Chapter 13—Partnerships: Characteristics, Formation, and
Accounting for Activities Key
1. The characteristic of a partnership where specific assets contributed by a partner lose their identity as to
source and become shared property of the partnership is:
2. The characteristic of a partnership where a partner is an agent for other partners and the partnership when
transacting partnership business is:
3. Which of the following statements is true when comparing corporations and partnerships?
4. A partnership that consists of two classes of partners, one that participates in management of the company
and have unlimited liability, and another that does not participate in management and whose liability is limited
to a stated amount is a:
5. A partnership where all partners may participate in management of the company, but whose personal liability
is limited to that resulting from their own actions or those who are acting under their direct supervision is a:
6. Which of the following is not a characteristic of a partnership consistent with the proprietary theory?
7. Which of the following is not a characteristic of the proprietary theory that influences accounting for
partnerships?
8. Which of the following is not an advantage of a partnership over a corporation?
9. Under the entity theory, a partnership is
10. The articles of partnership should include all but the following:
11. The Uniform Partnership Act
12. Taylor and Tanner formed a partnership. Taylor contributed $50,000 in cash. Tanner contributed land and
buildings he purchased for $50,000 some time ago. His tax basis in the property is now $30,000, although it
was recently appraised for $70,000. There is a $15,000 mortgage attached to the building that the partnership
will assume. What is the amount of Tanner’s capital account after his contribution?
13. Partnership drawings are
14. Partner Alta had a capital balance on January 1, 2008 of $45,000 and made additional capital contributions
during 2008 totaling $50,000. During the year 2008, Alta withdrew $8,000 per month. Alta’s post-closing
capital balance on December 31, 2008 is $30,000. Alta’s share of 2008 partnership income is ____.
15. For financial accounting purposes, assets of an individual partner contributed to a partnership are recorded
by the partnership at
16. A partnership has the following accounting amounts:
(1)
Sales $70,000
(2)
Cost of Goods Sold = $40,000
(3)
Operating Expenses = $10,000
(4)
Salary allocations to partners = $13,000
(5)
Interest paid to banks = $2,000
(6)
Partners’ withdrawals = $8,000
Partnership net income (loss) is ____.
17. When partnership profits are allocated based on partnership capital, the allocation should be based upon:
18. Which of the following best describes the use of interest on invested capital as a means of allocating
profits?
19. Partner A began the year with $20,000 in capital. On June 1, 2008, the partner contributed another $20,000.
On September 1, 2008, the partner withdrew $15,000 from the partnership. Withdrawals in excess of $5,000 are
charged to the partner’s capital account. The partnership’s fiscal year end is December 31. The annual weighted-
average capital balance is ____.
20. Jolly is a partner in the HoHoHo Partnership. The articles of partnership states that Jolly’s share of
partnership income include 10% of his weighted average capital. he may withdraw $12,000 before withdrawals
are offset against his capital balance. His capital activity is as follows:
Beginning balance, January 1
$20,000
Withdrawal, February 1
5,000
Contribution, May 1
10,000
Withdrawal, June 1
5,000
Withdrawal, August 1
5,000
Contribution, October 1
8,000
What is the weighted average balance of Jolly’s capital account?
21. Which of the following statements is true concerning the treatment of salaries in partnership accounting?
22. Which of the following would be least likely to be used as a means of allocating profits among partners who
are active in the management of the partnership?
23. Maxwell is a partner and has an annual salary of $30,000 per year, but he actually draws $3,000 per month.
The other partner in the partnership has an annual salary of $40,000 and draws $4,000 per month. What is the
total annual salary that should be used to allocate annual net income among the partners?
24. Partners active in a partnership business should have their share of partnership profits based on the
following
25. Ace & Barnes partnership has income of $110,000 and Partner A is to be allocated a bonus of 10% of
income after the bonus, Partner A’s bonus would be ____.
26. Partners A and B have a profit and loss agreement with the following provisions: salaries of $20,000 and
$25,000 for A and B, respectively; a bonus to A of 10% of net income after bonus; and interest of 20% on
average capital balances of $40,000 and $50,000 for A and B, respectively. Any remainder is split equally. If
the partnership had net income of $88,000, how much should be allocated to Partner A?
27. Maxwell is trying to decide whether to accept a salary of $60,000 or a salary of $25,000 plus a bonus of
20% of net income after the bonus as a means of allocating profit among the partners. What amount of income
would be necessary so that Maxwell would consider the choices to be equal?
