TEST BANK
CHAPTER 14
Partnership Accounting and Reporting
MULTIPLE CHOICE
1.
Topic: Partnership characteristics
LO 1
Which one of the following is not a characteristic of a general partnership?
a.
b.
c.
d.
ANS:
2.
d
Topic: Partnership characteristics
LO 1
Joint and several liability in a partnership means that:
a.
b.
d.
Each partner has personal liability for partnership obligations.
Each partner’s personal liability for partnership obligations is limited to their initial
investment in the partnership.
Each partner’s personal liability for partnership obligations is limited to the balance in
their capital account.
Partners are responsible for their own actions but not the actions of the other partners.
ANS:
a
c.
3.
A partner has the right to participate in management, but is not a co-owner of
partnership property.
A partnership is an entity distinct from the individual partners.
Any partner may legally enter a contract that also binds the other partners.
Partnership income is separately taxed.
Topic: Partnership characteristics
LO 1
Most professional organizations, such as CPA firms, organize as:
a.
b.
c.
d.
Limited liability corporations
Professional corporations
Publicly traded partnerships
Limited liability partnerships
ANS:
d
Test Bank, Chapter 14
©Cambridge Business Publishers, 2016
14-1
4.
5.
6.
Topic: Partnership characteristics
LO 1
Revisions to the Uniform Partnership Act in the 1990s:
a.
b.
c.
d.
Gave each partner the right to dissolve the partnership at any time
Established the partnership as a separate entity
Required each partner to be liable for all of the debts of the partnership
Sheltered a partner’s personal assets from partnership creditors
ANS:
b
Topic: Limited partnerships
LO 1
In a limited partnership, the limited partners:
a.
b.
c.
d.
Cannot share in partnership profits
Only receive a fixed periodic payment in return for their investment
Have no right to participate in management
Have no liability for partnership obligations
ANS:
c
Topic: Relations among partners
LO 1
Absent a separate agreement, the Revised Uniform Partnership Act provides for all of the
following except:
a.
b.
c.
d.
ANS:
7.
No person can become a member of the partnership without the consent of all partners.
Disagreements arising as to ordinary matters connected with partnership business may
be decided by a majority of the partners.
Partners have the right to receive reasonable compensation for services performed for
partnership operations.
A partner who makes a payment beyond the amount of capital which he/she agreed to
contribute shall be paid interest from the date of payment.
c
Topic: Relations among partners
LO 1
Unless the partnership agreement has a different specific arrangement, partnership income is
allocated between partners:
a.
b.
c.
d.
In proportion to their initial capital investment
Equally
In proportion to their current capital balance
On the basis of their involvement with partnership management
ANS:
b
©Cambridge Business Publishers, 2016
14-2
Advanced Accounting, 3rd Edition
8.
9.
10.
11.
Topic: Partner liability
LO 1
If a CPA firm is organized as an LLP and an individual partner is involved in a negligent audit,
another partner in the same CPA firm is personally liable:
a.
b.
c.
d.
Always
If the partner operates out of the same office
If the partner was involved in the audit in a supervisory role
Never
ANS:
c
Topic: Limited partnerships
LO 1
Which statement is false concerning attributes of limited partnerships?
a.
b.
c.
d.
There has to be at least one general partner.
Limited partners cannot be limited in liability for partnership obligations.
Limited partners have the right to a specified share of partnership income or loss.
The general partner(s) have the right to participate in managing the partnership.
ANS:
b
Topic: Limited partnerships
LO 1
Unlike a limited liability company (LLC), in a limited liability partnership (LLP):
a.
b.
c.
d.
Corporations can be owners.
Partnership income is passed through to its owners.
At least one of the managing partners must be liable for partnership obligations.
Partnership income is taxed separately.
ANS:
c
Topic: Limited partnerships
LO 1
The distinguishing feature of a master limited partnership (MLP) is that:
a.
b.
c.
d.
Its income must come mostly from tech-related services.
Partnership income is not taxed separately.
Partnership income is defined as the amount of cash distributed to partners.
Partnership shares trade on markets.
ANS:
d
Test Bank, Chapter 14
©Cambridge Business Publishers, 2016
14-3
12.
13.
Topic: Partnership reporting issues
LO 1
A distribution to a partner is reported as:
a.
b.
c.
d.
A reduction in his or her capital account
A charge to dividends, a temporary account closed to partnership retained income
An expense, reducing partnership income
A deferred outflow, amortized to expense over time
ANS:
a
Topic: Measuring partnership income
LO 1
Which of the following is false regarding the measurement of partnership income?
a.
b.
c.
14.
d.
Partnerships employ the same revenue and expense recognition criteria as corporations.
Salaries to partners are deducted as expenses in measuring partnership income.
Interest allocated to partners is not deducted as an expense in measuring partnership
income.
Partnerships do not report income tax expense.
ANS:
b
Topic: Consolidation of partnerships
LO 1
A corporation has a financial relationship with a limited partnership. It is likely to include the
accounts of the partnership in its financial statements (i.e., consolidate the partnership) if the
corporation:
a.
b.
c.
d.
Owns the majority of partnership shares
Is the general partner
Has kick-out or participating rights
Is a limited partner
ANS:
b
©Cambridge Business Publishers, 2016
14-4
Advanced Accounting, 3rd Edition
Use the following information to answer Questions 15 – 17.
Casper and Dold decide to form a partnership. Casper contributes $500,000 in cash. Dold contributes
buildings and equipment with a fair market value of $800,000, subject to a mortgage of $100,000, which
the partnership assumes.
15.
16.
Topic: Partnership formation
LO 2
If each partner's capital account is initially set equal to net assets invested at fair market value,
the entry to record the partnership formation includes the following:
a.
b.
c.
d.
A credit to Casper’s capital account for $650,000
A credit to Casper’s capital account for $400,000
A credit to Dold’s capital account for $700,000
A credit to Dold’s capital account for $600,000
ANS:
c
The entry to record the formation of the partnership is:
Cash
Buildings & equipment
Mortgage payable
Capital—Casper
Capital—Dold
500,000
800,000
100,000
500,000
700,000
Topic: Partnership formation, bonus method
LO 2
Assume the partners specify an agreed-upon percentage in the initial partner capital, as follows:
50% to Casper, and 50% to Dold. If the bonus approach to partnership formation is used, Dold’s
initial capital balance will be:
a.
b.
c.
d.
$600,000
$700,000
$650,000
$625,000
ANS:
a
The total partnership capital is $1,200,000 ($500,000 in cash plus $800,000 in property
less $100,000 mortgage); Dold receives 50% of $1,200,000, or $600,000.
Test Bank, Chapter 14
©Cambridge Business Publishers, 2016
14-5
17.
18.
Topic: Partnership formation, goodwill method
LO 2
Assume the partners specify an agreed-upon percentage in the initial partner capital, as follows:
50% to Casper, and 50% to Dold. If the goodwill approach to partnership formation is used, the
initial entry to record the formation of the partnership will recognize goodwill of:
a.
b.
c.
d.
$350,000
$300,000
$250,000
$200,000
ANS:
d
If Dold’s fair value contribution of $700,000 is equal to a 50% interest, then the total
partnership capital must be $700,000/0.5 = $1,400,000. Fair value of net assets
contributed is $1,200,000 (cash and property of $1,300,000 less mortgage of $100,000).
Therefore goodwill is $1,400,000 – $1,200,000 = $200,000.
Topic: Formation of a partnership
LO 2
A partnership is formed with four partners. Each partner invests net assets with a different fair
value, but they are each given a 25% capital percentage. Which of the following statements is
true?
a.
b.
c.
d.
ANS:
19.
Using the bonus method, the partners will have different initial capital balances.
Total capital balances will be the same whether the bonus or goodwill method is used.
Because the investments are unequal, it is not possible to set each partner’s capital
balance equal to the amount invested.
The capital balances will be equal regardless of whether the bonus or goodwill method is
used.
d
Topic: Partnership income allocation
LO 3
A partnership’s income-sharing ratio applies to:
a.
b.
c.
d.
Partnership income after salaries and interest are deducted
Partnership income before salaries are deducted but after interest is deducted
Partnership income after salaries are deducted but before interest is deducted
Partnership income before both salaries and interest are deducted
ANS:
a
©Cambridge Business Publishers, 2016
14-6
Advanced Accounting, 3rd Edition
20.
21.
