in the partnership and the new partner has to pay a premium for admission

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					Chapter 12—Accounting for Partnerships and Limited Liability Companies


TRUE/FALSE

  1. There are only four legal structures to form and operate a business.

      ANS: F          DIF: Easy            OBJ: 12-01
      NAT: AACSB Analytic | AICPA BB-Legal

  2. In a general partnership, each partner is individually liable to creditors for debts incurred by the
     partnership, to the extent of the partner's capital balance.

      ANS: F          DIF: Easy            OBJ: 12-01
      NAT: AACSB Analytic | AICPA BB-Legal

  3. A partnership is a legal entity separate from its owners.

      ANS: F          DIF: Easy            OBJ: 12-01
      NAT: AACSB Analytic | AICPA BB-Legal

  4. A partnership is subject to federal income taxes.

      ANS: F          DIF: Easy            OBJ: 12-01
      NAT: AACSB Analytic | AICPA BB-Legal

  5. A disadvantage of partnerships is the mutual agency of all partners.

      ANS: T          DIF: Easy            OBJ: 12-01
      NAT: AACSB Analytic | AICPA BB-Legal

  6. Each partnership must have a written partnership agreement.

      ANS: T          DIF: Easy            OBJ: 12-01
      NAT: AACSB Analytic | AICPA BB-Legal

  7. Each partner may withdraw the assets he or she contributed to the partnership at any time.

      ANS: F          DIF: Easy            OBJ: 12-01
      NAT: AACSB Analytic | AICPA BB-Legal

  8. When compared to a corporation, one of the major disadvantages of the partnership is its limited life.

      ANS: T          DIF: Easy           OBJ: 12-01
      NAT: AACSB Analytic | AICPA BB-Industry

  9. When compared to a corporation, one of the major advantages of a partnerships is its relative ease of
     formation.

      ANS: T          DIF: Easy           OBJ: 12-01
      NAT: AACSB Analytic | AICPA BB-Industry
10. An advantage of the partnership form of business is that each partner’s potential loss is limited to that
    partner’s investment in the partnership.

     ANS: F          DIF: Easy           OBJ: 12-01
     NAT: AACSB Analytic | AICPA BB-Industry

11. A Limited Liability Company is a business entity form designed to overcome some of the
    disadvantages of the partnership form.

     ANS: T          DIF: Easy            OBJ: 12-01
     NAT: AACSB Analytic | AICPA BB-Legal

12. For tax purposes, a Limited Liability Company may elect to be treated as a partnership.

     ANS: T          DIF: Easy            OBJ: 12-01
     NAT: AACSB Analytic | AICPA BB-Legal

13. The Limited Liability Company may elect to be manager managed rather than member managed
    which means that only authorized members may legally bind the corporation.

     ANS: T          DIF: Easy            OBJ: 12-01
     NAT: AACSB Analytic | AICPA BB-Legal

14. Each partner has a separate capital and withdrawal account.

     ANS: T          DIF: Easy          OBJ: 12-02
     NAT: AACSB Analytic | AICPA FN-Measurement

15. The chart of accounts for a partnership, with the exception of drawing and capital accounts, does not
    differ from the chart of accounts for a sole proprietorship.

     ANS: T          DIF: Easy          OBJ: 12-02
     NAT: AACSB Analytic | AICPA FN-Measurement

16. The equity reporting for a Limited Liability Company is similar to that of a partnership but the changes
    in capital are shown on a statement of members' equity.

     ANS: T          DIF: Easy          OBJ: 12-02
     NAT: AACSB Analytic | AICPA FN-Measurement

17. When a partner invests noncash assets in a partnership, the assets are recorded at the partner's book
    value.

     ANS: F          DIF: Easy          OBJ: 12-02
     NAT: AACSB Analytic | AICPA FN-Measurement

18. Accounts receivable contributed to the partnership are recorded at their face value.

     ANS: T          DIF: Easy          OBJ: 12-02
     NAT: AACSB Analytic | AICPA FN-Measurement
19. A new partner contributes accounts receivable to a partnership which appear in the ledger of his sole
    proprietorship at $ 20,500 and there was an allowance for doubtful accounts of $ 750. If $600 of the
    accounts receivables are completely worthless, the partnership accounts receivable should be debited
    for $19,900.

     ANS: T          DIF: Easy          OBJ: 12-02
     NAT: AACSB Analytic | AICPA FN-Measurement

20. One reason that distributions of income and loss are prepared is to obtain the information to record a
    closing entry.

     ANS: T          DIF: Easy          OBJ: 12-02
     NAT: AACSB Analytic | AICPA FN-Measurement

21. If nothing is stated, partnership income is divided in proportion to the individual partner's capital
    balance.

     ANS: F          DIF: Easy            OBJ: 12-02
     NAT: AACSB Analytic | AICPA BB-Legal

22. The salary allocation to partners used in dividing net income would also appear as salary expense on
    the partnership income statement.

     ANS: F          DIF: Easy          OBJ: 12-02
     NAT: AACSB Analytic | AICPA FN-Measurement

23. If the articles of partnership provide for annual salary allowances of $36,000 and $18,000 to X and Y
    respectively and net income is $30,000, X's share of net income is $20,000.

     ANS: F          DIF: Easy          OBJ: 12-02
     NAT: AACSB Analytic | AICPA FN-Measurement

24. If the net income of a partnership is less than the total of the allowances provided by the partnership
    agreement, the difference must be divided among the partners in the income-sharing ratio.

     ANS: F          DIF: Moderate      OBJ: 12-02
     NAT: AACSB Analytic | AICPA FN-Measurement

25. The amount that a partner withdraws as a monthly salary allowance does not affect the division of net
    income.

     ANS: T          DIF: Easy          OBJ: 12-02
     NAT: AACSB Analytic | AICPA FN-Measurement

26. A devotes full time and B devotes one-half time to their partnership. If the partnership agreement is
    silent concerning the division of net income, A will receive a $20,000 share of a net income of
    $30,000.

     ANS: F          DIF: Easy          OBJ: 12-02
     NAT: AACSB Analytic | AICPA FN-Measurement
27. In the distribution of income, the net income is less than the salary and interest allowances granted, the
    remaining balance will be a negative amount that must be divided among the partners as though it
    were a loss.

     ANS: T          DIF: Moderate      OBJ: 12-02
     NAT: AACSB Analytic | AICPA FN-Measurement

28. Details of the division of partnership income should normally be disclosed in the financial statements.

     ANS: T          DIF: Easy           OBJ: 12-02
     NAT: AACSB Analytic | AICPA FN-Reporting

29. Whenever a partnership is dissolved, the assets are liquidated.

     ANS: F          DIF: Easy            OBJ: 12-02
     NAT: AACSB Analytic | AICPA BB-Legal

30. When a partnership dissolves, a new partnership is formed and a new partnership agreement should be
    prepared.

     ANS: T          DIF: Easy            OBJ: 12-02
     NAT: AACSB Analytic | AICPA BB-Legal

31. Many partnerships provide for the admission of new partners or withdrawals of present partners in the
    partnership agreement so that the firm may continue to operate without executing a new agreement.

     ANS: T          DIF: Easy            OBJ: 12-02
     NAT: AACSB Analytic | AICPA BB-Legal

32. A person may be admitted to a partnership only with the consent of all the current partners.

     ANS: T          DIF: Easy            OBJ: 12-02
     NAT: AACSB Analytic | AICPA BB-Legal

33. Partnership's asset accounts should be changed from cost to fair market value when a new partner is
    admitted to a firm or an existing partner withdraws and dies.

     ANS: T          DIF: Moderate      OBJ: 12-02
     NAT: AACSB Analytic | AICPA FN-Measurement

34. In admitting a new partner, the company chooses to use the purchase of an interest method, the capital
    interest of the new partner is obtained from the current partners and both the total assets and total
    capital are increased.

     ANS: F          DIF: Easy          OBJ: 12-03
     NAT: AACSB Analytic | AICPA FN-Measurement

35. When a new partner purchases the entire interest of an old partner, the new partner's capital account
    should be credited for the amount he or she paid to the old partner.

     ANS: F          DIF: Easy          OBJ: 12-03
     NAT: AACSB Analytic | AICPA FN-Measurement
36. If a new partner is given a 20% interest in the firm then the new partner will receive a 20% interest in
    earnings.

     ANS: F          DIF: Easy          OBJ: 12-03
     NAT: AACSB Analytic | AICPA FN-Measurement

37. When a new partner is admitted by making an investment in the partnership, the old partners' capital
    accounts are always credited.

     ANS: F          DIF: Easy          OBJ: 12-03
     NAT: AACSB Analytic | AICPA FN-Measurement

38. When a new partner is admitted by making an investment of assets in the partnership and the new
    partner has to pay a premium for admission, a bonus is divided among the old partners' capital
    accounts.

     ANS: T          DIF: Easy          OBJ: 12-03
     NAT: AACSB Analytic | AICPA FN-Measurement

39. Sarno has a capital balance of $42,000 after adjusting the assets to fair market value. Minton
    contributes $22,000 to receive a 30% interest in the new partnership. the bonus paid by Minton is
    $2,800.

     ANS: T          DIF: Moderate      OBJ: 12-03
     NAT: AACSB Analytic | AICPA FN-Measurement

40. When a partner withdraws from the partnership, the partnership dissolves.

     ANS: T          DIF: Easy            OBJ: 12-03
     NAT: AACSB Analytic | AICPA BB-Legal

41. If not enough partnership cash or other assets are available to pay the withdrawing partner, a liability
    may be created for the amount owed the withdrawing partner.

     ANS: T          DIF: Easy          OBJ: 12-03
     NAT: AACSB Analytic | AICPA FN-Measurement

42. When a partner withdraws from the partnership by selling his or her interest back to the partnership,
    the remaining partners must pay the withdrawing partner a specified amount from their personal assets.

     ANS: F          DIF: Easy          OBJ: 12-03
     NAT: AACSB Analytic | AICPA FN-Measurement

43. X sells to A one-half of a partnership capital interest that totals $70,000 for $40,000. A's capital
    account in the partnership should be credited for $40,000.

     ANS: F          DIF: Easy          OBJ: 12-03
     NAT: AACSB Analytic | AICPA FN-Measurement

44. When a new partner is admitted to a partnership, all partnership assets should be revised to reflect
    current prices.

     ANS: T          DIF: Easy          OBJ: 12-03
     NAT: AACSB Analytic | AICPA FN-Measurement
45. If a new partner is to be admitted to a partnership and a bonus is attributed to the old partnership, the
    bonus should be divided between the capital accounts of the original partners according to their capital
    balances.

     ANS: F          DIF: Easy          OBJ: 12-03
     NAT: AACSB Analytic | AICPA FN-Measurement

46. If retiring partner A sells his or her interest to B, the partnership should record the assets paid to A in
    its accounts at their book values.

     ANS: F          DIF: Easy          OBJ: 12-03
     NAT: AACSB Analytic | AICPA FN-Measurement

47. When a new partner is admitted to a partnership, bonuses attributable to either the old partnership or to
    the incoming partner may be recognized in accordance with the agreement among the partners.

     ANS: T          DIF: Easy          OBJ: 12-03
     NAT: AACSB Analytic | AICPA FN-Measurement

48. Dissolution is the term which solely means to liquidate the partnership.

     ANS: F          DIF: Easy            OBJ: 12-04
     NAT: AACSB Analytic | AICPA BB-Legal

49. In a partnership liquidation, gains and losses on the sale of partnership assets are divided among the
    partners' capital accounts on the basis of their capital balances.

     ANS: F          DIF: Easy          OBJ: 12-04
     NAT: AACSB Analytic | AICPA FN-Measurement

50. If the share of losses on realization of the sale of noncash assets exceed the balance in a partner's
    capital account, the resulting balance is called a deficiency.

