Chapter 15 Test Bank
PARTNERSHIPS – FORMATION, OPERATIONS, AND CHANGES
IN OWNERSHIP INTERESTS
Multiple Choice Questions
LO1
1.
Under the Uniform Partnership Act, loans made by a partner to
the partnership are treated as
a. advances to the partnership for which interest shall be
paid from the date of the advance.
b. advances to the partnership that are carried in the
partners' capital accounts.
c. Accounts Payable of the partnership for which interest is
paid.
d. advances to the partnership for which interest does not
have to be paid.
LO1
2.
A partner assigned his partnership interest to a third party.
Which statement best describes the legal ramifications to the
assignee?
a. The assignment of the partnership interest does not entitle
the assignee to partnership assets upon a liquidation.
b. The assignment dissolves the partnership.
c. The assignee has the right to share in the management of
the partnership.
d. The assignee does not become a partner but has the right to
share in future partnership profits and to receive the
proper share of partnership assets upon liquidation.
LO1
3.
In the Uniform Partnership Act, partners have
I. mutual agency.
II.unlimited liability.
a.
b.
c.
d.
I only.
II only.
I and II.
Neither I nor II.
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LO1
4.
Partnerships
a. are required to prepare annual reports.
b. are required to file income tax returns but do not pay
Federal taxes.
c. are required to file income tax returns and pay Federal
income taxes.
d. are not required to file income tax returns or pay Federal
income taxes.
LO2
5.
Langley invests his delivery van in
partnership with McCurdy.
What amount
credited to Langley’s partnership capital?
a.
b.
c.
d.
a computer repair
should the van be
The tax basis.
The fair value at the date of contribution.
Langley’s original cost.
The assessed valuation for property tax purposes.
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Use the following information for questions 6, 7 and 8.
A summary balance sheet for the McCune, Nall, and Oakley partnership
appears below. McCune, Nall, and Oakley share profits and losses in a
ratio of 2:3:5, respectively.
Assets
Cash
Inventory
Marketable securities
Land
Building-net
Total assets
$
50,000
62,500
100,000
50,000
250,000
512,500
$
Equities
McCune, capital
Nall, capital
Oakely, capital
Total equities
$
212,500
200,000
100,000
512,500
$
The partners agree to admit Pavic for a one-fifth interest. The fair
market value of partnership land is appraised at $100,000 and the
fair market value of inventory is $87,500. The assets are to be
revalued prior to the admission of Pavic and there is $15,000 of
goodwill that attaches to the old partnership.
LO2
6.
By how much will the capital accounts of McCune, Nall, and
Oakley increase, respectively, due to the revaluation of the
assets and the recognition of goodwill?
a.
b.
c.
d.
LO2
7.
The capital accounts will increase by $25,000 each.
The capital accounts will increase by $30,000 each.
$18,000, $27,000, and $45,000.
$20,000, $25,000, and $30,000.
How much
interest?
a.
b.
c.
d.
cash
must
Pavic
invest
to
acquire
$117,500.
$120,500.
$146,875.
$150,625.
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a
one-fifth
LO2
8.
What will the profit and loss sharing ratios be after Pavic’s
investment?
a.
b.
c.
d.
1:2:4:2.
2:3:5:2.
3:4:6:2.
4:6:10:5.
Use the following information for questions 9, 10 and 11.
Albion and Blaze share profits and losses equally. Albion and Blaze
receive salary allowances of $20,000 and $30,000, respectively, and
both partners receive 10% interest on their average capital balances.
Average capital balances are calculated at the beginning of each
month balance regardless of when additional capital contributions or
permanent withdrawals are made subsequently within the month.
Partners’ drawings are not used in determining the average capital
balances. Total net income for 2006 is $120,000.
January 1 capital balances
Yearly drawings ($1,500 a month)
Permanent withdrawals of capital:
June 3
May 2
Additional investments of capital:
July 3
October 2
LO3
9.
$
(
$
Blaze
120,000
18,000
12,000 )
(
15,000 )
40,000
50,000
What is the weighted-average capital for Albion and Blaze in
2006?
a.
b.
c.
d.
LO3
10.
Albion
100,000
18,000
$100,000
$105,333
$110,667
$126,667
and
and
and
and
$120,000.
$126,667.
$119,583.
$105,333.
