Deck 15: Partnerships: Formation, operation and Ownership Changes

Question 1

When a partner retires and withdraws assets in excess of his book value,the remaining partners absorb the excess:

A)equally.
B)in their profit-sharing ratio.
C)based on their average capital balances.
D)based on their ending capital balances.

Answer 1

B

Question 2

The following balance sheet information is for the partnership of Abel,Boule,and Cayman: Figures shown parenthetically reflect agreed profit and loss sharing percentages.
If assets on the initial balance sheet are fairly valued,Abele and Boule consent and Dann pays Cayman $225,000 for his interest; the revised capital balances of the partners would be

A)Abele,$315,000; Boule,$495,000; Dann,$450,000.
B)Abele,$315,000; Boule,$495,000; Dann,$420,000.
C)Abele,$300,000; Boule,$570,000; Dann,$450,000.
D)Abele,$300,000; Boule,$480,000; Dann,$420,000.

Answer 2

D

Question 3

In a partnership,interest on capital investment is accounted for as a(n):

A)return on investment.
B)expense.
C)allocation of net income.
D)reduction of capital.

Answer 3

C

Question 4

At December 31,2017,Mick and Keith are partners with capital balances of $250,000 and $150,000,and they share profits and losses in the ratio of 2:1,respectively.On this date,Jumpin Jack invests $125,000 cash for a one-fifth interest in the capital and profit of the new partnership.The partners agree that the implied partnership goodwill is to be recorded simultaneously with the admission of Jumpin Jack.The total implied goodwill of the firm is:

A)$25,000.
B)$20,000.
C)$45,000.
D)$100,000.

Question 5

The bonus and goodwill methods of recording the admission of a new partner will produce the same result if the:

A)new partner's profit-sharing ratio equals his capital interest
B)old partners' profit-sharing ratio in the new partnership is the same relatively as it was in the old partnership.
C)both new partner's profit-sharing ratio equals his capital interest and old partners' profit-sharing ratio in the new partnership is the same relatively as it was in the old partnership are met
D)none of these.

Question 6

The partnership of Abel and Caine was formed on February 28,2017.At that date the following assets were invested: The building is subject to a mortgage loan of $280,000,which is to be assumed by the partnership.The partnership agreement provides that Abel and Caine share profits or losses 30% and 70%,respectively.Caine's capital account at February 28,2017,should be

A)$1,080,000.
B)$1,360,000.
C)$1,176,000.
D)$952,000.

Question 7

In the absence of an agreement among the partners:

A)interest is allowed on capital investments.
B)interest is charged on partners' drawings.
C)interest is allowed on advances to the firm made by partners beyond agreed investments.
D)compensation is allowed partners for extra time devoted to the partnership.

Question 8

The partnership of Gilligan,Skipper,and Ginger had total capital of $570,000 on December 31,2017 as follows: Profit and loss sharing percentages are shown in parentheses.
Assume that Professor became a partner by investing $190,000 in the Gilligan,Skipper,and Ginger partnership for a 25 percent interest in the capital and profits,and the partnership assets are revalued.Under this assumption

A)Professor's capital credit will be $150,000.
B)Gilligan's capital will be increased to $147,000.
C)total partnership capital after Professor's admission to the partnership will be $600,000.
D)net assets of the partnership will increase by $190,000,including Professor's interest.

Question 9

The partnership of Gilligan,Skipper,and Ginger had total capital of $570,000 on December 31,2017 as follows: Profit and loss sharing percentages are shown in parentheses.The partnership has no liabilities.If Mary Ann purchases a 25 percent interest from each of the old partners for a total payment of $270,000 directly to the old partners

A)total partnership net assets can logically be revalued to $1,080,000 on the basis of the price paid by Mary Ann.
B)the payment of Mary Ann does not constitute a basis for revaluation of partnership net assets because the capital and income interests of the old partnership were not aligned.
C)total capital of the new partnership should be $760,000.
D)total capital of the new partnership will be $840,000 assuming no revaluation.

Question 10

When the goodwill method is used and the book value acquired is less than the value of the assets invested,total implied capital is computed by:

A)multiplying the new partner's capital interest by the capital balances of existing partners.
B)dividing the total capital balances of existing partners by their collective capital interest.
C)dividing the new partner's investment by his (her)capital interest.
D)dividing the new partner's investment by the existing partners' collective capital interest.

Question 11

Bob and Fred form a partnership and agree to share profits in a 2 to 1 ratio.During the first year of operation,the partnership incurs a $20,000 loss.The partners should share the losses:

A)based on their average capital balances.
B)in a 2 to 1 ratio.
C)equally.
D)based on their ending capital balances.

Question 12

The profit and loss sharing ratio should be:

A)in the same ratio as the percentage interest owned by each partner.
B)based on relative effort contributed to the firm by the partners.
C)a weighted average of capital and effort contributions.
D)based on any formula that the partners choose.

Question 13

Which of the following is an advantage of a partnership?

A)mutual agency
B)limited life
C)unlimited liability
D)none of these

Question 14

When the goodwill method is used to record the admission of a new partner,total partnership capital increases by an amount:

A)equal to the new partner's investment.
B)greater than the new partner's investment.
C)less than the new partner's investment.
D)that may be more or less than the new partner's investment.

Question 15

A partnership in which one or more of the partners are general partners and one or more are not is called a(n):

A)joint venture.
B)general partnership.
C)limited partnership.
D)unlimited partnership.

Question 16

The partnership agreement of Powell,Gaunt,and Holl allows Gaunt a bonus of 10% of income after the bonus,salaries of $30,000 per partner and interest of 6% on average capital balances of $120,000,$150,000,and $180,000 for Powell,Gaunt,and Holl,respectively.The amount of Gaunt's bonus,assuming income before bonus,salaries,and interest of $315,000,is

A)$18,000.
B)$22,000.
C)$19,800.
D)$31,500.

Question 17

The partnership of Gilligan,Skipper,and Ginger had total capital of $570,000 on December 31,2017 as follows: Profit and loss sharing percentages are shown in parentheses.Assume that Mary Ann became a partner by investing $150,000 in the Gilligan,Skipper,and Ginger partnership for a 25 percent interest in capital and profits and that partnership net assets are not revalued.Mary Ann's capital credit using the bonus method should be

A)$180,000.
B)$142,500.
C)$150,000.
D)$190,000.

Question 18

Shrek,Donkey,and Muffin are partners with capital balances of $135,000,$90,000,and $60,000,respectively.The partners share profits and losses equally.For an investment of $120,000 cash,Fiona is to be admitted as a partner with a one-fourth interest in capital and profits.Based on this information,the amount of Fiona's investment can best be justified by which of the following?

A)Fiona will receive a bonus from the other partners upon his admission to the partnership.
B)Assets of the partnership were overvalued immediately prior to Fiona's investment.
C)The book value of the partnership's net assets were less than their fair value immediately prior to Fiona's investment.
D)Fiona is apparently bringing goodwill into the partnership and her capital account will be credited for the appropriate amount.

Question 19

The following balance sheet information is for the partnership of Abele,Boule,and Cayman: Figures shown parenthetically reflect agreed profit and loss sharing percentages.
If the assets are fairly valued on the above balance sheet and the partnership wishes to admit Dann as a new 1/5 partner without recording goodwill or bonus,Dann should invest cash or other assets of

A)$427,500.
B)$240,000.
C)$300,000.
D)$342,000.

Question 20

Pink desires to purchase a one-fourth capital and profit and loss interest in the partnership of Brown,Greene,and Red.The three partners agree to sell Pink one-fourth of their respective capital and profit and loss interests in exchange for a total payment of $100,000.The payment is made directly to the individual partners.The capital accounts and the respective percentage interests in profits and losses immediately before the sale to Pink follow All other assets and liabilities are fairly valued and implied goodwill is to be recorded prior to the acquisition by Pink.Immediately after Pink's acquisition,what should be the capital balances of Brown,Greene,and Red,respectively?

A)$126,000; $78,000; $36,000
B)$156,000; $99,000; $45,000
C)$178,000; $111,000; $51,000
D)$208,000; $132,000; $60,000

Question 21

Carter and Gore are partners in an automobile repair business.Their respective capital balances are $425,000 and $275,000,and they share profits in a 3:2 ratio.Because of growth in their repair business,they decide to admit a new partner.Bush is admitted to the partnership,after which Carter,Gore,and Bush agree to share profits in a 3:2:1 ratio.
Required:
Prepare the necessary journal entries to record the admission of Bush in each of the following independent situations:
A.Bush invests $300,000 for a one-fourth capital interest,but will not accept a capital balance of less than his investment.
B.Bush invests $150,000 for a one-fifth capital interest.The partners agree that assets and the firm as a whole should be revalued.
C.Bush purchases a 20% capital interest from each partner.Carter receives $100,000 and Gore receives $50,000 directly from Bush.

Question 22

Mack and Ruben are partners operating an electronics repair shop.For 2017,net income,after salaries expense of $150,000 was $50,000.Mack and Ruben have salary allowances of $90,000 and $60,000,respectively,and remaining profits and losses are shared 6:4. The division of salaries and profits in total to Mack and Ruben would be:

A)$30,000 and $20,000
B)$50,000 and $-0-
C)$120,000 and $80,000
D)$25,000 and $25,000

Question 23

Portney,Grey,and Ross are partners with capital balances of $80,000,$200,000,and $120,000,respectively.Profits and losses are shared in a 3:2:1 ratio.Grey decided to withdraw and the partnership revalued its assets.The value of inventory was decreased by $20,000 and the value of land was increased by $50,000.Portney and Ross then agreed to pay Grey $230,000 for his withdrawal from the partnership.
Required:
Prepare the journal entry to record Grey's withdrawal under the
A.bonus method.
B.full goodwill method.

Question 24

The balance sheet for the partnership of Nina,Pinta,and Santa Maria at January 1,2017 follows.The partners share profits and losses in the ratio of 3:2:5,respectively. Nina is retiring from the partnership.By mutual agreement,the assets are to be adjusted to their fair value of $540,000 at January 1,2017.Pinta and Santa Maria agree that the partnership will pay Nina $135,000 cash for hers her partnership interest.There is no goodwill is to be recorded.What is the balance of Pinta's capital account after Nina's retirement?

A)$138,000
B)$108,000
C)$120,000
D)$132,000

Question 25

Rodgers and Michael formed a partnership on January 2,2017.Michael invested $120,000 in cash.Rodgers invested land valued at $30,000,which he had purchased for $20,000 in 2005.In addition,Rodgers possessed superior managerial skills and agreed to manage the firm.The partners agreed to the following profit and loss allocation formula:
a.Interest -8% on original capital investments.
b.Salary - $5,000 a month to Rodgers.
c.Bonus - Rodgers is to be allocated a bonus of 20% of net income after subtracting the bonus,interest,and salary.
d.Remaining profit is to be divided equally.
At the end of 2017 the partnership reported net income before interest,salaries,and bonus of $168,000.
Required:
Calculate the amount of bonus to be allocated to Rodgers.

Question 26

Garlic,Pepper,and Salt are partners in a plumbing service.The business reported net income of $108,000 for 2017.The partnership agreement provides that profits and losses are to be divided equally after Pepper receives a $60,000 salary,Salt receives a $24,000 salary,and each partner receives 10% interest on his beginning capital balance.Beginning capital balances were $40,000 for Garlic,$48,000 for Pepper,and $32,000 for Salt.Pepper's share of partnership income for 2017 is:

A)$68,800.
B)$36,000.
C)$31,200.
D)$27,200.

Question 27

The principal types of partnerships are general partnerships,limited partnerships,and joint ventures.Describe the characteristics of each type of partnership.

Question 28

Letterman and Conan are partners who share profits and losses 3:7.The capital accounts on January 1,2017,are $120,000 and $160,000,respectively.Leno is to be admitted as a partner with a one-fourth interest in the capital and profits and losses by investing $80,000.Goodwill is not to be recorded.The capital balances after admission should be:

A)Letterman,$117,000; Conan,$153,000; Leno,$90,000
B)Letterman,$120,000; Conan,$160,000; Leno,$90,000
C)Letterman,$123,000; Conan,$160,000; Leno,$80,000
D)Letterman,$120,000; Conan,$167,000; Leno,$80,000

Question 29

The partnership of Gamma,Ginger,and Gert had total capital of $1,140,000 on December 31,2017,as follows: Profit and loss sharing percentages are shown in parentheses.
Assume that Grizelda became a partner by investing $300,000 in the Gamma,Ginger,and Gert partnership for a 25 percent interest in capital and profits and that partnership net assets are not revalued.Grizelda's capital credit should be:

A)$360,000.
B)$285,000.
C)$300,000.
D)$380,000.

Question 30

Dante,Milton,and Cervantes formed a partnership and agreed to share profits in a 3:1:2 ratio after recognition of 5% interest on average capital balances and monthly salary allowances of $3,750 to Milton and $3,000 to Cervantes.Average capital balances were as follows:
Required:
Compute the net income (loss)allocated to each partner assuming the partnership incurred a $27,000 net loss.