28. Partners A and B have a profit and loss agreement with the following provisions: salaries of $30,000 and
$45,000 for A and B, respectively; a bonus to A of 12% of net income after salaries and bonus; and interest of
10% on average capital balances of $50,000 and $65,000 for A and B, respectively. One-fourth of any
remaining profits are allocated to A and the balance to B. If the partnership had net income of $108,600, how
much should be allocated to Partner A?
29. Maxwell is trying to decide whether to accept a salary of $60,000 or a salary of $25,000 plus a bonus of
20% of net income after salaries and bonus as a means of allocating profit among the partners. Salaries
traceable to the other partners are estimated to be $75,000. What amount of income would be necessary so that
Maxwell would consider the choices to be equal?
30. Partners Acker, Becker & Checker have the following profit and loss agreement:
(1)
Acker & Becker receive salaries of $40,000 each
(2)
Checker gets a bonus of 10 percent of net income after salaries and bonus (the bonus is zero if salaries exhaust net income)
(3)
Remaining profits are shared by Acker, Becker & Checker in the following ratios respectively: 3:4:3.
The partnership had a net income of $91,000. How much should be allocated to Checker?
31. Partners Tuba and Drum share profits and losses of their partnership equally after 1) annual salary
allowances of $25,000 for Tuba and $20,000 for Drum and 2) 10% interest is provided on average capital
balances. During 2008, the partnership had earnings of $50,000; Tuba’s average capital balance was $60,000
and Drum’s average capital balance was $90,000. How should the $50,000 of earnings be divided?
Tuba Drum
32. A partnership agreement calls for allocation of profits and losses by salary allocations, a bonus allocation,
interest on capital, with any remainder to be allocated by preset ratios. If a partnership has a loss to allocate,
generally which of the following procedures would be applied?
33. Partners A and B have a profit and loss agreement with the following provisions: salaries of $40,000 and
$45,000 for A and B, respectively; a bonus to A of 10% of net income after salaries and bonus; and interest of
15% on average capital balances of $40,000 and $60,000 for A and B, respectively. One-third of any remaining
profits or losses are allocated to B and the balance to A. If the partnership had net income of $52,000, how
much should be allocated to Partner A?
34. Partners Tuba and Drum share profits and losses of their partnership equally after 1) annual salary
allowances of $25,000 for Tuba and $20,000 for Drum and 2) 10% interest is provided on average capital
balances. During 2008, the partnership had earnings of $50,000; Tuba’s average capital balance was $60,000
and Drum’s average capital balance was $90,000. What would be the correct answer if an order of priority was
in the partnership agreement whereby salary allowances have a higher priority than interest on capital
allocations?
Tuba Drum
35. Partners A and B have a profit and loss agreement with the following provisions: salaries of $41,600 and
$38,400 for A and B, respectively; a bonus to A of 10% of net income after salaries and bonus; and interest of
10% on average capital balances of $20,000 and $35,000 for A and B, respectively. One-third of any remaining
profits are allocated to A and the balance to B. If the partnership had a net income of $36,000, how much should
be allocated to Partner A, assuming that the provisions of the profit and loss agreement are ranked by order of
priority starting with salaries?
36. Tupper and Tolin have decided to form a partnership to provide environmental testing services to industry.
The individuals will share profits equally and have conveyed the following assets and liabilities to the
partnership:
Tupper Tolin
Fair Value
Book Value
Fair Value
Book Value
Cash
$20,000
$20,000
$ –
$ –
Equipment basis
12,000
10,000
34,000
40,000
Vehicles basis
6,000
6,000
Notes payable*
8,000
6,000
20,000
22,000
* Associated with equipment
Required:
1) Calculate the capital balance of each partner in the partnership subsequent to the contributions.
2) Prepare the journal entry necessary to record the partners’ contributions.
Tupper
Tolin
Cash
$20,000
Equipment
12,000
$ 34,000
Vehicles
6,000
Notes payable
(8,000)
(20,000)
Basis of partner’s interest
$24,000
$20,000
Cash
20,000
Equipment
46,000
Vehicles
6,000
Notes payable
28,000
Tupper, Capital
24,000
Tolin, Capital
20,000
37. The Amato, Bergin, Chelsey partnership profit allocation agreement calls for salaries of $15,000 and
$30,000 for Amato & Bergin, respectively. Amato is also to receive a bonus equal to 10% of partnership
income after her bonus. Interest at the rate of 10% is to be allocated to Chelsey based on his weighted average
capital after draws. Any remaining profit (or loss) is to be allocated equally among the partners. Chelsey began
the current year with a capital balance of $54,000 and had the following subsequent activity:
March 1
Withdraw
$20,000
July 1
Withdraw
$10,000
September 1
Contribute
$5,000
October 1
Contribute
$12,000
Required:
Amato
Bergin
Chelsey
Total Distrib
Bal to Dist
Net income
66,000
Salaries
15,000
30,000
–
45,000
21,000
6,000
6,000
15,000
Interest
3,700
3,700
11,300
Bal equally
3,767
3,767
3,766
11,300
–
24,767
33,767
7,466
66,000
= 6,000
months
weighted
beg bal
54,000
2
9,000
(20,000)
34,000
4
11,333
(10,000)
24,000
2
4,000
5,000
29,000
1
2,417
12,000
41,000
3
10,250
37,000
´ 10% = 3,700
38. Carey and Drew formed a partnership on January 1, 2008. Carey invested $100,000, Drew $70,000. Each
withdrew $12,000 on each of the following dates during 2008: February 1, August 1, and November 1. These
withdrawals in total were equal to salaries for the year. Interest of 8 percent was to be paid partners on the basis
of their average capital balances excluding net income. Additionally, Carey was to get a 20 percent bonus based
on partnership net income after the bonus, but before the salaries and interest.
Any remaining profit (or loss) was to be allocated equally among the partners.
Required:
1) If partnership net income was $150,000, how was it to be allocated between Carey and Drew?
Order of allocation: bonus, salaries, interest. Round to the nearest whole dollar.
2) Prepare the journal entry to distribute income to the partners.
39. Matt and Jeff organized their partnership on 1/1/00. The following entries were made into their capital
accounts during 00:
Matt
Debit
Credit
Balance
1/1
35,000
35,000
6/1
10,000
45,000
10/1
5,000
50,000
Jeff
1/1
25,000
25,000
3/1
10,000
35,000
9/1
10,000
25,000
11/1
5,000
20,000
12/1
8,000
28,000
If partnership profits for the year equaled $66,000, indicate the allocations between the partners under the following independent profit-sharing
allocation conditions:
a.
Interest of 10% is allocated on weighted average capital balance and the remainder is divided equally
b.
A salary of $9,000 will be allocated to Jeff; 10% interest on ending capital is allocated to the partners; remainder is divided 60/40 to Matt
and Jeff, respectively
c.
Salaries are allocated to Matt and Jeff in the amount of $10,000 and $15,000, respectively and the remainder is allocated in proportion to
weighted average capital balances
d.
A bonus of 10% of partnership profits after bonus is credited to Matt, a salary of $35,000 is allocated to Jeff, a $20,000 salary is allocated
to Matt, 10% interest on weighted capital is allocated, and remainder is split equally
Weighted Average Capital Calculation:
Matt
Cap Bal
# months
Gross Cap
1/1 to 6/1
35,000
5
175,000
6/1 to 10/1
45,000
4
180,000
10/1 to 12/31
50,000
3
150,000
Total
505,000
Average
42,083
Jeff
Cap Bal
# months
Gross Cap
1/1 to 3/1
25,000
2
50,000
3/1 to 9/1
35,000
6
210,000
9/1 to 11/1
25,000
2
50,000
11/1 to 12/1
20,000
1
20,000
12/1 to 12/31
28,000
1
28,000
Total
358,000
Average
29,833
40. Olsen and Katch organized the OK Partnership on 1/1/01. The following entries were made into their capital
accounts during 01:
Olsen
Debits
Credits
1/1
20,000
4/1
5,000
10/1
5,000
Katch
1/1
40,000
3/1
10,000
9/1
10,000
11/1
10,000
The partnership agreement called for the following in the allocation of partnership profits and losses:
Salaries of $48,000 and $36,000 would be allocated to Olsen and Katch, respectively
Interest of 8% on average capital balances will be allocated
Katch will receive a bonus of 10% on all partnership billings in excess of $300,000
Any remaining profits/losses will be allocated 60/40 to Olsen and Katch, respectively.
Required (account for each situation independently):
a.
Determine the distribution of partnership net income. Assume the following priority of allocation: interest, bonus, salaries, then remaining
assuming partnership income of $85,000; partnership billings amounted to $400,000
b.
Determine the distribution of partnership net income of $165,000 on billings of $400,000. No specific priority is given to any of the
allocation criteria.
