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ch07 Lecture Notes 1
ch07 Lecture Notes 1
CHAPTER 7
PARTNERSHIP FORMATION, OPERATION,
AND CHANGE IN OWNERSHIP
SUMMARY OF ITEMS BY TOPIC
Conceptual Computational
True- Multiple Multiple Short
False Choice Choice Problems Answer
Contrasting partnerships, 1-15 107-112 333-336
proprietorships, and
corporations
Equity theories applied to 16-21 113-115 337-338
partnerships
Articles of partnership 22-25 116-117
Initial capital 26-28 118-119 275-277 339-340
contributions
Carrying value assigned 29-30 120 169 275-276
noncash assets
Tax basis assigned 31-33 121 276
noncash assets
Market value assigned 34-36 122 277
noncash assets
Liabilities assumed by 37-40 123 170 278 341
partnership
Partnership formation, 41-47, 124-126 171-173 279-280 342-343
bonus method 49
Partnership formation, 41-44, 127-129 174-176 281-282 344-345
goodwill method 48-50
Drawing accounts 51-53 130-132 346
Sharing profits and losses 54-55 133 347
Interest on capital 56-59 134, 136 177-178, 185, 283-284, 348-349
balances portion of profit 187 288-289
and loss allocation
Salary portion of profit 60-62 135, 137 185-186 288-289 350
and loss allocation
Bonus portion of profit 63-65 138-139 179-181, 185 285-286, 351
and loss allocation 288-289
Residual ratio portion of 66-71 140-142 182-187 287-289 352-353
profit and loss allocation
Unrealized holding gains 72-74 143-144 188-205 290-295, 354-355
and losses 297
True-False Statements
1. A partnership is an association of two or more investors to carry on as co-owners a
business for profit.
3. Proprietorships and partnerships are similar in that they are both easily formed.
4. Proprietorships and partnerships are different in that proprietors have unlimited legal
liability while each partner’s legal liability is limited to his/her percentage ownership in
the partnership.
5. A partner’s personal assets may be taken by creditors to pay partnership debts if the
partnership is unable to meet its obligations.
7. For a partnership to get an unqualified audit opinion, the financial records must conform
to Generally Accepted Accounting Principles.
11. The taxable income of all partners does not necessarily sum to the net income of the
partnership.
12. The only accounting difference that must exist between partnerships and corporations is
the reporting of the ownership equity.
13. The manner in which a partnership and a corporation are formed is very similar.
14. It is generally easier to transfer ownership interest in a corporate form of business than in
a partnership.
15. A partnership legally ceases to exist each time a new partner joins the partnership or an
existing partner leaves the partnership
16. The proprietary theory of equity is based on the notion that a business entity is distinct
from the owners.
17. The entity theory of equity is based on the notion that a business entity is distinct from
the owners.
18. An individual partner’s personal responsibility for partnership debts is an example of the
entity theory of equity.
19. The dissolution of a partnership because of the admission of a new partner or withdrawal
of an existing partner is an example of the proprietary theory of equity.
20. The fact that partnerships can enter into contracts is an example of the proprietary theory
of equity.
21. Contributed assets becoming property of the partnership is an example of the entity
theory of equity.
22. The Uniform Partnership Act is the basis for partnership laws in many states.
24. When a partnership is formed without a written agreement, the state laws where the
partnership is formed will establish the legal relationship between partners.
25. All provisions of state partnership law must be applied when a partnership is formed.
27. There are different ways the partnership can value noncash assets contributed to the
partnership.
28. Appraisals are not necessarily required when assigning value to noncash assets
contributed to the partnership.
29. Assigning a noncash asset the contributor’s carrying value could result in a misallocation
of gain or loss if the asset is sold.
30. An asset’s carrying value should not be considered when establishing the initial capital
accounts of partners.
31. The tax basis of contributed noncash assets must be used to determine partnership
income allocation for tax reporting purposes.
32. Partnerships are required to file an informational return (Form 1065) with the IRS
indicating the amount of partnership income allocated to each partner.
33. The income assigned to each partner for financial accounting purposes will equal the
partner’s partnership income included on the partner’s individual income tax return.
34. The market value of noncash assets contributed to the partnership may be used for
computing the partners’ taxable income.
35. A contributing partner’s capital account may be assigned the market value of noncash
assets contributed but a market value assignment is not required.
36. The market value of noncash assets contributed to a partnership is the only relevant value
when determining the partners’ beginning capital balances.
37. The assumption of a liability by the partnership with regard to a noncash asset
contributed to the partnership by a partner will affect the value assigned to the partner’s
capital account.
38. The tax basis of a noncash asset contributed to a partnership with an accompanying
liability will not change as a result of the contribution.
39. When a noncash asset is contributed to a partnership with an accompanying liability, the
book value of the asset must become the cost basis of the asset on the partnership’s
financial records.
41. Initial partner capital balances must equal the sum of the net assets contributed to the
partnership by the partner.
42. Initial partner capital balances are determined by agreement among the partners.
43. Only tangible assets contributed to the partnership can be considered when creating
initial capital balances.
44. There are two ways to consider unidentifiable intangible assets contributed to a
partnership: the bonus method and the goodwill method.
48. Application of the goodwill method when forming a partnership requires partners to
agree on the amount of goodwill to be assigned to a partner(s).
49. At the date the partnership is formed, the total partner capital will be the same regardless
of whether the bonus method or the goodwill method is used to recognize unidentifiable
intangible assets.
50. Goodwill can be assigned to more than one partner at the date the partnership is formed.
51. The ability of partners to withdraw resources from the partnership is controlled
exclusively by the laws of the state where the partnership resides.
52. The articles of partnership often control the size of withdrawals partners are allowed to
make.
54. Partnerships are required to indicate the manner in which profits and losses are to be
allocated among the partners.
55. With the exception of the residual profit and loss ratio, partners can agree to apply profit
and loss allocation components in any order.
56. The interest component of partnership profit and loss allocation rewards the partner for
labor and expertise brought into the partnership.
57. The purpose of the interest on capital balances component of partnership profit and loss
allocation is to reward partners for contributing economic resources to the partnership.
58. The interest on capital balances component of partnership profit and loss allocation is
always based on each partner’s beginning or period capital balance.
59. The interest on capital balances component of partnership profit and loss allocation is
generally stated as a percentage of the capital balance.
60. The salary portion of the profit and loss allocation is set in the articles of partnership and
will not change over time.
61. The salary portion of the partnership profit and loss allocation is not included in the
partnership’s income statement.
62. The salary portion of the partnership profit and loss allocation is used to compensate
partners for the time and effort expected in the business.
63. Partnerships are required to have bonus clauses in the articles of partnership.
64. Bonus to partners can be based on any criteria on which the partners agree.
65. Partnership bonus arrangements must consider net income as part of the bonus
calculation.
66. A residual interest is always a component of partnership profit and loss allocation.
68. Partnership profit and loss residual percentages must be the same for profits as they are
for losses.
69. Partnership profit and loss residual percentages are used to allocate any remaining profit
or loss to partners after all other allocation components have been considered.
70. Partnership residual profit and loss percentages may be changed by agreement of the
partners.
71. Partnership residual profit and loss percentages do not have to be the last component
applied in the profit and loss allocation process.
72. When partnership profit and loss ratios are changed, the difference between market and
book values should be determined and allocated to partners based on the currently
existing profit and loss ratios.
73. Partnerships must revalue assets up and/or down when the profit and loss ratios are
adjusted.
75. The dissolution of a partnership occurs only when the partnership is terminating
operations and going out of business.
76. One reason a change in the number of partners in a partnership through the addition or
withdrawal of a partner is important because the partners have unlimited liability.
77. A new partner in a partnership accepts unlimited liability for actions that occurred before
that partner joined the partnership.
78. The admission of a new partner into a partnership can occur without any new assets
being invested into the partnership.
79. If a new partner is going to acquire an ownership interest in a partnership directly from
another partner, the other partners do not need to approve the admission.
80. If a new partner acquires 40 percent of an existing partner’s equity in the partnership, the
new partner is also entitled to 40 percent of the existing partner’s profit and loss
allocation.
81. When a new partner is joining a partnership by making a payment to the partnership for
an amount more than book value, the partners are required to choose one of three
methods of recording the new partner’s payment in excess of book value.
82. The revaluation of assets and liabilities at the date a new partner joins the partnership, by
investing assets directly into the partnership, does not eliminate the possibility that the
partnership might need to record bonuses or goodwill as part of the admission of the new
partner.
83. The amount that assets are revalued when a new partner joins a partnership is always
shared by existing partners equally.
84. If a new partner’s capital account is created for an amount less than the value of net
assets contributed, an error has been made in the partnership’s accounting records.
85. The recognition of a bonus to existing partners at the date a new partner is admitted to a
partnership often occurs in lieu of the recognition of goodwill for the existing partners.
86. The bonus recognized by existing partners when a new partner is admitted to a
partnership is commonly shared among the existing partners based on the existing
partners’ relative profit and loss residual ratios.
87. It is possible for a new partner’s capital account to be established at an amount greater
than the market value of the identifiable assets invested.
88. New partners are never recipients of bonuses when they join the partnership.
89. A bonus paid to a new partner results in a reduction to the capital accounts of the existing
partners in proportion to their profit and loss sharing ratios.
90. The goodwill method of admitting a new partner to a partnership results in greater total
assets than the bonus method of admitting a new partner.
91. When the goodwill method is applied to recognize the admission of a new partner and
the existing partners are responsible for the goodwill, the new partner’s capital account
will always be established equal to the amount of the contribution to the partnership.
92. The existing partners will always recognize goodwill when a new partner is admitted to
the company and the goodwill method is applied.
93. When the goodwill method is applied to recognize the admission of a new partner and
the new partner is responsible for the goodwill, the new partner’s capital account will be
established at the amount of the contribution.
94. When new partner goodwill is recognized at the date the partner joins the partnership, the
existing partners’ capital accounts do not change as a result of the new partner’s
admission
95. A partner may withdraw from a partnership at any time without notice given to the
existing partners.
96. A withdrawing partner may have his/her partnership interest acquired by an outside
investor agreed to by the remaining partners, the remaining partners, or the partnership.
97. If existing partners acquire a withdrawing partner’s equity, the existing partners must
purchase the withdrawing partner’s equity in proportion to their residual profit and loss
ratios.
98. The revaluation of assets when a partner withdraws from the partnership may be a
complete revaluation or a partial revaluation, reflecting the change in value with regard
to the withdrawing partner’s ownership interest.
100. When a partnership’s assets are revalued at the date a partner withdraws from the
partnership, the withdrawing partner’s equity must be acquired by the partnership. It
cannot be acquired by an outside investor or the existing partners personally.
101. Withdrawing partners from a partnership may receive a bonus or pay a bonus to
remaining partners.
102. If the assets of a partnership are revalued at the date of a partner’s withdrawal, there can
be no bonus recorded.
103. A bonus can be recorded for a retiring partner only if the partnership acquires the equity
of the partner.
104. At the date a partner withdraws from a partnership, the partners must choose to either
recognize the goodwill with respect to the withdrawing partner or they can choose to
recognize all of the partnership’s goodwill.
105. Any goodwill recognized at the date a partner withdraws from a partnership is usually
allocated to partners based on their residual profit and loss ratios.
106. Partnerships may have both a revaluation of assets and liabilities as well as goodwill
recognition at the date a partner withdraws from a partnership.
25. F, Most provisions only apply if there is no agreement among the partners with regard to
that specific issue.
26. F, Initial capital contributions are determined by agreement among the partners and do
not have to be equal in size.
27. T
28. T
29. T
30. F, Any basis (i.e., carrying value, tax basis, or market value) can be used to value
noncash assets contributed to a partnership
31. T
32. T
33. F, There are numerous differences that can cause the income assigned to partners for
accounting purposes to differ from income assigned to partners for tax purposes such as
noncash assets contributed to the partnership valued at an amount different than the
contributing partner’s tax basis
34. F, The tax basis of noncash assets contributed to the partnership must be used to
determine taxable income.
35. T
36. F, Partners should agree on the method to be used to value noncash asset contributions
when preparing the articles of partnership. A variety of bases can be used and the market
value is one of the alternatives.
37. T
38. F, The amount of the liability assumed by the partnership, excluding the contributing
partners share of that liability, will reduce the tax basis of the asset contributed.
39. F, The assumption of a liability has no impact on the valuation approach by the
partnership.
40. T
41. F, The capital balances established can be any amounts agreed by the partners.
42. T
43. F, Partners may contribute tangible and intangible assets to the partnership. It is possible
to consider both when determining initial partnership capital account balances.
44. T
45. T
46. F, The bonus method reallocates the total partnership capital among the partners’ capital
based on the agreed value of unidentifiable intangible assets contributed. Capital
accounts do not have to be the same when the process is completed.
47. F, The bonus method reallocates the total partnership capital among the partners based on
the agreed value of unidentifiable intangible assets contributed. It will always result in
one or more partner’s capital accounts decreasing while the remaining partner(s) capital
accounts increase.
48. T
49. F, The goodwill method requires an additional asset (Goodwill) to be recognized on the
balance sheet. As a result, the partners’ capital accounts will be greater in aggregate.
The bonus method results in a reallocation of capital among the partners and does not
result in a change in total partnership capital.
50. T
51. F, While states may have laws indicating that the partners cannot withdraw resources and
make the partnership insolvent, withdrawals are typically controlled by the articles of
partnership.
52. T,
53. T
54. F, If the partnership agreement is silent with regard to profit and loss allocation, profits
and losses are shared equally.
55. T
56. F, The interest component of partnership profit and loss allocation rewards partners for
capital contributions.
57. T
58. F, The interest on capital balances component of partnership profit and loss allocation
may be based on the beginning, ending, simple average capital balance, or weighted
average capital balance.
59. T
60. F, The salary component of the partnership profit and loss allocation would be expected
to be renegotiated periodically as the duties of the partners change.
61. T
62. T
63. F, Partnerships can offer bonuses to anyone. The choice is up to the partners. On the
other hand, there is no requirement to ever offer a bonus.
64. T
65. F, While many bonuses are based on a measure of income, it is not required. Bonus can
be based on other criteria such as market share, revenue, or average cost per unit.
66. T
67. F, Residual interests may be equal but they are not required to be equal.
68. F, While profit residual ratios and loss residual ratios are generally the same, they can
differ.
69. T
70. T
71. F, Residual profit and loss percentages are the last component of the profit and loss
allocation process applied because they are designed to allocate any remaining amount to
the partners.
72. T
73. F, There are several ways that the difference between market and book value of assets
can be addressed when the profit and loss ratios are changed. Revaluing the assets is one
of the possibilities along with maintaining a record of assets with market and book value
differences as well as directly adjusting capital accounts while leaving asset values
unchanged.
74. T
75. F, A dissolution occurs every time there is a change in relationship among the partners.
This can occur when a new partner enters the partnership or an existing partner leaves the
partnership. A dissolution occurs when the partnership is going out of business but the
termination of business is not a requirement for a dissolution.
76. T
77. F, A new partner's liability for actions that occurred before joining the partnership is
limited to the amount invested in the partnership.
78. T
79. F, Regardless how a new partner enters a partnership, the other partners have to approve
the admission because they must accept unlimited liability due to actions of the new
partner taken on behalf of the partnership.
80. F, There is no necessary relationship between the percentage of equity acquired and the
amount of profit or loss received. These are separate contractual issues.
81. F, There are three methods that may be used when a new partner is paying an amount
more than book value for the investment: revaluation of existing assets, bonus method,
and goodwill method. The partners do not have to choose one method. It would not be
inconsistent to revalue the assets and apply either the bonus or the goodwill method to
record the investment.
82. T
83. F, Existing partners share the difference between market value and book value equally if
that is the manner in which profits and losses are shared. If profits and losses are shared
in some other manner, then the difference between market and book values are shared in
that manner.
84. F, While it is possible that an error has been made, it is more likely that the existing
partners recognized an increase in their capital accounts via a bonus. The difference
between the amount credited to the new partner’s capital account and the amount
invested is shared by the existing partners.
85. T
86. T
87. T
88. F, New partners may receive a bonus if they bring value to the partnership in excess of
the tangible assets invested. This additional amount may be from such things as
expertise, experience, or business contacts. The bonus allocated to the new partner is
payment for these types of unidentifiable assets contributed to the partnership.
89. T
90. T
91. T
92. F, Goodwill may be recognized with regard to the existing partners but it may also be
recognized with regard to the new partner.