Question 31

Joey and Rachel are partners whose capital balances are $400,000 and $300,000 and who share profits 3:2.Due to a shortage of cash,Joey and Rachel agree to admit Ross to the firm.
Required:
Prepare the journal entries required to record Ross's admission under each of the following assumptions:
(a)Ross invests $200,000 for a 1/4 interest.The total firm capital is to be $900,000.
(b)Ross invests $300,000 for a 1/4 interest.Goodwill is to be recorded.
(c)Ross invests $150,000 for a 1/5 interest.Goodwill is to be recorded.
(d)Ross purchases a 1/4 interest in the firm,with 1/4 of the capital of each old partner transferred to the account of the new partner.Ross pays the partners cash of $250,000,which they divide between themselves.

Question 32

The partnership agreement of Sleeter,Frisco,and Kinney provides for annual distribution of profit and loss in the following sequence:
- Frisco,the managing partner,receives a bonus of 10% of net income.
- Each partner receives 5% interest on average capital investment.
- Residual profit or loss is to be divided 4:2:4.
Average capital investments for 2017 were:
Required:
A.Prepare a schedule to allocate net income,assuming operations for the year resulted in:
1.Net income of $75,000.
2.Net income of $15,000.
3.Net loss of $30,000.
B.Prepare the journal entry to close the Income Summary account for each situation above.

Question 33

Agler,Bates and Colter are partners who share income in a 5:3:2 ratio.Colter,whose capital balance is $150,000,retires from the partnership.
Required:
Determine the amount paid to Colter under each of the following cases:
(1)$50,000 is debited to Agler capital account; the bonus approach is used.
(2)Goodwill of $60,000 is recorded; the partial goodwill approach is used.
(3)$66,000 is credited to Bates' capital account; the total goodwill approach is used.

Question 34

The following balance sheet information is for the partnership of Professor,Mary Ann,and Skipper: Figures shown parenthetically reflect agreed profit and loss sharing percentages.
If the assets are fairly valued on the above balance sheet and the partnership wishes to admit Mrs.Howell as a new 1/5 partner without recording goodwill or bonus,Mrs.Howell should invest cash or other assets of

A)$427,500.
B)$240,000.
C)$300,000.
D)$342,000.

Question 35

The partners in the ABC partnership have capital balances as follows:
Profits and losses are shared 30%,20%,and 50%,respectively.
On this date,C withdraws and the partners agree to pay him $140,000 out of partnership cash.
Required:
A.Prepare journal entries to show three acceptable methods of recording the withdrawal.(Tangible assets are already stated at values approximating their fair market values.)
B.Which alternative would you recommend if you determined that the agreement to pay C $140,000 was not the result of arms length bargaining between C and the other partners? Why?

Question 36

Robbie and Ruben are partners operating a portable toilet lease and maintenance operation.For 2017,net income was $50,000 (without taking into consideration the salary allowances).Robbie and Ruben have salary allowances of $90,000 and $60,000,respectively,and remaining profits and losses are shared 6:4. If their agreement specifies that salaries are allowed only to the extent of income,based on a prorata share of their salary allowances,the division of profits would be:

A)$20,000 and $30,000
B)$50,000 and $-0-
C)$30,000 and $20,000
D)$25,000 and $25,000

Question 37

The partnership of Ned,Fred,and Ted had total capital of $1,140,000 on December 31,2017,as follows: Profit and loss sharing percentages are shown in parentheses.
Assume that Ed became a partner by investing $300,000 in the Ned,Fred,and Ted partnership for a 25 percent interest in the capital and profits,and the partnership assets are revalued.Under this assumption:

A)Ted's capital credit will be $300,000.
B)Ned's capital will be increased to $394,000.
C)total partnership capital after Ed's admission to the partnership will be $1,200,000.
D)net assets of the partnership will increase by $380,000 including Ed's interest.

Question 38

There are two methods of recording changes in the membership of a partnership - the bonus method and the goodwill method.Describe these two methods of recording changes in partnership membership.

Question 39

Donkey desires to purchase a one-fourth capital and profit and loss interest in the partnership of Shrek,Fiona,and Muffin.The three partners agree to sell Donkey one-fourth of their respective capital and profit and loss interests in exchange for a total payment of $125,000.The payment is made directly to the individual partners.The capital accounts and the respective percentage interests in profits and losses immediately before the sale to Donkey follow: All other assets and liabilities are fairly valued above.Immediately after Donkey's acquisition,what should be the capital balances of Shrek,Fiona,and Muffin,respectively?

A)$157,500; $97,500; $45,000
B)$195,000; $123,750; $56,250
C)$222,500; $138,750; $63,750
D)$260,000; $165,000; $75,000