Test Bank Partnership Accounting and Reporting Multiple Choice 1. Topic: Partnership Characteristics LO1

TEST BANK
CHAPTER 14
Partnership Accounting and Reporting
MULTIPLE CHOICE
1. Topic: Partnership characteristics

LO 1
Which one of the following is not a characteristic of a general partnership?
a. A partner has the right to participate in management, but is not a co-owner of

partnership property.
b. A partnership is an entity distinct from the individual partners.
c. Any partner may legally enter a contract that also binds the other partners.
d. Partnership income is separately taxed.
ANS: d

LO 1
Joint and several liability in a partnership means that:
a. Each partner has personal liability for partnership obligations.

b. Each partner’s personal liability for partnership obligations is limited to their initial
investment in the partnership.
c. Each partner’s personal liability for partnership obligations is limited to the balance in
their capital account.
d. Partners are responsible for their own actions but not the actions of the other partners.
ANS: a

LO 1
Most professional organizations, such as CPA firms, organize as:
a. Limited liability corporations

b. Professional corporations
c. Publicly traded partnerships
d. Limited liability partnerships
ANS: d
©Cambridge Business Publishers, 2016

Test Bank, Chapter 14 14-1
LO 1
Revisions to the Uniform Partnership Act in the 1990s:
a. Gave each partner the right to dissolve the partnership at any time
b. Established the partnership as a separate entity
c. Required each partner to be liable for all of the debts of the partnership
d. Sheltered a partner’s personal assets from partnership creditors
ANS: b
5. Topic: Limited partnerships

LO 1
In a limited partnership, the limited partners:
a. Cannot share in partnership profits

b. Only receive a fixed periodic payment in return for their investment
c. Have no right to participate in management
d. Have no liability for partnership obligations
ANS: c
6. Topic: Relations among partners

LO 1
Absent a separate agreement, the Revised Uniform Partnership Act provides for all of the
following except:
a. No person can become a member of the partnership without the consent of all partners.
b. Disagreements arising as to ordinary matters connected with partnership business may
be decided by a majority of the partners.
c. Partners have the right to receive reasonable compensation for services performed for
partnership operations.
d. A partner who makes a payment beyond the amount of capital which he/she agreed to
contribute shall be paid interest from the date of payment.
ANS: c
7. Topic: Relations among partners

LO 1
Unless the partnership agreement has a different specific arrangement, partnership income is
allocated between partners:
a. In proportion to their initial capital investment

b. Equally
c. In proportion to their current capital balance
d. On the basis of their involvement with partnership management
ANS: b

14-2 Advanced Accounting, 3rd Edition
8. Topic: Partner liability
LO 1
If a CPA firm is organized as an LLP and an individual partner is involved in a negligent audit,
another partner in the same CPA firm is personally liable:
a. Always
b. If the partner operates out of the same office
c. If the partner was involved in the audit in a supervisory role
d. Never
ANS: c

LO 1
Which statement is false concerning attributes of limited partnerships?
a. There has to be at least one general partner.

b. Limited partners cannot be limited in liability for partnership obligations.
c. Limited partners have the right to a specified share of partnership income or loss.
d. The general partner(s) have the right to participate in managing the partnership.
ANS: b

LO 1
Unlike a limited liability company (LLC), in a limited liability partnership (LLP):
a. Corporations can be owners.

b. Partnership income is passed through to its owners.
c. At least one of the managing partners must be liable for partnership obligations.
d. Partnership income is taxed separately.
ANS: c

LO 1
The distinguishing feature of a master limited partnership (MLP) is that:
a. Its income must come mostly from tech-related services.

b. Partnership income is not taxed separately.
c. Partnership income is defined as the amount of cash distributed to partners.
d. Partnership shares trade on markets.
ANS: d

12. Topic: Partnership reporting issues
LO 1
A distribution to a partner is reported as:
a. A reduction in his or her capital account

b. A charge to dividends, a temporary account closed to partnership retained income
c. An expense, reducing partnership income
d. A deferred outflow, amortized to expense over time
ANS: a
13. Topic: Measuring partnership income

LO 1
Which of the following is false regarding the measurement of partnership income?
a. Partnerships employ the same revenue and expense recognition criteria as corporations.
b. Salaries to partners are deducted as expenses in measuring partnership income.
c. Interest allocated to partners is not deducted as an expense in measuring partnership
income.
d. Partnerships do not report income tax expense.
ANS: b
14. Topic: Consolidation of partnerships

LO 1
A corporation has a financial relationship with a limited partnership. It is likely to include the
accounts of the partnership in its financial statements (i.e., consolidate the partnership) if the
corporation:
a. Owns the majority of partnership shares

b. Is the general partner
c. Has kick-out or participating rights
d. Is a limited partner
ANS: b

Use the following information to answer Questions 15 – 17.
Casper and Dold decide to form a partnership. Casper contributes $500,000 in cash. Dold contributes
buildings and equipment with a fair market value of $800,000, subject to a mortgage of $100,000, which
the partnership assumes.
15. Topic: Partnership formation

LO 2
If each partner's capital account is initially set equal to net assets invested at fair market value,
the entry to record the partnership formation includes the following:
a. A credit to Casper’s capital account for $650,000

b. A credit to Casper’s capital account for $400,000
c. A credit to Dold’s capital account for $700,000
d. A credit to Dold’s capital account for $600,000
ANS: c
The entry to record the formation of the partnership is:
Cash 500,000
Buildings & equipment 800,000
Mortgage payable 100,000
Capital—Casper 500,000
Capital—Dold 700,000
16. Topic: Partnership formation, bonus method

LO 2
Assume the partners specify an agreed-upon percentage in the initial partner capital, as follows:
50% to Casper, and 50% to Dold. If the bonus approach to partnership formation is used, Dold’s
initial capital balance will be:
a. $600,000
b. $700,000
c. $650,000
d. $625,000
ANS: a
The total partnership capital is $1,200,000 ($500,000 in cash plus $800,000 in property
less $100,000 mortgage); Dold receives 50% of $1,200,000, or $600,000.

17. Topic: Partnership formation, goodwill method
LO 2
Assume the partners specify an agreed-upon percentage in the initial partner capital, as follows:
50% to Casper, and 50% to Dold. If the goodwill approach to partnership formation is used, the
initial entry to record the formation of the partnership will recognize goodwill of:
a. $350,000
b. $300,000
c. $250,000
d. $200,000
ANS: d
If Dold’s fair value contribution of $700,000 is equal to a 50% interest, then the total
partnership capital must be $700,000/0.5 = $1,400,000. Fair value of net assets
contributed is $1,200,000 (cash and property of $1,300,000 less mortgage of $100,000).
Therefore goodwill is $1,400,000 – $1,200,000 = $200,000.
18. Topic: Formation of a partnership

LO 2
A partnership is formed with four partners. Each partner invests net assets with a different fair
value, but they are each given a 25% capital percentage. Which of the following statements is
true?
a. Using the bonus method, the partners will have different initial capital balances.
b. Total capital balances will be the same whether the bonus or goodwill method is used.
c. Because the investments are unequal, it is not possible to set each partner’s capital
balance equal to the amount invested.
d. The capital balances will be equal regardless of whether the bonus or goodwill method
is used.
ANS: d
19. Topic: Partnership income allocation

LO 3
A partnership’s income-sharing ratio applies to:
a. Partnership income after salaries and interest are deducted

b. Partnership income before salaries are deducted but after interest is deducted
c. Partnership income after salaries are deducted but before interest is deducted
d. Partnership income before both salaries and interest are deducted
ANS: a

