Practice For Finals

CHAPTER 7
PARTNERSHIP FORMATION, OPERATION,

AND CHANGE IN OWNERSHIP
True-False Statements
1. A partnership is an association of two or more investors to carry on as co-owners a

business for profit.
2. Only individuals are allowed to be partners in a partnership.
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 partners legal liability is limited to his/her percentage ownership in
the partnership.
5. A partners personal assets may be taken by creditors to pay partnership debts if the
partnership is unable to meet its obligations.
6. Partnerships are not required to prepare financial statements in accordance with

Generally Accepted Accounting Principles unless they have publicly traded debt or are
required to follow GAAP by a creditor.
7. For a partnership to get an unqualified audit opinion, the financial records must conform
to Generally Accepted Accounting Principles.
8. Most small partnerships maintain their financial information in accordance with

Generally Accepted Accounting Principles.
9. Tax authorities basically view partnerships and proprietorships as extensions of their

owners.
10. Partnerships are not required to pay any taxes.
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 partners 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.
23. A written agreement is required to form a partnership.
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.
26. Partners make contributions of equal size when forming a partnership
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 contributors carrying value could result in a misallocation
of gain or loss if the asset is sold.
30. An assets 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
partners partnership income included on the partners 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 partners 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.
40. The assumption of a liability related to a noncash asset contributed to a partnership

reduces the value contributed.
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.
45. The bonus method of recognizing unidentifiable intangible assets contributed at a
partnerships formation does not result in a net increase in total owners equity.

partnerships formation has to make the capital account balances for all partners equal.

partnerships formation will result in all of the partner s capital accounts increasing.
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.
53. If a partnership makes a payment on behalf of a partner, a withdrawal has occurred.
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 partners 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
partnerships 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.
67. Partnership profit and loss residual percentages must be equal.
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.
74. When an error is discovered in the financial records of a partnership, it should be

corrected immediately. Allocation of any change to capital accounts as a result of an
error correction should be based on the profit and loss ratios that existed when the error
occurred.
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 partners 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 partners 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 partners capital account is created for an amount less than the value of net assets
contributed, an error has been made in the partnerships 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 partners 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 partners 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 partners equity, the existing partners must
purchase the withdrawing partners 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 partners ownership interest.
99. A partnerships assets must be revalued when a partner withdraws.
100. When a partnerships assets are revalued at the date a partner withdraws from the
partnership, the withdrawing partners 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 partnerships 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.
Conceptual Multiple Choice Questions
107. Which of the following is not a reason for forming a partnership?

a. Combine economic resources
b. Share managerial talent
c. Avoid complicated tax laws
d. Undertake a specific business objective
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 companys income on the owners 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
c. Partners have unlimited liability while corporation shareholders generally do not
have unlimited liability
d. Corporations are required to pay income tax while partnerships are not required to
pay income taxes
113. What theory of equity is applicable for partnerships?

a. Proprietary theory
b. Entity theory
c. A mix of proprietary and entity theory
d. Partnership theory
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 partners income tax includes the partners 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 partners 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 partnerships 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. Contributors carrying value
b. Contributors tax basis
c. Market (appraised) value
d. All of the above valuation amounts are allowed
119. Which of the following statements is correct with regard to the creation of initial capital
account balances on a partnerships 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 partners 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 partnerships formation?
a. Use of the noncash assets 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
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 partners allocation of
taxable partnership income
c. The contributing partners 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 partnerships 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 partners share of the partnerships 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
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
b. Liabilities associated with assets contributed to a partnership become the liability
of the partnership
c. Liabilities associated with assets contributed to a partnership become the liability
of both the contributing partner and the partnership
d. Assets may not be contributed to a partnership if there is a liability associated
with the asset
124. The bonus method of recognizing unidentifiable intangible asset contributions to a

partnership does which of the following?
a. It recognizes that partners may contribute more than the observable assets to the
partnership
b. It increases total partnership capital
c. Can only increase partner capital accounts
d. b and c are correct
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
126. When can the bonus method be applied?

a. When a partnership is formed
b. When a new partner is added to the partnership
c. When an existing partner retires from the partnership
d. The bonus method can be applied in all three of the above circumstances
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
129. The goodwill method always results in which of the following?

a. A change in the dollar value assigned to two or more partners capital accounts
b. A decrease in a partners capital account
c. An increase in a partners capital account
d. An increase in a partners capital account and a decrease in at least one partners
capital account
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 partnerships drawing
account?
a. Removal of cash by a partner
b. Payment of a partners 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?
a. Beginning capital account balance
b. Average of beginning and ending capital account balances
c. Weighted average capital account balance
d. Ending capital account balance
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?
b. Bonus
c. Salary
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?
b. Bonus
c. Salary
141. Which of the following statements is true with regard to partnership residual profit and
loss ratios?
a. A partners 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 partners 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
partnerships 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 partners 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 partners 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 partnerships 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?
a. Revaluation of existing assets
b. Recognition of goodwill
c. Application of the bonus method
d. Any of the three or a combination may be applied
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
partners 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 partners contribution exceeds his/her percentage of total partnership
capital after the investment is made
b. The new partners contribution is less than his/her percentage of total partnership
c. The new partners contribution is equal to his/her percentage of total partnership
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 partnerships total assets
d. A new partners 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 partners capital accounts will be decreased
b. The existing partner will receive cash from the partnership
c. The partnerships 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 partners 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
partnerships 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 partners 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 partners contribution to the partnership is greater than
the value of the identifiable net assets contributed
d. The new partners residual interest in profits and losses is greater than 30 percent
160. What portion of the partnerships assets must be revalued when a partner withdraws from
the partnership?
a. The withdrawing partners share must be revalued
b. All of the partnerships assets must be revalued
c. Any or all of the partnerships 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 partners 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 partners portion of goodwill
b. The continuing partners portion of goodwill
c. Goodwill may not be recognized at the date a partner withdraws
d. Either the withdrawing partners portion of goodwill or the goodwill attributable
to the entire partnership
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
Computational Multiple Choice Questions
169. Paul, Jeremy, and Juan are forming a partnership. Juan contributes a building having an
historical cost, accumulated depreciation, and market value of $290,000, $100,000, and
$400,000, respectively. The building is initially recorded on the partnership s books at
Juans book value ($190,000). Two years later the building is sold for a $270,000 gain.
What portion of the profit or loss should be allocated to Juan?
a. $20,000
b. $230,000
c. $210,000
d. $90,000
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
d. $100,000 $100,000 $300,000
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
Ikes 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 Davids 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 stores 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 Shawns 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. Cheryls 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%
Nick Joe Mike

a. $43,000 $46,500 $60,500
b. $45,325 $50,685 $53,990
c. $50,000 $50,000 $50,000
d. $44,075 $48,435 $57,490
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
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
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
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
changed the building is sold for $650,000. What is the amount of change to Bruces
capital account at the date the building is revalued?
a. $105,000
b. $91,000
c. $45,000
d. $39,000
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
changed the building is sold for $650,000. What is the amount of change to Bruces
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 Theresas 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 Craigs 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 Erics 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 Phillips 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 Cynthias 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 Rays equity. At the
date of the proposed transaction, Sam and Ray want to revalue the partnerships 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 partnerships assets. If the net increase in the partnerships assets is $125,000,
what will be the balance in Sandras capital account immediately before Judys
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
interest and the bonus method is applied. What is the dollar amount of bonus recognized
in Kens capital account at the date of admission?
a. $4,500
b. $34,500
c. $6,000
d. $1,500
in Roberts capital account at the date of admission?
a. $6,000
b. $1,500
c. $144,000
d. $4,500
interest and the bonus method is applied. What is the dollar amount of Ken s capital
a. $274,500
b. $304,500
c. $144,000
d. $271,500
interest and the bonus method is applied. What is the dollar amount of Robert s capital
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 Pierres capital account at
the date of admission?
a. $933,000
b. $450,000
c. $388,750
d. $622,000
and the bonus method is applied. What is the dollar amount of bonus recognized in
Johns capital account at the date of admission?
a. $98,000
b. $61,250
c. $24,500
d. $36,750
and the bonus method is applied. What is the dollar amount of bonus recognized in
Sams capital account at the date of admission?
a. $98,000
b. $61,250
c. $24,500
d. $36,750
and the bonus method is applied. What is the dollar amount of Johns capital account at
a. $516,750
b. $661,750
c. $649,500
d. $504,500
and the bonus method is applied. What is the dollar amount of Johns capital account at
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
a. $137,500
b. $120,000
c. $143,333
d. The dollar amount cannot be determined from this information
in Franks capital account at the date of admission?
a. $70,000
b. $23,333
c. $17,500
d. $52,500
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
interest and the bonus method is applied. What is the dollar amount of the reduction to
Marks capital account at the date of admission?
a. $5,250
b. $12,250
c. $17,500
d. $100,333
interest and the bonus method is applied. What is the dollar amount of Kris capital
a. $157,750
b. $254,750
c. $164,750
d. $247,750
interest and the bonus method is applied. What is the dollar amount of Mark s capital
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 Gregs capital account at
a. $60,000
b. $78,530
c. $429,250
d. $75,750
account balances of $265,000 and $180,000, respectively at the date they admit Greg to
and the bonus method is applied. What is the dollar amount of reduction to Tom s capital
a. $6,300
b. $9,450
c. $54,300
d. $81,450
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
and the bonus method is applied. What is the dollar amount of Tom s capital account at
a. $255,550
b. $258,700
c. $173,700
d. $170,550
and the bonus method is applied. What is the dollar amount of Barbaras 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
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
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
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
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
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
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
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
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
They are considering admitting Jason to the partnership. He will receive a 25 percent
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
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
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
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
are considering admitting Julia to the partnership. She will receive a 20 percent equity
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
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
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
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
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 Harrys portion of the partnerships assets. If the
value of the partnerships 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
percent, respectively. Harry is withdrawing from the partnership. At the date of
withdrawal, the partners are revaluing all of the partnerships assets. If the value of the
partnerships 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
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 partnerships assets, an increase of
$200,000. If Susan and Walter acquire Harrys equity, what will be the amount of
Susans capital on the partnerships balance sheet immediately after Harrys withdrawal,
rounded to the nearest dollar?
a. $110,000
b. $230,000
c. $282,308
d. Susans capital account balance cannot be determined from the information given
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 partnerships assets, an increase of
$200,000. If Susan and Walter acquire Harrys equity, what will be the amount of total
capital on the partnerships balance sheet immediately after Harrys 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 Scotts
retirement are 45 percent, 30 percent, and 25 percent, respectively. How much will
Franks 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
retirement are 45 percent, 30 percent, and 25 percent, respectively. What will be the
balance in Franks capital account if the bonus method is applied for the withdrawal?
a. $160,000
b. $104,000
c. $184,000
d. $136,000
retirement are 45 percent, 30 percent, and 25 percent, respectively. How much will
Georges 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
retirement are 45 percent, 30 percent, and 25 percent, respectively. What will be the
balance in Georges 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
Randys ownership interest for $240,000. The profit and loss residual ratios before
Randys retirement are 42 percent, 30 percent, and 28 percent, respectively. How much
will Melissas 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
Randys retirement are 42 percent, 30 percent, and 28 percent, respectively. What will be
the balance in Melissas capital account if the bonus method is applied for the
withdrawal?
a. $336,000
b. $300,000
c. $264,000
d. $246,000
Randys retirement are 42 percent, 30 percent, and 28 percent, respectively. How much
will Sarahs 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
Randys retirement are 42 percent, 30 percent, and 28 percent, respectively. What will be
the balance in Sarahs 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 Bobs 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 Deborahs initial capital account?
a. $150,000
b. $170,000
c. $172,500
d. The amount cannot be determined because the amount Deborah paid for Bobs
equity is not known
is purchased by Claire (60 percent) and Jack (40 percent), what is the amount of Claires
capital account at the date of Bobs withdrawal?
a. $238,500
b. $307,500
c. $186,750
d. $180,000
is purchased by Claire (60 percent) and Jack (40 percent), what is the amount of Jacks
capital account at the date of Bobs withdrawal?
a. $397,500
b. $294,000
c. $285,000
d. $159,000
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
partnerships goodwill $75,000. Assuming that Bobs equity is purchased by a new
partner (Deborah) approved by Claire and Jack, what is the amount of Deborahs initial
capital account?
a. $150,000
b. $170,000
c. $172,500
d. The amount cannot be determined because the amount Deborah paid for Bobs
equity is not known
partnerships goodwill $75,000. Assuming that Bobs equity is purchased by Claire (60
percent) and Jack (40 percent), what is the amount of Claires capital account at the date
of Bobs withdrawal?
a. $175,500
b. $247,500
c. $257,250
d. $327,750
partnerships goodwill $75,000. Assuming that Bobs equity is purchased by Claire (60
percent) and Jack (40 percent), what is the amount of Jacks capital account at the date of
Bobs 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 Sallys equity is purchased by a new partner (Mary) approved by Bonnie
and Gwen, what is the amount of Marys initial capital account?
a. $240,000
b. $390,000
c. $320,000
d. The amount cannot be determined because the amount Mary paid for Sallys
equity is not known
Assuming that Sallys equity is purchased by Bonnie (60 percent) and Gwen (40 percent),
what is the amount of Bonnies capital account at the date of Sallys withdrawal?
a. $446,000
b. $494,000
c. $424,000
d. $376,000
Assuming that Sallys equity is purchased by Bonnie (60 percent) and Gwen (40 percent),
what is the amount of Gwens capital account at the date of Sallys withdrawal?
a. $446,000
b. $494,000
c. $424,000
d. $376,000
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 partnerships 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 Marys initial capital account?
a. $87,500
b. $237,500
c. $350,000
d. The amount cannot be determined because the amount Mary paid for Sallys
equity is not known
equity is purchased by Bonnie (60 percent) and Gwen (40 percent), what is the amount of
Bonnies capital account at the date of Sallys 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,
equity is purchased by Bonnie (60 percent) and Gwen (40 percent), what is the amount of
Bonnies capital account at the date of Sallys withdrawal?
a. $441,000
b. $490,000
c. $560,000
d. $420,000
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
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:
Alan Betty Carl__

