FORMS OF BUSINESS ORGANIZATIONS
Problems
C.1
E-Z Manufacturing Company 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 Corporation 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 Shack 30 Medium
LO C-3
Students are required to demonstrate their understanding of partnership
accounts and the nature of partnership income.
C.5
The Top 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 Corporation and Amber Industries 25 Easy
LO C-6,
C-7
Prepare 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
Avery 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 Furnishings, 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 Planning Case 40 Strong
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.
4.
5.
Salaries of owner-managers are an expense deducted in arriving at the net income of a
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
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
7. a.
Owners’ liability for debts of the business. Partners are jointly and individually liable for
b.
Transferability of ownership interest. A partnership interest can be transferred only if the
c.
Continuity of existence. A partnership is terminated upon the resignation or death of any
d.
Federal taxation on income. A corporation is subject to federal income tax on its income,
8.
*9.
*10.
Consideration should be given to differences in the contributions of the partners to the business
One factor to be considered is that the salary allowance has first priority in the division of
income among the partners. A second factor is the difference in the share of the residual
The term double taxation refers to the fact that the income of a corporation is taxed at two
SOLUTIONS TO PROBLEMS
b.
c.
Gonzales Todd Walker Total
$ 50,000 $ 60,000 $ 40,000 $ 150,000
$ 110,000 $ 120,000 $ 100,000 $ 330,000
$ 85,000 $ 97,000 $ 65,000 $ 247,000
Balances, December 31, 20xx
Add: Net income for the year
Subtotals
Less: Drawings
15 Minutes, Easy
Statement of Partners’ Equity
For the Year Ended December 31, 20xx
E-Z MANAUFACTURING COMPANY
PROBLEM C.1
Each partner must report his share of net income of the partnership ($60,000) on his or her
personal income tax return.
E-Z MANUFACTURING COMPANY
Balances, January 1, 20xx
PROBLEM C.2
WASSON CORPORATION
a.
15 Minutes, Easy
Additional investment $20,000 [$50,000 (ending capital stock balance) – $30,000 (beginning
capital stock balance)].
*
Net
Guenther Firmin Income
$ 247,000
$ 80,000 $ 60,000 (140,000)
PROBLEM C.3
15 Minutes, Easy
Net income to be divided
GUENTHER AND FIRMIN
Salary allowances to partners
$ 107,000
$ 80,000
$ 143,000 $ 104,000 $ 0
Total share to each partner
Income after salary allowances
Interest allowances on beginning capital:
Guenther ($100,000 × 15%)
Firmin ($80,000 × 15%)
Remaining income after salaries and interest
Guenther (60%)
Firmin (40%)
b.
Glen Chow Wilkes Total
Beginning capital balance $ 55,000 $ 60,000 $ 5,000 $ 120,000
Add: Net income 30,000 30,000 30,000 90,000
Less: Drawing 15,000 15,000 25,000 55,000
Ending capital balance $ 70,000 $ 75,000 $ 10,000 $ 155,000
c.
d.
PROBLEM C.4
30 Minutes, Medium
Assuming that each partner devoted the same amount of time to the business, Glen and
Partnership net income should compensate partners for their services to the business,
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 $0.30 per share, payable
b.
Retained earnings, May 31 520,000$
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
2017
Jan 15 Cash 800,000
Capital Stock 800,000
Issued 40,000 shares of capital stock at $20 per share.
b.
2018
Mar 15 Dividends 20,000
Dividends Payable 20,000
c.
2018
Dec 31 Retained Earnings 18,000
Income Summary 18,000
To close the Income Summary account for a period
with a net loss.
30 Minutes, Medium
PROBLEM C.6
FRONTIER WESTERN WEAR, INC. (concluded)
d. FRONTIER WESTERN WEAR, INC.
Partial Balance Sheet
December 31, 2018
Stockholders’ equity:
Computation of retained earnings at December 31, 2018:
Income before income tax—2017 120,000$
Less: Income tax expense 48,000
Less: Net loss for 2018 18,000 38,000
Retained earnings, December 31, 2018 34,000$
25 Minutes, Easy PROBLEM C.7
WESSON CORPORATION AND AMBER INDUSTRIES
a. WESSON CORPORATION
Partial Balance Sheet
December 31, 2018
Stockholders’ equity:
Capital stock 250,000$
Retained earnings 21,000*
b.
AMBER INDUSTRIES
Partial Balance Sheet
December 31, 2018
Stockholders’ equity:
Capital stock 1,000,000$