CH 15

Package Title: Test Bank Questions
Course Title: Advanced Accounting, 6e

Chapter Number: 15
Question Type: Multiple Choice
1) When a partner retires and withdraws assets in excess of his book value, the remaining partners absorb
the excess:
a) equally.
b) in their profit-sharing ratio.
c) based on their average capital balances.
d) based on their ending capital balances.
Answer: b
Question Title: Test Bank (Multiple Choice) Question 01

Difficulty: Medium
Learning Objective: 8 Describe the methods used to record partnership changes when a new partner is
admitted or when a partner withdraws from the partnership.
Section Reference: 15.8, 15.9
2) In a partnership, interest on capital investment is accounted for as a(n) :
a) return on investment.
b) expense.
c) allocation of net income.
d) reduction of capital.
Answer: c

Difficulty: Medium
Learning Objective: 4 Explain the purpose of the partners’ drawing accounts and capital accounts., 6
Describe some common agreements used to allocate partnership net income or loss., 7 Explain why salary
allowances and interest allowances are used in allocating partnership profits and losses.
Section Reference: 15.5
3) A partnership in which one or more of the partners are general partners and one or more are not is called
a(n) :
a) joint venture.
b) general partnership.
c) limited partnership.
d) unlimited partnership.
Answer: c

Difficulty: Easy
Learning Objective: 1 Describe the characteristics of a general partnership, a limited partnership, and a joint
venture.
4) Which of the following is an advantage of a partnership?

a) mutual agency
b) limited life
c) unlimited liability
d) none of these
Answer: d

Difficulty: Medium
venture.
5) Bob and Fred form a partnership and agree to share profits in a 2 to 1 ratio. During the first year of
operation, the partnership incurs a $20,000 loss. The partners should share the losses:
a) based on their average capital balances.

b) in a 2 to 1 ratio.
c) equally.
d) based on their ending capital balances.
Answer: b

Difficulty: Medium
Learning Objective: 5 Prepare journal entries to form a partnership using the bonus and the goodwill
methods.
6) When the goodwill method is used to record the admission of a new partner, total partnership capital
increases by an amount:
a) equal to the new partner’s investment.

b) greater than the new partner’s investment.
c) less than the new partner’s investment.
d) that may be more or less than the new partner’s investment.
Answer: b

Difficulty: Hard
7) The bonus and goodwill methods of recording the admission of a new partner will produce the same
result if the:
a) new partner’s profit-sharing ratio equals his capital interest

b) old partners’ profit-sharing ratio in the new partnership is the same relatively as it was in the old
partnership.
c) both new partner’s profit-sharing ratio equals his capital interest and old partners’ profit-sharing ratio in
the new partnership is the same relatively as it was in the old partnership are met
d) none of these.
Answer: c

Difficulty: Hard
8) When the goodwill method is used and the book value acquired is less than the value of the assets
invested, total implied capital is computed by:
a) multiplying the new partner’s capital interest by the capital balances of existing partners.
b) dividing the total capital balances of existing partners by their collective capital interest.
c) dividing the new partner’s investment by his (her) capital interest.
d) dividing the new partner’s investment by the existing partners’ collective capital interest.
Answer: c

Difficulty: Hard
9) The partnership of Abel and Caine was formed on February 28, 2017. At that date the following assets
were invested:
Abel Caine
Cash $ 120,000 $200,000
Merchandise -0- 320,000
Building -0- 840,000
Furniture and equipment 200,000 -0-
The building is subject to a mortgage loan of $280,000, which is to be assumed by the partnership. The
partnership agreement provides that Abel and Caine share profits or losses 30% and 70%, respectively.
Caine’s capital account at February 28, 2017, should be
a) $1,080,000.
b) $1,360,000.
c) $1,176,000.
d) $952,000.
Answer: a

Difficulty: Easy
methods.
10) The following balance sheet information is for the partnership of Abele, Boule, and Cayman:
Cash $ 210,000 Liabilities $ 510,000

