Chapter 1 Test Bank

Chapter 15 Test Bank

PARTNERSHIPS FORMATION, OPERATIONS, AND CHANGES

IN OWNERSHIP INTERESTS

Multiple Choice Questions

LO11.Under the Uniform Partnership Act, loans made by a partner to the partnership are treated as

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

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

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

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

LO12.A partner assigned his partnership interest to a third party. Which statement best describes the legal ramifications to the assignee?

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

b.The assignment dissolves the partnership.

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

d.The assignee does not become a partner but has the right to share in future partnership profits and to receive the proper share of partnership assets upon liquidation.

LO13.In the Uniform Partnership Act, partners have

I. mutual agency.II.unlimited liability.

a.I only.

b.II only.

c.I and II.

d.Neither I nor II.

LO14.Partnerships

a.are required to prepare annual reports.

b.are required to file income tax returns but do not pay Federal taxes.

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

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

LO25.Langley invests his delivery van in a computer repair partnership with McCurdy. What amount should the van be credited to Langleys partnership capital?

a.The tax basis.

b.The fair value at the date of contribution.

c.Langleys original cost.

d.The assessed valuation for property tax purposes.

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

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

Assets

Cash $50,000

Inventory62,500

Marketable securities100,000

Land50,000

Building-net250,000

Total assets$512,500

Equities

McCune, capital$212,500

Nall, capital200,000

Oakely, capital100,000

Total equities$512,500

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

LO26.By how much will the capital accounts of McCune, Nall, and Oakley increase, respectively, due to the revaluation of the assets and the recognition of goodwill?

a.The capital accounts will increase by $25,000 each.

b.The capital accounts will increase by $30,000 each.

c.$18,000, $27,000, and $45,000.

d.$20,000, $25,000, and $30,000.

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

a.$117,500.

b.$120,500.

c.$146,875.

d.$150,625.

LO28.What will the profit and loss sharing ratios be after Pavics investment?

a.1:2:4:2.

b.2:3:5:2.

c.3:4:6:2.

d.4:6:10:5.

Use the following information for questions 9, 10 and 11.

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

AlbionBlaze

January 1 capital balances$100,000$120,000

Yearly drawings ($1,500 a month)18,00018,000

Permanent withdrawals of capital:

June 3(12,000)

May 2(15,000)

Additional investments of capital:

July 340,000

October 250,000

LO39.What is the weighted-average capital for Albion and Blaze in 2006?

a.$100,000 and $120,000.

b.$105,333 and $126,667.

c.$110,667 and $119,583.

d.$126,667 and $105,333.

LO310.If the average capital for Albion and Blaze from the above information is $112,000 and $119,000, respectively, what will be the total amount of profit allocated after the salary and interest distributions are completed?

a.$70,000.

b.$73,100.

c.$75,000.

d.$80,000.

LO311.If the average capital balances for Albion and Blaze are $100,000 and $120,000, what will the final profit allocations for Albion and Blaze in 2006?

a.$50,000 and $70,000.

b.$54,000 and $66,000.

c.$70,000 and $50,000.

d.$75,000 and $45,000.

Use the following information for questions 12 and 13.

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

BloomCarnes

January 1 capital balances$200,000$300,000

Yearly drawings ($1,500 a month)18,00018,000

LO312.What are the total amounts for the allocation of interest, salary, and bonus, and, how much over-allocation is present?

a.$60,000 and $0.

b.$80,000 and $20,000.

c.$83,000 and $0.

d.$83,000 and $23,000.

LO313.If the partnership experiences a net loss of $20,000 for the year, what will be the final amount of profit or (loss) closed to each partners capital account?

a.($30,000) to Bloom and $10,000 to Carnes.

b.($10,000) to Bloom and ($10,000) to Carnes.

c.($8,000) to Bloom and ($12,000) to Carnes.

d.$10,000 to Bloom and ($30,000) to Carnes.

LO314.The XYZ partnership provides a 10% bonus to Partner Y that is based upon partnership income, after deduction of the bonus. If the partnership's income is $121,000, how much is Partner Y's bonus allocation?

a.$11,000.

b.$11,450.

c.$11,650.

d.$12,100.

LO315.Drawings

a.are advances to a partnership.

b.are loans to a partnership.

c.are a function of interest on partnership average capital.

d.*are the same nature as withdrawals.