     ANS: T          DIF: Easy          OBJ: 12-04
     NAT: AACSB Analytic | AICPA FN-Measurement

51. In a partnership liquidation, if a partner has a debit capital balance in his or her capital account, he or
    she is responsible for contributing personal assets sufficient to eliminate the deficit.

     ANS: T          DIF: Easy          OBJ: 12-04
     NAT: AACSB Analytic | AICPA FN-Measurement

52. The process of winding up the affairs of a partnership is referred to as realization.

     ANS: F          DIF: Easy            OBJ: 12-04
     NAT: AACSB Analytic | AICPA BB-Legal

53. The distribution of cash, as the final process in winding up the affairs of a partnership, is based on the
    income-sharing ratio.

     ANS: F          DIF: Easy          OBJ: 12-04
     NAT: AACSB Analytic | AICPA FN-Measurement
 54. If a partner's capital balance is a debit after it has absorbed its share of the loss on realization, the
     balance is referred to as a deficiency.

      ANS: T          DIF: Easy          OBJ: 12-04
      NAT: AACSB Analytic | AICPA FN-Measurement

 55. In the liquidating process, any uncollected cash becomes a loss to the partnership and is divided among
     the remaining partners' capital balances based on their income-sharing ratio.

      ANS: T          DIF: Easy          OBJ: 12-04
      NAT: AACSB Analytic | AICPA FN-Measurement

 56. After all noncash assets have been converted to cash and all liabilities paid, A, B, and C have capital
     balances of $10,000 (debit), $5,000 (debit), and $25,000 (credit). The cash available for distribution
     to the partners is $10,000.

      ANS: T          DIF: Easy          OBJ: 12-04
      NAT: AACSB Analytic | AICPA FN-Measurement

 57. The statement of members’ equity is used for equity reporting of a partnership.

      ANS: F          DIF: Easy          OBJ: 12-04
      NAT: AACSB Analytic | AICPA FN-Measurement

 58. The capital account for each partner can change due to net income, but it must be withdrawn.

      ANS: F          DIF: Easy          OBJ: 12-05
      NAT: AACSB Analytic | AICPA FN-Measurement

 59. Revenue per employee may be used to measure partnership (LLC) efficiency.

      ANS: T          DIF: Easy          OBJ: 12-05
      NAT: AACSB Analytic | AICPA FN-Measurement


MULTIPLE CHOICE

  1. Which of the following is characteristic of a general partnership?
     a. The partners have co-ownership of partnership property.
     b. The partnership is subject to federal income tax.
     c. The partnership has an unlimited life.
     d. The partners have limited liability.
      ANS: A          DIF: Easy            OBJ: 12-01
      NAT: AACSB Analytic | AICPA BB-Legal

  2. Which of the following is not a characteristic of a general partnership?
     a. the partnership is created by a contract
     b. mutual agency
     c. partners share equally in net income or net losses unless an agreement states differently
     d. dissolution occurs only when all partners agree
      ANS: D          DIF: Easy            OBJ: 12-01
      NAT: AACSB Analytic | AICPA BB-Legal
3. Which of the following is an advantage of a partnership when compared to a corporation?
   a. The partnership is more likely have a net income.
   b. The partnership is relatively inexpensive to organize.
   c. The partnership involves fewer people to operate.
   d. The partnership usually hires professional managers.
    ANS: B          DIF: Easy           OBJ: 12-01
    NAT: AACSB Analytic | AICPA BB-Industry

4. Which of the following is a disadvantage of a partnership when compared to a corporation?
   a. The partnership is more likely to have a net loss.
   b. The partnership is easier to organize.
   c. The partnership is less expensive to organize.
   d. The partnership has limited life.
    ANS: D          DIF: Easy           OBJ: 12-01
    NAT: AACSB Analytic | AICPA BB-Industry

5. An advantage of the partnership form of business organization is
   a. unlimited liability
   b. mutual agency
   c. ease of formation
   d. limited life
    ANS: C          DIF: Easy           OBJ: 12-01
    NAT: AACSB Analytic | AICPA BB-Industry

6. The characteristic of a partnership that gives the authority to any partner to legally bind the partnership
   and all other partners to business contracts is called
   a. unlimited liability
   b. ease of formation
   c. mutual agency
   d. dissolution
    ANS: C          DIF: Easy            OBJ: 12-01
    NAT: AACSB Analytic | AICPA BB-Legal

7. When a limited partnership is formed
   a. the partnership activities are limited
   b. all partners have limited liability
   c. some of the partners have limited liability
   d. none of the partners have limited liability
    ANS: C          DIF: Easy            OBJ: 12-01
    NAT: AACSB Analytic | AICPA BB-Legal

8. Which of the following below is not one of the four major forms of business entities that are discussed
   in this chapter?
   a. Sole proprietorship
   b. Corporation
   c. Partnership
   d. Subchapter S Corporation
    ANS: D          DIF: Easy          OBJ: 12-01
    NAT: AACSB Analytic | AICPA FN-Measurement
 9. Which of the following below is not a characteristic of a Limited Liability Company?
    a. limited life
    b. limited liability
    c. file articles of organization with the state government
    d. avoids mutual agency
     ANS: D          DIF: Easy            OBJ: 12-01
     NAT: AACSB Analytic | AICPA BB-Legal

10. Accounting for the day-to-day activities for a partnership or Limited Liability Company is
    a. the same as the accounting for any other form of business
    b. the same as the accounting for a sole proprietorship only
    c. is not the same as the accounting for any other form of business
    d. the same as the accounting for a corporation only
     ANS: A          DIF: Easy          OBJ: 12-02
     NAT: AACSB Analytic | AICPA FN-Measurement

11. When a partnership is formed, assets contributed by the partners should be recorded on the partnership
    books at their
    a. book values on the partners' books prior to their being contributed to the partnership
    b. fair market value at the time of the contribution
    c. original costs to the partner contributing them
    d. assessed values for property purposes
     ANS: B          DIF: Easy          OBJ: 12-02
     NAT: AACSB Analytic | AICPA FN-Measurement

12. As part of the initial investment, a partner contributes equipment that had originally cost $110,000 and
    on which accumulated depreciation of $85,000 has been recorded. If similar equipment would cost
    $140,000 to replace and the partners agree on a valuation of $45,000 for the contributed equipment,
    what amount should be debited to the equipment account?
    a. $45,000
    b. $140,000
    c. $110,000
    d. $85,000
     ANS: A          DIF: Easy          OBJ: 12-02
     NAT: AACSB Analytic | AICPA FN-Measurement

13. As part of the initial investment, Omar contributes accounts receivable that had a balance of $25,000
    in the accounts of a sole proprietorship. Of this amount, $1,150 is completely worthless. For the
    remaining accounts, the partnership will establish a provision for possible future uncollectible accounts
    of $750. The amount debited to Accounts Receivable for the new partnership is
    a. $23,100
    b. $25,000
    c. $24,250
    d. $23,850
     ANS: D          DIF: Easy          OBJ: 12-02
     NAT: AACSB Analytic | AICPA FN-Measurement
14. Radley and Smithers share income and losses in a 2:1 ratio after allowing for salaries to Radley of
    $24,000 and $30,000 to Smithers. Net income for the partnership is $48,000. Income should be
    divided as follows:
    a. Radley, $24,000; Smithers, $24,000
    b. Radley, $21,000; Smithers, $27,000
    c. Radley, $32,000; Smithers, $16,000
    d. Radley, $20,000; Smithers, $28,000
     ANS: D          DIF: Moderate      OBJ: 12-02
     NAT: AACSB Analytic | AICPA FN-Measurement

15. Franco and Elisa share income equally. During the current year the partnership net income was
    $40,000. Franco made withdrawals of $12,000 and Elisa made withdrawals of $17,000. At the
    beginning of the year, the capital account balances were: Franco capital, $40,000; Elisa capital,
    $58,000. Franco’s capital account balance at the end of the year is
    a. $74,500
    b. $62,500
    c. $60,000
    d. $48,000
     ANS: D          DIF: Moderate      OBJ: 12-02
     NAT: AACSB Analytic | AICPA FN-Measurement

16. Franco and Elisa share income equally. During the current year the partnership net income was
    $40,000. Franco made withdrawals of $12,000 and Elisa made withdrawals of $17,000. At the
    beginning of the year, the capital account balances were: Franco capital, $42,000; Elisa capital,
    $58,000. Elisa’s capital account balance at the end of the year is
    a. $81,000
    b. $50,000
    c. $61,000
    d. $95,000
     ANS: C          DIF: Moderate      OBJ: 12-02
     NAT: AACSB Analytic | AICPA FN-Measurement

17. Partnership income and losses are usually divided on the basis of interest, salaries, and stated ratios
    because
    a. partners seldom contribute time and resources equally
    b. this method reflects the amount of time devoted to the partnership by the partners
    c. it is simpler than following the legal rules
    d. it prevents arguments among the partners
     ANS: A          DIF: Easy          OBJ: 12-02
     NAT: AACSB Analytic | AICPA FN-Measurement

18. A ratio of 2:2:1 is the same as
    a. 20%:20%:10%
    b. 2/5:2/5:1/5
    c. 2/10:2/10:1/20
    d. both (a) and (c)
     ANS: B          DIF: Easy          OBJ: 12-02
     NAT: AACSB Analytic | AICPA FN-Measurement
19. Compton and Danson form a partnership in which Compton contributes $50,000 in assets and agrees
    to devote half time to the partnership. Danson contributed $40,000 in assets and agrees to devote full
    time to the partnership. How will Compton and Danson share in the division of income?
    a. 5:8
    b. 1:2
    c. 1:1
    d. 5:4
     ANS: C          DIF: Easy          OBJ: 12-02
     NAT: AACSB Analytic | AICPA FN-Measurement

20. Xavier and Yolonda have original investments of $50,000 and $100,000 respectively in a partnership.
    The articles of partnership include the following provisions regarding the division of net income:
    interest on original investment at 15%, salary allowances of $22,000 and $20,000 respectively, and the
    remainder equally. How much of the net income of $90,000 is allocated to Xavier?
    a. $30,250
    b. $47,750
    c. $45,000
    d. $42,250
     ANS: D          DIF: Moderate      OBJ: 12-02
     NAT: AACSB Analytic | AICPA FN-Measurement

21. Xavier and Yolonda have original investments of $50,000 and $100,000 respectively in a partnership.
    The articles of partnership include the following provisions regarding the division of net income:
    interest on original investment at 10%, salary allowances of $27,000 and $18,000 respectively, and the
    remainder equally. How much of the net income of $40,000 is allocated to Xavier?
    a. $20,000
    b. $22,000
    c. $32,000
    d. $0
     ANS: B          DIF: Moderate      OBJ: 12-02
     NAT: AACSB Analytic | AICPA FN-Measurement

22. Xavier and Yolonda have original investments of $50,000 and $100,000 respectively in a partnership.
    The articles of partnership include the following provisions regarding the division of net income:
    interest on original investment at 10%, salary allowances of $27,000 and $18,000 respectively, and the
    remainder equally. How much of the net loss of $6,000 is allocated to Xavier?
    a. $4,000
    b. $1,000
    c. $3,000
    d. $6,000
     ANS: B          DIF: Moderate      OBJ: 12-02
     NAT: AACSB Analytic | AICPA FN-Measurement

23. If there is no written agreement as to the way income will be divided among partners
    a. they will share income and losses equally
    b. they will share income and losses according to their capital balances
    c. they will share income and losses according to the time devoted to the business.
    d. there really is no partnership agreement
     ANS: A          DIF: Easy            OBJ: 12-02
     NAT: AACSB Analytic | AICPA BB-Legal
24. Partner A has a capital balance of $20,000 and devotes full time to the partnership. Partner B has a
    capital balance of $30,000 and devotes half time to the partnership. In what ratio is net income to be
    divided?
    a. 3:5
    b. 1:1
    c. 2:3
    d. 1:2
     ANS: B          DIF: Easy          OBJ: 12-02
     NAT: AACSB Analytic | AICPA FN-Measurement

25. Details of the division of net income for a partnership should be disclosed
    a. in the asset section of the balance sheet
    b. in the partners’ subsidiary ledger
    c. in the statement of cash flows
    d. in the income statement
     ANS: D          DIF: Easy           OBJ: 12-02
     NAT: AACSB Analytic | AICPA FN-Reporting

26. Pia and Ramona are partners who share income in the ratio of 3:2. Their capital balances are $80,000
    and $120,000 respectively. Income Summary has a credit balance of $40,000. What is Pia’s capital
    balance after closing Income Summary to Capital?
    a. $60,000
    b. $104,000
    c. $56,000
    d. $64,000
     ANS: B          DIF: Easy          OBJ: 12-02
     NAT: AACSB Analytic | AICPA FN-Measurement

27. Pia and Ramona are partners who share income in the ratio of 3:2. Their capital balances are $80,000
    and $120,000 respectively. Income Summary has a credit balance of $40,000. What is Ramona’s
    capital balance after closing Income Summary to Capital?
    a. $140,000
    b. $136,000
    c. $96,000
    d. $144,000
     ANS: B          DIF: Easy          OBJ: 12-02
     NAT: AACSB Analytic | AICPA FN-Measurement
    Use the following information to answer the following questions.

