Partnerships - Formation and Operations Part 3

Part 3 - Partnerships: Formation and Operations 50. What is the balance of Hane's capital account after the new partnership is created? A. $84,000. B. $100,000. C. $140,000. D. $176,000. E. $200,000. 51. What is the new total balance of the partnership accounts? A. $84,000. B. $140,000. C. $176,000. D. $200,000. E. $400,000. 52. Which of the following could be used as a basis to allocate profits among partners who are active in the management of the partnership? 1) Allocation of salaries. 2) The number of years with the partnership. 3) The amount of time each partner works. 4) The average capital invested. A. 1 and 2. B. 1 and 3. C. 1, 2, and 4. D. 1, 3, and 4. E. 1, 2, 3, and 4. P, L, and O are partners with capital balances of $50,000, $30,000 and $20,000 and who share in the profit and loss of the PLO partnership 30%, 20%, and 50%, respectively, when they agree to admit C for a 20% interest. 53. If C is to contribute an amount equal to his book value share of the new partnership, how much should C contribute? A. $22,000 B. $20,000 C. $25,000 D. $18,000 E. $10,000 54. C contributes $38,000 to the partnership and the bonus method is used. What amount will be credited for C's beginning capital balance? A. $20,000 B. $25,000 C. $27,600 D. $32,600 E. $38,000 55. If C contributes $40,000 to the partnership and the goodwill method is used, what amount will be debited for goodwill? A. $15,000 B. $20,000 C. $25,000 D. $28,000 E. $60,000 56. C contributes $10,000 to the partnership and the goodwill method is used. What will be the result of the goodwill calculation? A. Goodwill of $15,000; split among the original partners. B. Goodwill of $15,000; all to C. C. Goodwill of $15,000; split among all four partners: P, L, O, and C. D. Goodwill of $12,000; all to C. E. Goodwill of $12,000; split among original partners. Peter, Roberts, and Dana have the following capital balances; $80,000, $100,000 and $60,000, respectively. The partners share profits and losses 20%, 40%, and 40% respectively. 57. Roberts retires and is paid $160,000 based on an independent appraisal of the business. If the goodwill method is used, what is the capital balance of Peter? A. $20,000. B. $60,000. C. $110,000. D. $120,000. E. $230,000. Roberts receives an additional $60,000 above her capital balance. Since she is assigned 40 percent of all profits and losses, this extra allocation indicates total goodwill of $150,000, which must be split among all partners. 40% of Goodwill = $60,000 .40 G = $60,000 G = $150,000 and Peter receives 20% = $30,000. Peter's balance = $80,000 + $30,000 = $110,000. 58. Roberts retires and is paid $160,000 based on an independent appraisal of the business. If the goodwill method is used, what is the capital balance of Dana? A. $20,000. B. $60,000. C. $110,000. D. $120,000. E. $230,000. Roberts receives an additional $60,000 above her capital balance. Since she is assigned 40 percent of all profits and losses, this extra allocation indicates total goodwill of $150,000, which must be split among all partners. 40% of Goodwill = $60,000 .40 G = $60,000 G = $150,000 and Dana receives 40% = $60,000. Dana's balance = $60,000 + $60,000 = $120,000. 59. What is the total partnership capital after Roberts retires receiving $160,000 and using the goodwill method? A. $290,000. B. $176,000. C. $80,000. D. $120,000. E. $230,000. Roberts receives an additional $60,000 above her capital balance. Since she is assigned 40 percent of all profits and losses, this extra allocation indicates total goodwill of $150,000, which must be split among all partners. 40% of Goodwill = $60,000 .40 G = $60,000 G = $150,000 Total capital is $240,000 + goodwill $150,000 = $390,000. Roberts receives $160,000 and partnership capital is then $390,000-$160,000 = $230,000. Donald, Anne, and Todd have the following capital balances; $40,000, $50,000 and $30,000 respectively. The partners share profits and losses 20%, 40%, and 40% respectively. 60. Anne retires and is paid $80,000 based on an independent appraisal of the business. If the goodwill method is used, what is the capital of the remaining partners? A. Donald, $55,000; Todd, $60,000 B. Donald, $40,000; Todd, $30,000 C. Donald, $65,000; Todd, $55,000 D. Donald, $15,000; Todd, $30,000 Anne receives an additional $30,000 above her capital balance. Since she is assigned 40 percent of all profits and losses, this extra allocation indicates total goodwill of $75,000, which must be split among all partners. 40% of Goodwill = $30,000 .40 G = $30,000 G = $75,000 Donald = 20% Goodwill = $15,000. $40,000 + $15,000 = $55,000. Todd = 40% Goodwill = $30,000. $30,000 + $30,000 = $60,000. 61. Anne retires and is paid $80,000 based on the terms of the original partnership agreement. If the bonus method is used, what is the capital of the remaining partners? A. Donald, $40,000; Todd, $30,000 B. Donald, $30,000; Todd, $10,000 C. Donald, $50,000; Todd, $50,000 D. Donald, $24,000; Todd, $18,000 The $30,000 bonus is deducted from the remaining partners according to their relative profit and loss ratio. Donald = 20% and Todd = 40% which is a 1/3, 2/3 split. Donald = $40,000 - (1/3 x $30,000) = $30,000. Todd = $30,000 - (2/3 x $30,000) = $10,000. 62. What is the total partnership capital after Anne retires receiving $80,000 and using the bonus method? A. $70,000. B. $40,000. C. $60,000. D. $80,000. E. $42,000. Essay Questions 63. What is the dissolution of a partnership? The dissolution of a partnership is the breakup of the partnership caused by any change in the members that make up the partnership. 64. By what methods can a person gain admittance to a partnership? A person can gain admittance to a partnership by purchasing all or part of a current partner's interest or by investing assets in the partnership. 65. What events cause the dissolution of a partnership? The dissolution of a partnership occurs whenever there is a change in the members that make up the partnership. Dissolution does not mean going out of business, although, on occasion, dissolution would be accompanied by liquidation of assets and termination of the business. Dissolution would occur whenever a new partner is admitted to the partnership, dissolving one partnership and forming a new one. Dissolution also occurs when a partner leaves the partnership or when a partner dies or retires. The Articles of Partnership may allow the partners to force dissolution under some circumstances. 66. For what events or conditions should the Articles of Partnership make provision? The Articles of Partnership should be a comprehensive document that is fair to all the partners. It should contain the following provisions: (A.) The amounts that will be invested in the partnership by the founding partners. (B.) The amounts of withdrawals that partners can make. Limiting the amount of withdrawals causes the partners to maintain a reasonable investment in the partnership. (C.) The division of income or loss between the partners. (D.) Guidelines for admission of new partners or withdrawal or retirement of partners. (E.) In some cases, guidelines for division of assets when the partnership liquidates. In addition, the Articles of Partnership should specify how much time each partner will spend in the business; the responsibilities of each partner; and procedures for resolution of disputes between partners. 67. How is accounting for a partnership different from accounting for a corporation? Financial accounting for a partnership differs from corporate accounting only in accounting for owners' equity. A partnership does not sell capital stock and does not have a retained earnings account. Each partner will have a capital account and a drawing account. On the balance sheet, the balance in each of the partner's capital accounts should be reported. The accountant for a partnership must divide income or loss among partners, following the provisions of the Articles of Partnership. Income tax accounting differs between corporations and partnerships. A corporation is a taxable entity and must file an income tax return. A partnership is not a taxable entity but is required to file an informational return that reports the various amounts of revenues and expenses attributed to each partner. 68. Why are the terms of the Articles of Partnership important to partners? The Articles of Partnership contain terms that help to protect the interests of each partner and the longevity and profitability of the business. One of the most important terms in the Articles of Partnership is the provision for division of income or loss. The amount of income or loss assigned to partners affects the balances in their capital accounts and may affect the amount of withdrawals the partners can make and the assets they receive upon the liquidation of the partnership. The terms in the Articles of Partnership help to prevent one partner from taking advantage of other partners. 69. Brown and Green are forming a business as partners. If they do not create a formal written partnership agreement, what risks are they exposing themselves to? The Articles of Partnership should help every partner protect his or her interests. Because of mutual agency and unlimited liability, being a partner involves some risk. If a partnership becomes insolvent, any or all of the partners may be required to use personal assets to settle partnership liabilities. The Articles of Partnership can require each partner to maintain his or her investment in the partnership and to meet other responsibilities, such as working in the business. With a formal written agreement, each partner would have recourse if another partner does not fulfill the terms in the Articles of Partnership. 70. What theoretical argument could be made against the recognition of goodwill when there is a change in the ownership of a partnership? Goodwill should be recognized only when a business is purchased in an arms-length transaction — a transaction between independent parties. Generally, partners are not independent parties. Transactions between partners or between a partner and the partnership may be influenced by factors other than fair value and bargaining between independent parties. For example, if one partner has been causing trouble for a partnership, the other partners might agree to pay more than fair value to convince that partner to leave the business. The amount of goodwill that could be calculated for such a transaction would not be an indication of the fair value of the business. 71. Under what circumstances does a partner's balance in his or her capital account have practical consequences for the partner? The most direct practical consequence of a partner's capital account balance occurs when the partnership is liquidated. After assets are sold and liabilities are paid, each partner receives the balance in his or her capital account. The balance in the capital account may also influence the division of income or loss each year and could affect the amount of cash each partner is allowed to withdraw from the partnership. 72. Reed, Sharp, and Tucker were partners with capital account balances of $80,000, $100,000, and $70,000, respectively. They agreed to admit Upton to the partnership. Upton purchased 30% of each partner's interest, with payments directly to Reed, Sharp, and Tucker of $32,000, $40,000, and $28,000, respectively. Before the admission of Upton, the profit and loss sharing ratio was 2:3:2. The partners agreed to use the bonus method to account for the admission of Upton to the partnership. Required: Prepare the journal entry to record the admission of Upton to the partnership. 73. Jipsom and Klark were partners with capital account balances of $80,000 and $100,000, respectively. Looney directly paid $32,000 to Jipsom and $40,000 to Klark for 30% of their interests in the partnership. Jipsom and Klark shared income in the ratio of 2:3. They believed that revaluation of the partnership was appropriate when a new partner was admitted. Required: Prepare the journal entries to record the admission of Looney to the partnership. Norr and Caylor established a partnership on January 1, 2010. Norr invested cash of $100,000 and Caylor invested $30,000 in cash and equipment with a book value of $40,000 and fair value of $50,000. For both partners, the beginning capital balance was to equal the initial investment. Norr and Caylor agreed to the following procedure for sharing profits and losses: - 12% interest on the yearly beginning capital balance - $10 per hour of work that can be billed to the partnership's clients - the remainder divided in a 3:2 ratio The Articles of Partnership specified that each partner should withdraw no more than $1,000 per month. For 2010, the partnership's income was $70,000. Norr had 1,000 billable hours, and Caylor worked 1,400 billable hours. In 2011, the partnership's income was $24,000, and Norr and Caylor worked 800 and 1,200 billable hours respectively. Each partner withdrew $1,000 per month throughout 2010 and 2011.