Horngren's Accounting, 12e (Miller-Nobles et al.)
Chapter 12 Partnerships
Learning Objective 12-1
1) A partnership is a business with two or more owners that is legally organized as a corporation.
Answer: FALSE
Diff: 1
LO: 12-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: What Are the Characteristics and Types of Partnerships (H1)
2) The articles of partnership is a written contract between partners that specifies the name, location, and
nature of the business; the duties of each partner; and the method of sharing profits and losses among the
partners.
Answer: TRUE
Diff: 1
LO: 12-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Partnership Characteristics
3) A written partnership agreement is also known as the articles of partnership.
Answer: TRUE
Diff: 1
LO: 12-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Partnership Characteristics
4) The addition of a new partner to a firm does not dissolve the old partnership.
Answer: FALSE
Diff: 1
LO: 12-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Partnership Characteristics
1
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5) Mutual agency means that any partner can legally bind the other partners and the partnership to
business contracts within the scope of the business's regular operations.
Answer: TRUE
Diff: 1
LO: 12-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Partnership Characteristics
6) In a general partnership, each partner has limited personal liability for the debts of the business.
Answer: FALSE
Diff: 1
LO: 12-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Partnership Characteristics
7) In a general partnership, if one partner cannot pay his or her part of the debts, the other partner or
partners must pay with their personal assets.
Answer: TRUE
Diff: 1
LO: 12-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Partnership Characteristics
8) In a partnership, when a partner contributes a particular asset to the firm, he or she is considered to be
the sole owner of the asset.
Answer: FALSE
Diff: 1
LO: 12-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Partnership Characteristics
9) In a partnership, the income is taxed at the partnership level as well as at the personal level of the
owners.
Answer: FALSE
Diff: 1
LO: 12-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Partnership Characteristics
2
Copyright © 2018 Pearson Education, Inc.
10) In a general partnership, the partners have unlimited personal liability for the debts of the business.
Answer: TRUE
Diff: 1
LO: 12-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Types of Partnerships
11) In a limited liability partnership, each partner is not personally liable for the malpractice or negligence
committed by another partner.
Answer: TRUE
Diff: 1
LO: 12-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Types of Partnerships
12) The income of a limited liability company cannot be taxed to the members as though they were
partners.
Answer: FALSE
Diff: 1
LO: 12-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Other Forms of Business
13) An S corporation is a corporation with 100 or fewer stockholders that can elect to be taxed as a
partnership.
Answer: TRUE
Diff: 1
LO: 12-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Other Forms of Business
14) If elected, an S corporation pays no corporate income tax.
Answer: TRUE
Diff: 1
LO: 12-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Other Forms of Business
3
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15) A partnership is a ________.
A) firm listed on a stock exchange, in which no owner owns a controlling majority of equity
B) business with two or more owners that is not organized as a corporation
C) corporation in which the owners have limited liability for the organization's liabilities
D) private firm in which all owners have equal ownership and limited liability in the event of a
bankruptcy
Answer: B
Diff: 1
LO: 12-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: What Are the Characteristics and Types of Partnerships (H1)
16) Which of the following is a characteristic of a partnership?
A) Partnerships pay corporate income taxes.
B) Partnerships are listed on a stock exchange.
C) Partnerships are organized as corporations.
D) Partners have co-ownership of the partnership's assets.
Answer: D
Diff: 1
LO: 12-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Partnership Characteristics
17) Which of the following is TRUE of a written partnership agreement?
A) It is an agreement in which the partners hold a direct agreement with the registration body, and the
registration body acts as an interlocutor between the partners.
B) It is an informal agreement between the partners and is not legally binding.
C) It is a legally-binding agreement between the owners which explains the procedures for liquidating
the partnership.
D) It is a legally-binding agreement between the proprietors and the stock exchange where it is listed
regarding the profit sharing between the owners.
Answer: C
Diff: 1
LO: 12-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Partnership Characteristics
4
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18) Which of the following is specified in the articles of partnership?
A) procedures for withdrawal of assets by the partners
B) procedures for distribution of dividends
C) methods for valuation of the assets
D) selection of an appropriate depreciation method
Answer: A
Diff: 1
LO: 12-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Partnership Characteristics
19) Which of the following is TRUE of a partnership?
A) All partnership firms are public firms.
B) Partnership firms have a limited life.
C) The owners of the partnership have limited liabilities for the partnership's debts.
D) The maximum loss an owner of a partnership can incur is the invested amount.
Answer: B
Diff: 1
LO: 12-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Partnership Characteristics
20) Which of the following will result in the dissolution of a partnership?
A) admission of a new partner
B) purchase of plant assets for the business
C) contribution of an asset by an existing partner
D) a partner's withdrawal of cash from the partnership
Answer: A
Diff: 1
LO: 12-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Partnership Characteristics
5
Copyright © 2018 Pearson Education, Inc.
21) In a partnership, mutual agency means that ________.
A) the addition of a new partner does not dissolve the old partnership; there is a mutual exchange of
ownership with the existing partners
B) every partner must contribute the same amount of capital
C) the agency problem between the principal and agents are mutual and are neutralized
D) any partner can bind the business to a contract within the scope of its regular business operations
Answer: D
Diff: 1
LO: 12-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Partnership Characteristics
22) A firm has two partners: Jim and Bill. Jim owns 60% of the partnership and Bill owns 40%. In which of
the following transactions will the partnership be held responsible for an individual partners' actions?
A) Jim signs a contract as a guarantor for Bill's personal loan.
B) Jim buys a laptop on credit for personal use.
C) Bill signs a contract to buy furniture for official use in the partnership.
D) Bill defaults on payment of his personal credit card bill.
Answer: C
Diff: 1
LO: 12-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Partnership Characteristics
23) In comparison to a corporation, the owners of a general partnership ________.
A) have limited claim on the profits generated by the business
B) are restricted from dissolving the business without prior notice to the SEC
C) have an unlimited personal liability for the debts of the business
D) are taxed at two levels
Answer: C
Diff: 1
LO: 12-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Partnership Characteristics
6
Copyright © 2018 Pearson Education, Inc.
24) Which of the following is TRUE of the assets of a partnership?
A) The partner who is more actively involved in the daily business affairs is considered to be the sole
owner of the partnership's assets.
B) Any new assets purchased by the partnership are jointly owned by each partner.
C) When a partner contributes a particular asset to the firm, he is considered to be the sole owner of the
asset.
D) In the case of the liquidation of a partnership, the partners must be paid based on the profit sharing
ratio of the partnership.
Answer: B
Diff: 1
LO: 12-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Partnership Characteristics
25) Which of the following is a disadvantage of partnership firms?
A) They cannot be dissolved without the permission of the SEC.
B) They are taxed at multiple levels: corporate level and individual level.
C) They have more difficulty in raising capital as compared to a sole proprietorship.
D) They have mutual agency which creates personal obligations for each partner.
Answer: D
Diff: 1
LO: 12-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Partnership Characteristics
26) Which of the following is an advantage of a partnership?
A) Partnerships are less expensive to organize than corporations.
B) The owners of a partnership are generally exempted from personal income taxes.
C) The owners who contribute an asset to the partnership retain absolute claim on the asset.
D) Mutual agency creates personal obligations for each partner.
Answer: A
Diff: 1
LO: 12-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Partnership Characteristics
7
Copyright © 2018 Pearson Education, Inc.
27) Which of the following is TRUE of a general partnership?
A) Each partner has all the privileges and risks of ownership.
B) The income of a general partnership is subject to double taxation.
C) Each partner's liability is limited to their contributed capital.
D) When a general partner contributes a particular asset to the firm, he or she is considered the sole
owner of the asset.
Answer: A
Diff: 2
LO: 12-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Types of Partnerships
28) In which of the following ways does a limited partnership differ from a general partnership?
A) In a limited partnership, the general partner has an unlimited personal liability in the partnership;
whereas in a general partnership, all partners have unlimited personal liability.
B) In a limited partnership, all the partners make an equal contribution to the daily operations; whereas
in a general partnership, the general partner assumes a greater responsibility of the operation.
C) In a limited partnership, there will be only one class of partners named limited partners; whereas in a
general partnership, there will be only one class of partners named general partners.
D) In a limited partnership, each partner is not personally liable for the malpractice committed by another
partner; whereas in a general partnership, only the general partner is personally liable for the malpractice
committed by another partner.
Answer: A
Diff: 3
LO: 12-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Types of Partnerships
29) A general partner in a limited partnership ________.
A) has less personal liability for the debts of the business than the limited partners
B) is the majority shareholder and is not involved in the daily business activities
C) has unlimited personal liability in the partnership
D) is the first owner to receive a share of profits and losses
Answer: C
Diff: 1
LO: 12-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Types of Partnerships
8
Copyright © 2018 Pearson Education, Inc.
30) Which of the following is TRUE of limited partners in a limited partnership?
A) They have limited liability for the debts of the business but their potential for profits is unlimited.
B) They usually have first claim to profits and losses made by the business.
C) They assume the same operational duties as that of the general partner.
D) They have to assume a liability beyond their contribution in the business in the event of a bankruptcy.
Answer: B
Diff: 2
LO: 12-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Types of Partnerships
31) Which of the following is an additional feature of a limited liability partnership compared to a limited
partnership?
A) It has a general partner who does not participate in the day-to-day operations of the partnership.
B) It limits the personal liability of limited partners to their contribution in the business.
C) It restricts the general partner from taking high-risk projects.
D) It protects each partner from any malpractice or negligence of another partner's actions.
Answer: D
Diff: 2
LO: 12-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Types of Partnerships
32) In a ________, each partner is not personally liable for the malpractice committed by another partner.
A) general partnership
B) limited liability partnership
C) limited partnership
D) sole proprietorship
Answer: B
Diff: 1
LO: 12-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Types of Partnerships
9
Copyright © 2018 Pearson Education, Inc.
33) A(n) ________ must carry large insurance policies to protect the public in case the partnership is
found guilty of malpractice.
A) general partnership
B) S Corporation
C) limited liability partnership
D) C Corporation
Answer: C
Diff: 1
LO: 12-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Types of Partnerships
34) Which of the following businesses is most likely to be organized as an LLP?
A) a bookstore run by two partners
B) an international retail chain
C) an accounting firm run by two partners
D) a stationery store owned by an individual
Answer: C
Diff: 1
LO: 12-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Types of Partnerships
35) A ________ is a form of business organization that combines the advantages of both a partnership and
a corporation.
A) limited liability company
B) limited liability partnership
C) C Corporation
D) general partnership
Answer: A
Diff: 1
LO: 12-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Other Forms of Business
10
Copyright © 2018 Pearson Education, Inc.
36) Which of the following is TRUE of a limited liability company?
A) A limited liability company is not obligated to file the articles of organization with the state.
B) The owners of a limited liability company are personally liable for the business's debts.
C) A limited liability company can elect not to pay business income tax.
D) The owners of a limited liability company cannot participate actively in management of the business.
Answer: C
Diff: 2
LO: 12-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Other Forms of Business
37) Which of the following is an advantage of a limited liability company compared to a partnership?
A) Unlike a partnership, the members of a limited liability company cannot participate actively in
management of the business.
B) Unlike a partnership, the members of a limited liability company are not personally liable for the
business's debts.
C) Unlike a partnership, the members of a limited liability company are taxed at the business level and
are double-taxed.
D) Unlike a partnership, the members of a limited liability company do not need to file articles of
organization with the state.
Answer: B
Diff: 2
LO: 12-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Other Forms of Business
38) Which of the following is an advantage of a limited liability company compared to a corporation?
