Chapter 12

Chapter 012 Accounting for Partnerships
Summary of Questions by Difficulty Level (DL) and Learning Objective (LO)

True/False
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1.
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Easy
Easy
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C1
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P1
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Med
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P2
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P2
P3
24.
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Easy
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Multiple Choice
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Hard
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Easy
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12-1

Matching
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75.
Med
C1
Short Essay
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Problems
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Completion Problems
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Easy
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Problems
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120.
121.
P2
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12-2
True / False Questions

1. A partnership has an unlimited life.
FALSE
AACSB: Communications
AICPA BB: Legal
AICPA FN: Decision Making
Difficulty: Easy
Learning Objective: C1
2. A partnership is an unincorporated association of two or more people to pursue a business

for profit as co-owners.
TRUE
AICPA BB: Legal
Difficulty: Easy
3. Mutual agency means each partner can commit or bind the partnership to any contract
within the scope of the partnership business.
TRUE
AICPA BB: Legal
Difficulty: Medium
4. Accounting procedures for all items are the same for both C corporations and S
corporations in all aspects.
FALSE
AICPA BB: Legal
Difficulty: Medium
12-3
5. Partners in a partnership are taxed on the amounts they withdraw from the partnership, not
the partnership income.
FALSE
AICPA BB: Legal
Difficulty: Medium
6. Limited liability partnerships are designed to protect innocent partners from malpractice or
negligence claims resulting from the acts of another partner.
TRUE
AICPA BB: Legal
Difficulty: Medium
7. A partnership cannot use salary allowances or interest allowances if it uses the stated ratio
method to allocate income and losses to the partners.
FALSE
AICPA BB: Industry
AICPA FN: Measurement
Difficulty: Medium
8. In a limited partnership the general partner has unlimited liability.

TRUE
AICPA BB: Legal
Difficulty: Hard
12-4
9. Partner return on equity can be used by each partner to help decide whether additional
investment or withdrawal of resources is best for that partner.
TRUE
AICPA BB: Industry
AICPA FN: Risk Analysis
Difficulty: Medium
Learning Objective: A1
10. Benson is a partner in B&D Company. Benson's share of the partnership income is
$18,600 and her average partnership equity is $155,000. Her partner return on equity equals
8.33.
FALSE
$18,600/$155,000 = 12%
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
11. When partners invest in a partnership, their capital accounts are credited for the amount
invested.
TRUE
AICPA BB: Industry
Difficulty: Easy
Learning Objective: P1
12. Partners' withdrawals are credited to their separate withdrawals accounts.

FALSE
AICPA BB: Industry
Difficulty: Easy
12-5
13. Partners can invest both assets and liabilities into a partnership.
TRUE
AICPA BB: Industry
Difficulty: Medium
14. The withdrawals account of each partner is closed to retained earnings at the end of the
accounting period.
FALSE
AICPA BB: Industry
Difficulty: Medium
15. In closing the accounts at the end of a period, the partners' capital accounts are credited
for their share of the partnership loss or debited for their share of the partnership net income.
FALSE
AICPA BB: Industry
Difficulty: Hard
16. In the absence of a partnership agreement, the law says that income of a partnership will
be shared equally by the partners.
TRUE
AICPA BB: Industry, Legal
Difficulty: Easy
12-6
17. Salary allowances are reported as salaries expense on a partnership income statement.
FALSE
AICPA BB: Industry
Difficulty: Easy
18. The statement of changes in partners' equity shows the beginning balance in retained
earnings, plus investments, less withdrawals, the income or loss and the ending balance in
retained earnings.
FALSE
AICPA BB: Industry
AICPA FN: Reporting
Difficulty: Medium
19. The equity section of the balance sheet of a partnership can report the separate capital
account balances of each partner.
TRUE
AICPA BB: Industry
AICPA FN: Reporting
Difficulty: Medium
20. If partners devote their time and services to their partnership, their salaries are expenses
on the income statement.
FALSE
AICPA BB: Industry
Difficulty: Medium
12-7
21. If the partners agree on a formula to share income and say nothing about losses, then the
losses are shared equally.
FALSE
Difficulty: Medium
22. Assume that the S & B partnership agreement gave Steely 60% and Breck 40% of
partnership income and losses. The partnership lost $27,000 in the current period. This
implies that Steely's share of the loss equals $16,200, and Breck's share equals $10,800.
TRUE
AACSB: Analytic
Difficulty: Hard
23. When a partner leaves a partnership, the present partnership ends.

TRUE
Difficulty: Easy
24. To buy into an existing partnership, the new partner must contribute cash to the
partnership.
FALSE
AICPA BB: Industry
Difficulty: Easy
12-8
25. When a partner leaves a partnership, the present partnership ends, but the business can
still continue to operate.
TRUE
Difficulty: Medium
26. Assets invested by a partner into a partnership remain the property of the individual
partner.
FALSE
Difficulty: Medium
27. Admitting a partner by accepting assets is a personal transaction between one or more
current partners and the new partner.
FALSE
Difficulty: Medium
28. When the current value of a partnership is greater than the recorded amounts of equity, the
current partners usually require any new partner to pay a bonus for the privilege of joining.
TRUE
AICPA BB: Industry
Difficulty: Hard
12-9
29. When a partner leaves a partnership, the withdrawing partner is entitled to a bonus if the
recorded equity is overstated.
FALSE
AICPA BB: Industry
Difficulty: Hard
30. When a partnership is liquidated, its business is ended.

