Pr obl ems ms LO 141
1 . Wh i c hoft h ef o l l o wi n gi snot ar eas onf ort hepopul ar i t yof par t ner s hi psasal eg al f or mf orbus i nes s es ? a. Partnerships may be formed merely by an oral agreement. b. Partnerships can more easily generate significant amounts of capital. c. Partnerships avoid the double taxation of income that is found in corporations.
t o offset gains for tax purposes. d. In some cases, losses may be used to
LO 141
2 . Ho wd oe spa r t n er s h i pac c o un t i n gd i ff erf r o mc o r p or a t eac c o un t i n g? a. The matching principle is not considered appropriate for partnership accounting. b. Revenues are recognized at a different time by a partnership than is appropriate for a corporation. c. Individual capital accounts replace the contributed capital and retained earnings balances found in corporate accounting. d. Partnerships report all assets at fair value as of the latest balance sheet date.
LO 142
3. Whi c ho ft hef ol l o wi n gbes tdes c r i b est hear t i c l esofpar t ner s hi p agr eeme ment ? a. The purpose of the partnership and partners' rights and responsibilities are required elements of the articles of partnership. b. The articles of partnership are a legal covenant and must be expressed in riting to be valid. c. The articles of partnership are an agreement that limits partners' liability to partnership assets. d. The articles of partnership are a legal covenant that may be expressed orally or in riting, and forms the central governance for a partnership's operations.
LO 149
4 . Pa t ,J e anLo u,an dDi a near epar t n er swi t hc ap i t a lb al a nc eso f $5 0, 000 ,$30, 000,and$ 20, 00 0,r es pec t i v el y .Thes et hr eepar t ner s s ha r ep r o fit san dl o ss eseq ua l l y . Fo ra ni n v es t me nto f$ 50 , 0 00c a sh ( pai dt ot h ebus i n es s ) ,Mar y Annwi l l beadmi t t edasapar t nerwi t ha onef our t hi nt er es ti nc api t al andpr ofi t s .Bas edont hi si nf or mat i on, whi c hoft h ef ol l o wi ngb es tj us t i fi est heamountofMar y An n' s i n v es t ment ? a. !ary"nn ill receive a bonus from t he other partners upon her admission to the partnership. b. "ssets of the partnership ere overvalued immediately prior to !ary"nn's investment. c.
Page 657
The boo# value of the partnership's net assets as less than the fair value immediately prior to !ary"nn's investment.
d. !ary"nn is apparently bringing goodill into the partnership, and her
capital account ill be credited for the appropriate amount.
LO 1410
5 . Ap ar t n er s hi ph ast h ef o l l o wi n gc a pi t a lb al a nc es :
Da vi di sgoi n gt oi n v es t$1 05, 00 0i nt ot hebu si nes st oa cqui r ea30 per c entowner s hi pi nt er es t .Goodwi l l i st ober ec or ded.Whatwi l l be Dav i d' sbegi nni ngc api t al bal anc e? a. $%&,((. b. $)(,(((. c. $)*+,(((. d. $),(((.
LO 148
6 . Ap ar t n er s hi ph ast h ef o l l o wi n gc a pi t a lb al a nc es :
Kr y st al i sgoi ngt opayat ot al of$240, 000di r ec t l yt ot hes et hr ee par t ner st oa cqui r ea25per c entowner s hi pi nt er es tf r om ea ch. Goodwi l l i st ober e c or ded.Whati sDane' sc api t al bal anc eaf t ert he t r ans ac t i on? a. $*)(,(((. b. $*,(((. c. $&(,(((. d. $*,(((.
LO 149
7 . Th ec ap i t a lb al a nc ef o rBo l c ari s$ 11 0, 0 00an df o rNe ar yi s$ 40 , 0 00 . Th es et wop ar t n er ss ha r epr o fit san dl o ss es70p er c en t( Bo l c ar )a nd 30per c ent( Near y ) .Kan sasi n v es t s$50, 00 0i ncas hi nt ot h e pa r t n er s hi pf o ra30p er c ento wn er s hi p.Th ebo nu sme t h odwi l l b e us ed.Whati sNe ar y ' sc api t al b al a nc eaf t erKans as ' si n ves t ment ? a. $,(((. b. $-,(((. c. $&(,(((. d. $&,(((.
LO 149
8 . Bi s h opha sac ap i t a lb al a nc eo f$ 120 , 0 00i nal oc a lp ar t ne r s hi p ,a nd Co t t o nh asa$ 90 , 0 00b al a nc e .Th es et wop ar t n er ss ha r ep r o fi t san d l os s esbyar at i oo f60p er c entt oBi s hopand4 0per c entt oCo t t on. Lo vet ti nv es t s$60, 000i nc as hi nt hepar t ner s hi pf ora20per c ent own er s hi p.Thego odwi l l met h odwi l l beus ed.Wh ati sCot t on' sc api t al bal anc eaf t ert hi sne wi n ves t ment ? a. $%%,+((. b. $)(*,(((. c. $))*,(((. d. $)*+,(((.
