QUESTIONS BANK

Chapter 14 Partnership formation and operations

S / Abdullah Khaled Hamed

X.BODA
1. Griffin and Rhodes formed a partnership on January 1, 2009. Griffin contributed cash of $120,000 and
Rhodes contributed land with a fair value of $160,000. The partnership assumed the mortgage on the land
which amounted to $40,000 on January 1. Rhodes originally paid$90,000 for the land. On July 31, 2009, the
partnership sold the land for $190,000. Assuming Griffin and Rhodes share profits and losses equally, how
much of the gain from sale of land should be credited to Griffin for financial accounting purposes?
A. $0
B. $15,000
C. $35,000
D. $45,000
2. The DEF partnership reported net income of $130,000 for the year ended December 31,2008. According to
the partnership agreement, partnership profits and losses are to be distributed as follows:

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

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

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

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

Average capital balances for

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

Refer to the information given. Assuming a current year net income of $150,000, what amount should be
allocated to each partner?
5. Refer to the information given. Assuming a current year net income of $50,000, what amount should be
allocated to each partner?

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

7. Refer to the above information. Which statement below is correct if a new partner receives a bonus upon
contributing assets into the partnership?

A. B < A and D = C - A
B. B > A and D = C + A
C. A = B and A = D + C
D. B > A and C = D + A
8. Refer to the above information. Which statement below is correct if the old partners receive a bonus upon the
contribution of assets into the partnership by a new partner?
A. B < A and D = C - A
B. B + A and D > C + A
C. B < A and D = C + A
D. B > A and D = C + A
9. Refer to the above information. Which statement below is correct if goodwill of the old partners is recognized
upon the contribution of assets into the partnership by a new partner?
A. B = A and D < C + A
B. B = A and D > C + A
C. B < A and D = C + A
D. B > A and D < C + A
10. Refer to the above information. Which statement below is correct if a new partner's goodwill is recognized
upon contributing assets into the partnership?
A. B = A and D > C + A
B. B < A and D < C + A
C. B > A and D = C + A
D. B > A and D > C + A11. Refer to the above information. Which statement below is correct if a new
partner purchases an interest in capital directly from the old partners?
A. C < D B. C = D C. C = D and B = A D. C < D and B = A
12. When a new partner is admitted into a partnership and the new partner receives a capital credit less than the
tangible assets contributed, which of the following explains the difference?
I. The new partner's goodwill has been recognized.
II. The old partners received a bonus from the new partner.

A. I only B. II only C. Either I or II D. Neither I nor II

13. When a new partner is admitted into a partnership and the new partner receives a capital credit greater than
the tangible assets contributed, which of the following explains the difference?
I. The old partners' goodwill is being recognized.
II. The new partner's goodwill is being recognized.

A. I only B. II only C. Either I or II D. Both I and II

14. When a new partner is admitted into a partnership and the capital of the old partners decreases, which of the
following explains the reason for the decrease?
I. Undervalued liabilities were written up to their fair values.
II. Undervalued assets were written up to their fair values.

A. I only B. II only C. Both I and II D. Neither I nor II

15. When the old partners receive a bonus upon admission of a new partner into a partnership, the bonus is
allocated to:
I. all the partners in their profit and loss sharing ratio.
II. the existing partners in their profit and loss sharing ratio.

A. I only B. II only C. Either I or II D. Neither I nor II

16. When a new partner is admitted into a partnership and the old partners' goodwill is recognized, the goodwill
is allocated to:
I. all the partners in their profit-and-loss-sharing ratio.
II. the old partners in their profit and loss sharing ratio.

A. I only B. II only C. Either I or II D. Neither I nor II

In the RST partnership, Ron's capital is $80,000, Stella's is $75,000, and Tiffany's is $50,000. They share
income in a 3:2:1 ratio, respectively. Tiffany is retiring from the partnership. Each of the following questions is
independent of the others.
17. Refer to the above information. Tiffany is paid $60,000, and no goodwill is recorded. In the
journal entry to record Tiffany's withdrawal:
A. Tiffany, Capital will be credited for $60,000.
B. Ron, Capital will be debited for $5,000.
C. Stella, Capital will be debited for $4,000.
D. Cash will be debited for $60,000.
18. Refer to the above information. Tiffany is paid $60,000, and no goodwill is recorded. What
is the Ron's capital balance after Tiffany withdraws from the partnership?