20. Topic: Partnership income
LO 3
The interest component of partnership income allocation is usually based on a percentage of:
a. Salary
b. Weighted average invested capital
c. Partnership income
d. Partnership income before deducting salaries and interest
ANS: b
21. Topic: Partnership income

LO 3
Which statement is true concerning the sharing of income in a partnership?
a. The Revised Uniform Partnership Act requires that partners share partnership income
equally.
b. The Revised Uniform Partnership requires a partnership to specify a different sharing
rule for losses than for profits.
c. A partnership agreement specifying unequal sharing of profits takes precedence over
the specifications of the Revised Uniform Partnership Act.
d. The Revised Uniform Partnership Act is silent regarding income sharing; the partnership
agreement is required to specify an income sharing rule.
ANS: c

LO 3
Xun, Yue and Zhuo have interests in XYZ Partnership. Partnership income for the year is
$400,000. The partnership agreement specifies that Xun is to receive an annual salary of
$212,500, Yue is to receive an annual salary of $42,500, and Zhuo is to receive an annual salary
of $170,000. Any remaining income or loss is to be divided between the three partners in a
1:1:2 ratio.
Salaries are to be fully implemented. Partnership income allocated to Zhuo is:
a. $200,000
b. $182,500
c. $170,000
d. $157,500
ANS: d
Zhuo will receive $170,000 salary, less 1/2 of the $25,000 loss after salaries are
deducted, or a total of $157,500.

LO 3
Xun, Yue and Zhuo have interests in XYZ Partnership. Partnership income for the year is
$400,000. The partnership agreement specifies that Xun is to receive an annual salary of
$212,500, Yue is to receive an annual salary of $42,500, and Zhuo is to receive an annual salary
of $170,000. Any remaining income or loss is to be divided between the three partners in a
1:1:2 ratio. Salaries are to be proportionately implemented.
Partnership income allocated to Zhuo is:
a. $170,000
b. $160,000
c. $180,000
d. $200,000
ANS: b
The partners will only receive salary, since partnership income is lower than fully
implemented salaries. Zhuo will receive a proportionate share of total salary,
($170,000/$425,000) x $400,000 = $160,000.

LO 3
Jing, Kang and Liang have interests in the JKL Partnership. Partnership income for the year is
$350,000. The partnership agreement specifies that partnership income is to be allocated as
follows: salaries of $100,000 to Jing, $50,000 to Kang, and $50,000 to Liang; a bonus of 20% of
partnership income, after deducting salaries and bonus, to Kang, and the remainder allocated
equally between the three partners.
Kang's bonus for the year is:
a. $37,500
b. $30,000
c. $25,000
d. $27,500
ANS: c
B = Bonus to Kang
B = ($350,000 – $200,000 – B) x 20%
B = $30,000 – 0.2B
B = $25,000

LO 3
Anh, Byun and Chea have interests in the ABC Partnership. Partnership income for the year is
$200,000. The partnership agreement specifies that partnership income is to be allocated as
follows: salaries of $50,000 to Anh, $25,000 to Byun, and $35,000 to Chea; a bonus of 50% of
partnership income, after deducting salaries and bonus, to Byun, and the remainder allocated
equally between the three partners.
The total income allocation to Byun is:
a. $ 75,000
b. $ 85,000
c. $ 95,000
d. $105,000
ANS: a
B = Bonus to Byun
B = ($200,000 – $110,000 – B) x 50%
B = $45,000 – 0.5B
B = $30,000
Remaining unallocated income after salaries and bonus = $200,000 – $110,000 –
$30,000 = $60,000
Byun’s total allocation = $25,000 + $30,000 + ($60,000/3) = $75,000

LO 3
A partnership agreement specifies that each partner is to receive 20 percent interest on their
weighted average capital balance for the year. Suppose a partner’s capital account starts the
year with a balance of $200,000. On April 1, $25,000 is withdrawn. On July 1, $40,000 is
withdrawn. On September 1, $30,000 is invested.
How much partnership income for the year will be allocated to the partner for interest?
a. $36,500
b. $34,850
c. $35,750
d. $34,250
ANS: d
$200,000(3/12) + $175,000(3/12) + $135,000(2/12) + $165,000(4/12)
= $171,250 $171,250 x 20%
= $34,250

LO 3
A partnership agreement specifies that each partner is to receive 25 percent interest on their
weighted average capital balance for the year. Suppose a partner’s capital account starts the
year with a balance of $150,000. On May 1, $20,000 is withdrawn. On August 1, $41,000 is
invested.
On December 1, $21,000 is withdrawn. How much partnership income for the year will be
allocated to the partner for interest?
a. $37,600
b. $36,250
c. $38,000
d. $37,500
ANS: c
$150,000(4/12) + $130,000(3/12) + $171,000(4/12) + $150,000(1/12)
= $152,000 $152,000 x 25%
= $38,000
Use the following information to answer Questions 28-31.
Bouchard, Caron and Dion own interests in the BCD Partnership. Their current capital account balances
are as follows:
Bouchard $350,000
Caron 300,000
Dion 200,000
Partnership income is shared as follows: 40% to Bouchard, 35% to Caron, and 25% to Dion.
Audet buys a 20% interest in the partnership by acquiring 20% of each existing partner's interest, paying
the three partners a total of $225,000.
28. Topic: Admission of new partner by purchasing existing interest

LO 4
Using the transfer of capital interests approach, Audet’s initial capital balance after entering the
partnership is:
a. $225,000
b. $170,000
c. $215,000
d. $200,000
ANS: b
20% x ($350,000 + $300,000 + $200,000) = $170,000

LO 4
Using the transfer of capital interests approach, Bouchard’s capital balance immediately
following admission of Audet is:
a. $285,500
b. $260,000
c. $350,000
d. $280,000
ANS: d
80% x $350,000 = $280,000

LO 4
Using the recognition of implied goodwill approach, implied goodwill is:
a. $1,125,000
b. $ 900,000
c. $ 275,000
d. $ 45,000
ANS: c
Implied goodwill is $225,000/0.20 = $1,125,000 – $850,000 = $275,000

LO 4
Using the recognition of implied goodwill approach, Caron’s capital balance after the addition of
Audet to the partnership will be:
a. $317,000
b. $396,250
c. $492,000
d. $252,600
ANS: a
Caron receives 35% of $275,000 = $96,250 in goodwill.
Caron then gives up 20% of the new capital balance of $300,000 + $96,250 = $396,250,
resulting in a balance of 80% x $396,250 = $317,000.