LO 149
9 . Th ec a pi t a lb al a nc ef o rMe s s al i n ai s$ 21 0, 0 00an df o rRo mu l u si s $1 40 , 00 0.Th es et wopar t n er ss h ar epr o fit sa ndl o ss es6 0pe r c en t ( Me ss al i na )a nd40p er c en t( Ro mul u s) .Cl a ud i u si n v es t s$10 0, 0 00i n c as hi nt h epa r t n er s hi pf o ra20pe r c ento wn er s hi p .Th ebo nusme t h od wi l l beu sed.Whatar et hec api t al b al a nc esf orMes s al i n a,Romul us , andCl audi usaf t ert hi si nv es t menti sr ec or ded? a. $*)+,(((, $)&&,(((, $%(,(((. b. $*),(((, $)&*,(((, $,(((. c. $***,(((, $)&,(((, $(,(((. d. $*&(,(((, $)+(,(((, $)((,(((.
Page 658
LO 146
10.Apar t ner s hi pbegi nsi t sfir s ty earwi t ht hef ol l owi ngc api t al bal anc es :
Thear t i c l esofpar t ner s hi ps t i pul at et hatpr ofi t sandl os sesbe as s i gnedi nt hef ol l owi ngmanner : •
•
•
•
Eac hpar t neri sal l oc at edi nt er es tequal t o5per c entoft he begi nni ngcapi t al bal anc e. Be r n ar di sal l o ca t e dc omp en sat i o no f$ 18 , 0 00p ery e ar . An yr emai ni ngpr ofi t sandl os s esar eal l oc at e dona3: 3: 4 bas i s ,r es pec t i v el y . Ea c hp ar t n eri sal l o we dt owi t h dr a wu pt o$ 5, 0 00c as hp er y ear .
As s umi n gt h att h en eti n co mei s$6 0, 0 00an dt h ate ac hpar t n er wi t h dr a wst h ema x i mu ma mo un ta l l o we d,wh ati st h eb al a nc ei n Col l i nscapi t al ac countatt heendoft haty ear ? a. $-(,((. b. $+,-((. c. $-,((. d. $),-((.
LO 144,145,1 4 6
11.Apar t ner s hi pbegi nsi t sfir s ty earofoper at i onswi t ht hef ol l owi ng c api t al bal anc es :
Ac cor di ngt ot hear t i c l esofpar t ner s hi p,al l pr ofi t swi l l beas si gnedas f ol l ows : •
•
Wi n s t onwi l l b ea wa r d eda na nn ua ls al a r yo f$ 20 , 0 00wi t h $10, 000assi gnedt oSal em. Thepar t ner swi l l beat t r i but edi nt er es tequal t o10per c entof t hec api t al bal anc easoft hefi r s tda yoft hey ear .
•
Ther emai nderwi l lb eas s i gn edona5: 2: 3bas i s ,r es pec t i v el y .
•
Eac hpar t n eri sal l o wedt owi t h dr a w upt o$10 , 0 00pery ear .
Thene tl os sf ort hefi r s ty earofoper at i onsi s$20, 000an dne ti nc ome f ort hes ubs equenty e ari s$ 40, 000.Eac hpar t nerwi t h dr a wst h e maxi mum amountf r om t hebusi nesseachper i od.Whati st hebal ance i nWi ns t on' sc api t al ac c oun tatt heendoft hes ec on dy ear ? a. $)(*,+((. b. $)(&,&((. c. $)(,+((. d. $)(%,*((.
LO 1410
12.Apar t n er s hi phast hef ol l o wi n gc api t al bal anc es :
Pr ofi t sandl os sesar es pl i tasf ol l ows :Al l en( 20per c ent ) ,Bur ns( 30 per c ent ) ,andCos t el l o( 50per c ent ) .Cos t el l owant st ol eav et he pa r t n er s hi pan di sp ai d$1 00 , 0 00f r om t h eb us i n es sb as e do n pr ov i s i onsi nt hear t i c l esofpar t ner s hi p.I ft hepar t ner s hi pus est he bo nusmet hod,wh ati st hebal anc eofBur ns ' sc api t al ac c ountaf t er Cos t el l owi t hdr aws ? a. $*&,(((. b. $*-,(((. c. $,(((. d. $+,(((. Page 659
Pr obl ems13and14ar ei obl emsbasedont he ndependentpr f ol l owi ngs ce na r i o: Aty ear end,t heCi r c l eCi t ypar t ner s hi phast hef ol l owi ngc api t al b al a nc e s :
Pr ofi t sandl os sesar es pl i tona3: 3: 2: 2bas i s ,r es pec t i v el y .Cl ar k de ci dest ol ea v et hep ar t ner s hi pan di spa i d$90, 000f r om t he bu si nes sbas edont h eor i gi nal c ont r ac t ual agr eement . LO 1410
13.Us i ngt hegoodwi l l met h od,whati sManni ng' sc api t al b al anc eaf t er Cl ar kwi t hd r a ws ? a. $),(((. b. $)-,((. c. $)&(,(((. d. $)&,(((.