Topic: Partnership income
LO 3
The interest component of partnership income allocation is usually based on a percentage of:
a.
b.
c.
d.
Salary
Weighted average invested capital
Partnership income
Partnership income before deducting salaries and interest
ANS:
b
Topic: Partnership income
LO 3
Which statement is true concerning the sharing of income in a partnership?
a.
b.
c.
d.
ANS:
22.
The Revised Uniform Partnership Act requires that partners share partnership income
equally.
The Revised Uniform Partnership requires a partnership to specify a different sharing
rule for losses than for profits.
A partnership agreement specifying unequal sharing of profits takes precedence over
the specifications of the Revised Uniform Partnership Act.
The Revised Uniform Partnership Act is silent regarding income sharing; the partnership
agreement is required to specify an income sharing rule.
c
Topic: Partnership income allocation
LO 3
Xun, Yue and Zhuo have interests in XYZ Partnership. Partnership income for the year is
$400,000. The partnership agreement specifies that Xun is to receive an annual salary of
$212,500, Yue is to receive an annual salary of $42,500, and Zhuo is to receive an annual salary
of $170,000. Any remaining income or loss is to be divided between the three partners in a
1:1:2 ratio.
Salaries are to be fully implemented. Partnership income allocated to Zhuo is:
a.
b.
c.
d.
$200,000
$182,500
$170,000
$157,500
ANS:
d
Zhuo will receive $170,000 salary, less 1/2 of the $25,000 loss after salaries are
deducted, or a total of $157,500.
Test Bank, Chapter 14
©Cambridge Business Publishers, 2016
14-7
23.
Topic: Partnership income allocation
LO 3
Xun, Yue and Zhuo have interests in XYZ Partnership. Partnership income for the year is
$400,000. The partnership agreement specifies that Xun is to receive an annual salary of
$212,500, Yue is to receive an annual salary of $42,500, and Zhuo is to receive an annual salary
of $170,000. Any remaining income or loss is to be divided between the three partners in a
1:1:2 ratio. Salaries are to be proportionately implemented.
Partnership income allocated to Zhuo is:
24.
a.
b.
c.
d.
$170,000
$160,000
$180,000
$200,000
ANS:
b
The partners will only receive salary, since partnership income is lower than fully
implemented salaries. Zhuo will receive a proportionate share of total salary,
($170,000/$425,000) x $400,000 = $160,000.
Topic: Partnership income allocation
LO 3
Jing, Kang and Liang have interests in the JKL Partnership. Partnership income for the year is
$350,000. The partnership agreement specifies that partnership income is to be allocated as
follows: salaries of $100,000 to Jing, $50,000 to Kang, and $50,000 to Liang; a bonus of 20% of
partnership income, after deducting salaries and bonus, to Kang, and the remainder allocated
equally between the three partners.
Kang's bonus for the year is:
a.
b.
c.
d.
$37,500
$30,000
$25,000
$27,500
ANS:
c
B = Bonus to Kang
B = ($350,000 – $200,000 – B) x 20%
B = $30,000 – 0.2B
B = $25,000
©Cambridge Business Publishers, 2016
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Advanced Accounting, 3rd Edition
25.
Topic: Partnership income allocation
LO 3
Anh, Byun and Chea have interests in the ABC Partnership. Partnership income for the year is
$200,000. The partnership agreement specifies that partnership income is to be allocated as
follows: salaries of $50,000 to Anh, $25,000 to Byun, and $35,000 to Chea; a bonus of 50% of
partnership income, after deducting salaries and bonus, to Byun, and the remainder allocated
equally between the three partners.
The total income allocation to Byun is:
26.
a.
b.
c.
d.
$ 75,000
$ 85,000
$ 95,000
$105,000
ANS:
a
B = Bonus to Byun
B = ($200,000 – $110,000 – B) x 50%
B = $45,000 – 0.5B
B = $30,000
Remaining unallocated income after salaries and bonus = $200,000 – $110,000 –
$30,000 = $60,000
Byun’s total allocation = $25,000 + $30,000 + ($60,000/3) = $75,000
Topic: Partnership income allocation
LO 3
A partnership agreement specifies that each partner is to receive 20 percent interest on their
weighted average capital balance for the year. Suppose a partner’s capital account starts the
year with a balance of $200,000. On April 1, $25,000 is withdrawn. On July 1, $40,000 is
withdrawn. On September 1, $30,000 is invested.
How much partnership income for the year will be allocated to the partner for interest?
a.
b.
c.
d.
$36,500
$34,850
$35,750
$34,250
ANS:
d
$200,000(3/12) + $175,000(3/12) + $135,000(2/12) + $165,000(4/12)
= $171,250 $171,250 x 20%
= $34,250
Test Bank, Chapter 14
©Cambridge Business Publishers, 2016
14-9
27.
Topic: Partnership income allocation
LO 3
A partnership agreement specifies that each partner is to receive 25 percent interest on their
weighted average capital balance for the year. Suppose a partner’s capital account starts the
year with a balance of $150,000. On May 1, $20,000 is withdrawn. On August 1, $41,000 is
invested.
On December 1, $21,000 is withdrawn. How much partnership income for the year will be
allocated to the partner for interest?
a.
b.
c.
d.
$37,600
$36,250
$38,000
$37,500
ANS:
c
$150,000(4/12) + $130,000(3/12) + $171,000(4/12) + $150,000(1/12)
= $152,000 $152,000 x 25%
= $38,000
Use the following information to answer Questions 28-31.
Bouchard, Caron and Dion own interests in the BCD Partnership. Their current capital account balances
are as follows:
Bouchard
Caron
Dion
$350,000
300,000
200,000
Partnership income is shared as follows: 40% to Bouchard, 35% to Caron, and 25% to Dion.
Audet buys a 20% interest in the partnership by acquiring 20% of each existing partner's interest, paying
the three partners a total of $225,000.
28.
Topic: Admission of new partner by purchasing existing interest
LO 4
Using the transfer of capital interests approach, Audet’s initial capital balance after entering the
partnership is:
a.
b.
c.
d.
$225,000
$170,000
$215,000
$200,000
ANS:
b
20% x ($350,000 + $300,000 + $200,000) = $170,000
©Cambridge Business Publishers, 2016
14-10
Advanced Accounting, 3rd Edition
29.
30.
31.
Topic: Admission of new partner by purchasing existing interest
LO 4
Using the transfer of capital interests approach, Bouchard’s capital balance immediately
following admission of Audet is:
a.
b.
c.
d.
$285,500
$260,000
$350,000
$280,000
ANS:
d
80% x $350,000 = $280,000
Topic: Admission of new partner by purchasing existing interest
LO 4
Using the recognition of implied goodwill approach, implied goodwill is:
a.
b.
c.
d.
$1,125,000
$ 900,000
$ 275,000
$ 45,000
ANS:
c
Implied goodwill is $225,000/0.20 = $1,125,000 – $850,000 = $275,000
Topic: Admission of new partner by purchasing existing interest
LO 4
Using the recognition of implied goodwill approach, Caron’s capital balance after the addition of
Audet to the partnership will be:
a.
b.
c.
d.
$317,000
$396,250
$492,000
$252,600
ANS:
a
Caron receives 35% of $275,000 = $96,250 in goodwill.
Caron then gives up 20% of the new capital balance of $300,000 + $96,250 = $396,250,
resulting in a balance of 80% x $396,250 = $317,000.
Test Bank, Chapter 14
©Cambridge Business Publishers, 2016
14-11
32.
Topic: Admission of new partner by purchasing existing interest
LO 4
Which of the following is true regarding the admission of a new partner by purchase of an
existing partnership interest?
a.
b.
c.
d.
ANS:
Using the transfer of capital interests approach, total partnership capital increases.
Using the transfer of capital interests approach, partnership capital of existing partners
does not change.
Using the implied goodwill approach, goodwill equals the new partner’s investment
divided by his/her capital percentage.
Using the implied goodwill approach, the recognized goodwill is shared among only the
existing partners.
d
Use the following information to answer Questions 33-37.
The capital balances of the FGH Partnership are as follows:
Fortier
Gauthier
Houle
$ 120,000
75,000
225,000
The partners' income sharing ratio is: Fortier, 35%; Gauthier, 45%; Houle, 20%.
Escoffier joins the partnership by contributing $150,000 to the partnership for a 25% interest in the
partnership. Assume the partnership’s identifiable net assets are carried at amounts approximating fair
value.
