, and Norr and
Caylor worked 800 and 1,200 billable hours respectively. Each partner withdrew $1,000 per
month throughout 2010 and 2011.
74. Determine the amount of net income allocated to each partner for 2010.
75. Determine the balance in both capital accounts at the end of 2010.
9-21
76. Determine the amount of net income allocated to each partner for 2011. Round all
calculations to the nearest whole dollar.
77. Determine the balance in both capital accounts at the end of 2011 to the nearest dollar.
The ABCD Partnership has the following balance sheet at January 1, 2010, prior to the
admission of new partner, Eden.
78. 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.
9-22
79. 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?
80. 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?
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?
9-23
Assume the partnership of Dean, Hardin, and Roth has been in existence for a number of
years. Dean decides to withdraw from the partnership when the partners' capital balances are
as follows:
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.
82. Prepare the journal entry for the payment to Dean in the dissolution of his partnership
interest, assuming the bonus method is to be applied.
83. What are the remaining partners' capital balances after Dean's interest is dissolved,
assuming the bonus method is applied?
9-24
Assume the partnership of Howell, Madrid, and Waldrop has been in existence for a number
of years. Howell decides to withdraw from the partnership when the partners' capital balances
are as follows:
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.
84. Prepare the journal entries for the dissolution of Howell's partnership interest, assuming
the goodwill method is to be applied.
85. What are the remaining partners' capital balances after Howell's interest is dissolved,
assuming the goodwill method is applied?
9-25
On January 1, 2011, Lamb and Mona LLP admitted Noris to a 20% interest in net assets for
an investment of $50,000 cash. Prior to the admission of Noris, Lamb and Mona had net
assets of $100,000 and an income-sharing ratio of 25% to Lamb and 75% to Mona. After the
admission of Noris, the partnership contract included the following provisions:
Salary of $40,000 a year to Noris.
Remaining net income in ratio Lamb 20%, Mona 60%, Noris 20%
During the fiscal year ended December 31, 2011, the partnership had income of $90,000 prior
to recognition of salary to Noris.
86. Record the journal entry for the admission of Noris. Goodwill is not to be recorded.
87. Record the journal entry to allocate the salary of Noris.
88. Record the journal entry to record the remainder of net income to the capital accounts.
9-26
89. 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?
9-27
Chapter 09 Partnerships: Formation and Operations Answer Key
Multiple Choice Questions
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.
AACSB: Reflective thinking

AICPA FN: Measurement
Bloom's: Comprehension
Difficulty: Easy
Learning Objective: 09-08 Prepare journal entries to record the acquisition by a new partner of either all or a portion of a current partner's
interest.
9-28
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.

Bloom's: Knowledge
Difficulty: Easy
Learning Objective: 09-10 Prepare journal entries to record the withdrawal of a current partner.
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.

Difficulty: Easy
Learning Objective: 09-01 Discuss the advantages and disadvantages of the partnership versus the corporate form of business.
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.

Difficulty: Easy
9-29
5. The dissolution of a partnership occurs

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.

AICPA BB: Legal
Bloom's: Knowledge
Difficulty: Easy
Learning Objective: 09-07 Discuss the meaning of partnership dissolution and understand that a dissolution
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.

Difficulty: Easy
Cleary, Wasser, and Nolan formed a partnership on January 1, 2010, with investments of
$100,000, $150,000, and $200,000, respectively. For division of income, they agreed to (1)
interest of 10% of the beginning capital balance each year, (2) annual compensation of
$10,000 to Wasser, and (3) sharing the remainder of the income or loss in a ratio of 20% for
Cleary, and 40% each for Wasser and Nolan. Net income was $150,000 in 2010 and $180,000
in 2011. Each partner withdrew $1,000 for personal use every month during 2010 and 2011.
9-30

A. $63,000.
B. $53,000.
C. $58,000.
D. $29,000.
E. $51,000.
AACSB: Analytic
Bloom's: Application
Difficulty: Easy
Learning Objective: 09-06 Allocate income to partners when interest and/or salary factors are included.

A. $63,000.
B. $53,000.
C. $58,000.
D. $29,000.
E. $51,000.
AACSB: Analytic
Difficulty: Easy

A. $63,000.
B. $53,000.
C. $58,000.
D. $29,000.
E. $51,000.
AACSB: Analytic
Difficulty: Easy
9-31

A. $200,000.
B. $224,000.
C. $238,000.
D. $246,000.
E. $254,000.
AACSB: Analytic
Difficulty: Medium
Learning Objective: 09-05 Understand the impact that the allocation of partnership income has on the partners' individual capital balances.