A) Unlike a corporation, the members of a limited liability company are personally liable for the
business's debts.
B) Unlike a corporation, the members of a limited liability company need not file articles of organization
with the state.
C) Unlike a corporation, the members of a limited liability company cannot participate actively in
management of the business.
D) Unlike a corporation, the members of a limited liability company are taxed at the individual level only.
Answer: D
Diff: 2
LO: 12-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Other Forms of Business
11
Copyright © 2018 Pearson Education, Inc.
39) Which of the following types of business organizations pay business income taxes?
A) S Corporations
B) sole proprietorships
C) general partnerships
D) C Corporations
Answer: D
Diff: 1
LO: 12-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Other Forms of Business
40) In which of the following types of business organizations do the owners have unlimited personal
liabilities for the business's debts?
A) general partnerships
B) S Corporations
C) C Corporations
D) limited liability companies
Answer: A
Diff: 1
LO: 12-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Other Forms of Business
Learning Objective 12-2
1) The statement of partners' equity shows the changes in each partner's capital account for a specific
period of time.
Answer: TRUE
Diff: 1
LO: 12-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Partnership Financial Statements
2) In a partnership balance sheet, each partner's assets, liabilities, and equity will be shown separately.
Answer: FALSE
Diff: 1
LO: 12-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Partnership Financial Statements
12
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3) The financial statements of a partnership are similar to the statements of a sole proprietorship.
Answer: TRUE
Diff: 1
LO: 12-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Partnership Financial Statements
4) An asset received from a partner as a contribution is recorded at its historical cost.
Answer: FALSE
Diff: 1
LO: 12-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: The Start-Up of a Partnership
5) A(n) ________ does NOT require any permission from the state to be set up.
A) LLC
B) partnership
C) S Corporation
D) C Corporation
Answer: B
Diff: 1
LO: 12-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: How Are Partnerships Organized? (H1)
6) A partnership records the partners' contributions at their ________.
A) current market value
B) historical value
C) net realizable value
D) average value
Answer: A
Diff: 1
LO: 12-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: The Start-Up of a Partnership
13
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7) Andy and Ian formed a partnership on April 1, 2019. Andy contributes equipment to the business that
originally cost $82,000 and on which accumulated depreciation of $16,000 has been recorded. The current
market value of the equipment is $74,000. The value of the equipment recorded in the partnership journal
is ________.
A) $66,000
B) $74,000
C) $58,000
D) $82,000
Answer: B
Diff: 1
LO: 12-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: The Start-Up of a Partnership
8) Rodriguez and Ying start a partnership on July 1, 2019. Rodriguez contributes $4100 cash, furniture
with a current market value of $55,000, and computer equipment. The computer equipment originally
cost $48,000 in 2017 with recorded accumulated depreciation of $28,000. The current market value of the
computer equipment is $17,000. At what value should the computer equipment be recorded in the
accounting records of the partnership?
A) $48,000
B) $17,000
C) $20,000
D) $28,000
Answer: B
Explanation: The partnership records the partners' contributions at current market value because the
partnership is receiving the assets and assuming the liabilities at their current market values.
Diff: 1
LO: 12-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: The Start-Up of a Partnership
14
Copyright © 2018 Pearson Education, Inc.
9) Rodriguez and Ying start a partnership on July 1, 2019. Rodriguez contributes $4100 cash, furniture
with a current market value of $47,000, accounts payable with a current market value of $16,000 and
equipment with a current market value of $23,000. Which of the following is the correct journal entry to
record Rodriguez's partnership investment?
A)
Cash
4100
Furniture
47,000
Equipment
23,000
Accounts Payable
16,000
Rodriguez, Capital
90,100
B)
Cash
4100
Furniture
47,000
Equipment
23,000
Accounts Payable
16,000
Rodriguez, Capital
58,100
C)
Cash
4100
Furniture
47,000
Equipment
23,000
Accounts Payable
16,000
Rodriguez, Capital
12,100
D)
Accounts Payable
16,000
Rodriguez, Capital
58,100
Cash
4100
Furniture
47,000
Equipment
23,000
Answer: B
Diff: 2
LO: 12-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: The Start-Up of a Partnership
15
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10) Jack holds an ownership interest of 63% and Teresa holds an ownership interest of 37% in the J and T
Partnership. This year, in order to further develop the business, Jack contributes an additional $6800 and
Teresa contributes an additional $3200 to the partnership. Which of the following is TRUE of this
scenario?
A) Either the total contribution of $10,000 or the contribution in relationship to the ownership interest
ratio will be recorded.
B) Only the total contribution of $10,000 will be recorded.
C) Individual contributions of $6800 by Jack and $3200 by Teresa will be recorded.
D) 63% of Jack's contribution and 37% of Teresa's contribution will be recorded.
Answer: C
Explanation: Contributions by partners are recorded at their current market value in the individual
contributing partners' capital accounts.
Diff: 1
LO: 12-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: The Start-Up of a Partnership
11) Which of the following is TRUE of a partnership balance sheet?
A) Unlike a corporation's balance sheet, it includes all income statement account information.
B) It excludes any current liabilities.
C) It reports a separate capital account for each partner.
D) It details the interest expenses of the business.
Answer: C
Diff: 1
LO: 12-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Partnership Financial Statements
16
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12) The balance sheet of Incrad Clothes, LLC, as of December 31, 2017 is presented below.
Assets
Cash
Merchandise inventory
Furniture
Computer
Other assets
Total Assets
$15,000
56,000
12,000
15,000
22,000
$120,000
Liabilities
Accounts payable
Bank Loan
Partner's Equity
Chad, Capital
Brad, Capital
Total Liabilities and
Partner's Equity
$12,000
25,000
45,000
38,000
$120,000
Which of the following statements is TRUE regarding Incrad's balance sheet?
A) The computer was purchased at a cost less than $15,000.
B) The bank loan of $25,000 should be considered part of the Partner's Equity.
C) Brad and Chad have limited liabilities for the partnership's debts because it is a limited liability
company.
D) The current market value of the furniture is $12,000.
Answer: C
Diff: 1
LO: 12-1, 12-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Synthesis
H2: Partnership Financial Statements, Other Forms of Business
13) If a partner's capital account is credited with the amount that he or she contributed in cash, which of
the following financial statements will be affected?
A) the withdrawal statement
B) the bank reconciliation statement
C) the statement of partners' equity
D) the interest payment schedule
Answer: C
Diff: 1
LO: 12-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Partnership Financial Statements
17
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14) In their business partnership, George has an ownership interest of 55% and Ben has an ownership
interest of 45%. In the current year, they purchase equipment for $9900. In order to finance the equipment
purchase, George makes a cash contribution of $7400 and Ben makes a cash contribution of $2500 to the
partnership. Based on the information provided, which of the following is TRUE regarding the
partnership balance sheet?
A) Both George, Capital and Ben, Capital will increase by $9900.
B) George, Capital will increase by $7400 and Ben, Capital will increase by $2500.
C) George, Capital will increase by $9900 and Ben, Capital will remain unchanged.
D) George, Capital will increase by $5445 and Ben, Capital will increase by $4455.
Answer: B
Explanation: Contributions by partners are recorded at their current market value in the individual
contributing partners' capital accounts.
Diff: 2
LO: 12-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: The Start-Up of a Partnership
15) Steve owns 64% and Mark owns 36% of a partnership business. They purchase equipment with a
suggested value of $9600. The current market value of the equipment at the time of purchase was $9100.
At the time of the balance sheet preparation, depreciation of $160 was recorded. Based on the information
provided, which of the following is TRUE of the partnership?
A) The Equipment account will be debited at $9100 on the date of purchase.
B) The Equipment account will be debited at $8940 on the date of purchase.
C) The Equipment account will be debited at $9600 on the date of purchase.
D) The Equipment account will be debited at $9440 on the date of purchase.
Answer: A
Explanation: Plant assets are recorded at their historic cost.
Diff: 2
LO: 12-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: The Start-Up of a Partnership
18
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16) Tim and Michelle have decided to form a partnership with a 60/40 partnership interest ratio. Tim
contributes $7500 cash and merchandise inventory with a market value of $1500. While journalizing this
transaction ________.
A) Tim, Capital will be debited for $9000
B) Tim, Capital will be credited for $9000
C) Tim, Capital will be credited for $6000 and Michelle, Capital will be credited for $4500
D) Tim, Capital will be debited for $6000 and Michelle, Capital will be debited for $4500
Answer: B
Explanation: Assets of $7500 cash and $1500 inventory will be debited. The owner's capital account will
be credited for the total contribution.
Diff: 1
LO: 12-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: The Start-Up of a Partnership
17) Edwin and Darren have decided to form a partnership. Edwin contributes $80,000 cash and
merchandise inventory with a current market value of $17,000. Darren contributes $2400 cash and office
furniture with a current market value of $3200. When journalizing these transactions ________.
A) Office Furniture will be debited for $1070
B) Office Furniture will be credited for $3200
C) Office Furniture will be debited for $3200
D) Office Furniture will be credited for $1070
Answer: C
Explanation: Assets are recorded in the partnerships records at their current market value.
Diff: 1
LO: 12-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: The Start-Up of a Partnership
18) Sasha and Michelle form a partnership. Sasha contributes $16,000 cash and merchandise inventory
with a current market value of $3000. While journalizing this transaction ________.
A) Merchandise Inventory will be credited for $3000
B) Merchandise Inventory will be debited for $3000
C) Merchandise Inventory will be credited for $13,000
D) Merchandise Inventory will be debited for $13,000
Answer: B
Explanation: Assets are recorded in the partnerships records at their current market value.
Diff: 1
LO: 12-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: The Start-Up of a Partnership
19
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19) Which of the following is TRUE of a partnership balance sheet?
A) Each partner's assets will be shown separately.
B) Each partner's liabilities will be shown separately.
C) Each partner's equity will be shown separately.
D) Each partner's assets, liabilities, and equity will be shown separately.
Answer: C
Diff: 1
LO: 12-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Partnership Financial Statements
Learning Objective 12-3
1) Profits and losses in a partnership must be shared based on each partner's capital balances.
Answer: FALSE
Diff: 1
LO: 12-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: How Are Partnership Profits and Losses Allocated? (H1)
2) If the partnership agreement specifies a method for sharing profits but not losses, then losses are
shared the same way as profits.
Answer: TRUE
Diff: 1
LO: 12-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: How Are Partnership Profits and Losses Allocated? (H1)
3) The sum (or total) of the net income (loss) allocated to each partner should always equal the total net
income (loss) of the partnership.
Answer: TRUE
Diff: 1
LO: 12-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: How Are Partnership Profits and Losses Allocated? (H1)
20
Copyright © 2018 Pearson Education, Inc.
4) The withdrawal accounts of a partnership are closed at the end of the period, as they are for a sole
proprietorship.
Answer: TRUE
Diff: 1
LO: 12-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Partner Withdrawal of Cash and Other Assets
5) Like a sole proprietorship's statement of owner's equity, the statement of partners' equity will show all
the partners' capital accounts as one account.
Answer: FALSE
Diff: 1
LO: 12-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Statement of Partner's Equity
6) Bill and Bob share profits of their partnership in the ratio of 6:1 respectively. If the net income of the
firm is $29,000, calculate Bill's share of net income. (Do not round any intermediate calculations.)
A) $20,714
B) $4143
C) $29,000
D) $24,857
Answer: D
Explanation: Bill's share of net income $29,000 × 6 / 7* = $24,857
*(6 + 1 = 7)
Diff: 1
LO: 12-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Allocation Based on Stated Ratio
21
Copyright © 2018 Pearson Education, Inc.