33.
Topic: Admission of new partner by investment of new capital; bonus
LO 4
If the bonus approach is used, Escoffier’s capital balance is:
a.
b.
c.
d.
$136,500
$105,000
$142,500
$150,000
ANS:
c
25% ($420,000 + $150,000) = $142,500
©Cambridge Business Publishers, 2016
14-12
Advanced Accounting, 3rd Edition
34.
35.
36.
Topic: Admission of new partner by investment of new capital; bonus
LO 4
If the bonus approach is used, Houle’s capital balance after the admission of Escoffier is:
a.
b.
c.
d.
$223,500
$226,500
$232,000
$225,000
ANS:
b
The $7,500 difference ($150,000 – $142,500) between the amount credited to Escoffier
and his contribution to the partnership is an increase to the existing partners' capital
accounts; Houle’s new balance is $225,000 + (20% x $7,500) = $226,500.
Topic: Admission of new partner by investment of new capital: goodwill
LO 4
If the goodwill approach is used to record the admission of Escoffier, goodwill will be recorded
on the books of the partnership in the amount of:
a.
b.
c.
d.
$75,000
$60,000
$45,000
$30,000
ANS:
d
Total value implied by Escoffier’s investment = $150,000/0.25 = $600,000
Goodwill = $600,000 – ($420,000 + $150,000) = $30,000
Topic: Admission of new partner by investment of new capital: goodwill
LO 4
If the goodwill approach is used to record the admission of Escoffier, Gauthier’s capital balance
immediately after the addition of Escoffier is:
a.
b.
c.
d.
$88,500
$61,500
$75,000
$95,250
ANS:
a
$75,000 + (45% x $30,000) = $88,500
Test Bank, Chapter 14
©Cambridge Business Publishers, 2016
14-13
37.
38.
Topic: Admission of new partner by investment of new capital: goodwill
LO 4
Now assume Escoffier paid $100,000 for a 25% interest in the partnership, and the goodwill
method of admission is used. Goodwill will be recorded on the partnership books in the amount
of:
a.
b.
c.
d.
$ 5,000
$50,000
$44,500
$40,000
ANS:
d
Escoffier pays $100,000 for a ($420,000 + $100,000) x 25% = $130,000 share of
partnership net assets. The total value of the firm implied by existing capital =
$420,000/0.75 = $560,000. Escoffier’s share of total value is (25% x $560,000) =
$140,000. Therefore, goodwill = $140,000 – $100,000 = $40,000.
Topic: Admission of new partner
LO 4
Which of the following statements is false concerning a comparison of the bonus and goodwill
methods of recording admission of a new partner by investment of new capital?
a.
b.
c.
d.
ANS:
39.
The goodwill method will typically result in a larger total partnership capital than the
bonus method.
When the investment by the new partner exceeds that partner's share of the firm's total
capital, the existing partners will receive either a bonus or goodwill, depending on
whether the bonus or goodwill method is used.
Both the bonus and goodwill methods deal with the presence of unrecorded assets in
the new partnership, as indicated by the amount invested by the new partner.
While the bonus method recognizes a new basis of asset valuation when a new partner
invests assets in the partnership, the goodwill method does not.
d
Topic: Retirement of partner
LO 5
The Uniform Partnership Act uses what term to characterize a change in partnership ownership
whereby a partner leaves the partnership?
a.
b.
c.
d.
Retirement
Dissociation
Dissolution
Recapitalization
ANS:
b
©Cambridge Business Publishers, 2016
14-14
Advanced Accounting, 3rd Edition
40.
Topic: Retirement of partner: purchase with personal assets
LO 5
Partners in MNO Partnership have capital accounts and income-sharing percentages as follows:
Partner M
Partner N
Partner O
Totals
Capital Balance
$160,000
400,000
140,000
$700,000
Income Share
20%
50%
30%
100%
Partners M and N buy Partner O’s interest for $210,000, using their personal assets. The
partners retain their relative income-sharing ratio.
After this transaction, Partner M’s capital balance is:
41.
a.
b.
c.
d.
$188,000
$220,000
$200,000
$202,000
ANS:
c
$160,000 + ($140,000 x 2/7) = $200,000
Topic: Retirement of partner: purchase with personal assets
LO 5
J, K and L have been partners for many years. L decides to retire and J and K acquire his
partnership interest for $160,000, using their personal assets. The partners' capital balances
before L's retirement and their income/loss sharing percentages are as follows:
Partner
J
K
L
Totals
Capital Balance
$ 50,000
100,000
125,000
$275,000
Income Share
20%
30%
50%
100%
Assuming J and K maintain their relative income sharing ratio, subsequent to L's departure, K's
capital balance will be:
a.
b.
c.
d.
$148,000
$175,000
$183,333
$196,000
ANS:
b
$125,000 x 3/5 = $75,000 + $100,000 = $175,000
Test Bank, Chapter 14
©Cambridge Business Publishers, 2016
14-15
42.
Topic: Retirement of partner: purchase with partnership assets
LO 5
A partnership has four partners. One partner retires, and is paid using partnership assets. The
payment made to a retiring partner:
a.
b.
c.
43.
d.
Always equals the balance in the retiring partner’s capital account
Must be defined in the partnership agreement
Equals one fourth of total partnership net assets, unless the partnership agreement
states otherwise
Is defined by either the partnership agreement or as agreed at the time of retirement
ANS:
d
Topic: Retirement of partner through purchase with partnership assets: bonus method
LO 5
Elander, Flodin and Gustafsson are partners providing engineering services. Relevant data
regarding income-sharing relationships and capital balances are as follows:
Partner
Elander
Flodin
Gustafsson
Totals
Capital Balance
$ 350,000
80,000
250,000
$ 680,000
Income Share
45%
35%
20%
100%
Gustafsson decides to retire and receives $200,000 in cash from the partnership.
If the bonus method is used to account for the retirement, Elander's capital balance subsequent
to Gustafsson's retirement is:
a.
b.
c.
d.
$372,500
$381,875
$378,125
$321,875
ANS:
c
Elander's capital balance increases by (45%/80%) x $50,000 bonus to the remaining
partners, or $28,125.
$350,000 + $28,125 = $378,125
©Cambridge Business Publishers, 2016
14-16
Advanced Accounting, 3rd Edition
Use the following information to answer Questions 44 – 46.
Elander, Flodin and Gustafsson are partners providing engineering services. Relevant data regarding
income-sharing relationships and capital balances are as follows:
Partner
Elander
Flodin
Gustafsson
Totals
Capital Balance
$ 350,000
80,000
250,000
$ 680,000
Income Share
50%
25%
25%
100%
Flodin retires and receives $100,000 in cash from the partnership. Partnership net assets are recorded at
amounts approximating fair value.
44.
45.
Topic: Retirement of partner through purchase with partnership assets: partial goodwill
approach
LO 5
If the excess payment is attributed entirely to goodwill and the partial goodwill approach is used,
goodwill will be recognized at:
a.
b.
c.
d.
$ 80,000
$ 20,000
$100,000
$ 60,000
ANS:
b
Goodwill = $100,000 – $80,000 = $20,000
Topic: Retirement of a partner through purchase with partnership assets: total goodwill
method
LO 5
If the excess payment is attributed entirely to goodwill, and the total goodwill approach is used,
Elander’s capital balance after Flodin's departure is:
a.
b.
c.
d.
$390,000
$403,333
$430,000
$410,667
ANS: a
$20,000/0.25 = $80,000 total goodwill
Elander’s share of goodwill = 50% x $80,000 = $40,000
$350,000 + $40,000 = $390,000
Test Bank, Chapter 14
©Cambridge Business Publishers, 2016
14-17
46.
47.
Topic: Retirement of a partner through purchase with partnership assets: partial goodwill
approach
LO 5
Using the partial goodwill approach, Gustafsson's capital balance, after Flodin's departure, is:
a.
b.
c.
d.
$270,000
$254,000
$250,000
$256,667
ANS:
c
The goodwill is credited only to the retiring partner.
Topic: Retirement of a partner
LO 5
Dan, Evan and Flora are partners who share income in a 5:4:3 ratio. Each has a capital balance of
$150,000. Dan retires from the partnership and is paid $180,000. In recording the retirement,
no change was made to Evan's capital account.
Which method of recording the retirement was used?
