Deck 16: Partnerships - Formation, Operations, and Changes in Ownership Interests

Question 1

In a limited partnership, a general partner

A) is excluded from management of the business.
B) is not entitled to a bonus at the end of the year.
C) has limited liability for partnership debt.
D) has unlimited liability for partnership debt.

Answer 1

D

Question 2

Use the following information to answer the question(s) below.
Bertram and Ernest share profits and losses equally after salary and interest allowances. Bertram and Ernest receive salary allowances of $40,000 and $60,000, respectively, and both partners receive 10% interest on their average capital balances. Average capital balances are calculated at the beginning of each month, regardless of when additional capital contributions or permanent withdrawals are made subsequently within the month. Partners' drawings of $3,000 per month are not used in determining the average capital balances. Total net income for 2011 is $240,000.

If the average capital balances for Bertram and Ernest are $200,000 and $240,000, what will the total partnership profit allocations be for Bertram and Ernest in 2011?

A) $100,000 and $140,000
B) $108,000 and $132,000
C) $120,000 and $120,000
D) $140,000 and $100,000

Answer 2

B

Question 3

Austin contributes his computer equipment to the landscaping partnership he starts with Bentley.At what amount should the computer equipment be credited to Austin's partnership capital?

A) The tax basis
B) The fair value at the date of contribution
C) Austin's original cost
D) At the amount that Bentley contributes, with the assumption that they both contribute equally to the partnership

Answer 3

B

Question 4

Use the following information to answer the question(s) below.
A summary balance sheet for the Lemon, Mango, and Nobb partnership appears below. Lemon, Mango, and Nobb share profits and losses in a ratio of 2:3:5, respectively.
The partners agree to admit Oran for a one-fifth interest. The fair market value of partnership land is appraised at $200,000 and the fair market value of inventory is $175,000. The assets are to be revalued prior to the admission of Oran and there is $30,000 of goodwill that attaches to the old partnership.
How much cash must Oran invest to acquire a one-fifth interest?

A) $235,000
B) $141,000
C) $293,750
D) $301,250

Question 5

Which of the following is a reason to use a partnership as the legal form of a business?

A) Partnerships avoid the issue of mutual agency.
B) Partnerships avoid the issue of unlimited liability.
C) Partnerships avoid the issue of double-taxation faced by corporations.
D) Partnerships avoid the difficulty of raising capital.

Question 6

Use the following information to answer the question(s) below.
Quincy has decided to retire from the partnership of Quincy, Robert, and Sam. The partnership will pay Quincy $400,000. Total partnership capital should be revalued based on the excess payment to Quincy. (Assume the book values of the assets listed below equals fair values.) A summary balance sheet for the Quincy, Robert, and Sam partnership appears below. Quincy, Robert, and Sam share profits and losses in a ratio of 1:1:3, respectively.

What partnership capital will Robert have after Quincy retires?

A) $200,000
B) $280,000
C) $360,000
D) $440,000

Question 7

Partnerships

A) are required to prepare annual reports.
B) are required to file income tax returns but do not pay Federal income 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.

Question 8

Use the following information to answer the question(s) below.
Bertram and Ernest share profits and losses equally after salary and interest allowances. Bertram and Ernest receive salary allowances of $40,000 and $60,000, respectively, and both partners receive 10% interest on their average capital balances. Average capital balances are calculated at the beginning of each month, regardless of when additional capital contributions or permanent withdrawals are made subsequently within the month. Partners' drawings of $3,000 per month are not used in determining the average capital balances. Total net income for 2011 is $240,000.

What is the weighted-average capital for Bertram and Ernest in 2011?

A) $224,000 and $245,000
B) $203,333 and $221,167
C) $221,333 and $239,167
D) $256,000 and $220,000

Question 9

In the Uniform Partnership Act, partners have I.mutual agency.
II)unlimited liability.

A) I only
B) II only
C) I and II
D) Neither I nor II

Question 10

Use the following information to answer the question(s) below.
A summary balance sheet for the Lemon, Mango, and Nobb partnership appears below. Lemon, Mango, and Nobb share profits and losses in a ratio of 2:3:5, respectively.
The partners agree to admit Oran for a one-fifth interest. The fair market value of partnership land is appraised at $200,000 and the fair market value of inventory is $175,000. The assets are to be revalued prior to the admission of Oran and there is $30,000 of goodwill that attaches to the old partnership.
By how much will the capital accounts of Lemon, Mango, and Nobb increase, respectively, due to the revaluation of the assets and the recognition of goodwill?