93. F, When goodwill is recognized with regard to the new partner, the new partner’s capital
account will be greater than the amount invested by the recognized goodwill.
94. T
95. F, The articles of partnership may include an agreement on the length of advanced notice
a partner must give before withdrawing from a partnership. Failure to provide the agreed
notice may result in the withdrawing partner being liable for damages suffered by the
partnership.
96. T
97. F, If existing partners acquire a withdrawing partner’s equity, they can divide the
purchase of that equity among themselves in any manner they choose.
98. T
99. F, Partnership assets may be revalued but they may also remain at their carrying value.
100. F, The revaluation of the partnership’s assets is unrelated to the purchase of the
withdrawing partners ownership interest in the partnership.
101. T
102. F, The revaluation of partnership assets at the time of a partner’s withdrawal has no
impact on the recognition of a bonus or goodwill.
103. T
104. F, While the partners can recognize either the withdrawing partner’s goodwill or the
entire partnership’s goodwill, there is no requirement to recognize any goodwill when a
partner withdraws from a partnership.
105. T
106. T
108. Which of the following business entity forms is (are) required to maintain their financial
information in accordance with Generally Accepted Accounting Principles?
a. Corporations
b. Corporation and Partnership
c. Partnership and Proprietorships
d. Corporation, Partnerships, and Proprietorships
109. Which of the following statements is not true with regard to tax issues of partnerships?
a. Partnerships are viewed as an extension of the owners
b. Partnerships are required to pay some forms of taxes
c. The IRS must be informed as to the manner partnership income is allocated to the
partners
d. All of the above are true
110. Which of the following is not a similarity that exists between proprietorships and
partnerships?
a. Neither requires approval by a state to form
b. Both can use an accounting method that does not conform to GAAP
c. Owners put the company’s income on the owner’s individual tax return
d. All of the above are similarities of proprietorships and partnerships
111. Which of the following is not an area where there are differences when comparing
partnerships and corporations?
a. The ease of formation
b. The level of owner legal liability
c. The ease of ownership transferability
d. All of the above are areas where partnerships and corporations differ
112. Which of the following is not a difference when comparing partnerships and
corporations?
a. Corporations must conform to GAAP whereas partnerships are not required to
conform to GAAP
b. Partnerships and corporations neither are required to attain state approval to form
114. Which of the following is not an example of the proprietary theory of equity?
a. Partners do not have claims to specific assets
b. Individual partners are liable for all debts of the partnership
c. A partner’s income tax includes the partner’s share of partnership net income, and
the partnership does not pay income taxes
d. Salaries of partners are viewed as distributions of income, not components of net
income
115. Which of the following is not an example of the entity theory of equity?
a. Continuity of the partnership when admission or withdrawal of partners occurs
b. A partnership can enter into contracts
c. Assets contributed to the partnership retain the existing tax basis to the partner
contributing
d Partnership creditors have priority claim to partnership assets and the creditors of
partners have priority claim to the partner’s assets in the event of liquidation
116. Which of the following statements is not true with regard to articles of partnership?
a. Written articles of partnership are not required to form a partnership
b. The Uniform Partnership Act provides a list of items that must be included in
articles of partnership
c. A written partnership agreement enables the partners to detail the agreed working
relationship among the partners
d. State law applies only if there is not agreement among the partners with regard to
that specific issue
117. When a partnership agreement is silent with regard to any aspect of a partnership
operation, who/what decides on that aspect of the partnership’s operations?
a. State law
b. Uniform Partnership Act
c. Majority vote of stockholders
d. Decision by senior partner
118. Which of the following valuation amounts is not allowed when assigning values to
noncash assets in a partnership formation?
a. Contributor’s carrying value
b. Contributor’s tax basis
c. Market (appraised) value
119. Which of the following statements is correct with regard to the creation of initial capital
account balances on a partnership’s financial records?
a. The capital accounts can be created for any dollar amount agreed by all partners
b. The market value of noncash assets must be considered when creating the initial
capital balances
c. Each partner’s capital account must have a non-zero value assigned to it
d. All of the above statements are correct
120. Which of the following statements is not true with regard to assigning the carrying value
of noncash assets contributed to those assets at the date of a partnership’s formation?
a. Use of the noncash asset’s historical cost can result in the misstatement of the
partners’ capital accounts
b. Assigning the historical cost to noncash assets contributed to a partnership may
require the partnership agreement to address profit/loss distribution that will
occur when the contributed asset is sold
c. Assigning the historical cost to noncash assets contributed to a partnership will
not cause partner taxable income to differ from the partner’s share of partnership
income
d. All of the above statements are correct
121. Which of the following statements is true with regard to assigning a noncash asset
contributed to a partnership the tax basis of the contributing partner?
a. The tax basis of noncash assets contributed must be used if the partnership is a
taxable entity
b. The tax basis must be considered when determine each partner’s allocation of
taxable partnership income
c. The contributing partner’s tax basis may not be used for financial accounting
records
d. None of the above statements are true
122. Which of the following statements is not true with regard to assigning the market value
of noncash assets contributed to those assets at the date of a partnership’s formation?
a. Gains or losses would likely not be recorded if the asset were sold at the date for
partnership is formed
b. The contributing partner’s share of the partnership’s income would be adjusted by
the difference between the market value and tax basis at the date the asset is
contributed to the partnership
c. The market value is the most commonly assigned value to contributed noncash
assets
d. All of the above statements are correct
123. Which of the following statements is correct with regard to the contribution of assets and
associated liabilities to a partnership?
a. Liabilities associated with assets contributed to a partnership remain the liability
of the contributing partner
125. This method of recognizing unidentifiable intangible assets does not result in a change to
total contributed capital.
a. Goodwill method
b. Bonus method
c. Reciprocal method
d. None of these methods will result in a change to total contributed capital
127. Shawn, Harris, and Derek are forming a partnership. The partners agree that Harris
should be assigned goodwill because of his knowledge of the business. Which partners’
capital accounts will have the dollar assigned dollar amounts altered due to the
recognition of the goodwill?
a. Shawn
b. Harris
c. Derek
d. All dollar amount assigned to all three partners’ capital accounts will be altered.
128. This method of recognizing unidentifiable intangible assets results in a change to total
contributed capital.
a. Goodwill method
b. Bonus method
c. Reciprocal method
d. None of these methods will result in a change to total contributed capital
130. For what purpose(s) might a drawing account be used for a partnership?
a. To keep a list of business contacts made by a partner
b. To recognize a loan made to a partner
c. To recognize inventory removed from the partnership by the partner
d. None of the above ore possible uses of a drawing account
131. Which of the following is not a withdrawal that may be found in a partnership’s drawing
account?
a. Removal of cash by a partner
b. Payment of a partner’s speeding ticket by the partnership
c. Removal of inventory by a partner
d. All of the above may be found in a drawing account
132. Which of the following statements is correct with regard to drawing accounts that may be
used by a partnership?
a. Drawing accounts are closed to the partners’ capital accounts at the end of the
accounting period
b. Drawing accounts establish the amount that may be taken from the partnership by
a partner in a given time period
c. Drawing accounts are similar to Retained Earnings in a corporation
d. Drawing accounts appear on the balance sheet as a contra-equity account
133. Which of the following should not be done by the accountant with regard to partnership
profit and loss allocation?
a. Prepare an analysis of alternative methods to allocate profits and losses
b. Recommend a particular method for allocating profits and losses
c. Inform partners of different ways that profits and losses could be allocated
d. All of the above are reasonable duties of the accountant
134. What is the underlying purpose of the interest on capital balances component of
allocating partnership profits and losses?
a. Compensate partners who contribute economic resources to the partnership
b. Reward labor and expertise contributions
c. Reward for special responsibilities undertaken
d. None of the above
135. What is the underlying purpose of the salary component of allocating partnership profits
and losses?
a. Compensate partners who contribute economic resources to the partnership
b. Reward labor and expertise contributions
c. Reward for special responsibilities undertaken
d. None of the above
136. Which of the following interest component calculation bases is least susceptible to
manipulation when allocating profits and losses to partners?
137. Which component of the partnership profit and loss allocation compensates partners for
the routine time and effort expended in the business?
a. Interest on capital balance
b. Bonus
c. Salary
d. Residual interest
138. Which component of the partnership profit and loss allocation is most commonly offered
to the partner who manages the business?
a. Interest on capital balance
b. Bonus
c. Salary
d. Residual interest
139. Which of the following may be a basis for determining the amount of a partner’s bonus?
a. Operating income
b. Market share
c. Average cost per unit
d. All of the three may be bases for determining the amount of a partner’s bonus
140. Which component of the partnership profit and loss allocation must be performed last?
a. Interest on capital balance
b. Bonus
c. Salary
d. Residual interest
141. Which of the following statements is true with regard to partnership residual profit and
loss ratios?
a. A partner’s residual profit ratio must be the same as the loss ratio
b. Residual profit and loss ratios can be changed by agreement
c. The residual profit and loss ratio must always be applied
d. All of the above are true statements
142. Applying the partnership residual profit and loss ratio can have which of the following
effects on a partner’s allocation of profit and/or loss?
a. Increase
b. Decrease
c. Increase or decrease
d. The residual profit and loss ratio is not used for the allocation or profit and/or loss
143. Which of the following should be done when the partnership profit and loss ratios are
changed?
a. The book and market value of assets and liabilities should be evaluated
b. The capital accounts should be modified to reflect the new profit and loss ratios
c. The creditors should be informed that the profit and loss ratios have been changed
d. The partners must draft new articles of partnership.
144. Which of the following is not a common way to address the difference between market
and book values of assets and liabilities when the partnership profit and loss ratios are
changed?
a. Assets and liabilities are revalued to market value
b. Assets with a difference between market and book value are sold and the profit is
distributed to partners based on existing profit and loss ratios
c. A list of differences between market value and book value are made
d. Capital accounts of the partners are altered to reflect the difference between
market and book values at the date the profit and loss ratios change
145. Which of the following occurs every time a new partner is admitted to a partnership or an
existing partner leaves the partnership?
a. Dissolution
b. Termination
c. Dissolution and termination
d. None of the above occurs
146. Which of the following forms of new partner admission will not result in a change in the
partnership’s net assets?
a. Purchase of an ownership interest directly from the partnership
b. Purchase of an ownership interest directly from an existing partner
c. Either of the above
d. Neither of the above
147. Which of the following must occur for a new partner to enter the partnership by
acquiring an ownership interest directly from an existing partner?
a. Existing partners must know the amount the new partner is paying for the
ownership interest
b. The new partner must acquire all of the current partner’s ownership interest
c. Existing partners must approve the admission of the new partner into the
partnership
d. The new partner must live in the same state as the other partners
148. Which of the following must be true when a new partner acquires an ownership interest
directly from an existing partner?
a. Capital must be assigned to the new partner
b. The new partner’s profit and loss allocation must be proportionate to the capital
account balance
c. The new partner must be allocated some amount of profit and loss
d. The existing partners must provide a list of all the partnership’s outstanding
liabilities to the new partner
149. When a new partner joins a partnership by investing assets into the partnership, what
method may be used to record the admission of the new partner?
150. Which of the following is a reason to not revalue partnership assets at the date a new
partner is admitted to the partnership?
a. There has been a change in ownership
b. A new legal entity exists
c. The partnership has not ceased operations
d. All three are reasons to not revalue partnership assets at the date of a new
partner’s admission
151. A bonus is recognized by existing partners at the date a new partner joins a partnership
when which of the following relationships occur?
a. The new partner’s contribution exceeds his/her percentage of total partnership
capital after the investment is made
b. The new partner’s contribution is less than his/her percentage of total partnership
capital after the investment is made
c. The new partner’s contribution is equal to his/her percentage of total partnership
capital after the investment is made
d. It is not possible to determine the answer to this question
152. Which of the following is not a criterion for recognizing a bonus to existing partners
when a new partner joins the partnership?
a. Only cash assets were contributed to the partnership by the new partner
b. The existing partners desire to not recognize goodwill on the balance sheet
c. The articles of partnership indicate that the bonus method will be used to admit
new partners
d. The new partner invests more into the partnership that his/her share of total
partnership capital after the investment is made
153. Which method of recording the admission of a new partner into a partnership potentially
results in the existing partners’ capital accounts changing in value?
a. Bonus method
b. Goodwill method
c. Either bonus method or goodwill method
d. Existing partners’ capital accounts never change when a new partner is admitted
into a partnership.
154. A bonus recognized by a new partner at the date of admission into the partnership is
generally shared by the existing partners in what way?
a. Equally
b. In proportion to capital account balances
c. In proportion to profit and loss residual ratios
d. In proportion to salaries
155. Which of the following is not a criterion for recognizing a bonus to a new partner when
the new partner joins the partnership?
a. Only cash assets were contributed to the partnership by the new partner
b. The existing partners desire to not recognize goodwill on the balance sheet
c. The articles of partnership indicate that the bonus method will be used to admit
new partners
d. The new partner invests less into the partnership that his/her share of total
partnership capital after the investment is made
156. When the goodwill method of recognizing the admission of a new partner is applied and
the existing partners contribute the goodwill, which of the following will result?
a. An increase in the capital accounts of existing partners
b. A decrease in the amount invested by the new partner
c. A decrease in the partnership’s total assets
d. A new partner’s capital account less than the amount invested
157. Which of the following will occur when the existing partners contribute goodwill and a
new partner is admitted to the partnership?
a. The existing partner’s capital accounts will be decreased
b. The existing partner will receive cash from the partnership
c. The partnership’s total assets will be increased
d. The new partner will be required to reduce his/her profit and loss sharing ratio
158. Which of the following statements is false with regard to the goodwill recognized for a
new partner entering a partnership?
a. The new partner’s capital account balance will exceed the amount invested
b. The existing partners’ capital accounts will remain unchanged
c. The amount invested by the new partner will be less than his/her proportion of the
partnership’s book value before goodwill is recognized
d. The three partners will have equal capital account balances when the transaction
is completed
159. Which of the following statements presents a reason that goodwill may be recorded with
regard to a new partner at the date of that partner’s admission to the partnership?
a. The existing partnership is worth more than the appraised value of the tangible
net assets
b. The new partner has a strong desire to become a member of the partnership
c. The total value of the new partner’s contribution to the partnership is greater than
the value of the identifiable net assets contributed
d. The new partner’s residual interest in profits and losses is greater than 30 percent
160. What portion of the partnership’s assets must be revalued when a partner withdraws from
the partnership?
a. The withdrawing partner’s share must be revalued
b. All of the partnership’s assets must be revalued
c. Any or all of the partnership’s assets may be revalued but none have to be
revalued
d. Partnership assets may not be revalued when a partner withdraws
161. Who may acquire the ownership interest of a partner who is withdrawing from a
partnership?
a. Existing partners
b. New investor
c. The partnership
d. All of the above
162. If existing partners acquire the equity of a withdrawing partner, in what manner do they
divide the equity?
a. In any manner they choose
b. Equally
c. Proportionate to their residual profit and loss ratios
d. Existing partners are not permitted to acquire the equity of a withdrawing partner
163. Which of the following must exist to create the potential for a retiring partner to have a
bonus recognized at the date of withdrawal?
a. The retiring partner must be paid more than the book value of his equity
b. The existing partners must decide to not admit a new partner to the partnership
c. The retiring partner’s equity must be acquired by the partnership
d. All of the above are necessary for a bonus to be recognized
164. In what manner do the remaining partners share in the bonus paid to a withdrawing
partner?
a. In proportion to their residual profit and loss ratios
b. Equally
c. In proportion to their capital account balances
d. The partner with the greatest capital account is assigned the bonus
165. Which of the following statements is true with regard to a withdrawing partner?
a. A bonus must be paid to the retiring partner
b. A bonus may be paid to the retiring partner
c. A bonus must be paid to the retiring partner or to the remaining partners
d. Recognizing a bonus is not appropriate when a partner retires
166. What change occurs to continuing partners’ capital accounts when a withdrawing partner
is assigned goodwill at the date of withdrawal?
a. Continuing partners’ capital accounts decease by their profit and loss ratio
proportion of the goodwill assigned to the withdrawing partner
b. Continuing partners’ capital accounts increase
c. Continuing partners’ capital accounts do not change
d. Goodwill cannot be recognized with regard to withdrawing partners
167. What amount of goodwill can be recognized at the date a partner withdraws from a
partnership?
a. The withdrawing partner’s portion of goodwill
b. The continuing partners’ portion of goodwill
c. Goodwill may not be recognized at the date a partner withdraws
168. Which of the following will occur when the goodwill method is used to recognize the
withdrawal of a partner?
a. The partnership must acquire the equity of the withdrawing partner
b. The withdrawing partner will be paid the book value of his/her equity after the
goodwill is recognized
c. The existing partners will divide the salary of the withdrawing partner
d. The total equity of the partnership will not change as a result of the partner’s
withdrawal
142. easy c
143. moderate a
144. easy b
145. easy a
146. easy b
147. easy c
148. moderate c
149. easy d
150. moderate c
151. moderate b
152. easy a
153. easy c
154. easy c
155. easy a
156. moderate a
157. easy c
158. easy d
159. moderate c
160. easy c
161. easy d
162. moderate a
163. moderate d
164. easy a
165. easy b
166. easy c
167. easy d
168. easy b
170. Philip, Ray, and Sarah are forming a partnership. Philip contributes cash of $100,000;
Ray contributes inventory with a value of $100,000; and Sarah contributes a building
with a market value of $300,000. The partnership also assumed the $210,000 mortgage
on the building. What is the amount of capital assigned to each partner?
Philip Ray Sarah
a. $30,000 $30,000 $230,000
b. $56,000 $56,000 $174,000
c. $100,000 $100,000 $90,000
171. Max, Ike, and Tony are forming a partnership. The appraised value of assets contributed
is $60,000, $80,000, and $100,000, respectively. In addition, Max and Tony agree that
Ike’s experience is worth $30,000. The partners desire to apply the bonus method where
applicable. What is the total capital recorded at the date the partnership is formed?
a. $210,000
b. $240,000
c. $270,000
d. Some other dollar amount
172. Richardson, Peterson, and Wilkerson are forming a partnership. The partners contribute
cash and noncash assets valued at $30,000, $50,000, and $25,000, respectively. The
partners choose to apply the bonus method where applicable. If the partners agree to
establish equal capital account balances when the partnership is formed, how much of a
bonus is received by Richardson?
a. $15,000
b. $10,000
c. $5,000
d. Richardson does not receive a bonus
173. Richardson, Peterson, and Wilkerson are forming a partnership. The partners contribute
cash and noncash assets valued at $30,000, $50,000, and $25,000, respectively. The
partners choose to apply the bonus method where applicable. If the partners agree to
establish equal capital account balances when the partnership is formed, how much
capital is Peterson sacrificing to give a bonus to Richardson and Wilkerson?
a. $15,000
b. $10,000
c. $5,000
d. Richardson does not receive a bonus
174. Albert, Claude, and Jamie form a partnership by contributing $25,000, $70,000, and
$80,000, respectively. In addition, the partners agree that Albert should receive $20,000
of goodwill because of his special skills relevant to this business. What amount of capital
will exist for Albert when the partnership is formed?
a. $20,000
b. $25,000
c. $65,000
d. $45,000
175. Albert, Claude, and Jamie form a partnership by contributing $25,000, $70,000, and
$80,000, respectively. In addition, the partners agree that Albert should receive $20,000
of goodwill because of his special skills relevant to this business. What amount of capital
will exist for Claude when the partnership is formed?
a. $60,000
b. $65,000
c. $70,000
d. Some other amount
176. Chris and David are forming a partnership with contributions of $75,000 and $125,000,
respectively. In addition, they agree that they will recognize $25,000 goodwill with
regard to David’s contacts in the area. What is the total amount of capital that will exist
for the partnership immediately after it is formed?
a. $75,000
b. $125,000
c. $150,000
d. $225,000
177. Chris is a partner in a local partnership. The profit and loss sharing agreement includes
an interest allocation of 7 percent on the invested capital. The capital account of Chris
reveals that he had a beginning capital account balance of $50,000. He withdrew
$10,000 on May 1 and invested $25,000 on October 31. Rounded to the nearest dollar,
what is Chris’ weighted average capital balance?
a. $57,500
b. $51,667
c. $47,500
d. $28,333
178. Richard is a partner in a local partnership. The profit and loss sharing agreement
includes an interest allocation of 8 percent on the invested capital. Richard had a
beginning capital balance of $60,000. He invested $30,000 on March 1, withdrew
$20,000 on August 1, and invested $40,000 on December 1. Rounded to the nearest
dollar, what dollar amount is allocated to Richard as interest on capital balance if the
weighted average capital balance is used as the basis of the computation?
a. $82,500
b. $6,400
c. $80,000
d. $6,600
179. Shawn is a managing partner in a local business. Part of his profit allocation is a bonus
based on the store’s operating income. The bonus is 8 percent of operating income in
excess of $200,000 after deducting the bonus. If operating income for the year is
$250,000, what is Shawn’s bonus (rounded to the nearest dollar)?
a. $3,703
b. $40,000
c. $20,000
d. $4,000
180. James has a bonus as part of his partner profit allocation. The bonus is based on the
partnerships net income. James receives a bonus equal to 5 percent that the net income
exceeds $150,000. If the net income in the current year is $180,000, how much bonus
does James receive?
a. $30,000
b. $7,500
c. $1,500
d. $9,000
181. Cheryl is the manager of a local store. She is also a partner in the company and she
receives a bonus as part of the profit and loss allocation. Cheryl’s bonus is based on the
increase in revenues recorded during the period. The bonus arrangement is that Cheryl
receives 1 percent of net income for every full percentage point growth for revenues in
excess of a 5 percent revenue growth. During the most recent period, revenues grew
from $500,000 to $540,000 and net income grew from $98,000 to $120,000. How much
bonus does Cheryl receive for this period?
a. $2,000
b. $1,100
c. $6,000
d. $3,600
182. Norman, Sarah, and Taylor are partners. The partnership income for the period is
$130,000. The partnership agreement assigns salaries to the partners of $10,000,
$15,000, and $18,000, respectively. In addition, the partners have profit and loss residual
ratios of 30%, 45%, and 25%. What is the amount of profit and loss allocated to Sarah
as a result of applying the residual ratios?
a. $39,150
b. $54,150
c. $58,500
d. $51,750
183. Jim and Scott are partners who have residual profit and loss ratios of 55% and 45%,
respectively. The partnership has income of $60,000 for the current period. How much
of this income is allocated to Scott?
a. $30,000
b. $33,000
c. $14,850
d. $27,000
184. Mike and Michelle are partners in a local business. The business has a $25,000 loss this
year. How much of this loss is allocated to Mike?
a. $12,500
b. $0
c. $25,000
d. Losses cannot be allocated without residual profit and loss ratios
185. Nick, Joe, and Mike are partners. The company has $150,000 net income for the period.
How is this income divided to the partners if the following profit and loss allocation
process is followed?
Nick Joe Mike
Weighted average capital $200,000 $350,000 $180,000
Salary 25,000 15,000 35,000
Bonus .1 (NI - $100,000)
Residual profit/loss ratios .25 .45 .30
Return on invested capital 9%
186. Harriet, Bob, and Tim are partners. Income for the current year is $500,000. The profit
and loss agreement states that salaries are $35,000, $50,000, and $40,000, respectively.
In addition, the residual profit and loss ratios are 40%, 30%, and 30%, respectively.
How much of the profit is allocated to Harriet?
a. $150,000
b. $185,000
c. $162,500
d. $152,500
187. Suzanne, Thomas, and Vicky are partners. They have average capital account balances
of $200,000, $250,000, and $400,000, respectively. In addition, they have residual profit
and loss ratios of 15%, 25%, and 60%, respectively. If income for the year is $300,000
and the partners earn 8 percent return on invested capital, how much will be allocated to
Thomas?
a. $78,000
b. $100,000
c. $50,800
d. $171,200
188. Johnson and Pritchard are partners. They are changing the profit and loss ratios from the
current 60/40 to 70/30. At the date of the change, vacant land owned by the partnership
has a book value of $50,000 and a market value of $60,000. The partners choose to
prepare an itemized list of assets with market values different from book values. If the
land is sold in the future for $80,000, how much of the gain will be assigned to Johnson?
a. $21,000
b. $18,000
c. $27,000
d. $20,000
189. Johnson and Pritchard are partners. They are changing the profit and loss ratios from the
current 60/40 to 70/30. At the date of the change, vacant land owned by the partnership
has a book value of $50,000 and a market value of $60,000. The partners choose to
prepare an itemized list of assets with market values different from book values. If the
land is sold in the future for $80,000, how much of the gain will be assigned to
Pritchard?
a. $12,000
b. $10,000
c. $9,000
d. $13,000
190. Karen and Andrea are currently changing their partnership profit and loss ratios from
75/25 to 60/40. They have created a list of assets that have market and book value
differences. One of the assets is a building with a $300,000 market value and $200,000
book value. Two years after changing the profit and loss ratios, the building is sold for
$380,000. How much of the profit is allocated to Karen?
a. $135,000
b. $108,000
c. $123,000
d. $183,000
191. Karen and Andrea are currently changing their partnership profit and loss ratios from
75/25 to 60/40. They have created a list of assets that have market and book value
differences. One of the assets is a building with a $300,000 market value and $200,000
book value. Two years after changing the profit and loss ratios, the building is sold for
$380,000. How much of the profit is allocated to Andrea?
a. $57,000
b. $45,000
c. $72,000
d. $97,000
192. Peter and Ronald are partners. They have shared profits and losses 65/35 for a number of
years. Peter has indicated that he is going to reduce his involvement in the partnership so
the profit and loss ratio is being modified to 45/55. At the date of the change in the profit
and loss ratio, the partnership own vacant land with a market value of $300,000 and a
book value of $100,000. Peter and Ronald compile a list of assets with market and book
value differences. Two years after the change in the profit and loss ratios, the land is sold
for $450,000. How much of the gain is allocated to Peter?
a. $197,500
b. $227,500
c. $157,500
d. $287,500
193. Peter and Ronald are partners. They have shared profits and losses 65/35 for a number of
years. Peter has indicated that he is going to reduce his involvement in the partnership so
the profit and loss ratio is being modified to 45/55. At the date of the change in the profit
and loss ratio, the partnership own vacant land with a market value of $300,000 and a
book value of $100,000. Peter and Ronald compile a list of assets with market and book
value differences. Two years after the change in the profit and loss ratios, the land is sold
for $450,000. How much of the gain is allocated to Ronald?
a. $122,500
b. $192,500
c. $152,500
d. $262,500
194. Jennifer and Robert are partners who are changing their profit and loss ratios from 60/40
to 45/55. At the date of the change, the partners choose to revalue assets with market
value different from book value. One asset revalued is land with a book value of
$50,000 and a market value of $120,000. Two years after the profit and loss ratio is
changed, the land is sold for $200,000. What is the amount of change to Jennifer’s
capital account at the date the land is revalued?
a. $72,000
b. $42,000
c. $30,000
d. $28,000
195. Jennifer and Robert are partners who are changing their profit and loss ratios from 60/40
to 45/55. At the date of the change, the partners choose to revalue assets with market
value different from book value. One asset revalued is land with a book value of
$50,000 and a market value of $120,000. Two years after the profit and loss ratio is
changed, the land is sold for $200,000. What is the amount of change to Robert’s capital
account at the date the land is revalued?
a. $72,000
b. $42,000
c. $30,000
d. $28,000
196. Jennifer and Robert are partners who are changing their profit and loss ratios from 60/40
to 45/55. At the date of the change, the partners choose to revalue assets with market
value different from book value. One asset revalued is land with a book value of
$50,000 and a market value of $120,000. Two years after the profit and loss ratio is
changed, the land is sold for $200,000. What is the amount of change to Jennifer’s
capital account at the date the land is sold?
a. $48,000
b. $67,500
c. $31,500
d. $36,000
197. Jennifer and Robert are partners who are changing their profit and loss ratios from 60/40
to 45/55. At the date of the change, the partners choose to revalue assets with market
value different from book value. One asset revalued is land with a book value of
$50,000 and a market value of $120,000. Two years after the profit and loss ratio is
changed, the land is sold for $200,000. What is the amount of change to Robert’s capital
account at the date the land is sold?
a. $44,000
b. $82,500
c. $32,000
d. $60,000
198. James and Bruce are partners. They have shared profits and losses 70/30 for several
years. The partnership profit allocation agreement is currently being modified to 60/40.
At the date of the change, the partners choose to revalue assets with market value
different from book value. One asset revalued is a building with a book value of
$370,000 and a market value of $520,000. One year after the profit and loss ratio is
changed the building is sold for $650,000. What is the amount of change to James’
capital account at the date the building is revalued?
a. $105,000
b. $91,000
c. $45,000
d. $39,000
199. James and Bruce are partners. They have shared profits and losses 70/30 for several
years. The partnership profit allocation agreement is currently being modified to 60/40.
At the date of the change, the partners choose to revalue assets with market value
different from book value. One asset revalued is a building with a book value of
$370,000 and a market value of $520,000. One year after the profit and loss ratio is
changed the building is sold for $650,000. What is the amount of change to Bruce’s
capital account at the date the building is revalued?
a. $105,000
b. $91,000
c. $45,000
d. $39,000
200. James and Bruce are partners. They have shared profits and losses 70/30 for several
years. The partnership profit allocation agreement is currently being modified to 60/40.
At the date of the change, the partners choose to revalue assets with market value
different from book value. One asset revalued is a building with a book value of
$370,000 and a market value of $520,000. One year after the profit and loss ratio is
changed the building is sold for $650,000. What is the amount of change to James’
capital account at the date the building is sold?
a. $91,000
b. $78,000
c. $39,000
d. $52,000
201. James and Bruce are partners. They have shared profits and losses 70/30 for several
years. The partnership profit allocation agreement is currently being modified to 60/40.
At the date of the change, the partners choose to revalue assets with market value
different from book value. One asset revalued is a building with a book value of
$370,000 and a market value of $520,000. One year after the profit and loss ratio is
changed the building is sold for $650,000. What is the amount of change to Bruce’s
capital account at the date the building is sold?
a. $91,000
b. $78,000
c. $39,000
d. $52,000
202. Theresa and Craig are partners. Their current profit and loss ratios (70/30) are being
changed to (60/40). The partners decide to adjust their capital accounts at the date of the
change in the profit and loss ratios to reflect the difference between market value and
book value of assets and liabilities. At the date of the change, land has a market value of
$250,000 and a book value of $120,000. How much will Theresa’s capital account be
adjusted at the date of the change in the profit and loss ratios?
a. $52,000 increase
b. $13,000 increase
c. $52,000 decrease
d. $13,000 decrease
203. Theresa and Craig are partners. Their current profit and loss ratios (70/30) are being
changed to (60/40). The partners decide to adjust their capital accounts at the date of the
change in the profit and loss ratios to reflect the difference between market value and
book value of assets and liabilities. At the date of the change, land has a market value of
$250,000 and a book value of $120,000. How much will Craig’s capital account be
adjusted at the date of the change in the profit and loss ratios?
a. $52,000 increase
b. $13,000 increase
c. $52,000 decrease
d. $13,000 decrease
204. Eric and Phillip have been partners for several years. During that time they have shared
profits and losses (60/40). They are currently revising the profit and loss ratios to
(70/30). Eric and Phillip decide to adjust the capital accounts at the date of the change to
reflect the difference between market value and book value of assets and liabilities. At
the date of the change, the partnership owns a building with a book value of $350,000
and a market value of $600,000. How much will Eric’s capital account be adjusted at the
date of the change in the profit and loss ratios?
a. $25,000 increase
b. $50,000 increase
c. $25,000 decrease
d. $50,000 decrease
205. Eric and Phillip have been partners for several years. During that time they have shared
profits and losses (60/40). They are currently revising the profit and loss ratios to
(70/30). Eric and Phillip decide to adjust the capital accounts at the date of the change to
reflect the difference between market value and book value of assets and liabilities. At
the date of the change, the partnership owns a building with a book value of $350,000
and a market value of $600,000. How much will Phillip’s capital account be adjusted at
the date of the change in the profit and loss ratios?
a. $25,000 increase
b. $50,000 increase
c. $25,000 decrease
d. $50,000 decrease
206. Jenna is about to purchase some of Cynthia’s partnership interest. Cynthia currently has
partnership equity of $84,500. If Jenna pays Cynthia $30,000 for 30 percent of her
capital, what amount will be recorded in the partnership accounting records?
Jenna Cynthia
a. $30,000 credit $25,350 debit
b. $25,350 credit $25,350 debit
c. $30,000 credit $30,000 debit
d. $25,350 debit $25,350 credit
207. Sam and Ray are partners with capital accounts of $150,000 and $225,000, respectively.
They are considering allowing Richard to purchase 30 percent of Ray’s equity. At the
date of the proposed transaction, Sam and Ray want to revalue the partnership’s assets
and allocate any differences based on their 40/60 profit sharing agreement. Assume that
the net market versus book value differences is $100,000. What amount would Richard
pay for the 30 percent interest?
a. $67,500
b. $76,500
c. $97,500
d. The amount cannot be determined from the information provided
208. Jesse, Joseph, and Leslie are partners with capital accounts of $70,000, $120,000, and
$90,000, respectively. The partnership share profits and losses 45%, 30%, and 25%,
respectively. They are considering allowing Hans to join the partnership by investing
directly into the partnership. The partners intend to revalue the assets before Hans’
admission. Neither bonus nor goodwill are required. If the asset’s market value exceeds
book value $150,000, how much will Hans invest to acquire a 20% equity interest in the
partnership?
a. $107,500
b. $86,000
c. $70,000
d. $100,000
209. Sandra and Joshua are partners. They have capital account balances of $250,000 and
$200,000, respectively, and they share profits and losses 70/30. The partners are
considering admitting Judy as a new partner with a 25 percent equity interest for an
investment in the partnership of $180,000. Before admission, Sandra and Joshua will
revalue the partnership’s assets. If the net increase in the partnership’s assets is
$125,000, what will be the balance in Sandra’s capital account immediately before Judy’s
admission?
a. $575,000
b. $337,500
c. $528,500
d. $262,500
210. Ken and Robert are partners who share profits and losses 75/25. They have capital
account balances of $270,000 and $300,000, respectively at the date they admit Susan
into the partnership. Susan invests $150,000 in the partnership for a 20 percent equity
interest and the bonus method is applied. What is the dollar amount of Susan’s capital
account at the date of admission?
a. $142,500
b. $150,000
c. $144,000
d. The dollar amount cannot be determined from this information
211. Ken and Robert are partners who share profits and losses 75/25. They have capital
account balances of $270,000 and $300,000, respectively at the date they admit Susan
into the partnership. Susan invests $150,000 in the partnership for a 20 percent equity
interest and the bonus method is applied. What is the dollar amount of bonus recognized
in Ken’s capital account at the date of admission?
a. $4,500
b. $34,500
c. $6,000
d. $1,500
212. Ken and Robert are partners who share profits and losses 75/25. They have capital
account balances of $270,000 and $300,000, respectively at the date they admit Susan
into the partnership. Susan invests $150,000 in the partnership for a 20 percent equity
interest and the bonus method is applied. What is the dollar amount of bonus recognized
in Robert’s capital account at the date of admission?
a. $6,000
b. $1,500
c. $144,000
d. $4,500
213. Ken and Robert are partners who share profits and losses 75/25. They have capital
account balances of $270,000 and $300,000, respectively at the date they admit Susan
into the partnership. Susan invests $150,000 in the partnership for a 20 percent equity
interest and the bonus method is applied. What is the dollar amount of Ken’s capital
account at the date of admission?
a. $274,500
b. $304,500
c. $144,000
d. $271,500
214. Ken and Robert are partners who share profits and losses 75/25. They have capital
account balances of $270,000 and $300,000, respectively at the date they admit Susan
into the partnership. Susan invests $150,000 in the partnership for a 20 percent equity
interest and the bonus method is applied. What is the dollar amount of Robert’s capital
account at the date of admission?
a. $271,500
b. $301,500
c. $144,000
d. $304,500
215. John and Sam are partners who share profits and losses 60/40. They have capital account
balances of $625,000 and $480,000, respectively at the date they admit Pierre into the
partnership. Pierre invests $450,000 in the partnership for a 25 percent equity interest
and the bonus method is applied. What is the dollar amount of Pierre’s capital account at
the date of admission?
a. $933,000
b. $450,000
c. $388,750
d. $622,000
216. John and Sam are partners who share profits and losses 60/40. They have capital account
balances of $625,000 and $480,000, respectively at the date they admit Pierre into the
partnership. Pierre invests $450,000 in the partnership for a 25 percent equity interest
and the bonus method is applied. What is the dollar amount of bonus recognized in
John’s capital account at the date of admission?
a. $98,000
b. $61,250
c. $24,500
d. $36,750
217. John and Sam are partners who share profits and losses 60/40. They have capital account
balances of $625,000 and $480,000, respectively at the date they admit Pierre into the
partnership. Pierre invests $450,000 in the partnership for a 25 percent equity interest
and the bonus method is applied. What is the dollar amount of bonus recognized in
Sam’s capital account at the date of admission?
a. $98,000
b. $61,250
c. $24,500
d. $36,750
218. John and Sam are partners who share profits and losses 60/40. They have capital account
balances of $625,000 and $480,000, respectively at the date they admit Pierre into the
partnership. Pierre invests $450,000 in the partnership for a 25 percent equity interest
and the bonus method is applied. What is the dollar amount of John’s capital account at
the date of admission?
a. $516,750
b. $661,750
c. $649,500
d. $504,500
219. John and Sam are partners who share profits and losses 60/40. They have capital account
balances of $625,000 and $480,000, respectively at the date they admit Pierre into the
partnership. Pierre invests $450,000 in the partnership for a 25 percent equity interest
and the bonus method is applied. What is the dollar amount of John’s capital account at
the date of admission?
a. $516,750
b. $661,750
c. $649,500
d. $504,500
220. Kris and Mark are partners who share profits and losses 70/30. They have capital
account balances of $170,000 and $260,000, respectively at the date they admit Frank
into the partnership. Frank invests $120,000 in the partnership for a 25 percent equity
interest and the bonus method is applied. What is the dollar amount of Frank’s capital
account at the date of admission?
a. $137,500
b. $120,000
c. $143,333
d. The dollar amount cannot be determined from this information
221. Kris and Mark are partners who share profits and losses 70/30. They have capital
account balances of $170,000 and $260,000, respectively at the date they admit Frank
into the partnership. Frank invests $120,000 in the partnership for a 25 percent equity
interest and the bonus method is applied. What is the dollar amount of bonus recognized
in Frank’s capital account at the date of admission?
a. $70,000
b. $23,333
c. $17,500
d. $52,500
222. Kris and Mark are partners who share profits and losses 70/30. They have capital
account balances of $170,000 and $260,000, respectively at the date they admit Frank
into the partnership. Frank invests $120,000 in the partnership for a 25 percent equity
interest and the bonus method is applied. What is the dollar amount of the reduction to
Kris’ capital account at the date of admission?
a. $5,250
b. $12,250
c. $17,500
d. $100,333
223. Kris and Mark are partners who share profits and losses 70/30. They have capital
account balances of $170,000 and $260,000, respectively at the date they admit Frank
into the partnership. Frank invests $120,000 in the partnership for a 25 percent equity
interest and the bonus method is applied. What is the dollar amount of the reduction to
Mark’s capital account at the date of admission?
a. $5,250
b. $12,250
c. $17,500
d. $100,333
224. Kris and Mark are partners who share profits and losses 70/30. They have capital
account balances of $170,000 and $260,000, respectively at the date they admit Frank
into the partnership. Frank invests $120,000 in the partnership for a 25 percent equity
interest and the bonus method is applied. What is the dollar amount of Kris’ capital
account at the date of admission?
a. $157,750
b. $254,750
c. $164,750
d. $247,750
225. Kris and Mark are partners who share profits and losses 70/30. They have capital
account balances of $170,000 and $260,000, respectively at the date they admit Frank
into the partnership. Frank invests $120,000 in the partnership for a 25 percent equity
interest and the bonus method is applied. What is the dollar amount of Mark’s capital
account at the date of admission?
a. $157,750
b. $254,750
c. $164,750
d. $247,750
226. Tom and Barbara are partners who share profits and losses 40/60. They have capital
account balances of $265,000 and $180,000, respectively at the date they admit Greg into
the partnership. Greg invests $60,000 in the partnership for a 15 percent equity interest
and the bonus method is applied. What is the dollar amount of Greg’s capital account at
the date of admission?
a. $60,000
b. $78,530
c. $429,250
d. $75,750
227. Tom and Barbara are partners who share profits and losses 40/60. They have capital
account balances of $265,000 and $180,000, respectively at the date they admit Greg to
the partnership. Greg invests $60,000 in the partnership for a 15 percent equity interest
and the bonus method is applied. What is the dollar amount of reduction to Tom’s capital
account at the date of admission?
a. $6,300
b. $9,450
c. $54,300
d. $81,450
228. Tom and Barbara are partners who share profits and losses 40/60. They have capital
account balances of $265,000 and $180,000, respectively at the date they admit Greg to
the partnership. Greg invests $60,000 in the partnership for a 15 percent equity interest
and the bonus method is applied. What is the dollar amount of reduction to Barbara’s
capital account at the date of admission?
a. $6,300
b. $9,450
c. $54,300
d. $81,450
229. Tom and Barbara are partners who share profits and losses 40/60. They have capital
account balances of $265,000 and $180,000, respectively at the date they admit Greg to
the partnership. Greg invests $60,000 in the partnership for a 15 percent equity interest
and the bonus method is applied. What is the dollar amount of Tom’s capital account at
the date of admission?
a. $255,550
b. $258,700
c. $173,700
d. $170,550
230. Tom and Barbara are partners who share profits and losses 40/60. They have capital
account balances of $265,000 and $180,000, respectively at the date they admit Greg to
the partnership. Greg invests $60,000 in the partnership for a 15 percent equity interest
and the bonus method is applied. What is the dollar amount of Barbara’s capital account
at the date of admission?
a. $255,550
b. $258,700
c. $173,700
d. $170,550
231. Michelle and Steve are partners in a local business. They currently share profits and
losses 60/40 and have capital account balances of $150,000 and $200,000, respectively.
They are considering admitting Jacob to the partnership. He will receive a 20 percent
equity interest in the partnership for a $120,000 investment. Assuming that goodwill is
to be recognized, which partner(s) are contributing the goodwill?
a. Both new and existing partners are contributing goodwill
b. New partner is contributing goodwill
c. Existing partners are contributing goodwill
d. There is not enough information to answer this question
232. Michelle and Steve are partners in a local business. They currently share profits and
losses 60/40 and have capital account balances of $150,000 and $200,000, respectively.
They are considering admitting Jacob to the partnership. He will receive a 20 percent
equity interest in the partnership for a $120,000 investment. Assuming that goodwill is
to be recognized, what amount of goodwill would be disclosed on the partnership balance
sheet immediately after Jacob is admitted?
a. $130,000
b. $26,000
c. $87,500
d. $32,500
233. Michelle and Steve are partners in a local business. They currently share profits and
losses 60/40 and have capital account balances of $150,000 and $200,000, respectively.
They are considering admitting Jacob to the partnership. He will receive a 20 percent
equity interest in the partnership for a $120,000 investment. Assuming that goodwill is
to be recognized, what will be the capital account balance of Jacob immediately after he
is admitted?
a. $228,000
b. $252,000
c. $250,000
d. $120,000
234. Michelle and Steve are partners in a local business. They currently share profits and
losses 60/40 and have capital account balances of $150,000 and $200,000, respectively.
They are considering admitting Jacob to the partnership. He will receive a 20 percent
equity interest in the partnership for a $120,000 investment. Assuming that goodwill is
to be recognized, what will be the capital account balance of Michelle immediately after
Jacob is admitted?
a. $228,000
b. $252,000
c. $250,000
d. $120,000
235. Michelle and Steve are partners in a local business. They currently share profits and
losses 60/40 and have capital account balances of $150,000 and $200,000, respectively.
They are considering admitting Jacob to the partnership. He will receive a 20 percent
equity interest in the partnership for a $120,000 investment. Assuming that goodwill is
to be recognized, what will be the capital account balance of Steve immediately after
Jacob is admitted?
a. $228,000
b. $252,000
c. $250,000
d. $120,000
236. Susan and David are partners in a local business. They currently share profits and losses
45/55 and have capital account balances of $250,000 and $300,000, respectively. They
are considering admitting Jane to the partnership. She will receive a 25 percent equity
interest in the partnership for a $225,000 investment. Assuming that goodwill is to be
recognized, which partner(s) are contributing the goodwill?
a. New partner is contributing goodwill
b. Existing partners are contributing goodwill
c. Both new and existing partners are contributing goodwill
d. There is not enough information to answer this question
237. Susan and David are partners in a local business. They currently share profits and losses
45/55 and have capital account balances of $250,000 and $300,000, respectively. They
are considering admitting Jane to the partnership. She will receive a 25 percent equity
interest in the partnership for a $225,000 investment. Assuming that goodwill is to be
recognized, what amount of goodwill would be disclosed on the partnership balance
sheet immediately after Jane is admitted?
a. $31,250
b. $125,000
c. $183,333
d. $41,667
238. Susan and David are partners in a local business. They currently share profits and losses
45/55 and have capital account balances of $250,000 and $300,000, respectively. They
are considering admitting Jane to the partnership. She will receive a 25 percent equity
interest in the partnership for a $225,000 investment. Assuming that goodwill is to be
recognized, what will be the capital account balance of Jane immediately after she is
admitted?
a. $225,000
b. $281,250
c. $293,750
d. $183,333
239. Susan and David are partners in a local business. They currently share profits and losses
45/55 and have capital account balances of $250,000 and $300,000, respectively. They
are considering admitting Jane to the partnership. She will receive a 25 percent equity
interest in the partnership for a $225,000 investment. Assuming that goodwill is to be
recognized, what will be the capital account balance of Susan immediately after Jane is
admitted?
a. $318,750
b. $356,250
c. $368,750
d. $306,250
240. Susan and David are partners in a local business. They currently share profits and losses
45/55 and have capital account balances of $250,000 and $300,000, respectively. They
are considering admitting Jane to the partnership. She will receive a 25 percent equity
interest in the partnership for a $225,000 investment. Assuming that goodwill is to be
recognized, what will be the capital account balance of David immediately after Jane is
admitted?
a. $318,750
b. $356,250
c. $368,750
d. $306,250
241. Dan and Stephanie are partners in a local business They currently share profits and
losses 30/70 and have capital account balances of $250,000 and $320,000, respectively.
They are considering admitting Jason to the partnership. He will receive a 25 percent
equity interest in the partnership for a $175,000 investment. Assuming that goodwill is
to be recognized, what amount of goodwill would be disclosed on the partnership balance
sheet immediately after Jason is admitted?
a. $11,250
b. $8,438
c. $186,250
d. $15,000
242. Dan and Stephanie are partners in a local business They currently share profits and
losses 30/70 and have capital account balances of $250,000 and $320,000, respectively.
They are considering admitting Jason to the partnership. He will receive a 25 percent
equity interest in the partnership for a $175,000 investment. Assuming that goodwill is
to be recognized, what will be the capital account balance of Jason immediately after he
is admitted?
a. $190,000
b. $175,000
c. $15,000
d. $186,250
243. Dan and Stephanie are partners in a local business They currently share profits and
losses 30/70 and have capital account balances of $250,000 and $320,000, respectively.
They are considering admitting Jason to the partnership. He will receive a 25 percent
equity interest in the partnership for a $175,000 investment. Assuming that goodwill is
to be recognized, what will be the capital account balance of Dan immediately after Jason
is admitted?
a. $285,000
b. $186,250
c. $250,000
d. $320,000
244. Dan and Stephanie are partners in a local business They currently share profits and
losses 30/70 and have capital account balances of $250,000 and $320,000, respectively.
They are considering admitting Jason to the partnership. He will receive a 25 percent
equity interest in the partnership for a $175,000 investment. Assuming that goodwill is
to be recognized, what will be the capital account balance of Stephanie immediately after
Jason is admitted?
a. $285,000
b. $186,250
c. $250,000
d. $320,000
245. Juan and Felix are partners in a local business. They currently share profits and losses
70/30 and have capital account balances of $240,000 and $320,000, respectively. They
are considering admitting Julia to the partnership. She will receive a 20 percent equity
interest in the partnership for a $150,000 investment. Assuming that goodwill is to be
recognized, which partner(s) are contributing the goodwill?
a. New partner is contributing goodwill
b. Existing partners are contributing goodwill
c. Both new and existing partners are contributing goodwill
d. There is not enough information to answer this question
246. Juan and Felix are partners in a local business. They currently share profits and losses
70/30 and have capital account balances of $240,000 and $320,000, respectively. They
are considering admitting Julia to the partnership. She will receive a 20 percent equity
interest in the partnership for a $150,000 investment. Assuming that goodwill is to be
recognized, what amount of goodwill would be disclosed on the partnership balance
sheet immediately after Julia is admitted?
a. $142,000
b. $150,000
c. $10,000
d. $8,000
247. Juan and Felix are partners in a local business. They currently share profits and losses
70/30 and have capital account balances of $240,000 and $320,000, respectively. They
are considering admitting Julia to the partnership. She will receive a 20 percent equity
interest in the partnership for a $150,000 investment. Assuming that goodwill is to be
recognized, what will be the capital account balance of Julia immediately after she is
admitted?
a. $160,000
b. $150,000
c. $152,000
d. $158,000
248. Juan and Felix are partners in a local business. They currently share profits and losses
70/30 and have capital account balances of $240,000 and $320,000, respectively. They
are considering admitting Julia to the partnership. She will receive a 20 percent equity
interest in the partnership for a $150,000 investment. Assuming that goodwill is to be
recognized, what will be the capital account balance of Juan immediately after Julia is
admitted?
a. $280,000
b. $142,000
c. $320,000
d. $240,000
249. Juan and Felix are partners in a local business. They currently share profits and losses
70/30 and have capital account balances of $240,000 and $320,000, respectively. They
are considering admitting Julia to the partnership. She will receive a 20 percent equity
interest in the partnership for a $150,000 investment. Assuming that goodwill is to be
recognized, what will be the capital account balance of Felix immediately after Julia is
admitted?
a. $280,000
b. $142,000
c. $320,000
d. $240,000
250. Harry, Susan, and Walter are partners who share profits and losses 35, 40, and 25 percent,
respectively. Harry is withdrawing from the partnership. At the date of withdrawal, the
partners are revaluing Harry’s portion of the partnership’s assets. If the value of the
partnership’s assets are $200,000 greater than book value, what is the dollar amount of
capital account adjustment that will be recorded?
a. $50,000
b. $70,000
c. $80,000
d. $200,000
251. Harry, Susan, and Walter are partners who share profits and losses 35, 40, and 25 percent,
respectively. Harry is withdrawing from the partnership. At the date of withdrawal, the
partners are revaluing all of the partnership’s assets. If the value of the partnership’s
assets are $200,000 greater than book value, what is the dollar amount of capital account
adjustment that will be recorded?
a. $50,000
b. $70,000
c. $80,000
d. $200,000
252. Harry, Susan, and Walter are partners who share profits and losses 35, 40, and 25 percent,
respectively. The partners have capital account balances of $80,000, $110,000, and
$55,000, respectively. Harry is withdrawing from the partnership. At the date of
withdrawal, the partners are revaluing all of the partnership’s assets, an increase of
$200,000. If Susan and Walter acquire Harry’s equity, what will be the amount of
Susan’s capital on the partnership’s balance sheet immediately after Harry’s withdrawal,
rounded to the nearest dollar?
a. $110,000
b. $230,000
c. $282,308
d. Susan’s capital account balance cannot be determined from the information given
253. Harry, Susan, and Walter are partners who share profits and losses 35, 40, and 25 percent,
respectively. The partners have capital account balances of $80,000, $110,000, and
$55,000, respectively. Harry is withdrawing from the partnership. At the date of
withdrawal, the partners are revaluing all of the partnership’s assets, an increase of
$200,000. If Susan and Walter acquire Harry’s equity, what will be the amount of total
capital on the partnership’s balance sheet immediately after Harry’s withdrawal?
a. $245,000
b. $445,000
c. $365,000
d. $295,000
254. Frank, George, and Scott are partners with capital accounts of $160,000, $120,000, and
$210,000, respectively. Scott has informed Frank and George that he must withdraw
from the partnership. The partners have agreed that the partnership will purchase Scott’s
ownership interest for $250,000. The profit and loss residual ratios before Scott’s
retirement are 45 percent, 30 percent, and 25 percent, respectively. How much will
Frank’s capital account be reduced if the bonus method is applied for the withdrawal?
a. $40,000
b. $24,000
c. $20,000
d. $16,000
255. Frank, George, and Scott are partners with capital accounts of $160,000, $120,000, and
$210,000, respectively. Scott has informed Frank and George that he must withdraw
from the partnership. The partners have agreed that the partnership will purchase Scott’s
ownership interest for $250,000. The profit and loss residual ratios before Scott’s
retirement are 45 percent, 30 percent, and 25 percent, respectively. What will be the
balance in Frank’s capital account if the bonus method is applied for the withdrawal?
a. $160,000
b. $104,000
c. $184,000
d. $136,000
256. Frank, George, and Scott are partners with capital accounts of $160,000, $120,000, and
$210,000, respectively. Scott has informed Frank and George that he must withdraw
from the partnership. The partners have agreed that the partnership will purchase Scott’s
ownership interest for $250,000. The profit and loss residual ratios before Scott’s
retirement are 45 percent, 30 percent, and 25 percent, respectively. How much will
George’s capital account be reduced if the bonus method is applied for the withdrawal?
a. $40,000
b. $24,000
c. $20,000
d. $16,000
257. Frank, George, and Scott are partners with capital accounts of $160,000, $120,000, and
$210,000, respectively. Scott has informed Frank and George that he must withdraw
from the partnership. The partners have agreed that the partnership will purchase Scott’s
ownership interest for $250,000. The profit and loss residual ratios before Scott’s
retirement are 45 percent, 30 percent, and 25 percent, respectively. What will be the
balance in George’s capital account if the bonus method is applied for the withdrawal?
a. $120,000
b. $104,000
c. $184,000
d. $136,000
258. Melissa, Randy, and Sarah are partners with capital accounts of $300,000, $180,000, and
$270,000, respectively. Randy has informed Melissa and Sarah that he must withdraw
from the partnership. The partners have agreed that the partnership will purchase
Randy’s ownership interest for $240,000. The profit and loss residual ratios before
Randy’s retirement are 42 percent, 30 percent, and 28 percent, respectively. How much
will Melissa’s capital account be reduced if the bonus method is applied for the
withdrawal?
a. $36,000
b. $60,000
c. $24,000
d. $30,000
259. Melissa, Randy, and Sarah are partners with capital accounts of $300,000, $180,000, and
$270,000, respectively. Randy has informed Melissa and Sarah that he must withdraw
from the partnership. The partners have agreed that the partnership will purchase
Randy’s ownership interest for $240,000. The profit and loss residual ratios before
Randy’s retirement are 42 percent, 30 percent, and 28 percent, respectively. What will be
the balance in Melissa’s capital account if the bonus method is applied for the
withdrawal?
a. $336,000
b. $300,000
c. $264,000
d. $246,000
260. Melissa, Randy, and Sarah are partners with capital accounts of $300,000, $180,000, and
$270,000, respectively. Randy has informed Melissa and Sarah that he must withdraw
from the partnership. The partners have agreed that the partnership will purchase
Randy’s ownership interest for $240,000. The profit and loss residual ratios before
Randy’s retirement are 42 percent, 30 percent, and 28 percent, respectively. How much
will Sarah’s capital account be reduced if the bonus method is applied for the
withdrawal?
a. $36,000
b. $60,000
c. $24,000
d. $30,000
261. Melissa, Randy, and Sarah are partners with capital accounts of $300,000, $180,000, and
$270,000, respectively. Randy has informed Melissa and Sarah that he must withdraw
from the partnership. The partners have agreed that the partnership will purchase
Randy’s ownership interest for $240,000. The profit and loss residual ratios before
Randy’s retirement are 42 percent, 30 percent, and 28 percent, respectively. What will be
the balance in Sarah’s capital account if the bonus method is applied for the withdrawal?
a. $336,000
b. $300,000
c. $264,000
d. $246,000
262. Bob, Claire, and Jack are partners who share profits and losses 30 percent, 25 percent,
and 45 percent, respectively. Bob informed Claire and Jack that he is withdrawing from
the partnership. The partners’ capital accounts at the date of Bob’s withdrawal are
$150,000, $135,000, and $225,000, respectively. The partnership agreement states that
the goodwill, if any, of the withdrawing partner will be recognized for all partners
immediately prior to the withdrawal of any partner. In this instance, the partners
determine that the goodwill associated with Bob is $22,500. Assuming that Bob’s equity
is purchased by a new partner (Deborah) approved by Claire and Jack, what is the
amount of Deborah’s initial capital account?
a. $150,000
b. $170,000
c. $172,500
d. The amount cannot be determined because the amount Deborah paid for Bob’s
equity is not known
263. Bob, Claire, and Jack are partners who share profits and losses 30 percent, 25 percent,
and 45 percent, respectively. Bob informed Claire and Jack that he is withdrawing from
the partnership. The partners’ capital accounts at the date of Bob’s withdrawal are
$150,000, $135,000, and $225,000, respectively. The partnership agreement states that
the goodwill, if any, of the withdrawing partner will be recognized for all partners
immediately prior to the withdrawal of any partner. In this instance, the partners
determine that the goodwill associated with Bob is $22,500. Assuming that Bob’s equity
is purchased by Claire (60 percent) and Jack (40 percent), what is the amount of Claire’s
capital account at the date of Bob’s withdrawal?
a. $238,500
b. $307,500
c. $186,750
d. $180,000
264. Bob, Claire, and Jack are partners who share profits and losses 30 percent, 25 percent,
and 45 percent, respectively. Bob informed Claire and Jack that he is withdrawing from
the partnership. The partners’ capital accounts at the date of Bob’s withdrawal are
$150,000, $135,000, and $225,000, respectively. The partnership agreement states that
the goodwill, if any, of the withdrawing partner will be recognized for all partners
immediately prior to the withdrawal of any partner. In this instance, the partners
determine that the goodwill associated with Bob is $22,500. Assuming that Bob’s equity
is purchased by Claire (60 percent) and Jack (40 percent), what is the amount of Jack’s
capital account at the date of Bob’s withdrawal?
a. $397,500
b. $294,000
c. $285,000
d. $159,000
265. Bob, Claire, and Jack are partners who share profits and losses 30 percent, 25 percent,
and 45 percent, respectively. Bob informed Claire and Jack that he is withdrawing from
the partnership. The partners’ capital accounts at the date of Bob’s withdrawal are
$150,000, $135,000, and $225,000, respectively. The partnership agreement states that
the goodwill of the partnership will be recognized for all partners immediately prior to
the withdrawal of any partner. In this instance, the partners determine that the
partnership’s goodwill $75,000. Assuming that Bob’s equity is purchased by a new
partner (Deborah) approved by Claire and Jack, what is the amount of Deborah’s initial
capital account?
a. $150,000
b. $170,000
c. $172,500
d. The amount cannot be determined because the amount Deborah paid for Bob’s
equity is not known
266. Bob, Claire, and Jack are partners who share profits and losses 30 percent, 25 percent,
and 45 percent, respectively. Bob informed Claire and Jack that he is withdrawing from
the partnership. The partners’ capital accounts at the date of Bob’s withdrawal are
$150,000, $135,000, and $225,000, respectively. The partnership agreement states that
the goodwill of the partnership will be recognized for all partners immediately prior to
the withdrawal of any partner. In this instance, the partners determine that the
partnership’s goodwill $75,000. Assuming that Bob’s equity is purchased by Claire (60
percent) and Jack (40 percent), what is the amount of Claire’s capital account at the date
of Bob’s withdrawal?
a. $175,500
b. $247,500
c. $257,250
d. $327,750
267. Bob, Claire, and Jack are partners who share profits and losses 30 percent, 25 percent,
and 45 percent, respectively. Bob informed Claire and Jack that he is withdrawing from
the partnership. The partners’ capital accounts at the date of Bob’s withdrawal are
$150,000, $135,000, and $225,000, respectively. The partnership agreement states that
the goodwill of the partnership will be recognized for all partners immediately prior to
the withdrawal of any partner. In this instance, the partners determine that the
partnership’s goodwill $75,000. Assuming that Bob’s equity is purchased by Claire (60
percent) and Jack (40 percent), what is the amount of Jack’s capital account at the date of
Bob’s withdrawal?
a. $175,500
b. $247,500
c. $257,250
d. $327,750
268. Bonnie, Gwen, and Sally are partners with capital account balances of $350,000,
$280,000, and $200,000 respectively. Sally informed Bonnie and Gwen that she is
withdrawing from the partnership. The partners’ share profits and losses 45 percent, 30
percent, and 25 percent, respectively. The partnership agreement states that the goodwill,
if any, of the withdrawing partner will be recognized at the date of withdrawal. In this
instance, the partners determine that the goodwill associated with Sally is $40,000.
Assuming that Sally’s equity is purchased by a new partner (Mary) approved by Bonnie
and Gwen, what is the amount of Mary’s initial capital account?
a. $240,000
b. $390,000
c. $320,000
d. The amount cannot be determined because the amount Mary paid for Sally’s
equity is not known
269. Bonnie, Gwen, and Sally are partners with capital account balances of $350,000,
$280,000, and $200,000 respectively. Sally informed Bonnie and Gwen that she is
withdrawing from the partnership. The partners’ share profits and losses 45 percent, 30
percent, and 25 percent, respectively. The partnership agreement states that the goodwill,
if any, of the withdrawing partner will be recognized at the date of withdrawal. In this
instance, the partners determine that the goodwill associated with Sally is $40,000.
Assuming that Sally’s equity is purchased by Bonnie (60 percent) and Gwen (40
percent), what is the amount of Bonnie’s capital account at the date of Sally’s
withdrawal?
a. $446,000
b. $494,000
c. $424,000
d. $376,000
270. Bonnie, Gwen, and Sally are partners with capital account balances of $350,000,
$280,000, and $200,000 respectively. Sally informed Bonnie and Gwen that she is
withdrawing from the partnership. The partners’ share profits and losses 45 percent, 30
percent, and 25 percent, respectively. The partnership agreement states that the goodwill,
if any, of the withdrawing partner will be recognized at the date of withdrawal. In this
instance, the partners determine that the goodwill associated with Sally is $40,000.
Assuming that Sally’s equity is purchased by Bonnie (60 percent) and Gwen (40
percent), what is the amount of Gwen’s capital account at the date of Sally’s withdrawal?
a. $446,000
b. $494,000
c. $424,000
d. $376,000
271. Bonnie, Gwen, and Sally are partners with capital account balances of $350,000,
$280,000, and $200,000 respectively. Sally informed Bonnie and Gwen that she is
withdrawing from the partnership. The partners’ share profits and losses 45 percent, 30
percent, and 25 percent, respectively. The partnership agreement states that the goodwill
of the partnership will be recognized at the date of withdrawal. In this instance, the
partners determine that the partnership’s goodwill $150,000. Assuming that Sally’s
equity is purchased by a new partner (Mary) approved by Bonnie and Gwen, what is the
amount of Mary’s initial capital account?
a. $87,500
b. $237,500
c. $350,000
d. The amount cannot be determined because the amount Mary paid for Sally’s
equity is not known
272. Bonnie, Gwen, and Sally are partners with capital account balances of $350,000,
$280,000, and $200,000 respectively. Sally informed Bonnie and Gwen that she is
withdrawing from the partnership. The partners’ share profits and losses 45 percent, 30
percent, and 25 percent, respectively. The partnership agreement states that the goodwill
of the partnership will be recognized at the date of withdrawal. In this instance, the
partners determine that the partnership’s goodwill $150,000. Assuming that Sally’s
equity is purchased by Bonnie (60 percent) and Gwen (40 percent), what is the amount of
Bonnie’s capital account at the date of Sally’s withdrawal?
a. $441,000
b. $490,000
c. $560,000
d. $420,000
273 Bonnie, Gwen, and Sally are partners with capital account balances of $350,000,
$280,000, and $200,000 respectively. Sally informed Bonnie and Gwen that she is
withdrawing from the partnership. The partners’ share profits and losses 45 percent, 30
percent, and 25 percent, respectively. The partnership agreement states that the goodwill
of the partnership will be recognized at the date of withdrawal. In this instance, the
partners determine that the partnership’s goodwill $150,000. Assuming that Sally’s
equity is purchased by Bonnie (60 percent) and Gwen (40 percent), what is the amount of
Bonnie’s capital account at the date of Sally’s withdrawal?
a. $441,000
b. $490,000
c. $560,000
d. $420,000
274. Bonnie, Gwen, and Sally are partners with capital account balances of $350,000,
$280,000, and $200,000 respectively. Sally informed Bonnie and Gwen that she is
withdrawing from the partnership. The partners’ share profits and losses 45 percent, 30
percent, and 25 percent, respectively. The partnership agreement states that the goodwill
of the partnership will be recognized at the date of withdrawal. In this instance, the
partners determine that the partnership’s goodwill $150,000. Assuming that Sally’s
equity is purchased by Bonnie (60 percent) and Gwen (40 percent), what is total
partnership equity after the withdrawal?
a. $980,000
b. $780,000
c. $830,000
d. $630,000
212. moderate b
[$150,000 - ($270,000 + $300,000 + $150,000)(.20)](.25)
213. difficult a
[$150,000 - ($270,000 + $300,000 + $150,000)(.20)](.75) + $270,000
214. difficult b
[$150,000 - ($270,000 + $300,000 + $150,000)(.20)](.25) + $300,000
215. moderate c
($625,000 + $480,000 + $450,000)(.25)
216. moderate d
[$450,000 - ($625,000 + $480,000 + $450,000)(.25)](.60)
217. moderate c
[$450,000 - ($625,000 + $480,000 + $450,000)(.25)](.40)
218. difficult b
[$450,000 - ($625,000 + $480,000 + $450,000)(.25)](.60) + $625,000
219. difficult d
[$450,000 - ($625,000 + $480,000 + $450,000)(.25)](.40) + $480,000
220. moderate a
($170,000 + $260,000 + $120,000)(.25)
221. moderate c
[$120,000 - ($170,000 + $260,000 + $120,000)(.25)]
222. moderate b
[$120,000 - ($170,000 + $260,000 + $120,000)(.25)](.70)
223. moderate a
[$120,000 - ($170,000 + $260,000 + $120,000)(.25)](.30)
224. difficult a
$170,000 - [$120,000 - ($170,000 + $260,000 + $120,000)(.25)](.70)
225. difficult b
$260,000 - [$120,000 - ($170,000 + $260,000 + $120,000)(.25)](.30)
226. moderate d
($265,000 + $180,000 + $60,000)(.15)
227. moderate a
[$60,000 - ($265,000 + $180,000 + $60,000)(.15)](.40)
228. moderate b
[$60,000 - ($265,000 + $180,000 + $60,000)(.15)](.60)
229. difficult b
$265,000 - [$60,000 - ($265,000 + $180,000 + $60,000)(.15)](.40)
230. difficult d
$180,000 - [$60,000 - ($265,000 + $180,000 + $60,000)(.15)](.60)
231. moderate c
($150,000 + $200,000 + $120,000)(.20) = $94,000
232. difficult a
($150,000 + $200,000 + $120,000)(.20) = $94,000, goodwill to existing partners
$120,000 + $0 = .2($150,000 + $200,000 + $120,000 + goodwill)
$120,000 = $94,000 + .2 goodwill
$26,000 = .2 goodwill
Goodwill = $130,000
233. moderate d
($240,000 - $180,000)(42/70)
259. moderate c
$300,000 - ($240,000 - $180,000)(42/70)
260. moderate c
($240,000 - $180,000)(28/70)
261. moderate d
$270,000 - ($240,000 - $180,000)(28/70)
262. easy c
$150,000 + $22,500
263. moderate a
$135,000 + ($150,000 + $22,500)(.60)
264. moderate b
$225,000 + ($150,000 + $22,500)(.40)
265. easy c
$150,000 + ($75,000 x .3)
266. difficult c
$135,000 + ($75,000 x .25) + [$150,000 + ($75,000 x .30)](.60)
267. difficult d
$225,000 + ($75,000 x .45) + [$150,000 + ($75,000 x .30)](.40)
268. easy a
$200,000 + $40,000
269. moderate b
$350,000 + ($200,000 + $40,000)(.60)
270. moderate c
$280,000 + ($200,000 + $40,000)(.40)
271. easy b
$200,000 + ($150,000 x .25)
272. difficult c
$350,000 + ($150,000 x .45) + [$200,000 + ($150,000 x .25)](.60)
273 difficult d
$280,000 + ($150,000 x .30) + [$200,000 + ($150,000 x .25)](.40)
274. moderate a
$350,000 + $280,000 + $200,000 + $150,000
Problems
275. (10 Points) moderate
Alan, Betty, and Carl are forming a partnership. Each will contribute cash and noncash
assets. Assume the initial capital account balances will be determined based on the value
of the assets contributed. Information regarding the initial contributions is provided
below:
Required:
a. Record the journal entry to establish the initial partners’ capital accounts and the
assets assuming the carrying value is used to determine the value assigned to
noncash assets contributed. Assume also that each partner’s capital account is
assigned a value equal to the cash and noncash assets contributed by that partner.
b. Record the journal entry to establish the initial partners’ capital accounts and the
assets assuming the carrying value is used to determine the value assigned to
noncash assets contributed. Assume also that all of the partners’ capital accounts
are equal when the journal entry is completed.
c. Contrast the entries in parts a. and b. Why might the partners agree to equal
capital accounts as presented in b.?
Answer:
Part a.
Cash ($150,000 + $275,000 + $125,000) 550,000
Plant Assets ($215,000 + $225,000 + $300,000) 740,000
Alan, Capital ($150,000 + $215,000) 365,000
Betty, Capital ($275,000 + $225,000) 500,000
Carl, Capital ($125,000 + $300,000) 425,000
Part b.
Cash ($150,000 + $275,000 + $125,000) 550,000
Plant Assets ($215,000 + $225,000 + $300,000) 740,000
Alan, Capital ($550,000 + $740,000)/3 430,000
Betty, Capital ($550,000 + $740,000)/3 430,000
Carl, Capital ($550,000 + $740,000)/3 430,000
Part c. Alan has significantly more capital when it is divided equally when compared to
assigning the sum of the carrying values of assets contributed. On the other hand,
Betty has significantly less capital when it is divided equally. Carl has
approximately the same amount under either assignment method. One possibility
is that Betty is giving up some capital to Alan because Alan has substantially
more expertise in running the business. Thus, Betty is paying a bonus to Alan.
Required:
a. Record the journal entry to establish the initial partners’ capital accounts and the
assets assuming the tax basis is used to determine the value assigned to noncash
assets contributed. Assume also that each partner’s capital account is assigned a
value equal to the cash and noncash assets contributed by that partner.
b. Record the journal entry to establish the initial partners’ capital accounts and the
assets assuming the tax basis is used to determine the value assigned to noncash
assets contributed. Assume also that all of the partners’ capital accounts are equal
when the journal entry is completed.
c. Contrast the entries in parts a. and b. Why might the partners agree to equal
capital accounts as presented in b.?
Answer:
Part a.
Cash ($150,000 + $275,000 + $125,000) 550,000
Plant Assets ($200,000 + $190,000 + $230,000) 620,000
Alan, Capital ($150,000 + $200,000) 350,000
Betty, Capital ($275,000 + $190,000) 465,000
Carl, Capital ($125,000 + $230,000) 355,000
Part b.
Cash ($150,000 + $275,000 + $125,000) 550,000
Plant Assets ($200,000 + $190,000 + $230,000) 620,000
Alan, Capital ($550,000 + $620,000)/3 390,000
Betty, Capital ($550,000 + $620,000)/3 390,000
Carl, Capital ($550,000 + $620,000)/3 390,000
Part c. Alan and Carl each have significantly more capital when it is divided equally
when compared to assigning the sum of the carrying values of assets contributed.
On the other hand, Betty has significantly less capital when it is divided equally.
One possibility is that Betty is giving up some capital to Alan and Carl because
they have substantially more expertise in running the business. Thus, Betty is
paying a bonus to Alan and Carl.
Required:
a. Record the journal entry to establish the initial partners’ capital accounts and the
assets assuming the market value is used to determine the value assigned to
noncash assets contributed. Assume also that each partner’s capital account is
assigned a value equal to the cash and noncash assets contributed by that partner.
b. Record the journal entry to establish the initial partners’ capital accounts and the
assets assuming the market value is used to determine the value assigned to
noncash assets contributed. Assume also that all of the partners’ capital accounts
are equal when the journal entry is completed.
c. Contrast the entries in parts a. and b. Why might the partners agree to equal
capital accounts as presented in b.?
Answer:
Part a.
Cash ($150,000 + $275,000 + $125,000) 550,000
Plant Assets ($350,000 + $260,000 + $310,000) 920,000
Alan, Capital ($150,000 + $350,000) 500,000
Betty, Capital ($275,000 + $260,000) 535,000
Carl, Capital ($125,000 + $310,000) 435,000
Part b.
Cash ($150,000 + $275,000 + $125,000) 550,000
Plant Assets ($350,000 + $260,000 + $310,000) 920,000
Alan, Capital ($550,000 + $920,000)/3 490,000
Betty, Capital ($550,000 + $920,000)/3 490,000
Carl, Capital ($550,000 + $920,000)/3 490,000
Part c. Carl has significantly more capital when it is divided equally when compared to
assigning the sum of the carrying values of assets contributed. On the other hand,
Betty has significantly less capital when it is divided equally. Alan has
approximately the same amount under either assignment method. One possibility
is that Betty is giving up some capital to Carl because Carl has substantially more
expertise in running the business. Thus, Betty is paying a bonus to Carl.
Record the journal entry to establish the assets and owners’ equity of the partnership.
Answer:
Cash ($150,000 + $225,000 + $175,000) 550,000
Inventory ($57,000 + $89,000) 146,000
In addition, Casey brings significant experience needed to run the business. It is agreed
that partners will receive capital allocations equal to the market value of the net assets
contributed and that Casey will receive additional capital of $75,000 and the bonus
method will be applied. Two-thirds of the bonus is to come from William and one-third
from Samantha. Record the journal entry for the creation of the partnership.
Answer:
Cash ($15,000 + $20,000 + $10,000) 45,000
Inventory ($100,000 + $60,000 + $80,000) 240,000
Plant Assets ($250,000 + $160,000) 410,000
Liabilities ($130,000 + $90,000) 220,000
Casey, Capital ($20,000 + $60,000 + $75,000) 155,000
Samantha, Capital [$10,000 + $80,000 + 135,000
$160,000 - $90,000 - ($75,000/3)]
William, Capital [$15,000 + $100,000 + 185,000
$250,000 - $130,000 - ($75,000 x 2/3)]
In addition, Bonnie brings significant experience because she has run a similar type of
business. It is agreed that Bonnie will receive additional capital of $80,000 and the
bonus method will be applied. Sixty percent of the bonus is to come from Deborah and
forty percent from Connie. Record the journal entry for the creation of the partnership.
Answer:
Cash ($150,000 + $200,000 + $140,000) 490,000
Inventory ($160,000 + $190,000 + $180,000) 530,000
Plant Assets ($300,000 + $340,000) 640,000
Liabilities ($180,000 + $130,000) 310,000
Bonnie, Capital ($150,000 + $160,000 + 510,000
$300,000 - $180,000 + $80,000)
Connie, Capital [$200,000 + $190,000 - 358,000
($80,000 x .4)]
Deborah, Capital [$140,000 + $180,000 + 482,000
$340,000 - $130,000 - ($80,000 x .6)]
Answer:
Cash ($20,000 + $35,000 + $55,000) 110,000
Plant Assets ($75,000 + $90,000 + $60,000) 225,000
Goodwill 50,000
Liabilities ($25,000 + $45,000 + $15,000) 85,000
Able, Capital ($20,000 + $75,000 - $25,000) 70,000
Baker, Capital ($35,000 + $90,000 - $45,000) 80,000
Charlie, Capital ($55,000 + $60,000 - $15,000 + 150,000
$50,000)
Required:
a. Record the journal entry to establish the partnership.
b. What appears to be the partners’ intent when creating the new partnership?
Answer:
Part a.
Cash ($100,000 + $250,000 + $170,000) 520,000
Inventory ($280,000 + $400,000 + $450,000) 1,130,000
Plant Assets ($750,000 + $500,000 + $600,000) 1,850,000
Goodwill 120,000
Accounts Payable ($190,000 + $270,000 + 720,000
$260,000)
Mortgage Payable ($340,000 + $200,000 + 860,000
$320,000)
Jessica, Capital ($100,000 + $280,000 + 680,000
$750,000 - $190,000 - $340,000 + $80,000)
Mary, Capital ($250,000 + $400,000 + 680,000
$500,000 - $270,000 - $200,000)
Susan, Capital ($170,000 + $450,000 + 680,000
$600,000 - $260,000 - $320,000 + $40,000)
Part b.
The apparent intent of the partners is to make all three partner capital accounts of equal
dollar amount when the partnership is formed.
The partnership agreement stipulates that the weighted-average capital balance is the
basis for the interest on capital component of profit and loss allocation and the rate of
return on invested capital is 12 percent. What is the amount of interest on capital
allocated to each partner as a part of the profit and loss allocation?
Answer:
The partnership agreement stipulates that the weighted-average capital balance is the
basis for the interest on capital component of profit and loss allocation and the rate of
Answer:
JOHN’S AVERAGE CAPITAL BALANCE
Capital Time Average
Date Invest/Withdraw Balance Invested Capital__
January 1 $250,000 3 months $ 750,000
March 31 Withdraw $30,000 220,000 5 months 1,100,000
August 31 Invest $40,000 260,000 2 months 520,000
November 1 Invest $25,000 285,000 2 months 570,000
$2,940,000
Average capital ($2,940,000 / 12) $245,000
Answer:
Bonus = .08($350,000 - $200,000 - B)
1.08 Bonus = $12,000
Bonus = $11,111.11
Answer:
Bonus = .12 ($400,000 - $250,000 - B)
Bonus = $16,071.43
Required:
a. How much is allocated to each partner if the profit and loss residual ratios are
30%, 20%, and 50%, respectively?
b. How would the profit be allocated if there were no profit and loss residual ratios?
Answer:
Part a.
Frank $90,000 x .30 = $27,000
George $90,000 x .20 = $18,000
Hank $90,000 x .50 = $45,000
Part b.
Frank, George and Hank $90,000/3 = $30,000
The interest portion of the profit and loss allocation is 8 percent of the weighted-average
capital balance. Profit allocation is determined in the order presented above. Assume the
allocation is completed regardless of the level of profit. Partnership losses, on the other
hand, are allocated by the residual ratios only.
Required:
Solution:
Part a.
Beverly Brad Bob Total__
Interest on capital
$400,000 x .08 $ 32,000
$650,000 x .08 $ 52,000
$550,000 x .08 $ 44,000 $128,000
Salary 40,000 65,000 80,000 185,000
Bonus
.1($580,000 - $200,000) 38,000 38,000
Residual
$229,000 x .4 91,600
$229,000 x .35 80,150
$229,000 x .25 57,250 229,000
$163,600 $235,150 $181,250 $580,000
Part b.
Beverly Brad Bob Total__
Interest on capital
$400,000 x .08 $32,000
$650,000 x .08 $ 52,000
$550,000 x .08 $44,000 $128,000
Salary 40,000 65,000 80,000 185,000
Bonus
.1($250,000 - $200,000) 5,000 5,000
Residual
($68,000) x .4 (27,200)
($68,000) x .35 (23,800)
($68,000) x .25 (17,000) (68,000)
$44,800 $98,200 $107,000 $250,000
Part c.
Beverly Brad Bob Total__
Residual
($50,000) x .4 ($20,000)
($50,000) x .35 ($17,500)
($50,000) x .25 ($12,500) ($50,000)
Solution:
Tiffany Jason Shanel Total_
Interest on capital
$200,000 x .06 $ 12,000
$180,000 x .06 $ 10,800
$160,000 x .06 $ 9,600 $ 32,400
Salary
1,500 x $40 60,000
1,700 x $40 68,000
2,200 x $40 88,000 216,000
Bonus
.15($450,000 - $250,000 - B) 26,087 26,087
Residual
$175,513/3 58,504 58,504 58,505 175,513
$130,504 $163,391 $156,105 $450,000
Solution:
Cash 280,000
Land 110,000
Gain on Sale of Land 170,000
building with a $370,000 market value and a $150,000 book value. One year after
changing the profit and loss ratios, the building is sold for $500,000. Record (1) the sale
of the building and (2) the distribution of the gain on sale to the partners.
Solution:
Cash 500,000
Building 150,000
Gain on Sale of Building 350,000
Solution:
Land ($420,000 - $250,000) 170,000
Janice, capital ($170,000 x .40) 68,000
Richard, capital ($170,000 x .60) 102,000
Cash 600,000
Land 420,000
Gain on Sale of Land ($600,000 - $420,000) 180,000
Solution:
Building ($340,000 - $100,000) 240,000
Cash 270,000
Loss on Sale of Building ($270,000 - $340,000) 70,000
Building 340,000
Solution:
Darris, capital [($340,000 - $150,000)(.20-.30)] 21,000
Tom, capital [($340,000 - $150,000)(.80 - .70)] 21,000
Solution:
Donna, capital [($650,000 - $400,000)(.40-.55)] 37,500
Tim, capital [($650,000 - $400,000)(.60 - .45)] 37,500
Solution:
Mel, capital ($105,000/3) 35,000
Heather, capital 35,000
John, Linda, and Bill are partners with capital accounts of $78,000, $59,000, and
$183,000, respectively. In addition, they share profits and losses 30%, 25%, and 45%,
respectively. Bill is planning to partially retire and has asked John and Linda if they
would approve Mitch as a new partner. John and Linda respond that Mitch is acceptable
but they want to revalue the partnership’s assets before Mitch is admitted. At the date of
the admission, the net assets are written up $250,000. Mitch pays Bill $200,000 for 60
percent of his equity. Record the revaluation of the assets and the admission of Mitch
into the partnership.
Solution:
Assets 250,000
John, capital ($250,000 x .30)
75,000
Linda, capital ($250,000 x .25) 62,500
Bill, capital ($250,000 x .45) 112,500
Solution:
Assets 100,000
Susan, capital ($100,000 x .60) 60,000
Tom, capital ($100,000 x .40) 40,000
Cash 187,500
Scott, capital 187,500
revalued up $225,000. Record the revaluation of the assets and the admission of Dorothy
into the partnership.
Answer:
Assets 225,000
Wayne, capital ($225,000 x .30) 67,500
Dennis, capital ($225,000 x .70) 157,500
Cash 193,750
Dorothy, capital 193,750
Answer:
Cash 140,000
Jane, capital ($140,000 - $118,000)(.30) 6,600
Louise, capital ($140,000 - $118,000)(.70) 15,400
Mary, capital ($260,000 + $190,000 + $140,000)(.20) 118,000
Answer:
Cash 325,000
Sheila, capital ($300,000 + $460,000 + 271,250
$325,000)(.25)
Ray, capital ($325,000 - $271,250)(.40) 21,500
Steve, capital ($325,000 - $271,250)(.60) 32,250
Deborah and Randy are partners who share profits and losses 55/45. They have capital
account balances of $450,000 and $380,000, respectively. The partners have been
negotiating with Marsha about her joining the partnership. The parties agree that the
partnership will revalue assets to their market value ($150,000 above book value) and
that Marsha will invest $250,000 for a 15 percent equity interest. Record the revaluation
and the admission of Marsha into the partnership assuming the bonus method is applied.
Answer:
Assets 150,000
Deborah, capital ($150,000 x .55) 82,500
Randy, capital ($150,000 x .45) 67,500
Cash 250,000
Deborah, capital ($250,000 - $184,500)(.55) 36,025
Marsha, capital ($450,000 + $380,000 + 184,500
$150,000 + $250,000)(.15)
Randy, capital ($250,000 - $184,500)(.45) 29,475
Answer:
Cash 80,000
Jennifer, capital ($85,000 - $80,000)(.45) 2,250
Juan, capital ($85,000 - $80,000)(.55) 2,750
Kathryn, capital ($100,000 + $160,000 + 85,000
$80,000)(.25)
Answer:
Cash 125,000
Fred, capital ($143,750 - $125,000)(.60) 11,250
Laurie, capital ($143,750 - $125,000)(.40) 7,500
John, capital ($160,000 + $290,000 + 143,750
$125,000)(.25)
Jo Ann and Robert are partners who share profits and losses 30/70. They have capital
account balances of $150,000 and $280,000, respectively. The partners have been
negotiating with Bill about him joining the partnership. The parties agree that the
partnership will revalue assets to their market value ($80,000 above book value) and that
Bill will invest $100,000 for a 20 percent equity interest. Record the revaluation and the
admission of Bill into the partnership assuming the bonus method is applied.
Answer:
Assets 80,000
Jo Ann, capital ($80,000 x .30) 24,000
Robert, capital ($80,000 x .70) 56,000
Cash 100,000
Jo Ann, capital ($122,000 - $100,000)(.30) 6,600
Robert, capital ($122,000 - $100,000)(.70) 15,400
Bill, capital ($280,000 + $150,000 + 122,000
$80,000 + $100,000)(.20)
Answer:
Book value of capital before the investment $570,000
Don’s investment 225,000
Total book value of capital after the investment $795,000
Don’s percentage ownership 0.25
Book value of Don’s ownership percentage capital $198,750
Cash 225,000
Goodwill 105,000
Don, capital 225,000
Robert, capital ($105,000 x .80) 84,000
Steve, capital ($105,000 x .20) 21,000
Ann and Sarah are partners in a local company. They have capital accounts in the
amounts of $150,000 and $220,000, respectively, when they agree to admit a new
partner, John, to the company. John has agreed to contribute $175,000 for a 25 percent
interest in the owners’ equity of the partnership. Before John’s admission to the
partnership, Ann and Sarah share profits and losses 40 percent and 60 percent,
respectively. Record the admission of John assuming the goodwill method is applied.
Answer:
Book value of capital before the investment $370,000
John’s investment 175,000
Total book value of capital after the investment 545,000
John’s percentage ownership 0.25
Book value of John’s ownership percentage capital 136,250
Cash 175,000
Goodwill 155,000
Ann, capital ($155,000 x .40) 62,000
John, capital 175,000
Sarah, capital ($155,000 x .60) 93,000
Answer:
Assets 150,000
Bob, capital ($150,000 x .70) 105,000
Norman, capital ($150,000 x .30) 45,000
Cash 300,000
Goodwill 220,000
Bob, capital ($220,000 x .70) 154,000
Norman, capital ($220,000 x .30) 66,000
John, capital 300,000
Answer:
Book value of capital before the investment $280,000
($120,000 + $160,000)
James’ investment 60,000
Total book value of capital after the investment $340,000
James’ percentage ownership 0.20
Book value of James’ ownership percentage capital $ 68,000
Cash 60,000
Goodwill 10,000
James, capital 70,000
Answer:
Book value of capital before the investment $ 870,000
($370,000 + $500,000)
Frank’s investment 270,000
Total book value of capital after the investment 1,140,000
Frank’s percentage ownership 0.25
Book value of Frank’s ownership percentage capital $ 285,000
Cash 270,000
Goodwill 20,000
Frank, capital 290,000
Answer:
Assets 200,000
Clark, capital ($200,000 x .75) 150,000
Nick, capital ($200,000 x .25) 50,000
Cash 170,000
Goodwill 37,500
Ron, capital 207,500
Answer:
Assets ($50,000 x .40) 20,000
Theresa, capital ($50,000 x .40) 20,000
Answer:
Assets 50,000
Sarah, capital ($50,000 x .25) 12,500
Tanya, capital ($50,000 x .35) 17,500
Theresa, capital ($50,000 x .40) 20,000
partnership. Record the journal entry for the revaluation of the assets. Record the
withdrawal assuming that Sam purchases 30 percent and Tim purchase 70 percent of
Tyrone’s equity.
Answer:
Assets ($80,000 x .45) 36,000
Tyrone, capital 36,000
Answer:
Assets 80,000
Sam, capital ($80,000 x .15) 12,000
Tim, capital ($80,000 x .40) 32,000
Tyrone, capital ($80,000 x .45) 36,000
Answer:
Assets ($75,000 x .20) 15,000
Mark, capital 15,000
Answer:
Assets 75,000
Don, capital ($75,000 x .25) 18,750
Mark, capital ($75,000 x .20) 15,000
James, capital ($75,000 x .55) 41,250
Book Market
Value Value_
Current Assets 210,000 210,000
Fixed Assets 850,000 980,000
Total Assets 1,060,000
Current Liabilities 110,000 110,000
Long-term Debt 220,000 180,000
Berry, Capital (45%) 380,000
Carl, Capital (25%) 180,000
Phil, Capital (30%) 170,000
Total Liabilities and Partnership Equity 1,060,000
The partnership agreement specifies that the withdrawing partner’s portion of the change
in value of any assets and liabilities should be recognized at the date of withdrawal. The
partners agree that $300,000 of partnership assets will be used to purchase Carl’s
ownership equity. The assets are to be financed by borrowing the money on long-term
notes payable. Record these events assuming that the bonus method is used to recognize
the withdrawal.
Answer:
Fixed Assets ($980,000 - $850,000)(.25) 32,500
Long-term Debt ($220,000 - $180,000)(.25) 10,000
Carl, capital 42,500
Cash 300,000
Long-term Debt 300,000
Answer
Barbara, capital 280,000
Mitch, capital ($340,000 - $280,000)(28/70) 24,000
Susan, capital ($340,000 - $280,000)(42/70) 36,000
Cash 340,000
Answer:
Sam, capital 150,000
Fred, capital ($200,000 - $150,000)(45/80) 28,125
Greg, capital ($200,000 - $150,000)(35/80) 21,875
Cash 200,000
Answer:
Goodwill 80,000
Ken, capital 80,000
Answer:
Goodwill 50,000
Doris, capital 50,000
Answer:
Goodwill 75,000
Mark, capital 75,000
Answer:
Goodwill 90,000
Eric, capital 90,000
Answer:
Goodwill 60,000
Sam, capital 60,000
Answer:
Goodwill 30,000
Hal, capital 30,000
James, Kris, and Lance are partners in a local company. Kris has announced her
withdrawal from the company. The articles of partnership indicate that the entire
partnership’s goodwill is to be recognized at the date of withdrawal. James, Kris, and
Lance share profits in a 30 percent, 25 percent, and 45 percent ratio, respectively, and
their respective capital accounts just prior to the withdrawal are $160,000, $120,000, and
$225,000, respectively. Estimated goodwill is $180,000. Prepare the journal entry
(entries) necessary to reflect the withdrawal of Kris assuming that Felix has been
approved to become the new partner. Felix pays Kris $175,000 for 100 percent of her
partnership equity.
Answer:
Goodwill 180,000
James, capital ($180,000 x .30) 54,000
Kris, capital ($180,000 x .25) 45,000
Lance, capital ($180,000 x .45) 81,000
Answer:
Goodwill 120,000
Nicole, capital ($120,000 x .40) 48,000
Melvin, capital ($120,000 x .25) 30,000
Joshua, capital ($120,000 x .35) 42,000
Answer:
Goodwill 95,000
Kim, capital ($95,000 x .40) 38,000
Jennifer, capital ($95,000 x .25) 23,750
David, capital ($95,000 x .35) 33,250
Answer:
Goodwill 110,000
Natalie, capital ($110,000 x .30) 33,000
Oscar, capital ($110,000 x .25) 27,500
Paul, capital ($110,000 x .45) 49,500
Answer:
Goodwill 40,000
Cindy, capital ($40,000 x .25) 10,000
Tony, capital ($40,000 x .55) 22,000
Ben, capital ($40,000 x .20) 8,000
Answer:
Goodwill 50,000
Mary, capital ($50,000 x .15) 7,500
Nick, capital ($50,000 x .25) 12,500
Shawn, capital ($50,000 x .60) 30,000
Answer: Partnerships are not required to comply with generally accepted accounting
principles (GAAP) unless the entity has publicly traded debt securities or the entity is
required to comply with GAAP by a creditor.
334. What are the similarities and differences among proprietorships, partnerships, and
corporations with regard income tax filing.
335. Three individuals are considering forming a business together. One of their concerns is
the liability exposure from the business. Prepare a short note to these individuals
explaining the extent of liability each has when forming a partnership and a corporation.
Answer: A partner may bind the partnership by contract when conducting business in the
name of the partnership. This results in each partner being liable for the partnership
business dealings of the other partners. In addition, partners have unlimited liability with
regard to partnership debts. On the other hand, stockholders of a corporation do not
share such legal liability. The corporation is a legal entity separate from the owners and
management can commit the corporation to legal contracts in the name of the
corporation, but not the stockholders. Thus, management of the corporation can sue in
the name of the corporation and the corporation can be sued. As a result, the
stockholders are generally not liable for the debts of the corporation beyond the amount
invested.
336. Alex is the owner of a small local business. He has operated as a proprietorship for many
years but his health is starting to fail. As a result, Alex is going to reduce the number of
hours worked in the business. He has asked you to explain how changing his business to
a partnership would affect him (legally). Prepare a brief memo outlining the similarity
and differences between a proprietorship and a partnership with regard to legal issues.
Answer: Similarities to be discussed include (1) ease of formation and (2) unlimited
owner’s liability. Difference to be discussed is shared management.
337. Compare and contrast the proprietary theory of equity and the entity theory of equity
with regard to partnerships.
Answer: The proprietary theory is based on the notion that the business entity is an
extension of the owners. The entity theory is based on the notion that the business entity
is distinct and separate from the owners. Partnerships contain elements of both the
proprietary and entity theories. Support for the proprietary theory can be found in the
following:
338. Partnership accounting applies elements of both the proprietary and entity theories.
Explain the underlying theoretical basis for the proprietary theory and the entity theory.
Answer: The proprietary theory is based on the notion that the business entity is an
extension of the owners. The entity theory is based on the notion that the business entity
is distinct and separate from the owners.
339. Hans and Felix are attempting to work out the final issues for forming a partnership.
They are currently debating the values to assign to noncash assets contributed to the
partnership by each partner. Hans believe that the market value has to be assigned to
these assets while Felix believes there may be other alternatives. Prepare a short note to
the two potential partners clarifying this issue.
Answer: The three most likely valuations that can be assigned to noncash assets are the 1)
contributor’s carrying value, 2) contributor’s tax basis, or 3) market or appraised value of
the asset. The amount to be assigned to the noncash assets can be determined by
agreement among the partners or by appraisal (if market values are used).
340. Berry and Charlie plan to start a partnership. One partner is contributing an old building
while the other partner is contributing several delivery trucks. Both partners are also
contributing cash. A difference of opinion exists regarding the amount at which the
building and delivery trucks are to be placed on the partnership’s books. Berry believes
the carrying values should be recorded. Charlie objects because it would give Berry too
great a share of the partnership’s owners’ equity. Charlie believes the tax basis should be
used. Berry objects to the tax basis for the same reason Charlie objects to the book basis.
The partners ask for your opinion. How do you respond?
Answer: The amounts recorded on the partnership’s books do not determine the amounts
assigned to each individual capital account. The amount recorded for the assets will help
determine total capital, not how total capital is divided between the partners.
341. Explain how the assumption of a liability by the partnership on an asset contributed by a
partner impacts the contributing partner’s capital account and tax basis in that asset.
Answer: Generally the value assigned to the asset (e.g., carrying value, tax basis, market
value) is explicitly reduced by the amount of the liability assumed to determine the
contributing partner’s capital account balance. The reduction may be implicit if partners
agree to create capital accounts in equal amounts through such techniques as the
recognition of goodwill for other partners. The tax basis of a contributing partner is only
reduced by the part of the liability assumed by the partnership because the IRS interprets
this event as all partners sharing the obligation so the contributing partner is still
obligated for part of the liability.
342. Clark, Mitchell, and Thomas are forming a partnership. Each partner is contributing cash
and other tangible assets. In addition, Clark has a significant amount of experience in
operating the type of business being created. The partners do not like the idea of
recording goodwill but they are not sure how to otherwise recognize the additional
Answer: The initial capital accounts can be modified to reflect Clark’s additional
contribution. Mitchell and Thomas would give up an agreed amount of capital to be
assigned to Clark. This approach is called the bonus method. Mitchell and Thomas are
giving a bonus to Clark because of the additional contribution that cannot be measured in
a traditional manner.
343. James and Rachel are forming a partnership. They agree on the values to assign to all of
the assets and liabilities. The partners also want to recognize that Rachel has many
contacts that will be of value to the business. A mutual friend who owns a business has
told them the bank will be unhappy with their balance sheet if they record goodwill for
Rachel. How else can they recognize Rachel’s contacts?
Answer: The bonus method can be used instead of the goodwill method. The bonus
method reallocates capital from James to Rachel to recognize the contribution made by
Rachel in excess of the identifiable assets. As a result, James will have a reduced capital
account balance and Rachel will have a greater balance.
344. Barry, George, and Felix are forming a partnership. Each partner is contributing cash
and other tangible assets. George and Felix are contributing greater amounts of cash and
other tangible assets but Barry has a significant amount of experience in operating the
type of business being created. A mutual friend has suggested that the three make their
initial capital accounts equal in value. George and Felix do not like the idea of recording
their capital accounts at an amount less than the market value of what they are
contributing but they are not sure how to otherwise recognize the additional contribution
Barry is making. Prepare a brief memo explaining a different way to recognize Barry’s
contribution.
Answer: The additional contribution being made by Barry could be recorded as goodwill.
This intangible asset would be created at an amount agreed by the partners. Goodwill
results in an increase in the value of Barry’s capital account but it does not result in a
decrease in the value of the other partners’ capital accounts.
345. Explain how partners may determine the dollar amount of goodwill recognized at the
date a partnership is formed.
Answer: The value assigned to goodwill can be determined in any legal manner
agreeable to the partners. One possibility is to have an independent appraisal of the
intangible asset contributed. Another possibility is for the partners to agree on an
assigned value of the intangible asset.
346. Explain how a drawing account used by a partnership is similar in concept to a dividend
account used by a corporation.
are temporary in nature. They do not exist on the company’s balance sheet and they are
closed at the end of the accounting period to permanent equity accounts (partnership
capital accounts for drawing accounts and retained earnings for dividends).
347. Vicky, Robert, and Ray are forming a partnership. They have asked for some
information regarding the allocation of profits and losses among the partners. While they
believe that each partner will contribute significantly to the partnership, this contribution
will take different forms. They are unsure how to recognize these different types of
contributions. Prepare a short note explaining the different components that might be
considered when allocating partnership profits to individual partners.
Answer: Partnership profits and losses can be allocated in any manner but there are four
common components: interest on capital balance, salary, bonus, and residual percentages.
These different components reward partners for contributions of economic resources,
labor and expertise, taking on special responsibilities, and agreed allocation of any
residual profit or loss remaining after the other components have been considered.
348. Susan is joining an already existing partnership. She is reading the profit and loss
sharing part of the partnership agreement. She calls you with a question regarding a term
she does not understand, weighted average capital balance. Prepare a short note
explaining what is meant by this term.
Answer: The weighted average capital balance is the calculated average dollar amount in
the capital account after considering the length of time that balance existed. This method
of computing the average is less subject to manipulation that the simple average, which is
beginning amount plus ending amount divided by two.
349. Ben is a new partner in a local company. When he became a partner, he received a copy
of the partnership agreement including the profit and loss sharing agreement. Ben is
concerned about the interest on capital balance portion of the profit and loss sharing
agreement because his capital account is very small. Prepare a short note explaining the
reason this component of profit and loss allocation exists.
Answer: The interest on capital balance is meant to reward partners for contributions of
economic resources. As a new partner, a small capital account will likely exist and
therefore this component of the profit allocation will be small. As the capital account
grows through additional investment and profit accumulation, this component of the
profit and loss allocation will also grow.
350. Michelle is a new partner is considering becoming a partner in a small company. She
obtained a copy of the most recent income statement and is surprised when she does not
find salaries on the income statement. She asks you if it is unusual for partners to not
receive a salary from their work in the partnership.
Answer: The lack of salary expense on the income statement does not mean that the
partners do not receive a salary. Partner salaries are not on the income statement, they
are part of the profit allocation.
351. Are there any differences between bonuses offered to partners and bonuses offered to
managers in corporations?
352. Ben and Natalie are forming a partnership. They have worked out many of the details
but they are confused about how to divide profits and losses. They have spoken with
several associates who are in different partnership and there seems to be some
inconsistencies. Some partnerships have residual profit and loss ratios while others do
not. Prepare a note to Ben and Natalie informing them of the reason for this
inconsistency.
Answer: Residual profit and loss ratios are not needed if the ratios are to be equal. The
default profit and loss ratio, if not stated, is that all partners will share the residual profit
and loss equally. If the desire is to share the residual amount of profit or loss in some
other proportion, the allocation must be disclosed.
353. Do partnership residual profit ratios have to be the same as partnership residual loss
ratios? Why or why not.
Answer: Residual profit and loss ratios are part of a contractual agreement among the
partners. As a result, the partnership can apply any ratios agreed by the partners. The
ratios are typically the same for profits and losses but they can differ.
354. Alex, Shawn, and Tammy are partners in a local company. They have been conducting
business for a number of years and Shawn recently told the partners that he is going to
reduce his activities in the partnership. As a result, the partners have agreed that the
profit and loss sharing arrangement should be modified. They have agreed to adjust the
salaries and the profit and loss residuals. They come to you with a concern regarding the
assets that are currently owned by the partnership. The partners know that the assets are
worth more than the amount recorded on the financial records but they do not know how
this should be considered when the profit and loss ratios are changed. Prepare a short
note to the partners outlining the their options.
Answer: The difference between the market and book values of assets that exist when the
profit and loss ratios change can be addressed in several ways. One way is to make a list
of these assets and their market value at the date of the change. When the assets are sold,
the amount of the gain that existed when the profit and loss ratios were changed would be
allocated based on the previous profit and loss ratios and any change in market value that
occurs after the ratios are changed would be allocated based on the new ratios. Another
approach is to revalue the assets at the date the profit and loss ratios are changed. The
gain would be allocated based on the previous ratios. A third approach is to determine
the impact of the unrealized gains on the capital accounts due to the change in the ratios
and directly adjust the capital accounts. The gain on the assets at the date of sale would
then be allocated based on the new ratios. All three approaches give the same end result,
the choice is a matter of preference by the partners.
355. Partners sometimes change the profit and loss ratios used to determine the allocation of
profits and losses. When this occurs, why would the partners choose to prepare a list of
assets with market values different from book values when they could have chosen to
revalue the assets to market value at the date the profit and loss ratios were changed?
Answer: Some partners and possibly their creditors may not want to have the assets
revalued to market value. The revaluation is a significant departure from GAAP and the
partners and their creditors may prefer to have the partnership’s financial records
maintained in accord with GAAP.
356. Sarah, a friend who knows you are a CPA comes to you with a concern. She has been
asked by a colleague to consider becoming a partner in a small company. She will be the
fourth partner in the company. Sarah has had two meetings with the current partners.
She is concerned that one of the current partners who does not know her has been asking
a variety of questions pertaining to her business practices beliefs and her personal ethics.
Sarah asks if you have any idea why this partner would ask such questions. How do you
respond?
Answer: The current partner may be concerned because the existing partners will have
unlimited liability for the actions of the new partner. Given that this partner does not
know Sarah, he/she is gathering information so a choice can be made about accepting
such risk.
357. Don and Jerry are partners in a publishing company. Don is interested in reducing his
involvement in the company and they have been searching for a new partner to take on
some of the work. They learn that Ted is interested in joining the partnership and they
enter into negotiations. Don is willing to support Ted joining the partnership if Ted will
pay Don $250,000. Don will not transfer any of his equity to Ted but will allocate 30
percent of his profit allocation to Ted. Ted comes to you with a concern about Don’s
unwillingness to allocate any equity to him even though a significant investment is
required. How do you respond?
358. Sally, Robert, and Stuart are partners in a manufacturing company. They are considering
allowing Dick to acquire an ownership interest in the partnership by purchasing part of
Stuart’s equity. Dick is interested in purchasing 40 percent of Stuart’s equity. Dick
comes to you with a question just before a negotiating session with the current partners.
He asks if his ownership in Stuart’s equity gives him the right to 40 percent of Stuart’s
profit allocation or if that is a separate issue. How do you respond?
Answer: A purchase of Stuart’s equity is a separate issue from the allocation of profits
and losses. These two items have to be negotiated simultaneously but they are
independent. Dick has to be comfortable with the outcome on both issues if he is going
to acquire a part ownership in the partnership.
359. Fred is negotiating an investment to join a partnership. The existing partners are asking
for an investment of $80,000 for a 20 percent ownership in the partnership’s equity. Fred
is encouraged by this proposal but then he learns that the partners plan to revalue the
assets before Fred’s admission. Fred does not understand the reason for the revaluations.
Prepare a note to Fred explaining why the existing partners want to revalue the assets
before he is admitted.
Answer: The partners believe that the difference between market value and book value of
existing assets belong to them because they have been the partners during the time period
when the assets value increased. As a result, they intend to have the unrealized increase
in value added to their capital accounts so that it will not be shared with the new partner.
Any changes in value after Fred becomes a member of the partnership will be allocated
to all of the partners, including Fred.
360. Why are some people opposed to the revaluation of partnership assets when a new
partner is admitted to the partnership?
Answer: These individuals contend that the partnership is still in operation and there
should be no change in the values assigned to assets and liabilities while the partnership
is in operation. There has not been a change in ownership so there is no transaction to
justify the revaluation.
361. You are a staff accountant for a local company. The partners of a client are discussing
the admission of a new partner. Some partners believe that the partnership’s assets
should be revalued before admission of the new partner while other partners are opposed
to the revaluation. Prepare a short note explaining why it may be appropriate to revalue
the partnership’s assets at this time.
Answer: The change in value of the assets has occurred over time and the partners during
that time should share in the increase in value. The new partner should have no claim to
increases in value before that partner’s investment in the company. In addition, when the
new partner joins the company, there is a new legal entity so recording the assets at the
market value at that date is not inappropriate.
362. Sam and Mark are discussing bringing Susan into the partnership. Susan understands
that the partnership’s assets will be revalued before her admission but she does not
understand why she should invest more in the partnership than her share of the market
value of the partnership’s assets. Prepare a short note to Susan explaining the reason that
it may require a greater investment to become a member of this partnership.
Answer: Revaluing the partnership’s assets does not recognize the goodwill that exists in
the company. The partners have chosen to not record goodwill on the company’s balance
sheet but goodwill still exists. The amount that Susan is investing in excess of the capital
account created represents her investment in the goodwill that already exists in the
company. She is paying a bonus to the existing partners for allowing her to share in the
goodwill of the partnership.
363. Steve is negotiating with the partners in a local business. He would like to become a new
partner in the business but there are several issues he does not understand. One of the
primary issues pertains to the amount of his capital account at the date of investment.
The partners told Steve that he would have to invest $100,000 to join the business but his
capital account would be created for $85,000. Prepare a short note to Steve explaining
why his capital account would be recognized at an amount less than his investment.
Answer: The partnership has an unidentified asset (goodwill) that has value to the
company. The partners have chosen to not record goodwill on the company’s balance
sheet but goodwill still exists. The amount that Steve is investing in excess of the capital
account created represents his investment in the goodwill that already exists in the
company. He is paying a bonus to the existing partners for allowing him to share in the
goodwill of the partnership.
364. Jim and Fred have decided to admit Richard into their partnership. Jim and Fred know
that they are going to apply something called the bonus method to record the admission
of Richard into the partnership but they do not understand the technical accounting part
of the transaction. As a result, they do not understand why Richard’s capital account will
be created at an amount greater than the amount of his investment in the partnership.
Prepare a short note to Jim and Fred explaining the reason that Richard’s capital account
is created for this amount.
Answer: The parties have agreed that Richard is going to receive a certain percentage of
the partnership’s equity at the date of the investment. They have also agreed on the
amount that Richard will invest. When the investment takes place, the bonus method
required Richard’s capital account to be created at the agreed percentage of the total
capital after the investment. This amount may be less than, equal to, or more than the
amount invested. If it is less than or more than the amount of the investment, the capital
accounts of the existing partners is adjusted to make up for the difference.
365. John and Joel are negotiating with a potential partner to join their local business. They
would like Laura to become a new partner in the business but there are several issues
they do not understand. One of the primary issues pertains to the amount of his capital
account at the date of investment. The partners agreed that Laura would have to invest
$75,000 to join the business and they agree that he is going to have a 30% equity interest
in the partnership. What they did not realize is that their capital accounts were going to
decrease when Laura joined the partnership. Prepare a short note to John and Joel
explaining why their capital accounts would be reduced when Laura joins the company.
Answer: The partners have agreed that Laura is contributing something to the partnership
in addition to the tangible assets. They have also agreed on the value of this contribution
when they established the interest she would have in the partnership’s total capital.
When the bonus method is applied, the total capital (based on the existing partners’
capital plus the investment) is allocated to the new and existing partners in the agreed
manner. If the new partner is receiving an equity interest more or less than the amount
invested, the existing partners’ capital accounts must be adjusted. In this instance, the
capital account of the new partner is greater than the amount invested so the existing
partners’ capital accounts must be reduced.
366. Shawn is currently in discussion with Ted and Mark regarding his joining their
partnership. Initial discussions resulted in an agreement that Shawn would contribute
$50,000 for a 20 percent equity interest in the partnership. The last discussion was about
how the transaction would be disclosed in the partnership’s financial statements. Shawn
noticed that the Ted and Mark’s capital accounts were greater in the pro forma balance
sheet and that goodwill had been added to the balance sheet. Shawn asks for an
explanation of this change. You are the accountant attending the meetings, how do you
respond?
Answer: The partnership agreement indicates that the goodwill method is to be applied
when new partners join the company. In this instance, Shawn is contributing more than
his share of the book value of the company. This implies that there exists goodwill in the
company. The goodwill is recorded and allocated to Ted and Mark because they were the
partners when the goodwill was developed. As a result, Shawn’s $50,000 investment will
exactly equal his share of the partnership’s book value after the goodwill is recorded.
367. You are conducting training for new loan officers of a bank. The topic of the day is
partnerships and their changes in ownership. The bank often receives loan requests when
partnerships are expanding. At the same time, the partnership may also be adding a new
partner to increase the company’s capital and improving its potential for a loan from the
bank. You hand out several partnership balance sheets before and after a new partner has
joined. One loan officer asks about the reason for a change in existing partner capital
accounts and the addition of goodwill to the balance sheet. How do you respond?
Answer: Partnerships are permitted to record goodwill when a new partner joins the
company. Estimated goodwill is determined by evaluating the new partner’s investment
and that partner’s share of the partnership’s total equity after the investment. If the
investment results in the new partner receiving less than his/her share of the partnership’s
equity, goodwill is said to exist in the current partners. As a result, this goodwill is
recorded and allocated to the current partners.
368. Three investors have asked for your assistance in planning the formation of a partnership.
After about two hours of discussion the group arrives at the topic of how to admit
additional partners in the future or retire existing partners. You explain that there are two
methods that can be used to account for these events: the bonus method and the goodwill
method. One of the partners listens to the explanation of the two methods and then asks
for you to summarize the criteria that may be used to determine which method this
partnership wants to use. Prepare a response to the partner’s request.
Answer: The difference that exists when comparing the bonus method and the goodwill
method is whether the partners wish to recognize goodwill on the balance sheet. The
goodwill method will result in greater total assets than the bonus method but the
relationship that exists among the partners will be the same regardless of the method
applied.
369. Why would partners in an existing partnership agree to allocate an equity interest to a
new partner that is greater than the value of the identifiable net assets contributed by the
new partner?
Answer: The existing partners would be willing to allocate a capital account to a new
partner greater than the value of the identifiable new assets contributed because the new
partner is contributing unidentifiable assets to the partnership. These other assets may
include business expertise, a good reputation, or existing customers. The additional
assets contributed to the partnership result in the new partner having goodwill.
370. You are an analyst for a local bank. A question just arrived in your email from a new
loan officer. The loan officer is reviewing information from a small partnership
requesting a loan. The partnership indicates that one of the partners is withdrawing from
the partnership. The remaining partners send a current balance sheet and a pro forma
balance sheet after the withdrawal. The loan officer is confused because the withdrawing
partner’s capital account is deleted and all of the other partners’ capital accounts have
been reduced. Why might all of the other partners’ capital accounts be reduced?
Answer: There are two reasons why the remaining partners’ capital accounts could be
reduced. First, the partnership may have revalued assets to their market value. If the
market value were less than book value, the capital accounts would be reduced. The
second, and more likely, reason is that the remaining partners are going to pay a bonus to
the withdrawing partner. As a result, each of the remaining partners’ capital accounts
will be reduced by his/her proportion of the bonus paid.
371. Jennifer is confused with regard to the recognition of the withdrawal of a partner from
the company. The partnership agreement indicates that they will apply the bonus method
to recognize the withdrawal and that any bonus will be shared by the remaining partners
based on their profit and loss ratio. Jennifer was surprised when she is assigned 40
percent of the bonus paid even though she only has a 35 percent ownership interest in the
partnership. How do you respond?
Answer: The remaining partners, based on their profit and loss residual ratios, absorb the
bonus paid to the withdrawing partner. As a result, Jennifer’s 35 percent ownership
became 40 percent of the remaining equity after the existing partner was removed from
consideration.