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57. Rice, Hepburn, and DiMarco formed a partnership with Rice contributing $60,000,
Hepburn contributing $50,000 and DiMarco 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 DiMarco's capital account?
A. $20,000.
B. $25,000.
C. $30,000.
D. $40,000.
E. $75,000.
58. Shelby and Mortonson formed a partnership with capital contributions of $300,000 and
$400,000, respectively. Their partnership agreement calls for Shelby 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 Shelby and Mortonson'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.
12-22
59. 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.
60. Nguyen invested $100,000 and Hansen invested $200,000 in a partnership. They agreed to
share incomes and losses by allowing a $60,000 per year salary allowance to Nguyen and a
$40,000 per year salary allowance to Hansen, 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 Nguyen; $52,500 to Hansen.
B. $35,000 to Nguyen; $70,000 to Hansen.
C. $57,500 to Nguyen; $47,500 to Hansen.
D. $42,500 to Nguyen; $62,500 to Hansen.
E. $70,000 to Nguyen; $60,000 to Hansen.
61. The partnership agreement for Smith, Wesson & Davis, a general partnership, provided
that profits be shared between the partners in the ratio of their financial contributions to the
partnership. Smith contributed $100,000, Wesson contributed $60,000 and Davis contributed
$20,000. In the partnership's first year of operation, it incurred a loss of $210,000. What
amount of the partnership's loss, rounded to the nearest dollar, should be absorbed by Smith?
A. $70,000
B. $116,667
C. $23,333
D. $105,000
E. $52,500
62. Regina Harrison is a partner in Pressed for Time. An analysis of Regina Harrison's capital
account indicates that during the most recent year, she withdrew $20,000 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. $124,000
B. $144,000
C. $192,000
D. $176,000
E. $134,000
63. The following information is available on Stewart 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 Stewart Enterprises: Stewart, Tedder and Armstrong. 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. Stewart = $108,000; Tedder = $54,000; Armstrong = $108,000.
B. Stewart = $90,000; Tedder = $90,000; Armstrong = $90,000.
C. Stewart = $204,000; Tedder = $102,000; Armstrong = $204,000.
D. Stewart = $84,000; Tedder = $102,000; Armstrong = $84,000.
E. Stewart = $60,000; Tedder = $30,000; Armstrong = $60,000.
64. A partner can withdraw from a partnership by:
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. All of the options are correct.
65. A bonus may be paid:
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. In all of the situations listed.
66. 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.
67. A partnership recorded the following journal entry:
Cash .................................................................................................... 70,000
B. Tanner, Capital ............................................................................ 10,000
R. Jackson, Capital .......................................................................... 10,000
H. Rivera, Capital…………………………………………….. 90,000
This entry reflects:
A. Acceptance of a new partner who invests $70,000 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 Tanner and Jackson.
E. Withdrawal of $10,000 each by Tanner and Jackson upon the admission of a new partner.
68. Groh and Jackson are partners. Groh's capital balance in the partnership is $64,000, and
Jackson's capital balance $61,000. Groh and Jackson have agreed to share equally in income
or loss. Groh and Jackson agree to accept Block with a 20% interest. Block will invest
$35,000 in the partnership. The bonus that is granted to Groh and Jackson equals:
A. $1,500 each.
B. $1,875 each.
C. $3,750 each.
D. 1,920 to Groh; $1,830 to Jackson.
E. $0, because Groh and Jackson actually grant a bonus to Block.
69. Groh and Jackson are partners. Groh's capital balance in the partnership is $64,000, and
Jackson's capital balance $61,000. Groh and Jackson have agreed to share equally in income
or loss. Groh and Jackson agree to accept Block with a 25% interest. Block will invest
$35,000 in the partnership. The bonus that is granted to Block equals:
A. $5,000.
B. $2,500.
C. $6,667.
D. $3,333.
E. $0, because Block must actually grant a bonus to Groh and Jackson.
70. Mack, Harris, and Huss are dissolving their partnership. Their partnership agreement
allocates income and losses equally among the partners. The current period's ending capital
account balances are Mack, $15,000; Harris, $15,000; Huss, $(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. Huss pays $2,000 to cover the deficiency in his account.
The general journal entry to record the final distribution would be:
A. Debit Mack, Capital $15,000; debit Harris, Capital $15,000; credit Cash $30,000.
B. Debit Mack, Capital $14,000; debit Harris, Capital $14,000; credit Cash $28,000.
C. Debit Mack, Capital $15,000; debit Harris, Capital $15,000; credit Huss, Capital $2,000;
credit Cash $28,000.