LO 1410
1 4.I fi n st e adt h epa r t n er s hi pu s est h eb on usme t ho d,wh ati st h eb al a nc e ofManni ng' sc api t al ac c ountaf t erCl ar kwi t hdr aws ? a. $)((,(((. b. $)*+,*(.
c. $)(,(((. d. $),-(.
Pr obl ems15and16ar ei ndependentpr obl emsbasedont he f ol l owi ngc api t a la cc ountba l a nc es :
LO 148
1 5.Dar r o wi n v es t s$27 0, 0 00i nc as hf ora3 0p er c e nto wne r s hi pi nt e r e s t . Themon eygo est ot heor i gi nal par t ner s .Go odwi l l i st ob er ec or de d. Ho w mu c hg oo dwi l l s h ou l dber e c og ni z e d,a ndwh ati sDa r r o w' s begi nni ngc api t al bal anc e? a. $&)(,((( and $*-(,(((. b. $)&(,((( and $*-(,(((. c. $)&(,((( and $)%,(((. d. $&)(,((( and $)%,(((.
LO 149
1 6.Dar r o wi n v es t s$25 0, 0 00i nc as hf ora3 0p er c e nto wne r s hi pi nt e r e s t . Themon eygo est ot hebus i nes s .Nogoodwi l l oro t herr e v al u at i oni st o ber ec or ded.Af t ert het r ans ac t i on,whati sJenni ngs ' scapi t al bal anc e? a. $)+(,(((. b. $)+,(((. c. $)-(,*((. d. $)-),*((.
LO 149
1 7.L ea ri st obe c omeap ar t n eri nt h eWSp ar t n er s h i pbyp ay i n g$ 80 , 0 00 i nc as ht ot hebus i nes s.Atpr es ent ,t hec api t al bal anc ef orHaml eti s $70, 000andf orMacBet hi s$40, 000.Haml etandMacBet hshar e pr ofi t sona7: 3ba si s .Leari sac qui r i n g40per c ento ft hene w par t ner s hi p. a. If the goodill method is applied, hat ill the three capital balances be folloing the payment by /ear0 b. If the bonus method is applied, hat ill the three capital balances be folloing the payment by /ear0
LO 149
18.TheDi s t anc ePl uspar t n er s hi phast hef ol l o wi ngcapi t al bal anc esat t hebegi nni ngoft hec ur r enty ear :
Eac hoft hef ol l o wi n gques t i onss houl dbev i ewe di nd ependen t l y . a.
Page 660
If 1ergio invests $)((,((( in cash in the business for a * percent interest, hat 2ournal entry i s recorded0 "ssume that the bonus method is used.
b. If 1ergio invests $+(,((( in cash in the business for a * percent interest, hat 2ournal entry is recorded0 "ssume that the bonus method i s used. c. If 1ergio invests $-*,((( in cash in the business for a * percent interest,
hat 2ournal entry is recorded0 "ssume that the goodill method is used.
LO 149
1 9.Ap ar t n er s hi pha st h ef o l l o wi n ga cc o un tb al a nc es :Ca s h$ 50, 00 0; Ot herAs s et s$600, 000;Li abi l i t i es$240, 000;Ni x on,Capi t al ( 50 per c entofpr ofi t san dl os s es )$200, 000;Hoo v er ,Capi t al ( 20per c ent ) $1 20, 00 0;andPol k ,Ca pi t al ( 3 0per c ent )$90, 000.Eac hoft he f ol l o wi n gques t i onss ho ul dbevi e we dasani nd ependents i t uat i on: a. 3rant invests $(,((( in the partnership for an ) percent capital interest. 3oodill is to be recognized. 4hat are the capital accounts thereafter0 b. 3rant invests $)((,((( in the partnership to get a *( percent capital balance. 3oodill is not to be recorded. 4hat are the capital accounts thereafter0
LO 149
20.ThePr i nc eRobbi nsp ar t ner s hi phast hef ol l o wi ngca pi t al ac c ount bal ancesonJanuar y1,2015:
Pr i nc ei sal l oc at ed80per c entofal l pr ofi t sandl os s eswi t ht he r emai ni ng20per c entas s i gn edt oRo bbi nsaf t eri nt er es tof10per c ent i sgi v ent oeac hpar t nerbas edonbegi nni ngc api t al bal a nc es . OnJ an ua r y2 ,2 01 5,J e ffr e yi n v es t s$ 37 , 0 00c as hf ora20pe r c en t i nt er es ti nt hepar t ner s hi p.Thi st r ans ac t i oni sr ec or dedbyt hegoodwi l l met hod.Af t ert hi st r ans ac t i on,10per c enti nt er es ti sst i l l t ogot oeac h par t ner .Pr ofi t sandl os seswi l l t henbes pl i tasf ol l ows :Pr i nc e( 50 per c ent ) ,Robbi ns( 30per c ent ) ,andJ eff r e y( 20p er c ent ) .I n2015,t he par t ner s hi pr epor t sane ti nc omeof$15, 0 00. a. Prepare the 2ournal entry to record 5effrey's entrance into the partnership on 5anuary *, *(). b. 6etermine the allocation of income at the end of *().
LO 146
2 1.Th ep ar t n er s hi pagr e eme nto fJ on es ,Ki n g,a ndLa nepr o v i d esf o rt h e annual al l oc at i onoft hebus i nes s' spr ofi torl os si nt hef ol l owi ng sequence: •
•
•
J o ne s,t h ema nag i n gp ar t n er ,r e ce i v e sab on useq ua lt o2 0 per c entoft hebus i nes s' spr ofi t . Eac hpar t n err ec ei v es15p er c enti nt er es tona v er agec api t al i n ves t ment . Anyr es i dual pr ofi torl os si sdi v i dedequal l y .
Theav er ag ec api t al i n v es t me nt sf or2015wer easf ol l o ws :
Ho w mu c ho ft h e$ 90 , 0 00p ar t n er s h i pp r o fi tf o r2 01 5s h ou l dbe as s i g ne dt oea c hp ar t ne r ? LO 144,14-
2 2.Pu r k e r s o n,Smi t h ,a ndT r a y no rh a v eo pe r a t e dab oo k s t o r ef o ra
5,1 4 6
numberofy ear sasapar t ner s hi p.Att hebe gi n ni n gof2015,c api t al ba l a nc e swe r ea sf o l l o ws :
Duet oac as hs hor t age,Pur k er s oni n v es t sanaddi t i o nal $8 , 0 00i nt he bu si nes sonApr i l 1,2015. Ea c hp ar t n eri sal l o we dt owi t h dr a w$ 1, 0 00c a s he ac hmo nt h . Th ep ar t n er sha v eu s edt h es a meme t h odo fa l l o c at i n gp r o fi t san d l os s essi nc et hebus i nes s' si nc ept i on: •
•
•
Eac hpar t n eri sgi v ent hef ol l o wi ngcompens at i o nal l owa nc e f orwor kdo nei nt hebus i nes s :Pur k er s on,$ 18 , 00 0;Smi t h, $ 25 , 0 00 ;a ndT r a y nor ,$ 8, 0 00 . Eac hpar t neri sc r edi t edwi t hi nt er es tequal t o10per c entof t heav er agemont hl yc api t al bal anc ef ort hey earwi t houtr egar d f o rn or mal d r a wi n gs . Anyr emai ni ngpr ofi torl os si sal l oc at ed4: 2: 4t oPur k er s on, Smi t h,andTr a ynor ,r es pec t i v el y .Theneti nc omef or2015i s $ 23 , 6 00 .Ea chp ar t n erwi t h dr a wst h ea l l o t t e da mo un te ac h mont h.
Wh ata r et h ee nd i n gc a pi t a lb al a nc esf o r2 01 5? Page 661
LO 144,145,1 4 6
23.OnJan uar y1,201 4,t h edent al par t ner s hi pofLef t ,Cent er ,an dRi ght wa sf or me dwhe nt h ep ar t n er sc o nt r i b ut e d$ 20 , 0 00 ,$ 60 , 0 00,a nd $50, 000,r es pec t i v el y .Ov ert hene xtt hr eey ear s ,t hebus i nes s r epor t edne ti nc omeand( l os s )a sf ol l ows :
Dur i ngt hi sper i o d,e ac hpar t nerwi t hdr e wc as ho f$1 0, 000pery e ar . Ri g hti n v es t e dana ddi t i o na l$ 12 , 0 00i nc as ho nFe br ua r y9 ,2 01 5. Att het i met hatt hepar t ner s hi pwascr eat ed,t het hr eepar t ner s agr eedt oal l oc at eal l pr ofi t sandl os sesac cor di ngt oas pec i fi edpl an wr i t t enasf ol l ows : •
•
•
Eac hpar t neri sent i t l edt oi nt er es tc omput edatt her at eof12 per c entpery earbas edont hei ndi v i dual c api t al bal anc esatt he begi nni ngoft haty ear . Bec aus eofpr i orwor kex per i enc e,Lef ti sent i t l edt oanannual s al ar yal l owanc eof$1 2, 000 ,andCe nt eri sc r edi t e dwi t h$8, 000 pery ear . Anyr e mai ni ngpr ofi twi l l bes pl i tasf ol l ows :Lef t ,20per c ent ; Cent er ,40per c ent ;andRi ght ,40per c ent .I fal os sr emai ns ,t he bal anc ewi l l beal l oc at ed:Lef t ,30per c ent ;Cent er ,50per c ent ; a ndRi g ht ,2 0p er c en t .
Det er mi net h eendi ngcapi t al b al a nc ef orea chpar t nera so ft heendof
ea c ho ft h es et hr e ey e ar s . LO 1410
24.TheE. N. D.par t ner s hi ph ast h ef ol l o wi ngc api t al bal anc esasoft he endoft hecur r enty ear :
An swe re ac ho ft h ef o l l o wi n gi q ues t i ons : n d ep e nd e nt a. "ssume that the partners share profits and losses 7 7*7*, respectively. 8ergie retires and is paid $)%(,((( based on the terms of the original partnership agreement. If the goodill method is used, hat is the capital balance of the remaining three partners0 b. "ssume that the partners share profits and losses &7 7*7), respectively. Pineda retires and is paid $*(,((( based on the terms of the original partnership agreement. If the bonus method is used, hat is the capital balance of the remaining three partners0
LO 1410
2 5.Th ep ar t n er s hi po fMa t t e s on ,Ri c h t o n,a ndO' T oo l eh asex i s t e df ora numberofy ear s .Att hepr es entt i met h epar t ner sha v et hef ol l owi ng c api t al ba l anc esandpr ofi tan dl os ss har i n gper c ent ages :
O' T ool eel ec t st owi t hdr a wf r om t hep ar t ner s hi p,l ea vi ngMa t t es onand Ri c ht ont ooper at et hebus i nes s .F ol l owi ngt heor i gi nal par t ner s hi p agr eement ,wh enapar t nerwi t hdr aws ,t h epar t ner s hi pa ndal l ofi t s i ndi v i dual as set sar et ober eas s es s edt oc ur r entf ai rv al uesbyan i nd ependentap pr ai s er .Thewi t hdr a wi ngpar t nerwi l l r ec ei v ec as hor ot heras set sequal t ot hatpar t ner ' sc ur r entc api t al bal anc eaf t er i nc l u di nga nappr opr i at es har eofan yadj us t menti ndi c at e db yt he appr ai s al .Gai nsandl os sesi ndi c at edbyt heappr ai s al ar eal l oc at ed us i n gt her eg ul arpr ofi tandl os sper c ent ages . Ani ndep end entappr ai s eri shi r eda ndes t i mat est hatt hepar t ner s hi p asawhol ei swor t h$60 0, 000.Reg ar di ngt h ei ndi v i d ual as s et s ,t he ap pr ai s erfi ndst hatab ui l di ngwi t haboo kv al u eof$1 80, 00 0hasaf ai r v al ueof$220, 000.Thebookv al uesf oral l ot heri dent i fi abl eas set s andl i abi l i t i esar et hes ameast hei rappr ai s edf ai rv al ues . Page 662
Ac c or di n gl y , t hep ar t ne r s hi pa gr ee st op ayO' T ool e$ 12 0, 0 00u po n wi t hd r a wa l .Ma t t e s ona ndRi c ht o n,h owe v er ,d on otwi s ht or e c or da ny go odwi l l i nc onnec t i o nwi t ht hecha ng ei no wner s hi p. Pr epar et hej our nal ent r yt or ec or dO' T ool e' swi t hdr awal f r om t he par t ner s hi p. LO 142,14-
2 6.I nt h ee ar l yp ar to f2 01 5,t h ep ar t n er so fHu gh ,J ac o bs ,a ndTh omas
4,1 4 6 ,1 4 9
s o ug hta s s i s t a nc ef r o m al o c al a c c ou nt a nt .Th eyha db eg unan ew bu s i n es si n20 14bu th adne v eru s edanac c ou nt a nt ' ss er v i c es . Hu gha ndJ a c ob sb eg ant h ep ar t n er s h i pb yc on t r i b ut i n g$ 15 0, 0 00a nd $1 00, 00 0i nc as h,r es pec t i v el y . Hug hwast owor koc c as i onal l yatt h e bu s i n es s ,a ndJ ac o bswa st ob eemp l o y edf u l l t i me.Th eyde ci d edt h at y e ar e ndp r o fit san dl os s ess hou l db eas s i g ne da sf ol l o ws : •
•
•
Eac hpar t n erwast obeal l oc at ed10per c enti nt er es t c omput e dont hebegi nni ngc api t al b al anc esf ort heper i od. Ac o mp en s at i o na l l o wa nc eof$ 5, 0 00wa st ogot oHu ghwi t ha $25, 000amountassi gnedt oJacobs. An yr e ma i n i n gi n c omewo ul db es p l i to na4 : 6b as i st oHu gh andJ ac obs ,r es pec t i v el y .
I n2 01 4,r e v e nu est o t a l e d$ 17 5, 0 00 ,a ndex p en s eswe r e$ 14 6, 0 00 ( no ti nc l udi ngt hepar t ner s ' c ompens at i onal l o wanc e) .Hughwi t hdr ew c as ho f$ 9, 0 00d ur i n gt h ey e ar ,a ndJ ac ob st o okou t$ 14 , 0 00.I n ad di t i o n,t h eb us i n es spa i d$ 7, 5 00f orr e pa i r sma det oHug h' sho me an dc har gedi tt or epai re xp ens e. OnJ an uar y1,201 5,t h epar t ner s hi ps ol da15per c enti nt er es tt o Th oma sf o r$ 64 , 0 00c a s h.Th i smo ne ywa sc o nt r i b ut e dt ot h e b us i n es swi t ht h eb on usme t h odu s edf o ra c c ou nt i n gp ur p os e s . Ans wert hef ol l o wi ngques t i o ns : a. 4hy as the original profit and loss allocation, as 2ust outlined, designed by the partners0 b. 4hy did the draings for *()& not agree ith the compensation alloances provided for in the partnership agreement0 c. 4hat 2ournal entries should the partnership have recorded on 6ecember ), *()&0 d. 4hat 2ournal entry should the partnership have recorded on 5anuary ), *()0
LO 143,149,1 4 1 0
27.Fol l owi ngi st hec ur r entbal anc es heetf oral oc al par t ner s hi pof d o c t o r s :
Thef ol l owi n gques t i onsr epr es enti s i t uat i ons : n d ep e nd e nt a. 9 is going to invest enough money in this partnership to receive a * percent interest. :o goodill or bonus is to be recorded. ;o much should 9 invest0 b. 9 contributes $+,((( in cash to the business to receive a )( percent interest in the partnership. 3oodill is to be recorded. Profits and losses have previously been split according to the folloing percentages7 ", ( percent< =, )( percent< >, &( percent< and 6, *( percent. "fter 9 ma#es
this investment, hat are the individual capital balances0 c. 9 contributes $&*,((( in cash to the business to receive a *( percent interest in the partnership. 3oodill is to be recorded. The four original partners share all profits and losses equally. "fter 9 ma#es this investment, hat are the individual capital balances0 d. 9 contributes $,((( in cash to the business to receive a *( percent interest in the partnership. :o goodill or other asset revaluation is to be recorded. Profits and losses have previously been split according to the folloing percentages7 ", )( percent< =, ( percent< >, *( percent< and 6, &( percent. "fter 9 ma#es this investment, hat are the individual capital balances0 e. > retires from the partnership and, as per the original partnership agreement, is to receive cash equal to )* percent of her final capital balance. :o goodill or other asset revaluation is to be recognized. "ll partners share profits and losses equally. "fter the ithdraal, hat are the individual capital balances of the remaining partners0 Page 663
LO 145,146,1 4 9
28.Boswel l andJohnsonf or m apar t ner shi ponMay1,2013.Boswel l c ont r i but esc as hof$50, 000;J ohns onc on vey st i t l et ot hef ol l owi ng pr oper t i est ot hepar t ner s hi p:
Thepar t ner sagr eet os t ar tt hei rpar t ner s hi pwi t hequal c api t al bal anc es .Nog oodwi l l i st ob er ec ogni z ed. Ac cor di ngt ot hear t i c l esofpar t ner s hi pwr i t t enbyt hepar t ner s ,pr ofi t s an dl os s esar eal l oc at edb as edo nt h ef ol l o wi n gf or mul a: •
•
•
Bo swe l l r ec ei v e sac omp en sa t i o na l l o wa nc eof$ 1, 00 0p er mont h. Al l r emai ni ngpr ofi t sandl os s esar es pl i t60: 40t oJ ohns onand Bos wel l ,r es pec t i v el y . Eachpar t nerc anmakeannual cashdr awi ngsof$5, 000 b eg i n ni n gi n20 14 .
Ne ti n c omeo f$ 11 , 0 00i se ar n edb yt h eb us i n es sd ur i n g2 01 3. Wal pol ei si n vi t edt oj oi nt hep ar t n er s hi ponJ anuar y1,2014.Bec aus e ofherbus i nes sr eput at i onandfinanc i al e xper t i s e,s hei sgi v ena40 pe r c en ti n t e r es tf o r$ 54 , 0 00c a sh .Th eb on usap pr o ac hi sus edt o r ec or dt hi si nv es t ment ,madedi r ec t l yt ot hebus i nes s .Thear t i c l esof p ar t n er s h i par eame nd edt ogi v eWa l p ol ea$ 2, 0 00c omp en s at i o n a l l o wa nc epe rmo nt han da na nn ua lc a s hd r a wi n go f$ 10 , 0 00 . Re ma i ni n gp r o fit sa r eno w al l o c at e d:
Al l dr a wi ngsar et ak enb yt hep ar t n er sdur i ng2 01 4.Aty ear en d,t he pa r t n er s hi pr e po r t sane ar n edn eti n c omeo f$ 28 , 0 00.
OnJ an ua r y1,2 01 5,Po pe( p r e v i o us l yapa r t n er s hi pe mp l o y ee)i s admi t t edi nt ot hepar t ner s hi p.Eac hpar t nert r ans f er s10per c entt o Pop e,wh omak est hef ol l owi ngpa ymen t sd i r ec t l yt ot hepar t ner s :
Onc eag ai n,t hear t i c l esofpar t ner s hi pmus tbeamen de dt oal l owf or t heent r anc eoft hen ewpar t ner .Thi sc han geent i t l esPop et oa compensat i onal l owanceof$800permont handanannualdr awi ngof $4 , 0 00.Pr o fit san dl o ss e sar en owa s si g ne da sf ol l ows :
Fort hey earof2015,t hep ar t n er s hi pear nedapr ofi tof$ 46, 00 0,and e ac hp ar t n erwi t h dr e wt h ea l l o we da mo un to fc a s h. Det er mi net hec api t al bal anc esf ort hei ndi v i dual par t ner sasoft he e ndofe ac hy e ar :2 01 3t h r o ug h2 01 5. LO 144,145,1 4 6 ,1 4 9
2 9.Gr a y ,St o ne ,a ndLa ws o no pe na na c c ou nt i n gp r a c t i c eonJ an ua r y1 , 20 13,i nSanDi ego,Cal i f or ni a,t obeop er at edasap ar t n er s hi p.Gr a y an dSt onewi l l s er v east hes eni orpar t ner sbe caus eoft hei ry ear sof e x per i e nc e.T oes t a bl i s ht h eb us i n es s ,Gr a y ,St o ne ,a ndL aws o n c ont r i but ec as handot herpr oper t i esv al ueda t$2 10, 000,$ 180, 000, and$90, 000,r es pec t i v el y .Anar t i c l esofpar t ner s hi pagr eementi s dr awnup.I thast hef ol l owi ngs t i pul at i ons : •
•
Pe r s on al d r a wi n gsa r eal l o we da nn ual l yu pt oanamo un t equal t o10per c entoft hebegi nni ngc api t al bal anc ef ort hey ear . Pr ofi t sandl os s esar eal l oc at edac c or di ngt ot hef ol l owi ng pl a n:
?)@ " salary alloance is credited to each partner in an amount equal to $ per billable hour or#ed by that individual during the year. ?*@ Interest is credited to the partners' capital accounts at the rate of )* percent of the average monthly balance for the year ?computed ithout regard for current income or draings@. ?@
Page 664
"n annual bonus is to be credited to 3ray and 1tone. 9ach bonus is to be )( percent of net income after subtracting the bonus, the salary alloance, and the interest. "lso included in the agreement is the provision that the bonus cannot be a negative amount.
?&@ "ny remaining partnership profit or loss is to be divided evenly among all partners.
Be c au s eo fmo ne t a r yp r o bl e mse nc o un t e r e di nge t t i n gt h eb us i n es s s t ar t e d,Gr a yi n v es t sana ddi t i o nal $ 9, 1 00o nMa y1 ,2 013 .On J anuar y1,2 014,t hepar t ner sal l o w Mone tt obuyi nt ot hepar t n er s hi p . Mon etc ont r i but esc as hdi r ec t l yt ot hebu si nes si nanamountequal t o a25per c enti nt er es ti nt hebookv al ueoft hepar t ner s hi ppr oper t y
s ubs equentt ot hi scont r i but i on.Th epar t ner s hi pagr e ementast o s pl i t t i ngpr ofi t sandl os sesi snotal t er eduponMonet ' sent r anc ei nt o t hefi r m;t hegener al pr ov i s i onsc ont i nuet obeappl i c abl e. Thebi l l abl ehour sf ort hepar t ner sdur i ngt hefi r s tt hr eey ear sof oper at i onf ol l ow:
Th ep ar t n er s hi pr e po r t sne ti n co mef o r2 01 3t hr o ug h2 01 5a sf o l l o ws :
Eachpar t nerwi t hdr awst hemaxi mum al l owabl eamounteachyear . a. 6etermine the allocation of income for each of these three years ?to the nearest dollar@. b. Prepare in appropriate form a statement of partners' capital for the year ending 6ecember ), *().
LO 148,149,1 4 1 0
30.Apar t ner s hi pofat t or ney si nt heSt .Loui s ,Mi s s our i ,ar eahast he f o l l o wi n gb al a nc es he eta cc o un t sasofJ a nu ar y1,2 015 :
Ac cor di ngt ot hear t i c l esofpar t ner s hi p,At hosi st or ec ei v ean al l oc at i onof50per c entofal l par t ner s hi ppr ofi t sandl os seswhi l e Por t h osr ec e i v e s30pe r c en ta ndAr a mi s ,20pe r c en t .Th eb oo kv al ue ofe ac has s etandl i abi l i t yshoul db ec ons i der edanac c ur at e r epr es ent at i onoff ai rv al ue. Foreac hoft hef ol l owi ngi s i t uat i ons ,pr epar et hej our nal n d ep e nd e nt ent r yorent r i est ober e c or dedbyt hepar t ner s hi p.( Roundt onear es t dol l ar . ) a. Porthos, ith permission of the other partners, decides to sell half of his partnership interest to 6'"rtagnan for $(,((( in cash. :o asset revaluation or goodill is to be recorded by the partnership. b. "ll three of the present partners agree to sell )( percent of each partnership interest to 6'"rtagnan for a total cash payment of $*,(((. 9ach partner receives a negotiated portion of this amount. 3oodill is recorded as a result of the transaction. c. 6'"rtagnan is alloed to become a partner ith a )( percent onership interest by contributing $(,((( in cash directly into the business. The bonus method is used to record this admission. d. Ase the same facts as in requirement ?c@ except that the entrance into the partnership is recorded by the goodill method. e. 6'"rtagnan is alloed to become a partner ith a )( percent onership interest by contributing $)*,*** in cash directly to the business. The
goodill method is used to record this transaction. f.
