Chapter 14—Partnerships: Ownership Changes and Liquidations
Key
1. Changes in partnership ownership are presumed to be arm’s length transactions that may require which of the
following actions?
2. The bonus method
3. Callie is admitted to the Adams & Beal Partnership under the bonus method. Callie contributes cash of
$20,000 and non-cash assets with a market value of $30,000 and book value of $15,000 in exchange for a 20%
ownership interest in the new partnership. Prior to the admission of Callie, the capital of the existing partnership
was $130,000 and an appraisal showed the partnership net assets were fairly stated. What will be Callie’s initial
capital balance?
4. Assume the existing capital of a partnership is $100,000. Two partners currently own the partnership and split
profits 40/60. A new partner is to be admitted and will contribute net assets with a fair value of $50,000. An
appraisal of existing partnership assets indicates accounts receivable overstated by $10,000, inventory
overstated by $12,000 and land understated by $25,000. What is the total capital of the new partnership if the
bonus method is being used?
5. Under the bonus method, when a new partner is admitted to the partnership, the total capital of the new
partnership is equal to:
6. If a bonus is traceable to the previous partners rather than an incoming partner, it is allocated among the
partners according to the
7. Callie is admitted to the Adams & Beal Partnership under the bonus method. Callie contributes cash of
$20,000 and non-cash assets with a market value of $30,000 and book value of $15,000 in exchange for a 20%
ownership interest in the new partnership. Prior to the admission of Callie, the capital of the existing partnership
was $130,000 and an appraisal showed the partnership net assets were fairly stated. Adams & Beal shared
profits and losses at a ratio of 80/20, respectively.
Which of the following bonus amounts would be recorded?
8. Assume that the capital of an existing partnership is $90,000 and all existing assets reflect fair market values.
If an incoming partner acquires a 40% interest in the partnership for $55,000, the bonus traceable to the
incoming partner is
9. Assume that the capital of an existing partnership is $130,000 and that existing assets are overvalued by
$10,000. If an incoming partner acquires a 25% interest in the partnership for $37,000, goodwill traceable to the
incoming partner is ____.
10. The admission of a new partner under the bonus method will result in a bonus to
11. Under the goodwill method,
12. The fair market value of a partnership can be implied by
13. When a new partner is admitted to a partnership under the goodwill method, an original partner’s capital
account may be adjusted for
14. If goodwill is traceable to the previous partners, it is
15. If goodwill is traceable only to the previous partners,
16. Callie is admitted to the Adams & Beal Partnership under the goodwill method. Callie contributes cash of
$20,000 and non-cash assets with a market value of $30,000 and book value of $15,000 in exchange for a 20%
ownership interest in the new partnership. Prior to the admission of Callie, the capital of the existing partnership
was $130,000 and an appraisal showed the partnership net assets were fairly stated. What will be Callie’s initial
capital balance?
17. Callie is admitted to the Adams & Beal Partnership under the goodwill method. Callie contributes cash of
$20,000 and non-cash assets with a market value of $30,000 and book value of $15,000 in exchange for a 20%
ownership interest in the new partnership. Prior to the admission of Callie, the capital of the existing partnership
was $130,000 and an appraisal showed the partnership net assets were fairly stated. Adams & Beal shared
profits and losses at a ratio of 80/20, respectively.
Which of the following goodwill amounts would be recorded?
18. If goodwill is traceable to the incoming partner, the new partner’s capital balance equals
19. Assume that the capital of an existing partnership is $90,000 and all existing assets reflect fair market
values. If an incoming partner acquires a 40% interest in the partnership for $55,000, the goodwill traceable to
the incoming partner is
20. Assume that the capital of an existing partnership is $130,000 and that existing assets are overvalued by
$10,000. If an incoming partner acquires a 25% interest in the partnership for $37,000, goodwill traceable to the
incoming partner is ____.
21. Which of the following characterizes the bonus method, compared to the goodwill method, when
unrecorded intangibles are traceable to the previous partners?
22. When a new partner buys an ownership interest in a partnership directly from an existing partner for more
than the balance in that partner’s capital account, under the more common method of accounting for those
transactions,
23. Palit buys Quincy’s partnership interest in the Q-R-S partnership. Quincy thus retires, leaving Reale and
Susien as Palit’s co-partners. Prior to Palit entering the partnership, Quincy, Reale, and Susien split profits and
losses equally. Palit pays $75,000 for Quincy’s capital which, at the time, totaled $60,000. No revaluation of
partnership assets or liabilities occurs at the time. In recording this event on the partnership books
24. Verst, Brown and Sullivan have a partnership. Pertinent information is as follows:
Verst
Brown
Sullivan
Capital balance
50,000
120,000
30,000
Profit and loss percentage
25%
50%
25%
Sullivan sells his partnership interest to Verst for $35,000. What is the balance in Verst’s capital account after the sale?
