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QUESTIONS 1. The characteristics of a partnership include the following: (a) association of individuals, (b) limited life, and (c) co-ownership of property. Explain each of these terms! a. Association of individuals At least two persons must joint together to form a partnership. Furthermore, there must be an agreement between persons desirous of forming a partnership. b. Limited Life A partnership may be ended voluntarily at anytime through the acceptance of a new partner or withdrawal of a partner. It may be ended involuntarily by the death or incapacity of a partner. c. Co-Ownership of Property Property co-ownership refers to a situation where two or more people share the ownership of a property. Put simply, it involves your assets and liabilities because co-ownership is base on the equity. 2. Jerry Kerwin is confused about the partnership characteristics of (a) mutual agency and (b) unlimited liability. Explain these two characteristics for Jerry. a. Mutual Agency The business of partnership may be carried on by all the partners or by any of them acting for all. Thus every partner is an agent of other partners and at the same time of the firm. b. Unlimited Liability The unlimited liability of partners is the legal relationship among general partners of a partnership that makes each general partner responsible for paying all the debts of the partnership if the other partners are unable to pay their shares. 11.Are the financial statements of a partnership similar to those of a proprietorship? Discuss! Yes, the differences are due to the number of owners involved. The income statement for a partnership is identical to the income statement for a proprietorship except for the division of net income. 12.How does the liquidation of a partnership differ from the dissolution of a partnership? Liquidation is the process of converting all assets into cash. Proceeds of which will be used to pay-out its obligations in the order set-out by the standards/court. Whereas partnership dissolution occurs whenever a partner withdraws or a new partner is admitted. Dissolution doesn’t necessarily mean that the business ends. But, dissolution may be the cause of the liquidation. A lot of case shows that if a business dissolves they will have to liquidate their
assets (including office furniture, computers, etc) in order to pay off creditors (or just to get rid of the stuff)
P12-1A The post-closing trial balances of two proprietorships on January 1, 2010 are presented below: Patrick Company Samuelson Company Dr. Cash Account receivable Allowance for doubtful account Merchandise inventory Equipment Accumulated depreciationequipment Notes payable Account payable Patrick, Capital Samuelson, Capital $ 103,000 $ 103,000 $ 85,400 36,000 24,000 $ 85,400 26,500 40,000 24,000 18,000 22,000 $ 14,000 17,500 $ 3,000 18,400 29,000 11,000 15,000 31,000 Cr. Dr. $ 12,000 26,000 $ 4,400 Cr.
Patrick and Samuelson decide to form a partnership, Pasa Company, with the following agreed upon valuations for noncash assets. Patrick Samuelson Company Company Account receivable Allowance for doubtful account Merchandise inventory $ 17,500 4500 28,000 $ 26,000 4,000 20,000
Equipment 23,000 16,000
All cash will be transferred to the partnership, and the partnership will assume all the liabilities of the two proprietorships. Further, it is agreed that Patrick will invest an additional $5,000 in cash, and Samuelson will invest an additional $19,000 in cash. Instructions: a. Prepare separate journal entries to record the transfer of each proprietorship’s assets and liabilities to the partnership. $ Cash 14,000 Account Receivable 17,500 Merchandise Inventory 28,000 $ Equipment 23,000 $ Notes Payable 18,000 Accounts Payable 22,000 Allowance for Doubtful Account 4,500 $ Patrick, Capital 38,000 $ 12,000 26, 000 20, 000 $ 16,000
Cash Account Receivable Merchandise Inventory Equipment Notes Payable
$ 15,000 31,0 Accounts Payable 00 Allowance for Doubtful 4, Account 000 $ Samuelson, Capital 24,000 b. Journalize the additional cash investment by each partner. Cas $ h 5,000 $ Patrick, Capital 5,000 Cas $ h 19,000
Samuelson, $ Capital 19,000 c. Prepare a classified balance sheet for the partnership on January 1, 2010. PASA COMPANY BALANCE SHEET January 1st 2010 Assets Cash Account Receivable Merchandise Inventory Equipme nt Allowance for Doubtful Account Total Assets Liabilities and Owners' Equity Liabilitie s Notes Payable Account Payable Total Liabilities Owners' Equity Patrick, Capital Samuelson, Capital Additional Cash Total Owners' Equity Total Liabilities and Owners' Equity $ 43,000 43, 000 86,0 00 $ 172,000 $ 50,000 43,5 00 48,0 00 39,0 00 (8,5 00) $ 172,000
$ 33,000 53,0 00 86,0 00
P12-2A At the end of its first year of operations on December 31, 2010, CNU Company’s accounts show the following: Patrick Samuelson Company Company Reese Caplin Phyliss Newell Betty Uhrich $ 23,000 14,000 10,000 $ 48,000 30,000 25,000
The capital balance represents each partner’s initial capital investment. Therefore, net income or net loss for 2010 has not been closed to the partners’ capital accounts. Instructions: a. Journalize the entry to record the division of net income for the year 2010 under each of the following independent assumptions. 1. Net income is $30,000. Income is shared 6 : 3 : 1 $ Income Summary 30,000 Reese Caplin, $ Capital 18,000 Phyliss Newell, 9, Capital 000 Betty Uhrich, $ Capital 3,000 2. Net income is $37,000. Caplin and Newell are given salary allowances of $15,000 and $10,000, respectively. The remainder is shared equally. $ Income Summary 37,000 Reese Caplin, $ Capital 19,000 Phyliss Newell, 14, Capital 000 Betty Uhrich, $ Capital 4,000
3. Net income is $19,000. Each partner is allowed interest of 10% on beginning capital balances. Caplin is given a $12,000 salary allowance. The remainder is shared equally. $ Income Summary 19,000 Reese Caplin, $ Capital 15,700 Phyliss Newell, 1, Capital 900 Betty Uhrich, $ Capital 1,400
b. Prepare a schedule showing the division of net income under assumption (3) above. CNU Company Income Statement (partial) December 31st 2010 Net Income $19,000 Division of Net Income Reese Phyliss Caplin Newell $ 12,000
Total $ 12,000
Salary Allowance Interest Allowance on Partner's Capital Reese Caplin Phyliss Newell Betty Uhrich
4,8 00 3,0 00 $ 2,500 10,3 Total Interest Allowance 00
16,8 Total Salaries and Interest Remaining Deficiency ($3,300) Reese Caplin ($3,300 : 3) Phyliss Newell ($3,300 : 3) Betty Uhrich ($3,300 : 3) Total Remainder Total Division $ 15,700 $ 1,900 $ 1,400 00 00 3,0 00 2,5 00 22,3
(1,1 00) (1,10 0) (1,1 00) (3,3 00) $ 19,000
c. Prepare a partners’ capital statement for the year under assumption (3) above. CNU Company Partners' Capital Statement December 31st 2010 Reese Caplin Capital, January 1 Net Income Drawings Capital, December 31 $ 48,000 15,70 0 (23,00 0) $ 40,700 Phyliss Newell $ 30,000 1,900 (14,000 ) $ 17,900 Betty Uhrich $ 25,000 1,40 0 (10,00 0) $ 16,400 Total $ 103,000 19,0 00 (47,0 00) $ 75,000
P12-4A At April 30, partners’ capital balances in SKG Company are: S Seger $52,000, J. Kensington $54,000, and T. Gomez $18,000. The income sharing ratios are 5 : 4 : 1, respectively. On May 1, the SKGA Company is formed by admitting D. Atchley to the firm as a partner. Instructions:
a. Journalize the admission of Atchley under each of the following independent assumptions. 1. Atchley purchases 50% of Gomez’s ownership interest by paying Gomez $16,000 in cash. T. Gomez, $ Capital 9,000 Atchley, $ Capital 9,000 2. Atchley purchases 331/3% of Kensington’s ownership interest by paying Kensington $15,000 in cash. J. Kenshington, $ Capital 18,000 $ Atchley, Capital 18,000 3. Atchley invests $66,000 for a 30% ownership interest, and bonuses are given to the old partners. $ Cash 66,000 $ S. Seger, Capital 4,500 J. Kenshington, $ Capital 3,600 $ T. Gomez, Capital 900 $ Atchley, Capital 57,000 4. Atchley invests $46,000 for a 30% ownership interest, which includes a bonus to the new partner. $ Cash 46,000 $ S. Seger, Capital 2,500 J. Kenshington, $ Capital 2,000 $ T. Gomez, Capital 500 $ Atchley, Capital 51,000 a. Kensington’s capital balance is $32,000 after admitting Atchley to the partnership by investment. If Kensington’s ownership interest is 20% of total partnership capital, what were: 1. Atchley’s cash investment 2. The bonus to the partner?
P12-5A On December 31, the capital balances and income ratios in FAD Company are as follows: Partner Capital Income Balance Ratio J. Fagan P. Ames K. Durham $ 60,000 40,000 26,000 50% 30% 20%
Instructions: a. Journalize the withdrawal of Durham under each of the following assumptions: 1. Each of the continuing partners agrees to pay $18,000 in cash from personal funds to purchase Durham’s ownership equity. Each receives 50% of Durham’s equity. K. Durham , $ Capital 26,000 J. Fagan, $ Capital 13,000 P. Ames, $ Capital 13,000 2. Ames agrees to purchase Durham’s ownership interest for $25,000 cash. K. Durham , $ Capital 26,000 P. Ames, $ Capital 26,000 3. Durham is paid $34,000 from partnership assets, which includes a bonus to the retiring partner. K. Durham , $ Capital 26,000 J. Fagan, $ Capital 5,000 P. Ames, $ Capital 3,000
$ Cash 34,000 4. Durham is paid $22,000 from partnership assets, and bonuses to the remaining partners are recognized. K. Durham , $ Capital 26,000 J. Fagan, $ Capital 2,500 P. Ame, $ Capital 1,500 $ Cash 22,000 b. If Ames’s capital balance after Durham’s withdrawal is $42,400 what were: 1. The total bonus to the remaining partners? Total bonus to remaining partner = $4,000 + $2,400 = $6,400 2. The cash paid by the partnership to Durham? Total cash paid by the partnership to Durham = Durham’s capital – Durham’s bonus =$26,000 - $6,400 = $19,600 K. Durham , $ Capital 26,000 J. Fagan, $ Capital 4,000 P. Ames, $ Capital 2,400 $ Cash 19,600
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