Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
Chapter 15
Partnerships: Formation, Operation, and Changes in Membership
Multiple Choice Questions
1. A partnership is a(n):
I. accounting entity.
II. taxable entity.
A. I only
B. II only
C. Neither I nor II
D. Both I and II
2. A partner's tax basis in a partnership is comprised of which of the following items?
I. The partner's tax basis of assets contributed to the partnership.
II. The amount of the partner's liabilities assumed by the other partners.
III. The partner's share of other partners' liabilities assumed by the partnership.
A. I plus II minus III
B. I plus II plus III
C. I minus II plus III
D. I minus II minus III
In the ABC partnership (to which Daniel seeks admittance), the capital balances of Albert,
Bert, and Connell, who share income in the ratio of 5:3:2 are:
3. Based on the preceding information, if no goodwill or bonus is recorded, how much should
Daniel invest for a 20 percent interest?
A. $400,000
B. $200,000
C. $300,000
D. $250,000
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Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
4. Based on the preceding information, what amount of goodwill will be recorded if Daniel
invests $450,000 for a one-third interest?
A. $0
B. $10,000
C. $50,000
D. $100,000
Jones and Smith formed a partnership with each partner contributing the following items:
Assume that for tax purposes Jones and Smith agree to share equally in the liabilities assumed
by the Jones and Smith partnership.
5. Refer to the above information. What is each partner's tax basis in the Jones and Smith
partnership?
A. Option A
B. Option B
C. Option C
D. Option D
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Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
6. Refer to the above information. What is the balance in each partner's capital account for
financial accounting purposes?
A. Option A
B. Option B
C. Option C
D. Option D
7. Griffin and Rhodes formed a partnership on January 1, 2009. Griffin contributed cash of
$120,000 and Rhodes contributed land with a fair value of $160,000. The partnership assumed
the mortgage on the land which amounted to $40,000 on January 1. Rhodes originally paid
$90,000 for the land. On July 31, 2009, the partnership sold the land for $190,000. Assuming
Griffin and Rhodes share profits and losses equally, how much of the gain from sale of land
should be credited to Griffin for financial accounting purposes?
A. $0
B. $15,000
C. $35,000
D. $45,000
8. Which of the following accounts could be found in the general ledger of a partnership?
A. Option A
B. Option B
C. Option C
D. Option D
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Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
9. Which of the following accounts could be found in the PQ partnership's general ledger?
I. Due from P
II. P, Drawing
III. Loan Payable to Q
A. I, II
B. I, III
C. II, III
D. I, II, and III
10. The DEF partnership reported net income of $130,000 for the year ended December 31,
2008. According to the partnership agreement, partnership profits and losses are to be
distributed as follows:
How should partnership net income for 2008 be allocated to D, E, and F?
A. Option A
B. Option B
C. Option C
D. Option D
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Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
11. The JPB partnership reported net income of $160,000 for the year ended December 31,
2008. According to the partnership agreement, partnership profits and losses are to be
distributed as follows:
How should partnership net income for 2008 be allocated to J, P, and B?
A. Option A
B. Option B
C. Option C
D. Option D
The APB partnership agreement specifies that partnership net income be allocated as follows:
Average capital balances for the current year were $50,000 for A, $30,000 for P, and $20,000
for B.
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Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
12. Refer to the information given. Assuming a current year net income of $150,000, what
amount should be allocated to each partner?
A. Option A
B. Option B
C. Option C
D. Option D
13. Refer to the information given. Assuming a current year net income of $50,000, what
amount should be allocated to each partner?
A. Option A
B. Option B
C. Option C
D. Option D
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Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
14. RD formed a partnership on February 10, 2009. R contributed cash of $150,000, while D
contributed inventory with a fair value of $120,000. Due to R's expertise in selling, D agreed
that R should have 60 percent of the total capital of the partnership. R and D agreed to
recognize goodwill. What is the total capital of the RD partnership and the capital balance of R
after the goodwill is recognized?
A. Option A
B. Option B
C. Option C
D. Option D
15. A joint venture may be organized as a:
I. Partnership.
II. Corporation.
III. Undivided interest.
A. I only
B. II only
C. I or III only
D. I, II, or III
16. Refer to the above information. Which statement below is correct if a new partner receives a
bonus upon contributing assets into the partnership?
A. B < A and D = C - A
B. B > A and D = C + A
C. A = B and A = D + C
D. B > A and C = D + A
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Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
17. Refer to the above information. Which statement below is correct if the old partners receive
a bonus upon the contribution of assets into the partnership by a new partner?
A. B < A and D = C - A
B. B + A and D > C + A
C. B < A and D = C + A
D. B > A and D = C + A
18. Refer to the above information. Which statement below is correct if goodwill of the old
partners is recognized upon the contribution of assets into the partnership by a new partner?
A. B = A and D < C + A
B. B = A and D > C + A
C. B < A and D = C + A
D. B > A and D < C + A
19. Refer to the above information. Which statement below is correct if a new partner purchases
an interest in capital directly from the old partners?