25. If an existing partner withdraws from a partnership,
26. Verst, Brown and Sullivan have a partnership. Pertinent information is as follows:
Verst
Brown
Sullivan
Capital balance
50,000
120,000
30,000
Profit and loss percentage
25%
50%
25%
Sullivan retires and the partnership pays him $35,000. What is the balance in Verst’s capital account after the sale assuming this transaction was
accounted for using the bonus method?
27. If goodwill is suggested by the consideration paid to a withdrawing partner,
28. Verst, Brown and Sullivan have a partnership. Pertinent information is as follows:
Verst
Brown
Sullivan
Capital balance
50,000
120,000
30,000
Profit and loss percentage
25%
50%
25%
Sullivan retires and the partnership pays him $35,000. What is the balance in Verst’s capital account after the sale assuming goodwill was
recognized by the retiring partner only?
29. Verst, Brown and Sullivan have a partnership. Pertinent information is as follows:
Verst
Brown
Sullivan
Capital balance
50,000
120,000
30,000
Profit and loss percentage
25%
50%
25%
Sullivan retires and the partnership pays him $35,000. What is the balance in Verst’s capital account after the sale assuming goodwill was
recognized by all of the partners?
30. Below are steps in which partnership distribution takes place:
1. Profits and losses are allocated to partner accounts.
2. Distributions are made to partners.
3. Assets must be used to discharge creditor obligations.
4. Partners with deficit balances should make up the balance or other partners make it up.
In what order should these occur?
31. Which of the following statements is correct regarding a partner’s debit capital balances in a liquidation?
32. The right of offset doctrine
33. Partners Able, Baker, and Chapman have the following personal assets, personal liabilities, and partnership
capital balances:
Able
Baker
Chapman
Personal assets
$30,000
$ 80,000
$60,000
Personal liabilities
25,000
50,000
72,000
Capital balances
50,000
(32,000)
70,000
Assume profits and losses are allocated equally.
If Baker is in bankruptcy and is able to make a contribution, the capital balance for Able would be
34. Under the Revised Uniform Partnership Agreement,
35. Hetzer and Whalen partnership is insolvent and has liabilities of $5,000. Other information follows:
Hetzer
Whalen
Personal assets
$20,000
$ 8,000
Personal liabilities
8,000
10,000
Partnership capital balance
10,000
(5,000)
What is Hetzer’s required contribution if the partnership creditors move against him first.
36. Hetzer and Whalen partnership is insolvent and has liabilities of $5,000. Other information follows:
Hetzer
Whalen
Personal assets
$20,000
$ 8,000
Personal liabilities
8,000
10,000
Partnership capital balance
10,000
(15,000)
What is Hetzer’s required contribution if the partnership creditors move against Whalen first.
37. Assume that a partnership had assets with a book value of $240,000 and a market value of $195,000, outside
liabilities of $70,000, loans payable to partner Able of $20,000, and capital balances for partners Able, Baker,
and Chapman of $70,000, $30,000, and $50,000. How much would Able receive upon liquidation of the
partnership assuming profits and losses are allocated equally?
38. Assume that a partnership had assets with a book value of $240,000 and a market value of $195,000, outside
liabilities of $70,000, loans payable to partner Able of $20,000, and capital balances for partners Able, Baker,
and Chapman of $70,000, $30,000, and $50,000. If all outside creditors and loans to partners had been paid,
how would the balance of the assets be distributed assuming that Chapman had already received assets with a
value of $30,000 assuming profits and losses are allocated equally?
39. If a partnership has only non-cash assets, all liabilities have been properly disbursed, and no additional
liquidation expenses are expected, the maximum potential loss to the partnership in the liquidation process is:
40. Which of the following is not an assumption that is made when determining safe payments during a
partnership liquidation?
41. Allen, Branden & Caylin are in the process of liquidating their partnership. They have the following capital
balances and profit and loss percentages:
Capital Balance
Profit/Loss %
Allen
5,000
debit
20%
Branden
18,000
credit
50%
Caylin
6,000
credit
30%
The partnership balance sheet shows cash of $5,000, non-cash assets of $14,000, and no liabilities. Assuming no liquidation expenses, what safe
payment could be made?
42. Partners Dalton, Edwards, and Finley have capital balances of $40,000, 90,000 and $30,000, respectively,
immediately prior to liquidation. Total remaining assets have a book value of $160,000, the liabilities having
been paid. Among these remaining assets is a machine with a fair value of $35,000. The partners split profits
and losses equally. Edwards covets the machine and is willing to accept it for $35,000 in lieu of cash. The other
partners have no designs on specific assets, only cash in liquidation. How much cash, in addition to the
machine, would be first distributed to Edwards, before any of the other partners received anything?