48.
a.
b.
c.
d.
Bonus
Partial goodwill
Total goodwill
Transfer of assets
ANS:
b
Topic: Retirement of partner
LO 5
Mallory, who has a 40 percent interest in a partnership, retires and receives a settlement
payment that is $25,000 less than her capital balance.
Which of the following statements is correct?
a.
b.
c.
d.
Under the bonus method, the capital of the remaining partners will increase.
Under the partial goodwill method, partnership assets will be written up by $25,000.
Under the total goodwill method, partnership assets will be written down by $25,000.
Under the bonus, partial goodwill, and total goodwill methods, the capital of the
remaining partners will change.
ANS:
a
©Cambridge Business Publishers, 2016
14-18
Advanced Accounting, 3rd Edition
49.
Topic: Partnership liquidation
LO 6
In a partnership liquidation, when a partner has a capital deficiency, the right of offset:
a.
b.
c.
50.
d.
Allows the partner to invest personal assets to bring the capital balance to zero
Reclassifies a partnership loan payable to the partner as part of her capital balance
Requires all the other partners to have positive capital balances, to absorb the partner’s
capital deficiency
Allows the partner to neutralize the deficiency using previously invested personal assets
ANS:
b
Topic: Partnership liquidation
LO 6
If an individual partner is insolvent and the partnership is being liquidated, a creditor may
petition the court to specify that any partnership payments to which the individual partner
becomes entitled shall be made to the creditor.
This specification is called:
51.
a.
b.
c.
d.
A charging order
Foreclosure
The rule of dual priorities
The right of offset
ANS:
a
Topic: Partnership liquidation
LO 6
Which statement is true concerning the safe payment and cash distribution plan approaches to
liquidation?
a.
b.
c.
d.
ANS:
Both approaches are used in simple liquidations.
The safe payment approach determines how the current available cash is distributed,
but not future payments.
The safe payment approach is more conservative than the cash distribution plan.
The safe payment approach uses the right of offset, but the cash distribution plan does
not.
b
Test Bank, Chapter 14
©Cambridge Business Publishers, 2016
14-19
52.
Topic: Partnership simple liquidation
LO 6
Attah and Boro are partners who share income in a 2:3 ratio, and have capital balances of
$150,000 and $180,000 respectively. Book value of total assets is $500,000. Sale of all assets
results in total available cash of $440,000.
The amount to be distributed to Attah upon liquidation is:
a.
b.
c.
d.
$150,000
$176,000
$132,000
$126,000
ANS:
d
Loss on asset sale = $440,000 – $500,000 = $60,000
Capital balances:
Prior balance
Allocation of $60,000 loss
Balance
53.
Attah
$150,000
(24,000)
$126,000
Boro
$180,000
(36,000)
$144,000
Topic: Partnership simple liquidation
LO 6
Cisse and Diallo are partners who share income in a 2:3 ratio, and have capital balances of
$50,000 and $120,000 respectively. Book value of total assets is $300,000. Sale of all assets
results in total available cash of $160,000.
Assuming no further investment by either partner, the amount to be distributed to Diallo upon
liquidation is:
a.
b.
c.
d.
$160,000
$ 36,000
$ 30,000
$ 24,000
ANS:
c
Loss on asset sale = $160,000 – $300,000 = $140,000
Capital balances:
Prior balance
Allocation of $140,000 loss
Balance
Allocate Cisse’s deficiency
Balance
©Cambridge Business Publishers, 2016
14-20
Cisse
$ 50,000
(56,000)
(6,000)
6,000
$
0
Diallo
$120,000
(84,000)
36,000
(6,000)
$ 30,000
Advanced Accounting, 3rd Edition
Use the following information to answer Questions 54 and 55.
The balance sheet of the XYZ Partnership appears as follows:
Cash
Loan receivable—X
Other assets
Total
$ 40,000
30,000
450,000
______
$520,000
Loan payable—Z
Other liabilities
Capital:
X
Y
Z
Total
$ 20,000
110,000
50,000
260,000
80,000
$520,000
The partners share income in a 2:5:3 ratio. The other assets are sold for $150,000, and no other capital
is contributed by any of the partners.
54.
55.
Topic: Partnership liquidation: cash distribution
LO 6
How much total cash will be distributed to partner X?
a.
b.
c.
d.
$-0$10,000
$30,000
$50,000
ANS:
a
Topic: Partnership liquidation: cash distribution
LO 6
How much total cash will be distributed to partner Y?
a.
b.
c.
d.
$-0$40,000
$80,000
$85,000
ANS:
c
Notes for Questions 54 and 55:
Capital balances:
Prior balance
Allocation of $300,000 loss
Offset loan receivable from X and loan payable to Z
Balance
Allocate X's deficiency
Balance
Allocate Z's deficiency
Test Bank, Chapter 14
X
$ 50,000
(60,000)
(30,000)
(40,000)
40,000
0
______
$
0
Y
$ 260,000
(150,000)
______
110,000
(25,000)
85,000
(5,000)
$ 80,000
Z
$ 80,000
(90,000)
20,000
10,000
(15,000)
(5,000)
5,000
$
0
©Cambridge Business Publishers, 2016
14-21
56.
Topic: Partnership liquidation: safe payment
LO 6
The ST partnership is undergoing an installment liquidation. S and T share income in a 2:3 ratio,
and have current capital balances of $140,000 and $180,000, respectively. $50,000 in cash is
available for distribution.
Assuming all liabilities have been paid, what is the amount of the safe payment to partner S?
a.
b.
c.
d.
$-0$20,000
$32,000
$38,000
ANS:
c
Capital balances:
Prior balance
Assume $270,000 loss on remaining assets
Cash distribution
57.
S
$140,000
(108,000)
$ 32,000
T
$180,000
(162,000)
$ 18,000
Topic: Partnership liquidation: safe payment
LO 6
The UV partnership is undergoing an installment liquidation. U and V share income in a 3:2 ratio,
and have current capital balances of $120,000 and $130,000, respectively. $25,000 in cash is
available for distribution.
Assuming all liabilities have been paid, what is the amount of the safe payment to partner U?
a.
b.
c.
d.
$-0$15,000
$25,000
$ 5,000
ANS:
a
Prior balance
Assume $225,000 loss on remaining assets
Balance
Deficiency offset
Cash distribution
©Cambridge Business Publishers, 2016
14-22
U
$120,000
(135,000)
(15,000)
15,000
$
0
V
$130,000
(90,000)
40,000
(15,000)
$ 25,000
Advanced Accounting, 3rd Edition
58.
Topic: Partnership liquidation: safe payment
LO 6
The FGH Partnership has the following balance sheet:
Cash
Inventory
Facilities, net
Total
$ 10,000
25,000
365,000
______
$400,000
Accounts payable
Bank loan payable
Capital:
F
G
H
Total
$ 20,000
80,000
60,000
120,000
120,000
$400,000
The partners share income equally. The inventory is sold for $19,000 and facilities with a book
value of $200,000 are sold for $125,000.
What is the amount of the safe payment to partner G?
a.
b.
c.
d.
$48,000
$27,000
$36,000
$54,000
ANS:
b
Cash available for distribution to the partners is $10,000 + $19,000 + $125,000 – $20,000
– $80,000 = $54,000.
Capital balances:
Prior balance
Loss on inventory (total $6,000)
Loss on facilities (total $75,000)
Balance
Assume $165,000 loss on remaining facilities
Balance
Deficiency offset
Cash distribution
Test Bank, Chapter 14
F
$ 60,000
(2,000)
(25,000)
33,000
(55,000)
(22,000)
22,000
$
0
G
$120,000
(2,000)
(25,000)
93,000
(55,000)
38,000
(11,000)
$ 27,000
H
$120,000
(2,000)
(25,000)
93,000
(55,000)
38,000
(11,000)
$ 27,000
©Cambridge Business Publishers, 2016
14-23
59.
Topic: Partnership liquidation: cash distribution plan
LO 6
The DE partnership is undergoing an installment liquidation. Partners D and E share income in a
3:2 ratio and have current capital balances of $60,000 and $80,000, respectively. No loans are
receivable from or payable to partners.
After outside creditors are paid, if $50,000 in cash becomes available for distribution to the
partners, how is it distributed?
a.
b.
c.
d.