A. C < D
B. C = D
C. C = D and B = A
D. C < D and B = A
20. Refer to the above information. Which statement below is correct if a new partner's
goodwill is recognized upon contributing assets into the partnership?
A. B = A and D > C + A
B. B < A and D < C + A
C. B > A and D = C + A
D. B > A and D > C + A
21. When a partnership is formed, noncash assets contributed by partners should be recorded:
I. at their respective book values for income tax purposes.
II. at their respective fair values for financial accounting purposes.
A. I only
B. II only
C. Both I and II
D. Neither I nor II
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Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
22. When a new partner is admitted into a partnership and the new partner receives a capital
credit less than the tangible assets contributed, which of the following explains the difference?
I. The new partner's goodwill has been recognized.
II. The old partners received a bonus from the new partner.
A. I only
B. II only
C. Either I or II
D. Neither I nor II
23. When a new partner is admitted into a partnership and the new partner receives a capital
credit greater than the tangible assets contributed, which of the following explains the
difference?
I. The old partners' goodwill is being recognized.
II. The new partner's goodwill is being recognized.
A. I only
B. II only
C. Either I or II
D. Both I and II
24. When a new partner is admitted into a partnership and the capital of the old partners
decreases, which of the following explains the reason for the decrease?
I. Undervalued liabilities were written up to their fair values.
II. Undervalued assets were written up to their fair values.
A. I only
B. II only
C. Both I and II
D. Neither I nor II
25. When a partner retires from a partnership and the retiring partner is paid more than the
capital balance in her account, which of the following explains the difference?
I. The retiring partner is receiving a bonus from the other partners.
II. The retiring partner's goodwill is being recognized.
A. I only
B. II only
C. Either I or II
D. Neither I nor II
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Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
26. When the old partners receive a bonus upon admission of a new partner into a partnership,
the bonus is allocated to:
I. all the partners in their profit and loss sharing ratio.
II. the existing partners in their profit and loss sharing ratio.
A. I only
B. II only
C. Either I or II
D. Neither I nor II
27. When a new partner is admitted into a partnership and the old partners' goodwill is
recognized, the goodwill is allocated to:
I. all the partners in their profit-and-loss-sharing ratio.
II. the old partners in their profit and loss sharing ratio.
A. I only
B. II only
C. Either I or II
D. Neither I nor II
In the RST partnership, Ron's capital is $80,000, Stella's is $75,000, and Tiffany's is $50,000.
They share income in a 3:2:1 ratio, respectively. Tiffany is retiring from the partnership. Each
of the following questions is independent of the others.
28. Refer to the above information. Tiffany is paid $60,000, and no goodwill is recorded. In the
journal entry to record Tiffany's withdrawal:
A. Tiffany, Capital will be credited for $60,000.
B. Ron, Capital will be debited for $5,000.
C. Stella, Capital will be debited for $4,000.
D. Cash will be debited for $60,000.
29. Refer to the above information. Tiffany is paid $60,000, and no goodwill is recorded. What
is the Ron's capital balance after Tiffany withdraws from the partnership?
A. $74,000
B. $71,000
C. $75,000
D. $86,000
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Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
30. Refer to the above information. Tiffany is paid $56,000, and all implied goodwill is
recorded. What is the total amount of goodwill recorded?
A. $0
B. $6,000
C. $30,000
D. $36,000
In the AD partnership, Allen's capital is $140,000 and Daniel's is $40,000 and they share
income in a 3:1 ratio, respectively. They decide to admit David to the partnership. Each of the
following questions is independent of the others.
31. Refer to the information provided above. What amount will David have to invest to give
him one-fifth percent interest in the capital of the partnership if no goodwill or bonus is
recorded?
A. $60,000
B. $36,000
C. $50,000
D. $45,000
32. Refer to the information provided above. Assume that David invests $50,000 for a onefourth interest. Goodwill is to be recorded. The journal to record David's admission into the
partnership will include:
A. a credit to cash for $50,000.
B. a debit to goodwill for $7,500.
C. a credit to David, Capital for $60,000.
D. a credit to David, Capital for $50,000.
33. Refer to the information provided above. Allen and Daniel agree that some of the inventory
is obsolete. The inventory account is decreased before David is admitted. David invests $40,000
for a one-fifth interest. What is the amount of inventory written down?
A. $4,000
B. $20,000
C. $15,000
D. $10,000
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Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
34. Refer to the information provided above. Allen and Daniel agree that some of the inventory
is obsolete. The inventory account is decreased before David is admitted. David invests $40,000
for a one-fifth interest. What are the capital balances of Allen and Daniel after David is
admitted into the partnership?
A. Option A
B. Option B
C. Option C
D. Option D
35. Refer to the information provided above. David directly purchases a one-fifth interest by
paying Allen $34,000 and Daniel $10,000. The land account is increased before David is
admitted. By what amount is the land account increased?
