CHAPTER 7

PARTNERSHIP FORMATION, OPERATION,

AND CHANGE IN OWNERSHIP
SUMMARY OF ITEMS BY TOPIC

Conceptual Computational
True- Multiple Multiple Short
False Choice Choice Problems Answer
Contrasting partnerships, 1-15 107-112 333-336
proprietorships, and
corporations
Equity theories applied to 16-21 113-115 337-338
partnerships
Articles of partnership 22-25 116-117
Initial capital 26-28 118-119 275-277 339-340
contributions
Carrying value assigned 29-30 120 169 275-276
noncash assets
Tax basis assigned 31-33 121 276
noncash assets
Market value assigned 34-36 122 277
noncash assets
Liabilities assumed by 37-40 123 170 278 341
partnership
Partnership formation, 41-47, 124-126 171-173 279-280 342-343
bonus method 49
Partnership formation, 41-44, 127-129 174-176 281-282 344-345
goodwill method 48-50
Drawing accounts 51-53 130-132 346
Sharing profits and losses 54-55 133 347
Interest on capital 56-59 134, 136 177-178, 185, 283-284, 348-349
balances portion of profit 187 288-289
and loss allocation
Salary portion of profit 60-62 135, 137 185-186 288-289 350
and loss allocation
Bonus portion of profit 63-65 138-139 179-181, 185 285-286, 351
and loss allocation 288-289
Residual ratio portion of 66-71 140-142 182-187 287-289 352-353
profit and loss allocation
 Unrealized holding gains 72-74 143-144 188-205 290-295, 354-355
and losses 297
Changes in ownership 75-77 145 356
Admission of new partner 78-80 146-148 206-207 296-297 357-358
- no change in net assets
Admission of new partner 81-83 149-150 208-209 298-299, 359-361
- change in net assets - 302, 305,
revaluation of existing 308
assets
Admission of new partner 84-86 151-153 210-219 300-302 362-363
- bonus to existing
partners
Admission of new partner 87-89 154-155 220-230 303-305 364-365
- bonus to new partner
Admission of new partner 90-92 153, 156- 231-240 306-308 366-368
- goodwill to existing 157
partners
Admission of new partner 90, 93- 158-159 241-249 309-311 368-369
- goodwill to new partner 94
Withdrawal of partner - 95-100 160-162 250-253 312-317
revaluation of existing
assets
Withdrawal of partner - 95-97, 163-165 254-261 318-320 370-371
bonus method 101-103
Withdrawal of partner - 95-97, 166-168 262-274 321-332
goodwill method 104-106

True-False Statements

1. A partnership is an association of two or more investors to carry on as co-owners a

business for profit.

2. Only individuals are allowed to be partners in a partnership.

3. Proprietorships and partnerships are similar in that they are both easily formed.

4. Proprietorships and partnerships are different in that proprietors have unlimited legal
liability while each partner’s legal liability is limited to his/her percentage ownership in
the partnership.

5. A partner’s personal assets may be taken by creditors to pay partnership debts if the
partnership is unable to meet its obligations.
6. Partnerships are not required to prepare financial statements in accordance with
Generally Accepted Accounting Principles unless they have publicly traded debt or are
required to follow GAAP by a creditor.

7. For a partnership to get an unqualified audit opinion, the financial records must conform
to Generally Accepted Accounting Principles.

8. Most small partnerships maintain their financial information in accordance with

Generally Accepted Accounting Principles.

9. Tax authorities basically view partnerships and proprietorships as extensions of their

owners.

10. Partnerships are not required to pay any taxes.

11. The taxable income of all partners does not necessarily sum to the net income of the
partnership.

12. The only accounting difference that must exist between partnerships and corporations is
the reporting of the ownership equity.

13. The manner in which a partnership and a corporation are formed is very similar.

14. It is generally easier to transfer ownership interest in a corporate form of business than in
a partnership.

15. A partnership legally ceases to exist each time a new partner joins the partnership or an
existing partner leaves the partnership

16. The proprietary theory of equity is based on the notion that a business entity is distinct
from the owners.

17. The entity theory of equity is based on the notion that a business entity is distinct from
the owners.

18. An individual partner’s personal responsibility for partnership debts is an example of the
entity theory of equity.

19. The dissolution of a partnership because of the admission of a new partner or withdrawal
of an existing partner is an example of the proprietary theory of equity.

20. The fact that partnerships can enter into contracts is an example of the proprietary theory
of equity.

21. Contributed assets becoming property of the partnership is an example of the entity
theory of equity.
22. The Uniform Partnership Act is the basis for partnership laws in many states.

23. A written agreement is required to form a partnership.

24. When a partnership is formed without a written agreement, the state laws where the
partnership is formed will establish the legal relationship between partners.

25. All provisions of state partnership law must be applied when a partnership is formed.

26. Partners make contributions of equal size when forming a partnership

27. There are different ways the partnership can value noncash assets contributed to the
partnership.

28. Appraisals are not necessarily required when assigning value to noncash assets
contributed to the partnership.

29. Assigning a noncash asset the contributor’s carrying value could result in a misallocation
of gain or loss if the asset is sold.

30. An asset’s carrying value should not be considered when establishing the initial capital
accounts of partners.

31. The tax basis of contributed noncash assets must be used to determine partnership
income allocation for tax reporting purposes.

32. Partnerships are required to file an informational return (Form 1065) with the IRS
indicating the amount of partnership income allocated to each partner.

33. The income assigned to each partner for financial accounting purposes will equal the
partner’s partnership income included on the partner’s individual income tax return.

34. The market value of noncash assets contributed to the partnership may be used for
computing the partners’ taxable income.

35. A contributing partner’s capital account may be assigned the market value of noncash
assets contributed but a market value assignment is not required.

36. The market value of noncash assets contributed to a partnership is the only relevant value
when determining the partners’ beginning capital balances.

37. The assumption of a liability by the partnership with regard to a noncash asset
contributed to the partnership by a partner will affect the value assigned to the partner’s
capital account.
38. The tax basis of a noncash asset contributed to a partnership with an accompanying
liability will not change as a result of the contribution.

39. When a noncash asset is contributed to a partnership with an accompanying liability, the
book value of the asset must become the cost basis of the asset on the partnership’s
financial records.

40. The assumption of a liability related to a noncash asset contributed to a partnership

reduces the value contributed.

41. Initial partner capital balances must equal the sum of the net assets contributed to the
partnership by the partner.

42. Initial partner capital balances are determined by agreement among the partners.

43. Only tangible assets contributed to the partnership can be considered when creating
initial capital balances.

44. There are two ways to consider unidentifiable intangible assets contributed to a
partnership: the bonus method and the goodwill method.

45. The bonus method of recognizing unidentifiable intangible assets contributed at a

partnership’s formation does not result in a net increase in total owners’ equity.

46. The bonus method of recognizing unidentifiable intangible assets contributed at a

partnership’s formation has to make the capital account balances for all partners equal.

47. The bonus method of recognizing unidentifiable intangible assets contributed at a

partnership’s formation will result in all of the partner’s capital accounts increasing.

48. Application of the goodwill method when forming a partnership requires partners to
agree on the amount of goodwill to be assigned to a partner(s).

49. At the date the partnership is formed, the total partner capital will be the same regardless
of whether the bonus method or the goodwill method is used to recognize unidentifiable
intangible assets.

50. Goodwill can be assigned to more than one partner at the date the partnership is formed.

51. The ability of partners to withdraw resources from the partnership is controlled
exclusively by the laws of the state where the partnership resides.
52. The articles of partnership often control the size of withdrawals partners are allowed to
make.

53. If a partnership makes a payment on behalf of a partner, a withdrawal has occurred.

54. Partnerships are required to indicate the manner in which profits and losses are to be
allocated among the partners.

55. With the exception of the residual profit and loss ratio, partners can agree to apply profit
and loss allocation components in any order.

56. The interest component of partnership profit and loss allocation rewards the partner for
labor and expertise brought into the partnership.

57. The purpose of the interest on capital balances component of partnership profit and loss
allocation is to reward partners for contributing economic resources to the partnership.

58. The interest on capital balances component of partnership profit and loss allocation is
always based on each partner’s beginning or period capital balance.

59. The interest on capital balances component of partnership profit and loss allocation is
generally stated as a percentage of the capital balance.

60. The salary portion of the profit and loss allocation is set in the articles of partnership and
will not change over time.

61. The salary portion of the partnership profit and loss allocation is not included in the
partnership’s income statement.

62. The salary portion of the partnership profit and loss allocation is used to compensate
partners for the time and effort expected in the business.

63. Partnerships are required to have bonus clauses in the articles of partnership.

64. Bonus to partners can be based on any criteria on which the partners agree.

65. Partnership bonus arrangements must consider net income as part of the bonus
calculation.

66. A residual interest is always a component of partnership profit and loss allocation.

67. Partnership profit and loss residual percentages must be equal.

68. Partnership profit and loss residual percentages must be the same for profits as they are
for losses.
69. Partnership profit and loss residual percentages are used to allocate any remaining profit
or loss to partners after all other allocation components have been considered.

70. Partnership residual profit and loss percentages may be changed by agreement of the
partners.
71. Partnership residual profit and loss percentages do not have to be the last component
applied in the profit and loss allocation process.

72. When partnership profit and loss ratios are changed, the difference between market and
book values should be determined and allocated to partners based on the currently
existing profit and loss ratios.

73. Partnerships must revalue assets up and/or down when the profit and loss ratios are
adjusted.

74. When an error is discovered in the financial records of a partnership, it should be

corrected immediately. Allocation of any change to capital accounts as a result of an
error correction should be based on the profit and loss ratios that existed when the error
occurred.

75. The dissolution of a partnership occurs only when the partnership is terminating
operations and going out of business.

76. One reason a change in the number of partners in a partnership through the addition or
withdrawal of a partner is important because the partners have unlimited liability.

77. A new partner in a partnership accepts unlimited liability for actions that occurred before
that partner joined the partnership.

78. The admission of a new partner into a partnership can occur without any new assets
being invested into the partnership.

79. If a new partner is going to acquire an ownership interest in a partnership directly from
another partner, the other partners do not need to approve the admission.

80. If a new partner acquires 40 percent of an existing partner’s equity in the partnership, the
new partner is also entitled to 40 percent of the existing partner’s profit and loss
allocation.

81. When a new partner is joining a partnership by making a payment to the partnership for
an amount more than book value, the partners are required to choose one of three
methods of recording the new partner’s payment in excess of book value.

82. The revaluation of assets and liabilities at the date a new partner joins the partnership, by
investing assets directly into the partnership, does not eliminate the possibility that the
partnership might need to record bonuses or goodwill as part of the admission of the new
partner.

83. The amount that assets are revalued when a new partner joins a partnership is always
shared by existing partners equally.
84. If a new partner’s capital account is created for an amount less than the value of net
assets contributed, an error has been made in the partnership’s accounting records.

85. The recognition of a bonus to existing partners at the date a new partner is admitted to a
partnership often occurs in lieu of the recognition of goodwill for the existing partners.

86. The bonus recognized by existing partners when a new partner is admitted to a
partnership is commonly shared among the existing partners based on the existing
partners’ relative profit and loss residual ratios.

87. It is possible for a new partner’s capital account to be established at an amount greater
than the market value of the identifiable assets invested.

88. New partners are never recipients of bonuses when they join the partnership.

89. A bonus paid to a new partner results in a reduction to the capital accounts of the existing
partners in proportion to their profit and loss sharing ratios.

90. The goodwill method of admitting a new partner to a partnership results in greater total
assets than the bonus method of admitting a new partner.

91. When the goodwill method is applied to recognize the admission of a new partner and
the existing partners are responsible for the goodwill, the new partner’s capital account
will always be established equal to the amount of the contribution to the partnership.

92. The existing partners will always recognize goodwill when a new partner is admitted to
the company and the goodwill method is applied.

93. When the goodwill method is applied to recognize the admission of a new partner and
the new partner is responsible for the goodwill, the new partner’s capital account will be
established at the amount of the contribution.

94. When new partner goodwill is recognized at the date the partner joins the partnership, the
existing partners’ capital accounts do not change as a result of the new partner’s
admission

95. A partner may withdraw from a partnership at any time without notice given to the
existing partners.

96. A withdrawing partner may have his/her partnership interest acquired by an outside
investor agreed to by the remaining partners, the remaining partners, or the partnership.

97. If existing partners acquire a withdrawing partner’s equity, the existing partners must
purchase the withdrawing partner’s equity in proportion to their residual profit and loss
ratios.
98. The revaluation of assets when a partner withdraws from the partnership may be a
complete revaluation or a partial revaluation, reflecting the change in value with regard
to the withdrawing partner’s ownership interest.

99. A partnership’s assets must be revalued when a partner withdraws.

100. When a partnership’s assets are revalued at the date a partner withdraws from the
partnership, the withdrawing partner’s equity must be acquired by the partnership. It
cannot be acquired by an outside investor or the existing partners personally.

101. Withdrawing partners from a partnership may receive a bonus or pay a bonus to
remaining partners.

102. If the assets of a partnership are revalued at the date of a partner’s withdrawal, there can
be no bonus recorded.

103. A bonus can be recorded for a retiring partner only if the partnership acquires the equity
of the partner.

104. At the date a partner withdraws from a partnership, the partners must choose to either
recognize the goodwill with respect to the withdrawing partner or they can choose to
recognize all of the partnership’s goodwill.

105. Any goodwill recognized at the date a partner withdraws from a partnership is usually
allocated to partners based on their residual profit and loss ratios.

106. Partnerships may have both a revaluation of assets and liabilities as well as goodwill
recognition at the date a partner withdraws from a partnership.

True-False Statement Solutions

1. T
2. F, Individuals, partnerships, and corporations are allowed to be partners in a partnership.
3. T
4. F, All of the general partners are liable for all the partnership’s debts.
5. T
6. T
7. F, Partnerships may receive an unqualified audit opinion when using a comprehensive
basis of accounting other that accrual such as cash, modified accrual, or the tax basis.
8. F, Most small partnerships maintain their financial information using the tax basis.
9. T
10. F, While the partnership does not pay income taxes, it is responsible for other taxes such
as payroll taxes and franchise taxes.
11. T
12. T
13. F, Partnerships and corporations are formed by two are more parties. A written
agreement is not necessary and state approval is not required for a partnership but a
corporation must file articles of incorporation with the state to attain a corporate charter.
14. T
15. T
16. F, The proprietary theory is based on the notion that the business entity is an aggregation
of the owners
17. T
18. F, This is an example of the proprietary theory of equity.
19. T
20. F, This is an example of the entity theory of equity.
21. T
22. T
23. F, While a written agreement is generally recommended when forming a partnership, it is
not required.
24. T
25. F, Most provisions only apply if there is no agreement among the partners with regard to
that specific issue.
26. F, Initial capital contributions are determined by agreement among the partners and do
not have to be equal in size.
27. T
28. T
29. T
30. F, Any basis (i.e., carrying value, tax basis, or market value) can be used to value
noncash assets contributed to a partnership
31. T
32. T
33. F, There are numerous differences that can cause the income assigned to partners for
accounting purposes to differ from income assigned to partners for tax purposes such as
noncash assets contributed to the partnership valued at an amount different than the
contributing partner’s tax basis
34. F, The tax basis of noncash assets contributed to the partnership must be used to
determine taxable income.
35. T
36. F, Partners should agree on the method to be used to value noncash asset contributions
when preparing the articles of partnership. A variety of bases can be used and the market
value is one of the alternatives.
37. T
38. F, The amount of the liability assumed by the partnership, excluding the contributing
partners share of that liability, will reduce the tax basis of the asset contributed.
39. F, The assumption of a liability has no impact on the valuation approach by the
partnership.
40. T
41. F, The capital balances established can be any amounts agreed by the partners.
42. T
43. F, Partners may contribute tangible and intangible assets to the partnership. It is possible
to consider both when determining initial partnership capital account balances.
44. T
45. T
46. F, The bonus method reallocates the total partnership capital among the partners’ capital
based on the agreed value of unidentifiable intangible assets contributed. Capital
accounts do not have to be the same when the process is completed.
47. F, The bonus method reallocates the total partnership capital among the partners based on
the agreed value of unidentifiable intangible assets contributed. It will always result in
one or more partner’s capital accounts decreasing while the remaining partner(s) capital
accounts increase.
48. T
49. F, The goodwill method requires an additional asset (Goodwill) to be recognized on the
balance sheet. As a result, the partners’ capital accounts will be greater in aggregate.
The bonus method results in a reallocation of capital among the partners and does not
result in a change in total partnership capital.
50. T
51. F, While states may have laws indicating that the partners cannot withdraw resources and
make the partnership insolvent, withdrawals are typically controlled by the articles of
partnership.
52. T,
53. T
54. F, If the partnership agreement is silent with regard to profit and loss allocation, profits
and losses are shared equally.
55. T
56. F, The interest component of partnership profit and loss allocation rewards partners for
capital contributions.
57. T
58. F, The interest on capital balances component of partnership profit and loss allocation
may be based on the beginning, ending, simple average capital balance, or weighted
average capital balance.
59. T
60. F, The salary component of the partnership profit and loss allocation would be expected
to be renegotiated periodically as the duties of the partners change.
61. T
62. T
63. F, Partnerships can offer bonuses to anyone. The choice is up to the partners. On the
other hand, there is no requirement to ever offer a bonus.
64. T
65. F, While many bonuses are based on a measure of income, it is not required. Bonus can
be based on other criteria such as market share, revenue, or average cost per unit.
66. T
67. F, Residual interests may be equal but they are not required to be equal.
68. F, While profit residual ratios and loss residual ratios are generally the same, they can
differ.
69. T
70. T
71. F, Residual profit and loss percentages are the last component of the profit and loss
allocation process applied because they are designed to allocate any remaining amount to
the partners.
72. T
73. F, There are several ways that the difference between market and book value of assets
can be addressed when the profit and loss ratios are changed. Revaluing the assets is one
of the possibilities along with maintaining a record of assets with market and book value
differences as well as directly adjusting capital accounts while leaving asset values
unchanged.
74. T
75. F, A dissolution occurs every time there is a change in relationship among the partners.
This can occur when a new partner enters the partnership or an existing partner leaves the
partnership. A dissolution occurs when the partnership is going out of business but the
termination of business is not a requirement for a dissolution.
76. T
77. F, A new partner's liability for actions that occurred before joining the partnership is
limited to the amount invested in the partnership.
78. T
79. F, Regardless how a new partner enters a partnership, the other partners have to approve
the admission because they must accept unlimited liability due to actions of the new
partner taken on behalf of the partnership.
80. F, There is no necessary relationship between the percentage of equity acquired and the
amount of profit or loss received. These are separate contractual issues.
81. F, There are three methods that may be used when a new partner is paying an amount
more than book value for the investment: revaluation of existing assets, bonus method,
and goodwill method. The partners do not have to choose one method. It would not be
inconsistent to revalue the assets and apply either the bonus or the goodwill method to
record the investment.
82. T
83. F, Existing partners share the difference between market value and book value equally if
that is the manner in which profits and losses are shared. If profits and losses are shared
in some other manner, then the difference between market and book values are shared in
that manner.
84. F, While it is possible that an error has been made, it is more likely that the existing
partners recognized an increase in their capital accounts via a bonus. The difference
between the amount credited to the new partner’s capital account and the amount
invested is shared by the existing partners.
85. T
86. T
87. T
88. F, New partners may receive a bonus if they bring value to the partnership in excess of
the tangible assets invested. This additional amount may be from such things as
expertise, experience, or business contacts. The bonus allocated to the new partner is
payment for these types of unidentifiable assets contributed to the partnership.
89. T
90. T
91. T
92. F, Goodwill may be recognized with regard to the existing partners but it may also be
recognized with regard to the new partner.
93. F, When goodwill is recognized with regard to the new partner, the new partner’s capital
account will be greater than the amount invested by the recognized goodwill.
94. T
95. F, The articles of partnership may include an agreement on the length of advanced notice
a partner must give before withdrawing from a partnership. Failure to provide the agreed
notice may result in the withdrawing partner being liable for damages suffered by the
partnership.
96. T
97. F, If existing partners acquire a withdrawing partner’s equity, they can divide the
purchase of that equity among themselves in any manner they choose.
98. T
99. F, Partnership assets may be revalued but they may also remain at their carrying value.
100. F, The revaluation of the partnership’s assets is unrelated to the purchase of the
withdrawing partners ownership interest in the partnership.
101. T
102. F, The revaluation of partnership assets at the time of a partner’s withdrawal has no
impact on the recognition of a bonus or goodwill.
103. T
104. F, While the partners can recognize either the withdrawing partner’s goodwill or the
entire partnership’s goodwill, there is no requirement to recognize any goodwill when a
partner withdraws from a partnership.
105. T
106. T

Conceptual Multiple Choice Questions

107. Which of the following is not a reason for forming a partnership?

a. Combine economic resources
b. Share managerial talent
c. Avoid complicated tax laws
d. Undertake a specific business objective

108. Which of the following business entity forms is (are) required to maintain their financial
information in accordance with Generally Accepted Accounting Principles?
a. Corporations
b. Corporation and Partnership
c. Partnership and Proprietorships
d. Corporation, Partnerships, and Proprietorships

109. Which of the following statements is not true with regard to tax issues of partnerships?
a. Partnerships are viewed as an extension of the owners
b. Partnerships are required to pay some forms of taxes
 c. The IRS must be informed as to the manner partnership income is allocated to the
partners
d. All of the above are true

110. Which of the following is not a similarity that exists between proprietorships and
partnerships?
a. Neither requires approval by a state to form
b. Both can use an accounting method that does not conform to GAAP
c. Owners put the company’s income on the owner’s individual tax return
d. All of the above are similarities of proprietorships and partnerships

111. Which of the following is not an area where there are differences when comparing
partnerships and corporations?
a. The ease of formation
b. The level of owner legal liability
c. The ease of ownership transferability
d. All of the above are areas where partnerships and corporations differ

112. Which of the following is not a difference when comparing partnerships and
corporations?
a. Corporations must conform to GAAP whereas partnerships are not required to
conform to GAAP
b. Partnerships and corporations neither are required to attain state approval to form
c. Partners have unlimited liability while corporation shareholders generally do not
have unlimited liability
d. Corporations are required to pay income tax while partnerships are not required to
pay income taxes

113. What theory of equity is applicable for partnerships?

a. Proprietary theory
b. Entity theory
c. A mix of proprietary and entity theory
d. Partnership theory

114. Which of the following is not an example of the proprietary theory of equity?
a. Partners do not have claims to specific assets
b. Individual partners are liable for all debts of the partnership
c. A partner’s income tax includes the partner’s share of partnership net income, and
the partnership does not pay income taxes
d. Salaries of partners are viewed as distributions of income, not components of net
income

115. Which of the following is not an example of the entity theory of equity?
a. Continuity of the partnership when admission or withdrawal of partners occurs
b. A partnership can enter into contracts
 c. Assets contributed to the partnership retain the existing tax basis to the partner
contributing
d Partnership creditors have priority claim to partnership assets and the creditors of
partners have priority claim to the partner’s assets in the event of liquidation

116. Which of the following statements is not true with regard to articles of partnership?
a. Written articles of partnership are not required to form a partnership
b. The Uniform Partnership Act provides a list of items that must be included in
articles of partnership
c. A written partnership agreement enables the partners to detail the agreed working
relationship among the partners
d. State law applies only if there is not agreement among the partners with regard to
that specific issue

117. When a partnership agreement is silent with regard to any aspect of a partnership
operation, who/what decides on that aspect of the partnership’s operations?
a. State law
b. Uniform Partnership Act
c. Majority vote of stockholders
d. Decision by senior partner

118. Which of the following valuation amounts is not allowed when assigning values to
noncash assets in a partnership formation?
a. Contributor’s carrying value
b. Contributor’s tax basis
c. Market (appraised) value
d. All of the above valuation amounts are allowed

119. Which of the following statements is correct with regard to the creation of initial capital
account balances on a partnership’s financial records?
a. The capital accounts can be created for any dollar amount agreed by all partners
b. The market value of noncash assets must be considered when creating the initial
capital balances
c. Each partner’s capital account must have a non-zero value assigned to it
d. All of the above statements are correct

120. Which of the following statements is not true with regard to assigning the carrying value
of noncash assets contributed to those assets at the date of a partnership’s formation?
a. Use of the noncash asset’s historical cost can result in the misstatement of the
partners’ capital accounts
b. Assigning the historical cost to noncash assets contributed to a partnership may
require the partnership agreement to address profit/loss distribution that will
occur when the contributed asset is sold
c. Assigning the historical cost to noncash assets contributed to a partnership will
not cause partner taxable income to differ from the partner’s share of partnership
income
 d. All of the above statements are correct

121. Which of the following statements is true with regard to assigning a noncash asset
contributed to a partnership the tax basis of the contributing partner?
a. The tax basis of noncash assets contributed must be used if the partnership is a
taxable entity
b. The tax basis must be considered when determine each partner’s allocation of
taxable partnership income
c. The contributing partner’s tax basis may not be used for financial accounting
records
d. None of the above statements are true

122. Which of the following statements is not true with regard to assigning the market value
of noncash assets contributed to those assets at the date of a partnership’s formation?
a. Gains or losses would likely not be recorded if the asset were sold at the date for
partnership is formed
b. The contributing partner’s share of the partnership’s income would be adjusted by
the difference between the market value and tax basis at the date the asset is
contributed to the partnership
c. The market value is the most commonly assigned value to contributed noncash
assets
d. All of the above statements are correct

123. Which of the following statements is correct with regard to the contribution of assets and
associated liabilities to a partnership?
a. Liabilities associated with assets contributed to a partnership remain the liability
of the contributing partner
b. Liabilities associated with assets contributed to a partnership become the liability
of the partnership
c. Liabilities associated with assets contributed to a partnership become the liability
of both the contributing partner and the partnership
d. Assets may not be contributed to a partnership if there is a liability associated
with the asset

124. The bonus method of recognizing unidentifiable intangible asset contributions to a

partnership does which of the following?
a. It recognizes that partners may contribute more than the observable assets to the
partnership
b. It increases total partnership capital
c. Can only increase partner capital accounts
d. b and c are correct

125. This method of recognizing unidentifiable intangible assets does not result in a change to
total contributed capital.
a. Goodwill method
b. Bonus method
 c. Reciprocal method
d. None of these methods will result in a change to total contributed capital

126. When can the bonus method be applied?

a. When a partnership is formed
b. When a new partner is added to the partnership
c. When an existing partner retires from the partnership
d. The bonus method can be applied in all three of the above circumstances

127. Shawn, Harris, and Derek are forming a partnership. The partners agree that Harris
should be assigned goodwill because of his knowledge of the business. Which partners’
capital accounts will have the dollar assigned dollar amounts altered due to the
recognition of the goodwill?
a. Shawn
b. Harris
c. Derek
d. All dollar amount assigned to all three partners’ capital accounts will be altered.

128. This method of recognizing unidentifiable intangible assets results in a change to total
contributed capital.
a. Goodwill method
b. Bonus method
c. Reciprocal method
d. None of these methods will result in a change to total contributed capital

129. The goodwill method always results in which of the following?

a. A change in the dollar value assigned to two or more partners’ capital accounts
b. A decrease in a partner’s capital account
c. An increase in a partner’s capital account
d. An increase in a partner’s capital account and a decrease in at least one partners’
capital account

130. For what purpose(s) might a drawing account be used for a partnership?
a. To keep a list of business contacts made by a partner
b. To recognize a loan made to a partner
c. To recognize inventory removed from the partnership by the partner
d. None of the above ore possible uses of a drawing account

131. Which of the following is not a withdrawal that may be found in a partnership’s drawing
account?
a. Removal of cash by a partner
b. Payment of a partner’s speeding ticket by the partnership
c. Removal of inventory by a partner
d. All of the above may be found in a drawing account
132. Which of the following statements is correct with regard to drawing accounts that may be
used by a partnership?
a. Drawing accounts are closed to the partners’ capital accounts at the end of the
accounting period
b. Drawing accounts establish the amount that may be taken from the partnership by
a partner in a given time period
c. Drawing accounts are similar to Retained Earnings in a corporation
d. Drawing accounts appear on the balance sheet as a contra-equity account

133. Which of the following should not be done by the accountant with regard to partnership
profit and loss allocation?
a. Prepare an analysis of alternative methods to allocate profits and losses
b. Recommend a particular method for allocating profits and losses
c. Inform partners of different ways that profits and losses could be allocated
d. All of the above are reasonable duties of the accountant

134. What is the underlying purpose of the interest on capital balances component of
allocating partnership profits and losses?
a. Compensate partners who contribute economic resources to the partnership
b. Reward labor and expertise contributions
c. Reward for special responsibilities undertaken
d. None of the above

135. What is the underlying purpose of the salary component of allocating partnership profits
and losses?
a. Compensate partners who contribute economic resources to the partnership
b. Reward labor and expertise contributions
c. Reward for special responsibilities undertaken
d. None of the above

136. Which of the following interest component calculation bases is least susceptible to
manipulation when allocating profits and losses to partners?
a. Beginning capital account balance
b. Average of beginning and ending capital account balances
c. Weighted average capital account balance
d. Ending capital account balance

137. Which component of the partnership profit and loss allocation compensates partners for
the routine time and effort expended in the business?
a. Interest on capital balance
b. Bonus
c. Salary
d. Residual interest

138. Which component of the partnership profit and loss allocation is most commonly offered
to the partner who manages the business?
 a. Interest on capital balance
b. Bonus
c. Salary
d. Residual interest

139. Which of the following may be a basis for determining the amount of a partner’s bonus?
a. Operating income
b. Market share
c. Average cost per unit
d. All of the three may be bases for determining the amount of a partner’s bonus

140. Which component of the partnership profit and loss allocation must be performed last?
a. Interest on capital balance
b. Bonus
c. Salary
d. Residual interest

141. Which of the following statements is true with regard to partnership residual profit and
loss ratios?
a. A partner’s residual profit ratio must be the same as the loss ratio
b. Residual profit and loss ratios can be changed by agreement
c. The residual profit and loss ratio must always be applied
d. All of the above are true statements

142. Applying the partnership residual profit and loss ratio can have which of the following
effects on a partner’s allocation of profit and/or loss?
a. Increase
b. Decrease
c. Increase or decrease
d. The residual profit and loss ratio is not used for the allocation or profit and/or loss

143. Which of the following should be done when the partnership profit and loss ratios are
changed?
a. The book and market value of assets and liabilities should be evaluated
b. The capital accounts should be modified to reflect the new profit and loss ratios
c. The creditors should be informed that the profit and loss ratios have been changed
d. The partners must draft new articles of partnership.

144. Which of the following is not a common way to address the difference between market
and book values of assets and liabilities when the partnership profit and loss ratios are
changed?
a. Assets and liabilities are revalued to market value
b. Assets with a difference between market and book value are sold and the profit is
distributed to partners based on existing profit and loss ratios
c. A list of differences between market value and book value are made
 d. Capital accounts of the partners are altered to reflect the difference between
market and book values at the date the profit and loss ratios change

145. Which of the following occurs every time a new partner is admitted to a partnership or an
existing partner leaves the partnership?
a. Dissolution
b. Termination
c. Dissolution and termination
d. None of the above occurs

146. Which of the following forms of new partner admission will not result in a change in the
partnership’s net assets?
a. Purchase of an ownership interest directly from the partnership
b. Purchase of an ownership interest directly from an existing partner
c. Either of the above
d. Neither of the above

147. Which of the following must occur for a new partner to enter the partnership by
acquiring an ownership interest directly from an existing partner?
a. Existing partners must know the amount the new partner is paying for the
ownership interest
b. The new partner must acquire all of the current partner’s ownership interest
c. Existing partners must approve the admission of the new partner into the
partnership
d. The new partner must live in the same state as the other partners

148. Which of the following must be true when a new partner acquires an ownership interest
directly from an existing partner?
a. Capital must be assigned to the new partner
b. The new partner’s profit and loss allocation must be proportionate to the capital
account balance
c. The new partner must be allocated some amount of profit and loss
d. The existing partners must provide a list of all the partnership’s outstanding
liabilities to the new partner

149. When a new partner joins a partnership by investing assets into the partnership, what
method may be used to record the admission of the new partner?
a. Revaluation of existing assets
b. Recognition of goodwill
c. Application of the bonus method
d. Any of the three or a combination may be applied

150. Which of the following is a reason to not revalue partnership assets at the date a new
partner is admitted to the partnership?
a. There has been a change in ownership
b. A new legal entity exists
 c. The partnership has not ceased operations
d. All three are reasons to not revalue partnership assets at the date of a new
partner’s admission

151. A bonus is recognized by existing partners at the date a new partner joins a partnership
when which of the following relationships occur?
a. The new partner’s contribution exceeds his/her percentage of total partnership
capital after the investment is made
b. The new partner’s contribution is less than his/her percentage of total partnership
capital after the investment is made
c. The new partner’s contribution is equal to his/her percentage of total partnership
capital after the investment is made
d. It is not possible to determine the answer to this question

152. Which of the following is not a criterion for recognizing a bonus to existing partners
when a new partner joins the partnership?
a. Only cash assets were contributed to the partnership by the new partner
b. The existing partners desire to not recognize goodwill on the balance sheet
c. The articles of partnership indicate that the bonus method will be used to admit
new partners
d. The new partner invests more into the partnership that his/her share of total
partnership capital after the investment is made

153. Which method of recording the admission of a new partner into a partnership potentially
results in the existing partners’ capital accounts changing in value?
a. Bonus method
b. Goodwill method
c. Either bonus method or goodwill method
d. Existing partners’ capital accounts never change when a new partner is admitted
into a partnership.

154. A bonus recognized by a new partner at the date of admission into the partnership is
generally shared by the existing partners in what way?
a. Equally
b. In proportion to capital account balances
c. In proportion to profit and loss residual ratios
d. In proportion to salaries

155. Which of the following is not a criterion for recognizing a bonus to a new partner when
the new partner joins the partnership?
a. Only cash assets were contributed to the partnership by the new partner
b. The existing partners desire to not recognize goodwill on the balance sheet
c. The articles of partnership indicate that the bonus method will be used to admit
new partners
d. The new partner invests less into the partnership that his/her share of total
partnership capital after the investment is made
156. When the goodwill method of recognizing the admission of a new partner is applied and
the existing partners contribute the goodwill, which of the following will result?
a. An increase in the capital accounts of existing partners
b. A decrease in the amount invested by the new partner
c. A decrease in the partnership’s total assets
d. A new partner’s capital account less than the amount invested

157. Which of the following will occur when the existing partners contribute goodwill and a
new partner is admitted to the partnership?
a. The existing partner’s capital accounts will be decreased
b. The existing partner will receive cash from the partnership
c. The partnership’s total assets will be increased
d. The new partner will be required to reduce his/her profit and loss sharing ratio

158. Which of the following statements is false with regard to the goodwill recognized for a
new partner entering a partnership?
a. The new partner’s capital account balance will exceed the amount invested
b. The existing partners’ capital accounts will remain unchanged
c. The amount invested by the new partner will be less than his/her proportion of the
partnership’s book value before goodwill is recognized
d. The three partners will have equal capital account balances when the transaction
is completed

159. Which of the following statements presents a reason that goodwill may be recorded with
regard to a new partner at the date of that partner’s admission to the partnership?
a. The existing partnership is worth more than the appraised value of the tangible
net assets
b. The new partner has a strong desire to become a member of the partnership
c. The total value of the new partner’s contribution to the partnership is greater than
the value of the identifiable net assets contributed
d. The new partner’s residual interest in profits and losses is greater than 30 percent

160. What portion of the partnership’s assets must be revalued when a partner withdraws from
the partnership?
a. The withdrawing partner’s share must be revalued
b. All of the partnership’s assets must be revalued
c. Any or all of the partnership’s assets may be revalued but none have to be
revalued
d. Partnership assets may not be revalued when a partner withdraws

161. Who may acquire the ownership interest of a partner who is withdrawing from a
partnership?
a. Existing partners
b. New investor
c. The partnership
 d. All of the above

162. If existing partners acquire the equity of a withdrawing partner, in what manner do they
divide the equity?
a. In any manner they choose
b. Equally
c. Proportionate to their residual profit and loss ratios
d. Existing partners are not permitted to acquire the equity of a withdrawing partner

163. Which of the following must exist to create the potential for a retiring partner to have a
bonus recognized at the date of withdrawal?
a. The retiring partner must be paid more than the book value of his equity
b. The existing partners must decide to not admit a new partner to the partnership
c. The retiring partner’s equity must be acquired by the partnership
d. All of the above are necessary for a bonus to be recognized

164. In what manner do the remaining partners share in the bonus paid to a withdrawing
partner?
a. In proportion to their residual profit and loss ratios
b. Equally
c. In proportion to their capital account balances
d. The partner with the greatest capital account is assigned the bonus

165. Which of the following statements is true with regard to a withdrawing partner?
a. A bonus must be paid to the retiring partner
b. A bonus may be paid to the retiring partner
c. A bonus must be paid to the retiring partner or to the remaining partners
d. Recognizing a bonus is not appropriate when a partner retires

166. What change occurs to continuing partners’ capital accounts when a withdrawing partner
is assigned goodwill at the date of withdrawal?
a. Continuing partners’ capital accounts decease by their profit and loss ratio
proportion of the goodwill assigned to the withdrawing partner
b. Continuing partners’ capital accounts increase
c. Continuing partners’ capital accounts do not change
d. Goodwill cannot be recognized with regard to withdrawing partners

167. What amount of goodwill can be recognized at the date a partner withdraws from a
partnership?
a. The withdrawing partner’s portion of goodwill
b. The continuing partners’ portion of goodwill
c. Goodwill may not be recognized at the date a partner withdraws
d. Either the withdrawing partner’s portion of goodwill or the goodwill attributable
to the entire partnership
168. Which of the following will occur when the goodwill method is used to recognize the
withdrawal of a partner?
a. The partnership must acquire the equity of the withdrawing partner
b. The withdrawing partner will be paid the book value of his/her equity after the
goodwill is recognized
c. The existing partners will divide the salary of the withdrawing partner
d. The total equity of the partnership will not change as a result of the partner’s
withdrawal

Conceptual Multiple Choice Question Difficulty and Solutions

107. easy c
108. moderate a
109. moderate d
110. easy d
111. easy d
112. moderate b
113. moderate c
114. difficult a
115. difficult c
116. moderate b
117. moderate a
118. easy d
119. moderate a
120. difficult c
121. moderate b
122. moderate d
123. easy b
124. easy a
125. easy b
126. moderate d
127. easy b
128. easy a
129. moderate c
130. easy c
131. moderate d
132. moderate a
133. easy b
134. easy a
135. easy b
136. easy c
137. easy c
138. easy b
139. moderate d
140. easy d
141. moderate b
142. easy c
143. moderate a
144. easy b
145. easy a
146. easy b
147. easy c
148. moderate c
149. easy d
150. moderate c
151. moderate b
152. easy a
153. easy c
154. easy c
155. easy a
156. moderate a
157. easy c
158. easy d
159. moderate c
160. easy c
161. easy d
162. moderate a
163. moderate d
164. easy a
165. easy b
166. easy c
167. easy d
168. easy b

Computational Multiple Choice Questions

169. Paul, Jeremy, and Juan are forming a partnership. Juan contributes a building having an
historical cost, accumulated depreciation, and market value of $290,000, $100,000, and
$400,000, respectively. The building is initially recorded on the partnership’s books at
Juan’s book value ($190,000). Two years later the building is sold for a $270,000 gain.
What portion of the profit or loss should be allocated to Juan?
a. $20,000
b. $230,000
c. $210,000
d. $90,000

170. Philip, Ray, and Sarah are forming a partnership. Philip contributes cash of $100,000;
Ray contributes inventory with a value of $100,000; and Sarah contributes a building
with a market value of $300,000. The partnership also assumed the $210,000 mortgage
on the building. What is the amount of capital assigned to each partner?
Philip Ray Sarah
a. $30,000 $30,000 $230,000
b. $56,000 $56,000 $174,000
 c. $100,000 $100,000 $90,000
d. $100,000 $100,000 $300,000

171. Max, Ike, and Tony are forming a partnership. The appraised value of assets contributed
is $60,000, $80,000, and $100,000, respectively. In addition, Max and Tony agree that
Ike’s experience is worth $30,000. The partners desire to apply the bonus method where
applicable. What is the total capital recorded at the date the partnership is formed?
a. $210,000
b. $240,000
c. $270,000
d. Some other dollar amount

172. Richardson, Peterson, and Wilkerson are forming a partnership. The partners contribute
cash and noncash assets valued at $30,000, $50,000, and $25,000, respectively. The
partners choose to apply the bonus method where applicable. If the partners agree to
establish equal capital account balances when the partnership is formed, how much of a
bonus is received by Richardson?
a. $15,000
b. $10,000
c. $5,000
d. Richardson does not receive a bonus

173. Richardson, Peterson, and Wilkerson are forming a partnership. The partners contribute
cash and noncash assets valued at $30,000, $50,000, and $25,000, respectively. The
partners choose to apply the bonus method where applicable. If the partners agree to
establish equal capital account balances when the partnership is formed, how much
capital is Peterson sacrificing to give a bonus to Richardson and Wilkerson?
a. $15,000
b. $10,000
c. $5,000
d. Richardson does not receive a bonus

174. Albert, Claude, and Jamie form a partnership by contributing $25,000, $70,000, and
$80,000, respectively. In addition, the partners agree that Albert should receive $20,000
of goodwill because of his special skills relevant to this business. What amount of
capital will exist for Albert when the partnership is formed?
a. $20,000
b. $25,000
c. $65,000
d. $45,000

175. Albert, Claude, and Jamie form a partnership by contributing $25,000, $70,000, and
$80,000, respectively. In addition, the partners agree that Albert should receive $20,000
of goodwill because of his special skills relevant to this business. What amount of
capital will exist for Claude when the partnership is formed?
a. $60,000
 b. $65,000
c. $70,000
d. Some other amount

176. Chris and David are forming a partnership with contributions of $75,000 and $125,000,
respectively. In addition, they agree that they will recognize $25,000 goodwill with
regard to David’s contacts in the area. What is the total amount of capital that will exist
for the partnership immediately after it is formed?
a. $75,000
b. $125,000
c. $150,000
d. $225,000

177. Chris is a partner in a local partnership. The profit and loss sharing agreement includes
an interest allocation of 7 percent on the invested capital. The capital account of Chris
reveals that he had a beginning capital account balance of $50,000. He withdrew
$10,000 on May 1 and invested $25,000 on October 31. Rounded to the nearest dollar,
what is Chris’ weighted average capital balance?
a. $57,500
b. $51,667
c. $47,500
d. $28,333

178. Richard is a partner in a local partnership. The profit and loss sharing agreement
includes an interest allocation of 8 percent on the invested capital. Richard had a
beginning capital balance of $60,000. He invested $30,000 on March 1, withdrew
$20,000 on August 1, and invested $40,000 on December 1. Rounded to the nearest
dollar, what dollar amount is allocated to Richard as interest on capital balance if the
weighted average capital balance is used as the basis of the computation?
a. $82,500
b. $6,400
c. $80,000
d. $6,600

179. Shawn is a managing partner in a local business. Part of his profit allocation is a bonus
based on the store’s operating income. The bonus is 8 percent of operating income in
excess of $200,000 after deducting the bonus. If operating income for the year is
$250,000, what is Shawn’s bonus (rounded to the nearest dollar)?
a. $3,703
b. $40,000
c. $20,000
d. $4,000

180. James has a bonus as part of his partner profit allocation. The bonus is based on the
partnerships net income. James receives a bonus equal to 5 percent that the net income
 exceeds $150,000. If the net income in the current year is $180,000, how much bonus
does James receive?
a. $30,000
b. $7,500
c. $1,500
d. $9,000

181. Cheryl is the manager of a local store. She is also a partner in the company and she
receives a bonus as part of the profit and loss allocation. Cheryl’s bonus is based on the
increase in revenues recorded during the period. The bonus arrangement is that Cheryl
receives 1 percent of net income for every full percentage point growth for revenues in
excess of a 5 percent revenue growth. During the most recent period, revenues grew
from $500,000 to $540,000 and net income grew from $98,000 to $120,000. How much
bonus does Cheryl receive for this period?
a. $2,000
b. $1,100
c. $6,000
d. $3,600

182. Norman, Sarah, and Taylor are partners. The partnership income for the period is
$130,000. The partnership agreement assigns salaries to the partners of $10,000,
$15,000, and $18,000, respectively. In addition, the partners have profit and loss
residual ratios of 30%, 45%, and 25%. What is the amount of profit and loss allocated to
Sarah as a result of applying the residual ratios?
a. $39,150
b. $54,150
c. $58,500
d. $51,750

183. Jim and Scott are partners who have residual profit and loss ratios of 55% and 45%,
respectively. The partnership has income of $60,000 for the current period. How much
of this income is allocated to Scott?
a. $30,000
b. $33,000
c. $14,850
d. $27,000

184. Mike and Michelle are partners in a local business. The business has a $25,000 loss this
year. How much of this loss is allocated to Mike?
a. $12,500
b. $0
c. $25,000
d. Losses cannot be allocated without residual profit and loss ratios
185. Nick, Joe, and Mike are partners. The company has $150,000 net income for the period.
How is this income divided to the partners if the following profit and loss allocation
process is followed?
Nick Joe Mike
Weighted average capital $200,000 $350,000 $180,000
Salary 25,000 15,000 35,000
Bonus .1 (NI - $100,000)
Residual profit/loss ratios .25 .45 .30
Return on invested capital 9%

Nick Joe Mike

a. $43,000 $46,500 $60,500
b. $45,325 $50,685 $53,990
c. $50,000 $50,000 $50,000
d. $44,075 $48,435 $57,490

186. Harriet, Bob, and Tim are partners. Income for the current year is $500,000. The profit
and loss agreement states that salaries are $35,000, $50,000, and $40,000, respectively.
In addition, the residual profit and loss ratios are 40%, 30%, and 30%, respectively.
How much of the profit is allocated to Harriet?
a. $150,000
b. $185,000
c. $162,500
d. $152,500

187. Suzanne, Thomas, and Vicky are partners. They have average capital account balances
of $200,000, $250,000, and $400,000, respectively. In addition, they have residual profit
and loss ratios of 15%, 25%, and 60%, respectively. If income for the year is $300,000
and the partners earn 8 percent return on invested capital, how much will be allocated to
Thomas?
a. $78,000
b. $100,000
c. $50,800
d. $171,200

188. Johnson and Pritchard are partners. They are changing the profit and loss ratios from the
current 60/40 to 70/30. At the date of the change, vacant land owned by the partnership
has a book value of $50,000 and a market value of $60,000. The partners choose to
prepare an itemized list of assets with market values different from book values. If the
land is sold in the future for $80,000, how much of the gain will be assigned to Johnson?
a. $21,000
b. $18,000
c. $27,000
d. $20,000
189. Johnson and Pritchard are partners. They are changing the profit and loss ratios from the
current 60/40 to 70/30. At the date of the change, vacant land owned by the partnership
has a book value of $50,000 and a market value of $60,000. The partners choose to
prepare an itemized list of assets with market values different from book values. If the
land is sold in the future for $80,000, how much of the gain will be assigned to
Pritchard?
a. $12,000
b. $10,000
c. $9,000
d. $13,000

190. Karen and Andrea are currently changing their partnership profit and loss ratios from
75/25 to 60/40. They have created a list of assets that have market and book value
differences. One of the assets is a building with a $300,000 market value and $200,000
book value. Two years after changing the profit and loss ratios, the building is sold for
$380,000. How much of the profit is allocated to Karen?
a. $135,000
b. $108,000
c. $123,000
d. $183,000

191. Karen and Andrea are currently changing their partnership profit and loss ratios from
75/25 to 60/40. They have created a list of assets that have market and book value
differences. One of the assets is a building with a $300,000 market value and $200,000
book value. Two years after changing the profit and loss ratios, the building is sold for
$380,000. How much of the profit is allocated to Andrea?
a. $57,000
b. $45,000
c. $72,000
d. $97,000

192. Peter and Ronald are partners. They have shared profits and losses 65/35 for a number of
years. Peter has indicated that he is going to reduce his involvement in the partnership so
the profit and loss ratio is being modified to 45/55. At the date of the change in the
profit and loss ratio, the partnership own vacant land with a market value of $300,000
and a book value of $100,000. Peter and Ronald compile a list of assets with market and
book value differences. Two years after the change in the profit and loss ratios, the land
is sold for $450,000. How much of the gain is allocated to Peter?
a. $197,500
b. $227,500
c. $157,500
d. $287,500

193. Peter and Ronald are partners. They have shared profits and losses 65/35 for a number of
years. Peter has indicated that he is going to reduce his involvement in the partnership so
the profit and loss ratio is being modified to 45/55. At the date of the change in the
 profit and loss ratio, the partnership own vacant land with a market value of $300,000
and a book value of $100,000. Peter and Ronald compile a list of assets with market and
book value differences. Two years after the change in the profit and loss ratios, the land
is sold for $450,000. How much of the gain is allocated to Ronald?
a. $122,500
b. $192,500
c. $152,500
d. $262,500

194. Jennifer and Robert are partners who are changing their profit and loss ratios from 60/40
to 45/55. At the date of the change, the partners choose to revalue assets with market
value different from book value. One asset revalued is land with a book value of
$50,000 and a market value of $120,000. Two years after the profit and loss ratio is
changed, the land is sold for $200,000. What is the amount of change to Jennifer’s
capital account at the date the land is revalued?
a. $72,000
b. $42,000
c. $30,000
d. $28,000

195. Jennifer and Robert are partners who are changing their profit and loss ratios from 60/40
to 45/55. At the date of the change, the partners choose to revalue assets with market
value different from book value. One asset revalued is land with a book value of
$50,000 and a market value of $120,000. Two years after the profit and loss ratio is
changed, the land is sold for $200,000. What is the amount of change to Robert’s capital
account at the date the land is revalued?
a. $72,000
b. $42,000
c. $30,000
d. $28,000

196. Jennifer and Robert are partners who are changing their profit and loss ratios from 60/40
to 45/55. At the date of the change, the partners choose to revalue assets with market
value different from book value. One asset revalued is land with a book value of
$50,000 and a market value of $120,000. Two years after the profit and loss ratio is
changed, the land is sold for $200,000. What is the amount of change to Jennifer’s
capital account at the date the land is sold?
a. $48,000
b. $67,500
c. $31,500
d. $36,000

197. Jennifer and Robert are partners who are changing their profit and loss ratios from 60/40
to 45/55. At the date of the change, the partners choose to revalue assets with market
value different from book value. One asset revalued is land with a book value of
$50,000 and a market value of $120,000. Two years after the profit and loss ratio is
 changed, the land is sold for $200,000. What is the amount of change to Robert’s capital
account at the date the land is sold?
a. $44,000
b. $82,500
c. $32,000
d. $60,000

198. James and Bruce are partners. They have shared profits and losses 70/30 for several
years. The partnership profit allocation agreement is currently being modified to 60/40.
At the date of the change, the partners choose to revalue assets with market value
different from book value. One asset revalued is a building with a book value of
$370,000 and a market value of $520,000. One year after the profit and loss ratio is
changed the building is sold for $650,000. What is the amount of change to James’
capital account at the date the building is revalued?
a. $105,000
b. $91,000
c. $45,000
d. $39,000

199. James and Bruce are partners. They have shared profits and losses 70/30 for several
years. The partnership profit allocation agreement is currently being modified to 60/40.
At the date of the change, the partners choose to revalue assets with market value
different from book value. One asset revalued is a building with a book value of
$370,000 and a market value of $520,000. One year after the profit and loss ratio is
changed the building is sold for $650,000. What is the amount of change to Bruce’s
capital account at the date the building is revalued?
a. $105,000
b. $91,000
c. $45,000
d. $39,000

200. James and Bruce are partners. They have shared profits and losses 70/30 for several
years. The partnership profit allocation agreement is currently being modified to 60/40.
At the date of the change, the partners choose to revalue assets with market value
different from book value. One asset revalued is a building with a book value of
$370,000 and a market value of $520,000. One year after the profit and loss ratio is
changed the building is sold for $650,000. What is the amount of change to James’
capital account at the date the building is sold?
a. $91,000
b. $78,000
c. $39,000
d. $52,000

201. James and Bruce are partners. They have shared profits and losses 70/30 for several
years. The partnership profit allocation agreement is currently being modified to 60/40.
At the date of the change, the partners choose to revalue assets with market value
 different from book value. One asset revalued is a building with a book value of
$370,000 and a market value of $520,000. One year after the profit and loss ratio is
changed the building is sold for $650,000. What is the amount of change to Bruce’s
capital account at the date the building is sold?
a. $91,000
b. $78,000
c. $39,000
d. $52,000

202. Theresa and Craig are partners. Their current profit and loss ratios (70/30) are being
changed to (60/40). The partners decide to adjust their capital accounts at the date of the
change in the profit and loss ratios to reflect the difference between market value and
book value of assets and liabilities. At the date of the change, land has a market value of
$250,000 and a book value of $120,000. How much will Theresa’s capital account be
adjusted at the date of the change in the profit and loss ratios?
a. $52,000 increase
b. $13,000 increase
c. $52,000 decrease
d. $13,000 decrease

203. Theresa and Craig are partners. Their current profit and loss ratios (70/30) are being
changed to (60/40). The partners decide to adjust their capital accounts at the date of the
change in the profit and loss ratios to reflect the difference between market value and
book value of assets and liabilities. At the date of the change, land has a market value of
$250,000 and a book value of $120,000. How much will Craig’s capital account be
adjusted at the date of the change in the profit and loss ratios?
a. $52,000 increase
b. $13,000 increase
c. $52,000 decrease
d. $13,000 decrease

204. Eric and Phillip have been partners for several years. During that time they have shared
profits and losses (60/40). They are currently revising the profit and loss ratios to
(70/30). Eric and Phillip decide to adjust the capital accounts at the date of the change to
reflect the difference between market value and book value of assets and liabilities. At
the date of the change, the partnership owns a building with a book value of $350,000
and a market value of $600,000. How much will Eric’s capital account be adjusted at the
date of the change in the profit and loss ratios?
a. $25,000 increase
b. $50,000 increase
c. $25,000 decrease
d. $50,000 decrease

205. Eric and Phillip have been partners for several years. During that time they have shared
profits and losses (60/40). They are currently revising the profit and loss ratios to
(70/30). Eric and Phillip decide to adjust the capital accounts at the date of the change to
 reflect the difference between market value and book value of assets and liabilities. At
the date of the change, the partnership owns a building with a book value of $350,000
and a market value of $600,000. How much will Phillip’s capital account be adjusted at
the date of the change in the profit and loss ratios?
a. $25,000 increase
b. $50,000 increase
c. $25,000 decrease
d. $50,000 decrease

206. Jenna is about to purchase some of Cynthia’s partnership interest. Cynthia currently has
partnership equity of $84,500. If Jenna pays Cynthia $30,000 for 30 percent of her
capital, what amount will be recorded in the partnership accounting records?
Jenna Cynthia
a. $30,000 credit $25,350 debit
b. $25,350 credit $25,350 debit
c. $30,000 credit $30,000 debit
d. $25,350 debit $25,350 credit