$50,000 to D;
$30,000 to D;
$6,000 to D;
$12,000 to D;
ANS:
c
$-0- to E
$20,000 to E
$44,000 to E
$38,000 to E
D
$ 60,000
100,000
______
100,000
Capital balances
Standardize
Equalize
Conversion
Plan:
60.
--
E
$ 80,000
200,000
(100,000)
100,000
$ 40,000
First $40,000 to E. Remaining to D and E in 3:2 ratio.
Distribution of $50,000:
D = $10,000 x 3/5 = $6,000; E = $40,000 + ($10,000 x 2/5) = $44,000
Topic: Partnership liquidation: cash distribution plan
LO 6
The FGH Partnership has the following balance sheet:
Cash
Inventory
Facilities, net
$ 10,000
25,000
365,000
Total
_______
$400,000
Accounts payable
Bank loan payable
Capital:
F
G
H
Total
$ 20,000
80,000
60,000
120,000
120,000
$400,000
The partners share income equally. In liquidation, what total amount must be distributed to G
and H before F receives a distribution?
a.
b.
c.
d.
$240,000
$800,000
$360,000
$120,000
©Cambridge Business Publishers, 2016
14-24
Advanced Accounting, 3rd Edition
ANS:
d
Capital
Standardize
Equalize
Balance
F
$ 60,000
180,000
______
180,000
Conversion
Plan:
G
$ 120,000
360,000
(180,000)
180,000
H
$ 120,000
360,000
(180,000)
180,000
$ 60,000
$ 60,000
First $120,000 to G and H in a 1:1 ratio.
Remainder equally to F, G and H.
Use the following information to answer Questions 61-63.
The STU partnership is undergoing an installment liquidation. Partners S, T, and U share income in a
4:3:3 ratio. The partnership balance sheet is as follows:
Cash
Accounts receivable
Loan receivable—S
Inventory
Buildings and equipment, net
Total
$ 5,000
10,000
15,000
25,000
545,000
______
$600,000
Accounts payable
Loan payable—T
Capital:
S
T
U
Total
$ 20,000
50,000
100,000
250,000
180,000
$600,000
You are preparing a cash distribution plan for the partnership.
61.
62.
Topic: Partnership liquidation: cash distribution plan
LO 6
What is the first distribution step?
a.
b.
c.
d.
First $400,000 to T
First $120,000 to T
First $180,000 to U
First $36,000 to U
ANS:
b
Topic: Partnership liquidation: cash distribution plan
LO 6
What is the second distribution step?
a.
b.
c.
d.
Second $232,500 to T and U in a 1:1 ratio
Second $212,500 to T and U in a 1:1 ratio
Second $600,000 to T and U in a 1:1 ratio
Second $100,000 to S and T in a 4:3 ratio
ANS:
a
Test Bank, Chapter 14
©Cambridge Business Publishers, 2016
14-25
63.
Topic: Partnership liquidation: cash distribution plan
LO 6
Cash is distributed to S, T and U in the income-sharing ratio only after distribution of how much
cash?
a.
b.
c.
d.
$262,500
$120,000
$352,500
$600,000
ANS:
c
Notes for Questions 61-63:
Capital balances:
Capital, net of loan receivable/payable
Standardize
Equalize
Balance
Equalize
Balance
Conversion
Plan:
S
$ 85,000
212,500
_______
212,500
_______
$ 212,500
T
$ 300,000
1,000,000
(400,000)
600,000
(387,500)
$ 212,500
U
$ 180,000
600,000
________
600,000
(387,500)
$ 212,500
$ 120,000
$ 116,250
$ 116,250
First $120,000 to T.
Next $232,500 to T and U in 1:1 ratio.
Remainder to S, T and U in a 4:3:3 ratio.
©Cambridge Business Publishers, 2016
14-26
Advanced Accounting, 3rd Edition
PROBLEMS
1.
Topic: Tax consequences of MLP investments
LO 1
At the beginning of 2017, an investor purchased 10,000 exchange-traded units of Comanche
Petroleum Company, which is organized as a Master Limited Partnership. The investment cost
$250,000. Per unit allocations of taxable income and cash distributions for 2017 and 2018 take
place at the end of each year, as follows:
Taxable income
Cash distributions
2017
$0.50
1.75
2018
$0.75
1.90
The taxable income is taxed at the investor’s personal tax rate, while the excess cash distribution
reduces the basis of the investment. At the time of sale, the basis reduction is taxed at the
investor’s personal rate, while the remaining gain is taxed at the capital gains rate. The investor’s
personal marginal tax rate is 35%, and the capital gains rate is 15%. The investor sells the
investment for $300,000 at the end of 2018.
Required
a.
Prepare a schedule of the total after-tax cash distribution for the investment, for 2017
and 2018.
b.
Calculate the amount of taxes the investor owes related to the sale of the investment at
the end of 2018.
ANS:
a.
Cash distribution (10,000 x per unit cash distribution)
Tax on taxable income (10,000 x per unit taxable
income x 35%)
Net cash return
b.
2017
$17,500
2018
$19,000
(1,750)
$15,750
(2,625)
$16,375
Calculation of basis:
Original cost
Less 2017 excess cash distribution = ($1.75 – $0.50) x 10,000 =
Less 2018 excess cash distribution = ($1.90 – $0.75) x 10,000 =
Basis
$ 250,000
(12,500)
(11,500)
$ 226,000
Selling price
Basis
Gain
$ 300,000
(226,000)
$ 74,000
Calculation of tax on gain:
Gain taxed at personal rate: ($12,500 + $11,500) x 35% =
Gain taxed at capital gains rate: ($74,000 – $24,000) x 15% =
Total tax on gain
Test Bank, Chapter 14
$
8,400
7,500
$ 15,900
©Cambridge Business Publishers, 2016
14-27
2.
Topic: Partnership formation
LO 2
Jagan and Kalap formed a partnership. Jagan contributed $225,000 in cash. Kalap contributed
assets having the following fair market values:



Merchandise, $200,000
Building, $300,000
Equipment, $100,000
The partnership assumed a mortgage of $75,000 on the building.
Required
Prepare the entry to record the formation of the partnership, under each of the following
methods:
a.
b.
c.
Capital accounts are set equal to net assets invested.
The partners have an equal interest in the initial total partnership capital, and the bonus
method is used.
The partners have an equal interest in the initial total partnership capital, and the
goodwill method is used.
ANS:
a.
Cash
Merchandise
Building
Equipment
225,000
200,000
300,000
100,000
Mortgage payable
Capital—Jagan
Capital—Kalap
75,000
225,000
525,000
b.
Cash
Merchandise
Building
Equipment
225,000
200,000
300,000
100,000
Mortgage payable
Capital—Jagan
Capital—Kalap
©Cambridge Business Publishers, 2016
14-28
75,000
375,000
375,000
Advanced Accounting, 3rd Edition
c.
Jagan contributes $225,000 while Kalap contributes $525,000.
contributes $525,000 – $225,000 = $300,000 of goodwill.
Cash
Merchandise
Building
Equipment
Goodwill
225,000
200,000
300,000
100,000
300,000
Mortgage payable
Capital, Jagan
Capital, Kalap
3.
Therefore, Jagan
75,000
525,000
525,000
Topic: Partnership formation
LO 2
Akashi, Bin, Chion and Daigo form a partnership in which they will share capital in a 1:3:4:2 ratio.
The fair value of net assets invested by each partner is as follows:
Akashi
Bin
Chion
Daigo
$400,000
500,000
600,000
300,000
Required
Calculate the balance in each partner’s capital account at the formation of the partnership using:
a.
The bonus approach
b.
The goodwill approach
ANS:
a.
Total fair value of net assets contributed = $400,000 + $500,000 + $600,000 + $300,000 =
$1,800,000
Akashi
Bin
Chion
Daigo
Total
b.
10% x $1,800,000
30% x $1,800,000
40% x $1,800,000
20% x $1,800,000
Capital Balance
$ 180,000
540,000
720,000
360,000
$1,800,000
Akashi contributes $400,000 for a 10% interest, so the total value of the partnership is
$400,000/0.1 = $4,000,000.
Akashi
Bin
Chion
Daigo
Total
Test Bank, Chapter 14
10% x $4,000,000
30% x $4,000,000
40% x $4,000,000
20% x $4,000,000
Capital Balance
$ 400,000
1,200,000
1,600,000
800,000
$4,000,000
©Cambridge Business Publishers, 2016
14-29
4.