Other assets 1,500,000 Abele, Capital (40%) 300,000
Boule, Capital (40%) 480,000
Cayman, Capital (20%) 420,000
$1,710,000 $1,710,000
Figures shown parenthetically reflect agreed profit and loss sharing percentages.
If the assets are fairly valued on the above balance sheet and the partnership wishes to admit Dann as a new
1/5 partner without recording goodwill or bonus, Dann should invest cash or other assets of
a) $427,500.
b) $240,000.
c) $300,000.
d) $342,000.
Answer: c

Difficulty: Medium
methods.
11) The following balance sheet information is for the partnership of Abel, Boule, and Cayman:

Other assets 1,500,000 Abele, Capital (40%) 300,000
Boule, Capital (40%) 480,000
Cayman, Capital (20%) 420,000
$1,710,000 $1,710,000
If assets on the initial balance sheet are fairly valued, Abele and Boule consent and Dann pays Cayman
$225,000 for his interest; the revised capital balances of the partners would be
a) Abele, $315,000; Boule, $495,000; Dann, $450,000.

b) Abele, $315,000; Boule, $495,000; Dann, $420,000.
c) Abele, $300,000; Boule, $570,000; Dann, $450,000.
d) Abele, $300,000; Boule, $480,000; Dann, $420,000.
Answer: d

Difficulty: Easy
12) Pink desires to purchase a one-fourth capital and profit and loss interest in the partnership of Brown,
Greene, and Red. The three partners agree to sell Pink one-fourth of their respective capital and profit and
loss interests in exchange for a total payment of $100,000. The payment is made directly to the individual
partners. The capital accounts and the respective percentage interests in profits and losses immediately
before the sale to Pink follow
Capital Percentage Interests

Accounts in Profits and Losses
Brown $168,000 50%
Greene 104,000 35
Red 48,000 15
Total $320,000
All other assets and liabilities are fairly valued and implied goodwill is to be recorded prior to the
acquisition by Pink. Immediately after Pink’s acquisition, what should be the capital balances of Brown,
Greene, and Red, respectively?
a) $126,000; $78,000; $36,000

b) $156,000; $99,000; $45,000
c) $178,000; $111,000; $51,000
d) $208,000; $132,000; $60,000
Answer: b

Difficulty: Hard
admitted or when a partner withdraws from the partnership., 9 Describe the rationale behind the goodwill
method in accounting for changes in partnership membership.
13) At December 31, 2017, Mick and Keith are partners with capital balances of $250,000 and $150,000,
and they share profits and losses in the ratio of 2:1, respectively. On this date, Jumpin Jack invests $125,000
cash for a one-fifth interest in the capital and profit of the new partnership. The partners agree that the
implied partnership goodwill is to be recorded simultaneously with the admission of Jumpin Jack. The total
implied goodwill of the firm is:
a) $25,000.
b) $20,000.
c) $45,000.
d) $100,000.
Answer: d

Difficulty: Hard
14) Shrek, Donkey, and Muffin are partners with capital balances of $135,000, $90,000, and $60,000,
respectively. The partners share profits and losses equally. For an investment of $120,000 cash, Fiona is to
be admitted as a partner with a one-fourth interest in capital and profits. Based on this information, the
amount of Fiona’s investment can best be justified by which of the following?
a) Fiona will receive a bonus from the other partners upon his admission to the partnership.
b) Assets of the partnership were overvalued immediately prior to Fiona’s investment.
c) The book value of the partnership’s net assets were less than their fair value immediately prior to Fiona’s
investment.
d) Fiona is apparently bringing goodwill into the partnership and her capital account will be credited for the
appropriate amount.
Answer: c

Difficulty: Easy
15) The partnership of Gilligan, Skipper, and Ginger had total capital of $570,000 on December 31, 2017 as
follows:
Gilligan, Capital (30%) $180,000

Skipper, Capital (45%) 255,000
Ginger, Capital (25%) 135,000
Total $570,000
Profit and loss sharing percentages are shown in parentheses. The partnership has no liabilities. If Mary Ann
purchases a 25 percent interest from each of the old partners for a total payment of $270,000 directly to the
old partners
a) total partnership net assets can logically be revalued to $1,080,000 on the basis of the price paid by Mary
Ann.
b) the payment of Mary Ann does not constitute a basis for revaluation of partnership net assets because the
capital and income interests of the old partnership were not aligned.
c) total capital of the new partnership should be $760,000.
d) total capital of the new partnership will be $840,000 assuming no revaluation.
Answer: a

Difficulty: Medium
follows:

Total $570,000
Profit and loss sharing percentages are shown in parentheses. Assume that Mary Ann became a partner by
investing $150,000 in the Gilligan, Skipper, and Ginger partnership for a 25 percent interest in capital and
profits and that partnership net assets are not revalued. Mary Ann’s capital credit using the bonus method
should be
a) $180,000.
b) $142,500.
c) $150,000.
d) $190,000.
Answer: a

Difficulty: Medium
follows:
Total $570,000
Profit and loss sharing percentages are shown in parentheses.

Assume that Professor became a partner by investing $190,000 in the Gilligan, Skipper, and Ginger
partnership for a 25 percent interest in the capital and profits, and the partnership assets are revalued. Under
this assumption
a) Professor’s capital credit will be $150,000.

b) Gilligan’s capital will be increased to $147,000.
c) total partnership capital after Professor’s admission to the partnership will be $600,000.
d) net assets of the partnership will increase by $190,000, including Professor’s interest.
Answer: d

Difficulty: Medium
18) In the absence of an agreement among the partners:
a) interest is allowed on capital investments.

b) interest is charged on partners’ drawings.
c) interest is allowed on advances to the firm made by partners beyond agreed investments.
d) compensation is allowed partners for extra time devoted to the partnership.
Answer: c

Difficulty: Easy
Learning Objective: 2 List some important items to be included in the partnership agreement.
19) The profit and loss sharing ratio should be:
a) in the same ratio as the percentage interest owned by each partner.

b) based on relative effort contributed to the firm by the partners.
c) a weighted average of capital and effort contributions.
d) based on any formula that the partners choose.
Answer: d

Difficulty: Easy
Learning Objective: 2 List some important items to be included in the partnership agreement.
20) The partnership agreement of Powell, Gaunt, and Holl allows Gaunt a bonus of 10% of income after the
bonus, salaries of $30,000 per partner and interest of 6% on average capital balances of $120,000, $150,000,
and $180,000 for Powell, Gaunt, and Holl, respectively. The amount of Gaunt’s bonus, assuming income
before bonus, salaries, and interest of $315,000, is
a) $18,000.
b) $22,000.
c) $19,800.
d) $31,500.
Answer: c

Difficulty: Medium
Learning Objective: 7 Explain why salary allowances and interest allowances are used in allocating
partnership profits and losses.
21) Mack and Ruben are partners operating an electronics repair shop. For 2017, net income, after salaries
expense of $150,000 was $50,000. Mack and Ruben have salary allowances of $90,000 and $60,000,
respectively, and remaining profits and losses are shared 6:4.
The division of salaries and profits in total to Mack and Ruben would be:
a) $30,000 and $20,000

b) $50,000 and $-0-
c) $120,000 and $80,000
d) $25,000 and $25,000
Answer: c

Difficulty: Easy
22) Robbie and Ruben are partners operating a portable toilet lease and maintenance operation. For 2017,
net income was $50,000 (without taking into consideration the salary allowances). Robbie and Ruben have
salary allowances of $90,000 and $60,000, respectively, and remaining profits and losses are shared 6:4.
If their agreement specifies that salaries are allowed only to the extent of income, based on a prorata share of
their salary allowances, the division of profits would be:
a) $20,000 and $30,000

b) $50,000 and $-0-
c) $30,000 and $20,000
d) $25,000 and $25,000
Answer: c

Difficulty: Easy
23) Letterman and Conan are partners who share profits and losses 3:7. The capital accounts on January 1,
2017, are $120,000 and $160,000, respectively. Leno is to be admitted as a partner with a one-fourth interest
in the capital and profits and losses by investing $80,000. Goodwill is not to be recorded. The capital
balances after admission should be:
a) Letterman, $117,000; Conan, $153,000; Leno, $90,000

b) Letterman, $120,000; Conan, $160,000; Leno, $90,000
c) Letterman, $123,000; Conan, $160,000; Leno, $80,000
d) Letterman, $120,000; Conan, $167,000; Leno, $80,000
Answer: a

Difficulty: Medium
methods.
24) The balance sheet for the partnership of Nina, Pinta, and Santa Maria at January 1, 2017 follows. The
partners share profits and losses in the ratio of 3:2:5, respectively.
Assets at cost $480,000
Liabilities $135,000
Nina, capital 75,000
Pinta, capital 120,000
Santa Maria, capital 150,000
$480,000
Nina is retiring from the partnership. By mutual agreement, the assets are to be adjusted to their fair value of
$540,000 at January 1, 2017. Pinta and Santa Maria agree that the partnership will pay Nina $135,000 cash
for hers her partnership interest. There is no goodwill is to be recorded. What is the balance of Pinta’s
capital account after Nina’s retirement?
a) $138,000
b) $108,000
c) $120,000
d) $132,000
Answer: c

Difficulty: Medium
Section Reference: 15.8, 15.9, 15.10
25) The following balance sheet information is for the partnership of Professor, Mary Ann, and Skipper:

Other assets 1,500,000 Professor, Capital (40%) 300,000
Mary Ann, Capital (40%) 480,000
$1,710,000 $1,710,000
If the assets are fairly valued on the above balance sheet and the partnership wishes to admit Mrs. Howell as
a new 1/5 partner without recording goodwill or bonus, Mrs. Howell should invest cash or other assets of
a) $427,500.
b) $240,000.
c) $300,000.
d) $342,000.
Answer: c

Difficulty: Medium
methods.
26) Donkey desires to purchase a one-fourth capital and profit and loss interest in the partnership of Shrek,
Fiona, and Muffin. The three partners agree to sell Donkey one-fourth of their respective capital and profit
and loss interests in exchange for a total payment of $125,000. The payment is made directly to the
individual partners. The capital accounts and the respective percentage interests in profits and losses
immediately before the sale to Donkey follow:
Capital Percentage Interests

Accounts in Profits and Losses
Shrek $210,000 60%
Fiona 130,000 25
Muffin 60,000 15
Total $400,000
All other assets and liabilities are fairly valued above. Immediately after Donkey’s acquisition, what should
be the capital balances of Shrek, Fiona, and Muffin, respectively?
a) $157,500; $97,500; $45,000
b) $195,000; $123,750; $56,250
c) $222,500; $138,750; $63,750
d) $260,000; $165,000; $75,000
Answer: b

Difficulty: Hard
27) The partnership of Gamma, Ginger, and Gert had total capital of $1,140,000 on December 31, 2017, as
follows:
Gamma, Capital (30%) $360,000

Gert, Capital (25%) 270,000
Total $1,140,000

Assume that Grizelda became a partner by investing $300,000 in the Gamma, Ginger, and Gert partnership
for a 25 percent interest in capital and profits and that partnership net assets are not revalued. Grizelda’s
capital credit should be:
a) $360,000.
b) $285,000.
c) $300,000.
d) $380,000.
Answer: a

Difficulty: Easy
28) The partnership of Ned, Fred, and Ted had total capital of $1,140,000 on December 31, 2017, as
follows:
Ned, Capital (30%) $360,000

Fred, Capital (45%) 510,000
Ted, Capital (25%) 270,000
Total $1,140,000

Assume that Ed became a partner by investing $300,000 in the Ned, Fred, and Ted partnership for a 25
percent interest in the capital and profits, and the partnership assets are revalued. Under this assumption:
a) Ted’s capital credit will be $300,000.

b) Ned’s capital will be increased to $394,000.
c) total partnership capital after Ed’s admission to the partnership will be $1,200,000.
d) net assets of the partnership will increase by $380,000 including Ed’s interest.
Answer: c

Difficulty: Easy
29) Garlic, Pepper, and Salt are partners in a plumbing service. The business reported net income of
$108,000 for 2017. The partnership agreement provides that profits and losses are to be divided equally after
Pepper receives a $60,000 salary, Salt receives a $24,000 salary, and each partner receives 10% interest on
his beginning capital balance. Beginning capital balances were $40,000 for Garlic, $48,000 for Pepper, and
$32,000 for Salt. Pepper’s share of partnership income for 2017 is:
a) $68,800.
b) $36,000.
c) $31,200.
d) $27,200.
Answer: a

Difficulty: Medium
Question Type: Essay
30) The principal types of partnerships are general partnerships, limited partnerships, and joint ventures.
Describe the characteristics of each type of partnership.
Answer:
In a general partnership, each member is a general partner. There are no “limited partners”. The following
are characteristics of a general partnership:
 Mutual agency
 Right to dispose of a partnership interest
 Unlimited liability
 Limited or uncertain life
In a limited partnership, one or more of the partners are general partners and one or more are limited
partners. While general partners manage the firm and are personally liable for obligations of the partnership,
limited partners invest capital only and limit their liability for partnership obligations to the amount of their
investment. In return, limited partners give up the right to participate in the management of the firm.
A joint venture is an arrangement entered into by two or more parties to accomplish a single or limited
purpose for the mutual benefit of the members of the group, often to earn a profit. The life of the joint
venture is usually limited to that of the undertaking, which may be of short- or long-term duration. The
relationship between the parties in the joint venture is generally governed by a written agreement. A
distinguishing characteristic of the agreement is that each joint venture participates directly or indirectly in
the overall management of the resources. Accordingly, major decisions require the consent of the ownership
group. Joint ventures are sometimes organized as corporations and sometimes organized as partnerships.
Question Title: Test Bank (Essay) Question 30

Difficulty: Medium
venture.
31) There are two methods of recording changes in the membership of a partnership – the bonus method and
the goodwill method. Describe these two methods of recording changes in partnership membership.
Answer:
Two methods are frequently used to record changes in partnership membership:
1. The bonus method. When this method is used, the assets of the partnership are increased by the amount of
the assets invested by the partner being admitted. Any difference between the assets invested and the credit
to the new partner’s capital account is adjusted to the capital accounts of the other partners involved in the
negotiations. If a partner withdraws from a partnership, the partners may agree to settle his or her capital
interest by permitting the withdrawal of partnership assets. If the bonus method is used to record the
withdrawal, the difference between the recorded value of the assets withdrawn and the debit to the
withdrawing partner’s capital account is adjusted to the capital accounts of the remaining partners.
2. The goodwill method. When this method is used, a new asset is recorded that is based on the difference
between the value implied by the amount of consideration negotiated in the admission or withdrawal of a
partner and the values reported in the partnership books.
Question Title: Test Bank (Essay) Question 31

Difficulty: Hard
methods., 8 Describe the methods used to record partnership changes when a new partner is admitted or
when a partner withdraws from the partnership.
32) Portney, Grey, and Ross are partners with capital balances of $80,000, $200,000, and $120,000,
respectively. Profits and losses are shared in a 3:2:1 ratio. Grey decided to withdraw and the partnership
revalued its assets. The value of inventory was decreased by $20,000 and the value of land was increased by
$50,000. Portney and Ross then agreed to pay Grey $230,000 for his withdrawal from the partnership.
Required:
Prepare the journal entry to record Grey’s withdrawal under the
A. bonus method.
B. full goodwill method.
Answer:
A. Grey, Capital $200,000 + ($30,000 × 2/6) 210,000
Portney, Capital ($20,000 × 3/4) 15,000
Ross, Capital ($20,000 × 1/4) 5,000
Cash 230,000
B. Goodwill ($20,000 ÷ 2/6) 60,000

Portney, Capital 30,000
Grey, Capital 20,000
Ross, Capital 10,000
Grey, Capital 230,000

Cash 230,000
Question Title: Test Bank (Problem) Question15-1

Difficulty: Medium
Learning Objective: 9 Describe the rationale behind the goodwill method in accounting for changes in
partnership membership.
33) Carter and Gore are partners in an automobile repair business. Their respective capital balances are
$425,000 and $275,000, and they share profits in a 3:2 ratio. Because of growth in their repair business, they
decide to admit a new partner. Bush is admitted to the partnership, after which Carter, Gore, and Bush agree
to share profits in a 3:2:1 ratio.
Required:
Prepare the necessary journal entries to record the admission of Bush in each of the following independent
situations:
A. Bush invests $300,000 for a one-fourth capital interest, but will not accept a capital balance of less than
his investment.
B. Bush invests $150,000 for a one-fifth capital interest. The partners agree that assets and the firm as a
whole should be revalued.
C. Bush purchases a 20% capital interest from each partner. Carter receives $100,000 and Gore receives
$50,000 directly from Bush.
Answer:
A. Goodwill [($300,000 ÷ .25) - $1,000,000] 200,000
Carter, Capital ($200,000 × 3/5) 120,000
Gore, Capital ($200,000 × 2/5) 80,000
Cash 300,000
Bush, Capital 300,000
B. Cash 150,000
Goodwill [($700,000 ÷ .80) - $850,000] 25,000
C. Carter, Capital ($425,000 × .20) 85,000

Gore, Capital ($275,000 × .20) 55,000

Difficulty: Medium
34) Dante, Milton, and Cervantes formed a partnership and agreed to share profits in a 3:1:2 ratio after
recognition of 5% interest on average capital balances and monthly salary allowances of $3,750 to Milton
and $3,000 to Cervantes. Average capital balances were as follows:
Dante 300,000
Milton 240,000
Cervantes 180,000
Required:
Compute the net income (loss) allocated to each partner assuming the partnership incurred a $27,000 net
loss.
Answer:
Dante Milton Cervantes Total
Salary --- $45,000 $ 36,000 $ 81,000
Interest $15,000 12,000 9,000 36,000
Residual (72,000) (24,000) (48,000) (144,000)
Total $(57,000) $33,000 $ (3,000) $(27,000)

Difficulty: Medium
35) Rodgers and Michael formed a partnership on January 2, 2017. Michael invested $120,000 in cash.
Rodgers invested land valued at $30,000, which he had purchased for $20,000 in 2005. In addition, Rodgers
possessed superior managerial skills and agreed to manage the firm. The partners agreed to the following
profit and loss allocation formula:
a. Interest —8% on original capital investments.
b. Salary — $5,000 a month to Rodgers.
c. Bonus — Rodgers is to be allocated a bonus of 20% of net income after subtracting the bonus,
interest, and salary.
d. Remaining profit is to be divided equally.
At the end of 2017 the partnership reported net income before interest, salaries, and bonus of $168,000.
Required:
Calculate the amount of bonus to be allocated to Rodgers.
Answer:
B = Bonus to Rodgers
B = 0.20(Net Income - interest - salary - bonus)
B = 0.20($168,000 - [0.08($150,000)] - $60,000 – B)
B = 0.20($96,000 - B)
B = $19,200 - 0.20B
1.20B = $19,200
B = $16,000

Difficulty: Medium
36) Joey and Rachel are partners whose capital balances are $400,000 and $300,000 and who share profits
3:2. Due to a shortage of cash, Joey and Rachel agree to admit Ross to the firm.
Required:
Prepare the journal entries required to record Ross’s admission under each of the following assumptions:
(a) Ross invests $200,000 for a 1/4 interest. The total firm capital is to be $900,000.
(b) Ross invests $300,000 for a 1/4 interest. Goodwill is to be recorded.
(c) Ross invests $150,000 for a 1/5 interest. Goodwill is to be recorded.
(d) Ross purchases a 1/4 interest in the firm, with 1/4 of the capital of each old partner
transferred to the account of the new partner. Ross pays the partners cash of $250,000,
which they divide between themselves.
Answer:
(a) Cash 200,000
Joey, Capital ($25,000 × 0.60) 15,000
Rachel, Capital ($25,000 × 0.40) 10,000
Ross, Capital ($900,000 × 0.25) 225,000
(b) Implied goodwill - 1/4X = $300,000; X = $1,200,000

Goodwill - $1,200,000 - $1,000,000 = $200,000
Goodwill 200,000
Joey, Capital 120,000
Rachel, Capital 80,000
Cash 300,000
(c) Implied goodwill - 4/5X = $700,000; X = $875,000

Goodwill: $875,000 - $850,000 = $25,000
Goodwill 25,000
Cash 150,000
(d) Joey, Capital (1/4 of $400,000) 100,000

Rachel, Capital (1/4 of $300,000) 75,000

Difficulty: Medium
Learning Objective: 6 Describe some common agreements used to allocate partnership net income or loss., 7
Explain why salary allowances and interest allowances are used in allocating partnership profits and losses.
37) The partners in the ABC partnership have capital balances as follows:
A. $70,000; B. $70,000 C. $105,000
Profits and losses are shared 30%, 20%, and 50%, respectively.
On this date, C withdraws and the partners agree to pay him $140,000 out of partnership cash.
Required:
A. Prepare journal entries to show three acceptable methods of recording the withdrawal. (Tangible assets
are already stated at values approximating their fair market values.)
B. Which alternative would you recommend if you determined that the agreement to pay C $140,000 was
not the result of arms length bargaining between C and the other partners? Why?
Answer:
A. 1) C, Capital 105,000
A, Capital 21,000
B, Capital 14,000
Cash 140,000
2) Goodwill 35,000
C, Capital 35,000
C, Capital 140,000
Cash 140,000
3) 0.5X = $35,000
X = $70,000
Goodwill 70,000
A, Capital 21,000
B, Capital 14,000
C, Capital 35,000
C, Capital 140,000
Cash 140,000
B. The bonus method is more objective. That is, the bonus method does not require the allocation
of a subjective value to goodwill. Since this is not an arm’s length transaction, there is no
objective basis to revalue the firm as a whole.

Difficulty: Hard
38) Agler, Bates and Colter are partners who share income in a 5:3:2 ratio. Colter, whose capital balance is
$150,000, retires from the partnership.
Required:
Determine the amount paid to Colter under each of the following cases:
(1) $50,000 is debited to Agler capital account; the bonus approach is used.
(2) Goodwill of $60,000 is recorded; the partial goodwill approach is used.
(3) $66,000 is credited to Bates’ capital account; the total goodwill approach is used.
Answer:
(1) Since a debit was made to Agler’s capital account, a bonus was paid to the retiring partner of
$80,000 (5/8 goodwill = $50,000), resulting in a total payment to Colter of $230,000. The entry
would be:
Agler, Capital 50,000
Bates, Capital 30,000
Colter, Capital 150,000
Cash 230,000
(2) Under the partial goodwill approach, only the goodwill attributed to the retiring partner is
recorded. Thus, the payment to Colter was $210,000 ($150,000 + $60,000).
(3) Since $66,000 was credited, total goodwill of $220,000 ($66,000/0.3) is recorded. Colter is
allocated $44,000 ($220,000 × 0.20). Thus, the payment to Colter was $194,000 ($150,000 +
$44,000).

Difficulty: Medium
Learning Objective: 9 Describe the rationale behind the goodwill method in accounting for changes in
partnership membership.
39) The partnership agreement of Sleeter, Frisco, and Kinney provides for annual distribution of profit and
loss in the following sequence:
– Frisco, the managing partner, receives a bonus of 10% of net income.
– Each partner receives 5% interest on average capital investment.
– Residual profit or loss is to be divided 4:2:4.
Average capital investments for 2017 were:
Sleeter $270,000
Frisco $180,000
Kinney $120,000
Required:
A. Prepare a schedule to allocate net income, assuming operations for the year resulted in:
1.Net income of $75,000.
2. Net income of $15,000.
3. Net loss of $30,000.
B. Prepare the journal entry to close the Income Summary account for each situation above.
Answer:
A. 1. Sleeter Frisco Kinney Total
Bonus $ --- $ 7,500 $ --- $ 7,500
Interest 13,500 9,000 6,000 28,500
13,500 16,500 6,000 36,000
Residual 15,600 7,800 15,600 39,000
Total $29,100 $24,300 $21,600 $75,000
2.
Bonus $ --- $1,500 $ --- $ 1,500
Interest 13,500 9,000 6,000 28,500
13,500 10,500 6,000 30,000
Residual (6,000) (3,000) (6,000) (15,000)
Total $7,500 $7,500 -0- $15,000
3.
Bonus $ --- --- --- ---
Interest 13,500 9,000 6,000 28,500
13,500 9,000 6,000 28,500
Residual (23,400) (11,700) (23,400) (58,500)
Total $(9,000) <9,900>$(2,700) $(17,400) $(30,000)
B. 1. Income Summary 75,000

Sleeter, Capital 29,100
Frisco, Capital 24,300
Kinney, Capital 21,600
2. Income Summary 15,000

Sleeter, Capital 7,500
3. Sleeter, Capital 9,900

Kinney, Capital 17,400
Income Summary 30,000
Question Title: Test Bank (Problem) Question 15-8

Difficulty: Medium

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Package Title: Test Bank Questions

Course Title: Advanced Accounting, 6e

Question Type: Multiple Choice

Question Title: Test Bank (Multiple Choice) Question 01

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

Question Title: Test Bank (Multiple Choice) Question 02

Question Title: Test Bank (Multiple Choice) Question 03

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

Question Title: Test Bank (Multiple Choice) Question 04

a) based on their average capital balances.

Question Title: Test Bank (Multiple Choice) Question 05

a) equal to the new partner’s investment.

Question Title: Test Bank (Multiple Choice) Question 06

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

Question Title: Test Bank (Multiple Choice) Question 07

Question Title: Test Bank (Multiple Choice) Question 08

Question Title: Test Bank (Multiple Choice) Question 09

Cash $ 210,000 Liabilities $ 510,000

Question Title: Test Bank (Multiple Choice) Question 10

Cash $ 210,000 Liabilities $ 510,000

a) Abele, $315,000; Boule, $495,000; Dann, $450,000.

Question Title: Test Bank (Multiple Choice) Question 11

Capital Percentage Interests

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

Question Title: Test Bank (Multiple Choice) Question 12

Question Title: Test Bank (Multiple Choice) Question 13

Question Title: Test Bank (Multiple Choice) Question 14

Gilligan, Capital (30%) $180,000

Question Title: Test Bank (Multiple Choice) Question 15

Gilligan, Capital (30%) $180,000

Question Title: Test Bank (Multiple Choice) Question 16

Profit and loss sharing percentages are shown in parentheses.

a) Professor’s capital credit will be $150,000.

Question Title: Test Bank (Multiple Choice) Question 17

a) interest is allowed on capital investments.

Question Title: Test Bank (Multiple Choice) Question 18

19) The profit and loss sharing ratio should be:

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

Question Title: Test Bank (Multiple Choice) Question 19

Question Title: Test Bank (Multiple Choice) Question 20

a) $30,000 and $20,000

Question Title: Test Bank (Multiple Choice) Question 21

a) $20,000 and $30,000

Question Title: Test Bank (Multiple Choice) Question 22

a) Letterman, $117,000; Conan, $153,000; Leno, $90,000

Question Title: Test Bank (Multiple Choice) Question 23

Assets at cost $480,000

Question Title: Test Bank (Multiple Choice) Question 24

Cash $ 210,000 Liabilities $ 510,000

Question Title: Test Bank (Multiple Choice) Question 25

Capital Percentage Interests

Question Title: Test Bank (Multiple Choice) Question 26

Gamma, Capital (30%) $360,000

Profit and loss sharing percentages are shown in parentheses.

Question Title: Test Bank (Multiple Choice) Question 27

Ned, Capital (30%) $360,000

Profit and loss sharing percentages are shown in parentheses.

a) Ted’s capital credit will be $300,000.

Question Title: Test Bank (Multiple Choice) Question 28

Question Title: Test Bank (Multiple Choice) Question 29

Question Type: Essay

Question Title: Test Bank (Essay) Question 30

Question Title: Test Bank (Essay) Question 31