    Izabelle and Marta are forming a partnership. Izabelle will invest a piece of equipment with a book
    value of $5,000 and a fair market value of $15,000. Marta will invest a building with a book value of
    $30,000 and a fair market value of $35,000.

28. At what amount will the building be recorded?
    a. $20,000
    b. $25,000
    c. $30,000
    d. $35,000
    ANS: D          DIF: Easy          OBJ: 12-02
    NAT: AACSB Analytic | AICPA FN-Measurement

29. At what amount will Izabelle’s capital account be recorded?
    a. $15,000
    b. $5,000
    c. $20,000
    d. $50,000
    ANS: A          DIF: Easy          OBJ: 12-02
    NAT: AACSB Analytic | AICPA FN-Measurement

30. At what amount will Marta’s capital account be recorded?
    a. $50,000
    b. $15,000
    c. $30,000
    d. $35,000
    ANS: D          DIF: Easy          OBJ: 12-02
    NAT: AACSB Analytic | AICPA FN-Measurement

31. Robert Johnson contributed equipment, inventory, and $42,000 cash to the partnership. The
    equipment had a book value of $25,000 and market value of $28,000. The inventory has a book value
    of $50,000, but only had a market value of $15,000. due to obsolescence. The partnership also
    assumed a $12,000 note payable owed by Robert that was originally used to purchase the equipment.

    What amount should Robert’s capital account be recorded?
    a. $85,000
    b. $73,000
    c. $117,000
    d. $105,000
    ANS: B          DIF: Moderate      OBJ: 12-02
    NAT: AACSB Analytic | AICPA FN-Measurement
32. Henry Jones contributed equipment, inventory, and $44,000 cash to the partnership. The equipment
    had a book value of $35,000 and market value of $28,000. The inventory has a book value of
    $25,000, but only had a market value of $12,000. due to obsolescence. The partnership also assumed
    a $15,000 note payable owed by Henry that was originally used to purchase the equipment.

     What amount should Henry’s capital account be recorded?
     a. $104,000
     b. $89,000
     c. $69,000
     d. $84,000
     ANS: C          DIF: Moderate      OBJ: 12-02
     NAT: AACSB Analytic | AICPA FN-Measurement

33. Ofelia and Teresa share income and losses in a 2:1 ratio after allowing for salaries to Ofelia of $48,000
    and $60,000 to Teresa. Net income for the partnership is $132,000. Income should be divided as
    follows:
    a. Ofelia, $56,000; Teresa, $76,000
    b. Ofelia, $60,000; Teresa, $72,000
    c. Ofelia, $72,000; Teresa, $60,000
    d. Ofelia, $64,000; Teresa, $68,000
     ANS: D          DIF: Moderate      OBJ: 12-02
     NAT: AACSB Analytic | AICPA FN-Measurement

34. Carla and Eliza share income equally. During the current year the partnership net income was
    $40,000. Carla made withdrawals of $12,000 and Eliza made withdrawals of $17,000. At the
    beginning of the year, the capital account balances were: Carla capital, $42,000; Eliza capital, $55,000.
    Eliza’s capital account balance at the end of the year is
    a. $52,000
    b. $58,000
    c. $82,000
    d. $75,000
     ANS: B          DIF: Moderate      OBJ: 12-02
     NAT: AACSB Analytic | AICPA FN-Measurement

35. Xavier and Yolanda have original investments of $50,000 and $100,000 respectively in a partnership.
    The articles of partnership include the following provisions regarding the division of net income:
    interest on original investment at 20%, salary allowances of $27,000 and $18,000 respectively, and the
    remainder equally. How much of the net income of $91,000 is allocated to Yolanda?
    a. $26,500
    b. $46,000
    c. $45,000
    d. $45,500
     ANS: B          DIF: Moderate      OBJ: 12-02
     NAT: AACSB Analytic | AICPA FN-Measurement
36. Xavier and Yolanda have original investments of $50,000 and $100,000 respectively in a partnership.
    The articles of partnership include the following provisions regarding the division of net income:
    interest on original investment at 20%, salary allowances of $34,000 and $26,000 respectively, and the
    remainder equally. How much of the net income of $100,000 is allocated to Yolanda?
    a. $49,000
    b. $51,000
    c. $50,000
    d. $56,000
     ANS: B          DIF: Moderate      OBJ: 12-02
     NAT: AACSB Analytic | AICPA FN-Measurement

37. Xavier and Yolanda have original investments of $50,000 and $100,000 respectively in a partnership.
    The articles of partnership include the following provisions regarding the division of net income:
    interest on original investment at 20%, salary allowances of $34,000 and $26,000 respectively, and the
    remainder equally. How much of the net income of $100,000 is allocated to Xavier?
    a. $49,000
    b. $51,000
    c. $50,000
    d. $56,000
     ANS: A          DIF: Moderate      OBJ: 12-02
     NAT: AACSB Analytic | AICPA FN-Measurement

38. Xavier and Yolanda have original investments of $50,000 and $100,000 respectively in a partnership.
    The articles of partnership include the following provisions regarding the division of net income:
    interest on original investment at 10%, salary allowances of $38,000 and $28,000 respectively, and the
    remainder equally. How much of the net income of $75,000 is allocated to Yolanda?
    a. $66,000
    b. $40,000
    c. $35,000
    d. $43,000
     ANS: C          DIF: Moderate      OBJ: 12-02
     NAT: AACSB Analytic | AICPA FN-Measurement

39. Xavier and Yolanda have original investments of $50,000 and $100,000 respectively in a partnership.
    The articles of partnership include the following provisions regarding the division of net income:
    interest on original investment at 10%, salary allowances of $38,000 and $28,000 respectively, and the
    remainder equally. How much of the net income of $75,000 is allocated to Xavier?
    a. $66,000
    b. $40,000
    c. $35,000
    d. $43,000
     ANS: B          DIF: Moderate      OBJ: 12-02
     NAT: AACSB Analytic | AICPA FN-Measurement
40. Xavier and Yolanda have original investments of $50,000 and $100,000 respectively in a partnership.
    The articles of partnership include the following provisions regarding the division of net income:
    interest on original investment at 10%, salary allowances of $27,000 and $18,000 respectively, and the
    remainder equally. How much of the net loss of $6,000 is allocated to Yolanda?
    a. $1,000
    b. $3,000
    c. $5,000
    d. $0
     ANS: C          DIF: Moderate      OBJ: 12-02
     NAT: AACSB Analytic | AICPA FN-Measurement

41. The articles of partnership for Paxton-Robson Partnership provide for a salary allowance of $5,000 per
    month for partner Robson, with the balance of net income to be divided equally. If Robson made an
    additional investment of $10,000 during the year and withdrew $4,000 per month, and net income for
    the year was $80,000, by what amount did Robson's capital increase during the year?
    a. $80,000
    b. $12,000
    c. $60,000
    d. $32,000
     ANS: D          DIF: Moderate      OBJ: 12-02
     NAT: AACSB Analytic | AICPA FN-Measurement

42. Tomas and Saturn are partners who share income in the ratio of 3:1. Their capital balances are
    $80,000 and $120,000 respectively. Income Summary has a credit balance of $30,000. What is
    Tomas’ capital balance after closing Income Summary to Capital?
    a. $102,500
    b. $22,500
    c. $57,500
    d. $127,500
     ANS: A          DIF: Easy          OBJ: 12-02
     NAT: AACSB Analytic | AICPA FN-Measurement

43. Tomas and Saturn are partners who share income in the ratio of 3:1. Their capital balances are
    $80,000 and $120,000 respectively. Income Summary has a credit balance of $30,000. What is
    Saturn’s capital balance after closing Income Summary to Capital?
    a. $102,500
    b. $120,000
    c. $112,500
    d. $127,500
     ANS: D          DIF: Easy          OBJ: 12-02
     NAT: AACSB Analytic | AICPA FN-Measurement
44. Tomas and Saturn are partners who share income in the ratio of 3:1. Their capital balances are
    $40,000 and $60,000 respectively. Income Summary has a credit balance of $20,000. What is
    Saturn’s capital balance after closing Income Summary to Capital?
    a. $55,000
    b. $75,000
    c. $45,000
    d. $65,000
     ANS: D          DIF: Easy          OBJ: 12-02
     NAT: AACSB Analytic | AICPA FN-Measurement

45. Franco and Jason share income and losses in a 2:1 ratio after allowing for salaries to Franco of $15,000
    and $30,000 to Jason. If the partnership suffers a $15,000 loss, by how much would Jason’s capital
    account increase?
    a. $10,000
    b. $20,000
    c. $40,000
    d. $25,000
     ANS: A          DIF: Moderate      OBJ: 12-02
     NAT: AACSB Analytic | AICPA FN-Measurement

46. Lambert invests $10,000 for a 1/3 interest in a partnership in which the other partners have capital
    totaling $26,000 before admitting Lambert. After distribution of the bonus, what is Lambert’s
    capital?
    a. $12,000
    b. $10,000
    c. $8,667
    d. $5,333
     ANS: A          DIF: Moderate      OBJ: 12-03
     NAT: AACSB Analytic | AICPA FN-Measurement

47. Douglas pays Selena $39,000 for her 30% interest in a partnership with total net assets of $105,000.
    Following this transaction, Selena’s capital account should have a credit balance of
    a. $31,500
    b. $39,000
    c. $35,250
    d. more than $39,000
     ANS: A          DIF: Moderate      OBJ: 12-03
     NAT: AACSB Analytic | AICPA FN-Measurement

48. Nick is admitted to an existing partnership by investing cash. Nick agrees to pay a bonus for his
    ownership interest because of the past success of the partnership. When Nick’s investment in the
    partnership is recorded
    a. his capital account will be credited for more than the cash he invested
    b. his capital account will be credited for the amount of cash he invested
    c. a bonus will be credited for the amount of cash he invested
    d. a bonus will be distributed to the old partners' capital accounts.
     ANS: D          DIF: Moderate      OBJ: 12-03
     NAT: AACSB Analytic | AICPA FN-Measurement
49. Bobbi and Stuart are partners. The partnership capital of Bobbi is $40,000 and Stuart is $70,000.
    Bobbi sells his interest in the partnership to John for $50,000. The journal entry to record the
    admission of John as a new partner would include
    a. a credit to John’s capital for $40,000
    b. a credit to Stuart’s capital for $10,000
    c. a credit John’s capital for $50,000
    d. a credit to John’s capital for $40,000 and a credit to Stuart’s capital for $10,000
     ANS: A          DIF: Moderate      OBJ: 12-03
     NAT: AACSB Analytic | AICPA FN-Measurement

