Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership

Chapter 15 Partnerships: Formation, Operation, and Changes in Membership
Multiple Choice Questions

1. A partnership is a(n): I. accounting entity. II. taxable entity. A. I only B. II only C. Neither I nor II D. Both I and II

2. A partner's tax basis in a partnership is comprised of which of the following items? I. The partner's tax basis of assets contributed to the partnership. II. The amount of the partner's liabilities assumed by the other partners. III. The partner's share of other partners' liabilities assumed by the partnership. A. I plus II minus III B. I plus II plus III C. I minus II plus III D. I minus II minus III

In the ABC partnership (to which Daniel seeks admittance), the capital balances of Albert, Bert, and Connell, who share income in the ratio of 5:3:2 are:

3. Based on the preceding information, if no goodwill or bonus is recorded, how much should Daniel invest for a 20 percent interest? A. $400,000 B. $200,000 C. $300,000 D. $250,000

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Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership

4. Based on the preceding information, what amount of goodwill will be recorded if Daniel invests $450,000 for a one-third interest? A. $0 B. $10,000 C. $50,000 D. $100,000

Jones and Smith formed a partnership with each partner contributing the following items:

Assume that for tax purposes Jones and Smith agree to share equally in the liabilities assumed by the Jones and Smith partnership.

5. Refer to the above information. What is each partner's tax basis in the Jones and Smith partnership?

A. Option A B. Option B C. Option C D. Option D

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Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership

6. Refer to the above information. What is the balance in each partner's capital account for financial accounting purposes?

A. Option A B. Option B C. Option C D. Option D

7. Griffin and Rhodes formed a partnership on January 1, 2009. Griffin contributed cash of $120,000 and Rhodes contributed land with a fair value of $160,000. The partnership assumed the mortgage on the land which amounted to $40,000 on January 1. Rhodes originally paid $90,000 for the land. On July 31, 2009, the partnership sold the land for $190,000. Assuming Griffin and Rhodes share profits and losses equally, how much of the gain from sale of land should be credited to Griffin for financial accounting purposes? A. $0 B. $15,000 C. $35,000 D. $45,000

8. Which of the following accounts could be found in the general ledger of a partnership?

A. Option A B. Option B C. Option C D. Option D

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Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership

9. Which of the following accounts could be found in the PQ partnership's general ledger? I. Due from P II. P, Drawing III. Loan Payable to Q A. I, II B. I, III C. II, III D. I, II, and III

10. The DEF partnership reported net income of $130,000 for the year ended December 31, 2008. According to the partnership agreement, partnership profits and losses are to be distributed as follows:

How should partnership net income for 2008 be allocated to D, E, and F?

A. Option A B. Option B C. Option C D. Option D

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Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership

11. The JPB partnership reported net income of $160,000 for the year ended December 31, 2008. According to the partnership agreement, partnership profits and losses are to be distributed as follows:

How should partnership net income for 2008 be allocated to J, P, and B?

A. Option A B. Option B C. Option C D. Option D

The APB partnership agreement specifies that partnership net income be allocated as follows:

Average capital balances for the current year were $50,000 for A, $30,000 for P, and $20,000 for B.

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Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership

12. Refer to the information given. Assuming a current year net income of $150,000, what amount should be allocated to each partner?

A. Option A B. Option B C. Option C D. Option D

13. Refer to the information given. Assuming a current year net income of $50,000, what amount should be allocated to each partner?

A. Option A B. Option B C. Option C D. Option D

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Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership

14. RD formed a partnership on February 10, 2009. R contributed cash of $150,000, while D contributed inventory with a fair value of $120,000. Due to R's expertise in selling, D agreed that R should have 60 percent of the total capital of the partnership. R and D agreed to recognize goodwill. What is the total capital of the RD partnership and the capital balance of R after the goodwill is recognized?

A. Option A B. Option B C. Option C D. Option D

15. A joint venture may be organized as a: I. Partnership. II. Corporation. III. Undivided interest. A. I only B. II only C. I or III only D. I, II, or III

16. Refer to the above information. Which statement below is correct if a new partner receives a bonus upon contributing assets into the partnership? A. B < A and D = C - A B. B > A and D = C + A C. A = B and A = D + C D. B > A and C = D + A

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Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership

17. Refer to the above information. Which statement below is correct if the old partners receive a bonus upon the contribution of assets into the partnership by a new partner? A. B < A and D = C - A B. B + A and D > C + A C. B < A and D = C + A D. B > A and D = C + A

18. Refer to the above information. Which statement below is correct if goodwill of the old partners is recognized upon the contribution of assets into the partnership by a new partner? A. B = A and D < C + A B. B = A and D > C + A C. B < A and D = C + A D. B > A and D < C + A