207. Sam and Ray are partners with capital accounts of $150,000 and $225,000, respectively.
They are considering allowing Richard to purchase 30 percent of Ray’s equity. At the
date of the proposed transaction, Sam and Ray want to revalue the partnership’s assets
and allocate any differences based on their 40/60 profit sharing agreement. Assume that
the net market versus book value differences is $100,000. What amount would Richard
pay for the 30 percent interest?
a. $67,500
b. $76,500
c. $97,500
d. The amount cannot be determined from the information provided

208. Jesse, Joseph, and Leslie are partners with capital accounts of $70,000, $120,000, and
$90,000, respectively. The partnership share profits and losses 45%, 30%, and 25%,
respectively. They are considering allowing Hans to join the partnership by investing
directly into the partnership. The partners intend to revalue the assets before Hans’
admission. Neither bonus nor goodwill are required. If the asset’s market value exceeds
book value $150,000, how much will Hans invest to acquire a 20% equity interest in the
partnership?
a. $107,500
b. $86,000
c. $70,000
d. $100,000

209. Sandra and Joshua are partners. They have capital account balances of $250,000 and
$200,000, respectively, and they share profits and losses 70/30. The partners are
considering admitting Judy as a new partner with a 25 percent equity interest for an
investment in the partnership of $180,000. Before admission, Sandra and Joshua will
revalue the partnership’s assets. If the net increase in the partnership’s assets is
 $125,000, what will be the balance in Sandra’s capital account immediately before
Judy’s admission?
a. $575,000
b. $337,500
c. $528,500
d. $262,500

210. Ken and Robert are partners who share profits and losses 75/25. They have capital
account balances of $270,000 and $300,000, respectively at the date they admit Susan
into the partnership. Susan invests $150,000 in the partnership for a 20 percent equity
interest and the bonus method is applied. What is the dollar amount of Susan’s capital
account at the date of admission?
a. $142,500
b. $150,000
c. $144,000
d. The dollar amount cannot be determined from this information

211. Ken and Robert are partners who share profits and losses 75/25. They have capital
account balances of $270,000 and $300,000, respectively at the date they admit Susan
into the partnership. Susan invests $150,000 in the partnership for a 20 percent equity
interest and the bonus method is applied. What is the dollar amount of bonus recognized
in Ken’s capital account at the date of admission?
a. $4,500
b. $34,500
c. $6,000
d. $1,500

212. Ken and Robert are partners who share profits and losses 75/25. They have capital
account balances of $270,000 and $300,000, respectively at the date they admit Susan
into the partnership. Susan invests $150,000 in the partnership for a 20 percent equity
interest and the bonus method is applied. What is the dollar amount of bonus recognized
in Robert’s capital account at the date of admission?
a. $6,000
b. $1,500
c. $144,000
d. $4,500

213. Ken and Robert are partners who share profits and losses 75/25. They have capital
account balances of $270,000 and $300,000, respectively at the date they admit Susan
into the partnership. Susan invests $150,000 in the partnership for a 20 percent equity
interest and the bonus method is applied. What is the dollar amount of Ken’s capital
account at the date of admission?
a. $274,500
b. $304,500
c. $144,000
d. $271,500
214. Ken and Robert are partners who share profits and losses 75/25. They have capital
account balances of $270,000 and $300,000, respectively at the date they admit Susan
into the partnership. Susan invests $150,000 in the partnership for a 20 percent equity
interest and the bonus method is applied. What is the dollar amount of Robert’s capital
account at the date of admission?
a. $271,500
b. $301,500
c. $144,000
d. $304,500

215. John and Sam are partners who share profits and losses 60/40. They have capital account
balances of $625,000 and $480,000, respectively at the date they admit Pierre into the
partnership. Pierre invests $450,000 in the partnership for a 25 percent equity interest
and the bonus method is applied. What is the dollar amount of Pierre’s capital account at
the date of admission?
a. $933,000
b. $450,000
c. $388,750
d. $622,000

216. John and Sam are partners who share profits and losses 60/40. They have capital account
balances of $625,000 and $480,000, respectively at the date they admit Pierre into the
partnership. Pierre invests $450,000 in the partnership for a 25 percent equity interest
and the bonus method is applied. What is the dollar amount of bonus recognized in
John’s capital account at the date of admission?
a. $98,000
b. $61,250
c. $24,500
d. $36,750

217. John and Sam are partners who share profits and losses 60/40. They have capital account
balances of $625,000 and $480,000, respectively at the date they admit Pierre into the
partnership. Pierre invests $450,000 in the partnership for a 25 percent equity interest
and the bonus method is applied. What is the dollar amount of bonus recognized in
Sam’s capital account at the date of admission?
a. $98,000
b. $61,250
c. $24,500
d. $36,750

218. John and Sam are partners who share profits and losses 60/40. They have capital account
balances of $625,000 and $480,000, respectively at the date they admit Pierre into the
partnership. Pierre invests $450,000 in the partnership for a 25 percent equity interest
and the bonus method is applied. What is the dollar amount of John’s capital account at
the date of admission?
 a. $516,750
b. $661,750
c. $649,500
d. $504,500

219. John and Sam are partners who share profits and losses 60/40. They have capital account
balances of $625,000 and $480,000, respectively at the date they admit Pierre into the
partnership. Pierre invests $450,000 in the partnership for a 25 percent equity interest
and the bonus method is applied. What is the dollar amount of John’s capital account at
the date of admission?
a. $516,750
b. $661,750
c. $649,500
d. $504,500

220. Kris and Mark are partners who share profits and losses 70/30. They have capital
account balances of $170,000 and $260,000, respectively at the date they admit Frank
into the partnership. Frank invests $120,000 in the partnership for a 25 percent equity
interest and the bonus method is applied. What is the dollar amount of Frank’s capital
account at the date of admission?
a. $137,500
b. $120,000
c. $143,333
d. The dollar amount cannot be determined from this information

221. Kris and Mark are partners who share profits and losses 70/30. They have capital
account balances of $170,000 and $260,000, respectively at the date they admit Frank
into the partnership. Frank invests $120,000 in the partnership for a 25 percent equity
interest and the bonus method is applied. What is the dollar amount of bonus recognized
in Frank’s capital account at the date of admission?
a. $70,000
b. $23,333
c. $17,500
d. $52,500

222. Kris and Mark are partners who share profits and losses 70/30. They have capital
account balances of $170,000 and $260,000, respectively at the date they admit Frank
into the partnership. Frank invests $120,000 in the partnership for a 25 percent equity
interest and the bonus method is applied. What is the dollar amount of the reduction to
Kris’ capital account at the date of admission?
a. $5,250
b. $12,250
c. $17,500
d. $100,333
223. Kris and Mark are partners who share profits and losses 70/30. They have capital
account balances of $170,000 and $260,000, respectively at the date they admit Frank
into the partnership. Frank invests $120,000 in the partnership for a 25 percent equity
interest and the bonus method is applied. What is the dollar amount of the reduction to
Mark’s capital account at the date of admission?
a. $5,250
b. $12,250
c. $17,500
d. $100,333

224. Kris and Mark are partners who share profits and losses 70/30. They have capital
account balances of $170,000 and $260,000, respectively at the date they admit Frank
into the partnership. Frank invests $120,000 in the partnership for a 25 percent equity
interest and the bonus method is applied. What is the dollar amount of Kris’ capital
account at the date of admission?
a. $157,750
b. $254,750
c. $164,750
d. $247,750

225. Kris and Mark are partners who share profits and losses 70/30. They have capital
account balances of $170,000 and $260,000, respectively at the date they admit Frank
into the partnership. Frank invests $120,000 in the partnership for a 25 percent equity
interest and the bonus method is applied. What is the dollar amount of Mark’s capital
account at the date of admission?
a. $157,750
b. $254,750
c. $164,750
d. $247,750

226. Tom and Barbara are partners who share profits and losses 40/60. They have capital
account balances of $265,000 and $180,000, respectively at the date they admit Greg into
the partnership. Greg invests $60,000 in the partnership for a 15 percent equity interest
and the bonus method is applied. What is the dollar amount of Greg’s capital account at
the date of admission?
a. $60,000
b. $78,530
c. $429,250
d. $75,750

227. Tom and Barbara are partners who share profits and losses 40/60. They have capital
account balances of $265,000 and $180,000, respectively at the date they admit Greg to
the partnership. Greg invests $60,000 in the partnership for a 15 percent equity interest
and the bonus method is applied. What is the dollar amount of reduction to Tom’s
capital account at the date of admission?
a. $6,300
 b. $9,450
c. $54,300
d. $81,450

228. Tom and Barbara are partners who share profits and losses 40/60. They have capital
account balances of $265,000 and $180,000, respectively at the date they admit Greg to
the partnership. Greg invests $60,000 in the partnership for a 15 percent equity interest
and the bonus method is applied. What is the dollar amount of reduction to Barbara’s
capital account at the date of admission?
a. $6,300
b. $9,450
c. $54,300
d. $81,450

229. Tom and Barbara are partners who share profits and losses 40/60. They have capital
account balances of $265,000 and $180,000, respectively at the date they admit Greg to
the partnership. Greg invests $60,000 in the partnership for a 15 percent equity interest
and the bonus method is applied. What is the dollar amount of Tom’s capital account at
the date of admission?
a. $255,550
b. $258,700
c. $173,700
d. $170,550

230. Tom and Barbara are partners who share profits and losses 40/60. They have capital
account balances of $265,000 and $180,000, respectively at the date they admit Greg to
the partnership. Greg invests $60,000 in the partnership for a 15 percent equity interest
and the bonus method is applied. What is the dollar amount of Barbara’s capital account
at the date of admission?
a. $255,550
b. $258,700
c. $173,700
d. $170,550

231. Michelle and Steve are partners in a local business. They currently share profits and
losses 60/40 and have capital account balances of $150,000 and $200,000, respectively.
They are considering admitting Jacob to the partnership. He will receive a 20 percent
equity interest in the partnership for a $120,000 investment. Assuming that goodwill is
to be recognized, which partner(s) are contributing the goodwill?
a. Both new and existing partners are contributing goodwill
b. New partner is contributing goodwill
c. Existing partners are contributing goodwill
d. There is not enough information to answer this question

232. Michelle and Steve are partners in a local business. They currently share profits and
losses 60/40 and have capital account balances of $150,000 and $200,000, respectively.
 They are considering admitting Jacob to the partnership. He will receive a 20 percent
equity interest in the partnership for a $120,000 investment. Assuming that goodwill is
to be recognized, what amount of goodwill would be disclosed on the partnership balance
sheet immediately after Jacob is admitted?
a. $130,000
b. $26,000
c. $87,500
d. $32,500

233. Michelle and Steve are partners in a local business. They currently share profits and
losses 60/40 and have capital account balances of $150,000 and $200,000, respectively.
They are considering admitting Jacob to the partnership. He will receive a 20 percent
equity interest in the partnership for a $120,000 investment. Assuming that goodwill is
to be recognized, what will be the capital account balance of Jacob immediately after he
is admitted?
a. $228,000
b. $252,000
c. $250,000
d. $120,000

234. Michelle and Steve are partners in a local business. They currently share profits and
losses 60/40 and have capital account balances of $150,000 and $200,000, respectively.
They are considering admitting Jacob to the partnership. He will receive a 20 percent
equity interest in the partnership for a $120,000 investment. Assuming that goodwill is
to be recognized, what will be the capital account balance of Michelle immediately after
Jacob is admitted?
a. $228,000
b. $252,000
c. $250,000
d. $120,000

235. Michelle and Steve are partners in a local business. They currently share profits and
losses 60/40 and have capital account balances of $150,000 and $200,000, respectively.
They are considering admitting Jacob to the partnership. He will receive a 20 percent
equity interest in the partnership for a $120,000 investment. Assuming that goodwill is
to be recognized, what will be the capital account balance of Steve immediately after
Jacob is admitted?
a. $228,000
b. $252,000
c. $250,000
d. $120,000

236. Susan and David are partners in a local business. They currently share profits and losses
45/55 and have capital account balances of $250,000 and $300,000, respectively. They
are considering admitting Jane to the partnership. She will receive a 25 percent equity
 interest in the partnership for a $225,000 investment. Assuming that goodwill is to be
recognized, which partner(s) are contributing the goodwill?
a. New partner is contributing goodwill
b. Existing partners are contributing goodwill
c. Both new and existing partners are contributing goodwill
d. There is not enough information to answer this question

237. Susan and David are partners in a local business. They currently share profits and losses
45/55 and have capital account balances of $250,000 and $300,000, respectively. They
are considering admitting Jane to the partnership. She will receive a 25 percent equity
interest in the partnership for a $225,000 investment. Assuming that goodwill is to be
recognized, what amount of goodwill would be disclosed on the partnership balance
sheet immediately after Jane is admitted?
a. $31,250
b. $125,000
c. $183,333
d. $41,667

238. Susan and David are partners in a local business. They currently share profits and losses
45/55 and have capital account balances of $250,000 and $300,000, respectively. They
are considering admitting Jane to the partnership. She will receive a 25 percent equity
interest in the partnership for a $225,000 investment. Assuming that goodwill is to be
recognized, what will be the capital account balance of Jane immediately after she is
admitted?
a. $225,000
b. $281,250
c. $293,750
d. $183,333

239. Susan and David are partners in a local business. They currently share profits and losses
45/55 and have capital account balances of $250,000 and $300,000, respectively. They
are considering admitting Jane to the partnership. She will receive a 25 percent equity
interest in the partnership for a $225,000 investment. Assuming that goodwill is to be
recognized, what will be the capital account balance of Susan immediately after Jane is
admitted?
a. $318,750
b. $356,250
c. $368,750
d. $306,250

240. Susan and David are partners in a local business. They currently share profits and losses
45/55 and have capital account balances of $250,000 and $300,000, respectively. They
are considering admitting Jane to the partnership. She will receive a 25 percent equity
interest in the partnership for a $225,000 investment. Assuming that goodwill is to be
recognized, what will be the capital account balance of David immediately after Jane is
admitted?
 a. $318,750
b. $356,250
c. $368,750
d. $306,250

241. Dan and Stephanie are partners in a local business They currently share profits and
losses 30/70 and have capital account balances of $250,000 and $320,000, respectively.
They are considering admitting Jason to the partnership. He will receive a 25 percent
equity interest in the partnership for a $175,000 investment. Assuming that goodwill is
to be recognized, what amount of goodwill would be disclosed on the partnership balance
sheet immediately after Jason is admitted?
a. $11,250
b. $8,438
c. $186,250
d. $15,000

242. Dan and Stephanie are partners in a local business They currently share profits and
losses 30/70 and have capital account balances of $250,000 and $320,000, respectively.
They are considering admitting Jason to the partnership. He will receive a 25 percent
equity interest in the partnership for a $175,000 investment. Assuming that goodwill is
to be recognized, what will be the capital account balance of Jason immediately after he
is admitted?
a. $190,000
b. $175,000
c. $15,000
d. $186,250

243. Dan and Stephanie are partners in a local business They currently share profits and
losses 30/70 and have capital account balances of $250,000 and $320,000, respectively.
They are considering admitting Jason to the partnership. He will receive a 25 percent
equity interest in the partnership for a $175,000 investment. Assuming that goodwill is
to be recognized, what will be the capital account balance of Dan immediately after Jason
is admitted?
a. $285,000
b. $186,250
c. $250,000
d. $320,000

244. Dan and Stephanie are partners in a local business They currently share profits and
losses 30/70 and have capital account balances of $250,000 and $320,000, respectively.
They are considering admitting Jason to the partnership. He will receive a 25 percent
equity interest in the partnership for a $175,000 investment. Assuming that goodwill is
to be recognized, what will be the capital account balance of Stephanie immediately after
Jason is admitted?
a. $285,000
b. $186,250
 c. $250,000
d. $320,000

245. Juan and Felix are partners in a local business. They currently share profits and losses
70/30 and have capital account balances of $240,000 and $320,000, respectively. They
are considering admitting Julia to the partnership. She will receive a 20 percent equity
interest in the partnership for a $150,000 investment. Assuming that goodwill is to be
recognized, which partner(s) are contributing the goodwill?
a. New partner is contributing goodwill
b. Existing partners are contributing goodwill
c. Both new and existing partners are contributing goodwill
d. There is not enough information to answer this question

246. Juan and Felix are partners in a local business. They currently share profits and losses
70/30 and have capital account balances of $240,000 and $320,000, respectively. They
are considering admitting Julia to the partnership. She will receive a 20 percent equity
interest in the partnership for a $150,000 investment. Assuming that goodwill is to be
recognized, what amount of goodwill would be disclosed on the partnership balance
sheet immediately after Julia is admitted?
a. $142,000
b. $150,000
c. $10,000
d. $8,000

247. Juan and Felix are partners in a local business. They currently share profits and losses
70/30 and have capital account balances of $240,000 and $320,000, respectively. They
are considering admitting Julia to the partnership. She will receive a 20 percent equity
interest in the partnership for a $150,000 investment. Assuming that goodwill is to be
recognized, what will be the capital account balance of Julia immediately after she is
admitted?
a. $160,000
b. $150,000
c. $152,000
d. $158,000

248. Juan and Felix are partners in a local business. They currently share profits and losses
70/30 and have capital account balances of $240,000 and $320,000, respectively. They
are considering admitting Julia to the partnership. She will receive a 20 percent equity
interest in the partnership for a $150,000 investment. Assuming that goodwill is to be
recognized, what will be the capital account balance of Juan immediately after Julia is
admitted?
a. $280,000
b. $142,000
c. $320,000
d. $240,000
249. Juan and Felix are partners in a local business. They currently share profits and losses
70/30 and have capital account balances of $240,000 and $320,000, respectively. They
are considering admitting Julia to the partnership. She will receive a 20 percent equity
interest in the partnership for a $150,000 investment. Assuming that goodwill is to be
recognized, what will be the capital account balance of Felix immediately after Julia is
admitted?
a. $280,000
b. $142,000
c. $320,000
d. $240,000

250. Harry, Susan, and Walter are partners who share profits and losses 35, 40, and 25
percent, respectively. Harry is withdrawing from the partnership. At the date of
withdrawal, the partners are revaluing Harry’s portion of the partnership’s assets. If the
value of the partnership’s assets are $200,000 greater than book value, what is the dollar
amount of capital account adjustment that will be recorded?
a. $50,000
b. $70,000
c. $80,000
d. $200,000

251. Harry, Susan, and Walter are partners who share profits and losses 35, 40, and 25
percent, respectively. Harry is withdrawing from the partnership. At the date of
withdrawal, the partners are revaluing all of the partnership’s assets. If the value of the
partnership’s assets are $200,000 greater than book value, what is the dollar amount of
capital account adjustment that will be recorded?
a. $50,000
b. $70,000
c. $80,000
d. $200,000

252. Harry, Susan, and Walter are partners who share profits and losses 35, 40, and 25
percent, respectively. The partners have capital account balances of $80,000, $110,000,
and $55,000, respectively. Harry is withdrawing from the partnership. At the date of
withdrawal, the partners are revaluing all of the partnership’s assets, an increase of
$200,000. If Susan and Walter acquire Harry’s equity, what will be the amount of
Susan’s capital on the partnership’s balance sheet immediately after Harry’s withdrawal,
rounded to the nearest dollar?
a. $110,000
b. $230,000
c. $282,308
d. Susan’s capital account balance cannot be determined from the information given

253. Harry, Susan, and Walter are partners who share profits and losses 35, 40, and 25
percent, respectively. The partners have capital account balances of $80,000, $110,000,
and $55,000, respectively. Harry is withdrawing from the partnership. At the date of
 withdrawal, the partners are revaluing all of the partnership’s assets, an increase of
$200,000. If Susan and Walter acquire Harry’s equity, what will be the amount of total
capital on the partnership’s balance sheet immediately after Harry’s withdrawal?
a. $245,000
b. $445,000
c. $365,000
d. $295,000

254. Frank, George, and Scott are partners with capital accounts of $160,000, $120,000, and
$210,000, respectively. Scott has informed Frank and George that he must withdraw
from the partnership. The partners have agreed that the partnership will purchase Scott’s
ownership interest for $250,000. The profit and loss residual ratios before Scott’s
retirement are 45 percent, 30 percent, and 25 percent, respectively. How much will
Frank’s capital account be reduced if the bonus method is applied for the withdrawal?
a. $40,000
b. $24,000
c. $20,000
d. $16,000

255. Frank, George, and Scott are partners with capital accounts of $160,000, $120,000, and
$210,000, respectively. Scott has informed Frank and George that he must withdraw
from the partnership. The partners have agreed that the partnership will purchase Scott’s
ownership interest for $250,000. The profit and loss residual ratios before Scott’s
retirement are 45 percent, 30 percent, and 25 percent, respectively. What will be the
balance in Frank’s capital account if the bonus method is applied for the withdrawal?
a. $160,000
b. $104,000
c. $184,000
d. $136,000

256. Frank, George, and Scott are partners with capital accounts of $160,000, $120,000, and
$210,000, respectively. Scott has informed Frank and George that he must withdraw
from the partnership. The partners have agreed that the partnership will purchase Scott’s
ownership interest for $250,000. The profit and loss residual ratios before Scott’s
retirement are 45 percent, 30 percent, and 25 percent, respectively. How much will
George’s capital account be reduced if the bonus method is applied for the withdrawal?
a. $40,000
b. $24,000
c. $20,000
d. $16,000

257. Frank, George, and Scott are partners with capital accounts of $160,000, $120,000, and
$210,000, respectively. Scott has informed Frank and George that he must withdraw
from the partnership. The partners have agreed that the partnership will purchase Scott’s
ownership interest for $250,000. The profit and loss residual ratios before Scott’s
 retirement are 45 percent, 30 percent, and 25 percent, respectively. What will be the
balance in George’s capital account if the bonus method is applied for the withdrawal?
a. $120,000
b. $104,000
c. $184,000
d. $136,000

258. Melissa, Randy, and Sarah are partners with capital accounts of $300,000, $180,000, and
$270,000, respectively. Randy has informed Melissa and Sarah that he must withdraw
from the partnership. The partners have agreed that the partnership will purchase
Randy’s ownership interest for $240,000. The profit and loss residual ratios before
Randy’s retirement are 42 percent, 30 percent, and 28 percent, respectively. How much
will Melissa’s capital account be reduced if the bonus method is applied for the
withdrawal?
a. $36,000
b. $60,000
c. $24,000
d. $30,000

259. Melissa, Randy, and Sarah are partners with capital accounts of $300,000, $180,000, and
$270,000, respectively. Randy has informed Melissa and Sarah that he must withdraw
from the partnership. The partners have agreed that the partnership will purchase
Randy’s ownership interest for $240,000. The profit and loss residual ratios before
Randy’s retirement are 42 percent, 30 percent, and 28 percent, respectively. What will
be the balance in Melissa’s capital account if the bonus method is applied for the
withdrawal?
a. $336,000
b. $300,000
c. $264,000
d. $246,000

260. Melissa, Randy, and Sarah are partners with capital accounts of $300,000, $180,000, and
$270,000, respectively. Randy has informed Melissa and Sarah that he must withdraw
from the partnership. The partners have agreed that the partnership will purchase
Randy’s ownership interest for $240,000. The profit and loss residual ratios before
Randy’s retirement are 42 percent, 30 percent, and 28 percent, respectively. How much
will Sarah’s capital account be reduced if the bonus method is applied for the
withdrawal?
a. $36,000
b. $60,000
c. $24,000
d. $30,000

261. Melissa, Randy, and Sarah are partners with capital accounts of $300,000, $180,000, and
$270,000, respectively. Randy has informed Melissa and Sarah that he must withdraw
from the partnership. The partners have agreed that the partnership will purchase
 Randy’s ownership interest for $240,000. The profit and loss residual ratios before
Randy’s retirement are 42 percent, 30 percent, and 28 percent, respectively. What will
be the balance in Sarah’s capital account if the bonus method is applied for the
withdrawal?
a. $336,000
b. $300,000
c. $264,000
d. $246,000

262. Bob, Claire, and Jack are partners who share profits and losses 30 percent, 25 percent,
and 45 percent, respectively. Bob informed Claire and Jack that he is withdrawing from
the partnership. The partners’ capital accounts at the date of Bob’s withdrawal are
$150,000, $135,000, and $225,000, respectively. The partnership agreement states that
the goodwill, if any, of the withdrawing partner will be recognized for all partners
immediately prior to the withdrawal of any partner. In this instance, the partners
determine that the goodwill associated with Bob is $22,500. Assuming that Bob’s equity
is purchased by a new partner (Deborah) approved by Claire and Jack, what is the
amount of Deborah’s initial capital account?
a. $150,000
b. $170,000
c. $172,500
d. The amount cannot be determined because the amount Deborah paid for Bob’s
equity is not known

263. Bob, Claire, and Jack are partners who share profits and losses 30 percent, 25 percent,
and 45 percent, respectively. Bob informed Claire and Jack that he is withdrawing from
the partnership. The partners’ capital accounts at the date of Bob’s withdrawal are
$150,000, $135,000, and $225,000, respectively. The partnership agreement states that
the goodwill, if any, of the withdrawing partner will be recognized for all partners
immediately prior to the withdrawal of any partner. In this instance, the partners
determine that the goodwill associated with Bob is $22,500. Assuming that Bob’s equity
is purchased by Claire (60 percent) and Jack (40 percent), what is the amount of Claire’s
capital account at the date of Bob’s withdrawal?
a. $238,500
b. $307,500
c. $186,750
d. $180,000

264. Bob, Claire, and Jack are partners who share profits and losses 30 percent, 25 percent,
and 45 percent, respectively. Bob informed Claire and Jack that he is withdrawing from
the partnership. The partners’ capital accounts at the date of Bob’s withdrawal are
$150,000, $135,000, and $225,000, respectively. The partnership agreement states that
the goodwill, if any, of the withdrawing partner will be recognized for all partners
immediately prior to the withdrawal of any partner. In this instance, the partners
determine that the goodwill associated with Bob is $22,500. Assuming that Bob’s equity
 is purchased by Claire (60 percent) and Jack (40 percent), what is the amount of Jack’s
capital account at the date of Bob’s withdrawal?
a. $397,500
b. $294,000
c. $285,000
d. $159,000

265. Bob, Claire, and Jack are partners who share profits and losses 30 percent, 25 percent,
and 45 percent, respectively. Bob informed Claire and Jack that he is withdrawing from
the partnership. The partners’ capital accounts at the date of Bob’s withdrawal are
$150,000, $135,000, and $225,000, respectively. The partnership agreement states that
the goodwill of the partnership will be recognized for all partners immediately prior to
the withdrawal of any partner. In this instance, the partners determine that the
partnership’s goodwill $75,000. Assuming that Bob’s equity is purchased by a new
partner (Deborah) approved by Claire and Jack, what is the amount of Deborah’s initial
capital account?
a. $150,000
b. $170,000
c. $172,500
d. The amount cannot be determined because the amount Deborah paid for Bob’s
equity is not known

266. Bob, Claire, and Jack are partners who share profits and losses 30 percent, 25 percent,
and 45 percent, respectively. Bob informed Claire and Jack that he is withdrawing from
the partnership. The partners’ capital accounts at the date of Bob’s withdrawal are
$150,000, $135,000, and $225,000, respectively. The partnership agreement states that
the goodwill of the partnership will be recognized for all partners immediately prior to
the withdrawal of any partner. In this instance, the partners determine that the
partnership’s goodwill $75,000. Assuming that Bob’s equity is purchased by Claire (60
percent) and Jack (40 percent), what is the amount of Claire’s capital account at the date
of Bob’s withdrawal?
a. $175,500
b. $247,500
c. $257,250
d. $327,750

267. Bob, Claire, and Jack are partners who share profits and losses 30 percent, 25 percent,
and 45 percent, respectively. Bob informed Claire and Jack that he is withdrawing from
the partnership. The partners’ capital accounts at the date of Bob’s withdrawal are
$150,000, $135,000, and $225,000, respectively. The partnership agreement states that
the goodwill of the partnership will be recognized for all partners immediately prior to
the withdrawal of any partner. In this instance, the partners determine that the
partnership’s goodwill $75,000. Assuming that Bob’s equity is purchased by Claire (60
percent) and Jack (40 percent), what is the amount of Jack’s capital account at the date of
Bob’s withdrawal?
a. $175,500
 b. $247,500
c. $257,250
d. $327,750

268. Bonnie, Gwen, and Sally are partners with capital account balances of $350,000,
$280,000, and $200,000 respectively. Sally informed Bonnie and Gwen that she is
withdrawing from the partnership. The partners’ share profits and losses 45 percent, 30
percent, and 25 percent, respectively. The partnership agreement states that the goodwill,
if any, of the withdrawing partner will be recognized at the date of withdrawal. In this
instance, the partners determine that the goodwill associated with Sally is $40,000.
Assuming that Sally’s equity is purchased by a new partner (Mary) approved by Bonnie
and Gwen, what is the amount of Mary’s initial capital account?
a. $240,000
b. $390,000
c. $320,000
d. The amount cannot be determined because the amount Mary paid for Sally’s
equity is not known

269. Bonnie, Gwen, and Sally are partners with capital account balances of $350,000,
$280,000, and $200,000 respectively. Sally informed Bonnie and Gwen that she is
withdrawing from the partnership. The partners’ share profits and losses 45 percent, 30
percent, and 25 percent, respectively. The partnership agreement states that the goodwill,
if any, of the withdrawing partner will be recognized at the date of withdrawal. In this
instance, the partners determine that the goodwill associated with Sally is $40,000.
Assuming that Sally’s equity is purchased by Bonnie (60 percent) and Gwen (40
percent), what is the amount of Bonnie’s capital account at the date of Sally’s
withdrawal?
a. $446,000
b. $494,000
c. $424,000
d. $376,000

270. Bonnie, Gwen, and Sally are partners with capital account balances of $350,000,
$280,000, and $200,000 respectively. Sally informed Bonnie and Gwen that she is
withdrawing from the partnership. The partners’ share profits and losses 45 percent, 30
percent, and 25 percent, respectively. The partnership agreement states that the goodwill,
if any, of the withdrawing partner will be recognized at the date of withdrawal. In this
instance, the partners determine that the goodwill associated with Sally is $40,000.
Assuming that Sally’s equity is purchased by Bonnie (60 percent) and Gwen (40
percent), what is the amount of Gwen’s capital account at the date of Sally’s withdrawal?
a. $446,000
b. $494,000
c. $424,000
d. $376,000
271. Bonnie, Gwen, and Sally are partners with capital account balances of $350,000,
$280,000, and $200,000 respectively. Sally informed Bonnie and Gwen that she is
withdrawing from the partnership. The partners’ share profits and losses 45 percent, 30
percent, and 25 percent, respectively. The partnership agreement states that the goodwill
of the partnership will be recognized at the date of withdrawal. In this instance, the
partners determine that the partnership’s goodwill $150,000. Assuming that Sally’s
equity is purchased by a new partner (Mary) approved by Bonnie and Gwen, what is the
amount of Mary’s initial capital account?
a. $87,500
b. $237,500
c. $350,000
d. The amount cannot be determined because the amount Mary paid for Sally’s
equity is not known

272. Bonnie, Gwen, and Sally are partners with capital account balances of $350,000,
$280,000, and $200,000 respectively. Sally informed Bonnie and Gwen that she is
withdrawing from the partnership. The partners’ share profits and losses 45 percent, 30
percent, and 25 percent, respectively. The partnership agreement states that the goodwill
of the partnership will be recognized at the date of withdrawal. In this instance, the
partners determine that the partnership’s goodwill $150,000. Assuming that Sally’s
equity is purchased by Bonnie (60 percent) and Gwen (40 percent), what is the amount of
Bonnie’s capital account at the date of Sally’s withdrawal?
a. $441,000
b. $490,000
c. $560,000
d. $420,000

273 Bonnie, Gwen, and Sally are partners with capital account balances of $350,000,
$280,000, and $200,000 respectively. Sally informed Bonnie and Gwen that she is
withdrawing from the partnership. The partners’ share profits and losses 45 percent, 30
percent, and 25 percent, respectively. The partnership agreement states that the goodwill
of the partnership will be recognized at the date of withdrawal. In this instance, the
partners determine that the partnership’s goodwill $150,000. Assuming that Sally’s
equity is purchased by Bonnie (60 percent) and Gwen (40 percent), what is the amount of
Bonnie’s capital account at the date of Sally’s withdrawal?
a. $441,000
b. $490,000
c. $560,000
d. $420,000

274. Bonnie, Gwen, and Sally are partners with capital account balances of $350,000,
$280,000, and $200,000 respectively. Sally informed Bonnie and Gwen that she is
withdrawing from the partnership. The partners’ share profits and losses 45 percent, 30
percent, and 25 percent, respectively. The partnership agreement states that the goodwill
of the partnership will be recognized at the date of withdrawal. In this instance, the
partners determine that the partnership’s goodwill $150,000. Assuming that Sally’s
 equity is purchased by Bonnie (60 percent) and Gwen (40 percent), what is total
partnership equity after the withdrawal?
a. $980,000
b. $780,000
c. $830,000
d. $630,000

Computational Multiple Choice Question Difficulty and Solutions

169. difficult b
($400,000 - $190,000) + [$270,000 - ($400,000 - $190,000)]/3 = $230,000
170. easy c
171. easy b
$60,000 + $80,000 + $100,000 = $240,000
172. easy c
$30,000 + $50,000 + $25,000 = $105,000/3 = $35,000 - $30,000 = $5,000
173. moderate a
$30,000 + $50,000 + $25,000 = $105,000/3 = $35,000
$50,000 - $30,000 = $15,000
174. easy d
175. easy c
176. easy d
177. moderate c
[($50,000 x 4) + ($40,000 x 6) + ($65,000 x 2)]/12 = $47,500
178. moderate b
[($60,000 x 2) + ($90,000 x 5) + ($70,000 x 4) + $110,000] (.08) = $6,400
179. difficult a
B = .08($250,000 - $200,000 - B)
180. moderate c
B = .05($180,000 - $150,000)
181. difficult d
B = {[($540,000 - $500,000)/$500,000] - .05} $120,000
182. moderate a
($130,000 - $10,000 - $15,000 - $18,000) .45
183. easy d
$60,000 x .45
184. easy a
Profits and losses are allocated equally if there is no allocation provided
185. difficult d
Nick Joe Mike Total
Interest on capital
$200,000 x .09 $18,000
$350,000 x .09 $31,500
$180,000 x .09 $16,200 $65,700
Salary 25,000 15,000 35,000 75,000
Bonus .1($150,000 - $100,000) 5,000 5,000
Residual
 $4,300 x .25 1,075
$4,300 x .45 1,935
$4,500 x .30 1,290 4,300
Totals $44,075 $48,435 $57,490 $150,000
186. moderate b
$35,000 + ($500,000 - $35,000 - $50,000 - $40,000) .4
187. moderate a
($250,000 x .08) + [$300,000 - ($200,000 + $250,000 + $400,000)(.08)] .25
188. moderate d
($60,000 - $50,000)(.60) + ($80,000 - $60,000)(.70)
189. moderate b
($60,000 - $50,000)(.40) + ($80,000 - $60,000)(.30)
190. moderate c
($300,000 - $200,000)(.75) + ($380,000 - $300,000)(.60)
191. moderate a
($300,000 - $200,000)(.25) + ($380,000 - $300,000)(.40)
192. moderate a
($300,000 - $100,000)(.65) + ($450,000 - $300,000)(.45)
193. moderate c
($300,000 - $100,000)(.35) + ($450,000 - $300,000)(.55)
194. easy b
($120,000 - $50,000)(.60)
195. easy d
($120,000 - $50,000)(.40)
196. easy d
($200,000 - $120,000)(.45)
197. easy a
($200,000 - $120,000)(.55)
198. moderate a
($520,000 - $370,000)(.70)
199. moderate c
($520,000 - $370,000)(.30)
200. moderate b
($650,000 - $520,000)(.60)
201. moderate d
($650,000 - $520,000)(.40)
202. difficult b
($250,000 - $120,000)(.70 - .60)
203. difficult d
($250,000 - $120,000)(.30 - .40)
204. difficult c
($600,000 - $350,000)(.70 - .60)
205. difficult a
($600,000 - $350,000)(.40 - .30)
206. easy b
$84,500 x .3
207. difficult d
The amount that Richard will pay Ray depends on many factors and cannot be
determined from the information provided here.
208. difficult a
[($70,000 + $120,000 + $90,000 + $150,000)/.80](.20)
209. easy b
$250,000 + ($125,000 x .70)
210. moderate c
($270,000 + $300,000 + $150,000)(.20)
211. moderate a
[$150,000 - ($270,000 + $300,000 + $150,000)(.20)](.75)
212. moderate b
[$150,000 - ($270,000 + $300,000 + $150,000)(.20)](.25)
213. difficult a
[$150,000 - ($270,000 + $300,000 + $150,000)(.20)](.75) + $270,000
214. difficult b
[$150,000 - ($270,000 + $300,000 + $150,000)(.20)](.25) + $300,000
215. moderate c
($625,000 + $480,000 + $450,000)(.25)
216. moderate d
[$450,000 - ($625,000 + $480,000 + $450,000)(.25)](.60)
217. moderate c
[$450,000 - ($625,000 + $480,000 + $450,000)(.25)](.40)
218. difficult b
[$450,000 - ($625,000 + $480,000 + $450,000)(.25)](.60) + $625,000
219. difficult d
[$450,000 - ($625,000 + $480,000 + $450,000)(.25)](.40) + $480,000
220. moderate a
($170,000 + $260,000 + $120,000)(.25)
221. moderate c
[$120,000 - ($170,000 + $260,000 + $120,000)(.25)]
222. moderate b
[$120,000 - ($170,000 + $260,000 + $120,000)(.25)](.70)
223. moderate a
[$120,000 - ($170,000 + $260,000 + $120,000)(.25)](.30)
224. difficult a
$170,000 - [$120,000 - ($170,000 + $260,000 + $120,000)(.25)](.70)
225. difficult b
$260,000 - [$120,000 - ($170,000 + $260,000 + $120,000)(.25)](.30)
226. moderate d
($265,000 + $180,000 + $60,000)(.15)
227. moderate a
[$60,000 - ($265,000 + $180,000 + $60,000)(.15)](.40)
228. moderate b
[$60,000 - ($265,000 + $180,000 + $60,000)(.15)](.60)
229. difficult b
 $265,000 - [$60,000 - ($265,000 + $180,000 + $60,000)(.15)](.40)
230. difficult d
$180,000 - [$60,000 - ($265,000 + $180,000 + $60,000)(.15)](.60)
231. moderate c
($150,000 + $200,000 + $120,000)(.20) = $94,000
232. difficult a
($150,000 + $200,000 + $120,000)(.20) = $94,000, goodwill to existing partners
$120,000 + $0 = .2($150,000 + $200,000 + $120,000 + goodwill)
$120,000 = $94,000 + .2 goodwill
$26,000 = .2 goodwill
Goodwill = $130,000
233. moderate d
($150,000 + $200,000 + $120,000)(.20) = $94,000, goodwill to existing partners; new
partner capital account recognized at amount invested
234. difficult a
($150,000 + $200,000 + $120,000)(.20) = $94,000, goodwill to existing partners
$120,000 + $0 = .2($150,000 + $200,000 + $120,000 + goodwill)
$120,000 = $94,000 + .2 goodwill
$26,000 = .2 goodwill
Goodwill = $130,000
$150,000 + $130,000 x .60
235. difficult b
($150,000 + $200,000 + $120,000)(.20) = $94,000, goodwill to existing partners
$120,000 + $0 = .2($150,000 + $200,000 + $120,000 + goodwill)
$120,000 = $94,000 + .2 goodwill
$26,000 = .2 goodwill
Goodwill = $130,000
$200,000 + $130,000 x .40
236. moderate b
($250,000 + $300,000 + $225,000)(.25) = $193,750
237. difficult b
($250,000 + $300,000 + $225,000)(.25) = $193,750, goodwill to existing partners
$225,000 + $0 = .25($250,000 + $300,000 + $225,000 + goodwill)
$225,000 = $193,750 + .25 goodwill
$31,250 = .25 goodwill
Goodwill = $125,000
238. moderate a
($250,000 + $300,000 + $225,000)(.25) = $193,750, goodwill to existing partners; new
partner capital account recognized at amount invested
239. difficult d
($250,000 + $300,000 + $225,000)(.25) = $193,750, goodwill to existing partners
$225,000 + $0 = .25($250,000 + $300,000 + $225,000 + goodwill)
$225,000 = $193,750 + .25 goodwill
$31,250 = .25 goodwill
Goodwill = $125,000
$250,000 + $125,000 x .45
240. difficult c
($250,000 + $300,000 + $225,000)(.25) = $193,750, goodwill to existing partners
$225,000 + $0 = .25($250,000 + $300,000 + $225,000 + goodwill)
$225,000 = $193,750 + .25 goodwill
$31,250 = .25 goodwill
Goodwill = $125,000
$300,000 + $125,000 x .55
241. difficult d
($250,000 + $320,000 + $175,000)(.25) = $186,250, goodwill to new partner
$175,000 + goodwill = .25($250,000 + $320,000 + $175,000 + goodwill)
$175,000 + goodwill = $186,250 + .25 goodwill
.75 goodwill = 11,250
Goodwill = $15,000
242. difficult a
($250,000 + $320,000 + $175,000)(.25) = $186,250, goodwill to new partner
$175,000 + goodwill = .25($250,000 + $320,000 + $175,000 + goodwill)
$175,000 + goodwill = $186,250 + .25 goodwill
.75 goodwill = 11,250
Goodwill = $15,000
$175,000 + $15,000
243. moderate c
($250,000 + $320,000 + $175,000)(.25) = $186,250, goodwill to new partner; existing
partners’ capital accounts do not change
244. moderate d
($250,000 + $320,000 + $175,000)(.25) = $186,250, goodwill to new partner; existing
partners’ capital accounts do not change
245. moderate a
($240,000 + $320,000 + $150,000)(.20) = $142,000
246. difficult c
($240,000 + $320,000 + $150,000)(.20) = $142,000, goodwill to new partner
$150,000 + goodwill = .20($240,000 + $320,000 + $150,000 + goodwill)
$150,000 + goodwill = $142,000 + .20 goodwill
.80 goodwill = $8,000
Goodwill = $10,000
247. difficult a
($240,000 + $320,000 + $150,000)(.20) = $142,000, goodwill to new partner
$150,000 + goodwill = .20($240,000 + $320,000 + $150,000 + goodwill)
$150,000 + goodwill = $142,000 + .20 goodwill
.80 goodwill = $8,000
Goodwill = $10,000
$160,000 + $10,000
248. moderate d
($240,000 + $320,000 + $150,000)(.20) = $142,000, goodwill to new partner, capital
accounts of existing partners do not change
249. moderate c
 ($240,000 + $320,000 + $150,000)(.20) = $142,000, goodwill to new partner, capital
accounts of existing partners do not change
250. easy b
$200,000 x .35
251. easy d
252. moderate d
253. moderate b
$80,000 + $110,000 + $55,000 + $200,000
254. moderate b
($250,000 - $210,000)(45/75)
255. moderate d
$160,000 - ($250,000 - $210,000)(45/75)
256. moderate d
($250,000 - $210,000)(30/75)
257. moderate b
$120,000 - ($250,000 - $210,000)(30/75)
258. moderate a
($240,000 - $180,000)(42/70)
259. moderate c
$300,000 - ($240,000 - $180,000)(42/70)
260. moderate c
($240,000 - $180,000)(28/70)
261. moderate d
$270,000 - ($240,000 - $180,000)(28/70)
262. easy c
$150,000 + $22,500
263. moderate a
$135,000 + ($150,000 + $22,500)(.60)
264. moderate b
$225,000 + ($150,000 + $22,500)(.40)
265. easy c
$150,000 + ($75,000 x .3)
266. difficult c
$135,000 + ($75,000 x .25) + [$150,000 + ($75,000 x .30)](.60)
267. difficult d
$225,000 + ($75,000 x .45) + [$150,000 + ($75,000 x .30)](.40)
268. easy a
$200,000 + $40,000
269. moderate b
$350,000 + ($200,000 + $40,000)(.60)
270. moderate c
$280,000 + ($200,000 + $40,000)(.40)
271. easy b
$200,000 + ($150,000 x .25)
272. difficult c
$350,000 + ($150,000 x .45) + [$200,000 + ($150,000 x .25)](.60)
273 difficult d
$280,000 + ($150,000 x .30) + [$200,000 + ($150,000 x .25)](.40)
274. moderate a
$350,000 + $280,000 + $200,000 + $150,000

Problems

275. (10 Points) moderate

Alan, Betty, and Carl are forming a partnership. Each will contribute cash and noncash
assets. Assume the initial capital account balances will be determined based on the value
of the assets contributed. Information regarding the initial contributions is provided
below:

Alan Betty Carl__

Cash $150,000 $275,000 $125,000
Plant Assets - historical cost 280,000 350,000 540,000
Plant Assets - carrying value 215,000 225,000 300,000
Plant Assets - tax basis 200,000 190,000 230,000
Plant Assets - market value 350,000 260,000 310,000

Required:
a. Record the journal entry to establish the initial partners’ capital accounts and the
assets assuming the carrying value is used to determine the value assigned to
noncash assets contributed. Assume also that each partner’s capital account is
assigned a value equal to the cash and noncash assets contributed by that partner.
b. Record the journal entry to establish the initial partners’ capital accounts and the
assets assuming the carrying value is used to determine the value assigned to
noncash assets contributed. Assume also that all of the partners’ capital accounts
are equal when the journal entry is completed.
c. Contrast the entries in parts a. and b. Why might the partners agree to equal
capital accounts as presented in b.?

Answer:
Part a.
Cash ($150,000 + $275,000 + $125,000) 550,000
Plant Assets ($215,000 + $225,000 + $300,000) 740,000
Alan, Capital ($150,000 + $215,000) 365,000
Betty, Capital ($275,000 + $225,000) 500,000
Carl, Capital ($125,000 + $300,000) 425,000
Part b.
Cash ($150,000 + $275,000 + $125,000) 550,000
Plant Assets ($215,000 + $225,000 + $300,000) 740,000
Alan, Capital ($550,000 + $740,000)/3 430,000
Betty, Capital ($550,000 + $740,000)/3 430,000
Carl, Capital ($550,000 + $740,000)/3 430,000
 Part c. Alan has significantly more capital when it is divided equally when compared to
assigning the sum of the carrying values of assets contributed. On the other hand,
Betty has significantly less capital when it is divided equally. Carl has
approximately the same amount under either assignment method. One possibility
is that Betty is giving up some capital to Alan because Alan has substantially
more expertise in running the business. Thus, Betty is paying a bonus to Alan.

276. (10 Points) moderate

Alan, Betty, and Carl are forming a partnership. Each will contribute cash and noncash
assets. Assume the initial capital account balances will be determined based on the value
of the assets contributed. Information regarding the initial contributions is provided
below:

Alan Betty Carl__

Cash $150,000 $275,000 $125,000
Plant Assets - historical cost 280,000 350,000 540,000
Plant Assets - carrying value 220,000 225,000 300,000
Plant Assets - tax basis 200,000 190,000 230,000
Plant Assets - market value 350,000 260,000 310,000

Required:
a. Record the journal entry to establish the initial partners’ capital accounts and the
assets assuming the tax basis is used to determine the value assigned to noncash
assets contributed. Assume also that each partner’s capital account is assigned a
value equal to the cash and noncash assets contributed by that partner.
b. Record the journal entry to establish the initial partners’ capital accounts and the
assets assuming the tax basis is used to determine the value assigned to noncash
assets contributed. Assume also that all of the partners’ capital accounts are equal
when the journal entry is completed.
c. Contrast the entries in parts a. and b. Why might the partners agree to equal
capital accounts as presented in b.?

Answer:
Part a.
Cash ($150,000 + $275,000 + $125,000) 550,000
Plant Assets ($200,000 + $190,000 + $230,000) 620,000
Alan, Capital ($150,000 + $200,000) 350,000
Betty, Capital ($275,000 + $190,000) 465,000
Carl, Capital ($125,000 + $230,000) 355,000

Part b.
Cash ($150,000 + $275,000 + $125,000) 550,000
Plant Assets ($200,000 + $190,000 + $230,000) 620,000
Alan, Capital ($550,000 + $620,000)/3 390,000
Betty, Capital ($550,000 + $620,000)/3 390,000
Carl, Capital ($550,000 + $620,000)/3 390,000
 Part c. Alan and Carl each have significantly more capital when it is divided equally
when compared to assigning the sum of the carrying values of assets contributed.
On the other hand, Betty has significantly less capital when it is divided equally.
One possibility is that Betty is giving up some capital to Alan and Carl because
they have substantially more expertise in running the business. Thus, Betty is
paying a bonus to Alan and Carl.

277. (10 Points) moderate

Alan, Betty, and Carl are forming a partnership. Each will contribute cash and noncash
assets. Assume the initial capital account balances will be determined based on the value
of the assets contributed. Information regarding the initial contributions is provided
below:

Alan Betty Carl__

Cash $150,000 $275,000 $125,000
Plant Assets - historical cost 280,000 350,000 540,000
Plant Assets - carrying value 220,000 225,000 300,000
Plant Assets - tax basis 200,000 190,000 230,000
Plant Assets - market value 350,000 260,000 310,000

Required:
a. Record the journal entry to establish the initial partners’ capital accounts and the
assets assuming the market value is used to determine the value assigned to
noncash assets contributed. Assume also that each partner’s capital account is
assigned a value equal to the cash and noncash assets contributed by that partner.
b. Record the journal entry to establish the initial partners’ capital accounts and the
assets assuming the market value is used to determine the value assigned to
noncash assets contributed. Assume also that all of the partners’ capital accounts
are equal when the journal entry is completed.
c. Contrast the entries in parts a. and b. Why might the partners agree to equal
capital accounts as presented in b.?

Answer:
Part a.
Cash ($150,000 + $275,000 + $125,000) 550,000
Plant Assets ($350,000 + $260,000 + $310,000) 920,000
Alan, Capital ($150,000 + $350,000) 500,000
Betty, Capital ($275,000 + $260,000) 535,000
Carl, Capital ($125,000 + $310,000) 435,000

Part b.
Cash ($150,000 + $275,000 + $125,000) 550,000
Plant Assets ($350,000 + $260,000 + $310,000) 920,000
Alan, Capital ($550,000 + $920,000)/3 490,000
Betty, Capital ($550,000 + $920,000)/3 490,000
 Carl, Capital ($550,000 + $920,000)/3 490,000

Part c. Carl has significantly more capital when it is divided equally when compared to
assigning the sum of the carrying values of assets contributed. On the other hand,
Betty has significantly less capital when it is divided equally. Alan has
approximately the same amount under either assignment method. One possibility
is that Betty is giving up some capital to Carl because Carl has substantially more
expertise in running the business. Thus, Betty is paying a bonus to Carl.

278. (5 Points) easy

Alex, Bill, and Martha contribute the following assets to begin partnership operations:

Alex Bill Martha_

Cash $150,000 $225,000 $175,000
Inventory 57,000 89,000
Plant Assets 350,000 100,000
Accounts Payable 14,000 40,000
Notes Payable 160,000

Record the journal entry to establish the assets and owners’ equity of the partnership.

Answer:
Cash ($150,000 + $225,000 + $175,000) 550,000
Inventory ($57,000 + $89,000) 146,000
Plant Assets ($350,000 + $100,000) 450,000
Accounts Payable ($14,000 + $40,000) 54,000
Notes Payable 160,000
Alex, capital ($150,000 + $57,000 - $14,000) 193,000
Bill, capital ($225,000 + $350,000 - $160,000) 415,000
Martha, capital ($175,000 + $89,000 + 324,000
$100,000 - $40,000)

279. (10 Points) moderate

William, Casey, and Samantha are forming a partnership. Below is a table outlining the
contributions of each partner.

William Casey Samantha

Cash $ 15,000 $20,000 $ 10,000
Inventory 100,000 60,000 80,000
Plant Assets 250,000 160,000
Liabilities Assumed by Partnership 130,000 90,000

In addition, Casey brings significant experience needed to run the business. It is agreed
that partners will receive capital allocations equal to the market value of the net assets
contributed and that Casey will receive additional capital of $75,000 and the bonus
 method will be applied. Two-thirds of the bonus is to come from William and one-third
from Samantha. Record the journal entry for the creation of the partnership.

Answer:
Cash ($15,000 + $20,000 + $10,000) 45,000
Inventory ($100,000 + $60,000 + $80,000) 240,000
Plant Assets ($250,000 + $160,000) 410,000
Liabilities ($130,000 + $90,000) 220,000
Casey, Capital ($20,000 + $60,000 + $75,000) 155,000
Samantha, Capital [$10,000 + $80,000 + 135,000
$160,000 - $90,000 - ($75,000/3)]
William, Capital [$15,000 + $100,000 + 185,000
$250,000 - $130,000 - ($75,000 x 2/3)]

280. (10 Points) moderate

Bonnie, Connie, and Deborah are forming a partnership. The partners will contribute the
following identifiable assets:

Bonnie Connie Deborah

Cash $150,000 $200,000 $140,000
Inventory 160,000 190,000 180,000
Plant Assets 300,000 340,000
Liabilities Assumed by Partnership 180,000 130,000

In addition, Bonnie brings significant experience because she has run a similar type of
business. It is agreed that Bonnie will receive additional capital of $80,000 and the
bonus method will be applied. Sixty percent of the bonus is to come from Deborah and
forty percent from Connie. Record the journal entry for the creation of the partnership.

Answer:
Cash ($150,000 + $200,000 + $140,000) 490,000
Inventory ($160,000 + $190,000 + $180,000) 530,000
Plant Assets ($300,000 + $340,000) 640,000
Liabilities ($180,000 + $130,000) 310,000
Bonnie, Capital ($150,000 + $160,000 + 510,000
$300,000 - $180,000 + $80,000)
Connie, Capital [$200,000 + $190,000 - 358,000
($80,000 x .4)]
Deborah, Capital [$140,000 + $180,000 + 482,000
$340,000 - $130,000 - ($80,000 x .6)]

281. (10 Points) moderate

Able, Baker, and Charlie are forming a partnership. Charlie has significant experience in
the type of business the partners are starting. As a result, Able and Baker agree that
goodwill of $50,000 should be recognized with regard to Charlie. The partners
contribute the following tangible assets:
 Able Baker Charlie
Cash $20,000 $35,000 $55,000
Plant Assets 75,000 90,000 60,000
Liabilities 25,000 45,000 15,000

Record the journal entry to establish the partnership.

Answer:
Cash ($20,000 + $35,000 + $55,000) 110,000
Plant Assets ($75,000 + $90,000 + $60,000) 225,000
Goodwill 50,000
Liabilities ($25,000 + $45,000 + $15,000) 85,000
Able, Capital ($20,000 + $75,000 - $25,000) 70,000
Baker, Capital ($35,000 + $90,000 - $45,000) 80,000
Charlie, Capital ($55,000 + $60,000 - $15,000 + 150,000
$50,000)

282. (15 Points) moderate

Jessica, Mary, and Susan currently operate three separate businesses. They are planning
to combine and form a partnership to operate as one business. The prospective partners
agree that, in addition to the net market value of the tangible assets contributed to the
partnership, Jessica and Susan should have goodwill recognized in the amounts of
$80,000 and $40,000, respectively. The following table presents the market value of the
assets and liabilities contributed to the partnership.