50. When a partner dies, the capital account balances of the remaining partners
    a. will increase
    b. will decrease
    c. will remain the same
    d. may increase, decrease, or remain the same
     ANS: D          DIF: Easy          OBJ: 12-03
     NAT: AACSB Analytic | AICPA FN-Measurement

51. A partner withdraws from a partnership by selling her interest to another person who currently is not
    associated with the firm. As a results of this transaction, the capital account balance of the other
    partners in the partnership
    a. will increase
    b. will decrease
    c. will remain the same
    d. may increase, decrease, or remain the same
     ANS: C          DIF: Easy          OBJ: 12-03
     NAT: AACSB Analytic | AICPA FN-Measurement

52. Samuel and Darci are partners. The partnership capital for Samuel is $50,000 and for Darci is
    $60,000. Josh is admitted as a new partner by investing $50,000 cash. Josh is given a 20% interest
    in return for his investment. The amount of the bonus to the old partners is
    a. $0
    b. $18,000
    c. $8,000
    d. $10,000
     ANS: B          DIF: Moderate      OBJ: 12-03
     NAT: AACSB Analytic | AICPA FN-Measurement

53. Abby and Bailey are partners who share income in the ratio of 2:1 and have capital balances of
    $60,000 and $30,000 respectively. With the consent of Bailey, Sandra buys one half of Abby's
    interest for $35,000. For what amount will Abby's capital account be debited to record admission of
    Sandra to the partnership?
    a. $40,000
    b. $15,000
    c. $35,000
    d. $30,000
     ANS: D          DIF: Moderate      OBJ: 12-03
     NAT: AACSB Analytic | AICPA FN-Measurement
54. A new partner may be admitted to a partnership by
    a. inheriting a partnership interest
    b. contributing assets to the partnership
    c. purchasing a specific quantity of assets from the partnership
    d. the consent of the majority of the current partners
     ANS: B          DIF: Easy            OBJ: 12-03
     NAT: AACSB Analytic | AICPA BB-Legal

55. A change in the ownership of a partnership results in the
    a. consolidating of the partnership
    b. liquidating of the partnership
    c. realization of the partnership
    d. dissolution of the partnership
     ANS: D          DIF: Easy          OBJ: 12-03
     NAT: AACSB Analytic | AICPA FN-Measurement

56. When a new partner is admitted to a partnership, there should be a(n)
    a. revaluation of assets
    b. realization of assets
    c. allocation of assets
    d. return of assets
     ANS: A          DIF: Easy          OBJ: 12-03
     NAT: AACSB Analytic | AICPA FN-Measurement

57. When a new partner is admitted to a partnership, there should be a(n)
    a. the total assets of the partnership increase
    b. new capital account is added to the ledger for the new partner
    c. the total owner's equity of the partnership increases
    d. the cash received by the current partner represents the amount of the debit to that partner's
       capital account.
     ANS: B          DIF: Easy          OBJ: 12-03
     NAT: AACSB Analytic | AICPA FN-Measurement

58. When an additional partner is admitted to a partnership by contribution of assets to the partnership
    a. the total assets of the partnership do not change
    b. no liabilities can be contributed at the same time
    c. the amount of the cash contribution is the same as the amount of the debit to the new
       partner's capital account
    d. the total of the owner's equity accounts increases
     ANS: D          DIF: Easy          OBJ: 12-03
     NAT: AACSB Analytic | AICPA FN-Measurement
59. When a new partner is admitted to a partnership
    a. a bonus may be attributable to the old partner
    b. a bonus may only result from more cash being given by the new partner than the value of
       the of the assets being purchased
    c. a bonus agreed upon by the partners is recorded as an asset so long as the amount is within
       the range set by the SEC
    d. a bonus is not recorded
     ANS: A          DIF: Easy          OBJ: 12-03
     NAT: AACSB Analytic | AICPA FN-Measurement

60. The Calvin-Dogwood Partnership owns inventory that was purchased for $65,000, has a current
    replacement cost of $64,500, and is priced to sell for $95,000. At what amount should the inventory
    be recorded in the accounts of the new partnership if Alexis is to be admitted?
    a. $97,000
    b. $64,500
    c. $65,000
    d. $95,000
     ANS: B          DIF: Easy          OBJ: 12-03
     NAT: AACSB Analytic | AICPA FN-Measurement

61. Immediately prior to the admission of Abbott, the Smith-Jones Partnership assets had been adjusted to
    current market prices, and the capital balances of Smith and Jones were $40,000 and $60,000
    respectively. If the parties agree that the business is worth $120,000, what is the amount of bonus that
    should be recognized in the accounts at the admission of Abbott?
    a. $60,000
    b. $80,000
    c. $40,000
    d. $20,000
     ANS: D          DIF: Easy          OBJ: 12-03
     NAT: AACSB Analytic | AICPA FN-Measurement

62. Benson and Orton are partners who share income in the ratio of 2:3 and have capital balances of
    $50,000 and $30,000 respectively. Ramsey is admitted to the partnership and is given a 40% interest
    by investing $20,000. What is Benson’s capital balance after admitting Ramsey?
    a. $20,000
    b. $25,000
    c. $42,000
    d. $18,000
     ANS: C          DIF: Difficult     OBJ: 12-03
     NAT: AACSB Analytic | AICPA FN-Measurement
63. Benson and Orton are partners who share income in the ratio of 2:3 and have capital balances of
    $30,000 and $50,000 respectively. Ramsey is admitted to the partnership and is given a 10% interest
    by investing $20,000. What is Orton’s capital balance after admitting Ramsey?
    a. $56,000
    b. $34,000
    c. $20,000
    d. $44,000
     ANS: A          DIF: Difficult     OBJ: 12-03
     NAT: AACSB Analytic | AICPA FN-Measurement

64. Benton and Orton are partners who share income in the ratio of 1:3 and have capital balances of
    $70,000 and $30,000 respectively. Ramsey is admitted to the partnership and is given a 40% interest
    by investing $20,000. What is Benson’s capital balance after admitting Ramsey?
    a. $20,000
    b. $7,000
    c. $70,000
    d. $63,000
     ANS: D          DIF: Difficult     OBJ: 12-03
     NAT: AACSB Analytic | AICPA FN-Measurement

65. Benson and Orton are partners who share income in the ratio of 1:3 and have capital balances of
    $70,000 and $30,000 respectively. Ramsey is admitted to the partnership and is given a 40% interest
    by investing $20,000. What is Orton’s capital balance after admitting Ramsey?
    a. $20,000
    b. $9,000
    c. $70,000
    d. $63,000
     ANS: B          DIF: Difficult     OBJ: 12-03
     NAT: AACSB Analytic | AICPA FN-Measurement

66. Singer and McMann are partners in a business. Singer’s original capital was $40,000 and McMann’s
    was $60,000. They agree to salaries of $12,000 and $18,000 for Singer and McMann respectively and
    10% interest on original capital. If they agree to share remaining profits and losses on a 3:2 ratio,
    what will Singer’s share of the income be if the income for the year was $50,000?
    a. $24,000
    b. $22,000
    c. $16,000
    d. $23,400
     ANS: B          DIF: Moderate      OBJ: 12-03
     NAT: AACSB Analytic | AICPA FN-Measurement
67. Singer and McMann are partners in a business. Singer’s original capital was $40,000 and McMann’s
    was $60,000. They agree to salaries of $12,000 and $18,000 for Singer and McMann respectively and
    10% interest on original capital. If they agree to share remaining profits and losses on a 3:2 ratio,
    what will McMann‘s share of the income be if the income for the year was $30,000?
    a. $20,000
    b. $18,000
    c. $18,600
    d. $17,400
     ANS: A          DIF: Moderate      OBJ: 12-03
     NAT: AACSB Analytic | AICPA FN-Measurement

68. Singer and McMann are partners in a business. Singer’s original capital was $40,000 and McMann’s
    was $60,000. They agree to salaries of $12,000 and $18,000 for Singer and McMann respectively and
    10% interest on original capital. If they agree to share remaining profits and losses on a 3:2 ratio,
    what will Singer’s share of the income(loss) be if the net loss for the year was $10,000?
    a. ($12,600)
    b. ($14,000)
    c. ($6,000)
    d. ($10,000)
     ANS: B          DIF: Moderate      OBJ: 12-03
     NAT: AACSB Analytic | AICPA FN-Measurement

69. Singer and McMann are partners in a business. Singer’s original capital was $40,000 and McMann’s
    was $60,000. They agree to salaries of $12,000 and $18,000 for Singer and McMann respectively and
    10% interest on original capital. If they agree to share remaining profits and losses on a 3:2 ratio,
    what will Singer’s share of the income be if the income for the year was $15,000?
    a. $9,000
    b. $2,400
    c. $1,000
    d. $5,600
     ANS: C          DIF: Moderate      OBJ: 12-03
     NAT: AACSB Analytic | AICPA FN-Measurement

70. Singer and McMann are partners in a business. Singer’s original capital was $40,000 and McMann’s
    was $60,000. They agree to salaries of $12,000 and $18,000 for Singer and McMann respectively and
    10% interest on original capital. If they agree to share remaining profits and losses on a 3:2 ratio,
    what will McMann’s share of the income be if the income for the year was $15,000?
    a. $6,000
    b. $9,400
    c. $12,600
    d. $14,000
     ANS: D          DIF: Moderate      OBJ: 12-03
     NAT: AACSB Analytic | AICPA FN-Measurement
71. Alpha and Beta are partners who share income in the ratio of 1:2 and have capital balances of $40,000
    and $70,000 at the time they decide to terminate the partnership. After all noncash assets are sold and
    all liabilities are paid, there is a cash balance of $50,000. What amount of loss on realization should
    be allocated to Alpha?
    a. $60,000
    b. $20,000
    c. $30,000
    d. $50,000
     ANS: B          DIF: Moderate      OBJ: 12-04
     NAT: AACSB Analytic | AICPA FN-Measurement

72. Teri, Doug, and Brian are partners with capital balances of $20,000, $30,000, and $50,000
    respectively. They share income in the ratio of 3:2:1. Income Summary with a debit balance of
    $30,000 is closed to the capital accounts. Doug withdraws from the partnership. How much cash
    does he get upon withdrawal?
    a. $30,000
    b. $20,000
    c. $40,000
    d. $24,000
     ANS: B          DIF: Difficult     OBJ: 12-04
     NAT: AACSB Analytic | AICPA FN-Measurement

73. A partnership liquidation occurs when
    a. a new partner is admitted
    b. a partner dies
    c. the ownership interest of one partner is sold to a new partner
    d. the assets are sold, liabilities paid, and business operations terminated
     ANS: D          DIF: Easy            OBJ: 12-04
     NAT: AACSB Analytic | AICPA BB-Legal

74. The balance sheet of Morgan and Rockwell was as follows immediately prior to the partnership's being
    liquidated: cash, $20,000; other assets, $160,000; liabilities, $40,000; Morgan capital, $60,000;
    Rockwell capital, $80,000. The other assets were sold for $139,000. Morgan and Rockwell share
    profits and losses in a 2:1 ratio. As a final cash distribution from the liquidation, Morgan will receive
    cash totaling
    a. $46,000
    b. $51,000
    c. $60,000
    d. $49,500
     ANS: A          DIF: Moderate      OBJ: 12-04
     NAT: AACSB Analytic | AICPA FN-Measurement
75. Harriet, Mickey, and Zack decide to liquidate their partnership. All assets are sold and the liabilities
    are paid. Following these transactions, the capital balances and profit and loss percentages are as
    follows: Harriet, $27,000 and 30%; Mickey, $(12,000) and 40%; Zack, $43,000 and 30%. Mickey is
    unable to contribute any assets to reduce the deficit. How much cash will Harriet receive as a results
    of the partnership liquidation?
    a. $27,000
    b. $21,000
    c. $23,400
    d. $15,000
     ANS: B          DIF: Moderate      OBJ: 12-04
     NAT: AACSB Analytic | AICPA FN-Measurement

76. The remaining cash of a partnership (after creditors have been paid) upon liquidation is divided among
    partners according to their
    a. capital balances
    b. contribution of assets
    c. drawing balances
    d. income sharing ratio
     ANS: A          DIF: Easy          OBJ: 12-04
     NAT: AACSB Analytic | AICPA FN-Measurement

77. A gain or loss on realization is divided among partners according to their
    a. income sharing ratio
    b. capital balances
    c. drawing balances
    d. contribution of assets
     ANS: A          DIF: Easy          OBJ: 12-04
     NAT: AACSB Analytic | AICPA FN-Measurement

78. Adriana and Belen are partners who share income in the ratio of 3:2 and have capital balances of
    $50,000 and $90,000 at the time they decide to terminate the partnership. After all noncash assets are
    sold and all liabilities are paid, there is a cash balance of $90,000. How much cash should be
    distributed to Adriana?
    a. $50,000
    b. $20,000
    c. $30,000
    d. $45,000
     ANS: B          DIF: Moderate      OBJ: 12-04
     NAT: AACSB Analytic | AICPA FN-Measurement
79. Everett, Miguel, and Ramona are partners, sharing income 1:2:3. After selling all of the assets for
    cash, dividing losses on realization, and paying liabilities, the balances in the capital accounts are as
    follows: Everett, $50,000 Cr.; Miguel, $40,000 Dr.; and Ramona, $30,000 Cr. How much cash is
    available for distribution to the partners?
    a. $120,000
    b. $30,000
    c. $40,000
    d. $90,000
     ANS: C          DIF: Moderate      OBJ: 12-04
     NAT: AACSB Analytic | AICPA FN-Measurement

80. Everett, Miguel, and Ramona are partners, sharing income 1:2:3. After selling all of the assets for
    cash, dividing losses on realization, and paying liabilities, the balances in the capital accounts are as
    follows: Everett, $50,000 Cr.; Miguel, $40,000 Dr.; and Ramona, $30,000 Cr. How much cash
    should be distributed to Everett assuming that Miguel pays the deficiency?
    a. $50,000
    b. $20,000
    c. $30,000
    d. $40,000
     ANS: A          DIF: Moderate      OBJ: 12-04
     NAT: AACSB Analytic | AICPA FN-Measurement

81. Everett, Miguel, and Ramona are partners, sharing income 1:2:3. After selling all of the assets for
    cash, dividing losses on realization, and paying liabilities, the balances in the capital accounts are as
    follows: Everett, $50,000 Cr.; Miguel, $20,000 Cr.; and Ramona, $30,000 Dr. Assume that after the
    available cash is distributed to the partners, Ramona pays $15,000 of the deficiency to the firm. How
    much of the $15,000 should be distributed to Everett?
    a. $15,000
    b. $0
    c. $5,000
    d. $10,000
     ANS: C          DIF: Moderate      OBJ: 12-04
     NAT: AACSB Analytic | AICPA FN-Measurement

82. Antonio and Barbara are partners who share income in the ratio of 1:2 and have capital balances of
    $40,000 and $70,000 at the time they decide to terminate the partnership. After all noncash assets are
    sold and all liabilities are paid, there is a cash balance of $80,000. What amount of loss on realization
    should be allocated to Barbara?
    a. $80,000
    b. $10,000
    c. $20,000
    d. $30,000
     ANS: C          DIF: Moderate      OBJ: 12-04
     NAT: AACSB Analytic | AICPA FN-Measurement
83. Soledad and Winston are partners who share income in the ratio of 1:3 and have capital balances of
    $100,000 and $140,000 at the time they decide to terminate the partnership. After all noncash assets
    are sold and all liabilities are paid, there is a cash balance of $130,000. What amount of loss on
    realization should be allocated to Soledad?
    a. $60,000
    b. $27,500
    c. $92,500
    d. $32,500
     ANS: B          DIF: Moderate      OBJ: 12-04
     NAT: AACSB Analytic | AICPA FN-Measurement

84. Soledad and Winston are partners who share income in the ratio of 1:3 and have capital balances of
    $100,000 and $140,000 at the time they decide to terminate the partnership. After all noncash assets
    are sold and all liabilities are paid, there is a cash balance of $130,000. What amount of loss on
    realization should be allocated to Winston?
    a. $110,000
    b. $97,500
    c. $42,500
    d. $82,500
     ANS: D          DIF: Moderate      OBJ: 12-04
     NAT: AACSB Analytic | AICPA FN-Measurement

85. Partners Ken and Macki each have a $40,000 capital balance and share income and losses in a 3:2.
    Cash equals $20,000, noncash assets equal $120,000, and liabilities equal $60,000. If the noncash
    assets are sold for $80,000, the Macki’s capital account will
    a. decrease by $16,000.
    b. decrease by $24,000.
    c. increase by $24,000.
    d. decrease by $40,000.
     ANS: A          DIF: Moderate      OBJ: 12-04
     NAT: AACSB Analytic | AICPA FN-Measurement

86. Partners Ken and Macki each have a $40,000 capital balance and share income and losses in a 3:2.
    Cash equals $20,000, noncash assets equal $120,000, and liabilities equal $60,000. If the noncash
    assets are sold for $50,000, and each partner is personally insolvent, Partner Macki will eventually
    receive cash of
    a. $0.
    b. $10,000.
    c. $12,000.
    d. $20,000.
     ANS: B          DIF: Moderate      OBJ: 12-04
     NAT: AACSB Analytic | AICPA FN-Measurement
87. Partners Ken and Macki each have a $40,000 capital balance and share income and losses in a 3:2.
    Cash equals $20,000, noncash assets equal $120,000, and liabilities equal $60,000. If the noncash
    assets are sold for $60,000, and both partners agree to make up an capital deficits with personal cash
    contributions, Partner Macki will eventually receive cash of
    a. $0.
    b. $4,000.
    c. $16,000.
    d. $24,000.
     ANS: C          DIF: Moderate      OBJ: 12-04
     NAT: AACSB Analytic | AICPA FN-Measurement

     The capital accounts of Harrison and Marti have balances of $180,000 and $130,000, respectively, on
     January 1, 2010, the beginning of the current fiscal year. On April 10, Harrison invested an additional
     $20,000. During the year, Harrison and Marti withdrew $96,000 and $78,000, respectively, and net
     income for the year was $248,000. The articles of partnership make no reference to the division of net
     income.

88. Based on this information, the statement of partners’ equity for the 2010 for the partnership would
    show what amount in the capital account for Marti on December 31, 2010?
    a. $228,000
    b. $176,000
    c. $404,000
    d. $52,000
     ANS: B          DIF: Moderate      OBJ: 12-05
     NAT: AACSB Analytic | AICPA FN-Measurement

89. Based on this information, the statement of partners’ equity for the 2010 for the partnership would
    show what amount in the capital account for Harrison on December 31, 2010?
    a. $228,000
    b. $176,000
    c. $404,000
    d. $52,000
     ANS: A          DIF: Moderate      OBJ: 12-05
     NAT: AACSB Analytic | AICPA FN-Measurement

90. Based on this information, the statement of partners’ equity for the 2010 for the partnership would
    show what amount in as total capital for the partnership on December 31, 2010?
    a. $228,000
    b. $176,000
    c. $404,000
    d. $752,000
     ANS: C          DIF: Moderate      OBJ: 12-05
     NAT: AACSB Analytic | AICPA FN-Measurement
EXERCISE/OTHER

  1. Aaron and Kim form a partnership by combining the assets of their separate businesses. Aaron
     contributes accounts receivable with a face amount of $50,000 and equipment with a cost of $180,000
     and accumulated depreciation of $100,000. The partners agree that the equipment is to be priced at
     $68,000, that $3,500 of the accounts receivable are completely worthless and are not to be accepted by
     the partnership, and that $2,000 is a reasonable allowance for the uncollectibility of the remaining
     accounts receivable. Frank contributes cash of $21,000 and merchandise inventory of $44,500. The
     partners agree that the merchandise inventory is to be priced at $48,000. Journalize the entries to
     record in the partnership accounts (a) Aaron’s investment and (b) Kim’s investment.

     ANS:
     (a) Accounts Receivable                                                   46,500
          Equipment                                                            68,000
           Allowance for Doubtful Accounts                                                      2,000
           Aaron, Capital                                                                     112,500

     (b)   Cash                                                                21,000
           Merchandise Inventory                                               48,000
            Kim, Capital                                                                       69,000

     DIF: Moderate         OBJ: 12-02            NAT: AACSB Analytic | AICPA FN-Measurement

  2. Barton and Fallows form a partnership by combining the assets of their separate businesses. Barton
     contributes accounts receivable with a face amount of $50,000 and equipment with a cost of $190,000
     and accumulated depreciation of $100,000. The partners agree that the equipment is to be priced at
     $85,000, that $3,500 of the accounts receivable are completely worthless and are not to be accepted by
     the partnership, and that $1,500 is a reasonable allowance for the uncollectibility of the remaining
     accounts receivable. Fallows contributes cash of $28,500 and merchandise inventory of $55,500. The
     partners agree that the merchandise inventory is to be priced at $60,000. Journalize the entries to
     record in the partnership accounts (a) Barton’s investment and (b) Fallows’ investment.

     ANS:
     (a) Accounts Receivable                                                   46,500
          Equipment                                                            85,000
               Allowance for Doubtful Accounts                                                  1,500
               Barton, Capital                                                                130,000

     (b)   Cash                                                                28,500
           Merchandise Inventory                                               60,000
                Fallows, Capital                                                               88,500

     DIF: Moderate         OBJ: 12-02            NAT: AACSB Analytic | AICPA FN-Measurement
3. Trevor Smith contributed equipment, inventory, and $48,000 cash to a partnership. The equipment
   had a book value of $25,000 and a market value of $28,000. The inventory had a book value of
   $60,000, but only had a market value of $20,000, due to obsolescence. The partnership also assumed
   a $15,000 note payable owed by Smith that was used originally to purchase the equipment.

   Provide the journal entry for Smith’s contribution to the partnership.

   ANS:
   Cash                                                    48,000
   Inventory                                               20,000
   Equipment                                               28,000
                   Notes Payable                                            15,000
                   Trevor Smith, Capital                                    81,000

   DIF: Easy         OBJ: 12-02                 NAT: AACSB Analytic | AICPA FN-Measurement
   TOP: Example Exercise 12-1

4. Emerson and Dakota formed a partnership dividing income as follows:

   1. Annual salary allowance to Emerson of $48,000
   2. Interest of 8% on each partner’s capital balance on January 1
   3. Any remaining net income divided equally.

   Emerson and Dakota had $25,000 and $140,000 respectively in their January 1 capital balances. Net
   income for the year was $220,000.

   How much net income should be distributed to Emerson?

   ANS:
   Salary                                                      48,000
   Interest (8%  $25,000)                                      2,000
   Remaining income                                           79,400*
   Total distribution to Emerson                             $129,400

   *($220,000 - $48,000 -$2,000 -$11,200)  50% = $79,400

   DIF: Difficult    OBJ: 12-02                 NAT: AACSB Analytic | AICPA FN-Measurement
   TOP: Example Exercise 12-2

5. Emerson and Dakota formed a partnership dividing income as follows:

   1. Annual salary allowance to Emerson of $58,000
   2. Interest of 8% on each partner’s capital balance on January 1
   3. Any remaining net income divided equally.

   Emerson and Dakota had $25,000 and $140,000 respectively in their January 1 capital balances. New
   income for the year was $220,000.

   How much net income should be distributed to Dakota?
   ANS:
   Salary                                           0
   Interest (8%  $140,000)                    11,200
   Remaining income                           74,400*
   Total distribution to Emerson              $85,600

   *($220,000 - $58,000 -$2,000 -$11,200)  50% = $74,400

   DIF: Difficult    OBJ: 12-02                 NAT: AACSB Analytic | AICPA FN-Measurement
   TOP: Example Exercise 12-2

6. Gavin invested $45,000 in the Jason and Kelly partnership for ownership equity of $45,000. Prior to
   the investment land was revalued to a market value of $320,000 from a book value of $200,000.
   Jason and Kelly share net income in a 1:2 ratio.

   a. Provide the journal entry for the revaluation of land.
   b. Provide the journal entry to admit Gavin.