19. Refer to the above information. Which statement below is correct if a new partner purchases an interest in capital directly from the old partners? A. C < D B. C = D C. C = D and B = A D. C < D and B = A

20. Refer to the above information. Which statement below is correct if a new partner's goodwill is recognized upon contributing assets into the partnership? A. B = A and D > C + A B. B < A and D < C + A C. B > A and D = C + A D. B > A and D > C + A

21. When a partnership is formed, noncash assets contributed by partners should be recorded: I. at their respective book values for income tax purposes. II. at their respective fair values for financial accounting purposes. A. I only B. II only C. Both I and II D. Neither I nor II

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Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership

22. When a new partner is admitted into a partnership and the new partner receives a capital credit less than the tangible assets contributed, which of the following explains the difference? I. The new partner's goodwill has been recognized. II. The old partners received a bonus from the new partner. A. I only B. II only C. Either I or II D. Neither I nor II

23. When a new partner is admitted into a partnership and the new partner receives a capital credit greater than the tangible assets contributed, which of the following explains the difference? I. The old partners' goodwill is being recognized. II. The new partner's goodwill is being recognized. A. I only B. II only C. Either I or II D. Both I and II

24. When a new partner is admitted into a partnership and the capital of the old partners decreases, which of the following explains the reason for the decrease? I. Undervalued liabilities were written up to their fair values. II. Undervalued assets were written up to their fair values. A. I only B. II only C. Both I and II D. Neither I nor II

25. When a partner retires from a partnership and the retiring partner is paid more than the capital balance in her account, which of the following explains the difference? I. The retiring partner is receiving a bonus from the other partners. II. The retiring partner's goodwill is being recognized. A. I only B. II only C. Either I or II D. Neither I nor II

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Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership

26. When the old partners receive a bonus upon admission of a new partner into a partnership, the bonus is allocated to: I. all the partners in their profit and loss sharing ratio. II. the existing partners in their profit and loss sharing ratio. A. I only B. II only C. Either I or II D. Neither I nor II

27. When a new partner is admitted into a partnership and the old partners' goodwill is recognized, the goodwill is allocated to: I. all the partners in their profit-and-loss-sharing ratio. II. the old partners in their profit and loss sharing ratio. A. I only B. II only C. Either I or II D. Neither I nor II

In the RST partnership, Ron's capital is $80,000, Stella's is $75,000, and Tiffany's is $50,000. They share income in a 3:2:1 ratio, respectively. Tiffany is retiring from the partnership. Each of the following questions is independent of the others.

28. Refer to the above information. Tiffany is paid $60,000, and no goodwill is recorded. In the journal entry to record Tiffany's withdrawal: A. Tiffany, Capital will be credited for $60,000. B. Ron, Capital will be debited for $5,000. C. Stella, Capital will be debited for $4,000. D. Cash will be debited for $60,000.

29. Refer to the above information. Tiffany is paid $60,000, and no goodwill is recorded. What is the Ron's capital balance after Tiffany withdraws from the partnership? A. $74,000 B. $71,000 C. $75,000 D. $86,000

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Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership

30. Refer to the above information. Tiffany is paid $56,000, and all implied goodwill is recorded. What is the total amount of goodwill recorded? A. $0 B. $6,000 C. $30,000 D. $36,000

In the AD partnership, Allen's capital is $140,000 and Daniel's is $40,000 and they share income in a 3:1 ratio, respectively. They decide to admit David to the partnership. Each of the following questions is independent of the others.

31. Refer to the information provided above. What amount will David have to invest to give him one-fifth percent interest in the capital of the partnership if no goodwill or bonus is recorded? A. $60,000 B. $36,000 C. $50,000 D. $45,000

32. Refer to the information provided above. Assume that David invests $50,000 for a onefourth interest. Goodwill is to be recorded. The journal to record David's admission into the partnership will include: A. a credit to cash for $50,000. B. a debit to goodwill for $7,500. C. a credit to David, Capital for $60,000. D. a credit to David, Capital for $50,000.

33. Refer to the information provided above. Allen and Daniel agree that some of the inventory is obsolete. The inventory account is decreased before David is admitted. David invests $40,000 for a one-fifth interest. What is the amount of inventory written down? A. $4,000 B. $20,000 C. $15,000 D. $10,000

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Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership

34. Refer to the information provided above. Allen and Daniel agree that some of the inventory is obsolete. The inventory account is decreased before David is admitted. David invests $40,000 for a one-fifth interest. What are the capital balances of Allen and Daniel after David is admitted into the partnership?

