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Appendix D
ACCOUNTING FOR PARTNERSHIPS
True /False Questions
1. A partnership has a limited life.
2. A partnership is an incorporated association of two or more people to pursue a business for
profit as co-owners.
3. Mutual agency means each partner can commit or bind the partnership to any contract
within the scope of the partnership business.
4. Accounting procedures for both C corporations and S corporations are the same in all
aspects.
5. Partners in a partnership are taxed on the partnership income, not the amounts they
withdraw from the partnership.
6. Limited liability partnerships are designed to protect innocent partners from malpractice or
negligence claims resulting from the acts of another partner.
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McGraw-Hill Education.
D-2
7. A partnership may allocate salary allowances to the partners reflecting the relative value of
services provided.
8. In a limited partnership the general partner has unlimited liability.
9. Partner return on equity can be used by each partner to help decide whether additional
investment or withdrawal of resources is best for that partner.
10. Feldt is a partner in Feldt &Dodson Company. Feldt’s share of the partnership income is
$18,600 and her average partnership equity is $155,000. Her partner return on equity equals
8.33.
11. When partners invest in a partnership, their capital accounts are debited for the amount
invested.
12. Partners’ withdrawals are debited to their separate withdrawals accounts.
13. Partners can invest assets but not liabilities into a partnership.
14. The withdrawals account of each partner is closed to retained earnings at the end of the
accounting period.
15. In closing the accounts at the end of a period, the partners’ capital accounts are credited
for their share of the partnership net income or debited for their share of the partnership loss.
16. In the absence of a partnership agreement, the law says that income of a partnership will
be shared equally by the partners.
17. Salary allowances are reported as salaries expense on a partnership income statement.
18. The statement of changes in partners’ equity shows the beginning balance in retained
earnings, plus investments, less withdrawals, plus the income (or less the loss) and the ending
balance in retained earnings.
19. The equity section of the balance sheet of a partnership can report the separate capital
account balances of each partner.
20. Even if partners devote their time and services to their partnership, their salaries are not
expenses on the income statement.
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D-7
21. If the partners agree on a formula to share income and say nothing about losses, then the
losses are shared using the same formula.
22. Assume that the M & L partnership agreement gave March 60% and Ludwig 40% of
partnership income and losses. The partnership lost $27,000 in the current period. This
implies that March’s share of the loss equals $16,200, and Ludwig’s share equals $10,800.
23. When a partner leaves a partnership, the present partnership ends.
24. To buy into an existing partnership, the new partner must contribute cash to the
partnership.
25. When a partner leaves a partnership, the present partnership ends, but the business can
still continue to operate.
26. Assets invested by a partner into a partnership become the property of the business.
27. Admitting a partner by accepting assets is a personal transaction between one or more
current partners and the new partner.
28. Current partners usually require any new partner to pay a bonus for the privilege of
joining when the current value of a partnership is greater than the recorded amounts of equity.
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McGraw-Hill Education.
D-10
29. When a partner leaves a partnership, the withdrawing partner is entitled to a bonus if the
recorded equity is overstated.
30. When a partnership is liquidated, its business is ended.
31. A capital deficiency exists when at least one partner has a debit balance in his or her
capital account at the point of final cash distribution during liquidation.
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McGraw-Hill Education.
D-11
32. A capital deficiency can arise from liquidation losses, excessive withdrawals before
liquidation, or recurring losses in prior periods.
33. If a partner is unable to cover a deficiency and the other partners absorb the deficiency,
then the partner with the deficiency is thus relieved of all liability.
34. If at the time of partnership liquidation, a partner has a $5,000 capital deficiency and pays
the partnership $5,000 out of personal assets to cover the deficiency, then that partner is
entitled to share in the final distribution of cash.
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McGraw-Hill Education.
D-12
35. An unincorporated association of two or more persons to pursue a business for profit as
co-owners is a:
A. Partnership.
B. Proprietorship.
C. Contractual company.
D. Mutual agency.
E. Voluntary organization.
36. Advantages of a partnership include:
A. Limited life.
B. Mutual agency.
C. Unlimited liability.
D. Co-ownership of property.
E. Voluntary association.
37. A partnership agreement:
A. Is not binding unless it is in writing.
B. Is the same as a limited liability partnership.
C. Is binding even if it is not in writing.
D. Does not generally address the issue of the rights and duties of the partners.
E. Is also called the articles of incorporation.
38. Mutual agency means
A. Creditors can apply their claims to partners’ personal assets.
B. Partners are taxed on partnership withdrawals.
C. All partners must agree before the partnership can act.
D. The partnership has a limited life.
E. A partner can commit or bind the partnership in any contract within the scope of the
partnership business.
39. A partnership that has two classes of partners, general and limited, where the limited
partners have no personal liability beyond the amounts they invest in the partnership, and no
active role in the partnership, except as specified in the partnership agreement is a:
A. Mutual agency partnership.
B. Limited partnership.
C. Limited liability partnership.
D. General partnership.
E. Limited liability company.
40. A partnership designed to protect innocent partners from malpractice or negligence claims
resulting from acts of another partner is a(n):
A. Partnership.
B. Limited partnership.
C. Limited liability partnership.
D. General partnership.
E. Unlimited liability company.
41. Mutual agency implies that each partner in a partnership is a fully authorized agent of the
partnership. Which of the following statements is correct regarding the authority of a partner
to bind the partnership in dealings with third parties?
A. The partner’s authority must be derived from the partnership agreement.
B. The partner’s authority may be effectively limited by a formal resolution of the other
partners, even if third parties are not aware of that limitation.
C. Only a partner with a majority interest in a partnership has the authority to represent the
partnership to third parties.
D. A partner has authority to deal with third parties on the behalf of the other partners only if
he has written permission to do so.
E. A partner may be able to legally bind the partnership to actions even if the other partners
are unaware of his actions.
42. Pat and Nicole formed Here & There as a limited liability company. Unless the member
owners elect to be treated otherwise, the Internal Revenue Service will tax the LLC as:
A. An S corporation.
B. A C corporation.
C. A non-taxable entity.
D. A joint venture.
E. A partnership.
43. A partnership in which all partners have mutual agency and unlimited liability is called:
A. Limited partnership.
B. Limited liability partnership.
C. General partnership.
D. S corporation.
E. Limited liability company.
44. Carter Pearson is a partner in Event Promoters. His beginning partnership capital balance
for the current year is $55,000, and his ending partnership capital balance for the current year
is $62,000. His share of this year’s partnership income was $6,250. What is his partner return
on equity?
A. 5.34%
B. 8.93%
C. 10.08%
D. 11.36%
E. 10.68%
45. Design Services is organized as a limited partnership, with Miko Toori as one of its
partners. Miko’s capital account began the year with a balance of $35,000. During the year,
Miko’s share of the partnership income was $7,500, and Miko received $4,000 in distributions
from the partnership. What is Miko’s partner return on equity?
A. 10.2%
B. 22.7%
C. 19.5%
D. 20.4%
E. 21.4%
46. The following information is available regarding Grace Smit’s capital account in
Enterprise Consulting Group, a general partnership, for a recent year:
Beginning of the year balance $22,000
Share of partnership income
$ 8,500
Withdrawals made during the year $ 6,000
What is Smit’s partner return on equity during the year in question?