   ANS:
   a. Land                                           120,000
               Jason, Capital                                         40,000
               Kelly, Capital                                         80,000

   b.   Cash                                          45,000
               Gavin, Capital                                         45,000

   DIF: Moderate     OBJ: 12-03                 NAT: AACSB Analytic | AICPA FN-Measurement
   TOP: Example Exercise 12-3

7. Malcolm has a capital balance of $90,000 after adjusting to fair market value. Celeste contributes
   $45,000 to receive a 25% interest in a new partnership with Malcolm.

   Determine the amount and recipient of the partner bonus.

   ANS:
   Equity of Malcom                                               $90,000
   Courtney contribution                                           45,000
   Total equity after admitting Celeste                          $135,000
   Celeste’s equity interest                                        25%
   Celeste’s equity after admission                               $33,750

   Celeste’s contribution                                        $45,000
   Celeste’s equity after admission                               33,750
   Bonus paid to Malcolm                                        $ 11,250

   DIF: Difficult    OBJ: 12-03                 NAT: AACSB Analytic | AICPA FN-Measurement
   TOP: Example Exercise 12-4
8. Prior to liquidating their partnership, Craig and Jenny had capital accounts of $60,000 and $100,000,
   respectively. The partnership assets were sold for $225,000. The partnership had $25,000 of
   liabilities. Craig and Jenny share income and losses equally. Determine the amount received by
   Jenny as a final distribution from liquidation of the partnership.

   ANS:
   Jenny’s equity prior to liquidation                                                  $100,000

   Realization of asset sales                                         $225,000
   Book value of assets ($160,000 + $25,000)                           185,000
   Gain on liquidation                                               $ 40,000

   Jenny’s share of gain (50%  $40,000)                                                  20,000
   Jenny’s cash distribution                                                            $120,000

   DIF: Moderate     OBJ: 12-04                 NAT: AACSB Analytic | AICPA FN-Measurement
   TOP: Example Exercise 12-5

9. The capital accounts of Hogan and Moss have balances of $90,000 and $65,000, respectively on
   January 1, 2009, the beginning of the current fiscal year. On April 10, Hogan invested an additional
   $8,000. During the year, Hogan and Moss withdrew $40,000 and $32,000, respectively, and net
   income for the year was $98,000. The articles of partnership make no reference to the division of net
   income.

   Required:

   (1)    Journalize the entries to:

          a.    Close the income summary account.

          b.    Close the drawing accounts.

   (2)    Prepare a statement of partners’ equity for 2009 for the partnership of Hogan and
          Moss.
     ANS:
     (a) Income Summary                                                                  98,000
             Hogan, Capital                                                                          49,000
             Moss, Capital                                                                           49,000

     (b)    Hogan, Capital                                                               40,000
            Moss, Capital                                                                32,000
               Hogan, Drawing                                                                        40,000
               Moss, Drawing                                                                         32,000

     (2)
                                           Hogan and Moss
                                     Statement of Partners’ Equity
                                For the Year Ended December 31, 2009



                                                          Hogan                   Moss                Total

     Capital, January 1, 2009                           $90,000                $65,000            $ 155,000
     Additional investment during the year                8,000                      —                8,000
                                                        $98,000                $65,000            $ 163,000
     Net income for the year                             49,000           49,000                     98,000
                                                       $147,000               $114,000             $261,000
     Withdrawals during the year                         40,000                  32,000            __72,000
     Capital, December 31, 2009                        $107,000                $82,000             $189,000


     DIF: Moderate         OBJ: 12-02 |12-05 NAT: AACSB Analytic | AICPA FN-Measurement

10. Hamir, Darci, and Pete are partners sharing income 3:2:1, respectively. After the firm’s loss form
    liquidation is distributed, the capital account balances were: Hamir, $36,000 Dr.; Darci, $90,000 Cr.,
    and Pete, $64,000 Cr. If Hamir is personally bankrupt and unable to pay any of the $36,000, what
    will be the amount of cash received by Darci and Pete upon liquidation? Show your work.


     ANS:

                                                         Hamir               Darci            Pete
    Capital balances after realization                   $(36,000)           $90,000          $64,000
    Distribution of partner deficiency                      36,000           (24,000)1        (12,000)2
    Capital balances after deficiency distribution                   $0      $66,000          $52,000

     1
      $36,000  2/3
     2
      $36,000  1/3

     DIF: Moderate         OBJ: 12-04            NAT: AACSB Analytic | AICPA FN-Measurement
11. S. Stephens and J. Perez are partners in Space Designs. Stephens and Perez share income equally. D.
    Fredricks will be admitted to the partnership. Prior to the admission, equipment was revalued
    downward by $8,000. The capital balances of each partner are $100,000 and $139,000, respectively,
    prior to the revaluation.

    Required:

    (1)    Provide the journal entry for the asset revaluation.

    (2)    Provide the journal entry for Fredricks’ admission under the following independent
           situations:

           a.    Fredricks purchased a 20% interest for $50,000.

           b.    Fredricks purchased a 30% interest for $125,000.

    ANS:
    (1). S. Stephens, Capital                                           4,000
         J. Perez, Capital                                              4,000
              Equipment                                                                       8,000

    (2).   (a)     Cash                                               50,000
                   S. Stephens, Capital                                3,100
                   J. Perez, Capital                                   3,100
                       D. Fredricks, Capital                                                 56,200

           Supporting calculations for the bonus:

           Equity of S. Stephens                                                        $ 96,000
           Equity of J. Perez                                                            135,000
           Contribution by D. Fredricks                                                   50,000
           Total equity after admitting D. Fredricks                                   $ 281,000
           D. Fredricks’ equity interest after admission                                 20%
           D. Fredricks’ equity after admission                                         $ 56,200
           Contribution by D. Fredricks’                                                  50,000
           Bonus paid to D. Fredricks’                                                  $ 6,200

           The bonus to Fredricks is debited equally between Stephens’ and Perez’s capital
           accounts.
           (b)      Cash                                                  125,000
                       S. Stephens, Capital                                                    9,100
                       J. Perez, Capital                                                       9,100
                       D. Fredricks, Capital                                                 106,800

           Supporting calculations for the bonus:

                 Equity of S. Stephens                                            $96,000
                 Equity of J. Perez                                               135,000
                 Contribution by D. Fredricks                                     125,000
                 Total equity after admitting D. Fredricks                      $ 356,000
                 Harris’s equity interest after admission                           30%
                 Harris’s equity after admission                                 $106,800
                 Contribution by D. Fredricks                                    $125,000
                 Harris’s equity after admission                                  106,800
                 Bonus paid to S. Stephens and J. Perez                           $18,200

                 The bonus to Stephens and Perez is credited equally between Stephens’ and Perez’s
                 capital accounts.

     DIF: Moderate   OBJ: 12-02 | 12-03
     NAT: AACSB Analytic | AICPA FN-Measurement

12. After the tangible assets have been adjusted to current market prices, the capital accounts of Harper
    and Kahlil have balances of $60,000 and $90,000, respectively. Fay is to be admitted to the
    partnership, contributing $45,000 cash, for which she is to receive an ownership equity of $60,000. All
    partners share equally in income.

     Required:

     (1) Journalize the entry to record the admission of Fay, who is to receive a bonus of $15,000.

     (2) What are the capital balances of each partner after the admission of the new partner?

     ANS:
     (1)  Cash                                                        45,000
          Harper, Capital                                              7,500
          Kahlil, Capital                                              7,500
            Fay, Capital                                                            60,000

     (2)         Harper                                               52,500
                 Kahlil                                               82,500
                 Fay                                                  60,000

     DIF: Moderate             OBJ: 12-03             NAT: AACSB Analytic | AICPA FN-Measurement
13. The partnership of Abraham Associates began operations on January 1, 2010, with contributions from
    two partners as follows:

                Waverley                                  $35,000
                Marquez                                   40,000

    The following additional partner transactions took place during the year:

    (1)    In early January, Houston is admitted to the partnership by contributing $25,000 cash
           for a 25% interest.

    (2)    Net income of $160,000 was earned in 2010. In addition, Waverley received a salary
           allowance of $30,000 for the year. The three partners agree to an income-sharing
           ratio equal to their capital balances after admitting Houston.

    (3)    The partners’ withdrawals are equal to half of their respective distributions of income
           after salary (i.e., half their respective portions of the $130,000).

    Required:

    Prepare a statement of partnership equity for the year ended December 31, 2010.

    ANS:

                                          ABRAHAM ASSOCIATES
                                        Statement of Partnership Equity
                                    For the Year Ended December 31, 2010

                            Waverley,         Marquez,            Houston,            Total
                            Capital           Capital             Capital             Partnership
                                                                                      Capital
    Partnership capital,    $35,000           $40,000                                 $75,000
    January 1, 2010
    Admission of            --                --                  $25,000             25,000
    Houston
    Salary allowance        30,000                                                    30,000
    Remaining income        45,500            52,000              32,500              130,000
    Less: Partner           (22,750)          (26,000)            (16,250)            (65,000)
    withdrawals
    Partnership capital,    $ 87,750          $66,000             $41,250             $195,000
    December 31, 2010

    Admission of Houston:

    Equity of initial partners prior to admission                                 $ 75,000
    Contribution by Houston                                                        __25,000
    Total                                                                          $100,000
    Houston’s equity interest after admission                                          25%
    Houston’s equity after admission                                                $ 25,000
    Contribution by Houston                                                        __25,000
    No bonus                                                                    $          0
    Net income distribution:

    The income-sharing ratio is equal to the proportion of the capital balances after admitting Houston
    according to the partnership agreement:

    Waverley: $35,000 / $100,000 = 35%

    Marquez: $40,000 / 100,000 = 40%

    Houston: $25,000 / 100,000 = 25%

    These ratios can be multiplied by the $130,000 remaining income ($160,000 – $30,000 salary
    allowance to Waverley) to distribute the earnings to the respective partner capital accounts.

    Withdrawals:
    Half of the remaining income is distributed to the three partners. Waverley need not take the salary
    allowance as a withdrawal but may allow it to accumulate in the member equity account.

    DIF: Difficult  OBJ: 12-02 | 12-03 | 12-05
    NAT: AACSB Analytic | AICPA FN-Measurement

14. The capital accounts of Hope and Indiana have balances of $115,000 and $95,000, respectively. Clint
    and Casey are to be admitted to the partnership. Clint buys one-fifth of Hope’s interest for $30,000
    and one-fourth of Indiana’s interest for $20,000. Casey contributes $45,000 cash to the partnership,
    for which he is to receive an ownership equity of $45,000.

    Required:

    (1) Journalize the entries to record the admission of (a) Clint and (b) Casey.

    (2) What are the capital balances of each partner after the admission of the new partners?

    ANS:
    (1)(a)      Hope, Capital (20%  $115,000)                         23,000
                Indiana, Capital (25%  $95,000)                       23,750
                   Clint, Capital                                                     46,750

    (b)         Cash                                                         45,000
                   Casey, Capital                                                     45,000

    (2)         Hope                                               92,000
                Indiana                                            71,250
                Clint                                              46,750
                Casey                                              45,000

    DIF: Moderate         OBJ: 12-03               NAT: AACSB Analytic | AICPA FN-Measurement
15. Holly and Luke formed a partnership, investing $240,000 and $80,000, respectively. Determine their
    participation in the year’s net income of $200,000 under each of the following independent
    assumptions:

    (a)     No agreement concerning division of net income;
    (b)     Divided in the ratio of original capital investment;
    (c)     Interest at the rate of 15% allowed on original investments and the remainder divided
            in the ratio of 2:3;
    (d)     Salary allowances of $50,000 and $70,000, respectively, and the balance divided
            equally;
    (e)     Allowance of interest at the rate of 15% on original investments, salary allowances of
            $50,000 and $70,000, respectively, and the remainder divided equally.