Cash $150,000 $275,000 $125,000
Plant Assets - historical cost 280,000 350,000 540,000
Plant Assets - carrying value 215,000 225,000 300,000
Plant Assets - tax basis 200,000 190,000 230,000
Plant Assets - market value 350,000 260,000 310,000
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 partners 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.?

below:
Alan Betty Carl__
Cash $150,000 $275,000 $125,000
Required:
assets assuming the tax basis is used to determine the value assigned to noncash
assets contributed. Assume also that each partners capital account is assigned a
value equal to the cash and noncash assets contributed by that partner.
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.

below:
Alan Betty Carl__

Cash $150,000 $275,000 $125,000
Required:
assets assuming the market value is used to determine the value assigned to
noncash assets contributed. Assume also that each partners capital account is
assigned a value equal to the cash and noncash assets contributed by that partner.
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.
278. (5 Points) easy
Alex, Bill, and Martha contribute the following assets to begin partnership operations:
Alex Bill Martha_

Cash $150,000 $225,000 $175,000
Inventory 57,000 89,000
Plant Assets 350,000 100,000
Accounts Payable 14,000 40,000
Notes Payable 160,000
Record the journal entry to establish the assets and owners equity of the partnership.

William, Casey, and Samantha are forming a partnership. Below is a table outlining the
contributions of each partner.
William Casey Samantha

Cash $ 15,000 $20,000 $ 10,000
Inventory 100,000 60,000 80,000
Plant Assets 250,000 160,000
Liabilities Assumed by Partnership 130,000 90,000
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.

Bonnie, Connie, and Deborah are forming a partnership. The partners will contribute the
following identifiable assets:
Bonnie Connie Deborah

Cash $150,000 $200,000 $140,000
Inventory 160,000 190,000 180,000
Plant Assets 300,000 340,000
Liabilities Assumed by Partnership 180,000 130,000
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.
Able, Baker, and Charlie are forming a partnership. Charlie has significant experience in
the type of business the partners are starting. As a result, Able and Baker agree that
goodwill of $50,000 should be recognized with regard to Charlie. The partners
contribute the following tangible assets:
Able Baker Charlie

Cash $20,000 $35,000 $55,000
Plant Assets 75,000 90,000 60,000
Liabilities 25,000 45,000 15,000
Record the journal entry to establish the partnership.

Jessica, Mary, and Susan currently operate three separate businesses. They are planning
to combine and form a partnership to operate as one business. The prospective partners
agree that, in addition to the net market value of the tangible assets contributed to the
partnership, Jessica and Susan should have goodwill recognized in the amounts of
$80,000 and $40,000, respectively. The following table presents the market value of the
assets and liabilities contributed to the partnership.
Jessica Mary Susan

Cash $100,000 $250,000 $170,000
Inventory 280,000 400,000 450,000
Plant Assets 750,000 500,000 600,000
Accounts Payable 190,000 270,000 260,000
Mortgage Payable 340,000 200,000 320,000
Required:
a. Record the journal entry to establish the partnership.
b. What appears to be the partners intent when creating the new partnership?

Tom, Jon, and Sandy are partners in a thriving business. You work for the firm that
provides accounting services to the partnership. The accounting period recently ended
and you have been assigned the task of helping with the profit allocation to the partners.
The following information has been extracted from the partnerships accounting records:
Date Tom Jon Sandy____

1/1 Balance $850,000 Balance $680,000 Balance $450,000
4/30 Withdraw $75,000 Withdraw $30,000
9/1 Invest $120,000 Withdraw $100,000
12/1 Invest $90,000 Invest $40,000 Withdraw $60,000
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?

John, Roger, and Troy are partners in a local business. You are a staff accountant at a
firm that provides accounting services to the partnership. You were just assigned the task
of helping prepare the profit allocation to the partners. The following information was
extracted from the partnerships accounting records:
Date John Roger Troy_____

1/1 Balance $250,000 Balance $350,000 Balance $500,000
3/31 Withdraw $30,000 Invest $50,000
8/31 Invest $40,000 Withdraw $90,000
11/1 Invest $25,000 Invest $60,000 Withdraw $60,000
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 10 percent. What is the amount of interest on capital
allocated to each partner as a part of the profit and loss allocation?

Philip is the managing partner of a local company. Part of his profit and loss allocation
is a bonus based on the store operating income. The bonus arrangement is 8 percent of
operating income in excess of $200,000 after deducting the bonus. How much is Philips
bonus this year if operating income before deducting the bonus is $350,000?

Sally is a partner, and business manager, in a local partnership. Part of the profit and loss
agreement in the articles of partnership is a bonus to be paid to the business manager.
The bonus is currently calculated at 12 percent of income in excess of $250,000 after
subtracting the bonus.
How much bonus will Sally receive if income is $400,000?

Frank, George, and Hank are partners. Partnership profits for the year are $90,000.
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?
288. (30 Points) difficult

Beverly, Brad, and Bob are partners in the 3Bs company. The partners have been in
business for a number of years. The following information exists with regard to the
allocation of profits and losses.
Beverly _ Brad Bob__

Weighted-average capital balance $400,000 $650,000 $550,000
Salary 40,000 65,000 80,000
Bonus .1(Net income - $200,000)
Residual 40% 35% 25%
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:
a. Determine the profit allocation if the partnership net income is $580,000.
b. Determine the profit allocation if the partnership net income is $250,000.
c. Determine the loss allocation if the partnership net loss is ($50,000).
289. (15 Points) difficult

Tiffany, Jason, and Shanel are partners in a marketing firm. They allocate profits and
losses based on four criteria: (1) 6 percent return on invested capital; (2) salary, based on
$40 per billable hour; (3) bonus to Jason for managing the business [.15 (net income -
$250,000 - bonus)]; and (4) residual allocation. For the year, the partners have the
following average invested capital and billable hours.
Tiffany Jason Shanel_

Average invested capital $200,000 $180,000 $160,000
Billable hours 1,500 1,700 2,200
Prepare a schedule allocating the partnerships $450,000 profit. Round all

amounts to the nearest dollar.

Practice For Finals

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CHAPTER 7

PARTNERSHIP FORMATION, OPERATION,

1. A partnership is an association of two or more investors to carry on as co-owners a

2. Only individuals are allowed to be partners in a partnership.

6. Partnerships are not required to prepare financial statements in accordance with

8. Most small partnerships maintain their financial information in accordance with

9. Tax authorities basically view partnerships and proprietorships as extensions of their

10. Partnerships are not required to pay any taxes.

23. A written agreement is required to form a partnership.

26. Partners make contributions of equal size when forming a partnership

40. The assumption of a liability related to a noncash asset contributed to a partnership

46. The bonus method of recognizing unidentifiable intangible assets contributed at a

47. The bonus method of recognizing unidentifiable intangible assets contributed at a

53. If a partnership makes a payment on behalf of a partner, a withdrawal has occurred.

67. Partnership profit and loss residual percentages must be equal.

74. When an error is discovered in the financial records of a partnership, it should be

99. A partnerships assets must be revalued when a partner withdraws.

Conceptual Multiple Choice Questions

107. Which of the following is not a reason for forming a partnership?

113. What theory of equity is applicable for partnerships?

124. The bonus method of recognizing unidentifiable intangible asset contributions to a

126. When can the bonus method be applied?

129. The goodwill method always results in which of the following?

Computational Multiple Choice Questions

Nick Joe Mike

275. (10 Points) moderate

Alan Betty Carl__

276. (10 Points) moderate

277. (10 Points) moderate

Alan Betty Carl__

Alex Bill Martha_

279. (10 Points) moderate

William Casey Samantha

280. (10 Points) moderate

Bonnie Connie Deborah

Able Baker Charlie

Record the journal entry to establish the partnership.

282. (15 Points) moderate

Jessica Mary Susan

283. (20 Points) moderate

Date Tom Jon Sandy____

284. (20 Points) moderate

Date John Roger Troy_____

285. (10 Points) easy

286. (10 Points) easy

How much bonus will Sally receive if income is $400,000?

287. (10 Points) easy

288. (30 Points) difficult

Beverly _ Brad Bob__

289. (15 Points) difficult

Tiffany Jason Shanel_

Prepare a schedule allocating the partnerships $450,000 profit. Round all

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99. A partnerships assets must be revalued when a partner withdraws.

Prepare a schedule allocating the partnerships $450,000 profit. Round all