A. 36.6%
B. 34.7%
C. 10.8%
D. 11.4%
E. 55.7%
47. Partnership accounting does not:
A. Use a capital account for each partner.
B. Use a withdrawals account for each partner.
C. Allocate net income to each partner according to the partnership agreement.
D. Allocate net loss to each partner according to the partnership agreement.
E. Tax the business entity.
48. Partnership accounting is the same as accounting for:
A. A sole proprietorship.
B. A corporation.
C. A sole proprietorship, except that separate capital and withdrawal accounts are kept for
each partner.
D. An S corporation.
E. A corporation, except that retained earnings is used to keep track of partners’ withdrawals.
49. Partners’ withdrawals of assets are:
A. Credited to their withdrawals accounts.
B. Debited to their withdrawals accounts.
C. Credited to their retained earnings.
D. Debited to their retained earnings.
E. Debited to their asset accounts.
50. The withdrawals account of each partner is:
A. Closed to that partner’s capital account with a credit.
B. Closed to that partner’s capital account with a debit.
C. A permanent account that is not closed.
D. Credited with that partner’s share of net income.
E. Debited with that partner’s share of net loss.
51. R. Stetson contributed $14,000 in cash plus office equipment valued at $7,000 to the SJ
Partnership. The journal entry to record the transaction for the partnership is:
A. Debit Cash $14,000; debit Office Equipment $7,000; credit R Stetson, Capital $21,000.
B. Debit Cash $14,000; debit Office Equipment $7,000; credit SJ Partnership, Capital
$21,000
C. Debit SJ Partnership $21,000; credit R. Stetson, Capital $21,000.
D. Debit R. Stetson, Capital $21,000; credit SJ Partnership, Capital $21,000.
E. Debit Cash $14,000; debit Office Equipment $7,000; credit Common Stock $21,000
52. T. Andrews contributed $14,000 in to the T & B Partnership. The journal entry to record
the transaction for the partnership is:
A. Debit Cash $14,000; credit T & B Partnership, Capital $14,000.
B. Debit Cash $14,000; credit T. Andrews, Capital $14,000
C. Debit T & B Partnership $14,000; credit T. Andrews, Capital $14,000.
D. Debit T. Andrews, Capital $14,000; credit T & B Partnership, Capital $14,000.
E. Debit Cash $14,000; credit Common Stock $14,000
53. Forman and Berry are forming a partnership. Forman will invest a building that currently
is being used by another business owned by Forman. The building has a market value of
$80,000. Also, the partnership will assume responsibility for a $20,000 note secured by a
mortgage on that building. Berry will invest $50,000 cash. For the partnership, the amounts to
be recorded for the building and for Forman’s Capital account are:
A. Building, $80,000 and Forman, Capital, $80,000.
B. Building, $60,000 and Forman, Capital, $60,000.
C. Building, $60,000 and Forman, Capital, $50,000.
D. Building, $80,000 and Forman, Capital, $60,000.
E. Building, $60,000 and Forman, Capital, $80,000.
54. Maxwell and Smart are forming a partnership. Maxwell is investing a building that has a
market value of $180,000. However, the building carries a $56,000 mortgage that will be
assumed by the partnership. Smart is investing $120,000 cash. The balance of Maxwell’s
Capital account will be:
A. $180,000.
B. $124,000.
C. $56,000.
D. $64,000.
E. $60,000.
55. Harvey and Quick have decided to form a partnership. Harvey is going to contribute a
depreciable asset to the partnership as his equity contribution to the partnership. The
following information regarding the asset to be contributed by Harvey is available:
Historical cost of the asset $76,000
Accumulated depreciation on the asset $40,000
Note payable secured by the asset* $18,000
Agreed-upon market value of the asset $45,000
*will be assumed by the partnership
Based on this information, Harvey’s beginning equity balance in the partnership will be:
A. $76,000
B. $36,000
C. $18,000
D. $27,000
E. $45,000
56. Dalworth and Minor have decided to form a partnership. Minor is going to contribute a
depreciable asset to the partnership as her equity contribution to the partnership. The
following information regarding the asset to be contributed by Minor is available:
Historical cost of the asset…………………………………………….… $276,000
Accumulated depreciation on the asset…………………………………. $140,000
Note payable secured by the asset and assumed by the partnership…….. $118,000
Agreed-upon market value of the asset………………………………….. $245,000
Based on this information, Minor’s beginning equity balance in the partnership will be:
A. $276,000
B. $158,000
C. $136,000
D. $127,000
E. $18,000
57. In the absence of a partnership agreement, the law says that income (and loss) should be
allocated based on:
A. A fractional basis.
B. The ratio of capital investments.
C. Salary allowances.
D. Equal shares.
E. Interest allowances.
58. In a partnership agreement, if the partners agreed to an interest allowance of 10% annually
on each partner’s investment, the interest allowance:
A. Is ignored when earnings are not sufficient to pay interest.
B. Can make up for unequal capital contributions.
C. Is an expense of the business.
D. Must be paid because the partnership contract has unlimited life.
E. Legally becomes a liability of the general partner.
59. Wheadon, Davis, and Singer formed a partnership with Wheadon contributing $60,000,
Davis contributing $50,000 and Singer contributing $40,000. Their partnership agreement
called for the income (loss) division to be based on the ratio of capital investments. If the
partnership had income of $75,000 for its first year of operation, what amount of income
(rounded to the nearest thousand) would be credited to Singer’s capital account?
A. $20,000.
B. $25,000.
C. $30,000.
D. $40,000.
E. $75,000.
60. Wheadon, Davis, and Singer formed a partnership with Wheadon contributing $60,000,
Davis contributing $50,000 and Singer contributing $40,000. Their partnership agreement
called for the income (loss) division to be based on the ratio of capital investments. If the
partnership had income of $75,000 for its first year of operation, what amount of income
(rounded to the nearest thousand) would be credited to Wheadon’s capital account?
A. $20,000.
B. $25,000.
C. $30,000.
D. $40,000.
E. $75,000.
61. Christie and Jergens formed a partnership with capital contributions of $300,000 and
$400,000, respectively. Their partnership agreement calls for Christie to receive a $60,000 per
year salary. Also, each partner is to receive an interest allowance equal to 10% of a partner’s
beginning capital investments. The remaining income or loss is to be divided equally. If the
net income for the current year is $135,000, then Christie and Jergens’s respective shares are:
A. $67,500; $67,500.
B. $92,500; $42,500.
C. $57,857; $77,143.
D. $90,000; $40,000.
E. $35,000; $100,000.
62. Farmer and Taylor formed a partnership with capital contributions of $200,000 and
$250,000, respectively. Their partnership agreement calls for Farmer to receive a $70,000 per
year salary. The remaining income or loss is to be divided equally. If the net income for the
current year is $135,000, then Farmer and Taylor’s respective shares are:
