Test bank advanced accounting 10e by beams chapter 15

The assignee does not become a partner but has the right to share in future partnership profits and to receive the proper share of partnership assets upon liquidation... Bloom and Carnes

Chapter 15 Test Bank

PARTNERSHIPS – FORMATION, OPERATIONS, AND CHANGES

IN OWNERSHIP INTERESTS

Multiple Choice Questions

LO1

1 Under the Uniform Partnership Act, loans made by a partner to

the partnership are treated as

2 A partner assigned his partnership interest to a third party

Which statement best describes the legal ramifications to the assignee?

a The assignment of the partnership interest does not entitle the assignee to partnership assets upon a liquidation

b The assignment dissolves the partnership

c The assignee has the right to share in the management of the partnership

d The assignee does not become a partner but has the right to share in future partnership profits and to receive the proper share of partnership assets upon liquidation

LO1

4 Partnerships

a are required to prepare annual reports

b are required to file income tax returns but do not pay Federal taxes

c are required to file income tax returns and pay Federalincome taxes

d are not required to file income tax returns or pay Federal income taxes

LO2

5 Langley invests his delivery van in a computer repair

partnership with McCurdy What amount should the van be credited to Langley’s partnership capital?

a The tax basis

b The fair value at the date of contribution

c Langley’s original cost

d The assessed valuation for property tax purposes

Use the following information for questions 6, 7 and 8

A summary balance sheet for the McCune, Nall, and Oakley partnership

appears below McCune, Nall, and Oakley share profits and losses in a

market value of partnership land is appraised at $100,000 and the

fair market value of inventory is $87,500 The assets are to be

revalued prior to the admission of Pavic and there is $15,000 of

goodwill that attaches to the old partnership

LO2

6 By how much will the capital accounts of McCune, Nall, and

Oakley increase, respectively, due to the revaluation of the

assets and the recognition of goodwill?

a The capital accounts will increase by $25,000 each

b The capital accounts will increase by $30,000 each

Use the following information for questions 9, 10 and 11

Albion and Blaze share profits and losses equally Albion and Blazereceive salary allowances of $20,000 and $30,000, respectively, and both partners receive 10% interest on their average capital balances Average capital balances are calculated at the beginning of each month balance regardless of when additional capital contributions or permanent withdrawals are made subsequently within the month Partners’ drawings are not used in determining the average capital balances Total net income for 2006 is $120,000

Albion Blaze January 1 capital balances $ 100,000 $ 120,000 Yearly drawings ($1,500 a month) 18,000 18,000 Permanent withdrawals of capital:

10 If the average capital for Albion and Blaze from the above

information is $112,000 and $119,000, respectively, what will

be the total amount of profit allocated after the salary and interest distributions are completed?

a $70,000

LO3

11 If the average capital balances for Albion and Blaze are

$100,000 and $120,000, what will the final profit allocations

for Albion and Blaze in 2006?

Use the following information for questions 12 and 13

Bloom and Carnes share profits and losses in a ratio of 2:3,

respectively Bloom and Carnes receive salary allowances of $10,000

and $20,000, also respectively, and both partners receive 10%

interest based upon the balance in their capital accounts on January

1 Partners’ drawings are not used in determining the average capital

balances Total net income for 2006 is $60,000 If net income after

deducting the interest and salary allocations is greater than

$20,000, Carnes receives a bonus of 5% of the original amount of net

income

January 1 capital balances $ 200,000 $ 300,000

Yearly drawings ($1,500 a month) 18,000 18,000

LO3

12 What are the total amounts for the allocation of interest,

salary, and bonus, and, how much over-allocation is present?

13 If the partnership experiences a net loss of $20,000 for the

year, what will be the final amount of profit or (loss) closed

to each partner’s capital account?

a ($30,000) to Bloom and $10,000 to Carnes

b ($10,000) to Bloom and ($10,000) to Carnes

c ($8,000) to Bloom and ($12,000) to Carnes

d $10,000 to Bloom and ($30,000) to Carnes

LO3

14 The XYZ partnership provides a 10% bonus to Partner Y that is

based upon partnership income, after deduction of the bonus

If the partnership's income is $121,000, how much is Partner Y's bonus allocation?

a are advances to a partnership

b are loans to a partnership

c are a function of interest on partnership average capital

d *are the same nature as withdrawals

LO4

16 If the partnership agreement provides a formula for the

computation of a bonus to the partners, the bonus would be computed

a next to last, because the final allocation is the

distribution of the profit residual

b before income tax allocations are made

c after the salary and interest allocations are made

d in any manner agreed to by the partners

Use the following information for questions 17, 18 and 19

Davis has decided to retire from the partnership of Davis, Eiser, and

Foreman The partnership will pay Davis $200,000 Goodwill is to be

recorded in the transaction as implied by the excess payment to

Davis A summary balance sheet for the Davis, Eiser, and Foreman

partnership appears below Davis, Eiser, and Foreman share profits

and losses in a ratio of 1:1:3, respectively

LO6

20 In a limited partnership, a general partner

a is excluded from management

b is not entitled to a bonus at the end of the year

c has limited liability for partnership debit

d has unlimited liability for partnership debit

LO2

Exercise 1

Cesar and Damon share partnership profits and losses at 60% and 40%, respectively The partners agree to admit Egan into the partnership for a 50% interest in capital and earnings Capital accounts immediately before the admission of Egan are:

2 Prepare the journal entry(s) for the admission of Egan to the partnership assuming Egan invested $500,000 for the ownership interest Egan paid the money to the partnership for a 50% interest in capital and earnings The partnership records goodwill

3 Prepare the journal entry(s) for the admission of Egan to the partnership assuming Egan invested $700,000 for the ownership interest Egan paid the money to the partnership for a 50% interest in capital and earnings The partnership records goodwill

LO3

Exercise 2

On February 1, 2005, Flores, Gilroy, and Hansen began a partnership

in which Flores and Hansen contributed cash of $25,000; Gilroy contribute property with a fair value of $50,000 and a tax basis

$40,000 Gilroy receives a 5% bonus of partnership income Flores and Hansen receive salaries of $10,000 each The partnership agreement of Flores, Gilroy, and Hansen provides all partners to receive a 5% interest on capital and that profits and losses be divided of the remaining income be distributed to Flores, Gilroy, and Hansen by a 1:3:1 ratio

Required:

Prepare a schedule to distribute $25,000 of partnership net income to the partners

LO3

Exercise 3

The profit and loss sharing agreement for the Quade, Reid, and Scott partnership provides for a $15,000 salary allowance to Reid Residual profits and losses are allocated 5:3:2 to Quade, Reid, and Scott, respectively In 2006, the partnership recorded $120,000 of net income that was properly allocated to the partner's capital accounts

On January 25, 2007, after the books were closed for 2006, Quadediscovered that office equipment, purchased for $12,000 on December

29, 2006, was recorded as office expense by the company bookkeeper Required:

Prepare the necessary correcting entry(s) for the partnership

LO3

Exercise 4

Evans, Fitch, and Gault operate a partnership with a complex profit and loss sharing agreement The average capital balance for each partner on December 31, 2006 is $300,000 for Evans, $250,000 for Fitch, and $325,000 for Gault An 8% interest allocation is provided

to each partner Evans and Fitch receive salary allocations of

$10,000 and $15,000, respectively If partnership net income is above

$25,000, after the salary allocations are considered (but before the interest allocations are considered), Gault will receive a bonus of 10% of the original amount of net income All residual income is allocated in the ratios of 2:3:5 to Evans, Fitch, and Gault, respectively

Required:

1 Prepare a schedule to allocate income to the partners assuming that partnership net income is $250,000

2 Prepare a journal entry to distribute the partnership's income to

the partners (assume that an Income Summary account is used by

the partnership)

LO3

Exercise 5

Required:

Using the information from Exercise 4 above:

1 Prepare a schedule to allocate income or loss to the partners assuming that the partnership incurs a net loss of $36,000

2 Prepare a journal entry to distribute the partnership's loss to

the partners (assume that an Income Summary account is used by the

Capital accounts Grech Harris Ivers Jan 1 balance $ 200,000 $ 300,000 $ 250,000

Feb 2 investment 50,000

Mar 6 investment 10,000 20,000

Apr 20 withdrawal ( 10,000 )Jul 3 withdrawal

and investment

( 7,000 ) 10,000Sep 29 investment 5,000 4,000 5,000

Required:

Calculate weighted average capital for each partner, and determine the amount of interest that each partner will be allocated

LO3

Exercise 7

The profit and loss sharing agreement for the Sealy, Teske, and Ubank

partnership provides that each partner receive a bonus of 5% on the

original amount of partnership net income if net income is above

$25,000 Sealy and Teske receive a salary allowance of $7,500 and

$10,500, respectively Ubank has an average capital balance of

$260,000, and receives a 10% interest allocation on the amount by

which his average capital account balance exceeds $200,000 Residual

profits and losses are allocated to Sealy, Teske, and Ubank in their

A summary balance sheet for the partnership of Ivory, Jacoby and Kato

on December 31, 2006 is shown below Partners Ivory, Jacoby and Kato

allocate profit and loss in their respective ratios of 9:6:10

market value for partnership land is $180,000, and the fair market

value of the inventory is $150,000

3 If Lange paid $200,000 to the partnership in exchange for a 10%

interest, what would be the bonus that is allocated to each

partner's capital account?

LO5

Exercise 9

A summary balance sheet for the Vail, Wacker Yang partnership on

December 31, 2006 is shown below Partners Vail, Wacker, and Yang

allocate profit and loss in their respective ratios of 4:5:7 The

partnership agreed to pay partner Yang $227,500 for his partnership

interest upon his retirement from the partnership on January 1, 2007

Any payments exceeding Yang’s capital balance are treated as a bonus

from partners Vail and Wacker

LO5

Exercise 10

A summary balance sheet for the Almond, Brandt, and Clack partnership

on December 31, 2006 is shown below Partners Almond, Brandt, and

Clack allocate profit and loss in their respective ratios of 2:1:1

The partnership agreed to pay partner Brandt $135,000 for his

partnership interest upon his retirement from the partnership on

January 1, 2007 The partnership financials on January 1, 2007 are:

1 Assuming a bonus to Brandt

2 Assuming a revaluation of total partnership capital based on

excess payment

3 Assuming goodwill to excess payment is recorded

6 c The assets will be valued upward by $90,000 which,

allocated on a 2:3:5 basis, yields $18,000 to McCune,

$27,000 to Nall, and $45,000 to Oakely

7 d After the revaluation, the assets will be recorded at

$602,500 If Pavic is admitted for a one-fifth interest, the $602,500 represents 80% of the total implied capital Dividing $602,500 by 80% gives a total capitalization of $753,150 for which $150,625 is required from Pavic for a 20% interest

8 d Each of the original partners has given up 20% of their

interest to Pavic Their profit and loss sharing ratios will therefore be 80% of what they were before the admission of Pavic

10 b Capital: ($112,000 + $119,000)x(10%) = $23,100

Salary: ($20,000 + $30,000) = $50,000 Total: $23,100 + $50,000 = $73,100

11 b Albion: ($100,000 x 10%) + $20,000 + $24,000 = $54,000

Blaze: ($120,000 x 10%) + $30,000 + $24,000 = $66,000

12 b Interest: ($500,000 x 10%) = $50,000

Salary: ($10,000 + $20,000) = $30,000 Bonus: Condition not met = $0 Total allocations = $80,000 and over-allocations =

$80,000 - $60,000 = $20,000

13 b Bloom:

Interest allocation: $20,000 Salary allocation: $10,000 Carnes:

Interest allocation: $30,000 Salary allocation: $20,000 There is a total of $80,000 for positive allocations

To bring them down to a $20,000 loss, a residual adjustment of ($100,000) is needed which is allocated ($40,000) to Bloom and ($60,000) to Carnes After these amounts are assigned to the partners, each partner’s capital account will be reduced by a net $10,000

14 a B = 1x($121,000 - B)

B = $12,100 - 1B 1.1B = $12,100

If a $400,000 payment represents 50% of total capital, then twice

that amount, or $800,000, is the implied total capital including

goodwill If the present total capital is $600,000, and the implied

total capital is $800,000, the amount of goodwill to record is

$200,000 This goodwill is allocated 60% to Cesar and 40% to Damon

After the first entry is posted, the balances in the Cesar and Damon

capital accounts will be $420,000 and $380,000, respectively If

one-half of each partner’s interest is given to Egan, Cesar’s capital

account is reduced by $210,000, and Damon’ capital account is reduced

If we focus on the current capital of the partnership, $600,000, and

say that it is fairly valued, then, if it represents 50% of final

capital after Egan’s investment, final capital should be $1,200,000

Egan’s share of final capital will be $600,000, and, if Egan invests

$500,000 for this interest, there must be $100,000 of goodwill that

If Egan invests $700,000 for a 50% interest, it implies that total

partnership capital should be $1,400,000 After Egan’s investment, total

capital will be $1,300,000, and goodwill is therefore $100,000 The

goodwill is allocated to Cesar and Damon

Interest allocation ( 70,000 ) 24,000 20,000 26,000Residual ( 130,000 ) 26,000 39,000 65,000 Final allocation $ 0 $ 60,000 $ 74,000 $ 116,000

Jan, Feb, Mar $ 300,000 x 3 = $ 900,000

Apr, May, Jun, Jul 320,000 x 4 = 1,280,000

Ivers Jan, Feb, Mar, Apr $ 250,000 x 4 = $ 1,000,000

May, Jun, Jul, Aug, Sep 240,000 x 5 = 1,200,000

The assets of the partnership must be adjusted to fair market value

Land will increase by $100,000, and Inventory by $75,000 The profit

and loss ratio elements add up to 25 Partner Ivory will then be

allocated 9/25 of the $175,000, etc

The partnership's total assets after revaluation are $900,000 If

Lange acquires a 10% interest, it implies that the $900,000

represents 90% of the partnership’s value after Lange's investment

Therefore, $900,000/90% = $1,000,000, and $1,000,000 x 10% =

$100,000 The entry to record Lange’s investment would be: