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Chapter 16
PARTNERSHIPS — FORMATION, OPERATIONS, AND
CHANGES IN OWNERSHIP INTERESTS
Answers to Questions
1
2
A partnership has a characteristics as follows:
a.
Owned by two or more persons. It can’t be said as a partnership if it is owned by a single person.
b.
Mutual agency. It means every partner act as an agent in the partnership. The action of every
partner on behalf of the partnership can bind the other partners.
c.
Unlimited liability. Every partner is liable for the partnership debts. If the partnership asset is not
sufficient to retire the debts, partners should use their personal asset to retire the partnership debts.
Articles of partnership explain the agreement of partners in the partnership. The article should include the
agreement of:
d.
The types of products and services to be provided and other details of the business’s operations.
Example: a restaurant partnership provides variety of traditional foods and drinks to the customers.
e.
Each partner’s rights and responsibilities in conducting the business. Example: an active partner
has responsibilities to become the managers of the partnership.
f.
Each partner’s initial investment including the value assigned to noncash asset investments.
Example: Partner A initially invests $ 5,000 cash and $ 5,000 in the form of vehicle.
g.
Additional investment conditions. Example: Each partner may add more investment in the form of
cash or other assets needed by the partnerships.
h.
Asset withdrawal provisions. Example: Each partner has a right to withdraw $100 cash each month
credited to the partner capital account.
i.
Profit- and loss-sharing formulas. Example: Profit and loss are shared based on the average capital
balance of each partner.
j.
Procedures for dissolving the partnership. Example: The partnership will be dissolved if there is
new partner or any of the partners withdraw.
3
Investment in a partnership can be in the form of non-cash assets. The non-cash assets should be appraised
to determine the value that should be recognized by the partnership. It should be appraised by independent
appraisal. However, as a practical matter, it may be determined by the agreement of the partners.
4
Salary and interest allowances are included in some partnership agreements in order to reward partners for
the time and effort that they devote to partnership business (salary allowances) and for capital investments
(interest allowances) that they make in the business.
5
Salary allowances to partners are not expenses of a partnership. Rather, they are a means of recognizing the
efforts of individual partners in the division of partnership income.
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16-2
Partnerships—Formation, Operations and Changes in Ownership Interests
6
When profits are divided in the ratio of capital balances, capital balances should be computed on the basis
of weighted average capital balances in the absence of evidence that another interpretation of capital
balances is intended by the partners.
7
An individual partner may have a loss from his share of partnership operating activities even though the
partnership has income. This situation results if priority allocations to other partners exceed partnership net
income. For example, if net income for the A and B Partnership is $5,000 and profits are divided equally
after a salary allowance of $8,000 to A, A will have partnership income of $6,500 and B will have a
partnership loss of $1,500.
8
Partnership dissociation under the Uniform Partnership Act is the change in the relation of the partners
caused by any partner ceasing to be associated in the carrying on of the business, as distinguished from the
winding up of the business. Thus, the assignment of a partnership interest to a third party by one of the
partners does not, by itself, dissolve the partnership because the assignee does not become a partner unless
accepted as a partner by the continuing partners.
9
The sale of a partnership interest to a third party dissolves the old partnership if the continuing partners
accept the third party purchaser as their partner. In this case, the relation among the partners is changed and
a new partnership agreement is necessary.
10
When a new partner acquires an interest by purchase from existing partners, the partnership receives no new
assets because the payment for the new partner’s interest is distributed to the old partners. Alternatively, an
investment in a partnership increases the net assets of the partnership. This difference is important in
accounting for the admission of a new partner.
11
The admission of a new partner may be recorded by the goodwill approach (or revaluation approach) or by
the bonus approach (or nonrevaluation approach).
12
The goodwill procedure for recording the admission of a new partner is best described as a revaluation
approach because identifiable assets and liabilities that are over or undervalued are adjusted to their fair
values before the unidentifiable asset goodwill is recorded. For example, if a new partner’s investment
reflects the fact that land owned by the old partnership is undervalued, it would be misleading to record the
amount of revaluation as goodwill, rather than as a revaluation of the land account.
13
A bonus procedure for recording an investment in a partnership involves adjusting the partnership capital
account to the extent necessary to meet the new partnership agreement without a revaluation of the assets
and liabilities of the old partnership.
If a new partner receives a capital credit in excess of his or her investment, the excess is a bonus to the new
partner. A bonus to a new partner is charged against the old partners’ capital balances in relation to their old
profit sharing ratios.
If a new partner’s investment exceeds his or her capital credit, the excess is a bonus to the old partners. A
bonus to the old partners is credited to the old partners’ capital balances in accordance with the old
partners’ profit sharing ratios.
14
The amounts received by the individual partners in final liquidation will be the same under the bonus and
goodwill procedures provided that the relative profit and loss sharing ratios of the old partners remain
unchanged in the new partnership and that the new partners’ capital interest and profit and loss sharing ratio
are aligned.
15
Parts a and b assume that the partnership assets are to be revalued upon the admission of Bob into the
partnership.
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Chapter 16
16-3
Goodwill would be recorded if identifiable assets and liabilities are equal to their fair values and
1.
$10,000  25% > $10,000 + old capital; or
2.
Old capital  75% > $10,000 + old capital; or
3.
An independent assessment of earning power or other factors indicate goodwill.
Old partnership assets would be written down if
1.
$10,000  25% < $10,000 + old capital; or
2.
Old capital  75% < $10,000 + old capital; or
3.
An independent assessment of earning power or other factors indicate that partnership assets are
overvalued.
Parts c and d assume that partnership assets are not to be revalued upon the admission of Bob into
the partnership. A bonus to the old partners would be recorded if 25%  ($10,000 + old capital) is less than
$10,000. A bonus to Bob would be recorded if 25%  ($10,000 + old capital) is greater than $10,000.
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Partnerships—Formation, Operations and Changes in Ownership Interests
16-4
SOLUTIONS TO EXERCISES
Solution E16-1
1.
Initial investments of partners are recorded at fair value instead of
cost.
Michelle
Cash
$ 450,000
Land
Truck
$ 750,000
$ 10,000,000
$ 10,000,000
$ 6,500,000
$ 1,300,000
$ 1,300,000
$ 200,000
$ 200,000
$ 6,950,000
$ 11,800,000
$ 18,750,000
37.07%
62.93%
100.00%
Inventory
Percentage
Total
$ 300,000
$ 6,500,000
Computer
Total
Devina
Using bonus approach, each partner will have equal capital balance from
the total investments.
Michelle capital ($18,750,000/2)
Devina capital ($18,750,000/2)
$9,375,000
$9,375,000
2. The partnership fair value can be determined from partner that doesn’t
bring goodwill to the partnership, which is Devina.
Partnership fair value ($11,800,000 / 50%)
$23,600,000
Each partner will have equal capital balance
Michelle capital ($23,600,000/2)
Devina capital ($23,600,000/2)
$11,800,000
$11,800,000
3. Total partnership equity after revaluation
Total partnership equity before revaluation
Goodwill
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$23,600,000
($18,750,000)
$ 4,850,000
Chapter 16
16-5
Solution E16-2
Computation of Bev’s bonus:
Let B
B
B
1.1B
B
=
=
=
=
=
bonus
10%  ($198,000 - B)
$19,800 - .1B
$19,800
$18,000
Schedule to Allocate Partnership Income
Arn
Net income to distribute
Bonus to Bev
Remainder to divide
Divided 40:40:20
Income allocation
$198,000
(18,000)
180,000
(180,000)
0
Bev
Car
$18,000
$72,000
$72,000
72,000
$90,000
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$ 36,000
$ 36,000
Partnerships—Formation, Operations and Changes in Ownership Interests
16-6
Solution E16-3
Mel
2012 income to divide
($25,000 - $4,000)
Salary to Mel
Remainder to divide
Divided equally
2011 income understatement
Divided in the 2011 60:40 ratio
Income allocation
$21,000
(18,000)
3,000
(3,000)
0
$ 4,000
(4,000)
0
Dav
$18,000
1,500
$ 1,500
2,400
$21,900
1,600
$ 3,100
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Chapter 16
16-7
Solution E16-4
Schedule to Allocate Partnership Income for 2011
Income to distribute
Salary allocation
Interest on capital*
Loss to divide
Divided equally
Income to partners
*
Balance
$28,000
(42,000)
(52,000)
(66,000)
66,000
0
Dan
$
Hen
--21,000
(22,000)
$(1,000)
$ 18,000
16,000
(22,000)
$12,000
Bai
$24,000
15,000
(22,000)
$17,000
Interest on average capital:
Dan
January 1, 2011
Balances
$200,000
240,000
200,000
 1/2 year =
 1/4 year =
 1/4 year =
Average
Interest
Capital
on Capital
$100,000
60,000
50,000
$21,000
$210,000  10% =
Hen
$ 160,000
 1 year =
$160,000  10% =
16,000
Bai
$ 150,000
 1 year =
$150,000  10% =
15,000
$52,000
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Partnerships—Formation, Operations and Changes in Ownership Interests
16-8
Solution E16-5
1. Capital balances for both partners:
Wero
Capital balances January 1, 2013
Additional investments March 1
Capital balances March 1
Amy
$7,500,000.00
$400,000.00
$7,900,000.00
Additional investments May 1
Capital balances May 1
Withdrawal October 1
$6,000,000.00
$150,000.00
$7,900,000.00
$6,150,000.00
$(1,300,000.00)
Capital balances October 1
Additional investments November
31
$6,600,000.00
Capital balances November 31
Additional investments December
31
$6,600,000.00
Capital balances December 31
$8,600,000.00
$6,150,000.00
$700,000.00
$6,850,000.00
$2,000,000.00
Weighted average capital of Wero capital
$7,500,000 x 2 / 12
$7,900,000 x 7 / 12
$6,600,000 x 3 / 12
$8,600,000 x 0 /12
Weighted average
$6,000,000 x 4 /
$6,150,000 x 7 /
$6,850,000 x 1 /
$6,000,000.00
capital of Amy capital
12
12
12
$6,850,000.00
$1,250,000
$4,608,333
$1,650,000
$0
$7,508,333
$2,000,000
$3,587,500
$570,833
$6,158,333
2.
Profit allocated to Wero
($9,000,000 x $7508,333 / ($7,508,333 + $6,158,333))
Profit allocated to Amy
($9,000,000 x $6,158,333 / ($7,508,333 + $6,158,333))
$4,944,512
$4,055,488
Solution E16-6
1
Ben capital
$350,000
Pet capital
$350,000
To record assignment of half of Ben’s capital account to Pet.
2
The total capital of BIG Entertainment Galley remains at $1,480,000. The
amount paid by Pet to Ben does not affect the partnership and Pet does
not become a partner with the assignment of half of Ben’s interest.
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Chapter 16
16-9
Solution E16-7
1.
Total equity of partnership before revaluation
($3,000,000 + $2,500,000 + $6,000,000)
$11,500,000
To get capital interest of $4,600,000 (40% x $11,500,000), Ping has to
invest for $6,000,000 (goodwill to old partners)
Fair value of the partnership ($6,000,000 / 40%) $15,000,000
Total equity of partnership before revaluation
$11,500,000
Goodwill
$3,500,000
Allocation of goodwill:
To Liu ($3,500,000 x 40%)
To Ping ($3,500,000 x 60%)
Capital balance of each partner:
Liu ($3,000,000 + $1,400,000)
Wang ($2,500,000 + $2,100,000)
Ping
2.
$1,400,000
$2,100,000
$3,500,000
$4,400,000
$4,600,000
$6,000,000
Ping interest in the partnership ($11,500,000 x 40%)
$4,600,000
Total bonus to old partners ($6,000,000 - $4,600,000)
$1,400,000
Capital balance of each partners:
Liu ($3,000,000 + (40% x $1,400,000))
Wang ($2,500,000 + (60% x $1,400,000))
Ping ($11,500,000 x 40%)
$3,560,000
$3,340,000
$4,600,000
Total
$11,500,000
Solution E16-8
Journal entries to admit Joh to the Bow/Mon partnership:
Goodwill
$ 45,000
Bow capital
$ 27,000
Mon capital
18,000
To record goodwill computed as follows:
New capital = $75,000  1/3 = $225,000
Goodwill = $225,000 new capital - $180,000 old capital = $45,000
Bow capital
Mon capital
$ 39,000
36,000
Joh capital
$75,000
To record capital transfer to Joh: ($90,000 + $27,000)/3 from Bow and
($90,000 + $18,000)/3 from Mon.
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Partnerships—Formation, Operations and Changes in Ownership Interests
16-10
Solution E16-9
1
Investment of $100,000 in partnership with revaluation:
Cash
Goodwill
$100,000
20,000
Wal capital
$120,000
The new partnership valuation is computed as: old capital of
$480,000/80% retained interest = $600,000 new capital. Goodwill is
computed as: new capital of $600,000 - $580,000 (the old capital
plus investment) = $20,000 goodwill.
2
Investment of $140,000 in partnership with revaluation:
Goodwill
$80,000
Sip capital
$24,000
Jog capital
40,000
Run capital
16,000
New partnership capital is computed on the basis of new investment
of $140,000/20% interest = $700,000 new capital. New capital of
$700,000 - ($480,000 old capital + $140,000 investment) = $80,000
goodwill.
Cash
$140,000
Wal capital
To record Wal’s investment in the partnership.
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$140,000
Chapter 16
16-11
Solution E16-10
1
Investment of $120,000 in the partnership with no revaluation:
$400,000 old capital + $120,000 additional investment = $520,000
Box’s interest = $520,000  25% = $130,000
Therefore, the old partners are giving a bonus to Box of $10,000.
Cash
Man capital
Eme capital
Fot capital
$120,000
3,600
2,400
4,000
Box capital
$130,000
To record Box’s admission to a 25% interest in the partnership
capital and earnings.
Capital accounts after Box’s admission to the partnership:
Man
Eme
Fot
Box
2
capital ($140,000 - $3,600)
capital ($100,000 - $2,400)
capital ($160,000 - $4,000)
capital
$136,400
97,600
156,000
130,000
$520,000
The profit and loss sharing ratios of the new partnership will depend on
the provisions of the new partnership agreement. If the old partners
wish to maintain their old partnership relationship, one possible
division would be to reduce each of the old partners ratio by 25% (in
other words, a new ratio of 27:18:30:25). However, if the issue is not
addressed in the new partnership agreement, the partners will share
profits equally, 25:25:25:25, in accordance with the Uniform Partnership
Act.
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Partnerships—Formation, Operations and Changes in Ownership Interests
16-12
Solution E16-11
Retirement of Nix with revaluation:
Goodwill
$140,000
Nix capital (30%)
$42,000
Man capital (30%)
42,000
Per capital (40%)
56,000
To record goodwill implied by the excess payment to Nix computed as:
($170,000 - $128,000)/30% = $140,000.
Nix capital
$170,000
Cash
To record payment to Nix upon his retirement.
$170,000
Solution E16-12
Entry to write-up assets to fair value
Assets
Bec capital
Dee capital
Lyn capital
Entry to record settlement with Dee
Dee capital
Bec capital (5/6  $30,000 excess payment)
Lyn capital (1/6  $30,000 excess payment)
Loan to Dee
Cash
$200,000
$100,000
80,000
20,000
$380,000
25,000
5,000
$100,000
310,000
Bec capital ($300,000 + $100,000 - $25,000)
$375,000
Lyn capital ($100,000 + $20,000 - $5,000)
$115,000
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Chapter 16
16-13
Solution E16-13
1
Income Allocation Schedule
Kat
Net income
Bonus to Kat
Remainder
Salary allowance
Remainder
50/50 split
Remainder
2
$30,000
(1,500)
28,500
(25,000)
3,500
(3,500)
-0-
Edd
1,500
1,500
10,000
15,000
25,000
1,750
$13,250
1,750
$16,750
3,500
$30,000
Revenue and Expense Summary
$30,000
Kat Capital
$13,250
Edd Capital
$16,750
Allocate partnership net income for the year to the partners.
Kat Capital
$15,000
Kat Drawing
Edd Capital
$15,000
$10,000
Edd Drawing
Close the drawing accounts to the capital accounts.
3
Total
$10,000
Capital Accounts
K & E Partnership
Statement of Partners’ Capital
For the year ended December 31 2011
Capital balances January 1, 2011
Add: Additional investments
Deduct: Withdrawals
Deduct: Drawings
Add: Net income
Capital balances December 31, 2011
Kat
$496,750
5,000
0
(15,000)
13,250
$500,000
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Edd
$268,250
5,000
0
(10,000)
16,750
$280,000
Partnerships—Formation, Operations and Changes in Ownership Interests
16-14
Solution E16-14
1
Valuation of assets and liabilities as implied by excess payment to Box:
Building
$10,000
Goodwill
40,000
Byd capital
$ 15,000
Box capital
10,000
Dar capital
20,000
Fus capital
5,000
To record revaluation of building and goodwill implied by the
excess payment to Box on his retirement ($10,000  20% = $50,000
revaluation).
Box capital
$35,000
Cash
$ 35,000
To record cash payment to Box on his retirement from the business.
2
No revaluation; bonus to retiring partner:
Box capital
$25,000
Byd (30/80)
3,750
Dar (40/80)
5,000
Fus(10/80)
1,250
Cash
To record a $10,000 bonus to Box upon retirement.
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$
35,000
Chapter 16
16-15
Solution E16-15
1
a
Bil’s contribution ($20,000 + $60,000 + $15,000 - $30,000)
Ken’s contribution
Total tangible contributions
$ 65,000
50,000
$115,000
Ken’s contribution $50,000/.4 interest = $125,000 total capital
Total capital based on Ken’s contribution $125,000 less amount
contributed by Ken and Bil $115,000 = $10,000 goodwill
2
c
Jay’s investment of $65,000 is greater than his capital credit of 1/3 of
$175,000; thus, there is goodwill to the old partners.
New capital = $65,000  1/3 = $195,000
New capital of $195,000 - (old capital $110,000 + $65,000 investment) =
$20,000 goodwill.
Revaluation is recorded:
Goodwill (other assets)
$20,000
Tho capital (50%)
Mar capital (50%)
Mar’s capital = $60,000 + $10,000 goodwill = $70,000
$ 10,000
10,000
3
c
Total capital ($170,000 + $200,000 + $200,000) = $570,000
Zen’s interest $570,000  1/3 = $190,000
Therefore, Tin and Web receive a $10,000 bonus, shared equally.
4
c
$90,000 investment > 25%  ($100,000 + $80,000 + $90,000), thus, there
is goodwill to the old partners.
5
New capital $90,000/25%
Old capital + new investment $180,000 + $90,000
Goodwill
$360,000
(270,000)
$ 90,000
Fin capital $100,000 + (50%  $90,000 goodwill)
Rho capital $80,000 + (50%  $90,000 goodwill)
Che capital
Total capital
$145,000
125,000
90,000
$360,000
b
Payment to Gin at retirement
Capital account before recording share of goodwill
Gin’s share of goodwill
$200,000
170,000
$ 30,000
Total goodwill for partnership ($30,000/.3)
$100,000
Total assets before Gin’s retirement ($240,000 cash +
$360,000 other assets + $100,000 goodwill)
Less: Payment to Gin on retirement
Total assets after Gin retires
$700,000
200,000
$500,000
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Partnerships—Formation, Operations and Changes in Ownership Interests
16-16
Solution E16-16
1
a
Ton capital
Olg capital
$ 30,000
70,000
$100,000
Capital Interest
30%
70%
Income Interest
50%
50%
Since capital and income interests were not aligned at the time of Shi’s
purchase, the $40,000 payment to Ton does not provide a basis for
revaluation. Thus, half of Ton’s $30,000 capital balance should be
transferred to Shi.
2
a
Implied total valuation of partnership based on
Dun’s $60,000 payment to partners ($60,000/.4)
Entry to record goodwill:
Goodwill
Lin capital
Que capital
3
$30,000
$ 15,000
15,000
Entry to transfer equal capital amounts to Dun:
Lin capital
$30,000
Que capital
30,000
Dun capital
$ 60,000
Capital accounts after admission of Dun:
Lin capital ($50,000 + $15,000 - $30,000)
Que capital ($70,000 + $15,000 - $30,000)
Dun capital
Total capital
$ 35,000
55,000
60,000
$150,000
c
Old capital of $120,000  2/3 interest retained by old partners =
$180,000 capitalization. $180,000 - $170,000 old capital and new
investment = $10,000 goodwill.
McC
New
Oak
Total
4
$150,000
Old
Capital
$ 70,000
50,000
$120,000
Admission
of Oak
$60,000
$60,000
New
Capital
$ 70,000
50,000
60,000
$180,000
b
Bonus to Oak = ($170,000/3) - $50,000 = $6,667 bonus
McC
New
Oak
Total
Old
Capital
$ 70,000
50,000
________
$120,000
Admission
of Oak
$(3,333)
(3,334)
56,667
$50,000
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New
Capital
$ 66,667
46,666
56,667
$170,000
Chapter 16
16-17
Solution E16-16 (continued)
5
a
Capital balances
Revalue assets
Adjusted balances
Excess payment to
Car 20/50
Ending balances
Ben
$100,000
20,000
120,000
Car
$200,000
30,000
230,000
Das
$200,000
50,000
250,000
(4,000)
$116,000
14,000
$244,000
(10,000)
$240,000
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Total
$500,000
100,000
$600,000
Partnerships—Formation, Operations and Changes in Ownership Interests
16-18
Solution E16-17 [Based on AICPA]
1
b
2
a
3
a
Withdrawal
Less: Additional investment
Net withdrawal
Less: Net decrease in capital
Pla’s share of net income
$130,000
25,000
105,000
60,000
$ 45,000
Total net income ($45,000/.3 Pla’s interest)
$150,000
4
a
Fox
Loss
Interest
Salaries
Loss to divide
Divided equally
5
$ (33,000)
(22,000)
(50,000)
(105,000)
105,000
0
$ 12,000
30,000
$
(35,000)
7,000
Gre
$
6,000
(35,000)
$(29,000)
b
The bonus to Bec is $60,000, computed as follows:
B
B
B
1.25B
B
=
=
=
=
=
bonus
.25($300,000 - B)
$75,000 - .25B
$75,000
$60,000
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How
$
4,000
20,000
(35,000)
$(11,000)
Chapter 16
Solution E16-18
1
2
16-19
[Based on AICPA]
c
Old capital at fair value = $300,000 = 80% of new capital
New capital ($300,000/.8)
Less: Old capital
Cash to be invested
b
Elt
Don
Kra
Old Capital
$ 70,000
60,000
$130,000
3
Capital Changes
$(7,000)
(3,000)
60,000
$50,000
New Capital
$ 63,000
57,000
60,000
$180,000
b
Wil’s $40,000 capital investment > capital credit ($140,000  25%) Thus,
goodwill to old partners.
New capital ($40,000/.25)
Old capital
Goodwill
Revaluation entry:
Goodwill
Eli capital ($20,000  60%)
Geo capital ($20,000  30%)
Dic capital ($20,000  10%)
Admission
Eli
Geo
Dic
4
$375,000
(300,000)
$ 75,000
of Wil:
capital ($92,000  25%)
capital ($46,000  25%)
capital ($22,000  25%)
Wil capital
$160,000
140,000
$ 20,000
$20,000
$ 12,000
6,000
2,000
$23,000
11,500
5,500
$ 40,000
New capital balances:
Eli capital ($92,000 - $23,000)
Geo capital ($46,000 - $11,500)
Dic capital ($22,000 - $5,500)
Wil capital
Total capital
$ 69,000
34,500
16,500
40,000
$160,000
b
Purchase price paid by Sid
Capital transferred to Sid ($444,000  20%)
Combined gain to New and Sha
$132,000
88,800
$ 43,200
Because capital balances are not aligned with profit and loss sharing
ratios, the $88,800 capital transferred to Sid will be charged to New
and Sha by agreement.
5
d
Old capital ($60,000 + $20,000)
Additional capital invested by Gra
New capital
Gra’s capital interest
Gra’s capital account
Copyright © 2015 Pearson Education Limited
$ 80,000
15,000
95,000
20%
$ 19,000
Partnerships—Formation, Operations and Changes in Ownership Interests
16-20
E16-18 (continued)
6
a
Excess payment to Dix [$74,000 - ($210,000 - $160,000)]
$ 24,000
Implied goodwill ($24,000 excess payment/.2 profit and loss
interest of Dixon)
$120,000
7
b
Per books
Asset revaluationa
Balance after revaluation
Goodwill recognitionb
Balance before retirement
Retirement of Wil
a
b
20%
Wil
$ 70,000
12,000
82,000
20,000
102,000
(102,000)
0
20%
Bro
$65,000
12,000
77,000
20,000
97,000
60%
Low
$150,000
36,000
186,000
60,000
246,000
$97,000
$246,000
Asset revaluation: $360,000 - $300,000 = $60,000
Goodwill: ($102,000 - $82,000)/.2 = $100,000
Copyright © 2015 Pearson Education Limited
Total
$285,000
60,000
345,000
100,000
445,000
(102,000)
$343,000
Chapter 16
16-21
Solution E16-19
Kra, Lam, and Man Partnership
Statement of Partners’ Capital
for the year ended December 31, 2011
Capital January 1, 2011
Additional investment
Withdrawals
Kra
Lam
Man
$65,000
4,000
$75,000
$70,000
(5,000)
(4,000)
Total
$210,000
4,000
(9,000)
Net contributed capital
Net income (see schedule)
69,000
11,500
70,000
23,500
66,000
12,000
205,000
47,000
Capital December 31, 2011
$80,500
$93,500
$78,000
$252,000
Kra, Lam, and Man Partnership
Schedule of Income Allocation
for the year ended December 31, 2011
Net Income
Kra
Lam
Man
Income to divide
Salary to Lam
Interest allowances
$47,000
(11,000)
(21,000)
$ 6,500
$11,000
7,500
$ 7,000
Remainder to divide
Divided equally
15,000
(15,000)
5,000
5,000
5,000
$11,500
$23,500
$12,000
Income allocation
0
Copyright © 2015 Pearson Education Limited
Partnerships—Formation, Operations and Changes in Ownership Interests
16-22
Solution E16-20
1
If assets are not revalued:
Before Admission
of Iot
Gro
Ham
Iot
$ 45,000
65,000
$110,000
Transfers on
Admission of Iot
$(22,500)
(32,500)
55,000
0
Capital Balances
After Admission
$ 22,500
32,500
55,000
$110,000
If assets are revalued:
Gro
Ham
Iot
Capital
Balances
Before
Revaluation
Revaluation
($30,000)
Capital
Balances
After
Revaluation
$ 45,000
65,000
$13,500
16,500
$ 58,500
81,500
$110,000
$30,000
$140,000
Transfers
to Iot
$(29,250)
(40,750)
70,000
0
Capital
Balances
After
Admission
$ 29,250
40,750
70,000
$140,000
2
Since old partners transferred 50% of their interests in future profits,
profits should be divided: 22.5% to Gro, 27.5% to Ham, and 50% to Iot.
The partners can, of course, agree to any profit and loss sharing
arrangement that they choose.
3
In the absence of a new partnership agreement, profits will be divided
equally.
Copyright © 2015 Pearson Education Limited
Chapter 16
16-23
Solution E16-21
Method 1: Bonus to retiring partner
Cas capital
Don capital
Ear capital
$140,000
9,000
12,000
Cash
$161,000
To record Cas’s retirement with a $21,000 bonus, shared by Don and
Ear in their relative profit and loss sharing ratios (3/7 and 4/7,
respectively).
Method 2: Goodwill to retiring partner only
Cas capital
Goodwill
$140,000
21,000
Cash
$161,000
To record Cas’s retirement and to record the $21,000 excess
payment to Cas as goodwill.
Method 3: Goodwill implied by excess payment
Goodwill
$ 70,000
Cas capital
$ 21,000
Don capital
21,000
Ear capital
28,000
To record goodwill implied by the excess payment to Cas on her
retirement. Goodwill is computed as the excess payment divided by
Cas’s profit and loss sharing ratio ($21,000/30%).
Cas capital
$161,000
Cash
To record retirement of Cas.
Copyright © 2015 Pearson Education Limited
$161,000
Partnerships—Formation, Operations and Changes in Ownership Interests
16-24
SOLUTIONS TO PROBLEMS
Solution P16-1
Preliminary computation
Beginning capital ($69,000 + $85,500 + $245,500)
Capital adjustments: Additional investment less withdrawals
Ending capital
Net income
$400,000
(4,000)
396,000
(481,000)
$ 85,000
Ell, Far, and Gar
Statement of Partnership Capital
for the year ended December 31, 2011
Capital balance January 1
Add: Additional investment
Deduct: Salary allowances
Net contributed capital
Income allocation (see
schedule)
Capital balance December 31
Ell
$69,000
Far
$85,500
Gar
$245,500
20,000
(12,000)
57,000
(12,000)
73,500
24,200
$81,200
24,200
$97,700
36,600
$302,100
85,000
$481,000
Ell
Far
Gar
$12,000
$12,000
12,200
$24,200
12,200
$24,200
265,500
Total
$400,000
20,000
(24,000)
396,000
Income allocation schedule:
Income to divide
Salary allowances
Remainder to divide
Divided 20:20:60
Income allocation
Total
$85,000
(24,000)
61,000
(61,000)
0
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$ 36,600
$ 36,600
Chapter 16
16-25
Solution P16-2
1
Mor, Osc, and Tre Partnership
Balance Sheet
at January 2, 2011
Cash ($20,000 + $95,000)
Accounts receivable — net
Inventories
Plant assets — net ($120,000 + $120,000)
Goodwill
Total assets
$115,000
100,000
200,000
240,000
40,000a
$695,000
Accounts payable
Mor capital (1/3 interest)
($120,000 + $85,000b + $20,000)
Osc capital (1/3 interest)
($100,000 + $85,000b + $20,000)
Tre capital (1/3 interest)
Total equities
$ 50,000
a
b
c
2
225,000
205,000
215,000c
$695,000
Tre’s $215,000  1/3 = $645,000 total capitalization
$645,000 - $605,000 fv of old assets + Tre’s investment = $40,000 goodwill.
$40,000 goodwill is divided equally between Mor and Osc
Revaluation of assets to fair value ($170,000 divided equally between Mor
and Osc)
Tre’s investment ($95,000 cash + $120,000 building) = $215,000
Mor, Osc, and Tre Partnership
Balance Sheet
at January 2, 2011
Cash ($20,000 + $95,000)
Accounts receivable — net
Inventories
Plant assets — net ($100,000 + $120,000)
Total assets
Accounts payable
Mor capital (1/3 interest)
($120,000 + $35,000a)
Osc capital (1/3 interest)
($100,000 + $35,000a)
Tre capital (1/3 interest)
Total equities
$115,000
100,000
50,000
220,000
$485,000
$ 50,000
155,000
135,000
145,000b
$485,000
a
Tre is paying a bonus to Mor and Osc because his investment of $215,000
($95,000 cash and $120,000 building) is worth more than a 1/3 interest in
the book value of the combined assets ($215,000 + $220,000). The $70,000
bonus is evenly divided between Mor and Osc based on their profit sharing
ratios. The journal entry to record Tre’s admission in the partnership is:
Cash
95,000
Building
120,000
Tre Capital
145,000
Mor Capital
35,000
Osc Capital
35,000
b
Tre’s investment ($95,000 cash + $120,000 building) = $215,000
Book value plus Tre’s investment is $220,000 + $215,000 = $435,000
Tre gets a 1/3 interest or $145,000.
Copyright © 2015 Pearson Education Limited
Partnerships—Formation, Operations and Changes in Ownership Interests
16-26
Solution P16-3
Ash and Bar Partnership
Income Distribution Schedule for 2011
Net income to divide
Interest allowance
Remainder to divide
Salary to Ash
Remainder to divide
Bonus to Ash
B = .2($84,000 - B)
1.2B = $16,800
B = $14,000
Remainder to divide
Divided equally
Income distribution
$105,000
(9,000)
96,000
(12,000)
84,000
(14,000)
70,000
(70,000)
0
Ash
Bar
$ 4,000
$ 5,000
Total
$
9,000
12,000
12,000
14,000
14,000
35,000
$65,000
35,000
$40,000
Copyright © 2015 Pearson Education Limited
70,000
$105,000
Chapter 16
16-27
Solution P16-4
1
Profit allocation schedule
Ale
Net loss for 2011
Salary to Ale
Loss to divide
Interest allowances:
Ale $60,000  10%
Car $100,000  10%
Eri $110,000  10%
Loss to divide
Divided 30:30:40
Allocation of loss
2
(6,000)
(10,000)
(11,000)
(49,000)
49,000
0
Car
Eri
$ 10,000
6,000
$ 10,000
$ 11,000
$
(14,700)
1,300
(14,700)
$ (4,700)
(19,600)
$ (8,600)
Ale, Car, and Eri Partnership
Statement of Partnership Capital
for the year ended December 31, 2011
Capital January 1, 2011
Add: Additional
Investments
Deduct: Withdrawals
Deduct: Drawings
Net contributed capital
Net loss for 2011
Capital
December 31, 2011
3
$(12,000)
(10,000)
(22,000)
Ale
$ 60,000
Car
$ 90,000
60,000
30,000
120,000
20,000
130,000
(10,000)
(8,000)
52,000
1,300
120,000
(4,700)
120,000
(8,600)
$ 53,300
$115,300
Eri
$110,000
$111,400
Total
$260,000
50,000
310,000
(10,000)
(8,000)
292,000
(12,000)
$280,000
Correcting entry:
Eri capital
$1,200
Ale capital
$1,100
Car capital
100
To correct capital accounts for error in loss allocation:
Correct loss allocation
Less: Actual loss allocation
Adjustment
Ale
$ 1,300
(200)
$ 1,100
Car
$(4,700)
4,800
$
100
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Eri
$(8,600)
7,400
$(1,200)
Partnerships—Formation, Operations and Changes in Ownership Interests
16-28
Solution P16-5
1.
Bonus calculation:
B
= 0.2 ($600,000 - $200,000 – B)
B
= $120,000 - $40,000 - 0.2B
B
= $80,000 – 0.2B
1.2 B = $80,000
B
= $66,667
INCOME ALLOCATION SCHEDULE
Kamal
Ahmed 20% 30%
Net income
$ 600,000
Bonus to Karim
Remainder to
divide
Salary allowances
to
-$ 66,667
Ahmed and Kamal
Remainder to
divide
Divided base on
ratio
Remainder to
divide
Net income
allocation
2
Karim 50%
$ 66,667
Total
$ 66,667
$ 533,333
-$ 200,000
$ 100,000
$100,000
$200,000
$ 66,667
$100,000
$ 166,667
$333,333
$ 166,667
$200,000
$ 233,334
$600,000
$ 333,333
-$ 333,333
$ 0
No bonus are distributed because no the partnership reported loss.
INCOME ALLOCATION SCHEDULE
Kamal
Ahmed 20% 30%
Net income
Salary allowances
to
-$ 10,000
Ahmed and Kamal
Remainder to
divide
Divided base on
ratio
Remainder to
divide
Net income
allocation
-$200,000
Karim 50%
$ 100,000
$100,000
-$ 42,000
-$63,000
-$105,000
$ 58,000
$ 37,000
-$105,000
Total
$200,000
-$210,000
$ 210,000
-$210,000
$ 0
Copyright © 2015 Pearson Education Limited
-$ 10,000
Chapter 16
16-29
Solution P16-6
1
Computation of reported capital balances:
Jon
Kel
Capital January 2, 2011
$30,000
$30,000
Add: Investments for 2011
Less: Withdrawals for 2011
(5,000)
(4,000)
Net contributed capital
25,000
26,000
4,000
Income allocation — Schedule A 11,000
Capital December 31, 2011
36,000
30,000
Add: Investments for 2012
5,000
Less: Withdrawals for 2012
(3,000)
Net contributed capital
41,000
27,000
4,500
Income allocation — Schedule B 12,100
Capital December 31, 2012
53,100
31,500
Add: Investments for 2013
Less: Withdrawals for 2013
(4,000)
Net contributed capital
53,100
27,500
6,450
Income allocation — Schedule C 15,610
Capital January 1, 2014
$68,710
$33,950
Schedule A
Income to allocate
Interest allowances:
Jon ($30,000  10%)
Kel ($30,000  10%)
Gla ($30,000  10%)
Remainder to divide
Salary to Jon
Remainder to divide
Divided equally
Income allocation
Net Income
$19,000
Schedule B
Income to allocate
Interest allowances:
Jon ($36,000  10%)
Kel ($30,000  10%)
Gla ($39,000  10%)
Remainder to divide
Salary to Jon
Remainder to divide
Divided equally
Income allocation
Net Income
$22,000
Schedule C
Income to allocate
Interest allowances:
Jon ($53,100  10%)
Kel ($31,500  10%)
Gla ($36,400  10%)
Remainder to divide
Salary to Jon
Remainder to divide
Divided equally
Income allocation
Net Income
$29,000
(3,000)
(3,000)
(3,000)
10,000
(7,000)
3,000
(3,000)
0
(3,600)
(3,000)
(3,900)
11,500
(7,000)
4,500
(4,500)
0
(5,310)
(3,150)
(3,640)
16,900
(7,000)
9,900
(9,900)
0
Jon
Gla
$30,000
5,000
35,000
4,000
39,000
(8,000)
31,000
5,400
36,400
6,000
(2,000)
40,400
6,940
$47,340
Total
$ 90,000
5,000
(9,000)
86,000
19,000
105,000
5,000
(11,000)
99,000
22,000
121,000
6,000
(6,000)
121,000
29,000
$150,000
Kel
Gla
$ 3,000
$ 3,000
$
3,000
$
1,000
4,000
7,000
1,000
$11,000
Jon
1,000
$ 4,000
Kel
Gla
$ 3,600
$ 3,000
$
3,900
$
1,500
5,400
7,000
1,500
$12,100
Jon
1,500
$ 4,500
Kel
Gla
$ 5,310
$ 3,150
$
3,640
$
3,300
6,940
7,000
3,300
$15,610
3,300
$ 6,450
Copyright © 2015 Pearson Education Limited
Partnerships—Formation, Operations and Changes in Ownership Interests
16-30
Solution P16-6 (continued)
2
Correct income and capital account balances:
Reported income
Understatement of depreciation
Understatement of inventory
at December 31, 2013
Corrected income
Capital per books
Understatement
Capital as corrected
3
Jon
$68,710
666
$69,376
2011
$19,000
(2,000)
2012
$22,000
(2,000)
2013
$29,000
(2,000)
$17,000
$20,000
8,000
$35,000
Kel
$33,950
667
$34,617
Gla
$47,340
667
$48,007
Total
$150,000
2,000
$152,000
Correcting entry on January 1, 2014:
Inventory
$ 8,000
Jon capital
$
666
Kel capital
667
Gla capital
667
Accumulated depreciation
6,000
To correct prior years’ profits and adjust inventory and
accumulated depreciation.
Note: Since residual income is divided equally, it is not necessary to
recompute the income allocation and capital balances for each of the
three years.
Copyright © 2015 Pearson Education Limited
Chapter 16
16-31
Solution P16-7
1. Assuming goodwill approach is used:
1.
Partnership fair value ($1,800,000 / 40%)
Total equity of the partnership
Goodwill
$4,500,000
$3,250,000
$1,250,000
Journal entry:
Goodwill (+A)
1,250,000
Kiyoshi capital (+OE) ($1,250,000 x 70%)
Masao capital (+OE) ($1,250,000 x 30%)
To record revaluation of partnership value
Capital balances after revaluation
Kiyoshi ($1,750,000 + $875,000)
Masao ($1,500,000 + $375,000)
875,000
375,000
$2,625,000
$1,875,000
Journal entry:
Kiyoshi capital (-OE) ($2,625,000 x 40%)
1,050,000
Masao capital (-OE) ($1,875,000 x 40%)
750,000
Naoki capital (+OE)
1,800,000
To transfer Kiyoshi capital and Masao Capital to Naoki capital
2.
Schedule to allocate the capital balance
CAPITAL BALANCES
Before
Revaluation
Revaluation
After
Revaluation
Kiyoshi
$ 1,750,000
$ 875,000
$ 2,625,000
Capital
Transferred
-$
1,050,000
Masao
$ 1,500,000
$ 375,000
$ 1,875,000
-$ 750,000
Naoki
$ 1,800,000
$ 3,250,000
$ 1,250,000
$ 4,500,000
$ 0
Assuming bonus approach is used
1. Journal entry:
Kiyoshi capital (-OE) ($1,750,000 x 40%)
Masao capital (-OE) ($1,500,000 x 40%)
Naoki capital (+OE)
Capital After
Transfer
$
1,575,000 35%
$
1,125,000 25%
$
1,800,000 40%
$
4,500,000
700,000
600,000
1,500,000
To transfer Kiyoshi capital and Masao Capital to Naoki capital
2. Schedule to allocate the capital balance
CAPITAL BALANCES
Per Books
Capital
Transferred
Kiyoshi
$ 1,750,000
-$ 700,000
Masao
$ 1,500,000
-$ 600,000
Naoki
Capital After
Transfer
$
1,050,000 32%
$ 900,000 28%
$
$ 1,300,000
1,300,000 40%
Copyright © 2015 Pearson Education Limited
Partnerships—Formation, Operations and Changes in Ownership Interests
16-32
$ 3,250,000
$ 0
$
3,250,000
Solution P16-8
1
Car sells one-half of her interest to Dar for $90,000:
Capital account balances:
Ann
Bob
Car
Dar
capital
capital
capital
capital
Total capital
$ 75,000
100,000
62,500
62,500
$300,000
There is no basis for revaluation because the capital balances are
not aligned with profit and loss sharing ratios. The entry to admit Dar
transfers one-half of Car’s capital account to Dar, regardless of the
amount Dar pays Car:
Car capital
$62,500
Dar capital
$ 62,500
To admit Dar to a 25% interest in the partnership.
2
Dar invests $75,000 in the partnership for a 25% interest, and
partnership assets are revalued:
Capital account balances:
Ann
Bob
Car
Dar
capital
capital
capital
capital
Total capital
$ 75,000
100,000
125,000
100,000
$400,000
Since Dar’s investment of $75,000 is less than his capital credit
under the bonus procedure [($300,000 + $75,000)  25%] and the assets
are to be revalued, goodwill accrues to the new partner. The entry to
record the admission of Dar to the partnership is:
Cash
Goodwill
$75,000
25,000
Dar capital
$100,000
To admit Dar to a 25% interest in the partnership and record
goodwill computed as follows:
Old capital $300,000/.75 interest retained by the old partners =
$400,000 new capital.
$400,000 new capital - ($300,000 old capital + $75,000 new
investment) = $25,000 goodwill to new partner.
Copyright © 2015 Pearson Education Limited
Chapter 16
16-33
Solution P16-8 (continued)
3
Dar invests $80,000 for a 20% interest in the partnership and
partnership assets are revalued:
Capital account balances:
Ann
Bob
Car
Dar
capital
capital
capital
capital
Total capital
$ 80,000
105,000
135,000
80,000
$400,000
Since Dar’s investment of $80,000 is greater than his capital
credit under the bonus procedure [($300,000 + $80,000)  20%], and
assets are to be revalued, goodwill accrues to the old partners. The
entries are as follows:
Goodwill
$20,000
Ann capital
$ 5,000
Bob capital
5,000
Car capital
10,000
To record goodwill and adjust the partners’ capital accounts:
Dar’s investment $80,000/20% = $400,000 new capital
$400,000 - $380,000 old capital plus new investment = $20,000
goodwill to the old partners.
Cash
4
$80,000
Dar capital
$ 80,000
To admit Dar to a 20% interest in the partnership for $80,000.
Dar invests $90,000 for a 30% interest in the partnership and assets are
not revalued:
Capital account balances:
Ann
Bob
Car
Dar
capital
capital
capital
capital
Total capital
$ 68,250
93,250
111,500
117,000
$390,000
Since Dar’s investment of $90,000 for a 30% interest is less than
his capital credit [($300,000 + $90,000)  30%], and no goodwill is to
be recorded, Dar receives the bonus. The entry is as follows:
Cash
Ann capital
Bob capital
Car capital
$90,000
6,750
6,750
13,500
Dar capital
$117,000
To record Dar’s $90,000 investment for a 30% interest and allow
him a bonus of $27,000 computed as follows:
($390,000 total capital  30%) - $90,000 investment = $27,000
Copyright © 2015 Pearson Education Limited
Partnerships—Formation, Operations and Changes in Ownership Interests
16-34
Solution P16-9
1
Revaluation (goodwill to new partner)
Cash
Goodwill
$85,080
4,920
Con capital
$90,000
To record admission of Con and goodwill to Con computed as:
Old capital of $450,000 = 5/6 new capital
New capital = $540,000
Con’s capital = $540,000  1/6 = $90,000
Goodwill to Con = $90,000 - $85,080 = $4,920
No revaluation (bonus to new partner)
Cash
Pat capital
Mic capital
Hay capital
$85,080
1,640
2,050
410
Con capital
$89,180
To record admission of Con and bonus to Con computed as:
New capital = $450,000 + $85,080 = $535,080
Con capital = $535,080  1/6 interest = $89,180
Bonus = $89,180 - $85,080 = $4,100, allocated 40:50:10
2
Revaluation
Goodwill
$60,480
Pat capital (40%)
$24,192
Mic capital (50%)
30,240
Hay capital (10%)
6,048
To record revaluation of old partnership computed as:
New capital = $85,080  1/6 = $510,480
$510,480 - $450,000 = $60,480 undervaluation
Pat capital
Mic capital
Hay capital
$28,032
41,040
16,008
Con capital
$85,080
To record capital transfers equal to 1/6 of old partners’ capital
balances as adjusted: Pat ($144,000 + $24,192)/6 = $28,032
Mic ($216,000 + $30,240)/6 = $41,040
Hay ($90,000 + $6,048)/6 = $16,008
No revaluation
Pat capital
Mic capital
Hay capital
$24,000
36,000
15,000
Con capital
To transfer 1/6 of capital balances to Con.
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$75,000
Chapter 16
16-35
Solution P16-10
1
Car pays $450,000 directly to Aid and Tha for 40% of each of their
interests and the bonus procedure is used.
Aid capital
Tha capital
$200,000
112,000
Car capital
Existing capital $780,000  40% = $312,000.
2
$312,000
Car pays $600,000 directly to Aid and Tha for 40% of each of their
interests and goodwill is recorded.
Goodwill
$720,000
Aid capital
$360,000
Tha capital
360,000
Goodwill = Payment to old partners $600,000/.4 - $780,000 existing
capital = $720,000
Aid capital
Tha capital
$344,000
256,000
Car capital
Aid capital = ($500,000 + $360,000)  .4
Tha capital = ($280,000 + $360,000)  .4
3
$600,000
Car invests $450,000 in the partnership for her 40% interest, and
goodwill is recorded.
Cash
Goodwill
$450,000
70,000
Car capital
$520,000
Old capital $780,000/.6 = $1,300,000 new capital
New capital $1,300,000 - old capital $780,000 + new investment
$450,000 = goodwill $70,000
4
Car invests $600,000 in the partnership for her 40% interest, and
goodwill is recorded.
Goodwill
$120,000
Aid capital
$ 60,000
Tha capital
60,000
Goodwill = new investment $600,000/.4 = $1,500,000 total capital
$1,500,000 - $1,380,000 old capital and new investment = $120,000
Cash
$600,000
Car capital
To record new partner’s investment.
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$600,000
Partnerships—Formation, Operations and Changes in Ownership Interests
16-36
Solution P16-11
Har, Ion, and Jer Partnership
Statement of Partnership Capital
for the years ended December 31, 2011 and 2012
Investment January 1, 2011
Additional investment — 2011
Withdrawal — 2011
Har
Capital
$20,000
Ion
Capital
$20,000
8,000
Jer
Capital
$20,000
(4,000)
Total
Capital
$ 60,000
8,000
(4,000)
Net contributed capital
Net income — 2011
16,000
4,000
28,000
4,000
20,000
16,000
64,000
24,000
Capital December 31, 2011
Withdrawal — 2012
20,000
(4,000)
32,000
(8,000)
36,000
88,000
(12,000)
Net contributed capital
Net income — 2012
Capital December 31, 2012
16,000
2,727
$18,727
24,000
4,364
$28,364
36,000
16,909
$52,909
76,000
24,000
$100,000
Computation of net income:
Assets $129,500 - liabilities $29,500 = $100,000 capital December 31, 2012
Beginning capital $60,000 + investment $8,000 - withdrawals $16,000 = $52,000
$100,000 - $52,000 = $48,000 net income for the two year period.
Schedule of Profit and Loss Distribution
Income for 2011
Salary allowance to Jer
Remainder to divide
One-third to each partner
Allocation of income
Income for 2012
Salary allowance to Jer
Remainder to divide
Divided in beginning capital
ratios: 20/88, 32/88, 36/88
Allocation of income
Net Income
$24,000
(12,000)
12,000
(12,000)
0
Har
Ion
$ 12,000
$ 4,000
$ 4,000
4,000
$ 4,000
$ 4,000
$ 16,000
$24,000
(12,000)
12,000
(12,000)
0
Jer
$ 12,000
$ 2,727
$ 4,364
4,909
$ 2,727
$ 4,364
$ 16,909
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Chapter 16
16-37
Solution P16-12
1
Closing entries for Par and Boo Partnership
Service revenue
$50,000
Supplies expense
$17,000
Utilities expense
4,000
Other miscellaneous expenses
5,000
Income summary
24,000
To close revenue and expense to profit and loss summary account.
Par capital
Boo capital
$ 8,000
10,000
Salaries to partners
$18,000
To close salaries to partners (drawings) to partners’ capital
accounts.
Income summary
$24,000
Par capital
$12,000
Boo capital
12,000
To close income summary and to divide profits equally as required
in the absence of a profit sharing agreement.
2
Par and Boo Partnership
Statement of Partners’ Capital
for the ten months ending December 31, 2011
Investments March 1, 2011
Add additional investments:
Boo July 1
Par October 1
Less Par withdrawal May 2
Less monthly drawings (salaries)
Net contributed capital
Add: Partnership net income
Partnership capital
December 31, 2011
Par
$30,000
Boo
$30,000
10,000
4,000
34,000
(4,000)
(8,000)
22,000
10,625
$32,625
Total
$60,000
(10,000)
30,000
13,375
10,000
4,000
74,000
(4,000)
(18,000)
52,000
24,000
$43,375
$76,000
40,000
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Partnerships—Formation, Operations and Changes in Ownership Interests
16-38
Solution P16-12
(continued)
Schedule of Profit and Loss Distribution
Net income
Salary allowances
Remainder to divide
Divide in average capital ratios:
Par 28/64 (or 43.75%)
Boo 36/64 (or 56.25%)
Distribution of income
Net Income
$24,000
(18,000)
6,000
(2,625)
(3,375)
0
Par
$ 8,000
Boo
$ 10,000
2,625
$10,625
3,375
$ 13,375
Computation of Average Capital Balances
Average capital
$30,000  2 months =
$26,000  5 months =
$30,000  3 months =
Total
Average capital
($280,000/10
months)
3
of Par
$ 60,000
130,000
90,000
$280,000
$ 28,000
Average capital
$30,000  4 months =
$40,000  6 months =
Total
Average capital
($360,000/10
months)
of Boo
$120,000
240,000
$360,000
$ 36,000
Par and Boo Partnership
Schedule of Profit and Loss Distribution
for the ten months ending December 31, 2011
Net income
Salary allowances
Remainder to divide
Interest allowance:
Par
$28,000  12%  10/12 year
Boo
$36,000  12%  10/12 year
Net Income
$24,000
(18,000)
6,000
(2,800)
Par
$ 8,000
Boo
$ 10,000
2,800
(3,600)
3,600
Loss to divide
Divide loss 50:50
Distribution of income
(400)
400
0
(200)
$10,600
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(200)
$ 13,400
Chapter 16
16-39
Solution P16-13
1
No revaluation of partnership assets
Proposal 1. Tom purchases one-half of Pet’s capital from Pet
Pet capital
$37,500
Tom capital
$37,500
To record Tom’s admission to the partnership for a one-fourth
interest in capital and profits by direct purchase of one-half of
Pet’s 50% interest. Tom’s capital credit is equal to capital
transferred from Pet to Tom ($75,000  50%).
Proposal 2. Tom purchases one-fourth of each partners’ capital from
partners
Pet capital
$18,750
Qua capital
12,500
She capital
6,250
Tom capital
$37,500
To record Tom’s admission to the partnership by direct purchase of
one-fourth of each partner’s capital and future profits. Tom’s
capital credit is equal to the capital transferred from the other
partners: ($75,000  25%) + ($50,000  25%) + ($25,000  25%).
Proposal 3. Tom invests cash in the partnership for a one-fourth
interest
Cash
$55,000
Pet capital
$ 1,875
Qua capital
1,125
She capital
750
Tom capital
51,250
To record Tom’s $55,000 investment for a one-fourth interest in
capital and future profits. Total capital is $150,000 + $55,000.
Tom’s share of total capital is $205,000  25%, or $51,250. Tom’s
investment of $55,000 less Tom’s capital credit of $51,250 equals
$3,750 bonus to old partners.
2
Partnership assets are revalued
Proposal 1. Tom purchases one-half of Pet’s capital from Pet
Goodwill
$90,000
Pet capital
$45,000
Qua capital
27,000
She capital
18,000
To record goodwill on basis of the price paid by Tom for a onefourth interest in capital and profits. Total capital is $240,000
($60,000/25%). Total capital of $240,000 less recorded capital of
$150,000 equals $90,000 goodwill.
Pet capital
$60,000
Tom capital
$60,000
To record Tom’s purchase of one-half of Pet’s capital and right to
Pet’s profits.
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Partnerships—Formation, Operations and Changes in Ownership Interests
16-40
Solution P16-13
(continued)
Proposal 2. Tom purchases one-fourth of partners’ capital from partners
Goodwill
$30,000
Pet capital
$15,000
Qua capital
9,000
She capital
6,000
To record goodwill on the basis of the price paid by Tom for onefourth of the capital and profits of each of the partners. Total
capital is $180,000 ($45,000/25%). Total capital of $180,000 less
recorded capital of $150,000 equals $30,000 goodwill.
Pet capital
Qua capital
She capital
$22,500
14,750
7,750
Tom capital
$45,000
To record Tom’s admission to a one-fourth interest in partnership
capital and profits. Tom’s capital is equal to the capital
transferred after revaluation: ($90,000  25%) + ($59,000  25%) +
($31,000  25%).
Proposal 3. Tom invests cash in the partnership for one-fourth interest
Goodwill
$15,000
Pet capital
$ 7,500
Qua capital
4,500
She capital
3,000
To record goodwill based on Tom’s investment of $55,000 for a onefourth interest in partnership capital and profit. Total capital
of $220,000 - ($150,000 recorded capital + $55,000 investment) =
$15,000 goodwill.
Cash
$55,000
Tom capital
$55,000
To record Tom’s $55,000 investment for a one-fourth interest in
capital and profits. Total capital = $220,000; Tom’s capital is
$220,000  25%, or $55,000.
Copyright © 2015 Pearson Education Limited
Chapter 16
16-41
Solution P16-14
1
Average capital balances
Tim
$60,000  3 months =
70,000  5 months =
64,000  4 months =
$786,000/12 months =
$180,000
350,000
256,000
$786,000
$ 65,500
2
Beginning balances
Add: Investments
Less: Withdrawals
Less: Drawings
Net contributed capital
Add: Net income (see schedule)
Ending capital balances
Las
$75,000  4 months =
63,000  6 months =
57,000  2 months =
$792,000/12 months =
$300,000
378,000
114,000
$792,000
$ 66,000
Tim
$ 60,000
10,000
(6,000)
(18,000)
46,000
54,600
$100,600
Total
$135,000
10,000
(24,000)
(42,000)
79,000
103,000
$182,000
Las
$75,000
0
(18,000)
(24,000)
33,000
48,400
$81,400
Schedule of income allocation:
Tim
Net income to allocate ($182,000 $79,000
Salary allowances
Remainder to divide
Divided 60 : 40
Income allocation
$103,000
(42,000)
61,000
(61,000)
0
Las
$18,000
$ 24,000
36,600
$54,600
24,400
$ 48,400
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