Chapter 12

Chapter 012 Accounting for Partnerships
Summary of Questions by Difficulty Level (DL) and Learning Objective (LO) True/False Item DL LO Item DL LO Item DL LO 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. Easy Easy Med Med Med Med Med Hard Med Med Easy Easy C1 C1 C1 C1 C1 C1 C1 C1 A1 A1 P1 P1 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. Med Med Hard Easy Easy Med Med Med Med Hard Easy P1 P1 P1 P2 P2 P2 P2 P2 P2 P2 P3 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. Easy Med Med Med Hard Hard Easy Easy Med Med Hard P3 P3 P3 P3 P3 P3 P4 P4 P4 P4 P4
Multiple Choice Item DL 35. 36. 37. 38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. Easy Easy Easy Med Med Med Hard Med Hard Med Med Med Easy Med
LO C1 C1 C1 C1 C1 C1 C1 C1 C1 A1 A1 A1 P1 P1
Item 49. 50. 51. 52. 53. 54. 55. 56. 57. 58. 59. 60. 61. 62.
DL Med Med Med Hard Hard Hard Easy Med Med Med Hard Hard Med Med
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Item 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74.
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Matching Item DL 75. Med
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Short Essay Item DL 76. 77. 78. Hard Easy Easy
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Problems Item DL 84. 85. 86. 87. 88. 89. 90. Hard Easy Med Med Med Med Med
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Completion Problems Item DL LO 104. 105. 106. 107. 108. 109. Easy Easy Med Med Med Med C1 C1 C1 C1 C1 C1
Item 110. 111. 112. 113. 114.
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True / False Questions 1. A partnership has an unlimited life. FALSE
AACSB: Communications AICPA BB: Legal AICPA FN: Decision Making Difficulty: Easy Learning Objective: C1
2. A partnership is an unincorporated association of two or more people to pursue a business for profit as co-owners. TRUE
AACSB: Communications AICPA BB: Legal AICPA FN: Decision Making Difficulty: Easy Learning Objective: C1
3. Mutual agency means each partner can commit or bind the partnership to any contract within the scope of the partnership business. TRUE
AACSB: Communications AICPA BB: Legal AICPA FN: Decision Making Difficulty: Medium Learning Objective: C1
4. Accounting procedures for all items are the same for both C corporations and S corporations in all aspects. FALSE
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5. Partners in a partnership are taxed on the amounts they withdraw from the partnership, not the partnership income. FALSE
6. Limited liability partnerships are designed to protect innocent partners from malpractice or negligence claims resulting from the acts of another partner. TRUE
7. A partnership cannot use salary allowances or interest allowances if it uses the stated ratio method to allocate income and losses to the partners. FALSE
AACSB: Communications AICPA BB: Industry AICPA FN: Measurement Difficulty: Medium Learning Objective: C1
8. In a limited partnership the general partner has unlimited liability. TRUE
AACSB: Communications AICPA BB: Legal AICPA FN: Decision Making Difficulty: Hard Learning Objective: C1
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9. Partner return on equity can be used by each partner to help decide whether additional investment or withdrawal of resources is best for that partner. TRUE
AACSB: Communications AICPA BB: Industry AICPA FN: Risk Analysis Difficulty: Medium Learning Objective: A1
10. Benson is a partner in B&D Company. Benson's share of the partnership income is $18,600 and her average partnership equity is $155,000. Her partner return on equity equals 8.33. FALSE $18,600/$155,000 = 12%
AACSB: Analytic AICPA BB: Industry AICPA FN: Risk Analysis Difficulty: Medium Learning Objective: A1
11. When partners invest in a partnership, their capital accounts are credited for the amount invested. TRUE
AACSB: Communications AICPA BB: Industry AICPA FN: Measurement Difficulty: Easy Learning Objective: P1
12. Partners' withdrawals are credited to their separate withdrawals accounts. FALSE
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13. Partners can invest both assets and liabilities into a partnership. TRUE
AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Medium Learning Objective: P1
14. The withdrawals account of each partner is closed to retained earnings at the end of the accounting period. FALSE
AACSB: Communications AICPA BB: Industry AICPA FN: Measurement Difficulty: Medium Learning Objective: P1
15. In closing the accounts at the end of a period, the partners' capital accounts are credited for their share of the partnership loss or debited for their share of the partnership net income. FALSE
AACSB: Communications AICPA BB: Industry AICPA FN: Measurement Difficulty: Hard Learning Objective: P1
16. In the absence of a partnership agreement, the law says that income of a partnership will be shared equally by the partners. TRUE
AACSB: Communications AICPA BB: Industry, Legal AICPA FN: Measurement Difficulty: Easy Learning Objective: P2
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17. Salary allowances are reported as salaries expense on a partnership income statement. FALSE
18. The statement of changes in partners' equity shows the beginning balance in retained earnings, plus investments, less withdrawals, the income or loss and the ending balance in retained earnings. FALSE
AACSB: Communications AICPA BB: Industry AICPA FN: Reporting Difficulty: Medium Learning Objective: P2
19. The equity section of the balance sheet of a partnership can report the separate capital account balances of each partner. TRUE
AACSB: Communications AICPA BB: Industry AICPA FN: Reporting Difficulty: Medium Learning Objective: P2
20. If partners devote their time and services to their partnership, their salaries are expenses on the income statement. FALSE
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21. If the partners agree on a formula to share income and say nothing about losses, then the losses are shared equally. FALSE
AACSB: Communications AICPA BB: Industry, Legal AICPA FN: Measurement Difficulty: Medium Learning Objective: P2
22. Assume that the S & B partnership agreement gave Steely 60% and Breck 40% of partnership income and losses. The partnership lost $27,000 in the current period. This implies that Steely's share of the loss equals $16,200, and Breck's share equals $10,800. TRUE
AACSB: Analytic AICPA BB: Industry, Legal AICPA FN: Measurement Difficulty: Hard Learning Objective: P2
23. When a partner leaves a partnership, the present partnership ends. TRUE
AACSB: Communications AICPA BB: Industry, Legal AICPA FN: Decision Making Difficulty: Easy Learning Objective: P3
24. To buy into an existing partnership, the new partner must contribute cash to the partnership. FALSE
AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Easy Learning Objective: P3
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25. When a partner leaves a partnership, the present partnership ends, but the business can still continue to operate. TRUE
AACSB: Communications AICPA BB: Industry, Legal AICPA FN: Decision Making Difficulty: Medium Learning Objective: P3
26. Assets invested by a partner into a partnership remain the property of the individual partner. FALSE
27. Admitting a partner by accepting assets is a personal transaction between one or more current partners and the new partner. FALSE
28. When the current value of a partnership is greater than the recorded amounts of equity, the current partners usually require any new partner to pay a bonus for the privilege of joining. TRUE
AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Hard Learning Objective: P3
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29. When a partner leaves a partnership, the withdrawing partner is entitled to a bonus if the recorded equity is overstated. FALSE
AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Difficulty: Hard Learning Objective: P3
30. When a partnership is liquidated, its business is ended. TRUE
AACSB: Communications AICPA BB: Industry, Legal AICPA FN: Decision Making Difficulty: Easy Learning Objective: P4
31. A capital deficiency exists when all partners have a credit balance in their capital accounts. FALSE
32. A capital deficiency can arise from liquidation losses, excessive withdrawals before liquidation, or recurring losses in prior periods. TRUE
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33. If a partner is unable to cover a deficiency and the other partners absorb the deficiency, then the partner with the deficiency is thus relieved of all liability. FALSE
34. If at the time of partnership liquidation, a partner has a $5,000 capital deficiency and pays the partnership $5,000 out of personal assets to cover the deficiency, then that partner is entitled to share in the final distribution of cash. FALSE
AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Difficulty: Hard Learning Objective: P4
Multiple Choice Questions 35. An unincorporated association of two or more persons to carry on a business for profit as co-owners is a: A. Partnership. B. Proprietorship. C. Contractual company. D. Mutual agency. E. Voluntary organization.
AACSB: Communications AICPA BB: Industry, Legal AICPA FN: Decision Making Difficulty: Easy Learning Objective: C1
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36. Disadvantages of a partnership include: A. Limited life. B. Mutual agency. C. Unlimited liability. D. Co-ownership of property. E. All of these.
37. A partnership agreement: A. Is not binding unless it is in writing. B. Is the same as a limited liability partnership. C. Is binding even if it is not in writing. D. Does not generally address the issue of the rights and duties of the partners. E. Is also called the articles of incorporation.
38. Mutual agency means A. Creditors can apply their claims to partners' personal assets. B. Partners are taxed on partnership withdrawals. C. All partners must agree before the partnership can act. D. The partnership has a limited life. E. A partner can commit or bind the partnership in any contract within the scope of the partnership business.
AACSB: Communications AICPA BB: Industry, Legal AICPA FN: Decision Making Difficulty: Medium Learning Objective: C1
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39. A partnership that has two classes of partners, general and limited, where the limited partners have no personal liability beyond the amounts they invest in the partnership, and no active role in the partnership, except as specified in the partnership agreement is a: A. Mutual agency partnership. B. Limited partnership. C. Limited liability partnership. D. General partnership. E. Limited liability company.
40. A partnership designed to protect innocent partners from malpractice or negligence claims resulting from acts of another partner is a: A. Partnership. B. Limited partnership. C. Limited liability partnership. D. General partnership. E. Limited liability company.
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41. Mutual agency implies that each partner in a partnership is a fully authorized agent of the partnership. Which of the following statements is correct regarding the authority of a partner to bind the partnership in dealings with third parties? A. The partner's authority must be derived from the partnership agreement. B. The partner's authority may be effectively limited by a formal resolution of the other partners, even if third parties are not aware of that limitation. C. Only a partner with a majority interest in a partnership has the authority to represent the partnership to third parties. D. A partner has authority to deal with third parties on the behalf of the other partners only if he has written permission to do so. E. A partner may be able to legally bind the partnership to actions even if the other partners are unaware of his actions.
AACSB: Communications AICPA BB: Industry, Legal AICPA FN: Decision Making Difficulty: Hard Learning Objective: C1
42. David and Jeannie formed This & That as a limited liability company. Unless the member owners elect to be treated otherwise, the Internal Revenue Service will tax the LLC as: A. An S corporation. B. A C corporation. C. A non-taxable entity. D. A joint venture. E. A partnership.
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43. Which of the following statements is generally correct? I. A limited partner in a limited partnership has the right to take part in the management of the partnership. II. A limited partner is subject to personal liability for the limited partnership's debts. A. I only B. II only C. Neither I nor II D. Both I and II E. Impossible to answer without knowing the state in which the partnership was formed.
44. Renee Jackson is a partner in Sports Promoters. Her beginning partnership capital balance for the current year is $55,000, and her ending partnership capital balance for the current year is $62,000. Her share of this year's partnership income was $5,250. What is her partner return on equity? A. 8.47% B. 8.97% C. 9.54% D. 1047% E. 1060% $5,250/[($55,000 + $62,000)/2] = 8.97%
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45. Web Services is organized as a limited partnership, with David White as one of its partners. David's capital account began the year with a balance of $45,000. During the year, David's share of the partnership income was $7,500, and David received $4,000 in distributions from the partnership. What is David's partner return on equity? A. 7.8% B. 8.9% C. 15.4% D. 16.0% E. 16.7% Ending partnership equity = $45,000 + $7,500 - $4,000 = $48,500 Return on partnership equity = $7,500/(($45,000 + $48,500)/2) = 16.0%
46. The following information is available regarding John Smith's capital account in Technology Consulting Group, a general partnership, for a recent year:
What is Smith's partner return on equity during the year in question? A. 36.6% B. 34.7% C. 10.8% D. 11.4% E. 55.7% Ending partner equity = $22,000 + $8,500 - $6,000 = $24,500 $8,500 / (($22,000 + $24,500)/2) = 36.6%
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47. Partnership accounting: A. Uses a capital account for each partner. B. Uses a withdrawals account for each partner. C. Allocates net income to each partner according to the partnership agreement. D. Allocates net loss to each partner according to the partnership agreement. E. All of these.
48. Partnership accounting: A. Is the same as accounting for a sole proprietorship. B. Is the same as accounting for a corporation. C. Is the same as accounting for a sole proprietorship, except that separate capital and withdrawal accounts are kept for each partner. D. Is the same as accounting for an S corporation. E. Is the same as accounting for a corporation, except that retained earnings is used to keep track of partners' withdrawals.
49. Partners' withdrawals of assets are: A. Credited to their withdrawals accounts. B. Debited to their withdrawals accounts. C. Credited to their retained earnings. D. Debited to their retained earnings. E. Debited to their asset accounts.
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50. The withdrawals account of each partner is: A. Closed to that partner's capital account with a credit. B. Closed to that partner's capital account with a debit. C. A permanent account that is not closed. D. Credited with that partner's share of net income. E. Debited with that partner's share of net loss.
51. B. Tanner contributed $14,000 in cash plus office equipment valued at $7,000 to the JT Partnership. The journal entry to record the transaction for the partnership is:
A.
B. C. D.
E.
AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Difficulty: Medium Learning Objective: P1
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52. Chen and Wright are forming a partnership. Chen will invest a building that currently is being used by another business owned by Chen. The building has a market value of $90,000. Also, the partnership will assume responsibility for a $30,000 note secured by a mortgage on that building. Wright will invest $50,000 cash. For the partnership, the amounts to be recorded for the building and for Chen's Capital account are: A. Building, $90,000 and Chen, Capital, $90,000. B. Building, $60,000 and Chen, Capital, $60,000. C. Building, $60,000 and Chen, Capital, $50,000. D. Building, $90,000 and Chen, Capital, $60,000. E. Building, $60,000 and Chen, Capital, $90,000.
53. Collins and Farina are forming a partnership. Collins is investing a building that has a market value of $80,000. However, the building carries a $56,000 mortgage that will be assumed by the partnership. Farina is investing $20,000 cash. The balance of Collins' Capital account will be: A. $80,000. B. $24,000. C. $56,000. D. $44,000. E. $60,000.
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54. Trump and Hawthorne have decided to form a partnership. Trump is going to contribute a depreciable asset to the partnership as his equity contribution to the partnership. The following information regarding the asset to be contributed by Trump is available:
*will be assumed by the partnership Based on this information, Trump's beginning equity balance in the partnership will be: A. $76,000 B. $36,000 C. $18,000 D. $27,000 E. $45,000 $45,000 market value of the asset - $18,000 of debt assumed by the partnership = $27,000.
55. In the absence of a partnership agreement, the law says that income (and loss) should be allocated based on: A. A fractional basis. B. The ratio of capital investments. C. Salary allowances. D. Equal shares. E. Interest allowances.
AACSB: Analytic AICPA BB: Industry, Legal AICPA FN: Measurement Difficulty: Easy Learning Objective: P2
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56. In a partnership agreement, if the partners agreed to an interest allowance of 10% annually on each partner's investment, the interest allowance: A. Is ignored when earnings are not sufficient to pay interest. B. Can make up for unequal capital contributions. C. Is an expense of the business. D. Must be paid because the partnership contract has unlimited life. E. Legally becomes a liability of the general partner.
57. Rice, Hepburn, and DiMarco formed a partnership with Rice contributing $60,000, Hepburn contributing $50,000 and DiMarco contributing $40,000. Their partnership agreement called for the income (loss) division to be based on the ratio of capital investments. If the partnership had income of $75,000 for its first year of operation, what amount of income (rounded to the nearest dollar) would be credited to DiMarco's capital account? A. $20,000. B. $25,000. C. $30,000. D. $40,000. E. $75,000. $75,000 x ($40,000/($60,000 + $50,000 + $40,000)) = $20,000
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58. Shelby and Mortonson formed a partnership with capital contributions of $300,000 and $400,000, respectively. Their partnership agreement calls for Shelby to receive a $60,000 per year salary. Also, each partner is to receive an interest allowance equal to 10% of a partner's beginning capital investments. The remaining income or loss is to be divided equally. If the net income for the current year is $135,000, then Shelby and Mortonson's respective shares are: A. $67,500; $67,500. B. $92,500; $42,500. C. $57,857; $77,143. D. $90,000; $40,000. E. $35,000; $100,000.
59. Which of the following statements is true? A. Partners are employees of the partnership. B. Salaries to partners are expenses on the partnership income statement. C. Salary allowances usually reflect the relative value of services provided by partners. D. Salary allowances are expenses. E. Interest allowances are expenses.
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60. Nguyen invested $100,000 and Hansen invested $200,000 in a partnership. They agreed to share incomes and losses by allowing a $60,000 per year salary allowance to Nguyen and a $40,000 per year salary allowance to Hansen, plus an interest allowance on the partners' beginning-year capital investments at 10%, with the balance to be shared equally. Under this agreement, the shares of the partners when the partnership earns $105,000 in income are: A. $52,500 to Nguyen; $52,500 to Hansen. B. $35,000 to Nguyen; $70,000 to Hansen. C. $57,500 to Nguyen; $47,500 to Hansen. D. $42,500 to Nguyen; $62,500 to Hansen. E. $70,000 to Nguyen; $60,000 to Hansen.
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61. The partnership agreement for Smith Wesson & Davis, a general partnership, provided that profits be shared between the partners in the ratio of their financial contributions to the partnership. Smith contributed $100,000, Wesson contributed $60,000 and Davis contributed $20,000. In the partnership's first year of operation, it incurred a loss of $210,000. What amount of the partnership's loss, rounded to the nearest dollar, should be absorbed by Smith? A. $70,000 B. $116,667 C. $23,333 D. $105,000 E. $52,500 If the partnership agreement does not specifically address how losses are to be allocated between the partners, the losses are to be shared in the same manner as profits. Therefore, since Smith's capital contribution ($100,000) represented 5/9 of the total capital upon formation ($100,000 + $60,000 + $20,000), Smith should be allocated 5/9 of the $210,000 loss or $116,667.
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62. Regina Harrison is a partner in Pressed for Time. An analysis of Regina Harrison's capital account indicates that during the most recent year, she withdrew $20,000 from the partnership. Her share of the partnership's net loss was $16,000 and she made an additional equity contribution of $10,000. Her capital account ended the year at $150,000. What was her capital balance at the beginning of the year? A. $124,000 B. $144,000 C. $192,000 D. $176,000 E. $134,000
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63. The following information is available on Stewart Enterprises, a partnership, for the most recent fiscal year:
There are three partners in Stewart Enterprises: Stewart, Tedder and Armstrong. At the end of the year, the partners' capital accounts were in the ratio of 2:1:2, respectively. Compute the ending capital balances of the three partners. A. Stewart = $108,000; Tedder = $54,000; Armstrong = $108,000. B. Stewart = $90,000; Tedder = $90,000; Armstrong = $90,000. C. Stewart = $204,000; Tedder = $102,000; Armstrong = $204,000. D. Stewart = $84,000; Tedder = $102,000; Armstrong = $84,000. E. Stewart = $60,000; Tedder = $30,000; Armstrong = $60,000.
If the partners' ending capital balances at in the ratio of 2:1:2, then Stewart has 2/5 of the total, Tedder has 1/5 of the total and Armstrong has 2/5 of the total. Therefore, Stewart and Armstrong have ending balances of $108,000 ($270,000 x 2/5) and Tedder has an ending balance of $54,000 ($270,000 x 1/5).
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64. A partner can withdraw from a partnership by: A. Selling his/her interest to another person for cash. B. Selling his/her interest to another person in exchange for assets. C. Receiving cash from the partnership in the amount of his/her interest. D. Receiving assets from the partnership in the amount of his/her interest. E. All of these.
AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Difficulty: Easy Learning Objective: P3
65. A bonus may be paid: A. By a new partner when the current value of a partnership is greater than the recorded amounts of equity. B. By a withdrawing partner to remaining partners if the recorded value of the equity is overstated. C. To a new partner with exceptional talents. D. By remaining partners to a withdrawing partner if the recorded equity is understated. E. All of these.
AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Difficulty: Medium Learning Objective: P3
66. When a partner is added to a partnership: A. The previous partnership ends. B. The underlying business operations end. C. The underlying business operations must close and then re-open. D. The partnership must continue. E. The partnership equity always increases.
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67. A partnership recorded the following journal entry:
This entry reflects: A. Acceptance of a new partner who invests $70,000 and receives a $20,000 bonus. B. Withdrawal of a partner who pays a $10,000 bonus to each of the other partners. C. Addition of a partner who pays a bonus to each of the other partners. D. Additional investment into the partnership by Tanner and Jackson. E. Withdrawal of $10,000 each by Tanner and Jackson upon the admission of a new partner.
68. Groh and Jackson are partners. Groh's capital balance in the partnership is $64,000, and Jackson's capital balance $61,000. Groh and Jackson have agreed to share equally in income or loss. Groh and Jackson agree to accept Block with a 20% interest. Block will invest $35,000 in the partnership. The bonus that is granted to Groh and Jackson equals: A. $1,500 each. B. $1,875 each. C. $3,750 each D. 1,920 to Groh; $1,830 to Jackson. E. $0, because Groh and Jackson actually grant a bonus to Block. Total partnership equity = $64,000 + $61,000 + $35,000 = $160,000 Equity of Block = $160,000 x 0.20 = $32,000 Bonus to old partners = $35,000 - $32,000 = $3,000, split equally
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69. Groh and Jackson are partners. Groh's capital balance in the partnership is $64,000, and Jackson's capital balance $61,000. Groh and Jackson have agreed to share equally in income or loss. Groh and Jackson agree to accept Block with a 25% interest. Block will invest $35,000 in the partnership. The bonus that is granted to Block equals: A. $5,000. B. $2,500. C. $6,667 D. $3,333 E. $0, because Block must actually grant a bonus to Groh and Jackson. Total partnership equity = $64,000 + $61,000 + $35,000 = $160,000 Equity of Block = $160,000 x 0.25 = $40,000 Bonus to Block = $40,000 - $35,000 = $5,000
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70. McCartney, Harris, and Hussin are dissolving their partnership. Their partnership agreement allocates income and losses equally among the partners. The current period's ending capital account balances are McCartney, $15,000, Harris, $15,000, Hussin, $(2,000). After all the assets are sold and liabilities are paid, but before any contributions to cover any deficiencies, there is $28,000 in cash to be distributed. Hussin pays $2,000 to cover the deficiency in his account. The general journal entry to record the final distribution would be:
A.
B.
C.
D.
E.
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71. When a partnership is liquidated: A. Noncash assets are converted to cash. B. Any gain or loss on liquidation is allocated to the partners' capital accounts using the income and loss sharing ratio. C. Liabilities are paid or settled. D. Any remaining cash is distributed to the partners based on their capital balances. E. All of these.
AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Difficulty: Easy Learning Objective: P4
72. A capital deficiency means that: A. The partnership has a loss. B. The partnership has more liabilities than assets. C. At least one partner has a debit balance in his/her capital account. D. At least one partner has a credit balance in his/her capital account. E. The partnership has been sold at a loss.
73. When a partner is unable to pay a capital deficiency: A. The partner must take out a loan to cover the deficient balance B. The deficiency is absorbed by the remaining partners. C. The partnership ends. D. The deficient partner has a personal liability to pay the deficiency. E. Both B and D.
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74. McCartney, Harris and Hussin are dissolving their partnership. Their partnership agreement allocates each partner 1/3 of all income and losses. The current period's ending capital account balances are McCartney, $13,000; Harris, $13,000; and Hussin, $(2,000). After all assets are sold and liabilities are paid, there is $24,000 in cash to be distributed. Hussin is unable to pay the deficiency. The journal entry to record the distribution should be:
A.
B.
C.
D.
E.
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Matching Questions 75. Match each of the following terms with the appropriate definitions. 1. Limited liability partnership
A corporation that meets special tax qualifications so as to be treated like a partnership for income tax purposes. The legal relationship among partners whereby each 2. Limited partner can commit or bind the partnership to any contract partnership within the scope of the partnership's business. 3. General An unincorporated association of two or more persons to partner pursue a business for profit as co-owners. The legal relationship among general partners that makes each of them responsible for paying the debts of the partnership if the other partners are unable to pay their 4. C corporation shares. 5. Statement of The agreement between partners that sets terms under partner's equity which the affairs of the partnership are conducted. A corporation that does not qualify for nor elect to be treated as a partnership for income tax purposes and 6. Mutual agency therefore is subject to income taxes. A partner who assumes unlimited liability for the debts 7. Partnership of the partnership. A partnership that protects innocent partners from 8. Partnership malpractice or negligence claims resulting from the acts of contract another partner. A financial statement that shows total capital balances at 9. Unlimited the beginning of the period, any additional investment by liability of partners, the income or loss of the period, the partners' partners withdrawals, and the ending capital balances. A partnership that has two classes of partners, limited partners and general partners. Limited partners have no personal liability beyond the amount they invest in the partnership, and have no active role except as specified in 10. S corporation the partnership agreement.
10 6 7
9 8 4 3 1
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Short Answer Questions 76. Identify and discuss the key characteristics of partnerships. Also, identify other organizations that possess the positive aspects of both partnerships and corporations. Partnerships are unincorporated associations of two or more persons who join to pursue a business for profit as co-owners. Partners sign a partnership agreement and are subject to mutual agency and unlimited liability for acts of the partnership. Partnerships have limited life, and are not taxable entities. Several types of business organizations such as S corporations, limited liability partnerships and limited liability companies combine the positive aspects of partnerships and corporations. The most notable is the adoption of the corporate characteristic of limited liability for owners of these hybrid business forms.
77. Define the partner return on equity ratio and explain how a specific partner would use this ratio. The partner return on equity ratio is calculated by dividing the partner's income by the average equity of that partner. This ratio can be calculated for individual partners or for the total partnership. It can be used by a partner to help determine whether additional investment or withdrawal of resources is best for that partner.
AACSB: Communications AICPA BB: Industry AICPA FN: Risk Analysis Difficulty: Easy Learning Objective: A1
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78. How are partners' investments in a partnership recorded? When partners invest in a partnership, their individual contributions are credited to each partner's capital account at an agreed-on value. The assets contributed are debited to the appropriate asset account. Partners may contribute assets that are encumbered by liabilities that are credited to the appropriate liability account.
79. Discuss the options for the allocation of income and loss among partners, including with and without a partnership agreement. In the absence of a partnership agreement, income and loss are shared equally by the partners. A partnership agreement should specify how to allocate partnership income or loss among partners. Allocation can be made based on stated ratios, capital balances, salary allowances, interest allowances or a combination of the above methods.
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80. What are the ways that a new partner can be admitted to an existing partnership? Explain how to account for the admission of the new partner under each of these circumstances. A new partner may purchase a partnership interest from one or more existing partners. In this case, a capital account is established for the new partner equal to the portion of the existing partners' interest that was purchased from that partner or partners. This transaction is a personal transaction between one or more current partners and the new partner. A new partner may invest assets in the existing partnership. This is a transaction between the new partner and the partnership. In this case, a capital account is established for the new partner equal to the portion of the partnership purchased. When the current value of a partnership is greater than the recorded amounts of equity, the partners usually require the new partner to pay a bonus for the privilege of joining. When the partnership needs additional cash or the new partner has exceptional talents, the existing partners may grant a bonus to the new partner.
81. What are the ways a partner can withdraw from a partnership? Explain how to account for the withdrawal of a current partner from a partnership. A partner may sell his or her interest in the partnership to a new partner who pays for it in cash or other assets. In this case, the partnership debits the old partner's capital account and credits the new partner's capital account. A partner may also withdraw and have cash or other assets of the partnership distributed to him or her in settlement of his or her interest. If the recorded value of the withdrawing partner's interest is overstated, then the withdrawing partner would give the remaining partners a bonus. If the withdrawing partner's interest is understated, the withdrawing partner receives a bonus from the remaining partners.
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82. Explain the steps involved in the liquidation of a partnership. Four steps are involved in the liquidation process. (1) Record the sale of noncash assets for cash and any gain or loss from their liquidation. (2) Allocate any gains or losses from liquidation to the partners' capital accounts using their income-and-loss sharing ratio. (3) Liabilities of the partnership are paid or settled. (4) Any remaining cash is distributed to the partners based on their capital balances.
83. The partners of Samanta Shoes know that knowledge of partnerships and their financial implications are important to success. What are some of the advantages or disadvantages of the partnership form of business? What areas did the partners focus on? Anyone considering forming a partnership would be wise to consider the manner in which partnerships are taxed, the mutual agency aspect of partnerships, the unlimited liability aspect of partnerships and the fact that partnership assets are considered to be jointly owned by all partners. Moreover, a formal, written partnership agreement should be developed to detail each partner's expectations. Both partners stressed the importance of attending to partnership formation, partnership agreements, and financial reports. They refer to partners' return on equity and the organizational form as key inputs to the partnership success.
AACSB: Communications AICPA BB: Industry AICPA FN: Measurement Difficulty: Medium Learning Objective: C1
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Problems 84. Basketball Products LP is organized as a limited partnership that sells sporting equipment. Information related to the two partner's capital balances is given below. Compute the partner return on equity for each limited partner. How would each partner evaluate the success of the partnership? What would you recommend the partners do with respect to additional investments or withdrawals?
Partner return on equity = Partner net income/Average partner equity Ball's partner return on equity = $85,000 / (($870,000 + $915,000)/2) = 9.5% Basquette's partner return on equity = $55,000 / (($580,000 + $610,000)/2) = 9.2% Each partner is earning a decent return on capital and the returns are almost equal which indicates net income is being allocated based on the amount of capital contributed by each partner. Since the capital balances are fairly large amounts, the partners may want to consider withdrawing larger amounts, reducing the capital balances. If the same earnings stream continues, this would yield a higher return on partner's equity. There would need to be sufficient quick assets available for the partnership to be able to do this.
AACSB: Analytic AICPA BB: Industry, Critical Thinking AICPA FN: Risk Analysis Difficulty: Hard Learning Objective: A1
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85. Kathleen Reilly and Ann Wolf decide to form a partnership on August 1. Reilly invested the following assets and liabilities in the new partnership:
The note payable is associated with the building and the partnership will assume responsibility for the loan. Wolf invested $60,000 in cash and $105,000 in equipment in the new partnership. Prepare the journal entries to record the two partners' original investments in the new partnership.
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86. Sierra and Jenson formed a partnership. Sierra contributed $25,000 cash and accounts receivable worth $11,000. Jenson's investment included cash, $5,000; inventory, $18,000; and supplies, $1,000. Prepare the journal entries to record each partner's investment in the new partnership.
87. Arthur, Barnett, and Cummings form a partnership. Arthur contributes $250,000 cash and Barnett contributes $230,000 in cash. Cummings contributes equipment worth $255,000. Prepare the single journal entry to record the formation of this partnership.
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88. Durango and Verde formed a partnership with capital contributions of $150,000 and $190,000, respectively. Their partnership agreement called for Durango to receive a $50,000 annual salary allowance. They also agreed to allow each partner a share of income equal to 10% of their initial capital investments. The remaining income or loss is to be divided equally. If the net income for the current year is $120,000, what are Durango's and Verde's respective shares?
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89. Juanita invested $100,000 and Jacque invested $95,000 in a new partnership. They agreed to a $50,000 annual salary allowance to Juanita and a $40,000 annual salary allowance to Jacque. They also agreed to an annual interest allowance of 10% on the partners' beginningyear capital balance, with the balance to be divided equally. Under this agreement, what are the income or loss shares of the partners if the annual partnership income is $102,000?
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90. Summers and Winters formed a partnership on January 1. Summers contributed $90,000 cash and equipment with a market value of $60,000. Winters' investment consisted of: cash, $30,000; inventory, $20,000; all at market values. Partnership net income for year 1 and year 2 was $75,000 and $120,000, respectively. 1. Determine each partner's share of the net income for each year, assuming each of the following independent situations: (a) Income is divided based on the partners' failure to sign an agreement. (b) Income is divided based on a 2:1 ratio (Summers: Winters). (c) Income is divided based on the ratio of the partners' original capital investments. (d) Income is divided based on interest allowance of 12% on the original capital investments; salary allowance to Summers of $30,000 and Winters of $25,000; and the remainder to be divided equally. 2. Prepare the journal entry to record the allocation of the Year 1 income under alternative (d) above.
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Part 1: Calculation of partners' capital contributions:
Part 2:
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91. Paco and Kate invested $99,000 and $126,000, respectively, in a partnership they began one year ago. Assuming the partnership earned $120,000 during the current year, compute the share of the net income each partner should receive under each of these independent assumptions.
Part 1
Part 2:
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92. Holden, Phillips, and Rogers are partners with beginning-year capital balances of $120,000, $60,000, and $60,000, respectively. Partnership net income for the year is $84,000. Make the necessary journal entry to close Income Summary to the capital accounts if: a. Partners agree to divide income based on their beginning-year capital balances. b. Partners agree to divide income based on the ratio of 5:3:2 (Holden:Phillips:Rogers), respectively. c. Partnership agreement is silent as to division of income and less.
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93. Khalid, Dina, and James are partners with beginning-of-year capital balances of $400,000, $320,000, and $160,000, respectively. The partners agreed to share income and loss as follows: Salary of $30,000 to Khalid, $50,000 to Dina, and $55,000 to James. An interest allowance of 10% on beginning-of-year capital balances. Any remaining balance is to be divided equally. If partnership net income for the year is $190,000, determine each partner's share and make the appropriate journal entry to close the Income Summary to the capital accounts.
94. Marquis and Bose agree to accept Sherman into their partnership. Sherman will contribute $25,000 in cash. Prepare the journal entry to record this transaction.
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95. Armstrong withdraws from the FAP Partnership. The remaining partners agree to buy out her share for her capital balance of $35,000. Prepare the journal entry to record the withdrawal from the partnership.
96. Alberts and Bartel are partners. On October 1, Alberts' capital balance is $75,000, and Bartel's capital balance is $125,000. With the partnership's approval, Bartel sells of his partnership interest to Camero for $70,000. Prepare the journal entry to record this transaction in the partnership records.
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97. Conley and Liu allow Lepley to purchase a 25% interest in their partnership for $35,000 cash. Lepley has exceptional talents that will enhance the partnership. Conley's and Liu's capital account balances are $55,000 each. The partners have agreed to share income or loss equally. Prepare the general journal entry to record the admission of Lepley to the partnership.
98. Armstrong plans to leave the FAP Partnership. The recorded value of her capital account is $48,000. The remaining partners Floyd and Peters agree to pay Armstrong $40,000 cash and Armstrong accepts. The partners share income and loss equally. Prepare the general journal entry to record the withdrawal from the partnership.
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99. Armstrong plans to leave the FAP Partnership. The recorded balance in her capital account is $48,000. The remaining partners, Peters and Floyd, agree to pay Armstrong $58,000 cash and Armstrong accepts. The partners share income and loss equally. Prepare the journal entry to record the transaction.
100. Conley and Liu allow Lepley to purchase a 25% interest in their partnership for $50,000 cash. Conley and Liu both have capital balances of $55,000 each, and have agreed to share income and loss equally. Prepare the journal entry to record the admission of Lepley to the partnership.
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101. The BlueFin Partnership agrees to dissolve. The remaining cash balance after liquidating partnership assets and liabilities is $60,000. The final capital account balances are: Smith, $30,000; Nagy, $20,000; and Russ, $10,000. Prepare the journal entry to distribute the remaining cash to the partners.
102. The BlueFin Partnership agrees to dissolve. The cash balance after selling all assets and paying all liabilities is $56,000. The final capital account balances are: Smith, $33,000; Nagy, $27,000; and Russ, ($4,000). Russ agrees to pay $4,000 cash from personal funds to settle his deficiency. Prepare the journal entries to record the transactions required to dissolve this partnership.
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103. The BlueFin Partnership agrees to dissolve. The cash balance after selling all assets and paying all liabilities is $60,000. The final capital account balances are: Smith, $35,000; Nagy, $29,000; and Russ, ($4,000). Russ is unable to pay the capital deficiency. Prepare the journal entries to record the transactions required to dissolve this partnership.
Fill in the Blank Questions 104. The life of a partnership is ____________________ in duration. Limited
105. A _____________________ is an unincorporated association of two or more people to pursue a business for profit as co-owners. Partnership
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106. ___________________________ means that partners can commit or bind the partnership to any contract within the scope of the partnership business. Mutual agency
107. ___________________________ implies that each partner in a partnership can be called on to pay a partnership's debts. Unlimited liability
108. A partnership that has at least two classes of partners, general and limited, allows the limited partners to have no personal liability beyond the amounts they invest in the partnership, and the limited partners have no active role except as specified in the partnership agreement is a ________________________ partnership. Limited
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109. A partnership designed to protect innocent partners from malpractice or negligence claims resulting from the acts of other partners is a ____________________________ partnership. Limited liability
110. A relatively new form of business organization that protects partners with limited liability, allows limited partners to assume an active management role, and is taxed as a partnership is a ______________________________ Limited liability company (or LLC)
111. Partners in a partnership are taxed on _______________________, not on their withdrawals. Share of partnership income
112. Partner return on equity is calculated as ______________________________. Partner net income divided by average partner equity.
AACSB: Communications AICPA BB: Industry AICPA FN: Risk Analysis Difficulty: Easy Learning Objective: A1
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113. When a partner invests in a partnership, his/her capital account is __________ for the invested amount. Credited
114. During the closing process, partner's capital accounts are _______________ for their share of net income and _________________ for their share of net loss. Credited; debited
115. During the closing process, each partner's withdrawals account is closed to __________________. That partner's capital account.
116. If partners agree on how to share income, but say nothing about losses, then losses are shared ___________________. In the same manner as income.
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117. A partner can be admitted into a partnership by ________________________ or by ______________________________. Purchasing an interest from a current partner, investing cash or other net assets.
118. If a partner withdraws from a partnership and the recorded value of his or her equity is overstated, then a bonus goes to _____________________; if the recorded value of the withdrawing partner's equity is understated, then a bonus goes to _______________________. The remaining partners; the withdrawing partner
119. A _________________________ means that at least one partner has a debit balance in his/her capital account at the point of the final distribution of cash. Capital deficiency
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Problems 120. Suze and Bess formed the Suzy B Company by making capital contributions of $130,000 and $195,000 respectively. They predict annual partnership income of $230,000 and are considering the following alternative plans of sharing income and loss: (a) in the ratio of their initial capital investments; or (b) salary allowances of $40,000 to Suze and $35,000 to Bess; interest allowances of 12% on their initial capital investments; and the balance shared equally. Assuming that both partners put about the same amount of time into the business, which method of allocating income would be best?
Plan (b) would be the better distribution of income because it takes into account all factors and still allows a reasonable return on the initial investment.
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121. Using the data presented in question 120, prepare the entries to record the initial capital investments, the allocation of net income assuming plan (b) was adopted, close the partner's withdrawal accounts assuming that Suze withdrew $50,000 and Bess withdrew $55,000.
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122. Paul and Peggy's company is organized as a partnership. At the prior year-end, Paul's equity balance was $352,000 and Peggy's was $256,000. For the current year, partnership net income is $137,000 ($77,000 allocated to Paul and $60,000 allocated to Peggy); withdrawals are $87,000 ($45,000 for Paul and $42,000 for Peggy). Compute the total partnership return on equity and the individual partner return on equity ratios.
AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Difficulty: Medium Learning Objective: A1
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123. Brit, Franc, and Scot who share income and loss in a 2:2:1 ratio, plan to liquidate their partnership. At liquidation, their balance sheet appears as follows. Prepare journal entries for (a) the sale of land and equipment sold as a package for $500,000, (b) the allocation of the gain or loss, (c) the payment of the liabilities, and (d) the distribution of cash to the individual partners.
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Chapter 12

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Chapter 12

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Chapter 012 Accounting for Partnerships

Chapter 012 Accounting for Partnerships

Short Essay Item DL 76. 77. 78. Hard Easy Easy

Item 79. 80. 81.

DL Med Med Med

Item 82. 83.

Item 91. 92. 93. 94. 95. 96. 97.

DL Med Med Med Easy Easy Med Med

Item 98. 99. 100. 101. 102. 103.

DL Med Med Med Easy Med Hard

Item 110. 111. 112. 113. 114.

DL Med Med Easy Med Med

Item 115. 116. 117. 118. 119.

DL Med Med Med Hard Easy

Problems Item DL 120. 121. Med Med

Item 122. 123.

Chapter 012 Accounting for Partnerships

True / False Questions 1. A partnership has an unlimited life. FALSE

Chapter 012 Accounting for Partnerships

8. In a limited partnership the general partner has unlimited liability. TRUE

Chapter 012 Accounting for Partnerships

Chapter 012 Accounting for Partnerships

Chapter 012 Accounting for Partnerships

Chapter 012 Accounting for Partnerships

Chapter 012 Accounting for Partnerships

Chapter 012 Accounting for Partnerships

30. When a partnership is liquidated, its business is ended. TRUE

Chapter 012 Accounting for Partnerships

Chapter 012 Accounting for Partnerships

Chapter 012 Accounting for Partnerships

Chapter 012 Accounting for Partnerships

Chapter 012 Accounting for Partnerships

Chapter 012 Accounting for Partnerships

Chapter 012 Accounting for Partnerships

Chapter 012 Accounting for Partnerships

Chapter 012 Accounting for Partnerships

Chapter 012 Accounting for Partnerships

Chapter 012 Accounting for Partnerships

Chapter 012 Accounting for Partnerships

Chapter 012 Accounting for Partnerships

Chapter 012 Accounting for Partnerships

Chapter 012 Accounting for Partnerships

Chapter 012 Accounting for Partnerships

Chapter 012 Accounting for Partnerships

Chapter 012 Accounting for Partnerships

67. A partnership recorded the following journal entry:

Chapter 012 Accounting for Partnerships

Chapter 012 Accounting for Partnerships

Chapter 012 Accounting for Partnerships

Chapter 012 Accounting for Partnerships

Chapter 012 Accounting for Partnerships

Chapter 012 Accounting for Partnerships

Chapter 012 Accounting for Partnerships

Chapter 012 Accounting for Partnerships

Chapter 012 Accounting for Partnerships

Chapter 012 Accounting for Partnerships

Chapter 012 Accounting for Partnerships

Chapter 012 Accounting for Partnerships

Chapter 012 Accounting for Partnerships

Chapter 012 Accounting for Partnerships

Chapter 012 Accounting for Partnerships

Chapter 012 Accounting for Partnerships

Chapter 012 Accounting for Partnerships

Chapter 012 Accounting for Partnerships