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Flashcards in Partnership Accounting Deck (10):
1

At December 31, year 1, Reed and Quinn are partners with capital balances of $40,000 and $20,000, and they share profit and loss in the ratio of 2:1, respectively.  On this date Poe invests $17,000 cash for a one fifth interest in the capital and profit of the new partnership.  Assuming that goodwill is not recorded, how much should be credited to Poe’s capital account on December 31, year 1?

  1. $12,000
  2. $15,000
  3. $15,400
  4. $17,000

$15,400

If goodwill is not recorded upon admission of a new partner, the bonus method is used to record the transaction.  Poe receives credit for a 1/5 interest in the total partnership equity of $77,000 ($40,000 + $20,000 + $17,000).  Therefore, his capital account is credited for $15,400 (1/5 × $77,000).  The difference between his cash contribution ($17,000) and his capital credit ($15,400) is the bonus to the old partners and is credited to their capital accounts, as indicated in the entry below.

  • Cash $17,000 
  • Poe, capital $15,400
  • Reed capital (1,600 × 2/3) $1,067
  • Quinn capital (1,600 × 1/3) $533

2

The partnership agreement for the partnership of Mayo and Pack provided for salary allowances of $45,000 to Mayo and $35,000 to Pack, and the residual profit was allocated equally.  During year 1, Mayo and Pack each withdrew cash equal to 80 percent of their salary allowances. If during year 1 the partnership had profits in excess of $100,000 without regard to salary allowances and withdrawals, Mayo’s equity in the partnership would

  1. Increase more than Pack’s.
  2. Decrease more than Pack’s.
  3. Increase the same as Pack’s.
  4. Decrease the same as Pack’s.

Increase more than Pack’s.

each partner withdrew 80% of his/her salary during the year, leaving his/her equity interest to increase by the remaining 20% plus half of the net profit after salaries. Since Mayo’s salary is $10,000 greater than Pack’s, Mayo’s equity interest will increase by $2,000 (20% of $10,000) more than Pack’s.

3

The partnership of Metcalf, Petersen, and Russell shared profits and losses equally.  When Metcalf withdrew from the partnership, the partners agreed that there was unrecorded goodwill in the partnership.  Under the bonus method, the capital balances of Petersen and Russell were

  1. Not affected.
  2. Each reduced by one half of the total amount of the unrecorded goodwill.
  3. Each reduced by one third of the total amount of the unrecorded goodwill.
  4. Each reduced by one half of Metcalf’s share of the total amount of the unrecorded goodwill.

Each reduced by one half of Metcalf’s share of the total amount of the unrecorded goodwill.

When the bonus method is used to account for the withdrawal of a partner from a partnership with unrecorded goodwill, the withdrawing partner’s (Metcalf’s) capital balance is removed from the books and the remaining partners’ (Peterson’s and Russell’s) capital accounts are reduced by the withdrawing partner’s share of the partnership’s total unrecorded goodwill in relation to their respective profit-loss ratios. Since the partners agreed to share profits and losses equally, remaining partners’ capital accounts will each be reduced by one half of the withdrawing partner’s share of the partnership’s unrecorded goodwill.

4

Beck, the active partner in Beck & Cris, receives an annual bonus of 25% of partnership net income after deducting the bonus. For the year ended December 31, year 1, partnership net income before the bonus amounted to $300,000.  Beck’s year 1 bonus should be

  1. $56,250
  2. $60,000
  3. $62,500
  4. $75,000

$60,000

The problem states that the bonus is 25% of partnership net income after deducting the bonus. The solutions approach is to write an equation and solve for the bonus (B).

  • B=% (NI − B)
  • B=.25($300,000 − B)
  • B=$75,000 − .25B
  • 1.25B=$75,000
  • B=$60,000

5

Pat, Helma, and Diane are partners with capital balances of $50,000, $30,000, and $20,000, respectively.  The partners share profits and losses equally.  For an investment of $50,000 cash, MaryAnn is to be admitted as a partner with a one-fourth interest in capital and profits.  Based on this information, the amount of MaryAnn’s investment can best be justified by which of the following?

  1. MaryAnn will receive a bonus from the other partners upon her admission to the partnership.
  2. Assets of the partnership were overvalued immediately prior to MaryAnn’s investment.
  3. The book value of the partnership’s net assets was less than their fair value immediately prior to MaryAnn’s investment.
  4. MaryAnn is apparently bringing goodwill into the partnership and her capital account will be credited for the appropriate amount.

The book value of the partnership’s net assets was less than their fair value immediately prior to MaryAnn’s investment.

The book value of the net assets of the partnership prior to admission of MaryAnn was $100,000 ($50,000 + $30,000 + $20,000). However, since MaryAnn paid $50,000 for a 1/4 interest, it can be assumed that the fair value of the partnership is $200,000 ($50,000 × 4). Thus, the book value of the partnership’s net assets was less than their fair value prior to the admission of MaryAnn.

6

The Flat and Iron partnership agreement provides for Flat to receive a 20% bonus on profits before the bonus. Remaining profits and losses are divided between Flat and Iron in the ratio of 2 to 3, respectively. Which partner has a greater advantage when the partnership has a profit or when it has a loss?

  • Profit
  • Loss

  • Profit - FLAT
  • Loss - FLAT

In the case of either a profit or a loss, Flat will have a greater advantage. When a profit occurs, Flat receives a greater amount because s/he is allocated [20% × profits + 40% (80% × profits)] while Iron only receives [60% (80% × profits)]. In the case of a loss, Flat bears a smaller percentage share of the loss (only 40%) and thus has a greater advantage.

7

A partnership is formed by two individuals who were previously sole proprietors.  Property other than cash which is part of the initial investment in the partnership would be recorded for financial accounting purposes at the

  1. Proprietor’s book values or the fair value of the property at the date of the investment, whichever is higher.
  2. Proprietor’s book values or the fair value of the property at the date of the investment, whichever is lower.
  3. Proprietors’ book values of the property at the date of the investment.
  4. Fair value of the property at the date of the investment.

Fair value of the property at the date of the investment.

The investment in the capital of a partnership should be measured at the fair market value of the assets contributed. This is necessary to achieve equity between the partners. Remember that the partnership is a separate reporting entity; any gains (losses) reported by the partnership should result solely from the activities of the partnership. If the property were recorded by the partnership at the proprietors’ book value, a gain (loss) may ultimately become recognized by the partnership which is actually attributable to the time period prior to when the property was acquired by the partnership.

8

A partnership agreement specifies that 5% interest is to be paid on the weighted-average capital balance for each partner throughout the year.  Abel had a beginning capital balance of $100,000.  Abel withdrew $30,000 cash on April 1 and on June 1; Abel contributed land with a fair value of $50,000 to the partnership.  No other events related to the capital count occurred throughout the year.  How much interest should be credited to Abel’s capital account?

  1. $0
  2. $5,000
  3. $5,333
  4. $5,500

$5,333

Abel is to receive 5% interest on the weighted-average capital balance.  The weighted-average capital balance and interest are calculated as follows:

  • Beginning capital$100,000 × 3/12 =$   25,000
  • Withdrawal of $30,000$70,000 × 2/12 = $   11,667
  • Contribution of $50,000$120,000 × 7/12 =$70,000
  •     Weighted-average balance $ 106,667
  •     Interest rate 5%
  •     Interest $5,333

9

At December 31, year 1, Arno and Dey are partners with capital balances of $80,000 and $40,000, and they share profit and loss in the ratio of 2:1, respectively.  On this date West invests $36,000 cash for a one-fifth interest in the capital and profit of the new partnership.  The partners agree that the implied partnership goodwill is to be recorded simultaneously with the admission of West. The total implied goodwill of the firm is

  1. $ 4,800
  2. $ 6,000
  3. $24,000
  4. $30,000

$24,000

Under the goodwill method, the difference between the total identifiable assets (tangible portion of equity) and the value of the partnership is recorded as goodwill upon admission of a new partner. West is investing $36,000 for a 1/5 interest in the partnership. Therefore, $36,000 represents 1/5 of the value of the equity of the new partnership ($36,000 ÷ 1/5 = $180,000). The tangible portion of the equity is $156,000 ($80,000 + $40,000 + $36,000). Thus, the total implied goodwill is $24,000 ($180,000 − $156,000).

10

Cor-Eng Partnership was formed on January 2, year 1. Under the partnership agreement, each partner has an equal initial capital balance accounted for under the goodwill method. Partnership net income or loss is allocated 60% to Cor and 40% to Eng.  To form the partnership, Cor originally contributed assets costing $30,000 with a fair value of $60,000 on January 2, year 1, while Eng contributed $20,000 in cash.  Drawings by the partners during year 1 totaled $3,000 by Cor and $9,000 by Eng.  Cor-Eng’s year 1 net income was $25,000.  Cor’s share of Cor-Eng’s year 1 net income is

  1. $15,000
  2. $12,500
  3. $12,000
  4. $ 7,800

$15,000

The partnership agreement states that partnership income or loss will be allocated 60% to Cor and 40% to Eng. Thus, Cor’s share of year 1 income is $15,000 ($25,000 × 60%). Note that the relative capital balances of Cor and Eng have nothing to do with the allocation of income and loss since the allocation percentages are explicitly stated in the partnership agreement.