7) Steve and Roger allocate 2/3 of their partnership's profits and losses to Steve and 1/3 to Roger. If the net
income of the firm is $30,000, calculate Roger's share of net income. (Do not round any intermediate
calculations.)
A) $20,000
B) $10,000
C) $30,000
D) $25,000
Answer: B
Explanation: Roger's share of net income $30,000 × 1/3 = $10,000
Diff: 1
LO: 12-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Allocation Based on Stated Ratio
8) Albert, Billy, and Cathy share profits and losses of their partnership as 1:4:3, respectively. If the net
income is $30,000, calculate Albert's share of the profits. (Do not round any intermediate calculations.)
A) $7500
B) $11,250
C) $15,000
D) $3750
Answer: D
Explanation: Albert's share of profits = $30,000 × 1 / (1 + 4 + 3) = $3750
Diff: 1
LO: 12-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Allocation Based on Stated Ratio
9) Albert, Billy, and Cathy share profits and losses of their partnership in a 1:6:3, ratio respectively. If the
net income is $60,000, calculate Billy's share of the profits. (Do not round any intermediate calculations.)
A) $12,000
B) $18,000
C) $36,000
D) $6000
Answer: C
Explanation: Billy's share of profits = $60,000 × 6 / (1 + 6 + 3) = $36,000
Diff: 1
LO: 12-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Allocation Based on Stated Ratio
22
Copyright © 2018 Pearson Education, Inc.
10) Andre, Beau, and Caroline share profits and losses of their partnership in a 3:3:7 ratio respectively. If
the net income is $900,000, calculate Caroline's share of the profits. (Do not round any intermediate
calculations.)
A) $207,692
B) $484,615
C) $161,538
D) $69,231
Answer: B
Explanation: The profit share of Caroline = $900,000 × 7 / (3 + 3 + 7) = $484,615
Diff: 1
LO: 12-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Allocation Based on Stated Ratio
11) Which of the following statements is TRUE of partnerships?
A) If the partners have no partnership agreement specifying how to divide profits and losses, then they
share profits and losses equally.
B) It is legally required to share the profit and losses equally, irrespective of the partnership agreement.
C) The stated ratio of profit sharing needs to be approved by the SEC.
D) The profit sharing is always based on each partner's capital balances and any losses will be shared
equally.
Answer: A
Diff: 1
LO: 12-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: How Are Partnership Profits and Losses Allocated? (H1)
12) Dana and Emile allocate 2/3 of their partnership's profits and losses to Dana and 1/3 to Emile. The net
income of the firm is $40,000. The journal entry to close the Income Summary will include a ________. (Do
not round any intermediate calculations.)
A) credit to Income Summary for $26,667
B) debit to Dana, Capital for $13,333
C) credit to Emile, Capital for $26,667
D) debit to Income Summary for $40,000
Answer: D
Explanation: In closing, the Income Summary account will be debited for the total amount of Net Income
and each of the Partner's Capital accounts will be credited for their respective share of Net Income.
Diff: 1
LO: 12-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Allocation Based on Stated Ratio
23
Copyright © 2018 Pearson Education, Inc.
13) Bob and Bill allocate 2/3 of their partnership's profits and losses to Bob and 1/3 to Bill. The net income
of the firm is $20,000. The journal entry to close the Income Summary will include ________. (Do not
round any intermediate calculations.)
A) credit to Income Summary for $13,333
B) debit to Bob, Capital for $6667
C) credit to Bob, Capital for $13,333
D) credit to Income Summary for $20,000
Answer: C
Explanation: In closing, the Income Summary account will be debited for the total amount of Net Income
and each of the Partner's Capital accounts will be credited for their respective share of Net Income.
Diff: 2
LO: 12-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Allocation Based on Stated Ratio
14) Felix and Ian allocate 2/5 of their partnership's profits and losses to Felix and 3/5 to Ian. The net
income of the firm is $20,000. The journal entry to close the Income Summary will include ________.
A) credit to Ian, Capital for $12,000
B) debit to Felix, Capital for $12,000
C) debit to Felix, Capital for $8000
D) credit to Income Summary for $20,000
Answer: A
Explanation: In closing, the Income Summary account will be debited for the total amount of Net Income
and each of the Partner's Capital accounts will be credited for their share of Net Income.
Diff: 2
LO: 12-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Allocation Based on Stated Ratio
24
Copyright © 2018 Pearson Education, Inc.
15) Alex, Brad, and Carl are partners. The profit sharing rule between them is 4:3:2 in alphabetical order.
The partnership incurs a net loss of $120,000. The journal entry to close Income Summary will include a
________. (Do not round any intermediate calculations.)
A) debit to Income Summary account for $120,000
B) debit to Alex, Capital account for $53,333
C) credit to Alex, Capital account for $53,333
D) credit to Carl, Capital account for $26,667
Answer: B
Explanation: In the closing entry, the Income Summary account will be credited for $120,000 (amount of
net loss) and each of the partners' capital accounts will be debited for their respective share of the net
loss. Alex's share is 4/9 × $120,000 = $53,333.
Diff: 2
LO: 12-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Allocation Based on Stated Ratio
16) David, Chris and John formed a partnership on July 31, 2019. They decided to share profits equally,
but inserted a clause in the partnership agreement where any losses would be allocated in the ratio of
5:2:3, respectively. For the year ended December 31, 2019, the firm earned a net income of $50,000.
However, for the year ended December 31, 2020, the firm incurred a loss of $60,000. Assuming that John
had an initial capital contribution of $43,000 and made no withdrawals, what is the balance of John's
Capital account as of December 31, 2020? (Assume that none of the partners made any further
contributions to their capital accounts. Do not round any percentage calculations. Round all monetary
calculations to the nearest dollar.)
A) $41,667
B) $43,000
C) $59,667
D) $44,333
Answer: A
Explanation: John's beginning capital balance $43,000
Net income allocated (1/3 of 50,000)
16,667
Loss allocated (3 / 10 of $60,000) (18,000)
Balance of capital account on December 31, 2020 $41,667
Diff: 2
LO: 12-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Allocation Based on Stated Ratio
25
Copyright © 2018 Pearson Education, Inc.
17) Adam, Bill, and Charlie are partners. The profit and loss sharing rule between them is 2:5:3, with Bill
getting the largest share and Adam receiving the smallest. The partnership incurs a net loss of $21,000.
While closing the Income Summary ________. (Do not round any intermediate calculations.)
A) Income Summary will be credited for $6300
B) Adam, Capital will be debited for $6300
C) Adam, Capital will be credited for $6300
D) Charlie, Capital will be debited for $6300
Answer: D
Explanation: Adam, Capital ($21,000 × 2 / 10)
4200
Bill, Capital ($21,000 × 5 / 10)
10,500
Charlie, Capital ($21,000 × 3 / 10)
6300
Income Summary
21,000
Diff: 2
LO: 12-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Allocation Based on Stated Ratio
18) Adam, Bill, and Charlie are partners. The profit and loss sharing rule between them is 4:6:1, with Bill
receiving the largest share and Charlie receiving the smallest. The partnership incurs a net loss of $72,000.
While closing the Income Summary ________. (Do not round any intermediate calculations.)
A) Income Summary will be debited for $72,000
B) Adam, Capital will be debited for $26,182
C) Adam, Capital will be credited for $39,273
D) Charlie, Capital will be credited for $39,273
Answer: B
Explanation: Adam, Capital ($72,000 × 4 / 11)
26,182
Bill, Capital ($72,000 × 6 / 11)
39,273
Charlie, Capital ($72,000 × 1 / 11)
6545
Income Summary
72,000
Diff: 2
LO: 12-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Allocation Based on Stated Ratio
26
Copyright © 2018 Pearson Education, Inc.
19) Keith and Jim formed a partnership, with the partners sharing profits and losses equally. The
partnership incurs a net loss of $5000 for the year. The entry to close the net loss will ________.
A) debit Income Summary by $5000
B) decrease Keith, Capital by $2500
C) increase Jim, Capital by $2500
D) decrease Jim, Capital by $5000
Answer: B
Explanation: Each partner's capital account will decrease by $2500 ( $5000 × 50%)
Diff: 2
LO: 12-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Allocation Based on Stated Ratio
20) Farrell and Jimmy enter into a partnership agreement on May 1, 2018. Farrell contributes $30,000 and
Jimmy contributes $140,000 as their capital contributions. They decide to share profits and losses in the
ratio of their respective capital account balances. The net income for the year ended December 31, 2018 is
$40,000. Which of the following amounts should be credited to Jimmy's capital account? (Do not round
any intermediate calculations. Round your final answers to the nearest dollar.)
A) $70,000
B) $40,000
C) $32,941
D) $7059
Answer: C
Explanation: Allocation based on capital balances uses the ratio of the partner's capital balance to the
total capital. In this case, Total Capital = $170,000 ($140,000 + $30,000)
Jimmy's Capital balance = $140,000
Income allocated to Jimmy = ($140,000 / $170,000) × $40,000 = $32,941
Diff: 2
LO: 12-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Allocation Based on Capital Balances
27
Copyright © 2018 Pearson Education, Inc.
21) Farrell and Jimmy enter into a partnership agreement on May 1, 2018. Farrell contributes $60,000 and
Jimmy contributes $120,000 as their capital contributions. They decide to share profits and losses in the
ratio of their respective capital account balances. The net income for the year ended December 31, 2018 is
$70,000. Which of the following is the correct journal entry to record the allocation of profit? (Do not
round any intermediate calculations. Round your final answers to the nearest dollar.)
A)
Farrell, Capital
46,667
Jimmy, Capital
46,667
B)
Income Summary
70,000
Farrell, Capital
23,333
Jimmy, Capital
46,667
C)
Farrell, Capital
23,333
Jimmy, Capital
46,667
Income Summary
70,000
D)
Income Summary
23,334
Farrell, Capital
23,333
Jimmy, Capital
46,667
Answer: B
Explanation: Allocation based on capital balances uses the ratio of the partner's capital balance to the
total capital. In this case, Total Capital = $180,000 ($120,000 + $60,000)
Jimmy's Capital balance = $120,000
Income allocated to Jimmy = ($120,000 / $180,000) × $70,000 = $46,667
Farrell's Capital balance = $60,000
Income allocated to Farrell = ($60,000 / $180,000) × $70,000 = $23,333
Diff: 1
LO: 12-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Allocation Based on Capital Balances
28
Copyright © 2018 Pearson Education, Inc.
22) Farrell and Jimmy enter into a partnership agreement on May 1, 2018. Farrell contributes $50,000 and
Jimmy contributes $150,000 as their capital contributions. They decide to share profits and losses in the
ratio of their respective capital account balances. The net loss for the year ended December 31, 2018 is
$40,000. The capital account of Farrell should be ________ with his share of the loss.
A) debited
B) credited
C) increased
D) halved
Answer: A
Diff: 3
LO: 12-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Allocation Based on Capital Balances
23) In a partnership, the entry to close net income ________.
A) increases assets
B) increases liabilities
C) decreases partners' capital accounts
D) decreases the Income Summary account
Answer: D
Diff: 1
LO: 12-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Allocation Based on Stated Ratio
24) In a partnership, the entry to close net loss ________.
A) increases assets
B) increases liabilities
C) decreases Partners' Capital accounts
D) decreases the Income Summary account
Answer: C
Diff: 1
LO: 12-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Allocation Based on Stated Ratio
29
Copyright © 2018 Pearson Education, Inc.
25) Nancy and Betty enter into a partnership agreement where they decide to share profits according to
the following rules:
(a) Nancy and Betty will receive salaries of $1700 and $14,500 respectively as the first allocation.