Jessica Mary Susan

Cash $100,000 $250,000 $170,000
Inventory 280,000 400,000 450,000
Plant Assets 750,000 500,000 600,000
Accounts Payable 190,000 270,000 260,000
Mortgage Payable 340,000 200,000 320,000

Required:
a. Record the journal entry to establish the partnership.
b. What appears to be the partners’ intent when creating the new
partnership?

Answer:
Part a.
Cash ($100,000 + $250,000 + $170,000) 520,000
Inventory ($280,000 + $400,000 + $450,000) 1,130,000
Plant Assets ($750,000 + $500,000 + $600,000) 1,850,000
Goodwill 120,000
Accounts Payable ($190,000 + $270,000 + 720,000
$260,000)
 Mortgage Payable ($340,000 + $200,000 + 860,000
$320,000)
Jessica, Capital ($100,000 + $280,000 + 680,000
$750,000 - $190,000 - $340,000 + $80,000)
Mary, Capital ($250,000 + $400,000 + 680,000
$500,000 - $270,000 - $200,000)
Susan, Capital ($170,000 + $450,000 + 680,000
$600,000 - $260,000 - $320,000 + $40,000)

Part b.
The apparent intent of the partners is to make all three partner capital accounts of equal
dollar amount when the partnership is formed.

283. (20 Points) moderate

Tom, Jon, and Sandy are partners in a thriving business. You work for the firm that
provides accounting services to the partnership. The accounting period recently ended
and you have been assigned the task of helping with the profit allocation to the partners.
The following information has been extracted from the partnership’s accounting records:

Date Tom Jon Sandy____

1/1 Balance $850,000 Balance $680,000 Balance $450,000
4/30 Withdraw $75,000 Withdraw $30,000
9/1 Invest $120,000 Withdraw $100,000
12/1 Invest $90,000 Invest $40,000 Withdraw $60,000

The partnership agreement stipulates that the weighted-average capital balance is the
basis for the interest on capital component of profit and loss allocation and the rate of
return on invested capital is 12 percent. What is the amount of interest on capital
allocated to each partner as a part of the profit and loss allocation?

Answer:
TOM’S AVERAGE CAPITAL BALANCE
Capital Time Average
Date Invest/Withdraw Balance Invested Capital__
January 1 $850,000 4 months $ 3,400,000
April 30 Withdraw $75,000 775,000 4 months 3,100,000
September 1 Invest $120,000 895,000 3 months 2,685,000
December 1 Invest $90,000 985,000 1 month 985,000
$10,170,000
Average capital ($10,170,000 / 12) $847,500

JON’S AVERAGE CAPITAL BALANCE

Capital Time Average
Date Invest/Withdraw Balance Invested Capital__
January 1 $680,000 8 months $5,440,000
September 1 Withdraw $100,000 580,000 3 months 1,740,000
 December 1 Invest $40,000 620,000 1 month 620,000
$7,800,000
Average capital ($7,800,000 / 12) $650,000

SANDY’S AVERAGE CAPITAL BALANCE

Capital Time Average
Date Invest/Withdraw Balance Invested Capital__
January 1 $450,000 4 months $1,800,000
April 30 Withdraw $30,000 420,000 7 months 2,940,000
December 1 Withdraw $60,000 360,000 1 month 360,000
$5,100,000
Average capital ($5,100,000 / 12) $425,000

Interest on capital contributions:

Tom: $847,500 x .12 = $101,700
Jon: $650,000 x .12 = $78,000
Sandy: $425,000 x .12 = $51,000

284. (20 Points) moderate

John, Roger, and Troy are partners in a local business. You are a staff accountant at a
firm that provides accounting services to the partnership. You were just assigned the task
of helping prepare the profit allocation to the partners. The following information was
extracted from the partnership’s accounting records:

Date John Roger Troy_____

1/1 Balance $250,000 Balance $350,000 Balance $500,000
3/31 Withdraw $30,000 Invest $50,000
8/31 Invest $40,000 Withdraw $90,000
11/1 Invest $25,000 Invest $60,000 Withdraw $60,000

The partnership agreement stipulates that the weighted-average capital balance is the
basis for the interest on capital component of profit and loss allocation and the rate of
return on invested capital is 10 percent. What is the amount of interest on capital
allocated to each partner as a part of the profit and loss allocation?

Answer:
JOHN’S AVERAGE CAPITAL BALANCE
Capital Time Average
Date Invest/Withdraw Balance Invested Capital__
January 1 $250,000 3 months $ 750,000
March 31 Withdraw $30,000 220,000 5 months 1,100,000
August 31 Invest $40,000 260,000 2 months 520,000
November 1 Invest $25,000 285,000 2 months 570,000
$2,940,000
Average capital ($2,940,000 / 12) $245,000
 ROGER’S AVERAGE CAPITAL BALANCE
Capital Time Average
Date Invest/Withdraw Balance Invested Capital__
January 1 $350,000 8 months $2,800,000
August 31 Withdraw $90,000 260,000 2 months 520,000
November 1 Invest $60,000 320,000 2 months 640,000
$3,960,000
Average capital ($3,960,000 / 12) $330,000

TROY’S AVERAGE CAPITAL BALANCE

Capital Time Average
Date Invest/Withdraw Balance Invested Capital__
January 1 $500,000 3 months $1,500,000
March 31 Invest $50,000 550,000 7 months 3,850,000
November 1 Withdraw $60,000 490,000 2 months 980,000
$6,330,000
Average capital ($6,660,000 / 12) $527,500

Interest on capital contributions:

John: $245,000 x .10 = $24,500
Roger: $330,000 x .10 = $33,000
Troy: $527,500 x .10 = $52,750

285. (10 Points) easy

Philip is the managing partner of a local company. Part of his profit and loss allocation
is a bonus based on the store operating income. The bonus arrangement is 8 percent of
operating income in excess of $200,000 after deducting the bonus. How much is Philip’s
bonus this year if operating income before deducting the bonus is $350,000?

Answer:
Bonus = .08($350,000 - $200,000 - B)
1.08 Bonus = $12,000
Bonus = $11,111.11

286. (10 Points) easy

Sally is a partner, and business manager, in a local partnership. Part of the profit and loss
agreement in the articles of partnership is a bonus to be paid to the business manager.
The bonus is currently calculated at 12 percent of income in excess of $250,000 after
subtracting the bonus.

How much bonus will Sally receive if income is $400,000?

Answer:
Bonus = .12 ($400,000 - $250,000 - B)
Bonus = $16,071.43
287. (10 Points) easy
Frank, George, and Hank are partners. Partnership profits for the year are $90,000.

Required:
a. How much is allocated to each partner if the profit and loss residual ratios are
30%, 20%, and 50%, respectively?

b. How would the profit be allocated if there were no profit and loss residual ratios?

Answer:
Part a.
Frank $90,000 x .30 = $27,000
George $90,000 x .20 = $18,000
Hank $90,000 x .50 = $45,000

Part b.
Frank, George and Hank $90,000/3 = $30,000

288. (30 Points) difficult

Beverly, Brad, and Bob are partners in the 3Bs company. The partners have been in
business for a number of years. The following information exists with regard to the
allocation of profits and losses.

Beverly _ Brad Bob__

Weighted-average capital balance $400,000 $650,000 $550,000
Salary 40,000 65,000 80,000
Bonus .1(Net income - $200,000)
Residual 40% 35% 25%

The interest portion of the profit and loss allocation is 8 percent of the weighted-average
capital balance. Profit allocation is determined in the order presented above. Assume the
allocation is completed regardless of the level of profit. Partnership losses, on the other
hand, are allocated by the residual ratios only.

Required:
a. Determine the profit allocation if the partnership net income is $580,000.
b. Determine the profit allocation if the partnership net income is $250,000.
c. Determine the loss allocation if the partnership net loss is ($50,000).

Solution:
Part a.
Beverly Brad Bob Total__
Interest on capital
$400,000 x .08 $ 32,000
$650,000 x .08 $ 52,000
 $550,000 x .08 $ 44,000 $128,000
Salary 40,000 65,000 80,000 185,000
Bonus
.1($580,000 - $200,000) 38,000 38,000
Residual
$229,000 x .4 91,600
$229,000 x .35 80,150
$229,000 x .25 57,250 229,000
$163,600 $235,150 $181,250 $580,000

Part b.
Beverly Brad Bob Total__
Interest on capital
$400,000 x .08 $32,000
$650,000 x .08 $ 52,000
$550,000 x .08 $44,000 $128,000
Salary 40,000 65,000 80,000 185,000
Bonus
.1($250,000 - $200,000) 5,000 5,000
Residual
($68,000) x .4 (27,200)
($68,000) x .35 (23,800)
($68,000) x .25 (17,000) (68,000)
$44,800 $98,200 $107,000 $250,000

Part c.
Beverly Brad Bob Total__
Residual
($50,000) x .4 ($20,000)
($50,000) x .35 ($17,500)
($50,000) x .25 ($12,500) ($50,000)

289. (15 Points) difficult

Tiffany, Jason, and Shanel are partners in a marketing firm. They allocate profits and
losses based on four criteria: (1) 6 percent return on invested capital; (2) salary, based on
$40 per billable hour; (3) bonus to Jason for managing the business [.15 (net income -
$250,000 - bonus)]; and (4) residual allocation. For the year, the partners have the
following average invested capital and billable hours.

Tiffany Jason Shanel_

Average invested capital $200,000 $180,000 $160,000
Billable hours 1,500 1,700 2,200

Prepare a schedule allocating the partnership’s $450,000 profit. Round all

amounts to the nearest dollar.
 Solution:
Tiffany Jason Shanel Total_
Interest on capital
$200,000 x .06 $ 12,000
$180,000 x .06 $ 10,800
$160,000 x .06 $ 9,600 $ 32,400
Salary
1,500 x $40 60,000
1,700 x $40 68,000
2,200 x $40 88,000 216,000
Bonus
.15($450,000 - $250,000 - B) 26,087 26,087
Residual
$175,513/3 58,504 58,504 58,505 175,513
$130,504 $163,391 $156,105 $450,000

290. (10 Points) moderate

Stan and Allan have been partners for several years. Their current partnership profit and
loss ratios are being changed from 75/25 to 60/40. As part of the change, they have
created a list of assets that have market and book value differences. One of the assets is
vacant land with a $200,000 market value and a $110,000 book value. One year after
changing the profit and loss ratios, the building is sold for $280,000. Record (1) the sale
of the land and (2) the distribution of the gain on sale to the partners.

Solution:
Cash 280,000
Land 110,000
Gain on Sale of Land 170,000

Gain on Sale of Land 170,000

Stan, capital ($200,000 - $110,000)(.75) + 115,500
($280,000 - $200,000)(.60)
Allan, capital ($200,000 - $110,000)(.25) + 54,500
($280,000 - $200,000)(.40)

291. (10 Points) moderate

Susan and Mary have been partners for several years. Their current partnership profit
and loss ratios are being changed from 65/35 to 55/45. As part of the change, they have
created a list of assets that have market and book value differences. One of the assets is a
building with a $370,000 market value and a $150,000 book value. One year after
changing the profit and loss ratios, the building is sold for $500,000. Record (1) the sale
of the building and (2) the distribution of the gain on sale to the partners.

Solution:
Cash 500,000
 Building 150,000
Gain on Sale of Building 350,000

Gain on Sale of Land 350,000

Susan, capital ($370,000 - $150,000)(.65) + 214,500
($500,000 - $370,000)(.55)
Mary, capital ($370,000 - $150,000)(.35) + 135,500
($500,000 - $370,000)(.45)

292. (10 Points) easy

Janice and Richard are partners who are changing their profit and loss ratios from 40/60
to 55/45. At the date of the change, the partners chooses to revalue assets with market
value different from book value. One asset revalued is land with a book value of
$250,000 and a market value of $420,000. Two years after the profit and loss ratio is
changed, the land is sold for $600,000. Record (1) the revaluation of the land, (2) the
sale of the land, and (3) the distribution of the gain on sale of land to the partners.

Solution:
Land ($420,000 - $250,000) 170,000
Janice, capital ($170,000 x .40) 68,000
Richard, capital ($170,000 x .60) 102,000

Cash 600,000
Land 420,000
Gain on Sale of Land ($600,000 - $420,000) 180,000

Gain on Sale of Land 180,000

Janice, capital ($180,000 x .55) 99,000
Richard, capital ($180,000 x .45) 81,000

293. (10 Points) moderate

John and Renee are partners who are changing their profit and loss ratios from 70/30 to
60/40. At the date of the change, the partners chooses to revalue assets with market
value different from book value. One asset revalued is a building with a net book value
of $100,000 and a market value of $340,000. One year after the profit and loss ratio is
changed, the building is sold for $270,000. Record (1) the revaluation of the building,
(2) the sale of the building, and (3) the distribution of the loss on sale of the building to
the partners.

Solution:
Building ($340,000 - $100,000) 240,000
John, capital ($240,000 x .70)
168,000
Renee, capital ($240,000 x .30) 72,000

Cash 270,000
 Loss on Sale of Building ($270,000 - $340,000) 70,000
Building 340,000

John, capital ($70,000 x .60) 42,000

Renee, capital ($70,000 x .40) 28,000
Loss on Sale of Building 70,000

294. (10 Points) moderate

Tom and Darris are partners. Their current profit and loss ratios (80/20) are being
changed to (70/30). The partners decide to adjust their capital accounts at the date of the
change in the profit and loss ratios to reflect the difference between market value and
book value of assets and liabilities. At the date of the change, land has a market value of
$350,000 and a book value of $140,000. Record the adjustment to the capital accounts at
the date of the change in the profit and loss ratios.

Solution:
Darris, capital [($340,000 - $150,000)(.20-.30)] 21,000
Tom, capital [($340,000 - $150,000)(.80 - .70)] 21,000

295. (10 Points) moderate

Tim and Donna are partners. Their current profit and loss ratios (60/40) are being
changed to (45/55). The partners decide to adjust their capital accounts at the date of the
change in the profit and loss ratios to reflect the difference between market value and
book value of assets and liabilities. At the date of the change, a building has a book
value of $400,000 and a market value of $650,000. Record the adjustment to the capital
accounts at the date of the change in the profit and loss ratios.

Solution:
Donna, capital [($650,000 - $400,000)(.40-.55)] 37,500
Tim, capital [($650,000 - $400,000)(.60 - .45)] 37,500

296. (5 Points) easy

Wesley, Slyvia, and Mel are partners. They have capital accounts of $60,000, $95,000,
and $105,000, respectively. Heather is talking to Mel about joining the partnership and
acquiring 1/3 of his equity. Wesley and Slyvia know Heather and they have approved
her admission into the partnership. Record Heather’s admission assuming she pays
$50,000 to acquire 1/3 of Mel’s equity.

Solution:
Mel, capital ($105,000/3) 35,000
Heather, capital 35,000

297. (10 Points) moderate

John, Linda, and Bill are partners with capital accounts of $78,000, $59,000, and
$183,000, respectively. In addition, they share profits and losses 30%, 25%, and 45%,
respectively. Bill is planning to partially retire and has asked John and Linda if they
 would approve Mitch as a new partner. John and Linda respond that Mitch is acceptable
but they want to revalue the partnership’s assets before Mitch is admitted. At the date of
the admission, the net assets are written up $250,000. Mitch pays Bill $200,000 for 60
percent of his equity. Record the revaluation of the assets and the admission of Mitch
into the partnership.

Solution:
Assets 250,000
John, capital ($250,000 x .30)
75,000
Linda, capital ($250,000 x .25) 62,500
Bill, capital ($250,000 x .45) 112,500

Bill, capital ($183,000 + $112,500)(.60) 177,300

Mitch, capital 177,300

298. (20 Points) moderate

Susan and Tom are partners with capital accounts of $280,000 and $182,500,
respectively. The partners share profits and losses 60/40. They are considering
admitting Scott into the partnership as a 25% equity ownership for an investment into the
partnership of $187,500. Before admission of Scott, the partnership’s assets will be
revalued up $100,000. Record the revaluation of the assets and the admission of Scott
into the partnership.

Solution:
Assets 100,000
Susan, capital ($100,000 x .60) 60,000
Tom, capital ($100,000 x .40)
40,000

Book value of capital before the investment $562,500

($280,000 + $182,500 + $100,000)
Scott’s investment 187,500
Total book value of capital after the investment $750,000
Scott’s percentage ownership 0.25
Book value of Scott’s ownership percentage capital $187,500

Cash 187,500
Scott, capital 187,500

299. (20 Points) moderate

Wayne and Dennis are partners with capital accounts of $250,000 and $300,000,
respectively. The partners share profits and losses 30/70. They are considering
admitting Dorothy into the partnership with a 20% equity ownership for an investment
into the partnership of $193,750. Before admission of Dorothy, the partnership’s assets
 will be revalued up $225,000. Record the revaluation of the assets and the admission of
Dorothy into the partnership.

Answer:
Assets 225,000
Wayne, capital ($225,000 x .30) 67,500
Dennis, capital ($225,000 x .70) 157,500

Book value of capital before the investment $775,000

($250,000 + $300,000 + $225,000)
Dorothy’s investment 193,750
Total book value of capital after the investment $968,750
Dorothy’s percentage ownership 0.20
Book value of Scott’s ownership percentage capital $193,750

Cash 193,750
Dorothy, capital 193,750

300. (10 Points) easy

Louise and Jane are considering admitting Mary into their partnership. Louise and Jane
share profits at losses 70/30 and their capital account balances are $260,000 and
$190,000, respectively. The partnership agreement indicates that the bonus method will
be applied when new partners are admitted to the company. Louise and Jane want to
know what the journal entry would look like if Mary is admitted with a 20 percent equity
interest in the partnership for an investment of $140,000. Prepare the journal entry at the
date of admission.

Answer:
Cash 140,000
Jane, capital ($140,000 - $118,000)(.30) 6,600
Louise, capital ($140,000 - $118,000)(.70) 15,400
Mary, capital ($260,000 + $190,000 + $140,000)(.20) 118,000

301. (10 Points) easy

Steve and Ray are partners with capital accounts of $300,000 and $460,000, respectively.
They share profits and losses 60/40. Their business is growing and they need to admit a
new partner. Sheila has indicated that she would like to be part of the business.
Negotiations occur and Sheila is admitted with a 25 percent equity interest for $325,000.
Record the admission of Sheila if the bonus method is applied.

Answer:
Cash 325,000
Sheila, capital ($300,000 + $460,000 + 271,250
$325,000)(.25)
Ray, capital ($325,000 - $271,250)(.40) 21,500
Steve, capital ($325,000 - $271,250)(.60) 32,250
302. (20 Points) moderate
Deborah and Randy are partners who share profits and losses 55/45. They have capital
account balances of $450,000 and $380,000, respectively. The partners have been
negotiating with Marsha about her joining the partnership. The parties agree that the
partnership will revalue assets to their market value ($150,000 above book value) and
that Marsha will invest $250,000 for a 15 percent equity interest. Record the revaluation
and the admission of Marsha into the partnership assuming the bonus method is applied.

Answer:
Assets 150,000
Deborah, capital ($150,000 x .55) 82,500
Randy, capital ($150,000 x .45) 67,500

Cash 250,000
Deborah, capital ($250,000 - $184,500)(.55) 36,025
Marsha, capital ($450,000 + $380,000 + 184,500
$150,000 + $250,000)(.15)
Randy, capital ($250,000 - $184,500)(.45) 29,475

303. (10 Points) easy

Jennifer and Juan are partners with capital accounts of $100,000 and $160,000,
respectively. They share profits and losses 45/55. The business is expanding and they
need to admit a new partner. Kathryn has indicated that she would like to join the
partnership. Negotiations occur and Kathryn is admitted with a 25 percent equity interest
for $75,000. Record the admission of Kathryn assuming the bonus method is applied.

Answer:
Cash 80,000
Jennifer, capital ($85,000 - $80,000)(.45) 2,250
Juan, capital ($85,000 - $80,000)(.55) 2,750
Kathryn, capital ($100,000 + $160,000 + 85,000
$80,000)(.25)

304. (10 Points) easy

Fred and Laurie are considering admitting John into their partnership. Fred and Laurie
share profits at losses 60/40 and their capital account balances are $160,000 and
$290,000, respectively. The partnership agreement indicates that the bonus method will
be applied when new partners are admitted to the company. Fred and Laurie have asked
you to prepare the journal entry to admit John with a 25 percent equity interest in the
partnership for an investment of $125,000.

Answer:
Cash 125,000
Fred, capital ($143,750 - $125,000)(.60) 11,250
Laurie, capital ($143,750 - $125,000)(.40) 7,500
 John, capital ($160,000 + $290,000 + 143,750
$125,000)(.25)

305. (20 Points) moderate

Jo Ann and Robert are partners who share profits and losses 30/70. They have capital
account balances of $150,000 and $280,000, respectively. The partners have been
negotiating with Bill about him joining the partnership. The parties agree that the
partnership will revalue assets to their market value ($80,000 above book value) and that
Bill will invest $100,000 for a 20 percent equity interest. Record the revaluation and the
admission of Bill into the partnership assuming the bonus method is applied.

Answer:
Assets 80,000
Jo Ann, capital ($80,000 x .30) 24,000
Robert, capital ($80,000 x .70) 56,000

Cash 100,000
Jo Ann, capital ($122,000 - $100,000)(.30) 6,600
Robert, capital ($122,000 - $100,000)(.70) 15,400
Bill, capital ($280,000 + $150,000 + 122,000
$80,000 + $100,000)(.20)

306. (20 Points) moderate

Robert and Steven are partners in a local company. They have capital accounts in the
amounts of $250,000 and $320,000, respectively, when they agree to admit a new
partner, Don, to the company. Don has agreed to contribute $225,000 for a 25 percent
interest in the owners’ equity of the partnership. Before Don’s admission to the
partnership, Robert and Steven share profits and losses 80 percent and 20 percent,
respectively. Record the admission of Don assuming the goodwill method is applied.

Answer:
Book value of capital before the investment $570,000
Don’s investment 225,000
Total book value of capital after the investment $795,000
Don’s percentage ownership 0.25
Book value of Don’s ownership percentage capital $198,750

Goodwill to existing partners

$225,000 = (.25)($795,000 + Goodwill)

$225,000 = $198,750 + .25 (Goodwill)
$26,250 = .25 (Goodwill)
Goodwill = $105,000

Cash 225,000
Goodwill 105,000
 Don, capital 225,000
Robert, capital ($105,000 x .80) 84,000
Steve, capital ($105,000 x .20) 21,000

307. (20 Points) moderate

Ann and Sarah are partners in a local company. They have capital accounts in the
amounts of $150,000 and $220,000, respectively, when they agree to admit a new
partner, John, to the company. John has agreed to contribute $175,000 for a 25 percent
interest in the owners’ equity of the partnership. Before John’s admission to the
partnership, Ann and Sarah share profits and losses 40 percent and 60 percent,
respectively. Record the admission of John assuming the goodwill method is applied.

Answer:
Book value of capital before the investment $370,000
John’s investment 175,000
Total book value of capital after the investment 545,000
John’s percentage ownership 0.25
Book value of John’s ownership percentage capital 136,250

Goodwill to existing partners

$175,000 = (.25)($495,000 + Goodwill)

$175,000 = $136,250 + .25 (Goodwill)
$38,750 = .25 (Goodwill)
Goodwill = $155,000

Cash 175,000
Goodwill 155,000
Ann, capital ($155,000 x .40) 62,000
John, capital 175,000
Sarah, capital ($155,000 x .60) 93,000

308. (30 Points) difficult

Bob and Norman are partners and they share profits and losses 70/30. They have capital
accounts balances of $350,000 and $480,000, respectively, when they agree to admit
Richard to the company. All parties have agreed that the partnership will first revalue
tangible assets to their market value ($150,000 above book value) and then Richard will
invest $300,000 for a 20 percent interest in the partnership’s owners’ equity. Record the
revaluation and the admission of Richard into the partnership assuming the goodwill
method is applied.

Answer:
Assets 150,000
Bob, capital ($150,000 x .70) 105,000
Norman, capital ($150,000 x .30) 45,000
 Book value of capital before the investment $ 980,000
($350,000 + $480,000 + $150,000)
Richard’s investment 300,000
Total book value of capital after the investment $1,280,000
Richard’s percentage ownership 0.20
Book value of Richard’s ownership percentage capital $ 256,000

Goodwill to existing partners

$300,000 = (.20)($1,280,000 + Goodwill)

$300,000 = $256,000 + .20 (Goodwill)
$44,000 = .20 (Goodwill)
Goodwill = $220,000

Cash 300,000
Goodwill 220,000
Bob, capital ($220,000 x .70) 154,000
Norman, capital ($220,000 x .30) 66,000
John, capital 300,000

309. (10 Points) moderate

Skip and Amy are partners in a struggling company. An investor, James, has offered to
join the partnership and provide the needed expertise. Skip and Amy have capital
account balances in the amount of $120,000 and $160,000, respectively, at the date
James is admitted to the partnership and their respective profit and loss ratios are 60
percent and 40 percent. James agrees to invest $60,000 for a 20 percent interest in the
partnership capital. Assuming the goodwill method is applied, record the admission of
James.

Answer:
Book value of capital before the investment $280,000
($120,000 + $160,000)
James’ investment 60,000
Total book value of capital after the investment $340,000
James’ percentage ownership 0.20
Book value of James’ ownership percentage capital $ 68,000

Goodwill to new partner

$60,000 + goodwill = (.20)($340,000 + Goodwill)

$60,000 + goodwill = $68,000 + .20 (Goodwill)
.80 goodwill = $8,000
Goodwill = $10,000

Cash 60,000
Goodwill 10,000
 James, capital 70,000

310. (10 Points) moderate

Rich and Barbara are partners who share profits and losses 70/30. They have been
looking for a new partner to help with the expanding business. Frank has expressed an
interest and discussions are underway. Frank is willing to join the partnership by
investing $270,000 for a 25 percent equity interest. At the date Frank joins the
partnership, Rich and Barbara have capital account balances of $370,000 and $500,000,
respectively. Assuming the goodwill method is applied, record Frank’s admission to the
partnership.

Answer:
Book value of capital before the investment $ 870,000
($370,000 + $500,000)
Frank’s investment 270,000
Total book value of capital after the investment 1,140,000
Frank’s percentage ownership 0.25
Book value of Frank’s ownership percentage capital $ 285,000

Goodwill to new partner

$270,000 + goodwill = (.25)($1,140,000 + Goodwill)

$270,000 + goodwill = $285,000 + .25 (Goodwill)
.75 goodwill = $15,000
Goodwill = $20,000

Cash 270,000
Goodwill 20,000
Frank, capital 290,000

311. (30 Points) difficult

Clark and Nick are partners and they share profits and losses 75/25. They have capital
accounts balances of $250,000 and $380,000, respectively, when they agree to admit Ron
to the company. All parties have agreed that the partnership will first revalue tangible
assets to their market value ($200,000 above book value) and then Ron will invest
$170,000 for a 20 percent interest in the partnership’s owners’ equity. Record the
revaluation and Ron’s admission into the partnership assuming the goodwill method is
applied.

Answer:
Assets 200,000
Clark, capital ($200,000 x .75) 150,000
Nick, capital ($200,000 x .25) 50,000

Book value of capital before the investment $ 830,000

($250,000 + $380,000 + $200,000)
 Ron’s investment $ 170,000
Total book value of capital after the investment $1,000,000
Ron’s percentage ownership 0.20
Book value of Ron’s ownership percentage capital $ 200,000

Goodwill to new partner

$170,000 + goodwill = (.20)($1,000,000 + Goodwill)

$170,000 + goodwill = $200,000 + .20 (Goodwill)
.80 goodwill = $30,000
Goodwill = $37,500

Cash 170,000
Goodwill 37,500
Ron, capital 207,500

312. (10 Points) easy

Sarah, Tanya, and Theresa are partners who share profits and losses 25 percent, 35
percent, and 40 percent, respectively. Theresa has decided to leave the partnership. The
fixed assets of the partnership are undervalued by $50,000. The capital accounts of
Sarah, Tanya, and Theresa before Theresa’s withdrawal are $82,000, $130,000, and
$156,000, respectively. The articles of partnership state that the withdrawing partner’s
share of any differences between market value and carrying value should be recognized
when a partner leaves the partnership. Record the journal entry for the revaluation of the
assets. Record also Theresa’s withdrawal assuming that Marsha purchases Theresa’s
equity.

Answer:
Assets ($50,000 x .40) 20,000
Theresa, capital ($50,000 x .40) 20,000

Theresa, capital ($156,000 + $20,000) 176,000

Marsha, capital 176,000

313. (10 Points) easy

Sarah, Tanya, and Theresa are partners who share profits and losses 25 percent, 35
percent, and 40 percent, respectively. Theresa has decided to leave the partnership. The
fixed assets of the partnership are undervalued by $50,000. The capital accounts of
Sarah, Tanya, and Theresa before Theresa’s withdrawal are $82,000, $130,000, and
$156,000, respectively. The articles of partnership state that the full market value of all
assets and liabilities should be recognized when a partner leaves the partnership. Record
the journal entry for the revaluation of the assets. Record also Theresa’s withdrawal
assuming that Marsha purchases Theresa’s equity.

Answer:
Assets 50,000
 Sarah, capital ($50,000 x .25) 12,500
Tanya, capital ($50,000 x .35) 17,500
Theresa, capital ($50,000 x .40) 20,000

Theresa, capital ($156,000 + $20,000) 176,000

Marsha, capital 176,000

314. (10 Points) moderate

Sam, Tim, and Tyrone are partners who share profits and losses 15 percent, 40 percent,
and 45 percent, respectively. Tyrone has decided to leave the partnership. The fixed
assets of the partnership are undervalued by $80,000. The partners’ capital account
balances before the withdrawal are $70,000, $190,000, and $250,000, respectively. The
articles of partnership state that the withdrawing partner’s share of any differences
between market value and carrying value should be recognized when a partner leaves the
partnership. Record the journal entry for the revaluation of the assets. Record the
withdrawal assuming that Sam purchases 30 percent and Tim purchase 70 percent of
Tyrone’s equity.

Answer:
Assets ($80,000 x .45) 36,000
Tyrone, capital 36,000

Tyrone, capital ($250,000 + $36,000) 286,000

Sam, capital ($286,000 x .30) 85,800
Tim, capital ($286,000 x .70) 200,200

315. (10 Points) moderate

Sam, Tim, and Tyrone are partners who share profits and losses 15 percent, 40 percent,
and 45 percent, respectively. Tyrone has decided to leave the partnership. The fixed
assets of the partnership are undervalued by $80,000. The partners’ capital account
balances before the withdrawal are $70,000, $190,000, and $250,000, respectively. The
articles of partnership state that the full market value of all assets and liabilities should be
recognized when a partner leaves the partnership. Record the journal entry for the
revaluation of the assets. Record the withdrawal assuming that Sam purchases 30 percent
and Tim purchase 70 percent of Tyrone’s equity.

Answer:
Assets 80,000
Sam, capital ($80,000 x .15) 12,000
Tim, capital ($80,000 x .40) 32,000
Tyrone, capital ($80,000 x .45) 36,000

Tyrone, capital ($250,000 + $36,000) 286,000

Sam, capital ($286,000 x .30) 85,800
Tim, capital ($286,000 x .70) 200,200
316. (10 Points) easy
Don, Mark, and James are partners who share profits and losses 25 percent, 20 percent,
and 55 percent, respectively. Mark has decided to leave the partnership. The articles of
partnership state that the withdrawing partner’s share of any differences between market
value and carrying value should be recognized when a partner leaves the partnership.
The fixed assets of the partnership are undervalued by $75,000. The partners’ capital
account balances before the withdrawal are $90,000, $110,000, and $240,000,
respectively. Record the journal entry for the revaluation of the assets. Record the
withdrawal assuming that the partnership acquires Mark’s equity.

Answer:
Assets ($75,000 x .20) 15,000
Mark, capital 15,000

Mark, capital ($110,000 + $15,000) 125,000

Cash 125,000

317. (10 Points) easy

Don, Mark, and James are partners who share profits and losses 25 percent, 20 percent,
and 55 percent, respectively. Mark has decided to leave the partnership. The articles of
partnership state that the full market value of all assets and liabilities should be
recognized when a partner leaves the partnership. The fixed assets of the partnership are
undervalued by $75,000. The partners’ capital account balances before the withdrawal
are $90,000, $110,000, and $240,000, respectively. Record the journal entry for the
revaluation of the assets. Record the withdrawal assuming that the partnership acquires
Mark’s equity.

Answer:
Assets 75,000
Don, capital ($75,000 x .25) 18,750
Mark, capital ($75,000 x .20) 15,000
James, capital ($75,000 x .55) 41,250

Mark, capital ($110,000 + $15,000) 125,000

Cash 125,000

318. (30 Points) difficult

Berry, Carl, and Phil have been partners for many years. Carl has indicated that he plans
to withdraw from the partnership. To prepare for his departure, the following
information is gathered:

Book Market
Value Value_
Current Assets 210,000 210,000
Fixed Assets 850,000 980,000
Total Assets 1,060,000
 Current Liabilities 110,000 110,000
Long-term Debt 220,000 180,000
Berry, Capital (45%) 380,000
Carl, Capital (25%) 180,000
Phil, Capital (30%) 170,000
Total Liabilities and Partnership Equity 1,060,000

The partnership agreement specifies that the withdrawing partner’s portion of the change
in value of any assets and liabilities should be recognized at the date of withdrawal. The
partners agree that $300,000 of partnership assets will be used to purchase Carl’s
ownership equity. The assets are to be financed by borrowing the money on long-term
notes payable. Record these events assuming that the bonus method is used to recognize
the withdrawal.

Answer:
Fixed Assets ($980,000 - $850,000)(.25) 32,500
Long-term Debt ($220,000 - $180,000)(.25) 10,000
Carl, capital 42,500

Cash 300,000
Long-term Debt 300,000

Carl, capital ($180,000 + $42,500) 222,500

Berry, capital ($300,000 - $222,500)(45/75) 46,500
Phil, capital ($300,000 - $222,500)(30/75) 31,000
Cash 300,000

319. (10 Points) moderate

Barbara, Mitch, and Susan are partners with capital accounts of $280,000, $350,000, and
$420,000, respectively. Barbara has informed Mitch and Susan that she is withdrawing
from the partnership. The partners have agreed that the partnership will purchase
Barbara’s ownership interest for $340,000. The profit and loss residual ratios before
Barbara’s retirement are 30 percent, 28 percent, and 42 percent, respectively. Assuming
the bonus method is applied, record Barbara’s withdrawal.

Answer
Barbara, capital 280,000
Mitch, capital ($340,000 - $280,000)(28/70) 24,000
Susan, capital ($340,000 - $280,000)(42/70) 36,000
Cash 340,000

320. (10 Points) easy

Fred, Greg, and Sam are partners with capital accounts of $175,000, $225,000, and
$150,000, respectively. Sam informs Fred and Greg that is withdrawing from the
partnership. The partners agree that the partnership will purchase Sam’s ownership
interest for $200,000. The profit and loss residual ratios before Sam’s retirement are 45
 percent, 35 percent, and 20 percent, respectively. Record Sam’s withdrawal assuming
the bonus method is applied.

Answer:
Sam, capital 150,000
Fred, capital ($200,000 - $150,000)(45/80) 28,125
Greg, capital ($200,000 - $150,000)(35/80) 21,875
Cash 200,000

321. (10 Points) moderate

Jack, Ken, and Laura are partners in a local company. Ken has announced his
withdrawal from the company. The articles of partnership indicate that the withdrawing
partner’s goodwill is to be recognized at the date of withdrawal. Jack, Ken, and Laura
share profits in a 30 percent, 25 percent, and 45 percent ratio, respectively, and their
respective capital accounts just prior to the withdrawal are $225,000, $260,000, and
$325,000, respectively. Estimated goodwill attributable to Ken’s ownership percentage
is $80,000. Prepare the journal entry (entries) necessary to reflect the withdrawal of Ken
assuming that Martin has been approved to become the new partner. Martin pays Ken
$380,000 for 100 percent of his partnership equity.

Answer:
Goodwill 80,000
Ken, capital 80,000

Ken, capital ($260,000 + $80,000) 340,000

Martin, capital 340,000

322. (10 Points) moderate

Doris, Elmer, and Fran are partners in a local company. Doris has announced her
withdrawal from the company. The articles of partnership indicate that the withdrawing
partner’s goodwill is to be recognized at the date of withdrawal. Doris, Elmer, and Fran
share profits in a 20 percent, 35 percent, and 45 percent ratio, respectively, and their
respective capital accounts just prior to the withdrawal are $120,000, $180,000, and
$275,000, respectively. Estimated goodwill attributable to Doris’ ownership percentage
is $50,000. Prepare the journal entry (entries) necessary to reflect the withdrawal of
Doris assuming that Greg has been approved to become the new partner. Greg pays
Doris $190,000 for 100 percent of her partnership equity.

Answer:
Goodwill 50,000
Doris, capital 50,000

Doris, capital ($120,000 + $50,000) 170,000

Greg, capital 170,000

323. (10 Points) moderate

 Shawn, Teresa, and Mark are partners who share profits and losses 25 percent, 35
percent, and 40 percent, respectively. Mark announced his withdrawal from the
company when the partners’ capital accounts were $190,000, $238,000, and $210,000,
respectively. The articles of partnership indicate that the withdrawing partner’s goodwill
is to be recognized at the date of withdrawal. Estimated goodwill attributable to Mark’s
ownership percentage is $75,000. Prepare the journal entry (entries) necessary to reflect
the withdrawal of Mark assuming that Shawn and Teresa acquire Mark’s equity. Shawn
pays Mark $190,000 for 60 percent of Mark’s equity and Teresa pays $130,000 for 40
percent of Mark’s equity.

Answer:
Goodwill 75,000
Mark, capital 75,000

Mark, capital ($210,000 + $75,000) 285,000

Shawn, capital ($285,000 x .60) 171,000
Theresa, capital ($280,000 x .40) 114,000

324. (10 Points) moderate

David, Eric, and Glenn are partners who share profits and losses 35 percent, 40 percent,
and 25 percent, respectively. Eric announced his withdrawal from the company when the
partners’ capital accounts were $220,000, $200,000, and $280,000, respectively. The
articles of partnership indicate that the withdrawing partner’s goodwill is to be
recognized at the date of withdrawal. Estimated goodwill attributable to Eric’s
ownership percentage is $90,000. Prepare the journal entry (entries) necessary to reflect
Eric’s withdrawal assuming that David and Glenn acquire Eric’s equity. David pays
$95,000 for 30 percent of Eric’s equity and Glenn pays $190,000 for 70 percent of Eric’s
equity.

Answer:
Goodwill 90,000
Eric, capital 90,000

Eric, capital ($200,000 + $90,000) 290,000

David, capital ($290,000 x .30) 87,000
Glenn, capital ($290,000 x .70) 203,000

325. (10 Points) easy

Rich, Sam, and Clarence are partners who share profits and losses 15 percent, 45 percent,
and 40 percent, respectively. Sam announced his withdrawal from the company when
the partners’ capital accounts were $90,000, $210,000, and $190,000, respectively. The
articles of partnership indicate that the withdrawing partner’s goodwill is to be
recognized at the date of withdrawal. Estimated goodwill attributable to Sam’s
ownership percentage is $60,000. Prepare the journal entry (entries) necessary to reflect
Sam’s withdrawal assuming that the partnership acquires Sam’s equity.
 Answer:
Goodwill 60,000
Sam, capital 60,000

Sam, capital ($210,000 + $60,000) 270,000

Cash 270,000

326. (10 Points) easy

Hal, Norris, and Eddie are partners who share profits and losses 25 percent, 15 percent,
and 60 percent, respectively. Hal announced his withdrawal from the company when the
partners’ capital accounts were $120,000, $100,000, and $380,000, respectively. The
articles of partnership indicate that the withdrawing partner’s goodwill is to be
recognized at the date of withdrawal. Estimated goodwill attributable to Hal’s ownership
percentage is $30,000. Prepare the journal entry (entries) necessary to reflect Hal’s
withdrawal assuming that the partnership acquires Hal’s equity.

Answer:
Goodwill 30,000
Hal, capital 30,000

Hal, capital ($120,000 + $30,000) 150,000

Cash 150,000

327. (10 Points) moderate

James, Kris, and Lance are partners in a local company. Kris has announced her
withdrawal from the company. The articles of partnership indicate that the entire
partnership’s goodwill is to be recognized at the date of withdrawal. James, Kris, and
Lance share profits in a 30 percent, 25 percent, and 45 percent ratio, respectively, and
their respective capital accounts just prior to the withdrawal are $160,000, $120,000, and
$225,000, respectively. Estimated goodwill is $180,000. Prepare the journal entry
(entries) necessary to reflect the withdrawal of Kris assuming that Felix has been
approved to become the new partner. Felix pays Kris $175,000 for 100 percent of her
partnership equity.

Answer:
Goodwill 180,000
James, capital ($180,000 x .30) 54,000
Kris, capital ($180,000 x .25) 45,000
Lance, capital ($180,000 x .45) 81,000

Kris, capital ($120,000 + $45,000) 165,000

Felix, capital 165,000

328. (10 Points) moderate

Nicole, Melvin, and Joshua are partners in a local company. Melvin has announced his
withdrawal from the company. The articles of partnership indicate that the entire
 partnership’s goodwill is to be recognized at the date of withdrawal. Nicole, Melvin, and
Joshua share profits in a 40 percent, 25 percent, and 35 percent ratio, respectively, and
their respective capital accounts just prior to the withdrawal are $200,000, $150,000, and
$190,000, respectively. Estimated goodwill is $120,000. Prepare the journal entry
(entries) necessary to reflect the withdrawal of Melvin assuming that Hans has been
approved to become the new partner. Hans pays Melvin $160,000 for 100 percent of his
partnership equity.

Answer:
Goodwill 120,000
Nicole, capital ($120,000 x .40) 48,000
Melvin, capital ($120,000 x .25) 30,000
Joshua, capital ($120,000 x .35) 42,000

Melvin, capital ($150,000 + $30,000) 180,000

Hans, capital 180,000

329. (10 Points) moderate

Kim, Jennifer, and David are partners who share profits and losses 40 percent, 25
percent, and 35 percent, respectively. Kim announced her withdrawal from the company
when the partners’ capital accounts were $250,000, $180,000, and $210,000,
respectively. The articles of partnership indicate that the entire partnership’s goodwill is
to be recognized at the date of withdrawal. Estimated goodwill is $95,000. Prepare the
journal entry (entries) necessary to reflect Kim’s withdrawal assuming that Jennifer and
David acquire Kim’s equity. Jennifer pays Kim $180,000 for 60 percent of her equity
and David pays $130,000 for 40 percent of Kim’s equity.

Answer:
Goodwill 95,000
Kim, capital ($95,000 x .40) 38,000
Jennifer, capital ($95,000 x .25) 23,750
David, capital ($95,000 x .35) 33,250

Kim, capital ($250,000 + $38,000) 288,000

Jennifer, capital ($288,000 x .60) 172,800
David, capital ($288,000 x .40) 115,200

330. (10 Points) moderate

Natalie, Oscar, and Paul are partners who share profits and losses 30 percent, 25 percent,
and 45 percent, respectively. Paul announced his withdrawal from the company when
the partners’ capital accounts were $180,000, $160,000, and $320,000, respectively. The
articles of partnership indicate that the entire partnership’s goodwill is to be recognized
at the date of withdrawal. Estimated goodwill is $110,000. Prepare the journal entry
(entries) necessary to reflect Paul’s withdrawal assuming that Natalie and Oscar acquire
Paul’s equity. Natalie pays Paul $140,000 for 30 percent of his equity and Oscar pays
$310,000 for 70 percent of Paul’s equity.
 Answer:
Goodwill 110,000
Natalie, capital ($110,000 x .30) 33,000
Oscar, capital ($110,000 x .25) 27,500
Paul, capital ($110,000 x .45) 49,500

Paul, capital ($320,000 + $49,500) 369,500

Natalie, capital ($369,500 x .30) 110,850
Oscar, capital ($369,500 x .70) 258,650

331. (10 Points) easy

Cindy, Tony, and Ben are partners who share profits and losses 25 percent, 55 percent,
and 20 percent, respectively. Ben announced his withdrawal from the company when the
partners’ capital accounts were $120,000, $250,000, and $100,000, respectively. The
articles of partnership indicate that the entire partnership’s goodwill is to be recognized
at the date of withdrawal. Estimated goodwill is $40,000. Prepare the journal entry
(entries) necessary to reflect Ben’s withdrawal assuming that the partnership acquires
Ben’s equity.

Answer:
Goodwill 40,000
Cindy, capital ($40,000 x .25) 10,000
Tony, capital ($40,000 x .55) 22,000
Ben, capital ($40,000 x .20) 8,000

Ben, capital ($100,000 + $8,000) 108,000

Cash 108,000

332. (10 Points) easy

Mary, Nick, and Shawn are partners who share profits and losses 15 percent, 25 percent,
and 60 percent, respectively. Mary announced her withdrawal from the company when
the partners’ capital accounts were $80,000, $140,000, and $280,000, respectively. The
articles of partnership indicate that the entire partnership’s goodwill is to be recognized
at the date of withdrawal. Estimated goodwill is $50,000. Prepare the journal entry
(entries) necessary to reflect Mary’s withdrawal assuming that the partnership acquires
Mary’s equity.

Answer:
Goodwill 50,000
Mary, capital ($50,000 x .15) 7,500
Nick, capital ($50,000 x .25) 12,500
Shawn, capital ($50,000 x .60) 30,000

Mary, capital ($80,000 + $7,500) 87,500

Cash 87,500
 Short Answer Questions

333. Helen and Richard are considering forming a partnership. They have worked out many
of the issues but they are unsure about how the accounting records have to be maintained.
They come to you for information pertaining to the application of GAAP for partnership
records.

Answer: Partnerships are not required to comply with generally accepted accounting
principles (GAAP) unless the entity has publicly traded debt securities or the entity is
required to comply with GAAP by a creditor.

334. What are the similarities and differences among proprietorships, partnerships, and
corporations with regard income tax filing.

Answer: Partnerships and proprietorships are viewed as an extension of the owners.

Neither entity is separately taxed on income. The taxable income or loss is allocated to
the owners according to the partners’ profit and loss sharing agreement. Once a partner’s
taxable partnership income is determined, the income is included on the partner’s
individual tax return. The partnership is required to file an informational tax return
(Form 1065) to disclose how the taxable income has been allocated to the partners. The
corporation, on the other hand, is a taxable entity and income tax is paid on the
corporation’s taxable income.

335. Three individuals are considering forming a business together. One of their concerns is
the liability exposure from the business. Prepare a short note to these individuals
explaining the extent of liability each has when forming a partnership and a corporation.

Answer: A partner may bind the partnership by contract when conducting business in the
name of the partnership. This results in each partner being liable for the partnership
business dealings of the other partners. In addition, partners have unlimited liability with
regard to partnership debts. On the other hand, stockholders of a corporation do not
share such legal liability. The corporation is a legal entity separate from the owners and
management can commit the corporation to legal contracts in the name of the
corporation, but not the stockholders. Thus, management of the corporation can sue in
the name of the corporation and the corporation can be sued. As a result, the
stockholders are generally not liable for the debts of the corporation beyond the amount
invested.

336. Alex is the owner of a small local business. He has operated as a proprietorship for many
years but his health is starting to fail. As a result, Alex is going to reduce the number of
hours worked in the business. He has asked you to explain how changing his business to
a partnership would affect him (legally). Prepare a brief memo outlining the similarity
and differences between a proprietorship and a partnership with regard to legal issues.
 Answer: Similarities to be discussed include (1) ease of formation and (2) unlimited
owner’s liability. Difference to be discussed is shared management.

337. Compare and contrast the proprietary theory of equity and the entity theory of equity
with regard to partnerships.

Answer: The proprietary theory is based on the notion that the business entity is an
extension of the owners. The entity theory is based on the notion that the business entity
is distinct and separate from the owners. Partnerships contain elements of both the
proprietary and entity theories. Support for the proprietary theory can be found in the
following:
Individual partners are liable for all debts of the partnership
Salaries of partners are viewed as distributions of income, not components of net
income
The admission of a new partner or withdrawal of an existing partner results in the
dissolution of the partnership
Assets contributed to the partnership retain the existing tax basis to the partner
contributing
A partner’s income tax includes the partner’s share of partnership net income, and
the partnership does not pay income taxes

Support for the entity theory can be found in the following:

Assets contributed to the partnership become property of the partnership
A partnership can enter into contracts
Partners do not have claims to specific assets
Partnership creditors have priority claim to partnership assets and the creditors of
partners have priority claim to partner’s assets in the event of liquidation
Continuity of the partnership when admission or withdrawal of partners occurs
338. Partnership accounting applies elements of both the proprietary and entity theories.
Explain the underlying theoretical basis for the proprietary theory and the entity theory.

Answer: The proprietary theory is based on the notion that the business entity is an
extension of the owners. The entity theory is based on the notion that the business entity
is distinct and separate from the owners.

339. Hans and Felix are attempting to work out the final issues for forming a partnership.
They are currently debating the values to assign to noncash assets contributed to the
partnership by each partner. Hans believe that the market value has to be assigned to
these assets while Felix believes there may be other alternatives. Prepare a short note to
the two potential partners clarifying this issue.

Answer: The three most likely valuations that can be assigned to noncash assets are the
1) contributor’s carrying value, 2) contributor’s tax basis, or 3) market or appraised value
of the asset. The amount to be assigned to the noncash assets can be determined by
agreement among the partners or by appraisal (if market values are used).

340. Berry and Charlie plan to start a partnership. One partner is contributing an old building
while the other partner is contributing several delivery trucks. Both partners are also
contributing cash. A difference of opinion exists regarding the amount at which the
building and delivery trucks are to be placed on the partnership’s books. Berry believes
the carrying values should be recorded. Charlie objects because it would give Berry too
great a share of the partnership’s owners’ equity. Charlie believes the tax basis should
be used. Berry objects to the tax basis for the same reason Charlie objects to the book
basis. The partners ask for your opinion. How do you respond?

Answer: The amounts recorded on the partnership’s books do not determine the amounts
assigned to each individual capital account. The amount recorded for the assets will help
determine total capital, not how total capital is divided between the partners.

341. Explain how the assumption of a liability by the partnership on an asset contributed by a
partner impacts the contributing partner’s capital account and tax basis in that asset.

Answer: Generally the value assigned to the asset (e.g., carrying value, tax basis, market
value) is explicitly reduced by the amount of the liability assumed to determine the
contributing partner’s capital account balance. The reduction may be implicit if partners
agree to create capital accounts in equal amounts through such techniques as the
recognition of goodwill for other partners. The tax basis of a contributing partner is only
reduced by the part of the liability assumed by the partnership because the IRS interprets
this event as all partners sharing the obligation so the contributing partner is still
obligated for part of the liability.

342. Clark, Mitchell, and Thomas are forming a partnership. Each partner is contributing cash
and other tangible assets. In addition, Clark has a significant amount of experience in
operating the type of business being created. The partners do not like the idea of
 recording goodwill but they are not sure how to otherwise recognize the additional
contribution Clark is making. Prepare a brief memo explaining a different way to
recognize Clark’s contribution.

Answer: The initial capital accounts can be modified to reflect Clark’s additional
contribution. Mitchell and Thomas would give up an agreed amount of capital to be
assigned to Clark. This approach is called the bonus method. Mitchell and Thomas are
giving a bonus to Clark because of the additional contribution that cannot be measured in
a traditional manner.

343. James and Rachel are forming a partnership. They agree on the values to assign to all of
the assets and liabilities. The partners also want to recognize that Rachel has many
contacts that will be of value to the business. A mutual friend who owns a business has
told them the bank will be unhappy with their balance sheet if they record goodwill for
Rachel. How else can they recognize Rachel’s contacts?

Answer: The bonus method can be used instead of the goodwill method. The bonus
method reallocates capital from James to Rachel to recognize the contribution made by
Rachel in excess of the identifiable assets. As a result, James will have a reduced capital
account balance and Rachel will have a greater balance.

344. Barry, George, and Felix are forming a partnership. Each partner is contributing cash
and other tangible assets. George and Felix are contributing greater amounts of cash and
other tangible assets but Barry has a significant amount of experience in operating the
type of business being created. A mutual friend has suggested that the three make their
initial capital accounts equal in value. George and Felix do not like the idea of recording
their capital accounts at an amount less than the market value of what they are
contributing but they are not sure how to otherwise recognize the additional contribution
Barry is making. Prepare a brief memo explaining a different way to recognize Barry’s
contribution.

Answer: The additional contribution being made by Barry could be recorded as goodwill.
This intangible asset would be created at an amount agreed by the partners. Goodwill
results in an increase in the value of Barry’s capital account but it does not result in a
decrease in the value of the other partners’ capital accounts.

345. Explain how partners may determine the dollar amount of goodwill recognized at the
date a partnership is formed.

Answer: The value assigned to goodwill can be determined in any legal manner
agreeable to the partners. One possibility is to have an independent appraisal of the
intangible asset contributed. Another possibility is for the partners to agree on an
assigned value of the intangible asset.

346. Explain how a drawing account used by a partnership is similar in concept to a dividend
account used by a corporation.
 Answer: Both accounts contain information pertaining to distributions to owners. These
distributions can take any form such as cash, inventory, and other assets. Both accounts
are temporary in nature. They do not exist on the company’s balance sheet and they are
closed at the end of the accounting period to permanent equity accounts (partnership
capital accounts for drawing accounts and retained earnings for dividends).

347. Vicky, Robert, and Ray are forming a partnership. They have asked for some
information regarding the allocation of profits and losses among the partners. While they
believe that each partner will contribute significantly to the partnership, this contribution
will take different forms. They are unsure how to recognize these different types of
contributions. Prepare a short note explaining the different components that might be
considered when allocating partnership profits to individual partners.

Answer: Partnership profits and losses can be allocated in any manner but there are four
common components: interest on capital balance, salary, bonus, and residual percentages.
These different components reward partners for contributions of economic resources,
labor and expertise, taking on special responsibilities, and agreed allocation of any
residual profit or loss remaining after the other components have been considered.

348. Susan is joining an already existing partnership. She is reading the profit and loss
sharing part of the partnership agreement. She calls you with a question regarding a term
she does not understand, weighted average capital balance. Prepare a short note
explaining what is meant by this term.

Answer: The weighted average capital balance is the calculated average dollar amount in
the capital account after considering the length of time that balance existed. This method
of computing the average is less subject to manipulation that the simple average, which is
beginning amount plus ending amount divided by two.

349. Ben is a new partner in a local company. When he became a partner, he received a copy
of the partnership agreement including the profit and loss sharing agreement. Ben is
concerned about the interest on capital balance portion of the profit and loss sharing
agreement because his capital account is very small. Prepare a short note explaining the
reason this component of profit and loss allocation exists.

Answer: The interest on capital balance is meant to reward partners for contributions of
economic resources. As a new partner, a small capital account will likely exist and
therefore this component of the profit allocation will be small. As the capital account
grows through additional investment and profit accumulation, this component of the
profit and loss allocation will also grow.

350. Michelle is a new partner is considering becoming a partner in a small company. She
obtained a copy of the most recent income statement and is surprised when she does not
find salaries on the income statement. She asks you if it is unusual for partners to not
receive a salary from their work in the partnership.
 Answer: The lack of salary expense on the income statement does not mean that the
partners do not receive a salary. Partner salaries are not on the income statement, they
are part of the profit allocation.

351. Are there any differences between bonuses offered to partners and bonuses offered to
managers in corporations?

Answer: Bonuses offered to partners and bonuses offered to managers in corporations

are the same. Both are forms of compensations designed to encourage performance.
Furthermore, both should be based on criteria within the control of the person who will
receive the bonus.

352. Ben and Natalie are forming a partnership. They have worked out many of the details
but they are confused about how to divide profits and losses. They have spoken with
several associates who are in different partnership and there seems to be some
inconsistencies. Some partnerships have residual profit and loss ratios while others do
not. Prepare a note to Ben and Natalie informing them of the reason for this
inconsistency.

Answer: Residual profit and loss ratios are not needed if the ratios are to be equal. The
default profit and loss ratio, if not stated, is that all partners will share the residual profit
and loss equally. If the desire is to share the residual amount of profit or loss in some
other proportion, the allocation must be disclosed.

353. Do partnership residual profit ratios have to be the same as partnership residual loss
ratios? Why or why not.

Answer: Residual profit and loss ratios are part of a contractual agreement among the
partners. As a result, the partnership can apply any ratios agreed by the partners. The
ratios are typically the same for profits and losses but they can differ.

354. Alex, Shawn, and Tammy are partners in a local company. They have been conducting
business for a number of years and Shawn recently told the partners that he is going to
reduce his activities in the partnership. As a result, the partners have agreed that the
profit and loss sharing arrangement should be modified. They have agreed to adjust the
salaries and the profit and loss residuals. They come to you with a concern regarding the
assets that are currently owned by the partnership. The partners know that the assets are
worth more than the amount recorded on the financial records but they do not know how
this should be considered when the profit and loss ratios are changed. Prepare a short
note to the partners outlining the their options.

Answer: The difference between the market and book values of assets that exist when the
profit and loss ratios change can be addressed in several ways. One way is to make a list
of these assets and their market value at the date of the change. When the assets are sold,
the amount of the gain that existed when the profit and loss ratios were changed would be
 allocated based on the previous profit and loss ratios and any change in market value that
occurs after the ratios are changed would be allocated based on the new ratios. Another
approach is to revalue the assets at the date the profit and loss ratios are changed. The
gain would be allocated based on the previous ratios. A third approach is to determine
the impact of the unrealized gains on the capital accounts due to the change in the ratios
and directly adjust the capital accounts. The gain on the assets at the date of sale would
then be allocated based on the new ratios. All three approaches give the same end result,
the choice is a matter of preference by the partners.

355. Partners sometimes change the profit and loss ratios used to determine the allocation of
profits and losses. When this occurs, why would the partners choose to prepare a list of
assets with market values different from book values when they could have chosen to
revalue the assets to market value at the date the profit and loss ratios were changed?

Answer: Some partners and possibly their creditors may not want to have the assets
revalued to market value. The revaluation is a significant departure from GAAP and the
partners and their creditors may prefer to have the partnership’s financial records
maintained in accord with GAAP.

356. Sarah, a friend who knows you are a CPA comes to you with a concern. She has been
asked by a colleague to consider becoming a partner in a small company. She will be the
fourth partner in the company. Sarah has had two meetings with the current partners.
She is concerned that one of the current partners who does not know her has been asking
a variety of questions pertaining to her business practices beliefs and her personal ethics.
Sarah asks if you have any idea why this partner would ask such questions. How do you
respond?

Answer: The current partner may be concerned because the existing partners will have
unlimited liability for the actions of the new partner. Given that this partner does not
know Sarah, he/she is gathering information so a choice can be made about accepting
such risk.

357. Don and Jerry are partners in a publishing company. Don is interested in reducing his
involvement in the company and they have been searching for a new partner to take on
some of the work. They learn that Ted is interested in joining the partnership and they
enter into negotiations. Don is willing to support Ted joining the partnership if Ted will
pay Don $250,000. Don will not transfer any of his equity to Ted but will allocate 30
percent of his profit allocation to Ted. Ted comes to you with a concern about Don’s
unwillingness to allocate any equity to him even though a significant investment is
required. How do you respond?

Answer: There is no requirement for a partner to give up equity to a new partner

acquiring part of his ownership. Ted’s is purchasing an ownership in the income stream
of the partnership. His capital account would start at $0 an increase as the partnership
has income.
358. Sally, Robert, and Stuart are partners in a manufacturing company. They are considering
allowing Dick to acquire an ownership interest in the partnership by purchasing part of
Stuart’s equity. Dick is interested in purchasing 40 percent of Stuart’s equity. Dick
comes to you with a question just before a negotiating session with the current partners.
He asks if his ownership in Stuart’s equity gives him the right to 40 percent of Stuart’s
profit allocation or if that is a separate issue. How do you respond?

Answer: A purchase of Stuart’s equity is a separate issue from the allocation of profits
and losses. These two items have to be negotiated simultaneously but they are
independent. Dick has to be comfortable with the outcome on both issues if he is going
to acquire a part ownership in the partnership.

359. Fred is negotiating an investment to join a partnership. The existing partners are asking
for an investment of $80,000 for a 20 percent ownership in the partnership’s equity.
Fred is encouraged by this proposal but then he learns that the partners plan to revalue
the assets before Fred’s admission. Fred does not understand the reason for the
revaluations. Prepare a note to Fred explaining why the existing partners want to revalue
the assets before he is admitted.

Answer: The partners believe that the difference between market value and book value of
existing assets belong to them because they have been the partners during the time period
when the assets value increased. As a result, they intend to have the unrealized increase
in value added to their capital accounts so that it will not be shared with the new partner.
Any changes in value after Fred becomes a member of the partnership will be allocated
to all of the partners, including Fred.

360. Why are some people opposed to the revaluation of partnership assets when a new
partner is admitted to the partnership?

Answer: These individuals contend that the partnership is still in operation and there
should be no change in the values assigned to assets and liabilities while the partnership
is in operation. There has not been a change in ownership so there is no transaction to
justify the revaluation.

361. You are a staff accountant for a local company. The partners of a client are discussing
the admission of a new partner. Some partners believe that the partnership’s assets
should be revalued before admission of the new partner while other partners are opposed
to the revaluation. Prepare a short note explaining why it may be appropriate to revalue
the partnership’s assets at this time.

Answer: The change in value of the assets has occurred over time and the partners during
that time should share in the increase in value. The new partner should have no claim to
increases in value before that partner’s investment in the company. In addition, when the
new partner joins the company, there is a new legal entity so recording the assets at the
market value at that date is not inappropriate.
362. Sam and Mark are discussing bringing Susan into the partnership. Susan understands
that the partnership’s assets will be revalued before her admission but she does not
understand why she should invest more in the partnership than her share of the market
value of the partnership’s assets. Prepare a short note to Susan explaining the reason that
it may require a greater investment to become a member of this partnership.

Answer: Revaluing the partnership’s assets does not recognize the goodwill that exists in
the company. The partners have chosen to not record goodwill on the company’s
balance sheet but goodwill still exists. The amount that Susan is investing in excess of
the capital account created represents her investment in the goodwill that already exists in
the company. She is paying a bonus to the existing partners for allowing her to share in
the goodwill of the partnership.

363. Steve is negotiating with the partners in a local business. He would like to become a new
partner in the business but there are several issues he does not understand. One of the
primary issues pertains to the amount of his capital account at the date of investment.
The partners told Steve that he would have to invest $100,000 to join the business but his
capital account would be created for $85,000. Prepare a short note to Steve explaining
why his capital account would be recognized at an amount less than his investment.

Answer: The partnership has an unidentified asset (goodwill) that has value to the
company. The partners have chosen to not record goodwill on the company’s balance
sheet but goodwill still exists. The amount that Steve is investing in excess of the capital
account created represents his investment in the goodwill that already exists in the
company. He is paying a bonus to the existing partners for allowing him to share in the
goodwill of the partnership.

364. Jim and Fred have decided to admit Richard into their partnership. Jim and Fred know
that they are going to apply something called the bonus method to record the admission
of Richard into the partnership but they do not understand the technical accounting part
of the transaction. As a result, they do not understand why Richard’s capital account will
be created at an amount greater than the amount of his investment in the partnership.
Prepare a short note to Jim and Fred explaining the reason that Richard’s capital account
is created for this amount.

Answer: The parties have agreed that Richard is going to receive a certain percentage of
the partnership’s equity at the date of the investment. They have also agreed on the
amount that Richard will invest. When the investment takes place, the bonus method
required Richard’s capital account to be created at the agreed percentage of the total
capital after the investment. This amount may be less than, equal to, or more than the
amount invested. If it is less than or more than the amount of the investment, the capital
accounts of the existing partners is adjusted to make up for the difference.

365. John and Joel are negotiating with a potential partner to join their local business. They
would like Laura to become a new partner in the business but there are several issues
they do not understand. One of the primary issues pertains to the amount of his capital
 account at the date of investment. The partners agreed that Laura would have to invest
$75,000 to join the business and they agree that he is going to have a 30% equity interest
in the partnership. What they did not realize is that their capital accounts were going to
decrease when Laura joined the partnership. Prepare a short note to John and Joel
explaining why their capital accounts would be reduced when Laura joins the company.

Answer: The partners have agreed that Laura is contributing something to the partnership
in addition to the tangible assets. They have also agreed on the value of this contribution
when they established the interest she would have in the partnership’s total capital.
When the bonus method is applied, the total capital (based on the existing partners’
capital plus the investment) is allocated to the new and existing partners in the agreed
manner. If the new partner is receiving an equity interest more or less than the amount
invested, the existing partners’ capital accounts must be adjusted. In this instance, the
capital account of the new partner is greater than the amount invested so the existing
partners’ capital accounts must be reduced.

366. Shawn is currently in discussion with Ted and Mark regarding his joining their
partnership. Initial discussions resulted in an agreement that Shawn would contribute
$50,000 for a 20 percent equity interest in the partnership. The last discussion was about
how the transaction would be disclosed in the partnership’s financial statements. Shawn
noticed that the Ted and Mark’s capital accounts were greater in the pro forma balance
sheet and that goodwill had been added to the balance sheet. Shawn asks for an
explanation of this change. You are the accountant attending the meetings, how do you
respond?

Answer: The partnership agreement indicates that the goodwill method is to be applied
when new partners join the company. In this instance, Shawn is contributing more than
his share of the book value of the company. This implies that there exists goodwill in the
company. The goodwill is recorded and allocated to Ted and Mark because they were
the partners when the goodwill was developed. As a result, Shawn’s $50,000 investment
will exactly equal his share of the partnership’s book value after the goodwill is recorded.

367. You are conducting training for new loan officers of a bank. The topic of the day is
partnerships and their changes in ownership. The bank often receives loan requests when
partnerships are expanding. At the same time, the partnership may also be adding a new
partner to increase the company’s capital and improving its potential for a loan from the
bank. You hand out several partnership balance sheets before and after a new partner has
joined. One loan officer asks about the reason for a change in existing partner capital
accounts and the addition of goodwill to the balance sheet. How do you respond?

Answer: Partnerships are permitted to record goodwill when a new partner joins the
company. Estimated goodwill is determined by evaluating the new partner’s investment
and that partner’s share of the partnership’s total equity after the investment. If the
investment results in the new partner receiving less than his/her share of the partnership’s
equity, goodwill is said to exist in the current partners. As a result, this goodwill is
recorded and allocated to the current partners.
368. Three investors have asked for your assistance in planning the formation of a partnership.
After about two hours of discussion the group arrives at the topic of how to admit
additional partners in the future or retire existing partners. You explain that there are two
methods that can be used to account for these events: the bonus method and the goodwill
method. One of the partners listens to the explanation of the two methods and then asks
for you to summarize the criteria that may be used to determine which method this
partnership wants to use. Prepare a response to the partner’s request.

Answer: The difference that exists when comparing the bonus method and the goodwill
method is whether the partners wish to recognize goodwill on the balance sheet. The
goodwill method will result in greater total assets than the bonus method but the
relationship that exists among the partners will be the same regardless of the method
applied.

369. Why would partners in an existing partnership agree to allocate an equity interest to a
new partner that is greater than the value of the identifiable net assets contributed by the
new partner?

Answer: The existing partners would be willing to allocate a capital account to a new
partner greater than the value of the identifiable new assets contributed because the new
partner is contributing unidentifiable assets to the partnership. These other assets may
include business expertise, a good reputation, or existing customers. The additional
assets contributed to the partnership result in the new partner having goodwill.

370. You are an analyst for a local bank. A question just arrived in your email from a new
loan officer. The loan officer is reviewing information from a small partnership
requesting a loan. The partnership indicates that one of the partners is withdrawing from
the partnership. The remaining partners send a current balance sheet and a pro forma
balance sheet after the withdrawal. The loan officer is confused because the withdrawing
partner’s capital account is deleted and all of the other partners’ capital accounts have
been reduced. Why might all of the other partners’ capital accounts be reduced?

Answer: There are two reasons why the remaining partners’ capital accounts could be
reduced. First, the partnership may have revalued assets to their market value. If the
market value were less than book value, the capital accounts would be reduced. The
second, and more likely, reason is that the remaining partners are going to pay a bonus to
the withdrawing partner. As a result, each of the remaining partners’ capital accounts
will be reduced by his/her proportion of the bonus paid.

371. Jennifer is confused with regard to the recognition of the withdrawal of a partner from
the company. The partnership agreement indicates that they will apply the bonus method
to recognize the withdrawal and that any bonus will be shared by the remaining partners
based on their profit and loss ratio. Jennifer was surprised when she is assigned 40
percent of the bonus paid even though she only has a 35 percent ownership interest in the
partnership. How do you respond?
Answer: The remaining partners, based on their profit and loss residual ratios, absorb the
bonus paid to the withdrawing partner. As a result, Jennifer’s 35 percent ownership
became 40 percent of the remaining equity after the existing partner was removed from
consideration.
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Self Test Chapter 3

Multiple Choice Theories
1. If existing partners acquire the equity of a withdrawing partner, in what manner do they divide the
equity?
a. In any manner they choose
b. Equally
c. Proportionate to their residual profit and loss ratios
d. Existing partners are not permitted to acquire the equity of a withdrawing partner
2. Which of the following must exist to create the potential for a retiring partner to have a bonus
recognized at the date of withdrawal?
a. The retiring partner must be paid more than the book value of his equity
b. The existing partners must decide to not admit a new partner to the partnership
c. The retiring partner’s equity must be acquired by the partnership
d. All of the above are necessary for a bonus to be recognized
3. In what manner do the remaining partners share in the bonus paid to a withdrawing partner?
a. In proportion to their residual profit and loss ratios
b. Equally
c. In proportion to their capital account balances
d. The partner with the greatest capital account is assigned the bonus
4. Which of the following statements is true with regard to a withdrawing partner?
a. A bonus must be paid to the retiring partner
b. A bonus may be paid to the retiring partner
c. A bonus must be paid to the retiring partner or to the remaining partners
d. Recognizing a bonus is not appropriate when a partner retires
5. What change occurs to continuing partners’ capital accounts when a withdrawing partner is
assigned goodwill at the date of withdrawal?
a. Continuing partners’ capital accounts decease by their profit and loss ratio proportion of the
goodwill assigned to the withdrawing partner
b. Continuing partners’ capital accounts increase
c. Continuing partners’ capital accounts do not change
d. Goodwill cannot be recognized with regard to withdrawing partners
6. What amount of goodwill can be recognized at the date a partner withdraws from a partnership?
a. The withdrawing partner’s portion of goodwill
b. The continuing partners’ portion of goodwill
c. Goodwill may not be recognized at the date a partner withdraws
d. Either the withdrawing partner’s portion of goodwill or the goodwill attributable to the entire
partnership
7. What portion of the partnership’s assets must be revalued when a partner withdraws from the
partnership?
a. The withdrawing partner’s share must be revalued
b. All of the partnership’s assets must be revalued
c. Any or all of the partnership’s assets may be revalued but none have to be revalued
d. Partnership assets may not be revalued when a partner withdraws
8. If existing partners acquire the equity of a withdrawing partner, in what manner do they divide the
equity?
a. In any manner they choose
b. Equally
c. Proportionate to their residual profit and loss ratios
d. Existing partners are not permitted to acquire the equity of a withdrawing partner
9. Which of the following must exist to create the potential for a retiring partner to have a bonus
recognized at the date of withdrawal?
a. The retiring partner must be paid more than the book value of his equity
b. The existing partners must decide to not admit a new partner to the partnership
c. The retiring partner’s equity must be acquired by the partnership
d. All of the above are necessary for a bonus to be recognized
Problems
1. Kern and Pate are partners with capital balances of P60,000 and P20,000, respectively.
Profits and losses are divided in the ratio of 60:40. Kern and Pate decide to admit Grant,
who invested land valued at P15,000 for a 20% capital interest in the partnership.
Grant’s capital account should be credited for:

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2. At December 31, RR and SH are partners with capital balances of P40,000 and P20,000,
and they share profits and losses in the ratio of 2:1, respectively. On this date, PP invests
P17,000 in cash for a one-fifth interest in the capital and profit of the new partnership.
Assuming that the bonus method is used, how much should be credited to PP’s capital
account on December 31?
3. The capital balance for Messalina is P210,000 and for Romulus is P140,000. These two
partners share profits and losses 60 percent (Messalina) and 40 percent (Romulus).
Claudius invests P100,000 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?
4. Jesse, Joseph, and Leslie are partners with capital accounts of P70,000, P120,000, and
P90,000, respectively. The partnership share profits and losses 45%, 30%, and 25%,
respectively. They are considering allowing Hans to join the partnership by investing
directly into the partnership. The partners intend to revalue the assets before Hans’
admission. Neither bonus nor goodwill are required. If the asset’s market value exceeds
book value P150,000, how much will Hans invest to acquire a 20% equity interest in the
partnership?
5. Sandra and Joshua are partners. They have capital account balances of P250,000 and
P200,000, respectively, and they share profits and losses 70/30. The partners are
considering admitting Judy as a new partner with a 25 percent equity interest for an
investment in the partnership of P180,000. Before admission, Sandra and Joshua will
revalue the partnership’s assets. If the net increase in the partnership’s assets is
P125,000, what will be the balance in Sandra’s capital account immediately before Judy’s
admission?
6. Kris and Mark are partners who share profits and losses 70/30. They have capital
account balances of P170,000 and P260,000, respectively at the date they admit Frank
into the partnership. Frank invests P120,000 in the partnership for a 25 percent equity
interest and the bonus method is applied. What is the peso amount of the reduction to
Kris’ capital account at the date of admission?
7. The following balance sheet information is for the partnership of Abel, Boule, and
Cayman:
Cash P 210,000 Liabilities P 510,000
Other assets 1,500,000 Abele, Capital (40%) 300,000
Boule, Capital (40%) 480,000
Cayman, Capital (20%) 420,000
P1,710,000 P1,710,000
Figures shown parenthetically reflect agreed profit and loss sharing percentages. If
assets on the initial balance sheet are fairly valued, Abele and Boule consent and Dann
pays Cayman P225,000 for his interest; the revised capital balances of the partners
would be:
8. 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
P100,000. 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 % Interests in
Accounts Profits and Losses
Brown P168,000 50%
Greene 104,000 35
Red 48,000 15
Total P320,000
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?

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9. 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 P125,000. 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 % Interests in
Accounts Profits and Losses
Shrek P210,000 60%
Fiona 130,000 25
Muffin 60,000 15
Total P400,000
All other assets and liabilities are fairly valued by Donkey. Immediately after Donkey’s
acquisition, what should be the capital balances of Shrek, Fiona, and Muffin,
respectively?
10. The partnership of Gilligan, Skipper, and Ginger had total capital of P570,000 on
December 31, 20x4 as follows:
Gilligan, Capital (30%) P180,000
Skipper, Capital (45%) 255,000
Ginger, Capital (25%) 135,000
Total P570,000
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 P270,000 directly to the old partners:
a. total partnership net assets can logically be revalued to P1,080,000 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 P760,000.
d. total capital of the new partnership will be P840,000 assuming no revaluation.
11. Assume the same data in No. 10, except that Mary Ann became a partner by investing
P150,000 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
12. Assume the same data in No. 10, except that Professor became a partner by investing
P190,000 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 P150,000.
b. Gilligan’s capital will be increased to P147,000.
c. total partnership capital after Professor’s admission to the partnership will be
P600,000.
d. net assets of the partnership will increase by P190,000, including Professor’s interest.
13. The balance sheet for the partnership of Nina, Pinta, and Santa Maria at January 1, 20x4
follows. The partners share profits and losses in the ratio of 3:2:5, respectively.
Assets at cost P480,000
Liabilities P135,000
Nina, capital 75,000
Pinta, capital 120,000
Santa Maria, capital 150,000
P480,000

Nina is retiring from the partnership. By mutual agreement, the assets are to be adjusted
to their fair value of P540,000 at January 1, 20x4. Pinta and Santa Maria agree that the
partnership will pay Nina P135,000 cash for hers her partnership interest. There is no

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goodwill is to be recorded. What is the balance of Pinta’s capital account after Nina’s
retirement?
14. Alf and Ben, partners in Alf & Ben Partnership who share net income and losses equally,
had capital account balances of P40,000 and P60,000, respectively, on September 25,
20x4, on which date the following journal entry was prepared for the partnership:
Cash 62,000
Goodwill [(P62,000 x 3)  (P100,000 + P62,000)] 24,000
Alf, Capital (P24,000 x 0.50) 12,000
Ben, Capital (P24,000 x 0.50) 12,000
Cam, Capital 62,000
To record investment by Cam for a one-third interest in capital,
with goodwill of P24,000 divided equally between Alf and Ben.
The foregoing journal entry:
a. Is acceptable
b. Should be replaced by an entry allocating an P8,000 bonus equally to Alf and to Ben
c. Should be replaced by an entry allocating a P24,000 bonus equally to Alf and to Ben
d. Should not reflect either a bonus or goodwill
15. Michelle and Steve are partners in a local business. They currently share profits and
losses 60/40 and have capital account balances of P150,000 and P200,000, respectively.
They are considering admitting Jacob to the partnership. He will receive a 20 percent
equity interest in the partnership for a P120,000 investment. Assuming that goodwill is
to be recognized, which partner(s) are contributing the goodwill?
a. Both new and existing partners are contributing goodwill
b. New partner is contributing goodwill
c. Existing partners are contributing goodwill
d. There is not enough information to answer this question
16. Assuming the same data in No. 15, what amount of goodwill would be disclosed on the
partnership balance sheet immediately after Jacob is admitted?
17. Susan and David are partners in a local business. They currently share profits and
losses 45/55 and have capital account balances of P250,000 and P300,000, respectively.
They are considering admitting Jane to the partnership. She will receive a 25 percent
equity interest in the partnership for a P225,000 investment. Assuming that goodwill
(revaluation) is to be recognized, which partner(s) are contributing the goodwill?
a. New partner is contributing goodwill
b. Existing partners are contributing goodwill
c. Both new and existing partners are contributing goodwill
d. There is not enough information to answer this question
18. Assuming the same information in No. 17, what amount of goodwill would be disclosed
on the partnership balance sheet immediately after Jane is admitted?
19 At year-end, the Cisco partnership has the following capital balances:
. Montana, P 130,000
Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rice, Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110,000
..
Craig, 80,000
Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Taylor, 70,000
Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Profits and losses are split on a 3:3:2:2 basis, respectively. Craig decides to leave the
partnership and is paid P90,000 from the business based on the original contractual
agreement. If the goodwill (revaluation) method is to be applied, what is the balance of
Montana’s capital account after Craig withdraws?

20. When Elsa Martin withdrew from Lewis, Martin, Noll & Ordway Partnership on January

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31, 20x4, she was paid P80,000, although her capital account balance was only P60,000.
The four partners shared net income and losses equally. The journal entry of the
partnership to record Martin's withdrawal on January 31, 20x4, preferably should include
a debit of:
a. P6,667 to Lewis, Capital c. P80,000 to Goodwill
b. P20,000 to Goodwill d. P80,000 to Martin, Drawing
21. Harry, Susan, and Walter are partners who share profits and losses 35, 40, and 25
percent, respectively. The partners have capital account balances of P80,000, P110,000,
and P55,000, respectively. Harry is withdrawing from the partnership. At the date of
withdrawal, the partners are revaluing all of the partnership’s assets, an increase of
P200,000. If Susan and Walter acquire Harry’s equity, what will be the amount of
Susan’s capital on the partnership’s balance sheet immediately after Harry’s withdrawal,
rounded to the nearest peso?
22. Assuming the same information in No. 21, what will be the amount of total capital on the
partnership’s balance sheet immediately after Harry’s withdrawal?
23. Frank, George, and Scott are partners with capital accounts of P160,000, P120,000, and
P210,000, respectively. Scott has informed Frank and George that he must withdraw
from the partnership. The partners have agreed that the partnership will purchase
Scott’s ownership interest for P250,000. The profit and loss residual ratios before Scott’s
retirement are 45 percent, 30 percent, and 25 percent, respectively. How much will
Frank’s capital account be reduced if the bonus method is applied for the withdrawal?
24. Assuming the same information in No. 23, what will be the balance in Frank’s capital
account if the bonus method is applied for the withdrawal?
25. Bob, Claire, and Jack are partners who share profits and losses 30 percent, 25 percent,
and 45 percent, respectively. Bob informed Claire and Jack that he is withdrawing from
the partnership. The partners’ capital accounts at the date of Bob’s withdrawal are
P150,000, P135,000, and P225,000, respectively. The partnership agreement states that
the goodwill, if any, of the withdrawing partner will be recognized for all partners
immediately prior to the withdrawal of any partner. In this instance, the partners
determine that the goodwill associated with Bob is P22,500. Assuming that Bob’s equity
is purchased by a new partner (Deborah) approved by Claire and Jack, what is the
amount of Deborah’s initial capital account?
26. Using the same information in No. 25, except that Bob’s equity is purchased by Claire
(60 percent) and Jack (40 percent), what is the amount of Claire’s capital account at the
date of Bob’s withdrawal?
Use the following information for questions 27 to 29:
Donald, Anne and Todd have the following capital balances; P40,000, P50,000 and P30,000
respectively. The partners share profits and losses 20%, 40% and 40% respectively.
27. Anne retires and is paid P80,000 based on the terms of the original partnership
agreement. If the goodwill (revaluation of asset) method is used, what is the capital of
the remaining partners?
28. Anne retires and is paid P80,000 based on the terms of the original partnership
agreement. If the bonus method is used, what is the capital of the remaining partners?
29. What is the total partnership capital after Anne retires receiving P80,000 and using the
bonus method?
30. XX and YY are partners who have capital of P600,000 and P480,000 sharing profits in
the ratio of 3:2. ZZ is admitted as a partner upon investing P500,000 for 25% interests in
the firm, profits are to be allocated equally. Given the choice between goodwill and
bonus method, ZZ will prefer bonus or goodwill with a gain amounting to or be
indifferent.
31. XX and YY are partners who have capital of P600,000 and P480,000 sharing profits in
the ratio of 3:2. ZZ is admitted as a partner upon investing P500,000 for 25% interests in
the firm, while the other partners continue to participate profits and losses in their

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original ratio. Given the choice between goodwill and bonus method, ZZ will prefer
bonus or goodwill with a gain amounting to or be indifferent. :
32. Neal, Palmer, and Ruppe are partners in a real estate company. Their respective capital
balances and profit-sharing ratios are as follows:
Partners Capital Balance Profit-sharing ratio
Neal . . . . . . . . . . . . . . . . . . . . . . . . . P 250,000 4
.
Palmer . . . . . . . . . . . . . . . . . . . . . . . 150,000 3
.
Ruppe . . . . . . . . . . . . . . . . . . . . . . . 100,000 3
.
Neal wishes to withdraw from the partnership on January 1, 2009, Palmer and Ruppe
have agreed to pay Neal P300,000 from the partnership assets for his 50% capital
interest. This settlement price was based on such factors as capital investments, sales
performance, and earning capacity. Palmer and Ruppe must decide whether to use the
bonus method or the goodwill method (recognize total goodwill implied by the payment)
to record the withdrawal, and they wish to compare the results of using the two
methods. The new profit and loss ratio is in the same relative ratio as that existing before
Neal’s withdrawal. Given the choice between goodwill and bonus method or indifferent,
Palmer will choose:
33. Using the same information in No. 32, except that the profit and loss ratio is changed to
3:2. Palmer is particularly interested in these results, because he feels that his present
contribution of time and capital is better reflected by this new profit and loss ratio. Given
the choice between goodwill and bonus method or indifferent, Palmer will choose:
34. JJ & KK partnership’s balance sheet at December 31, 20x4, reported the following:
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 100,000
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,000
JJ, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000
KK, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000
On January 2, 20x4, JJ and KK dissolved their partnership and transferred all assets and
liabilities to a newly-formed corporation. At the date of incorporation, the fair value of the
new assets was P12,000 more than the carrying amount on the partnership’s book, of
which P7,000 was assigned to intangible assets and P5,000 was assigned to goodwill. JJ
and KK were each issued P5,000 shares of the corporation’s P1 par value common stock.
Immediately following incorporation, additional paid-in capital in excess of par should be
credited for:
35.The balance sheet of Sade & Tipp LLP on April 30, 2006, was as follows:

Cash P 8,700Notes payable P10,000

Trade accounts receivable 13,250Trade accounts payable 9,800
Inventories 21,760Sade, Capital 25,110
Equipment 32,400Tipp, Capital 20,000
Less: Accumulated
depreciation (11,200)
______
Total P 64,910Total P64,910

The partnership was converted to S & T Corporation, with new accounting records. Sade
and Tipp received a total of 10,000 shares of P1 par common stock in exchange for the
net assets of the partnership. The accounting records of the partnership had been
maintained in accordance with generally accepted accounting principles, except that an
allowance for doubtful accounts of P800 had not been provided. The current fair values
of the inventories and equipment were P28,000 and P35,000, respectively. Sade and Tipp
shared net income and losses in a 3:2 ratio, respectively.

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Immediately following incorporation, additional paid-in capital in excess of par should be

credited for:

Solutions
Multiple Choice Theories
1. a
2. d
3. a
4. b
5. c
6. d
7. c
8. a
9. d

Problems
1. P19,000
2.
PP invests P17,000; no goodwill/revaluation recorded:
Investment in partnership P 17,000
New partner's proportionate book value
[(P60,000 + P17,000) x 1/5] (15,400)
Difference (investment > book value) P 1,600

Method: Bonus to prior/old partners

PP's capital credit = P77,000 x 1/5
= P15,400

3. Messalina, P216,000; Romulus, P144,000 and Claudius, P90,000

Total capital is P450,000 (P210,000 + P140,000 + P100,000) after the new investment.
As Claudius's portion is to be 20 percent, the new capital balance would be P90,000
(P450,000 × 20%). Since P100,000 was paid, a bonus of P10,000 is being given to the
two original partners based on their profit and loss ratio: Messalina – P6,000 (60%) and
Romulus – P4,000 (40%). The increase raises Messalina's capital balance from P210,000
to P216,000 and Romulus's capital balance from P140,000 to P144,000.

4. P107,500 = [(P70,000 + P120,000 + P90,000 + P150,000)/.80](.20)

5. P337,500 = P250,000 + (P125,000 x .70)
6. P121,250 = [P120,000 - (P170,000 + P260,000 + P120,000)(.25)](.70)

7. Abele, P300,000; Boule, P480,000; Dann, P420,000

8. Brown, P156,000; Green, P99,000; Red, P45,000

9. Shrek, P195,000; Fiona, P123,750; Muffin, P56,250

10. Total partnership net assets can logically be revalued to P1,080,000 on the basis of the
price paid by Mary Ann.

11. P180,000

12. Net assets of the partnership will increase by P190,000, including Professor’s interest.

13. P120,000

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14. b
15. c - (P150,000 + P200,000 + P120,000)(.20) = P94,000

16. P130,000
(P150,000 + P200,000 + P120,000)(.20) = P94,000, goodwill to existing partners
P120,000 + P0 = .2(P150,000 + $200,000 + P120,000 + goodwill)
P120,000 = P94,000 + .2 goodwill
P26,000 = .2 goodwill
Goodwill = P130,000

17. b
(P250,000 + P300,000 + P225,000)(.25) = P193,750

18. P125,000
(P250,000 + P300,000 + P225,000)(.25) = P193,750, goodwill to existing partners
P225,000 + P0 = .25 (P250,000 + P300,000 + P225,000 + goodwill)
P225,000 = P193,750 + .25 goodwill
P31,250 = .25 goodwill
Goodwill = P125,000

19. P145,000
Craig receives an additional P10,000. Since Craig is assigned 20 percent of all profits
and losses, this allocation indicates total goodwill of P50,000.

20% of Goodwill = P10,000

.20 G = P10,000
G = P10,000/.20
G = P50,000

Montana is assigned 30% of all profits and losses and would, therefore, record P15,000 of
this goodwill, an entry that raises this partner's capital balance from P130,000 to
P145,000.

20. a – [(P80,000  P60,000)  3 + P6,667]

21. Susan’s capital account balance cannot be determined from the information given
22. P445,000 = P80,000 + P110,000 + P55,000 + P200,000
23. P24,000 = (P250,000 - P210,000)(45/75)
24. P136,000 = P160,000 - (P250,000 - 210,000)(45/75)
25. P172,500 = P150,000 + (P75,000 x .3)
26. P257,250 = P135,000 + (P75,000 x .25) + [P150,000 + (P75,000 x .30)](.60)

27. Donald, P55,000; Todd, P60,000

Anne receives an additional P30,000 above her capital balance. Since she is assigned
40 percent of all profits and losses, this extra allocation indicates total goodwill of
P75,000, which must be split among all partners. 40% of Goodwill = P30,000

Amount paid P 80,000

Less: Book value of Anne (40%) 50,000
Partial goodwill/revaluation adjustment P 30,000
Capitalized at 40%
Goodwill/revaluation P 75,000

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Goodwill/assets 75,000
Donald (20%) 15,000
Anne (40%) 30,000
Todd (40%) 30,000

Anne (P50,000 + P30,000) 80,000

Cash 80,000

Donald: P40,000 + P15,000 = P55,000

Todd: PP30,000 + P30,000 = P60,000

28. Donald, P30,000; Todd, P10,000

The P30,000 bonus is deducted from the remaining partners according to their relative
profit and loss ratio. Donald = 20% and Todd = 40% which is a 1/3, 2/3 split.

Anne 50,000
Donald (P30,000 x 2/6) 10,000
Todd (P30,000 x 4/6) 20,000
Cash 80,000

Therefore: Donald: P40,000 – P10,000 = P30,000; Todd: P30,000 – P20,000 = P10,000

29. P40,000 - refer to No. 28 (P30,000 + P10,000 = P40,000)

30. Prefer bonus method due to ZZ’s gain of P35,000
Goodwill method: Using the capital of new partner as a basis for computing total agreed
capital.

Total agreed capital (P500,000 ÷ 25%) P2,000,000

Less: Total contributed capital (P600,000 + P480,000 + P500,000) 1,580,000
Goodwill to old partners P 420,000

Therefore, the capital balances after admission of ZZ:

XX: [P600,000 + (P420,000 x 3/5)] P852,000
YY: [P480,000 + (P420,000 x 2/5)] 648,000
ZZ: 500,000
Total agreed capital P2,000,000

Bonus Method:
Total agreed capital (P600,000 + P480,000)( P500,000) P 1,580,000
Multiplied by; ZZ’s capital interest 25%
Agreed capital to be credited to ZZ P 395,000
Contributed / invested capital of ZZ 500,000
Bonus to XX and YY (old partners) P 105,000

The bonus would be added to XX and YY:

XX: [P600,000 + (P105,000 x 3/5)] P 663,000
YY: [P480,000 + (P105,000 x 2/5)] 522,000
ZZ 395,000
Total agreed capital P 1,580,000

For the purposes of comparing bonus and goodwill, there are two alternatives presented:
Alternative 1: if goodwill is found to exist:

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XX YY ZZ
Goodwill Method is used P 852,000 P 648,000 P 500,000
Bonus Method is used P 663,000 P 522,000 P 395,000
Add: Goodwill (allocated equally) 140,000 140,000 140,000
P803,000 P 662,000 P 535,000
(Gain) Loss – Bonus method P 49,000 P (140,000) P 35,000

Alternative 2: If goodwill is not realized and written-off as a loss:

XX YY ZZ
Goodwill Method is used P 852,000 P 648,000 P 500,000
Less: Write-off of goodwill 140,000 140,000 140,000
(equally)
P 712,000 P 508,000 P 360,000
Bonus Method is used 663,000 522,000 395,000
(Gain) Loss – Bonus method P 49,000 P (140,000) P 35,000

Note: The bonus method adheres to the historical cost concept and it is often used in
accounting practice. It is objective that is establishes total capital of the new partnership at
an amount based on actual consideration received from the new partner. The bonus method
indirectly acknowledges the existence of goodwill by giving a bonus to either old or new
partners.

The goodwill method results in the recognition of an asset implied by a transaction rather
than recognizing an asset actually purchased. Historically, goodwill has been recognized
only when purchased so that a more objective measure of its value is established. Therefore,
opponents of the goodwill method contend that goodwill is not determined objectively and
other factors may have influenced the amount of investment required from the new
partners.

Although either method can be used in achieving the required interest for the new partner,
the two methods offer the same ultimate results only:
1. When the incoming partner’s percentage share of profit and loss and percentage
interest in assets upon admission are equal, and
2. When the former partners continue to share profits and losses between themselves in
the original ratio.

If these conditions are not fully met, however, results will be different.

31. Be indifferent for the goodwill (revaluation) or bonus methods are the same.
Goodwill method: Using the capital of new partner as a basis for computing total agreed
capital.
Total agreed capital (P500,000 ÷ 25%) P2,000,000
Less: Total contributed capital (P600,000 + P480,000 + P500,000) 1,580,000
Goodwill to old partners P 420,000

Therefore, the capital balances after admission of ZZ:

XX: [P600,000 + (P420,000 x 3/5)] P852,000
YY: [P480,000 + (P420,000 x 2/5)] 648,000
ZZ: 500,000
Total agreed capital P2,000,000

Bonus Method:
Total agreed capital (P600,000 + P480,000)( P500,000) P 1,580,000
Multiplied by; ZZ’s capital interest 25%

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Agreed capital to be credited to ZZ P 395,000

Contributed / invested capital of ZZ 500,000
Bonus to XX and YY (old partners) P 105,000
The bonus would be added to XX and YY:
XX: [P600,000 + (P105,000 x 3/5)] P 663,000
YY: [P480,000 + (P105,000 x 2/5)] 522,000
ZZ 395,000
Total agreed capital P 1,580,000

For the purposes of comparing bonus and goodwill, there are two alternatives presented:
Alternative 1: if goodwill is found to exist:
XX YY ZZ
Goodwill Method is used P 852,000 P 648,000 P 500,000
Bonus Method is used P 663,000 P 522,000 P 395,000
Add: Goodwill* (45%: 30%:25%) 189,000 126,000 105,000
P852,000 P 648,000 P 500,000
(Gain) Loss – Bonus method P 0 P 0 P 0

*XX: 75% x 3/5 = 45%; YY: 75% x 2/5 = 30%

Alternative 2: If goodwill is not realized and written-off as a loss:

XX YY ZZ
Goodwill Method is used P 852,000 P 648,000 P 500,000
Less: Write-off of goodwill* 189,000 126,000 105,000
P 633,000 P 522,000 P 395,000
Bonus Method is used 663,000 522,000 395,000
(Gain) Loss – Bonus method P 0 P 0 P 0

32. Be indifferent for the goodwill (revaluation) or bonus methods are the same.
*Goodwill (revaluation) method:
Amount paid P300,000
Less: Book value of interest – Neal (40%)) 250,000
Partial goodwill/revaluation adjustment P 50,000
Capitalized at 40%
Goodwill/revaluation P125,000

Neal Palmer Ruppe

Capital balances before withdrawal 250,000 150,000 100,000
Allocate goodwill* 50,000 37,500 37,500
300,000 187,500 137,500
Withdrawal of Neal (300,000) _______ _______
187,500 137,500
Write-off Impaired Goodwill (125,000  0.50) _______ (62,500) (62,500)
0 125,000 75,000
Capital balances using the bonus method** 125,000 75,000

33. Prefer bonus method due to Palmer’s gain of P12,500

Neal Palmer Ruppe
Capital balances before withdrawal 250,000 150,000 100,000
Allocation of goodwill* 50,000 37,500 37,500
300,000 187,500 137,500
Withdrawal of Neal (300,000) _______ _______
-0- 187,500 137,500
Write-off Impaired Goodwill

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125,000  0.60 (75,000)

125,000  0.40 ________ _______ (50,000)
-0- 112,500 87,500
Capital balances using the bonus method** 125,000 75,000
(Gain) Loss – Bonus method 0 12,500 12,500

**The excess paid to Neal of P50,000 would have been divided equally between Palmer
and Ruppe as follows:
Palmer Ruppe

Capital balance before withdraw 150,000 100,000

Allocation of excess paid to Neal (25,000) (25,000)
Capital balance using bonus method 125,000 75,000

34. P82,000
Carrying value of net assets (P100,000 – P20,000)………………………P 80,000
Add: Adjustments to reflect fair value…………………………………… 12,000
Fair value of net assets………………………………………………………. P 92,000
Less: Common stock, P1 par (5,000 shares x 2 x P1……………………... 10,000
Additional paid-in capital…………………………………………………… P82,000

35. P54,350
Carrying value of net assets (P25,110 + P20,000))……………………… P 45,110
Add: Adjustments to reflect fair value
(P28,000 – P21,760) – P800 + [(P35,000 – (P32,400 – P11,200)]… 19,240
Fair value of net assets………………………………………………………. P 64,350
Less: Common stock, P1 par (10,000 shares x P1)……………………... 10,000
Additional paid-in capital…………………………………………………… P 54,350
Note: Refer to Problem XII for journal entries for further analysis

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Self Test Chapter 3
Multiple Choice Theories
1. If existing partners acquire the equity of a withdrawing partner, in what manner do they divide the
equity?
a. In any manner they choose
b. Equally
c. Proportionate to their residual profit and loss ratios
d. Existing partners are not permitted to acquire the equity of a withdrawing partner
2. Which of the following must exist to create the potential for a retiring partner to have a bonus
recognized at the date of withdrawal?
a. The retiring partner must be paid more than the book value of his equity
b. The existing partners must decide to not admit a new partner to the partnership
c. The retiring partner’s equity must be acquired by the partnership
d. All of the above are necessary for a bonus to be recognized
3. In what manner do the remaining partners share in the bonus paid to a withdrawing partner?
a. In proportion to their residual profit and loss ratios
b. Equally
c. In proportion to their capital account balances
d. The partner with the greatest capital account is assigned the bonus
4. Which of the following statements is true with regard to a withdrawing partner?
a. A bonus must be paid to the retiring partner
b. A bonus may be paid to the retiring partner
c. A bonus must be paid to the retiring partner or to the remaining partners
d. Recognizing a bonus is not appropriate when a partner retires
5. What change occurs to continuing partners’ capital accounts when a withdrawing partner is
assigned goodwill at the date of withdrawal?
a. Continuing partners’ capital accounts decease by their profit and loss ratio proportion of the
goodwill assigned to the withdrawing partner
b. Continuing partners’ capital accounts increase
c. Continuing partners’ capital accounts do not change
d. Goodwill cannot be recognized with regard to withdrawing partners
6. What amount of goodwill can be recognized at the date a partner withdraws from a partnership?
a. The withdrawing partner’s portion of goodwill
b. The continuing partners’ portion of goodwill
c. Goodwill may not be recognized at the date a partner withdraws
d. Either the withdrawing partner’s portion of goodwill or the goodwill attributable to the entire
partnership
7. What portion of the partnership’s assets must be revalued when a partner withdraws from the
partnership?
a. The withdrawing partner’s share must be revalued
b. All of the partnership’s assets must be revalued
c. Any or all of the partnership’s assets may be revalued but none have to be revalued
d. Partnership assets may not be revalued when a partner withdraws
8. If existing partners acquire the equity of a withdrawing partner, in what manner do they divide the
equity?
a. In any manner they choose
b. Equally
c. Proportionate to their residual profit and loss ratios
d. Existing partners are not permitted to acquire the equity of a withdrawing partner
9. Which of the following must exist to create the potential for a retiring partner to have a bonus
recognized at the date of withdrawal?
a. The retiring partner must be paid more than the book value of his equity
b. The existing partners must decide to not admit a new partner to the partnership
c. The retiring partner’s equity must be acquired by the partnership
d. All of the above are necessary for a bonus to be recognized
Problems
1. Kern and Pate are partners with capital balances of P60,000 and P20,000, respectively.
Profits and losses are divided in the ratio of 60:40. Kern and Pate decide to admit Grant,
who invested land valued at P15,000 for a 20% capital interest in the partnership.
Grant’s capital account should be credited for:
2. At December 31, RR and SH are partners with capital balances of P40,000 and P20,000,
and they share profits and losses in the ratio of 2:1, respectively. On this date, PP invests
P17,000 in cash for a one-fifth interest in the capital and profit of the new partnership.
Assuming that the bonus method is used, how much should be credited to PP’s capital
account on December 31?
3. The capital balance for Messalina is P210,000 and for Romulus is P140,000. These two
partners share profits and losses 60 percent (Messalina) and 40 percent (Romulus).
Claudius invests P100,000 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?
4. Jesse, Joseph, and Leslie are partners with capital accounts of P70,000, P120,000, and
P90,000, respectively. The partnership share profits and losses 45%, 30%, and 25%,
respectively. They are considering allowing Hans to join the partnership by investing
directly into the partnership. The partners intend to revalue the assets before Hans’
admission. Neither bonus nor goodwill are required. If the asset’s market value exceeds
book value P150,000, how much will Hans invest to acquire a 20% equity interest in the
partnership?
5. Sandra and Joshua are partners. They have capital account balances of P250,000 and
P200,000, respectively, and they share profits and losses 70/30. The partners are
considering admitting Judy as a new partner with a 25 percent equity interest for an
investment in the partnership of P180,000. Before admission, Sandra and Joshua will
revalue the partnership’s assets. If the net increase in the partnership’s assets is
P125,000, what will be the balance in Sandra’s capital account immediately before Judy’s
admission?
6. Kris and Mark are partners who share profits and losses 70/30. They have capital
account balances of P170,000 and P260,000, respectively at the date they admit Frank
into the partnership. Frank invests P120,000 in the partnership for a 25 percent equity
interest and the bonus method is applied. What is the peso amount of the reduction to
Kris’ capital account at the date of admission?
7. The following balance sheet information is for the partnership of Abel, Boule, and
Cayman:
Cash P 210,000 Liabilities P 510,000
Other assets 1,500,000 Abele, Capital (40%) 300,000
Boule, Capital (40%) 480,000
Cayman, Capital (20%) 420,000
P1,710,000 P1,710,000
Figures shown parenthetically reflect agreed profit and loss sharing percentages. If
assets on the initial balance sheet are fairly valued, Abele and Boule consent and Dann
pays Cayman P225,000 for his interest; the revised capital balances of the partners
would be:
8. 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
P100,000. 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 % Interests in
Accounts Profits and Losses
Brown P168,000 50%
Greene 104,000 35
Red 48,000 15
Total P320,000
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?
9. 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 P125,000. 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 % Interests in
Accounts Profits and Losses
Shrek P210,000 60%
Fiona 130,000 25
Muffin 60,000 15
Total P400,000
All other assets and liabilities are fairly valued by Donkey. Immediately after Donkey’s
acquisition, what should be the capital balances of Shrek, Fiona, and Muffin,
respectively?
10. The partnership of Gilligan, Skipper, and Ginger had total capital of P570,000 on
December 31, 20x4 as follows:
Gilligan, Capital (30%) P180,000
Skipper, Capital (45%) 255,000
Ginger, Capital (25%) 135,000
Total P570,000
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 P270,000 directly to the old partners:
a. total partnership net assets can logically be revalued to P1,080,000 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 P760,000.
d. total capital of the new partnership will be P840,000 assuming no revaluation.
11. Assume the same data in No. 10, except that Mary Ann became a partner by investing
P150,000 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
12. Assume the same data in No. 10, except that Professor became a partner by investing
P190,000 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 P150,000.
b. Gilligan’s capital will be increased to P147,000.
c. total partnership capital after Professor’s admission to the partnership will be
P600,000.
d. net assets of the partnership will increase by P190,000, including Professor’s interest.
13. The balance sheet for the partnership of Nina, Pinta, and Santa Maria at January 1, 20x4
follows. The partners share profits and losses in the ratio of 3:2:5, respectively.
Assets at cost P480,000
Liabilities P135,000
Nina, capital 75,000
Pinta, capital 120,000
Santa Maria, capital 150,000
P480,000

Nina is retiring from the partnership. By mutual agreement, the assets are to be adjusted
to their fair value of P540,000 at January 1, 20x4. Pinta and Santa Maria agree that the
partnership will pay Nina P135,000 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?
14. Alf and Ben, partners in Alf & Ben Partnership who share net income and losses equally,
had capital account balances of P40,000 and P60,000, respectively, on September 25,
20x4, on which date the following journal entry was prepared for the partnership:
Cash 62,000
Goodwill [(P62,000 x 3)  (P100,000 + P62,000)] 24,000
Alf, Capital (P24,000 x 0.50) 12,000
Ben, Capital (P24,000 x 0.50) 12,000
Cam, Capital 62,000
To record investment by Cam for a one-third interest in capital,
with goodwill of P24,000 divided equally between Alf and Ben.
The foregoing journal entry:
a. Is acceptable
b. Should be replaced by an entry allocating an P8,000 bonus equally to Alf and to Ben
c. Should be replaced by an entry allocating a P24,000 bonus equally to Alf and to Ben
d. Should not reflect either a bonus or goodwill
15. Michelle and Steve are partners in a local business. They currently share profits and
losses 60/40 and have capital account balances of P150,000 and P200,000, respectively.
They are considering admitting Jacob to the partnership. He will receive a 20 percent
equity interest in the partnership for a P120,000 investment. Assuming that goodwill is
to be recognized, which partner(s) are contributing the goodwill?
a. Both new and existing partners are contributing goodwill
b. New partner is contributing goodwill
c. Existing partners are contributing goodwill
d. There is not enough information to answer this question
16. Assuming the same data in No. 15, what amount of goodwill would be disclosed on the
partnership balance sheet immediately after Jacob is admitted?
17. Susan and David are partners in a local business. They currently share profits and
losses 45/55 and have capital account balances of P250,000 and P300,000, respectively.
They are considering admitting Jane to the partnership. She will receive a 25 percent
equity interest in the partnership for a P225,000 investment. Assuming that goodwill
(revaluation) is to be recognized, which partner(s) are contributing the goodwill?
a. New partner is contributing goodwill
b. Existing partners are contributing goodwill
c. Both new and existing partners are contributing goodwill
d. There is not enough information to answer this question
18. Assuming the same information in No. 17, what amount of goodwill would be disclosed
on the partnership balance sheet immediately after Jane is admitted?
19 At year-end, the Cisco partnership has the following capital balances:
. Montana, P 130,000
Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rice, Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110,000
..
Craig, 80,000
Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Taylor, 70,000
Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Profits and losses are split on a 3:3:2:2 basis, respectively. Craig decides to leave the
partnership and is paid P90,000 from the business based on the original contractual
agreement. If the goodwill (revaluation) method is to be applied, what is the balance of
Montana’s capital account after Craig withdraws?

20. When Elsa Martin withdrew from Lewis, Martin, Noll & Ordway Partnership on January
 31, 20x4, she was paid P80,000, although her capital account balance was only P60,000.
The four partners shared net income and losses equally. The journal entry of the
partnership to record Martin's withdrawal on January 31, 20x4, preferably should include
a debit of:
a. P6,667 to Lewis, Capital c. P80,000 to Goodwill
b. P20,000 to Goodwill d. P80,000 to Martin, Drawing
21. Harry, Susan, and Walter are partners who share profits and losses 35, 40, and 25
percent, respectively. The partners have capital account balances of P80,000, P110,000,
and P55,000, respectively. Harry is withdrawing from the partnership. At the date of
withdrawal, the partners are revaluing all of the partnership’s assets, an increase of
P200,000. If Susan and Walter acquire Harry’s equity, what will be the amount of
Susan’s capital on the partnership’s balance sheet immediately after Harry’s withdrawal,
rounded to the nearest peso?
22. Assuming the same information in No. 21, what will be the amount of total capital on the
partnership’s balance sheet immediately after Harry’s withdrawal?
23. Frank, George, and Scott are partners with capital accounts of P160,000, P120,000, and
P210,000, respectively. Scott has informed Frank and George that he must withdraw
from the partnership. The partners have agreed that the partnership will purchase
Scott’s ownership interest for P250,000. The profit and loss residual ratios before Scott’s
retirement are 45 percent, 30 percent, and 25 percent, respectively. How much will
Frank’s capital account be reduced if the bonus method is applied for the withdrawal?
24. Assuming the same information in No. 23, what will be the balance in Frank’s capital
account if the bonus method is applied for the withdrawal?
25. Bob, Claire, and Jack are partners who share profits and losses 30 percent, 25 percent,
and 45 percent, respectively. Bob informed Claire and Jack that he is withdrawing from
the partnership. The partners’ capital accounts at the date of Bob’s withdrawal are
P150,000, P135,000, and P225,000, respectively. The partnership agreement states that
the goodwill, if any, of the withdrawing partner will be recognized for all partners
immediately prior to the withdrawal of any partner. In this instance, the partners
determine that the goodwill associated with Bob is P22,500. Assuming that Bob’s equity
is purchased by a new partner (Deborah) approved by Claire and Jack, what is the
amount of Deborah’s initial capital account?
26. Using the same information in No. 25, except that Bob’s equity is purchased by Claire
(60 percent) and Jack (40 percent), what is the amount of Claire’s capital account at the
date of Bob’s withdrawal?
Use the following information for questions 27 to 29:
Donald, Anne and Todd have the following capital balances; P40,000, P50,000 and P30,000
respectively. The partners share profits and losses 20%, 40% and 40% respectively.
27. Anne retires and is paid P80,000 based on the terms of the original partnership
agreement. If the goodwill (revaluation of asset) method is used, what is the capital of
the remaining partners?
28. Anne retires and is paid P80,000 based on the terms of the original partnership
agreement. If the bonus method is used, what is the capital of the remaining partners?
29. What is the total partnership capital after Anne retires receiving P80,000 and using the
bonus method?
30. XX and YY are partners who have capital of P600,000 and P480,000 sharing profits in
the ratio of 3:2. ZZ is admitted as a partner upon investing P500,000 for 25% interests in
the firm, profits are to be allocated equally. Given the choice between goodwill and
bonus method, ZZ will prefer bonus or goodwill with a gain amounting to or be
indifferent.
31. XX and YY are partners who have capital of P600,000 and P480,000 sharing profits in
the ratio of 3:2. ZZ is admitted as a partner upon investing P500,000 for 25% interests in
the firm, while the other partners continue to participate profits and losses in their
 original ratio. Given the choice between goodwill and bonus method, ZZ will prefer
bonus or goodwill with a gain amounting to or be indifferent. :
32. Neal, Palmer, and Ruppe are partners in a real estate company. Their respective capital
balances and profit-sharing ratios are as follows:
Partners Capital Balance Profit-sharing ratio
Neal . . . . . . . . . . . . . . . . . . . . . . . . . P 250,000 4
.
Palmer . . . . . . . . . . . . . . . . . . . . . . . 150,000 3
.
Ruppe . . . . . . . . . . . . . . . . . . . . . . . 100,000 3
.
Neal wishes to withdraw from the partnership on January 1, 2009, Palmer and Ruppe
have agreed to pay Neal P300,000 from the partnership assets for his 50% capital
interest. This settlement price was based on such factors as capital investments, sales
performance, and earning capacity. Palmer and Ruppe must decide whether to use the
bonus method or the goodwill method (recognize total goodwill implied by the payment)
to record the withdrawal, and they wish to compare the results of using the two
methods. The new profit and loss ratio is in the same relative ratio as that existing before
Neal’s withdrawal. Given the choice between goodwill and bonus method or indifferent,
Palmer will choose:
33. Using the same information in No. 32, except that the profit and loss ratio is changed to
3:2. Palmer is particularly interested in these results, because he feels that his present
contribution of time and capital is better reflected by this new profit and loss ratio. Given
the choice between goodwill and bonus method or indifferent, Palmer will choose:
34. JJ & KK partnership’s balance sheet at December 31, 20x4, reported the following:
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 100,000
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,000
JJ, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000
KK, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000
On January 2, 20x4, JJ and KK dissolved their partnership and transferred all assets and
liabilities to a newly-formed corporation. At the date of incorporation, the fair value of the
new assets was P12,000 more than the carrying amount on the partnership’s book, of
which P7,000 was assigned to intangible assets and P5,000 was assigned to goodwill. JJ
and KK were each issued P5,000 shares of the corporation’s P1 par value common stock.
Immediately following incorporation, additional paid-in capital in excess of par should be
credited for:
35.The balance sheet of Sade & Tipp LLP on April 30, 2006, was as follows:

Cash P 8,700Notes payable P10,000

Trade accounts receivable 13,250Trade accounts payable 9,800
Inventories 21,760Sade, Capital 25,110
Equipment 32,400Tipp, Capital 20,000
Less: Accumulated
depreciation (11,200)
______
Total P 64,910 Total P64,910

The partnership was converted to S & T Corporation, with new accounting records. Sade
and Tipp received a total of 10,000 shares of P1 par common stock in exchange for the
net assets of the partnership. The accounting records of the partnership had been
maintained in accordance with generally accepted accounting principles, except that an
allowance for doubtful accounts of P800 had not been provided. The current fair values
of the inventories and equipment were P28,000 and P35,000, respectively. Sade and Tipp
shared net income and losses in a 3:2 ratio, respectively.
 Immediately following incorporation, additional paid-in capital in excess of par should be
credited for:

Solutions
Multiple Choice Theories
1. a
2. d
3. a
4. b
5. c
6. d
7. c
8. a
9. d

Problems
1. P19,000
2.
PP invests P17,000; no goodwill/revaluation recorded:
Investment in partnership P 17,000
New partner's proportionate book value
[(P60,000 + P17,000) x 1/5] (15,400)
Difference (investment > book value) P 1,600

Method: Bonus to prior/old partners

PP's capital credit = P77,000 x 1/5
= P15,400

3. Messalina, P216,000; Romulus, P144,000 and Claudius, P90,000

Total capital is P450,000 (P210,000 + P140,000 + P100,000) after the new investment.
As Claudius's portion is to be 20 percent, the new capital balance would be P90,000
(P450,000 × 20%). Since P100,000 was paid, a bonus of P10,000 is being given to the
two original partners based on their profit and loss ratio: Messalina – P6,000 (60%) and
Romulus – P4,000 (40%). The increase raises Messalina's capital balance from P210,000
to P216,000 and Romulus's capital balance from P140,000 to P144,000.

4. P107,500 = [(P70,000 + P120,000 + P90,000 + P150,000)/.80](.20)

5. P337,500 = P250,000 + (P125,000 x .70)
6. P121,250 = [P120,000 - (P170,000 + P260,000 + P120,000)(.25)](.70)

7. Abele, P300,000; Boule, P480,000; Dann, P420,000

8. Brown, P156,000; Green, P99,000; Red, P45,000

9. Shrek, P195,000; Fiona, P123,750; Muffin, P56,250

10. Total partnership net assets can logically be revalued to P1,080,000 on the basis of the
price paid by Mary Ann.

11. P180,000

12. Net assets of the partnership will increase by P190,000, including Professor’s interest.

13. P120,000
14. b
15. c - (P150,000 + P200,000 + P120,000)(.20) = P94,000

16. P130,000
(P150,000 + P200,000 + P120,000)(.20) = P94,000, goodwill to existing partners
P120,000 + P0 = .2(P150,000 + $200,000 + P120,000 + goodwill)
P120,000 = P94,000 + .2 goodwill
P26,000 = .2 goodwill
Goodwill = P130,000

17. b
(P250,000 + P300,000 + P225,000)(.25) = P193,750

18. P125,000
(P250,000 + P300,000 + P225,000)(.25) = P193,750, goodwill to existing partners
P225,000 + P0 = .25 (P250,000 + P300,000 + P225,000 + goodwill)
P225,000 = P193,750 + .25 goodwill
P31,250 = .25 goodwill
Goodwill = P125,000

19.P145,000
Craig receives an additional P10,000. Since Craig is assigned 20 percent of all profits
and losses, this allocation indicates total goodwill of P50,000.

20% of Goodwill = P10,000

.20 G = P10,000
G = P10,000/.20
G = P50,000

Montana is assigned 30% of all profits and losses and would, therefore, record P15,000 of
this goodwill, an entry that raises this partner's capital balance from P130,000 to
P145,000.

20. a – [(P80,000  P60,000)  3 + P6,667]

21. Susan’s capital account balance cannot be determined from the information given
22. P445,000 = P80,000 + P110,000 + P55,000 + P200,000
23. P24,000 = (P250,000 - P210,000)(45/75)
24. P136,000 = P160,000 - (P250,000 - 210,000)(45/75)
25. P172,500 = P150,000 + (P75,000 x .3)
26. P257,250 = P135,000 + (P75,000 x .25) + [P150,000 + (P75,000 x .30)](.60)

27. Donald, P55,000; Todd, P60,000

Anne receives an additional P30,000 above her capital balance. Since she is assigned
40 percent of all profits and losses, this extra allocation indicates total goodwill of
P75,000, which must be split among all partners. 40% of Goodwill = P30,000

Amount paid P 80,000

Less: Book value of Anne (40%) 50,000
Partial goodwill/revaluation adjustment P 30,000
Capitalized at 40%
Goodwill/revaluation P 75,000
 Goodwill/assets 75,000
Donald (20%) 15,000
Anne (40%) 30,000
Todd (40%) 30,000

Anne (P50,000 + P30,000) 80,000

Cash 80,000

Donald: P40,000 + P15,000 = P55,000

Todd: PP30,000 + P30,000 = P60,000

28. Donald, P30,000; Todd, P10,000

The P30,000 bonus is deducted from the remaining partners according to their relative
profit and loss ratio. Donald = 20% and Todd = 40% which is a 1/3, 2/3 split.

Anne 50,000
Donald (P30,000 x 2/6) 10,000
Todd (P30,000 x 4/6) 20,000
Cash 80,000

Therefore: Donald: P40,000 – P10,000 = P30,000; Todd: P30,000 – P20,000 = P10,000

29. P40,000 - refer to No. 28 (P30,000 + P10,000 = P40,000)

30. Prefer bonus method due to ZZ’s gain of P35,000
Goodwill method: Using the capital of new partner as a basis for computing total agreed
capital.

Total agreed capital (P500,000 ÷ 25%) P2,000,000

Less: Total contributed capital (P600,000 + P480,000 + P500,000) 1,580,000
Goodwill to old partners P 420,000

Therefore, the capital balances after admission of ZZ:

XX: [P600,000 + (P420,000 x 3/5)] P852,000
YY: [P480,000 + (P420,000 x 2/5)] 648,000
ZZ: 500,000
Total agreed capital P2,000,000

Bonus Method:
Total agreed capital (P600,000 + P480,000)( P500,000) P 1,580,000
Multiplied by; ZZ’s capital interest 25%
Agreed capital to be credited to ZZ P 395,000
Contributed / invested capital of ZZ 500,000
Bonus to XX and YY (old partners) P 105,000

The bonus would be added to XX and YY:

XX: [P600,000 + (P105,000 x 3/5)] P 663,000
YY: [P480,000 + (P105,000 x 2/5)] 522,000
ZZ 395,000
Total agreed capital P 1,580,000

For the purposes of comparing bonus and goodwill, there are two alternatives presented:
Alternative 1: if goodwill is found to exist:
 XX YY ZZ
Goodwill Method is used P 852,000 P 648,000 P 500,000
Bonus Method is used P 663,000 P 522,000 P 395,000
Add: Goodwill (allocated equally) 140,000 140,000 140,000
P803,000 P 662,000 P 535,000
(Gain) Loss – Bonus method P 49,000 P (140,000) P 35,000

Alternative 2: If goodwill is not realized and written-off as a loss:

XX YY ZZ
Goodwill Method is used P 852,000 P 648,000 P 500,000
Less: Write-off of goodwill 140,000 140,000 140,000
(equally)
P 712,000 P 508,000 P 360,000
Bonus Method is used 663,000 522,000 395,000
(Gain) Loss – Bonus method P 49,000 P (140,000) P 35,000

Note: The bonus method adheres to the historical cost concept and it is often used in
accounting practice. It is objective that is establishes total capital of the new partnership at
an amount based on actual consideration received from the new partner. The bonus method
indirectly acknowledges the existence of goodwill by giving a bonus to either old or new
partners.

The goodwill method results in the recognition of an asset implied by a transaction rather
than recognizing an asset actually purchased. Historically, goodwill has been recognized
only when purchased so that a more objective measure of its value is established. Therefore,
opponents of the goodwill method contend that goodwill is not determined objectively and
other factors may have influenced the amount of investment required from the new
partners.

Although either method can be used in achieving the required interest for the new partner,
the two methods offer the same ultimate results only:
1. When the incoming partner’s percentage share of profit and loss and percentage
interest in assets upon admission are equal, and
2. When the former partners continue to share profits and losses between themselves in
the original ratio.

If these conditions are not fully met, however, results will be different.

31. Be indifferent for the goodwill (revaluation) or bonus methods are the same.
Goodwill method: Using the capital of new partner as a basis for computing total agreed
capital.
Total agreed capital (P500,000 ÷ 25%) P2,000,000
Less: Total contributed capital (P600,000 + P480,000 + P500,000) 1,580,000
Goodwill to old partners P 420,000

Therefore, the capital balances after admission of ZZ:

XX: [P600,000 + (P420,000 x 3/5)] P852,000
YY: [P480,000 + (P420,000 x 2/5)] 648,000
ZZ: 500,000
Total agreed capital P2,000,000

Bonus Method:
Total agreed capital (P600,000 + P480,000)( P500,000) P 1,580,000
Multiplied by; ZZ’s capital interest 25%
 Agreed capital to be credited to ZZ P 395,000
Contributed / invested capital of ZZ 500,000
Bonus to XX and YY (old partners) P 105,000
The bonus would be added to XX and YY:
XX: [P600,000 + (P105,000 x 3/5)] P 663,000
YY: [P480,000 + (P105,000 x 2/5)] 522,000
ZZ 395,000
Total agreed capital P 1,580,000

For the purposes of comparing bonus and goodwill, there are two alternatives presented:
Alternative 1: if goodwill is found to exist:
XX YY ZZ
Goodwill Method is used P 852,000 P 648,000 P 500,000
Bonus Method is used P 663,000 P 522,000 P 395,000
Add: Goodwill* (45%: 30%:25%) 189,000 126,000 105,000
P852,000 P 648,000 P 500,000
(Gain) Loss – Bonus method P 0 P 0 P 0

*XX: 75% x 3/5 = 45%; YY: 75% x 2/5 = 30%

Alternative 2: If goodwill is not realized and written-off as a loss:

XX YY ZZ
Goodwill Method is used P 852,000 P 648,000 P 500,000
Less: Write-off of goodwill* 189,000 126,000 105,000
P 633,000 P 522,000 P 395,000
Bonus Method is used 663,000 522,000 395,000
(Gain) Loss – Bonus method P 0 P 0 P 0

32. Be indifferent for the goodwill (revaluation) or bonus methods are the same.
*Goodwill (revaluation) method:
Amount paid P300,000
Less: Book value of interest – Neal (40%)) 250,000
Partial goodwill/revaluation adjustment P 50,000
Capitalized at 40%
Goodwill/revaluation P125,000

Neal Palmer Ruppe

Capital balances before withdrawal 250,000 150,000 100,000
Allocate goodwill* 50,000 37,500 37,500
300,000 187,500 137,500
Withdrawal of Neal (300,000) _______ _______
187,500 137,500
Write-off Impaired Goodwill (125,000  0.50) _______ (62,500) (62,500)
0 125,000 75,000
Capital balances using the bonus method** 125,000 75,000

33. Prefer bonus method due to Palmer’s gain of P12,500

Neal Palmer Ruppe
Capital balances before withdrawal 250,000 150,000 100,000
Allocation of goodwill* 50,000 37,500 37,500
300,000 187,500 137,500
Withdrawal of Neal (300,000) _______ _______
-0- 187,500 137,500
Write-off Impaired Goodwill
 125,000  0.60 (75,000)
125,000  0.40 ________ _______ (50,000)
-0- 112,500 87,500
Capital balances using the bonus method** 125,000 75,000
(Gain) Loss – Bonus method 0 12,500 12,500

**The excess paid to Neal of P50,000 would have been divided equally between Palmer
and Ruppe as follows:
Palmer Ruppe

Capital balance before withdraw 150,000 100,000

Allocation of excess paid to Neal (25,000) (25,000)
Capital balance using bonus method 125,000 75,000

34. P82,000
Carrying value of net assets (P100,000 – P20,000)………………………P 80,000
Add: Adjustments to reflect fair value…………………………………… 12,000
Fair value of net assets………………………………………………………. P 92,000
Less: Common stock, P1 par (5,000 shares x 2 x P1……………………... 10,000
Additional paid-in capital…………………………………………………… P82,000

35. P54,350
Carrying value of net assets (P25,110 + P20,000))……………………… P 45,110
Add: Adjustments to reflect fair value
(P28,000 – P21,760) – P800 + [(P35,000 – (P32,400 – P11,200)]… 19,240
Fair value of net assets………………………………………………………. P 64,350
Less: Common stock, P1 par (10,000 shares x P1)……………………... 10,000
Additional paid-in capital…………………………………………………… P 54,350
Note: Refer to Problem XII for journal entries for further analysis
 PARTNERSHIP OPERATIONS ENABLING ASSESSMENT
1. Luz, Vi and Minda are partners when the partnership earned a profit of P30,000. Their
agreement provides the following regarding the allocation of profit and losses:
a. 8% interest in partner’s ending capital in excess of P75,000
b. Salaries of P20,000 for Luz and 30,000 for Vi
c. Any balance is to be distributed 2:1:1 for Luz, Vi and Minda, respectively.

Assume ending capital balances of P60,000, P80,000 and P100,000 for partners Luz, Vi and
Minda, respectively. What is the amount of profit allocated for Minda, if each provision of the
profit and loss agreement is satisfied to whatever extent possible using the priority order shown
above?
P2,000

2. Partners AA and BB have profit and loss agreement with the following provisions: salaries of
P30,000 and P45,000 for AA and BB, respectively; a bonus to AA of 10% of net income after
salaries and bonus, and interest of 10% on average capital balances of P20,000 and P35,000
for AA and BB, respectively. One-third of any remaining profits will be allocated to AA and the
balance to BB.

● If the partnership has net income of P102,500, how much should be allocated to
Partner AA?
P41,000

● If the partnership has net income of P102,500, how much should be allocated to
Partner BB?
P61,500

● If the partnership had net income of P22,000, how much should be allocated to
partner AA, assuming that the provision of the profit and loss agreement are ranked by
order of priority starting with salaries?
P8,800

3. Hope & Faith Co. reports net income after 30% tax of P235,000 by the end of 2018. The
partnership agreement provides for division of profit or loss on the ratio of the partners’ capital
balances. At the end of 2017, each partner had a capital balance of P220,000. During 2018,
Hope made additional investment of P50,000 on April 1 and withdrew P70,000 of her capital on
September 30. Faith, on the other hand, made additional investment of P80,000 on October 1.

● The share of Hope in the net profit using the ratio of weighted average capital is _
P117,500

4. The partnership agreement of Rossi and Olson provides for salary allowances of P45,000 to
Rossi and P35,000 to Olson, with the remaining income or loss to be divided equally. During the
year, Rossi and Olson each withdraw cash equal to 80% of their salary allowances. If
partnership net income is P100,000, Rossi’s equity in the partnership would
Increase more than Olson’s

5. Nancy and Betty enter into a partnership agreement where they decide to share profits
according to the following rules.
● Nancy and Berry will receive salaries of P1700 and P14500 respectively as the from
allocation.
● The next allocation is based on 20% of each partner’s capital balances.
● Any remaining profit or loss is to be allocated completely to betty
The partnership net income for the first year is P50,000. Nancy’s capital balance is P83,000 and
Betty's capital is P11,000 at the end of the year. Calculate the share of profit/loss to be allocated
to Betty.
P31,700
6. The most appropriate basis for dividing partnership net income when the partners do not plan
to take an active role in daily operation is
On a ratio based average capital balances

7. XYZ Partnership provided for the following in the distribution of profits and losses:
First: X is to receive 10% of net income up to P100,000 and 20% of the amount in
excess thereof.
Then: Y and Z are each to receive a 5% of the remaining income in excess of P150,000
after X’s share.
Lastly: The balance is to be distributed equally to the three partners.

● If the partnership income is P250,000, what is the total share of X?

P108,000

8. Tamayo, Banson and Vidal, a partnership formed on january 1, 2018, had the following initial
investments.

Tamayo 100,000

Banson 150,000

Vidal 225,000

The partnership agreement profits and losses are to be shared equally by the partners after
consideration is made for the following:
a. Salaries allowed to partners: P60,000 for Tamayo; P48,000 for Banson and P36,000 for
Vidal.
b. Average partner’s capital balances during the year shall be allowed 10% interest.

Additional information:
A. On June 30,2018, Tamayo invested an additional P60,000.
B. Vidal withrew P70,000 from the partnership on September 30, 2018.
C. Share on the remaining profit was P3,000 for each partner.

● The average capital of Vidal is ________.

207500

● The partnership net profit for 2018 before salaries, interest and partner’s share on
the remainder is _______.
201750

● The average capital of Tamayo is ________.

130000
 ● Interest on average capital balances of the partners totals
48750

● Total Partnership Capital

666750

9. Mariano and Lucas entered into partnership on March 1, 2018, investing P125,000 and
P75,000 respectively. It was agreed that Mariano, the managing partner, was to receive a salary
of P12,000 per year and also 10% bonus on the profit after adjustment for the salary, the
balance of the profit was to be divided in the ratio of the original capital. On December 31, 2018,
account balances are as follows:
9. Mariano and Lucas entered into partnership on March 1, 2018, investing P125,000 and
P75,000 respectively. It was agreed that Mariano, the managing partner, was to receive a salary
of P12,000 per year and also 10% bonus on the profit after adjustment for the salary, the
balance of the profit was to be divided in the ratio of the original capital. On December 31, 2018,
account balances are as follows:

Cash 70,000 Accounts payable 60,000

Accounts receivable 67,000 Sales 233,000

Furniture and Fixtures 45,000 Mariano, Capital 125,000

Purchases 196,000 Lucas Capital 75,000

Sales returns & 5,000 Mariano Drawing (20,000)

allowances

Operating expenses 60,000 Lucas Drawing (30,000)

Inventories on December 31, 2018 were merchandise, P73,000; Supplies P2,500. Prepaid
insurance was P950 and accrued liabilities totaled P1,550. Depreciation on Furniture & Fixtures
is to be computed at 20% per year. Income tax rate is 35%.

● The distribution of net profit to Mariano is _______.

20342

● The distribution of net profit to Lucas is _______.

5268

● After closing the net profit and drawing accounts, the capital of Lucas is _______.
50268

● After closing the net profit and drawing accounts, the capital of Mariano is _______.
125342

10. Sison, Torres and Velasco are partners in an accounting firm. Their capital account
balances at year-end were: Sison, P50,000; Torres, P110,000; Velasco, P50,000. They share
profits and losses in a 4:4:2 ratio, after the following terms;
a. Partners Velasco is to receive a bonus of 10% of net profit after bonus.
b. Interest of 10% shall be paid on the portion of a partner’s capital in excess of
P100,000.
c. Salaries of P10,000 and P12,000 shall be paid to partners Sison and Velasco,
respectively.

● Assuming a net profit of P22,000 for the year, the profit share of Sison was ________.
8800
● Assuming a net profit of P22,000 for the year, the profit share of Torres was ________.
(200)

● Assuming a net profit of P22,000 for the year, the profit share of Velasco was
________.
13400

● Assuming a net profit of P44,000 for the year, the profit share of Sison was ________.
16800

● Assuming a net profit of P44,000 for the year, the profit share of Torres was ________.
7800

● Assuming a net profit of P44,000 for the year, the profit share of Velasco was
________.
19400
11. Carlin and Maley have a partnership agreement which includes the following provisions
regarding sharing net income or net loss:
● A salary allowance of P120,000 to Carlin and P100,000 to Maley.
● An investment allowance of 10% on capital balances at the beginning of the year.
● A bonus of 20% Carlin
● The remainder to be divided 40% to Carlin and 60% to Maley.

The capital balance on January 1, 2018 for Carlin and Maley was P90,000 and P120,000,
respectively. During 2018, the Carlin and Maley partnership had sales of P2,000,000 cost of
goods sold of P1,100,000 and operating expenses of P400,000. Income tax rate is 30%.

● If bonus is computed based on net income before bonus, salary allowances, and
interest on capital, the total share of C in the partnership is __________.
P214,600

● If bonus is computed based on net income after bonus, salary allowances, and interest
on capital, the total share of C in the partnership is __________.
P183,500

12. Which one of the following would not be considered an expense of a partnership in
determining income for the period?
Salary allowance to partners

13. A partners share of net income is recognized in the accounts through

Closing entries

14. Jaime, Madrid and Soriano are partners sharing profits on a 5:3:2 ratio. On January 1, 2018,
Matias was admitted into the partnership with a 20% share in the profits. The old partners
continue to participate in profits proportionate to their original ratios. For the year 2018, the
partnership books showed a net profit of P250,000. It was disclose however, that the errors
shown below were made:J
● Assuming that income tax rate is 35%, the share of Jaime in the corrected net profit is
________.
96100

● Assuming that income tax rate is 35%, the share of Madrid in the corrected net profit is
________.
57660

● Assuming that income tax rate is 35%, the share of Soriano in the corrected net profit is
________.
38440
● Assuming that income tax rate is 35%, the share of Matias in the corrected net profit is
________.
48050

● The new profit and loss ratio of Jaime is ________.

40%

● The new profit and loss ratio of Madrid is ________.

24%

● The new profit and loss ratio of Soriano is _______.

16%
15. The net income of the Rice and Wynn partnership is P120,000. The partnership agreement
specifies that Rice and Wynn have a salary allowance of P32,000 and P48,000 respectively.
The partnership agreement also specifies an interest allowance of 10% on capital balances at
the beginning of the year. Each partner had a beginning capital balance of P80,000. Any
remaining net income or net loss is shared equally.

● What is Rice’s share of the P120,000 net income?

P52,000

● What is the balance of Wynn’s Capital account at the end of the year after net income
has been distributed?
P148,000

16. The BLUE Company, a partnership, was formed on January 1, 2018 with four partners,
Belen, Lorna, and Edna. Capital contributions were as follows:

Belen 100,000

Lorna 50,000

Ursula 50,000

Edna 40,000

The partnership agreement provides that each partner shall receive 5% interest on the
amount of his/her capital contribution. In addition, Belen is to receive a salary of P10,000
and Lorna a salary of P6,000 per annum which are to be charged as expenses of the business.
The agreement further provides that Ursula shall receive a minimum of P5,000 per annum from
the partnership and Edna a minimum of P12,000 per annum, both including the profits is to be
distributed in the following proportion: Belen 30% Lorna 30% Ursula 20% Edna 20%.

● The amount that must be earned by the partnership during 2018, before any change for
interest on capital or partners salaries in order that Belen may receive an aggregate of
P25,000 including interest, salary and share of profits would be _________.
(Disregard income tax. Round your final answer to the nearest peso. Do not use peso
sign, comma, and decimal.)
64667

● Using the amount that must be earned by the partnership during 2018, before any
change for interest in capital or partners salaries in order that Belen may receive an
aggregate of P25,000, including interest, salary and share of profits, the total earnings
of Ursula would be _________. (Disregard income tax. Round your final answer to the
nearest peso. Do not use peso sign, comma, and decimal.)
9167
● Using the amount that must be earned by the partnership during 2018, before any
change for interest in capital or partners salaries in order that Belen may receive an
aggregate of P25,000, including interest, salary and share of profits, the total earnings
of Lorna would be _________. (Disregard income tax. Round your final answer to the
nearest peso. Do not use peso sign, comma, and decimal.)
18500
17. On October 31, 2018, Zita and Jones formed a partnership by investing cash of P300,000
and P200,000, respectively, The partners agreed to receive and annual salary allowance of
P360,000 and to give Zita a bonus 20% of the net income after partner’s salaries, the bonus
being treated as an expense.

If the profits after salaries and bonuses are to be divided equally, and the profits on
December 31, 2018 after partner’s salaries but before bonus of Zita are P360,000, how much is
the share of Zita in the profits?
P270,000

18. RK is trying to decide whether to accept a salary of P40,000 or a salary of P25,000 plus a
bonus of 10% of net income after salaries and bonus as a means of allocating profit among
partners. Salaries traceable to the other partners are estimated to be P100,000. What amount of
income would be necessary so that RK would consider choices to be equal?
P290,000

19. A, B, and C are capitalist partners while D is an industrial partner. The partnership reported
a net loss of P100,000. How much is the share of D in the reported net loss?
P-0-

20. A partner’s share of net income is recognized in the accounts through

Closing entries

21. If the partnership agreement does not specify how income is to be allocated, profits and
losses should be allocated
In accordance with their capital contribution

22. Lori and Mike enter into a partnership and decide to share profits and losses as follows:
● The first allocation is a salary allowance with Lori receiving P12,000 and Mike receiving
P25,000.
● The second allocation is 20% of the partners’ capital balances at year end. On
December 31, 2019, the capital balances for Lori and Mike are P86,000 and P344,000,
respectively.
● Any remaining profit or loss is allocated equally.

For the year ending December 31, 2019, the partnership reported a net loss of P122,000. The
journal entry to record the loss allocation will _______.
Debit Lori, Capital for P93,300

23. The Smith and Jones partnership agreement stipulates that profits and losses will be shared
equally after salary allowances of P120,000 for Smith and P60,000 for Jones. At the beginning
of the year, Smith’s Capital account had a balance of P240,000, while Jones’ Capital account
had a balance of P210,000. Net income for the year was P150,000 The balance of Jones’
Capital account at the end of the year after closing is
P255,000

24. David, Chris, and John formed a partnership on July 31, 2019. They decided to share profits
equally, but inserted a clause in the partnership agreement where any losses would be
allocated in the ratio of 5:2:3, respectively. For the year ended December 31, 2019, the firm
earned a net income of P50,000. However, for the year ended December 31, 2020, the firm
incurred a loss of P60,000. Assuming that John had an initial capital contribution of P43,000 and
made no withdrawals, what is the balance of John’s capital account as of december 30, 2020?
(Assume that none of the partners made any further contributions to their capital accounts. Do
not round any percentage calculations. Round all monetary calculations to the nearest peso)
P41,667
Question 1
Instrucons:
1. Do not use comma and peso sign (i.e. if your answer is P200,500, encode it as 200500)
2. If your answer is loss use the open and close parenthesis to denote negave, i.e. if your answer
is -50,000,encode it as (50000)
Problem: Partners Coleen and Norlyn received a salary of P150,000 and P300,000 and will share
profit andloss in a 2 : 1 rao, respecvely. If the partnership suffered a P150,000 loss in 2020,
determine how theloss will be distributed to Coleen and Norlyn.
1. Coleen's share on profit or loss _____
2. Norlyn's share on profit or loss _____
3. How much is the total amount to be distributed using the 2 : 1 rao? _____
Response: (250000)
Response: 100000
Response: (600000)

Question 2
Instrucons: Do not use comma and peso sign (i.e. if your answer is P200,500, encode it as 200500)
Problem: Partners Angela and Gabriel received a salary allowance of P30,000 and P70,000,
respecvely, andagreed to share the remainder of the profit equally. If the company earned
P40,000 during the period,how will the profit be distributed:
1. Angela _____
2. Gabriel _____
Response: 0
Response: 40000
Question 3
Instrucons:
1. Do not use comma and peso sign (i.e. if your answer is P200,500, encode it as 200500)
2. For Profit and Loss rao, round - off and use two decimal places and express your answer in
percentage(i.e. if your answer is .20345, encode it as 20.35%).
Problem: Nadine and Lysa formed a partnership on Jan. 01, 2019. Below the details of their
capital accountsfor 2019:
On the same year, the partnership generated a profit of P200,000.
Required: Determine the Profit Rao and the share on profits for Nadine and Lysa on the
followingagreements:
A. If agreement is based on Lysa
Capital Contribuons:Nadine
Profit Ratio 1 _____ 2 _____
Share on Profit 3 _____ 4 _____

Response: 62.50%
Response: 37.50%
Response: 125000
Response: 75000
Response: 50.00%
Response: 50.00%
Response: 100000
Response: 100000

Question 4
Instrucons: Do not use comma and peso sign (i.e. if your answer is P200,500, encode it as 200500)
Problem: Ciar and Jaybon are partners. Their capital contribuon are as follows: Ciar, P400,000 and
Jaybonwill provide his services. The partners agreed to divide profits or losses in the rao of 70%
and 30% forCiar and Jaybon, respecvely.
If the profit is P100,000, how should the profit be distributed among the partners?
1. Ciar _____
2. Jaybon _____
Response: 70000
Response: 30000
 PARTNERSHIP DISSOLUTION ENABLING ASSESSMENT
1. Blau and Rubi are partners who share profits and losses in the ratio of 6:4, respectively. On
May 1, 2018, their respective capital accounts were as follows:
Blau 60,000
Rubi 50,000
On that date, Lind was admitted as a partner with one-third interest in capital, and profits for
an investment of P40,000. The new partnership began with a total capital of P150,000
immediately after Lind’s admission, Blau’s capital should be
P54,000

2. When a partner retires and receives in cash less than his capital balance, how should the
difference be treated?
The difference should be credited to the remaining partners in their remaining
profit and loss ratio

3. LOV Partnership decided to admit E who purchased a 20% interest from L, whose capital
balance was P400,000. E paid her P100,000.

● The effect of this transaction is a/an

Decrease in L’s capital

● The journal entry to record the admission of E will include a

Debit to L, Capital

4. Which of the following conditions constitutes a legal dissolution of a partnership?

All of the choices given

5. If the new partner is admitted by purchase of interest of an old partner at an amount higher
than its book value, this will result in
No change in partnership’s net assets

6. The capital accounts of the partnership of R and O on January 30, 2014, are as follows:
R, Capital P80,000
O, Capital P40,000
The partners share profits and losses in the ratio of 6:4. The partnership is desperate for
cash and they agreed to admit Y as a new partner with a 1/3 interest in capital and profits
upon the latter’s capital infusion of P30,000.
After Y’s admission, what are the corresponding capital balances of R, O, and Y,
respectively, assuming assets and liabilities are fairly valued?
P68,000; P32,000; P50,000

7. Charlize and Megan are partners with capitals of P80,000 and P40,000, respectively. They
share profits in the ratio of 3:1. The partners agree to admit Caleb as a member of the firm.
● If no bonus is recognized and Caleb invests P80,000 for a 50% interest in the firm, what
is Charlize’s capital after the admission of Caleb?
P65,000
 ● If no bonus is recognized and Caleb invests P30,000 for a 20% interest in the firm, what
is Megan's capital after the admission of Caleb?
P40,000

● If total agreed capital is based on Caleb’s contribution and Caleb Invests P30,000 for a
15% interest in the firm, What is Megan’s capital after the admission of Caleb?
P52,500

● If no bonus is recognized and Caleb invests P80,000 for a 50% interest in the firm, what
is the profit sharing ratio of Charlize after the admission of Caleb?
37.5%

1. CAR Partnership decided to admit E who invested P100,000 for a 25% interest in the
partnership with a total capitalization of P500,000.

● The capital credit of E is

P125,000

● The journal entry to record the admission of E will include

A recognition of bonus to E

● The effect of this transaction is a/an

Increase in capital

2. Egay and Egoe who share profits and losses equally have capital balances of P200,000 and
P240,000, respectively. They admit Engyl for a 1/3 interest in partnership capital and profits
for an investment of P260,000.
By how much were the net assets undervalued? (Engyl is credited for his capital
contribution)
P80,000

3. Which of the following best describes the admission of new partner by investing an amount
more than his capital credit under the bonus method?
Increase on both net assets and total capital

4. The partnership of Lim and Mallorca provides for equal sharing of profits and losses. Prior to
the admission of a third partner Zamora, the capital accounts are Lim, P75,000 and
Mallorca, P105,000. Zamora invests P90,000 for a P75,000 interest and partners agreed
that the net assets of the new partnership would be P270,000. This admission involves
Bonus to old partners of P15,000

5. Peter, Queen and Roy are partners with capital balances of P300,000. P300,000 and
P200,000, respectively, and sharing profits and losses equally. Roy is to retire and it is
agreed that he will take certain office equipment with a second hand value of P50,000 and a
note for his interest. The office equipment carried in the books at P65,000 but brand new
would cost P80,000. Roy’s acquisition of the office equipment would result in
Reduction in capital of P55,000 for Roy
1. On June 30, 2018 the condensed balance sheet for the partnership of Eddy, Fox and Grimm
together with their respective profit and loss sharing percentage was as follows
Assets, net of liabilities P 320,000
Eddy , Capital (50%) P 160,000
Fox, Capital (30%) P 96,000
Grimm, Capital (20%) P 64,000
P 320,000

● Eddy decided to retire from the partnership and by mutual agreement is to be paid
P180,000 out of partnership funds for his interest. Total goodwill implicit in the
agreement is to be recorded. After Eddy’s retirement, what are the capital balances of
the other partner?
108,000(Fox) 72,000(Grimm)

● Assume that Eddy remains in the partnership and that Hamm is admitted as a new
partner with a 25% interest in the capital of the new partnership for a cash payment of
P140,000. Total goodwill implicit in the transaction is to be recorded. Immediately after
admission of Hamm, Eddy’s capital account balance should be
P210,000

2. Matthew, Paulo and Claude share partnership profits in the ratio 2:3:5. On September, 30
Claude opted to retire from the partnership. Prior to Claude’s investment, the capital
balances of the three partners are P25,000 ,P40,000 and P35,000, respectively.

● How much is Paulo’s capital after Claude’s retirement if Claude is paid P30,000 in full
settlement of his partnership interest?
P43,000

● How much is the capital of Matthew after Claude’s retirement if Claude is paid P39,000
in full settlement of his partnership interest?
P23,400

3. When Jill retired from the partnership of Jill, Bill and Hill, the final settlement of her interest
exceeded her capital balance. Under the bonus method, the excess
Reduced the capital balance of Bill and Hill

4. Jeric, Ken, and Lemuel are partners sharing profits in the ratio 5:3:2 respectively, as of
December 31, 2013, their capital balances were P95,000 for Julian, P80,000 for Ken and
P60,000 for Lemuel.
On January 1, 2019 the partners admitted Mark as a new partner and according to their
agreement Mark will contribute P80,000 in cash to the partnership and also pay P10,000 for
15% for Ken’s share. Mark will be given a 20% share in profits. While the original partners’
share will be proportionately the same as before. After the admission of Mark, the total
capital will be P330,000 and Mark’s capital will be P70,000
● The bonus in the admission of Mark would be
P22,000

● The balance of Ken’s Capital after the admission of Mark would be

P79,100

● The amount of asset revaluation is

P15,000
1. Which of the following best characterizes the bonus method of recording a new partner’s
investment in a partnership?
Assuming that recorded assets are properly valued, the book value of the new
partner is equal to the book value of the previous partnership and the investment
of the new partner.

2. B and N are partners sharing profits and losses in the ratio 7:3. On January 1,2013 their
credit balance capital accounts are P30,000 for B and P20,000 for N, W is to be admitted as
a partner by buying 50% of B’s interest for P20,000.
The capital balance of B after W’s admission is
P15,000

3. Mike and Tess are partners with capital balances of P70,000 and P50,000 respectively.
They share profits and losses in the ratio of 3:1, respectively. Voce is to be admitted in the
partnership for a cash contribution of P60,000 for a ½ interest in the partnership capital and
in future profits and losses.
If Voce would be given a capital credit of P90,000, how much would be charged to Mike’s
capital account?
P15,000

4. Partner’s Nitz, Pat and Candy share profits and losses 50:30:20 respectively. Capital
balances are P74,000 P130,000 and P96,000 respectively. The carrying values of assets
and liabilities are equal to their fair values. Emmie is to be admitted as a new partner with a
20% capital interest and a 20% share of profits and losses in exchange for a cash
contribution. No bonus is to be effected.
How much should Emmie contribute?
P75,000

5. J decided to withdraw from the JOY Partnership. A cash settlement was made by the
partnership this will
Decrease Assets

6. The partnership of Noynoy, Manny and Gibo have capital balances as follows: Noynoy -
P35,000, Manny - P50,000, Gibo - P40,000. Their profit and loss ratio are 30% 50% and
20% respectively, With the consent of Noynoy and Manny, Gibo sold one-half of his interest
to Erap for P30,000 , Gibo was paid in cash by Erap What is the Capital Balance of Manny
after the admission of Erap to the partnership?
P50,000

7. An adjustment of the assets and liabilities of the partnership to their fair market values
before dissolution is called
Asset revaluation
1. Paul, Melvin and Elrick are partners sharing profits and losses in the ratio of 2:2:1. On July
31, 2018, their capital balances are as follows: Paul - P700,000; Melvin - P500,000; Elrick -
P400,000. The partners agree to admit Laurence on the following conditions:
A. Laurence is to pay Paul P400,000 for 1/2 of Paul’s interest:
B. Laurence is also to invest P400,000 in the partnership
C. The total interest of Laurence is 25% of the total partnership capital, which is also
his share in the new partnership profit and loss sharing ratio. The old partners
are sharing in their old ratio

● How much is Paul’s capital after the admission of Laurence?

P450,000

● What is the percentage of Elrick’s share in the new profit and loss sharing ratio?
15%

2. A partnership agreement most likely will stipulate that assets be reappraised when
New partner is admitted to the partnership

3. The following transactions will affect the balance of the total partnership capital except
Admission by purchase

4. Ben and Ric are partners who share profits and losses in the ratio of 6:4, respectively. On
May 1, 2019, their respective capital accounts were as follows:
Ben P60,000
Ric P50,000
On that date, Lito was admitted as a partner with a one-third interest in capital and profits for
an investment of P40,000. The new partnership began with a total capital of P150,000.
Immediately after Lito’s admission, Ben’s capital account balance should be
P54,000

5. The admission of a new partner involving bonus will result in

Bonus to either old or new, but not both

6. Statement 1: The admission of new partner through his direct investment in the partnership
will increase the partnership capital even under bonus method
Statement 2: The admission of new partner through purchase of interest of existing partner
will increase partnership capital
Only statement 1 is true

7. Luke and Mark, who share profits and losses equally, agree to take John into the
partnership for a 40% share in capital and profits. Luke and Mark retain 30% interest each.
Luke and Mark have Capital balances of P100,000 and P140,000 respectively before the
admission of John. John pays P120,000 directly to Luke and Mark for his 40% interest. All
assets of the partnership, except for land are fairly valued.
● What would be the capital balance of Mark, immediately after the admission of John?
P102,000

● By how much was land undervalued?

P60,000
1. Dada and Elma are partners with capital balances of P400,000 and P600,000, respectively.
They share profits and losses equally. They decided to admit Jhai as a partner who will
invest P200,000 for a 16% interest. Total agreed capital is P1,250,000. Which of the
following statements is true?
There is revaluation of assets equal to P50,000

2. On June 30, 2018 the balance sheet for the partnership of Coll, Maduro and Prieto together
with their respective profit and loss ratios was as follows
Assets, at cost 180,000
Coll, Loan 9,000
Coll, Capital (20%) 42,000
Maduro,Capital (20%) 39,000
Prieto, Capital (60%) 90,000
Total 180,000
Coll decided to retire from the partnership by mutual agreement, the assets are to be
adjusted to their fair value of P216,000 at June 30,2018. It was agreed that the partnership
would pay Coll P61,200 cash for Coll’s partnership interest,including Coll loan which is to be
repaid in full. No goodwill is to be recorded. No goodwill is to be recorded.
After Coll’s retirement, what is the balance of Maduro's capital account?
P45,450

3. Pascual invested P400,000 for a 10% interest in a partnership that has a total capital of
P3,000,000 after admitting Pascual. Which of the following is true?
The original partners received a bonus of P100,000

4. B and N are partners sharing profits and losses in the ratio 7:3. On January 1, 2014 their
credit balance capital accounts are P30,000 for B and P20,000 for N. W is to be admitted for
a 25% interest in the capital directly from the partners for P45,000.
Each partner’s capital account is to be charged pro rata for amounts in their capital ratio that
will provide W with the 25% interest.
The capital balance of B after W’s admission is
P22,500

5. Partnership A has an existing capital of P70,000. Two partners currently own the partnership
and split profits of 50/50. A new partner is to be admitted and will contribute net assets with
a fair value of P90,000. For no goodwill or bonus (depending in whichever method is used)
to be recognized, what is the interest in the partnership granted the new partner?
56.25%

6. Total partners’ equity remains the same if a new partner is admitted by purchase of interest.
In partnership dissolution, bonus is computed as a percentage of net income.
Only statement 1 is true.
7. The capital accounts of Ed, Nick and Vic are presented below with their respective profit and
loss ratio:
Ed P139,000 (½)
Nick 209,000 (⅓)
Vic 96,000 (⅙)
Tony was admitted to the partnership when he purchased directly, for P132,000 a
proportionate interest from Ed and Nick in the net assets and profits of the partnership. As a
result, Tony acquired a one-fifth interest in the net assets and profits of the firm. Assuming
no revaluation of net assets is recorded, what is the combined gain realized by Ed and Nick
upon the sale of a portion of their interests in the partnership to Tony?
P43,200

8. At December 31, Rod and Sol are partners with capital balances of P40,000 and P20,000,
and they share profits and losses in the ratio of 2:1, respectively. On this date Pete invests
P17,000 in cash for a one-fifth interest in the capital and profit of the new partnership.
Assuming that assets are not revalued, how much should be credited to Pete’s capital
account on December 31?
P15,400
 CONCEPTUAL
1. The admission of a new partner requires the consent of the majority of the partners.
False

2. The remaining partners’ capital balance will increase when the amount of settlement to a
retiring partner is more than the retiring partner’s capital balance.
False

3. Pocholo, an incoming partner, acquires 10% interest in Southern Partnership by

acquiring half of the interest of Levi, an existing partner. This transaction will most likely
require a debit in the partnership books for the cash payment of Pocholo.
False

4. A partner may withdraw or retire from the partnership by

Any of these

5. A change in partnership ownership liquidates the partnership.

False

6. Ralph acquires 20% in Southern Partnership by contributing non-cash assets. This

transaction will be recorded in the partnership books as a transfer within equity
False

7. Partner A retires from ABC Partnership and receives P100.00 as full settlement of her
capital account with a balance of P120.00. Immediately before the retirement of A, the
partnership net assets is P1,000.00, equal to fair value. If Partner A’s capital balance
was paid by the partnership, the partnership net assets after A’s retirement would be
P880.
False

8. The withdrawal of a partner legally dissolve the partnership.

True

9. C is admitted in the partnership of A and B by investing P120,000 for an interest of

P150,000. Assuming that the net assets of the partnership prior to C’s admission are
fairly valued, this transaction would result in
A decrease in the capital balance of A and B

10. The new partner’s capital credit exceeds his/her asset contribution to the partnership
when bonus is given to this new partner.
True
11. The total assets of a partnership will most likely increase when a new partner is admitted
by investing directly to the partnership.
True

12. Payment to a retiring partner of an amount in excess of his/her capital balance may
indicate that some partnership assets are undervalued.
True
1. Partner A retires from ABC Partnership and receives P100.00 as full settlement of her
capital account with a balance of P120.00. Immediately before the retirement of A, the
partnership net assets is P1,000.00, equal to fair value. If Partner A’s capital balance
was paid by Partner B, the partnership net assets after A’s retirement would still be
P1,000.00.
True

2. When a new partner enters an existing partnership by purchase of interest, the cash
paid to the old partner for the partnership interest acquired is always equal to the new
partner’s capital balance.
False

3. The net assets of AB Partnership consist of P10.00 capital balance of A and P10.00
capital balance of B. The net assets approximate fair value. Partners A and B have
equal interests in the partnership. If C invests in the partnership for a 20% interest, the
interest of A after C’s admission will be decreased to 30%.
False

4. The insanity of a partner causes dissolution of a partnership.

True

5. The net assets of AB Partnership consist of P10.00 capital balance of A and P10.00
capital balance of B. The net assets approximate fair value. Partners A and B have
equal interests in the partnership. If C invests P10.00 in the partnership for a ⅓ interest,
the entry to record C’s admission will be a debit to Cash and a credit to C’s capital
account.
True

6. The total assets of the partnership remains unchanged when a new partner purchases
an interest directly from an existing partner.
True

7. A bonus to the old partners from a new partner increases the old partners’ capital
accounts.
True

8. A bonus to the new partner is normally shared by the existing partners using their profit
or loss ratio.
True

9. The total assets of a partnership most likely increases when an incoming partner
purchases the interest from an existing partner.
False
10. When the net assets of the partnership are fairly valued and the amount invested by the
incoming partner is equal to the interest acquired, it is implied that there is
No bonus to either new or old partners

11. The payment to a retiring partner at less than book value results in a loss to the other
partners, which must be shared according to their profit or loss ratio.
False

12. Which of the following does not change the partnership ownership?
Marriage of a partner
 1. The net assets of AB Partnership consist of P10.00 capital balance of A and P10.00
capital balance of B. The net assets approximate fair value. Partners A and B have
equal interests in the partnership. If C invests in the partnership for a ⅓ interest, C shall
invest P10.00.
True

COMPUTATIONAL
QUESTION 1
Tess and Shirley who share profits and losses equally, have capital balances of P170,000 and
P200,000, respectively. They agree to admit Gen for a ⅓ interest in capital and profits for her
investment of P200,000. Partnership assets are not to be revalued.

● The total bonus to Tess and Shirley is 10000

QUESTION 2
Egay and Egoe who share profits and losses equally have capital balances of P200,000 and
P240,000, respectively. They admit Engly for a ⅓ interest in partnership capital and profits for
an investment of P260,000.

● The net assets are undervalued by 80000

QUESTION 3
The partnership of A and B provides for equal sharing of profits and losses. Prior to the
admission of C, the capital accounts are A, P150,000 and B, P210,000. C invests P180,000 for
a P150,000 interest.

● B, Capital immediately after the admission of C is 225000

QUESTION 4
Mike and Tess are partners with capital balances of P70,000 and P50,000, respectively. They
share profits and losses in the ratio of 3:1, respectively. Victor is to be admitted in the
partnership for a cash contribution of P60,000 for a ½ interest in partnership capital and in the
future profits and losses.

● If Victor would be given a capital credit of P90,000, Mike’s capital would be charged by
22500
QUESTION 5
Partners Nitz, Pat and Candy share profits and losses 50:30:20, respectively. The statement of
financial position at July 31, 2020 shows the following balances:

Cash 40,000 Accounts Payable 100,000

Other Assets 360,000 Nitz, Capital 74,000

Pat, Capital 130,000

Candy, Capital 96,000

TOTAL 400,000 TOTAL 400,000

The carrying amount of assets and liabilities are equal to their fair values. Emmie is to be
admitted as a new partner with a 20% capital interest and a 20% share of profits and losses in
exchange for a cash contribution. No bonus is to be effected.

● Emmie’s contribution should be 75000

QUESTION 6
X, Y, and Z are partners sharing profits in the ratio of 3:3:2, respectively. On July 31, their
capital balances are as follows: X, P280,000; Y, P200,000; and Z, P160,000. They agree to
admit W on the following conditions:
a. W is to pay X P200,000 for ½ of X’s interest;
b. W is to invest P160,000 in the partnership;
c. Some assets of the partnership are undervalued by P160,000;
d. W’s interest is to be 25%.

● The total partnership capital immediately after the admission of W is 960000

● The capital balance of X immediately after the admission of W is 222500

QUESTION 7
Presented below is the condensed statement of financial position of the partnership of Gan,
Witt, and Windy. The partners share profits and losses in the ratio 6:3:1, respectively.

Cash 85,000 Liabilities 80,000

Other Assets 415,000 Gen, Capital 252,000

Witt, Capital 126,000

Windy, Capital 42,000

Total 500,000 Total 500,000

Treat independently each of the following questions relative to Windy’s retirement from the
partnership.
● If Windy is to receive P60,000 as cash settlement of her interest and the partnership
assets are fairly valued, the decrease in Gen’s capital as a result of Windy’s withdrawal
is 12000
● Windy is to receive P60,000 as settlement for her interest. Assume that any difference
between this amount and the carrying value of her capital indicates that some assets
have fair values in excess of carrying values. The credit to Witt, Capital as a result of
asset revaluation is 54000
● Gan and Witt buy ¼ and 3/4 , respectively, of Windy’s interest for P75,000 and P22,500.
This indicates that assets are overvalued by 120000
● Gan and Witt buy ⅓ and 2/3 , respectively , of Windy’s interest for P10,000 and P20,000.
Gan, capital immediately after Windy’s retirement is 266000
● Windy is to receive P33,000 as cash settlement. All assets and liabilities are fairly
valued. The capital balance of Witt immediately after withdrawal of Windy is 129000
● Allowance for bad debts of P4,000 and equipment impairment loss of P8,000 would be
recognized. The partnership would pay an amount to Windy equal to her adjusted
capital. Cash settlement to Windy is 40800
QUESTION 8
Partners Ellie, Ollie, and Millie agreed to sell to Tillie ¼ of their respective capital and profit and
loss interest for a total cash payment of P160,000. The capital balances and the respective
percentage interest in profits and losses immediately before the sale to Tillie are

PARTNER P/L CAPITAL BALANCE

Ellie 50% 320,000

Ollie 30% 180,000

Millie 20% 60,000

● The capital balance of Ollie immediately after Tillie’s admission is 135000

● From the sale of portion of his interest sold to Tillie, Ellie would receive 90000

QUESTION 9
Sophia purchased ½ of Jay’s interest and share in profit in the JC Partnership by paying Jay
P180,000. Immediately before Sophia’s admission, the capital balances of Jay and Chris were
P240,000 and P400,000, respectively. Jay and Chris were sharing profits in the ratio 2:3,
respectively.

● The capital balances of Sophia immediately after her admission is 120000

● In the new profit and loss ratio, Chris would have 30 (percent)
● In the new profit and loss ratio, Jay would have 20 (percent)

QUESTION 10
Luke and Mark, who share profits and losses equally, agree to take John into the partnership for
a 40% share in capital and profits. Luke and Mark retain 30% interest each. Luke and Mark
have capital balances of P100,000 and P140,000, respectively before the admission of John.
John pays P120,000 directly to Luke and Mark for his 40% interest. All assets of the
partnership, except land, are fairly valued.

● Land is undervalued by 60000

● The capital balance of Mark after the admission of John is 102000
 PARTNERSHIP LIQUIDATION
1. The liabilities and capital balances of the partners before the sale of the assets and
payments of liabilities including personal assets and liabilities of the partners were:

Partnership Personal Assets Personal Liabilities

Cash P10,000

Liabilities 70,000

Kath 65,000 P1,200,000 P1,500,000

Pau 20,000 2,500,000 2,490,000

Jas 15,000 3,000,000 3,200,000

After the assets were sold the capital balances of the partners were as follows: Kath,
P48,000; Pau, P12,000; and Jas, (P10,000)

● How much cash was received by Jas in the final settlement?

P0

● What is the P/L ratio of Jas? [34% - Kath; 16% - Pau]

50%

● How much is the gain/(loss) from sale of non-cash assets?

(P50,000)

● How much is the non-cash assets?

160,000

2. Jack and Beans, who share profits and losses in the ratio 3:7, decided to liquidate their
Talk Partnership. The partner’s capital balances are P300,000 and P190,000,
respectively.

● Before the realization of non-cash assets, the partnership has a zero balance in
its cash account and a P200,000 balance in its liabilities. If on final settlement of
partners’ claims Jack received P261,000, how much was the net proceeds from
the sale of non-cash assets?
P560,000

● If all partnership assets and liabilities are realized and settled at their carrying
amounts, how much would Beans receive from liquidation?
P190,000
● If all partnership assets are realized and all liabilities are settled, the partnership
has remaining cash of P120,000, how much would Beans receive from the
liquidation?
None

● If on final settlement of partners’ claims Beans received P99,000, how much did
Jack receive?
P261,000

● The partnership has total liabilities of P200,000. If all partnership assets are
realized for P500,000, how much would Jack receive from the liquidation?
243,000
1. Mickey, Donald, and Minnie are partners sharing profit and loss in the ratio of 2:1:1,
respectively. Their capital balances are P400,000 for Mickey, P200,000 for Donald and
P100,000 for Minnie. Claims of suppliers amounted to 500,000 including the loan
extended by Minnie, P50,000. The cash balance amounted to P300,000 and it increased
to P1,050,000 as a result of the sale of the non-cash assets.

● How much cash was received by Donald in the final settlement?

162,500

● How much cash was received by Mickey in the final settlement?

325,000

● How much was the non-cash assets of the partnership?

900,000

● How much was the loss from sale of non-cash assets?

150,000

● How much was the cash proceeds from sale of non-cash assets?
750,000

● How much cash will Minnie receive?

112,500

2. As of December 31, the books of AME Partnership showed capital balances of: A-
P40,000; M-P25,000; E-P5,000. The partners’ profit and loss ratio was 3:2:1,
respectively. The partners decided to dissolve and liquidate. They sold all the non-cash
assets for P37,000 cash. After settlement of all liabilities amounting to P12,000, they still
have P28,000 cash left for distribution.

● The loss on the realization of the non-cash assets was

P42,000

● Assuming that any partner’s capital debit balance is uncollectible, the share of A
in the 28,000 cash for distribution would be
P17,800

3. The statement of financial position of the partnership A, B, and C shows: Cash, P22,400;
Other Assets, P212,000; Liabilities, P38,400; A, Capital (50%) P76,000; B, Capital (25%)
P64,000, and C, Capital (25%) P56,000.

● If B received a total of P31,000 from partnership liquidation, how much was the
loss on realization?
P127,000
 ● If C received P10,000 from the first cash distribution, how much was the total
cash distributed to partners?
P28,000

● How much is the additional contribution required of B?

P6,000

● The partners realized P56,000 from the first installment sale of non-cash assets
with total carrying amount of P120,000. How much did B receive from the partial
liquidation?
P24,000

● If A received a total of P10,000 from partnership liquidation, how much was the
proceeds from the sale of all non-cash assets?
P85,000

1. The order of the liquidation process is

Sell assets, pay liabilities, disburse cash to partners

2. Dino, Doods, and Dong have the following accounts and their normal balances on
January 31, 2021, the date the partners agreed to liquidate their 3D Partnership:

Cash P20,000 Accounts Payable P10,000

Accounts Receivable 25,000 Notes Payable 27,000

Allowance for Bad Debts 5,000 Loans due to Dino 5,000

Merchandise Inventory 60,000 Loans due to Doods 7,000

Furniture & Equipment 50,000 Dino, Capital 20,000

Accumulated Depreciation 5,000 Doods, Capital 40,000

Dong, Capital 36,000

The partners divide profit and losses 4:1:5, respectively. Sales proceed follows:
Accounts Receivable P10,000
Merchandise Inventory 30,000
Furniture & Equipment 20,000

● Assuming that Dino is a limited partner, the cash paid to Dong is?
0

● If Dino is a limited partner, the cash paid to Doods is

32,500
● Assuming that Dino is a limited partner, how much additional investment should
Dong give?
1,500

● How much is the non-cash assets?

125,000
 ● Assuming that any deficiency will be immediately paid, the cash paid to Doods
40,500

● Assuming that any deficiency is uncollectible, the cash paid to Dong?

2,667

● The sale of non-cash assets resulted in a total loss of

65,000

● How much is the cash available for distribution to the partners?

43,000

● The sale resulted in a capital deficiency for

Dino

1. Jurado, Katindig, Lazaro, and Marcelo are partners sharing earnings in the ratio of
3:4:6:8. The balance of their capital accounts on December 31, 2015 are as follows:
Jurado P1,000
Katinding 25,000
Lazaro 25,000
Marcelo 9,000

The partners decide to liquidate, and they accordingly convert the non-cash assets into
P23,200 of cash. After paying the liabilities amounting to P3,000, they have P22,000 to
divide.

● Assume that a debit balance in any of partner’s capital is uncollectible. The share
of Jurado in the loss upon conversion of the non-cash assets into cash was:
5,400

● Assume that a debit balance in any of partner’s capital is uncollectible. The book
value of non-cash assets amounted to:
P61,000

● Assume that a debit balance in any of partner’s capital is uncollectible. When the
P22,200 was divided, Lazaro got
8,320

2. The statement of Financial Position for the partnership of Eclavo, Eclara, and Elorda,
who share profits and losses in the ratio 4:5:1, is as follows:
Cash P100,000 Accounts Payable P300,000
Inventory 720,000 Eclavo, Capital 320,000
Eclara, Capital 90,000
Elorda, Capital 110,000
 P820,000 P820,000

● Assuming Elorda is a limited partner, and the inventory is sold for P360,000, how
much should she receive upon liquidation of the partnership?
74,000
 ● Assuming Eclara is an insolvent partner, and the inventory is sold for P360,000,
how much should Eclavo receive upon liquidation of the partnership?
104,000

● If the inventory is sold for P600,000, how much should Eclavo receive upon
liquidation of the partnership?
P272,000

1. The following is the priority sequence on which liquidation proceeds will be distributed for
a partnership:
Partnership liabilities, partnership loans, partnership capital balances

2. Statement 1: Solvent partners are partners with sufficient remaining personal assets
after deducting or liquidating the personal liabilities.
Statement 2: Right of offset is a legal right to apply a part or all of the amount owing to a
partner against his or her capital deficiency.
Both statements are true

3. Statement 1: A deficient partner has to make an additional investment to make up for his
deficiency in all instances.
Statement 2: Partnership creditors have priority over partnership properties; in the same
manner that the partners’ personal creditors have priority over partners’ personal
properties.
Only the second statement is true

4. Iyah, Ayah and Mia operate a business as a partnership and share net income and net
loss in a 3:3:4 ratio, respectively. The personal assets and liabilities of the partners,
gathered from their personal records show:

Partner Assets Liabilities

Iyah (General Partner) P470,000 P450,000

Ayah (General Partner) 200,000 280,000

Mia (Limited Partner) 305,000 300,000

The statement of financial position is as shown below. Assets are sold for P175,000.
Liabilities are paid as soon as cash is available. Creditors collect from solvent partners
whenever necessary.

Cash P10,000 Accounts Payable P200,000

Non-Cash 375,000 Loan, Mia 5,000

 Iyah, Capital 50,000

Ayah, Capital 70,000

Mia, Capital 60,000

● How much cash was received by Mia in the final settlement?

20,000
5,000
0
10,000
 ● How much is the capital balance of Iyah after the sale of non-cash assets?
(P10,000)

● How much additional investment was made by Mia?

P0

● How much cash was received by Ayah in the final settlement?

0

● Who among the partners have received the cash in the final settlement?
Mia

● How much is the additional investment made by Ayah?

0

● How much is the share of Mia from the gain (loss) on sale of non-cash assets?
(P80,000)

● How much is the additional investment made by Iyah?

20,000

1. Partners Roger, Sergio and Tito, who share profit and loss in the ratio of 3:5:2,
respectively have decided to liquidate their partnership. The Statement of Financial
Position of the partnership at the time of liquidation is shown below:
Assets Liabilities and Capital
Cash P120,000 Accounts Payable
P93,000
Other Assets 360,000 Loan from Sergio 30,000
Roger, Capital
108,000
Sergio, Capital
120,000
Tito, Capital
129,000
P480,000
P480,000

The partners desire to prepare an installment distribution schedule showing how cash
would be distributed to partners as assets are realized.

● The schedule of possible losses on capital balances would indicate that the first
cash distributed after the payment of outside creditors would be distributed to
Tito, in the amount of P57,000
● If Roger has received P30,000, how much would Sergio had received?
20,000

● In the schedule of maximum absorbable loss, the maximum absorbable loss for
each partner would be
Roger, 360,000; Sergio, 300,000; Tito, 645,000
 ● Assuming that the first sale of other assets having book value of P150,000
realized P45,000 and all available cash is distributed, the partners would receive
Roger, P9,000; Sergio, P0; Tito, P63,00

1. Statement 1: A deficient and insolvent partner will still have a chance to receive cash
from the partnership if there is a loan payable to him which is higher than his capital
deficiency.
Statement 2: A deficient and limited partner who has a loan to the partnership can apply
the right of offset to eliminate his deficiency.
Both statements are true
Both statements are false
Only the first statement is true
Only the second statement is true

2. In lump-sum liquidation, capital deficiency resulting from division of loss from realization
must be eliminated before making any payment to partners. Any resulting capital
deficiency of an insolvent partner is eliminated by charging the capital accounts of the
remaining partners.
Both statements are true

3. Statement 1: A limited partner is liable only to the extent of his her contribution in the
partnership.
Statement 2: A limited partner can use the right of offset against his capital deficiency,
but he is not required to make additional contribution out of his/her personal properties.
Only the first statement is true

4. An entry is not required in the liquidation of a partnership to record the

Allocation of a capital deficiency to partners with credit balances when the
deficient partner is solvent

5. Statement 1: In case the partnership is insolvent, the general partners are liable to pay
the partnership creditors from his/her personal properties
Statement 2: A deficient partner may apply the right of offset to a loan balance owing to
him or her by the partnership.
Both statements are true

6. Statement 1: In the event of liquidation, outside creditors has priority claim over the
partnership assets.
Statement 2: When a partner becomes insolvent, the claim against his separate
properties shall be paid first to his personal creditors.
Both statements are true
7. In a cash priority program for use in installment liquidation, the partner with the highest
loss absorption balance is the most vulnerable partner. The amount of cash to be
distributed to partners in installment liquidation can be determined by preparing a cash
priority program.
Only statement 2 is true

8. A deficiency occurs for a partner when

Hi share in the losses of the partnership is more than his capital balance
DRILL 1

1. What is the valuation if a partner contributes a noncash property to the partnership?

a. Book value of the property c. Actual amount of the property
b. Acquisition cost of the property d. Fair value of the property
2. Temporary withdrawals made by the partner is posted in ledger as
a. Partner’s drawing, debit c. Partner’s capital, debit
b. Partner’s drawing, credit d. Partner’s capital, credit
3. Partnership drawings are
a. Always maintained in a separate account from the partner’s capital account
b. Equal to partners’ salaries
c. Usually maintained in a separate drawing account with any excess draws being deducted
directly to the capital account
d. Not discussed in the specific contract provisions of the partnership
4. Under the entity theory, a partnership is
a. Viewed through the eyes of the partners
b. Viewed as having its own existence apart from the partners
c. A separate legal and tax entity
d. Unable to enter into contracts in its own name
5. The Red and black partnership agreement provides for Red to receive a 20% bonus on profits before the
bonus. Remaining profits and losses are divided between Red and black in the ratio of 2:3, respectively.
Which partner has a greater advantage when the partnership has a profit or when it has a loss?
Profit Loss Profit Loss
a. Red Black c. Black Red
b. Red Red d. Black Black
6. WW and MM drafted a partnership agreement that lists the following assets contributed at the partnership’s
formation:
Contributions by: WW MM
Cash P20,000 P30,000
Inventory P15,000
Building P40,000
Furniture & equipment 15,000
The building is subject to a mortgage of P10,000, which the partnership has assumed. The partnership
agreement also specifies that profits and losses are to be distributed evenly. What amounts should be
recorded as capital for WW and MM at the formation of the partnership
WW MM WW MM
a. P35,000 P85,000 c. P55,000 P55,000
b. P35,000 P75,000 d. P60,000 P60,000
7. Anne, Iris and Alfred formed a partnership on April 30, with the following assets, measured at their fair
market value, contributed by each partner:
Particulars Anne Iris Alfred
Cash P200,000 P240,000 P600,000
Automobile 170,000
Delivery Trucks 560,000
Computer and printer 102,000
Office furniture 70,000 50,000
Land and Building 3,000,000
Totals P3,370,000 P972,000 P650,000
Although Alfred has contributed the most cash to the partnership, he did not have the full amount of
P600,000 available and was forced to borrow P400,000. The land and building contributed by Anne has a

1
 mortgage of P1,800,000 and the partnership is to assume responsibility of the loan. If the profit and loss
sharing agreement is 40 percent, 40 percent, and 20 percent respectively, for Anne, Iris and Alfred, what is
the total capital investment of all the partners at the opening of the business on April 30?
a. P4,992,000 b. P3,192,000 c. P2,792,000 d. P3,328,000
8. Mahal admits Mora as a partner in the business. Balance sheet accounts of Mahal on September 30, just
before admission of Mora show:
Cash P31,200 Accounts payable P74,400
Accounts receivable 144,000 Mahal, capital 316,800
Merchandise inventory 216,000
It is agreed that for purpose of establishing Mahal’s interest, the following adjustments shall be made:
• An allowance for doubtful accounts of 2% is to be established
• Merchandise inventory is to be valued at P242,400
• Prepaid expense of P4,200 and accrued expenses of P4,800 are to be recognized
Mora is to invest sufficient cash to obtain a 1/3 interest in the partnership. How much is Mora’s investment to
the partnership?
a. P169,860 b. P211,200 c. P171,660 d. P95,040

On March 1, 20x4, CC and FF formed a partnership with each contributing the following assets:
Accounts CC FF
Cash P30,000 P70,000
Machinery 25,000 75,000
Building -- 225,000
Furniture and Fixtures 10,000 --
The building is subject to a mortgage loan of P90,000, which is to be assumed by the partnership. The agreement
provides that CC and FF share profits and losses 30% and 70%, respectively
9. On March 1, 20x4 the capital account of FF would show a balance of
a. P280,000 b. P305,000 c. P314,000 d. P370,000
10. Assuming that the partners agreed to bring their respective capital in proportion to their respective profit and
loss ratio, and using FF’s capital as the base, how much cash is to be invested by CC?
a. P19,000 b. P30,000 c. P40,000 d. P55,000
CC admits DD as a partner in business. Accounts in the ledger for CC on November 30, 20x4, just before the
admission of DD, show the following balances:
Cash P6,800
Accounts receivable 14,200
Merchandise inventory 20,000
Accounts payable 8,000
CC, capital 33,000
It is agreed that for purpose of establishing CC’s interest the following adjustments shall be made:
An allowance for doubtful accounts of 3% of accounts receivable is to be established
The merchandise inventory is to be valued at P23,000
Prepaid salary expense of P600 and accrued rent expense of P800 are to be recognized
11. DD is to invest sufficient cash to obtain a 1/3 interest in the partnership. CC’s adjusted capital before the
admission of CC
a. P28,174 b. P35,347 c. P35,374 d. P36,374
12. The amount of cash investment by DD
a. P11,971 b. P14,087 c. P17,687 d. P18,487
13. In 2011, Jessie and Anne agreed to contribute equal amounts into a new partnership for a 50% interest in
profit (loss) and in capital to each of them. Their respective contributions will come from old proprietorships
they owned and will both be dissolved. Jessie contributed the following items and amounts:
Cash P585,000

2
 Machineries (at book value per her proprietorship records) P400,000
Anne contributed the following items at their carrying amounts in the proprietorship records:
Accounts receivable P75,000
Inventory 210,000
Furniture and fixtures 402,000
Intangibles 172,500
All non cash contributions are not property valued. The two partners have agreed that (a) P6,000 of the
accounts receivable are uncollectible; (b) the inventories are overstated by P15,000; (c) the furniture and
fixtures are understated by P9,000; and the intangibles includes a patent with a carrying value of P10,500,
which must now be derecognized due to the result of unsuccessful litigation promulgated by the court just
before the partnership formation.
What is the fair value of the machineries invested by Jessie into the partnership?
a. P336,000 b. P252,000 c. P390,000 d. P350,000
14. I and Q formed a partnership on January 2, 2016, and agreed to share income 90%, 10%, respectively. I
contributed a capital of P12,500. Q contributed no capital but has a specialized expertise and manages the
firm full-time. There were no withdrawals during the year. The partnership agreement provides for the
following:
a. Capital accounts are to be credited annually with interest at 5% of beginning capital
b. Q is to be paid a salary of P500 a month
c. Q is to receive a bonus of 20% of income calculated before deducting his bonus, his salary and interest
on both capital accounts
d. Bonus, interest, and Q’s salary are to be considered partnership expenses
The partnership’s 2016 income statement follows:
Revenues P48,225
Expenses 24,850
Net income P23,375
How much is the total share of Q on the 2016 partnership net income?
a. P15,837.50 b. P14,325 c. P16,194 d. P14,169
15. R and J, partners, divide profits and losses on the basis of average capitals. Capital accounts for the year
ended December 31, 2016, are shown below. The net profit for 2016 is P135,000. (Changes in capitals during
the first half of the month are the regarded as effective as the beginning of the month; changes during the
second half of a month are regarded as effective as of the beginning of the following month.)
Particulars R, Capital J, Capital
Dr Cr Dr Cr
January 1 P300,000 P330,000
March 9 P50,000
April 14 150,000
July 1 100,000
Sept 4 P40,000
Sept 22 100,000
October 26 75,000
The share of R on the 2016 profit is:
a. P57,250 b. P77,250 c. P57,750 d. P62,630
16. Efren and Frenz operate The Gourmet Restaurant as a partnership. Their partnership agreement has the
following provisions for sharing profits and losses:
A. Income is distributed only as far as it is available
B. Available income is to be distributed in the following sequence:
1. Efren, who is the chef, gets a salary of P25,000 a year; Frenz, who is still learning, gets a salary of
P10,000
2. Interest is imputed on the average capital balances at 15 percent

3
 3. Any remaining profits and losses are to be shared equally

The average capital balances during the year were P270,000 for Efren and P50,000 for Frenz. If the
partnership income for the year is P17,500, it should be distributed to the partners as follows:
a. Efren P8,000; Frenz P9,500 c. Efren P12,500; Frenz P5,000
b. Efren P8,750; Frenz P8,750 d. Efren P14,000; Frenz P3,500
17. Partner Alta had a capital balance on January 1, 20x4 of P45,000 and made additional capital contributions
during 20x4 totaling P50,000. During the year 20x4, Alta withdrew P8,000 per month. Alta’s post-closing trial
balance on December 31, 20x4 is P30,000. Alta’s share of 20x4 partnership income is:
a. P96,000 b. P50,000 c. P31,000 d. P8,000
18. Partners A and B have a profit and loss agreement with the following provisions: salaries of P20,000 and
P25,000 for A and B respectively; a bonus to A of 10% of net income after bonus; and interest of 20% on
average capital balances of P40,000 and P50,000 for A and B, respectively. Any remainder is to be split
equally. If the partnership had net income of P88,000, how much should be allocated to Partner A
a. P36,000 b. P44,500 c. P50,000 d. P43,500
X, Y and Z, a partnership formed on January 1, 20x4 had the following initial investment:
X P100,000
Y P150,000
Z P225,000
The partnership agreement states that the profits and losses are to be shared equally by the partners after
consideration is made for the following:
• Salaries allowed to partners: P60,000 for X, P48,000 for Y, and P36,000 for Z
• Average partners’ capital balances during the year shall be allowed10%
• Additional information:
• On June 30, 20x4, X invested an additional P60,000
• Z withdrew P70,000 from the partnership on September 30, 20x4
• Share the remaining partnership profit was P5,000 for each partner
19. Partnership net profit of December 31, 20x4 before salaries, interests and partner’s share on the remainder
was
a. P199,750 b. P207,750 c. P211,625 d. P222,750
A partnership begins its first year with the following capital balances:
A, capital P60,000
B, capital P80,000
C, capital P100,000
The articles of partnership stipulate that profits and losses be assigned in the following manner
• Each partner is allocated interest equal to 10 percent of the beginning capital balance
• B is allocated compensation of P20,000 per year
• Amy remaining profits and losses are allocated on a 3:3:4 basis, respectively
• Each partner is allowed to withdraw up to P5,000 cash per year
20. Assuming that the net income is P50,000 and that each partner withdraws the maximum amount allowed.
What is the balance in C’s capital account at the end of that year?
a. P105,800 b. P106,200 c. P106,900 d. P107,400
21. The following balance sheet for the partnership of LuzVisMin was taken from the books on October 1, 2010
Cash P200,000 Accounts payable P400,000
Other assets 800,000 Luz, capital 240,000
Vis, capital 190,000
Min, capital 170,000
Total P1,000,000 Total P1,000,000
The profit and loss agreement among the partners follows:
• Annual salaries to Luz and Vis of P10,000 each

4
• Annual interest of 5% on beginning capital
• Bonus of 15% to Luz based on income after salaries, interest and bonus. Remaining profit 25% to Luz, 35%
to Vis, and 40% to Min.
The partnership began its operations on October 1, 2010. Net income for the year ended December 31, 2010
is P139,000.
Which of the following is true?
a. The bonus to Luz is P11,608
b. Net income after salaries, interest and bonus is P77,392
c. Vis total share in net income is P43,375
d. Min’s share on the profit after salaries, interest and bonus is P27,086
22. The dissolution of a partnership occurs
a. Only when the partnership sells its assets and permanently closes its books
b. Only when a partner leaves the partnership
c. Only when a new partner is admitted to the partnership
d. When there is any change in the individuals who make up the partnership
23. The process of terminating the business, selling the assets, paying the liabilities and disbursing the remaining
cash to the partners is called
a. Dissolution c. Liquidation
b. Formation of a partnership d. Withdrawal
24. The selling of noncash assets for cash in partnership liquidation, any difference between book value and the
cash proceeds is called
a. Net profit or loss on sale c. Capital gain or loss
b. Gain or loss on realization d. Sales differential value
25. The main characteristic of a lump sum liquidation done in one transaction is that all the
a. Assets are sold in one transaction
b. Liabilities are paid on one transaction
c. Cash available to partners is distributed to them in one transaction
d. Assets are sold in one transaction and all the available cash is distributed to creditors and partners in
one transaction.
26. The cash available for distribution to partners in an installment liquidation is equal to the
a. Cash available after a sale of noncash assets is made
b. Cash available after payment to creditors are made
c. Cash available after payment to creditors are made and after reserve for future liquidation is set
aside
d. All of the above
27. When advance cash distribution plan is prepared, a partner’s loan payable to partnership is
a. Added to other liabilities
b. Added to the credit balance in the partner’s capital account
c. Subtracted from the credit balance in the partner’s capital account
d. Omitted from the calculation
28. Capital balance and profit and loss sharing ratios of the partners in the ABC partnership are as follows:
A, capital (40%) P168,000
B, capital (40%) 192,000
C, capital (20%) 120,000
Total P480,000
A needs money and agrees to assign one-fourth of his interest in the partnership to D for P45,000 cash. D
pays P45,000 directly to A. Compute the (1) capital balance of D, and (2) the total capital of the ABC
Partnership immediately after the assignment of the interest to D?
a. (1) P42,000; (2) P547,200 c. (1) P42,000; (2) P480,000
b. (1) P67,200; (2) P480,000 d. (1) P67,200; (2) P547,200

5
 29. A partnership has the following capital balances:
Elgin (40% of gains and losses) P100,000
Jethro (30%) 200,000
Foy (30%) 300,000
Oscar is going to pay a total of P200,000 to these three partners to acquire a 25 percent ownership interest
from each. Goodwill (or revaluation of asset) is to be recorded. What is Jethro’s capital balance after the
transaction?
a. P150,000 b. P175,000 c. P195,000 d. P200,000
30. Partners Allen, Baker and Coe share profits and losses 5:3:2, respectively. The balance sheet as of April 30,
2014 follows:
Assets Liabilities and Capital
Cash P40,000 Accounts payable P100,000
Other assets 360,000 Allen, Capital 74,000
Baker, Capital 130,000
Coe, Capital 96,000
The assets and liabilities are recorded and presented at their respective fair values. Jones is to be admitted as
a new partner with a 20% capital interest and a 20% share in the profits and losses in exchange for a cash
contribution. No goodwill or bonus is to be recorded. How much cash should Jones contribute?
a. P60,000 b. P72,000 c. P75,000 d. P80,000
The partners in the Kim, Gerald and Maja partnership have capital balances as follows:
Kim, capital P17,500
Gerald, capital P17,500
Maja, capital P20,000
Profits and losses are shared 30%, 30% and 40% respectively. On this date, Maja withdraws and the partners agree
to pay him P22,500 out of partnership cash (Tangible assets are already stated at values approximating their fair
market values).
31. Using bonus method, how much must be the ending capital of Kim immediately after Maja’s withdrawal?
a. P17,500 b. P16,250 c. P16,750 d. P19,375
32. Using partial goodwill method, how much must be the ending capital of Kim immediately after Maja’s
withdrawal?
a. P17,500 b. P16,250 c. P16,750 d. P19,375
33. Using full goodwill method, how much must be the ending capital of Kim immediately after Maja’s
withdrawal?
a. P17,500 b. P16,250 c. P16,750 d. P19,375
34. Elton and Don are partners who share profits and losses in the ratio of 7:3, respectively. On November 5,
20x4, their respective capital accounts were as follows:
Elton P70,000
Don 60,000
On that date they agreed to admit Kravitz as a partner with a one-third interest in the capital and profits and
losses upon his investment of P50,000. The new partnership will began with a total capital of P180,000.
Immediately after Kravitz’s admission, what are the capital balances of Elton, Don and Kravitz, respectively?
a. P60,000; P60,000; P60,000 c. P63,333; P56,667; P60,000
b. P63,000; P57,000; P60,000 d. P70,000; P60,000; P50,000
35. Kris and Mark are partners who share profits and losses 70:30. They have capital account balances of
P170,000 and P260,000, respectively at the date they admit Frank into the partnership. Frank invests
P120,000 in the partnership for a 25 percent equity interest and the bonus method is applied. What is the
peso amount of bonus recognized in Frank’s capital account at the date of admission?
a. P70,000 b. P52,500 c. P23,333 d. P17,500
36. On December 31, 20x4, AN and DE are partners with capital balances of P80,000 and P40,000 and they share
profits and losses in the ratio of 2:1, respectively. On this date, ST invests P36,000 cash for a one-fifth

6
 interest in the capital and profit of the new partnership. The partners agree that the implied partnership
goodwill (total revaluation of assets) is to be recorded simultaneously with the admission of ST. The total
implied goodwill of the firm is
a. P4,800 b. P6,000 c. P24,000 d. P30,000
37. Bishop has a capital balance of P120,000 in a local partnership, and Cotton has a P90,000 balance. These two
partners share profits and losses by a ratio of 60 percent to Bishop and 40 percent to Cotton. Lovett invests
P60,000 in cash in the partnership for a 20 percent ownership. The goodwill (or revaluation of asset) method
will be used. What is Cotton’s capital balance after this new investment?
a. P99,600 b. P102,000 c. P112,000 d. P126,000
38. On June 30, 20x4, the balance sheet for the partnership of William, Brown and Lowe, together with their
respective profit and loss ratios, is summarized as follows:
Assets, at cost P300,000 Williams, loan P15,000
Williams, capital 70,000
Brown, capital 65,000
Lowe, capital 150,000
Williams has decided to retire from the partnership, and by mutual agreement the assets are to be adjusted
to their fair value of P360,000 at June 30, 20x4. It is agreed that the partnership will pay Williams P102,000
cash for his partnership interest exclusive of his loan, which is to be repaid in full. Goodwill is to be recognized
in this transaction, as implied (total) by the excess payment to Williams. After Williams’ retirement, what are
the capital balances of Brown and Lowe, respectively?
a. P65,000 and P150,000 c. P73,000 and P174,000
b. P97,000 and P246,000 d. P77,000 and P186,000
39. Prior to liquidation, the liabilities and partners’ capital account are reported with the following balances:
Partner’s Capitals Profit ratio
Alaska P160,000 1/3
Beermen P290,000 2/3
Totals P450,000
The total liabilities of the partnership amount to P150,000, and all assets available are non-cash assets which
were realized at P540,000. The cash distribution to partners upon liquidation would be
Alaska Beermen Alaska Beermen
a. P135,000 P270,000 c. P140,000 P250,000
b. P130,000 P260,000 d. P190,000 P350,000
40. X, Y, and Z have capital balances of P40,000, P50,000 and P18,000, respectively and a profit sharing ratio of
4:2:1, respectively. If X received P8,000 upon liquidation, the total amount received by all partners was
a. P108,000 b. P56,000 c. P24,000 d. P52,000
41. Based on #38 above, except the X received P26,000 as a result of liquidation, Z received as part of the
liquidation
a. P26,000 b. P18,000 c. P14,500 d. P14,000
42. The statement of financial position of the firm A, B, C and D, just prior to liquidation shows the following: A,
loan, P1,000, A, capital, P5,500, B, capital, P5,150, C, capital, P6,850, D, capital, P4,500.
A, B, C and D share profits 4:3:2:1 respectively. Certain assets are sold for P6,000 and this is distributed to
partners. How much cash should C receive?
a. P3,283 b. P 0 c. P2,717 d. P6,000
43. On January 1, year 1, the partners of Cobb, Davis, and Eddy, who share profits and losses in the ratio of
5:3:2, respectively, decided to liquidate their partnership. On this date the partnership condensed balance
sheet was as follows:
Assets Liabilities and Capital
Cash P 50,000 Liabilities P 60,000
Other assets 250,000 Cobb, capital 80,000
Davis, capital 90,000

7
 Eddy, capital 70,000
Total assets P300,000 Total Liabilities and Capital P300,000
On January 15, year 1, the first cash sale of other assets with a carrying amount of P150,000 realized
P120,000. Safe installment payments to the partners were made the same date. How much cash should be
distributed to each partner?
Cobb Davis Eddy Cobb Davis Eddy
a. P15,000 P51,000 P44,000 c. P55,000 P33,000 P22,000
b. P40,000 P45,000 P35,000 d. P60,000 P36,000 P24,000
The balance sheet of Kate, Tim and Mar partnership shows the following information as of December 31, 2015:
Cash P4,000 Liabilities P10,000
Other assets 56,000 Kate, loan 5,000
Kate, capital 25,000
Tim, capital 14,000
Mar, capital 6,000
Total 60,000 Total 60,000
Profit and loss ratio is 3:2:1 for Tim, Kate and Mar respectively. Other assets were realized as follows:
Date Cash received Book value
January 2016 P12,000 P18,000
February 2016 7,000 15,400
March 2016 25,000 22,600
Cash is distributed as assets are realized
44. The total loss to Kate is
a. P6,000 b. P2,000 c. P2,000 d. None
45. The total cash received by Tim is
a. P4,000 b. Zero c. P10,000 d. P3,000
46. Cash received by Mar in January 2016 is:
a. P400 b. P2,000 c. P1,000 d. Zero

Rosa, Susan, and Tina are partners sharing profits on a 5:3:2. On January 1 , 20x1. Vida was admitted into the
partnership with a 20% in profits. The old partners continue to participate in profits in their original ratios. For the
year the partnership book showed a net income of P25,000. It was disclosed however, that the following errors were
committed:
Particulars 20x0 20x1
Accrued expenses not recorded at year-end P1,200
Inventory overstated P3,100
Purchases not recorded for which goods have been received
And inventoried P2,000
Income received in advance not adjusted P1,500
Unused supplies not taken up at year-end P900

47. The new profit and loss ratio of Rosa, Susan, Tina, and Vida, respectively for 20x1 is
a. 40%, 25%, 15%; and 20% c. 45%, 30%, 15% and 20%
b. 50%, 20%, 10% and 20% d. 40%, 24%, 16% and 20%
48. The share of partner Rosa in the 20x1 corrected net income is
a. P 9,400 b. P10,000 c. P11,750 d. P12,500

49. PFRS 11 Joint Arrangements provide that joint control exists where:
a. One party alone has power to control the strategic operating decisions of the joint arrangement
b. No single party is in a position to control the activity unilaterally

8
 c. The decisions in areas essential to the goals of the joint arrangement do not require the consent of the
parties
d. No one party may be appointed as the manager of the joint arrangement
50. Which if the following is correct?
a. Where the joint operators have designed the joint arrangement so that its activities primarily aim to
provide parties with an output it will be classified as a joint control
b. All joint arrangements are not structured through a separate vehicle are classified as joint ventures
c. For a joint venture, the rights pertain to the rights and obligations associated with individual assets and
liabilities, whereas with a joint operation, the rights and obligations pertain to the net assets
d. In considering the legal form of the separate vehicle if the legal form establishes rights to individual
assets and obligations, the arrangement is a joint operation. If the legal form establishes rights to the net
assets of the arrangement, then the arrangement is a joint venture
51. Which of the following statements is not true in relation to joint control?
a. Joint control exist only where there is contractually agreed sharing of control
b. Entities over which a party has joint control are accounted for in accordance with PFRS 11 Joint
Arrangements
c. Joint control requires the unanimous consent of the parties sharing control
d. Each party must have an equal interest for joint control to exist
52. In relation to supply of service to a joint operation by one of the joint operators, which of the following
statements is correct?
a. A joint operator cannot earn a profit on supplying services to itself
b. A joint operator is not able to recognize the service revenue or service cost for the services supplied to the
joint operation
c. A joint operator can recognize 100% of the earned through the supply of services to the joint operation
d. A joint operator is entitled to recognize a profit from the supply of services to itself
53. ON December 31, 2015, Intel, Inc. authorized Chiquito to operate as a franchisee for an initial franchise fee of
P15,000. Of this amount, P6,000 was received upon signing the agreement and the balance represented by
an note due in three annual instalments of P3,000 each beginning December 31, 2017. The present value on
December 31, 2015, for three annual payment appropriately discounted is P7,200. According to the
agreement, the non-refundable downpayment represents a fair measure of the services already performed by
Intel and substantial future services are still to be rendered. However, the collectability of the note is not
reasonably assured. Intel’s December 31, 2015, balance sheet unearned franchisee fee from Chiquito’s
franchise should report as:
a. P13,200 b. P10,000 c. P 0 d. P7,200
54. On December 31, 2015, McKing Inc. signed an agreement authorizing Burge Company to operate as a
franchise for an initial franchise fee of P500,000. Of this amount, P200,000 was received upon signing of the
agreement and the balance is due in three annual payment of P100,000 each, beginning December 31, 2011.
No future services are required to be performed. Burge Company’s credit rating is such that collection of the
note is reasonably assured. The present value at December 31, 8 of the three annual payments discounted at
14% (the implicit rate for a loan of this type) is P232,200. On December 31, 2016, McKing should record
earned franchise fees of
a. P232,200 b. P432,200 c. P300,000 d. P 0
55. On December 31, 2015 Bulaklak Company signed an agreement to operate as franchisee of Bluewich for a
franchise fee of P800,000. Of this amount, P300,000 was paid upon signing of the agreement and the balance
is payable in five annual payments of P100,000 each beginning December 31, 2016. The present value of the
five payment, at an appropriate rate of interest, is P560,000 at December 31, 2015. The agreement provides
that the downpayment is not refundable and no future services are required of the franchisor. The collection
of note receivable is reasonably certain. Bluewich’s Company should report unearned revenue from franchise
fee in its December 31, 2012 balance sheet at:
a. P800,000 b. P300,000 c. P660,000 d. P 0

9
56. The franchise agreement between Minute Burger and Ms. Paganda which was signed at the beginning of the
year required a P5,000,000 franchise fee payable P1,000,000 upon signing of the franchise and the balance in
four annual instalments starting the end of the current year. At the time of granting of the franchise, the
present value using 12% as discount rate of the four instalments would approximate P1,996,500. The fees
once paid are not refundable. The franchise may be cancelled subject to the provisions of the agreement.
Should there be unpaid franchise fee attributed to the balance of main fee (P5,000,000), same would become
due and demandable upon cancellation. Further, the franchisor is entitled to a 5% fee on gross sale payable
monthly within the first ten days of the following month. The Credit Investigation Bureau rated Ms. Paganda
as AA credit rating. Further the balance of the franchise fee was guaranteed by a commercial bank. The first
year of operations yielded gross sales of P90 million. As of the signing of the franchise agreement, Minute
Burger’s unearned franchise fee amounted to
a. P6,496,500 b. P4,000,000 c. zero d. P1,996,500
57. Mike and Noel formed a joint venture to purchase and sell a special type of merchandise. The venturers
agreed to contribute cash of P270,000 each to be used in purchasing the merchandise, and to share profits
and lossess equally. They also agreed that each shall record his purchases, sales, and expenses in their own
books.
Upon termination of the joint venture, the following data are made available:
Particulars Mike Noel
Joint venture P234,000 credit P170,600 debit
Inventory taken 10,800 33,750
Expenses paid from joint venture cash 5,400 9,900
How much cash is to be received by Noel in the final settlement?
a. P267,950 b. P290,225 c. P323,975 d. P280,325
58. ABS and CBN formed a joint venture on January 1, 2013 to operate two stores to be managed by each
ventures/participants. They agree to contribute cash as follows:
ABS P 30,000
CBN P 20,000
Profits and losses are to be divided in the capital ratio. All venture transactions are for cash. Cash receipts and
disbursements of the business during the 4-month period handled through the participant’s/venturer’s bank
accounts are as follows:
Particulars ABS CBN
Recepits P78,920 P65,425
Disbursements 62,275 70,695
On April 30, the remaining non-cash venture assets in the hands of the particiapants/venturers were sold for
P60,000. The venture is terminated and settlement is made between ABS and CBN
The P60,000 is divided between the particiapants/venturers as follows:
a. ABS, P16,180; CBN, P43,820 c. ABS, P26,180; CBN, P33,820
b. ABS, P21,905; CBN, P38,095 d. ABS, P48,095; CBN, P11,905

59. In the reporting of a corporate liquidation, assets are shown at

a. Present value calculated using an appropriate discount rate
b. Net realizable value
c. Historical rate
d. Book value
60. In a statement of affairs, assets are classified
a. According to whether they are pledged with particular creditors
b. As current or non-current
c. As monetary or non-monetary
d. As operating or non-operating
61. What are free assets?

10
 a. Assets for which net realizable value is greater than historical cost
b. Assets for which no market exists
c. Assets for which replacement cost is greater than historical cost
d. Assets available to be distributed for liabilities with priority and other unsecured obligations
62. What is an inherent limitation of statement of financial affairs?
a. Many of the amounts reported are only estimations that might prove to be inaccurate
b. The statement is applicable only to bankruptcy
c. The statement covers only a short time, whereas a bankruptcy may last much longer
d. The figures on the statement vary as to voluntary and an involuntary bankruptcy
63. In the accounting statement of affairs, the gains and losses upon liquidation would equal
a. Net book value of assets minus book value of liabilities
b. The book value of assets minus the realizable value
c. Total estimated realizable value of assets minus the amount assigned to secured creditors
d. Total estimated realizable value of assets minus the amount remaining for unsecured creditors
64. Lakeside Bank holds a P100,000 note secured by a building owned by Fly-by-Night Manufacturing, which has
filed by bankruptcy. If the property has a book value of P120,000 and a fair market value of P90,000, what is
the best way to describe the note held by the bank? It has a/an
a. Secured claim of P100,000
b. Unsecured claim of P100,000
c. Secured claim of P90,000 and an unsecured claim of P10,000
d. Secured claim of P100,000 and an unsecured claim of P20,000

The following was taken from the Statement of Affairs of Paradigm Company at August 30, 2018:
Assets pledged with fully secured creditors P71,000
Assets pledged with partially secured creditors 12,500
Free assets 11,000
Liabilities with priority 3,000
Fully secured liabilities 69,000
Partially secured liabilities 20,000
Liabilities without priority 18,000
65. The estimated deficiency to unsecured creditors without priority amounts is
a. P15,500 b. P15,150 c. P10,550 d. P10,050
66. The estimated amount payable to partially-secured liabilities is
a. P14,450 b. P14,045 c. P15,441 d. P14,540
67. The estimated amount payable to liabilities without priority is
a. P7,059 b. P5,790 c. P9,750 d. P9,570
68. Zero na Corp has been undergoing liquidation since January 1. As of March 31, its condensed statement of
realization and liquidation is presented below:
Assets:
Assets to be realized P95,000
Assets acquired 5,000
Assets realized 30,000
Assets not realized 42,000
Liabilities:
Liabilities liquidated 35,000
Liabilities not liquidated 31,850
Liabilities to be liquidated 65,000
Liabilities assumed 1,500
Revenues and expenses:
Sales on account (credit) 5,000

11
 Purchases (debit) 1,500
Payment of expenses of trustee 7,500
Sales for cash 25,000
Interest on marketable securities 150
The net gain (loss) for the three-month period ending March 31 is
a. P7,200 b. (P7,200) c. P49,500 d. (P17,500)
69. Rap Company is insolvent and its statement of affairs shows the following information:
Estimated gains on realization of assets P1,440,000
Estimated losses on realization of assets 2,000,000
Additional assets 1,280,000
Additional liabilities 960,000
Capital stock 2,000,000
Deficit 1,200,000
The pro-rate payment on the peso to stockholders (estimated amount to be recovered by stockholders) is:
a. P0.30 b. P0.43 c. P0.57 d. P0.70
70. S and L owes the Merian Corpozation P6,000 on account, which is secured by accounts receivable with a book
value of P5,000. Its statement of affairs lists the accounts receivable securing the Merian account with an
estimated realizable value of P4,500. If the dividend to general unsecured creditors is 80%, how much can,
Merian expect to receive?
a. P6,000 b. P5,800 c. P5,700 d. P4,800

12
Quiz Accounting

1. The statement of financial position of the partnership A, B and C shows: Cash, P22,400; Other
Assets, P212,000; Liabilities, P38,400; A, Capital (50%) P76,000; B, Capital (25%) P64,000;
and C, Capital (25%) P56,000.

If C received P10,000 from the first cash distribution, how much was the total cash distributed to
partners?

e P20,000
e P18,000
e P44,000

2. Jack and Beans, who share profits and losses in the ratio 3:7, decided to liquidate their Talk
Partnership. The partner’s capital balances are P300,000 and P190,000, respectively.

If on final settlement of partner’s claims Beans received P99,000, how much did Jack receive?

* None
eo P234,.000

3. The statement of financial position of the partnership A,B and C shows: Cash, P22,400; Other
Assets, P212,000; Liabilities, P38,400; A, Capital (50%) P76,000; B, Capital (25%) P64,000;
and C, Capital (25%) P56,000.

If A received a total of P10,000 from partnership liquidation, how much was the proceeds from
the sale of all non-cash assets?

¢ Answer not determinable

e P127,000

* P64,000
4. The statement of financial position of the partnership A,B and C shows: Cash, P22,400; Other
Assets, P212,000; Liabilities, P38,400; A, Capital (50%) P76,000; B, Capital (25%) P64,000;
and C, Capital (25%) P56,000.

If B received a total of P31,000 from partnership liquidation, how much was the loss on
realization?

e P85,000
* Answer not determinable

* P64,000

5. Jurado, Katindig, Lazaro, and Marcelo are partners sharing earnings in the ratio of 3:4:6:8.
The balance of their capital accounts on December 31, 2018 are as follows:

Jurado P1,000

Katindig 25,000

Lazaro 25,000
Marcelo 9,000

The partners decided to liquidate, and they accordingly convert the non-cash assets into P23,200
of cash. After paying the liabilities amounting to P3,000, they have P22,200 to divide. Assume
that a debit balance in any of partner’s capital is uncollectible. The book value of non-cash assets
amounted to:

* P63,000
* P45,400
eo P25,200

6. Jurado, Katindig, Lazaro, and Marcelo are partners sharing earnings in the ratio of 3:4:6:8.
The balance of their capital accounts on December 31, 2018 are as follows:

Jurado P1,000

Katindig 25,000

Lazaro 25,000

Marcelo 9,000

The partners decided to liquidate, and they accordingly convert the non-cash assets into P23,200
of cash. After paying the liabilities amounting to P3,000, they have P22,200 to divide. Assume
that a debit balance in any of partner’s capital is uncollectible. The share of Jurado in the loss
upon conversion of the non-cash assets into cash was:

e P5257
e P1,000
[ J

P4,792
7. In a cash priority program for use in installment liquidation, the partner with the highest loss
absorption balance is the most vulnerable partner. The amount of cash to be distributed to
partners in installment liquidation can be determined by preparing a cash priority program.

* Both statements are true.

* Only statement 1 is true

* Both statement are false

8. Partners Roger, Sergio and Tito, who share profit and loss in the ratio of 3:5:2, respectively
have decided to liquidate their partnership. The Statement of Financial Position of the
partnership at the time of liquidation is shown below:

Assets Liabilities and Capital

Cash P120,000 Accounts Payable P93,000

Other Assets 360,000 Loan from Sergio 30,000

Roger, Capital 108,000

Sergio, Capital 120,000

__ Tito, Capital 129,000

P480,000 P480,000

The partners desire to prepare an installment distribution schedule showing how cash would be
distributed to partners as assets are realized. In the schedule of maximum absorbable loss, the
maximum absorbable loss for each partner would be

* Roger, P360,000; Sergio, P240,000; Tito, P645,000

* Roger, P300,000; Sergio, P600,000; Tito, P225,000

* Roger, P450,000; Sergio, P525,000; Tito, P375,000

Partie
RIF fo AST IRC EIA (S59) BET PATHE CR Es Sve) BS 460688614 Peso Blot
P210,000. Upon liquidation, all of the partnership’s assets are sold and sufficient cash is realized
to pay all liabilities except one for P30,000. All partners are solvent except C.

How much is the additional contribution required of B?

* P24,000
* PO
* P6,000
e P18,000

10. The Statement of Financial Position for the partnership of Eclavo, Eclara, and Elorda, who
share profits and losses in the ratio 4:5:1, is as follows:

Cash P100,000 Accounts Payable P300,000

Inventory 720,000 Eclavo, Capital 320,000

Eclara, Capital 90,000

__ Elorda, Capital 110,000

P820,000 P820,000

Assuming Eclara is an insolvent partner, and the inventory is sold for P360,000, how much
should Eclavo receive upon liquidation of the partnership?

e P46,000
e P90,000
* None

11. Jurado, Katindig, Lazaro, and Marcelo are partners sharing earnings in the ratio of 3:4:6:8.
The balance of their capital accounts on December 31, 2018 are as follows:
Jurado P1,000

Katindig 25,000

Lazaro 25,000

Marcelo 9,000

The partners decided to liquidate, and they accordingly convert the non-cash assets into P23,200
of cash. After paying the liabilities amounting to P3,000, they have P22,200 to divide. Assume
that a debit balance in any of partner’s capital is uncollectible. When the P22,200 was divided,
Lazaro got
 e P14,200
* P6,342
e P10,800

12. The following is the priority sequence in which liquidation proceeds will be distributed for a

partnership:
e Parmership drawings, partnership liabilities, parmership loans, parmership capital
balances
* Partnership liabilities, partnership capital balances, partnership loans
e Parmership liabilities, parmership loans, parmership drawings, parmership capital
balances

13. Partners Roger, Sergio and Tito, who share profit and loss in the ratio of 3:5:2, respectively
have decided to liquidate their partnership. The Statement of Financial Position of the
partnership at the time of liquidation is shown below:

Assets Liabilities and Capital

Cash P120,000 Accounts Payable P93,000

Other Assets 360,000 Loan from Sergio 30,000

Roger, Capital 108,000

Sergio, Capital 120,000

___ Tito, Capital 129,000

P480,000 P480,000

The partners desire to prepare an installment distribution schedule showing how cash would be
distributed to partners as assets are realized. If Roger has received P30,000, how much would
Sergio had received?

e P30,000
e P77,000
* None

14. Jack and Beans, who share profits and losses in the ratio 3:7, decided to liquidate their Talk
Partnership. The partner’s capital balances are P300,000 and P190,000, respectively.
If all partnership assets and liabilities are realized and settled at their carrying amounts, how
much would Beans receive from the liquidation?

e P120,000
* P300,000
[ J

Answer not determinable

15. Partners Roger, Sergio and Tito, who share profit and loss in the ratio of 3:5:2, respectively
have decided to liquidate their partnership. The Statement of Financial Position of the
partnership at the time of liquidation is shown below:

Assets Liabilities and Capital

Cash P120,000 Accounts Payable P93,000

Other Assets 360,000 Loan from Sergio 30,000

Roger, Capital 108,000

Sergio, Capital 120,000

___ Tito, Capital 129,000

P480,000 P480,000

The partners desire to prepare an installment distribution schedule showing how cash would be
distributed to partners as assets are realized. The schedule of possible losses on capital balances
would indicate that the first cash distributed after the payment of outside creditors would be
distributed to

® Sergio, in the amount of P60,000

Tito, in the amount of P30,000

* Roger, in the amount of P48,000

16. Jack and Beans, who share profits and losses in the ratio 3:7, decided to liquidate their Talk
Partnership. The partner’s capital balances are P300,000 and P190,000, respectively.
Before the realization of non-cash assets, the partnership has a zero balance in its cash account
and a P200,000 balance in its liabilities. If on final settlement of partners’ claims Jack received
P261,000, how much was the net proceeds from the sale of the non-cash assets?

* P290,000
* PO

17. The Statement of Financial Position for the partnership of Eclavo, Eclara, and Elorda, who
share profits and losses in the ratio 4:5:1, is as follows:

Cash P100,000 Accounts Payable P300,000

Inventory 720,000 Eclavo, Capital 320,000

Eclara, Capital 90,000

__ Elorda, Capital 110,000

P820,000 P820,000

Assuming Elorda is a limited partner, and the inventory is sold for P360,000, how much should
she receive upon liquidation of the partnership?

* P56,000
* P65,000
e P110,000

18. An entry is not required in the liquidation of a partnership to record the

Distribution of cash to partners

* Payment of cash to creditors
e Sale of non-cash assets where proceeds are greater than the book value

19. Jack and Beans, who share profits and losses in the ratio 3:7, decided to liquidate their Talk
Partnership. The partner’s capital balances are P300,000 and P190,000, respectively.
The partnership has total liabilities of P200,000. If all partnership assets are realized for
P500,000, how much would Jack receive from the liquidation?

* P300,000
e P133,000

[ J
P57,000
20. Partners Roger, Sergio and Tito, who share profit and loss in the ratio of 3:5:2, respectively
have decided to liquidate their partnership. The Statement of Financial Position of the
partnership at the time of liquidation is shown below:

Assets Liabilities and Capital

Cash P120,000 Accounts Payable P93,000

Other Assets 360,000 Loan from Sergio 30,000

Roger, Capital 108,000

Sergio, Capital 120,000

___ Tito, Capital 129,000

P480,000 P480,000

The partners desire to prepare an installment distribution schedule showing how cash would be
distributed to partners as assets are realized. Assuming that the first sale of other assets having
book value of P150,000 realized P45,000 and all available cash is distributed, the partners would
receive

Roger, P63,000; Sergio, PO; Tito P9,000

Roger, PO; Sergio, P18,000; Tito, P54,000
Roger, P24,000; Sergio, P24,000; Tito, P24,000

21. ABC Partnership is liquidated and the non-cash assets are considered worthless. A and C are
general partners while B is a limited partner. The creditors will look to whose partner’s personal
assets for settlement of their claims?

® The personal assets of Partner B

® The personal assets are not available for partnership debts

® The personal assets of all partners

22. The Statement of Financial Position for the partnership of Eclavo, Eclara, and Elorda, who
share profits and losses in the ratio 4:5:1, is as follows:

Cash P100,000 Accounts Payable P300,000

Inventory 720,000 Eclavo, Capital 320,000

Eclara, Capital 90,000

__ Elorda, Capital 110,000

P820,000 P820,000

If the inventory is sold for P600,000, how much should Eclavo receive upon liquidation of the
partnership?

* P200,000
* P320,000
* P96,000

23. In lump-sum liquidation, a capital deficiency resulting from division of loss from realization
must be eliminated before making any payment to partners. Any resulting capital deficiency of
an insolvent partner is eliminated by charging the capital accounts of the remaining partners.

* Both statements are false

* Only statement 1 is true
* Only statement 2 is true

24. Jack and Beans, who share profits and losses in the ratio 3:7, decided to liquidate their Talk
Partnership. The partner’s capital balances are P300,000 and P190,000, respectively.

If all partnership assets are realized and all liabilities are settled, the partnership has remaining
cash of P120,000, how much would Beans receive from the liquidation?

* P99,000
* P189,000
e P120,000

25. As of December 31, the books of AME Partmership showed capital balances of: A — P40,000;

Mader Wli&ore 08: 11E §8arinerg profi afl ows Lo wag Fadi eeRes IY CRINGE
settlement of all liabilities amounting to P12,000, they still have P28,000 cash left for
distribution.

Assuming that any partner’s capital debit balance is uncollectible, the share of A in the P28,000
cash for distribution would be

e P8,000
* P40,000
e P19,000

26. The statement of financial position of the partnership A, B and C shows: Cash, P22,400;
Other Assets, P212,000; Liabilities, P38,400; A, Capital (50%) P76,000; B, Capital (25%)
P64,000; and C, Capital (25%) P56,000.

The partners realized P56,000 from the first installment sale of non-cash assets with total
carrying amount of P120,000. How much did B receive from the partial liquidation?

¢ P16,000
* PO
eo P25,000

27. The order of partnership liquidation process is

e Pay liabilities, sell assets, disburse cash to partners

* Disburse cash to partners, pay liabilities, sell assets

e Sell assets, disburse cash to partners, pay liabilities

28. A, B and C decided to liquidate their parmership business. The financial position of the
partnership shows: A, Capital (30%) P210,000; B, Capital (20%) P150,000; C, Capital (50%)

A090 pan awidasion,

alk of #15 BIE AT eRe i Rel dn apffictent cash is realized
By what amount would the capital of A change?

* PO
eo P24,000 increase

e P180,000 decrease

29. As of December 31, the books of AME Partmership showed capital balances of: A — P40,000;
M - P25,000; E — P5,000. The partners’ profit and loss ratio was 3:2:1, respectively. The partners
decided to dissolve and liquidate. They sold all the non-cash assets for P37,000 cash. After
settlement of all liabilities amounting to P12,000, they still have P28,000 cash left for
distribution.

The loss on the realization of the non-cash assets was

* P44,000
* P40,000
e P45,000

30. Partner Morgan is personally insolvent, owing P600,000. Personal assets will only bring
P200,000 when liquidated. At the same time, Morgan has a credit balance in the partnership of
P120,000. The capital amounts of the other partners total a credit balance of P250,000. Under the
doctrine of marshalling of assets, how much the personal creditors of Morgan can collect?

e P570,000
e P120,000
e P200,000
Quiz Accounting

1. The statement of financial position of the partnership A, B and C shows: Cash, P22,400; Other
Assets, P212,000; Liabilities, P38,400; A, Capital (50%) P76,000; B, Capital (25%) P64,000;
and C, Capital (25%) P56,000.

If C received P10,000 from the first cash distribution, how much was the total cash distributed to
partners?

 P20,000
 P18,000
 P44,000
 P28,000

2. Jack and Beans, who share profits and losses in the ratio 3:7, decided to liquidate their Talk
Partnership. The partner’s capital balances are P300,000 and P190,000, respectively.

If on final settlement of partner’s claims Beans received P99,000, how much did Jack receive?

 P89,000
 P261,000
 None
 P234,000

3. The statement of financial position of the partnership A,B and C shows: Cash, P22,400; Other
Assets, P212,000; Liabilities, P38,400; A, Capital (50%) P76,000; B, Capital (25%) P64,000;
and C, Capital (25%) P56,000.

If A received a total of P10,000 from partnership liquidation, how much was the proceeds from
the sale of all non-cash assets?

 Answer not determinable

 P127,000
 P85,000
 P64,000
4. The statement of financial position of the partnership A,B and C shows: Cash, P22,400; Other
Assets, P212,000; Liabilities, P38,400; A, Capital (50%) P76,000; B, Capital (25%) P64,000;
and C, Capital (25%) P56,000.

If B received a total of P31,000 from partnership liquidation, how much was the loss on
realization?

 P85,000
 Answer not determinable
 P127,000
 P64,000

5. Jurado, Katindig, Lazaro, and Marcelo are partners sharing earnings in the ratio of 3:4:6:8.
The balance of their capital accounts on December 31, 2018 are as follows:

Jurado P1,000

Katindig 25,000

Lazaro 25,000

Marcelo 9,000

The partners decided to liquidate, and they accordingly convert the non-cash assets into P23,200
of cash. After paying the liabilities amounting to P3,000, they have P22,200 to divide. Assume
that a debit balance in any of partner’s capital is uncollectible. The book value of non-cash assets
amounted to:

 P63,000
 P45,400
 P25,200
 P61,000

6. Jurado, Katindig, Lazaro, and Marcelo are partners sharing earnings in the ratio of 3:4:6:8.
The balance of their capital accounts on December 31, 2018 are as follows:

Jurado P1,000

Katindig 25,000

Lazaro 25,000

Marcelo 9,000

The partners decided to liquidate, and they accordingly convert the non-cash assets into P23,200
of cash. After paying the liabilities amounting to P3,000, they have P22,200 to divide. Assume
that a debit balance in any of partner’s capital is uncollectible. The share of Jurado in the loss
upon conversion of the non-cash assets into cash was:

 P5,400
 .P5,257
 P1,000
 P4,792

7. In a cash priority program for use in installment liquidation, the partner with the highest loss
absorption balance is the most vulnerable partner. The amount of cash to be distributed to
partners in installment liquidation can be determined by preparing a cash priority program.

 Both statements are true.

 Only statement 2 is true
 Only statement 1 is true
 Both statement are false

8. Partners Roger, Sergio and Tito, who share profit and loss in the ratio of 3:5:2, respectively
have decided to liquidate their partnership. The Statement of Financial Position of the
partnership at the time of liquidation is shown below:

Assets Liabilities and Capital

Cash P120,000 Accounts Payable P93,000

Other Assets 360,000 Loan from Sergio 30,000

Roger, Capital 108,000

Sergio, Capital 120,000

_____ Tito, Capital 129,000

P480,000 P480,000

The partners desire to prepare an installment distribution schedule showing how cash would be
distributed to partners as assets are realized. In the schedule of maximum absorbable loss, the
maximum absorbable loss for each partner would be

 Roger, P360,000; Sergio, P240,000; Tito, P645,000

 Roger, P300,000; Sergio, P600,000; Tito, P225,000
 Roger, P360,000; Sergio, P300,000; Tito, P645,000
 Roger, P450,000; Sergio, P525,000; Tito, P375,000

9. A, B and C decided to liquidate their partnership business. The financial position of the
partnership shows: A, Capital (30%) P210,000; B, Capital (20%) P150,000; C, Capital (50%)
P210,000. Upon liquidation, all of the partnership’s assets are sold and sufficient cash is realized
to pay all liabilities except one for P30,000. All partners are solvent except C.

How much is the additional contribution required of B?

 P24,000
 P0
 P6,000
 P18,000

10. The Statement of Financial Position for the partnership of Eclavo, Eclara, and Elorda, who
share profits and losses in the ratio 4:5:1, is as follows:

Cash P100,000 Accounts Payable P300,000

Inventory 720,000 Eclavo, Capital 320,000

Eclara, Capital 90,000

_____ Elorda, Capital 110,000

P820,000 P820,000

Assuming Eclara is an insolvent partner, and the inventory is sold for P360,000, how much
should Eclavo receive upon liquidation of the partnership?

 P46,000
 P90,000
 None
 P104,000

11. Jurado, Katindig, Lazaro, and Marcelo are partners sharing earnings in the ratio of 3:4:6:8.
The balance of their capital accounts on December 31, 2018 are as follows:

Jurado P1,000

Katindig 25,000

Lazaro 25,000

Marcelo 9,000

The partners decided to liquidate, and they accordingly convert the non-cash assets into P23,200
of cash. After paying the liabilities amounting to P3,000, they have P22,200 to divide. Assume
that a debit balance in any of partner’s capital is uncollectible. When the P22,200 was divided,
Lazaro got
  P8,320
 P14,200
 P6,342
 P10,800

12. The following is the priority sequence in which liquidation proceeds will be distributed for a
partnership:

 Partnership drawings, partnership liabilities, partnership loans, partnership capital

balances
 Partnership liabilities, partnership capital balances, partnership loans
 Partnership liabilities, partnership loans, partnership drawings, partnership capital
balances
 Partnership liabilities, partnership loans, partnership capital balances

13. Partners Roger, Sergio and Tito, who share profit and loss in the ratio of 3:5:2, respectively
have decided to liquidate their partnership. The Statement of Financial Position of the
partnership at the time of liquidation is shown below:

Assets Liabilities and Capital

Cash P120,000 Accounts Payable P93,000

Other Assets 360,000 Loan from Sergio 30,000

Roger, Capital 108,000

Sergio, Capital 120,000

_____ Tito, Capital 129,000

P480,000 P480,000

The partners desire to prepare an installment distribution schedule showing how cash would be
distributed to partners as assets are realized. If Roger has received P30,000, how much would
Sergio had received?

 P30,000
 P77,000
 None
 P20,000

14. Jack and Beans, who share profits and losses in the ratio 3:7, decided to liquidate their Talk
Partnership. The partner’s capital balances are P300,000 and P190,000, respectively.
If all partnership assets and liabilities are realized and settled at their carrying amounts, how
much would Beans receive from the liquidation?

 P190,000
 P120,000
 P300,000
 Answer not determinable

15. Partners Roger, Sergio and Tito, who share profit and loss in the ratio of 3:5:2, respectively
have decided to liquidate their partnership. The Statement of Financial Position of the
partnership at the time of liquidation is shown below:

Assets Liabilities and Capital

Cash P120,000 Accounts Payable P93,000

Other Assets 360,000 Loan from Sergio 30,000

Roger, Capital 108,000

Sergio, Capital 120,000

_____ Tito, Capital 129,000

P480,000 P480,000

The partners desire to prepare an installment distribution schedule showing how cash would be
distributed to partners as assets are realized. The schedule of possible losses on capital balances
would indicate that the first cash distributed after the payment of outside creditors would be
distributed to

 Sergio, in the amount of P60,000

 Tito, in the amount of P30,000
 Roger, in the amount of P48,000
 Tito, in the amount of P57,000

16. Jack and Beans, who share profits and losses in the ratio 3:7, decided to liquidate their Talk
Partnership. The partner’s capital balances are P300,000 and P190,000, respectively.
Before the realization of non-cash assets, the partnership has a zero balance in its cash account
and a P200,000 balance in its liabilities. If on final settlement of partners’ claims Jack received
P261,000, how much was the net proceeds from the sale of the non-cash assets?

 P290,000
 P0
 P360,000
 P560,000

17. The Statement of Financial Position for the partnership of Eclavo, Eclara, and Elorda, who
share profits and losses in the ratio 4:5:1, is as follows:

Cash P100,000 Accounts Payable P300,000

Inventory 720,000 Eclavo, Capital 320,000

Eclara, Capital 90,000

_____ Elorda, Capital 110,000

P820,000 P820,000

Assuming Elorda is a limited partner, and the inventory is sold for P360,000, how much should
she receive upon liquidation of the partnership?

 P74,000
 P56,000
 P65,000
 P110,000

18. An entry is not required in the liquidation of a partnership to record the

 Distribution of cash to partners

 Payment of cash to creditors
 Sale of non-cash assets where proceeds are greater than the book value
 Allocation of a capital deficiency to partners with credit balances when the deficient
partner is solvent

19. Jack and Beans, who share profits and losses in the ratio 3:7, decided to liquidate their Talk
Partnership. The partner’s capital balances are P300,000 and P190,000, respectively.
The partnership has total liabilities of P200,000. If all partnership assets are realized for
P500,000, how much would Jack receive from the liquidation?

 P300,000
 P133,000
 P243,000
 P57,000

20. Partners Roger, Sergio and Tito, who share profit and loss in the ratio of 3:5:2, respectively
have decided to liquidate their partnership. The Statement of Financial Position of the
partnership at the time of liquidation is shown below:

Assets Liabilities and Capital

Cash P120,000 Accounts Payable P93,000

Other Assets 360,000 Loan from Sergio 30,000

Roger, Capital 108,000

Sergio, Capital 120,000

_____ Tito, Capital 129,000

P480,000 P480,000

The partners desire to prepare an installment distribution schedule showing how cash would be
distributed to partners as assets are realized. Assuming that the first sale of other assets having
book value of P150,000 realized P45,000 and all available cash is distributed, the partners would
receive

 Roger, P9,000; Sergio, P0; Tito, P63,000

 Roger, P63,000; Sergio, P0; Tito P9,000
 Roger, P0; Sergio, P18,000; Tito, P54,000
 Roger, P24,000; Sergio, P24,000; Tito, P24,000

21. ABC Partnership is liquidated and the non-cash assets are considered worthless. A and C are
general partners while B is a limited partner. The creditors will look to whose partner’s personal
assets for settlement of their claims?

 The personal assets of Partner B

 The personal assets are not available for partnership debts
 The personal assets of Partners A and C
 The personal assets of all partners
22. The Statement of Financial Position for the partnership of Eclavo, Eclara, and Elorda, who
share profits and losses in the ratio 4:5:1, is as follows:

Cash P100,000 Accounts Payable P300,000

Inventory 720,000 Eclavo, Capital 320,000

Eclara, Capital 90,000

_____ Elorda, Capital 110,000

P820,000 P820,000

If the inventory is sold for P600,000, how much should Eclavo receive upon liquidation of the
partnership?

 P200,000
 P320,000
 P96,000
 P272,000

23. In lump-sum liquidation, a capital deficiency resulting from division of loss from realization
must be eliminated before making any payment to partners. Any resulting capital deficiency of
an insolvent partner is eliminated by charging the capital accounts of the remaining partners.

 Both statements are false

 Only statement 1 is true
 Only statement 2 is true
 Both statements are true

24. Jack and Beans, who share profits and losses in the ratio 3:7, decided to liquidate their Talk
Partnership. The partner’s capital balances are P300,000 and P190,000, respectively.

If all partnership assets are realized and all liabilities are settled, the partnership has remaining
cash of P120,000, how much would Beans receive from the liquidation?

 P99,000
 P189,000
 P120,000
 None

25. As of December 31, the books of AME Partnership showed capital balances of: A – P40,000;
M – P25,000; E – P5,000. The partners’ profit and loss ratio was 3:2:1, respectively. The partners
decided to dissolve and liquidate. They sold all the non-cash assets for P37,000 cash. After
settlement of all liabilities amounting to P12,000, they still have P28,000 cash left for
distribution.

Assuming that any partner’s capital debit balance is uncollectible, the share of A in the P28,000
cash for distribution would be

 P8,000
 P40,000
 P19,000
 P17,800

26. The statement of financial position of the partnership A, B and C shows: Cash, P22,400;
Other Assets, P212,000; Liabilities, P38,400; A, Capital (50%) P76,000; B, Capital (25%)
P64,000; and C, Capital (25%) P56,000.

The partners realized P56,000 from the first installment sale of non-cash assets with total
carrying amount of P120,000. How much did B receive from the partial liquidation?

 P24,000
 P16,000
 P0
 P25,000

27. The order of partnership liquidation process is

 Pay liabilities, sell assets, disburse cash to partners

 Sell assets, pay liabilities, disburse cash to partners
 Disburse cash to partners, pay liabilities, sell assets
 Sell assets, disburse cash to partners, pay liabilities

28. A, B and C decided to liquidate their partnership business. The financial position of the
partnership shows: A, Capital (30%) P210,000; B, Capital (20%) P150,000; C, Capital (50%)
P210,000. Upon liquidation, all of the partnership’s assets are sold and sufficient cash is realized
to pay all liabilities except one for P30,000. All partners are solvent except C.
By what amount would the capital of A change?

 P0
 P24,000 increase
 P234,000 decrease
 P180,000 decrease

29. As of December 31, the books of AME Partnership showed capital balances of: A – P40,000;
M – P25,000; E – P5,000. The partners’ profit and loss ratio was 3:2:1, respectively. The partners
decided to dissolve and liquidate. They sold all the non-cash assets for P37,000 cash. After
settlement of all liabilities amounting to P12,000, they still have P28,000 cash left for
distribution.

The loss on the realization of the non-cash assets was

 P44,000
 P40,000
 P45,000
 P42,000

30. Partner Morgan is personally insolvent, owing P600,000. Personal assets will only bring
P200,000 when liquidated. At the same time, Morgan has a credit balance in the partnership of
P120,000. The capital amounts of the other partners total a credit balance of P250,000. Under the
doctrine of marshalling of assets, how much the personal creditors of Morgan can collect?

 P320,000
 P570,000
 P120,000
 P200,000
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Acctgspecialpartnership

BS in Accountancy (Saint Mary's University Philippines)

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Self Test Chapter 3

Multiple Choice Theories
1. If existing partners acquire the equity of a withdrawing partner, in what manner do they divide the
equity?
a. In any manner they choose
b. Equally
c. Proportionate to their residual profit and loss ratios
d. Existing partners are not permitted to acquire the equity of a withdrawing partner
2. Which of the following must exist to create the potential for a retiring partner to have a bonus
recognized at the date of withdrawal?
a. The retiring partner must be paid more than the book value of his equity
b. The existing partners must decide to not admit a new partner to the partnership
c. The retiring partner’s equity must be acquired by the partnership
d. All of the above are necessary for a bonus to be recognized
3. In what manner do the remaining partners share in the bonus paid to a withdrawing partner?
a. In proportion to their residual profit and loss ratios
b. Equally
c. In proportion to their capital account balances
d. The partner with the greatest capital account is assigned the bonus
4. Which of the following statements is true with regard to a withdrawing partner?
a. A bonus must be paid to the retiring partner
b. A bonus may be paid to the retiring partner
c. A bonus must be paid to the retiring partner or to the remaining partners
d. Recognizing a bonus is not appropriate when a partner retires
5. What change occurs to continuing partners’ capital accounts when a withdrawing partner is
assigned goodwill at the date of withdrawal?
a. Continuing partners’ capital accounts decease by their profit and loss ratio proportion of the
goodwill assigned to the withdrawing partner
b. Continuing partners’ capital accounts increase
c. Continuing partners’ capital accounts do not change
d. Goodwill cannot be recognized with regard to withdrawing partners
6. What amount of goodwill can be recognized at the date a partner withdraws from a partnership?
a. The withdrawing partner’s portion of goodwill
b. The continuing partners’ portion of goodwill
c. Goodwill may not be recognized at the date a partner withdraws
d. Either the withdrawing partner’s portion of goodwill or the goodwill attributable to the entire
partnership
7. What portion of the partnership’s assets must be revalued when a partner withdraws from the
partnership?
a. The withdrawing partner’s share must be revalued
b. All of the partnership’s assets must be revalued
c. Any or all of the partnership’s assets may be revalued but none have to be revalued
d. Partnership assets may not be revalued when a partner withdraws
8. If existing partners acquire the equity of a withdrawing partner, in what manner do they divide the
equity?
a. In any manner they choose
b. Equally
c. Proportionate to their residual profit and loss ratios
d. Existing partners are not permitted to acquire the equity of a withdrawing partner
9. Which of the following must exist to create the potential for a retiring partner to have a bonus
recognized at the date of withdrawal?
a. The retiring partner must be paid more than the book value of his equity
b. The existing partners must decide to not admit a new partner to the partnership
c. The retiring partner’s equity must be acquired by the partnership
d. All of the above are necessary for a bonus to be recognized
Problems
1. Kern and Pate are partners with capital balances of P60,000 and P20,000, respectively.
Profits and losses are divided in the ratio of 60:40. Kern and Pate decide to admit Grant,
who invested land valued at P15,000 for a 20% capital interest in the partnership.
Grant’s capital account should be credited for:

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2. At December 31, RR and SH are partners with capital balances of P40,000 and P20,000,
and they share profits and losses in the ratio of 2:1, respectively. On this date, PP invests
P17,000 in cash for a one-fifth interest in the capital and profit of the new partnership.
Assuming that the bonus method is used, how much should be credited to PP’s capital
account on December 31?
3. The capital balance for Messalina is P210,000 and for Romulus is P140,000. These two
partners share profits and losses 60 percent (Messalina) and 40 percent (Romulus).
Claudius invests P100,000 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?
4. Jesse, Joseph, and Leslie are partners with capital accounts of P70,000, P120,000, and
P90,000, respectively. The partnership share profits and losses 45%, 30%, and 25%,
respectively. They are considering allowing Hans to join the partnership by investing
directly into the partnership. The partners intend to revalue the assets before Hans’
admission. Neither bonus nor goodwill are required. If the asset’s market value exceeds
book value P150,000, how much will Hans invest to acquire a 20% equity interest in the
partnership?
5. Sandra and Joshua are partners. They have capital account balances of P250,000 and
P200,000, respectively, and they share profits and losses 70/30. The partners are
considering admitting Judy as a new partner with a 25 percent equity interest for an
investment in the partnership of P180,000. Before admission, Sandra and Joshua will
revalue the partnership’s assets. If the net increase in the partnership’s assets is
P125,000, what will be the balance in Sandra’s capital account immediately before Judy’s
admission?
6. Kris and Mark are partners who share profits and losses 70/30. They have capital
account balances of P170,000 and P260,000, respectively at the date they admit Frank
into the partnership. Frank invests P120,000 in the partnership for a 25 percent equity
interest and the bonus method is applied. What is the peso amount of the reduction to
Kris’ capital account at the date of admission?
7. The following balance sheet information is for the partnership of Abel, Boule, and
Cayman:
Cash P 210,000 Liabilities P 510,000
Other assets 1,500,000 Abele, Capital (40%) 300,000
Boule, Capital (40%) 480,000
Cayman, Capital (20%) 420,000
P1,710,000 P1,710,000
Figures shown parenthetically reflect agreed profit and loss sharing percentages. If
assets on the initial balance sheet are fairly valued, Abele and Boule consent and Dann
pays Cayman P225,000 for his interest; the revised capital balances of the partners
would be:
8. 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
P100,000. 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 % Interests in
Accounts Profits and Losses
Brown P168,000 50%
Greene 104,000 35
Red 48,000 15
Total P320,000
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?

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9. 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 P125,000. 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 % Interests in
Accounts Profits and Losses
Shrek P210,000 60%
Fiona 130,000 25
Muffin 60,000 15
Total P400,000
All other assets and liabilities are fairly valued by Donkey. Immediately after Donkey’s
acquisition, what should be the capital balances of Shrek, Fiona, and Muffin,
respectively?
10. The partnership of Gilligan, Skipper, and Ginger had total capital of P570,000 on
December 31, 20x4 as follows:
Gilligan, Capital (30%) P180,000
Skipper, Capital (45%) 255,000
Ginger, Capital (25%) 135,000
Total P570,000
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 P270,000 directly to the old partners:
a. total partnership net assets can logically be revalued to P1,080,000 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 P760,000.
d. total capital of the new partnership will be P840,000 assuming no revaluation.
11. Assume the same data in No. 10, except that Mary Ann became a partner by investing
P150,000 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
12. Assume the same data in No. 10, except that Professor became a partner by investing
P190,000 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 P150,000.
b. Gilligan’s capital will be increased to P147,000.
c. total partnership capital after Professor’s admission to the partnership will be
P600,000.
d. net assets of the partnership will increase by P190,000, including Professor’s interest.
13. The balance sheet for the partnership of Nina, Pinta, and Santa Maria at January 1, 20x4
follows. The partners share profits and losses in the ratio of 3:2:5, respectively.
Assets at cost P480,000
Liabilities P135,000
Nina, capital 75,000
Pinta, capital 120,000
Santa Maria, capital 150,000
P480,000

Nina is retiring from the partnership. By mutual agreement, the assets are to be adjusted
to their fair value of P540,000 at January 1, 20x4. Pinta and Santa Maria agree that the
partnership will pay Nina P135,000 cash for hers her partnership interest. There is no

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goodwill is to be recorded. What is the balance of Pinta’s capital account after Nina’s
retirement?
14. Alf and Ben, partners in Alf & Ben Partnership who share net income and losses equally,
had capital account balances of P40,000 and P60,000, respectively, on September 25,
20x4, on which date the following journal entry was prepared for the partnership:
Cash 62,000
Goodwill [(P62,000 x 3)  (P100,000 + P62,000)] 24,000
Alf, Capital (P24,000 x 0.50) 12,000
Ben, Capital (P24,000 x 0.50) 12,000
Cam, Capital 62,000
To record investment by Cam for a one-third interest in capital,
with goodwill of P24,000 divided equally between Alf and Ben.
The foregoing journal entry:
a. Is acceptable
b. Should be replaced by an entry allocating an P8,000 bonus equally to Alf and to Ben
c. Should be replaced by an entry allocating a P24,000 bonus equally to Alf and to Ben
d. Should not reflect either a bonus or goodwill
15. Michelle and Steve are partners in a local business. They currently share profits and
losses 60/40 and have capital account balances of P150,000 and P200,000, respectively.
They are considering admitting Jacob to the partnership. He will receive a 20 percent
equity interest in the partnership for a P120,000 investment. Assuming that goodwill is
to be recognized, which partner(s) are contributing the goodwill?
a. Both new and existing partners are contributing goodwill
b. New partner is contributing goodwill
c. Existing partners are contributing goodwill
d. There is not enough information to answer this question
16. Assuming the same data in No. 15, what amount of goodwill would be disclosed on the
partnership balance sheet immediately after Jacob is admitted?
17. Susan and David are partners in a local business. They currently share profits and
losses 45/55 and have capital account balances of P250,000 and P300,000, respectively.
They are considering admitting Jane to the partnership. She will receive a 25 percent
equity interest in the partnership for a P225,000 investment. Assuming that goodwill
(revaluation) is to be recognized, which partner(s) are contributing the goodwill?
a. New partner is contributing goodwill
b. Existing partners are contributing goodwill
c. Both new and existing partners are contributing goodwill
d. There is not enough information to answer this question
18. Assuming the same information in No. 17, what amount of goodwill would be disclosed
on the partnership balance sheet immediately after Jane is admitted?
19 At year-end, the Cisco partnership has the following capital balances:
. Montana, P 130,000
Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rice, Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110,000
..
Craig, 80,000
Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Taylor, 70,000
Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Profits and losses are split on a 3:3:2:2 basis, respectively. Craig decides to leave the
partnership and is paid P90,000 from the business based on the original contractual
agreement. If the goodwill (revaluation) method is to be applied, what is the balance of
Montana’s capital account after Craig withdraws?

20. When Elsa Martin withdrew from Lewis, Martin, Noll & Ordway Partnership on January

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31, 20x4, she was paid P80,000, although her capital account balance was only P60,000.
The four partners shared net income and losses equally. The journal entry of the
partnership to record Martin's withdrawal on January 31, 20x4, preferably should include
a debit of:
a. P6,667 to Lewis, Capital c. P80,000 to Goodwill
b. P20,000 to Goodwill d. P80,000 to Martin, Drawing
21. Harry, Susan, and Walter are partners who share profits and losses 35, 40, and 25
percent, respectively. The partners have capital account balances of P80,000, P110,000,
and P55,000, respectively. Harry is withdrawing from the partnership. At the date of
withdrawal, the partners are revaluing all of the partnership’s assets, an increase of
P200,000. If Susan and Walter acquire Harry’s equity, what will be the amount of
Susan’s capital on the partnership’s balance sheet immediately after Harry’s withdrawal,
rounded to the nearest peso?
22. Assuming the same information in No. 21, what will be the amount of total capital on the
partnership’s balance sheet immediately after Harry’s withdrawal?
23. Frank, George, and Scott are partners with capital accounts of P160,000, P120,000, and
P210,000, respectively. Scott has informed Frank and George that he must withdraw
from the partnership. The partners have agreed that the partnership will purchase
Scott’s ownership interest for P250,000. The profit and loss residual ratios before Scott’s
retirement are 45 percent, 30 percent, and 25 percent, respectively. How much will
Frank’s capital account be reduced if the bonus method is applied for the withdrawal?
24. Assuming the same information in No. 23, what will be the balance in Frank’s capital
account if the bonus method is applied for the withdrawal?
25. Bob, Claire, and Jack are partners who share profits and losses 30 percent, 25 percent,
and 45 percent, respectively. Bob informed Claire and Jack that he is withdrawing from
the partnership. The partners’ capital accounts at the date of Bob’s withdrawal are
P150,000, P135,000, and P225,000, respectively. The partnership agreement states that
the goodwill, if any, of the withdrawing partner will be recognized for all partners
immediately prior to the withdrawal of any partner. In this instance, the partners
determine that the goodwill associated with Bob is P22,500. Assuming that Bob’s equity
is purchased by a new partner (Deborah) approved by Claire and Jack, what is the
amount of Deborah’s initial capital account?
26. Using the same information in No. 25, except that Bob’s equity is purchased by Claire
(60 percent) and Jack (40 percent), what is the amount of Claire’s capital account at the
date of Bob’s withdrawal?
Use the following information for questions 27 to 29:
Donald, Anne and Todd have the following capital balances; P40,000, P50,000 and P30,000
respectively. The partners share profits and losses 20%, 40% and 40% respectively.
27. Anne retires and is paid P80,000 based on the terms of the original partnership
agreement. If the goodwill (revaluation of asset) method is used, what is the capital of
the remaining partners?
28. Anne retires and is paid P80,000 based on the terms of the original partnership
agreement. If the bonus method is used, what is the capital of the remaining partners?
29. What is the total partnership capital after Anne retires receiving P80,000 and using the
bonus method?
30. XX and YY are partners who have capital of P600,000 and P480,000 sharing profits in
the ratio of 3:2. ZZ is admitted as a partner upon investing P500,000 for 25% interests in
the firm, profits are to be allocated equally. Given the choice between goodwill and
bonus method, ZZ will prefer bonus or goodwill with a gain amounting to or be
indifferent.
31. XX and YY are partners who have capital of P600,000 and P480,000 sharing profits in
the ratio of 3:2. ZZ is admitted as a partner upon investing P500,000 for 25% interests in
the firm, while the other partners continue to participate profits and losses in their

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original ratio. Given the choice between goodwill and bonus method, ZZ will prefer
bonus or goodwill with a gain amounting to or be indifferent. :
32. Neal, Palmer, and Ruppe are partners in a real estate company. Their respective capital
balances and profit-sharing ratios are as follows:
Partners Capital Balance Profit-sharing ratio
Neal . . . . . . . . . . . . . . . . . . . . . . . . . P 250,000 4
.
Palmer . . . . . . . . . . . . . . . . . . . . . . . 150,000 3
.
Ruppe . . . . . . . . . . . . . . . . . . . . . . . 100,000 3
.
Neal wishes to withdraw from the partnership on January 1, 2009, Palmer and Ruppe
have agreed to pay Neal P300,000 from the partnership assets for his 50% capital
interest. This settlement price was based on such factors as capital investments, sales
performance, and earning capacity. Palmer and Ruppe must decide whether to use the
bonus method or the goodwill method (recognize total goodwill implied by the payment)
to record the withdrawal, and they wish to compare the results of using the two
methods. The new profit and loss ratio is in the same relative ratio as that existing before
Neal’s withdrawal. Given the choice between goodwill and bonus method or indifferent,
Palmer will choose:
33. Using the same information in No. 32, except that the profit and loss ratio is changed to
3:2. Palmer is particularly interested in these results, because he feels that his present
contribution of time and capital is better reflected by this new profit and loss ratio. Given
the choice between goodwill and bonus method or indifferent, Palmer will choose:
34. JJ & KK partnership’s balance sheet at December 31, 20x4, reported the following:
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 100,000
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,000
JJ, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000
KK, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000
On January 2, 20x4, JJ and KK dissolved their partnership and transferred all assets and
liabilities to a newly-formed corporation. At the date of incorporation, the fair value of the
new assets was P12,000 more than the carrying amount on the partnership’s book, of
which P7,000 was assigned to intangible assets and P5,000 was assigned to goodwill. JJ
and KK were each issued P5,000 shares of the corporation’s P1 par value common stock.
Immediately following incorporation, additional paid-in capital in excess of par should be
credited for:
35.The balance sheet of Sade & Tipp LLP on April 30, 2006, was as follows:

Cash P 8,700Notes payable P10,000

Trade accounts receivable 13,250Trade accounts payable 9,800
Inventories 21,760Sade, Capital 25,110
Equipment 32,400Tipp, Capital 20,000
Less: Accumulated
depreciation (11,200)
______
Total P 64,910Total P64,910

The partnership was converted to S & T Corporation, with new accounting records. Sade
and Tipp received a total of 10,000 shares of P1 par common stock in exchange for the
net assets of the partnership. The accounting records of the partnership had been
maintained in accordance with generally accepted accounting principles, except that an
allowance for doubtful accounts of P800 had not been provided. The current fair values
of the inventories and equipment were P28,000 and P35,000, respectively. Sade and Tipp
shared net income and losses in a 3:2 ratio, respectively.

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Immediately following incorporation, additional paid-in capital in excess of par should be

credited for:

Solutions
Multiple Choice Theories
1. a
2. d
3. a
4. b
5. c
6. d
7. c
8. a
9. d

Problems
1. P19,000
2.
PP invests P17,000; no goodwill/revaluation recorded:
Investment in partnership P 17,000
New partner's proportionate book value
[(P60,000 + P17,000) x 1/5] (15,400)
Difference (investment > book value) P 1,600

Method: Bonus to prior/old partners

PP's capital credit = P77,000 x 1/5
= P15,400

3. Messalina, P216,000; Romulus, P144,000 and Claudius, P90,000

Total capital is P450,000 (P210,000 + P140,000 + P100,000) after the new investment.
As Claudius's portion is to be 20 percent, the new capital balance would be P90,000
(P450,000 × 20%). Since P100,000 was paid, a bonus of P10,000 is being given to the
two original partners based on their profit and loss ratio: Messalina – P6,000 (60%) and
Romulus – P4,000 (40%). The increase raises Messalina's capital balance from P210,000
to P216,000 and Romulus's capital balance from P140,000 to P144,000.

4. P107,500 = [(P70,000 + P120,000 + P90,000 + P150,000)/.80](.20)

5. P337,500 = P250,000 + (P125,000 x .70)
6. P121,250 = [P120,000 - (P170,000 + P260,000 + P120,000)(.25)](.70)

7. Abele, P300,000; Boule, P480,000; Dann, P420,000

8. Brown, P156,000; Green, P99,000; Red, P45,000

9. Shrek, P195,000; Fiona, P123,750; Muffin, P56,250

10. Total partnership net assets can logically be revalued to P1,080,000 on the basis of the
price paid by Mary Ann.

11. P180,000

12. Net assets of the partnership will increase by P190,000, including Professor’s interest.

13. P120,000

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14. b
15. c - (P150,000 + P200,000 + P120,000)(.20) = P94,000

16. P130,000
(P150,000 + P200,000 + P120,000)(.20) = P94,000, goodwill to existing partners
P120,000 + P0 = .2(P150,000 + $200,000 + P120,000 + goodwill)
P120,000 = P94,000 + .2 goodwill
P26,000 = .2 goodwill
Goodwill = P130,000

17. b
(P250,000 + P300,000 + P225,000)(.25) = P193,750

18. P125,000
(P250,000 + P300,000 + P225,000)(.25) = P193,750, goodwill to existing partners
P225,000 + P0 = .25 (P250,000 + P300,000 + P225,000 + goodwill)
P225,000 = P193,750 + .25 goodwill
P31,250 = .25 goodwill
Goodwill = P125,000

19. P145,000
Craig receives an additional P10,000. Since Craig is assigned 20 percent of all profits
and losses, this allocation indicates total goodwill of P50,000.

20% of Goodwill = P10,000

.20 G = P10,000
G = P10,000/.20
G = P50,000

Montana is assigned 30% of all profits and losses and would, therefore, record P15,000 of
this goodwill, an entry that raises this partner's capital balance from P130,000 to
P145,000.

20. a – [(P80,000  P60,000)  3 + P6,667]

21. Susan’s capital account balance cannot be determined from the information given
22. P445,000 = P80,000 + P110,000 + P55,000 + P200,000
23. P24,000 = (P250,000 - P210,000)(45/75)
24. P136,000 = P160,000 - (P250,000 - 210,000)(45/75)
25. P172,500 = P150,000 + (P75,000 x .3)
26. P257,250 = P135,000 + (P75,000 x .25) + [P150,000 + (P75,000 x .30)](.60)

27. Donald, P55,000; Todd, P60,000

Anne receives an additional P30,000 above her capital balance. Since she is assigned
40 percent of all profits and losses, this extra allocation indicates total goodwill of
P75,000, which must be split among all partners. 40% of Goodwill = P30,000

Amount paid P 80,000

Less: Book value of Anne (40%) 50,000
Partial goodwill/revaluation adjustment P 30,000
Capitalized at 40%
Goodwill/revaluation P 75,000

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Goodwill/assets 75,000
Donald (20%) 15,000
Anne (40%) 30,000
Todd (40%) 30,000

Anne (P50,000 + P30,000) 80,000

Cash 80,000

Donald: P40,000 + P15,000 = P55,000

Todd: PP30,000 + P30,000 = P60,000

28. Donald, P30,000; Todd, P10,000

The P30,000 bonus is deducted from the remaining partners according to their relative
profit and loss ratio. Donald = 20% and Todd = 40% which is a 1/3, 2/3 split.

Anne 50,000
Donald (P30,000 x 2/6) 10,000
Todd (P30,000 x 4/6) 20,000
Cash 80,000

Therefore: Donald: P40,000 – P10,000 = P30,000; Todd: P30,000 – P20,000 = P10,000

29. P40,000 - refer to No. 28 (P30,000 + P10,000 = P40,000)

30. Prefer bonus method due to ZZ’s gain of P35,000
Goodwill method: Using the capital of new partner as a basis for computing total agreed
capital.

Total agreed capital (P500,000 ÷ 25%) P2,000,000

Less: Total contributed capital (P600,000 + P480,000 + P500,000) 1,580,000
Goodwill to old partners P 420,000

Therefore, the capital balances after admission of ZZ:

XX: [P600,000 + (P420,000 x 3/5)] P852,000
YY: [P480,000 + (P420,000 x 2/5)] 648,000
ZZ: 500,000
Total agreed capital P2,000,000

Bonus Method:
Total agreed capital (P600,000 + P480,000)( P500,000) P 1,580,000
Multiplied by; ZZ’s capital interest 25%
Agreed capital to be credited to ZZ P 395,000
Contributed / invested capital of ZZ 500,000
Bonus to XX and YY (old partners) P 105,000

The bonus would be added to XX and YY:

XX: [P600,000 + (P105,000 x 3/5)] P 663,000
YY: [P480,000 + (P105,000 x 2/5)] 522,000
ZZ 395,000
Total agreed capital P 1,580,000

For the purposes of comparing bonus and goodwill, there are two alternatives presented:
Alternative 1: if goodwill is found to exist:

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XX YY ZZ
Goodwill Method is used P 852,000 P 648,000 P 500,000
Bonus Method is used P 663,000 P 522,000 P 395,000
Add: Goodwill (allocated equally) 140,000 140,000 140,000
P803,000 P 662,000 P 535,000
(Gain) Loss – Bonus method P 49,000 P (140,000) P 35,000

Alternative 2: If goodwill is not realized and written-off as a loss:

XX YY ZZ
Goodwill Method is used P 852,000 P 648,000 P 500,000
Less: Write-off of goodwill 140,000 140,000 140,000
(equally)
P 712,000 P 508,000 P 360,000
Bonus Method is used 663,000 522,000 395,000
(Gain) Loss – Bonus method P 49,000 P (140,000) P 35,000

Note: The bonus method adheres to the historical cost concept and it is often used in
accounting practice. It is objective that is establishes total capital of the new partnership at
an amount based on actual consideration received from the new partner. The bonus method
indirectly acknowledges the existence of goodwill by giving a bonus to either old or new
partners.

The goodwill method results in the recognition of an asset implied by a transaction rather
than recognizing an asset actually purchased. Historically, goodwill has been recognized
only when purchased so that a more objective measure of its value is established. Therefore,
opponents of the goodwill method contend that goodwill is not determined objectively and
other factors may have influenced the amount of investment required from the new
partners.

Although either method can be used in achieving the required interest for the new partner,
the two methods offer the same ultimate results only:
1. When the incoming partner’s percentage share of profit and loss and percentage
interest in assets upon admission are equal, and
2. When the former partners continue to share profits and losses between themselves in
the original ratio.

If these conditions are not fully met, however, results will be different.

31. Be indifferent for the goodwill (revaluation) or bonus methods are the same.
Goodwill method: Using the capital of new partner as a basis for computing total agreed
capital.
Total agreed capital (P500,000 ÷ 25%) P2,000,000
Less: Total contributed capital (P600,000 + P480,000 + P500,000) 1,580,000
Goodwill to old partners P 420,000

Therefore, the capital balances after admission of ZZ:

XX: [P600,000 + (P420,000 x 3/5)] P852,000
YY: [P480,000 + (P420,000 x 2/5)] 648,000
ZZ: 500,000
Total agreed capital P2,000,000

Bonus Method:
Total agreed capital (P600,000 + P480,000)( P500,000) P 1,580,000
Multiplied by; ZZ’s capital interest 25%

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Agreed capital to be credited to ZZ P 395,000

Contributed / invested capital of ZZ 500,000
Bonus to XX and YY (old partners) P 105,000
The bonus would be added to XX and YY:
XX: [P600,000 + (P105,000 x 3/5)] P 663,000
YY: [P480,000 + (P105,000 x 2/5)] 522,000
ZZ 395,000
Total agreed capital P 1,580,000

For the purposes of comparing bonus and goodwill, there are two alternatives presented:
Alternative 1: if goodwill is found to exist:
XX YY ZZ
Goodwill Method is used P 852,000 P 648,000 P 500,000
Bonus Method is used P 663,000 P 522,000 P 395,000
Add: Goodwill* (45%: 30%:25%) 189,000 126,000 105,000
P852,000 P 648,000 P 500,000
(Gain) Loss – Bonus method P 0 P 0 P 0

*XX: 75% x 3/5 = 45%; YY: 75% x 2/5 = 30%

Alternative 2: If goodwill is not realized and written-off as a loss:

XX YY ZZ
Goodwill Method is used P 852,000 P 648,000 P 500,000
Less: Write-off of goodwill* 189,000 126,000 105,000
P 633,000 P 522,000 P 395,000
Bonus Method is used 663,000 522,000 395,000
(Gain) Loss – Bonus method P 0 P 0 P 0

32. Be indifferent for the goodwill (revaluation) or bonus methods are the same.
*Goodwill (revaluation) method:
Amount paid P300,000
Less: Book value of interest – Neal (40%)) 250,000
Partial goodwill/revaluation adjustment P 50,000
Capitalized at 40%
Goodwill/revaluation P125,000

Neal Palmer Ruppe

Capital balances before withdrawal 250,000 150,000 100,000
Allocate goodwill* 50,000 37,500 37,500
300,000 187,500 137,500
Withdrawal of Neal (300,000) _______ _______
187,500 137,500
Write-off Impaired Goodwill (125,000  0.50) _______ (62,500) (62,500)
0 125,000 75,000
Capital balances using the bonus method** 125,000 75,000

33. Prefer bonus method due to Palmer’s gain of P12,500

Neal Palmer Ruppe
Capital balances before withdrawal 250,000 150,000 100,000
Allocation of goodwill* 50,000 37,500 37,500
300,000 187,500 137,500
Withdrawal of Neal (300,000) _______ _______
-0- 187,500 137,500
Write-off Impaired Goodwill

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125,000  0.60 (75,000)

125,000  0.40 ________ _______ (50,000)
-0- 112,500 87,500
Capital balances using the bonus method** 125,000 75,000
(Gain) Loss – Bonus method 0 12,500 12,500

**The excess paid to Neal of P50,000 would have been divided equally between Palmer
and Ruppe as follows:
Palmer Ruppe

Capital balance before withdraw 150,000 100,000

Allocation of excess paid to Neal (25,000) (25,000)
Capital balance using bonus method 125,000 75,000

34. P82,000
Carrying value of net assets (P100,000 – P20,000)………………………P 80,000
Add: Adjustments to reflect fair value…………………………………… 12,000
Fair value of net assets………………………………………………………. P 92,000
Less: Common stock, P1 par (5,000 shares x 2 x P1……………………... 10,000
Additional paid-in capital…………………………………………………… P82,000

35. P54,350
Carrying value of net assets (P25,110 + P20,000))……………………… P 45,110
Add: Adjustments to reflect fair value
(P28,000 – P21,760) – P800 + [(P35,000 – (P32,400 – P11,200)]… 19,240
Fair value of net assets………………………………………………………. P 64,350
Less: Common stock, P1 par (10,000 shares x P1)……………………... 10,000
Additional paid-in capital…………………………………………………… P 54,350
Note: Refer to Problem XII for journal entries for further analysis

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Self Test Chapter 3
Multiple Choice Theories
1. If existing partners acquire the equity of a withdrawing partner, in what manner do they divide the
equity?
a. In any manner they choose
b. Equally
c. Proportionate to their residual profit and loss ratios
d. Existing partners are not permitted to acquire the equity of a withdrawing partner
2. Which of the following must exist to create the potential for a retiring partner to have a bonus
recognized at the date of withdrawal?
a. The retiring partner must be paid more than the book value of his equity
b. The existing partners must decide to not admit a new partner to the partnership
c. The retiring partner’s equity must be acquired by the partnership
d. All of the above are necessary for a bonus to be recognized
3. In what manner do the remaining partners share in the bonus paid to a withdrawing partner?
a. In proportion to their residual profit and loss ratios
b. Equally
c. In proportion to their capital account balances
d. The partner with the greatest capital account is assigned the bonus
4. Which of the following statements is true with regard to a withdrawing partner?
a. A bonus must be paid to the retiring partner
b. A bonus may be paid to the retiring partner
c. A bonus must be paid to the retiring partner or to the remaining partners
d. Recognizing a bonus is not appropriate when a partner retires
5. What change occurs to continuing partners’ capital accounts when a withdrawing partner is
assigned goodwill at the date of withdrawal?
a. Continuing partners’ capital accounts decease by their profit and loss ratio proportion of the
goodwill assigned to the withdrawing partner
b. Continuing partners’ capital accounts increase
c. Continuing partners’ capital accounts do not change
d. Goodwill cannot be recognized with regard to withdrawing partners
6. What amount of goodwill can be recognized at the date a partner withdraws from a partnership?
a. The withdrawing partner’s portion of goodwill
b. The continuing partners’ portion of goodwill
c. Goodwill may not be recognized at the date a partner withdraws
d. Either the withdrawing partner’s portion of goodwill or the goodwill attributable to the entire
partnership
7. What portion of the partnership’s assets must be revalued when a partner withdraws from the
partnership?
a. The withdrawing partner’s share must be revalued
b. All of the partnership’s assets must be revalued
c. Any or all of the partnership’s assets may be revalued but none have to be revalued
d. Partnership assets may not be revalued when a partner withdraws
8. If existing partners acquire the equity of a withdrawing partner, in what manner do they divide the
equity?
a. In any manner they choose
b. Equally
c. Proportionate to their residual profit and loss ratios
d. Existing partners are not permitted to acquire the equity of a withdrawing partner
9. Which of the following must exist to create the potential for a retiring partner to have a bonus
recognized at the date of withdrawal?
a. The retiring partner must be paid more than the book value of his equity
b. The existing partners must decide to not admit a new partner to the partnership
c. The retiring partner’s equity must be acquired by the partnership
d. All of the above are necessary for a bonus to be recognized
Problems
1. Kern and Pate are partners with capital balances of P60,000 and P20,000, respectively.
Profits and losses are divided in the ratio of 60:40. Kern and Pate decide to admit Grant,
who invested land valued at P15,000 for a 20% capital interest in the partnership.
Grant’s capital account should be credited for:
2. At December 31, RR and SH are partners with capital balances of P40,000 and P20,000,
and they share profits and losses in the ratio of 2:1, respectively. On this date, PP invests
P17,000 in cash for a one-fifth interest in the capital and profit of the new partnership.
Assuming that the bonus method is used, how much should be credited to PP’s capital
account on December 31?
3. The capital balance for Messalina is P210,000 and for Romulus is P140,000. These two
partners share profits and losses 60 percent (Messalina) and 40 percent (Romulus).
Claudius invests P100,000 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?
4. Jesse, Joseph, and Leslie are partners with capital accounts of P70,000, P120,000, and
P90,000, respectively. The partnership share profits and losses 45%, 30%, and 25%,
respectively. They are considering allowing Hans to join the partnership by investing
directly into the partnership. The partners intend to revalue the assets before Hans’
admission. Neither bonus nor goodwill are required. If the asset’s market value exceeds
book value P150,000, how much will Hans invest to acquire a 20% equity interest in the
partnership?
5. Sandra and Joshua are partners. They have capital account balances of P250,000 and
P200,000, respectively, and they share profits and losses 70/30. The partners are
considering admitting Judy as a new partner with a 25 percent equity interest for an
investment in the partnership of P180,000. Before admission, Sandra and Joshua will
revalue the partnership’s assets. If the net increase in the partnership’s assets is
P125,000, what will be the balance in Sandra’s capital account immediately before Judy’s
admission?
6. Kris and Mark are partners who share profits and losses 70/30. They have capital
account balances of P170,000 and P260,000, respectively at the date they admit Frank
into the partnership. Frank invests P120,000 in the partnership for a 25 percent equity
interest and the bonus method is applied. What is the peso amount of the reduction to
Kris’ capital account at the date of admission?
7. The following balance sheet information is for the partnership of Abel, Boule, and
Cayman:
Cash P 210,000 Liabilities P 510,000
Other assets 1,500,000 Abele, Capital (40%) 300,000
Boule, Capital (40%) 480,000
Cayman, Capital (20%) 420,000
P1,710,000 P1,710,000
Figures shown parenthetically reflect agreed profit and loss sharing percentages. If
assets on the initial balance sheet are fairly valued, Abele and Boule consent and Dann
pays Cayman P225,000 for his interest; the revised capital balances of the partners
would be:
8. 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
P100,000. 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 % Interests in
Accounts Profits and Losses
Brown P168,000 50%
Greene 104,000 35
Red 48,000 15
Total P320,000
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?
9. 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 P125,000. 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 % Interests in
Accounts Profits and Losses
Shrek P210,000 60%
Fiona 130,000 25
Muffin 60,000 15
Total P400,000
All other assets and liabilities are fairly valued by Donkey. Immediately after Donkey’s
acquisition, what should be the capital balances of Shrek, Fiona, and Muffin,
respectively?
10. The partnership of Gilligan, Skipper, and Ginger had total capital of P570,000 on
December 31, 20x4 as follows:
Gilligan, Capital (30%) P180,000
Skipper, Capital (45%) 255,000
Ginger, Capital (25%) 135,000
Total P570,000
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 P270,000 directly to the old partners:
a. total partnership net assets can logically be revalued to P1,080,000 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 P760,000.
d. total capital of the new partnership will be P840,000 assuming no revaluation.
11. Assume the same data in No. 10, except that Mary Ann became a partner by investing
P150,000 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
12. Assume the same data in No. 10, except that Professor became a partner by investing
P190,000 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 P150,000.
b. Gilligan’s capital will be increased to P147,000.
c. total partnership capital after Professor’s admission to the partnership will be
P600,000.
d. net assets of the partnership will increase by P190,000, including Professor’s interest.
13. The balance sheet for the partnership of Nina, Pinta, and Santa Maria at January 1, 20x4
follows. The partners share profits and losses in the ratio of 3:2:5, respectively.
Assets at cost P480,000
Liabilities P135,000
Nina, capital 75,000
Pinta, capital 120,000
Santa Maria, capital 150,000
P480,000

Nina is retiring from the partnership. By mutual agreement, the assets are to be adjusted
to their fair value of P540,000 at January 1, 20x4. Pinta and Santa Maria agree that the
partnership will pay Nina P135,000 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?
14. Alf and Ben, partners in Alf & Ben Partnership who share net income and losses equally,
had capital account balances of P40,000 and P60,000, respectively, on September 25,
20x4, on which date the following journal entry was prepared for the partnership:
Cash 62,000
Goodwill [(P62,000 x 3)  (P100,000 + P62,000)] 24,000
Alf, Capital (P24,000 x 0.50) 12,000
Ben, Capital (P24,000 x 0.50) 12,000
Cam, Capital 62,000
To record investment by Cam for a one-third interest in capital,
with goodwill of P24,000 divided equally between Alf and Ben.
The foregoing journal entry:
a. Is acceptable
b. Should be replaced by an entry allocating an P8,000 bonus equally to Alf and to Ben
c. Should be replaced by an entry allocating a P24,000 bonus equally to Alf and to Ben
d. Should not reflect either a bonus or goodwill
15. Michelle and Steve are partners in a local business. They currently share profits and
losses 60/40 and have capital account balances of P150,000 and P200,000, respectively.
They are considering admitting Jacob to the partnership. He will receive a 20 percent
equity interest in the partnership for a P120,000 investment. Assuming that goodwill is
to be recognized, which partner(s) are contributing the goodwill?
a. Both new and existing partners are contributing goodwill
b. New partner is contributing goodwill
c. Existing partners are contributing goodwill
d. There is not enough information to answer this question
16. Assuming the same data in No. 15, what amount of goodwill would be disclosed on the
partnership balance sheet immediately after Jacob is admitted?
17. Susan and David are partners in a local business. They currently share profits and
losses 45/55 and have capital account balances of P250,000 and P300,000, respectively.
They are considering admitting Jane to the partnership. She will receive a 25 percent
equity interest in the partnership for a P225,000 investment. Assuming that goodwill
(revaluation) is to be recognized, which partner(s) are contributing the goodwill?
a. New partner is contributing goodwill
b. Existing partners are contributing goodwill
c. Both new and existing partners are contributing goodwill
d. There is not enough information to answer this question
18. Assuming the same information in No. 17, what amount of goodwill would be disclosed
on the partnership balance sheet immediately after Jane is admitted?
19 At year-end, the Cisco partnership has the following capital balances:
. Montana, P 130,000
Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rice, Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110,000
..
Craig, 80,000
Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Taylor, 70,000
Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Profits and losses are split on a 3:3:2:2 basis, respectively. Craig decides to leave the
partnership and is paid P90,000 from the business based on the original contractual
agreement. If the goodwill (revaluation) method is to be applied, what is the balance of
Montana’s capital account after Craig withdraws?

20. When Elsa Martin withdrew from Lewis, Martin, Noll & Ordway Partnership on January
 31, 20x4, she was paid P80,000, although her capital account balance was only P60,000.
The four partners shared net income and losses equally. The journal entry of the
partnership to record Martin's withdrawal on January 31, 20x4, preferably should include
a debit of:
a. P6,667 to Lewis, Capital c. P80,000 to Goodwill
b. P20,000 to Goodwill d. P80,000 to Martin, Drawing
21. Harry, Susan, and Walter are partners who share profits and losses 35, 40, and 25
percent, respectively. The partners have capital account balances of P80,000, P110,000,
and P55,000, respectively. Harry is withdrawing from the partnership. At the date of
withdrawal, the partners are revaluing all of the partnership’s assets, an increase of
P200,000. If Susan and Walter acquire Harry’s equity, what will be the amount of
Susan’s capital on the partnership’s balance sheet immediately after Harry’s withdrawal,
rounded to the nearest peso?
22. Assuming the same information in No. 21, what will be the amount of total capital on the
partnership’s balance sheet immediately after Harry’s withdrawal?
23. Frank, George, and Scott are partners with capital accounts of P160,000, P120,000, and
P210,000, respectively. Scott has informed Frank and George that he must withdraw
from the partnership. The partners have agreed that the partnership will purchase
Scott’s ownership interest for P250,000. The profit and loss residual ratios before Scott’s
retirement are 45 percent, 30 percent, and 25 percent, respectively. How much will
Frank’s capital account be reduced if the bonus method is applied for the withdrawal?
24. Assuming the same information in No. 23, what will be the balance in Frank’s capital
account if the bonus method is applied for the withdrawal?
25. Bob, Claire, and Jack are partners who share profits and losses 30 percent, 25 percent,
and 45 percent, respectively. Bob informed Claire and Jack that he is withdrawing from
the partnership. The partners’ capital accounts at the date of Bob’s withdrawal are
P150,000, P135,000, and P225,000, respectively. The partnership agreement states that
the goodwill, if any, of the withdrawing partner will be recognized for all partners
immediately prior to the withdrawal of any partner. In this instance, the partners
determine that the goodwill associated with Bob is P22,500. Assuming that Bob’s equity
is purchased by a new partner (Deborah) approved by Claire and Jack, what is the
amount of Deborah’s initial capital account?
26. Using the same information in No. 25, except that Bob’s equity is purchased by Claire
(60 percent) and Jack (40 percent), what is the amount of Claire’s capital account at the
date of Bob’s withdrawal?
Use the following information for questions 27 to 29:
Donald, Anne and Todd have the following capital balances; P40,000, P50,000 and P30,000
respectively. The partners share profits and losses 20%, 40% and 40% respectively.
27. Anne retires and is paid P80,000 based on the terms of the original partnership
agreement. If the goodwill (revaluation of asset) method is used, what is the capital of
the remaining partners?
28. Anne retires and is paid P80,000 based on the terms of the original partnership
agreement. If the bonus method is used, what is the capital of the remaining partners?
29. What is the total partnership capital after Anne retires receiving P80,000 and using the
bonus method?
30. XX and YY are partners who have capital of P600,000 and P480,000 sharing profits in
the ratio of 3:2. ZZ is admitted as a partner upon investing P500,000 for 25% interests in
the firm, profits are to be allocated equally. Given the choice between goodwill and
bonus method, ZZ will prefer bonus or goodwill with a gain amounting to or be
indifferent.
31. XX and YY are partners who have capital of P600,000 and P480,000 sharing profits in
the ratio of 3:2. ZZ is admitted as a partner upon investing P500,000 for 25% interests in
the firm, while the other partners continue to participate profits and losses in their
 original ratio. Given the choice between goodwill and bonus method, ZZ will prefer
bonus or goodwill with a gain amounting to or be indifferent. :
32. Neal, Palmer, and Ruppe are partners in a real estate company. Their respective capital
balances and profit-sharing ratios are as follows:
Partners Capital Balance Profit-sharing ratio
Neal . . . . . . . . . . . . . . . . . . . . . . . . . P 250,000 4
.
Palmer . . . . . . . . . . . . . . . . . . . . . . . 150,000 3
.
Ruppe . . . . . . . . . . . . . . . . . . . . . . . 100,000 3
.
Neal wishes to withdraw from the partnership on January 1, 2009, Palmer and Ruppe
have agreed to pay Neal P300,000 from the partnership assets for his 50% capital
interest. This settlement price was based on such factors as capital investments, sales
performance, and earning capacity. Palmer and Ruppe must decide whether to use the
bonus method or the goodwill method (recognize total goodwill implied by the payment)
to record the withdrawal, and they wish to compare the results of using the two
methods. The new profit and loss ratio is in the same relative ratio as that existing before
Neal’s withdrawal. Given the choice between goodwill and bonus method or indifferent,
Palmer will choose:
33. Using the same information in No. 32, except that the profit and loss ratio is changed to
3:2. Palmer is particularly interested in these results, because he feels that his present
contribution of time and capital is better reflected by this new profit and loss ratio. Given
the choice between goodwill and bonus method or indifferent, Palmer will choose:
34. JJ & KK partnership’s balance sheet at December 31, 20x4, reported the following:
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 100,000
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,000
JJ, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000
KK, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000
On January 2, 20x4, JJ and KK dissolved their partnership and transferred all assets and
liabilities to a newly-formed corporation. At the date of incorporation, the fair value of the
new assets was P12,000 more than the carrying amount on the partnership’s book, of
which P7,000 was assigned to intangible assets and P5,000 was assigned to goodwill. JJ
and KK were each issued P5,000 shares of the corporation’s P1 par value common stock.
Immediately following incorporation, additional paid-in capital in excess of par should be
credited for:
35.The balance sheet of Sade & Tipp LLP on April 30, 2006, was as follows:

Cash P 8,700Notes payable P10,000

Trade accounts receivable 13,250Trade accounts payable 9,800
Inventories 21,760Sade, Capital 25,110
Equipment 32,400Tipp, Capital 20,000
Less: Accumulated
depreciation (11,200)
______
Total P 64,910 Total P64,910

The partnership was converted to S & T Corporation, with new accounting records. Sade
and Tipp received a total of 10,000 shares of P1 par common stock in exchange for the
net assets of the partnership. The accounting records of the partnership had been
maintained in accordance with generally accepted accounting principles, except that an
allowance for doubtful accounts of P800 had not been provided. The current fair values
of the inventories and equipment were P28,000 and P35,000, respectively. Sade and Tipp
shared net income and losses in a 3:2 ratio, respectively.
 Immediately following incorporation, additional paid-in capital in excess of par should be
credited for:

Solutions
Multiple Choice Theories
1. a
2. d
3. a
4. b
5. c
6. d
7. c
8. a
9. d

Problems
1. P19,000
2.
PP invests P17,000; no goodwill/revaluation recorded:
Investment in partnership P 17,000
New partner's proportionate book value
[(P60,000 + P17,000) x 1/5] (15,400)
Difference (investment > book value) P 1,600

Method: Bonus to prior/old partners

PP's capital credit = P77,000 x 1/5
= P15,400

3. Messalina, P216,000; Romulus, P144,000 and Claudius, P90,000

Total capital is P450,000 (P210,000 + P140,000 + P100,000) after the new investment.
As Claudius's portion is to be 20 percent, the new capital balance would be P90,000
(P450,000 × 20%). Since P100,000 was paid, a bonus of P10,000 is being given to the
two original partners based on their profit and loss ratio: Messalina – P6,000 (60%) and
Romulus – P4,000 (40%). The increase raises Messalina's capital balance from P210,000
to P216,000 and Romulus's capital balance from P140,000 to P144,000.

