Solution manual advanced accounting 4e jeter ch15

A partner's capital balance represents his or her interest in the net assets of the partnership, whereas a partner's interest in income and loss represents how his or her interest in cap

CHAPTER 15 ANSWERS TO QUESTIONS

1 A partnership is not subject to an income tax, but the individual partners report their share of partnership income, whether distributed or not, on their respective individual tax returns

2 A partner's capital balance represents his or her interest in the net assets of the partnership, whereas

a partner's interest in income and loss represents how his or her interest in capital will be affected

by the subsequent operations of the partnership Generally, a partner's capital account is used to recognize asset investments and withdrawals which are not considered temporary The partner's drawing account is generally used to record withdrawals of assets in anticipation of profitable operations of the partnership or any payments of a partner's personal expenses from partnership assets

3 A partnership is viewed as a "separate economic entity" in accounting because it has a "separable and definable existence" The assets, liabilities, and residual capital interest, as well as the economic events which affect the various partnership accounts, require a "separable accounting" to provide necessary information to the partners and to others interested in the partnership's performance

4 Some common methods used in allocating income and loss to partners are: fixed ratio, a ratio based

on capital balances, interest on capital, and payment for time devoted to partnership operations, salary and/or bonus

5 A withdrawal is a reduction in assets, not a distribution of income A salary is a determinate in the allocation of income and is a reward to the partner for the amount of time devoted to the partnership's operations

6 A bonus may be calculated in several ways Some of these are: (1) net income before any income allocations are made; (2) net income after income allocations are made, but before subtracting the bonus; (3) net income after subtracting the bonus, but before any other income allocations are made; and (4) net income after all income allocations are made, including the bonus

7 The UPA defines "dissolution" as a "change in the relation of the partners caused by any partner ceasing to be associated in the carrying on as distinguished from the winding up of the business."

8 The two methods used to record changes in partnership membership are (1) the bonus method and (2) the goodwill method Under the bonus method, assets of the partnership are increased by the amount of the assets invested by the new partner or decreased by the amount of the assets paid to a withdrawing partner The new (withdrawing) partner's capital account is debited (credited) for the capital interest acquired (the balance in the capital account) Any balancing amount is adjusted to the other partners' capital accounts Under the goodwill method, an intangible asset is recorded based on the difference between the value implied by the amount of consideration exchanged in the admission or withdrawal of a partner and the capital interest of the new or withdrawing partner

9 An interest in a partnership can be acquired either (1) by purchasing all or part of an interest directly from one or more partners (outside the partnership), called an assignment of partnership

profit and loss agreement are met These are: (1) the new partner's profit sharing interest equals his

or her initial interest in capital; and (2) the old partners' profit sharing ratio is in the same relative ratio as in the old partnership

11 Neither the goodwill method nor the bonus method should be used to record the admission of a new partner when (1) the book value of the interest acquired is equal to the value of assets invested, or (2) the net assets of the firm are overvalued

12 A partner withdrawing in violation of the partnership agreement and without the other partners' approval is entitled only to his or her interest in the firm, without consideration made for any goodwill The withdrawing partner is also liable to the remaining partners for any damages created

by his breach of the partnership agreement A partner forced to withdraw, however, is entitled to his full interest in the partnership, including any goodwill

BUSINESS ETHICS SOLUTIONS

Business ethics solutions are merely suggestions of points to address The objective is to raise the students' awareness of the topics, and to invite discussion In most cases, there is clear room for disagreement or conflicting viewpoints

1 The defined benefit plan creates a challenge for a firm in a fluctuating market If the firm is simultaneously struggling with other financial issues, its manager may indeed consider reducing or eliminating the plan However, such a decision should not be taken lightly, as it would remove an important and valuable benefit to its employees Certainly, there would be no reason, particularly when the plan is fully funded as it is here, to eliminate any of the previously accrued benefits However, the firm may wish to revisit the types of benefits offered in the future One alternative is

to switch to a defined contribution plan This plan is somewhat less appealing to the employee, but

it is certainly more desirable than no pension plan and it greatly reduces the volatility and risk to the employer

It is crucial that the employer take into account the manner in which a change in its pension plan will affect its ability to attract and keep top quality employees over the long run, as this is essential

to the long-term viability of the company Changing market dynamics have made firms realize that

in order to maximize long-term profits, they have to be socially responsible Firms, therefore, engage in social responsibility by responding to market demands, legal regulation, including

consumer, employment and environmental laws, and by going beyond the letter of the law Laws combined with markets are often adequate to make profit-maximizing and socially responsible behavior converge

The following points are among those to be considered in reconciling the tradeoffs between

financial performance and responsibility to a firm’s employees:

Employees can insist on socially responsible behavior, both by contract and by deciding where

to work Employees can contract not only about wages and working conditions, but also concerning social responsibility of firms A corporation’s reputation for social responsibility can attract and retain employees

Employees derive satisfaction from being associated with, and expect better treatment from, responsible firms

The more difficult the skill set and knowledge requirements for the employees’ position are to fill, the more likely that employee is to be influenced by such benefits as pension plans and such considerations as social responsibility of the firm

Workers are also investors and, more importantly, consumers The firms must not only hire and contract with its employees, but also motivate them to perform at their maximum level of effort Disgruntled workers can erode a firm’s goodwill As discussed above, unions and other groups prefer to deal with worker-friendly firms

For additional information, see the following link:

Note payable assumed by partnership - - - 30,000 - - -

Part A Bonus Method Part B Goodwill Method

Part C The bonus method is used when John and Jeff recognize that Jane is bringing something of

value to the firm other than a tangible asset, but they do not want to recognize an intangible asset To equalize the capital accounts, $40,000 is transferred from John's capital account and

$20,000 is transferred from Jeff's capital account

The goodwill method is used when the partners recognize the intangible nature of the skills Jane is bringing to the partnership However, the capital accounts are equalized by recognizing an intangible asset and a corresponding increase in the capital accounts of the partners Unless the intangible asset can be specifically identified, such as a patent being invested, it should not be recognized, because of a lack of justification for goodwill in a new business

Statement of Changes in Partners' Capital For the Year Ended December 31, 2004

Tom Julie Total Capital balances, Jan 1 $ 0 $ 0 $ 0

3 Interest on capital and salary $28,000 $2,500 $21,000 $51,500

Excess allocation (-$15,100 -$51,500) (22,200) (22,200) (22,200) (66,600) Net loss allocation $5,800 $(19,700) $(1,200) $(15,100)

Schedule 1 - Bonus Calculation

B = 10 (income after salaries - B)

Schedule 1 - Income Allocation

Hill Jones Vose Total

2 Unrealized Loss on Revaluation of Inventory 2,000

Unrealized Loss on Revaluation of Inventory 2,000

6 Bill, Capital ($2,980 × 70) 2,086

Minus capital balances + Mike’s investment [($12,000 + $8,000 - $2,980) + $14,000] 31,020

$6

$)6/1(000

,

720

2 Book value of interest acquired = ($600,000 + $160,000) (1/5) = $152,000

Book value acquired ($152,000) is less than assets invested ($160,000) by $8,000

Total capital implied by contract ($160,000/0.20) $800,000

Less: Current balances + Mary's investment * (760,000)

* ($600,000 + $160,000)

3 Book value of interest acquired = ($600,000 + $160,000) ¼ = $190,000

Book value of interest acquired ($190,000) is greater than assets invested ($160,000) by $30,000 Bonus Method

Goodwill implicit in agreement:

Current partners' capital balance total $600,000

Less: Current balances + Mary's investment 760,000

4 Book value of interest acquired = ($600,000 + $160,000) 0.40 = $304,000

Book value of interest acquired ($304,000) is greater than assets invested ($160,000) by $144,000 Bonus Method

Goodwill Method

Total capital implied by contract ($600,000/0.60) $1,000,000

Less: Current balances + Mary's investment 760,000

2 c $60,000 is the fair value of the land invested

3 c $10,000 interest + $14,175 bonus + $6,775 underallocation

Exercise 15-12

Sue Josh Total

Part A Interest on beginning capital $ 6,000 $ 8,000 $14,000

Sue Josh Total

B = $8,182

Sue Josh Total

B = $2,727

*Rounded: $13,636.50

2

273,27

$

500,112

$

= $48,282

375,159

$

875,46

$

= 20,118

$68,400

Portion of Year Weighted Average

470,130

$

938,85

$

= $45,054

470,130

$

532,44

$

= 23,346

Day Night Total

5 Interest on average balance *$ 12,891 **$ 6,680 $ 19,571

Statement of Changes in Partners' Capital Accounts For the Years Ended December 31, 2008, 2009, and 2010 December 31, 2008 Dave Brian Paul Total

4 Add back purchase price of equipment expensed

aThis assumes that the prepaid insurance expires in the next year

bThis assumes that the advances are earned in the next year

cThis assumes that the interest expense was deducted in 2008

Allowance for Bad Debts Write-off-2008 1,800 1/1 1,200

Adjustment 1,640 12/31 Bal 1,040

During 2008, $1,800 was written off and debited to expense

Adjustment to income is $160 or ($1,800 - $1,640)

Analysis of Change in Capital Accounts

Problem 15-3 (continued) Cain, Gallo, and Hamm Partnership

Adjusted Trial Balance December 31, 2008

Allowance for Doubtful Accounts _ _ _ 1,040 _ 1,040

$205,000 $205,000 $13,100 $13,100 $205,100 $205,100

1 Book value of interest acquired = ($180,000 + $90,000) 1/3 = $90,000

Bonus Method

2 Book value of interest acquired = ($180,000 + $120,000) 0.45 = $135,000

Book value of interest is greater than assets invested

Total capital implied from contract [$120,000/(1/3)] $360,000

Minus current capital balance + Moore's investment ($180,000 + $120,000) 300,000

4 Book value of interest acquired ($180,000 + $40,000) ¼ = $55,000

Book value of interest acquired is greater than assets invested

Problem 15-4 (continued)

5 Book value of interest acquired ($180,000 + $35,000) 0.20 = $43,000

Book value of interest acquired is greater than the asset invested

6 Book value of interest acquired ($180,000 + $150,000) (1/3) = $110,000

Book value of interest acquired is less than asset invested

Part A 1 Bad Debt Expense 1,680

Allowance for Doubtful Accounts (0.05 $33,600 = $1,680) 1,680

6 Total adjustment to capital accounts is $29,695 (credit)

Problem 15-5 (continued)

Balance Sheet December 31, 2008 Assets

Liabilities and Capital

Entry to be made before recording the withdrawal of Allen

Problem 15-7

Neal Palmer Ruppe

1 Capital balances before withdrawal $250,000 $150,000 $100,000

300,000 187,500 137,500

187,500 137,500 Write-off Impaired Goodwill ($125,000 0.50) _ (62,500) (62,500)

$ 0 $125,000 $75,000

Neal Palmer Ruppe

2 Capital balances before withdrawal $250,000 $150,000 $100,000

000,50

Capital interest of Waite ($130,000 - $16,320) 113,680

Problem 15-9 DISCOUNT PARTNERSHIP

Worksheet to Adjust and Combine the Partnerships' Accounts

Up & Down Back & Forth Four Partners'

(6) 2,800 (3) 20,125 (7) 3,695

$406,000 $406,000 $443,000 $443,000

$60,125 $60,125 $880,240 $880,240

(1,2) To adjust allowance for doubtful accounts to 4% of receivables

Up and Down: $90,000 0.04 = $3,600 - $2,000 = $1,600 credit

Back and Forth: $140,000 0.04 = $5,600 - $6,000 = $400 debit

(3) To adjust inventory to FIFO valuation method 0.80 X = $115,000

X = $143,750 - $115,000 = $28,750 (4) To adjust the allowance for depreciation account to an accumulation of depreciation for 3 years computed by the double-declining

(5) To record unrecorded merchandise purchase

(6) To record vacation pay accrual ($200 10 2)

(7) To adjust capital account as agreed

Up Down Back Forth Total

Problem 15-9 (continued)

Part B Computation of Cash Settlement Between Partners

Up & Down Back & Forth

Adjusted Capital Balances Excluding Goodwill $222,360 $88,344 $134,016 $225,150 $71,345 $153,805 Capital in Excess of Book Value 2,640 1,056 1,584 (150) (45) (105)

225,000 89,400 135,600 225,000 71,300 153,700

Settlement Between Parties $0 $600 $(600) $0 $(3,800) $3,800

$2,640 0.40 = $1,056 ($150) 0.30 = ($45)

$2,640 0.60 = $1,584 ($150) 0.70 = ($105)