A. $67,500; $67,500.
B. $130,000; $5,000.
C. $106,140; $28,860.
D. $90,000; $45,000.
E. $102,500; $32,500.
63. Which of the following statements is true?
A. Partners are employees of the partnership.
B. Salaries to partners are expenses on the partnership income statement.
C. Salary allowances usually reflect the relative value of services provided by partners.
D. Salary allowances are expenses.
E. Interest allowances are expenses.
64. Zheng invested $100,000 and Murray invested $200,000 in a partnership. They agreed to
share incomes and losses by allowing a $60,000 per year salary allowance to Zheng and a
$40,000 per year salary allowance to Murray, plus an interest allowance on the partners’
beginning-year capital investments at 10%, with the balance to be shared equally. Under this
agreement, the shares of the partners when the partnership earns $105,000 in income are:
A. $52,500 to Zheng; $52,500 to Murray.
B. $35,000 to Zheng; $70,000 to Murray.
C. $57,500 to Zheng; $47,500 to Murray.
D. $42,500 to Zheng; $62,500 to Murray.
E. $70,000 to Zheng; $60,000 to Murray.
65. Brown invested $200,000 and Freeman invested $150,000 in a partnership. They agreed to
an interest allowance on the partners’ beginning-year capital investments at 10%, with the
balance to be shared equally. Under this agreement, the shares of the partners when the
partnership earns $205,000 in income are:
A. $102,500 to Brown; $102,500 to Freeman.
B. $117,143 to Brown; $87,857 to Freeman.
C. $122,500 to Brown; $82,500 to Freeman.
D. $105,000 to Brown; $100,000 to Freeman.
E. $112,750 to Brown; $92,250 to Freeman.
66. The partnership agreement for Wilson, Pickett & Nelson, a general partnership, provided
that profits be shared between the partners in the ratio of their financial contributions to the
partnership. Wilson contributed $100,000, Pickett contributed $50,000 and Nelson contributed
$50,000. In the partnership’s first year of operation, it incurred a loss of $110,000. What
amount of the partnership’s loss, rounded to the nearest dollar, should be absorbed by
Nelson?
A. $50,000
B. $27,500
C. $36,667
D. $0
E. $40,000
67. Olivia Greer is a partner in Made for You. An analysis of Greer’s capital account indicates
that during the most recent year, she withdrew $30,000 from the partnership. Her share of the
partnership’s net loss was $16,000 and she made an additional equity contribution of $10,000.
Her capital account ended the year at $150,000. What was her capital balance at the
beginning of the year?
A. $154,000
B. $170,000
C. $180,000
D. $186,000
E. $196,000
68. The following information is available on TGR Enterprises, a partnership, for the most
recent fiscal year:
Total partnership capital at beginning of the year $180,000
Partnership net income for the year $150,000
Withdrawals by partners during the year $120,000
Additional investments by partners during the year $ 60,000
There are three partners in TGR Enterprises: Tracey, Gregory and Rodgers. At the end of the
year, the partners’ capital accounts were in the ratio of 2:1:2, respectively. Compute the
ending capital balances of the three partners.
A. Tracey = $108,000; Gregory = $54,000; Rodgers = $108,000.
B. Tracey = $90,000; Gregory = $90,000; Rodgers = $90,000.
C. Tracey = $204,000; Gregory = $102,000; Rodgers = $204,000.
D. Tracey = $84,000; Gregory = $102,000; Rodgers = $84,000.
E. Tracey = $60,000; Gregory = $30,000; Rodgers = $60,000.
69. The following information is available on PDC Enterprises, a partnership, for the most
recent fiscal year:
Total partnership capital at beginning of the year $1,080,000
Partnership net income for the year $1,250,000
Withdrawals by partners during the year $ 320,000
Additional investments by partners during the year $ 70,000
There are three partners in TGR Enterprises: Pearson, Darling and Cathay. At the end of the
year, the partners’ capital accounts were in the ratio of 2:2:1, respectively. Compute the
ending capital balances of Cathay.
A. $466,000.
B. $402,000.
C. $416,000.
D. $544,000.
E. $388,000.
70. A partner can withdraw from a partnership by any of the following means except:
A. Selling his/her interest to another person for cash.
B. Selling his/her interest to another person in exchange for assets.
C. Receiving cash from the partnership in the amount of his/her interest.
D. Receiving assets from the partnership in the amount of his/her interest.
E. Close the business and liquidate the assets under the mutual agency principle.
71. A bonus may be paid in all of the following situations except:
A. By a new partner when the current value of a partnership is greater than the recorded
amounts of equity.
B. By a withdrawing partner to remaining partners if the recorded value of the equity is
overstated.
C. To a new partner with exceptional talents.
D. By remaining partners to a withdrawing partner if the recorded equity is understated.
E. By an existing partner to him or herself when in need of personal cash flow.
72. When a partner is added to a partnership:
A. The previous partnership ends.
B. The underlying business operations end.
C. The underlying business operations must close and then re-open.
D. The partnership must continue.
E. The partnership equity always increases.
73. A partnership recorded the following journal entry:
Cash................................................................................................. 60,000
B. Founder, Capital.......................................................................... 10,000
R. Aqui, Capital............................................................................... 10,000
H. Joiner, Capital…………………………………………….. 80,000
This entry reflects:
A. Acceptance of a new partner who invests $60,000 and receives a $20,000 bonus.
B. Withdrawal of a partner who pays a $10,000 bonus to each of the other partners.
C. Addition of a partner who pays a bonus to each of the other partners.
D. Additional investment into the partnership by Founder and Aqui.
E. Withdrawal of $10,000 each by Founder and Aqui upon the admission of a new partner.
74. Wright, Bell, and Edison are partners and share income in a 2:5:3 ratio. The partnership’s
capital balances are as follows: Wright, $33,000, Bell $27,000 and Edison $40,000. Edison
decides to withdraw from the partnership, and the partners agree not to revalue the assets
upon Edison’s retirement. The journal entry to record Edison’s June 1 withdrawal from the
partnership if Edison sells his interest to Whitney for $45,000 after the other two partners
approve Whitney as partner is:
A. Debit Edison, Capital $45,000; credit Whitney, Capital $45,000.
B. Debit Edison, Capital $40,000; credit Cash $40,000.
C. Debit Edison, Capital $40,000; debit Wright, Capital $2,500; debit Bell, Capital $2,500;
credit Whitney, Capital $45,000.
D. Debit Edison, Capital $40,000; credit Whitney, Capital $40,000.
E. Debit Edison, Capital $40,000; debit Cash $5,000; credit Whitney, Capital $45,000.
75. Wright, Bell, and Edison are partners and share income in a 2:5:3 ratio. The partnership’s
capital balances are as follows: Wright, $33,000, Bell $27,000 and Edison $40,000. Edison
decides to withdraw from the partnership, and the partners agree not to revalue the assets
upon Edison’s retirement. The journal entry to record Edison’s June 1 withdrawal from the
partnership if Edison is paid $40,000 for his equity is:
A. Debit Edison, Capital $40,000; credit Cash $40,000.
B. Debit Wright, Capital $20,000; Debit Bell, Capital $20,000; credit Cash $40,000.
C. Debit Wright, Capital $20,000; Debit Bell, Capital $20,000; credit Edison, Capital
$40,000.
D. Debit Edison, Capital $40,000; credit Wright, Capital $20,000; credit Bell, Capital
$20,000.
E. Debit Cash $40,000; credit Edison, Capital $40,000.
76. Hewlett and Martin are partners. Hewlett’s capital balance in the partnership is $64,000,
and Martin’s capital balance $67,000. Hewlett and Martin have agreed to share equally in
income or loss. The existing partners agree to accept Black with a 20% interest. Black will
invest $35,000 in the partnership. The bonus that is granted to Hewlett and Martin equals:
A. $900 each.
B. $1,500 each.
C. $600 each.
D. 600 to Hewlett; $900 to Martin.
E. $0, because Hewlett and Martin actually grant a bonus to Black.
77. Hewlett and Martin are partners. Hewlett’s capital balance in the partnership is $64,000,
and Martin’s capital balance $61,000. Hewlett and Martin have agreed to share equally in
income or loss. Hewlett and Martin agree to accept Black with a 25% interest. Black will
invest $35,000 in the partnership. The bonus that is granted to Black equals:
A. $5,000.
B. $2,500.
C. $6,667.
D. $3,333.
E. $0, because Black must actually grant a bonus to Hewlett and Martin.
78. Masters, Hardy, and Rowen are dissolving their partnership. Their partnership agreement
allocates income and losses equally among the partners. The current period’s ending capital
account balances are Masters, $15,000; Hardy, $15,000; Rowen, $(2,000). After all the assets
are sold and liabilities are paid, but before any contributions to cover any deficiencies, there is
$28,000 in cash to be distributed. Rowen pays $2,000 to cover the deficiency in his account.
The general journal entry to record the final distribution would be:
A. Debit Masters, Capital $15,000; debit Hardy, Capital $15,000; credit Cash $30,000.
B. Debit Masters, Capital $14,000; debit Hardy, Capital $14,000; credit Cash $28,000.
C. Debit Masters, Capital $15,000; debit Hardy, Capital $15,000; credit Rowen, Capital
$2,000; credit Cash $28,000.
D. Debit Cash $28,000; debit Rowen, Capital $2,000; credit Masters, Capital $15,000; credit
Hardy, Capital $15,000.
E. Debit Masters, Capital $9,334; debit Hardy, Capital $9,333; debit Rowen, Capital $9,333;
credit Cash $28,000.
79. Masters, Hardy, and Rowen are dissolving their partnership. Their partnership agreement
allocates income and losses equally among the partners. The current period’s ending capital
account balances are Masters, $15,000; Hardy, $15,000; Rowen, $30,000. After all the assets
are sold and liabilities are paid, but before any contributions to cover any deficiencies, there is
$54,000 in cash to be distributed. The general journal entry to record the final distribution
would be:
A. Debit Masters, Capital $18,000; debit Hardy, Capital $18,000; debit Rowen, Capital
$18,000; credit Cash $54,000.
B. Debit Masters, Capital $13,500; debit Hardy, Capital $13,500; debit Rowen, Capital
$27,000; credit Cash $54,000.
C. Debit Masters, Capital $15,000; debit Hardy, Capital $15,000; debit Rowen, Capital
$30,000; credit Gain from Liquidation $6,000; credit Cash $54,000.
D. Debit Cash $54,000; credit Rowen, Capital $13,500; credit Masters, Capital $13,500;
credit Hardy, Capital $27,000.
E. Debit Masters, Capital $15,000; debit Hardy, Capital $15,000; debit Rowen, Capital
$30,000; credit Retained Earnings $6000; credit Cash $54,000.
80. When a partnership is liquidated:
A. Noncash assets are distributed to partners.
B. Any gain or loss on liquidation is allocated to the partner with the highest capital account
balance.
C. Liabilities are paid or settled.
D. Any remaining cash is distributed to the partners equally.
E. The business may continue to operate.
81. A capital deficiency means that:
A. The partnership has a loss.
B. The partnership has more liabilities than assets.
C. At least one partner has a debit balance in his/her capital account.
D. At least one partner has a credit balance in his/her capital account.
E. The partnership has been sold at a loss.
82. When a partner is unable to pay a capital deficiency:
A. The partner must take out a loan to cover the deficient balance.
B. The deficiency is absorbed by the remaining partners before distribution of cash.
C. The partnership ends before distribution of cash.
D. The deficient partner is relieved of the liability.
E. The remaining partners must wait for the deficiency to be paid before cash is distributed.
83. Henry, Luther, and Gage are dissolving their partnership. Their partnership agreement
allocates each partner 1/3 of all income and losses. The current period’s ending capital
account balances are Henry, $45,000; Luther, $37,000; and Gage, $(5,000). After all assets
are sold and liabilities are paid, there is $77,000 in cash to be distributed. Gage is unable to
pay the deficiency. The journal entry to record the distribution should be:
A. Debit Henry, Capital $25,667; debit Luther, Capital $25,667; debit Gage, Capital $25,666;
credit Cash $77,000.
B. Debit Henry, Capital $42,500; debit Luther, Capital $34,500; credit Cash $77,000.
C. Debit Henry, Capital $45,000; debit Luther, Capital $37,000; credit Gage, Capital $5,000;
credit Cash $77,000.
D. Debit Cash $77,000, debit Gage, Capital $5,000, credit Henry, Capital $45,000, credit
Luther, Capital $37,000.
E. Debit Cash $77,000; credit Henry, Capital $25,667; credit Luther, Capital $25,667; credit
Gage, Capital $25,666.
84. Henry, Luther, and Gage are dissolving their partnership. Their partnership agreement
allocates each partner 1/3 of all income and losses. The current period’s ending capital
account balances are Henry, $45,000; Luther, $37,000; and Gage, $(5,000). After all assets
are sold and liabilities are paid, there is $77,000 in cash to be distributed. Gage is unable to
pay the deficiency. What amount of cash will Gage receive upon liquidation?
A. $25,667.
B. $20,667.
C. $30,667.
D. Gage will be invoiced for $5,000.
E. $0.
85. Fontaine and Monroe are forming a partnership. Fontaine invests a building that has a
market value of $250,000; the partnership assumes responsibility for a $75,000 note secured
by a mortgage on the property. Monroe invests $100,000 in cash and equipment that has a
market value of $55,000. For the partnership, the amounts recorded for the building and for
Fontaine’s Capital account are:
A. Building $250,000; Fontaine, Capital $250,000.
B. Building $175,000; Fontaine, Capital $175,000.
C. Building $250,000; Fontaine, Capital $75,000.
D. Building $250,000; Fontaine, Capital $175,000.
E. Building $175,000; Fontaine, Capital $75,000.
86. Fontaine and Monroe are forming a partnership. Fontaine invests a building that has a
market value of $250,000; the partnership assumes responsibility for a $75,000 note secured
by a mortgage on the property. Monroe invests $100,000 in cash and equipment that has a
market value of $55,000. For the partnership, the amounts recorded for Fontaine’s Capital
account and for Monroe’s Capital account are:
A. Fontaine, Capital $175; Monroe, Capital $45,000.
B. Fontaine, Capital $0; Monroe, Capital $100,000.
C. Fontaine, Capital $250,000; Monroe, Capital $100,000.
D. Fontaine, Capital $250,000; Monroe, Capital $155,000.
E. Fontaine, Capital $175,000; Monroe, Capital $155,000.
87. Fontaine and Monroe are forming a partnership. Fontaine invests a building that has a
market value of $250,000; the partnership assumes responsibility for a $75,000 note secured
by a mortgage on the property. Monroe invests $100,000 in cash and equipment that has a
market value of $55,000. For the partnership, the amounts recorded for total assets and for
total capital account are:
A. Total assets $405,000; total capital $330,000.
B. Total assets $350,000; total capital $350,000.
C. Total assets $350,000; total capital $275,000.
D. Total assets $305,000; total capital $230,000.
E. Total assets $405,000; total capital $305,000.
88. Cox, North, and Lee form a partnership. Cox contributes $180,000, North contributes
$150,000, and Lee contributes $270,000. Their partnership agreement calls for the income or
loss division to be based on the ratio of capital invested. If the partnership reports income of
$150,000 for its first year, what amount of income is credited to Cox’s capital account?
A. $50,000.
B. $64,286.
C. $45,000.
D. $36,000.
E. $60,000.
89. Cox, North, and Lee form a partnership. Cox contributes $180,000, North contributes
$150,000, and Lee contributes $270,000. Their partnership agreement calls for the income or
loss division to be based on the ratio of capital invested. If the partnership reports income of
$150,000 for its first year, what amount of income is credited to Lee’s capital account?
A. $50,000.
B. $67,500.
C. $45,000.
D. $54,000.
E. $60,000.
90. Cox, North, and Lee form a partnership. Cox contributes $180,000, North contributes
$150,000, and Lee contributes $270,000. Their partnership agreement calls for a 5% interest
allowance on the partner’s capital balances with the remaining income or loss to be allocated
equally. If the partnership reports income of $150,000 for its first year, what amount of
income is credited to North’s capital account?
A. $50,000.
B. $63,500.
C. $61,500.
D. $47,500.
E. $45,000.
91. Cox, North, and Lee form a partnership. Cox contributes $180,000, North contributes
$150,000, and Lee contributes $270,000. Their partnership agreement calls for a 5% interest
allowance on the partner’s capital balances with the remaining income or loss to be allocated
equally. If the partnership reports income of $174,000 for its first year, what amount of
income is credited to Lee’s capital account?
A. $58,000.
B. $57,000.
C. $61,500.
D. $55,500.
E. $48,000.
92. Mace and Bowen are partners and share equally in income or loss. Mace’s current capital
balance is $135,000 and Bowen’s is $120,000. Mace and Bowen agree to accept Kent with a
30% interest in the partnership. Kent invests $115,000 in the partnership. The amount
credited to Kent’s capital account is:
A. $111,000.
B. $115,000.
C. $92,500.
D. $120,000.
E. $119,000.
93. Mace and Bowen are partners and share equally in income or loss. Mace’s current capital
balance is $135,000 and Bowen’s is $120,000. Mace and Bowen agree to accept Kent with a
30% interest in the partnership. Kent invests $115,000 in the partnership. The balances in
Mace’s and Bowen’s capital accounts after admission of the new partner equal:
A. Mace $135,000; Bowen $120,000.
B. Mace $137,000; Bowen $122,000
C. Mace $133,000; Bowen $118,000.
D. Mace $139,000; Bowen $120,000.
E. Mace $135,000; Bowen $124,000.
94. Peters and Chong are partners and share equally in income or loss. Peters’ current capital
balance is $140,000 and Chong’s is $130,000. Peters and Chong agree to accept Aaron with a
30% interest in the partnership. Aaron invests $98,000 in the partnership. The balances in
Peters’s and Chong’s capital accounts after admission of the new partner equal:
A. Peters $140,000; Chong $130,000.
B. Peters $146,200; Chong $136,200.
C. Peters $145,000; Chong $135,000.
D. Peters $133,800; Chong $123,800.
E. Peters $166,027; Chong $156,027.
95. Peters and Chong are partners and share equally in income or loss. Peters’ current capital
balance is $140,000 and Chong’s is $130,000. Peters and Chong agree to accept Aaron with a
30% interest in the partnership. Aaron invests $98,000 in the partnership. The amount
credited to Aaron’s capital account is:
A. $81,000.
B. $102,600.
C. $110,400.
D. $98,000.
E. $114,533.
96. Peters, Chong, and Aaron are dissolving their partnership. Their partnership agreement
allocates each partner an equal share of all income and losses. The current period’s ending
capital account balances are Peters, $54,000; Chong, $42,000; and Aaron, $(2,000). After all
assets are sold and liabilities are paid, there is $94,000 in cash to be distributed. Aaron is
unable to pay the deficiency. The journal entry to record the distribution should be:
A. Debit Peters, Capital $54,000; debit Chong, Capital $40,000; credit Cash $94,000.
B. Debit Peters, Capital $54,000; debit Chong, Capital $42,000; credit Cash $96,000.
C. Debit Peters, Capital $53,000; debit Chong, Capital $41,000; credit Cash $94,000.
D. Debit Cash $94,000, debit Aaron, Capital $2,000, credit Peters, Capital $54,000, credit
Chong, Capital $42,000.
E. Debit Cash $94,000; credit Peters, Capital $47,000; credit Chong, Capital $47,000.
97. Barber and Atkins are partners in an accounting firm and share net income and loss
equally. Barber’s beginning partnership capital balance for the current year is $285,000, and
Atkins’ beginning partnership capital balance for the current year is $370,000. The
partnership had net income of $250,000 for the year. Barber withdrew $90,000 during the
year and Atkins withdrew $100,000. What is Barber’s ending equity?
A. $357,500
B. $362,500
C. $445,000
D. $320,000
E. $195,000
98. Barber and Atkins are partners in an accounting firm and share net income and loss
equally. Barber’s beginning partnership capital balance for the current year is $285,000, and
Atkins’ beginning partnership capital balance for the current year is $370,000. The
partnership had net income of $250,000 for the year. Barber withdrew $90,000 during the
year and Atkins withdrew $100,000. What is Barber’s return on equity?
A. 41.3%
B. 43.9%
C. 32.7%
D. 33.8%
E. 36.5%
99. Barber and Atkins are partners in an accounting firm and share net income and loss
equally. Barber’s beginning partnership capital balance for the current year is $285,000, and
Atkins’ beginning partnership capital balance for the current year is $370,000. The
partnership had net income of $250,000 for the year. Barber withdrew $90,000 during the
year and Atkins withdrew $100,000. What is Atkins’s return on equity?
A. 41.3%
B. 43.9%
C. 32.7%
D. 33.8%
E. 36.5%
100. Fellows and Marshall are partners in an accounting firm and share net income and loss
equally. Fellows’ beginning partnership capital balance for the current year is $185,000, and
Marshall’s beginning partnership capital balance for the current year is $260,000. The
partnership had net income of $350,000 for the year. Fellows withdrew $80,000 during the
year and Marshall withdrew $70,000. What is Marshall’s return on equity?
A. 67.3%
B. 60.3%
C. 78.7%
D. 54.3%
E. 56.0%
101. If a company wants to protect its three investors against personal liability risk, which of
the following business forms would not be a suitable option?
A. C Corporation
B. S Corporation
C. Limited liability partnership
D. Partnership
E. Limited liability company
102. Reno contributed $104,000 in cash plus equipment valued at $27,000 to the RD
Partnership. The journal entry to record the transaction for the partnership is:
A. Debit Cash $104,000; debit Equipment $27,000; credit RD Partnership, Capital $131,000.
B. Debit Cash $104,000; debit Equipment $27,000; credit Common Stock $131,000
C. Debit Cash $104,000; debit Equipment $27,000; credit Reno, Capital $131,000.
D. Debit Reno, Capital $131,000; credit RD Partnership, Capital $131,000.
E. Debit RD Partnership, Capital $131,000; credit Reno, Capital $131,000.
103. Bloom and Plant organize a partnership on January 1. Bloom’s initial investment consists
of $800 cash, $1,700 equipment and a $500 note payable reflecting a bank loan for the new
business. Plant’s initial investment is cash of $2,000. These amounts are the values agreed on
by both partners. The journal entry to record Bloom’s investment is:
A. Debit Cash $800; debit Equipment $1,700; credit Note Payable $500; credit Bloom,
Capital $2,000.
B. Debit Cash $2,000; credit Bloom, Capital $2,000
C. Debit Cash $800; debit Equipment $1,700; credit Bloom, Capital $2,500.
D. Debit Cash $800; debit Equipment $1,200; credit Bloom, Capital $2,000.
E. Debit Bloom, Capital $3,000; credit Common Stock $3,000
104. Bloom and Plant organize a partnership on January 1. Bloom’s initial investment consists
of $800 cash, $1,700 equipment and a $500 note payable reflecting a bank loan for the new
business. Plant’s initial investment is cash of $2,000. These amounts are the values agreed on
by both partners. The journal entry to record Plant’s investment is:
A. Debit Cash $1,500; debit Note Payable $500; credit Plant, Capital $2,000.
B. Debit Cash $2,000; credit Note Payable $500, credit Plant, Capital $1,500
C. Debit Bloom, Capital $2,000; credit Cash $2,000.
D. Debit Cash $2,500; credit Note Payable $500; credit Plant, Capital $2,500.
E. Debit Cash $2,000; credit Plant, Capital $2,000
105. Wallace and Simpson formed a partnership with Wallace contributing $60,000 and
Simpson contributing $40,000. Their partnership agreement calls for the income (loss)
division to be based on the ratio of capital investments. The partnership had income of
$150,000 for its first year of operation. When the Income Summary is closed, the journal
entry to allocate partner income is:
A. Debit Income Summary $150,000; credit Wallace, Capital $75,000; credit Simpson,
Capital $75,000.
B. Debit Wallace, Capital $75,000; debit Simpson, Capital $75,000; credit Income Summary
$150,000
C. Debit Income Summary $150,000; credit Wallace, Capital $90,000; credit Simpson,
Capital $60,000.
D. Debit Cash $150,000; credit Wallace, Capital $90,000; credit Simpson, Capital $60,000.
E. Debit Wallace, Capital $90,000; debit Simpson, Capital $60,000; credit Cash $150,000
106. Wallace and Simpson formed a partnership with Wallace contributing $60,000 and
Simpson contributing $40,000. Their partnership agreement calls for the income (loss)
division to be based on the ratio of capital investments. Wallace sold one-half of his
partnership interest to Prince for $55,000 when his capital balance was $78,000. The
partnership would record the admission of Prince into the partnership as:
A. Debit Wallace, Capital $55,000; credit Prince, Capital $55,000.
B. Debit Wallace, Capital $39,000; credit Prince, Capital $39,000.
C. Debit Prince, Capital $55,000; credit Wallace, Capital $55,000.
D. Debit Wallace, Capital $30,000; credit Prince, Capital $30,000.
E. Debit Wallace, Capital $39,000; debit Cash $16,000; credit Prince, Capital $55,000.
107. Wallace, Simpson, and Prince are partners and share income and losses in a 3:4:3 ratio.
The partnership’s capital balances are Wallace, $68,000; Simpson, $90,000; and Prince,
$42,000. Royal is admitted to the partnership on July 1 with a 20% equity and invests
$50,000. The partnership would record the admission of Royal into the partnership as:
A. Debit Wallace, Capital $15,000; debit Simpson, Capital, $20,000; debit Prince, Capital
$15,000; credit Royal, Capital $50,000.
B. Debit Cash $20,000; credit Prince, Capital $20,000.
C. Debit Cash $40,000; debit Wallace, Capital $3,000; debit Simpson, Capital, $4,000; debit
Prince, Capital $3,000; credit Royal, Capital $50,000.
D. Debit Cash $50,000; credit Royal, Capital $50,000.
E. Debit Cash $50,000; credit Simpson, Capital $10,000, credit Royal, Capital $40,000.
108. Match each of the following terms with the appropriate definitions.
A. S corporation
B. Mutual agency
C. Partnership
D. Unlimited liability of partners
E. Partnership contract
F. C corporation
G. General partner
H. Limited liability partnership
I. Statement of partners’ equity
J. Limited partnership
___ 1. A financial statement that shows total capital balances at the beginning of the
period, any additional investment by partners, the income or loss of the
period, the partners’ withdrawals, and the ending capital balances.
___ 2. A partnership that has two classes of partners, limited partners and general
partners. Limited partners have no personal liability beyond the amount they
invest in the partnership, and have no active role except as specified in the
partnership agreement.
___ 3. A partnership that protects innocent partners from malpractice or negligence
claims resulting from the acts of another partner.
___ 4. The legal relationship among general partners that makes each of them
personally responsible for paying the debts of the partnership if the
partnership cannot pay.
___ 5. The agreement between partners that sets terms under which the affairs of the
partnership are conducted.
___ 6. An unincorporated association of two or more persons to pursue a business
for profit as co-owners.
___ 7. A partner who assumes unlimited liability for the debts of the partnership.
___ 8. The legal relationship among partners whereby each partner can commit or
bind the partnership to any contract within the scope of the partnership’s
business.
___ 9. A corporation that does not qualify for nor elect to be treated as a partnership
for income tax purposes and therefore is subject to income taxes.
___ 10. A corporation with 100 or fewer stockholders that can elect to be treated as a
partnership for income tax purposes but retain the same limited liability as
other corporations.
1. I; 2. J; 3. H; 4. D; 5. E; 6. C; 7. G; 8. B; 9. F; 10. A
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McGraw-Hill Education.
D-64
Blooms: Remember
AACSB: Communication
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Decision Making
Difficulty: 1 Easy
Learning Objective: D-C1
Topic: Partnership Form of Organization
Short Answer Questions
109. Identify and discuss the key characteristics of partnerships. Also, identify other
organizations that possess partnership characteristics.
110. Define the partner return on equity ratio and explain how a specific partner would use
this ratio.
111. How are partners’ investments in a partnership recorded?
112. Discuss the options for the allocation of income and loss among partners, including with
and without a partnership agreement.
113. What are the ways that a new partner can be admitted to an existing partnership? Explain
how to account for the admission of the new partner under each of these circumstances.
114. What are the ways a partner can withdraw from a partnership? Explain how to account
for the withdrawal of a current partner from a partnership.
115. Explain the steps involved in the liquidation of a partnership.
116. What factors should be considered before establishing a partnership?
117. Cinema Products LP is organized as a limited partnership that sells movie props.
Information related to capital balances is given below. Compute the partner return on equity
for each limited partner. How would each partner evaluate the success of the partnership?
What would you recommend the partners do with respect to additional investments or
withdrawals?
Turner
Kelly
Total
Capital balance, beginning of year
890,000
570,000
1,460,000
Net income for current year 85,000 65,000 150,000
Withdrawals for current year 40,000 25,000 65,000
118. Cinema Products LP is organized as a limited partnership that sells movie props.
Information related to the capital balances is given below. Compute the partnership return on
equity.