(b) The next allocation is based on 20% of each partner's capital balances.
(c) Any remaining profit or loss is to be allocated completely to Betty.
The partnership's net income for the first year is $50,000. Nancy's capital balance is $83,000 and Betty's
capital balance is $11,000 at the end of the year. Calculate the share of profit/loss to be allocated to Betty.
A) $18,300
B) $31,700
C) $3760
D) $16,100
Answer: B
Explanation: The allocation of profit or loss can also be based on a combination of services, capital
balances, and stated ratios. A partnership might want to use this method if one partner contributes more
capital but the other partner devotes more time to the business.
Calculation:
Nancy
Betty
Total
Net Income
$50,000
Salary Allocation
$1700
$14,500
(16,200)
Capital Allocation
Nancy ( 20% of $83,000)
16,600
Betty (20% of $11,000)
2200
(18,800)
Net Income remaining
15,000
Remainder earned by Betty
_____
15,000
(15,000)
Total allocated profit
$18,300
$31,700
$0
Diff: 3
LO: 12-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Allocation Based on Services, Capital Balances and Stated Ratios
30
Copyright © 2018 Pearson Education, Inc.
26) Nancy and Betty enter into a partnership agreement whereby they undertake to share profits
according to the following rules:
(a) Nancy and Betty will receive salaries of $14,500 and $22,500 respectively as the first allocation.
(b) The next allocation is based on 20% of each partner's capital balances.
(c) Any remaining profit or loss is to be allocated completely to Betty.
The partnership's net loss for the first year is $50,000. Nancy's capital balance is $98,000 and Betty's capital
balance is $9000 at the end of the year. Calculate the share of profit (loss) to be allocated to Nancy.
A) $34,100
B) $(19,600)
C) $14,500
D) $(84,100)
Answer: A
Explanation: The allocation of profit or loss can also be based on a combination of services, capital
balances, and stated ratios. A partnership might want to use this method if one partner contributes more
capital but the other partner devotes more time to the business.
Calculation
Nancy
Betty
Total
Net Income (Loss)
$(50,000)
Salary Allocation
$14,500
$22,500
(37,000)
Capital Allocation
Nancy (20% of $98,000)
19,600
Betty (20% of $9000)
1800
(21,400)
Net Income(Loss) remaining
(108,400)
Remainder borne by Betty
______
(108,400)
108,400
Total allocated loss
$34,100
(84,100)
$0
Diff: 3
LO: 12-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Allocation Based on Services, Capital Balances and Stated Ratios
31
Copyright © 2018 Pearson Education, Inc.
27) Lori and Mike enter into a partnership and decide to share profits and losses as follows:
1. The first allocation is a salary allowance with Lori receiving $12,000 and Mike receiving $25,000.
2. The second allocation is 20% of the partners' capital balances at year end. On December 31, 2019, the
capital balances for Lori and Mike are $86,000 and $344,000, respectively.
3. Any remaining profit or loss is allocated equally.
For the year ending December 31, 2019, the partnership reported a net loss of $122,000. The journal entry
to record the loss allocation will ________.
A) debit Lori, Capital for $93,300
B) debit Lori, Capital for $28,700
C) debit Mike, Capital for $93,800
D) credit Mike, Capital for $93,800
Answer: A
Explanation:
Lori
Mike
Total
Net Loss
($122,000)
Salary
$12,000
$25,000
($37,000)
Capital
17,200
68,800
($86,000)
Net Loss for Allocation
($245,000)
Allocation
(122,500)
(122,500)
245,000
Net Loss Allocated
(93,300)
(28,700)
$0
Diff: 3
LO: 12-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Allocation Based on Services, Capital Balances and Stated Ratios
32
Copyright © 2018 Pearson Education, Inc.
28) Lori and Peter enter into a partnership and decide to share profits and losses as follows:
1. The first allocation is a salary allowance with Lori receiving $16,000 and Peter receiving $18,000.
2. The second allocation is 15% of the partners' capital balances at year end. On December 31, 2019, the
capital balances for Lori and Peter are $90,000 and $20,000, respectively.
3. Any remaining profit or loss is allocated equally.
For the year ending December 31, 2019, the partnership reported net income of $55,000. What is Lori's
share of the net income?
A) $29,500
B) $20,250
C) $31,750
D) $23,250
Answer: C
Explanation:
Lori
Peter
Total
Net Income
$55,000
Salary
$16,000
$18,000
(34,000)
Capital
13,500
3000
(16,500)
Net Loss for Allocation
(4500)
Allocation
(2250)
(2250)
4500
Net Income Allocated
$31,750
$23,250
$0
Diff: 3
LO: 12-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Allocation Based on Services, Capital Balances and Stated Ratios
33
Copyright © 2018 Pearson Education, Inc.
29) Nancy and Peter enter into a partnership and decide to share profits and losses as follows:
1. The first allocation is a salary allowance with Nancy receiving $13,000 and Peter receiving $11,000.
2. The second allocation is 15% of the partners' capital balances at year end. On December 31, 2019, the
capital balances for Nancy and Peter are $82,000 and $18,000, respectively.
3. Any remaining profit or loss is allocated equally.
For the year ending December 31, 2019, the partnership reported a net loss of $147,000. What is Peter's
share of the net loss?
A) $13,700
B) $54,000
C) $5800
D) $67,700
Answer: D
Explanation:
Lori
Peter
Total
Net Loss
$147,000
Salary
$13,000
$11,000
(24,000)
Capital
12,300
2700
(15,000)
Net Loss for Allocation
(108,000)
Allocation
(54,000)
(54,000)
108,000
Net Income Allocated
$79,300
$67,700
$0
Diff: 3
LO: 12-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Allocation Based on Services, Capital Balances and Stated Ratios
34
Copyright © 2018 Pearson Education, Inc.
30) Trevor and Brian enter into a partnership and decide to share profits and losses as follows:
1. The first allocation is a salary allowance with Trevor receiving $10,000 and Brian receiving $20,000.
2. The second allocation is 20% of the partners' capital balances at year end. On December 31, 2019, the
capital balances for Trevor and Brian are $50,000 and $40,000, respectively.
3. Any remaining profit or loss is allocated equally.
For the year ending December 31, 2019, the partnership reported net income of $50,000.
Required:
1. Calculate the share of profit allocated to each partner.
2. Prepare the journal entry to record the allocation of profit on December 31, 2019.
Answer:
Trevor
Brian
Total
Net Income
$50,000
Salary
$10,000
$20,000
(30,000)
Capital
10,000
8,000
(18,000)
Net Income for Allocation
2,000
Allocation
1,000
1,000
(2,000)
Net Income Allocated
$21,000
$29,000
$0
Accounts
Debit
Credit
Income Summary
50,000
Capital, Trevor
Capital, Brian
Diff: 3
LO: 12-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Allocation Based on Services, Capital Balances and Stated Ratios
35
Copyright © 2018 Pearson Education, Inc.
21,000
29,000
31) Aries and Eros start a partnership with capital contributions of $36,000 and $55,000, respectively. Over
the course of the year, Aries withdraws $5100 from the business in order to meet his personal expenses.
Which of the following is the correct journal entry to record the above withdrawal?
A)
Aries, Withdrawals
5100
Cash
5100
B)
Aries, Withdrawals
5100
Aries, Capital
5100
C) No entry
D)
Aries, Withdrawals
5100
Eros, Capital
5100
Answer: A
Diff: 1
LO: 12-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Partner Withdrawal of Cash and Other Assets
32) Aries and Eros start a partnership with capital contributions of $37,000 and $63,000, respectively. Over
the course of the year, Aries withdraws $4800 from the business in order to meet his personal expenses.
Which of the following is the correct journal entry to close the relevant Withdrawals account at the end of
the year?
A)
Aries, Withdrawals
4800
Cash
4800
B)
Aries, Capital
4800
Aries,
Withdrawals
4800
C) No entry
D)
Aries, Withdrawals
4800
Eros, Capital
4800
Answer: B
Explanation: Withdrawals will decrease the Capital account. To close the Withdrawals account, the
Withdrawals account is credited and the Capital account is debited.
Diff: 2
LO: 12-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Partner Withdrawal of Cash and Other Assets
36
Copyright © 2018 Pearson Education, Inc.
33) How is the accounting equation affected when a partner withdraws cash?
A) Both equity and assets decrease; liabilities are not affected.
B) Assets increase and equity decreases; liabilities are not affected.
C) Both assets and liabilities decrease; equity is not affected.
D) Liabilities decrease and assets increase; equity is not affected.
Answer: A
Diff: 1
LO: 12-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Partner Withdrawal of Cash and Other Assets
34) Kenny and Jeff form a partnership. During the year, Kenny and Jeff withdraw $30,000 and $23,000,
respectively. Which of the following will be included in the journal entry to record the withdrawals?
A) debit to Kenny, Withdrawals for $30,000
B) debit to Jeff, Withdrawals for $7000
C) credit to Kenny, Withdrawals for $30,000
D) credit to Jeff, Withdrawals for $23,000
Answer: A
Explanation: The journal entry to record withdrawals will include a debit to the partner's Withdrawal
account and a credit to the Cash account.
Diff: 2
LO: 12-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Partner Withdrawal of Cash and Other Assets
35) Neil and Paul formed a partnership. During the year, Neil and Paul withdrew $13,000 and $6,000,
respectively. Provide the journal entry to close the withdrawal accounts. Omit explanation.
Answer:
Neil, Capital
$13,000
Paul, Capital
$6,000
Neil, Withdrawals
$13,000
Paul, Withdrawals
$6,000
Diff: 3
LO: 12-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Partner Withdrawal of Cash and Other Assets
37
Copyright © 2018 Pearson Education, Inc.
36) A partnership began on January 1, 2020, with two partners Greg Lucey and Scott Lucas. Greg
contributed $50,000 cash and Scott contributed equipment with a fair market value of $40,000. The
partners share profits and losses 50:50. Partners' withdrawals were $12,000 by Greg and $6000 by Scott.
Net income for 2020 was $56,000. What is the balance in Greg's capital account at December 31, 2020?
A) $66,000
B) $78,000
C) $16,000
D) $50,000
Answer: A
Explanation: $50,000 contribution + $28,000 net income - $12,000 withdrawals = $66,000
Diff: 3
LO: 12-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Statement of Partner's Equity
37) A partnership began on January 1, 2020, with two partners Mary Snow and Scott Lucas. Mary
contributed $53,000 cash and Scott contributed equipment with a fair market value of $33,000. The
partners share profits and losses 60:40, with Mary receiving 60%. Partners' withdrawals were $11,000 by
Mary and $5500 by Scott. Net income for 2020 was $54,000. What is the balance in Mary's capital account
at December 31, 2020?
A) $74,400
B) $21,400
C) $53,000
D) $32,400
Answer: A
Explanation: $53,000 contribution+ $32,400 net income - $11,000 withdrawal = $74,400
Diff: 3
LO: 12-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Statement of Partner's Equity
38
Copyright © 2018 Pearson Education, Inc.
38) A partnership began on January 1, 2020, with two partners Kelly Simmons and Dawn Jones. The
partnership is called Simmons and Jones Partnership. Kelly contributed $40,000 cash and Dawn
contributed equipment with a fair market value of $70,000. The partners share profits and losses 50:50.
Partners' withdrawals were $10,000 by Kelly and $5,000 by Dawn. Net income for 2020 was $60,000.
Required:
Prepare the statement of partner's equity for the year ending December 31, 2020.
Answer: Simmons and Jones Partnership
Statement of Partners' Equity
For the Year Ended December 31, 2020
Simmons
Capital, January 1, 2020
Owner contribution
Net Income
Owner withdrawals
Capital, December 31, 2020
Diff: 3
LO: 12-3
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Statement of Partner's Equity
$0
40,000
30,000
(10,000)
$60,000
Jones
Total
$0
70,000
30,000
(5,000)
$95,000
$0
110,000
60,000
(15,000)
$155,000
Learning Objective 12-4
1) In a partnership, a person can become a partner by purchasing an existing partner's interest.
Answer: TRUE
Diff: 1
LO: 12-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Admission by Purchasing an Existing Partner's Interest
2) The purchase of an existing partner's interest is a transaction between the partnership and the new
partner, and not a personal transaction between the two individuals involved.
Answer: FALSE
Diff: 1
LO: 12-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Admission by Purchasing an Existing Partner's Interest
39
Copyright © 2018 Pearson Education, Inc.
3) When a new partner enters into a partnership by purchasing an existing partner's interest, the total
assets and equity of the business increase.
Answer: FALSE
Diff: 1
LO: 12-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Admission by Purchasing an Existing Partner's Interest
4) When a new partner is admitted to a partnership by purchasing an existing partner's interest, the
business's accounting records do not record the transfer of cash from the new partner to the existing
partner.
Answer: TRUE
Diff: 1
LO: 12-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Admission by Purchasing an Existing Partner's Interest
5) Admission of a new partner to a partnership, by purchasing an existing partner's interest, simply
transfers capital from one partner's account to another.
Answer: TRUE
Diff: 1
LO: 12-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Admission by Purchasing an Existing Partner's Interest
6) Admission of a new partner, by contributing directly to the partnership, increases both assets and
liabilities by the same amount.
Answer: FALSE
Diff: 1
LO: 12-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Admission by Contributing to the Partnership
40
Copyright © 2018 Pearson Education, Inc.
7) When a new partner is admitted at a higher-than-book-value contribution, the existing partners will
receive a bonus amount.
Answer: TRUE
Diff: 1
LO: 12-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Admission by Contributing to the Partnership
8) Irrespective of the original profit-and-loss-sharing ratio, the bonus received by existing partners—by
admitting a new partner—will be allocated equally.
Answer: FALSE
Diff: 1
LO: 12-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Admission by Contributing to the Partnership
9) New partners will always be admitted to a partnership at a contribution equal to or greater than the
book value of their interest.
Answer: FALSE
Diff: 1
LO: 12-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Admission by Contributing to the Partnership
10) When a partner sells his interest to another party, the journal entry simply credits the withdrawing
partner's capital account and debits the new partner's capital.
Answer: FALSE
Diff: 1
LO: 12-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Admission by Purchasing an Existing Partner's Interest
41
Copyright © 2018 Pearson Education, Inc.
11) Which of the following is TRUE of ownership changes in a partnership?
A) Admitting a new partner does not change the core structure of the old partnership.
B) The purchase of an existing partner's interest is a transaction between the new partner and the
partnership firm.
C) Any time the partner mix changes, the old partnership ceases to exist and a new partnership begins.
D) A person can become a partner by purchasing an existing partner's interest, even without the approval
of the other partners.
Answer: C
Diff: 1
LO: 12-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Admission by Purchasing an Existing Partner's Interest
12) Keith and Jim are partners. Keith has a capital balance of $47,000 and Jim has a capital balance of
$32,000. Jim sells $15,000 of his ownership to Bill. Which of the following is TRUE of the journal entry to
admit Bill?
A) Bill, Capital will be debited for $17,000.
B) Jim, Capital will be debited for $17,000.
C) Jim, Capital will be credited for $15,000.
D) Bill, Capital will be credited for $15,000.
Answer: D
Diff: 1
LO: 12-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Admission by Purchasing an Existing Partner's Interest
13) Dominic and Morgan are partners. Dominic has a capital balance of $360,000 and Morgan has a
capital balance of $225,000. Morgan sells $125,000 of his ownership to Lance. Which of the following is
TRUE of the items in the balance sheet?
A) The total equity decreases by $125,000.
B) The total equity remains unchanged.
C) Assets will decrease by $125,000.
D) Assets will increase by $125,000.
Answer: B
Diff: 2
LO: 12-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Admission by Purchasing an Existing Partner's Interest
42
Copyright © 2018 Pearson Education, Inc.
14) Raul and Bianca are partners. Raul has a capital balance of $50,000 and Bianca has a capital balance of
$37,000. Bianca sells half of her ownership interest to Bill for $20,500. Which of the following is TRUE of
the journal entry to record this transaction?
A) Bianca, Capital is credited for $18,500 and Raul, Capital is debited for $18,500.
B) Bill, Capital is credited for $20,500 and Raul, Capital is debited for $20,500.
C) Bill, Capital is credited for $18,500 and Bianca, Capital is debited for $18,500.
D) Bianca, Capital is credited for $20,500 and Raul, Capital is debited for $20,500.
Answer: C
Explanation: $37,000 / 2 = $18,500
Diff: 2
LO: 12-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Admission by Purchasing an Existing Partner's Interest
15) Which of the following is TRUE when a new partner is admitted to a partnership by purchasing an
existing partner's interest?
A) Only the transfer of cash from the new partner to the existing partner is recorded.
B) Admission of the new partner affects the total asset amount.
C) Admission of the new partner affects the total equity amount.
D) The only journal entry the partnership records is the transfer of partner's capital.
Answer: D
Diff: 1
LO: 12-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Admission by Purchasing an Existing Partner's Interest
43
Copyright © 2018 Pearson Education, Inc.
16) Floyd and Merriam start a partnership business on June 12, 2019. Their capital account balances as of
December 31, 2020 stood as follows:
Floyd
Merriam
$54,000
22,000
Floyd agrees to sell half of his share to Ramelow in exchange for $32,000 cash. Which of the following is
the correct journal entry in the books of the firm for the above transfer of interest?
A)
Cash
32,000
Ramelow, Capital
32,000
B)
Floyd, Capital
27,000
Ramelow, Capital
27,000
C)
Cash
32,000
Floyd, Capital
27,000
Ramelow, Capital
59,000
D)
Cash
32,000
Floyd, Capital
5000
Ramelow, Capital
27,000
Answer: B
Explanation: When a new partner purchases an existing partner's interest, capital is transferred by
debiting the existing partner's capital account and crediting the new partner's capital account.
Diff: 2
LO: 12-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Admission by Purchasing an Existing Partner's Interest
44
Copyright © 2018 Pearson Education, Inc.
17) Floyd and Merriam start a partnership business on June 12, 2019. Their capital account balances as of
December 31, 2020 stood as follows:
Floyd
Merriam
$51,000
19,000
Floyd and Merriam share profits and losses equally. They agreed to dissolve the partnership and start a
new one, admitting Ramelow for one-half share in the capital in exchange for land with a market value of
$66,000. Which of the following is the correct journal entry to record the introduction of Ramelow as a
partner?
A)
Land
66,000
Ramelow, Capital
66,000
B)
Floyd, Capital
66,000
Ramelow, Capital
66,000
C)
Merriam, Capital
33,000
Floyd, Capital
33,000
Ramelow, Capital
66,000
D)
Land
66,000
Merriam, Capital
1,000
Floyd, Capital
1,000
Ramelow, Capital
68,000
Answer: D
Explanation: Total Capital = $51,000 + $19,000 + $66,000 =$136,000
Ramelow Capital = $136,000 / 2 = $68,000
Land debit is $66,000.
$68,000 - $66,000 = $2,000 bonus to new partner.
$2,000 bonus to new partner is distributed to old partners in 50/50 ratio.
Diff: 2
LO: 12-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Admission by Contributing to the Partnership
45
Copyright © 2018 Pearson Education, Inc.
18) Floyd and Merriam start a partnership business on June 12, 2019. Their capital account balances as of
December 31, 2020 stood as follows:
Floyd
Merriam
$50,000
23,000
They agreed to admit Ramelow into the business for a one-fifth interest in the new partnership. Ramelow
contributes $27,000 cash in exchange for the partnership interest. Assume that Floyd and Merriam shared
profits and losses in a 3:1 ratio before the admission of Ramelow. Which of the following is the correct
journal entry to record the above admission?
A)
Cash
27,000
Ramelow, Capital
27,000
B)
Cash
27,000
Merriam, Capital
7000
Floyd, Capital
20,000
C)
Merriam, Capital
20,000
Floyd, Capital
7000
Ramelow, Capital
27,000
D)
Cash
27,000
Floyd, Capital
5250
Merriam, Capital
1750
Ramelow, Capital
20,000
Answer: D
Explanation: Existing capital
$73,000
Contribution of new partner
27,000
Capital after admission
100,000
Capital of new partner ($100,000 × 1 / 5)
20,000
Bonus to existing partners ($27,000 - $20,000)
$7000
Ramelow had to buy into the partnership at a contribution of $27,000, which is above the $20,000 book
value of his one-fifth interest. Ramelow's higher-than-book-value contribution creates a bonus for Floyd
and Merriam, which is shared between them in their profit sharing ratio, which is 3:1.
Diff: 2
LO: 12-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Admission by Contributing to the Partnership
46
Copyright © 2018 Pearson Education, Inc.
19) Floyd and Merriam start a partnership business on June 12, 2019. Their capital account balances as of
December 31, 2020 stood as follows:
Floyd
Merriam
$37,000
22,000
They agreed to admit Ramelow into the business for a one-third interest in the new partnership.
Ramelow contributes $22,000 cash in exchange for the partnership interest. Assume that Floyd and
Merriam shared profits and losses equally before the admission of Ramelow. Which of the following is
the correct journal entry to record the above admission?
A)
Cash
22,000
Ramelow, Capital
22,000
B)
Cash
22,000
Merriam, Capital
2500
Floyd, Capital
2500
Ramelow, Capital
27,000
C)
Merriam, Capital
13,500
Floyd, Capital
13,500
Ramelow, Capital
27,000
D)
Cash
22,000
Floyd, Capital
2500
Merriam, Capital
2500
Ramelow, Capital
17,000
Answer: B
Explanation: Existing capital
$59,000
Contribution of new partner
22,000
Capital after admission
81,000
Capital of new partner ($81,000 × 1 / 3)
27,000
Bonus to new partner ($27,000 - $22,000)
$5000*
*(to be borne equally by Floyd and Merriam)
A new partner may be so valuable that the existing partners offer a partnership share that includes a
bonus to the new partner. The bonus of $5000 went to Ramelow from the other partners, so their capital
accounts are debited for the bonus. The existing partners (Floyd and Merriam) share this decrease in
capital as though it were a loss, on the basis of their profit-and-loss sharing ratio.
Diff: 2
LO: 12-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Admission by Contributing to the Partnership
47
Copyright © 2018 Pearson Education, Inc.
20) Floyd and Merriam start a partnership business on June 12, 2019. Their capital account balances as of
December 31, 2020 stood as follows:
Floyd
Merriam
$55,000
17,000
They agreed to admit Ramelow into the business for a one-third interest in the new partnership.
Ramelow contributes $24,000 cash in exchange for the partnership interest. Floyd and Merriam share
profits and losses equally before the admission of Ramelow. What is the correct capital account balance of
Ramelow after he enters the business? (Do not round intermediate calculations. Round the final answer to
the nearest dollar.)
A) $24,000
B) $32,000
C) $28,000
D) $55,000
Answer: B
Explanation: Existing capital
$72,000
Contribution of new partner
24,000
Capital after admission
96,000
Capital of new partner ($96,000 × 1 / 3)
$32,000
A new partner may be so valuable that the existing partners offer a partnership share that includes a
bonus to the new person. The bonus of $8000 went to Ramelow from the other partners, Floyd and
Merriam, who had to bear the $8000 burden equally.