    ANS:
                                 Holly              Luke                    Total
    a. Net income (1:1)          $100,000           $100,000                $200,000

    b. Net income (3:1)          $150,000           $50,000                 $200,000

    c. Interest allowance +      $36,000 +          $12,000 + 91,200 =      $48,000 + 152,000 =
    Remaining income (2:3) =     60,800 =           $103,200                $200,000
    Net Income                   $96,800
    d. Salary allowance +        $50,000 +          $70,000 + 40,000 =      $120,000 + 80,000 =
    Remaining income (1:1) =     40,000 =           $110,000                $200,000
    Net Income                   $90,000
    e. Interest allowance +      $36,000 +          $12,000 + 70,000 +      $48,000 + 120,000 +
    Salary allowance +           50,000 + 16,000    16,000 = $98,000        32,000 = $200,000
    Remaining income (1:1) =     = $102,000
    Net Income

    DIF: Moderate         OBJ: 12-02            NAT: AACSB Analytic | AICPA FN-Measurement

16. Holly and Luke formed a partnership, investing $240,000 and $80,000, respectively. Determine their
    participation in the year’s net income of $380,000 under each of the following independent
    assumptions:

    (a)    No agreement concerning division of net income;
    (b)    Divided in the ratio of original capital investment;
    (c)    Interest at the rate of 15% allowed on original investments and the remainder divided
           in the ratio of 2:3;
    (d)    Salary allowances of $50,000 and $70,000, respectively, and the balance divided
           equally;
    (e)    Allowance of interest at the rate of 15% on original investments, salary allowances of
           $50,000 and $70,000, respectively, and the remainder divided equally.
    ANS:

                                 Holly              Luke                      Total
    a. Net income (1:1)          $190,000           $190,000                  $380,000

    b. Net income (3:1)          $285,000           $95,000                   $380,000

    c. Interest allowance +      $36,000 +          $12,000 + 199,200 =       $168,800 + 211,200 =
    Remaining income (2:3) =     132,800 =          $211,200                  $380,000
    Net Income                   $168,800
    d. Salary allowance +        $50,000 +          $70,000 + 130,000 =       $180,000 + 200,000 =
    Remaining income (1:1) =     130,000 =          $200,000                  $380,000
    Net Income                   $180,000
    e. Interest allowance +      $36,000 +          $12,000 + 70,000 +        $48,000 + 120,000 +
    Salary allowance +           50,000 +           106,000 = $188,000        212,000 = $380,000
    Remaining income (1:1) =     106,000 =
    Net Income                   $192,000

    DIF: Moderate         OBJ: 12-02             NAT: AACSB Analytic | AICPA FN-Measurement

17. Benson contributed land, inventory, and $22,000 cash to a partnership. The land had a book value of
    $65,000 and a market value of $111,000. The inventory had a book value of $60,000 and a market
    value of $58,000. The partnership also assumed a $52,000 note payable owned by Benson that was
    used originally to purchase the land.

    Required:

    Provide the journal entry for Benson’s contribution to the partnership.

    ANS:
    Cash                                                         22,000
    Inventory                                                    58,000
    Land                                                        111,000
       Notes Payable                                                                       52,000
       Benson, Capital                                                                    139,000

    DIF: Moderate         OBJ: 12-02             NAT: AACSB Analytic | AICPA FN-Measurement
18. Prior to liquidating their partnership, Porter and Robert had capital accounts of $160,000 and $100,000
    respectively. Prior to liquidation, the partnership had no cash assets other than what was realized
    from the sale of those asset. These partnership assets were sold for $250,000. The partnership had
    $10,000 of liabilities. Porter and Robert share income and losses equally.

     Required:

     Determine the amount received by Porter as a final distribution from liquidation of the partnership.

     ANS:
     Porter’s equity prior to liquidation                                                                          $ 160,000

     Realization of asset sales                                                                                    $ 250,000
     Book value of assets ($160,000 + $100,000 + $10,000)                                                            270,000
     Loss on liquidation                                                                                            $ 20,000
     Porter’s share of loss (50%  $20,000)                                                                         (10,000)
     Porter’s cash distribution                                                                                    $ 150,000

     DIF: Moderate                OBJ: 12-04                   NAT: AACSB Analytic | AICPA FN-Measurement

19. Prior to liquidating their partnership, Samuel and Brian had capital accounts of $60,000 and $240,000,
    respectively. The partnership assets were sold for $120,000. The partnership had no liabilities. Samuel
    and Brian share income
    and losses equally.

     Required:
     a. Determine the amount of Samuel’s deficiency.
     b. Determine the amount distributed to Brian, assuming Samuel is unable to satisfy the deficiency.

     ANS:
     a. Samuel’s equity prior to liquidation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 60,000
     Realization of asset sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 120,000
     Book value of assets ($60,000 + $240,000) . . . . . . . . . . . . . . . . . 300,000
     Loss on liquidation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 180,000
     Samuel’s share of loss (50%  $180,000). . . . . . . . . . . . . . . . . . . . . . . . . .                     90,000
     Samuel’s deficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(30,000)

     b. $120,000 = $240,000 - $90,000 share of loss - $30,000 Samuel’s deficiency, also equals the amount
     realized from asset sales.

     DIF: Moderate     OBJ: 12-04                              NAT: AACSB Analytic | AICPA FN-Measurement
     TOP: Example Exercise 12-6
20. Easy Sailing, LLC provides repair services for commercially-owned boats and yachts. The firm has 5
    members in the LLC, which did not change between 2009 and 2010. During 2010, the business
    expanded into three new regions of the country. The following revenue and employee information is
    provided:

                                          2009            2010
    Revenues (in thousands)                $50,625         $57,750
    Number of employees                        125             175

    Required:
    a. For 2009 and 2010, determine the revenue per employee (excluding members).
    b. Interpret the trend between the two years.

    ANS:
    a.   Revenue per employee, 2009: $50,625,000/125 = $405,000

          Revenue per employee, 2010:       = $330,000

    b.    Revenues increased between the two years; however, the number of employees has
          increased at a faster rate. Thus, the revenue per employee declined from $405,000 in
          2009 to $330,000 in 2010. This indicates that the efficiency of the firm has declined in
          the two years. This is likely the result of the expansion. That is, the large increase in the
          employment base is the likely result of the expansion into the three new regions. These
          new employees may need to be trained and thus are not as efficient in their jobs as the
          more experienced employees in the existing regions. Often, a business will suffer
          productivity losses in the midst of significant expansion because of the inexperience of
          the new employees.

    DIF: Moderate          OBJ: 12-05             NAT: AACSB Analytic | AICPA FN-Measurement
PROBLEM

 1. Gentry, sole proprietor of a hardware business, decides to form a partnership with Noel. Gentry’s
    accounts are as follows:

                                             Book Value                  Market Value
    Cash                                      $ 20,000                    $ 20,000
    Accounts Receivable (net)                   52,000                       45,000
    Inventory                                  112,000                      125,000
    Land                                        40,000                      100,000
    Building (net)                             300,000                      340,000
     Accounts Payable                           25,000                       25,000
     Mortgage Payable                           75,000                       75,000

    Noel agrees to contribute $70,000 for a 20% interest. Journalize the entries to record (a) Gentry’s
    investment and (b) Noel’s investment.

    ANS:
    (a) Cash                                                        20,000
         Accounts Receivable                                        45,000
         Inventory                                                 125,000
         Land                                                      100,000
         Building                                                  340,000
              Accounts Payable                                                        25,000
              Mortgage Payable                                                        75,000
              Gentry, Capital                                                        530,000

    (b)   Cash                                                      70,000
          Gentry, Capital                                           50,000
               Noel, Capital                                                         120,000

    DIF: Moderate   OBJ: 12-02 | 12-03
    NAT: AACSB Analytic | AICPA FN-Measurement

 2. Jeff Layton, sole proprietor of a hardware business, decides to form a partnership with Nicholas Fell.
    Jeff’s accounts are as follows:

                                             Book Value                 Market Value
    Cash                                      $ 30,000                   $ 30,000
    Accounts Receivable (net)                   55,000                      45,000
    Inventory                                  112,000                     135,000
    Land                                        40,000                     100,000
    Building (net)                             500,000                     540,000
     Accounts Payable                           25,000                      25,000
     Mortgage Payable                          125,000                     125,000

    Nicholas agrees to contribute $120,000 for a 20% interest. Journalize the entries to record (a) Jeff’s
    investment and (b) Nicholas’ investment.
   ANS:
   (a) Cash                                                         30,000
        Accounts Receivable                                         45,000
        Inventory                                                  135,000
        Land                                                       100,000
        Building                                                   540,000
               Accounts Payable                                                    25,000
               Mortgage Payable                                                   125,000
               Jeff Layton, Capital                                               700,000

   (b)    Cash                                                     120,000
          Jeff Layton, Capital                                      44,000
                  Nicholas Fell, Capital                                          164,000

   DIF: Moderate   OBJ: 12-02 | 12-03
   NAT: AACSB Analytic | AICPA FN-Measurement

3. Sharp and Townson had capital balances of $60,000 and $90,000 respectively at the beginning of the
   current fiscal year. The articles of partnership provide for salary allowances of $25,000 and $30,000
   respectively, an allowance of interest at 12% on the capital balances at the beginning of the year, with
   the remaining net income divided equally. Net income for the current year was $100,000.

   (a)    Present the income division section of the income statement for the current year.
   (b)    Assuming that the net income had been $50,000 instead of $100,000, present the
          income division section of the income statement for the current year.

   ANS:

   (a)
   Net income                                                                                 $100,000

                                                                Sharp        Townson              Total
   Division of net income:
    Salary allowance                                         $25,000          $30,000         $ 55,000
    Interest allowance                                         7,200           10,800           18,000
    Remaining income                                          13,500           13,500           27,000
   Net income                                                $45,700          $54,300         $100,000

   (b)
   Net income                                                                                  $50,000

                                                                  Division of net income:
    Salary allowance                                         $25,000          $30,000         $55,000
    Interest allowance                                          7,200          10,800           18,000
       Total                                                 $32,200          $40,800         $73,000
    Excess of allowances over net income.                    (11,500)        (11,500)         (23,000)
   Net income                                                $20,700          $29,300         $50,000

   DIF: Moderate   OBJ: 12-02 | 12-04
   NAT: AACSB Analytic | AICPA FN-Measurement
4. Sharp and Townson had capital balances of $60,000 and $120,000 respectively on January 1 of the
   current year. On May 8, Sharp invested an additional $10,000 in the partnership. During the year,
   Sharp and Townson withdrew $25,000 and $45,000 respectively. After closing all expense and
   revenue accounts at the end of the year, Income Summary has a credit balance of $90,000, that Sharp
   and Townson have agreed to split on a 2:1 basis, respectively.

   (a)   Journalize the entries to close the income summary account and the drawing accounts.
   (b)   Prepare the statement of owner's equity for the current year.

   ANS:
   (a)
   Income Summary                                                              90,000
    Sharp, Capital                                                                              60,000
    Townson, Capital                                                                            30,000

   Sharp, Capital                                                              25,000
   Townson, Capital.                                                           45,000
    Sharp, Drawing                                                                              25,000
    Townson, Drawing                                                                            45,000

   (b)
                                          Sharp and Townson
                                      Statement of Owner's Equity
                                      For Year Ended December 31
                                                               Sharp         Townson            Total
   Capital, January 1                                       $ 60,000         $120,000        $180,000
   Additional investment during the year                      10,000           ----            10,000
                                                            $ 70,000         $120,000        $190,000
   Net income for the year                                    60,000           30,000          90,000
                                                            $130,000         $150,000        $280,000
   Withdrawals during the year                                25,000           45,000          70,000
   Capital, December 31                                     $105,000         $105,000        $210,000

   DIF: Easy       OBJ: 12-02 | 12-05
   NAT: AACSB Analytic | AICPA FN-Measurement

5. Daja and Whitnee had capital balances of $140,000 and $160,000 respectively at the beginning of the
   current fiscal year. The articles of partnership provide for salary allowances of $25,000 and $35,000
   respectively, an allowance of interest at 12% on the capital balances at the beginning of the year, with
   the remaining net income divided equally. Net income for the current year was $120,000.

