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LO1
1. Under the Uniform Partnership Act, loans made by a partner to the partnership are
treated as
a. advances to the partnership for which interest shall be paid from the date of the
advance.
b. advances to the partnership that are carried in the partners' capital accounts.
c. Accounts Payable of the partnership for which interest is paid.
d. advances to the partnership for which interest does not have to be paid.
LO1
2. A partner assigned his partnership interest to a third party. Which statement best
describes the legal ramifications to the assignee?
a. The assignment of the partnership interest does not entitle the assignee to
partnership assets upon a liquidation.
b. The assignment dissolves the partnership.
c. The assignee has the right to share in the management of the partnership.
d. The assignee does not become a partner but has the right to share in future
partnership profits and to receive the proper share of partnership assets upon
liquidation.
LO1
3. In the Uniform Partnership Act, partners have
I. mutual agency.
II.unlimited liability.
a. I only.
b. II only.
c. I and II.
d. Neither I nor II.
LO1
4. Partnerships
LO2
5. Langley invests his delivery van in a computer repair partnership with McCurdy. What
amount should the van be credited to Langley’s partnership capital?
A summary balance sheet for the McCune, Nall, and Oakley partnership appears below.
McCune, Nall, and Oakley share profits and losses in a ratio of 2:3:5, respectively.
Assets
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Cash $ 50,000
Inventory 62,500
Marketable securities 100,000
Land 50,000
Building-net 250,000
Total assets $ 512,500
Equities
McCune, capital $ 212,500
Nall, capital 200,000
Oakely, capital 100,000
Total equities $ 512,500
The partners agree to admit Pavic for a one-fifth interest. The fair market value of partnership
land is appraised at $100,000 and the fair market value of inventory is $87,500. The assets
are to be revalued prior to the admission of Pavic and there is $15,000 of goodwill that
attaches to the old partnership.
LO2
6. By how much will the capital accounts of McCune, Nall, and Oakley increase,
respectively, due to the revaluation of the assets and the recognition of goodwill?
LO2
7. How much cash must Pavic invest to acquire a one-fifth interest?
a. $117,500.
b. $120,500.
c. $146,875.
d. $150,625.
LO2
8. What will the profit and loss sharing ratios be after Pavic’s investment?
a. 1:2:4:2.
b. 2:3:5:2.
c. 3:4:6:2.
d. 4:6:10:5.
Albion Blaze
January 1 capital balances $ 100,000 $ 120,000
Yearly drawings ($1,500 a month) 18,000 18,000
Permanent withdrawals of capital:
June 3 ( 12,000 )
May 2 ( 15,000 )
Additional investments of capital:
July 3 40,000
October 2 50,000
LO3
9. What is the weighted-average capital for Albion and Blaze in 2006?
LO3
10. If the average capital for Albion and Blaze from the above information is $112,000 and
$119,000, respectively, what will be the total amount of profit allocated after the salary
and interest distributions are completed?
a. $70,000.
b. $73,100.
c. $75,000.
d. $80,000.
LO3
11. If the average capital balances for Albion and Blaze are $100,000 and $120,000,
what will the final profit allocations for Albion and Blaze in 2006?
Bloom and Carnes share profits and losses in a ratio of 2:3, respectively. Bloom and Carnes
receive salary allowances of $10,000 and $20,000, also respectively, and both partners
receive 10% interest based upon the balance in their capital accounts on January 1. Partners’
drawings are not used in determining the average capital balances. Total net income for 2006
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is $60,000. If net income after deducting the interest and salary allocations is greater than
$20,000, Carnes receives a bonus of 5% of the original amount of net income.
Bloom Carnes
January 1 capital balances $ 200,000 $ 300,000
Yearly drawings ($1,500 a month) 18,000 18,000
LO3
12. What are the total amounts for the allocation of interest, salary, and bonus, and, how
much over-allocation is present?
LO3
13. If the partnership experiences a net loss of $20,000 for the year, what will be the final
amount of profit or (loss) closed to each partner’s capital account?
LO3
14. The XYZ partnership provides a 10% bonus to Partner Y that is based upon
partnership income, after deduction of the bonus. If the partnership's income is
$121,000, how much is Partner Y's bonus allocation?
a. $11,000.
b. $11,450.
c. $11,650.
d. $12,100.
