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Chapter 15 Test Bank Partnerships - Formation, Operations, and Changes in Ownership Interests
Chapter 15 Test Bank Partnerships - Formation, Operations, and Changes in Ownership Interests
LO1
2.
LO1
3.
I only.
II only.
I and II.
Neither I nor II.
LO1
4.
Partnerships
a. are required to prepare annual reports.
b. are required to file income tax returns but do not pay
Federal taxes.
c. are required to file income tax returns and pay Federal
income taxes.
d. are not required to file income tax returns or pay Federal
income taxes.
LO2
5.
50,000
62,500
100,000
50,000
250,000
512,500
Equities
McCune, capital
Nall, capital
Oakely, capital
Total equities
212,500
200,000
100,000
512,500
The partners agree to admit Pavic for a one-fifth interest. The fair
market value of partnership land is appraised at $100,000 and the
fair market value of inventory is $87,500. The assets are to be
revalued prior to the admission of Pavic and there is $15,000 of
goodwill that attaches to the old partnership.
LO2
6.
LO2
7.
How much
interest?
a.
b.
c.
d.
cash
must
Pavic
invest
to
acquire
one-fifth
$117,500.
$120,500.
$146,875.
$150,625.
LO2
8.
What will the profit and loss sharing ratios be after Pavics
investment?
a.
b.
c.
d.
1:2:4:2.
2:3:5:2.
3:4:6:2.
4:6:10:5.
$
(
12,000 )
Blaze
120,000
18,000
15,000 )
40,000
50,000
LO3
10.
Albion
100,000
18,000
$100,000
$105,333
$110,667
$126,667
and
and
and
and
$120,000.
$126,667.
$119,583.
$105,333.
If the average capital for Albion and Blaze from the above
information is $112,000 and $119,000, respectively, what will
be the total amount of profit allocated after the salary and
interest distributions are completed?
a.
b.
c.
d.
$70,000.
$73,100.
$75,000.
$80,000.
2009 Pearson Education, Inc. publishing as Prentice Hall
15-4
LO3
11.
$50,000
$54,000
$70,000
$75,000
and
and
and
and
$70,000.
$66,000.
$50,000.
$45,000.
Carnes
300,000
18,000
LO3
13.
Bloom
200,000
18,000
$60,000
$80,000
$83,000
$83,000
and
and
and
and
$0.
$20,000.
$0.
$23,000.
LO3
14.
LO3
15.
Drawings
a.
b.
c.
d.
LO4
16.
$11,000.
$11,450.
$11,650.
$12,100.
the
160,000
140,000
300,000
600,000
$40,000.
$120,000.
$160,000.
$200,000.
LO5
19.
75,000
82,000
38,000
150,000
255,000
600,000
LO5
18.
$100,000.
$140,000.
$180,000.
$220,000.
$240,000.
$300,000.
$360,000.
$420,000.
2009 Pearson Education, Inc. publishing as Prentice Hall
15-7
LO6
20.
LO2
Exercise 1
Cesar and Damon share partnership profits and losses at 60% and 40%,
respectively. The partners agree to admit Egan into the partnership
for a 50% interest in capital and earnings. Capital accounts
immediately before the admission of Egan are:
Cesar (60%)
Damon (40%)
Total
$
$
300,000
300,000
600,000
Required:
1. Prepare the journal entry(s) for the admission of Egan to the
partnership assuming Egan invested $400,000 for the ownership
interest. Egan paid the money directly to Cesar and to Damon for
50% of each of their respective capital interests. The
partnership records goodwill.
2. Prepare the journal entry(s) for the admission of Egan to the
partnership assuming Egan invested $500,000 for the ownership
interest. Egan paid the money to the partnership for a 50%
interest in capital and earnings. The partnership records
goodwill.
3. Prepare the journal entry(s) for the admission of Egan to the
partnership assuming Egan invested $700,000 for the ownership
interest. Egan paid the money to the partnership for a 50%
interest in capital and earnings. The partnership records
goodwill.