   (a)   Present the income division section of the income statement for the current year.
   (b)   Assuming that the net income had been $50,000 instead of $120,000, present the
         income division section of the income statement for the current year.
   ANS:
   (a)
   Net income                                                                          $120,000

                                                            Daja        Whitnee           Total
   Division of net income:
    Salary allowance                                     $25,000        $35,000        $ 60,000
    Interest allowance                                    16,800         19,200          36,000
    Remaining income                                      12,000         12,000          24,000
   Net income                                            $53,800        $66,200        $120,000

   (b)
   Net income                                                                           $50,000

                                                             Division of net income:
    Salary allowance                                    $25,000          $35,000       $60,000
    Interest allowance                                    16,800          19,200         36,000
       Total                                            $41,800          $54,200       $96,000
    Excess of allowances over net income.               (23,000)        (23,000)       (46,000)
   Net income                                           $18,800          $31,200       $50,000

   DIF: Moderate   OBJ: 12-02 | 12-05
   NAT: AACSB Analytic | AICPA FN-Measurement

6. Jackson and Campbell have capital balances of $100,000 and $300,000 respectively. Jackson devotes
   full time and Campbell one-half time to the business. Determine the division of $150,000 of net
   income under each of the following assumptions:

   (a)    No agreement as to division of net income.
   (b)    In ratio of capital balances.
   (c)    In ratio of time devoted to business.

   ANS:
            Jackson     Campbell Computations
   (a)      $75,000      $75,000  Jackson: 50%  $150,000
                                 Campbell: 50%  $150,000
   (b)      $37,500     $112,500 Jackson: 1/4  $150,000
                                 Campbell: 3/4  $150,000
   (c)     $100,000      $50,000  Jackson: 2/3  $150,000
                                 Campbell: 1/3  $150,000

   DIF: Moderate         OBJ: 12-02            NAT: AACSB Analytic | AICPA FN-Measurement
7. Jackson and Campbell have capital balances of $100,000 and $300,000 respectively. Jackson devotes
   full time and Campbell one-half time to the business. Determine the division of $120,000 of net
   income under each of the following assumptions:

   (a)    No agreement as to division of net income.
   (b)    In ratio of capital balances.
   (c)    In ratio of time devoted to business.
   (d)    Interest of 10% on capital balances and remainder equally.
   (e)    Interest of 10% on capital balances, salaries of $40,000 to Jackson and $20,000 to
          Campbell, and the remainder equally.

   ANS:
            Jackson     Campbell Computations
   (a)      $60,000     $60,000   Jackson: 50%  $120,000
                                 Campbell: 50%  $120,000
   (b)      $30,000     $90,000   Jackson: 1/4  $120,000
                                 Campbell: 3/4  $120,000
   (c)      $80,000     $40,000   Jackson: 2/3  $120,000
                                 Campbell: 1/3  $120,000
   (d)      $50,000     $70,000   Jackson: [(10%  $100,000) + (1/2  $80,000)]
                                 Campbell: [(10%  $300,000) +(1/2  $80,000)]
   (e)      $60,000     $60,000   Jackson: [(10%  $100,000) + $40,000 + (1/2  $(20,000)]
                                 Campbell: [(10%  $300,000) + $20,000 + (1/2  $(20,000)]

   DIF: Moderate          OBJ: 12-02            NAT: AACSB Analytic | AICPA FN-Measurement

8. Derek and Hailey, partners sharing net income in the ratio of 2:1, admit Ben to the partnership in
   accordance with the following agreement:

   (1)    Merchandise inventory recorded in the partnership accounts at $62,500 is to be revalued at
          its current replacement price of $68,500.
   (2)    Ben is to invest $48,000 in cash for a 30% interest in the partnership, which has total net
          assets (assets minus liabilities) of $130,000 after the inventory is revalued.
   (3)    The income-sharing ratio of Derek, Hailey, and Ben is to be 2:1:1.

   (a)    Journalize the entries to record the revaluation of merchandise inventory, and the admission
          of Ben to the partnership.
   (b)    A few years later, the capital balances of Derek, Hailey, and Ben were $150,000, $90,000,
          and $55,000 respectively. At this time, Kacy is admitted to the partnership by the purchase
          of one-half of Derek’s interest for $80,000. Journalize the entry to record the admission of
          Kacy to the partnership.
     ANS:
     (a) Merchandise Inventory                                                      6,000
          Derek, Capital                                                                             4,000
          Hailey, Capital                                                                            2,000

           Cash                                                                    48,000
            Derek, Capital                                                                           6,000
            Hailey, Capital                                                                          3,000
            Ben, Capital                                                                            39,000

     (b)   Derek, Capital                                                          75,000
            Kacy, Capital                                                                           75,000

     DIF: Moderate          OBJ: 12-03             NAT: AACSB Analytic | AICPA FN-Measurement

 9. Kala and Leah, partners in Best Designs, have capital balances of $40,000 and $60,000 respectively.
    Adam joins the partnership by buying one-half of Kala’s interest for $30,000. In addition, because of
    Adam’s outstanding sales skills, the partners agree to increase his interest to 40% if he invests another
    $10,000. The income-sharing ratio of Kala, Leah, and Adam is 4:3:1.

     (a)   Journalize the entries to record the admission of Adam to the partnership.
     (b)   Immediately after Adam’s admission to the partnership, Leah sells one-fourth of her
           interest to Denton for $35,000. Journalize the entry to record this transaction.

     ANS:
     (a) Kala, Capital                                                             20,000
          Adam, Capital                                                                             20,000

           Cash                                                                    10,000
           Kala, Capital                                                            8,000
           Leah, Capital                                                            6,000
            Adam, Capital                                                                           24,000

     (b)   Leah, Capital                                                           13,500
            Denton, Capital                                                                         13,500

     DIF: Moderate          OBJ: 12-03             NAT: AACSB Analytic | AICPA FN-Measurement

10. Immediately prior to the process of liquidation, partners Micco, Niccum, and Orwell have capital
    balances of $70,000, $20,000, and $30,000 respectively. There is a cash balance of $10,000, noncash
    assets total $160,000, and liabilities total $50,000. The partners share net income and losses in the
    ratio of 2:2:1.

     Journalize the entries to record the liquidation outlined below, using Assets as the account title for the
     noncash assets and Liabilities as the account title for all creditors' claims.

     (a)   Sold the noncash assets for $80,000 in cash.
     (b)   Divided the loss on realization.
     (c)   Paid the liabilities.
     (d)   Received cash from the partner with the deficiency.
     (e)   Distributed the cash to the partners.
     ANS:
      (a) Cash                                                                   80,000
          Loss on Realization                                                    80,000
           Assets                                                                               160,000

      (b)    Micco, Capital                                                      32,000
             Niccum, Capital                                                     32,000
             Orwell, Capital                                                     16,000
              Loss on Realization                                                                   80,000

      (c)    Liabilities                                                         50,000
              Cash                                                                                  50,000

      (d)    Cash                                                                12,000
              Niccum, Capital                                                                       12,000

      (e)    Micco, Capital                                                      38,000
             Orwell, Capital                                                     14,000
              Cash                                                                                  52,000

     DIF: Moderate          OBJ: 12-04            NAT: AACSB Analytic | AICPA FN-Measurement

11. After discontinuing the ordinary business operations and closing the accounts on May 7, the ledger of
    the partnership of Anna, Brian, and Cole indicated the following:

     Cash                                                                   $ 7,500
     Noncash Assets                                                          105,000
      Liabilities                                                                         $ 27,500
      Anna, Capital                                                                         45,000
      Brian, Capital                                                                        15,000
      Cole, Capital                                                                         25,000
                                                                            $112,500      $112,500

     The partners share net income and losses in the ratio of 3:2:1. Between May 7-30, the noncash assets
     were sold for $150,000, the liabilities were paid, and the remaining cash was distributed to the
     partners.

     (a)    Prepare a statement of partnership liquidation.
     (b)    Assume the same facts as in (a), except that the noncash assets were sold for $45,000
            and any partner with a capital deficiency pays the amount of the deficiency to the
            partnership. Prepare a statement of partnership liquidation.
ANS:
a)

                              Statement of Partnership Liquidation
                                     For Period May 7-30
                                                                         Capital
                       Noncash                               Anna         Brian      Cole
                    Cash + Assets =         Liabilities +   (3/6) +      (2/6) +     (1/6)
Balances before    $ 7,500 $105,000              $27,500      $45,000      $15,000    $25,000
realization
Sale of assets &   +150,000     -105,000                    + 22,500      + 15,000    + 7,500
division of gain
Balances after     $157,500             0        $27,500      $67,500     $30,000    $32,500
realization
Payment of          -27,500                       -27,500
liabilities
Balances after     $130,000             0               0     $67,500     $30,000    $32,500
payment of
liabilities
Distribution of    -130,000                                   - 67,500     -30,000    -32,500
cash to partners


Final balances           0              0               0            0          0          0

b)

                                    Anna, Brian, and Cole
                              Statement of Partnership Liquidation
                                     For Period May 7-30
                                                                         Capital
                      Noncash                                    Anna        Brian      Cole
                   Cash + Assets =          Liabilities +      (3/6) +     (2/6) +      (1/6)
Balances before    $ 7,500 $105,000              $27,500      $45,000     $15,000    $25,000
realization
Sale of assets &    +45,000     -105,000                      -30,000     - 20,000   - 10,000
division of loss
Balances after      $52,500             0        $27,500      $15,000    $5,000Dr.   $15,000
realization
Payment of          -27,500                       -27,500
liabilities
Balances after      $25,000             0               0     $15,000    $5,000Dr.   $15,000
payment of
liabilities
Receipt of         + 5,000                                                 + 5,000
deficiency
Balances            $30,000             0               0     $15,000           0    $15,000
Distribution of     -30,000                                   - 15,000               - 15,000
cash to partners
Final balances           0              0               0            0          0          0

DIF: Difficult      OBJ: 12-04              NAT: AACSB Analytic | AICPA FN-Measurement
12. Barker invested $128,000 in the Granger and Monroe partnership for ownership equity of $128,000.
    Prior to the investment, equipment was revalued to a market value of $90,000 from a book value of
    $66,000. Granger and Monroe share net income in a 2:1 ratio.

     Required:
     a. Provide the journal entry for the revaluation of equipment.
     b. Provide the journal entry to admit Barker.

     ANS:
     a.   Equipment                                                       24,000
             Granger, Capital                                                             16,000
             Monroe, Capital                                                               8,000

     b.     Cash                                                         128,000
               Barker, Capital                                                           128,000

     DIF: Moderate          OBJ: 12-03             NAT: AACSB Analytic | AICPA FN-Measurement

13. Watson purchased one-half of Dalton’s interest in the Patton and Dalton partnership for $40,000. Prior
    to the investment, land was revalued to a market value of $135,000 from a book value of $100,000.
    Patton and Dalton share net income equally. Dalton had a capital balance of $30,000 prior to these
    transactions.

     Required:
     a. Provide the journal entry for the revaluation of land.
     b. Provide the journal entry to admit Watson.

     ANS:
     a.   Land                                                        35,000
             Patton, Capital                                                              17,500
             Dalton, Capital                                                              17,500

     b.     Dalton, Capital                                           23,750
               Watson, Capital                                                           23,750*

            *($30,000 + $17,500)  50%

     DIF: Moderate          OBJ: 12-03             NAT: AACSB Analytic | AICPA FN-Measurement

				
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