If the average capital for Albion and Blaze from the above
information is $112,000 and $119,000, respectively, what will
be the total amount of profit allocated after the salary and
interest distributions are completed?
a. $70,000.
b. $73,100.
c. $75,000.
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d. $80,000.
LO3
11.
If the average capital balances for Albion and Blaze are
$100,000 and $120,000, what will the final profit allocations
for Albion and Blaze in 2006?
a.
b.
c.
d.
$50,000
$54,000
$70,000
$75,000
and
and
and
and
$70,000.
$66,000.
$50,000.
$45,000.
Use the following information for questions 12 and 13.
Bloom and Carnes share profits and losses in a ratio of 2:3,
respectively. Bloom and Carnes receive salary allowances of $10,000
and $20,000, also respectively, and both partners receive 10%
interest based upon the balance in their capital accounts on January
1. Partners’ drawings are not used in determining the average capital
balances. Total net income for 2006 is $60,000. If net income after
deducting the interest and salary allocations is greater than
$20,000, Carnes receives a bonus of 5% of the original amount of net
income.
January 1 capital balances
Yearly drawings ($1,500 a month)
LO3
12.
$
Carnes
300,000
18,000
What are the total amounts for the allocation of interest,
salary, and bonus, and, how much over-allocation is present?
a.
b.
c.
d.
LO3
13.
$
Bloom
200,000
18,000
$60,000
$80,000
$83,000
$83,000
and
and
and
and
$0.
$20,000.
$0.
$23,000.
If the partnership experiences a net loss of $20,000 for the
year, what will be the final amount of profit or (loss) closed
to each partner’s capital account?
a.
b.
c.
d.
($30,000) to Bloom and $10,000 to Carnes.
($10,000) to Bloom and ($10,000) to Carnes.
($8,000) to Bloom and ($12,000) to Carnes.
$10,000 to Bloom and ($30,000) to Carnes.
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LO3
14.
The XYZ partnership provides a 10% bonus to Partner Y that is
based upon partnership income, after deduction of the bonus.
If the partnership's income is $121,000, how much is Partner
Y's bonus allocation?
a.
b.
c.
d.
LO3
15.
Drawings
a.
b.
c.
d.
LO4
16.
$11,000.
$11,450.
$11,650.
$12,100.
are advances to a partnership.
are loans to a partnership.
are a function of interest on partnership average capital.
*are the same nature as withdrawals.
If the partnership agreement provides a formula for the
computation of a bonus to the partners, the bonus would be
computed
a. next to last, because the final allocation is
distribution of the profit residual.
b. before income tax allocations are made.
c. after the salary and interest allocations are made.
d. in any manner agreed to by the partners.
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the
Use the following information for questions 17, 18 and 19.
Davis has decided to retire from the partnership of Davis, Eiser, and
Foreman. The partnership will pay Davis $200,000. Goodwill is to be
recorded in the transaction as implied by the excess payment to
Davis.
A summary balance sheet for the Davis, Eiser, and Foreman
partnership appears below. Davis, Eiser, and Foreman share profits
and losses in a ratio of 1:1:3, respectively.
Assets
Cash
Inventory
Marketable securities
Land
Building-net
Total assets
Equities
Davis, capital
Eiser, capital
Foreman, capital
Total equities
LO5
17.
$
160,000
140,000
300,000
600,000
$40,000.
$120,000.
$160,000.
$200,000.
What partnership capital will Eiser have after Davis retires?
a.
b.
c.
d.
LO5
19.
$
75,000
82,000
38,000
150,000
255,000
600,000
What goodwill will be recorded?
a.
b.
c.
d.
LO5
18.
$
$100,000.
$140,000.
$180,000.
$220,000.
What partnership capital will Foreman have after Davis retires?
a. $240,000.
b. $300,000.
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c. $360,000.
d. $420,000.
LO6
20.
In a limited partnership, a general partner
a.
b.
c.
d.
is excluded from management.
is not entitled to a bonus at the end of the year.
has limited liability for partnership debit.
has unlimited liability for partnership debit.