LO 4
Which of the following is true regarding the admission of a new partner by purchase of an
existing partnership interest?
a. Using the transfer of capital interests approach, total partnership capital increases.
b. Using the transfer of capital interests approach, partnership capital of existing partners
does not change.
c. Using the implied goodwill approach, goodwill equals the new partner’s investment
divided by his/her capital percentage.
d. Using the implied goodwill approach, the recognized goodwill is shared among only the
existing partners.
ANS: d
The capital balances of the FGH Partnership are as follows:
Fortier $ 120,000
Gauthier 75,000
Houle 225,000
The partners' income sharing ratio is: Fortier, 35%; Gauthier, 45%; Houle, 20%.
Escoffier joins the partnership by contributing $150,000 to the partnership for a 25% interest in the
partnership. Assume the partnership’s identifiable net assets are carried at amounts approximating fair
value.
33. Topic: Admission of new partner by investment of new capital; bonus

LO 4
If the bonus approach is used, Escoffier’s capital balance is:
a. $136,500
b. $105,000
c. $142,500
d. $150,000
ANS: c
25% ($420,000 + $150,000) = $142,500

34. Topic: Admission of new partner by investment of new capital; bonus
LO 4
If the bonus approach is used, Houle’s capital balance after the admission of Escoffier is:
a. $223,500
b. $226,500
c. $232,000
d. $225,000
ANS: b
The $7,500 difference ($150,000 – $142,500) between the amount credited to Escoffier
and his contribution to the partnership is an increase to the existing partners' capital
accounts; Houle’s new balance is $225,000 + (20% x $7,500) = $226,500.
35. Topic: Admission of new partner by investment of new capital: goodwill

LO 4
If the goodwill approach is used to record the admission of Escoffier, goodwill will be recorded
on the books of the partnership in the amount of:
a. $75,000
b. $60,000
c. $45,000
d. $30,000
ANS: d
Total value implied by Escoffier’s investment = $150,000/0.25 = $600,000
Goodwill = $600,000 – ($420,000 + $150,000) = $30,000

LO 4
If the goodwill approach is used to record the admission of Escoffier, Gauthier’s capital balance
immediately after the addition of Escoffier is:
a. $88,500
b. $61,500
c. $75,000
d. $95,250
ANS: a
$75,000 + (45% x $30,000) = $88,500

LO 4
Now assume Escoffier paid $100,000 for a 25% interest in the partnership, and the goodwill
method of admission is used. Goodwill will be recorded on the partnership books in the amount
of:
a. $ 5,000
b. $50,000
c. $44,500
d. $40,000
ANS: d
Escoffier pays $100,000 for a ($420,000 + $100,000) x 25% = $130,000 share of
partnership net assets. The total value of the firm implied by existing capital =
$420,000/0.75 = $560,000. Escoffier’s share of total value is (25% x $560,000) =
$140,000. Therefore, goodwill = $140,000 – $100,000 = $40,000.
38. Topic: Admission of new partner

LO 4
Which of the following statements is false concerning a comparison of the bonus and goodwill
methods of recording admission of a new partner by investment of new capital?
a. The goodwill method will typically result in a larger total partnership capital than the
bonus method.
b. When the investment by the new partner exceeds that partner's share of the firm's total
capital, the existing partners will receive either a bonus or goodwill, depending on
whether the bonus or goodwill method is used.
c. Both the bonus and goodwill methods deal with the presence of unrecorded assets in
the new partnership, as indicated by the amount invested by the new partner.
d. While the bonus method recognizes a new basis of asset valuation when a new partner
invests assets in the partnership, the goodwill method does not.
ANS: d
39. Topic: Retirement of partner

LO 5
The Uniform Partnership Act uses what term to characterize a change in partnership ownership
whereby a partner leaves the partnership?
a. Retirement
b. Dissociation
c. Dissolution
d. Recapitalization
ANS: b

40. Topic: Retirement of partner: purchase with personal assets
LO 5
Partners in MNO Partnership have capital accounts and income-sharing percentages as follows:
Capital Balance Income Share

Partner M $160,000 20%
Partner N 400,000 50%
Partner O 140,000 30%
Totals $700,000 100%
Partners M and N buy Partner O’s interest for $210,000, using their personal assets. The
partners retain their relative income-sharing ratio.
After this transaction, Partner M’s capital balance is:
a. $188,000
b. $220,000
c. $200,000
d. $202,000
ANS: c
$160,000 + ($140,000 x 2/7) = $200,000
41. Topic: Retirement of partner: purchase with personal assets

LO 5
J, K and L have been partners for many years. L decides to retire and J and K acquire his
partnership interest for $160,000, using their personal assets. The partners' capital balances
before L's retirement and their income/loss sharing percentages are as follows:
Partner Capital Balance Income Share

J $ 50,000 20%
K 100,000 30%
L 125,000 50%
Totals $275,000 100%
Assuming J and K maintain their relative income sharing ratio, subsequent to L's departure, K's
capital balance will be:
a. $148,000
b. $175,000
c. $183,333
d. $196,000
ANS: b
$125,000 x 3/5 = $75,000 + $100,000 = $175,000

42. Topic: Retirement of partner: purchase with partnership assets
LO 5
A partnership has four partners. One partner retires, and is paid using partnership assets. The
payment made to a retiring partner:
a. Always equals the balance in the retiring partner’s capital account

b. Must be defined in the partnership agreement
c. Equals one fourth of total partnership net assets, unless the partnership agreement
states otherwise
d. Is defined by either the partnership agreement or as agreed at the time of retirement
ANS: d
43. Topic: Retirement of partner through purchase with partnership assets: bonus method
LO 5
Elander, Flodin and Gustafsson are partners providing engineering services. Relevant data
regarding income-sharing relationships and capital balances are as follows:

Elander $ 350,000 45%
Flodin 80,000 35%
Gustafsson 250,000 20%
Totals $ 680,000 100%
Gustafsson decides to retire and receives $200,000 in cash from the partnership.
If the bonus method is used to account for the retirement, Elander's capital balance subsequent
to Gustafsson's retirement is:
a. $372,500
b. $381,875
c. $378,125
d. $321,875
ANS: c
Elander's capital balance increases by (45%/80%) x $50,000 bonus to the remaining
partners, or $28,125.
$350,000 + $28,125 = $378,125

Use the following information to answer Questions 44 – 46.
Elander, Flodin and Gustafsson are partners providing engineering services. Relevant data regarding
income-sharing relationships and capital balances are as follows:

Elander $ 350,000 50%
Flodin 80,000 25%
Gustafsson 250,000 25%
Totals $ 680,000 100%
Flodin retires and receives $100,000 in cash from the partnership. Partnership net assets are recorded
at amounts approximating fair value.
44. Topic: Retirement of partner through purchase with partnership assets: partial goodwill
approach
LO 5
If the excess payment is attributed entirely to goodwill and the partial goodwill approach is
used, goodwill will be recognized at:
a. $ 80,000
b. $ 20,000
c. $100,000
d. $ 60,000
ANS: b
Goodwill = $100,000 – $80,000 = $20,000
45. Topic: Retirement of a partner through purchase with partnership assets: total goodwill
method
LO 5
If the excess payment is attributed entirely to goodwill, and the total goodwill approach is used,
Elander’s capital balance after Flodin's departure is:
a. $390,000
b. $403,333
c. $430,000
d. $410,667
ANS: a
$20,000/0.25 = $80,000 total goodwill
Elander’s share of goodwill = 50% x $80,000 = $40,000
$350,000 + $40,000 = $390,000

46. Topic: Retirement of a partner through purchase with partnership assets: partial goodwill
approach
LO 5
Using the partial goodwill approach, Gustafsson's capital balance, after Flodin's departure, is:
a. $270,000
b. $254,000
c. $250,000
d. $256,667
ANS: c
The goodwill is credited only to the retiring partner.
47. Topic: Retirement of a partner

LO 5
Dan, Evan and Flora are partners who share income in a 5:4:3 ratio. Each has a capital balance
of $150,000. Dan retires from the partnership and is paid $180,000. In recording the
retirement, no change was made to Evan's capital account.
Which method of recording the retirement was used?
a. Bonus
b. Partial goodwill
c. Total goodwill
d. Transfer of assets
ANS: b
48. Topic: Retirement of partner