43. A partner’s maximum loss absorbable is calculated by
44. Partners Thomas, Adams and Jones have capital balances of $24,000, $45,000, and $90,000 respectively.
They split profits in the ratio of 3:3:4, respectively. Under a predistribution plan, one of the partners will get the
following total amount in liquidation before any other partners get anything:
45. Assume that a partnership had assets with a book value of $240,000 and a market value of $195,000, outside
liabilities of $70,000, loans payable to partner Able of $20,000, and capital balances for partners Able, Baker,
and Chapman of $70,000, $30,000, and $50,000. How would the first $100,000 of available assets be
distributed assuming profits and losses are allocated equally?
46. Smith, Thompson and Nickels have a partnership. Their capital balances are $90,000, $130,000 and
$150,000, respectively. They share profits and losses 25%, 35% and 40%, respectively. Foster wants to become
a partner with a 10 percent share in partnership capital with a $60,000 cash contribution to the partnership.
Appraisal of the partnership reveals that the assets of the partnership are fairly valued.
Required:
Calculate Smith, Thompson, and Nickel’s ending capital balances under the:
a.
Bonus Method
b.
Goodwill Method
47. Wright, Smith, and Young are partners with present capital balances of $60,000, $35,000, and $30,000,
respectively. The partners share profits and losses according to the following percentages: 40% for Wright, 30%
for Smith, and 30% for Young. Locke is to join the partnership upon contributing $40,000 to the partnership in
exchange for a 20% interest in capital and a 20% interest in profits and losses. The existing assets of the original
partnership are undervalued by $20,000. The original partners will share the balance of profits and losses in
proportion to their original percentages.
Required:
Calculate the capital balances for each individual in the new partnership, assuming use of the bonus and
goodwill methods.
a.
Prior Capital
$125,000
Locke Contribution
40,000
Book Value of New Partnership
$165,000
Locke’s Capital = 20% ´ 165,000 = 33,000
Bonus = 40,000 – 33,000 = 7,000
Bonus is split 40% to Wright = $2,800
30% to Smith = $2,100
30% to Young = $2,100
Bonus method:
Wright
Smith
Young
Locke
Original capital balance
$60,000
$35,000
$30,000
Investment of new partner:
Bonus*
2,800
2,100
2,100
Capital balance*
$33,000
Total
$62,800
$37,100
$32,100
$33,000
Goodwill method:
Original capital balance
$60,000
$35,000
$30,000
Asset revaluation
8,000
6,000
6,000
Goodwill**
6,000
4,500
4,500
Investment of new partner
$40,000
Total
$74,000
$45,500
$40,500
$40,000
** $40,000 20% = $200,000;
48. Martel, Tusk, and Davis are partners with present capital balances of $40,000, $50,000, and $20,000,
respectively. The partners share profits and losses according to the following percentages: 60% for Martel, 30%
for Tusk, and 10% for Davis. Frank is to join the partnership upon contributing $40,000 to the partnership in
exchange for a 25% interest in capital and a 20% interest in profits and losses. An appraisal of the existing
partnerships’ assets reveals the following:
Accounts Receivable
$20,000 overvalued
Inventory
$10,000 overvalued
Land
$10,000 undervalued
Building
$15,000 undervalued
Required:
Calculate the capital balances for each individual in the new partnership assuming use of the bonus and goodwill methods.
Bonus method:
Martel
Tusk
Davis
Original capital balance
$40,000
$50,000
$20,000
Asset revaluation
(18,000)
(9,000)
(3,000)
Investment of new partner:
Bonus*
6,000
3,000
1,000
Capital balance*
$30,000
Total
$28,000
$44,000
$18,000
* New Partnership Capital:
Prior Capital
$110,000
Asset Writedown
(30,000)
Frank Consideration
40,000
Capital-New Partnership
$120,000
Frank’s Capital = 25% ´ 120,000 = 30,000
Bonus = 40,000 – 30,000 = 10,000
Goodwill method:
Original capital balance
$40,000
$50,000
$20,000
Asset Write Down
(18,000)
(9,000)
(3,000)
Asset Write Up
15,000
7,500
2,500
Goodwill**
9,000
4,500
1,500
Investment of new partner
Total
$46,000
$53,000
$21,000
49. Lee, Alverez, and Tyne have a partnership. Their capital balances are $50,000, $70,000 and $30,000,
respectively. The partner profit percentages are 30%, 40%, and 30%, respectively. They are considering on
what basis to admit Patton, a prospective new partner. Based on appraisal analysis, the net assets of the
partnership are worth $180,000. Patton is willing to put up cash of $30,000, plus a machine with book value of
$12,000 and a fair value of $20,000.
Required:
Given each of the following scenarios, prepare the journal entries necessary to record Patton’s admission to the
partnership.
1.
Patton is receiving a 20% share of the new partnership with his investment. His admission is to be recorded using the bonus
method.
2.
Patton is receiving a 20% share of the new partnership with his investment. His admission is to be recorded using the goodwill
method.
1.
Patton is receiving a 30% share of the new partnership with his investment. His admission is to be recorded using the bonus
method.
2.
Patton is receiving a 25% share of the new partnership with his investment. His admission is to be recorded using the goodwill
method.