LO3
Exercise 2
On February 1, 2005, Flores, Gilroy, and Hansen began a partnership
in which Flores and Hansen contributed cash of $25,000; Gilroy
contribute property with a fair value of $50,000 and a tax basis
$40,000. Gilroy receives a 5% bonus of partnership income. Flores
and Hansen receive salaries of $10,000 each.
The partnership
agreement of Flores, Gilroy, and Hansen provides all partners to
receive a 5% interest on capital and that profits and losses be
divided of the remaining income be distributed to Flores, Gilroy, and
Hansen by a 1:3:1 ratio.
Required:
Prepare a schedule to distribute $25,000 of partnership net income to
the partners.
2009 Pearson Education, Inc. publishing as Prentice Hall
15-9
LO3
Exercise 3
The profit and loss sharing agreement for the Quade, Reid, and Scott
partnership provides for a $15,000 salary allowance to Reid. Residual
profits and losses are allocated 5:3:2 to Quade, Reid, and Scott,
respectively. In 2006, the partnership recorded $120,000 of net
income that was properly allocated to the partner's capital accounts.
On January 25, 2007, after the books were closed for 2006, Quade
discovered that office equipment, purchased for $12,000 on December
29, 2006, was recorded as office expense by the company bookkeeper.
Required:
Prepare the necessary correcting entry(s) for the partnership.
LO3
Exercise 4
Evans, Fitch, and Gault operate a partnership with a complex profit
and loss sharing agreement. The average capital balance for each
partner on December 31, 2006 is $300,000 for Evans, $250,000 for
Fitch, and $325,000 for Gault. An 8% interest allocation is provided
to each partner. Evans and Fitch receive salary allocations of
$10,000 and $15,000, respectively. If partnership net income is above
$25,000, after the salary allocations are considered (but before the
interest allocations are considered), Gault will receive a bonus of
10% of the original amount of net income. All residual income is
allocated in the ratios of 2:3:5 to Evans, Fitch, and Gault,
respectively.
Required:
1.
2.
LO3
Exercise 5
Required:
Using the information from Exercise 4 above:
1. Prepare a schedule to allocate income or loss to the partners
assuming that the partnership incurs a net loss of $36,000.
2. Prepare a journal entry to distribute the partnership's loss to
the partners (assume that an Income Summary account is used by the
partnership).
LO3
Exercise 6
Grech, Harris, and Ivers have a retail partnership business selling
personal computers. The partners are allowed an interest allocation
of 8% on their average capital. Capital account balances on the first
day of each month are used in determining weighted average capital,
regardless
of
additional
partner
investment
or
withdrawal
transactions during any given month. Drawings are disregarded in
computing average capital, but temporary withdrawals of capital that
are debited to the capital account are used in the average
calculation. Partner capital activity for the year was:
Capital accounts
Jan 1 balance
Feb 2 investment
Mar 6 investment
Apr 20 withdrawal
Jul 3 withdrawal
and investment
Sep 29 investment
Nov 5 investment
Required:
Grech
200,000
50,000
10,000
7,000 )
5,000
Harris
300,000
20,000
10,000
4,000
$
(
Ivers
250,000
10,000 )
5,000
5,000
Calculate weighted average capital for each partner, and determine the
amount of interest that each partner will be allocated.
LO3
Exercise 7
The profit and loss sharing agreement for the Sealy, Teske, and Ubank
partnership provides that each partner receive a bonus of 5% on the
original amount of partnership net income if net income is above
$25,000. Sealy and Teske receive a salary allowance of $7,500 and
$10,500, respectively. Ubank has an average capital balance of
$260,000, and receives a 10% interest allocation on the amount by
which his average capital account balance exceeds $200,000. Residual
profits and losses are allocated to Sealy, Teske, and Ubank in their
respective ratios of 7:5:8.
Required:
Prepare a schedule to allocate $88,000 of partnership net income to
the partners.
LO5
Exercise 8
A summary balance sheet for the partnership of Ivory, Jacoby and Kato
on December 31, 2006 is shown below. Partners Ivory, Jacoby and Kato
allocate profit and loss in their respective ratios of 9:6:10.