LO416.If the partnership agreement provides a formula for the computation of a bonus to the partners, the bonus would be computed

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

b.before income tax allocations are made.

c.after the salary and interest allocations are made.

d.in any manner agreed to by the partners.

Use the following information for questions 17, 18 and 19.

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

Assets

Cash $75,000

Inventory82,000

Marketable securities38,000

Land150,000

Building-net255,000

Total assets$600,000

Equities

Davis, capital160,000

Eiser, capital140,000

Foreman, capital300,000

Total equities$600,000

LO517.What goodwill will be recorded?

a.$40,000.

b.$120,000.

c.$160,000.

d.$200,000.

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

a.$100,000.

b.$140,000.

c.$180,000.

d.$220,000.

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

a.$240,000.

b.$300,000.

c.$360,000.

d.$420,000.

LO620.In a limited partnership, a general partner

a.is excluded from management.

b.is not entitled to a bonus at the end of the year.

c.has limited liability for partnership debit.

d.has unlimited liability for partnership debit.

LO2Exercise 1

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

Cesar (60%)$300,000

Damon (40%)300,000

Total$600,000

Required:

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

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

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

LO3Exercise 2

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

Required:

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

LO3Exercise 3

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

Required:

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

LO3Exercise 4

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

Required:

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

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

LO3Exercise 5

Required:

Using the information from Exercise 4 above:

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

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

LO3Exercise 6

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

Capital accountsGrechHarrisIvers

Jan 1 balance$200,000$300,000$250,000

Feb 2 investment50,000

Mar 6 investment10,00020,000

Apr 20 withdrawal(10,000)

Jul 3 withdrawal and investment (7,000)10,000

Sep 29 investment5,0004,0005,000

Nov 5 investment5,000

Required:

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

LO3Exercise 7

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

Required:

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

LO5Exercise 8

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

Assets

Cash $50,000

Inventory75,000

Marketable securities120,000

Land80,000

Building-net400,000

Total assets$725,000

Equities

Ivory, capital$425,000

Jacoby, capital225,000

Kato, capital75,000

Total equities$725,000

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

Required:

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

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

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

LO5Exercise 9

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

Assets

Cash $75,000

Inventory87,500

Marketable securities60,000

Land90,000

Building-net150,000

Total assets$462,500

Equities

Vail, capital$212,500

Wacker, capital112,500

Yang, capital137,500

Total equities$462,500

Required:

Prepare the journal entry to reflect Yangs retirement from the partnership.

LO5Exercise 10

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

Assets

Cash $75,000

Inventory85,000

Marketable securities60,000

Land90,000

Building-net150,000

Total assets$420,000

Equities

Almond, capital$210,000

Brandt, capital105,000

Clack, capital105,000

Total equities$420,000

Required:

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

SOLUTIONS

Multiple Choice Questions

1.a

2.d

3.c

4.b

5.b

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

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

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

McCune 20% x 80% = 16%

Nall 30% x 80% = 24%

Oakely 50% x 80% = 40%

Pavic = 20%

Expressed as: 4:6:10:5

9.cAlbion: [($100,000 x 6) + ($88,000 x 1) +

($128,000 x 5)]/12 = $110,667

Blaze: [($120,000 x 5) + ($105,000 x 5) +

($155,000 x 2)]/12 = $119,583

10.bCapital: ($112,000 + $119,000)x(10%) = $23,100

Salary: ($20,000 + $30,000) = $50,000

Total: $23,100 + $50,000 = $73,100

11.bAlbion: ($100,000 x 10%) + $20,000 + $24,000 = $54,000

Blaze: ($120,000 x 10%) + $30,000 + $24,000 = $66,000

12.bInterest: ($500,000 x 10%) = $50,000

Salary: ($10,000 + $20,000) = $30,000

Bonus: Condition not met = $0

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

$80,000 - $60,000 = $20,000

13.bBloom:

Interest allocation: $20,000

Salary allocation: $10,000

Carnes:

Interest allocation: $30,000

Salary allocation: $20,000

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

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

15.d

16.d

17.d

18.c

19.c

20.d

Exercise 1

Requirement 1

Goodwill200,000

Cesar, capital120,000

Damon, capital80,000

Cesar, capital 210,000

Damon, capital190,000

Egan, capital400,000

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

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

Requirement 2

Goodwill 100,000

Cash500,000

Egan, capital600,000

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

Requirement 3

Goodwill100,000

Cesar, capital60,000

Damon, capital40,000

Cash700,000

Egan, capital700,000

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

Exercise 2

IncomeFloresGilroyHansen

Net income $25,000

Bonus to Gilroy(1,250)$1,250

Salaries(20,000)$10,000$10,000

Interest(5,000)1,2502,5001,250

Residual loss (1,250)

Loss allocation1,250$(250)(750)(250)

Allocation$0$11,000$3,000$11,000

Exercise 3

1/25/07 Office Equipment 12,000

Quade, capital6,000

Reid, capital3,600

Scott, capital2,400

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

Exercise 4

Requirement 1

IncomeEvansFitchGault

Net income $250,000

Bonus to Gault(25,000)$25,000

Salary allocation(25,000)$10,000$15,000

Interest allocation(70,000)24,00020,00026,000

Residual(130,000)26,00039,00065,000

Final allocation$0$60,000$74,000$116,000

Requirement 2

Income summary250,000

Evans, capital60,000

Fitch, capital74,000

Gault, capital116,000

Exercise 5

Requirement 1

LossEvansFitchGault

Net loss $(36,000)

Bonus to Gault(0)$0

Salary allocation(25,000)$10,000$15,000

Interest allocation(70,000)24,00020,000$26,000

Subtotal(131,000)34,00035,00026,000

Residual allocation131,000(26,200)(39,300)(65,500)

Totals$0$7,800$(4,300)$(39,500)

Requirement 2

Fitch, capital4,300

Gault, capital39,500

Evans, capital7,800

Income summary36,000

Exercise 6

Grech

Jan, Feb $ 200,000 x 2 =$400,000

Mar 250,000 x 1 =250,000

Apr, May, Jun, Jul 260,000 x 4 =1,040,000

Aug, Sep 253,000 x 2 =506,000

Oct, Nov, Dec 258,000 x 3 =774,000

Total capital$2,970,000

Average capital$247,500

Interest allocation$19,800

Harris

Jan, Feb, Mar $ 300,000 x 3 =$900,000

Apr, May, Jun, Jul 320,000 x 4 =1,280,000

Aug, Sep 330,000 x 2 =660,000

Oct, Nov, Dec 334,000 x 3 =1,002,000

Total capital$3,842,000

Average capital$320,167

Interest allocation$25,613

Ivers

Jan, Feb, Mar, Apr $ 250,000 x 4 =$1,000,000

May, Jun, Jul, Aug, Sep 240,000 x 5 =1,200,000

Oct, Nov 245,000 x 2 =490,000

Dec 250,000 x 1 =250,000

Total capital$2,940,000

Average capital$245,000

Interest allocation$19,600

Exercise 7

IncomeSealyTeskeUbank

Net income $88,000

Bonus (13,200)$4,400$4,400$4,400

Salary(18,000)7,50010,500

Interest(6,000)6,000

Subtotal50,80011,90014,90010,400

Balance(50,800)17,78012,70020,320

Totals$0$29,680$27,600$30,720

Exercise 8

Requirement 1

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

Land100,000

Inventory75,000

Ivory, capital63,000

Jacoby, capital42,000

Kato, capital70,000

Requirement 2

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

Cash100,000

Lange, capital100,000

Requirement 3

Cash 200,000

Lange, capital100,000

Ivory, capital36,000

Jacoby, capital24,000

Kato, capital40,000

Exercise 9

1/1/04 Yang, capital137,500

Vail, capital ($90,000 x 4/9)40,000

Wacker, capital ($90,000 x 5/9)50,000

Cash227,500

Exercise 10

Requirement 1

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

Brandt, capital105,000

Almond, capital20,000

Clack, capital10,000

Cash135,000

Requirement 2

Revalue the total partnership capital to reflect the value at Brandts retirements excess payment of $30,000.

Goodwill60,000

Almond, capital20,000

Clack, capital10,000

Brandt, capital30,000

Brandt, capital135,000

Cash135,000

Requirement 3

Add goodwill equal to the excess payment

Brandt, capital105,000

Goodwill30,000

Cash135,000

0426 2009 Pearson Education, Inc. publishing as Prentice Hall15-1