A. $74,000 B. $71,000 C. $75,000 D. $86,000

19. Refer to the above information. Tiffany is paid $56,000, and all implied goodwill is
recorded. What is the total amount of goodwill recorded?
A. $0 B. $6,000 C. $30,000 D. $36,000
In the AD partnership, Allen's capital is $140,000 and Daniel's is $40,000 and they share income in a 3:1 ratio,
respectively. They decide to admit David to the partnership. Each of the following questions is independent of
the others.
20. Refer to the information provided above. What amount will David have to invest to give him one-fifth
percent interest in the capital of the partnership if no goodwill or bonus is
recorded?
A. $60,000 B. $36,000 C. $50,000 D. $45,000
21. Refer to the information provided above. Assume that David invests $50,000 for a one-fourth interest.
Goodwill is to be recorded. The journal to record David's admission into the partnership will include:
A. a credit to cash for $50,000.
B. a debit to goodwill for $7,500.
C. a credit to David, Capital for $60,000.
D. a credit to David, Capital for $50,000.
22. Refer to the information provided above. Allen and Daniel agree that some of the inventory is obsolete. The
inventory account is decreased before David is admitted. David invests $40,000
for a one-fifth interest. What is the amount of inventory written down?

A. $4,000 B. $20,000 C. $15,000 D. $10,000

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

A. $140,000&40,000 B. $125,000&35,000 C. $120,000&36,000 D. $137,000&39,000

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

A. $40,000 B. $10,000 C. $36,000 D. $20,000

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

A. $136,000&34,000 B. $160,000&60,000 C. $170,000&50,000 D. $140,000&40,000

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

A. $160,000&60,000 B. $136,000&36,000 C. $140,000&40,000 D. $137,000&39,000

28. Refer to the information provided above. David invests $50,000 for a one-fifth interest. What amount of
goodwill will be recorded?

A. $20,000 B. $4,000 C. $40,000 D. $15,000

29. If A is the total capital of a partnership before the admission of a new partner, B is the total
capital of the partnership after the admission of the new partner, C is the amount of the new
partner's investment, and D is the amount of capital credited to the new partner, then there is:

A. goodwill to the new partner if B > (A + C) and D < C.

B. goodwill to the old partners if B = A + C and D > C.
C. a bonus to the new partner if B = A + C and D > C.
D. neither bonus nor goodwill if B > (A + C) and D > C.
30. The terms of a partnership agreement provide that one of the partners is to receive a salary allowance of
$30,000, plus a bonus of 20 percent of income after deduction of the bonus and the salary allowance. If income
is $150,000, the bonus should be:

A. $18,000 B. $20,000 C. $24,000 D. $30,000

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

A. $120,000. B. $300,000. C. $500,000. D. $600,000.

32. Shue, a partner in the Financial Brokers Partnership, has a 30 percent share in partnership profits and losses.
Shue's capital account had a net decrease of $100,000 during 2008. During 2008, Shue withdrew $240,000 as
withdrawals and contributed equipment valued at $50,000 to the partnership. What was the net income of the
Financial Brokers Partnership for 2008?

A. $633,334 B. $466,666 C. $300,000 D. $190,000

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

33. Based on the preceding information, if no goodwill or bonus is recorded, how much should Daniel invest for
a 20 percent interest?

A. $400,000 B. $200,000 C. $300,000 D. $250,000

34. Based on the preceding information, what amount of goodwill will be recorded if Daniel invests $450,000
for a one-third interest?

A. $0 B. $10,000 C. $50,000 D. $100,000

35. Transferable interest of a partner includes all of the following except:

A. the partner's share of the profits and losses of the partnership.

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

41. A limited liability company (LLC):

I. is governed by the laws of the state in which it is formed.
II. provides liability protection to its investors.
III. does not offer pass-through taxation benefits of partnerships.