D. Debit Cash $28,000; debit Huss, Capital $2,000; credit Mack, Capital $15,000; credit
Harris, Capital $15,000.
E. Debit Mack, Capital $9,334; debit Harris, Capital $9,333; debit Huss, Capital $9,333;
credit Cash $28,000.
71. When a partnership is liquidated:
A. Noncash assets are converted to cash.
B. Any gain or loss on liquidation is allocated to the partners' capital accounts using the
income and loss sharing ratio.
C. Liabilities are paid or settled.
D. Any remaining cash is distributed to the partners based on their capital balances.
E. All of the choices are correct.
72. 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.
73. 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.
74. Sam, Bart, and Lex 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 Sam, $45,000; Bart, $37,000; and Lex, $(5,000). After all assets are sold and
liabilities are paid, there is $77,000 in cash to be distributed. Lex is unable to pay the
deficiency. The journal entry to record the distribution should be:
A. Debit Sam, Capital $25,667; debit Bart, Capital $25,667; debit Lex, Capital $25,666; credit
Cash $77,000.
B. Debit Sam, Capital $42,500; debit Bart, Capital $34,500; credit Cash $77,000.
C. Debit Sam, Capital $45,000; debit Bart, Capital $37,000; credit Lex, Capital $5,000; credit
Cash $77,000.
D. Debit Cash $77,000, debit Lex, Capital $5,000, credit Sam, Capital $45,000, credit Bart,
Capital $37,000.
E. Debit Cash $77,000; credit Sam, Capital $25,667; credit Bart, Capital $25,667; credit Lex,
Capital $25,666.
75. Badger and Fox are forming a partnership. Badger invests a building that has a market
value of $350,000; the partnership assumes responsibility for a $125,000 note secured by a
mortgage on the property. Fox invests $100,000 in cash and equipment that has a market
value of $75,000. For the partnership, the amounts recorded for the building and for Badger’s
Capital account are:
A. Building $350,000; Badger, Capital $350,000.
B. Building $225,000; Badger, Capital $225,000.
C. Building $225,000; Badger, Capital $125,000.
D. Building $350,000; Badger, Capital $225,000.
E. Building $350,000; Badger, Capital $300,000.
76. Badger and Fox are forming a partnership. Badger invests a building that has a market
value of $350,000; the partnership assumes responsibility for a $125,000 note secured by a
mortgage on the property. Fox invests $100,000 in cash and equipment that has a market
value of $75,000. For the partnership, the amounts recorded for Badger’s Capital account and
for Fox’s Capital account are:
A. Badger, Capital $350,000; Fox, Capital $175,000.
B. Badger, Capital $225,000; Fox, Capital $100,000.
C. Badger, Capital $225,000; Fox, Capital $75,000.
D. Badger, Capital $350,000; Fox, Capital $100,000.
E. Badger, Capital $225,000; Fox, Capital $175,000.
77. Badger and Fox are forming a partnership. Badger invests a building that has a market
value of $350,000; the partnership assumes responsibility for a $125,000 note secured by a
mortgage on the property. Fox invests $100,000 in cash and equipment that has a market
value of $75,000. For the partnership, the amounts recorded for total assets and for total
capital account are:
A. Total assets $525,000; total capital $400,000.
B. Total assets $400,000; total capital $400,000.
C. Total assets $650,000; total capital $650,000.
D. Total assets $400,000; total capital $525,000.
E. Total assets $525,000; total capital $525,000.
78. Smith, West, and Krug form a partnership. Smith contributes $180,000, West contributes
$150,000, and Krug 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 $175,000 for its first year, what amount of income is credited to Smith’s capital account?
A. $43,750.
B. $78,750.
C. $52,500.
D. $58,333.
E. $60,000.
79. Smith, West, and Krug form a partnership. Smith contributes $180,000, West contributes
$150,000, and Krug 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 $175,000 for its first year, what amount of income is credited to Krug’s capital account?
A. $43,750.
B. $78,750.
C. $52,500.
D. $58,333.
E. $60,000.
80. Smith, West, and Krug form a partnership. Smith contributes $180,000, West contributes
$150,000, and Krug 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 West’s capital account?
A. $58,000.
B. $57,000.
C. $61,500.
D. $55,500.
E. $48,000.
81. Smith, West, and Krug form a partnership. Smith contributes $180,000, West contributes
$150,000, and Krug 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 Krug’s capital account?
A. $58,000.
B. $57,000.
C. $61,500.
D. $55,500.
E. $48,000.
12-34
82. Chase and Hatch are partners and share equally in income or loss. Chase’s current capital
balance is $135,000 and Hatch’s is $120,000. Chase and Hatch agree to accept Flax with a
30% interest in the partnership. Flax invests $115,000 in the partnership. The amount
credited to Flax’s capital account is:
A. $111,000.
B. $115,000.
C. $92,500.
D. $120,000.
E. $119,000.
83. Chase and Hatch are partners and share equally in income or loss. Chase’s current capital
balance is $135,000 and Hatch’s is $120,000. Chase and Hatch agree to accept Flax with a
30% interest in the partnership. Flax invests $115,000 in the partnership. The balances in
Chase’s and Hatch’s capital accounts after admission of the new partner equal:
A. Chase $135,000; Hatch $120,000.
B. Chase $137,000; Hatch $122,000
C. Chase $133,000; Hatch $118,000.
D. Chase $139,000; Hatch $120,000.
E. Chase $135,000; Hatch $124,000.
84. Jane and Castle are partners and share equally in income or loss. Jane’s current capital
balance is $140,000 and Castle’s is $130,000. Jane and Castle agree to accept Sean with a
30% interest in the partnership. Sean invests $108,000 in the partnership. The balances in
Jane’s and Castle’s capital accounts after admission of the new partner equal:
A. Jane $140,000; Castle $130,000.
B. Jane $142,700; Castle $132,700.
C. Jane $145,000; Castle $135,000.
D. Jane $137,300; Castle $127,300.
E. Jane $135,000; Castle $124,000.
85. Jane and Castle are partners and share equally in income or loss. Jane’s current capital
balance is $140,000 and Castle’s is $130,000. Jane and Castle agree to accept Sean with a
30% interest in the partnership. Sean invests $108,000 in the partnership. The amount
credited to Sean’s capital account is:
A. $108,000.
B. $102,600.
C. $110,500.
D. $115,000.
E. $113,400.
86. Jane, Castle, and Sean 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 Jane, $54,000; Castle, $42,000; and Sean, $(6,000). After all
assets are sold and liabilities are paid, there is $90,000 in cash to be distributed. Sean is
unable to pay the deficiency. The journal entry to record the distribution should be:
A. Debit Jane, Capital $54,000; debit Castle, Capital $36,000; credit Cash $90,000.
B. Debit Jane, Capital $54,000; debit Castle, Capital $42,000; credit Cash $96,000.
C. Debit Jane, Capital $51,000; debit Castle, Capital $39,000; credit Cash $90,000.
D. Debit Cash $90,000, debit Sean, Capital $6,000, credit Jane, Capital $54,000, credit Castle,
Capital $42,000.
E. Debit Cash $90,000; credit Jane, Capital $30,000; credit Castle, Capital $30,000; credit
Sean, Capital $30,000.
87. Nee High and Low Jack are partners in an accounting firm and share net income and loss
equally. High’s beginning partnership capital balance for the current year is $285,000, and
Jack’s beginning partnership capital balance for the current year is $370,000. The partnership
had net income of $250,000 for the year. High withdrew $90,000 during the year and Jack
withdrew $100,000. What is High’s return on equity?
A. 41.3%
B. 43.9%
C. 32.7%
D. 33.8%
E. 36.5%
88. Nee High and Low Jack are partners in an accounting firm and share net income and loss
equally. High’s beginning partnership capital balance for the current year is $285,000, and
Jack’s beginning partnership capital balance for the current year is $370,000. The partnership
had net income of $250,000 for the year. High withdrew $90,000 during the year and Jack
withdrew $100,000. What is Jack’s return on equity?
A. 41.3%
B. 43.9%
C. 32.7%
D. 33.8%
E. 36.5%
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 responsible for
paying the debts of the partnership if the other partners are unable to pay their shares.
___ 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 that meets special tax qualifications so as to be treated like a
partnership for income tax purposes.
12-39
90. Identify and discuss the key characteristics of partnerships. Also, identify other
organizations that possess the positive aspects of both partnerships and corporations.
91. Define the partner return on equity ratio and explain how a specific partner would use this
ratio.
92. How are partners' investments in a partnership recorded?
93. Discuss the options for the allocation of income and loss among partners, including with
and without a partnership agreement.
94. 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.