TRUE
Difficulty: Easy
31. A capital deficiency exists when all partners have a credit balance in their capital
accounts.
FALSE
AICPA BB: Industry
Difficulty: Easy
32. A capital deficiency can arise from liquidation losses, excessive withdrawals before
liquidation, or recurring losses in prior periods.
TRUE
AICPA BB: Industry
Difficulty: Medium
12-10
33. If a partner is unable to cover a deficiency and the other partners absorb the deficiency,
then the partner with the deficiency is thus relieved of all liability.
FALSE
Difficulty: Medium
34. If at the time of partnership liquidation, a partner has a $5,000 capital deficiency and pays
the partnership $5,000 out of personal assets to cover the deficiency, then that partner is
entitled to share in the final distribution of cash.
FALSE
AACSB: Analytic
AICPA BB: Industry
Difficulty: Hard
Multiple Choice Questions

35. An unincorporated association of two or more persons to carry on a business for profit as
co-owners is a:
A. Partnership.
B. Proprietorship.
C. Contractual company.
D. Mutual agency.
E. Voluntary organization.
Difficulty: Easy
12-11
36. Disadvantages of a partnership include:

A. Limited life.
B. Mutual agency.
C. Unlimited liability.
D. Co-ownership of property.
E. All of these.
Difficulty: Easy
37. A partnership agreement:

A. Is not binding unless it is in writing.
B. Is the same as a limited liability partnership.
C. Is binding even if it is not in writing.
D. Does not generally address the issue of the rights and duties of the partners.
E. Is also called the articles of incorporation.
Difficulty: Easy
38. Mutual agency means

A. Creditors can apply their claims to partners' personal assets.
B. Partners are taxed on partnership withdrawals.
C. All partners must agree before the partnership can act.
D. The partnership has a limited life.
E. A partner can commit or bind the partnership in any contract within the scope of the
partnership business.
Difficulty: Medium
12-12
39. A partnership that has two classes of partners, general and limited, where the limited
partners have no personal liability beyond the amounts they invest in the partnership, and no
active role in the partnership, except as specified in the partnership agreement is a:
A. Mutual agency partnership.
B. Limited partnership.
C. Limited liability partnership.
D. General partnership.
E. Limited liability company.
Difficulty: Medium
40. A partnership designed to protect innocent partners from malpractice or negligence claims
resulting from acts of another partner is a:
A. Partnership.
B. Limited partnership.
C. Limited liability partnership.
D. General partnership.
E. Limited liability company.
Difficulty: Medium
12-13
41. Mutual agency implies that each partner in a partnership is a fully authorized agent of the
partnership. Which of the following statements is correct regarding the authority of a partner
to bind the partnership in dealings with third parties?
A. The partner's authority must be derived from the partnership agreement.
B. The partner's authority may be effectively limited by a formal resolution of the other
partners, even if third parties are not aware of that limitation.
C. Only a partner with a majority interest in a partnership has the authority to represent the
partnership to third parties.
D. A partner has authority to deal with third parties on the behalf of the other partners only if
he has written permission to do so.
E. A partner may be able to legally bind the partnership to actions even if the other partners
are unaware of his actions.
Difficulty: Hard
42. David and Jeannie formed This & That as a limited liability company. Unless the member
owners elect to be treated otherwise, the Internal Revenue Service will tax the LLC as:
A. An S corporation.
B. A C corporation.
C. A non-taxable entity.
D. A joint venture.
E. A partnership.
Difficulty: Medium
12-14
43. Which of the following statements is generally correct?

I. A limited partner in a limited partnership has the right to take part in the management of the
partnership.
II. A limited partner is subject to personal liability for the limited partnership's debts.
A. I only
B. II only
C. Neither I nor II
D. Both I and II
E. Impossible to answer without knowing the state in which the partnership was formed.
Difficulty: Hard
44. Renee Jackson is a partner in Sports Promoters. Her beginning partnership capital balance
for the current year is $55,000, and her ending partnership capital balance for the current year
is $62,000. Her share of this year's partnership income was $5,250. What is her partner return
on equity?
A. 8.47%
B. 8.97%
C. 9.54%
D. 1047%
E. 1060%
$5,250/[($55,000 + $62,000)/2] = 8.97%
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
12-15
45. Web Services is organized as a limited partnership, with David White as one of its
partners. David's capital account began the year with a balance of $45,000. During the year,
David's share of the partnership income was $7,500, and David received $4,000 in
distributions from the partnership. What is David's partner return on equity?
A. 7.8%
B. 8.9%
C. 15.4%
D. 16.0%
E. 16.7%
Ending partnership equity = $45,000 + $7,500 - $4,000 = $48,500
Return on partnership equity = $7,500/(($45,000 + $48,500)/2) = 16.0%
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
46. The following information is available regarding John Smith's capital account in
Technology Consulting Group, a general partnership, for a recent year:
What is Smith's partner return on equity during the year in question?

A. 36.6%
B. 34.7%
C. 10.8%
D. 11.4%
E. 55.7%
Ending partner equity = $22,000 + $8,500 - $6,000 = $24,500
$8,500 / (($22,000 + $24,500)/2) = 36.6%
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
12-16
47. Partnership accounting:

A. Uses a capital account for each partner.
B. Uses a withdrawals account for each partner.
C. Allocates net income to each partner according to the partnership agreement.
D. Allocates net loss to each partner according to the partnership agreement.
E. All of these.
AICPA BB: Industry
Difficulty: Easy
48. Partnership accounting:

A. Is the same as accounting for a sole proprietorship.
B. Is the same as accounting for a corporation.
C. Is the same as accounting for a sole proprietorship, except that separate capital and
withdrawal accounts are kept for each partner.
D. Is the same as accounting for an S corporation.
E. Is the same as accounting for a corporation, except that retained earnings is used to keep
track of partners' withdrawals.
AICPA BB: Industry
Difficulty: Medium
49. Partners' withdrawals of assets are:

A. Credited to their withdrawals accounts.
B. Debited to their withdrawals accounts.
C. Credited to their retained earnings.
D. Debited to their retained earnings.
E. Debited to their asset accounts.
AICPA BB: Industry
Difficulty: Medium
12-17
50. The withdrawals account of each partner is:

A. Closed to that partner's capital account with a credit.
B. Closed to that partner's capital account with a debit.
C. A permanent account that is not closed.
D. Credited with that partner's share of net income.
E. Debited with that partner's share of net loss.
AICPA BB: Industry
Difficulty: Medium
51. B. Tanner contributed $14,000 in cash plus office equipment valued at $7,000 to the JT
Partnership. The journal entry to record the transaction for the partnership is:
A.
B.
C.
D.
E.
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
12-18
52. Chen and Wright are forming a partnership. Chen will invest a building that currently is
being used by another business owned by Chen. The building has a market value of $90,000.
Also, the partnership will assume responsibility for a $30,000 note secured by a mortgage on
that building. Wright will invest $50,000 cash. For the partnership, the amounts to be recorded
for the building and for Chen's Capital account are:
A. Building, $90,000 and Chen, Capital, $90,000.
B. Building, $60,000 and Chen, Capital, $60,000.
C. Building, $60,000 and Chen, Capital, $50,000.
D. Building, $90,000 and Chen, Capital, $60,000.
E. Building, $60,000 and Chen, Capital, $90,000.
AACSB: Analytic
AICPA BB: Industry
Difficulty: Hard
53. Collins and Farina are forming a partnership. Collins is investing a building that has a
market value of $80,000. However, the building carries a $56,000 mortgage that will be
assumed by the partnership. Farina is investing $20,000 cash. The balance of Collins' Capital
account will be:
A. $80,000.
B. $24,000.
C. $56,000.
D. $44,000.
E. $60,000.
AACSB: Analytic
AICPA BB: Industry
Difficulty: Hard
12-19
54. Trump and Hawthorne have decided to form a partnership. Trump is going to contribute a
depreciable asset to the partnership as his equity contribution to the partnership. The
following information regarding the asset to be contributed by Trump is available:
*will be assumed by the partnership

Based on this information, Trump's beginning equity balance in the partnership will be:
A. $76,000
B. $36,000
C. $18,000
D. $27,000
E. $45,000
$45,000 market value of the asset - $18,000 of debt assumed by the partnership = $27,000.
AACSB: Analytic
AICPA BB: Industry
Difficulty: Hard
55. In the absence of a partnership agreement, the law says that income (and loss) should be
allocated based on:
A. A fractional basis.
B. The ratio of capital investments.
C. Salary allowances.
D. Equal shares.
E. Interest allowances.
AACSB: Analytic
Difficulty: Easy
12-20
56. In a partnership agreement, if the partners agreed to an interest allowance of 10% annually
on each partner's investment, the interest allowance:
A. Is ignored when earnings are not sufficient to pay interest.
B. Can make up for unequal capital contributions.
C. Is an expense of the business.
D. Must be paid because the partnership contract has unlimited life.
E. Legally becomes a liability of the general partner.
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
57. Rice, Hepburn, and DiMarco formed a partnership with Rice contributing $60,000,
Hepburn contributing $50,000 and DiMarco contributing $40,000. Their partnership
agreement called for the income (loss) division to be based on the ratio of capital investments.
If the partnership had income of $75,000 for its first year of operation, what amount of
income (rounded to the nearest dollar) would be credited to DiMarco's capital account?
A. $20,000.
B. $25,000.
C. $30,000.
D. $40,000.
E. $75,000.
$75,000 x ($40,000/($60,000 + $50,000 + $40,000)) = $20,000
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
12-21
58. Shelby and Mortonson formed a partnership with capital contributions of $300,000 and
$400,000, respectively. Their partnership agreement calls for Shelby to receive a $60,000 per
year salary. Also, each partner is to receive an interest allowance equal to 10% of a partner's
beginning capital investments. The remaining income or loss is to be divided equally. If the
net income for the current year is $135,000, then Shelby and Mortonson's respective shares
are:
A. $67,500; $67,500.
B. $92,500; $42,500.
C. $57,857; $77,143.
D. $90,000; $40,000.
E. $35,000; $100,000.
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
59. Which of the following statements is true?

A. Partners are employees of the partnership.
B. Salaries to partners are expenses on the partnership income statement.
C. Salary allowances usually reflect the relative value of services provided by partners.
D. Salary allowances are expenses.
E. Interest allowances are expenses.
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
12-22
60. Nguyen invested $100,000 and Hansen invested $200,000 in a partnership. They agreed to
share incomes and losses by allowing a $60,000 per year salary allowance to Nguyen and a
$40,000 per year salary allowance to Hansen, plus an interest allowance on the partners'
beginning-year capital investments at 10%, with the balance to be shared equally. Under this
agreement, the shares of the partners when the partnership earns $105,000 in income are:
A. $52,500 to Nguyen; $52,500 to Hansen.
B. $35,000 to Nguyen; $70,000 to Hansen.
C. $57,500 to Nguyen; $47,500 to Hansen.
D. $42,500 to Nguyen; $62,500 to Hansen.
E. $70,000 to Nguyen; $60,000 to Hansen.
AACSB: Analytic
AICPA BB: Industry
Difficulty: Hard
12-23
61. The partnership agreement for Smith Wesson & Davis, a general partnership, provided
that profits be shared between the partners in the ratio of their financial contributions to the
partnership. Smith contributed $100,000, Wesson contributed $60,000 and Davis contributed
$20,000. In the partnership's first year of operation, it incurred a loss of $210,000. What
amount of the partnership's loss, rounded to the nearest dollar, should be absorbed by Smith?
A. $70,000
B. $116,667
C. $23,333
D. $105,000
E. $52,500
If the partnership agreement does not specifically address how losses are to be allocated
between the partners, the losses are to be shared in the same manner as profits.
Therefore, since Smith's capital contribution ($100,000) represented 5/9 of the total capital
upon formation ($100,000 + $60,000 + $20,000), Smith should be allocated 5/9 of the
$210,000 loss or $116,667.
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
12-24
62. Regina Harrison is a partner in Pressed for Time. An analysis of Regina Harrison's capital
account indicates that during the most recent year, she withdrew $20,000 from the
partnership.
Her share of the partnership's net loss was $16,000 and she made an additional equity
contribution of $10,000. Her capital account ended the year at $150,000. What was her capital
balance at the beginning of the year?
A. $124,000
B. $144,000
C. $192,000
D. $176,000
E. $134,000
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
12-25
63. The following information is available on Stewart Enterprises, a partnership, for the most
recent fiscal year:
There are three partners in Stewart Enterprises: Stewart, Tedder and Armstrong. At the end of
the year, the partners' capital accounts were in the ratio of 2:1:2, respectively. Compute the
ending capital balances of the three partners.
A. Stewart = $108,000; Tedder = $54,000; Armstrong = $108,000.
B. Stewart = $90,000; Tedder = $90,000; Armstrong = $90,000.
C. Stewart = $204,000; Tedder = $102,000; Armstrong = $204,000.
D. Stewart = $84,000; Tedder = $102,000; Armstrong = $84,000.
E. Stewart = $60,000; Tedder = $30,000; Armstrong = $60,000.
If the partners' ending capital balances at in the ratio of 2:1:2, then Stewart has 2/5 of the total,
Tedder has 1/5 of the total and Armstrong has 2/5 of the total. Therefore, Stewart and
Armstrong have ending balances of $108,000 ($270,000 x 2/5) and Tedder has an ending
balance of $54,000 ($270,000 x 1/5).
AACSB: Analytic
AICPA BB: Industry
Difficulty: Hard
12-26
64. A partner can withdraw from a partnership by:

A. Selling his/her interest to another person for cash.
B. Selling his/her interest to another person in exchange for assets.
C. Receiving cash from the partnership in the amount of his/her interest.
D. Receiving assets from the partnership in the amount of his/her interest.
E. All of these.
AACSB: Analytic
AICPA BB: Industry
Difficulty: Easy
65. A bonus may be paid:

A. By a new partner when the current value of a partnership is greater than the recorded
amounts of equity.
B. By a withdrawing partner to remaining partners if the recorded value of the equity is
overstated.
C. To a new partner with exceptional talents.
D. By remaining partners to a withdrawing partner if the recorded equity is understated.
E. All of these.
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
66. When a partner is added to a partnership:

A. The previous partnership ends.
B. The underlying business operations end.
C. The underlying business operations must close and then re-open.
D. The partnership must continue.
E. The partnership equity always increases.
Difficulty: Medium
12-27
67. A partnership recorded the following journal entry:
This entry reflects:

A. Acceptance of a new partner who invests $70,000 and receives a $20,000 bonus.
B. Withdrawal of a partner who pays a $10,000 bonus to each of the other partners.
C. Addition of a partner who pays a bonus to each of the other partners.
D. Additional investment into the partnership by Tanner and Jackson.
E. Withdrawal of $10,000 each by Tanner and Jackson upon the admission of a new partner.
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
68. Groh and Jackson are partners. Groh's capital balance in the partnership is $64,000, and
Jackson's capital balance $61,000. Groh and Jackson have agreed to share equally in income
or loss. Groh and Jackson agree to accept Block with a 20% interest. Block will invest
$35,000 in the partnership. The bonus that is granted to Groh and Jackson equals:
A. $1,500 each.
B. $1,875 each.
C. $3,750 each
D. 1,920 to Groh; $1,830 to Jackson.
E. $0, because Groh and Jackson actually grant a bonus to Block.
Total partnership equity = $64,000 + $61,000 + $35,000 = $160,000
Equity of Block = $160,000 x 0.20 = $32,000
Bonus to old partners = $35,000 - $32,000 = $3,000, split equally
AACSB: Analytic
AICPA BB: Industry
Difficulty: Hard
12-28
69. Groh and Jackson are partners. Groh's capital balance in the partnership is $64,000, and
Jackson's capital balance $61,000. Groh and Jackson have agreed to share equally in income
or loss. Groh and Jackson agree to accept Block with a 25% interest. Block will invest
$35,000 in the partnership. The bonus that is granted to Block equals:
A. $5,000.
B. $2,500.
C. $6,667
D. $3,333
E. $0, because Block must actually grant a bonus to Groh and Jackson.
Total partnership equity = $64,000 + $61,000 + $35,000 = $160,000
Equity of Block = $160,000 x 0.25 = $40,000
Bonus to Block = $40,000 - $35,000 = $5,000
AACSB: Analytic
AICPA BB: Industry
Difficulty: Hard
12-29
70. McCartney, Harris, and Hussin are dissolving their partnership. Their partnership
agreement allocates income and losses equally among the partners. The current period's
ending capital account balances are McCartney, $15,000, Harris, $15,000, Hussin, $(2,000).
After all the assets are sold and liabilities are paid, but before any contributions to cover any
deficiencies, there is $28,000 in cash to be distributed. Hussin pays $2,000 to cover the
deficiency in his account. The general journal entry to record the final distribution would be:
A.
B.
C.
D.
E.
AACSB: Analytic
AICPA BB: Industry
Difficulty: Hard
12-30
71. When a partnership is liquidated:

A. Noncash assets are converted to cash.
B. Any gain or loss on liquidation is allocated to the partners' capital accounts using the
income and loss sharing ratio.
C. Liabilities are paid or settled.
D. Any remaining cash is distributed to the partners based on their capital balances.
E. All of these.
AACSB: Analytic
AICPA BB: Industry
Difficulty: Easy
72. A capital deficiency means that:

A. The partnership has a loss.
B. The partnership has more liabilities than assets.
C. At least one partner has a debit balance in his/her capital account.
D. At least one partner has a credit balance in his/her capital account.
E. The partnership has been sold at a loss.
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
73. When a partner is unable to pay a capital deficiency:

A. The partner must take out a loan to cover the deficient balance
B. The deficiency is absorbed by the remaining partners.
C. The partnership ends.
D. The deficient partner has a personal liability to pay the deficiency.
E. Both B and D.
Difficulty: Medium
12-31
74. McCartney, Harris and Hussin are dissolving their partnership. Their partnership
agreement allocates each partner 1/3 of all income and losses. The current period's ending
capital account balances are McCartney, $13,000; Harris, $13,000; and Hussin, $(2,000).
After all assets are sold and liabilities are paid, there is $24,000 in cash to be distributed.
Hussin is unable to pay the deficiency. The journal entry to record the distribution should be:
A.
B.
C.
D.
E.
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
12-32
Matching Questions
75. Match each of the following terms with the appropriate definitions.
1. Limited
liability
partnership
A corporation that meets special tax qualifications so as

to be treated like a partnership for income tax purposes.
The legal relationship among partners whereby each
2. Limited
partner can commit or bind the partnership to any contract
partnership
within the scope of the partnership's business.
3. General
An unincorporated association of two or more persons to
partner
pursue a business for profit as co-owners.
The legal relationship among general partners that
makes each of them responsible for paying the debts of the
partnership if the other partners are unable to pay their
4. C corporation
shares.
5. Statement of
The agreement between partners that sets terms under
partner's equity
which the affairs of the partnership are conducted.
A corporation that does not qualify for nor elect to be
treated as a partnership for income tax purposes and
6. Mutual agency
therefore is subject to income taxes.
A partner who assumes unlimited liability for the debts
7. Partnership
of the partnership.
A partnership that protects innocent partners from
8. Partnership
malpractice or negligence claims resulting from the acts of
contract
another partner.
A financial statement that shows total capital balances at
9. Unlimited
the beginning of the period, any additional investment by
liability of
partners, the income or loss of the period, the partners'
partners
withdrawals, and the ending capital balances.
A partnership that has two classes of partners, limited
partners and general partners. Limited partners have no
personal liability beyond the amount they invest in the
partnership, and have no active role except as specified in
10. S corporation
the partnership agreement.
Difficulty: Medium
12-33
10
6
7
9
8
4
3
1
Short Answer Questions

76. Identify and discuss the key characteristics of partnerships. Also, identify other
organizations that possess the positive aspects of both partnerships and corporations.
Partnerships are unincorporated associations of two or more persons who join to pursue a
business for profit as co-owners. Partners sign a partnership agreement and are subject to
mutual agency and unlimited liability for acts of the partnership. Partnerships have limited
life, and are not taxable entities. Several types of business organizations such as S
corporations, limited liability partnerships and limited liability companies combine the
positive aspects of partnerships and corporations. The most notable is the adoption of the
corporate characteristic of limited liability for owners of these hybrid business forms.
Difficulty: Hard
77. Define the partner return on equity ratio and explain how a specific partner would use this
ratio.
The partner return on equity ratio is calculated by dividing the partner's income by the
average equity of that partner. This ratio can be calculated for individual partners or for the
total partnership. It can be used by a partner to help determine whether additional investment
or withdrawal of resources is best for that partner.
AICPA BB: Industry
Difficulty: Easy
12-34
78. How are partners' investments in a partnership recorded?

When partners invest in a partnership, their individual contributions are credited to each
partner's capital account at an agreed-on value. The assets contributed are debited to the
appropriate asset account. Partners may contribute assets that are encumbered by liabilities
that are credited to the appropriate liability account.
AICPA BB: Industry
Difficulty: Easy
79. Discuss the options for the allocation of income and loss among partners, including with
and without a partnership agreement.
In the absence of a partnership agreement, income and loss are shared equally by the partners.
A partnership agreement should specify how to allocate partnership income or loss among
partners. Allocation can be made based on stated ratios, capital balances, salary allowances,
interest allowances or a combination of the above methods.
AICPA BB: Industry
Difficulty: Medium
12-35
80. What are the ways that a new partner can be admitted to an existing partnership? Explain
how to account for the admission of the new partner under each of these circumstances.
A new partner may purchase a partnership interest from one or more existing partners. In this
case, a capital account is established for the new partner equal to the portion of the existing
partners' interest that was purchased from that partner or partners. This transaction is a
personal transaction between one or more current partners and the new partner. A new partner
may invest assets in the existing partnership. This is a transaction between the new partner
and the partnership. In this case, a capital account is established for the new partner equal to
the portion of the partnership purchased. When the current value of a partnership is greater
than the recorded amounts of equity, the partners usually require the new partner to pay a
bonus for the privilege of joining. When the partnership needs additional cash or the new
partner has exceptional talents, the existing partners may grant a bonus to the new partner.
AICPA BB: Industry
Difficulty: Medium
81. What are the ways a partner can withdraw from a partnership? Explain how to account for
the withdrawal of a current partner from a partnership.
A partner may sell his or her interest in the partnership to a new partner who pays for it in
cash or other assets. In this case, the partnership debits the old partner's capital account and
credits the new partner's capital account. A partner may also withdraw and have cash or other
assets of the partnership distributed to him or her in settlement of his or her interest. If the
recorded value of the withdrawing partner's interest is overstated, then the withdrawing
partner would give the remaining partners a bonus. If the withdrawing partner's interest is
understated, the withdrawing partner receives a bonus from the remaining partners.
AICPA BB: Industry
Difficulty: Medium
12-36
82. Explain the steps involved in the liquidation of a partnership.

Four steps are involved in the liquidation process. (1) Record the sale of noncash assets for
cash and any gain or loss from their liquidation. (2) Allocate any gains or losses from
liquidation to the partners' capital accounts using their income-and-loss sharing ratio. (3)
Liabilities of the partnership are paid or settled. (4) Any remaining cash is distributed to the
partners based on their capital balances.
AICPA BB: Industry
Difficulty: Medium
83. The partners of Samanta Shoes know that knowledge of partnerships and their financial
implications are important to success. What are some of the advantages or disadvantages of
the partnership form of business? What areas did the partners focus on?
Anyone considering forming a partnership would be wise to consider the manner in which
partnerships are taxed, the mutual agency aspect of partnerships, the unlimited liability aspect
of partnerships and the fact that partnership assets are considered to be jointly owned by all
partners. Moreover, a formal, written partnership agreement should be developed to detail
each partner's expectations. Both partners stressed the importance of attending to partnership
formation, partnership agreements, and financial reports. They refer to partners' return on
equity and the organizational form as key inputs to the partnership success.
AICPA BB: Industry
Difficulty: Medium
12-37

Problems
84. Basketball Products LP is organized as a limited partnership that sells sporting equipment.
Information related to the two partner's capital balances is given below. Compute the partner
return on equity for each limited partner. How would each partner evaluate the success of the
partnership? What would you recommend the partners do with respect to additional
investments or withdrawals?
Partner return on equity = Partner net income/Average partner equity

Ball's partner return on equity = $85,000 / (($870,000 + $915,000)/2) = 9.5%
Basquette's partner return on equity = $55,000 / (($580,000 + $610,000)/2) = 9.2%
Each partner is earning a decent return on capital and the returns are almost equal which
indicates net income is being allocated based on the amount of capital contributed by each
partner.
Since the capital balances are fairly large amounts, the partners may want to consider
withdrawing larger amounts, reducing the capital balances. If the same earnings stream
continues, this would yield a higher return on partner's equity. There would need to be
sufficient quick assets available for the partnership to be able to do this.
AACSB: Analytic
AICPA BB: Industry, Critical Thinking
Difficulty: Hard
12-38
85. Kathleen Reilly and Ann Wolf decide to form a partnership on August 1. Reilly invested
the following assets and liabilities in the new partnership:
The note payable is associated with the building and the partnership will assume
responsibility for the loan. Wolf invested $60,000 in cash and $105,000 in equipment in the
new partnership. Prepare the journal entries to record the two partners' original investments in
the new partnership.
AACSB: Analytic
AICPA BB: Industry
Difficulty: Easy
12-39
86. Sierra and Jenson formed a partnership. Sierra contributed $25,000 cash and accounts
receivable worth $11,000. Jenson's investment included cash, $5,000; inventory, $18,000; and
supplies, $1,000. Prepare the journal entries to record each partner's investment in the new
partnership.
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
87. Arthur, Barnett, and Cummings form a partnership. Arthur contributes $250,000 cash and
Barnett contributes $230,000 in cash. Cummings contributes equipment worth $255,000.
Prepare the single journal entry to record the formation of this partnership.
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
12-40
88. Durango and Verde formed a partnership with capital contributions of $150,000 and
$190,000, respectively. Their partnership agreement called for Durango to receive a $50,000
annual salary allowance. They also agreed to allow each partner a share of income equal to
10% of their initial capital investments. The remaining income or loss is to be divided equally.
If the net income for the current year is $120,000, what are Durango's and Verde's respective
shares?
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
12-41
89. Juanita invested $100,000 and Jacque invested $95,000 in a new partnership. They agreed
to a $50,000 annual salary allowance to Juanita and a $40,000 annual salary allowance to
Jacque. They also agreed to an annual interest allowance of 10% on the partners' beginningyear capital balance, with the balance to be divided equally. Under this agreement, what are
the income or loss shares of the partners if the annual partnership income is $102,000?
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
12-42

90. Summers and Winters formed a partnership on January 1. Summers contributed $90,000
cash and equipment with a market value of $60,000. Winters' investment consisted of: cash,
$30,000; inventory, $20,000; all at market values. Partnership net income for year 1 and year
2 was $75,000 and $120,000, respectively.
1. Determine each partner's share of the net income for each year, assuming each of the
following independent situations:
(a) Income is divided based on the partners' failure to sign an agreement.
(b) Income is divided based on a 2:1 ratio (Summers: Winters).
(c) Income is divided based on the ratio of the partners' original capital investments.
(d) Income is divided based on interest allowance of 12% on the original capital investments;
salary allowance to Summers of $30,000 and Winters of $25,000; and the remainder to be
divided equally.
2. Prepare the journal entry to record the allocation of the Year 1 income under alternative (d)
above.
12-43

Part 1: Calculation of partners' capital contributions:
Part 2:
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
12-44

91. Paco and Kate invested $99,000 and $126,000, respectively, in a partnership they began
one year ago. Assuming the partnership earned $120,000 during the current year, compute the
share of the net income each partner should receive under each of these independent
assumptions.
Part 1
Part 2:
12-45

AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
92. Holden, Phillips, and Rogers are partners with beginning-year capital balances of
$120,000, $60,000, and $60,000, respectively. Partnership net income for the year is $84,000.
Make the necessary journal entry to close Income Summary to the capital accounts if:
a. Partners agree to divide income based on their beginning-year capital balances.
b. Partners agree to divide income based on the ratio of 5:3:2 (Holden:Phillips:Rogers),
respectively.
c. Partnership agreement is silent as to division of income and less.
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
12-46
93. Khalid, Dina, and James are partners with beginning-of-year capital balances of $400,000,
$320,000, and $160,000, respectively. The partners agreed to share income and loss as
follows: Salary of $30,000 to Khalid, $50,000 to Dina, and $55,000 to James. An interest
allowance of 10% on beginning-of-year capital balances. Any remaining balance is to be
divided equally. If partnership net income for the year is $190,000, determine each partner's
share and make the appropriate journal entry to close the Income Summary to the capital
accounts.
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
94. Marquis and Bose agree to accept Sherman into their partnership. Sherman will contribute
$25,000 in cash. Prepare the journal entry to record this transaction.
AACSB: Analytic
AICPA BB: Industry
Difficulty: Easy
12-47
95. Armstrong withdraws from the FAP Partnership. The remaining partners agree to buy out
her share for her capital balance of $35,000. Prepare the journal entry to record the
withdrawal from the partnership.
AACSB: Analytic
AICPA BB: Industry
Difficulty: Easy
96. Alberts and Bartel are partners. On October 1, Alberts' capital balance is $75,000, and
Bartel's capital balance is $125,000. With the partnership's approval, Bartel sells of his
partnership interest to Camero for $70,000. Prepare the journal entry to record this transaction
in the partnership records.
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
12-48
97. Conley and Liu allow Lepley to purchase a 25% interest in their partnership for $35,000
cash. Lepley has exceptional talents that will enhance the partnership. Conley's and Liu's
capital account balances are $55,000 each. The partners have agreed to share income or loss
equally. Prepare the general journal entry to record the admission of Lepley to the
partnership.
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
98. Armstrong plans to leave the FAP Partnership. The recorded value of her capital account
is $48,000. The remaining partners Floyd and Peters agree to pay Armstrong $40,000 cash
and Armstrong accepts. The partners share income and loss equally. Prepare the general
journal entry to record the withdrawal from the partnership.
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
12-49
99. Armstrong plans to leave the FAP Partnership. The recorded balance in her capital account
is $48,000. The remaining partners, Peters and Floyd, agree to pay Armstrong $58,000 cash
and Armstrong accepts. The partners share income and loss equally. Prepare the journal entry
to record the transaction.
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
100. Conley and Liu allow Lepley to purchase a 25% interest in their partnership for $50,000
cash. Conley and Liu both have capital balances of $55,000 each, and have agreed to share
income and loss equally. Prepare the journal entry to record the admission of Lepley to the
partnership.
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
12-50
101. The BlueFin Partnership agrees to dissolve. The remaining cash balance after liquidating
partnership assets and liabilities is $60,000. The final capital account balances are: Smith,
$30,000; Nagy, $20,000; and Russ, $10,000. Prepare the journal entry to distribute the
remaining cash to the partners.
AACSB: Analytic
AICPA BB: Industry
Difficulty: Easy
102. The BlueFin Partnership agrees to dissolve. The cash balance after selling all assets and
paying all liabilities is $56,000. The final capital account balances are: Smith, $33,000; Nagy,
$27,000; and Russ, ($4,000). Russ agrees to pay $4,000 cash from personal funds to settle his
deficiency. Prepare the journal entries to record the transactions required to dissolve this
partnership.
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
12-51
103. The BlueFin Partnership agrees to dissolve. The cash balance after selling all assets and
paying all liabilities is $60,000. The final capital account balances are: Smith, $35,000; Nagy,
$29,000; and Russ, ($4,000). Russ is unable to pay the capital deficiency. Prepare the journal
entries to record the transactions required to dissolve this partnership.
AACSB: Analytic
AICPA BB: Industry
Difficulty: Hard
Fill in the Blank Questions

104. The life of a partnership is ____________________ in duration.
Limited
Difficulty: Easy
105. A _____________________ is an unincorporated association of two or more people to

pursue a business for profit as co-owners.
Partnership
Difficulty: Easy
12-52
106. ___________________________ means that partners can commit or bind the partnership
to any contract within the scope of the partnership business.
Mutual agency
Difficulty: Medium
107. ___________________________ implies that each partner in a partnership can be called

on to pay a partnership's debts.
Unlimited liability
Difficulty: Medium
108. A partnership that has at least two classes of partners, general and limited, allows the
limited partners to have no personal liability beyond the amounts they invest in the
partnership, and the limited partners have no active role except as specified in the partnership
agreement is a ________________________ partnership.
Limited
Difficulty: Medium
12-53
109. A partnership designed to protect innocent partners from malpractice or negligence

claims resulting from the acts of other partners is a ____________________________
partnership.
Limited liability
Difficulty: Medium
110. A relatively new form of business organization that protects partners with limited
liability, allows limited partners to assume an active management role, and is taxed as a
partnership is a ______________________________
Limited liability company (or LLC)
Difficulty: Medium
111. Partners in a partnership are taxed on _______________________, not on their

withdrawals.
Share of partnership income
Difficulty: Medium
112. Partner return on equity is calculated as ______________________________.