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LO2
Exercise 1
Cesar and Damon share partnership profits and losses at 60% and 40%,
respectively. The partners agree to admit Egan into the partnership
for a 50% interest in capital and earnings. Capital accounts
immediately before the admission of Egan are:
Cesar (60%)
Damon (40%)
Total
$
$
300,000
300,000
600,000
Required:
1. Prepare the journal entry(s) for the admission of Egan to the partnership assuming Egan
invested $400,000 for the ownership interest. Egan paid the money directly to Cesar and to
Damon for 50% of each of their respective capital interests. The partnership records goodwill.
2. Prepare the journal entry(s) for the admission of Egan to the partnership assuming Egan
invested $500,000 for the ownership interest. Egan paid the money to the partnership for a 50%
interest in capital and earnings. The partnership records goodwill.
3. Prepare the journal entry(s) for the admission of Egan to the partnership assuming Egan
invested $700,000 for the ownership interest. Egan paid the money to the partnership for a 50%
interest in capital and earnings. The partnership records goodwill.
LO3
Exercise 2
On February 1, 2005, Flores, Gilroy, and Hansen began a partnership
in which Flores and Hansen contributed cash of $25,000; Gilroy
contribute property with a fair value of $50,000 and a tax basis
$40,000. Gilroy receives a 5% bonus of partnership income. Flores
and Hansen receive salaries of $10,000 each.
The partnership
agreement of Flores, Gilroy, and Hansen provides all partners to
receive a 5% interest on capital and that profits and losses be
divided of the remaining income be distributed to Flores, Gilroy, and
Hansen by a 1:3:1 ratio.
Required:
Prepare a schedule to distribute $25,000 of partnership net income to
the partners.
LO3
Exercise 3
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The profit and loss sharing agreement for the Quade, Reid, and Scott partnership provides for a $15,000
salary allowance to Reid. Residual profits and losses are allocated 5:3:2 to Quade, Reid, and Scott,
respectively. In 2006, the partnership recorded $120,000 of net income that was properly allocated to
the partner's capital accounts. On January 25, 2007, after the books were closed for 2006, Quade
discovered that office equipment, purchased for $12,000 on December 29, 2006, was recorded as office
expense by the company bookkeeper.
Required:
Prepare the necessary correcting entry(s) for the partnership.
LO3
Exercise 4
Evans, Fitch, and Gault operate a partnership with a complex profit
and loss sharing agreement. The average capital balance for each
partner on December 31, 2006 is $300,000 for Evans, $250,000 for
Fitch, and $325,000 for Gault. An 8% interest allocation is provided
to each partner. Evans and Fitch receive salary allocations of
$10,000 and $15,000, respectively. If partnership net income is above
$25,000, after the salary allocations are considered (but before the
interest allocations are considered), Gault will receive a bonus of
10% of the original amount of net income. All residual income is
allocated in the ratios of 2:3:5 to Evans, Fitch, and Gault,
respectively.
Required:
1.
Prepare a schedule to allocate income to the partners assuming
that partnership net income is $250,000.
2.
Prepare a journal entry to distribute the partnership's income to
the partners (assume that an Income Summary account is used by
the partnership).
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LO3
Exercise 5
Required:
Using the information from Exercise 4 above:
1. Prepare a schedule to allocate income or loss to the partners
assuming that the partnership incurs a net loss of $36,000.
2. Prepare a journal entry to distribute the partnership's loss to
the partners (assume that an Income Summary account is used by the
partnership).
LO3
Exercise 6
Grech, Harris, and Ivers have a retail partnership business selling
personal computers. The partners are allowed an interest allocation
of 8% on their average capital. Capital account balances on the first
day of each month are used in determining weighted average capital,
regardless
of
additional
partner
investment
or
withdrawal
transactions during any given month. Drawings are disregarded in
computing average capital, but temporary withdrawals of capital that
are debited to the capital account are used in the average
calculation. Partner capital activity for the year was:
Capital accounts
Jan 1 balance
Feb 2 investment
Mar 6 investment
Apr 20 withdrawal
Jul 3 withdrawal
and investment
Sep 29 investment
Nov 5 investment
Required:
Grech
200,000
50,000
10,000
$
$
Harris
300,000
$
20,000
(
(
7,000 )
5,000
Ivers
250,000
10,000
4,000
10,000 )
5,000
5,000
Calculate weighted average capital for each partner, and determine the
amount of interest that each partner will be allocated.
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LO3
Exercise 7
The profit and loss sharing agreement for the Sealy, Teske, and Ubank
partnership provides that each partner receive a bonus of 5% on the
original amount of partnership net income if net income is above
$25,000. Sealy and Teske receive a salary allowance of $7,500 and
$10,500, respectively. Ubank has an average capital balance of
$260,000, and receives a 10% interest allocation on the amount by
which his average capital account balance exceeds $200,000. Residual
profits and losses are allocated to Sealy, Teske, and Ubank in their
respective ratios of 7:5:8.
Required:
Prepare a schedule to allocate $88,000 of partnership net income to
the partners.
LO5
Exercise 8
A summary balance sheet for the partnership of Ivory, Jacoby and Kato
on December 31, 2006 is shown below. Partners Ivory, Jacoby and Kato
allocate profit and loss in their respective ratios of 9:6:10.
Assets
Cash
Inventory
Marketable securities
Land
Building-net
Total assets
Equities
Ivory, capital
Jacoby, capital
Kato, capital
Total equities
$
$
$
$
50,000
75,000
120,000
80,000
400,000
725,000
425,000
225,000
75,000
725,000
The partners agree to admit Lange for a one-tenth interest. The fair
market value for partnership land is $180,000, and the fair market
value of the inventory is $150,000.
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Required:
1. Record the entry to revalue the partnership assets prior to the admission of Lange.
2. Calculate how much Lange will have to invest to acquire a 10% interest.
3. If Lange paid $200,000 to the partnership in exchange for a 10% interest, what would be the
bonus that is allocated to each partner's capital account?
LO5
Exercise 9
A summary balance sheet for the Vail, Wacker Yang partnership on
December 31, 2006 is shown below. Partners Vail, Wacker, and Yang
allocate profit and loss in their respective ratios of 4:5:7. The
partnership agreed to pay partner Yang $227,500 for his partnership
interest upon his retirement from the partnership on January 1, 2007.
Any payments exceeding Yang’s capital balance are treated as a bonus
from partners Vail and Wacker.
Assets
Cash
Inventory
Marketable securities
Land
Building-net
Total assets
Equities
Vail, capital
Wacker, capital
Yang, capital
Total equities
$
$
$
$
75,000
87,500
60,000
90,000
150,000
462,500
212,500
112,500
137,500
462,500
Required:
Prepare the journal entry to reflect Yang’s retirement from the
partnership.
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LO5
Exercise 10
A summary balance sheet for the Almond, Brandt, and Clack partnership
on December 31, 2006 is shown below. Partners Almond, Brandt, and
Clack allocate profit and loss in their respective ratios of 2:1:1.
The partnership agreed to pay partner Brandt $135,000 for his
partnership interest upon his retirement from the partnership on
January 1, 2007. The partnership financials on January 1, 2007 are:
Assets
Cash
Inventory
Marketable securities
Land
Building-net
Total assets
Equities
Almond, capital
Brandt, capital
Clack, capital
Total equities
$
$
$
$
75,000
85,000
60,000
90,000
150,000
420,000
210,000
105,000
105,000
420,000
Required:
Prepare the journal entry to reflect Brandt’s retirement from the
partnership:
1. Assuming a bonus to Brandt.
2. Assuming a revaluation of total partnership capital based on
excess payment.
3. Assuming goodwill to excess payment is recorded.
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SOLUTIONS
Multiple Choice Questions
1.
a
2.
d
3.
c
4.
b
5.
b
6.
c
The assets will be valued upward by $90,000 which,
allocated on a 2:3:5 basis, yields $18,000 to McCune,
$27,000 to Nall, and $45,000 to Oakely.
7.
d
After the revaluation, the assets will be recorded at
$602,500. If Pavic is admitted for a one-fifth
interest, the $602,500 represents 80% of the total
implied capital. Dividing $602,500 by 80% gives a total
capitalization of $753,150 for which $150,625 is
required from Pavic for a 20% interest.
8.
d
Each of the original partners has given up 20% of their
interest to Pavic. Their profit and loss sharing ratios
will therefore be 80% of what they were before the
admission of Pavic.
