Chapter 15 – PARTNERSHIPS: FORMATION, OPERATION, AND CHANGES IN MEMBERSHIP
15-7
DESCRIPTIONS OF CASES, EXERCISES, AND PROBLEMS
C15-1
LO 15-1,
LO 15-5
30 min.
E
Partnership Agreement
This case points out the necessity for a partnership agreement and focuses on the
need to define the accounting treatment of salaries and bonuses.
C15-2
LO 15-6
30 min.
M
Comparisons of Bonus, Goodwill, and Asset Revaluation Methods
Students are asked to evaluate and discuss the three alternative methods of
accounting for the admission of a new partner.
C15-3
LO 15-1
45 min.
M
Uniform Partnership Act Issues
Research case requiring reference to the UPA 1997 to address several specific
partnership issues.
C15-4
LO 15-1
20 min.
M
Defining Partners’ Authority
Students are to prepare a memo to discuss the rights of each partner to engage in
transactions on behalf of the partnership and how a partnership can restrict a
partner’s authority to engage in specific types of transactions.
C15-5
LO 15-4,
LO 15-5
25 min.
M
Preferences for Using GAAP for Partnership Accounting
Students are to prepare a memo to discuss the use of generally accepted
accounting principles (GAAP) for a partnership while admitting a new member
into the partnership.
E15-1
LO 15-3
15 min.
E
Multiple-Choice on Initial Investment [AICPA Adapted]
Five multiple-choice questions on the accounting for initial investments for
various cases.
E15-2
LO 15-5
20 min.
E
Division of Income—Multiple Bases
Income distribution schedules are required for a multiple base illustration for two
different income amounts. One of the amounts results in a deficit that must be
distributed.
E15-3
LO 15-5
30 min.
M
Division of Income—Interest on Capital Balances
Students must compute the average capital balances during the period in order to
determine the amount of interest that will be distributed to each partner as part of
an income distribution.
Chapter 15 – PARTNERSHIPS: FORMATION, OPERATION, AND CHANGES IN MEMBERSHIP
15-8
E15-4
LO 15-5
25 min.
M
Distribution of Partnership Income and Preparation of a Statement of
Partners’ Capital
Students are asked to distribute partnership net income, prepare the statement of
partners’ capital, and then analyze the effects of changes in the partners’ salaries.
E15-5
LO 15-1
through
LO 15-6
20 min.
E
Matching Terms
Thirteen terms are presented for which students must match the appropriate
description.
E15-6
LO 15-6
30 min.
M
Admission of a Partner
Journal entries are required for several alternative investment amounts and
percentage of capital amounts. Students must compute the proportionate book
value received under the alternatives.
E15-7
LO 15-6
40 min.
H
Admission of a Partner
Six independent cases of investment amounts and methods of recording the
admission of a new partner must be analyzed and journal entries for each of the
six cases are required.
E15-8
LO 15-6
25 min.
M
Multiple-Choice Questions on the Admission of a Partner
Eight questions presenting different types of admission situations, including
direct purchase.
E15-9
LO 15-6
30 min.
M
Withdrawal of a Partner
Journal entries are required for each of three alternative methods of accounting
for the withdrawal of a partner. The bonus method is contrasted with recognizing
just the retired partner’s portion of goodwill and with recognizing all the implied
goodwill.
E15-10
LO 15-6
25 min.
M
Retirement of a Partner
Six cases are presented for which students must determine the method used to
account for the retirement of a partner.
P15-11
LO 15-6
60 min.
H
Admission of a Partner
Seven alternatives are examined for accounting for the admission of a new
partner to a partnership. Students must provide the journal entries required for
each of the seven alternatives.
P15-12
LO 15-5
50 min.
H
Division of Income
Students are asked to prepare income distribution schedules for three alternative
distribution plans. The plans include interest on average capital, which must be
computed, salaries, and bonuses.
Chapter 15 – PARTNERSHIPS: FORMATION, OPERATION, AND CHANGES IN MEMBERSHIP
15-9
P15-13
LO 15-6
45 min.
M
Determining a New Partner’s Investment Cost
Students are presented with seven independent cases for which they must
determine the amount of investment required of a new partner. The cases include
bonus, goodwill, and revaluation of assets.
P15-14
LO 15-5
50 min.
H
Division of Income
Students are asked to prepare income distribution schedules for three alternative
distribution plans. One of the distribution plans requires the final distribution of a
deficit created in an earlier stage of the income distribution process. Alternative
bonus plans are used.
P15-15
LO 15-6
50 min.
H
Withdrawal of a Partner under Various Alternatives
Journal entries are required to record the withdrawal of a partner under seven
independent alternatives including revaluing net assets and recording goodwill.
P15-16
LO 15-5,
LO 15-6
30 min.
M
Multiple-Choice Questions—Initial Investments, Division of Income,
Admission and Retirement of a Partner [AICPA Adapted]
Nine multiple-choice questions on a variety of partnership issues including
accounting for the creation of a partnership, division of income, and accounting
for the withdrawal of a partner recording a bonus or goodwill.
P15-17
LO 15-3
through
LO 15-6
60 min.
H
Partnership Formation, Operation, and Changes in Ownership
A comprehensive problem requiring journal entries to record the formation and
operation of a partnership, preparation of the partnership’s income statement and
balance sheet, and recording of the admission of a new partner.
P15-18A
30 min.
M
Initial Investments and Tax Bases [AICPA Adapted]
Students are required to compare GAAP accounting and tax accounting for the
initial contribution of several long-term assets including a building that is subject
to a mortgage. Instructors not wishing to cover the tax method may assign
requirement a of the problem only.
P15-19
LO 15-3
through
LO 15-6
50 min.
M
Formation of a Partnership and Allocation of Profit and Loss
This is a two-part problem involving a new partnership formed by two sole
proprietors. Part I requires that students prepare a classified balance sheet
immediately after formation of the new entity. Part II requires that students
prepare an income statement, a schedule showing the allocation of partnership
income, and calculate partners’ capital balances at the end of the first year after
the partnership was formed. In addition, students must calculate what partnership
income must be so that each partner receives the same income.
Chapter 15 – PARTNERSHIPS: FORMATION, OPERATION, AND CHANGES IN MEMBERSHIP
15–10
OTHER RESOURCES Chapter 15
Allocation of Income/Loss
Allocate income/loss before taxes (partnerships don’t pay taxes) follow the partnership
agreement with regard to:
interest on capital balances
salaries to partners
bonus to partners
residual in profit and loss sharing ratio (assume equal unless otherwise stated)
Example:
Partners A and B share profits and losses in ratio of 3:2
Partner A receives a salary of $20,000 and Partner B of $14,000. Partner A receives a
bonus of 10% of net income after deducting the bonus. Interest of 10% is paid on average
capital balances of $70,000 for A and $90,000 for B. Profits for the period are $44,000.
Partners
A
Profit percentage
60%
Net income
Salary
$20,000
Bonus**
4,000
Interest
7,000
Residual (Deficit)
Allocate in P&L ratio
(6,000)
Total
$25,000
** Bonus
B
=
.10 (NI-B)
B
=
.10NI-.10B
1.1B
=
.10NI
1.1B
=
.10 (44,000)
1.1B
=
4,400
B
=
4,000
Chapter 15 – PARTNERSHIPS: FORMATION, OPERATION, AND CHANGES IN MEMBERSHIP
15–11
Overview of Accounting for Admission of a New Partner
PARTNERSHIPS: CHANGES IN MEMBERSHIP
New partners proportion
of the partnership’s book
value
=
Prior capital of
present partners
+
Investment of
new partner
X
Percentage of
capital to new
partner
Step 1: Compare
Proportionate Book
Value and Investment of
New Partner
Step 2: Alternative Methods
to Account for Admission
Key Observations
Investment cost greater
than Book value
1. Revalue net assets up to
market value and allocate
to prior partners.
2. Record unrecognized
goodwill and allocate to
prior partners.
3. Assign bonus to prior
partners.
• Prior partners receive asset
valuation increase, goodwill, or
bonus indicated by the excess of
new partner’s investment over
book value of the capital share
initially assignable to new
partner.
• Recording asset valuation
increase or prior partners’
goodwill increases total resulting
partnership capital.
Investment cost equal to
Book value
1. No revaluations, bonus, or
goodwill.
• No additional allocations
necessary because new partner
will receive a capital share equal
to the amount invested.
• Total resulting partnership
capital equals prior partners’
capital plus investment of new
partner.
Investment cost less than
Book value
1. Revalue net assets down
to market value and
allocate to prior partners.
2. Recognize goodwill
brought in by new
partner.
3. Assign bonus to new
partner.
• Prior partners are assigned the
reduction of asset values
occurring before admission of
the new partner. Alternatively,
new partner is assigned goodwill
or bonus as part of admission
incentive.
• Recording asset valuation
decrease reduces total resulting
capital, while recording new
partner’s goodwill increases total
resulting capital.