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Test bank with answers for advanced accounting 3e by jeter chapter 15

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The three partners agree to sell Linda one-fourth of their respective capital and profit and loss interests in exchange for a total payment of $100,000.. The capital accounts and the res

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Chapter 15 Partnerships: Formation, Operation, and Ownership Changes

Multiple Choice

1 When a partner retires and withdraws assets in excess of his book value, the remaining partners

absorb the excess

a equally

b in their profit-sharing ratio

c based on their average capital balances

d based on their ending capital balances

2 In a partnership, interest on capital investment is accounted for as a(n)

a return on investment

b expense

c allocation of net income

d reduction of capital

3 A partnership in which one or more of the partners are general partners and one or more are not is

called a(n)

a joint venture

b general partnership

c limited partnership

d unlimited partnership

4 Which of the following is an advantage of a partnership?

a mutual agency

b limited life

c unlimited liability

d none of these

5 Bob and Fred form a partnership and agree to share profits in a 2 to 1 ratio During the first year of

operation, the partnership incurs a $20,000 loss The partners should share the losses

a based on their average capital balances

b in a 2 to 1 ratio

c equally

d based on their ending capital balances

6 When the goodwill method is used to record the admission of a new partner, total partnership capital

increases by an amount

a equal to the new partner’s investment

b greater than the new partner’s investment

c less than the new partner’s investment

d that may be more or less than the new partner’s investment

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7 The bonus and goodwill methods of recording the admission of a new partner will produce the same

result if the:

1 new partner’s profit-sharing ratio equals his capital interest

2 old partners’ profit-sharing ratio in the new partnership is the same relatively as it was in the old partnership

a 1

b 2

c both 1 and 2 are met

d none of these

8 When the goodwill method is used and the book value acquired is less than the value of the assets

invested, total implied capital is computed by

a multiplying the new partner’s capital interest by the capital balances of existing partners

b dividing the total capital balances of existing partners by their collective capital interest

c dividing the new partner’s investment by his (her) capital interest

d dividing the new partner’s investment by the existing partners’ collective capital interest

9 The partnership of Adams and Baker was formed on February 28, 2011 At that date the following

assets were invested:

Furniture and equipment 200,000 -0-

The building is subject to a mortgage loan of $280,000, which is to be assumed by the partnership The partnership agreement provides that Adams and Baker share profits or losses 30% and 70%, respectively Baker’s capital account at February 28, 2011, should be

a $1,080,000

b $1,360,000

c $1,176,000

d $952,000

10 The following balance sheet information is for the partnership of Abel, Ball, and Catt:

Other assets 1,500,000 Abel, Capital (40%) 300,000

Ball, Capital (40%) 480,000 Catt, Capital (20%) 420,000

Figures shown parenthetically reflect agreed profit and loss sharing percentages

If the assets are fairly valued on the above balance sheet and the partnership wishes to admit Dent as

a new 1/5 partner without recording goodwill or bonus, Dent should invest cash or other assets of

a $427,500

b $240,000

c $300,000

d $342,000

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11 The following balance sheet information is for the partnership of Abel, Ball, and Catt:

Other assets 1,500,000 Abel, Capital (40%) 300,000

Ball, Capital (40%) 480,000 Catt, Capital (20%) 420,000

Figures shown parenthetically reflect agreed profit and loss sharing percentages

If assets on the initial balance sheet are fairly valued, Abel and Ball consent and Dent pays Catt

$225,000 for his interest; the revised capital balances of the partners would be

a Abel, $315,000; Ball, $495,000; Dent, $450,000

b Abel, $315,000; Ball, $495,000; Dent, $420,000

c Abel, $300,000; Ball, $570,000; Dent, $450,000

d Abel, $300,000; Ball, $480,000; Dent, $420,000

12 Linda desires to purchase a one-fourth capital and profit and loss interest in the partnership of Hank,

Greg, and Jim The three partners agree to sell Linda one-fourth of their respective capital and profit and loss interests in exchange for a total payment of $100,000 The payment is made directly to the individual partners The capital accounts and the respective percentage interests in profits and losses immediately before the sale to Linda follow

Percentage Capital Interests in Accounts Profits and Losses

All other assets and liabilities are fairly valued and implied goodwill is to be recorded prior to the acquisition by Linda Immediately after Linda’s acquisition, what should be the capital balances of Hank, Greg, and Jim, respectively?

a $126,000; $78,000; $36,000

b $156,000; $99,000; $45,000

c $178,000; $111,000; $51,000

d $208,000; $132,000; $60,000

13 At December 31, 2011, Barb and Kim are partners with capital balances of $250,000 and $150,000,

and they share profits and losses in the ratio of 2:1, respectively On this date, Jack invests $125,000 cash for a one-fifth interest in the capital and profit of the new partnership The partners agree that the implied partnership goodwill is to be recorded simultaneously with the admission of Jack The total implied goodwill of the firm is

a $25,000

b $20,000

c $45,000

d $100,000

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14 Pete, Joe, and Ron are partners with capital balances of $135,000, $90,000, and $60,000,

respectively The partners share profits and losses equally For an investment of $120,000 cash, Jerry is to be admitted as a partner with a one-fourth interest in capital and profits Based on this information, the amount of Jerry’s investment can best be justified by which of the following?

a Jerry will receive a bonus from the other partners upon his admission to the partnership

b Assets of the partnership were overvalued immediately prior to Jerry’s investment

c The book value of the partnership’s net assets were less than their fair value immediately prior

to Jerry’s investment

d Jerry is apparently bringing goodwill into the partnership and his capital account will be

credited for the appropriate amount

15 The partnership of Amos, Cole, and Eddy had total capital of $570,000 on December 31, 2011 as

follows:

Eddy, Capital (25%) 135,000

Profit and loss sharing percentages are shown in parentheses If Flynn purchases a 25 percent interest from each of the old partners for a total payment of $270,000 directly to the old partners

a total partnership net assets can logically be revalued to $1,080,000 on the basis of the price paid

by Flynn

b the payment of Flynn does not constitute a basis for revaluation of partnership net assets

because the capital and income interests of the old partnership were not aligned

c total capital of the new partnership should be $760,000

d total capital of the new partnership will be $840,000 assuming no revaluation

16 The partnership of Amos, Cole, and Eddy had total capital of $570,000 on December 31, 2011 as

follows:

Eddy, Capital (25%) 135,000

Profit and loss sharing percentages are shown in parentheses Assume that Flynn became a partner

by investing $150,000 in the Amos, Cole, and Eddy partnership for a 25 percent interest in capital and profits and that partnership net assets are not revalued Flynn’s capital credit should be

a $180,000

b $142,500

c $150,000

d $190,000

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17 The partnership of Amos, Cole, and Eddy had total capital of $570,000 on December 31, 2011 as

follows:

Eddy, Capital (25%) 135,000

Profit and loss sharing percentages are shown in parentheses

Assume that Flynn became a partner by investing $100,000 in the Amos, Cole, and Eddy

partnership for a 25 percent interest in the capital and profits, and the partnership assets are

revalued Under this assumption

a Flynn’s capital credit will be $150,000

b Amos’s capital will be increased to $147,000

c total partnership capital after Flynn’s admission to the partnership will be $600,000

d net assets of the partnership will increase by $190,000, including Flynn’s interest

18 In the absence of an agreement among the partners

a interest is allowed on capital investments

b interest is charged on partners’ drawings

c interest is allowed on advances to the firm made by partners beyond agreed investments

d compensation is allowed partners for extra time devoted to the partnership

19 The profit and loss sharing ratio should be

a in the same ratio as the percentage interest owned by each partner

b based on relative effort contributed to the firm by the partners

c a weighted average of capital and effort contributions

d based on any formula that the partners choose

20 The partnership agreement of Flynn, Gant, and Hill allows Gant a bonus of 10% of income after the

bonus, salaries of $30,000 per partner and interest of 6% on average capital balances of $120,000,

$150,000, and $180,000 for Flynn, Gant, and Hill, respectively The amount of Gant’s bonus, assuming income before bonus, salaries, and interest of $315,000, is

a $18,000

b $22,000

c $19,800

d $31,500

21 Steve and Robby are partners operating an electronics repair shop For 2011, net income was

$50,000 Steve and Robby have salary allowances of $90,000 and $60,000, respectively, and remaining profits and losses are shared 4:6

The division of profits would be:

a $20,000 and $30,000

b $50,000 and $-0-

c $30,000 and $20,000

d $25,000 and $25,000

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22 Steve and Robby are partners operating an electronics repair shop For 2011, net income was

$50,000 Steve and Robby have salary allowances of $90,000 and $60,000, respectively, and remaining profits and losses are shared 4:6