A. $150,000.
B. $160,000.
C. $165,000.
D. $213,000.
E. $201,000.
AACSB: Analytic
Difficulty: Medium
12. What was Cleary's capital balance at the end of 2010?

A. $100,000.
B. $117,000.
C. $119,000.
D. $129,000.
E. $153,000.
AACSB: Analytic
Difficulty: Medium
9-32
A. $600,000
B. $564,000
C. $535,000
D. $523,000
E. $545,000
AACSB: Analytic
Difficulty: Medium
14. What was the amount of interest attributed to Wasser for 2011?
A. $17,600
B. $18,800
C. $20,100
D. $17,800
E. $30,100
AACSB: Analytic
Difficulty: Medium
A. $34,420.
B. $75,540.
C. $65,540.
D. $70,040.
E. $61,420.
AACSB: Analytic
Difficulty: Medium
9-33
16. What was the remainder portion of net income allocated to Nolan for 2011?
A. $45,440
B. $58,040
C. $70,040
D. $72,000
E. $82,040
AACSB: Analytic
Difficulty: Medium
A. $34,420.
B. $75,540.
C. $65,540.
D. $70,040.
E. $61,420.
AACSB: Analytic
Difficulty: Medium
A. $34,420.
B. $75,540.
C. $65,540.
D. $70,040.
E. $61,420.
AACSB: Analytic
Difficulty: Medium
9-34

A. $139,420.
B. $246,000.
C. $276,540.
D. $279,440.
E. $304,040.
AACSB: Analytic
Difficulty: Medium

A. $201,000.
B. $263,520.
C. $264,540.
D. $304,040.
E. $313,780.
AACSB: Analytic
Difficulty: Medium
21. What was Cleary's capital account balance at the end of 2011?
A. $163,420.
B. $151,420.
C. $139,420.
D. $100,000.
E. $142,000.
AACSB: Analytic
Difficulty: Medium
9-35
A. $852,000
B. $780,000
C. $708,000
D. $744,000
E. $594,000
AACSB: Analytic
Difficulty: Medium
23. What was the amount of interest attributed to Cleary for 2012?
A. $15,142
B. $13,942
C. $12,942
D. $14,142
E. $10,000
AACSB: Analytic
Difficulty: Medium
24. 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. $900.
B. $560.
C. $600.
D. $590.
E. $630.
AACSB: Analytic
Difficulty: Hard
Learning Objective: 09-09 Prepare journal entries to record a new partner's admission by a contribution made directly to the partnership.
9-36
25. Jerry, a partner in the JSK partnership, begins the year on January 1, 2011 with a capital
balance of $20,000. The JSK partnership agreement states that Jerry receives 6% interest on
this weighted average capital balance.
On March 1, 2011, when the partnership tax return for 2010 was completed, Jerry's capital
account was credited for his share of 2010 profit of $120,000.
Jerry withdrew this amount quarterly, beginning April 1.
On September 1, Jerry's capital account was credited with a special bonus of $60,000 for
business he brought to the partnership.
What amount of interest will be attributed to Jerry for year 2011 that will go toward his profit
distribution for the year? (Use a 360-day year for calculations.)
A. $5,250
B. $6,000
C. $6,400
D. $7,000
E. $7,200
AACSB: Analytic
Difficulty: Hard
A partnership began its first year of operations with the following capital balances:
Young, Capital: $143,000
Eaton, Capital: $104,000
Thurman, Capital: $143,000
The Articles of Partnership stipulated that profits and losses be assigned in the following
manner:
Young was to be awarded an annual salary of $26,000 with $13,000 salary assigned to
Thurman.
Each partner was to be attributed with interest equal to 10% of the capital balance as of the
first day of the year.
The remainder was to be assigned on a 5:2:3 basis to Young, Eaton, and Thurman,
respectively.
Each partner withdrew $13,000 per year.
Assume that the net loss for the first year of operations was $26,000 with net income of
$52,000 in the second year.
9-37
26. What was Young's total share of net 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.
AACSB: Analytic
Difficulty: Medium
27. What was Eaton's total share of net 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.
AACSB: Analytic
Difficulty: Medium
28. What was Thurman's total share of net 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.
AACSB: Analytic
Difficulty: Medium
9-38
29. 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.
AACSB: Analytic
Difficulty: Medium
30. 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.
AACSB: Analytic
Difficulty: Medium
31. 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.
AACSB: Analytic
Difficulty: Medium
9-39
32. What was Young's total share of net income for the second year?
A. $17,160 income.
B. $4,160 income.
C. $19,760 income.
D. $17,290 income.
E. $28,080 income.
AACSB: Analytic
Difficulty: Hard
33. What was Eaton's total share of net income for the second year?
A. $17,160 income.
B. $4,160 income.
C. $19,760 income.
D. $17,290 income.
E. $28,080 income.
AACSB: Analytic
Difficulty: Hard
34. What was Thurman's total share of net income for the second year?
A. $17,160 income.
B. $4,160 income.
C. $19,760 income.
D. $17,290 income.
E. $28,080 income.
AACSB: Analytic
Difficulty: Hard
9-40
35. 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.
AACSB: Analytic
Difficulty: Medium
36. 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.
AACSB: Analytic
Difficulty: Medium
37. 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.
AACSB: Analytic
Difficulty: Medium
9-41
38. 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.