Turner
Kelly
Total
Capital balance, beginning of year
890,000
570,000
1,460,000
Net income for current year 85,000 65,000 150,000
Withdrawals for current year 40,000 25,000 65,000
119. Caroline Meeks and Charlie Fox decide to form a partnership on August 1. Meeks
invests the following assets and liabilities in the new partnership:
Market Value
Land............................................................. $80,000
Building........................................................ 250,000
Note payable................................................ 114,000
The note payable is associated with the building and the partnership will assume
responsibility for the loan. Fox invested $100,000 in cash and $95,000 in equipment in the
new partnership. Prepare the journal entries to record the two partners’ original investments in
the new partnership.
120. Montez and Flair formed a partnership. Montez contributed $15,000 cash and accounts
receivable worth $11,000. Flair contributed cash of $5,000; inventory valued at $16,000; and
supplies valued at $2,000. Prepare the journal entries to record each partner’s investment in
the new partnership.
121. MacArthur, Strong, and Viet form a partnership. MacArthur contributes $190,000 cash
and Strong contributes $200,000 in cash. Viet contributes equipment worth $215,000. Prepare
the single journal entry to record the formation of this partnership.
122. Ranger and Sol formed a partnership with capital contributions of $150,000 and
$180,000, respectively. Their partnership agreement called for Ranger to receive a $60,000
annual salary allowance. They also agreed to allow each partner a share of income equal to
10% of their initial capital investments. The remaining income or loss is to be divided
equally. If the net income for the current year is $110,000, what are Ranger’s and Sol’s
respective shares?
Answer:
Ranger
Sol
Total
Net income...............................................
$110,000
Salary Allowance.....................................
$60,000
(60,000)
Interest allowance
$150,000 x 0.10 15,000 (15,000)
$180,000 x 0.10
18,000
(18,000
)
17,000
Remainder
Allocation of remainder 8,500 8,500 (17,000)
Total $83,500 $26,500 -0-
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Measurement
Difficulty: 3 Hard
Learning Objective: D-P2
Topic: Dividing Income or Loss
123. Bannister invested $110,000 and Wilder invested $99,500 in a new partnership. They
agreed to an annual interest allowance of 10% on the partners’ beginning-year capital balance,
with the balance of income or loss to be divided equally. Under this agreement, what are the
income or loss shares of the partners if the annual partnership income is $202,000?
124. Bannister invested $110,000 and Wilder invested $99,000 in a new partnership. Their
partnership agreement called for Wilder to receive a $70,000 annual salary allowance. They
also agreed to an annual interest allowance of 5% on the partners’ beginning-year capital
balance, with the balance of income or loss to be divided equally. Under this agreement, what
are the income or loss shares of the partners if the annual partnership income is $82,000?
125. Bannister invested $110,000 and Wilder invested $99,000 in a new partnership. Their
partnership agreement called for Wilder to receive a $70,000 annual salary allowance. Under
this agreement, what are the income or loss shares of the partners if the annual partnership
income is $90,000?
126. Fallon and Springer formed a partnership on January 1. Fallon contributed $90,000 cash
and equipment with a market value of $60,000. Springer’s investment consisted of: cash,
$30,000; inventory, $20,000; all at market values. Partnership net income for Year 1 and Year
2 was $75,000 and $120,000, respectively.
1. Determine each partner’s share of the net income for each year, assuming each of the
following independent situations:
(a) Income is divided based on the partners’ failure to sign an agreement.
(b) Income is divided based on a 2:1 ratio (Fallon: Springer).
(c) Income is divided based on the ratio of the partners’ original capital investments.
(d) Income is divided based on interest allowance of 12% on the original capital investments;
salary allowance to Fallon of $30,000 and Springer of $25,000; and the remainder to be
divided equally.
2. Prepare the journal entry to record the allocation of the Year 1 income under alternative (d)
above.
127. Lin and Coral invested $99,000 and $126,000, respectively, in a partnership they began
one year ago. Assuming the partnership earned $120,000 during the current year; compute
the share of the net income each partner should receive under each of these independent
assumptions.
1. The partnership contract specifies salary allowances of $45,000 to Lin and $60,000 to
Coral, and any balance shared equally.
Lin Coral Allocated
Net Income
Salary allowance
Remainder
Allocation of remainder
Total
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D-78
2. The partnership contract specifies salary allowances of $45,000 to Lin and $60,000 to
Coral, interest allowance of 10% on the partners’ beginning capital balance for the year.
Lin Coral Allocated
Net Income
Salary allowance
Interest allowance
Remainder
Allocation of remainder
Total
128. Glade, Marker, and Walters are partners with beginning-year capital balances of
$100,000, $50,000, and $50,000, respectively. Partnership net income for the year is $84,000.
Make the necessary journal entry to close Income Summary to the capital accounts if:
a. Partners agree to divide income based on their beginning-year capital balances.
b. Partners agree to divide income based on the ratio of 5:3:2 (Glade:Marker:Walters),
respectively.
c. Partnership agreement is silent as to division of income and less.
129. Glade, Marker, and Walters are partners with beginning-year capital balances of
$250,000, $150,000, and $100,000, respectively. Partnership net income for the year is
$192,000. Make the necessary journal entry to close Income Summary to the capital accounts
if partners agree to divide income based on their beginning-year capital balances.
130. Jakobs, Penn, and Lundt are partners with beginning-of-year capital balances of
$400,000, $320,000, and $160,000, respectively. The partners agreed to share income and
loss as follows: Salary of $30,000 to Jakobs, $50,000 to Penn, and $36,000 to Lundt. An
interest allowance of 8% on beginning-of-year capital balances. Any remaining balance is to
be divided equally. If partnership net income for the year is $190,000, determine each
partner’s share and make the appropriate journal entry to close the Income Summary to the
capital accounts.
131. Darien and Hayden agree to accept Kevin into their partnership. Kevin will contribute
$22,000 in cash. Prepare the journal entry to record this transaction.
132. Palmer withdraws from the FAP Partnership. The remaining partners agree to buy out
her share for her capital balance of $65,000. Prepare the journal entry to record the
withdrawal from the partnership.
133. Lemon and Parks are partners. On October 1, Lemon’s capital balance is $75,000, and
Parks’ capital balance is $125,000. With the partnership’s approval, Parks sells ½ of his
partnership interest to Tambling for $70,000. Prepare the journal entry to record this
transaction in the partnership records.
134. Leto and Duncan allow Gunner to purchase a 25% interest in their partnership for
$30,000 cash. Gunner has exceptional talents that will enhance the partnership. Leto’s and
Duncan’s capital account balances are $55,000 each. The partners have agreed to share
income or loss equally. Prepare the general journal entry to record the admission of Lepley to
the partnership.
135. Conklin plans to leave the CAP Partnership. The recorded value of his capital account is
$48,000. The remaining partners Arthurs and Preston agree to pay Conklin $40,000 cash and
Conklin accepts. The partners share income and loss equally. Prepare the general journal
entry to record the withdrawal from the partnership.
136. Conklin plans to leave the CAP Partnership. The recorded balance in her capital account
is $48,000. The remaining partners, Arthurs and Preston, agree to pay Conklin $58,000 cash
and Conklin accepts. The partners share income and loss equally. Prepare the journal entry to
record the transaction.
137. Kramer and Jones allow Sanders to purchase a 25% interest in their partnership for
$50,000 cash. Kramer and Jones both have capital balances of $55,000 each, and have agreed
to share income and loss equally. Prepare the journal entry to record the admission of Sanders
to the partnership.
138. The Redtail Partnership agrees to dissolve. The remaining cash balance after liquidating
partnership assets and liabilities is $70,000. The final capital account balances are: Paulson,
$35,000; Gray, $25,000; and Chang, $10,000. Prepare the journal entry to distribute the
remaining cash to the partners.
139. The Redtail Partnership agrees to dissolve. The cash balance after selling all assets and
paying all liabilities is $56,000. The final capital account balances are: Paulson, $33,000;
Gray, $27,000; and Chang, ($4,000). Chang agrees to pay $4,000 cash from personal funds to
settle his deficiency. Prepare the journal entries to record the transactions required to dissolve
this partnership.
140. The Redtail Partnership agrees to dissolve. The cash balance after selling all assets and
paying all liabilities is $60,000. The final capital account balances are: Paulson, $35,000;
Gray, $29,000; and Chang, ($4,000). Chang is unable to pay the capital deficiency. Prepare
the journal entries to record the transactions required to dissolve this partnership.
141. Sharon and Nancy formed a partnership by making capital contributions of $130,000 and
$195,000 respectively. They predict annual partnership income of $230,000 and are
considering the following alternative plans of sharing income and loss: (a) in the ratio of their
initial capital investments; or (b) salary allowances of $40,000 to Sharon and $35,000 to
Nancy; interest allowances of 12% on their initial capital investments; and the balance shared
equally. Assuming that both partners put about the same amount of time into the business,
which method of allocating income would be best?
142. Sharon and Nancy formed a partnership by making capital contributions of $130,000 and
$195,000 respectively. The annual partnership income of $230,000 is to be allocated
assuming a salary allowance of $40,000 to Sharon and $35,000 to Nancy; interest allowances
of 12% on their initial capital investments; and the balance shared equally. Prepare the entries
to record the initial capital investments, the allocation of net income, and close the partner’s
withdrawal accounts assuming that Sharon withdrew $50,000 and Nancy withdrew $45,000.
143. Kramer and Feldman Company is organized as a partnership. At the prior year-end,
Kramer’s equity balance was $352,000 and Feldman’s was $256,000. For the current year,
partnership net income is $137,000 ($77,000 allocated to Kramer and $60,000 allocated to
Feldman); withdrawals are $87,000 ($45,000 for Kramer and $42,000 for Feldman).
Compute the total partnership return on equity and the individual partner return on equity
ratios.
144. Masco, Short, and Henderson who are partners in the MSH Company share income and
loss in a 2:2:1 ratio. They plan to liquidate their partnership. At liquidation, their balance
sheet appears as follows. Prepare journal entries for (a) the sale of land and equipment sold as
a package for $500,000, (b) the allocation of the gain or loss, (c) the payment of the liabilities,
and (d) the distribution of cash to the individual partners.
MSH Company
Balance Sheet
January 31
Assets Liabilities and Equity
Cash $200,000 Accounts Payable $221,500
Equipment 200,000 Masco, Capital 210,000
Land
350,000
Short, Capital
178,000
Henderson, Capital 140,500
Total assets $750,000 Total liabilities and equity $750,000
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Measurement
Difficulty: 3 Hard
Learning Objective: D-P4
Topic: Liquidation of a Partnership
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
D-93
145. Tower, Knight, and Spears are partners who share income and loss in a 3:2:2 ratio. The
partnership’s capital balances are as follows: Tower, $332,000; Knight, $124,000; and Spears,
$214,000. Spears decides to withdraw from the partnership, and the partners agree not to
have the assets revalued upon Spears’ retirement. Prepare journal entries to record Spears’
withdrawal from the partnership under each of the following separate assumptions: Spears (a)
sells his interest to Conner for $200,000 after Tower and Knight approve the entry of Conner
as a partner; (b) is paid $214,000 in partnership cash for his equity; (c) is paid $205,000 in
partnership cash for his equity; (d) is paid $220,000 in partnership cash for his equity.
146. Tower, Knight, and Spears are partners who share income and loss in a 4:2:2 ratio. The
partnership’s capital balances are as follows: Tower, $292,000; Knight, $114,000; and Spears,
$194,000. Damsel is admitted to the partnership on March 1 with a 25% equity. Prepare the
journal entries to record Damsel’s entry into the partnership under each of the following
separate assumptions: Damsel invests (a) $200,000; (b) $180,000; and (c) $240,000.
147. On May 1, Gosworth and Jordan formed a partnership. Gosworth contributed cash of
$100,000 and equipment valued at $142,000. Jordan contributed land valued at $130,000 and
a building valued at $250,000. The partnership also assumed responsibility for Jordan’s
$120,000 long-term note payable associated with the land and building. The partners agreed
to share income as follows: Gosworth is to receive a salary allowance of $38,000, both are to
receive an annual interest allowance of 8% of their beginning-year capital investments, and
any remaining income or loss is to be shared equally. During the year, Gosworth withdrew
$40,000 and Jordan withdrew $42,000 cash. After the adjusting and closing entries are made
to the revenue and expense accounts at the end of the year, the Income Summary account had
a credit balance of $140,000. Prepare the journal entries to record (a) the partners’ initial
capital investments, (b) their cash withdrawals, and (c) closing of both the Withdrawals and
Income Summary accounts.
148. Mesner’s and Sanchez’s company is organized as a partnership. At the prior year-end,
Mesner’s equity balance was $258,000 and Sanchez’s was $212,000. For the current year,
partnership net income is $125,000 ($75,000 allocated to Mesner and $50,000 allocated to
Sanchez); withdrawals are $77,000 ($40,000 for Mesner and $37,000 for Sanchez). Compute
the total partnership return on equity and the individual partner return on equity ratios.
149. The life of a partnership is ____________________ in duration.
150. A ________________ is an unincorporated association of two or more people to pursue a
business for profit as co-owners.
151. __________________ means that partners can commit or bind the partnership to any
contract within the scope of the partnership business.
152. __________________ implies that each partner in a partnership can be called on to
personally pay a partnership’s debts.
153. A partnership that has at least two classes of partners, general and limited, allows the
limited partners to have no personal liability beyond the amounts they invest in the
partnership, and the limited partners have no active role except as specified in the partnership
agreement is a ___________________ partnership.
154. A partnership designed to protect innocent partners from malpractice or negligence
claims resulting from the acts of other partners is a ________________________ partnership.
155. A relatively new form of business organization that protects partners with limited
liability, allows limited partners to assume an active management role, and is taxed as a
partnership is a ______________________________
156. Partners in a partnership are not taxed on their withdrawals , but rather on
_____________________________.
157. Partner net income divided by average partner equity equals ______________________.
158. When a partner invests in a partnership, his/her capital account is __________ for the
invested amount.
159. During the closing process, partner’s capital accounts are _______________ for their
share of net income and _________________ for their share of net loss.
160. During the closing process, each partner’s withdrawals account is closed to
_________________________.
161. If partners agree on how to share income, but say nothing about losses, then losses are
shared ___________________.
162. A partner can be admitted into a partnership by _________________________ or by
__________________________________.
163. If a partner withdraws from a partnership and the recorded value of his or her equity is
overstated, then a bonus goes to _________________________; if the recorded value of the
withdrawing partner’s equity is understated, then a bonus goes to ____________________.
164. At least one partner having a debit balance in his/her capital account at the point of the
final distribution of cash is known as a _________________________.