LO3
15. Drawings
LO4
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15-5
16. If the partnership agreement provides a formula for the computation of a bonus to the
partners, the bonus would be computed
a. next to last, because the final allocation is the distribution of the profit residual.
b. before income tax allocations are made.
c. after the salary and interest allocations are made.
d. in any manner agreed to by the partners.
Davis has decided to retire from the partnership of Davis, Eiser, and Foreman. The
partnership will pay Davis $200,000. Goodwill is to be recorded in the transaction as implied
by the excess payment to Davis. A summary balance sheet for the Davis, Eiser, and Foreman
partnership appears below. Davis, Eiser, and Foreman share profits and losses in a ratio of
1:1:3, respectively.
Assets
Cash $ 75,000
Inventory 82,000
Marketable securities 38,000
Land 150,000
Building-net 255,000
Total assets $ 600,000
Equities
Davis, capital 160,000
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Eiser, capital 140,000
Foreman, capital 300,000
Total equities $ 600,000
LO5
17. What goodwill will be recorded?
a. $40,000.
b. $120,000.
c. $160,000.
d. $200,000.
LO5
18. What partnership capital will Eiser have after Davis retires?
a. $100,000.
b. $140,000.
c. $180,000.
d. $220,000.
LO5
19. What partnership capital will Foreman have after Davis retires?
a. $240,000.
b. $300,000.
c. $360,000.
d. $420,000.
LO6
20. In a limited partnership, a general partner
Cesar and Damon share partnership profits and losses at 60% and 40%, respectively. The
partners agree to admit Egan into the partnership for a 50% interest in capital and earnings.
Capital accounts immediately before the admission of Egan are:
Required:
1. Prepare the journal entry(s) for the admission of Egan to the partnership assuming
Egan invested $400,000 for the ownership interest. Egan paid the money directly to
Cesar and to Damon for 50% of each of their respective capital interests. The
partnership records goodwill.
2. Prepare the journal entry(s) for the admission of Egan to the partnership assuming
Egan invested $500,000 for the ownership interest. Egan paid the money to the
partnership for a 50% interest in capital and earnings. The partnership records
goodwill.
3. Prepare the journal entry(s) for the admission of Egan to the partnership assuming
Egan invested $700,000 for the ownership interest. Egan paid the money to the
partnership for a 50% interest in capital and earnings. The partnership records
goodwill.
LO3
Exercise 2
On February 1, 2005, Flores, Gilroy, and Hansen began a partnership in which Flores and
Hansen contributed cash of $25,000; Gilroy contribute property with a fair value of $50,000
and a tax basis $40,000. Gilroy receives a 5% bonus of partnership income. Flores and
Hansen receive salaries of $10,000 each. The partnership agreement of Flores, Gilroy, and
Hansen provides all partners to receive a 5% interest on capital and that profits and losses be
divided of the remaining income be distributed to Flores, Gilroy, and Hansen by a 1:3:1 ratio.
Required:
LO3
Exercise 3
Required:
LO3
Exercise 4
Evans, Fitch, and Gault operate a partnership with a complex profit and loss sharing
agreement. The average capital balance for each partner on December 31, 2006 is $300,000
for Evans, $250,000 for Fitch, and $325,000 for Gault. An 8% interest allocation is provided to
each partner. Evans and Fitch receive salary allocations of $10,000 and $15,000, respectively.
If partnership net income is above $25,000, after the salary allocations are considered (but
before the interest allocations are considered), Gault will receive a bonus of 10% of the
original amount of net income. All residual income is allocated in the ratios of 2:3:5 to Evans,
Fitch, and Gault, respectively.
Required:
1. Prepare a schedule to allocate income to the partners assuming that partnership net
income is $250,000.
2. Prepare a journal entry to distribute the partnership's income to the partners (assume
that an Income Summary account is used by the partnership).
Required:
1. Prepare a schedule to allocate income or loss to the partners assuming that the
partnership incurs a net loss of $36,000.
2. Prepare a journal entry to distribute the partnership's loss to the partners (assume that an
Income Summary account is used by the partnership).
LO3
Exercise 6
Grech, Harris, and Ivers have a retail partnership business selling personal computers. The
partners are allowed an interest allocation of 8% on their average capital. Capital account
balances on the first day of each month are used in determining weighted average capital,
regardless of additional partner investment or withdrawal transactions during any given month.
Drawings are disregarded in computing average capital, but temporary withdrawals of capital
that are debited to the capital account are used in the average calculation. Partner capital
activity for the year was:
Calculate weighted average capital for each partner, and determine the amount of interest that each
partner will be allocated.
The profit and loss sharing agreement for the Sealy, Teske, and Ubank partnership provides
that each partner receive a bonus of 5% on the original amount of partnership net income if
net income is above $25,000. Sealy and Teske receive a salary allowance of $7,500 and
$10,500, respectively. Ubank has an average capital balance of $260,000, and receives a 10%
interest allocation on the amount by which his average capital account balance exceeds
$200,000. Residual profits and losses are allocated to Sealy, Teske, and Ubank in their
respective ratios of 7:5:8.
Required:
LO5
Exercise 8
A summary balance sheet for the partnership of Ivory, Jacoby and Kato on December 31, 2006
is shown below. Partners Ivory, Jacoby and Kato allocate profit and loss in their respective
ratios of 9:6:10.
Assets
Cash $ 50,000
Inventory 75,000
Marketable securities 120,000
Land 80,000
Building-net 400,000
Total assets $ 725,000
Equities
Ivory, capital $ 425,000
Jacoby, capital 225,000
Kato, capital 75,000
Total equities $ 725,000
The partners agree to admit Lange for a one-tenth interest. The fair market value for
partnership land is $180,000, and the fair market value of the inventory is $150,000.
1. Record the entry to revalue the partnership assets prior to the admission of Lange.
2. Calculate how much Lange will have to invest to acquire a 10% interest.
3. If Lange paid $200,000 to the partnership in exchange for a 10% interest, what would
be the bonus that is allocated to each partner's capital account?
LO5
Exercise 9
A summary balance sheet for the Vail, Wacker Yang partnership on December 31, 2006 is
shown below. Partners Vail, Wacker, and Yang allocate profit and loss in their respective ratios
of 4:5:7. The partnership agreed to pay partner Yang $227,500 for his partnership interest
upon his retirement from the partnership on January 1, 2007. Any payments exceeding Yang’s
capital balance are treated as a bonus from partners Vail and Wacker.
Assets
Cash $ 75,000
Inventory 87,500
Marketable securities 60,000
Land 90,000
Building-net 150,000
Total assets $ 462,500
Equities
Vail, capital $ 212,500
Wacker, capital 112,500
Yang, capital 137,500
Total equities $ 462,500
Required:
Prepare the journal entry to reflect Yang’s retirement from the partnership.
A summary balance sheet for the Almond, Brandt, and Clack partnership on December 31,
2006 is shown below. Partners Almond, Brandt, and Clack allocate profit and loss in their
respective ratios of 2:1:1. The partnership agreed to pay partner Brandt $135,000 for his
partnership interest upon his retirement from the partnership on January 1, 2007. The
partnership financials on January 1, 2007 are:
Assets
Cash $ 75,000
Inventory 85,000
Marketable securities 60,000
Land 90,000
Building-net 150,000
Total assets $ 420,000
Equities
Almond, capital $ 210,000
Brandt, capital 105,000
Clack, capital 105,000
Total equities $ 420,000
Required:
Prepare the journal entry to reflect Brandt’s retirement from the partnership:
1. Assuming a bonus to Brandt.
2. Assuming a revaluation of total partnership capital based on excess payment.
3. Assuming goodwill to excess payment is recorded.
1. a
2. d
3. c
4. b
5. b
8. d Each of the original partners has given up 20% of their interest to Pavic.
Their profit and loss sharing ratios will therefore be 80% of what they were
before the admission of Pavic.
13. b Bloom:
Interest allocation: $20,000
Salary allocation: $10,000
Carnes:
Interest allocation: $30,000
Salary allocation: $20,000
14. a B = .1x($121,000 - B)
B = $12,100 - .1B
1.1B = $12,100
B = $11,000
15. d
16. d
17. d
18. c
19. c
20. d
Requirement 1
Goodwill 200,000
Cesar, capital 120,000
Damon, capital 80,000
If a $400,000 payment represents 50% of total capital, then twice that amount, or $800,000, is
the implied total capital including goodwill. If the present total capital is $600,000, and the
implied total capital is $800,000, the amount of goodwill to record is $200,000. This goodwill is
allocated 60% to Cesar and 40% to Damon.
After the first entry is posted, the balances in the Cesar and Damon capital accounts will be
$420,000 and $380,000, respectively. If one-half of each partner’s interest is given to Egan,
Cesar’s capital account is reduced by $210,000, and Damon’ capital account is reduced by
$190,000.
Requirement 2
Goodwill 100,000
Cash 500,000
Egan, capital 600,000
If we focus on the current capital of the partnership, $600,000, and say that it is fairly valued,
then, if it represents 50% of final capital after Egan’s investment, final capital should be
$1,200,000. Egan’s share of final capital will be $600,000, and, if Egan invests $500,000 for
this interest, there must be $100,000 of goodwill that is allocated to Egan.
Requirement 3
Goodwill 100,000
Cesar, capital 60,000
Damon, capital 40,000
Cash 700,000
Egan, capital 700,000
If Egan invests $700,000 for a 50% interest, it implies that total partnership capital should be
$1,400,000. After Egan’s investment, total capital will be $1,300,000, and goodwill is therefore
$100,000. The goodwill is allocated to Cesar and Damon.
Exercise 2
Exercise 3
Correction of journal entry error from 12/29/03. To record office equipment and
to adjust partner capital accounts.
Exercise 4
Requirement 1
Requirement 2
Exercise 5
Requirement 2
Exercise 6
Grech
Jan, Feb $ 200,000 x 2 = $ 400,000
Mar 250,000 x 1 = 250,000
Apr, May, Jun, Jul 260,000 x 4 = 1,040,000
Aug, Sep 253,000 x 2 = 506,000
Oct, Nov, Dec 258,000 x 3 = 774,000
Total capital $ 2,970,000
Average capital $ 247,500
Interest allocation $ 19,800
Harris
Jan, Feb, Mar $ 300,000 x 3 = $ 900,000
Apr, May, Jun, Jul 320,000 x 4 = 1,280,000
Aug, Sep 330,000 x 2 = 660,000
Oct, Nov, Dec 334,000 x 3 = 1,002,000
Total capital $ 3,842,000
Average capital $ 320,167
Interest allocation $ 25,613
Ivers
Jan, Feb, Mar, Apr $ 250,000 x 4 = $ 1,000,000
May, Jun, Jul, Aug, Sep 240,000 x 5 = 1,200,000
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Oct, Nov 245,000 x 2 = 490,000
Dec 250,000 x 1 = 250,000
Total capital $ 2,940,000
Average capital $ 245,000
Interest allocation $ 19,600
Exercise 7
Exercise 8
Requirement 1
The assets of the partnership must be adjusted to fair market value. Land will increase by
$100,000, and Inventory by $75,000. The profit and loss ratio elements add up to 25. Partner
Ivory will then be allocated 9/25 of the $175,000, etc.
Land 100,000
Inventory 75,000
Ivory, capital 63,000
Jacoby, capital 42,000
Kato, capital 70,000
Requirement 2
The partnership's total assets after revaluation are $900,000. If Lange acquires a 10% interest,
it implies that the $900,000 represents 90% of the partnership’s value after Lange's
investment. Therefore, $900,000/90% = $1,000,000, and $1,000,000 x 10% = $100,000. The
entry to record Lange’s investment would be:
Cash 100,000
Lange, capital 100,000
Cash 200,000
Lange, capital 100,000
Ivory, capital 36,000
Jacoby, capital 24,000
Kato, capital 40,000
Exercise 9
Exercise 10
Requirement 1
Almond and Clack give a bonus to Brand which reduces their capital in a 2 to 1 ratio.
Requirement 2
Revalue the total partnership capital to reflect the value at Brandt’s retirement’s excess
payment of $30,000.
Goodwill 60,000
Almond, capital 20,000
Clack, capital 10,000
Brandt, capital 30,000