121)
Caitlin, Chris, and Molly are partners and share income and losses in a 3:4:3 ratio. The
partnership’s capital balances are Caitlin, $120,000; Chris, $80,000; and Molly, $100,000. Paul is
admitted to the partnership on July 1 with a 20% equity and invests $160,000. The balance in
Caitlin’s capital account immediately after Paul’s admission is:
A) $140,400 B) $107,200 C) $120,400 D) $99,600 E) $160,000
122)
Caitlin, Chris, and Molly are partners and share income and losses in a 3:4:3 ratio. The
partnership’s capital balances are Caitlin, $120,000; Chris, $80,000; and Molly, $100,000. Paul is
admitted to the partnership on July 1 with a 20% equity and invests $60,000. The balance in Paul’s
capital account immediately after his admission is:
A) $68,000 B) $300,000 C) $92,000 D) $72,000 E) $160,000
83
123)
Caitlin, Chris, and Molly are partners and share income and losses in a 3:4:3 ratio. The
partnership’s capital balances are Caitlin, $120,000; Chris, $80,000; and Molly, $100,000. Paul is
admitted to the partnership on July 1 with a 20% equity and invests $60,000. The balance in
Caitlin’s capital account immediately after Paul’s admission is:
A) $60,000 B) $123,600 C) $72,000 D) $120,000 E) $116,400
SHORT ANSWER QUESTIONS
124)
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.
ESSAY QUESTIONS
125)
Identify and discuss the key characteristics of partnerships. Also, identify other organizations that
possess partnership characteristics.
126)
Define the partner return on equity ratio and explain how a specific partner would use this ratio.
127)
How are partners’ investments in a partnership recorded?
128)
Discuss the options for the allocation of income and loss among partners, including with and
without a partnership agreement.
129)
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.
130)
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.
131)
Explain the steps involved in the liquidation of a partnership.
132)
What factors should be considered before establishing a partnership?
133)
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
1 Cash
134)
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
135)
Caroline Meeks and Charlie Fox decide to form a partnership on August 1. Meeks invests the
following assets and liabilities in the new partnership:
Land
Building
Note payable
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.
136)
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.
137)
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.
138)
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?
139)
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?
92
140)
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?
141)
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?
142)
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.
Net income
Salary allowance
Allocation of remainder
143)
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
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
144)
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.
145)
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.
146)
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.