LO 5
Mallory, who has a 40 percent interest in a partnership, retires and receives a settlement
payment that is $25,000 less than her capital balance.
Which of the following statements is correct?
a. Under the bonus method, the capital of the remaining partners will increase.
b. Under the partial goodwill method, partnership assets will be written up by $25,000.
c. Under the total goodwill method, partnership assets will be written down by $25,000.
d. Under the bonus, partial goodwill, and total goodwill methods, the capital of the
remaining partners will change.
ANS: a

49. Topic: Partnership liquidation
LO 6
In a partnership liquidation, when a partner has a capital deficiency, the right of offset:
a. Allows the partner to invest personal assets to bring the capital balance to zero
b. Reclassifies a partnership loan payable to the partner as part of her capital balance
c. Requires all the other partners to have positive capital balances, to absorb the partner’s
capital deficiency
d. Allows the partner to neutralize the deficiency using previously invested personal assets
ANS: b

LO 6
If an individual partner is insolvent and the partnership is being liquidated, a creditor may
petition the court to specify that any partnership payments to which the individual partner
becomes entitled shall be made to the creditor.
This specification is called:
a. A charging order
b. Foreclosure
c. The rule of dual priorities
d. The right of offset
ANS: a

LO 6
Which statement is true concerning the safe payment and cash distribution plan approaches to
liquidation?
a. Both approaches are used in simple liquidations.

b. The safe payment approach determines how the current available cash is distributed,
but not future payments.
c. The safe payment approach is more conservative than the cash distribution plan.
d. The safe payment approach uses the right of offset, but the cash distribution plan does
not.
ANS: b

52. Topic: Partnership simple liquidation
LO 6
Attah and Boro are partners who share income in a 2:3 ratio, and have capital balances of
$150,000 and $180,000 respectively. Book value of total assets is $500,000. Sale of all assets
results in total available cash of $440,000.
The amount to be distributed to Attah upon liquidation is:
a. $150,000
b. $176,000
c. $132,000
d. $126,000
ANS: d
Loss on asset sale = $440,000 – $500,000 = $60,000
Capital balances:
Attah Boro
Prior balance $150,000 $180,000
Allocation of $60,000 loss (24,000) (36,000)
Balance $126,000 $144,000
53. Topic: Partnership simple liquidation

LO 6
Cisse and Diallo are partners who share income in a 2:3 ratio, and have capital balances of
$50,000 and $120,000 respectively. Book value of total assets is $300,000. Sale of all assets
results in total available cash of $160,000.
Assuming no further investment by either partner, the amount to be distributed to Diallo upon
liquidation is:
a. $160,000
b. $ 36,000
c. $ 30,000
d. $ 24,000
ANS: c
Loss on asset sale = $160,000 – $300,000 = $140,000
Capital balances:
Cisse Diallo
Prior balance $ 50,000 $120,000
Allocation of $140,000 loss (56,000) (84,000)
Balance (6,000) 36,000
Allocate Cisse’s deficiency 6,000 (6,000)
Balance $ 0 $ 30,000

Use the following information to answer Questions 54 and 55.
The balance sheet of the XYZ Partnership appears as follows:
Cash $ 40,000 Loan payable—Z $ 20,000

Loan receivable—X 30,000 Other liabilities 110,000
Other assets 450,000 Capital:
X 50,000
Y 260,000
______ Z 80,000
Total $520,000 Total $520,000
The partners share income in a 2:5:3 ratio. The other assets are sold for $150,000, and no other capital
is contributed by any of the partners.
54. Topic: Partnership liquidation: cash distribution

LO 6
How much total cash will be distributed to partner X?
a. $-0-
b. $10,000
c. $30,000
d. $50,000
ANS: a
55. Topic: Partnership liquidation: cash distribution

LO 6
How much total cash will be distributed to partner Y?
a. $-0-
b. $40,000
c. $80,000
d. $85,000
ANS: c
Notes for Questions 54 and 55:

Capital balances:
X Y Z
Prior balance $ 50,000 $ 260,000 $ 80,000
Allocation of $300,000 loss (60,000) (150,000) (90,000)
Offset loan receivable from X and loan payable to Z (30,000) ______ 20,000
Balance (40,000) 110,000 10,000
Allocate X's deficiency 40,000 (25,000) (15,000)
Balance 0 85,000 (5,000)
Allocate Z's deficiency ______ (5,000) 5,000
$ 0 $ 80,000 $ 0

56. Topic: Partnership liquidation: safe payment
LO 6
The ST partnership is undergoing an installment liquidation. S and T share income in a 2:3 ratio,
and have current capital balances of $140,000 and $180,000, respectively. $50,000 in cash is
available for distribution.
Assuming all liabilities have been paid, what is the amount of the safe payment to partner S?
a. $-0-
b. $20,000
c. $32,000
d. $38,000
ANS: c
Capital balances:
S T
Prior balance $140,000 $180,000
Assume $270,000 loss on remaining assets (108,000) (162,000)
Cash distribution $ 32,000 $ 18,000

LO 6
The UV partnership is undergoing an installment liquidation. U and V share income in a 3:2
ratio, and have current capital balances of $120,000 and $130,000, respectively. $25,000 in cash
is available for distribution.
Assuming all liabilities have been paid, what is the amount of the safe payment to partner U?
a. $-0-
b. $15,000
c. $25,000
d. $ 5,000
ANS: a
U V
Prior balance $120,000 $130,000
Assume $225,000 loss on remaining assets (135,000) (90,000)
Balance (15,000) 40,000
Deficiency offset 15,000 (15,000)
Cash distribution $ 0 $ 25,000

LO 6
The FGH Partnership has the following balance sheet:
Cash $ 10,000 Accounts payable $ 20,000

Inventory 25,000 Bank loan payable 80,000
Facilities, net 365,000 Capital:
F 60,000
G 120,000
______ H 120,000
Total $400,000 Total $400,000
The partners share income equally. The inventory is sold for $19,000 and facilities with a book
value of $200,000 are sold for $125,000.
What is the amount of the safe payment to partner G?
a. $48,000
b. $27,000
c. $36,000
d. $54,000
ANS: b
Cash available for distribution to the partners is $10,000 + $19,000 + $125,000 –
$20,000 – $80,000 = $54,000.
Capital balances:
F G H
Prior balance $ 60,000 $120,000 $120,000
Loss on inventory (total $6,000) (2,000) (2,000) (2,000)
Loss on facilities (total $75,000) (25,000) (25,000) (25,000)
Balance 33,000 93,000 93,000
Assume $165,000 loss on remaining facilities (55,000) (55,000) (55,000)
Balance (22,000) 38,000 38,000
Deficiency offset 22,000 (11,000) (11,000)
Cash distribution $ 0 $ 27,000 $ 27,000

59. Topic: Partnership liquidation: cash distribution plan
LO 6
The DE partnership is undergoing an installment liquidation. Partners D and E share income in a
3:2 ratio and have current capital balances of $60,000 and $80,000, respectively. No loans are
receivable from or payable to partners.
After outside creditors are paid, if $50,000 in cash becomes available for distribution to the
partners, how is it distributed?
a. $50,000 to D; $-0- to E
b. $30,000 to D; $20,000 to E
c. $6,000 to D; $44,000 to E
d. $12,000 to D; $38,000 to E
ANS: c
D E
Capital balances $ 60,000 $ 80,000
Standardize 100,000 200,000
Equalize ______ (100,000)
100,000 100,000
Conversion -- $ 40,000
Plan: First $40,000 to E. Remaining to D and E in 3:2 ratio.

