Beruflich Dokumente
Kultur Dokumente
CHAPTER 14
PARTNERSHIPS: FORMATION AND OPERATION
Answers to Questions
1.
The advantages of operating a business as a partnership include the ease of formation and
the avoidance of the double taxation effect that inherently reduces the profits distributed to
the owners of a corporation. In addition, because the losses of a partnership pass, for tax
purposes, directly through to the owners, partnerships have historically been used
(especially in certain industries) to reduce or defer income taxes.
Several disadvantages also accrue from the partnership format. Each general partner, for
example, has unlimited liability for all debts of the business. This potential liability can be
especially significant in light of the concept of mutual agency, the right that each partner has
to create liabilities in the name of the partnership. Because of the risks created by unlimited
liability and mutual agency, the growth potential of most partnerships is severely limited. Few
people are willing to become general partners in an organization unless they can maintain
some day-to-day contact and control over the business.
Further discussion of these issues can be found in the Answer to the first Discussion
Question that appears above.
2.
Specific partnership accounting problems center in the equity (or capital) section of the
balance sheet. In a corporation, stockholders' equity is divided between earned capital and
contributed capital. Conversely, for a partnership, each partner has an individual capital
account that is not differentiated according to its sources. Virtually all accounting issues
encountered purely in connection with the partnership format are related to recording and
maintaining these capital balances.
3.
The balance in each partner's capital account measures that partner's interest in the book
value of the business net assets. This figure arises from contributions, earnings, drawings,
and other capital transactions.
4.
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
5.
In a general partnership, each partner can have unlimited liability for the debts of the
business. Therefore, a partner may face a significant risk, especially in connection with the
actions and activities of other partners. However, general partnerships are easy to form and
often serve well in smaller businesses where all partners know each other. The major
advantage of a general partnership is that all income earned by the business is only taxed
once when earned by the business so that no second tax is incurred when distributions are
made to owners.
A limited liability partnership (LLP) is very similar to a general partnership except in the
method by which a partners liability is measured. In an LLP, the partners can still lose their
entire investment and be held responsible for all contractual debts of the business such as
loans. However, partners cannot be held responsible for damages caused by other partners.
For example, if one partner carelessly causes damage and is sued, the other partners are
not held responsible.
A limited liability company can now be created in certain situations. This type of organization
is classified as a partnership for tax purposes so that the double-taxation effect is avoided.
However, the liability of the owners is limited to their individual investments like a
Subchapter C Corporation. Depending on state law, the number of owners is not restricted
in the same manner as a Subchapter S Corporation so that there is a greater potential for
growth.
6.
The Articles of Partnership is a legal agreement that should be created as a prerequisite for
the formation of a partnership. This document defines the rights and responsibilities of the
partners in relation to the business and in relation to each other. Thus, it serves as a
governing document for the partnership. The Articles of Partnership may contain any
number of provisions but should normally specify each of the following:
a.
b.
c.
d.
e.
To give fair recognition to noncash contributions, all assets donated by the partners (such as
land or inventory) should be recorded by the partnership at their fair values at the date of
investment. However, for taxation purposes, the partners book value is retained.
8.
In forming a partnership, one or more of the partners may be contributing some factor (such
as an established clientele or an expertise) which is not viewed normally as an asset in the
traditional accounting sense. In effect, the partner will be receiving a larger capital balance
than the identifiable contributions would warrant.
14-2
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
The bonus method of recording this transaction is to value and record only the identifiable
assets such as land and buildings. The capital accounts are then aligned to recognize the
proportionate interest being assigned to each partner's investment. If, for example, the
capital balances are to be equal, they are set at identical amounts that correspond in total to
the value of the identifiable assets.
As an alternative, the amounts contributed along with the established capital percentages
can be used to determine mathematically the implied total value of the business and the
presence of any goodwill brought into the business. This goodwill is recognized at the time
that the partnership is created so that the amount can be credited to the appropriate partner.
9.
The Drawing account measures the amount of assets that a particular partner takes from
the business during the current period. Often, only regularly allowed distributions are
recorded in the Drawing account with larger, more sporadic withdrawals being recorded as
direct reductions to the partner's capital balance.
10. At the end of each fiscal year, when revenues and expenses are closed out, some
assignment must be made of the resulting income figure Because a partnership will have
two or more capital accounts rather than a single retained earnings balance. This allocation
to the capital accounts is based on the agreement established by the partners preferably as
a part of the Articles of Partnership.
11. The allocation process can be based on any number of factors. The actual assignment of
income should be designed to give fair and equitable treatment to each of the partners.
Often, an interest factor is used to reward the capital investment of the partners. A salary
allowance is utilized as a means of recognizing the amount of time worked by an individual
or a certain degree of business expertise. The allocation process can be further refined by a
ratio that is either divided evenly among the partners or weighted in favor of one or more
members.
12. If agreement as to the allocation of income has not been specified, an equal division among
all partners is presumed. If an agreement has been reached for assigning profits but no
mention is made concerning losses, the assumption is made that the same method is
intended in either case.
13. The dissolution of a partnership is the breakup or cessation of the partnership. Many
reasons can exist for a partnership to dissolve. One partner may withdraw, retire, or die. A
new partner may be admitted to the partnership. The original partnership terminates
whenever the identity of the individuals serving as partners has changed.
Dissolution, however, does not necessarily lead to the liquidation of the business. In most
cases, but not all, a new partnership is formed which takes over the business. Such
dissolutions are no more than changes in the composition of the ownership and should not
affect operations.
14. A new partner can join a partnership by acquiring part or all of the interest of one or more of
the present partners. This transaction is carried out with the individual partners directly and
not with the partnership. A new partner may also enter through a contribution to the
business. In such cases, the investment is made to the partnership rather than to the
individuals.
14-3
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
15. In selling an interest in a partnership, three rights are conveyed to the new owner:
a. The right of co-ownership of the business property;
b. The right to a specified allocation of profits and losses generated by the partnership's
business; and
c. The right to participate in the management of the business.
No problem exists in selling or assigning the first two of these rights. However, the right to
participate in management decisions can only be transferred with the consent of all partners.
16. Goodwill recognized in a capital transaction is allocated to the original partners based on the
profit and loss ratio. The amount is assumed to represent unrealized gains in the value of
the business. To determine the amount of goodwill, the implied value of the business as a
whole must be calculated based on the price being paid for a portion by the new partner.
The difference between this implied value and the total capital is assumed to be goodwill or
some other adjustment to asset value.
17. Allocating goodwill to an entering partner may be necessary for several reasons. One of the
most common is that the partner is bringing to the partnership an attribute that is not an
asset in the traditional accounting sense. For example, a new partner with an excellent
business reputation might be credited with goodwill at the time of entrance. Other factors
such as an established clientele or a professional expertise can justify attributing goodwill to
the new partner. The partnership might make this same concession to an entering partner if
cash is urgently needed by the business and a larger share of the capital has to be offered
as an enticement to generate the new investment.
18. Book values in most cases measure historical cost expenditures which often have
undergone years of allocation and changes in value. For this reason, book value will
frequently fail to mirror or even resemble the actual worth of a business. In addition, the
goodwill that is assumed to be present in a business as a going concern is not a factor that
is always reflected within book values. Therefore, distributing partnership property to a
withdrawing partner based on book value would not necessarily be fair. Hence, the Articles
of Partnership should spell out a method by which an equitable settlement can be achieved.
14-4
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Answers to Problems
1. B
2. C
3. D
4. C Mary Ann's investment equals 1/3 of total capital ($50,000 $150,000).
However, she receives only a 1/4 interest capital balance. One explanation
for the difference is that the business assets are worth more than book
value. To achieve agreement, the net assets could be valued upward to fair
value with the adjustment credited to the original partners capital
accounts. Alternatively, a bonus could be credited to the original partners.
5. D Based on the new contribution, the companys implied value is $350,000
($105,000 30%) which is less than the capital balances ($315,000 in
original capital plus $105,000 to be invested). Thus, either the assets are
overvalued or the new partner is contributing goodwill in addition to a cash
investment. Because the problem indicates that goodwill is recognized,
goodwill must be computed. Note that the $105,000 is going into the
business and, thus, increases capital.
David's investment = 30% (Original capital plus David's investment)
$105,000 + Goodwill = .30 ($315,000 + $105,000 + Goodwill)
$105,000 + Goodwill = $126,000 + .30 Goodwill
.70 Goodwill = $21,000
Goodwill = $30,000
David's investment (Capital) = $105,000 + $30,000 = $135,000
6. B The implied value of the company is $960,000 ($240,000 25%). Because
the current capital total is only $760,000, goodwill of $200,000 must be
recognized. Krystal's investment is paid directly to the partners and does
not affect the capital total. Of the $200,000 in goodwill, 30 percent or
$60,000 is attributed to Dane which brings that capital balance to $340,000.
Because a 25% interest is conveyed to the new partner, Dane's balance
decreases by 25% or $85,000resulting in a new balance of $255,000.
7. B Total capital is $200,000 ($110,000 + $40,000 + $50,000) after the new
investment. As Kansas's portion is 30 percent, the capital balance becomes
$60,000 ($200,000 30%). Because only $50,000 was paid, a bonus of
$10,000 is taken from the two original partners based on their profit
and
loss ratios: Bolcar $7,000 (70%) and Neary $3,000 (30%). The reduction
drops Neary's capital balance from $40,000 to $37,000.
14-5
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Interest5% of
beginning capital .................
$ 2,500
Salary........................................
Allocation of remaining income
($33,000 divided on a 3:3:4 basis)
9,900
Totals .............................
$12,400
BERNARD
COLLINS
TOTAL
$ 3,000
18,000
$ 3,500
$ 9,000
18,000
9,900
$30,900
13,200
$16,700
33,000
$60,000
BERNARD
COLLINS
TOTAL
STATEMENT OF CAPITAL
ALFRED
$50,000
12,400
(5,000)
$57,400
$60,000
30,900
(5,000)
$85,900
$70,000 $180,000
16,700
60,000
(5,000) (15,000)
$81,700 $225,000
Interest10% of
beginning capital ...............
$11,000
Salary........................................
20,000
Allocation of remaining loss
($80,000 divided on a 5:2:3 basis) (40,000)
Totals .............................
$(9,000)
DURHAM
SALEM
TOTAL
$ 8,000
-0-
$11,000
10,000
$30,000
30,000
(16,000)
$ (8,000)
(24,000) (80,000)
$ (3,000) $(20,000)
$110,000
(9,000)
(10,000)
$ 91,000
DURHAM
$80,000
(8,000)
(10,000)
$62,000
SALEM
TOTAL
$110,000 $300,000
(3,000) (20,000)
(10,000) (30,000)
$ 97,000 $250,000
14-6
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
11. (continued)
ASSIGNMENT OF INCOMEYEAR TWO
WINSTON
Interest10% of
beginning capital ...............
$ 9,100
Salary........................................
20,000
Allocation of remaining loss
($15,000 divided on a 5:2:3 basis)
(7,500)
Totals .............................
$21,600
DURHAM
SALEM
TOTAL
$ 6,200
-0-
$ 9,700
10,000
$25,000
30,000
(3,000)
$3,200
(4,500) (15,000)
$15,200 $ 40,000
WINSTON
DURHAM
$ 91,000
21,600
(10,000)
$102,600
$62,000
3,200
(10,000)
$55,200
SALEM
TOTAL
$ 97,000 $250,000
15,200
40,000
(10,000) (30,000)
$102,200 $260,000
12. A Costello receives a $10,000 bonus ($100,000 less $90,000 capital balance).
This bonus is deducted from the two remaining partners according to their
profit and loss ratio (2:3). A 60 percent (3/5) reduction is assigned to Burns
which decreases that partners capital balance from $30,000 to $24,000.
13. D Clark receives an additional $10,000. Because Clark receives 20 percent of
profits and losses, this allocation indicates total goodwill of $50,000.
20% of Goodwill = $10,000
Goodwill = $10,000 .20 = $50,000
Goodwill
Manning, capital (30%)
Gonzalez, capital (30%)
Clark, capital (20%)
Freeney, capital (20%)
50,000
15,000
15,000
10,000
10,000
3,750
3,750
2,500
80,000
90,000
14-7
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
15. A The implied value of the company is $900,000 ($270,000 30%). Because
the money is going to the partners rather than into the business, the capital
total is $490,000 before realigning the balances. Hence, goodwill of
$410,000 is recognized based on the implied value ($900,000 $490,000).
This goodwill is assumed to represent unrealized business gains and is
attributed to the original partners according to their profit and loss ratio.
They will then each convey 30 percent ownership of the $900,000
partnership to Darrow for a capital balance of $270,000.
16. D Because the money goes into the business, total capital becomes $740,000
($490,000 + $250,000). Darrow is allotted 30 percent of this total or
$222,000. Because Darrow invested $250,000, the extra $28,000 is assumed
to be a bonus to the original partners. Jennings will be assigned 40 percent
of this extra amount or $11,200. This bonus increases Jennings capital
from $160,000 to $171,200.
17. (10 Minutes) (Compute capital balances under both goodwill and bonus
methods)
a. Goodwill Method
Implied value of partnership ($80,000 40%) ...............
Total capital after investment ($70,000 + $40,000 + $80,000)
Goodwill ............................................................................
$200,000
190,000
$ 10,000
7,000
$ 3,000
$ 77,000
$ 43,000
$ 80,000
b. Bonus Method
Total capital after investment ($70,000 + 40,000 + $80,000)
Ownership portionLear ................................................
Lear, capital ......................................................................
$190,000
40%
$ 76,000
4,000
2,800
1,200
$ 72,800
$ 41,200
$ 76,000
14-8
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
18. (15 Minutes) (Prepare journal entries to record admission of new partner under
both the goodwill and the bonus methods)
Part a.
Total capital is $300,000 ($85,000 + $60,000 + $55,000 + $100,000) after the
new investment. As Sergio's portion is 25 percent, this partner's capital
balance would be $75,000. Because $100,000 was paid, a bonus of $25,000
is given to the three original partners based on their profit and loss ratio:
Tiger$12,500 (50%), Phil$7,500 (30%), and Ernie$5,000 (20%).
Cash ............................................................................
Sergio, capital .......................................................
Tiger, capital ..........................................................
Phil, capital ............................................................
Ernie, capital ..........................................................
100,000
75,000
12,500
7,500
5,000
Part b.
Total capital is $260,000 ($85,000 + $60,000 + $55,000 + $60,000) after the
new investment. As Sergio's portion is 25 percent, this partner's capital
balance is $65,000. Because only $60,000 was paid, a bonus of $5,000 is
taken from the three original partners based on their profit and loss ratio:
Tiger$2,500 (50%), Phil$1,500 (30%), and Ernie$1,000 (20%).
Cash ............................................................................
Tiger, capital ................................................................
Phil, capital ..................................................................
Ernie, capital ...............................................................
Sergio, capital .......................................................
60,000
2,500
1,500
1,000
65,000
Part c.
Total capital is $272,000 ($85,000 + $60,000 + $55,000 + $72,000) after the
new investment. However, the implied value of the business based on the
new investment is $288,000 ($72,000 25%). Consequently, goodwill of
$16,000 must be recognized with the offsetting allocation to the original
partners based on their profit and loss ratio: Tiger$8,000 (50%), Phil
$4,800 (30%), and Ernie$3,200 (20%).
Goodwill .....................................................................
Tiger, capital ..........................................................
Phil, capital ............................................................
Ernie, capital ..........................................................
Cash .............................................................................
Sergio, capital .......................................................
16,000
8,000
4,800
3,200
72,000
72,000
14-9
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
19. (16 Minutes) (Determine capital balances after admission of new partner using
both goodwill and bonus methods)
Part a.
Total capital is $490,000 ($200,000 + $120,000 + $90,000 + $80,000) after the
new investment. However, the implied value of the business based on the
new investment is only $444,444 ($80,000 18%). According to the goodwill
method, this situation indicates that the new partner must be bringing
some intangible attribute to the partnership other than just cash. This
contribution must be computed algebraically and is recorded as goodwill
to the new partner.
G's Investment = .18 ($200,000 + $120,000 + $90,000 + G's Investment)
$80,000 + Goodwill = .18 ($410,000 + $80,000 + Goodwill)
$80,000 + Goodwill = $88,200 + .18 Goodwill
.82 Goodwill = $8,200
Goodwill = $10,000
The above goodwill balance indicates that Grant's total investment is
$90,000 (cash of $80,000 and goodwill of $10,000). A $90,000 contribution
raises the total capital to $500,000 so that Grant does, indeed, have an 18
percent interest ($90,000 $500,000).
CAPITAL BALANCES:
Nixon ......................................................................
Hoover ....................................................................
Polk ......................................................................
Grant ......................................................................
$200,000
120,000
90,000
90,000
Part b.
Total capital is $510,000 ($200,000 + $120,000 + $90,000 + $100,000) after
the new investment. As Grant's portion is to be 20 percent, this partner's
capital balance will be $102,000. Because only $100,000 was paid, a bonus
of $2,000 is taken from the three original partners based on their profit and
loss ratio: Nixon$1,000 (50%), Hoover$400 (20%), and Polk$600
(30%).
CAPITAL BALANCES
Original
Nixon .....................
Hoover ...................
Polk ........................
Grant ......................
Total .................
$200,000
120,000
90,000
-0-
Investment
Bonus
100,000
$(1,000)
(400)
(600)
2,000
Total
$199,000
119,600
89,400
102,000
$510,000
14-10
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
20. (10 Minutes) (Record admission of new partner and allocation of new income)
Part a.
Total capital is $167,000 ($70,000 + $60,000 + $37,000) after the new
investment. However, the implied value of the business based on the new
investment is $185,000 ($37,000 20%). Consequently, goodwill of $18,000
must be recognized with the offsetting allocation to the original two
partners based on their profit and loss ratio: Prince$14,400 (80%) and
Robbins$3,600 (20%).
Goodwill..................................................................
Prince, capital ..................................................
Robbins, capital ...............................................
Cash ......................................................................
Jeffrey, capital ..................................................
18,000
14,400
3,600
37,000
37,000
Part b.
Interest ..................................
Remaining loss......................
Income allocation ...........
Prince
$8,440
(1,750)
$6,690
Robbins
$6,360
(1,050)
$5,310
Jeffrey
$3,700
(700)
$3,000
Total
$18,500
(3,500)
$15,000
Lane
$
-045,000
(6,000)
$39,000
Total
$18,000
90,000
(18,000)
$90,000
King
$
-030,000
(6,000)
$24,000
14-11
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Purkerson
Smith
$ 6,600 (below) $ 4,000
18,000
25,000
(16,000)
$ 8,600
(8,000)
$21,000
Traynor
$ 2,000
8,000
Totals
$12,600
51,000
(16,000)
(40,000)
$(6,000)
$23,600
$180,000
612,000
$792,000
12
$ 66,000
10%
$ 6,600
$60,000
8,000
8,600
(12,000)
$64,600
Smith
$40,000
-021,000
(12,000)
$49,000
Traynor
Totals
$20,000 $120,000
-08,000
(6,000)
23,600
(12,000)
(36,000)
$ 2,000 $115,600
14-12
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
23. (30 Minutes) (Allocate income for several years and determine ending capital
balances)
INCOME ALLOCATION2014
Left
Interest (12% of beginning capital) $2,400
Salary
12,000
Remaining income/loss:
$(30,000)
(15,600)
(20,000)
$(65,600)
(19,680)
Totals
$(5,280)
Center
$ 7,200
8,000
(32,800)
$(17,600)
Right
$ 6,000
-0-
Total
$ 15,600
20,000
(13,120)
(65,600)
$(7,120) $(30,000)
Left
$20,000
(5,280)
(10,000)
$ 4,720
Center
$60,000
(17,600)
(10,000)
$32,400
INCOME ALLOCATION2015
Left
Center
Interest(12% of beginning capital above) *$566
$3,888
Salary ..................................
12,000
8,000
Remaining income/loss:
$20,000
(8,400)
(20,000)
$(8,400)
(2,520)
(4,200)
Totals...................
$10,046
$7,688
*Rounded
Right
Total
$50,000 $130,000
(7,120)
(30,000)
(10,000)
(30,000)
$32,880 $ 70,000
Right
$3,946
-0-
Total
$ 8,400
20,000
(1,680)
$2,266
(8,400)
$20,000
Left
$ 4,720
-010,046
(10,000)
$ 4,766
Center
$32,400
-07,688
(10,000)
$30,088
Right
$32,880
12,000
2,266
(10,000)
$37,146
Total
$70,000
12,000
20,000
(30,000)
$72,000
14-13
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
23. (continued)
INCOME ALLOCATION2016
Left
Center
Interest (12% of beginning capital
above)* ............................
$ 572
$ 3,611
Salary ...................................
12,000
8,000
Remaining income:
$40,000
(8,640)
(20,000)
$11,360.........................
2,272
4,544
Totals..........................
$14,844
$16,155
Right
Total
$4,457
-0-
$ 8,640
20,000
4,544
$9,001
11,360
$40,000
*Rounded
STATEMENT OF PARTNERS' CAPITALDECEMBER 31, 2016
Left
Center
Right
Total
Beginning balances (above)
$ 4,766
$30,088
$37,146
$72,000
Income allocation
14,844
16,155
9,001
40,000
Drawings
(10,000)
(10,000)
(10,000)
(30,000)
Ending balances
$ 9,610
$36,243
$36,147
$82,000
14-14
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
24. (12 Minutes) (Determine capital balances after retirement of a partner using
both the goodwill and the bonus approaches)
a. Fergie receives $30,000 more than her capital balance. Because Fergie is
assigned 20 percent of all profits and losses, this extra allocation indicates
total goodwill of $150,000, which must be split among all partners.
20% of Goodwill = $30,000
.20 G = $30,000
G = $150,000
CAPITAL BALANCES AFTER WITHDRAWAL
Original Balance
Pineda
Adams
Fergie
Gomez
Total
$230,000
190,000
160,000
140,000
Goodwill
$45,000
45,000
30,000
30,000
Withdrawal
Final Balance
$(190,000)
$275,000
235,000
-0170,000
$680,000
b. A $50,000 bonus is paid to Pineda ($280,000 is paid rather than the $230,000
capital balance). This bonus is deducted from the three remaining partners
according to their relative profit and loss ratio (3:2:1). A reduction of 50
percent (3/6) is assigned to Adams or a decrease of $25,000 which drops this
partner's capital balance from $190,000 to $165,000. A reduction of 33.3
percent (2/6) is assigned to Fergie or a decrease of $16,667 which drops this
partner's capital balance from $160,000 to $143,333. A reduction of 16.7
percent (1/6) is assigned to Gomez or a decrease of $8,333 which drops this
partner's capital balance from $140,000 to $131,667.
25. (10 minutes) (Hybrid method for recording a partner withdrawal)
Because the continuing partners do not wish to record goodwill, a hybrid approach
records identifiable asset fair value changes and corresponding capital
adjustments, but no goodwill. The remaining excess payment to the withdrawing
partner after the revaluation is then treated as a bonus.
Building
Matteson, capital
Richton, capital
OToole, capital
40,000
12,000
20,000
8,000
OToole, capital
Matteson, capital
Richton, capital
Cash
108,000
4,500
7,500
120,000
14-15
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
26.
16,500
14,000
Revenues .....................................................................
Expenses (adjusted by first entry) ......................
Income summary ..................................................
(To close revenue and expense accounts for 2014.)
175,000
7,500
16,500
14,000
138,500
36,500
Hugh
$ 15,000
5,000
Jacobs
$ 10,000
25,000
(7,400) (40%)
$12,600
(11,100) (60%)
$23,900
14-16
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
26. (continued)
d. Total capital (original balances of $250,000 plus 2014
net income less drawings) ...................................
$256,000
Investment by Thomas ..............................................
64,000
Total capital after investment ....................................
$320,000
Ownership portion acquired by Thomas .................
15%
Thomas, capital ..........................................................
$ 48,000
Amount paid ................................................................
64,000
Bonus paid by Thomasassigned to original partners $ 16,000
Bonus to Hugh (40%) .................................................
$6,400
$9,600
Cash ............................................................................
Thomas, capital (20% of total capital) ................
Hugh, capital .........................................................
Jacobs, capital ......................................................
64,000
48,000
6,400
9,600
14-17
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
$360,000
306,000
$ 54,000
$16,200
5,400
21,600
10,800
$54,000
CAPITAL BALANCES
Original balances
Goodwill (above)
Investment
Capital balances
A
$20,000
16,200
-0 $ 36,200
B
$40,000
5,400
-0 $45,400
C
$ 90,000
21,600
-0 $111,600
D
$120,000
10,800
-0 $130,800
E
$-0-036,000
$36,000
c. Because E's investment of $42,000 is less than 20% of the resulting capital
($312,000). E is apparently bringing some other attribute to the partnership
(goodwill) that must be computed:
E Investment = 20% (Original Capital + E Investment)
$42,000 + Goodwill = .20 ($270,000 + $42,000 + Goodwill)
$42,000 + Goodwill = $62,400 + .20 Goodwill
.80 Goodwill = $20,400
Goodwill = $25,500
E's investment is, therefore, $42,000 in cash and $25,500 in goodwill for a total
capital balance of $67,500; the other capital accounts remain unchanged. Note
that E's capital of $67,500 is 20% of the new total capital $337,500 ($270,000 +
$67,500).
14-18
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
27. (continued)
d.
20%
$ 65,000
55,000
$ 10,000
Bonus from:
A (10%) .................................................................
B (30%) .................................................................
C (20%) .................................................................
D (40%) .................................................................
$10,000
Original balances
Investment
Bonus (above)
Capital balances
CAPITAL BALANCES
A
B
C
$20,000
$40,000
$90,000
-0-0-0(1,000)
(3,000)
(2,000)
$19,000
$37,000
$88,000
$1,000
3,000
2,000
4,000
D
$120,000
-0(4,000)
$116,000
E
$-055,000
10,000
$65,000
$ 90,000
112,500
$ 22,500
$7,500
7,500
7,500
$22,500
CAPITAL BALANCES
A
B
Original balances .................
$20,000
$40,000
Bonus (above) ......................
(7,500)
(7,500)
Payment ................................
-0 -0 Capital balances ...................
$12,500
$32,500
C
D
$ 90,000 $120,000
22,500
(7,500)
(112,500)
-0 $
-0- $112,500
14-19
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
28. (55 Minutes) (Allocation of income to the partners and determination of capital
balances)
ALLOCATION OF INCOME2013
Boswell
Johnson
Salary (8 months) .................
$8,000
$-0Remaining $3,000 .................
1,200 (40%)
3,000
Totals ................................
$9,200
$1,800
Total
$ 8,000
$11,000
Johnson
$-0(3,840)
$(3,840)
Walpole
$24,000
(3,200)
$20,800
Total
$36,000
(8,000)
$28,000
Boswell
$66,200
(7,040)
11,040
(5,000)
$65,200
Johnson
$58,800
(10,560)
(3,840)
(5,000)
$39,400
Walpole
Total
$ -0- $125,000
71,600
54,000
20,800
28,000
(10,000)
(20,000)
$82,400 $187,000
14-20
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
28. (continued)
ADMISSION OF POPEJANUARY 1, 2015
Pope's payment was made directly to the partners. Therefore, neither goodwill
nor a bonus need be recognized. Instead, 10% of each capital balance shown
above will be reclassified to Pope. The journal entry would be as follows:
Boswell, capital ................................................................
Johnson, capital ...............................................................
Walpole, capital.................................................................
Pope, capital ...............................................................
6,520
3,940
8,240
18,700
ALLOCATION OF INCOME2015
Salary
Remaining $400 income
Totals
Boswell
Johnson
Walpole
Pope
Total
$12,000
54
$12,054
$-0162
$162
$24,000
144
$24,144
$9,600
40
$9,640
$45,600
400
$46,000
Boswell Johnson
$65,200
$39,400
(6,520)
(3,940)
12,054
(5,000)
$65,734
162
(5,000)
$30,622
Walpole
$82,400
(8,240)
24,144
(10,000)
$88,304
Pope
$-018,700
Total
$187,000
-0-
9,640
46,000
(4,000) (24,000)
$24,340 $209,000
14-21
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
29. (60 Minutes) (Allocate income and prepare a statement of partners' capital)
a. Income Allocation2013
Gray
Salary allowance ($8 per billable
hour)
$13,680
Interest (see Note A)
25,928
Bonus (not applicable because
salary and interest would
necessitate a negative bonus)
-0Remaining loss (split evenly):
$ 65,000
(35,600)
(58,328)
$(28,928)
(9,643)
Profit allocation
$29,965
Stone
Lawson
Totals
$11,520
21,600
$10,400
10,800
$35,600
58,328
-0-
-0-
-0-
(9,643)
$23,477
(9,642)
$11,558
(28,928)
$65,000
Note A: Interest for Stone and Lawson is calculated at 12% of their beginning
capital balances ($180,000 and $90,000, respectively) while for Gray the
computation is based on a $210,000 balance for 4/12 of the year and $219,100
for the remaining 8/12.
Capital Account Balances1/1/13 12/31/13
Beginning contributions
Added Investment
Profit allocation (from above)
Drawing (10% of beginning
balances)
Ending balances
Gray
$210,000
9,100
29,965
Stone
$180,000
-023,477
Lawson
$90,000
-011,558
Totals
$480,000
9,100
65,000
(21,000)
$228,065
(18,000)
$185,477
(9,000)
$92,558
(48,000)
$506,100
14-22
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
29. a. (continued)
Income Allocation2014
Gray
Salary allowance ($8
per billable hour) $14,400
Interest (12% of beginning capital balances
for the year)
27,368
Bonus (not applicable)
-0Remaining loss (split
evenly):
$ (20,400)
(46,960)
(80,976)
$(148,336)
(37,084)
Loss allocation
$ 4,684
Stone
Lawson
Monet
Totals
$ 12,000
$ 11,040
$ 9,520
$ 46,960
22,257
-0-
11,107
-0-
20,244
-0-
80,976
-0-
(37,084)
$(2,827)
(37,084)
$(14,937)
Lawson
$92,558
(37,084)
$ (7,320)
Monet
$168,700
(148,336)
$(20,400)
Totals
$674,800
(14,937)
(7,320)
(20,400)
(9,256)
$68,365
(16,870)
$144,510
(67,480)
$586,920
Stone
Lawson
Monet
Totals
$12,960
$10,480
$12,640
$ 51,120
19,692
2,604
8,204
-0-
17,341
-0-
70,430
5,208
6,510
$41,766
6,511
$25,195
6,511
$36,492
26,042
$152,800
14-23
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
29. a. (continued)
Note B: The bonus to Gray and Stone can only be derived algebraically.
Because each of the two partners is entitled to 10% of net income as defined,
the total bonus is 20% and can be computed as follows:
Bonus = 20% (Net income Salary Interest Bonus)
B = .2 ($152,800 $51,120 $70,430 B)
B = .2 ($31,250 B)
B = $6,250 .2B
1.2 B = $6,250
B = $5,208 (or $2,604 per person)
Capital Account Balances 1/1/15 12/31/15
Gray
Stone
Beginning balances $209,943 $164,102
Profit allocation (from
above)
49,347
41,766
Drawings (10% of
beginning
balances)
(20,994) (16,410)
Ending balances
$238,296 $189,458
Lawson
$68,365
Monet
$144,510
Totals
$586,920
25,195
36,492
152,800
(6,837)
$86,723
(14,451)
$166,551
(58,692)
$681,028
Lawson
$68,365
Monet
$144,510
Totals
$586,920
25,195
36,492
152,800
b.
GRAY, STONE, LAWSON, and MONET
Statement of Partners' Capital
For Year Ending December 31, 2015
Gray
Stone
Beginning balances $209,943 $164,102
Profit allocation (from
above)
49,347
41,766
Drawings (10% of
beginning
balances)
(20,994) (16,410)
Ending balances
$238,296 $189,458
(6,837)
$86,723
(14,451)
$166,551
(58,692)
$681,028
14-24
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
30. (40 Minutes) (Recording admission and retirement of partners using both the
bonus and goodwill methods)
a. Porthos, capital ..........................................................
35,000
D'Artagnan, capital ...............................................
35,000
(To reclassify Porthos's capital balance to reflect transfer of interest to
D'Artagnan.)
b. Goodwill
.................................................................
50,000
Athos, capital (50%) .............................................
25,000
Porthos, capital (30%) .........................................
15,000
Aramis, capital (20%) ...........................................
10,000
(To record goodwill based on $250,000 implied value of partnership [$25,000
10%]. Because current capital is only $200,000 [the $25,000 goes directly
to the partners], goodwill of $50,000 has to be recorded and allocated using
profit and loss ratio.)
Athos, capital (10% of balance) ................................
10,500
Porthos, capital (10% of balance) .............................
8,500
Aramis, capital (10% of balance) ..............................
6,000
D'Artagnan, capital................................................
25,000
(To reclassify 10% of each partner's capital to reflect transfer of interest to
D'Artagnan.)
c. Cash ............................................................................
30,000
D'Artagnan, capital (10% of total capital)............
23,000
Athos, capital (50% of excess payment) ............
3,500
Porthos, capital (30% of excess payment) .........
2,100
Aramis, capital (20% of excess payment) ..........
1,400
(To record $30,000 payment by D'Artagnan which increases total capital to
$230,000. D'Artagnan is credited for only 10% of that balance with the extra
$7,000 payment being recorded as a bonus to the original partners.)
d. Cash ............................................................................
30,000
Goodwill ......................................................................
70,000
D'Artagnan, capital ...............................................
30,000
Athos, capital (50% of goodwill) .........................
35,000
Porthos, capital (30% of goodwill) .....................
21,000
Aramis, capital (20% of goodwill) ........................
14,000
(To record D'Artagnan's contribution to the partnership. The $30,000
payment for 10% interest indicates a $300,000 value for the business
although the capital balances would only increase to $230,000. The $70,000
difference is recorded as goodwill, an amount assigned to the original
partners.)
14-25
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
30. (continued)
e. Cash .............................................................................
12,222
Goodwill . ....................................................................
10,000
D'Artagnan, capital ...............................................
22,222
To record investment by D'Artagnan. The implied value of the investment as
a whole would be only $122,220 ($12,222 10%). Because the capital
balances are well in excess of this figure, D'Artagnan is apparently bringing
some other factor (goodwill) into the partnership. This goodwill can be
computed as follows:
$12,222 + Goodwill = 10% (Original Capital + $12,222 + Goodwill)
$12,222 + Goodwill = 10% ($200,000 + $12,222 + Goodwill)
$12,222 + Goodwill = $21,222 + .10 Goodwill
.90 Goodwill = $9,000
Goodwill = $10,000
f. Goodwill ......................................................................
80,000
Athos, capital (50%) ..............................................
40,000
Porthos, capital (30%) ..........................................
24,000
Aramis, capital (20%) ............................................
16,000
(To record goodwill of $80,000 based on $280,000 appraisal of business.)
Aramis, capital ............................................................
66,000
Cash ......................................................................
66,000
(To distribute cash to retiring partner based on final capital balance.)
14-26
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Building .......................................................
52,000
Equipment....................................................
16,000
Cash .............................................................
12,000
O'Donnell, capital .................................
40,000
Reese, capital ........................................
40,000
(To record initial investment. Assets recorded at fair value with
two equal capital balances.)
Cash .............................................................
15,000
O'Donnell, capital (15%) ............................
300
Reese, capital (85%) ..................................
1,700
Dunn, capital .........................................
17,000
(New investment by Dunn brings total capital to $85,000 after 2013
loss [$80,000 $10,000 + $15,000]. Dunn's 20% interest is $17,000
[$85,000 20%] with the extra $2,000 coming from the two original
partners [allocated between them according to their profit and
loss ratio].)
31. a. (continued)
O'Donnell
Interest (20% of $51,700
beginning capital balance)........
15% of $44,000 income ...................
60:40 split of remaining $27,060
income ........................................
Total ..................................................
Reese
Dunn
$16,236
$16,236
$10,824
$10,824
$10,340
6,600
$16,940
Reese
$40,000
(22,000)
(1,700)
(5,000)
16,236
$27,536
22,824
11,660
5,507
5,000
$17,000
(5,000)
10,824
$22,824
22,824
11,660
5,507
5,000
Dunn
20,810
24,114
16,076
Reese
Postner
$24,114
$24,114
$16,076
$16,076
14-28
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
31. a. (continued)
1/1/16
Postner, capital ...........................................
O'Donnell, capital (15%) ............................
Reese, capital (85%) ..................................
Cash .......................................................
(Postner's capital is $33,900 [$22,824
$5,000 + $16,076]. Extra 10% payment is
deducted from the two remaining
partners' capital accounts.)
b. 1/1/13
33,900
509
2,881
37,290
Building........................................................
Equipment ...................................................
Cash .............................................................
Goodwill ......................................................
O'Donnell, capital .................................
Reese, capital ........................................
(To record initial capital investments.
Reese is credited with goodwill of
$80,000
to
match
O'Donnell's
investment.)
52,000
16,000
12,000
80,000
30,000
1/1/14
15,000
22,500
Cash .............................................................
Goodwill ......................................................
Dunn, capital .........................................
(Cash and goodwill being contributed by
Dunn are recorded. Goodwill must be
calculated algebraically.)
80,000
80,000
20,000
10,000
37,500
14-29
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
31. b. (continued)
12/31/14 O'Donnell, capital .......................................
20,000
Reese, capital .............................................
10,000
Dunn, capital ...............................................
7,500
O'Donnell, drawings..............................
Reese, drawings ...................................
Dunn, drawings .....................................
(To close out drawings accounts for the
year based on 20 % of beginning capital
balances: O'Donnell$100,000, Reese
$50,000, and Dunn$37,500.)
12/31/14 Income summary .......................................
44,000
O'Donnell, capital .................................
Reese, capital ........................................
Dunn, capital .........................................
(To allocate $44,000 income figure as follows)
O'Donnell
Interest (20% of $100,000
beginning capital balance)
15% of $44,000 income
60:40 split of remaining $17,400
Totals
26,600
10,440
6,960
Reese
Dunn
$10,440
$10,440
$6,960
$6,960
$20,000
6,600
$26,600
20,000
10,000
7,500
Reese
$80,000
(30,000)
(10,000)
10,440
$50,440
Dunn
$37,500
(7,500)
6,960
$36,960
Goodwill ......................................................
26,588
O'Donnell, capital (15%) .......................
3,988
Reese, capital (51%) .............................
13,560
Dunn, capital (34%) ..............................
9,040
(To record goodwill indicated by purchase of Dunn's interest.)
In effect, profits are shared 15% to O'Donnell, 51% to Reese (60% of the 85%
remaining after O'Donnell's income), and 34% to Dunn (40% of the 85%
remaining after O'Donnell's income). Postner is paying $46,000, an amount
$9,040 in excess of Dunn's capital ($36,960). The additional payment for this
34% income interest indicates total goodwill of $26,588 ($9,040 34%).
Because Dunn is entitled to 34% of the profits but only holds 19% of the total
capital, an implied value for the company as a whole cannot be determined
14-30
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
directly from the payment of $46,000. Thus, goodwill can only be computed
based on the excess payment.
31. b. (continued)
1/1/15
46,000
46,000
61,000
O'Donnell
Reese
Postner
$17,839
$17,839
$11,893
$11,893
Reese
$50,440
13,560
(12,800)
17,839
$69,039
Postner
$36,960
9,040
(9,200)
11,893
$48,693
31,268
17,839
11,893
$22,118
9,150
$31,268
Postner will be paid $53,562 (110% of the capital balance) for her interest. This
amount exceeds her capital balance by $4,869. Because Postner is only
entitled to a 34% share of profits and losses, the additional $4,869 indicates
that the partnership as a whole is undervalued by $14,321 (4,869 34%). Only
in that circumstance is the extra payment to Postner justified:
14-31
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
31. b. (continued)
1/1/16 Goodwill .................................................................
O'Donnell, capital (15%) ..................................
Reese, capital (51%) ........................................
Postner, capital (34%) .....................................
(To recognize implied goodwill.)
14,321
53,562
2,148
7,304
4,869
53,562
14-32
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Analysis Case
An unlimited number of allocation plans can be developed for any partnership.
Here, Wilson will be interested in some reward for investing the capital used to
create the business. Higgins will expect to be recognized for the work put into
the operation. Poncelet should seek some reward for any new clients that she is
able to bring to the business.
One possibility would be to accrue interest to Wilson on her capital balance for
the year based, perhaps, on the prime rate. Poncelet could be assigned a
particularly high share of any revenues generated from new clients. The amount
of income left would result from Higginss work in the day-to-day operations of
the business so a large part of that remainder could be assigned to her.
As an alternative, Wilson could be allocated an interest factor but only based on
the initial amount invested in the business rather than the capital balance as a
whole. Higgins could be assigned some type of allowance for the number of
hours of work put in each period. Any remaining income could be divided evenly
among the three partners but only up to a certain level. Beyond that, perhaps
only Poncelet and Higgins would share in the income Because they are doing the
14-33
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
work, one in gaining new clients and the other in the day-to-day operations of the
business.
Communication Cases 1 and 2
These two cases ask the student to identify the types of factors that will lend
themselves toward the organization becoming a corporation (in Case 1) or a
partnership (in Case 2). Several issues should be considered when looking into a
legal format for a business enterprise:
Do state laws play any role in the decision? In some states, particular
types of organizations are prohibited from operating as a corporation. Will
state law come into play in making this decision? If so, the partnership
form of organization will be required.
How big do the owners expect the company to become? If the business
will remain small, there may be no need to raise additional capital so that
the ability to sell ownership may not be an issue. This favors creation of a
partnership. However, if Birmingham and Roberts expect the business to
prosper and grow, they should consider which type of business will enable
them to attract other capital or debt investments. Usually, it is a
corporation that is best set up to enable growth through the issuance of
securities.
How risky is the business operation? If the company is operating in a
business where liability is not a significant problem, the limited liability of a
corporation might not be of much interest. However, if there is some risk
involved, the two owners may need the corporate type of organization just
for their own financial security.
How well do the owners know and trust each other? As with the previous
comment, potential liability can be greatly enhanced if the owners do not
know each other well or if additional owners are expected to join at a later
point in time. Under that circumstance, everyone may feel more
comfortable if the business is created as a corporation or as one of the
limited liability organizations. If the owners, though, are comfortable with
each other, they may not feel the necessity of creating a formalized
corporation.
What changes will occur in the tax laws? At this writing, dividends paid by
a corporation to its owners are taxable at 15%. However, from time to time
various politicians have proposed the elimination of part or all of that tax.
Corporations gain appeal if dividend income is not taxed.
How much money do they have available to create a legal organization? In
most states, creation of a partnership can be virtually free whereas the
legal formality of a corporation can cost money. If finances are tight, the
business could begin as a partnership and then convert to a corporation at
a later date as monetary restrictions ease.
14-34
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
$200,000
2,000
1,500
$80,000
$50,000
$20
$30
10%
10%
Profit to be Split:
$40,000
45,000
8,000
5,000
$98,000
$102,000
Profit-Red
Profit-Blue
50%
50%
$51,000
$51,000
14-35
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Problems
LO 14-1
1.
LO 14-1
2.
LO 14-2
3.
LO 14-9
4.
Pat, Jean Lou, and Diane are partners with capital balances of
$50,000, $30,000, and $20,000, respectively. These three partners
share profits and losses equally. For an investment of $50,000 cash
(paid to the business), MaryAnn will be admitted as a partner with a
one-fourth interest in capital and profits. Based on this information,
which of the following best justifies the amount of MaryAnn's
investment?
a. MaryAnn will receive a bonus from the other partners upon her
admission to the partnership.
b. Assets of the partnership were overvalued immediately prior to
MaryAnn's investment.
c.
Page 657
The book value of the partnership's net assets was less than the fair value
immediately prior to MaryAnn's investment.
5.
6.
7.
The capital balance for Bolcar is $110,000 and for Neary is $40,000.
These two partners share profits and losses 70 percent (Bolcar) and
30 percent (Neary). Kansas invests $50,000 in cash into the
partnership for a 30 percent ownership. The bonus method will be
used. What is Neary's capital balance after Kansas's investment?
a. $35,000.
b. $37,000.
c. $40,000.
d. $43,000.
LO 14-9
8.
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
d. $126,000.
LO 14-9
9.
Page 658
LO 14-6
10. A partnership begins its first year with the following capital balances:
Assuming that the net income is $60,000 and that each partner
withdraws the maximum amount allowed, what is the balance in
Collins capital account at the end of that year?
a. $70,800.
b. $86,700.
c. $73,500.
d. $81,700.
LO 14-4, 145, 14-6
11. A partnership begins its first year of operations with the following
capital balances:
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
The net loss for the first year of operations is $20,000 and net income
for the subsequent year is $40,000. Each partner withdraws the
maximum amount from the business each period. What is the balance
in Winston's capital account at the end of the second year?
a. $102,600.
b. $104,400.
c. $108,600.
d. $109,200.
LO 14-10
Profits and losses are split as follows: Allen (20 percent), Burns (30
percent), and Costello (50 percent). Costello wants to leave the
partnership and is paid $100,000 from the business based on
provisions in the articles of partnership. If the partnership uses the
bonus method, what is the balance of Burns's capital account after
Costello withdraws?
a. $24,000.
b. $27,000.
c. $33,000.
d. $36,000.
Page 659
13. Using the goodwill method, what is Manning's capital balance after
Clark withdraws?
a. $133,000.
b. $137,500.
c. $140,000.
d. $145,000.
LO 14-10
14. If instead the partnership uses the bonus method, what is the balance
of Manning's capital account after Clark withdraws?
14-39
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
a. $100,000.
b. $126,250.
c. $130,000.
d. $133,750.
Problems 15 and 16 are independent problems based on the
following capital account balances:
LO 14-8
LO 14-9
LO 14-9
LO 14-9
18. The Distance Plus partnership has the following capital balances at
the beginning of the current year:
Page 660
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
LO 14-9
LO 14-6
21. The partnership agreement of Jones, King, and Lane provides for the
annual allocation of the business's profit or loss in the following
sequence:
14-41
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
23. On January 1, 2014, the dental partnership of Left, Center, and Right
was formed when the partners contributed $20,000, $60,000, and
$50,000, respectively. Over the next three years, the business
reported net income and (loss) as follows:
During this period, each partner withdrew cash of $10,000 per year.
Right invested an additional $12,000 in cash on February 9, 2015.
At the time that the partnership was created, the three partners
agreed to allocate all profits and losses according to a specified plan
written as follows:
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
24. The E.N.D. partnership has the following capital balances as of the
end of the current year:
25. The partnership of Matteson, Richton, and O'Toole has existed for a
number of years. At the present time the partners have the following
capital balances and profit and loss sharing percentages:
26. In the early part of 2015, the partners of Hugh, Jacobs, and Thomas
sought assistance from a local accountant. They had begun a new
business in 2014 but had never used an accountant's services.
Hugh and Jacobs began the partnership by contributing $150,000 and
$100,000 in cash, respectively. Hugh was to work occasionally at the
business, and Jacobs was to be employed full-time. They decided that
year-end profits and losses should be assigned as follows:
should E invest?
b. E contributes $36,000 in cash to the business to receive a 10 percent
interest in the partnership. Goodwill is to be recorded. Profits and losses
have previously been split according to the following percentages: A, 30
percent; B, 10 percent; C, 40 percent; and D, 20 percent. After E makes
this investment, what are the individual capital balances?
c. E contributes $42,000 in cash to the business to receive a 20 percent
interest in the partnership. Goodwill is to be recorded. The four original
partners share all profits and losses equally. After E makes this
investment, what are the individual capital balances?
d. E contributes $55,000 in cash to the business to receive a 20 percent
interest in the partnership. No goodwill or other asset revaluation is to be
recorded. Profits and losses have previously been split according to the
following percentages: A, 10 percent; B, 30 percent; C, 20 percent; and
D, 40 percent. After E makes this investment, what are the individual
capital balances?
e. C retires from the partnership and, as per the original partnership
agreement, is to receive cash equal to 125 percent of her final capital
balance. No goodwill or other asset revaluation is to be recognized. All
partners share profits and losses equally. After the withdrawal, what are
the individual capital balances of the remaining partners?
Page 663
All remaining profits and losses are split 60:40 to Johnson and
Boswell, respectively.
All drawings are taken by the partners during 2014. At year-end, the
partnership reports an earned net income of $28,000.
On January 1, 2015, Pope (previously a partnership employee) is
admitted into the partnership. Each partner transfers 10 percent to
Pope, who makes the following payments directly to the partners:
For the year of 2015, the partnership earned a profit of $46,000, and
each partner withdrew the allowed amount of cash.
Determine the capital balances for the individual partners as of the
end of each year: 2013 through 2015.
LO 14-4, 145, 14-6, 14-9
Page 664
The partnership reports net income for 2013 through 2015 as follows:
30. A partnership of attorneys in the St. Louis, Missouri, area has the
following balance sheet accounts as of January 1, 2015:
The partnership reported a net loss of $10,000 during the first year of
its operation. On January 1, 2014, Terri Dunn becomes a third partner
in this business by contributing $15,000 cash to the partnership. Dunn
receives a 20 percent share of the business's capital. The profit and
loss agreement is altered as follows:
On January 1, 2015, Dunn becomes ill and sells her interest in the
partnership (with the consent of the other two partners) to Judy
Postner. Postner pays $46,000 directly to Dunn. Net income for 2015
is $61,000 with the partners again taking their full drawing allowance.
On January 1, 2016, Postner withdraws from the business for
personal reasons. The articles of partnership state that any partner
may leave the partnership at any time and is entitled to receive cash in
an amount equal to the recorded capital balance at that time plus 10
percent.
a. Prepare journal entries to record the preceding transactions on the
assumption that the bonus (or no revaluation) method is used. Drawings
need not be recorded, although the balances should be included in the
closing entries.
b. Prepare journal entries to record the previous transactions on the
assumption that the goodwill (or revaluation) method is used. Drawings
need not be recorded, although the balances should be included in the
closing entries.
(Round all amounts to the nearest dollar.)
Problems
LO 14-1
LO 14-1
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
LO 14-2
LO 14-9
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
LO 14-10
amount.
A partnership has the following capital balances:
LO 14-8
LO 14-9
LO 14-9
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
LO 14-9
Page 658
LO 14-6
$99,600.
$102,000.
$112,000.
$126,000.
The capital balance for Messalina is $210,000
and for Romulus is $140,000. These
two partners share profits and
losses 60 percent (Messalina) and 40
percent (Romulus). Claudius invests
$100,000 in cash in the partnership
for a 20 percent ownership. The
bonus method will be used. What are
the capital balances for Messalina,
Romulus, and Claudius after this
investment is recorded?
$216,000, $144,000, $90,000.
$218,000, $142,000, $88,000.
$222,000, $148,000, $80,000.
$240,000, $160,000, $100,000.
A partnership begins its first year with the
following capital balances:
The articles of partnership stipulate that profits
and losses be assigned in the
following manner:
Each partner is allocated interest equal to 5
percent of the beginning capital balance.
Bernard is allocated compensation of
$18,000 per year.
Any remaining profits and losses are
allocated on a 3:3:4 basis, respectively.
Each partner is allowed to withdraw up to
$5,000 cash per year.
Assuming that the net income is $60,000 and
that each partner withdraws the
maximum amount allowed, what is
the balance in Collins capital
14-52
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
LO 14-4, 145, 1
4-6
LO 14-10
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
LO 14-10
LO 14-10
LO 14-8
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
LO 14-9
LO 14-9
LO 14-9
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
LO 14-9
LO 14-9
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
LO 14-6
LO 14-4, 145, 1
4-6
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Page 661
LO 14-4, 145, 1
4-6
LO 14-10
14-58
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
LO 14-10
LO 14-2, 144, 1
46, 1
4-9
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
LO 14-3, 149, 1
410
Page 663
LO 14-5, 146, 1
4-9
LO 14-4, 145, 1
46, 1
4-9
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
LO 14-8, 149, 1
410
14-65
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Page 665
LO 14-2, 143, 1
45, 1
46, 1
48, 1
410
of $280,000. Goodwill is to be
recorded. Aramis will then be given
the exact amount of cash that will
close out his capital account.
Steve Reese is a well-known interior designer in
Fort Worth, Texas. He wants to start
his own business and convinces
Rob O'Donnell, a local merchant, to
contribute the capital to form a
partnership. On January 1, 2013,
O'Donnell invests a building worth
$52,000 and equipment valued at
$16,000 as well as $12,000 in cash.
Although Reese makes no tangible
contribution to the partnership, he
will operate the business and be an
equal partner in the beginning
capital balances.
To entice O'Donnell to join this partnership,
Reese draws up the following profit
and loss agreement:
O'Donnell will be credited annually with
interest equal to 20 percent of the
beginning capital balance for the year.
O'Donnell will also have added to his
capital account 15 percent of partnership
income each year (without regard for the
preceding interest figure) or $4,000,
whichever is larger. All remaining income is
credited to Reese.
Neither partner is allowed to withdraw
funds from the partnership during 2013.
Thereafter, each can draw $5,000 annually
or 20 percent of the beginning capital
balance for the year, whichever is larger.
The partnership reported a net loss of $10,000
during the first year of its operation.
On January 1, 2014, Terri Dunn
becomes a third partner in this
business by contributing $15,000
cash to the partnership. Dunn
receives a 20 percent share of the
business's capital. The profit and
loss agreement is altered as follows:
O'Donnell is still entitled to (1) interest on
14-67
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
14-68
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.