A) The capital accounts will increase by $50,000 each.
B) The capital accounts will increase by $60,000 each.
C) $36,000, $54,000, and $90,000
D) $40,000, $50,000, and $60,000

Question 11

Use the following information to answer the question(s) below.
Alfred and Barne share profits and losses in a ratio of 2:3, respectively, after salary allowances, interest allowances and bonus allocations. Alfred and Barne receive salary allowances of $30,000 and $60,000, 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 2011 is $180,000. If net income after deducting the interest and salary allocations is more than $60,000, Barne receives a bonus of 5% of the original amount of net income.

What is the total amount for the allocation of interest, salary, and bonus, and how much over-allocation is present?

A) $180,000 and $0
B) $240,000 and $60,000
C) $249,000 and $0
D) $249,000 and $69,000

Question 12

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.

Question 13

Under the Uniform Partnership Act, loans made by a partner to the partnership are treated as

A) liabilities 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.

Question 14

Drawings

A) are advances to a partnership.
B) are loans to a partnership.
C) are a function of interest on partnership average capital.
D) are the same nature as withdrawals.

Question 15

Use the following information to answer the question(s) below.
Quincy has decided to retire from the partnership of Quincy, Robert, and Sam. The partnership will pay Quincy $400,000. Total partnership capital should be revalued based on the excess payment to Quincy. (Assume the book values of the assets listed below equals fair values.) A summary balance sheet for the Quincy, Robert, and Sam partnership appears below. Quincy, Robert, and Sam share profits and losses in a ratio of 1:1:3, respectively.

What goodwill will be recorded?

A) $ 80,000
B) $240,000
C) $320,000
D) $400,000

Question 16

Use the following information to answer the question(s) below.
A summary balance sheet for the Lemon, Mango, and Nobb partnership appears below. Lemon, Mango, and Nobb share profits and losses in a ratio of 2:3:5, respectively.
The partners agree to admit Oran for a one-fifth interest. The fair market value of partnership land is appraised at $200,000 and the fair market value of inventory is $175,000. The assets are to be revalued prior to the admission of Oran and there is $30,000 of goodwill that attaches to the old partnership.
What will the profit and loss sharing ratios be after Oran's investment?

A) 1:2:4:2
B) 2:3:5:2
C) 3:4:6:2
D) 4:6:10:5

Question 17

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 the 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 in the partnership agreement.

Question 18

Use the following information to answer the question(s) below.
Bertram and Ernest share profits and losses equally after salary and interest allowances. Bertram and Ernest receive salary allowances of $40,000 and $60,000, respectively, and both partners receive 10% interest on their average capital balances. Average capital balances are calculated at the beginning of each month, regardless of when additional capital contributions or permanent withdrawals are made subsequently within the month. Partners' drawings of $3,000 per month are not used in determining the average capital balances. Total net income for 2011 is $240,000.

If the average capital for Bertram and Ernest from the above information is $224,000 and $238,000, respectively, what will be the total amount of profit allocated to salary and interest distributions?

A) $ 93,800
B) $146,200
C) $218,200
D) $240,000

Question 19

Use the following information to answer the question(s) below.
Alfred and Barne share profits and losses in a ratio of 2:3, respectively, after salary allowances, interest allowances and bonus allocations. Alfred and Barne receive salary allowances of $30,000 and $60,000, 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 2011 is $180,000. If net income after deducting the interest and salary allocations is more than $60,000, Barne receives a bonus of 5% of the original amount of net income.

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 $140,000, how much is Partner Y's bonus allocation?

A) $12,727
B) $13,860
C) $14,000
D) $15,400

Question 20

Use the following information to answer the question(s) below.
Alfred and Barne share profits and losses in a ratio of 2:3, respectively, after salary allowances, interest allowances and bonus allocations. Alfred and Barne receive salary allowances of $30,000 and $60,000, 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 2011 is $180,000. If net income after deducting the interest and salary allocations is more than $60,000, Barne receives a bonus of 5% of the original amount of net income.

If the partnership experiences a net loss of $60,000 for the year, what will be the final net amount of profit or (loss)closed to each partner's capital account?

A) ($90,000) to Alfred and $30,000 to Barne
B) ($30,000) to Alfred and ($30,000) to Barne
C) ($24,000) to Alfred and ($36,000) to Barne
D) $30,000 to Alfred and ($90,000) to Barne

Question 21

Dan and Ellie share partnership profits and losses at 70% and 30%, respectively.The partners agree to admit Fran into the partnership for a 50% interest in capital and earnings.Capital accounts immediately before the admission of Fran are:
Required:
1.Prepare the journal entry(s)for the admission of Fran to the partnership assuming Fran invested $800,000 for the ownership interest, and that this is a fair price for that share of the partnership to be acquired.Fran paid the money directly to Dan and to Ellie for 50% of each of their respective capital interests.The partnership records goodwill.
2.Prepare the journal entry(s)for the admission of Fran to the partnership assuming Fran invested $1,000,000 for the ownership interest.Fran paid the money to the partnership for a 50% interest in capital and earnings.Assume the valuation is based on the capital of the current partnership, which is fairly valued.The partnership records goodwill.
3.Prepare the journal entry(s)for the admission of Fran to the partnership assuming Fran invested $1,400,000 for the ownership interest, and that this is a fair price for that share of the partnership to be acquired.Fran paid the money to the partnership for a 50% interest in capital and earnings.The partnership records goodwill.

Question 22

The Leo, Mark and Natalie Partnership had the following capital balances and profit/loss sharing percentages:
Newsome is going to buy into the partnership by paying $200,000 for a 20% ownership in the partnership.
Required:
1.If Newsome pays the partnership directly, what are the four partner capital balances immediately following Newsome's admission to the partnership using the bonus method? Assume the partnership assets are not revalued.
2.If Newsome pays the partnership directly, what are the four partner capital balances immediately following Newsome's admission to the partnership using the goodwill method? Assume the partnership assets are revalued.The $200,000 amount paid by Newsome is fair value for a 20% share of the partnership.

Question 23

A summary balance sheet for the partnership of Quail, Rainne and Selma on December 31, 2011 is shown below.Partners Quail, Rainne and Selma allocate profit and loss in their respective ratios of 6:3:1.
The partners agree to admit Trask for a one-tenth interest.The fair market value for partnership land is $260,000, and the fair market value of the inventory is $370,000.
Required:
1.Record the entry to revalue the partnership assets prior to the admission of Trask.
2.Calculate how much Trask will have to invest to acquire a 10% interest.
3.Assume the partnership assets are not revalued.If Trask paid $300,000 to the partnership in exchange for a 10% interest, what would be the bonus that is allocated to each partner's capital account?

Question 24

Anna and Bess share partnership profits and losses at 60% and 40%, respectively.The partners agree to admit Cal into the partnership for a 50% interest in capital and earnings.Capital accounts immediately before the admission of Cal are:
Required:
1.Prepare the journal entry(s)for the admission of Cal to the partnership assuming Cal invested $400,000 for the ownership interest, and that this is a fair price for that share of the partnership to be acquired.Cal paid the money directly to Anna and to Bess for 50% of each of their respective capital interests.The partnership records goodwill.
2.Prepare the journal entry(s)for the admission of Cal to the partnership assuming Cal invested $500,000 for the ownership interest.Cal paid the money to the partnership for a 50% interest in capital and earnings.Assume the valuation is based on the capital of the current partnership, which is fairly valued.The partnership records goodwill.
3.Prepare the journal entry(s)for the admission of Cal to the partnership assuming Cal invested $700,000 for the ownership interest, and that this is a fair price for that share of the partnership to be acquired.Cal paid the money to the partnership for a 50% interest in capital and earnings.The partnership records goodwill.

Question 25

On February 1, 2011, George, Hamm, and Ishmael began a partnership in which George and Ishmael each contributed cash of $25,000; and Hamm contributed property with a fair value of $50,000 and a tax basis $40,000.Hamm receives a 5% bonus of partnership income.George and Ishmael receive salaries of $10,000 each.The partnership agreement of George, Hamm, and Ishmael provides that all partners receive 5% interest on capital, and that profits and losses of the remaining income be distributed to George, Hamm, and Ishmael by a 1:3:1 ratio.
Required:
Prepare a schedule to distribute $25,000 of partnership net income to the partners.

Question 26

A summary balance sheet for the Uma, Van, and Walter partnership on December 31, 2011 is shown below.Partners Uma, Van, and Walter allocate profit and loss in their respective ratios of 4:5:7.The partnership agreed to pay Walter $227,500 for his partnership interest upon his retirement from the partnership on January 1, 2012.Any payments exceeding Walter's capital balance are treated as a bonus from partners Uma and Van.
Required:
Prepare the journal entry to reflect Walter's retirement.

Question 27

Use the following information to answer the question(s) below.
Adam, Bella, and Chris operate a partnership with a complex profit and loss sharing agreement. The average capital balance for Adam, Bella and Chris on December 31, 2011 is $120,000, $270,000, and $340,000, respectively. A 6% interest allocation is provided to each partner based on the average capital balance on December 31, 2011. Adam and Bella receive salary allocations of $40,000 and $50,000, respectively. If partnership net income is above $160,000, after the salary allocations are considered (but before the interest allocations are considered), Chris will receive a bonus of 10% of the income (pre-salary and interest, but net of the bonus). All residual income is allocated in the ratios of 2:2:6 to Adam, Bella, and Chris, respectively.
Required:
1.Prepare a schedule to allocate income or loss to the partners assuming that the partnership incurs a net loss of $26,200 for 2011.
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).

Question 28

Use the following information to answer the question(s) below.
Xavier, Young, and Zane operate a partnership with a complex profit and loss sharing agreement. The average capital balance for each partner on December 31, 2011 is $300,000 for Xavier, $250,000 for Young, and $325,000 for Zane. An 8% interest allocation is provided to each partner based on the average capital balance on December 31, 2011. Xavier and Young 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), Zane 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 Xavier, Young, and Zane, respectively.
Required:
1.Prepare a schedule to allocate income to the partners assuming that partnership net income for 2011 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).

Question 29

Daniel, Ethan, and Frank 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.Withdrawals of capital that are debited to the capital account are used in the average calculation.Partner capital activity for the year was:
Required:
Calculate weighted average capital for each partner, and determine the amount of interest that each partner will be allocated.Round all calculations to the nearest whole dollar.

Question 30

The profit and loss sharing agreement for the Mason, Nell, and Odell partnership provides for a $15,000 salary allowance to Nell.Residual profits and losses are allocated 5:3:2 to Mason, Nell, and Odell, respectively.In 2010, the partnership recorded $120,000 of net income that was properly allocated to the partners' capital accounts.On January 25, 2011, after the books were closed for 2010, Mason discovered that office equipment, purchased for $12,000 on December 29, 2010, was recorded as office expense by the company bookkeeper.
Required:
Prepare the necessary correcting entry(s)for the partnership.

Question 31

A summary balance sheet for the Ash, Brown, and Curly partnership on December 31, 2011 is shown below.Partners Ash, Brown, and Curly allocate profit and loss in their respective ratios of 2:1:1.The partnership agreed to pay partner Brown $135,000 for his partnership interest upon his retirement from the partnership on January 1, 2012.The partnership financials on January 1, 2012 are:
Required:
Prepare the journal entry to reflect Brown's retirement from the partnership:
1.Assuming a bonus to Brown.
2.Assuming a revaluation of total partnership capital based on excess payment.
3.Assuming goodwill equal to the excess payment is recorded.

Question 32

Use the following information to answer the question(s) below.
Xavier, Young, and Zane operate a partnership with a complex profit and loss sharing agreement. The average capital balance for each partner on December 31, 2011 is $300,000 for Xavier, $250,000 for Young, and $325,000 for Zane. An 8% interest allocation is provided to each partner based on the average capital balance on December 31, 2011. Xavier and Young 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), Zane 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 Xavier, Young, and Zane, respectively.
Required:
1.Prepare a schedule to allocate income or loss to the partners assuming that the partnership incurs a net loss of $36,000 for 2011.
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).

Question 33

On July 1, 2011, Joe, Kline, and Lama began a partnership in which Joe and Kline each contributed cash of $200,000; and Lama contributed property with a fair value of $100,000 and a tax basis $150,000.Joe receives a 10% bonus of partnership income.Kline and Lama receive salaries of $40,000 each.The partnership agreement of Joe, Kline, and Lama provides that all partners receive 5% interest on capital and that profits and losses of the remaining income be distributed to Joe, Kline, and Lama by a 1:1:3 ratio.
Required:
Prepare a schedule to distribute $225,000 of partnership net income to the partners.

Question 34

Use the following information to answer the question(s) below.
Adam, Bella, and Chris operate a partnership with a complex profit and loss sharing agreement. The average capital balance for Adam, Bella and Chris on December 31, 2011 is $120,000, $270,000, and $340,000, respectively. A 6% interest allocation is provided to each partner based on the average capital balance on December 31, 2011. Adam and Bella receive salary allocations of $40,000 and $50,000, respectively. If partnership net income is above $160,000, after the salary allocations are considered (but before the interest allocations are considered), Chris will receive a bonus of 10% of the income (pre-salary and interest, but net of the bonus). All residual income is allocated in the ratios of 2:2:6 to Adam, Bella, and Chris, respectively.
Required:
1.Prepare a schedule to allocate income to the partners assuming that partnership net income for 2011 is $330,000.
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).

Question 35

Greta, Harriet, and Ivy have a retail partnership business selling personal computers.The partners are allowed an interest allocation of 6% 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.Withdrawals of capital that are debited to the capital account are used in the average calculation.Partner capital activity for the year was:
Required:
Calculate weighted average capital for each partner, and determine the amount of interest that each partner will be allocated.Round all calculations to the nearest whole dollar.

Question 36

A summary balance sheet for the partnership of Maddy, Nelson and Olsen on December 31, 2011 is shown below.Partners Maddy, Nelson and Olsen allocate profit and loss in their respective ratios of 9:6:10.
The partners agree to admit Poosh 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.
Required:
1.Record the entry to revalue the partnership assets prior to the admission of Poosh.
2.Calculate how much Poosh will have to invest to acquire a 10% interest.
3.Assume the partnership assets are not revalued.If Poosh paid $200,000 to the partnership in exchange for a 10% interest, what is the bonus that is allocated to each partner's capital account?

Question 37

The profit and loss sharing agreement for the Jill, Kelly, and Lila partnership provides that each partner receives a bonus of 5% on the original amount of partnership net income if net income is above $25,000.Jill and Kelly receive a salary allowance of $7,500 and $10,500, respectively.Lila has an average capital balance of $260,000, and receives a 10% interest allocation on the amount by which her average capital account balance exceeds $200,000.Residual profits and losses are allocated to Jill, Kelly, and Lila in their respective ratios of 7:5:8.
Required:
Prepare a schedule to allocate $88,000 of partnership net income to the partners.

Question 38

The profit and loss sharing agreement for the Tuttle, Upman, and Veer partnership provides for residual profits and losses to be allocated 2:3:6 to Tuttle, Upman, and Veer, respectively.In 2011, the partnership recorded $11,000 of net income that was properly allocated to the partners' capital accounts.On January 18, 2012, after the books were closed for 2011, Tuttle discovered that the $16,500 payment for the partnership's liability and workers compensation insurance for 2012 was recorded as insurance expense when it was paid on December 28, 2011.
Required:
Prepare the necessary correcting entry(s)for the partnership.

Question 39

A summary balance sheet for the Akerly, Baskin, and Crow partnership on December 31, 2011 is shown below.Partners Akerly, Baskin, and Crow allocate profit and loss in their respective ratios of 3:2:1.The partnership agreed to pay partner Baskin $500,000 for his partnership interest upon his retirement from the partnership on January 1, 2012.The partnership financials on January 1, 2012 are:
Required:
Prepare the journal entry to reflect Baskin's retirement from the partnership:
1.Assuming a bonus to Baskin.
2.Assuming a revaluation of total partnership capital based on excess payment.
3.Assuming goodwill equal to the excess payment is recorded.