A. Option A B. Option B C. Option C D. Option D

35. Refer to the information provided above. David directly purchases a one-fifth interest by paying Allen $34,000 and Daniel $10,000. The land account is increased before David is admitted. By what amount is the land account increased? A. $40,000 B. $10,000 C. $36,000 D. $20,000

36. Refer to the information provided above. David directly purchases a one-fifth interest by paying Allen $34,000 and Daniel $10,000. The land account is increased before David is admitted. What are the capital balances of Allen and Daniel after David is admitted into the partnership?

A. Option A B. Option B C. Option C D. Option D

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Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership

37. Refer to the information provided above. David invests $40,000 for a one-fifth interest in the total capital of $220,000. The journal to record David's admission into the partnership will include: A. a credit to Cash for $40,000. B. a debit to Allen, Capital for $3,000. C. a credit to David, Capital for $40,000. D. a credit to Daniel, Capital for $1,000.

38. Refer to the information provided above. David invests $40,000 for a one-fifth interest in the total capital of $220,000. What are the capital balances of Allen and Daniel after David is admitted into the partnership?

A. Option A B. Option B C. Option C D. Option D

39. Refer to the information provided above. David invests $50,000 for a one-fifth interest. What amount of goodwill will be recorded? A. $20,000 B. $4,000 C. $40,000 D. $15,000

40. Which of the following observations is true of an S corporation? A. It elects to be taxed in the same manner as a corporation. B. It does not have the burden of double taxation of corporate income. C. Its shareholders have personal liability for the corporation's obligations. D. Its primary income source should be passive investments.

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Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership

41. A limited liability company (LLC): I. is governed by the laws of the state in which it is formed. II. provides liability protection to its investors. III. does not offer pass-through taxation benefits of partnerships. A. Both I and III. B. III C. Both I and II D. I, II, and II

42. If A is the total capital of a partnership before the admission of a new partner, B is the total capital of the partnership after the admission of the new partner, C is the amount of the new partner's investment, and D is the amount of capital credited to the new partner, then there is: A. goodwill to the new partner if B > (A + C) and D < C. B. goodwill to the old partners if B = A + C and D > C. C. a bonus to the new partner if B = A + C and D > C. D. neither bonus nor goodwill if B > (A + C) and D > C.

43. The terms of a partnership agreement provide that one of the partners is to receive a salary allowance of $30,000, plus a bonus of 20 percent of income after deduction of the bonus and the salary allowance. If income is $150,000, the bonus should be: A. $18,000 B. $20,000 C. $24,000 D. $30,000

44. The partnership of X and Y shares profits and losses in the ratio of 60 percent to X and 40 percent to Y. For the year 2008, partnership net income was double X's withdrawals. Assume X's beginning capital balance was $80,000, and ending capital balance (after closing) was $140,000. Partnership net income for the year was: A. $120,000. B. $300,000. C. $500,000. D. $600,000.

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Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership

45. Shue, a partner in the Financial Brokers Partnership, has a 30 percent share in partnership profits and losses. Shue's capital account had a net decrease of $100,000 during 2008. During 2008, Shue withdrew $240,000 as withdrawals and contributed equipment valued at $50,000 to the partnership. What was the net income of the Financial Brokers Partnership for 2008? A. $633,334 B. $466,666 C. $300,000 D. $190,000

46. Transferable interest of a partner includes all of the following except: A. the partner's share of the profits and losses of the partnership. B. the right to receive distributions. C. the right to receive any liquidating distribution. D. the authority to transact any of the partnership's business operations.

Essay Questions

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Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership

47. Net income for Levin-Tom partnership for 2009 was $125,000. Levin and Tom have agreed to distribute partnership net income according to the following plan:

Additional Information for 2009 follows: 1. Levin began the year with a capital balance of $75,000. 2. Tom began the year with a capital balance of $100,000. 3. On March 1, Levin invested an additional $25,000 into the partnership. 4. On October 1, Tom invested an additional $20,000 into the partnership. 5. Throughout 2009, each partner withdrew $200 per week in anticipation of partnership net income. The partners agreed that these withdrawals are not to be included in the computation of average capital balances for purposes of income distributions. Required: a. Prepare a schedule that discloses the distribution of partnership net income for 2009. Show supporting computations in good form. b. Prepare the statement of partners' capital at December 31, 2009. c. How would your answer to part a change if all of the provisions of the income distribution plan were the same except that the salaries were $45,000 to Levin and $60,000 to Jack?

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Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership

48. Paul and Ray sell musical instruments through their partnership. To bring in additional funds and expertise, they decide to admit Janet to the partnership. Paul's capital is $400,000, Ray's capital is $200,000, and they share income in a ratio of 7:3, respectively. Required Record Janet's admission for each of the following independent situations: a) Janet invests $180,000 for a one-fourth interest. Goodwill is to be recorded. b) Paul and Ray agree that some of the inventory is obsolete. The inventory account is decreased before Janet is admitted. Janet invests $190,000 for a one-fourth interest.