Diff: 2
LO: 12-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Admission by Contributing to the Partnership
21) Rex and Sandy are partners. Rex has a capital balance of $370,000 and Sandy has a capital balance of
$280,000. Marcus contributes a building with a fair market value of $220,000 in order to acquire an
interest in the partnership. What is Marcus's partnership share after he makes the investment?(Assume
no bonus to any partner. Round the percentage to one decimal place.)
A) 25.3%
B) 32.2%
C) 42.5%
D) 17.2%
Answer: A
Explanation: Marcus's share in the partnership after the investment
= $220,000 / ($370,000 + $280,000 + $220,000) = $220,000 / $870,000 = 25.3%
Diff: 2
LO: 12-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Admission by Contributing to the Partnership
48
Copyright © 2018 Pearson Education, Inc.
22) Ruby and Anita are partners. Ruby has a capital balance of $270,000 and Anita has a capital balance of
$180,000. Denis contributes a building with a current market value of $170,000 to acquire an interest in the
new partnership. Which of the following is TRUE of the journal entry to record this transaction? (Assume
no bonus to any partner.)
A) Building will be debited for $170,000, Ruby, Capital and Anita, Capital will be credited for $85,000
each.
B) Building will be debited for $170,000 and Denis, Capital will be credited for $170,000.
C) Ruby, Capital and Anita, Capital will be debited for $85,000 each and Denis, Capital will be credited
for $170,000.
D) Ruby, Capital and Anita, Capital will be credited for $85,000 each and Denis, Capital will be debited
for $170,000.
Answer: B
Diff: 2
LO: 12-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Admission by Contributing to the Partnership
23) Shaun and Rick are partners. Shaun has a capital balance of $12,000 and Rick has a capital balance of
$10,000. Edwin contributes a building with a current market value of $8000 to acquire an interest in the
new partnership. Which of the following is TRUE of the effect of the transaction on the balance sheet?
(Assume no bonus to any partner.)
A) Both assets and equity will increase by $8000.
B) Both assets and liabilities will decrease by $8000.
C) Both assets and equity will decrease by $8000.
D) Both assets and liabilities will increase by $8000.
Answer: A
Diff: 2
LO: 12-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Admission by Contributing to the Partnership
49
Copyright © 2018 Pearson Education, Inc.
24) Frank and Harry are partners. Frank has a capital balance of $51,000 and Harry has a capital balance
of $40,000. Bill contributes a building with a fair market value of $27,000 to the partnership for an
ownership interest of 20%. Calculate Bill's capital in the new partnership.
A) $13,000
B) $27,000
C) $24,000
D) $23,600
Answer: D
Explanation: Bill will get an ownership interest of 20% of ($51,000 + $40,000 + $27,000)
= 0.2 × $118,000 = $23,600
Diff: 2
LO: 12-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Admission by Contributing to the Partnership
25) Keith and Jim are partners. Keith has a capital balance of $51,000 and Jim has a capital balance of
$39,000. Bill contributes a building with a fair market value of $27,000 to the partnership for an ownership
interest of 20%. How much is the total bonus for the existing partners?
A) $12,000
B) $13,500
C) $3600
D) $27,000
Answer: C
Explanation: Bill will get an ownership interest of 20% of ($51,000 + $39,000 + $27,000) = 0.2 × $117,000 =
$23,400
Total bonus to existing partners = $27,000 - $23,400 = $3600
Diff: 1
LO: 12-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Admission by Contributing to the Partnership
50
Copyright © 2018 Pearson Education, Inc.
26) Sarah and Jane formed a partnership with capital contributions of $210,000 and $123,000, respectively.
Peter contributed $86,000 to acquire an ownership interest of 12% in the new partnership. How much is
the total bonus for the existing partners?
A) $86,000
B) $35,720
C) $50,280
D) $17,860
Answer: B
Explanation: Peter will get an ownership interest of 12% of ($210,000 + $123,000 + $86,000)
= 0.12 × $419,000 = $50,280.
Total bonus for the existing partners = $86,000 - $50,280 = $35,720
Diff: 3
LO: 12-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Admission by Contributing to the Partnership
27) Anna and Naomi are partners. Anna has a capital balance of $49,000 and Naomi has a capital balance
of $42,000. Gary invested $27,000 to acquire an ownership interest of $18,000. Which of the following is
TRUE of the partnership journal entry to record the receipt of Gary's contribution? (Assume the existing
partners equally divide the bonus.)
A) Cash is debited for $27,000 and Gary, Capital is credited for $18,000.
B) Cash is debited for $18,000 and Gary, Capital is credited for $18,000.
C) Cash is credited for $27,000 and Gary, Capital is debited for $18,000.
D) Cash is credited for $18,000 and Gary, Capital is debited for $18,000.
Answer: A
Diff: 2
LO: 12-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Admission by Contributing to the Partnership
28) Allan and Ralph are partners. Allan has a capital balance of $92,000 and Ralph has a capital balance of
$75,000. Carol invested $60,000 to acquire an ownership interest of $50,000. Which of the following is
TRUE of the impact of the transaction on the balance sheet?
A) Asset increases and the equity will remain unchanged.
B) Both assets and equity will increase.
C) Assets will increase and equity will decrease.
D) Assets will decrease and the equity will remain unchanged.
Answer: B
Diff: 2
LO: 12-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Admission by Contributing to the Partnership
51
Copyright © 2018 Pearson Education, Inc.
29) Keith and Jim are partners. Keith has a capital balance of $49,000 and Jim has a capital balance of
$38,000. Bill invested $33,000 to acquire an ownership interest of 30%. Which of the following statements
is TRUE of this transaction? (Round the final answer to the nearest dollar.)
A) Keith and Jim received a bonus of $1500 each.
B) Bill received a bonus of $4900.
C) Keith and Jim received a bonus of $2450 each.
D) Bill received a bonus of $3000.
Answer: D
Explanation: Bill's ownership in the partnership after the investment
= 0.3 × ($49,000 + $38,000 + $33,000) = $36,000
Bill's equity bonus = $36,000 - $33,000 = $3000
Diff: 2
LO: 12-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Admission by Contributing to the Partnership
30) Issac and Karl are partners. Issac has a capital balance of $25,000 and Karl has a capital balance of
$20,000. Bill invested $15,000 to acquire an ownership interest of 30%. How does this transaction affect
the balance sheet items?
A) Asset increases and the equity remains unchanged.
B) Assets increase and the equity decreases.
C) Both assets and equity increase.
D) Assets increase, liabilities decrease, and the equity remain unchanged.
Answer: C
Diff: 2
LO: 12-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Admission by Contributing to the Partnership
52
Copyright © 2018 Pearson Education, Inc.
31) Lauren and Elizabeth are partners. Lauren has a capital balance of $125,000 and Elizabeth has a capital
balance of $110,000. Harry invested $100,000 to acquire an ownership interest of 30%. The journal entry to
record the receipt of Harry's contribution will ________.
A) decrease Lauren, Capital
B) increase Elizabeth, Capital
C) decrease Cash
D) decrease Harry, Capital
Answer: A
Explanation:
Partnership capital before admission of new partner = $125,000 + $110,000 = $235,000
Contribution of new partner
100,000
Partnership capital after contribution
$335,000
New partner's ownership share ($335,000 × 30%)
100,500
Contribution of new partner
(100,000)
Bonus to new partner
$500
In this case Harry entered the partnership at a price less than the book value of his equity.
The bonus came to Harry from the other partners so their capital accounts are reduced in the amount of
the bonus.
Diff: 2
LO: 12-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Admission by Contributing to the Partnership
32) When an existing partner sells his interest to another party in a personal transaction ________.
A) it is considered a transaction between the partnership and the new party
B) the old partnership will continue functioning, since the partner is replaced by another party without
diluting the old partnership
C) the journal entry simply debits the withdrawing partner's capital account and credits the new partner's
capital
D) the equity and assets in the balance sheet always increase by the same amount
Answer: C
Diff: 1
LO: 12-4
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Admission by Purchasing an Existing Partner's Interest
53
Copyright © 2018 Pearson Education, Inc.
Learning Objective 12-5
1) Whenever a partner mix in a partnership changes, the old partnership ceases to exist and a new
partnership begins.
Answer: TRUE
Diff: 1
LO: 12-5
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: How is the Withdrawal of a Partner Accounted For? (H1)
2) The death of a partner dissolves the partnership.
Answer: TRUE
Diff: 1
LO: 12-5
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: How is the Withdrawal of a Partner Accounted For? (H1)
3) When a partner withdraws his or her partnership interest for cash, the liabilities in the balance sheet
remain unchanged.
Answer: TRUE
Diff: 1
LO: 12-5
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: How is the Withdrawal of a Partner Accounted For? (H1)
4) A withdrawing partner acquires a bonus if the assets they receive in the dissolution are worth more
than the book value of their equity.
Answer: TRUE
Diff: 1
LO: 12-5
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Withdrawal from the Partnership--Bonus to the Withdrawing Partner
54
Copyright © 2018 Pearson Education, Inc.
5) When a partner withdraws his or her interest in the partnership, both assets and equity will decrease.
Answer: TRUE
Diff: 1
LO: 12-5
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Withdrawal from the Partnership--No Bonus to Any Partner
6) If a withdrawing partner receives assets worth more than the book value of his or her equity, the
capital accounts of the remaining partners decrease.
Answer: TRUE
Diff: 1
LO: 12-5
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Withdrawal from the Partnership--Bonus to the Withdrawing Partner
7) When a partner withdraws his or her equity for cash, the corresponding capital account will be closed.
Answer: TRUE
Diff: 1
LO: 12-5
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Withdrawal from the Partnership--No Bonus to Any Partner
8) When a partner dies, the partnership ceases to exist, and the deceased partner's estate will have
ownership of the partner's equity in the partnership.
Answer: TRUE
Diff: 1
LO: 12-5
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Death of a Partner
55
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9) Gary, Peter, and Chris own a firm as partners. Gary has a capital balance of $22,000; Peter a capital
balance of $42,000; and Chris has a capital balance of $32,000. As per the partnership agreement, Gary
gets a profit share of 2/9; Peter has 4/9; and Chris has 3/9. Which of the following is TRUE, if Gary
withdraws from the partnership by receiving $22,000?
A) Peter, Capital and Chris, Capital will be credited for $11,000 each.
B) Gary, Capital will be debited for $22,000.
C) Cash is debited for $22,000.
D) Peter, Capital will be credited for $22,000.
Answer: B
Explanation: The debit entry to Gary, Capital account will close his capital account. There are no
bonuses since Gary received the book value of his capital account.
Diff: 1
LO: 12-5
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Withdrawal from the Partnership--No Bonus to Any Partner
10) Marshall retires from the partnership of Marshall, Mark, and Dennis. Marshall had a capital balance
of $25,000. If Marshall received $25,000 as final settlement, how will this transaction affect the balance
sheet items?
A) Cash will increase.
B) Liabilities will increase.
C) Liabilities will decrease.
D) Equity will decrease.
Answer: D
Explanation: Marshall received the book value of his capital account (no bonuses). His Capital account
will be debited (decrease equity) and Cash will be credited.
Diff: 1
LO: 12-5
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Withdrawal from the Partnership--No Bonus to Any Partner
56
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11) Simonsen, Paulson, and Richardson are partners in a firm with the following capital account balances:
Simonsen
Paulson
Richardson
$60,000
170,000
90,000
The profit-and-loss-sharing ratio among Simonsen, Paulson, and Richardson is 1:3:2, in the order given.