Assets
Cash
Inventory
Marketable securities
Land
Building-net
Total assets
Equities
Ivory, capital
Jacoby, capital
Kato, capital
Total equities
$
$
50,000
75,000
120,000
80,000
400,000
725,000
425,000
225,000
75,000
725,000
The partners agree to admit Lange for a one-tenth interest. The fair
market value for partnership land is $180,000, and the fair market
value of the inventory is $150,000.
Required:
1. Record the entry to revalue the partnership assets prior to the
admission of Lange.
2. Calculate how much Lange will have to invest to acquire a 10%
interest.
3. If Lange paid $200,000 to the partnership in exchange for a 10%
interest, what would be the bonus that is allocated to each
partner's capital account?
LO5
Exercise 9
A summary balance sheet for the Vail, Wacker Yang partnership on
December 31, 2006 is shown below. Partners Vail, Wacker, and Yang
allocate profit and loss in their respective ratios of 4:5:7. The
partnership agreed to pay partner Yang $227,500 for his partnership
interest upon his retirement from the partnership on January 1, 2007.
Any payments exceeding Yangs capital balance are treated as a bonus
from partners Vail and Wacker.
Assets
Cash
Inventory
Marketable securities
Land
Building-net
Total assets
Equities
Vail, capital
Wacker, capital
Yang, capital
Total equities
$
$
75,000
87,500
60,000
90,000
150,000
462,500
212,500
112,500
137,500
462,500
Required:
Prepare the journal entry to reflect Yangs retirement from the
partnership.
LO5
Exercise 10
A summary balance sheet for the Almond, Brandt, and Clack partnership
on December 31, 2006 is shown below. Partners Almond, Brandt, and
Clack allocate profit and loss in their respective ratios of 2:1:1.
The partnership agreed to pay partner Brandt $135,000 for his
partnership interest upon his retirement from the partnership on
January 1, 2007. The partnership financials on January 1, 2007 are:
Assets
Cash
Inventory
Marketable securities
Land
Building-net
Total assets
Equities
Almond, capital
Brandt, capital
Clack, capital
Total equities
$
$
75,000
85,000
60,000
90,000
150,000
420,000
210,000
105,000
105,000
420,000
Required:
Prepare the journal entry to reflect Brandts retirement from the
partnership:
1. Assuming a bonus to Brandt.
2. Assuming a revaluation of total partnership capital based on
excess payment.
3. Assuming goodwill to excess payment is recorded.
SOLUTIONS
Multiple Choice Questions
1.
2.
3.
4.
5.
6.
7.
8.
20% x 80% =
30% x 80% =
50% x 80% =
=
16%
24%
40%
20%
10.
[($120,000 x 5) + ($105,000 x 5) +
($155,000 x 2)]/12 = $119,583
11.
12.
= $50,000
= $30,000
= $0
Bloom:
Interest allocation:
Salary allocation:
$20,000
$10,000
Carnes:
Interest allocation:
Salary allocation:
$30,000
$20,000
15.
16.
17.
18.
19.
20.
B = .1x($121,000 - B)
B = $12,100 - .1B
1.1B = $12,100
B = $11,000
Exercise 1
Requirement 1
Goodwill
Cesar, capital
Damon, capital
200,000
Cesar, capital
Damon, capital
Egan, capital
210,000
190,000
120,000
80,000
400,000
100,000
500,000
600,000
100,000
Cash
700,000
Egan, capital
60,000
40,000
700,000
Exercise 2
Net income
$
Bonus to Gilroy
(
Salaries
(
Interest
(
Residual loss
(
Loss allocation
Allocation
$
Income
25,000
1,250
20,000
5,000
1,250
1,250
0
Flores
)
)
)
)
Gilroy
$
$
$(
$
Hansen
1,250
10,000
1,250
2,500
250 ) (
11,000
$
750 ) (
3,000
$
10,000
1,250
250 )
11,000
Exercise 3
1/25/07
Office Equipment
Quade, capital
Reid, capital
Scott, capital
12,000
6,000
3,600
2,400
Exercise 4
Requirement 1
Net income
Bonus to Gault
Salary allocation
Interest allocation
Residual
Final allocation
$
(
(
(
(
$
Income
250,000
25,000
25,000
70,000
130,000
0
Evans
)
) $
)
)
$
10,000
24,000
26,000
60,000
Fitch
$
$
15,000
20,000
39,000
74,000
Gault
$
25,000
26,000
65,000
116,000
Requirement 2
Income summary
Evans, capital
Fitch, capital
Gault, capital
250,000
60,000
74,000
116,000
Exercise 5
Requirement 1
Net loss
Bonus to Gault
Salary allocation
Interest allocation
Subtotal
Residual allocation
Totals
$(
(
(
(
(
$
Loss
36,000
0
25,000
70,000
131,000
131,000
0
)
)
) $
)
)
(
$
Evans
Fitch
Gault
10,000
$
24,000
34,000
26,200 ) (
7,800
$(
$
15,000
20,000
$
35,000
39,300 ) (
4,300 ) $(
0
26,000
26,000
65,500 )
39,500 )
Requirement 2
Fitch, capital
Gault, capital
Evans, capital
Income summary
4,300
39,500
7,800
36,000
Exercise 6
Jan, Feb
Mar
Apr, May, Jun, Jul
Aug, Sep
Oct, Nov, Dec
Total capital
Average capital
Interest allocation
$ 200,000
250,000
260,000
253,000
258,000
$ 300,000
320,000
330,000
334,000
x
x
x
x
x
x
x
x
x
2
1
4
2
3
3
4
2
3
= $
=
=
=
=
$
$
$
=
=
=
=
$
$
$
Grech
400,000
250,000
1,040,000
506,000
774,000
2,970,000
247,500
19,800
Harris
900,000
1,280,000
660,000
1,002,000
3,842,000
320,167
25,613
$ 250,000
240,000
245,000
250,000
x
x
x
x
4
5
2
1
=
=
=
=
$
$
$
Ivers
1,000,000
1,200,000
490,000
250,000
2,940,000
245,000
19,600
Exercise 7
Net income
Bonus
Salary
Interest
Subtotal
Balance
Totals
$
(
(
(
(
$
Income
88,000
13,200
18,000
6,000
50,800
50,800
0
Sealy
) $
)
)
)
$
4,400
7,500
11,900
17,780
29,680
Teske
$
4,400
10,500
14,900
12,700
27,600
Ubank
$
4,400
6,000
10,400
20,320
30,720
Exercise 8
Requirement 1
The assets of the partnership must be adjusted to fair market value.
Land will increase by $100,000, and Inventory by $75,000. The profit
and loss ratio elements add up to 25. Partner Ivory will then be
allocated 9/25 of the $175,000, etc.
Land
Inventory
Ivory, capital
Jacoby, capital
Kato, capital
100,000
75,000
63,000
42,000
70,000
Requirement 2
The partnership's total assets after revaluation are $900,000. If
Lange acquires a 10% interest, it implies that the $900,000
represents 90% of the partnerships value after Lange's investment.
Therefore, $900,000/90% = $1,000,000, and $1,000,000 x 10% =
$100,000. The entry to record Langes investment would be:
Cash
100,000
Lange, capital
100,000
Requirement 3
Cash
200,000
Lange, capital
Ivory, capital
Jacoby, capital
Kato, capital
100,000
36,000
24,000
40,000
Exercise 9
1/1/04
Yang, capital
Vail, capital ($90,000 x 4/9)
Wacker, capital ($90,000 x 5/9)
Cash
137,500
40,000
50,000
227,500
Exercise 10
Requirement 1
Almond and Clack give a bonus to Brand which reduces their capital in
a 2 to 1 ratio.
Brandt, capital
Almond, capital
Clack, capital
Cash
105,000
20,000
10,000
135,000
Requirement 2
Revalue the total partnership capital to reflect
Brandts retirements excess payment of $30,000.
the
Goodwill
Almond, capital
Clack, capital
Brandt, capital
60,000
Brandt, capital
Cash
135,000
value
at
20,000
10,000
30,000
135,000
Requirement 3
Add goodwill equal to the excess payment
Brandt, capital
Goodwill
Cash
105,000
30,000
135,000