AICPA BB: Legal
Bloom's: Knowledge
Difficulty: Easy
39. Partnerships have alternative legal forms including all of the following except:
A. General Partnership.
B. Limited Partnership.
C. Subchapter S Partnership.
D. Limited Liability Partnership.
E. Limited Liability Company.

AICPA BB: Legal
Bloom's: Knowledge
Difficulty: Easy
9-42
40. 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.

AICPA BB: Legal
Bloom's: Knowledge
Difficulty: Medium
41. 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 consent of other existing partners.
C. The right to participate in management of the business can be conveyed without the
consent of other existing partners.
D. The right to share in profits and losses can be sold to a new partner without the consent of
other existing partners.
E. A new partner always pays book value.

Difficulty: Medium
Learning Objective: 09-03 Prepare the journal entry to record the initial capital investment made by a partner.
9-43
42. Withdrawals from the partnership capital accounts are typically not used
A. to reward partners 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 partner's capital balance.
D. to reduce the basic investment that has been made in the business.
E. to record the partnership's payment of a partner's personal expense such as income tax.

Difficulty: Medium
Learning Objective: 09-04 Use both the bonus method and the goodwill method to record a partner's capital investment.
43. 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. $35,520.
E. $38,400.
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
AACSB: Analytic
Difficulty: Medium
9-44
44. 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, 2011, 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.
D. $75,000.
E. $90,000.
($150,000/.8=$187,500. $187,500 - $150,000 = $37,500 to invest)
AACSB: Analytic
Difficulty: Medium
9-45
45. The appropriate format of the December 31, 2010 closing entry for John & Hope Limited
Liability Partnership, whose two partners had withdrawn their salaries from the partnership
during the year is:
A. A Above.
B. B Above.
C. C Above.
D. D Above.
AACSB: Analytic
Difficulty: Medium
9-46
46. 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 to record the effect on John's capital due to Danny's
withdrawal would include :
A. $6,667 debit to John, Capital.
B. $6,667 credit to John, Capital.
C. $20,000 debit to John, Capital.
D. $5,000 debit to John, Capital.
E. $5,000 credit to John, Capital.
($80,000 - $60,000) 3 = $6,667
AACSB: Analytic
Difficulty: Medium
47. 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 after revaluation. At what amount
should land be recorded on the partnership books?
A. $20,000.
B. $30,000.
C. $45,000.
D. $50,000.
E. $200,000.
Land will be recorded at the fair value of $45,000.
AACSB: Analytic
Difficulty: Easy
9-47
The capital account balances for Donald & Hanes LLP on January 1, 2011, were as follows:
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.
48. What is the balance of May's capital account after the new partnership is created?
A. $84,000.
B. $100,000.
C. $140,000.
D. $176,000.
E. $200,000.
AACSB: Analytic
Difficulty: Easy
49. What is the balance of Donald's capital account after the new partnership is created?
A. $84,000.
B. $100,000.
C. $140,000.
D. $176,000.
E. $200,000.
AACSB: Analytic
Difficulty: Medium
9-48
50. What is the balance of Hane's capital account after the new partnership is created?
A. $84,000.
B. $100,000.
C. $140,000.
D. $176,000.
E. $200,000.
AACSB: Analytic
Difficulty: Medium
51. 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.
AACSB: Analytic
Difficulty: Easy
9-49
52. 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 4.
D. 1, 3, and 4.
E. 1, 2, 3, and 4.

Bloom's: Knowledge
Difficulty: Easy
P, L, and O are partners with capital balances of $50,000, $30,000 and $20,000 and who
share in the profit and loss of the PLO partnership 30%, 20%, and 50%, respectively, when
they agree to admit C for a 20% interest.
53. If C is to contribute an amount equal to his book value share of the new partnership, how
much should C contribute?
A. $22,000
B. $20,000
C. $25,000
D. $18,000
E. $10,000
AACSB: Analytic
Difficulty: Easy
9-50
54. C contributes $38,000 to the partnership and the bonus method is used. What amount will
be credited for C's beginning capital balance?
A. $20,000
B. $25,000
C. $27,600
D. $32,600
E. $38,000
AACSB: Analytic
Difficulty: Easy
55. If C contributes $40,000 to the partnership and the goodwill method is used, what amount
will be debited for goodwill?
A. $15,000
B. $20,000
C. $25,000
D. $28,000
E. $60,000
AACSB: Analytic
Difficulty: Medium
56. C contributes $10,000 to the partnership and the goodwill method is used. What will be
the result of the goodwill calculation?
A. Goodwill of $15,000; split among the original partners.
B. Goodwill of $15,000; all to C.
C. Goodwill of $15,000; split among all four partners: P, L, O, and C.
D. Goodwill of $12,000; all to C.
E. Goodwill of $12,000; split among original partners.
AACSB: Analytic
Difficulty: Hard
9-51
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.
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.
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.
Peter's balance = $80,000 + $30,000 = $110,000.
AACSB: Analytic
Difficulty: Medium
9-52
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.
.40 G = $60,000
G = $150,000 and Dana receives 40% = $60,000.
Dana's balance = $60,000 + $60,000 = $120,000.
AACSB: Analytic
Difficulty: Medium
9-53
59. What is the total partnership capital after Roberts retires receiving $160,000 and using the
goodwill method?
A. $290,000.
B. $176,000.
C. $80,000.
D. $120,000.
E. $230,000.
.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.
AACSB: Analytic
Difficulty: Medium
Donald, Anne, and Todd have the following capital balances; $40,000, $50,000 and $30,000
respectively. The partners share profits and losses 20%, 40%, and 40% respectively.
9-54
60. Anne retires and is paid $80,000 based on an independent appraisal of the business. 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
Anne receives an additional $30,000 above her capital balance. Since she is assigned 40
.40 G = $30,000
G = $75,000
Donald = 20% Goodwill = $15,000. $40,000 + $15,000 = $55,000.
Todd = 40% Goodwill = $30,000. $30,000 + $30,000 = $60,000.
AACSB: Analytic
Difficulty: Medium
61. 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, $24,000; Todd, $18,000
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.
AACSB: Analytic
Difficulty: Medium
9-55
62. What is the total partnership capital after Anne retires receiving $80,000 and using the
bonus method?
A. $70,000.
B. $40,000.
C. $60,000.
D. $80,000.
E. $42,000.
AACSB: Analytic
Difficulty: Medium
Essay Questions
63. What is the dissolution of a partnership?
The dissolution of a partnership is the breakup of the partnership caused by any change in the
members that make up the partnership.

AICPA BB: Legal
Bloom's: Knowledge
Difficulty: Easy
64. By what methods can a person gain admittance to a partnership?
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.

Bloom's: Knowledge
Difficulty: Easy
9-56
65. What events cause the dissolution of a partnership?
The dissolution of a partnership occurs whenever there is a change in the members that make
up the partnership. Dissolution does not mean going out of business, although, on occasion,
dissolution would be accompanied by liquidation of assets and termination of the business.
Dissolution would occur whenever a new partner is admitted to the partnership, dissolving
one partnership and forming a new one. Dissolution also occurs when a partner leaves the
partnership or when a partner dies or retires. The Articles of Partnership may allow the
partners to force dissolution under some circumstances.

AICPA BB: Legal
Bloom's: Knowledge
Difficulty: Easy
66. For what events or conditions should the Articles of Partnership make provision?
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.

AICPA BB: Legal
AICPA FN: Risk Analysis
Bloom's: Knowledge
Difficulty: Medium
Learning Objective: 09-02 Describe the purpose of the articles of partnership and list specific items that should be included in this
agreement.
9-57
67. How is accounting for a partnership different from accounting for a corporation?
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
68. Why are the terms of the Articles of Partnership important to partners?
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.

AICPA BB: Legal
Difficulty: Medium
agreement.
9-58
69. 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?
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. 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.
AACSB: Analytic
AICPA BB: Legal
Difficulty: Medium
agreement.
70. What theoretical argument could be made against the recognition of goodwill when there
is a change in the ownership of a partnership?
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
Learning Objective: 09-04 Use both the bonus method and the goodwill method to record a partner's capital investment.
9-59
71. Under what circumstances does a partner's balance in his or her capital account have
practical consequences for the partner?
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
72. 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 directly 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.
AACSB: Analytic
Difficulty: Medium
interest.
9-60
73. Jipsom and Klark were partners with capital account balances of $80,000 and $100,000,
respectively. Looney directly 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.
AACSB: Analytic
Difficulty: Hard
interest.
Norr and Caylor established a partnership on January 1, 2010. Norr invested cash of
$100,000 and Caylor invested $30,000 in cash and equipment with a book value of $40,000
and fair value of $50,000. For both partners, the beginning capital balance was to equal the
initial investment. Norr and Caylor agreed to the following procedure for sharing profits and
losses:
- 12% interest on the yearly beginning capital balance
- $10 per hour of work that can be billed to the partnership's clients
- the remainder divided in a 3:2 ratio
The Articles of Partnership specified that each partner should withdraw no more than $1,000
per month.
For 2010, the partnership's income was $70,000. Norr had 1,000 billable hours, and Caylor
worked 1,400 billable hours. In 2011, the partnership's income was $24,000, and Norr and
Caylor worked 800 and 1,200 billable hours respectively. Each partner withdrew $1,000 per
month throughout 2010 and 2011.
9-61
74. Determine the amount of net income allocated to each partner for 2010.
Distribution of income for 2010:
AACSB: Analytic
Difficulty: Medium
75. Determine the balance in both capital accounts at the end of 2010.
Capital account balances at the end of 2010:
AACSB: Analytic
Difficulty: Medium
9-62
76. Determine the amount of net income allocated to each partner for 2011. Round all
calculations to the nearest whole dollar.
Distribution of income for 2011:
AACSB: Analytic
Difficulty: Medium
77. Determine the balance in both capital accounts at the end of 2011 to the nearest dollar.
Capital account balances at the end of 2011:
AACSB: Analytic
Difficulty: Medium
9-63
The ABCD Partnership has the following balance sheet at January 1, 2010, prior to the
admission of new partner, Eden.
78. 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.
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:
The capital balances of each of the five partners after Eden's entry into the partnership are as
follows:
AACSB: Analytic
Difficulty: Medium
9-64
79. 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?
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.
After allocating the goodwill to each of the original four partners, their partnership capital
balances are as follows:
The second step is to record Eden's cash contribution and to record Eden's capital account
balance:
AACSB: Analytic
Difficulty: Medium
9-65
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?
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:
The partners' balances following the admission of Eden are:
AACSB: Analytic
Difficulty: Medium
interest.
9-66
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?
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 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:
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:
The partners' capital balances after admitting Eden are:
AACSB: Analytic
Difficulty: Medium
interest.
9-67
Assume the partnership of Dean, Hardin, and Roth has been in existence for a number of
years. Dean decides to withdraw from the partnership when the partners' capital balances are
as follows:
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.
82. Prepare the journal entry for the payment to Dean in the dissolution of his partnership
interest, assuming the bonus method is to be applied.
AACSB: Analytic
Difficulty: Medium
83. What are the remaining partners' capital balances after Dean's interest is dissolved,
assuming the bonus method is applied?
Hardin: $12,600 ($15,000 - $2,400)

Roth: 23,400 ($25,000 - $1,600)
AACSB: Analytic
Difficulty: Medium
9-68
Assume the partnership of Howell, Madrid, and Waldrop has been in existence for a number
of years. Howell decides to withdraw from the partnership when the partners' capital balances
are as follows:
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.
84. Prepare the journal entries for the dissolution of Howell's partnership interest, assuming
the goodwill method is to be applied.
AACSB: Analytic
Difficulty: Medium
9-69
85. What are the remaining partners' capital balances after Howell's interest is dissolved,
assuming the goodwill method is applied?
Madrid: 33,000 ($15,000 + $18,000)