A. $40,000
B. $10,000
C. $36,000
D. $20,000
36. Refer to the information provided above. David directly purchases a one-fifth interest by
paying Allen $34,000 and Daniel $10,000. The land account is increased before David is
admitted. What are the capital balances of Allen and Daniel after David is admitted into the
partnership?
A. Option A
B. Option B
C. Option C
D. Option D
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Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
37. Refer to the information provided above. David invests $40,000 for a one-fifth interest in
the total capital of $220,000. The journal to record David's admission into the partnership will
include:
A. a credit to Cash for $40,000.
B. a debit to Allen, Capital for $3,000.
C. a credit to David, Capital for $40,000.
D. a credit to Daniel, Capital for $1,000.
38. Refer to the information provided above. David invests $40,000 for a one-fifth interest in
the total capital of $220,000. What are the capital balances of Allen and Daniel after David is
admitted into the partnership?
A. Option A
B. Option B
C. Option C
D. Option D
39. Refer to the information provided above. David invests $50,000 for a one-fifth interest.
What amount of goodwill will be recorded?
A. $20,000
B. $4,000
C. $40,000
D. $15,000
40. Which of the following observations is true of an S corporation?
A. It elects to be taxed in the same manner as a corporation.
B. It does not have the burden of double taxation of corporate income.
C. Its shareholders have personal liability for the corporation's obligations.
D. Its primary income source should be passive investments.
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Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
41. A limited liability company (LLC):
I. is governed by the laws of the state in which it is formed.
II. provides liability protection to its investors.
III. does not offer pass-through taxation benefits of partnerships.
A. Both I and III.
B. III
C. Both I and II
D. I, II, and II
42. If A is the total capital of a partnership before the admission of a new partner, B is the total
capital of the partnership after the admission of the new partner, C is the amount of the new
partner's investment, and D is the amount of capital credited to the new partner, then there is:
A. goodwill to the new partner if B > (A + C) and D < C.
B. goodwill to the old partners if B = A + C and D > C.
C. a bonus to the new partner if B = A + C and D > C.
D. neither bonus nor goodwill if B > (A + C) and D > C.
43. The terms of a partnership agreement provide that one of the partners is to receive a salary
allowance of $30,000, plus a bonus of 20 percent of income after deduction of the bonus and
the salary allowance. If income is $150,000, the bonus should be:
A. $18,000
B. $20,000
C. $24,000
D. $30,000
44. The partnership of X and Y shares profits and losses in the ratio of 60 percent to X and 40
percent to Y. For the year 2008, partnership net income was double X's withdrawals. Assume
X's beginning capital balance was $80,000, and ending capital balance (after closing) was
$140,000. Partnership net income for the year was:
A. $120,000.
B. $300,000.
C. $500,000.
D. $600,000.
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Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
45. Shue, a partner in the Financial Brokers Partnership, has a 30 percent share in partnership
profits and losses. Shue's capital account had a net decrease of $100,000 during 2008. During
2008, Shue withdrew $240,000 as withdrawals and contributed equipment valued at $50,000 to
the partnership. What was the net income of the Financial Brokers Partnership for 2008?
A. $633,334
B. $466,666
C. $300,000
D. $190,000
46. Transferable interest of a partner includes all of the following except:
A. the partner's share of the profits and losses of the partnership.
B. the right to receive distributions.
C. the right to receive any liquidating distribution.
D. the authority to transact any of the partnership's business operations.
Essay Questions
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Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
47. Net income for Levin-Tom partnership for 2009 was $125,000. Levin and Tom have agreed
to distribute partnership net income according to the following plan:
Additional Information for 2009 follows:
1. Levin began the year with a capital balance of $75,000.
2. Tom began the year with a capital balance of $100,000.
3. On March 1, Levin invested an additional $25,000 into the partnership.
4. On October 1, Tom invested an additional $20,000 into the partnership.
5. Throughout 2009, each partner withdrew $200 per week in anticipation of partnership net
income. The partners agreed that these withdrawals are not to be included in the computation of
average capital balances for purposes of income distributions.
Required:
a. Prepare a schedule that discloses the distribution of partnership net income for 2009. Show
supporting computations in good form.
b. Prepare the statement of partners' capital at December 31, 2009.
c. How would your answer to part a change if all of the provisions of the income distribution
plan were the same except that the salaries were $45,000 to Levin and $60,000 to Jack?
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Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
48. Paul and Ray sell musical instruments through their partnership. To bring in additional
funds and expertise, they decide to admit Janet to the partnership. Paul's capital is $400,000,
Ray's capital is $200,000, and they share income in a ratio of 7:3, respectively.
Required
Record Janet's admission for each of the following independent situations:
a) Janet invests $180,000 for a one-fourth interest. Goodwill is to be recorded.
b) Paul and Ray agree that some of the inventory is obsolete. The inventory account is
decreased before Janet is admitted. Janet invests $190,000 for a one-fourth interest.
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Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
49. Two sole proprietors, L and M, agreed to form a partnership on January 1, 2009. The trial
balance for each proprietorship is shown below as of January 1, 2009.
The LM partnership will take over the assets and assume the liabilities of the proprietors as of
January 1, 2009.
Required:
a) Prepare a balance sheet, for financial accounting purposes, for the LM partnership as of
January 1, 2009.
b) In addition, assume that M agreed to recognize the goodwill generated by L's business.
Accordingly, M agreed to recognize an amount for L's goodwill such that L's capital equalled
M's capital on January 1, 2009. Given this alternative, how does the balance sheet prepared for
requirement A change?
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Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
50. The PQ partnership has the following plan for the distribution of partnership net income
(loss):
Required:
Calculate the distribution of partnership net income (loss) for each independent situation below
(for each situation, assume the average capital balance of P is $140,000 and of Q is $240,000).
1. Partnership net income is $360,000.
2. Partnership net income is $240,000.
3. Partnership net loss is $40,000.
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Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
51. Miller and Davis, partners in a consulting business, share profits and losses in the ratio of
3:2, respectively. Prior to recording the admission of Shaw as a new partner, Miller has a capital
balance of $80,000, and Davis has a capital balance of $40,000.
Required:
For each of the following independent cases, prepare the journal entry that was made to record
the admission of Shaw into the partnership.
1) Shaw purchased 20 percent of the respective capital balances of Miller and Davis, paying
$20,000 cash directly to each of them.
2) Shaw invested $30,000 cash in the partnership for a 20 percent ownership interest. Total
capital after recording his admission was $150,000.
3) Shaw invested $40,000 cash into the partnership for a 20 percent ownership interest. Total
capital after recording his admission was $160,000.
4) Shaw invested $50,000 into the partnership for a 20 percent interest. Goodwill is to be
recognized.
52. In the JAW partnership, Jane's capital is $100,000, Anne's is $80,000, and William's is
$75,000. They share income in a 3:2:1 ratio, respectively. William is retiring from the
partnership.
Required
Prepare journal entries to record William's withdrawal according to each of the following
independent assumptions:
a. William is paid $80,000, and no goodwill is recorded.
b. William is paid $85,000, and only his share of the goodwill is recorded.
c. William is paid $78,000, and all implied goodwill is recorded.
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Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
53. Apple and Betty are planning on beginning a new business. They plan on forming a
partnership. Apple will contribute $300,000 and will not be working. Betty will be working full
time. They plan on splitting profits equally. They approach you, as an accounting major, to
confirm their thoughts. What do you recommend?
54. The ABC partnership had net income of $100,000 for 2009. They allocate profits and losses
in the ratio 5:3:2. After closing the 12/31/2009 books they discovered that $30,000 was spent on
a piece of land in December 2009 and was expensed. What should happen?
Chapter 15 Partnerships: Formation, Operation, and Changes in Membership
Answer Key
Multiple Choice Questions
1. A partnership is a(n):
I. accounting entity.
II. taxable entity.
A. I only
B. II only
C. Neither I nor II
D. Both I and II
AACSB: Reflective Thinking
AICPA: Decision Making
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Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
2. A partner's tax basis in a partnership is comprised of which of the following items?
I. The partner's tax basis of assets contributed to the partnership.
II. The amount of the partner's liabilities assumed by the other partners.
III. The partner's share of other partners' liabilities assumed by the partnership.
A. I plus II minus III
B. I plus II plus III
C. I minus II plus III
D. I minus II minus III
AACSB: Reflective Thinking
AICPA: Decision Making
In the ABC partnership (to which Daniel seeks admittance), the capital balances of Albert,
Bert, and Connell, who share income in the ratio of 5:3:2 are:
3. Based on the preceding information, if no goodwill or bonus is recorded, how much should
Daniel invest for a 20 percent interest?
A. $400,000
B. $200,000
C. $300,000
D. $250,000
AACSB: Analytic
AICPA: Decision Making
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Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
4. Based on the preceding information, what amount of goodwill will be recorded if Daniel
invests $450,000 for a one-third interest?
A. $0
B. $10,000
C. $50,000
D. $100,000
AACSB: Analytic
AICPA: Decision Making
Jones and Smith formed a partnership with each partner contributing the following items:
Assume that for tax purposes Jones and Smith agree to share equally in the liabilities assumed
by the Jones and Smith partnership.
5. Refer to the above information. What is each partner's tax basis in the Jones and Smith
partnership?
A. Option A
B. Option B
C. Option C
D. Option D
AACSB: Analytic
AICPA: Measurement
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Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
6. Refer to the above information. What is the balance in each partner's capital account for
financial accounting purposes?
A. Option A
B. Option B
C. Option C
D. Option D
AACSB: Analytic
AICPA: Measurement
7. Griffin and Rhodes formed a partnership on January 1, 2009. Griffin contributed cash of
$120,000 and Rhodes contributed land with a fair value of $160,000. The partnership assumed
the mortgage on the land which amounted to $40,000 on January 1. Rhodes originally paid
$90,000 for the land. On July 31, 2009, the partnership sold the land for $190,000. Assuming
Griffin and Rhodes share profits and losses equally, how much of the gain from sale of land
should be credited to Griffin for financial accounting purposes?
A. $0
B. $15,000
C. $35,000
D. $45,000
AACSB: Analytic
AICPA: Decision Making
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Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
8. Which of the following accounts could be found in the general ledger of a partnership?
A. Option A
B. Option B
C. Option C
D. Option D
AACSB: Reflective Thinking
AICPA: Decision Making
9. Which of the following accounts could be found in the PQ partnership's general ledger?
I. Due from P
II. P, Drawing
III. Loan Payable to Q
A. I, II
B. I, III
C. II, III
D. I, II, and III
AACSB: Reflective Thinking
AICPA: Decision Making
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Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
10. The DEF partnership reported net income of $130,000 for the year ended December 31,
2008. According to the partnership agreement, partnership profits and losses are to be
distributed as follows:
How should partnership net income for 2008 be allocated to D, E, and F?
A. Option A
B. Option B
C. Option C
D. Option D
AACSB: Analytic
AICPA: Measurement
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Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
11. The JPB partnership reported net income of $160,000 for the year ended December 31,
2008. According to the partnership agreement, partnership profits and losses are to be
distributed as follows:
How should partnership net income for 2008 be allocated to J, P, and B?
A. Option A
B. Option B
C. Option C
D. Option D
AACSB: Analytic
AICPA: Measurement
The APB partnership agreement specifies that partnership net income be allocated as follows:
Average capital balances for the current year were $50,000 for A, $30,000 for P, and $20,000
for B.
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Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
12. Refer to the information given. Assuming a current year net income of $150,000, what
amount should be allocated to each partner?
A. Option A
B. Option B
C. Option C
D. Option D
AACSB: Analytic
AICPA: Measurement
13. Refer to the information given. Assuming a current year net income of $50,000, what
amount should be allocated to each partner?
A. Option A
B. Option B
C. Option C
D. Option D
AACSB: Analytic
AICPA: Measurement
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Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
14. RD formed a partnership on February 10, 2009. R contributed cash of $150,000, while D
contributed inventory with a fair value of $120,000. Due to R's expertise in selling, D agreed
that R should have 60 percent of the total capital of the partnership. R and D agreed to
recognize goodwill. What is the total capital of the RD partnership and the capital balance of R
after the goodwill is recognized?
A. Option A
B. Option B
C. Option C
D. Option D
AACSB: Analytic
AICPA: Measurement
15. A joint venture may be organized as a:
I. Partnership.
II. Corporation.
III. Undivided interest.
A. I only
B. II only
C. I or III only
D. I, II, or III
AACSB: Analytic
AICPA: Measurement
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Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
16. Refer to the above information. Which statement below is correct if a new partner receives a
bonus upon contributing assets into the partnership?
A. B < A and D = C - A
B. B > A and D = C + A
C. A = B and A = D + C
D. B > A and C = D + A
AACSB: Analytic
AICPA: Decision Making
17. Refer to the above information. Which statement below is correct if the old partners receive
a bonus upon the contribution of assets into the partnership by a new partner?
A. B < A and D = C - A
B. B + A and D > C + A
C. B < A and D = C + A
D. B > A and D = C + A
AACSB: Analytic
AICPA: Decision Making
18. Refer to the above information. Which statement below is correct if goodwill of the old
partners is recognized upon the contribution of assets into the partnership by a new partner?
A. B = A and D < C + A
B. B = A and D > C + A
C. B < A and D = C + A
D. B > A and D < C + A
AACSB: Analytic
AICPA: Decision Making
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Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
19. Refer to the above information. Which statement below is correct if a new partner purchases
an interest in capital directly from the old partners?
A. C < D
B. C = D
C. C = D and B = A
D. C < D and B = A
AACSB: Analytic
AICPA: Decision Making
20. Refer to the above information. Which statement below is correct if a new partner's
goodwill is recognized upon contributing assets into the partnership?
A. B = A and D > C + A
B. B < A and D < C + A
C. B > A and D = C + A
D. B > A and D > C + A
AACSB: Analytic
AICPA: Decision Making
21. When a partnership is formed, noncash assets contributed by partners should be recorded:
I. at their respective book values for income tax purposes.
II. at their respective fair values for financial accounting purposes.
A. I only
B. II only
C. Both I and II
D. Neither I nor II
AACSB: Reflective Thinking
AICPA: Decision Making
15-31
Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
22. When a new partner is admitted into a partnership and the new partner receives a capital
credit less than the tangible assets contributed, which of the following explains the difference?
I. The new partner's goodwill has been recognized.
II. The old partners received a bonus from the new partner.
A. I only
B. II only
C. Either I or II
D. Neither I nor II
AACSB: Reflective Thinking
AICPA: Decision Making
23. When a new partner is admitted into a partnership and the new partner receives a capital
credit greater than the tangible assets contributed, which of the following explains the
difference?
I. The old partners' goodwill is being recognized.
II. The new partner's goodwill is being recognized.
A. I only
B. II only
C. Either I or II
D. Both I and II
AACSB: Reflective Thinking
AICPA: Decision Making
24. When a new partner is admitted into a partnership and the capital of the old partners
decreases, which of the following explains the reason for the decrease?
I. Undervalued liabilities were written up to their fair values.
II. Undervalued assets were written up to their fair values.
A. I only
B. II only
C. Both I and II
D. Neither I nor II
AACSB: Reflective Thinking
AICPA: Decision Making
15-32
Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
25. When a partner retires from a partnership and the retiring partner is paid more than the
capital balance in her account, which of the following explains the difference?
I. The retiring partner is receiving a bonus from the other partners.
II. The retiring partner's goodwill is being recognized.
A. I only
B. II only
C. Either I or II
D. Neither I nor II
AACSB: Reflective Thinking
AICPA: Decision Making
26. When the old partners receive a bonus upon admission of a new partner into a partnership,
the bonus is allocated to:
I. all the partners in their profit and loss sharing ratio.
II. the existing partners in their profit and loss sharing ratio.
A. I only
B. II only
C. Either I or II
D. Neither I nor II
AACSB: Reflective Thinking
AICPA: Decision Making
27. When a new partner is admitted into a partnership and the old partners' goodwill is
recognized, the goodwill is allocated to:
I. all the partners in their profit-and-loss-sharing ratio.
II. the old partners in their profit and loss sharing ratio.
A. I only
B. II only
C. Either I or II
D. Neither I nor II
AACSB: Reflective Thinking
AICPA: Decision Making
15-33
Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
In the RST partnership, Ron's capital is $80,000, Stella's is $75,000, and Tiffany's is $50,000.
They share income in a 3:2:1 ratio, respectively. Tiffany is retiring from the partnership. Each
of the following questions is independent of the others.
28. Refer to the above information. Tiffany is paid $60,000, and no goodwill is recorded. In the
journal entry to record Tiffany's withdrawal:
A. Tiffany, Capital will be credited for $60,000.
B. Ron, Capital will be debited for $5,000.
C. Stella, Capital will be debited for $4,000.
D. Cash will be debited for $60,000.
AACSB: Analytic
AICPA: Measurement
29. Refer to the above information. Tiffany is paid $60,000, and no goodwill is recorded. What
is the Ron's capital balance after Tiffany withdraws from the partnership?
A. $74,000
B. $71,000
C. $75,000
D. $86,000
AACSB: Analytic
AICPA: Measurement
30. Refer to the above information. Tiffany is paid $56,000, and all implied goodwill is
recorded. What is the total amount of goodwill recorded?
A. $0
B. $6,000
C. $30,000
D. $36,000
AACSB: Analytic
AICPA: Measurement
15-34
Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
In the AD partnership, Allen's capital is $140,000 and Daniel's is $40,000 and they share
income in a 3:1 ratio, respectively. They decide to admit David to the partnership. Each of the
following questions is independent of the others.
31. Refer to the information provided above. What amount will David have to invest to give
him one-fifth percent interest in the capital of the partnership if no goodwill or bonus is
recorded?
A. $60,000
B. $36,000
C. $50,000
D. $45,000
AACSB: Analytic
AICPA: Measurement
32. Refer to the information provided above. Assume that David invests $50,000 for a onefourth interest. Goodwill is to be recorded. The journal to record David's admission into the
partnership will include:
A. a credit to cash for $50,000.
B. a debit to goodwill for $7,500.
C. a credit to David, Capital for $60,000.
D. a credit to David, Capital for $50,000.
AACSB: Analytic
AICPA: Measurement
33. Refer to the information provided above. Allen and Daniel agree that some of the inventory
is obsolete. The inventory account is decreased before David is admitted. David invests $40,000
for a one-fifth interest. What is the amount of inventory written down?
A. $4,000
B. $20,000
C. $15,000
D. $10,000
AACSB: Analytic
AICPA: Measurement
15-35
Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
34. Refer to the information provided above. Allen and Daniel agree that some of the inventory
is obsolete. The inventory account is decreased before David is admitted. David invests $40,000
for a one-fifth interest. What are the capital balances of Allen and Daniel after David is
admitted into the partnership?
A. Option A
B. Option B
C. Option C
D. Option D
AACSB: Analytic
AICPA: Measurement
35. Refer to the information provided above. David directly purchases a one-fifth interest by
paying Allen $34,000 and Daniel $10,000. The land account is increased before David is
admitted. By what amount is the land account increased?
