Chapter 8 — Partnerships: Characteristics, Formation, and
Accounting for Activities
MULTIPLE CHOICE
1. Which of the following is NOT a characteristic of the proprietary
theory that influences accounting for partnerships?
a.
Partners’ salaries are viewed as a distribution of income rather
than a component of net income.
b.
A partnership is not viewed as a separate, distinct, taxable
entity.
c.
A partnership is characterized by limited liability.
d.
Changes in the ownership structure of a partnership result in the
dissolution of the partnership.
2. Don and Key form a partnership. Don contributes into the partnership a
personal computer that he has used at home in nonbusiness related
activities. Don had paid $10,000 for the computer 2 years ago. The
current market value of the computer is $9,000. The partners, after
reviewing IRS rules, assigned the computer a useful life of 5 years.
For financial reporting purposes, at what amount should the computer be
recorded in the partnership ledger?
a.
$10,000
b.
$9,000
c.
$7,500
d.
$6,000
3. 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?
a.
Salaries
b.
Bonus as a percentage of net income before the bonus
c.
Bonus as a percentage of sales in excess of a targeted amount
d.
Interest on average capital balances
4. Which of the following best describes the use of interest on invested
capital as a means of allocating profits?
a.
If interest on invested capital is used, it must be used for all
partners.
b.
Interest is allocated only if there is partnership net profit.
c.
Invested capital balances are never affected by drawings of the
partnerships.
d.
Use of beginning or ending measures of invested capital may be
subject to manipulation that distorts the measure of invested
capital.
Chapter 8
5. 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?
a.
Any loss would be allocated equally to all partners.
b.
Any salary allocation criteria would not be used.
c.
The bonus criteria would not be used.
d.
The loss would be allocated using the profit and loss ratios,
only.
6. 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 ______________.
a.
$11,000
b.
$10,000
c.
$9,091
d.
$9,000
7. Partner A first contributed $20,000 of capital into an existing
partnership on February 1, 20X1. On June 1, 20X1, the partner
contributed another $20,000. On September 1, 20X1, 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
______________.
a.
$25,000
b.
$26,667
c.
$28,334
d.
$30,000
8. Partner Alta had a capital balance on January 1, 20X5 of $45,000 and
made additional capital contributions during 20X5 totaling $50,000.
During the year 20X5, Alta withdrew $8,000 per month. Alta’s post–
closing capital balance on December 31, 20X5 is $30,000. Alta’s share
of 20X5 partnership income is _________________.
a.
$96,000
b.
$50,000
c.
$31,000
d.
$8,000
Chapter 8
9. 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?
a.
$36,000
b.
$44,500
c.
$50,000
d.
$43,500
10. 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?
a.
$43,225
b.
$43,816
c.
$47,850
d.
$65,375
11. 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?
a.
$14,000
b.
$30,000
c.
$38,000
d.
None of the above
Chapter 8
12. 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?
a.
$3,300
b.
$10,300
c.
$1,000
d.
$4,000
13. 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?
a.
$12,000
b.
$18,000
c.
$18,720
d.
$41,600
14. 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 20X1, 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
a.
$26,000 $24,000
b.
$27,000 $23,000
c.
$25,000 $25,000
d.
$27,500 $22,500
Chapter 8
8-5
15. Assuming the same facts as in Question #14, 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
a.
$26,000 $24,000
b.
$27,000 $23,000
c.
$25,000 $25,000
d.
$27,500 $22,500
16. Which of the following statements is true concerning the treatment of
salaries in partnership accounting?
a.
Partner salaries may be used to allocate profits and losses; they
are not considered expenses of the partnership
b.
Partner salaries are equal to the annual partner draw.
c.
The salary of a partner is treated in the same manner as salaries
of corporate employees.
d.
Partner salaries are directly closed to the capital account.
17. Partners active in a partnership business should have their share of
partnership profits based on the following
a.
a combination of salaries plus interest based on average capital
balances.
b.
a combination of salaries and percentage of net income after
salaries and any other allocation basis.
c.
salaries only.
d.
percentage of net income after salaries is paid to inactive
partners.
18. Which of the following statements are true when comparing corporations
and partnerships?
a.
Partnership entities provide for taxes at the same rates used by
corporations.
b.
In theory, partnerships are more able to attract capital.
c.
Like corporations, partnerships have an infinite life.
d.
Unlike shareholders, general partners may have liability beyond
their capital balances.
19. Partnership drawings are
a.
always maintained in a separate account from the partner’s capital
account.
b.
equal to partners’ salaries.
c.
usually maintained in a separate draw account with any excess
draws being debited directly to the capital account.
d.
not discussed in the specific contract provisions of the
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8-6
partnership.
20. 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?
a.
$35,000
b.
$85,000
c.
$140,000
d.
$210,000
21. 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?
a.
$175,000
b.
$210,000
c.
$285,000
d.
$310,000
22. 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?
a.
$14,000
b.
$50,000
c.
$70,000
d.
$84,000
23. 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 ______________.
a.
$20,000
b.
$18,000
Chapter 8
8-7
c.
$5,000
d.
$(3,000)
24. Which of the following characteristics of a partnership most likely
explains why a public accounting firm is organized as a partnership
from a public policy viewpoint?
a.
A partnership is not a taxable entity.
b.
A partnership is characterized by unlimited liability.
c.
A partnership is characterized by a fiduciary relationship among
the partners.
d.
Salaries to the partners are not considered a component of net
income.
25. For financial accounting purposes, assets of an individual partner
contributed to a partnership are recorded by the partnership at
a.
historical cost.
b.
book value.
c.
fair market value.
d.
lower of cost or market.
26. Which of the following is not an advantage of a partnership over a
corporation?
a.
Ease of formation
b.
Unlimited liability
c.
The elimination of taxes at the entity level
d.
All of the above
27. Under the entity theory, a partnership is
a.
viewed through the eyes of the partners.
b.
viewed as having its own existence apart from the partners.
c.
a separate legal and tax entity.
d.
unable to enter into contracts in its own name.
28. Of the following components used to allocate profits among partners,
which is less likely to be found in a partnership of landscape
architects?
a.
Salaries
b.
Bonuses
c.
Interest on invested capital
d.
Profit and loss percentages
Chapter 8
29. Della Reise was admitted to a partnership. She contributed $25,000 cash
plus equipment she purchased for $50,000 and which had accumulated
depreciation for tax purposes of $20,000. The fair value of the
equipment was $35,000. She also assumed 1/3 of partnership debt of
$15,000. Her beginning capital balance was $48,000. For tax purposes
her partnership interest should be initially valued at
a.
$60,000
b.
$48,000
c.
$55,000
d.
$65,000
30. Which of the following does not decrease a partner’s tax basis in a
partnership?
a.
The basis of other partners’ liabilities assumed by the
partnership
b.
The basis of that partner’s liabilities assumed by the partnership
c.
Distributions to the individual partner
d.
The partner’s share of taxable losses
31. For tax purposes, assets of an individual partner that are contributed
to a partnership are recorded by the partnership at
a.
historical cost.
b.
fair market value.
c.
the individual partner’s tax basis.
d.
book value.
32. The disadvantages of double taxation for an entity with two owners may
not be avoided if the entity is
a.
organized as a partnership.
b.
organized as a Subchapter S corporation.
c.
distributing all of its income in the form of dividends.
d.
None of the above.
Chapter 8
8-9
PROBLEM
1. Carey and Drew formed a partnership on January 1, 20X1. Carey invested
$100,000, Drew $70,000. Each withdrew $12,000 on each of the following
dates during 20X1: 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:
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.
Chapter 8
8-10
Chapter 8
2. Matt and Jeff organized their partnership on 1/1/00. The following
entries were made into their capital accounts during 00:
Debit Credit Balance
Matt:
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
Chapter 8
8-12
Chapter 8
8-13
3. 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.
Chapter 8
Chapter 8
8-15
4. 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.
5. 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
Cash…………………………………. $20,000
Equipment:
Tax basis…………………………… 10,000 $40,000
Book basis………………………….. 12,000 34,000
Vehicles:
Tax basis…………………………… 0
Book basis………………………….. 6,000
Liabilities…………………………… 8,000 20,000
Required:
Calculate the tax basis and the book basis of each partner in the
partnership.
Chapter 8
8-16
6. Van and Shapiro formed a 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.
Other facts:
Van contributed equipment whose cost to her was $60,000, with
accumulated depreciation for tax purposes of $36,000. The partnership
awarded her $40,000 towards her partnership interest for the equipment.
The partnership assumed $10,000 of Shapiro’s personal debts when she
was admitted into the partnership.
Required:
Calculate the two partners’ ending capital balances:
a.
for book purposes
b.
for tax purposes
Chapter 8
8-17
7. The Amato, Bergin, Chelsey partnership profit allocation agreement
calls for salaries of $15,000 and $30,000 for Anato & 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. 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: Contributed $ 5,000
October 1: Contributed $12,000
Required:
Assuming the partnership has income of $66,000, determine the amounts
to be allocated to each partner.
Chapter 8
8. Turner, Ike, and Gibson formed a partnership in 20X2 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 20X3, it was discovered that the 20X2 income of $54,000 was
overstated by $22,000. Turner and Gibson suggest that the error be
offset against the 20X3 income. Ike argued that they are being harmed
by this decision. Discuss the merits of Ike’s position.
Chapter 8
ESSAY
1. 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?