If their agreement specifies that salaries are allowed only to the extent of income, based on a prorata share of their salary allowances, the division of profits would be:

a $20,000 and $30,000

b $50,000 and $-0-

c $30,000 and $20,000

d $25,000 and $25,000

23 Carter, Wynn, and Norton are partners in a janitorial service The business reported net income of

$54,000 for 2011 The partnership agreement provides that profits and losses are to be divided equally after Wynn receives a $60,000 salary, Norton receives a $24,000 salary, and each partner receives 10% interest on his beginning capital balance Beginning capital balances were $40,000 for Carter, $48,000 for Wynn, and $32,000 for Norton Norton’s share of partnership income for 2011 is:

a $68,800

b $36,000

c $31,200

d $27,200

24 Bell and Carson are partners who share profits and losses 3:7 The capital accounts on January 1,

2011, are $120,000 and $160,000, respectively Elston is to be admitted as a partner with a one-fourth interest in the capital and profits and losses by investing $80,000 Goodwill is not to be recorded The capital balances after admission should be:

a Bell, $117,000; Carson, $153,000; Elston, $90,000

b Bell, $120,000; Carson, $160,000; Elston, $90,000

c Bell, $123,000; Carson, $160,000; Elston, $80,000

e Bell, $120,000; Carson, $167,000; Elston, $80,000

25 The balance sheet for the partnership of Nen, Pap, and Sup at January 1, 2011 follows The partners

share profits and losses in the ratio of 3:2:5, respectively

Nen is retiring from the partnership By mutual agreement, the assets are to be adjusted to their fair value of $540,000 at January 1, 2011 Pap and Sup agree that the partnership will pay Nen $135,000 cash for his partnership interest NO goodwill is to be recorded What is the balance of Pap’s capital account after Nen’s retirement?

a $138,000

b $108,000

c $120,000

d $132,000

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26 The following balance sheet information is for the partnership of Axe, Barr, and Cole:

Barr, Capital (40%) 480,000 Cole, Capital (20%) 420,000

Figures shown parenthetically reflect agreed profit and loss sharing percentages

If the assets are fairly valued on the above balance sheet and the partnership wishes to admit Dent as a new 1/5 partner without recording goodwill or bonus, Dent should invest cash or other assets of

a $427,500

b $240,000

c $300,000

d $342,000

27 Susan desires to purchase a one-fourth capital and profit and loss interest in the partnership of Tony, Mary, and Ron The three partners agree to sell Susan one-fourth of their respective capital and profit and loss interests in exchange for a total payment of $125,000 The payment is made directly to the individual partners The capital accounts and the respective percentage interests in profits and losses immediately before the sale to Susan follow

Percentage

Accounts Profits and Losses

All other assets and liabilities are fairly valued and implied goodwill is to be recorded prior to the acquisition by Susan Immediately after Susan’s acquisition, what should be the capital balances of Tony, Mary, and Ron, respectively?

a $157,500; $97,500; $45,000

b $195,000; $123,750; $56,250

c $222,500; $138,750; $63,750

d $260,000; $165,000; $75,000

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28 The partnership of Carr, Eddy, and Howe had total capital of $1,140,000 on December 31, 2011, as

follows:

Carr, Capital (30%) $360,000

Eddy, Capital (45%) 510,000

Howe, Capital (25%) 270,000

Profit and loss sharing percentages are shown in parentheses

Assume that Klein became a partner by investing $300,000 in the Carr, Eddy, and Howe partnership for a 25 percent interest in capital and profits and that partnership net assets are not revalued Klein’s capital credit should be

a $360,000

b $285,000

c $300,000

d $380,000

29 The partnership of Carr, Eddy, and Howe had total capital of $1,140,000 on December 31, 2011, as

follows:

Carr, Capital (30%) $360,000

Eddy, Capital (45%) 510,000

Howe, Capital (25%) 270,000

Profit and loss sharing percentages are shown in parentheses

Assume that Klein became a partner by investing $300,000 in the Carr, Eddy, and Howe partnership for a 25 percent interest in the capital and profits, and the partnership assets are revalued Under this assumption

a Klein’s capital credit will be $300,000

b Carr’s capital will be increased to $394,000

c total partnership capital after Klein’s admission to the partnership will be $1,200,000

d net assets of the partnership will increase by $380,000 including Klein interest