Partner net income divided by average partner equity.
AICPA BB: Industry
Difficulty: Easy
12-54
113. When a partner invests in a partnership, his/her capital account is __________ for the
invested amount.
Credited
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
114. During the closing process, partner's capital accounts are _______________ for their
share of net income and _________________ for their share of net loss.
Credited; debited
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
115. During the closing process, each partner's withdrawals account is closed to
__________________.
That partner's capital account.
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
116. If partners agree on how to share income, but say nothing about losses, then losses are
shared ___________________.
In the same manner as income.
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
12-55
117. A partner can be admitted into a partnership by ________________________ or by

______________________________.
Purchasing an interest from a current partner, investing cash or other net assets.
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
118. If a partner withdraws from a partnership and the recorded value of his or her equity is
overstated, then a bonus goes to _____________________; if the recorded value of the
withdrawing partner's equity is understated, then a bonus goes to
_______________________.
The remaining partners; the withdrawing partner
AACSB: Analytic
AICPA BB: Industry
Difficulty: Hard
119. A _________________________ means that at least one partner has a debit balance in
his/her capital account at the point of the final distribution of cash.
Capital deficiency
AACSB: Analytic
AICPA BB: Industry
Difficulty: Easy
12-56
Problems
120. Suze and Bess formed the Suzy B Company by making capital contributions of $130,000
and $195,000 respectively. They predict annual partnership income of $230,000 and are
considering the following alternative plans of sharing income and loss: (a) in the ratio of their
initial capital investments; or (b) salary allowances of $40,000 to Suze and $35,000 to Bess;
interest allowances of 12% on their initial capital investments; and the balance shared equally.
Assuming that both partners put about the same amount of time into the business, which
method of allocating income would be best?
Plan (b) would be the better distribution of income because it takes into account all factors
and still allows a reasonable return on the initial investment.
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
12-57
121. Using the data presented in question 120, prepare the entries to record the initial capital
investments, the allocation of net income assuming plan (b) was adopted, close the partner's
withdrawal accounts assuming that Suze withdrew $50,000 and Bess withdrew $55,000.
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
12-58
122. Paul and Peggy's company is organized as a partnership. At the prior year-end, Paul's
equity balance was $352,000 and Peggy's was $256,000. For the current year, partnership net
income is $137,000 ($77,000 allocated to Paul and $60,000 allocated to Peggy); withdrawals
are $87,000 ($45,000 for Paul and $42,000 for Peggy). Compute the total partnership return
on equity and the individual partner return on equity ratios.
AACSB: Analytic
AICPA BB: Industry
Difficulty: Medium
12-59
123. Brit, Franc, and Scot who share income and loss in a 2:2:1 ratio, plan to liquidate their
partnership. At liquidation, their balance sheet appears as follows. Prepare journal entries for
(a) the sale of land and equipment sold as a package for $500,000, (b) the allocation of the
gain or loss, (c) the payment of the liabilities, and (d) the distribution of cash to the individual
partners.
AACSB: Analytic
AICPA BB: Industry
Difficulty: Hard
12-60

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Chapter 012 Accounting for Partnerships

Summary of Questions by Difficulty Level (DL) and Learning Objective (LO)

Chapter 012 Accounting for Partnerships

Chapter 012 Accounting for Partnerships

True / False Questions

2. A partnership is an unincorporated association of two or more people to pursue a business

Chapter 012 Accounting for Partnerships

8. In a limited partnership the general partner has unlimited liability.

Chapter 012 Accounting for Partnerships

12. Partners' withdrawals are credited to their separate withdrawals accounts.

Chapter 012 Accounting for Partnerships

Chapter 012 Accounting for Partnerships

Chapter 012 Accounting for Partnerships

23. When a partner leaves a partnership, the present partnership ends.

Chapter 012 Accounting for Partnerships

Chapter 012 Accounting for Partnerships

30. When a partnership is liquidated, its business is ended.

Chapter 012 Accounting for Partnerships

Multiple Choice Questions

Chapter 012 Accounting for Partnerships

36. Disadvantages of a partnership include:

37. A partnership agreement:

38. Mutual agency means

Chapter 012 Accounting for Partnerships

Chapter 012 Accounting for Partnerships

Chapter 012 Accounting for Partnerships

43. Which of the following statements is generally correct?

Chapter 012 Accounting for Partnerships

What is Smith's partner return on equity during the year in question?

Chapter 012 Accounting for Partnerships

47. Partnership accounting:

48. Partnership accounting:

49. Partners' withdrawals of assets are:

Chapter 012 Accounting for Partnerships

50. The withdrawals account of each partner is:

Chapter 012 Accounting for Partnerships

Chapter 012 Accounting for Partnerships

*will be assumed by the partnership

Chapter 012 Accounting for Partnerships

Chapter 012 Accounting for Partnerships

59. Which of the following statements is true?

Chapter 012 Accounting for Partnerships

Chapter 012 Accounting for Partnerships

Chapter 012 Accounting for Partnerships

Chapter 012 Accounting for Partnerships

Chapter 012 Accounting for Partnerships

64. A partner can withdraw from a partnership by:

65. A bonus may be paid:

66. When a partner is added to a partnership:

Chapter 012 Accounting for Partnerships

67. A partnership recorded the following journal entry:

This entry reflects:

Chapter 012 Accounting for Partnerships

Chapter 012 Accounting for Partnerships

Chapter 012 Accounting for Partnerships

71. When a partnership is liquidated:

72. A capital deficiency means that:

73. When a partner is unable to pay a capital deficiency:

Chapter 012 Accounting for Partnerships

Chapter 012 Accounting for Partnerships

A corporation that meets special tax qualifications so as

Chapter 012 Accounting for Partnerships

Short Answer Questions

Chapter 012 Accounting for Partnerships