McCune
Nall
Oakely
Pavic
20% x 80% =
30% x 80% =
50% x 80% =
=
16%
24%
40%
20%
Expressed as: 4:6:10:5
9.
c
Albion: [($100,000 x 6) + ($88,000 x 1) +
($128,000 x 5)]/12 = $110,667
Blaze:
10.
b
[($120,000 x 5) + ($105,000 x 5) +
($155,000 x 2)]/12 = $119,583
Capital: ($112,000 + $119,000)x(10%) = $23,100
Salary: ($20,000 + $30,000)
= $50,000
Total:
$23,100 + $50,000 = $73,100
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11.
b
Albion: ($100,000 x 10%) + $20,000 + $24,000 = $54,000
Blaze:
($120,000 x 10%) + $30,000 + $24,000 = $66,000
12.
b
Interest: ($500,000 x 10%)
Salary:
($10,000 + $20,000)
Bonus:
Condition not met
= $50,000
= $30,000
= $0
Total allocations = $80,000 and over-allocations =
$80,000 - $60,000 = $20,000
13.
b
Bloom:
Interest allocation:
Salary allocation:
$20,000
$10,000
Carnes:
Interest allocation:
Salary allocation:
$30,000
$20,000
There is a total of $80,000 for positive allocations.
To bring them down to a $20,000 loss, a residual
adjustment of ($100,000) is needed which is allocated
($40,000) to Bloom and ($60,000) to Carnes. After these
amounts are assigned to the partners, each partner’s
capital account will be reduced by a net $10,000.
14.
a
15.
d
16.
d
17.
d
18.
c
19.
c
20.
d
B = .1x($121,000 - B)
B = $12,100 - .1B
1.1B = $12,100
B = $11,000
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Exercise 1
Requirement 1
Goodwill
Cesar, capital
Damon, capital
200,000
Cesar, capital
Damon, capital
Egan, capital
210,000
190,000
120,000
80,000
400,000
If a $400,000 payment represents 50% of total capital, then twice
that amount, or $800,000, is the implied total capital including
goodwill. If the present total capital is $600,000, and the implied
total capital is $800,000, the amount of goodwill to record is
$200,000. This goodwill is allocated 60% to Cesar and 40% to Damon.
After the first entry is posted, the balances in the Cesar and Damon
capital accounts will be $420,000 and $380,000, respectively. If onehalf of each partner’s interest is given to Egan, Cesar’s capital
account is reduced by $210,000, and Damon’ capital account is reduced
by $190,000.
Requirement 2
Goodwill
Cash
Egan, capital
100,000
500,000
600,000
If we focus on the current capital of the partnership, $600,000, and
say that it is fairly valued, then, if it represents 50% of final
capital after Egan’s investment, final capital should be $1,200,000.
Egan’s share of final capital will be $600,000, and, if Egan invests
$500,000 for this interest, there must be $100,000 of goodwill that
is allocated to Egan.
Requirement 3
Goodwill
Cesar, capital
Damon, capital
100,000
Cash
700,000
60,000
40,000
Egan, capital
700,000
If Egan invests $700,000 for a 50% interest, it implies that total
partnership capital should be $1,400,000. After Egan’s investment, total
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capital will be $1,300,000, and goodwill is therefore $100,000. The
goodwill is allocated to Cesar and Damon.
Exercise 2
Net income
$
Bonus to Gilroy
(
Salaries
(
Interest
(
Residual loss
(
Loss allocation
Allocation
$
Income
25,000
1,250
20,000
5,000
1,250
1,250
0
Flores
)
)
)
)
Gilroy
$
$
$(
$
Hansen
1,250
10,000
1,250
2,500
$
10,000
1,250
250 ) (
11,000
$
750 ) (
3,000
$
250 )
11,000
Exercise 3
1/25/07
Office Equipment
Quade, capital
Reid, capital
Scott, capital
12,000
6,000
3,600
2,400
Correction of journal entry error from 12/29/03. To record
office equipment and to adjust partner capital accounts.
Exercise 4
Requirement 1
Net income
Bonus to Gault
Salary allocation
Interest allocation
Residual
Final allocation
$
(
(
(
(
$
Income
250,000
25,000
25,000
70,000
130,000
0
Evans
)
) $
)
)
$
10,000
24,000
26,000
60,000
Fitch
$
$
15,000
20,000
39,000
74,000
Gault
$
25,000
$
26,000
65,000
116,000
Requirement 2
Income summary
Evans, capital
Fitch, capital
Gault, capital
250,000
60,000
74,000
116,000
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Exercise 5
Requirement 1
Net loss
Bonus to Gault
Salary allocation
Interest allocation
Subtotal
Residual allocation
Totals
Loss
$ ( 36,000
(
0
( 25,000
( 70,000
( 131,000
131,000
$
0
)
)
) $
)
)
(
$
Evans
Fitch
Gault
10,000
$
24,000
34,000
26,200 ) (
7,800
$(
$
15,000
20,000
$
35,000
39,300 ) (
4,300 ) $(
0
26,000
26,000
65,500 )
39,500 )
Requirement 2
Fitch, capital
Gault, capital
Evans, capital
Income summary
4,300
39,500
7,800
36,000
Exercise 6
Jan, Feb
Mar
Apr, May, Jun, Jul
Aug, Sep
Oct, Nov, Dec
Total capital
Average capital
Interest allocation
Jan, Feb, Mar
Apr, May, Jun, Jul
Aug, Sep
Oct, Nov, Dec
Total capital
Average capital
Interest allocation
$ 200,000
250,000
260,000
253,000
258,000
$ 300,000
320,000
330,000
334,000
x
x
x
x
x
x
x
x
x
2
1
4
2
3
3
4
2
3
= $
=
=
=
=
$
$
$
=
=
=
=
$
$
$
$
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15-19
Grech
400,000
250,000
1,040,000
506,000
774,000
2,970,000
247,500
19,800
Harris
900,000
1,280,000
660,000
1,002,000
3,842,000
320,167
25,613
Jan, Feb, Mar, Apr
May, Jun, Jul, Aug, Sep
Oct, Nov
Dec
Total capital
Average capital
Interest allocation
$ 250,000
240,000
245,000
250,000
x
x
x
x
4
5
2
1
=
=
=
=
$
$
$
$
Ivers
1,000,000
1,200,000
490,000
250,000
2,940,000
245,000
19,600
Exercise 7
Net income
Bonus
Salary
Interest
Subtotal
Balance
Totals
$
(
(
(
(
$
Income
88,000
13,200
18,000
6,000
50,800
50,800
0
Sealy
) $
)
)
)
$
4,400
7,500
11,900
17,780
29,680
Teske
$
$
4,400
10,500
14,900
12,700
27,600
Ubank
$
4,400
$
6,000
10,400
20,320
30,720
Exercise 8
Requirement 1
The assets of the partnership must be adjusted to fair market value.
Land will increase by $100,000, and Inventory by $75,000. The profit
and loss ratio elements add up to 25. Partner Ivory will then be
allocated 9/25 of the $175,000, etc.
Land
Inventory
Ivory, capital
Jacoby, capital
Kato, capital
100,000
75,000
63,000
42,000
70,000
Requirement 2
The partnership's total assets after revaluation are $900,000. If
Lange acquires a 10% interest, it implies that the $900,000
represents 90% of the partnership’s value after Lange's investment.
Therefore, $900,000/90% = $1,000,000, and $1,000,000 x 10% =
$100,000. The entry to record Lange’s investment would be:
Cash
100,000
Lange, capital
100,000
©2009 Pearson Education, Inc. publishing as Prentice Hall
15-20
Requirement 3
Cash
200,000
Lange, capital
Ivory, capital
Jacoby, capital
Kato, capital
100,000
36,000
24,000
40,000
Exercise 9
1/1/04
Yang, capital
Vail, capital ($90,000 x 4/9)
Wacker, capital ($90,000 x 5/9)
Cash
137,500
40,000
50,000
227,500
Exercise 10
Requirement 1
Almond and Clack give a bonus to Brand which reduces their capital in
a 2 to 1 ratio.
Brandt, capital
Almond, capital
Clack, capital
Cash
105,000
20,000
10,000
135,000
Requirement 2
Revalue the total partnership capital to reflect
Brandt’s retirement’s excess payment of $30,000.
the
Goodwill
Almond, capital
Clack, capital
Brandt, capital
60,000
Brandt, capital
Cash
135,000
value
at
20,000
10,000
30,000
135,000
©2009 Pearson Education, Inc. publishing as Prentice Hall
15-21
Requirement 3
Add goodwill equal to the excess payment
Brandt, capital
Goodwill
Cash
105,000
30,000
135,000
©2009 Pearson Education, Inc. publishing as Prentice Hall
15-22