"ramis decides to retire and leave the partnership. "n independent appraisal of the business and its assets indicates a current fair value of $*(,(((. 3oodill is to be recorded. "ramis ill then be given the exact amount of cash that ill close out his capital account.
Page 665
31.St e v eRees ei sawel l k no wni nt er i ordes i gneri nFor tWor t h,T ex as . Hewa nt st os t a r th i sownb us i n es san dc o nv i n c esRo bO' Do nn el l ,a 3,1 4 5 ,1 4 6 ,14l oc al mer c hant ,t oc ont r i but et hec api t al t of or m apar t ner s hi p.On 8,1 4 1 0 J an ua r y1 ,2 01 3,O' Do nn el l i n v es t sab ui l d i ngwo r t h$ 52 , 0 00a nd eq ui pme ntv a l u edat$ 16 , 00 0a swe l la s$1 2, 0 00i nc as h.Al t h ou gh Rees emak esnot angi bl ec ont r i but i ont ot hepar t ner s hi p,hewi l l op er at et heb us i nes sandbeanequal par t neri nt heb egi nni n gc api t al b al a nc e s . LO 142,14-
T oent i c eO' Don nel l t oj oi nt hi spar t ner s hi p,Re es edr a wsupt he f ol l o wi n gpr ofi ta ndl os sagr e ement : •
•
•
O' Donnel l wi l l bec r edi t edannual l ywi t hi nt er es tequal t o20 per c entoft hebegi nni ngc api t al bal anc ef ort hey ear . O' Donnel l wi l l al s oha v eaddedt ohi sc api t al ac c ount15 per c entofpar t ner s hi pi nc omeeac hy e ar( wi t houtr eg ar df ort h e pr ec edi ngi nt er es tfi gur e)or$4, 000,whi c hev eri sl ar ger .Al l r e ma i ni n gi nc o mei sc r e di t e dt oRe es e . Nei t herpar t neri sa l l o we dt owi t h dr a wf u ndsf r om t he p ar t n er s hi pd ur i n g2 01 3.Th er e af t er ,e ac hc andr a w$ 5, 0 00 annual l yor20per c entoft hebegi nni ngc api t al bal anc ef ort he y ear ,whi c hev eri sl ar ger .
Thepar t ner s hi pr e por t edane tl os sof$ 10, 000d ur i ngt hefi r s ty earof i t sop er at i on.OnJanuar y1,2 014,T er r i Dun nbec omesat hi r dpar t n er i nt hi sbus i nes sbyc ont r i but i ng$15, 000cas ht ot hepar t ner s hi p.Dunn r ec ei v esa20p er c ents har eoft h ebus i nes s ' sc api t al .Thepr ofi ta nd l os sagr eementi sal t er edasf ol l ows : •
•
O' Donnel l i ss t i l l ent i t l edt o( 1)i nt er es to nhi sbegi nni ngc api t al bal anc easwel l as( 2)t hes har eofp ar t ner s hi pi nc omej us t s pe ci fi ed . Anyr emai ni ngpr ofi torl os swi l l bes pl i tona6: 4bas i s b et we enRe es ean dDu nn ,r e s pe c t i v e l y .
Par t n er s hi pi n c omef or2 01 4i sr e po r t e da s$ 44 , 0 00.Eac hp ar t n er wi t hdr awst hef ul l amountt hati sal l owed. OnJan uar y1,201 5,Du nnbec omesi l l ands el l sheri nt er es ti nt he par t ner s hi p( wi t ht hec ons entoft heot hert wopar t ner s )t oJ udy Pos t ne r .Pos t ne rp a y s$ 46, 0 00d i r e ct l yt oDu nn .Ne ti nc o mef o r2 01 5 i s$61, 000wi t ht hepar t ner sagai nt ak i ngt hei rf ul l dr awi ngal l owanc e. OnJ an ua r y1,2 01 6,Po s t n erwi t h dr a wsf r o mt h eb us i n es sf or per s onal r eas ons .Thear t i c l esofpar t ner s hi ps t at et hatanypar t ner
mayl eav et hepar t ner s hi patanyt i meandi sent i t l edt or ec ei v ec as hi n anamountequ al t ot h er ec or dedcapi t al bal anc eatt hatt i mepl us10 per c ent . a. Prepare 2ournal entries to record the preceding transactions on t he assumption that the bonus ?or no revaluation@ method is used. 6raings need not be recorded, although the balances should be included in the closing entries. b. Prepare 2ournal entries to record the previous transactions on t he assumption that the goodill ?or revaluation@ method is used. 6raings need not be recorded, although the balances should be included in the closing entries.
( Roundal l amount st ot henear es tdol l ar . )