Paulson is retiring from the partnership on December 31, 2018. Paulson's capital account is settled at book
value. Which of the following journal entries would the firm record for Paulson's withdrawal?
A)
Paulson, Capital
170,000
Cash
170,000
B)
Paulson, Capital
170,000
Cash
110,000
Simonsen, Capital
20,000
Richardson, Capital
40,000
C)
Cash
170,000
Paulson, Capital
170,000
D)
Paulson, Capital
170,000
Simonsen, Capital
60,000
Richardson, Capital
90,000
Cash
320,000
Answer: A
Explanation: Paulson withdraws from the partnership by receiving cash for the book value of her capital
account. Paulson's capital account is now closed, and Simonsen and Richardson may or may not continue
in the new partnership. If they continue, they will need to draft a new partnership agreement and
determine a new profit-and-loss-sharing ratio.
Diff: 1
LO: 12-5
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Withdrawal from the Partnership--No Bonus to Any Partner
57
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12) Simonsen, Paulson, and Richardson are partners in a firm with the following capital account balances:
Simonsen
Paulson
Richardson
$40,000
180,000
120,000
Paulson is retiring from the partnership on December 31, 2018. The profit-and-loss-sharing ratio among
Simonsen, Paulson, and Richardson is 1:3:2, in the order given. Paulson is paid $100,000 cash in full
compensation for her capital account balance. Which of the following journal entries would the firm
record for this transaction? (Round the final answer to the nearest dollar.)
A)
Paulson, Capital
100,000
Cash
100,000
B)
Paulson, Capital
180,000
Cash
100,000
Simonsen, Capital
26,667
Richardson, Capital
53,333
C)
Cash
180,000
Paulson, Capital
180,000
D)
Paulson, Capital
180,000
Simonsen, Capital
40,000
Richardson, Capital
40,000
Cash
100,000
Answer: B
Explanation: The withdrawing partner may be so eager to depart that he or she will take less than his or
her full capital balance. Paulson withdraws from the business and agrees to receive cash of $100,000. This
settlement is $80,000 less than Paulson's capital account balance. The remaining partners (Simonsen and
Richardson) share this $80,000 difference according to their existing profit-and-loss-sharing ratio (1:2).
Diff: 3
LO: 12-5
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Withdrawal from the Partnership--Bonus to the Existing Partners
58
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13) Gary, Peter, and Chris and have capital balances of $26,000, $38,000, and $30,000, respectively. As per
the partnership agreement, Gary gets a profit share of 2/9; Peter gets 4/9; and Chris gets 3/9. The
partnership agrees to pay $20,000 as the final settlement to Gary. How much bonus does Peter receive as
a result of this transaction? (Do not round intermediate calculations and round the final answer to the
nearest dollar.)
A) $3429
B) $2571
C) $3333
D) $2667
Answer: A
Explanation: Bonus = $26,000 - $20,000 = $6000
Profit share between Peter and Chris is 4:3
Peter's Share = $6000 × 4 / 7 = $3429
Diff: 3
LO: 12-5
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Withdrawal from the Partnership--Bonus to the Existing Partners
14) Mathew, Patrick, and Robin and have capital balances of $75,000, $125,000 and $93,000, respectively.
As per the partnership agreement, Mathew gets a profit share of 2/9; Patrick gets 4/9; and Robin gets 3/9.
Partnership agrees to pay $65,000 as final settlement to Mathew. How much bonus will Robin receive as a
result of this transaction? (Do not round intermediate calculations and round the final answer to the
nearest dollar.)
A) $5714
B) $4286
C) $5556
D) $4444
Answer: B
Explanation: Bonus = $75,000 - $65,000 = $10,000
Profit share between Patrick and Robin is 4:3
Robin's Share = $10,000 × 3 / 7 = $4286
Diff: 3
LO: 12-5
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Withdrawal from the Partnership--Bonus to the Existing Partners
59
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15) Mary, Ann, and Beth are partners. Their capital balances are, $23,000; $41,000; and $30,000,
respectively. As per the partnership agreement, Mary receives a profit share of 2/9; Ann has 4/9; and Beth
has 3/9. Beth withdraws from the partnership by receiving $23,000. What will be the impact of this
transaction on the journal entries?
A) Cash will be debited for $30,000.
B) Mary, Capital will be debited for $7000.
C) Ann, Capital will be credited for $7000.
D) Beth, Capital will be debited for $30,000.
Answer: D
Explanation: The debit entry to Beth, Capital account will close her capital account. There is a bonus of
7000 to the remaining partners since Beth received less than the book value of her capital account, and the
7000 will be divided between Mary and Ann according to their profit share.
Diff: 1
LO: 12-5
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Withdrawal from the Partnership--Bonus to the Existing Partners
16) Simonsen, Paulson, and Richardson are partners in a firm with the following capital account balances:
Simonsen
Paulson
Richardson
$40,000
160,000
120,000
The profit-and-loss-sharing ratio among Simonsen, Paulson, and Richardson is 1:3:2, in the order given.
Paulson is retiring from the partnership on December 31, 2017. Paulson is paid $230,000 cash in full
compensation for her capital account balance. Which of the following is TRUE of the journal entry
prepared at the time of retirement? (Round the final answer to the nearest dollar.)
A) Debit Paulson's capital account by $230,000.
B) Debit Richardson's capital account by $35,000.
C) Debit Simonsen's capital account by $23,333.
D) Debit Income Summary by $70,000.
Answer: C
Explanation: A withdrawing partner may receive assets worth more than the book value of his or her
capital account balance. This situation creates a bonus for the withdrawing partner and a decrease in the
remaining partners' capital accounts, shared in their profit-and-loss sharing ratio (1:2).
Capital account balance
$160,000
Cash received on retirement
230,000
Bonus to retiring partner
70,000
Simonsen's share of bonus (1 / 3 × $70,000)
$23,333
Richardson's share of bonus (2 / 3 × $70,000)
$46,667
Diff: 3
LO: 12-5
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Withdrawal from the Partnership--Bonus to the Withdrawing Partner
60
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17) Which of the following is TRUE when a partner withdraws his interest from the partnership?
A) He is obliged to pay a bonus to the existing partners.
B) The existing partners are obliged to pay a bonus to the withdrawing partner.
C) The partner's capital account will be closed.
D) He must get the book-value of his interest.
Answer: C
Diff: 1
LO: 12-5
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Withdrawal from the Partnership--Bonus to the Withdrawing Partner
18) Which of the following occurs if a withdrawing partner receives assets worth more than the book
value of his or her equity?
A) an increase in the remaining partners' capital accounts
B) no change to the remaining partners' capital accounts
C) a premium to existing partners
D) a bonus to the withdrawing partner
Answer: D
Diff: 1
LO: 12-5
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Withdrawal from the Partnership--Bonus to the Withdrawing Partner
61
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19) Ronald, Ross, and Carol opened a partnership firm. Ronald has a capital of $77,000; Ross has a capital
of $119,000; and Carol has a capital of $91,000. Ronald decided to withdraw from the partnership and
received $86,000. Which of the following will be included in the journal entry to record this? (Assume an
equal profit-loss sharing between the existing partners.)
A) Cash is credited for $9000.
B) Ross, Capital is credited for $4500.
C) Carol, Capital is debited for $4500.
D) Ross, Capital is debited for $9000.
Answer: C
Explanation: Capital account
$77,000
Cash received on withdrawal
$86,000
Bonus to withdrawing partner
$9000
Equal capital reduction
to each remaining partner (50% × $9000)
$4500
A withdrawing partner may receive assets worth more than the book value of his or her capital account
balance. This situation creates a bonus for the withdrawing partner and a decrease in the remaining
partners' capital accounts, shared in their equal profit-and-loss sharing ratio.
Diff: 2
LO: 12-5
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Withdrawal from the Partnership--Bonus to the Withdrawing Partner
Learning Objective 12-6
1) The process of going out of business by selling the entity's assets, paying its liabilities, and distributing
any remaining cash to the partners based on their equity balances is known as liquidation.
Answer: TRUE
Diff: 1
LO: 12-6
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: How is the Liquidation of a Partnership Accounted For? (H1)
2) While liquidating a partnership, the cash remaining after paying all liabilities is paid to the partners
based on their profit-and-loss-sharing agreement.
Answer: FALSE
Diff: 1
LO: 12-6
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: How is the Liquidation of a Partnership Accounted For? (H1)
62
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3) Upon liquidation of a partnership, gains and losses on the sale of assets are divided according to the
partner's capital balances.
Answer: FALSE
Diff: 1
LO: 12-6
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: How is the Liquidation of a Partnership Accounted For? (H1)
4) Upon liquidation of a partnership, the cash received from the sale of assets is first returned to the
capital balances of the partners. The remaining cash is then used to pay off the liabilities of the business.
Answer: FALSE
Diff: 1
LO: 12-6
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: How is the Liquidation of a Partnership Accounted For? (H1)
5) Upon liquidation, if there is a sale of assets at a loss, the loss must be allocated to the partners' capital
accounts based on their profit-and-loss-sharing ratio.
Answer: TRUE
Diff: 1
LO: 12-6
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: How is the Liquidation of a Partnership Accounted For? (H1)
6) Capital deficiency occurs when a partner's capital account has a credit balance.
Answer: FALSE
Diff: 1
LO: 12-6
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Sale of Assets at a Loss with Capital Deficiency
7) Capital deficiency refers to a partnership's claim against a partner.
Answer: TRUE
Diff: 1
LO: 12-6
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Sale of Assets at a Loss with Capital Deficiency
63
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8) Before the start of the liquidation process, the books are adjusted and closed.
Answer: TRUE
Diff: 1
LO: 12-6
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: How is the Liquidation of a Partnership Accounted For? (H1)
9) Liquidation in a partnership refers to ________.
A) increasing the investment in highly liquid assets
B) shutting down the business by selling its assets and paying its liabilities
C) the admission or withdrawal of a partner that dissolves the partnership
D) purchase of another partnership firm which is operating in the same business
Answer: B
Diff: 1
LO: 12-6
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: How is the Liquidation of a Partnership Accounted For? (H1)
10) Which of the following is TRUE of a liquidation of a partnership?
A) It allocates the gain or loss on sale of assets to the partners' capital accounts based on the profit-andloss-sharing ratio.
B) The remaining cash after paying all liabilities are paid to the partners based on their profit-and-losssharing agreement.
C) Before a business is liquidated, its books should not be adjusted or closed.
D) It involves the selling of short-term liquid assets and does not involve the sale of fixed assets.
Answer: A
Diff: 1
LO: 12-6
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: How is the Liquidation of a Partnership Accounted For? (H1)
64
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11) Harry, Tony, and Liza run a partnership firm. In the process of liquidation, the partnership sells noncash assets, having a book value of $78,000, for $86,000. Which of the following is TRUE of the journal
entries?
A) Cash will be credited by $8000.
B) Non-cash assets will be credited for $86,000.
C) Cash will be credited for $78,000.
D) Non-cash assets will be credited for $78,000.
Answer: D
Diff: 1
LO: 12-6
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Sale of Assets at a Gain
12) In the process of liquidation, a partnership firm sells its non-cash assets with a book value of $55,000,
for $73,000. Which of the following will be included in the entry to record the sale of assets at liquidation?
A) Gain on Disposal will be credited by $73,000.
B) Gain on Disposal will be debited by $73,000.
C) Gain on Disposal will be credited by $18,000.
D) Gain on Disposal will be debited by $18,000.
Answer: C
Diff: 1
LO: 12-6
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Sale of Assets at a Gain
65
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13) Hillary, Bruce, and Cindy own a partnership firm. Hillary has an ownership interest of $24,000; Bruce
has an ownership interest of $41,000; and Cindy has an ownership interest of $30,000. In the process of
liquidation, the partnership sells non-cash assets and registers a gain of $30,000. The profit-loss sharing
agreement is 1/6 to Hillary; 2/6 to Bruce; and 3/6 to Cindy. Which of the following is TRUE when a journal
entry for the allocation of gain is recorded?
A) Hillary, Capital is credited for $10,000.
B) Cindy, Capital is credited for $15,000.
C) Hillary, Capital is debited for $10,000.
D) Cindy, Capital is credited for $10,000.
Answer: B
Explanation: The partnership has realized a gain of $30,000 which will be allocated to the partner's based
on their profit-sharing ratio. Hillary's share will be 1/6 of the $30,000 (5000), Bruce's share will be 2/6 of
the $30,000 ($10,000) and Cindy's share will be 3/6 of the $30,000 ($15,000). The amount of the gain will be
credited to each partner's capital account, with Gain on Disposal being debited for the total amount of the
gain of $30,000.
Diff: 1
LO: 12-6
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Sale of Assets at a Gain
66
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14) The balance sheet of Ryan and Peter's partnership as of December 31, 2018, is given below.
Assets
Cash
Accounts Receivable
Furniture
Equipment
Other assets
Total assets
$15,000
12,000
22,000
39,000
8,000
$96,000
Liabilities
Accounts Payable
Other liabilities
Partners' Equity
Ryan, Capital
Peter, Capital
Total liabilities and partners' equity
$15,000
21,000
30,000
30,000
$96,000
Ryan and Peter share profits in the ratio 3:2. They have decided to liquidate the partnership. They sold
the furniture and equipment for $72,000. Which of the following is the correct journal entry for the sale
transaction?
A)
Cash
61,000
Furniture
22,000
Equipment
39,000
B)
Cash
72,000
Furniture
22,000
Equipment
39,000
Gain on Disposal
11,000
C)
Loss on Disposal
11,000
Cash
61,000
Furniture
22,000
Equipment
50,000
D)
Liquidation account
133,000
Cash
72,000
Furniture
22,000
Equipment
39,000
Answer: B
Diff: 1
LO: 12-6
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Sale of Assets at a Gain
67
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15) The balance sheet of Ryan and Peter's partnership as of December 31, 2018, is given below.
Assets
Cash
Accounts Receivable
Furniture
Equipment
Other assets
Total assets
Liabilities
$15,000 Accounts Payable
12,000 Other liabilities
25,000 Partners' Equity
40,000 Ryan, Capital
13,000 Peter, Capital
$105,000 Total liabilities and partners' equity
$20,000
25,000
30,000
30,000
$105,000
Ryan and Peter share profits in the ratio 3:2. They have decided to liquidate the partnership. The accounts
payable were settled at $17,000 due to the poor financial condition of the partnership firm. As a result,
Ryan's capital account will be credited by ________.
A) $10,200
B) $9000
C) $1800
D) $3000
Answer: C
Explanation: When liabilities are settled at less than book value, the resulting gain is allocated to the
partners in their existing profit-sharing ratio.
Book value of payables
Cash settlement price
Gain on settlement
Ryan's share of gain (3 / 5 × $3000)
Diff: 2
LO: 12-6
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Sale of Assets at a Gain
$20,000
17,000
3000
$1800
68
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16) The balance sheet of Ryan and Peter's partnership as of December 31, 2018, is given below.
Assets
Cash
Accounts Receivable
Furniture
Equipment
Other assets
Total assets
Liabilities
$15,000 Accounts Payable
12,000 Other liabilities
25,000 Partners' Equity
36,000 Ryan, Capital
8,000 Peter, Capital
$96,000 Total liabilities and partners' equity
$15,000
25,000
26,000
30,000
$96,000
Ryan and Peter share profits in the ratio 3:2. They have decided to liquidate the partnership. After
completing all the liquidation procedures (assuming all assets and liabilities were liquidated at book
value), the business is left with $56,000 cash. As a result, Ryan will receive ________.
A) $26,000
B) $30,000
C) $56,000
D) $36,000
Answer: A
Explanation: Upon liquidation, the final cash payment is divided according to the capital balances
outstanding as of that date. (Total assets $96,000 - Total liabilities $40,000 = $56,000)
Remaining cash balance
Thus, Ryan's share of cash (Ryan's capital balance)
Diff: 2
LO: 12-6
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Sale of Assets at a Gain
$56,000
$26,000
69
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17) The balance sheet of Ryan and Peter's partnership as of December 31, 2018, is given below.
Assets
Cash
Accounts Receivable
Furniture
Equipment
Other assets
Total assets
Liabilities
$17,000 Accounts Payable
9000 Other liabilities
28,000 Partners' Equity
40,000 Ryan, Capital
8,000 Peter, Capital
$102,000 Total liabilities and partners' equity
$15,000
25,000
31,000
31,000
$102,000
Ryan and Peter share profits in the ratio 3:2. They liquidate the partnership. The furniture and equipment
sold at a loss of $50,000. The accounts receivable were collected in full and the other assets were written
off as worthless. The cash balance remaining to pay the liabilities is ________.
A) $17,000
B) $94,000
C) $44,000
D) $40,000
Answer: C
Explanation: Beginning cash balance
$17,000
Sale of equipment and furniture ($68,000 - $50,000)
18,000
Accounts Receivable
9000
Ending cash balance
$44,000
Diff: 2
LO: 12-6
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Sale of Assets at a Loss with Capital Deficiency
70
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18) The balance sheet of Ryan and Peter's partnership as of December 31, 2018, is given below.
Assets
Cash
Accounts Receivable
Furniture
Equipment
Other assets
Total assets
Liabilities
$54,201 Accounts Payable
11,000 Other liabilities
23,000 Partners' Equity
38,000 Ryan, Capital
9000 Peter, Capital
$135,201 Total liabilities and partners' equity
$12,000
69,201
27,000
27,000
$135,201
Ryan and Peter share profits in the ratio 3:2. They have decided to liquidate the partnership. The
furniture
and the equipment were sold at a cumulative loss of $4000. The accounts receivable were collected in full
and the other assets were written off as worthless. The accounts payable and other liabilities were paid
off at book value. The firm's accountant distributed the remaining cash between Ryan and Peter equally.
However, Peter initiated a lawsuit claiming that his share was greater than Ryan's. How much should
Peter have received?
A) $20,500
B) $19,200
C) $21,800
D) $23,200
Answer: C
Explanation:
Ryan
Peter
Beginning capital account balance
$27,000
$27,000
Loss on sale of furniture, equipment
(2400)
(1600)
Loss on disposal of other assets
(5400)
(3600)
Ending capital balance
$19,200
$21,800
Beginning cash balance
$54,201
Sale of equipment and furniture ($61,000 - $4000)
57,000
Accounts Receivable
11,000
Ending cash balance
122,201
Accounts payable and other liabilities
(81,201)
Remaining cash for partners
$41,000
The partners divide the remaining cash according to their capital balances. As a result,
Peter should receive $21,800 cash and Ryan should receive $19,200 cash.
Diff: 3
LO: 12-6
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Sale of Assets at a Loss with Capital Deficiency
71
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19) The balance sheet of Ryan, James and Peter's partnership as of December 31, 2018, is given below.
Assets
Cash
Accounts Receivable
Furniture
Equipment
Other assets
Total assets
Liabilities
$18,000 Accounts Payable
10,000 Other liabilities
10,000 Partners' Equity
15,000 Ryan, Capital
7000 Peter, Capital
_______ James, Capital
$60,000 Total liabilities and partners' equity
$15,000
24,000
9000
10,000
2000
$60,000
Ryan, Peter, and James share profits 3:2:1. They liquidate the partnership. The furniture and equipment
are sold at a $8000 loss. The accounts receivable were collected in full and the other assets were
written off as worthless. The liabilities were paid off at book value. James argued that he should
receive a portion of the remaining cash, but Ryan and Peter disagree. How much cash should James
receive or pay?
A) He should receive $1500.
B) He should not receive or pay any money.
C) He should pay $55,500.
D) He should pay $500.
Answer: D
Explanation:
Ryan
Peter
James
Beginning capital account balance
$9000
$10,000
$2000
Loss on sale of furniture, equipment (4000)
(2667)
(1333)
Loss on disposal of other assets
(3500)
(2333)
(1167)
Ending capital balance
$1500
$5000
($500)
James has to pay $500 to meet the deficit in his capital account.
Beginning cash balance
Sale of equipment and furniture ($25,000 - $8000)
Accounts Receivable
Cash paid by James
Ending cash balance
Accounts payable and other liabilities
Remaining cash for partners (Ryan and Peter)
Diff: 3
LO: 12-6
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Sale of Assets at a Loss with Capital Deficiency
$18,000
17,000
12,000
$500
$45,500
(39,000)
$6500
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20) Which of the following is TRUE of a capital deficiency in the liquidation of a partnership?
A) It refers to a partnership's claim against a partner.
B) It occurs when a partner's capital account has a credit balance.
C) It refers to the partnership's inability to find capital.
D) It occurs when a partner cannot find positive NPV projects.
Answer: A
Diff: 1
LO: 12-6
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Sale of Assets at a Loss with Capital Deficiency
21) A partnership is liquidating. The partners share profits and losses equally. After liquidating the assets
and paying the liabilities, the partners' capital accounts are as follows:
Partner
Blaine, Capital
Farmer, Capital
Fleet, Capital
Capital Balance
$43,000 Credit
$20,000 Credit
$14,000 Debit
Assume Fleet does not contribute the capital deficiency. How much cash is available to distribute to the
partners?
A) $43,000
B) $49,000
C) $63,000
D) $77,000
Answer: B
Explanation: $43,000 + $20,000 - $14,000 = $49,000
Diff: 3
LO: 12-6
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Sale of Assets at a Loss with Capital Deficiency
73
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22) A partnership is liquidating. The partners share profits and losses equally. After liquidating the assets
and paying the liabilities, the partners' capital accounts are as follows:
Partner
Blau, Capital
Finch, Capital
Fleet, Capital
Capital Balance
$41,000 Credit
$27,000 Credit
$11,000 Debit
Assume Fleet contributes the capital deficiency. How much cash is available to distribute to the partners?
A) $41,000
B) $57,000
C) $68,000
D) $79,000
Answer: C
Explanation: $41,000 + $27,000 = $68,000
Diff: 3
LO: 12-6
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Sale of Assets at a Loss with Capital Deficiency
74
Copyright © 2018 Pearson Education, Inc.
23) A partnership has the following balance sheet at December 31, 2018. Blair and Smith share profits
50:50.
Cash
Land
Total Assets
$9,000 Accounts Payable
120,000 Blair, Capital
$129,000 Smith, Capital
Total Liabilities and Partners' Equity
$50,000
45,000
34,000
$129,000
The partnership liquidates and sells its land for $100,000. All liabilities are liquidated at book value.
Required:
Prepare the journal entries to liquidate the partnership on December 31, 2018.
Answer:
Accounts
Debit
Credit
Cash
100,000
Loss on Disposal
20,000
Land
120,000
Blair, Capital
Smith, Capital
Loss on Disposal
10,000
10,000
Accounts Payable
Cash
50,000
20,000
50,000
Blair, Capital
35,000
Smith, Capital
24,000
Cash
Diff: 3
LO: 12-6
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Sale of Assets at a Loss with Capital Deficiency
59,000
75
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