Waldrop: 37,000 ($25,000 + $12,000)
AACSB: Analytic
Difficulty: Medium
On January 1, 2011, Lamb and Mona LLP admitted Noris to a 20% interest in net assets for
an investment of $50,000 cash. Prior to the admission of Noris, Lamb and Mona had net
assets of $100,000 and an income-sharing ratio of 25% to Lamb and 75% to Mona. After the
admission of Noris, the partnership contract included the following provisions:
Salary of $40,000 a year to Noris.
Remaining net income in ratio Lamb 20%, Mona 60%, Noris 20%
During the fiscal year ended December 31, 2011, the partnership had income of $90,000 prior
to recognition of salary to Noris.
86. Record the journal entry for the admission of Noris. Goodwill is not to be recorded.
AACSB: Analytic
Difficulty: Easy
9-70
87. Record the journal entry to allocate the salary of Noris.
AACSB: Analytic
Difficulty: Easy
88. Record the journal entry to record the remainder of net income to the capital accounts.
AACSB: Analytic
Difficulty: Easy
9-71
89. 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?
Remaining income (loss):
CALCULATION OF JAMES INTEREST ALLOCATION
AACSB: Analytic
Difficulty: Hard
9-72

CH 07

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

CH 07

Uploaded by

Copyright:

Available Formats

Chapter 09 - Partnerships: Formation and Operations

Multiple Choice Questions

3. The disadvantages of the partnership form of business organization, compared to

4. The advantages of the partnership form of business organization, compared to corporations,

5. The dissolution of a partnership occurs

7. What was Wasser's total share of net income for 2010?

8. What was Nolan's total share of net income for 2010?

9. What was Cleary's total share of net income for 2010?

10. What was Nolan's capital balance at the end of 2010?

11. What was Wasser's capital balance at the end of 2010?

12. What was Cleary's capital balance at the end of 2010?

19. What was Nolan's capital balance at the end of 2011?

20. What was Wasser's capital balance at the end of 2011?

38. Which of the following is not a characteristic of a partnership?

40. Which of the following type of organization is classified as a partnership, or similar to a

51. What is the new total balance of the partnership accounts?

63. What is the dissolution of a partnership?

64. By what methods can a person gain admittance to a partnership?

65. What events cause the dissolution of a partnership?

87. Record the journal entry to allocate the salary of Noris.

Chapter 09 Partnerships: Formation and Operations Answer Key

Multiple Choice Questions

AACSB: Reflective thinking

AACSB: Reflective thinking

3. The disadvantages of the partnership form of business organization, compared to

AACSB: Reflective thinking

4. The advantages of the partnership form of business organization, compared to corporations,

AACSB: Reflective thinking

5. The dissolution of a partnership occurs

AACSB: Reflective thinking

AACSB: Reflective thinking

7. What was Wasser's total share of net income for 2010?

8. What was Nolan's total share of net income for 2010?

9. What was Cleary's total share of net income for 2010?

10. What was Nolan's capital balance at the end of 2010?

11. What was Wasser's capital balance at the end of 2010?

12. What was Cleary's capital balance at the end of 2010?

19. What was Nolan's capital balance at the end of 2011?

20. What was Wasser's capital balance at the end of 2011?

38. Which of the following is not a characteristic of a partnership?

AACSB: Reflective thinking

AACSB: Reflective thinking

40. Which of the following type of organization is classified as a partnership, or similar to a

AACSB: Reflective thinking

AACSB: Reflective thinking

AACSB: Reflective thinking

Bonus = .20(NI-Bonus)= (.20NI)-(.20Bonus).

($150,000/.8=$187,500. $187,500 - $150,000 = $37,500 to invest)

($80,000 - $60,000) 3 = $6,667

Land will be recorded at the fair value of $45,000.

51. What is the new total balance of the partnership accounts?

AACSB: Reflective thinking

63. What is the dissolution of a partnership?

AACSB: Reflective thinking

64. By what methods can a person gain admittance to a partnership?

AACSB: Reflective thinking

65. What events cause the dissolution of a partnership?

AACSB: Reflective thinking

AACSB: Reflective thinking

AACSB: Reflective thinking

AACSB: Reflective thinking

Goodwill should be recognized only when a business is purchased in an arms-length

AACSB: Reflective thinking