A. Both I and III. B. III C. Both I and II D. I, II, and II

42. Which of the following is not a reason for the popularity of partnerships as a legal form for businesses?
a. Partnerships may be formed merely by an oral agreement.
b. Partnerships can more easily generate significant amounts of capital.
c. Partnerships avoid the double taxation of income that is found in corporations.
d. In some cases, losses may be used to offset gains for tax purposes.

43. How does partnership accounting differ from corporate accounting?

a. The matching principle is not considered appropriate for partnership accounting.
b. Revenues are recognized at a different time by a partnership than is appropriate for a corporation.
c. Individual capital accounts replace the contributed capital and retained earnings balances found in
corporate accounting.
d. Partnerships report all assets at fair value as of the latest balance sheet date.

44. Which of the following best describes the articles of partnership agreement?
a. The purpose of the partnership and partners’ rights and responsibilities are required elements of the
articles of partnership.
b. The articles of partnership are a legal covenant and must be expressed in writing to be valid.
c. The articles of partnership are an agreement that limits partners’ liability to partnership assets.
d. The articles of partnership are a legal covenant that may be expressed orally or in writing, and form
the central governance for a partnership’s operations.

45. Pat, Jean Lou, and Diane are partners with capital balances of $50,000, $30,000, and $20,000, respectively.
These three partners share profits and losses equally. For an investment of $50,000 cash (paid to the business),
MaryAnn will be admitted as a partner with a one-fourth interest in capital and profits. Based on this
information, which of the following best justifies the amount of MaryAnn’s investment?
a. MaryAnn will receive a bonus from the other partners upon her admission to the partnership.
b. Assets of the partnership were overvalued immediately prior to MaryAnn’s investment.
c. The book value of the partnership’s net assets was less than the fair value immediately prior to
MaryAnn’s investment.
d. MaryAnn is apparently bringing goodwill into the partnership, and her capital account will be credited
for the appropriate amount.
46. A partnership has the following capital balances with partners’ profit and loss percentages indicated
parenthetically: Henry (50%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $135,000
Thomas (30%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85,000
Catherine (20%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .80,000
Anne is going to invest $125,000 into the business to acquire a 40 percent ownership interest. Goodwill is to be
recorded. What will be Anne’s beginning capital balance?
a. $125,000 b. $170,000 c. $200,000 d. $245,000
47. A partnership has the following capital balances with partners’ profit and loss percentages indicated
parenthetically: Burks (35%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $280,000
Donovan (40%) . . . . . . . . . . . . . . . . . . . . . . . . . . . 300,000
Watkins (25%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170,000

Rozella agrees to pay a total of $245,000 directly to these three partners to acquire a 25 percent ownership
interest from each. The partnership will record goodwill based on the new partner’s payment. What is
Donovan’s capital balance after the transaction?

a. $225,000 b. $294,000 c. $392,000 d. $398,000

48. The capital balance for Maxwell is $110,000 and for Russell is $40,000. These two partners share profits
and losses 70 percent (Maxwell) and 30 percent (Russell). Evan invests $50,000 in cash into the partnership for
a 30% ownership. The bonus method will be used. What is Russell’s capital balance after Evan’s investment?

a. $35,000 b. $37,000 c. $40,000 d. $43,000

49. Patrick has a capital balance of $120,000 in a local partnership, and Caitlin has a $90,000 balance. These
two partners share profits and losses by a ratio of 60 percent to Patrick and 40 percent to Caitlin. Camille
invests $60,000 in cash in the partnership for a 20 percent ownership. The goodwill method will be used. What
is Caitlin’s capital balance after this new investment?

a. $99,600 b. $102,000 c. $112,000 d. $126,000

50. The capital balance for Messalina is $210,000 and for Romulus is $140,000. These two partners share
profits and losses 60 percent (Messalina) and 40 percent (Romulus). Claudius invests $100,000 in cash in the
partnership for a 20 percent ownership. The bonus method will be used. What are the capital balances for
Messalina, Romulus, and Claudius after this investment is recorded?

a. $216,000, $144,000, $90,000

b. $218,000, $142,000, $88,000
c. $222,000, $148,000, $80,000
d. $240,000, $160,000, $100,000