Olsen
Katch
Total
Remainder
Available
85,000
Interest (1)
$ 2,000
$ 2,400
$ 4,400
80,600
Bonus (2)
10,000
10,000
70,600
Salaries (3)
40,343
30,257
70,600
0
Subtotals:
$42,343
$42,657
$85,000
Olsen:
Capital
Gross
Balance
# of Months
Capital
1/1 to 4/1
20,000
3
60,000
4/1 to 10/1
25,000
6
150,000
10/1 to 12/31
30,000
3
90,000
Total
300,000
Average
25,000
41. Van and Shapiro formed a partnership. As part of the formation, Van contributed equipment whose cost to
her was $60,000, with accumulated depreciation for tax purposes of $36,000. The fair value of the equipment
was $40,000. The partnership assumed $10,000 of Shapiro’s personal debts when she was admitted into the
partnership.
After one year of operation, the partnership had the following partial trial balance:
Debit
Credit
Van, Capital
70,000
Shapiro, Capital
95,000
Van, Withdrawals
15,000
Shapiro, Withdrawals
14,000
Service Revenue
300,000
Salaries Expense (to employees)
100,000
Rent Expense
36,000
Supplies Expense
28,000
Other Operating Expenses
15,000
Partners split profits as follows:
(1)
A salary of $30,000 is paid to Van.
(2)
Remaining profits (or losses) are split 40% to Van, the remainder to Shapiro.
Required:
Calculate the two partners’ ending capital balances.
Allocation of Net Income:
Total
Van
Shapiro
Service revenue
$300,000
Salaries expense
(100,000)
Rent expense
(36,000)
Supplies expense
(28,000)
Other operating expenses
(15,000)
$121,000
Allocation of Salary:
(30,000)
$30,000
Subtotal:
$ 91,000
$30,000
$ 0
Sharing of Remainder 40:60
(91,000)
36,400
54,600
Allocation of Net Income:
$ 0
$66,400
$54,600
Partners’ Capital
Total
Van
Shapiro
Capital, Beginning
$165,000
$ 70,000
$ 95,000
Net Income
121,000
66,400
54,600
Less: Withdrawals:
(29,000)
(15,000)
(14,000)
Capital, Ending
$257,000
$121,400
$135,600
42. Cable and Jones are considering forming a partnership whereby profits will be allocated through the use of
salaries and bonuses. Bonuses will be 10% of net income after total salaries and total bonuses. Cable will
receive a salary of $30,000 and a 10% bonus. Jones has the option of receiving a salary of $40,000 and a 10%
bonus or simply receiving a salary of $52,000.
Required:
Determine the level of income that would be necessary so that Jones would be indifferent to the profit-sharing
option selected.
43. There are several differences between a partnership and a corporation. Describe these differences and
comment as to whether each is apparent upon review of the financial statements.
44. While the lack of formality may be viewed as an advantage of a partnership over a corporation, it is still
necessary to plan for various factors affecting the partnership. Therefore, it is advisable for the partners to
develop a written partnership agreement or articles of partnership.
1) List seven provisions that should be included in the articles of partnership besides the partnership name
and address, the names of the partners and the effective date of the partnership.
2) Discuss why the articles of partnership are important.
45. Barnes and Noble, both lawyers, have decided to form a partnership. They have asked your advice on how
the profits and losses should be divided and have provided you with the following information:
Initial Capital Contribution:
Barnes
$20,000
Noble
$80,000
Time Devoted to Business Operations:
Barnes
75%
Noble
100%
Personal facts:
Barnes has an excellent reputation in the community and is very well known. Substantially all new client will come from her efforts.
Noble has a very strong technical and operational background, and is an excellent supervisor of staff lawyers who are expected to do more of the
legal research and initial preparation of legal documentation.
Required:
How would you advise the partners to share in profits and losses?
46. Turner, Ike, and Gibson formed a partnership in 2009 that provided for each member to receive a salary of
$20,000. Gibson was to receive a bonus of 10% of partnership income after the bonus. Interest on ending capital
balances of 10% was also used as a component for allocating profits to Turner and Gibson. Any remaining
profits/losses were to be allocated 30%, 30%, and 40% for Turner, like, and Gibson, respectively. In early 2010,
it was discovered that the 2009 income of $54,000 was overstated by $22,000. Turner and Gibson suggest that
the error be offset against the 2010 income. Ike argued that they are being harmed by this decision. Discuss the
merits of Ike’s position.