A. $40,000
B. $10,000
C. $36,000
D. $20,000
AACSB: Analytic
AICPA: Measurement
15-36
Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
36. Refer to the information provided above. David directly purchases a one-fifth interest by
paying Allen $34,000 and Daniel $10,000. The land account is increased before David is
admitted. What are the capital balances of Allen and Daniel after David is admitted into the
partnership?
A. Option A
B. Option B
C. Option C
D. Option D
AACSB: Analytic
AICPA: Measurement
37. Refer to the information provided above. David invests $40,000 for a one-fifth interest in
the total capital of $220,000. The journal to record David's admission into the partnership will
include:
A. a credit to Cash for $40,000.
B. a debit to Allen, Capital for $3,000.
C. a credit to David, Capital for $40,000.
D. a credit to Daniel, Capital for $1,000.
AACSB: Analytic
AICPA: Measurement
15-37
Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
38. Refer to the information provided above. David invests $40,000 for a one-fifth interest in
the total capital of $220,000. What are the capital balances of Allen and Daniel after David is
admitted into the partnership?
A. Option A
B. Option B
C. Option C
D. Option D
AACSB: Analytic
AICPA: Measurement
39. Refer to the information provided above. David invests $50,000 for a one-fifth interest.
What amount of goodwill will be recorded?
A. $20,000
B. $4,000
C. $40,000
D. $15,000
AACSB: Analytic
AICPA: Measurement
40. Which of the following observations is true of an S corporation?
A. It elects to be taxed in the same manner as a corporation.
B. It does not have the burden of double taxation of corporate income.
C. Its shareholders have personal liability for the corporation's obligations.
D. Its primary income source should be passive investments.
AACSB: Reflective Thinking
AICPA: Decision Making
15-38
Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
41. A limited liability company (LLC):
I. is governed by the laws of the state in which it is formed.
II. provides liability protection to its investors.
III. does not offer pass-through taxation benefits of partnerships.
A. Both I and III.
B. III
C. Both I and II
D. I, II, and II
AACSB: Reflective Thinking
AICPA: Decision Making
42. If A is the total capital of a partnership before the admission of a new partner, B is the total
capital of the partnership after the admission of the new partner, C is the amount of the new
partner's investment, and D is the amount of capital credited to the new partner, then there is:
A. goodwill to the new partner if B > (A + C) and D < C.
B. goodwill to the old partners if B = A + C and D > C.
C. a bonus to the new partner if B = A + C and D > C.
D. neither bonus nor goodwill if B > (A + C) and D > C.
AACSB: Reflective Thinking
AICPA: Decision Making
43. The terms of a partnership agreement provide that one of the partners is to receive a salary
allowance of $30,000, plus a bonus of 20 percent of income after deduction of the bonus and
the salary allowance. If income is $150,000, the bonus should be:
A. $18,000
B. $20,000
C. $24,000
D. $30,000
AACSB: Analytic
AICPA: Measurement
15-39
Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
44. The partnership of X and Y shares profits and losses in the ratio of 60 percent to X and 40
percent to Y. For the year 2008, partnership net income was double X's withdrawals. Assume
X's beginning capital balance was $80,000, and ending capital balance (after closing) was
$140,000. Partnership net income for the year was:
A. $120,000.
B. $300,000.
C. $500,000.
D. $600,000.
AACSB: Analytic
AICPA: Measurement
45. Shue, a partner in the Financial Brokers Partnership, has a 30 percent share in partnership
profits and losses. Shue's capital account had a net decrease of $100,000 during 2008. During
2008, Shue withdrew $240,000 as withdrawals and contributed equipment valued at $50,000 to
the partnership. What was the net income of the Financial Brokers Partnership for 2008?
A. $633,334
B. $466,666
C. $300,000
D. $190,000
AACSB: Analytic
AICPA: Measurement
46. Transferable interest of a partner includes all of the following except:
A. the partner's share of the profits and losses of the partnership.
B. the right to receive distributions.
C. the right to receive any liquidating distribution.
D. the authority to transact any of the partnership's business operations.
AACSB: Reflective Thinking
AICPA: Decision Making
Essay Questions
15-40
Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
47. Net income for Levin-Tom partnership for 2009 was $125,000. Levin and Tom have agreed
to distribute partnership net income according to the following plan:
Additional Information for 2009 follows:
1. Levin began the year with a capital balance of $75,000.
2. Tom began the year with a capital balance of $100,000.
3. On March 1, Levin invested an additional $25,000 into the partnership.
4. On October 1, Tom invested an additional $20,000 into the partnership.
5. Throughout 2009, each partner withdrew $200 per week in anticipation of partnership net
income. The partners agreed that these withdrawals are not to be included in the computation of
average capital balances for purposes of income distributions.
Required:
a. Prepare a schedule that discloses the distribution of partnership net income for 2009. Show
supporting computations in good form.
b. Prepare the statement of partners' capital at December 31, 2009.
c. How would your answer to part a change if all of the provisions of the income distribution
plan were the same except that the salaries were $45,000 to Levin and $60,000 to Jack?
15-41
Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
a)
15-42
Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
AACSB: Analytic
AICPA: Measurement
15-43
Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
48. Paul and Ray sell musical instruments through their partnership. To bring in additional
funds and expertise, they decide to admit Janet to the partnership. Paul's capital is $400,000,
Ray's capital is $200,000, and they share income in a ratio of 7:3, respectively.
Required
Record Janet's admission for each of the following independent situations:
a) Janet invests $180,000 for a one-fourth interest. Goodwill is to be recorded.
b) Paul and Ray agree that some of the inventory is obsolete. The inventory account is
decreased before Janet is admitted. Janet invests $190,000 for a one-fourth interest.
15-44
Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
15-45
Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
AACSB: Analytic
AICPA: Measurement
15-46
Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
49. Two sole proprietors, L and M, agreed to form a partnership on January 1, 2009. The trial
balance for each proprietorship is shown below as of January 1, 2009.
The LM partnership will take over the assets and assume the liabilities of the proprietors as of
January 1, 2009.
Required:
a) Prepare a balance sheet, for financial accounting purposes, for the LM partnership as of
January 1, 2009.
b) In addition, assume that M agreed to recognize the goodwill generated by L's business.
Accordingly, M agreed to recognize an amount for L's goodwill such that L's capital equalled
M's capital on January 1, 2009. Given this alternative, how does the balance sheet prepared for
requirement A change?
15-47
Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
a)
b) Assets change due to the addition of goodwill of $34,000. Total assets are now $1,128,000
($1,094,000 + $34,000 goodwill).
L, Capital and M, Capital are each $294,000 if L's goodwill is recognized. Total capital is
$588,000, and total liabilities and capital amount to $1,128,000.
AACSB: Analytic
AICPA: Measurement
15-48
Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
50. The PQ partnership has the following plan for the distribution of partnership net income
(loss):
Required:
Calculate the distribution of partnership net income (loss) for each independent situation below
(for each situation, assume the average capital balance of P is $140,000 and of Q is $240,000).
1. Partnership net income is $360,000.
2. Partnership net income is $240,000.
3. Partnership net loss is $40,000.
15-49
Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
Situation 1: Net income is $360,000
Situation 2: Net income is $240,000
Situation 3: Net loss is $40,000
AACSB: Analytic
AICPA: Measurement
15-50
Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
51. Miller and Davis, partners in a consulting business, share profits and losses in the ratio of
3:2, respectively. Prior to recording the admission of Shaw as a new partner, Miller has a capital
balance of $80,000, and Davis has a capital balance of $40,000.
Required:
For each of the following independent cases, prepare the journal entry that was made to record
the admission of Shaw into the partnership.
1) Shaw purchased 20 percent of the respective capital balances of Miller and Davis, paying
$20,000 cash directly to each of them.
2) Shaw invested $30,000 cash in the partnership for a 20 percent ownership interest. Total
capital after recording his admission was $150,000.
3) Shaw invested $40,000 cash into the partnership for a 20 percent ownership interest. Total
capital after recording his admission was $160,000.
4) Shaw invested $50,000 into the partnership for a 20 percent interest. Goodwill is to be
recognized.
AACSB: Analytic
AICPA: Measurement
15-51
Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
52. In the JAW partnership, Jane's capital is $100,000, Anne's is $80,000, and William's is
$75,000. They share income in a 3:2:1 ratio, respectively. William is retiring from the
partnership.
Required
Prepare journal entries to record William's withdrawal according to each of the following
independent assumptions:
a. William is paid $80,000, and no goodwill is recorded.
b. William is paid $85,000, and only his share of the goodwill is recorded.
c. William is paid $78,000, and all implied goodwill is recorded.
15-52
Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
15-53
Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
AACSB: Analytic
AICPA: Measurement
53. Apple and Betty are planning on beginning a new business. They plan on forming a
partnership. Apple will contribute $300,000 and will not be working. Betty will be working full
time. They plan on splitting profits equally. They approach you, as an accounting major, to
confirm their thoughts. What do you recommend?
Students should recognize that partners can agree to any form of profit allocation. However,
since one partner, Apple, has contributed money and Betty hasn't, they might want to consider
some form of interest on the capital balance. Also, since one partner, Betty, is working full
time, Apple is not, they might want to consider having a salary or a bonus opportunity for
Apple.
AACSB: Communication
AICPA: Critical Thinking
15-54
Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
54. The ABC partnership had net income of $100,000 for 2009. They allocate profits and losses
in the ratio 5:3:2. After closing the 12/31/2009 books they discovered that $30,000 was spent on
a piece of land in December 2009 and was expensed. What should happen?
Since the books are closed then the correction must be made against the capital accounts. The
following journal entry would be made:
AACSB: Analytic
AICPA: Critical Thinking
15-55