51. A partnership begins its first year with the following capital balances:
Alexander, Capital . . . . . . . . . . . . . . . . . . . . . . . . $ 90,000
Bertrand, Capital . . . . . . . . . . . . . . . . . . . . . . . . . 100,000
Coloma, Capital . . . . . . . . . . . . . . . . . . . . . . . . . . 160,000

The articles of partnership stipulate that profits and losses be assigned in the following manner:
∙ Each partner is allocated interest equal to 5 percent of the beginning capital balance.
∙ Bertrand is allocated compensation of $45,000 per year.
∙ Any remaining profits and losses are allocated on a 3:3:4 basis, respectively.
∙ Each partner is allowed to withdraw up to $25,000 cash per year.
Assuming that the net income is $115,000 and that each partner withdraws the maximum amount allowed, what
is the balance in Coloma’s capital account at the end of the year?

a. $143,000 b. $135,000 c. $168,000 d. $164,000

52. A partnership begins its first year of operations with the following capital balances:
Winston, Capital . . . . . . . . . . . . . . . . . . . . . . . . . . $110,000
Durham, Capital . . . . . . . . . . . . . . . . . . . . . . . . . . 80,000
Salem, Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110,000

According to the articles of partnership, all profits will be assigned as follows:

∙ Winston will be awarded an annual salary of $20,000 with $10,000 assigned to Salem.
∙ The partners will be attributed interest equal to 10 percent of the capital balance as of the first day of
the year.
∙ The remainder will be assigned on a 5:2:3 basis, respectively.
∙ Each partner is allowed to withdraw up to $10,000 per year.
The net loss for the first year of operations is $20,000, and net income for the subsequent year is
$40,000. Each partner withdraws the maximum amount from the business each period. What is the
balance in Winston’s capital account at the end of the second year?

a. $102,600 b. $104,400 c. $108,600 d. $109,200

53. A partnership has the following capital balances:

Allen, Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $60,000
Burns, Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,000
Costello, Capital . . . . . . . . . . . . . . . . . . . . . . . . . . 90,000

Profits and losses are split as follows: Allen (20%), Burns (30%), and Costello (50%). Costello wants to leave
the partnership and is paid $100,000 from the business based on provisions in the articles of partnership. If the
partnership uses the bonus method, what is the balance of Burns’s capital account after Costello withdraws?

a. $24,000 b. $27,000 c. $33,000 d. $36,000

Problems 54 and 55 are independent problems based on the following scenario:

At year-end, the Circle City partnership has the following capital balances:
Manning, Capital . . . . . . . . . . . . . . . . . . . . . . . . . $130,000
Gonzalez, Capital . . . . . . . . . . . . . . . . . . . . . . . . . 110,000
Clark, Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80,000
Freeney, Capital . . . . . . . . . . . . . . . . . . . . . . . . . . 70,000

Profits and losses are split on a 3:3:2:2 basis, respectively. Clark decides to leave the partnership and is paid
$90,000 from the business based on the original contractual agreement.

54. The payment made to Clark beyond his capital account was for Clark’s share of previously unrecognized
goodwill. After recognizing partnership goodwill, what is Manning’s capital balance after Clark withdraws?

a. $133,000 b. $137,500 c. $140,000 d. $145,000

55. If instead the partnership uses the bonus method, what is the balance of Manning’s capital account after
Clark withdraws?

a. $100,000 b. $126,250 c. $130,000 d. $133,750

Problems 56 & 57 are independent problems based on the following capital account balances and P/L ratios:
William (40%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 220,000
Jennings (40%) . . . . . . . . . . . . . . . . . . . . . . . . . . . 160,000
Bryan (20%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110,000

56. Darrow invests $270,000 in cash for a 30 percent ownership interest. The money goes to the original
partners. Goodwill is to be recorded. How much goodwill should be recognized, and what is Darrow’s beginning
capital balance?
a. $410,000 and $270,000
b. $140,000 and $270,000
c. $140,000 and $189,000
d. $410,000 and $189,000

57. Darrow invests $250,000 in cash for a 30 percent ownership interest. The money goes to the business.
No goodwill or other revaluation is to be recorded. After the transaction, what is Jennings’s capital balance?

a. $160,000 b. $168,000 c. $170,200 d. $171,200

58. The disadvantages of the partnership form of business organization, compared to corporations, include
A) the legal requirements for formation.
B) unlimited liability for the partners.
C) the requirement for the partnership to pay income taxes.
D) the extent of governmental regulation.
E) the complexity of operations.

59. When the hybrid method is used to record the withdrawal of a partner, the partnership
A) revalues assets and liabilities and records goodwill to the continuing partner but not to the
withdrawing partner.
B) revalues liabilities but not assets, and no goodwill is recorded.
C) can recognize goodwill but does not revalue assets and liabilities.
D) revalues assets but not liabilities, and records goodwill to the continuing partner but not to the
withdrawing partner.
E) revalues assets and liabilities but does not record goodwill.

60. The dissolution of a partnership occurs

A) only when the partnership sells its assets and permanently closes its books.
B) only when a partner leaves the partnership.
C) at the end of each year, when income is allocated to the partners.
D) only when a new partner is admitted to the partnership.
E) when there is any change in the individuals who make up the partnership.

61. The partnership of Clapton, Seidel, and Thomas was insolvent and will be unable to pay $30,000 in
liabilities currently due. What recourse was available to the partnership's creditors?
A) they must present equal claims to the three partners as individuals.
B) they must try obtain a payment from the partner with the largest capital account balance.
C) they cannot seek remuneration from the partners as individuals.
D) they may seek remuneration from any partner they choose.
E) they must present their claims to the three partners in the order of the partners' capital account
balances.
Use the following info. to answer questions 62-73:

Cleary, Wasser, and Nolan formed a partnership on January 1, 2003, with investments of $100,000, $150,000,
and $200,000, respectively. For division of income, they agreed to (1) interest of 10% of the beginning capital
balance each year, (2) annual compensation of $10,000to Wasser, and (3) sharing the remainder of the income
or loss in a ratio of 20% for Cleary, and40% each for Wasser and Nolan. Net income was $150,000 in 2003 and
$180,000 in 2004. Each partner withdrew $1,000 for personal use every month during 2003 and 2004.

62. What was Wasser's share of income for 2003?

A) $63,000 B) $53,000 C) $58,000 D) $29,000 E) $51,000

63. What was Nolan's share of income for 2003?

A) $63,000 B) $53,000 C) $58,000 D) $29,000 E) $51,000

64. What was Cleary's share of income for 2003?

A) $63,000 B) $53,000 C) $58,000 D) $29,000 E) $51,000

65. What was Nolan's capital balance at the end of 2003?

A) $200,000 B) $224,000 C) $238,000 D) $246,000 E) $254,000

66. What was Wasser's capital balance at the end of 2003?

A) $150,000 B) $160,000 C) $165,000 D) $213,000 E) $201,000

67. What was Cleary's capital balance at the end of 2003?

A) $100,000 B) $117,000 C) $119,000 D) $129,000 E) $153,000

68. What was Wasser's share of income for 2004?

A) $34,420 B) $75,540 C) $65,540 D) $70,040 E) $61,420

69. What was Nolan's share of income for 2004?

A) $34,420 B) $75,540 C) $65,540 D) $70,040 E) $61,420

70. What was Cleary's share of income for 2004?

A) $34,420 B) $75,540 C) $65,540 D) $70,040 E) $61,420

71. What was Nolan's capital balance at the end of 2004?

A) $139,420 B) $246,000 C) $276,540 D) $279,440 E) $304,040

72. What was Wasser's capital balance at the end of 2004?

A) $201,000 B) $263,520 C) $264,540 D) $304,040 E) $313,780
73. What is Cleary's capital account balance at the end of 2004?
A) $163,420 B) $151,420 C) $139,420 D) $100,000 E) $142,000
74. Jell and Dell were partners with capital balances of $600 and $800 and an income sharing ratio of 2:3. They
admitted Zell to a 30% interest in the partnership, and the total amount of goodwill credited to the original
partners was $70. What amount did Zell contribute to the business?

A) $560 B) $570 C) $600 D) $590 E) $630

Use the following to info. answer questions 75-86:
A partnership began its first year of operations with the following capital balances:
Young, Capital $ 143,000
Eaton, Capital 104,000
Thurman, Capital 143,000
The Articles of Partnership stipulated that profits and losses be assigned in the following manner:
• Young was to be awarded an annual salary of $26,000 with $13,000 assigned to Thurman.
• Each partner was to be attributed with interest equal 10% of the capital balance as of the first day of the
year.
• The remainder was to be assigned on a 5:2:3 basis, respectively.
• Each partner was allowed to withdraw up to $13,000 per year.
Assume that the net loss for the first year of operations was $26,000 with net income of $52,000 in the second
year. Assume further that each partner withdrew the maximum amount from the business each year.
75. What was Young's share of income or loss for the first year?
A) $ 3,900 loss B) $11,700 loss C) $10,400 loss D) $24,700 loss E) $ 9,100 loss
76. What was Eaton's share of income or loss for the first year?
A) $ 3,900 loss B) $11,700 loss C) $10,400 loss D) $24,700 loss E) $ 9,100 loss
77. What was Thurman's share of income or loss for the first year?
A)$ 3,900 loss B)$11,700 loss C) $10,400 loss D) $24,700 loss E) $ 9,100 loss
78. What was the balance in Young's Capital account at the end of the first year?
A) $120,900 B) $118,300 C) $126,100 D) $ 80,600 E) $111,500
79. What was the balance in Eaton's Capital account at the end of the first year?
A) $120,900 B) $118,300 C) $126,100 D) $ 80,600 E) $111,500
80. What was the balance in Thurman's Capital account at the end of the first year?
A) $120,900 B) $118,300 C) $126,100 D) $ 80,600 E) $111,500
81. What was Young's share of income or loss for the second year?
A) $17,160 income
B) $ 4,160 income
C) $19,760 income
D) $28,080 income
82. What was Eaton's share of income or loss for the second year?
A) $17,160 income
B) $ 4,160 income
C) $19,760 income
D) $17,290 income
83. What was Thurman's share of income or loss for the second year?
A) $17,160 income
B) $ 4,160 income
C) $19,760 income
D) $17,290 income
84. What was the balance in Young's Capital account at the end of the second year?
A) $133,380 B) $ 84,760 C) $105,690 D) $132,860 E) $ 71,760
85. What was the balance in Eaton's Capital account at the end of the second year?
A) $133,380 B) $ 84,760 C) $105,690 D) $132,860 E) $ 71,760
86. What was the balance in Thurman's Capital account at the end of the second year?
A) $133,380 B) $ 84,760 C) $105,690 D) $132,860 E) $ 71,760
87. Which of the following is not a characteristic of a partnership?
A) The partnership itself pays no income taxes.
B) It is easy to form a partnership.
C) Any partner can be held personally liable for all debts of the business.
D) A partnership requires written Articles of Partnership.
E) Each partner has to incur liabilities in the name of the partnership.

88. Partnerships have alternative legal forms including all of the following except:
A) Subchapter S Corporation
B) Limited Partnership
C) Limited Corporation
D) Limited Liability Partnership
E) Limited Liability Company
89. Which of the following type of organization is classified as a partnership for tax purposes?
I. Limited Liability Companies
I. Limited Liability Partnership
I. Subchapter S Corporation
A) II only B) II and III C) I and II D) I and III E) I, II, and III

90. Which of the following statements is correct regarding the admission of a new partner?
A) A new partner must purchase a partnership interest directly from the business.
B) The right of co-ownership in the business property can be transferred to a new partner without the
consent of other existing partners.
C) The right to participate in management of the business can be conveyed without the consent of other
existing partners.
D) The right to share in profits and losses can be sold to a new partner without the consent of other
existing partners.
E) A new partner always pays book value.
Brief Questions
1. The E.N.D. partnership has the following capital balances as of the end of the current year:
Pineda . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $230,000
Adams . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 190,000
Fergie . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160,000
Gomez . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140,000
Total capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $720,000

Answer each of the following independent questions:

a. Assume that the partners share profits and losses 3:3:2:2, respectively. Fergie retires and is paid
$190,000 based on the terms of the original partnership agreement. If the goodwill method is
used, what is the capital balance of the remaining three partners?

b. Assume that the partners share profits and losses 4:3:2:1, respectively. Pineda retires and is paid
$280,000 based on the terms of the original partnership agreement. If the bonus method is used,
what is the capital balance of the remaining three partners?
2. The partnership agreement of Jones, King, and Lane provides for the annual allocation of the business’s
profit or loss in the following sequence:
∙ Jones, the managing partner, receives a bonus equal to 20 percent of the business’s profit.
∙ Each partner receives 15 percent interest on average capital investment.
∙ Any residual profit or loss is divided equally.
The average capital investments for 2021 were as follows:
Jones . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $100,000
King . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200,000
Lane . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300,000

The partnership earned $90,000 net income for 2021.

• Prepare a schedule showing how the 2021 net income should be allocated to the partners.

3. The partnership of Matteson, Richton, and O’Toole has existed for a number of years. At the present time, the
partners have the following capital balances and profit and loss sharing percentages:

• O’Toole elects to withdraw from the partnership, leaving Matteson and Richton to operate the business.
Following the original partnership agreement, when a partner withdraws, the partnership and all of its individual
assets are to be reassessed to current fair values by an independent appraiser. The withdrawing partner will
receive cash or other assets equal to that partner’s current capital balance after including an appropriate share of
any adjustment indicated by the appraisal. Gains and losses indicated by the appraisal are allocated using the
regular profit and loss percentages.
• An independent appraiser is hired and estimates that the partnership as a whole is worth $600,000. Regarding
the individual assets, the appraiser finds that a building with a book value of $180,000 has a fair value of
$220,000. The book values for all other identifiable assets and liabilities are the same as their appraised fair
values. • Accordingly, the partnership agrees to pay O’Toole $120,000 upon withdrawal. Matteson and Richton,
however, do not wish to record any goodwill in connection with the change in ownership but wish to revalue the
assets.
• Prepare the journal entry to record O’Toole’s withdrawal from the partnership.
4. Purkerson, Smith, and Traynor have operated a bookstore for a number of years as a partnership. At the
beginning of 2021, capital balances were as follows:
Purkerson . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $60,000
Smith . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000
Traynor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,000

Due to a cash shortage, Purkerson invests an additional $8,000 in the business on April 1, 2021.
∙Each partner is allowed to withdraw $1,000 cash each month.

The partners have used the same method of allocating profits and losses since the business’s inception:
∙ Each partner is given the following compensation allowance for work done in the business: Purkerson,
$18,000; Smith, $25,000; and Traynor, $8,000.
∙ Each partner is credited with interest equal to 10 percent of the average monthly capital balance for the year
without regard for normal drawings.
∙ Any remaining profit or loss is allocated 4:2:4 to Purkerson, Smith, and Traynor, respectively.

The net income for 2021 is $23,600. Each partner withdraws the allotted amount each month.
• Prepare a schedule showing calculations for the partners’ 2021 ending capital balances.

5. The Distance Plus partnership has the following capital balances at the beginning of the current year along
with respective profit and loss percentages:
Tiger (50%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $85,000
Phil (30%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,000
Ernie (20%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55,000
Each of the following questions should be viewed independently.
a. If Sergio invests $100,000 in cash in the business for a 25 percent interest, what journal entry is
recorded? Assume that the bonus method is used.
b. If Sergio invests $60,000 in cash in the business for a 25 percent interest, what journal entry is
recorded? Assume that the bonus method is used.
c. If Sergio invests $72,000 in cash in the business for a 25 percent interest, what journal entry is
recorded? Assume that the goodwill method is used.

6. Reed, Sharp, and Tucker were partners with capital account balances of $80,000, $100,000, and $70,000,
respectively. They agreed to admit Upton to the partnership. Upton purchased 30% of each partner's interest,
with payments to Reed, Sharp, and Tucker of $32,000, $40,000, and $28,000, respectively. Before the
admission of Upton, the profit and loss sharing ratio was 2:3:2. The partners agreed to use the bonus method to
account for the admission of Upton to the partnership.
Required:
Prepare the journal entry to record the admission of Upton to the partnership.

7. Jipsom and Klark were partners with capital account balances of $80,000 and $100,000, respectively. Looney
paid $32,000 to Jipsom and $40,000 to Klark for 30% of their interests in the partnership. Jipsom and Klark
shared income in the ratio of 2:3. They believed that revaluation of the partnership was appropriate when a new
partner was admitted.

Required:
Prepare the journal entries to record the admission of Looney to the partnership.
Use the following info. to answer questions 8-11:

Norr and Caylor established a partnership on January 1, 2003. Norr invested cash of $100,000 and Caylor
invested $30,000 in cash and equipment with a book value of $40,000 and fair market value of $50,000. For
both partners, the beginning capital balance was to equal the initial investment. Norr and Caylor agreed to the
following procedure for sharing profits and losses:
12% interest on the yearly beginning capital balance
$10 per hour of work that can be billed to the partnership's clients
the remainder divided in a 3:2 ratio

The Articles of Partnership specified that each partner should withdraw no more than $1,000 per month.
For 2003, the partnership's income was $70,000. Norr had 1,000 billable hours, and Caylor worked 1,400
billable hours. In 2004, the partnership's income was $24,000, and Norr and Caylor worked 800 and 1,200
billable hours respectively. Each partner withdrew $1,000 per month throughout 2003 and 2004.

8. Required:
Determine the amount of income allocated to each partner for 2003.

9. Required:
Determine the balance in both capital accounts at the end of 2003.

10. Required:
Determine the amount of income allocated to each partner for 2004 to the nearest dollar.

11. Required:
Determine the balance in both capital accounts at the end of 2004 to the nearest dollar.
Use the following partnership balance sheet to answer questions 12-15:

12. Required:
Eden contributes $49,000 into the partnership for a 25% interest. The four original partners share profits and
losses equally. Using the bonus method, determine the balances for each of the five partners after Eden joins the
partnership.

13. Required:
Eden contributed $124,000 in cash to the business to receive a 20% interest in the partnership. Goodwill was to
be recorded. The four original partners shared all profits and losses equally. After Eden made his investment,
what were the individual capital balances?

14. Required:
Eden acquired a 20% interest in the partnership by contributing a total of $71,500 directly to the other four
partners. No goodwill is to be recorded. Profits and losses have previously been split according to the following
percentages: Adams, 15%, Barnes, 35%,Cordas, 30%, and Davis, 20%. After Eden made his investment, what
were the individual capital balances?

15. Required:
Eden acquired a 20% interest in the partnership by contributing a total of $71,500 directly to the other four
partners. Goodwill is to be recorded. Profits and losses have previously been split according to the following
percentages: Adams, 15%, Barnes, 35%, Cordas,30%, and Davis, 20%. After Eden made his investment, what
were the individual capital balances?
Use the following to answer questions 16-17:

Assume the partnership of Dean, Hardin, and Roth has been in existence for a number of years, Dean decides to
withdraw from the partnership when the partners’ capital balances are as follows:

An appraisal of the business and its property estimates the fair market value to be $ 100,000. Dean has agreed to
receive $64,000 in exchange for his partnership interest.

16. Prepare the journal entry for the payment to Dean in the dissolution of his partnership interest, assuming the
bonus method is to be applied.

17. What are the remaining partners' capital balances after Dean's interest is dissolved, assuming the bonus
method is applied?

Use the following to answer questions 18-19:

Assume the partnership of Howell, Madrid, and Waldrop has been in existence for a number of years. Howell
decides to withdraw from the partnership when the partners’ capital balances are as follows:

An appraisal of the business and its property estimates the fair market value to be $ 160,000. Land with a book
value of $20,000 has a fair market value of $35,000. Howell has agreed to receive $64,000 in exchange for her
partnership interest.

18. Prepare the journal entries for the dissolution of Howell's partnership interest, assuming the goodwill
method is to be applied.

19. What are the remaining partners' capital balances after Howell's interest is dissolved, assuming the goodwill
method is applied?