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Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership

49. Two sole proprietors, L and M, agreed to form a partnership on January 1, 2009. The trial balance for each proprietorship is shown below as of January 1, 2009.

The LM partnership will take over the assets and assume the liabilities of the proprietors as of January 1, 2009. Required: a) Prepare a balance sheet, for financial accounting purposes, for the LM partnership as of January 1, 2009. b) In addition, assume that M agreed to recognize the goodwill generated by L's business. Accordingly, M agreed to recognize an amount for L's goodwill such that L's capital equalled M's capital on January 1, 2009. Given this alternative, how does the balance sheet prepared for requirement A change?

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Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership

50. The PQ partnership has the following plan for the distribution of partnership net income (loss):

Required: Calculate the distribution of partnership net income (loss) for each independent situation below (for each situation, assume the average capital balance of P is $140,000 and of Q is $240,000). 1. Partnership net income is $360,000. 2. Partnership net income is $240,000. 3. Partnership net loss is $40,000.

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Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership

51. Miller and Davis, partners in a consulting business, share profits and losses in the ratio of 3:2, respectively. Prior to recording the admission of Shaw as a new partner, Miller has a capital balance of $80,000, and Davis has a capital balance of $40,000. Required: For each of the following independent cases, prepare the journal entry that was made to record the admission of Shaw into the partnership. 1) Shaw purchased 20 percent of the respective capital balances of Miller and Davis, paying $20,000 cash directly to each of them. 2) Shaw invested $30,000 cash in the partnership for a 20 percent ownership interest. Total capital after recording his admission was $150,000. 3) Shaw invested $40,000 cash into the partnership for a 20 percent ownership interest. Total capital after recording his admission was $160,000. 4) Shaw invested $50,000 into the partnership for a 20 percent interest. Goodwill is to be recognized.

52. In the JAW partnership, Jane's capital is $100,000, Anne's is $80,000, and William's is $75,000. They share income in a 3:2:1 ratio, respectively. William is retiring from the partnership. Required Prepare journal entries to record William's withdrawal according to each of the following independent assumptions: a. William is paid $80,000, and no goodwill is recorded. b. William is paid $85,000, and only his share of the goodwill is recorded. c. William is paid $78,000, and all implied goodwill is recorded.

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Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership

53. Apple and Betty are planning on beginning a new business. They plan on forming a partnership. Apple will contribute $300,000 and will not be working. Betty will be working full time. They plan on splitting profits equally. They approach you, as an accounting major, to confirm their thoughts. What do you recommend?

54. The ABC partnership had net income of $100,000 for 2009. They allocate profits and losses in the ratio 5:3:2. After closing the 12/31/2009 books they discovered that $30,000 was spent on a piece of land in December 2009 and was expensed. What should happen?

Chapter 15 Partnerships: Formation, Operation, and Changes in Membership Answer Key

Multiple Choice Questions

1. A partnership is a(n): I. accounting entity. II. taxable entity. A. I only B. II only C. Neither I nor II D. Both I and II

AACSB: Reflective Thinking AICPA: Decision Making

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Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership

2. A partner's tax basis in a partnership is comprised of which of the following items? I. The partner's tax basis of assets contributed to the partnership. II. The amount of the partner's liabilities assumed by the other partners. III. The partner's share of other partners' liabilities assumed by the partnership. A. I plus II minus III B. I plus II plus III C. I minus II plus III D. I minus II minus III

AACSB: Reflective Thinking AICPA: Decision Making

In the ABC partnership (to which Daniel seeks admittance), the capital balances of Albert, Bert, and Connell, who share income in the ratio of 5:3:2 are:

3. Based on the preceding information, if no goodwill or bonus is recorded, how much should Daniel invest for a 20 percent interest? A. $400,000 B. $200,000 C. $300,000 D. $250,000

AACSB: Analytic AICPA: Decision Making

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Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership

4. Based on the preceding information, what amount of goodwill will be recorded if Daniel invests $450,000 for a one-third interest? A. $0 B. $10,000 C. $50,000 D. $100,000

AACSB: Analytic AICPA: Decision Making

Jones and Smith formed a partnership with each partner contributing the following items:

Assume that for tax purposes Jones and Smith agree to share equally in the liabilities assumed by the Jones and Smith partnership.

5. Refer to the above information. What is each partner's tax basis in the Jones and Smith partnership?

A. Option A B. Option B C. Option C D. Option D

AACSB: Analytic AICPA: Measurement

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Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership

6. Refer to the above information. What is the balance in each partner's capital account for financial accounting purposes?

A. Option A B. Option B C. Option C D. Option D

AACSB: Analytic AICPA: Measurement

7. Griffin and Rhodes formed a partnership on January 1, 2009. Griffin contributed cash of $120,000 and Rhodes contributed land with a fair value of $160,000. The partnership assumed the mortgage on the land which amounted to $40,000 on January 1. Rhodes originally paid $90,000 for the land. On July 31, 2009, the partnership sold the land for $190,000. Assuming Griffin and Rhodes share profits and losses equally, how much of the gain from sale of land should be credited to Griffin for financial accounting purposes? A. $0 B. $15,000 C. $35,000 D. $45,000

AACSB: Analytic AICPA: Decision Making

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Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership

8. Which of the following accounts could be found in the general ledger of a partnership?

A. Option A B. Option B C. Option C D. Option D

AACSB: Reflective Thinking AICPA: Decision Making

9. Which of the following accounts could be found in the PQ partnership's general ledger? I. Due from P II. P, Drawing III. Loan Payable to Q A. I, II B. I, III C. II, III D. I, II, and III

AACSB: Reflective Thinking AICPA: Decision Making

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Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership

10. The DEF partnership reported net income of $130,000 for the year ended December 31, 2008. According to the partnership agreement, partnership profits and losses are to be distributed as follows:

How should partnership net income for 2008 be allocated to D, E, and F?

A. Option A B. Option B C. Option C D. Option D

AACSB: Analytic AICPA: Measurement

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Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership

11. The JPB partnership reported net income of $160,000 for the year ended December 31, 2008. According to the partnership agreement, partnership profits and losses are to be distributed as follows:

How should partnership net income for 2008 be allocated to J, P, and B?

A. Option A B. Option B C. Option C D. Option D

AACSB: Analytic AICPA: Measurement

The APB partnership agreement specifies that partnership net income be allocated as follows:

Average capital balances for the current year were $50,000 for A, $30,000 for P, and $20,000 for B.

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Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership

12. Refer to the information given. Assuming a current year net income of $150,000, what amount should be allocated to each partner?

A. Option A B. Option B C. Option C D. Option D

AACSB: Analytic AICPA: Measurement

13. Refer to the information given. Assuming a current year net income of $50,000, what amount should be allocated to each partner?

A. Option A B. Option B C. Option C D. Option D

AACSB: Analytic AICPA: Measurement

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Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership

14. RD formed a partnership on February 10, 2009. R contributed cash of $150,000, while D contributed inventory with a fair value of $120,000. Due to R's expertise in selling, D agreed that R should have 60 percent of the total capital of the partnership. R and D agreed to recognize goodwill. What is the total capital of the RD partnership and the capital balance of R after the goodwill is recognized?

A. Option A B. Option B C. Option C D. Option D

AACSB: Analytic AICPA: Measurement

15. A joint venture may be organized as a: I. Partnership. II. Corporation. III. Undivided interest. A. I only B. II only C. I or III only D. I, II, or III

AACSB: Analytic AICPA: Measurement

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Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership

16. Refer to the above information. Which statement below is correct if a new partner receives a bonus upon contributing assets into the partnership? A. B < A and D = C - A B. B > A and D = C + A C. A = B and A = D + C D. B > A and C = D + A

AACSB: Analytic AICPA: Decision Making

17. Refer to the above information. Which statement below is correct if the old partners receive a bonus upon the contribution of assets into the partnership by a new partner? A. B < A and D = C - A B. B + A and D > C + A C. B < A and D = C + A D. B > A and D = C + A

AACSB: Analytic AICPA: Decision Making

18. Refer to the above information. Which statement below is correct if goodwill of the old partners is recognized upon the contribution of assets into the partnership by a new partner? A. B = A and D < C + A B. B = A and D > C + A C. B < A and D = C + A D. B > A and D < C + A

AACSB: Analytic AICPA: Decision Making

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Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership

19. Refer to the above information. Which statement below is correct if a new partner purchases an interest in capital directly from the old partners? A. C < D B. C = D C. C = D and B = A D. C < D and B = A

AACSB: Analytic AICPA: Decision Making

20. Refer to the above information. Which statement below is correct if a new partner's goodwill is recognized upon contributing assets into the partnership? A. B = A and D > C + A B. B < A and D < C + A C. B > A and D = C + A D. B > A and D > C + A

AACSB: Analytic AICPA: Decision Making

21. When a partnership is formed, noncash assets contributed by partners should be recorded: I. at their respective book values for income tax purposes. II. at their respective fair values for financial accounting purposes. A. I only B. II only C. Both I and II D. Neither I nor II

AACSB: Reflective Thinking AICPA: Decision Making

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Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership

22. When a new partner is admitted into a partnership and the new partner receives a capital credit less than the tangible assets contributed, which of the following explains the difference? I. The new partner's goodwill has been recognized. II. The old partners received a bonus from the new partner. A. I only B. II only C. Either I or II D. Neither I nor II

AACSB: Reflective Thinking AICPA: Decision Making

23. When a new partner is admitted into a partnership and the new partner receives a capital credit greater than the tangible assets contributed, which of the following explains the difference? I. The old partners' goodwill is being recognized. II. The new partner's goodwill is being recognized. A. I only B. II only C. Either I or II D. Both I and II

AACSB: Reflective Thinking AICPA: Decision Making

24. When a new partner is admitted into a partnership and the capital of the old partners decreases, which of the following explains the reason for the decrease? I. Undervalued liabilities were written up to their fair values. II. Undervalued assets were written up to their fair values. A. I only B. II only C. Both I and II D. Neither I nor II

AACSB: Reflective Thinking AICPA: Decision Making

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Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership

25. When a partner retires from a partnership and the retiring partner is paid more than the capital balance in her account, which of the following explains the difference? I. The retiring partner is receiving a bonus from the other partners. II. The retiring partner's goodwill is being recognized. A. I only B. II only C. Either I or II D. Neither I nor II

AACSB: Reflective Thinking AICPA: Decision Making

26. When the old partners receive a bonus upon admission of a new partner into a partnership, the bonus is allocated to: I. all the partners in their profit and loss sharing ratio. II. the existing partners in their profit and loss sharing ratio. A. I only B. II only C. Either I or II D. Neither I nor II

AACSB: Reflective Thinking AICPA: Decision Making

27. When a new partner is admitted into a partnership and the old partners' goodwill is recognized, the goodwill is allocated to: I. all the partners in their profit-and-loss-sharing ratio. II. the old partners in their profit and loss sharing ratio. A. I only B. II only C. Either I or II D. Neither I nor II

AACSB: Reflective Thinking AICPA: Decision Making

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Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership

In the RST partnership, Ron's capital is $80,000, Stella's is $75,000, and Tiffany's is $50,000. They share income in a 3:2:1 ratio, respectively. Tiffany is retiring from the partnership. Each of the following questions is independent of the others.

28. Refer to the above information. Tiffany is paid $60,000, and no goodwill is recorded. In the journal entry to record Tiffany's withdrawal: A. Tiffany, Capital will be credited for $60,000. B. Ron, Capital will be debited for $5,000. C. Stella, Capital will be debited for $4,000. D. Cash will be debited for $60,000.

AACSB: Analytic AICPA: Measurement

29. Refer to the above information. Tiffany is paid $60,000, and no goodwill is recorded. What is the Ron's capital balance after Tiffany withdraws from the partnership? A. $74,000 B. $71,000 C. $75,000 D. $86,000

AACSB: Analytic AICPA: Measurement

30. Refer to the above information. Tiffany is paid $56,000, and all implied goodwill is recorded. What is the total amount of goodwill recorded? A. $0 B. $6,000 C. $30,000 D. $36,000

AACSB: Analytic AICPA: Measurement

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Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership

In the AD partnership, Allen's capital is $140,000 and Daniel's is $40,000 and they share income in a 3:1 ratio, respectively. They decide to admit David to the partnership. Each of the following questions is independent of the others.

31. Refer to the information provided above. What amount will David have to invest to give him one-fifth percent interest in the capital of the partnership if no goodwill or bonus is recorded? A. $60,000 B. $36,000 C. $50,000 D. $45,000

AACSB: Analytic AICPA: Measurement

32. Refer to the information provided above. Assume that David invests $50,000 for a onefourth interest. Goodwill is to be recorded. The journal to record David's admission into the partnership will include: A. a credit to cash for $50,000. B. a debit to goodwill for $7,500. C. a credit to David, Capital for $60,000. D. a credit to David, Capital for $50,000.

AACSB: Analytic AICPA: Measurement

33. Refer to the information provided above. Allen and Daniel agree that some of the inventory is obsolete. The inventory account is decreased before David is admitted. David invests $40,000 for a one-fifth interest. What is the amount of inventory written down? A. $4,000 B. $20,000 C. $15,000 D. $10,000

AACSB: Analytic AICPA: Measurement

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Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership

34. Refer to the information provided above. Allen and Daniel agree that some of the inventory is obsolete. The inventory account is decreased before David is admitted. David invests $40,000 for a one-fifth interest. What are the capital balances of Allen and Daniel after David is admitted into the partnership?

A. Option A B. Option B C. Option C D. Option D

AACSB: Analytic AICPA: Measurement

35. Refer to the information provided above. David directly purchases a one-fifth interest by paying Allen $34,000 and Daniel $10,000. The land account is increased before David is admitted. By what amount is the land account increased? A. $40,000 B. $10,000 C. $36,000 D. $20,000

AACSB: Analytic AICPA: Measurement

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Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership

36. Refer to the information provided above. David directly purchases a one-fifth interest by paying Allen $34,000 and Daniel $10,000. The land account is increased before David is admitted. What are the capital balances of Allen and Daniel after David is admitted into the partnership?

A. Option A B. Option B C. Option C D. Option D

AACSB: Analytic AICPA: Measurement

37. Refer to the information provided above. David invests $40,000 for a one-fifth interest in the total capital of $220,000. The journal to record David's admission into the partnership will include: A. a credit to Cash for $40,000. B. a debit to Allen, Capital for $3,000. C. a credit to David, Capital for $40,000. D. a credit to Daniel, Capital for $1,000.

AACSB: Analytic AICPA: Measurement

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Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership

38. Refer to the information provided above. David invests $40,000 for a one-fifth interest in the total capital of $220,000. What are the capital balances of Allen and Daniel after David is admitted into the partnership?

A. Option A B. Option B C. Option C D. Option D

AACSB: Analytic AICPA: Measurement

39. Refer to the information provided above. David invests $50,000 for a one-fifth interest. What amount of goodwill will be recorded? A. $20,000 B. $4,000 C. $40,000 D. $15,000

AACSB: Analytic AICPA: Measurement

40. Which of the following observations is true of an S corporation? A. It elects to be taxed in the same manner as a corporation. B. It does not have the burden of double taxation of corporate income. C. Its shareholders have personal liability for the corporation's obligations. D. Its primary income source should be passive investments.

AACSB: Reflective Thinking AICPA: Decision Making

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Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership

41. A limited liability company (LLC): I. is governed by the laws of the state in which it is formed. II. provides liability protection to its investors. III. does not offer pass-through taxation benefits of partnerships. A. Both I and III. B. III C. Both I and II D. I, II, and II

AACSB: Reflective Thinking AICPA: Decision Making

42. If A is the total capital of a partnership before the admission of a new partner, B is the total capital of the partnership after the admission of the new partner, C is the amount of the new partner's investment, and D is the amount of capital credited to the new partner, then there is: A. goodwill to the new partner if B > (A + C) and D < C. B. goodwill to the old partners if B = A + C and D > C. C. a bonus to the new partner if B = A + C and D > C. D. neither bonus nor goodwill if B > (A + C) and D > C.

AACSB: Reflective Thinking AICPA: Decision Making

43. The terms of a partnership agreement provide that one of the partners is to receive a salary allowance of $30,000, plus a bonus of 20 percent of income after deduction of the bonus and the salary allowance. If income is $150,000, the bonus should be: A. $18,000 B. $20,000 C. $24,000 D. $30,000

AACSB: Analytic AICPA: Measurement

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Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership

44. The partnership of X and Y shares profits and losses in the ratio of 60 percent to X and 40 percent to Y. For the year 2008, partnership net income was double X's withdrawals. Assume X's beginning capital balance was $80,000, and ending capital balance (after closing) was $140,000. Partnership net income for the year was: A. $120,000. B. $300,000. C. $500,000. D. $600,000.

AACSB: Analytic AICPA: Measurement

45. Shue, a partner in the Financial Brokers Partnership, has a 30 percent share in partnership profits and losses. Shue's capital account had a net decrease of $100,000 during 2008. During 2008, Shue withdrew $240,000 as withdrawals and contributed equipment valued at $50,000 to the partnership. What was the net income of the Financial Brokers Partnership for 2008? A. $633,334 B. $466,666 C. $300,000 D. $190,000

AACSB: Analytic AICPA: Measurement

46. Transferable interest of a partner includes all of the following except: A. the partner's share of the profits and losses of the partnership. B. the right to receive distributions. C. the right to receive any liquidating distribution. D. the authority to transact any of the partnership's business operations.

AACSB: Reflective Thinking AICPA: Decision Making

Essay Questions

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Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership

47. Net income for Levin-Tom partnership for 2009 was $125,000. Levin and Tom have agreed to distribute partnership net income according to the following plan:

Additional Information for 2009 follows: 1. Levin began the year with a capital balance of $75,000. 2. Tom began the year with a capital balance of $100,000. 3. On March 1, Levin invested an additional $25,000 into the partnership. 4. On October 1, Tom invested an additional $20,000 into the partnership. 5. Throughout 2009, each partner withdrew $200 per week in anticipation of partnership net income. The partners agreed that these withdrawals are not to be included in the computation of average capital balances for purposes of income distributions. Required: a. Prepare a schedule that discloses the distribution of partnership net income for 2009. Show supporting computations in good form. b. Prepare the statement of partners' capital at December 31, 2009. c. How would your answer to part a change if all of the provisions of the income distribution plan were the same except that the salaries were $45,000 to Levin and $60,000 to Jack?

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Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership

a)

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Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership

AACSB: Analytic AICPA: Measurement

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Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership

48. Paul and Ray sell musical instruments through their partnership. To bring in additional funds and expertise, they decide to admit Janet to the partnership. Paul's capital is $400,000, Ray's capital is $200,000, and they share income in a ratio of 7:3, respectively. Required Record Janet's admission for each of the following independent situations: a) Janet invests $180,000 for a one-fourth interest. Goodwill is to be recorded. b) Paul and Ray agree that some of the inventory is obsolete. The inventory account is decreased before Janet is admitted. Janet invests $190,000 for a one-fourth interest.

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Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership

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Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership

AACSB: Analytic AICPA: Measurement

15-46

Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership

49. Two sole proprietors, L and M, agreed to form a partnership on January 1, 2009. The trial balance for each proprietorship is shown below as of January 1, 2009.

The LM partnership will take over the assets and assume the liabilities of the proprietors as of January 1, 2009. Required: a) Prepare a balance sheet, for financial accounting purposes, for the LM partnership as of January 1, 2009. b) In addition, assume that M agreed to recognize the goodwill generated by L's business. Accordingly, M agreed to recognize an amount for L's goodwill such that L's capital equalled M's capital on January 1, 2009. Given this alternative, how does the balance sheet prepared for requirement A change?

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Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership

a)

b) Assets change due to the addition of goodwill of $34,000. Total assets are now $1,128,000 ($1,094,000 + $34,000 goodwill). L, Capital and M, Capital are each $294,000 if L's goodwill is recognized. Total capital is $588,000, and total liabilities and capital amount to $1,128,000.

AACSB: Analytic AICPA: Measurement

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Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership

50. The PQ partnership has the following plan for the distribution of partnership net income (loss):

Required: Calculate the distribution of partnership net income (loss) for each independent situation below (for each situation, assume the average capital balance of P is $140,000 and of Q is $240,000). 1. Partnership net income is $360,000. 2. Partnership net income is $240,000. 3. Partnership net loss is $40,000.

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Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership

Situation 1: Net income is $360,000

Situation 2: Net income is $240,000

Situation 3: Net loss is $40,000

AACSB: Analytic AICPA: Measurement

15-50

Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership

51. Miller and Davis, partners in a consulting business, share profits and losses in the ratio of 3:2, respectively. Prior to recording the admission of Shaw as a new partner, Miller has a capital balance of $80,000, and Davis has a capital balance of $40,000. Required: For each of the following independent cases, prepare the journal entry that was made to record the admission of Shaw into the partnership. 1) Shaw purchased 20 percent of the respective capital balances of Miller and Davis, paying $20,000 cash directly to each of them. 2) Shaw invested $30,000 cash in the partnership for a 20 percent ownership interest. Total capital after recording his admission was $150,000. 3) Shaw invested $40,000 cash into the partnership for a 20 percent ownership interest. Total capital after recording his admission was $160,000. 4) Shaw invested $50,000 into the partnership for a 20 percent interest. Goodwill is to be recognized.

AACSB: Analytic AICPA: Measurement

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Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership

52. In the JAW partnership, Jane's capital is $100,000, Anne's is $80,000, and William's is $75,000. They share income in a 3:2:1 ratio, respectively. William is retiring from the partnership. Required Prepare journal entries to record William's withdrawal according to each of the following independent assumptions: a. William is paid $80,000, and no goodwill is recorded. b. William is paid $85,000, and only his share of the goodwill is recorded. c. William is paid $78,000, and all implied goodwill is recorded.

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Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership

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Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership

AACSB: Analytic AICPA: Measurement

53. Apple and Betty are planning on beginning a new business. They plan on forming a partnership. Apple will contribute $300,000 and will not be working. Betty will be working full time. They plan on splitting profits equally. They approach you, as an accounting major, to confirm their thoughts. What do you recommend? Students should recognize that partners can agree to any form of profit allocation. However, since one partner, Apple, has contributed money and Betty hasn't, they might want to consider some form of interest on the capital balance. Also, since one partner, Betty, is working full time, Apple is not, they might want to consider having a salary or a bonus opportunity for Apple.

AACSB: Communication AICPA: Critical Thinking

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Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership

54. The ABC partnership had net income of $100,000 for 2009. They allocate profits and losses in the ratio 5:3:2. After closing the 12/31/2009 books they discovered that $30,000 was spent on a piece of land in December 2009 and was expensed. What should happen? Since the books are closed then the correction must be made against the capital accounts. The following journal entry would be made:

AACSB: Analytic AICPA: Critical Thinking

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