30 Newlin, Vick, and Morton are partners in a plumbing service The business reported net income of

$108,000 for 2011 The partnership agreement provides that profits and losses are to be divided equally after Vick receives a $60,000 salary, Morton receives a $24,000 salary, and each partner receives 10% interest on his beginning capital balance Beginning capital balances were $40,000 for Newlin, $48,000 for Vick, and $32,000 for Morton Vick’s share of partnership income for 2011 is:

a $68,800

b $36,000

c $31,200

d $27,200

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Problems

15-1 Unruh, Grey, and Carter are partners with capital balances of $80,000, $200,000, and $120,000,

respectively Profits and losses are shared in a 3:2:1 ratio Grey decided to withdraw and the

partnership revalued its assets The value of inventory was decreased by $20,000 and the value of land was increased by $50,000 Unruh and Carter then agreed to pay Grey $230,000 for his

withdrawal from the partnership

Required:

Prepare the journal entry to record Grey’s withdrawal under the

A bonus method

B full goodwill method

15-2 Dell and Gore are partners in an automobile repair business Their respective capital balances are

$425,000 and $275,000, and they share profits in a 3:2 ratio Because of growth in their repair business, they decide to admit a new partner Mann is admitted to the partnership, after which Dell, Gore, and Mann agree to share profits in a 3:2:1 ratio

Required:

Prepare the necessary journal entries to record the admission of Mann in each of the following independent situations:

A Mann invests $300,000 for a one-fourth capital interest, but will not accept a capital balance

of less than his investment

B Mann invests $150,000 for a one-fifth capital interest The partners agree that assets and the

firm as a whole should be revalued

C Mann purchases a 20% capital interest from each partner Dell receives $100,000 and Gore

receives $50,000 directly from Mann

15-3 Bryant, Milton, and Pine formed a partnership and agreed to share profits in a 3:1:2 ratio after

recognition of 5% interest on average capital balances and monthly salary allowances of $3,750 to Milton and $3,000 to Pine Average capital balances were as follows:

Required:

Compute the net income (loss) allocated to each partner assuming the partnership incurred a

$27,000 net loss

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15-4 Rice and Thome formed a partnership on January 2, 2011 Thome invested $120,000 in cash Rice

invested land valued at $30,000, which he had purchased for $20,000 in 2005 In addition, Rice possessed superior managerial skills and agreed to manage the firm The partners agreed to the following profit and loss allocation formula:

a Interest —8% on original capital investments

b Salary — $5,000 a month to Rice

c Bonus — Rice is to be allocated a bonus of 20% of net income after subtracting the bonus, interest, and salary

d Remaining profit is to be divided equally

At the end of 2011 the partnership reported net income before interest, salaries, and bonus of

$168,000

Required:

Calculate the amount of bonus to be allocated to Rice

15-5 Wynn and Yates are partners whose capital balances are $400,000 and $300,000 and who share

profits 3:2 Due to a shortage of cash, Wynn and Yates agree to admit Zaun to the firm

Required:

Prepare the journal entries required to record Zaun’s admission under each of the following

assumptions:

(a) Zaun invests $200,000 for a 1/4 interest The total firm capital is to be $900,000

(b) Zaun invests $300,000 for a 1/4 interest Goodwill is to be recorded

(c) Zaun invests $150,000 for a 1/5 interest Goodwill is to be recorded

(d) Zaun purchases a 1/4 interest in the firm, with 1/4 of the capital of each old partner

transferred to the account of the new partner Zaun pays the partners cash of $250,000, which they divide between themselves

15-6 The partners in the ABC partnership have capital balances as follows:

A $70,000; B $70,000 C $105,000

Profits and losses are shared 30%, 20%, and 50%, respectively

On this date, C withdraws and the partners agree to pay him $140,000 out of partnership cash

Required:

A Prepare journal entries to show three acceptable methods of recording the withdrawal

(Tangible assets are already stated at values approximating their fair market values.)

B Which alternative would you recommend if you determined that the agreement to pay C

$140,000 was not the result of arms length bargaining between C and the other partners? Why?

15-7 Agler, Bates and Colter are partners who share income in a 5:3:2 ratio Colter, whose capital balance

is $150,000, retires from the partnership

Required:

Determine the amount paid to Colter under each of the following cases:

(1) $50,000 is debited to Agler capital account; the bonus approach is used

(2) Goodwill of $60,000 is recorded; the partial goodwill approach is used

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