Universidad Ana G Méndez

Division of Business, Tourism & Entrepreneurship

Acco 112 – Introduction to Accounting II

Assignment #4LP: Chapter Questions and Problems

Chapter 11. Current Liabilities and Payroll Accounting
Chapter 12- Accounting for Partnerships
Due Date: Monday, December 13, 2021; 12:30pm

Cap 11
1. Lori Randle believes a current liability is a debt that can be expected to be paid in one year. Is
Lori correct? Explain.
Yes, however, it must also be the intent of the company to use current assets to settle the
liability.

2. What is liquidity? What are two measures of liquidity?

Liquidity refers to the ability of a company to pay its maturing obligations and meet unexpected
needs for cash. Two measures of liquidity are working capital (current assets – current
liabilities) and the current ratio (current assets ÷ current liabilities).

3. What is a contingent liability? Give an example of a contingent liability that is usually

recorded in the accounts.
A contingent liability is an existing situation involving uncertainty as to a possible obligation
which will be resolved when one or more future events occur or fail to occur. Contingent
liabilities are only recorded in the accounts if they are probable, and the amount is reasonably
estimable. Warranty costs are a contingent liability usually recorded in the accounts since they
are both probable in incurrence and subject to estimation.

4. What is the difference between gross pay and net pay? Which amount should a company
record as wages and salaries expense?
Gross pay is the amount an employee actually earns. Net pay, the amount an employee is paid,
is gross pay reduced by both mandatory and voluntary deductions, such as FICA taxes, union
dues, federal income taxes, etc. Gross pay should be recorded as wages or salaries expense.

5. Which payroll tax is levied on both employers and employees?

Both employees and employers are required to pay FICA taxes.

6. What information is shown in a W-2 statement?

A W-2 statement contains the employee’s name, address, social security number, wages, tips,
other compensation, social security taxes withheld, wages subject to social security taxes, and
federal, state and local income taxes withheld.
7. What are the primary uses of the employee earnings record?
The employee earnings record is used in: (1) determining when an employee has earned the
maximum earnings subject to FICA taxes, (2) filing state and federal tax returns, and (3)
providing each employee with a statement of gross earnings and tax withholdings for the year.

Cap 12
8. The characteristics of a partnership include the following: (a) association of individuals, (b)
limited life, and (c) co-ownership of property. Explain each of these terms.
a. Association of individuals: At least two persons must joint together to form a partnership.
Furthermore, there must be an agreement between persons desirous of forming a partnership.
b. Limited Life: A partnership may be ended voluntarily at anytime through the acceptance of a
new partner or withdrawal of a partner. It may be ended involuntarily by the death or
incapacity of a partner.
c. Co-Ownership of Property: Property co-ownership refers to a situation where two or more
people share the ownership of a property. Put simply, it involves your assets and liabilities
because co-ownership is base on the equity.

9. Kevin Mathis is confused about the partnership characteristics of (a) mutual agency and (b)
unlimited liability. Explain these two characteristics for Kevin.
(a) Mutual agency. This characteristic means that the act of any partner is binding on all other
partners when engaging in partnership business. This is true even when the partners act
beyond the scope of their authority, so long as the act appears to be appropriate for the
partnership.
(b) Unlimited liability. Each partner is personally and individually liable for all partnership
liabilities.
Creditors’ claims attach first to partnership assets and then to personal resources of any
partner, irrespective of that partner’s equity in the partnership.

10. Lance Kosinski and Matt Morrisen are considering a business venture. They ask you to
explain the advantages and disadvantages of the partnership form of organization.
The advantages of a partnership are: (1) combining skills and resources of two or more
individuals, (2) ease of formation, (3) freedom from governmental regulations and restrictions,
and (4) ease of decision making. Disadvantages are: (1) mutual agency, (2) limited life, and (3)
unlimited liability

11. Why might a company choose to use a limited partnership?

A limited partnership is used when a general partner(s) wish to raise cash without involving
outside investors in management of the business. Limited partners in this case have limited
personal liability for business debts as long as they don’t participate in management.

12. Newland and Palermo form a partnership. Newland contributes land with a book value of
$50,000 and a fair value of $60,000. Newland also contributes equipment with a book value of
$52,000 and a fair value of $57,000. The partnership assumes a $20,000 mortgage on the land.
What should be the balance in Newland's capital account upon formation of the partnership?
Newland's capital account balance should be $102,000, comprised of land $65,000, and
equipment
$57,000, less debt $20,000
60,000 +57000 -20000= 97000 in capital account.
50,000 + 52,000 = 102,000

13. Mutt and Jeff are discussing how income and losses should be divided in a partnership they
plan to form. What factors should be considered in determining the division of net income or
net loss?
Factors to be considered in determining how income and loss should be divided are: (1) a fixed
ratio is easy to apply and it may be an equitable basis in some circumstances; (2) capital balance
ratios when the funds invested in the partnership are considered the most critical factor; and
(3) salary allowance and/or interest allowance coupled with a fixed ratio. This last approach
gives specific recognition to differences that may exist among partners by providing salary
allowances for time worked and interest allowances for capital invested.

14. Are the financial statements of a partnership similar to those of a proprietorship? Discuss.
The financial statements of a partnership are similar to those of a proprietorship. The
differences are due to the number of partners involved. The income statement for a
partnership is identical to the income statement for a proprietorship except for the detailed
information concerning the division of net income. The owners’ equity statement is called the
partners’ capital statement. This statement shows the changes in each partner’s capital account
and in total partnership capital during the year. On the balance sheet each partner’s capital
balance is reported in the owners’ equity section.

15. How does the liquidation of a partnership differ from the dissolution of a partnership?
Liquidation of a partnership ends both the legal and economic life of the entity. Partnership
dissolution occurs whenever a partner withdraws or a new partner is admitted. Dissolution
does not necessarily mean that the business ends. If the continuing partners agree, operations
can continue without interruption by forming a new partnership.

Part II. Problems

A. Assume that the payroll records of Klein Oil Company provided the following information for the
weekly payroll ended November 30, 2020.
Year-to-Date
Hourly Federal Earnings Through
Employee Hours Worked Pay Rate Income Tax Union Dues Previous Week
T. King 44 $55 $442 $9 $128,200
T. Binion 46 15 97 5 23,200
N.Cole 40 25 148 — 5,700
C. Hennesey 42 30 230 7 49,500
Additional information: All employees are paid overtime at time and a half for hours worked in excess of
40 per week. The FICA tax rate is 7.65% for the first $127,200 of each employee's annual earnings. The
employer pays unemployment taxes of 6.2% (5.4% for state and .8% for federal) on the first $7,000 of
each employee's annual earnings.

Instructions

(a) Prepare the payroll register for the pay period.

(b) Prepare general journal entries to record the payroll and payroll taxes.

a)KLEIN OIL COMPANY

Payroll Register
For the Week Ending November 30, 2020
Employee Hours Reg Overtime pay FICA Income Tax Union DuesNET PAY
T. King 44 2200 330 2,530 - 442.00 9.00 2,079.00
T. Binion 46 600 135 735 56.23 97.00 5.00 576.77
N.Cole 40 1000 0 1,000 76.50 148.00 - 775.50
C. Hennesey 42 1200 90 1,290 98.69 230.00 7.00 954.31
5,555.00 231.42 917.00 21.00 4,385.58

(b)
Nov.30 Salaries and Wages Expense 5,555.00
FICA Taxes Payable 231.42
Federal Income Taxes Payable 917.00
Union Dues Payable 21.00
Salaries and Wages Payable 4,385.58
(To record weekly payroll)

Nov.30 Payroll Tax Expense 293.42

State Unemployment Taxes Payable ($1,000 × .054) 54.00
Federal Unemployment Taxes Payable ($1,000 × .008) 8.00
FICA Taxes Payable 231.42
(To record employer's payroll taxes)

B. Draper and Becker decide to organize a partnership. Draper invests $25,000 cash, and Becker
contributes $5,000 and equipment having a book value of $7,000 and a fair value of $15,000.

Instructions

Prepare the entry to record each partner’s investment

Cash 25,000
Draper, Capital 25,000

Cash 5,000
Equipment 15,000
Becker, Capital 20,000
C. The Fig & Olive Co. reports net income of $24,000. Interest allowances are Fig $3,000 and Olive
$5,000; partner salary allowances are Fig $18,000 and Olive $10,000 and the remainder is shared
equally.

Instructions

Indicate the division of net income to each partner, and prepare the entry to distribute the net income.

Division of Net Income

Fig Olive Total
Salary allowance 18,000 10,000 28,000
Interest allowance on partners’ capital 3,000 5,000 8,000
Total salaries and interest 21,000 15,000 36,000
Remaining income (6,000) (6,000) (12,000)
Total division of Net Income 15,000 9,000 24,000

The entry to record the division of net income is:

Income Summary 24,000

Fig, Capital 15,000
Olive, Capital 9,000

D. Appalachian Company at December 31 has cash $40,000, noncash assets $200,000, liabilities
$110,000, and the following capital balances: Hoffman $90,000 and Mena $40,000. The firm is
liquidated, and $220,000 in cash is received for the noncash assets. Hoffman and Mena income ratios
are 60% and 40%, respectively.

Instructions

Prepare a schedule of cash payments.

APPALACHIAN COMPANY
Schedule of Cash Payments

Noncash Hoffman Mena

Item cash + Assets = Liabilities + Capital + Capital
Balance before
liquidation 40,000 200,000 110,000 90,000 40,000
Sale of noncash assets
and allocation of losses 220,000 (200,000) 12,000 8,000
New balances 260,000 - 110,000 102,000 48,000
Pay liabilitie (110,000) (110,000)
New Balances 150,000 - - 102,000 48,000
Cash distribution 150,000 - - 102,000 48,000