Topic: Partnership formation
LO 2
Renata is the sole proprietor of a company with the following balance sheet:
Assets
Cash
Inventory
Buildings and equipment
Total assets
$ 115,000
300,000
600,000
________
$1,015,000
Liabilities
Accounts payable
Notes payable
Total liabilities
Owners’ equity
Total liabilities and equity
$ 100,000
55,000
155,000
860,000
$1,015,000
The cash and inventory are carried at fair value, and the buildings and equipment have a fair
value of $640,000.
Renata enters into a partnership with Santiago. Renata contributes her company, and the
partnership assumes the accounts payable and notes payable. Santiago contributes cash of
$270,000. The partners agree to share capital and profits in a 2:1 ratio.
Required
Prepare the balance sheet of the partnership at the date of formation using:
a.
b.
The bonus approach
The goodwill approach
ANS:
a.
Total fair value of net assets contributed are:
Renata: $115,000 + $300,000 + $640,000 – $100,000 – $55,000 = $900,000
Santiago: $270,000
Total = $1,170,000
Renata’s capital balance = $1,170,000 x 2/3 = $780,000
Santiago’s capital balance = $1,170,000 x 1/3 = $390,000
Partnership balance sheet:
Assets
Cash
Inventory
Buildings and equipment
Total assets
©Cambridge Business Publishers, 2016
14-30
$ 385,000
300,000
640,000
________
$1,325,000
Liabilities
Accounts payable
Notes payable
Total liabilities
Capital
Capital—Renata
Capital—Santiago
Total capital
Total liabilities and capital
$ 100,000
55,000
155,000
780,000
390,000
1,170,000
$1,325,000
Advanced Accounting, 3rd Edition
b.
Renata’s $900,000 contribution implies a total partnership fair value of $900,000/(2/3) =
$1,350,000. Therefore total goodwill is $1,350,000 – $1,170,000 = $180,000.
Renata’s capital balance = $1,350,000 x 2/3 = $900,000
Santiago’s capital balance = $1,350,000 x 1/3 = $450,000
Partnership balance sheet:
Assets
Cash
Inventory
Buildings and equipment
Goodwill
Total assets
5.
$ 385,000
300,000
640,000
180,000
________
$1,505,000
Liabilities
Accounts payable
Notes payable
Total liabilities
Capital
Capital—Renata
Capital—Santiago
Total capital
Total liabilities and capital
$ 100,000
55,000
155,000
900,000
450,000
1,350,000
$1,505,000
Topic: Partnership income allocation
LO 3
Reyes and Salazar are partners in RS Services. At the beginning of 2017, their capital balances
were $200,000 and $275,000, respectively. The partnership agreement specifies that Reyes
receives a salary of $45,000 for the year, and Salazar receives a salary of $60,000. Salaries are
fully implemented. Any remaining income is allocated in a 3:1 ratio. Reyes and Salazar each
withdraw their salary in cash during the year, and there are no other investments or
withdrawals.
Required
a.
Compute the balance of each partner’s capital account at the end of 2017, assuming
2017 partnership income of $200,000.
b.
Compute the balance of each partner’s capital account at the end of 2017, assuming
2017 partnership income of $90,000.
ANS:
a.
Beginning capital balance
Salary
Withdrawal of salary
Profit distribution ($200,000 – $105,000), allocated 3:1
Ending capital balance
Reyes
$200,000
45,000
(45,000)
71,250
$271,250
Salazar
$275,000
60,000
(60,000)
23,750
$298,750
Beginning capital balance
Salary
Withdrawal of salary
Loss distribution ($105,000 – $90,000), allocated 3:1
Ending capital balance
Reyes
$200,000
45,000
(45,000)
(11,250)
$188,750
Salazar
$275,000
60,000
(60,000)
(3,750)
$271,250
b.
Test Bank, Chapter 14
©Cambridge Business Publishers, 2016
14-31
6.
Topic: Partnership income allocation
LO 3
Santos and Torres are partners in ST Grocery. Their partnership agreement specifies that they
share income in a 1:4 ratio after each partner receives 20 percent interest on weighted average
capital. Their capital transactions for the year 2018 are summarized as follows:
Capital, January 1
Investment, April 1
Withdrawal, July 1
Investment, September 1
Investment, November 1
Withdrawal, December 1
Capital, December 31
Santos
$100,000
-(10,000)
35,000
-(5,000)
$120,000
Torres
$250,000
25,000
(41,000)
-18,000
(12,000)
$250,000
Partnership income of ST Grocery for 2018 was $160,000.
Required
Determine the allocation of partnership income between Santos and Torres.
ANS:
Weighted average capital calculation:
Santos: $100,000(6/12) + $90,000(2/12) + $125,000(3/12) + $120,000(1/12) = $106,250
Torres: $250,000(3/12) + $275,000(3/12) + $234,000(4/12) + $252,000(1/12) +
$240,000(1/12) = $250,250
Allocation of income:
Interest (20% x weighted average capital)
Income distribution ($160,000 - $71,300) in 1:4 ratio
Total
7.
Santos
$21,250
17,740
$38,990
Torres
$50,050
70,960
$121,010
Topic: Partnership income allocation
LO 3
Stanton, Thorn and Underwood are partners in STU Associates. The partnership agreement of
STU Associates provides that income be allocated in the following manner:
1. Each partner receives interest of 10% of beginning capital.
2. Stanton receives an annual salary of $45,000 and Thorn receives an annual salary of
$35,000.
3. Underwood receives a bonus of 25% of partnership income after deducting interest,
salaries and bonus.
4. Any remaining income is shared in a 4:3:3 ratio.
5. All provisions are to be fully implemented.
The partnership income for the year was $200,000. Beginning capital balances are: Stanton
$130,000; Thorn $80,000; Underwood $65,000.
Required
Determine the allocation of partnership income among the partners.
©Cambridge Business Publishers, 2016
14-32
Advanced Accounting, 3rd Edition
ANS:
Interest
Salary
Bonus (1)
Balance
Total
Stanton
$13,000
45,000
-29,600
$87,600
Thorn
$ 8,000
35,000
-22,200
$65,200
Underwood
$ 6,500
18,500
22,200
$47,200
(1) Calculation of bonus:
B = Bonus to Underwood
B = ($200,000 – $13,000 – $8,000 – $6,500 – $45,000 – $35,000 – B) x 25%
B = $23,125 – 0.25B
B = $18,500
8.
Topic: Partnership income allocation
LO 3
Novarro and Ocampo are partners in NO Services. The partnership agreement specifies the
following income sharing provisions:
1. Novarro receives an annual salary of $100,000 and Ocampo receives an annual salary of
$75,000.
2. Each partner receives 10% interest on average capital investment.
3. Remaining income is allocated in a 1:4 ratio.
4. All provisions are fully implemented.
Average capital investment for the year is $300,000 for Novarro and $450,000 for Ocampo.
Required
a.
Prepare a schedule to allocate partnership income of $270,000.
b.
Prepare a schedule to allocate partnership income of $150,000.
c.
Suppose that in addition to the above income allocation provisions, Novarro receives a
bonus of 25% of profit after the bonus but before other allocation provisions. Prepare a
schedule to allocate partnership income of $320,000.
ANS:
a.
Salary
Interest on capital
Residual income
Total
Novarro
$ 100,000
30,000
4,000
$ 134,000
Ocampo
$ 75,000
45,000
16,000
$ 136,000
Salary
Interest on capital
Residual loss
Total
Novarro
$ 100,000
30,000
(20,000)
$ 110,000
Ocampo
$ 75,000
45,000
(80,000)
$ 40,000
b.
Test Bank, Chapter 14
©Cambridge Business Publishers, 2016
14-33
c.
Novarro
$ 100,000
30,000
64,000
1,200
$ 195,200
Salary
Interest on capital
Bonus (1)
Residual income
Total
Ocampo
$ 75,000
45,000
-4,800
$ 124,800
(1) B = Bonus
B = 25% x ($320,000 – B)
B = 80,000 – 0.25B
B = $64,000
9.
Topic: Admission of a new partner by purchase of existing partnership interest
LO 4
Jacobus and Kumalo are partners in JK Construction Services. Their capital accounts are
currently as follows:
Jacobus
Kumalo
$460,000
340,000
Jacobus and Kumalo share income equally. Lotter purchases a 35 percent interest in the
partnership by paying Jacobus and Kumalo a total of $367,500 for 35 percent of each of their
interests in the partnership.
Required
Record the addition of Lotter to the partnership, using:
a.
The transfer of capital interests method
b.
The implied goodwill method
ANS:
a.
Capital—Jacobus
Capital—Kumalo
161,000
119,000
Capital—Lotter
280,000
b.
Goodwill (1)
250,000
Capital—Jacobus
Capital—Kumalo
Capital—Jacobus
Capital—Kumalo
125,000
125,000
204,750
162,750
Capital—Lotter
367,500
(1) Calculation of goodwill: $367,500/.35 = $1,050,000 - $800,000 = $250,000
©Cambridge Business Publishers, 2016
14-34
Advanced Accounting, 3rd Edition
10.
Topic: Admission of a new partner by investment of new capital
LO 4
Diaz and Evans are partners in DE Delivery Services. The partners share income in a 3:7 ratio.
Diaz has a capital balance of $340,000 and Evans has a capital balance of $425,000. The
partnership’s identifiable net assets are carried at amounts approximating fair value, except for
customer lists, valued at $85,000, which are not recorded. Foster is to be admitted as a new
partner, investing cash of $210,000 in the partnership and receiving a 15 percent interest in
capital and income.
Required
Record Foster’s admission, using:
a.
The bonus approach
b.
The goodwill approach
ANS:
a.
Foster’s share of partnership net assets is 15% x ($765,000 + $210,000) = $146,250
Entry:
Cash
210,000
Capital—Diaz
Capital—Evans
Capital—Foster
b.
$210,000/0.15 = $1,400,000 – $975,000 = $425,000
Entry:
Cash
Customer lists
Goodwill
210,000
85,000
340,000
Capital—Diaz
Capital—Evans
Capital—Foster
11.
19,125
44,625
146,250
127,500
297,500
210,000
Topic: Admission of a new partner by investment of new capital
LO 4
Rahal and Saliba are partners who share income in a 1:4 ratio. Total partnership capital is
$366,000. Touma is to be admitted as a new partner, investing $100,000 in the partnership and
receiving a 25% interest in capital and income.
Required
Record Touma’s admission, using:
a.
The bonus approach
b.
The goodwill approach
Test Bank, Chapter 14
©Cambridge Business Publishers, 2016
14-35
ANS:
a.
Touma’s share of partnership net assets is 25% x ($366,000 + $100,000) = $116,500
Entry:
Cash
Capital—Rahal
Capital—Saliba
100,000
3,300
13,200
Capital—Touma
b.
116,500
$366,000/0.75 = $488,000 x 25% = $122,000
Entry:
Cash
Goodwill
100,000
22,000
Capital—Touma
12.
122,000
Topic: Admission of a new partner by investment of new capital
LO 4
Bava and Char are partners in BC Enterprises, providing systems support to small companies.
The partners share income in a 3:1 ratio. The partnership balance sheet is as follows:
Assets
Cash
Supplies
Facilities, net
Total assets
$ 65,000
45,000
460,000
______
$570,000
Liabilities
Accounts payable
Notes payable
Total liabilities
Capital
Capital—Bava
Capital—Char
Total capital
Total liabilities and capital
$ 40,000
175,000
215,000
200,000
155,000
355,000
$570,000
Dey is to be admitted as a new partner, investing $20,000 in cash and equipment with a fair
value of $80,000 in the partnership, and receiving a 10 percent interest in capital and income.
Appraisal of partnership net assets reveals that current facilities have a fair value of $500,000
and there are unreported identifiable intangible assets of $75,000.
Required
Prepare the partnership balance sheet following Dey’s admission to the partnership, using:
a.
The bonus approach
b.
The goodwill approach
©Cambridge Business Publishers, 2016
14-36
Advanced Accounting, 3rd Edition
ANS:
a.
Dey’s share of partnership net assets is 10% x ($355,000 + $100,000) = $45,500
The entry to record Dey’s admission is:
Cash
Facilities, net
Capital—Bava
Capital—Char
Capital—Dey
The partnership balance sheet is:
Assets
Cash
$ 85,000
Supplies
45,000
Facilities, net
540,000
Total assets
b.
_______
$670,000
20,000
80,000
40,875
13,625
45,500
Liabilities
Accounts payable
Notes payable
Total liabilities
$ 40,000
175,000
215,000
Capital
Capital—Bava
Capital—Char
Capital—Dey
Total capital
Total liabilities and capital
240,875
168,625
45,500
455,000
$670,000
$100,000/0.10 = $1,000,000
Net assets are understated by $1,000,000 – ($355,000 + $100,000) = $545,000
The entry to record Dey’s admission is:
Cash
Facilities, net (1)
Identifiable intangibles
Goodwill
Capital—Bava
Capital—Char
Capital—Dey
20,000
120,000
75,000
430,000
408,750
136,250
100,000
(1) $40,000 revaluation of current facilities plus $80,000 equipment contributed by Dey.
The partnership balance sheet is:
Assets
Cash
$ 85,000
Supplies
45,000
Facilities, net
580,000
Identifiable intangibles
75,000
Goodwill
430,000
Total assets
Test Bank, Chapter 14
________
$1,215,000
Liabilities
Accounts payable
Notes payable
Total liabilities
Capital
Capital—Bava
Capital—Char
Capital—Dey
Total capital
Total liabilities and capital
$
40,000
175,000
215,000
608,750
291,250
100,000
1,000,000
$1,215,000
©Cambridge Business Publishers, 2016
14-37
13.
Topic: Retirement of a partner using partnership assets
LO 5
Nazarov, Osin and Panarin are partners with capital accounts of $350,000, $225,000 and
$175,000 respectively. Income is shared in a 4:3:3 ratio. Panarin resigns from the partnership,
and receives $217,000 in partnership cash. All partnership net assets are currently reported at
fair value.
Required
Record Panarin’s resignation on the partnership books, using:
a.
The bonus method
b.
The partial goodwill approach
c.
The total goodwill approach
ANS:
a.
Capital—Nazarov
Capital—Osin
24,000
18,000
Capital—Panarin
Capital—Panarin
42,000
217,000
Cash
217,000
b.
Goodwill
Capital—Panarin
42,000
175,000
Cash
c.
217,000
($217,000 – $175,000)/0.3 = $140,000
Goodwill
140,000
Capital—Nazarov
Capital—Osin
Capital—Panarin
Capital—Panarin
217,000
Cash
©Cambridge Business Publishers, 2016
14-38
56,000
42,000
42,000
217,000
Advanced Accounting, 3rd Edition
14.
Topic: Retirement of a partner using partnership assets
LO 5
Harry, Issie, and Jake are partners who share income in a 6:4:2 ratio. Jake, whose capital balance
is $40,000, retires from the partnership, and receives partnership assets.
Required
Determine the amount paid to Jake under each of the following assumptions:
a.
The partial goodwill approach is used and $15,000 of goodwill is recorded.
b.
The bonus method is used and Issie's capital account is reduced by $20,000.
c.
The total goodwill approach is used, and Harry's capital account increases by $30,000.
ANS:
a.
b.
c.
15.
$40,000 + $15,000 = $55,000
$20,000/0.4 = $50,000 + $40,000 = $90,000
$30,000/0.5 = $60,000 x 2/12 = $10,000 + $40,000 = $50,000
Topic: Retirement of a partner
LO 5
Mori, Nakamura and Ochi have interests in MNO Partnership. The partners have capital
balances of $130,000, $150,000, and $200,000 respectively, and share income in a 2:3:5 ratio.
Required
Record the entry or entries needed under each of the following circumstances:
a.
b.
c.
Nakamura and Ochi buy Mori’s interest using $186,000 of their personal cash.
Nakamura and Ochi retain the same income-sharing relationship as before.
Nakamura and Ochi buy Mori’s interest using $186,000 of partnership cash. Nakamura
and Ochi retain the same income-sharing relationship as before. The bonus method is
used.
Nakamura and Ochi buy Mori’s interest by transferring ownership of partnership
equipment valued at $186,000. The equipment is currently reported on the partnership
books at $140,000. The total goodwill approach is used, and the partnership’s other net
assets are reported at amounts approximating fair value, except that the partnership has
unreported identifiable intangible assets valued at $50,000.
ANS:
a.