Distribution of $50,000:
D = $10,000 x 3/5 = $6,000; E = $40,000 + ($10,000 x 2/5) = $44,000

LO 6
The FGH Partnership has the following balance sheet:

Inventory 25,000 Bank loan payable 80,000
Facilities, net 365,000 Capital:
F 60,000
G 120,000
_______ H 120,000
Total $400,000 Total $400,000
The partners share income equally. In liquidation, what total amount must be distributed to G
and H before F receives a distribution?
a. $240,000
b. $800,000
c. $360,000
d. $120,000

ANS: d
F G H
Capital $ 60,000 $ 120,000 $ 120,000
Standardize 180,000 360,000 360,000
Equalize ______ (180,000) (180,000)
Balance 180,000 180,000 180,000
Conversion $ 60,000 $ 60,000
Plan: First $120,000 to G and H in a 1:1 ratio.

Remainder equally to F, G and H.
The STU partnership is undergoing an installment liquidation. Partners S, T, and U share income in a
4:3:3 ratio. The partnership balance sheet is as follows:

Accounts receivable 10,000 Loan payable—T 50,000
Loan receivable—S 15,000 Capital:
Inventory 25,000 S 100,000
Buildings and equipment, net 545,000 T 250,000
______ U 180,000
Total $600,000 Total $600,000
You are preparing a cash distribution plan for the partnership.

LO 6
What is the first distribution step?
a. First $400,000 to T
b. First $120,000 to T
c. First $180,000 to U
d. First $36,000 to U
ANS: b

LO 6
What is the second distribution step?
a. Second $232,500 to T and U in a 1:1 ratio

b. Second $212,500 to T and U in a 1:1 ratio
c. Second $600,000 to T and U in a 1:1 ratio
d. Second $100,000 to S and T in a 4:3 ratio
ANS: a

LO 6
Cash is distributed to S, T and U in the income-sharing ratio only after distribution of how much
cash?
a. $262,500
b. $120,000
c. $352,500
d. $600,000
ANS: c
Notes for Questions 61-63:

Capital balances:
S T U
Capital, net of loan receivable/payable $ 85,000 $ 300,000 $ 180,000
Standardize 212,500 1,000,000 600,000
Equalize _______ (400,000) ________
Balance 212,500 600,000 600,000
Equalize _______ (387,500) (387,500)
Balance $ 212,500 $ 212,500 $ 212,500
Conversion $ 120,000
$ 116,250 $ 116,250
Plan: First $120,000 to T.

Next $232,500 to T and U in 1:1 ratio.
Remainder to S, T and U in a 4:3:3 ratio.

PROBLEMS
1. Topic: Tax consequences of MLP investments

LO 1
At the beginning of 2017, an investor purchased 10,000 exchange-traded units of Comanche
Petroleum Company, which is organized as a Master Limited Partnership. The investment cost
$250,000. Per unit allocations of taxable income and cash distributions for 2017 and 2018 take
place at the end of each year, as follows:
2017 2018
Taxable income $0.50 $0.75
Cash distributions 1.75 1.90
The taxable income is taxed at the investor’s personal tax rate, while the excess cash
distribution reduces the basis of the investment. At the time of sale, the basis reduction is taxed
at the investor’s personal rate, while the remaining gain is taxed at the capital gains rate. The
investor’s personal marginal tax rate is 35%, and the capital gains rate is 15%. The investor sells
the investment for $300,000 at the end of 2018.
Required
a. Prepare a schedule of the total after-tax cash distribution for the investment, for 2017
and 2018.
b. Calculate the amount of taxes the investor owes related to the sale of the investment at
the end of 2018.
ANS:
a.
2017 2018
Cash distribution (10,000 x per unit cash distribution) $17,500 $19,000
Tax on taxable income (10,000 x per unit taxable
income x 35%) (1,750) (2,625)
Net cash return $15,750 $16,375
b. Calculation of basis:
Original cost $ 250,000

Less 2017 excess cash distribution = ($1.75 – $0.50) x 10,000 = (12,500)
Less 2018 excess cash distribution = ($1.90 – $0.75) x 10,000 = (11,500)
Basis $ 226,000
Selling price $ 300,000

Basis (226,000)
Gain $ 74,000
Calculation of tax on gain:

Gain taxed at personal rate: ($12,500 + $11,500) x 35% = $ 8,400
Gain taxed at capital gains rate: ($74,000 – $24,000) x 15% = 7,500
Total tax on gain $ 15,900

LO 2
Jagan and Kalap formed a partnership. Jagan contributed $225,000 in cash. Kalap contributed
assets having the following fair market values:
 Merchandise, $200,000
 Building, $300,000
 Equipment, $100,000
The partnership assumed a mortgage of $75,000 on the building.
Required
Prepare the entry to record the formation of the partnership, under each of the following
methods:
a. Capital accounts are set equal to net assets invested.

b. The partners have an equal interest in the initial total partnership capital, and the bonus
method is used.
c. The partners have an equal interest in the initial total partnership capital, and the
goodwill method is used.
ANS:
a.
Cash 225,000
Merchandise 200,000
Building 300,000
Equipment 100,000
Capital—Jagan 225,000
Capital—Kalap 525,000
b.
Cash 225,000
Merchandise 200,000
Building 300,000
Equipment 100,000
Capital—Jagan 375,000
Capital—Kalap 375,000

c. Jagan contributes $225,000 while Kalap contributes $525,000. Therefore, Jagan
contributes $525,000 – $225,000 = $300,000 of goodwill.
Cash 225,000
Merchandise 200,000
Building 300,000
Equipment 100,000
Goodwill 300,000
Capital, Jagan 525,000
Capital, Kalap 525,000

LO 2
Akashi, Bin, Chion and Daigo form a partnership in which they will share capital in a 1:3:4:2 ratio.
The fair value of net assets invested by each partner is as follows:
Akashi $400,000
Bin 500,000
Chion 600,000
Daigo 300,000
Required
Calculate the balance in each partner’s capital account at the formation of the partnership
using:
a. The bonus approach
b. The goodwill approach
ANS:
a. Total fair value of net assets contributed = $400,000 + $500,000 + $600,000 + $300,000
= $1,800,000
Capital Balance
Akashi 10% x $1,800,000 $ 180,000
Bin 30% x $1,800,000 540,000
Chion 40% x $1,800,000 720,000
Daigo 20% x $1,800,000 360,000
Total $1,800,000
b. Akashi contributes $400,000 for a 10% interest, so the total value of the partnership is
$400,000/0.1 = $4,000,000.
Capital Balance
Akashi 10% x $4,000,000 $ 400,000
Bin 30% x $4,000,000 1,200,000
Chion 40% x $4,000,000 1,600,000
Daigo 20% x $4,000,000 800,000
Total $4,000,000

LO 2
Renata is the sole proprietor of a company with the following balance sheet:
Assets Liabilities
Inventory 300,000 Notes payable 55,000
Buildings and equipment 600,000 Total liabilities 155,000
________ Owners’ equity 860,000
Total assets $1,015,000
Total liabilities and equity $1,015,000
The cash and inventory are carried at fair value, and the buildings and equipment have a fair
value of $640,000.
Renata enters into a partnership with Santiago. Renata contributes her company, and the
partnership assumes the accounts payable and notes payable. Santiago contributes cash of
$270,000. The partners agree to share capital and profits in a 2:1 ratio.
Required
Prepare the balance sheet of the partnership at the date of formation using:

ANS:
a. Total fair value of net assets contributed are:
Renata: $115,000 + $300,000 + $640,000 – $100,000 – $55,000 = $900,000

Santiago: $270,000
Total = $1,170,000
Renata’s capital balance = $1,170,000 x 2/3 = $780,000

Santiago’s capital balance = $1,170,000 x 1/3 = $390,000
Partnership balance sheet:
Assets Liabilities
Capital
Capital—Renata 780,000
Capital—Santiago 390,000
________ Total capital 1,170,000
Total liabilities and capital $1,325,000

b. Renata’s $900,000 contribution implies a total partnership fair value of $900,000/(2/3) =
$1,350,000. Therefore total goodwill is $1,350,000 – $1,170,000 = $180,000.
Renata’s capital balance = $1,350,000 x 2/3 = $900,000

Santiago’s capital balance = $1,350,000 x 1/3 = $450,000
Partnership balance sheet:
Assets Liabilities
Goodwill 180,000 Capital
Capital—Renata 900,000
Capital—Santiago 450,000
________ Total capital 1,350,000

LO 3
Reyes and Salazar are partners in RS Services. At the beginning of 2017, their capital balances
were $200,000 and $275,000, respectively. The partnership agreement specifies that Reyes
receives a salary of $45,000 for the year, and Salazar receives a salary of $60,000. Salaries are
fully implemented. Any remaining income is allocated in a 3:1 ratio. Reyes and Salazar each
withdraw their salary in cash during the year, and there are no other investments or
withdrawals.
Required
a. Compute the balance of each partner’s capital account at the end of 2017, assuming
2017 partnership income of $200,000.
b. Compute the balance of each partner’s capital account at the end of 2017, assuming
2017 partnership income of $90,000.
ANS:
a.
Reyes Salazar
Beginning capital balance $200,000 $275,000
Salary 45,000 60,000
Withdrawal of salary (45,000) (60,000)
Profit distribution ($200,000 – $105,000), allocated 3:1 71,250 23,750
Ending capital balance $271,250 $298,750
b.
Reyes Salazar
Beginning capital balance $200,000 $275,000
Salary 45,000 60,000
Withdrawal of salary (45,000) (60,000)
Loss distribution ($105,000 – $90,000), allocated 3:1 (11,250) (3,750)
Ending capital balance $188,750 $271,250

LO 3
Santos and Torres are partners in ST Grocery. Their partnership agreement specifies that they
share income in a 1:4 ratio after each partner receives 20 percent interest on weighted average
capital. Their capital transactions for the year 2018 are summarized as follows:
Santos Torres
Capital, January 1 $100,000 $250,000
Investment, April 1 -- 25,000
Withdrawal, July 1 (10,000) (41,000)
Investment, September 1 35,000 --
Investment, November 1 -- 18,000
Withdrawal, December 1 (5,000) (12,000)
Capital, December 31 $120,000 $250,000
Partnership income of ST Grocery for 2018 was $160,000.
Required
Determine the allocation of partnership income between Santos and Torres.
ANS:
Weighted average capital calculation:
Santos: $100,000(6/12) + $90,000(2/12) + $125,000(3/12) + $120,000(1/12) = $106,250
Torres: $250,000(3/12) + $275,000(3/12) + $234,000(4/12) + $252,000(1/12) +
$240,000(1/12) = $250,250
Allocation of income:
Santos Torres
Interest (20% x weighted average capital) $21,250 $50,050
Income distribution ($160,000 - $71,300) in 1:4 ratio 17,740 70,960
Total $38,990 $121,010

LO 3
Stanton, Thorn and Underwood are partners in STU Associates. The partnership agreement of
STU Associates provides that income be allocated in the following manner:
1. Each partner receives interest of 10% of beginning capital.

2. Stanton receives an annual salary of $45,000 and Thorn receives an annual salary of
$35,000.
3. Underwood receives a bonus of 25% of partnership income after deducting interest,
salaries and bonus.
4. Any remaining income is shared in a 4:3:3 ratio.
5. All provisions are to be fully implemented.
The partnership income for the year was $200,000. Beginning capital balances are: Stanton
$130,000; Thorn $80,000; Underwood $65,000.
Required
Determine the allocation of partnership income among the partners.

ANS:
Stanton Thorn Underwood
Interest $13,000 $ 8,000 $ 6,500
Salary 45,000 35,000
Bonus (1) -- -- 18,500
Balance 29,600 22,200 22,200
Total $87,600 $65,200 $47,200
(1) Calculation of bonus:

B = Bonus to Underwood
B = ($200,000 – $13,000 – $8,000 – $6,500 – $45,000 – $35,000 – B) x 25%
B = $23,125 – 0.25B
B = $18,500

LO 3
Novarro and Ocampo are partners in NO Services. The partnership agreement specifies the
following income sharing provisions:
1. Novarro receives an annual salary of $100,000 and Ocampo receives an annual salary of
$75,000.
2. Each partner receives 10% interest on average capital investment.
3. Remaining income is allocated in a 1:4 ratio.
4. All provisions are fully implemented.
Average capital investment for the year is $300,000 for Novarro and $450,000 for Ocampo.
Required
a. Prepare a schedule to allocate partnership income of $270,000.
b. Prepare a schedule to allocate partnership income of $150,000.
c. Suppose that in addition to the above income allocation provisions, Novarro receives a
bonus of 25% of profit after the bonus but before other allocation provisions. Prepare a
schedule to allocate partnership income of $320,000.
ANS:
a.
Novarro Ocampo
Salary $ 100,000 $ 75,000
Interest on capital 30,000 45,000
Residual income 4,000 16,000
Total $ 134,000 $ 136,000
b.
Novarro Ocampo
Salary $ 100,000 $ 75,000
Residual loss (20,000) (80,000)
Total $ 110,000 $ 40,000

c.
Novarro Ocampo
Salary $ 100,000 $ 75,000
Bonus (1) 64,000 --
Residual income 1,200 4,800
Total $ 195,200 $ 124,800
(1) B = Bonus
B = 25% x ($320,000 – B)
B = 80,000 – 0.25B
B = $64,000
9. Topic: Admission of a new partner by purchase of existing partnership interest

LO 4
Jacobus and Kumalo are partners in JK Construction Services. Their capital accounts are
currently as follows:
Jacobus $460,000
Kumalo 340,000
Jacobus and Kumalo share income equally. Lotter purchases a 35 percent interest in the
partnership by paying Jacobus and Kumalo a total of $367,500 for 35 percent of each of their
interests in the partnership.
Required
Record the addition of Lotter to the partnership, using:
a. The transfer of capital interests method
b. The implied goodwill method
ANS:
a.
Capital—Jacobus 161,000
Capital—Kumalo 119,000
Capital—Lotter 280,000
b.
Goodwill (1) 250,000
Capital—Lotter 367,500
(1) Calculation of goodwill: $367,500/.35 = $1,050,000 - $800,000 = $250,000

10. Topic: Admission of a new partner by investment of new capital
LO 4
Diaz and Evans are partners in DE Delivery Services. The partners share income in a 3:7 ratio.
Diaz has a capital balance of $340,000 and Evans has a capital balance of $425,000. The
partnership’s identifiable net assets are carried at amounts approximating fair value, except for
customer lists, valued at $85,000, which are not recorded. Foster is to be admitted as a new
partner, investing cash of $210,000 in the partnership and receiving a 15 percent interest in
capital and income.
Required
Record Foster’s admission, using:
ANS:
a. Foster’s share of partnership net assets is 15% x ($765,000 + $210,000) = $146,250
Entry:
Cash 210,000
Capital—Diaz 19,125
Capital—Evans 44,625
Capital—Foster 146,250
b. $210,000/0.15 = $1,400,000 – $975,000 = $425,000
Entry:
Cash 210,000
Customer lists 85,000
Goodwill 340,000
Capital—Diaz 127,500
Capital—Evans 297,500
Capital—Foster 210,000

LO 4
Rahal and Saliba are partners who share income in a 1:4 ratio. Total partnership capital is
$366,000. Touma is to be admitted as a new partner, investing $100,000 in the partnership and
receiving a 25% interest in capital and income.
Required
Record Touma’s admission, using:

ANS:
a. Touma’s share of partnership net assets is 25% x ($366,000 + $100,000) = $116,500
Entry:
Cash 100,000
Capital—Rahal 3,300
Capital—Saliba 13,200
Capital—Touma 116,500
b. $366,000/0.75 = $488,000 x 25% = $122,000
Entry:
Cash 100,000
Goodwill 22,000
Capital—Touma 122,000

LO 4
Bava and Char are partners in BC Enterprises, providing systems support to small companies.
The partners share income in a 3:1 ratio. The partnership balance sheet is as follows:
Assets Liabilities
Supplies 45,000 Notes payable 175,000
Facilities, net 460,000 Total liabilities 215,000
Capital
Capital—Bava 200,000
Capital—Char 155,000
______ Total capital 355,000
Total assets $570,000 Total liabilities and capital $570,000
Dey is to be admitted as a new partner, investing $20,000 in cash and equipment with a fair
value of $80,000 in the partnership, and receiving a 10 percent interest in capital and income.
Appraisal of partnership net assets reveals that current facilities have a fair value of $500,000
and there are unreported identifiable intangible assets of $75,000.
Required
Prepare the partnership balance sheet following Dey’s admission to the partnership, using:

ANS:
a. Dey’s share of partnership net assets is 10% x ($355,000 + $100,000) = $45,500
The entry to record Dey’s admission is:

Cash 20,000
Facilities, net 80,000
Capital—Dey 45,500
The partnership balance sheet is:

Assets Liabilities
Capital
_______ Total capital 455,000
Total assets $670,000 Total liabilities and capital $670,000
b. $100,000/0.10 = $1,000,000
Net assets are understated by $1,000,000 – ($355,000 + $100,000) = $545,000
The entry to record Dey’s admission is:

Cash 20,000
Facilities, net (1) 120,000
Identifiable intangibles 75,000
Goodwill 430,000
(1) $40,000 revaluation of current facilities plus $80,000 equipment contributed by Dey.
The partnership balance sheet is:

Assets Liabilities
Goodwill 430,000 Capital
________ Total capital 1,000,000

13. Topic: Retirement of a partner using partnership assets
LO 5
Nazarov, Osin and Panarin are partners with capital accounts of $350,000, $225,000 and
$175,000 respectively. Income is shared in a 4:3:3 ratio. Panarin resigns from the partnership,
and receives $217,000 in partnership cash. All partnership net assets are currently reported at
fair value.
Required
Record Panarin’s resignation on the partnership books, using:
a. The bonus method
b. The partial goodwill approach
c. The total goodwill approach
ANS:
a.
Capital—Nazarov 24,000
Capital—Osin 18,000
Capital—Panarin 42,000
Cash 217,000
b.
Goodwill 42,000
Cash 217,000
c. ($217,000 – $175,000)/0.3 = $140,000
Goodwill 140,000
Capital—Nazarov 56,000
Capital—Osin 42,000
Cash 217,000

LO 5
Harry, Issie, and Jake are partners who share income in a 6:4:2 ratio. Jake, whose capital
balance is $40,000, retires from the partnership, and receives partnership assets.
Required
Determine the amount paid to Jake under each of the following assumptions:
a. The partial goodwill approach is used and $15,000 of goodwill is recorded.
b. The bonus method is used and Issie's capital account is reduced by $20,000.
c. The total goodwill approach is used, and Harry's capital account increases by $30,000.
ANS:
a. $40,000 + $15,000 = $55,000
b. $20,000/0.4 = $50,000 + $40,000 = $90,000
c. $30,000/0.5 = $60,000 x 2/12 = $10,000 + $40,000 = $50,000
15. Topic: Retirement of a partner

LO 5
Mori, Nakamura and Ochi have interests in MNO Partnership. The partners have capital
balances of $130,000, $150,000, and $200,000 respectively, and share income in a 2:3:5 ratio.
Required
Record the entry or entries needed under each of the following circumstances:
a. Nakamura and Ochi buy Mori’s interest using $186,000 of their personal cash.
Nakamura and Ochi retain the same income-sharing relationship as before.
b. Nakamura and Ochi buy Mori’s interest using $186,000 of partnership cash. Nakamura
and Ochi retain the same income-sharing relationship as before. The bonus method is
used.
c. Nakamura and Ochi buy Mori’s interest by transferring ownership of partnership
equipment valued at $186,000. The equipment is currently reported on the partnership
books at $140,000. The total goodwill approach is used, and the partnership’s other net
assets are reported at amounts approximating fair value, except that the partnership
has unreported identifiable intangible assets valued at $50,000.
ANS:
a.
Capital—Mori 130,000
Capital—Nakamura 48,750
Capital—Ochi 81,250
b.
Capital—Ochi 35,000
Cash 186,000

c. Adjust the equipment to fair value:
Equipment, net 46,000

Capital—Oshi 23,000
Mori’s capital account balance is now $130,000 + $9,200 = $139,200

($186,000 – $139,200)/0.2 = $234,000

Goodwill 184,000
Capital—Oshi 117,000
Equipment, net 186,000

LO 5
Norman, Olivia and Patty are partners with capital accounts of $400,000, $650,000 and
$200,000 respectively. Income is shared in a 1:3:1 ratio. Norman resigns from the partnership,
and receives $350,000 in partnership cash.
Required
Record Norman’s resignation on the partnership books, under each of the following
assumptions:
a. The bonus method is used.
b. The partial goodwill approach is used, and partnership buildings and equipment are
determined to be overvalued by $250,000.
c. The total goodwill approach is used, and partnership buildings and equipment are
determined to be overvalued by $250,000.
ANS:
a.
Capital—Norman 50,000
Capital—Olivia 37,500
Capital—Patty 12,500
Cash 350,000

b.
Buildings and equipment, net 50,000
Cash 350,000
c.
Capital—Olivia 150,000
Capital—Patty 50,000
Buildings and equipment, net 250,000
Cash 350,000
17. Topic: Simple partnership liquidation

LO 6
The balance sheet of the ABC Partnership, which is being liquidated, is as shown:

Receivables 40,000 Bank loan payable 100,000
Inventory 60,000 Capital:
Plant and equipment, net 275,000 A 35,000
B 85,000
_______ C 100,000
Total $400,000 Total $400,000
The partners share income in a 1:4:5 ratio. The receivables yield $25,000 in cash. The inventory
and plant and equipment are sold for $260,000.
Required
Determine the proper distribution of the available cash to the creditors and the partners.
ANS:
A B C
Capital balances $ 35,000 $ 85,000 $ 100,000
Loss on receivables (1,500) (6,000) (7,500)
Loss on inventory and plant (7,500) (30,000) (37,500)
Cash distribution $ 26,000 $ 49,000 $ 55,000
Final cash distribution:
Creditors $180,000
A 26,000
B 49,000
C 55,000
Total $310,000

18. Topic: Simple partnership liquidation
LO 6
The balance sheet of JKL Partnership prior to liquidation is as follows:
Loan receivable—J $ 50,000 Loan payable-L $ 70,000

Other assets 200,000 Other liabilities 40,000
Capital—J 30,000
Capital—K 20,000
_______ Capital—L 90,000
Total $250,000 Total $250,000
J, K, and L share income in a 2:2:4 ratio. The partners are unable to make any additional
investments in the partnership. The other assets are sold for $80,000 in cash.
Required
Determine the proper distribution of the $80,000 in available cash.
ANS:
J K L
Capital balances $ 30,000 $ 20,000 $ 90,000
Offset loan payable/receivable (50,000) -- 70,000
Balance (20,000) 20,000 160,000
Loss on asset sale (30,000) (30,000) (60,000)
Balance (50,000) (10,000) 100,000
Allocate deficiencies 50,000 10,000 (60,000)
Cash distribution $ 0 $ 0 $ 40,000
Final cash distribution:
Creditors $40,000
L 40,000
Total $80,000

LO 6
MNO Enterprises, a partnership, is about to begin liquidation. It is anticipated that the process
of selling the company's assets will occur over time. However, the partners would like to receive
cash distributions as asset sales occur. The company's books show total assets of $1,000,000.
Capital accounts and income sharing percentages are as follows:
Capital Balance Income Share

Maya Smith $200,000 40%
Norton Johnson 100,000 10%
Oswald Brown 90,000 50%
Total $390,000 100%
Required
a. What is the balance of the partnership liabilities?
b. Prepare a cash distribution plan.

ANS:
a. $1,000,000 – $390,000 = $610,000
b.
Maya Norton Olivia
Capital balance $ 200,000 $ 100,000 $ 90,000
Standardized capital 500,000 1,000,000 180,000
Equalize -- (500,000) --
Balance 500,000 500,000 180,000
Equalize (320,000) (320,000) --
Balance $ 180,000 $ 180,000 $180,000
Conversion: $ 50,000
$ 128,000 $ 32,000
Cash distribution plan:
Distribution Amount Paid To:

1 $610,000 Creditors
2 50,000 Norton
3 160,000 Maya and Norton in 4:1 ratio
4 Remaining All partners in 4:1:5 ratio

LO 6
The partnership of Clark, Davis, and Evans has a balance sheet as follows:
Cash $ 50,000 Loan payable to Davis $ 80,000

Inventory 100,000 Other liabilities 400,000
Equipment 500,000 Capital—Clark 120,000
Other assets 300,000 Capital—Davis 180,000
_______ Capital—Evans 170,000
$ 950,000 $ 950,000
The partners share income in a 3:1:1 ratio. The partnership is in the process of liquidation.
Required
a. Prepare a cash distribution plan.
b. Assume all available cash is to be distributed to the partners as it becomes available.
The inventory is sold for $65,000 and the equipment is sold for $485,000. How much
cash is distributed to each partner?
c. Now assume the distribution in b. is made according to plan. Evans receives other
assets with a book value of $150,000 and fair value of $80,000 as a distribution. Then
the partnership receives $100,000 from the sale of other assets with a book value of
$120,000. How should the $100,000 be distributed among the partners?

ANS:
a.
Clark Davis Evans
Capital & loan $ 120,000 $ 260,000 $ 170,000
Standardize 200,000 1,300,000 850,000
Equalize -- (450,000) --
Balance 200,000 850,000 850,000
Equalize -- (650,000) (650,000)
Balance $ 200,000 $ 200,000 $ 200,000
Conversion: $ 90,000
$ 130,000 $ 130,000
Cash distribution plan:
Distribution Amount Paid to

1 $400,000 Creditors
2 $ 90,000 Davis
3 $260,000 Davis and Evans in a 1:1 ratio
4 Remaining Clark, Davis and Evans in a 3:1:1 ratio
b. Total cash available = $50,000 + $65,000 + $485,000 = $600,000. Creditors are paid
$400,000, leaving $200,000 to distribute to partners. The distribution is as follows:
Clark Davis Evans

Distribution 2 to Davis $ 90,000
Distribution 3 to Davis and Evans in a 1:1 ratio _____ 55,000 $ 55,000
Total $ 0 $145,000 $ 55,000
c. Since Evans received $80,000 before distribution 3 has been completed, Davis must
receive the rest of distribution 3 and Clark and Davis must receive a cash distribution in
distribution 4 to bring them even with Evans, before Evans receives additional cash
distributions.
Clark Davis Evans

Rest of distribution 3 to Davis $75,000
Distribution 4 to Clark and Davis in 3:1 ratio $15,000 5,000
Distribution 4 to Clark, Davis, and Evans in a
3:1:1 ratio 3,000 1,000 $1,000
Total $18,000 $81,000 $1,000


Test Bank Partnership Accounting and Reporting Multiple Choice 1. Topic: Partnership Characteristics LO1

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Test Bank Partnership Accounting and Reporting Multiple Choice 1. Topic: Partnership Characteristics LO1

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TEST BANK

1. Topic: Partnership characteristics

a. A partner has the right to participate in management, but is not a co-owner of

2. Topic: Partnership characteristics

a. Each partner has personal liability for partnership obligations.

3. Topic: Partnership characteristics

a. Limited liability corporations

©Cambridge Business Publishers, 2016

5. Topic: Limited partnerships

a. Cannot share in partnership profits

6. Topic: Relations among partners

7. Topic: Relations among partners

a. In proportion to their initial capital investment

©Cambridge Business Publishers, 2016

9. Topic: Limited partnerships

a. There has to be at least one general partner.

10. Topic: Limited partnerships

a. Corporations can be owners.

11. Topic: Limited partnerships

a. Its income must come mostly from tech-related services.

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a. A reduction in his or her capital account

13. Topic: Measuring partnership income

14. Topic: Consolidation of partnerships

a. Owns the majority of partnership shares

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15. Topic: Partnership formation

a. A credit to Casper’s capital account for $650,000

16. Topic: Partnership formation, bonus method

©Cambridge Business Publishers, 2016

18. Topic: Formation of a partnership

19. Topic: Partnership income allocation

a. Partnership income after salaries and interest are deducted

©Cambridge Business Publishers, 2016

21. Topic: Partnership income

22. Topic: Partnership income allocation

Salaries are to be fully implemented. Partnership income allocated to Zhuo is:

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Partnership income allocated to Zhuo is:

24. Topic: Partnership income allocation

Kang's bonus for the year is:

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The total income allocation to Byun is:

26. Topic: Partnership income allocation

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Use the following information to answer Questions 28-31.

28. Topic: Admission of new partner by purchasing existing interest

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30. Topic: Admission of new partner by purchasing existing interest

31. Topic: Admission of new partner by purchasing existing interest

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Use the following information to answer Questions 33-37.

The capital balances of the FGH Partnership are as follows:

33. Topic: Admission of new partner by investment of new capital; bonus

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35. Topic: Admission of new partner by investment of new capital: goodwill

36. Topic: Admission of new partner by investment of new capital: goodwill

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38. Topic: Admission of new partner

39. Topic: Retirement of partner

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Capital Balance Income Share

After this transaction, Partner M’s capital balance is: