FORMS OF BUSINESS ORGANIZATIONS
Problems
C.1 E-Z Manufacturin
g
Com
p
an
y
15 Easy
LO C-3,
C-10 Students are required to calculate partners’ share of net income, determine
the effects of income taxes for partners, and prepare a statement of
partners’ equity.
C.2 Waffon Cor
p
oration 15 Easy
LO C-6,
C-7 Students must analyze the effects of stockholders’ investments, net
income, and dividends on stockholders’ equity.
C.3 Guenther and Firmin 15 Easy
LO C-10 Students are required to distribute net income to partners, including
interest, salaries, and residual amounts.
C.4 Snack Shac
k
30 Medium
LO C-3 Students are required to demonstrate their understanding of partnership
accounts and the nature of partnership income.
C.5 The To
p
Hat, Inc. 25 Medium
LO C-6,
C-7 Record typical equity transactions for a corporation and prepare a
statement of retained earnings.
C.6 Frontier Western Wear, Inc. 30 Medium
LO C-4-
C-7 Make entries to record equity transactions for a corporation and close
Income Summary and Dividends accounts. Prepare the stockholders’
equity section of a corporation’s balance sheet.
C.7 Wesson Cor
p
oration and Amber Industries 25 Easy
LO C-6, C-
7Prepare the stockholders’ equity section of the balance sheet of two
different corporations.
C.8 S & X Co. 45 Strong
LO C-1, C-
2, C-4-C-8 Prepare entries to record owner’s equity transactions in a sole
proprietorship and in a corporation. Contrast the nature of net income for
these two types of business organizations.
Below are brief descriptions of each problem. These descriptions are accompanied by the estimated time (in
minutes) required for completion and by a difficulty rating. The time estimates assume use of the partially
filled-in working papers.
APPENDIX C
Aver
y
and Kirk 20 Easy
Formation of a partnership, journal entries, and a beginning balance
sheet. Entries to close the Income Summary account and drawing
accounts.
Comedy Today 25 Medium
Profit sharing under a variety of agreements. Includes fixed ratio;
interest on beginning capital accounts and fixed ratio for balance;
salaries to partners, interest on capital accounts, and balance in fixed
ratio. Journal entry to close the Income Summary account.
Rothchild Furnishin
g
s, Inc. 30 Medium
Sharing of income in a partnership when partnership agreement
provides for salaries to partners, interest on invested capital, and
balance in a fixed ratio. Separate cases handling a loss, a small profit,
and a large profit.
Prime Cuts—a Tax Plannin
g
Case 40 Stron
g
An individual has recently incorporated his business and is now being
“hammered” by the effects of double taxation. Students are to compute
the overall tax burden of the corporation compared to the former
proprietorship and to make tax planning recommendations. A very
practical “eye opener” to the importance of tax planning.
Ramirez and Smith 30 Medium
Given the plans, personal backgrounds, and financial status of two
individuals planning a partnership, draft an income-sharing agreement
that will provide an equitable division of partnership income between
them. Also, prepare a 2-year schedule showing how the recommended
plan will work out under forecasts of earnings. Write a defense of the
profit-sharing plan in the light of the division of earnings over the 2-
year period.
* Supplemental Topic , “Partnership Accounting—A Closer Look.”
*C.9
LO
C-3, C-9,
C-10
*C.10
LO C-10
*C.13
LO C-10
*C.11
LO C-10
C.12
LO
C-1, C-4,
C-5, C-9
SUGGESTED ANSWERS TO DISCUSSION QUESTIONS
1.
2.
3.
4.
Neither the house nor the mortgage should appear in the financial statements of Hansen Sporting
The primary advantages of the partnership form of organization are the opportunity to bring
together sufficient capital to carry on a business and the opportunity to combine the specialized
skills of a group of individuals. In comparison to a corporation, the partnership form of
Mutual agency means that every partner in a partnership has the right to bind that partnership to
contracts.
There are two important reasons why this type of business would probably be organized as a
limited partnership rather than as a general partnership. First, the 50 investors throughout the state
could be designated as limited partners, thereby limiting their personal liability for any losses
incurred by the business to the amount of their investment. If the business were organized as a
6.
7. a. Owners’ liability for debts of the business. Partners are jointly and individually liable for
the debts of the partnership. A corporation, however, is responsible for its own debts; the
stockholders in a corporation are not personally liable for the debts of the business entity.
Thus, the amount of money which a stockholder might lose by investing in a corporation is
8.
Partner Reed must report her share of the net income, $39,000, not the amounts of cash or other
assets she withdraws from the business.
The term double taxation refers to the fact that the income of a corporation is taxed at two
levels. First, the income of a corporation is subject to corporate income taxes, which must be
paid by the corporation. Second, if the corporation distributes its earnings as dividends to
stockholders, the stockholders must pay personal income taxes on the amounts they receive. This
SOLUTIONS TO PROBLEMS
a.
b.
$ 85,000 $ 97,000 $ 65,000 $ 247,000 Balances, December 31, 20xx
15 Minutes, Easy
PROBLEM C.1
Each partner must report his share of net income of the partnership ($60,000) on his or her
E-Z MANUFACTURING COMPANY
$60,000 ($180,000 × 1/3)
PROBLEM C.2
WASSON CORPORATION
a.
15 Minutes, Easy
Additional investment $20,000 [$50,000 (ending capital stock balance) – $30,000 (beginning
*Net
Guenther Firmin Income
$ 247,000
GUENTHER AND FIRMIN
PROBLEM C.3
15 Minutes, Easy
Net income to be divided
a.
b.
Glen Chow Wilkes Total
c.
PROBLEM C.4
30 Minutes, Medium
Assuming that each partner devoted the same amount of time to the business, Glen and
$30,000 ($90,000 × 1/3), each partner’s share of net income of the partnership must be
reported on his income tax return.
Snack Shack
Statement of Partners’ Equity
For the Year Ended December 31, 20xx
SNACK SHACK
PROBLEM C.5
THE TOP HAT, INC.
a. General Journal
Jun 3 Cash 20,000
Capital Stock 20,000
Issued 1,000 shares of capital stock at $20 per share.
10 Dividends 6,000
Dividends Payable 6,000
Declared a dividend of $0.30 per share, payable
June 23 ($0.30 × 20,000 shares = $6,000).
b.
Retained earnings, May 31 520,000$
25 Minutes, Medium
THE TOP HAT, INC.
Statement of Retained Earnings
For the Month Ended June 30, 20xx
PROBLEM C.6
FRONTIER WESTERN WEAR, INC.
a. General Journal
2014
Jan 15 Cash 800,000
Capital Stock 800,000
Issued 40,000 shares of capital stock at $20 per share.
30 Minutes, Medium