Capital—Mori
130,000
Capital—Nakamura
Capital—Ochi
48,750
81,250
b.
Capital—Nakamura
Capital—Ochi
Capital—Mori
21,000
35,000
130,000
Cash
Test Bank, Chapter 14
186,000
©Cambridge Business Publishers, 2016
14-39
c.
Adjust the equipment to fair value:
Equipment, net
46,000
Capital—Mori
Capital—Nakamura
Capital—Oshi
9,200
13,800
23,000
Mori’s capital account balance is now $130,000 + $9,200 = $139,200
($186,000 – $139,200)/0.2 = $234,000
Identifiable intangibles
Goodwill
50,000
184,000
Capital—Mori
Capital—Nakamura
Capital—Oshi
Capital—Mori
46,800
70,200
117,000
186,000
Equipment, net
16.
186,000
Topic: Retirement of a partner using partnership assets
LO 5
Norman, Olivia and Patty are partners with capital accounts of $400,000, $650,000 and $200,000
respectively. Income is shared in a 1:3:1 ratio. Norman resigns from the partnership, and
receives $350,000 in partnership cash.
Required
Record Norman’s resignation on the partnership books, under each of the following
assumptions:
a.
The bonus method is used.
b.
The partial goodwill approach is used, and partnership buildings and equipment are
determined to be overvalued by $250,000.
c.
The total goodwill approach is used, and partnership buildings and equipment are
determined to be overvalued by $250,000.
ANS:
a.
Capital—Norman
50,000
Capital—Olivia
Capital—Patty
Capital—Norman
350,000
Cash
©Cambridge Business Publishers, 2016
14-40
37,500
12,500
350,000
Advanced Accounting, 3rd Edition
b.
Capital—Norman
50,000
Buildings and equipment, net
Capital—Norman
50,000
350,000
Cash
350,000
c.
Capital—Norman
Capital—Olivia
Capital—Patty
50,000
150,000
50,000
Buildings and equipment, net
Capital—Norman
250,000
350,000
Cash
17.
350,000
Topic: Simple partnership liquidation
LO 6
The balance sheet of the ABC Partnership, which is being liquidated, is as shown:
Cash
Receivables
Inventory
Plant and equipment, net
$ 25,000
40,000
60,000
275,000
Total
_______
$400,000
Accounts payable
Bank loan payable
Capital:
A
B
C
Total
$ 80,000
100,000
35,000
85,000
100,000
$400,000
The partners share income in a 1:4:5 ratio. The receivables yield $25,000 in cash. The inventory
and plant and equipment are sold for $260,000.
Required
Determine the proper distribution of the available cash to the creditors and the partners.
ANS:
A
$ 35,000
(1,500)
(7,500)
$ 26,000
Capital balances
Loss on receivables
Loss on inventory and plant
Cash distribution
B
$ 85,000
(6,000)
(30,000)
$ 49,000
C
$ 100,000
(7,500)
(37,500)
$ 55,000
Final cash distribution:
Creditors
A
B
C
Total
Test Bank, Chapter 14
$180,000
26,000
49,000
55,000
$310,000
©Cambridge Business Publishers, 2016
14-41
18.
Topic: Simple partnership liquidation
LO 6
The balance sheet of JKL Partnership prior to liquidation is as follows:
Loan receivable—J
Other assets
$ 50,000
200,000
Total
_______
$250,000
Loan payable-L
Other liabilities
Capital—J
Capital—K
Capital—L
Total
$ 70,000
40,000
30,000
20,000
90,000
$250,000
J, K, and L share income in a 2:2:4 ratio. The partners are unable to make any additional
investments in the partnership. The other assets are sold for $80,000 in cash.
Required
Determine the proper distribution of the $80,000 in available cash.
ANS:
Capital balances
Offset loan payable/receivable
Balance
Loss on asset sale
Balance
Allocate deficiencies
Cash distribution
J
$ 30,000
(50,000)
(20,000)
(30,000)
(50,000)
50,000
$
0
K
$ 20,000
-20,000
(30,000)
(10,000)
10,000
$
0
L
$ 90,000
70,000
160,000
(60,000)
100,000
(60,000)
$ 40,000
Final cash distribution:
Creditors
L
Total
19.
$40,000
40,000
$80,000
Topic: Partnership liquidation: cash distribution plan
LO 6
MNO Enterprises, a partnership, is about to begin liquidation. It is anticipated that the process
of selling the company's assets will occur over time. However, the partners would like to receive
cash distributions as asset sales occur. The company's books show total assets of $1,000,000.
Capital accounts and income sharing percentages are as follows:
Maya Smith
Norton Johnson
Oswald Brown
Total
Capital Balance
$200,000
100,000
90,000
$390,000
Income Share
40%
10%
50%
100%
Required
a.
What is the balance of the partnership liabilities?
b.
Prepare a cash distribution plan.
©Cambridge Business Publishers, 2016
14-42
Advanced Accounting, 3rd Edition
ANS:
a.
$1,000,000 – $390,000 = $610,000
b.
Capital balance
Standardized capital
Equalize
Balance
Equalize
Balance
Maya
$ 200,000
500,000
-500,000
(320,000)
$ 180,000
Norton
$ 100,000
1,000,000
(500,000)
500,000
(320,000)
$ 180,000
$ 128,000
$ 50,000
$ 32,000
Conversion:
Olivia
$ 90,000
180,000
-180,000
-$180,000
Cash distribution plan:
Distribution
1
2
3
4
20.
Amount
$610,000
50,000
160,000
Remaining
Paid To:
Creditors
Norton
Maya and Norton in 4:1 ratio
All partners in 4:1:5 ratio
Topic: Partnership liquidation: cash distribution plan
LO 6
The partnership of Clark, Davis, and Evans has a balance sheet as follows:
Cash
Inventory
Equipment
Other assets
$ 50,000
100,000
500,000
300,000
_______
$ 950,000
Loan payable to Davis
Other liabilities
Capital—Clark
Capital—Davis
Capital—Evans
$ 80,000
400,000
120,000
180,000
170,000
$ 950,000
The partners share income in a 3:1:1 ratio. The partnership is in the process of liquidation.
Required
a.
Prepare a cash distribution plan.
b.
Assume all available cash is to be distributed to the partners as it becomes available.
The inventory is sold for $65,000 and the equipment is sold for $485,000. How much
cash is distributed to each partner?
c.
Now assume the distribution in b. is made according to plan. Evans receives other assets
with a book value of $150,000 and fair value of $80,000 as a distribution. Then the
partnership receives $100,000 from the sale of other assets with a book value of
$120,000. How should the $100,000 be distributed among the partners?
Test Bank, Chapter 14
©Cambridge Business Publishers, 2016
14-43
ANS:
a.
Capital & loan
Standardize
Equalize
Balance
Equalize
Balance
Clark
$ 120,000
200,000
-200,000
-$ 200,000
Conversion:
Davis
$ 260,000
1,300,000
(450,000)
850,000
(650,000)
$ 200,000
Evans
$ 170,000
850,000
-850,000
(650,000)
$ 200,000
$ 90,000
$ 130,000
$ 130,000
Cash distribution plan:
Distribution
1
2
3
4
b.
Amount
$400,000
$ 90,000
$260,000
Remaining
Paid to
Creditors
Davis
Davis and Evans in a 1:1 ratio
Clark, Davis and Evans in a 3:1:1 ratio
Total cash available = $50,000 + $65,000 + $485,000 = $600,000. Creditors are paid
$400,000, leaving $200,000 to distribute to partners. The distribution is as follows:
Clark
Distribution 2 to Davis
Distribution 3 to Davis and Evans in a 1:1 ratio
Total
c.
$
_____
0
Davis
$ 90,000
55,000
$145,000
Evans
$ 55,000
$ 55,000
Since Evans received $80,000 before distribution 3 has been completed, Davis must
receive the rest of distribution 3 and Clark and Davis must receive a cash distribution in
distribution 4 to bring them even with Evans, before Evans receives additional cash
distributions.
Clark
Rest of distribution 3 to Davis
Distribution 4 to Clark and Davis in 3:1 ratio
Distribution 4 to Clark, Davis, and Evans in a
3:1:1 ratio
Total
©Cambridge Business Publishers, 2016
14-44
$15,000
Davis
$75,000
5,000
3,000
$18,000
1,000
$81,000
Evans
$1,000
$1,000
Advanced Accounting, 3rd Edition