4. P107,500 = [(P70,000 + P120,000 + P90,000 + P150,000)/.80](.20)

5. P337,500 = P250,000 + (P125,000 x .70)
6. P121,250 = [P120,000 - (P170,000 + P260,000 + P120,000)(.25)](.70)

7. Abele, P300,000; Boule, P480,000; Dann, P420,000

8. Brown, P156,000; Green, P99,000; Red, P45,000

9. Shrek, P195,000; Fiona, P123,750; Muffin, P56,250

10. Total partnership net assets can logically be revalued to P1,080,000 on the basis of the
price paid by Mary Ann.

11. P180,000

12. Net assets of the partnership will increase by P190,000, including Professor’s interest.

13. P120,000
14. b
15. c - (P150,000 + P200,000 + P120,000)(.20) = P94,000

16. P130,000
(P150,000 + P200,000 + P120,000)(.20) = P94,000, goodwill to existing partners
P120,000 + P0 = .2(P150,000 + $200,000 + P120,000 + goodwill)
P120,000 = P94,000 + .2 goodwill
P26,000 = .2 goodwill
Goodwill = P130,000

17. b
(P250,000 + P300,000 + P225,000)(.25) = P193,750

18. P125,000
(P250,000 + P300,000 + P225,000)(.25) = P193,750, goodwill to existing partners
P225,000 + P0 = .25 (P250,000 + P300,000 + P225,000 + goodwill)
P225,000 = P193,750 + .25 goodwill
P31,250 = .25 goodwill
Goodwill = P125,000

19.P145,000
Craig receives an additional P10,000. Since Craig is assigned 20 percent of all profits
and losses, this allocation indicates total goodwill of P50,000.

20% of Goodwill = P10,000

.20 G = P10,000
G = P10,000/.20
G = P50,000

Montana is assigned 30% of all profits and losses and would, therefore, record P15,000 of
this goodwill, an entry that raises this partner's capital balance from P130,000 to
P145,000.

20. a – [(P80,000  P60,000)  3 + P6,667]

21. Susan’s capital account balance cannot be determined from the information given
22. P445,000 = P80,000 + P110,000 + P55,000 + P200,000
23. P24,000 = (P250,000 - P210,000)(45/75)
24. P136,000 = P160,000 - (P250,000 - 210,000)(45/75)
25. P172,500 = P150,000 + (P75,000 x .3)
26. P257,250 = P135,000 + (P75,000 x .25) + [P150,000 + (P75,000 x .30)](.60)

27. Donald, P55,000; Todd, P60,000

Anne receives an additional P30,000 above her capital balance. Since she is assigned
40 percent of all profits and losses, this extra allocation indicates total goodwill of
P75,000, which must be split among all partners. 40% of Goodwill = P30,000

Amount paid P 80,000

Less: Book value of Anne (40%) 50,000
Partial goodwill/revaluation adjustment P 30,000
Capitalized at 40%
Goodwill/revaluation P 75,000
 Goodwill/assets 75,000
Donald (20%) 15,000
Anne (40%) 30,000
Todd (40%) 30,000

Anne (P50,000 + P30,000) 80,000

Cash 80,000

Donald: P40,000 + P15,000 = P55,000

Todd: PP30,000 + P30,000 = P60,000

28. Donald, P30,000; Todd, P10,000

The P30,000 bonus is deducted from the remaining partners according to their relative
profit and loss ratio. Donald = 20% and Todd = 40% which is a 1/3, 2/3 split.

Anne 50,000
Donald (P30,000 x 2/6) 10,000
Todd (P30,000 x 4/6) 20,000
Cash 80,000

Therefore: Donald: P40,000 – P10,000 = P30,000; Todd: P30,000 – P20,000 = P10,000

29. P40,000 - refer to No. 28 (P30,000 + P10,000 = P40,000)

30. Prefer bonus method due to ZZ’s gain of P35,000
Goodwill method: Using the capital of new partner as a basis for computing total agreed
capital.

Total agreed capital (P500,000 ÷ 25%) P2,000,000

Less: Total contributed capital (P600,000 + P480,000 + P500,000) 1,580,000
Goodwill to old partners P 420,000

Therefore, the capital balances after admission of ZZ:

XX: [P600,000 + (P420,000 x 3/5)] P852,000
YY: [P480,000 + (P420,000 x 2/5)] 648,000
ZZ: 500,000
Total agreed capital P2,000,000

Bonus Method:
Total agreed capital (P600,000 + P480,000)( P500,000) P 1,580,000
Multiplied by; ZZ’s capital interest 25%
Agreed capital to be credited to ZZ P 395,000
Contributed / invested capital of ZZ 500,000
Bonus to XX and YY (old partners) P 105,000

The bonus would be added to XX and YY:

XX: [P600,000 + (P105,000 x 3/5)] P 663,000
YY: [P480,000 + (P105,000 x 2/5)] 522,000
ZZ 395,000
Total agreed capital P 1,580,000

For the purposes of comparing bonus and goodwill, there are two alternatives presented:
Alternative 1: if goodwill is found to exist:
 XX YY ZZ
Goodwill Method is used P 852,000 P 648,000 P 500,000
Bonus Method is used P 663,000 P 522,000 P 395,000
Add: Goodwill (allocated equally) 140,000 140,000 140,000
P803,000 P 662,000 P 535,000
(Gain) Loss – Bonus method P 49,000 P (140,000) P 35,000

Alternative 2: If goodwill is not realized and written-off as a loss:

XX YY ZZ
Goodwill Method is used P 852,000 P 648,000 P 500,000
Less: Write-off of goodwill 140,000 140,000 140,000
(equally)
P 712,000 P 508,000 P 360,000
Bonus Method is used 663,000 522,000 395,000
(Gain) Loss – Bonus method P 49,000 P (140,000) P 35,000

Note: The bonus method adheres to the historical cost concept and it is often used in
accounting practice. It is objective that is establishes total capital of the new partnership at
an amount based on actual consideration received from the new partner. The bonus method
indirectly acknowledges the existence of goodwill by giving a bonus to either old or new
partners.

The goodwill method results in the recognition of an asset implied by a transaction rather
than recognizing an asset actually purchased. Historically, goodwill has been recognized
only when purchased so that a more objective measure of its value is established. Therefore,
opponents of the goodwill method contend that goodwill is not determined objectively and
other factors may have influenced the amount of investment required from the new
partners.

Although either method can be used in achieving the required interest for the new partner,
the two methods offer the same ultimate results only:
1. When the incoming partner’s percentage share of profit and loss and percentage
interest in assets upon admission are equal, and
2. When the former partners continue to share profits and losses between themselves in
the original ratio.

If these conditions are not fully met, however, results will be different.

31. Be indifferent for the goodwill (revaluation) or bonus methods are the same.
Goodwill method: Using the capital of new partner as a basis for computing total agreed
capital.
Total agreed capital (P500,000 ÷ 25%) P2,000,000
Less: Total contributed capital (P600,000 + P480,000 + P500,000) 1,580,000
Goodwill to old partners P 420,000

Therefore, the capital balances after admission of ZZ:

XX: [P600,000 + (P420,000 x 3/5)] P852,000
YY: [P480,000 + (P420,000 x 2/5)] 648,000
ZZ: 500,000
Total agreed capital P2,000,000

Bonus Method:
Total agreed capital (P600,000 + P480,000)( P500,000) P 1,580,000
Multiplied by; ZZ’s capital interest 25%
 Agreed capital to be credited to ZZ P 395,000
Contributed / invested capital of ZZ 500,000
Bonus to XX and YY (old partners) P 105,000
The bonus would be added to XX and YY:
XX: [P600,000 + (P105,000 x 3/5)] P 663,000
YY: [P480,000 + (P105,000 x 2/5)] 522,000
ZZ 395,000
Total agreed capital P 1,580,000

For the purposes of comparing bonus and goodwill, there are two alternatives presented:
Alternative 1: if goodwill is found to exist:
XX YY ZZ
Goodwill Method is used P 852,000 P 648,000 P 500,000
Bonus Method is used P 663,000 P 522,000 P 395,000
Add: Goodwill* (45%: 30%:25%) 189,000 126,000 105,000
P852,000 P 648,000 P 500,000
(Gain) Loss – Bonus method P 0 P 0 P 0

*XX: 75% x 3/5 = 45%; YY: 75% x 2/5 = 30%

Alternative 2: If goodwill is not realized and written-off as a loss:

XX YY ZZ
Goodwill Method is used P 852,000 P 648,000 P 500,000
Less: Write-off of goodwill* 189,000 126,000 105,000
P 633,000 P 522,000 P 395,000
Bonus Method is used 663,000 522,000 395,000
(Gain) Loss – Bonus method P 0 P 0 P 0

32. Be indifferent for the goodwill (revaluation) or bonus methods are the same.
*Goodwill (revaluation) method:
Amount paid P300,000
Less: Book value of interest – Neal (40%)) 250,000
Partial goodwill/revaluation adjustment P 50,000
Capitalized at 40%
Goodwill/revaluation P125,000

Neal Palmer Ruppe

Capital balances before withdrawal 250,000 150,000 100,000
Allocate goodwill* 50,000 37,500 37,500
300,000 187,500 137,500
Withdrawal of Neal (300,000) _______ _______
187,500 137,500
Write-off Impaired Goodwill (125,000  0.50) _______ (62,500) (62,500)
0 125,000 75,000
Capital balances using the bonus method** 125,000 75,000

33. Prefer bonus method due to Palmer’s gain of P12,500

Neal Palmer Ruppe
Capital balances before withdrawal 250,000 150,000 100,000
Allocation of goodwill* 50,000 37,500 37,500
300,000 187,500 137,500
Withdrawal of Neal (300,000) _______ _______
-0- 187,500 137,500
Write-off Impaired Goodwill
 125,000  0.60 (75,000)
125,000  0.40 ________ _______ (50,000)
-0- 112,500 87,500
Capital balances using the bonus method** 125,000 75,000
(Gain) Loss – Bonus method 0 12,500 12,500

**The excess paid to Neal of P50,000 would have been divided equally between Palmer
and Ruppe as follows:
Palmer Ruppe

Capital balance before withdraw 150,000 100,000

Allocation of excess paid to Neal (25,000) (25,000)
Capital balance using bonus method 125,000 75,000

34. P82,000
Carrying value of net assets (P100,000 – P20,000)………………………P 80,000
Add: Adjustments to reflect fair value…………………………………… 12,000
Fair value of net assets………………………………………………………. P 92,000
Less: Common stock, P1 par (5,000 shares x 2 x P1……………………... 10,000
Additional paid-in capital…………………………………………………… P82,000

35. P54,350
Carrying value of net assets (P25,110 + P20,000))……………………… P 45,110
Add: Adjustments to reflect fair value
(P28,000 – P21,760) – P800 + [(P35,000 – (P32,400 – P11,200)]… 19,240
Fair value of net assets………………………………………………………. P 64,350
Less: Common stock, P1 par (10,000 shares x P1)……………………... 10,000
Additional paid-in capital…………………………………………………… P 54,350
Note: Refer to Problem XII for journal entries for further analysis
 PARTNERSHIP OPERATIONS ENABLING ASSESSMENT
1. Luz, Vi and Minda are partners when the partnership earned a profit of P30,000. Their
agreement provides the following regarding the allocation of profit and losses:
a. 8% interest in partner’s ending capital in excess of P75,000
b. Salaries of P20,000 for Luz and 30,000 for Vi
c. Any balance is to be distributed 2:1:1 for Luz, Vi and Minda, respectively.

Assume ending capital balances of P60,000, P80,000 and P100,000 for partners Luz, Vi and
Minda, respectively. What is the amount of profit allocated for Minda, if each provision of the
profit and loss agreement is satisfied to whatever extent possible using the priority order shown
above?
P2,000

2. Partners AA and BB have profit and loss agreement with the following provisions: salaries of
P30,000 and P45,000 for AA and BB, respectively; a bonus to AA of 10% of net income after
salaries and bonus, and interest of 10% on average capital balances of P20,000 and P35,000
for AA and BB, respectively. One-third of any remaining profits will be allocated to AA and the
balance to BB.

● If the partnership has net income of P102,500, how much should be allocated to
Partner AA?
P41,000

● If the partnership has net income of P102,500, how much should be allocated to
Partner BB?
P61,500

● If the partnership had net income of P22,000, how much should be allocated to
partner AA, assuming that the provision of the profit and loss agreement are ranked by
order of priority starting with salaries?
P8,800

3. Hope & Faith Co. reports net income after 30% tax of P235,000 by the end of 2018. The
partnership agreement provides for division of profit or loss on the ratio of the partners’ capital
balances. At the end of 2017, each partner had a capital balance of P220,000. During 2018,
Hope made additional investment of P50,000 on April 1 and withdrew P70,000 of her capital on
September 30. Faith, on the other hand, made additional investment of P80,000 on October 1.

● The share of Hope in the net profit using the ratio of weighted average capital is _
P117,500

4. The partnership agreement of Rossi and Olson provides for salary allowances of P45,000 to
Rossi and P35,000 to Olson, with the remaining income or loss to be divided equally. During the
year, Rossi and Olson each withdraw cash equal to 80% of their salary allowances. If
partnership net income is P100,000, Rossi’s equity in the partnership would
Increase more than Olson’s

5. Nancy and Betty enter into a partnership agreement where they decide to share profits
according to the following rules.
● Nancy and Berry will receive salaries of P1700 and P14500 respectively as the from
allocation.
● The next allocation is based on 20% of each partner’s capital balances.
● Any remaining profit or loss is to be allocated completely to betty
The partnership net income for the first year is P50,000. Nancy’s capital balance is P83,000 and
Betty's capital is P11,000 at the end of the year. Calculate the share of profit/loss to be allocated
to Betty.
P31,700
6. The most appropriate basis for dividing partnership net income when the partners do not plan
to take an active role in daily operation is
On a ratio based average capital balances

7. XYZ Partnership provided for the following in the distribution of profits and losses:
First: X is to receive 10% of net income up to P100,000 and 20% of the amount in
excess thereof.
Then: Y and Z are each to receive a 5% of the remaining income in excess of P150,000
after X’s share.
Lastly: The balance is to be distributed equally to the three partners.

● If the partnership income is P250,000, what is the total share of X?

P108,000

8. Tamayo, Banson and Vidal, a partnership formed on january 1, 2018, had the following initial
investments.

Tamayo 100,000

Banson 150,000

Vidal 225,000

The partnership agreement profits and losses are to be shared equally by the partners after
consideration is made for the following:
a. Salaries allowed to partners: P60,000 for Tamayo; P48,000 for Banson and P36,000 for
Vidal.
b. Average partner’s capital balances during the year shall be allowed 10% interest.

Additional information:
A. On June 30,2018, Tamayo invested an additional P60,000.
B. Vidal withrew P70,000 from the partnership on September 30, 2018.
C. Share on the remaining profit was P3,000 for each partner.

● The average capital of Vidal is ________.

207500

● The partnership net profit for 2018 before salaries, interest and partner’s share on
the remainder is _______.
201750

● The average capital of Tamayo is ________.

130000
 ● Interest on average capital balances of the partners totals
48750

● Total Partnership Capital

666750

9. Mariano and Lucas entered into partnership on March 1, 2018, investing P125,000 and
P75,000 respectively. It was agreed that Mariano, the managing partner, was to receive a salary
of P12,000 per year and also 10% bonus on the profit after adjustment for the salary, the
balance of the profit was to be divided in the ratio of the original capital. On December 31, 2018,
account balances are as follows:
9. Mariano and Lucas entered into partnership on March 1, 2018, investing P125,000 and
P75,000 respectively. It was agreed that Mariano, the managing partner, was to receive a salary
of P12,000 per year and also 10% bonus on the profit after adjustment for the salary, the
balance of the profit was to be divided in the ratio of the original capital. On December 31, 2018,
account balances are as follows:

Cash 70,000 Accounts payable 60,000

Accounts receivable 67,000 Sales 233,000

Furniture and Fixtures 45,000 Mariano, Capital 125,000

Purchases 196,000 Lucas Capital 75,000

Sales returns & 5,000 Mariano Drawing (20,000)

allowances

Operating expenses 60,000 Lucas Drawing (30,000)

Inventories on December 31, 2018 were merchandise, P73,000; Supplies P2,500. Prepaid
insurance was P950 and accrued liabilities totaled P1,550. Depreciation on Furniture & Fixtures
is to be computed at 20% per year. Income tax rate is 35%.

● The distribution of net profit to Mariano is _______.

20342

● The distribution of net profit to Lucas is _______.

5268

● After closing the net profit and drawing accounts, the capital of Lucas is _______.
50268

● After closing the net profit and drawing accounts, the capital of Mariano is _______.
125342

10. Sison, Torres and Velasco are partners in an accounting firm. Their capital account
balances at year-end were: Sison, P50,000; Torres, P110,000; Velasco, P50,000. They share
profits and losses in a 4:4:2 ratio, after the following terms;
a. Partners Velasco is to receive a bonus of 10% of net profit after bonus.
b. Interest of 10% shall be paid on the portion of a partner’s capital in excess of
P100,000.
c. Salaries of P10,000 and P12,000 shall be paid to partners Sison and Velasco,
respectively.

● Assuming a net profit of P22,000 for the year, the profit share of Sison was ________.
8800
● Assuming a net profit of P22,000 for the year, the profit share of Torres was ________.
(200)

● Assuming a net profit of P22,000 for the year, the profit share of Velasco was
________.
13400

● Assuming a net profit of P44,000 for the year, the profit share of Sison was ________.
16800

● Assuming a net profit of P44,000 for the year, the profit share of Torres was ________.
7800

● Assuming a net profit of P44,000 for the year, the profit share of Velasco was
________.
19400
11. Carlin and Maley have a partnership agreement which includes the following provisions
regarding sharing net income or net loss:
● A salary allowance of P120,000 to Carlin and P100,000 to Maley.
● An investment allowance of 10% on capital balances at the beginning of the year.
● A bonus of 20% Carlin
● The remainder to be divided 40% to Carlin and 60% to Maley.

The capital balance on January 1, 2018 for Carlin and Maley was P90,000 and P120,000,
respectively. During 2018, the Carlin and Maley partnership had sales of P2,000,000 cost of
goods sold of P1,100,000 and operating expenses of P400,000. Income tax rate is 30%.

● If bonus is computed based on net income before bonus, salary allowances, and
interest on capital, the total share of C in the partnership is __________.
P214,600

● If bonus is computed based on net income after bonus, salary allowances, and interest
on capital, the total share of C in the partnership is __________.
P183,500

12. Which one of the following would not be considered an expense of a partnership in
determining income for the period?
Salary allowance to partners

13. A partners share of net income is recognized in the accounts through

Closing entries

14. Jaime, Madrid and Soriano are partners sharing profits on a 5:3:2 ratio. On January 1, 2018,
Matias was admitted into the partnership with a 20% share in the profits. The old partners
continue to participate in profits proportionate to their original ratios. For the year 2018, the
partnership books showed a net profit of P250,000. It was disclose however, that the errors
shown below were made:J
● Assuming that income tax rate is 35%, the share of Jaime in the corrected net profit is
________.
96100

● Assuming that income tax rate is 35%, the share of Madrid in the corrected net profit is
________.
57660

● Assuming that income tax rate is 35%, the share of Soriano in the corrected net profit is
________.
38440
● Assuming that income tax rate is 35%, the share of Matias in the corrected net profit is
________.
48050

● The new profit and loss ratio of Jaime is ________.

40%

● The new profit and loss ratio of Madrid is ________.

24%

● The new profit and loss ratio of Soriano is _______.

16%
15. The net income of the Rice and Wynn partnership is P120,000. The partnership agreement
specifies that Rice and Wynn have a salary allowance of P32,000 and P48,000 respectively.
The partnership agreement also specifies an interest allowance of 10% on capital balances at
the beginning of the year. Each partner had a beginning capital balance of P80,000. Any
remaining net income or net loss is shared equally.

● What is Rice’s share of the P120,000 net income?

P52,000

● What is the balance of Wynn’s Capital account at the end of the year after net income
has been distributed?
P148,000

16. The BLUE Company, a partnership, was formed on January 1, 2018 with four partners,
Belen, Lorna, and Edna. Capital contributions were as follows:

Belen 100,000

Lorna 50,000

Ursula 50,000

Edna 40,000

The partnership agreement provides that each partner shall receive 5% interest on the
amount of his/her capital contribution. In addition, Belen is to receive a salary of P10,000
and Lorna a salary of P6,000 per annum which are to be charged as expenses of the business.
The agreement further provides that Ursula shall receive a minimum of P5,000 per annum from
the partnership and Edna a minimum of P12,000 per annum, both including the profits is to be
distributed in the following proportion: Belen 30% Lorna 30% Ursula 20% Edna 20%.

● The amount that must be earned by the partnership during 2018, before any change for
interest on capital or partners salaries in order that Belen may receive an aggregate of
P25,000 including interest, salary and share of profits would be _________.
(Disregard income tax. Round your final answer to the nearest peso. Do not use peso
sign, comma, and decimal.)
64667

● Using the amount that must be earned by the partnership during 2018, before any
change for interest in capital or partners salaries in order that Belen may receive an
aggregate of P25,000, including interest, salary and share of profits, the total earnings
of Ursula would be _________. (Disregard income tax. Round your final answer to the
nearest peso. Do not use peso sign, comma, and decimal.)
9167
● Using the amount that must be earned by the partnership during 2018, before any
change for interest in capital or partners salaries in order that Belen may receive an
aggregate of P25,000, including interest, salary and share of profits, the total earnings
of Lorna would be _________. (Disregard income tax. Round your final answer to the
nearest peso. Do not use peso sign, comma, and decimal.)
18500
17. On October 31, 2018, Zita and Jones formed a partnership by investing cash of P300,000
and P200,000, respectively, The partners agreed to receive and annual salary allowance of
P360,000 and to give Zita a bonus 20% of the net income after partner’s salaries, the bonus
being treated as an expense.

If the profits after salaries and bonuses are to be divided equally, and the profits on
December 31, 2018 after partner’s salaries but before bonus of Zita are P360,000, how much is
the share of Zita in the profits?
P270,000

18. RK is trying to decide whether to accept a salary of P40,000 or a salary of P25,000 plus a
bonus of 10% of net income after salaries and bonus as a means of allocating profit among
partners. Salaries traceable to the other partners are estimated to be P100,000. What amount of
income would be necessary so that RK would consider choices to be equal?
P290,000

19. A, B, and C are capitalist partners while D is an industrial partner. The partnership reported
a net loss of P100,000. How much is the share of D in the reported net loss?
P-0-

20. A partner’s share of net income is recognized in the accounts through

Closing entries

21. If the partnership agreement does not specify how income is to be allocated, profits and
losses should be allocated
In accordance with their capital contribution

22. Lori and Mike enter into a partnership and decide to share profits and losses as follows:
● The first allocation is a salary allowance with Lori receiving P12,000 and Mike receiving
P25,000.
● The second allocation is 20% of the partners’ capital balances at year end. On
December 31, 2019, the capital balances for Lori and Mike are P86,000 and P344,000,
respectively.
● Any remaining profit or loss is allocated equally.

For the year ending December 31, 2019, the partnership reported a net loss of P122,000. The
journal entry to record the loss allocation will _______.
Debit Lori, Capital for P93,300

23. The Smith and Jones partnership agreement stipulates that profits and losses will be shared
equally after salary allowances of P120,000 for Smith and P60,000 for Jones. At the beginning
of the year, Smith’s Capital account had a balance of P240,000, while Jones’ Capital account
had a balance of P210,000. Net income for the year was P150,000 The balance of Jones’
Capital account at the end of the year after closing is
P255,000

24. David, Chris, and John formed a partnership on July 31, 2019. They decided to share profits
equally, but inserted a clause in the partnership agreement where any losses would be
allocated in the ratio of 5:2:3, respectively. For the year ended December 31, 2019, the firm
earned a net income of P50,000. However, for the year ended December 31, 2020, the firm
incurred a loss of P60,000. Assuming that John had an initial capital contribution of P43,000 and
made no withdrawals, what is the balance of John’s capital account as of december 30, 2020?
(Assume that none of the partners made any further contributions to their capital accounts. Do
not round any percentage calculations. Round all monetary calculations to the nearest peso)
P41,667
Question 1
Instrucons:
1. Do not use comma and peso sign (i.e. if your answer is P200,500, encode it as 200500)
2. If your answer is loss use the open and close parenthesis to denote negave, i.e. if your answer
is -50,000,encode it as (50000)
Problem: Partners Coleen and Norlyn received a salary of P150,000 and P300,000 and will share
profit andloss in a 2 : 1 rao, respecvely. If the partnership suffered a P150,000 loss in 2020,
determine how theloss will be distributed to Coleen and Norlyn.
1. Coleen's share on profit or loss _____
2. Norlyn's share on profit or loss _____
3. How much is the total amount to be distributed using the 2 : 1 rao? _____
Response: (250000)
Response: 100000
Response: (600000)

Question 2
Instrucons: Do not use comma and peso sign (i.e. if your answer is P200,500, encode it as 200500)
Problem: Partners Angela and Gabriel received a salary allowance of P30,000 and P70,000,
respecvely, andagreed to share the remainder of the profit equally. If the company earned
P40,000 during the period,how will the profit be distributed:
1. Angela _____
2. Gabriel _____
Response: 0
Response: 40000
Question 3
Instrucons:
1. Do not use comma and peso sign (i.e. if your answer is P200,500, encode it as 200500)
2. For Profit and Loss rao, round - off and use two decimal places and express your answer in
percentage(i.e. if your answer is .20345, encode it as 20.35%).
Problem: Nadine and Lysa formed a partnership on Jan. 01, 2019. Below the details of their
capital accountsfor 2019:
On the same year, the partnership generated a profit of P200,000.
Required: Determine the Profit Rao and the share on profits for Nadine and Lysa on the
followingagreements:
A. If agreement is based on Lysa
Capital Contribuons:Nadine
Profit Ratio 1 _____ 2 _____
Share on Profit 3 _____ 4 _____

Response: 62.50%
Response: 37.50%
Response: 125000
Response: 75000
Response: 50.00%
Response: 50.00%
Response: 100000
Response: 100000

Question 4
Instrucons: Do not use comma and peso sign (i.e. if your answer is P200,500, encode it as 200500)
Problem: Ciar and Jaybon are partners. Their capital contribuon are as follows: Ciar, P400,000 and
Jaybonwill provide his services. The partners agreed to divide profits or losses in the rao of 70%
and 30% forCiar and Jaybon, respecvely.
If the profit is P100,000, how should the profit be distributed among the partners?
1. Ciar _____
2. Jaybon _____
Response: 70000
Response: 30000
 PARTNERSHIP DISSOLUTION ENABLING ASSESSMENT
1. Blau and Rubi are partners who share profits and losses in the ratio of 6:4, respectively. On
May 1, 2018, their respective capital accounts were as follows:
Blau 60,000
Rubi 50,000
On that date, Lind was admitted as a partner with one-third interest in capital, and profits for
an investment of P40,000. The new partnership began with a total capital of P150,000
immediately after Lind’s admission, Blau’s capital should be
P54,000

2. When a partner retires and receives in cash less than his capital balance, how should the
difference be treated?
The difference should be credited to the remaining partners in their remaining
profit and loss ratio

3. LOV Partnership decided to admit E who purchased a 20% interest from L, whose capital
balance was P400,000. E paid her P100,000.

● The effect of this transaction is a/an

Decrease in L’s capital

● The journal entry to record the admission of E will include a

Debit to L, Capital

4. Which of the following conditions constitutes a legal dissolution of a partnership?

All of the choices given

5. If the new partner is admitted by purchase of interest of an old partner at an amount higher
than its book value, this will result in
No change in partnership’s net assets

6. The capital accounts of the partnership of R and O on January 30, 2014, are as follows:
R, Capital P80,000
O, Capital P40,000
The partners share profits and losses in the ratio of 6:4. The partnership is desperate for
cash and they agreed to admit Y as a new partner with a 1/3 interest in capital and profits
upon the latter’s capital infusion of P30,000.
After Y’s admission, what are the corresponding capital balances of R, O, and Y,
respectively, assuming assets and liabilities are fairly valued?
P68,000; P32,000; P50,000

7. Charlize and Megan are partners with capitals of P80,000 and P40,000, respectively. They
share profits in the ratio of 3:1. The partners agree to admit Caleb as a member of the firm.
● If no bonus is recognized and Caleb invests P80,000 for a 50% interest in the firm, what
is Charlize’s capital after the admission of Caleb?
P65,000
 ● If no bonus is recognized and Caleb invests P30,000 for a 20% interest in the firm, what
is Megan's capital after the admission of Caleb?
P40,000

● If total agreed capital is based on Caleb’s contribution and Caleb Invests P30,000 for a
15% interest in the firm, What is Megan’s capital after the admission of Caleb?
P52,500

● If no bonus is recognized and Caleb invests P80,000 for a 50% interest in the firm, what
is the profit sharing ratio of Charlize after the admission of Caleb?
37.5%

1. CAR Partnership decided to admit E who invested P100,000 for a 25% interest in the
partnership with a total capitalization of P500,000.

● The capital credit of E is

P125,000

● The journal entry to record the admission of E will include

A recognition of bonus to E

● The effect of this transaction is a/an

Increase in capital

2. Egay and Egoe who share profits and losses equally have capital balances of P200,000 and
P240,000, respectively. They admit Engyl for a 1/3 interest in partnership capital and profits
for an investment of P260,000.
By how much were the net assets undervalued? (Engyl is credited for his capital
contribution)
P80,000

3. Which of the following best describes the admission of new partner by investing an amount
more than his capital credit under the bonus method?
Increase on both net assets and total capital

4. The partnership of Lim and Mallorca provides for equal sharing of profits and losses. Prior to
the admission of a third partner Zamora, the capital accounts are Lim, P75,000 and
Mallorca, P105,000. Zamora invests P90,000 for a P75,000 interest and partners agreed
that the net assets of the new partnership would be P270,000. This admission involves
Bonus to old partners of P15,000

5. Peter, Queen and Roy are partners with capital balances of P300,000. P300,000 and
P200,000, respectively, and sharing profits and losses equally. Roy is to retire and it is
agreed that he will take certain office equipment with a second hand value of P50,000 and a
note for his interest. The office equipment carried in the books at P65,000 but brand new
would cost P80,000. Roy’s acquisition of the office equipment would result in
Reduction in capital of P55,000 for Roy
1. On June 30, 2018 the condensed balance sheet for the partnership of Eddy, Fox and Grimm
together with their respective profit and loss sharing percentage was as follows
Assets, net of liabilities P 320,000
Eddy , Capital (50%) P 160,000
Fox, Capital (30%) P 96,000
Grimm, Capital (20%) P 64,000
P 320,000

● Eddy decided to retire from the partnership and by mutual agreement is to be paid
P180,000 out of partnership funds for his interest. Total goodwill implicit in the
agreement is to be recorded. After Eddy’s retirement, what are the capital balances of
the other partner?
108,000(Fox) 72,000(Grimm)

● Assume that Eddy remains in the partnership and that Hamm is admitted as a new
partner with a 25% interest in the capital of the new partnership for a cash payment of
P140,000. Total goodwill implicit in the transaction is to be recorded. Immediately after
admission of Hamm, Eddy’s capital account balance should be
P210,000

2. Matthew, Paulo and Claude share partnership profits in the ratio 2:3:5. On September, 30
Claude opted to retire from the partnership. Prior to Claude’s investment, the capital
balances of the three partners are P25,000 ,P40,000 and P35,000, respectively.

● How much is Paulo’s capital after Claude’s retirement if Claude is paid P30,000 in full
settlement of his partnership interest?
P43,000

● How much is the capital of Matthew after Claude’s retirement if Claude is paid P39,000
in full settlement of his partnership interest?
P23,400

3. When Jill retired from the partnership of Jill, Bill and Hill, the final settlement of her interest
exceeded her capital balance. Under the bonus method, the excess
Reduced the capital balance of Bill and Hill

4. Jeric, Ken, and Lemuel are partners sharing profits in the ratio 5:3:2 respectively, as of
December 31, 2013, their capital balances were P95,000 for Julian, P80,000 for Ken and
P60,000 for Lemuel.
On January 1, 2019 the partners admitted Mark as a new partner and according to their
agreement Mark will contribute P80,000 in cash to the partnership and also pay P10,000 for
15% for Ken’s share. Mark will be given a 20% share in profits. While the original partners’
share will be proportionately the same as before. After the admission of Mark, the total
capital will be P330,000 and Mark’s capital will be P70,000
● The bonus in the admission of Mark would be
P22,000

● The balance of Ken’s Capital after the admission of Mark would be

P79,100

● The amount of asset revaluation is

P15,000
1. Which of the following best characterizes the bonus method of recording a new partner’s
investment in a partnership?
Assuming that recorded assets are properly valued, the book value of the new
partner is equal to the book value of the previous partnership and the investment
of the new partner.

2. B and N are partners sharing profits and losses in the ratio 7:3. On January 1,2013 their
credit balance capital accounts are P30,000 for B and P20,000 for N, W is to be admitted as
a partner by buying 50% of B’s interest for P20,000.
The capital balance of B after W’s admission is
P15,000

3. Mike and Tess are partners with capital balances of P70,000 and P50,000 respectively.
They share profits and losses in the ratio of 3:1, respectively. Voce is to be admitted in the
partnership for a cash contribution of P60,000 for a ½ interest in the partnership capital and
in future profits and losses.
If Voce would be given a capital credit of P90,000, how much would be charged to Mike’s
capital account?
P15,000

4. Partner’s Nitz, Pat and Candy share profits and losses 50:30:20 respectively. Capital
balances are P74,000 P130,000 and P96,000 respectively. The carrying values of assets
and liabilities are equal to their fair values. Emmie is to be admitted as a new partner with a
20% capital interest and a 20% share of profits and losses in exchange for a cash
contribution. No bonus is to be effected.
How much should Emmie contribute?
P75,000

5. J decided to withdraw from the JOY Partnership. A cash settlement was made by the
partnership this will
Decrease Assets

6. The partnership of Noynoy, Manny and Gibo have capital balances as follows: Noynoy -
P35,000, Manny - P50,000, Gibo - P40,000. Their profit and loss ratio are 30% 50% and
20% respectively, With the consent of Noynoy and Manny, Gibo sold one-half of his interest
to Erap for P30,000 , Gibo was paid in cash by Erap What is the Capital Balance of Manny
after the admission of Erap to the partnership?
P50,000

7. An adjustment of the assets and liabilities of the partnership to their fair market values
before dissolution is called
Asset revaluation
1. Paul, Melvin and Elrick are partners sharing profits and losses in the ratio of 2:2:1. On July
31, 2018, their capital balances are as follows: Paul - P700,000; Melvin - P500,000; Elrick -
P400,000. The partners agree to admit Laurence on the following conditions:
A. Laurence is to pay Paul P400,000 for 1/2 of Paul’s interest:
B. Laurence is also to invest P400,000 in the partnership
C. The total interest of Laurence is 25% of the total partnership capital, which is also
his share in the new partnership profit and loss sharing ratio. The old partners
are sharing in their old ratio

● How much is Paul’s capital after the admission of Laurence?

P450,000

● What is the percentage of Elrick’s share in the new profit and loss sharing ratio?
15%

2. A partnership agreement most likely will stipulate that assets be reappraised when
New partner is admitted to the partnership

3. The following transactions will affect the balance of the total partnership capital except
Admission by purchase

4. Ben and Ric are partners who share profits and losses in the ratio of 6:4, respectively. On
May 1, 2019, their respective capital accounts were as follows:
Ben P60,000
Ric P50,000
On that date, Lito was admitted as a partner with a one-third interest in capital and profits for
an investment of P40,000. The new partnership began with a total capital of P150,000.
Immediately after Lito’s admission, Ben’s capital account balance should be
P54,000

5. The admission of a new partner involving bonus will result in

Bonus to either old or new, but not both

6. Statement 1: The admission of new partner through his direct investment in the partnership
will increase the partnership capital even under bonus method
Statement 2: The admission of new partner through purchase of interest of existing partner
will increase partnership capital
Only statement 1 is true

7. Luke and Mark, who share profits and losses equally, agree to take John into the
partnership for a 40% share in capital and profits. Luke and Mark retain 30% interest each.
Luke and Mark have Capital balances of P100,000 and P140,000 respectively before the
admission of John. John pays P120,000 directly to Luke and Mark for his 40% interest. All
assets of the partnership, except for land are fairly valued.
● What would be the capital balance of Mark, immediately after the admission of John?
P102,000

● By how much was land undervalued?

P60,000
1. Dada and Elma are partners with capital balances of P400,000 and P600,000, respectively.
They share profits and losses equally. They decided to admit Jhai as a partner who will
invest P200,000 for a 16% interest. Total agreed capital is P1,250,000. Which of the
following statements is true?
There is revaluation of assets equal to P50,000

2. On June 30, 2018 the balance sheet for the partnership of Coll, Maduro and Prieto together
with their respective profit and loss ratios was as follows
Assets, at cost 180,000
Coll, Loan 9,000
Coll, Capital (20%) 42,000
Maduro,Capital (20%) 39,000
Prieto, Capital (60%) 90,000
Total 180,000
Coll decided to retire from the partnership by mutual agreement, the assets are to be
adjusted to their fair value of P216,000 at June 30,2018. It was agreed that the partnership
would pay Coll P61,200 cash for Coll’s partnership interest,including Coll loan which is to be
repaid in full. No goodwill is to be recorded. No goodwill is to be recorded.
After Coll’s retirement, what is the balance of Maduro's capital account?
P45,450

3. Pascual invested P400,000 for a 10% interest in a partnership that has a total capital of
P3,000,000 after admitting Pascual. Which of the following is true?
The original partners received a bonus of P100,000

4. B and N are partners sharing profits and losses in the ratio 7:3. On January 1, 2014 their
credit balance capital accounts are P30,000 for B and P20,000 for N. W is to be admitted for
a 25% interest in the capital directly from the partners for P45,000.
Each partner’s capital account is to be charged pro rata for amounts in their capital ratio that
will provide W with the 25% interest.
The capital balance of B after W’s admission is
P22,500

5. Partnership A has an existing capital of P70,000. Two partners currently own the partnership
and split profits of 50/50. A new partner is to be admitted and will contribute net assets with
a fair value of P90,000. For no goodwill or bonus (depending in whichever method is used)
to be recognized, what is the interest in the partnership granted the new partner?
56.25%

6. Total partners’ equity remains the same if a new partner is admitted by purchase of interest.
In partnership dissolution, bonus is computed as a percentage of net income.
Only statement 1 is true.
7. The capital accounts of Ed, Nick and Vic are presented below with their respective profit and
loss ratio:
Ed P139,000 (½)
Nick 209,000 (⅓)
Vic 96,000 (⅙)
Tony was admitted to the partnership when he purchased directly, for P132,000 a
proportionate interest from Ed and Nick in the net assets and profits of the partnership. As a
result, Tony acquired a one-fifth interest in the net assets and profits of the firm. Assuming
no revaluation of net assets is recorded, what is the combined gain realized by Ed and Nick
upon the sale of a portion of their interests in the partnership to Tony?
P43,200

8. At December 31, Rod and Sol are partners with capital balances of P40,000 and P20,000,
and they share profits and losses in the ratio of 2:1, respectively. On this date Pete invests
P17,000 in cash for a one-fifth interest in the capital and profit of the new partnership.
Assuming that assets are not revalued, how much should be credited to Pete’s capital
account on December 31?
P15,400
 CONCEPTUAL
1. The admission of a new partner requires the consent of the majority of the partners.
False

2. The remaining partners’ capital balance will increase when the amount of settlement to a
retiring partner is more than the retiring partner’s capital balance.
False

3. Pocholo, an incoming partner, acquires 10% interest in Southern Partnership by

acquiring half of the interest of Levi, an existing partner. This transaction will most likely
require a debit in the partnership books for the cash payment of Pocholo.
False

4. A partner may withdraw or retire from the partnership by

Any of these

5. A change in partnership ownership liquidates the partnership.

False

6. Ralph acquires 20% in Southern Partnership by contributing non-cash assets. This

transaction will be recorded in the partnership books as a transfer within equity
False

7. Partner A retires from ABC Partnership and receives P100.00 as full settlement of her
capital account with a balance of P120.00. Immediately before the retirement of A, the
partnership net assets is P1,000.00, equal to fair value. If Partner A’s capital balance
was paid by the partnership, the partnership net assets after A’s retirement would be
P880.
False

8. The withdrawal of a partner legally dissolve the partnership.

True

9. C is admitted in the partnership of A and B by investing P120,000 for an interest of

P150,000. Assuming that the net assets of the partnership prior to C’s admission are
fairly valued, this transaction would result in
A decrease in the capital balance of A and B

10. The new partner’s capital credit exceeds his/her asset contribution to the partnership
when bonus is given to this new partner.
True
11. The total assets of a partnership will most likely increase when a new partner is admitted
by investing directly to the partnership.
True

12. Payment to a retiring partner of an amount in excess of his/her capital balance may
indicate that some partnership assets are undervalued.
True
1. Partner A retires from ABC Partnership and receives P100.00 as full settlement of her
capital account with a balance of P120.00. Immediately before the retirement of A, the
partnership net assets is P1,000.00, equal to fair value. If Partner A’s capital balance
was paid by Partner B, the partnership net assets after A’s retirement would still be
P1,000.00.
True

2. When a new partner enters an existing partnership by purchase of interest, the cash
paid to the old partner for the partnership interest acquired is always equal to the new
partner’s capital balance.
False

3. The net assets of AB Partnership consist of P10.00 capital balance of A and P10.00
capital balance of B. The net assets approximate fair value. Partners A and B have
equal interests in the partnership. If C invests in the partnership for a 20% interest, the
interest of A after C’s admission will be decreased to 30%.
False

4. The insanity of a partner causes dissolution of a partnership.

True

5. The net assets of AB Partnership consist of P10.00 capital balance of A and P10.00
capital balance of B. The net assets approximate fair value. Partners A and B have
equal interests in the partnership. If C invests P10.00 in the partnership for a ⅓ interest,
the entry to record C’s admission will be a debit to Cash and a credit to C’s capital
account.
True

6. The total assets of the partnership remains unchanged when a new partner purchases
an interest directly from an existing partner.
True

7. A bonus to the old partners from a new partner increases the old partners’ capital
accounts.
True

8. A bonus to the new partner is normally shared by the existing partners using their profit
or loss ratio.
True

9. The total assets of a partnership most likely increases when an incoming partner
purchases the interest from an existing partner.
False
10. When the net assets of the partnership are fairly valued and the amount invested by the
incoming partner is equal to the interest acquired, it is implied that there is
No bonus to either new or old partners

11. The payment to a retiring partner at less than book value results in a loss to the other
partners, which must be shared according to their profit or loss ratio.
False

12. Which of the following does not change the partnership ownership?
Marriage of a partner
 1. The net assets of AB Partnership consist of P10.00 capital balance of A and P10.00
capital balance of B. The net assets approximate fair value. Partners A and B have
equal interests in the partnership. If C invests in the partnership for a ⅓ interest, C shall
invest P10.00.
True

COMPUTATIONAL
QUESTION 1
Tess and Shirley who share profits and losses equally, have capital balances of P170,000 and
P200,000, respectively. They agree to admit Gen for a ⅓ interest in capital and profits for her
investment of P200,000. Partnership assets are not to be revalued.

● The total bonus to Tess and Shirley is 10000

QUESTION 2
Egay and Egoe who share profits and losses equally have capital balances of P200,000 and
P240,000, respectively. They admit Engly for a ⅓ interest in partnership capital and profits for
an investment of P260,000.

● The net assets are undervalued by 80000

QUESTION 3
The partnership of A and B provides for equal sharing of profits and losses. Prior to the
admission of C, the capital accounts are A, P150,000 and B, P210,000. C invests P180,000 for
a P150,000 interest.

● B, Capital immediately after the admission of C is 225000

QUESTION 4
Mike and Tess are partners with capital balances of P70,000 and P50,000, respectively. They
share profits and losses in the ratio of 3:1, respectively. Victor is to be admitted in the
partnership for a cash contribution of P60,000 for a ½ interest in partnership capital and in the
future profits and losses.

● If Victor would be given a capital credit of P90,000, Mike’s capital would be charged by
22500
QUESTION 5
Partners Nitz, Pat and Candy share profits and losses 50:30:20, respectively. The statement of
financial position at July 31, 2020 shows the following balances:

Cash 40,000 Accounts Payable 100,000

Other Assets 360,000 Nitz, Capital 74,000

Pat, Capital 130,000

Candy, Capital 96,000

TOTAL 400,000 TOTAL 400,000

The carrying amount of assets and liabilities are equal to their fair values. Emmie is to be
admitted as a new partner with a 20% capital interest and a 20% share of profits and losses in
exchange for a cash contribution. No bonus is to be effected.

● Emmie’s contribution should be 75000

QUESTION 6
X, Y, and Z are partners sharing profits in the ratio of 3:3:2, respectively. On July 31, their
capital balances are as follows: X, P280,000; Y, P200,000; and Z, P160,000. They agree to
admit W on the following conditions:
a. W is to pay X P200,000 for ½ of X’s interest;
b. W is to invest P160,000 in the partnership;
c. Some assets of the partnership are undervalued by P160,000;
d. W’s interest is to be 25%.

● The total partnership capital immediately after the admission of W is 960000

● The capital balance of X immediately after the admission of W is 222500

QUESTION 7
Presented below is the condensed statement of financial position of the partnership of Gan,
Witt, and Windy. The partners share profits and losses in the ratio 6:3:1, respectively.

Cash 85,000 Liabilities 80,000

Other Assets 415,000 Gen, Capital 252,000

Witt, Capital 126,000

Windy, Capital 42,000

Total 500,000 Total 500,000

Treat independently each of the following questions relative to Windy’s retirement from the
partnership.
● If Windy is to receive P60,000 as cash settlement of her interest and the partnership
assets are fairly valued, the decrease in Gen’s capital as a result of Windy’s withdrawal
is 12000
● Windy is to receive P60,000 as settlement for her interest. Assume that any difference
between this amount and the carrying value of her capital indicates that some assets
have fair values in excess of carrying values. The credit to Witt, Capital as a result of
asset revaluation is 54000
● Gan and Witt buy ¼ and 3/4 , respectively, of Windy’s interest for P75,000 and P22,500.
This indicates that assets are overvalued by 120000
● Gan and Witt buy ⅓ and 2/3 , respectively , of Windy’s interest for P10,000 and P20,000.
Gan, capital immediately after Windy’s retirement is 266000
● Windy is to receive P33,000 as cash settlement. All assets and liabilities are fairly
valued. The capital balance of Witt immediately after withdrawal of Windy is 129000
● Allowance for bad debts of P4,000 and equipment impairment loss of P8,000 would be
recognized. The partnership would pay an amount to Windy equal to her adjusted
capital. Cash settlement to Windy is 40800
QUESTION 8
Partners Ellie, Ollie, and Millie agreed to sell to Tillie ¼ of their respective capital and profit and
loss interest for a total cash payment of P160,000. The capital balances and the respective
percentage interest in profits and losses immediately before the sale to Tillie are

PARTNER P/L CAPITAL BALANCE

Ellie 50% 320,000

Ollie 30% 180,000

Millie 20% 60,000

● The capital balance of Ollie immediately after Tillie’s admission is 135000

● From the sale of portion of his interest sold to Tillie, Ellie would receive 90000

QUESTION 9
Sophia purchased ½ of Jay’s interest and share in profit in the JC Partnership by paying Jay
P180,000. Immediately before Sophia’s admission, the capital balances of Jay and Chris were
P240,000 and P400,000, respectively. Jay and Chris were sharing profits in the ratio 2:3,
respectively.

● The capital balances of Sophia immediately after her admission is 120000

● In the new profit and loss ratio, Chris would have 30 (percent)
● In the new profit and loss ratio, Jay would have 20 (percent)

QUESTION 10
Luke and Mark, who share profits and losses equally, agree to take John into the partnership for
a 40% share in capital and profits. Luke and Mark retain 30% interest each. Luke and Mark
have capital balances of P100,000 and P140,000, respectively before the admission of John.
John pays P120,000 directly to Luke and Mark for his 40% interest. All assets of the
partnership, except land, are fairly valued.

● Land is undervalued by 60000

● The capital balance of Mark after the admission of John is 102000
 PARTNERSHIP LIQUIDATION
1. The liabilities and capital balances of the partners before the sale of the assets and
payments of liabilities including personal assets and liabilities of the partners were:

Partnership Personal Assets Personal Liabilities

Cash P10,000

Liabilities 70,000

Kath 65,000 P1,200,000 P1,500,000

Pau 20,000 2,500,000 2,490,000

Jas 15,000 3,000,000 3,200,000

After the assets were sold the capital balances of the partners were as follows: Kath,
P48,000; Pau, P12,000; and Jas, (P10,000)

● How much cash was received by Jas in the final settlement?

P0

● What is the P/L ratio of Jas? [34% - Kath; 16% - Pau]

50%

● How much is the gain/(loss) from sale of non-cash assets?

(P50,000)

● How much is the non-cash assets?

160,000

2. Jack and Beans, who share profits and losses in the ratio 3:7, decided to liquidate their
Talk Partnership. The partner’s capital balances are P300,000 and P190,000,
respectively.

● Before the realization of non-cash assets, the partnership has a zero balance in
its cash account and a P200,000 balance in its liabilities. If on final settlement of
partners’ claims Jack received P261,000, how much was the net proceeds from
the sale of non-cash assets?
P560,000

● If all partnership assets and liabilities are realized and settled at their carrying
amounts, how much would Beans receive from liquidation?
P190,000
● If all partnership assets are realized and all liabilities are settled, the partnership
has remaining cash of P120,000, how much would Beans receive from the
liquidation?
None

● If on final settlement of partners’ claims Beans received P99,000, how much did
Jack receive?
P261,000

● The partnership has total liabilities of P200,000. If all partnership assets are
realized for P500,000, how much would Jack receive from the liquidation?
243,000
1. Mickey, Donald, and Minnie are partners sharing profit and loss in the ratio of 2:1:1,
respectively. Their capital balances are P400,000 for Mickey, P200,000 for Donald and
P100,000 for Minnie. Claims of suppliers amounted to 500,000 including the loan
extended by Minnie, P50,000. The cash balance amounted to P300,000 and it increased
to P1,050,000 as a result of the sale of the non-cash assets.

● How much cash was received by Donald in the final settlement?

162,500

● How much cash was received by Mickey in the final settlement?

325,000

● How much was the non-cash assets of the partnership?

900,000

● How much was the loss from sale of non-cash assets?

150,000

● How much was the cash proceeds from sale of non-cash assets?
750,000

● How much cash will Minnie receive?

112,500

2. As of December 31, the books of AME Partnership showed capital balances of: A-
P40,000; M-P25,000; E-P5,000. The partners’ profit and loss ratio was 3:2:1,
respectively. The partners decided to dissolve and liquidate. They sold all the non-cash
assets for P37,000 cash. After settlement of all liabilities amounting to P12,000, they still
have P28,000 cash left for distribution.

● The loss on the realization of the non-cash assets was

P42,000

● Assuming that any partner’s capital debit balance is uncollectible, the share of A
in the 28,000 cash for distribution would be
P17,800

3. The statement of financial position of the partnership A, B, and C shows: Cash, P22,400;
Other Assets, P212,000; Liabilities, P38,400; A, Capital (50%) P76,000; B, Capital (25%)
P64,000, and C, Capital (25%) P56,000.

● If B received a total of P31,000 from partnership liquidation, how much was the
loss on realization?
P127,000
 ● If C received P10,000 from the first cash distribution, how much was the total
cash distributed to partners?
P28,000

● How much is the additional contribution required of B?

P6,000

● The partners realized P56,000 from the first installment sale of non-cash assets
with total carrying amount of P120,000. How much did B receive from the partial
liquidation?
P24,000

● If A received a total of P10,000 from partnership liquidation, how much was the
proceeds from the sale of all non-cash assets?
P85,000

1. The order of the liquidation process is

Sell assets, pay liabilities, disburse cash to partners

2. Dino, Doods, and Dong have the following accounts and their normal balances on
January 31, 2021, the date the partners agreed to liquidate their 3D Partnership:

Cash P20,000 Accounts Payable P10,000

Accounts Receivable 25,000 Notes Payable 27,000

Allowance for Bad Debts 5,000 Loans due to Dino 5,000

Merchandise Inventory 60,000 Loans due to Doods 7,000

Furniture & Equipment 50,000 Dino, Capital 20,000

Accumulated Depreciation 5,000 Doods, Capital 40,000

Dong, Capital 36,000

The partners divide profit and losses 4:1:5, respectively. Sales proceed follows:
Accounts Receivable P10,000
Merchandise Inventory 30,000
Furniture & Equipment 20,000

● Assuming that Dino is a limited partner, the cash paid to Dong is?
0

● If Dino is a limited partner, the cash paid to Doods is

32,500
● Assuming that Dino is a limited partner, how much additional investment should
Dong give?
1,500

● How much is the non-cash assets?

125,000
 ● Assuming that any deficiency will be immediately paid, the cash paid to Doods
40,500

● Assuming that any deficiency is uncollectible, the cash paid to Dong?

2,667

● The sale of non-cash assets resulted in a total loss of

65,000

● How much is the cash available for distribution to the partners?

43,000

● The sale resulted in a capital deficiency for

Dino

1. Jurado, Katindig, Lazaro, and Marcelo are partners sharing earnings in the ratio of
3:4:6:8. The balance of their capital accounts on December 31, 2015 are as follows:
Jurado P1,000
Katinding 25,000
Lazaro 25,000
Marcelo 9,000

The partners decide to liquidate, and they accordingly convert the non-cash assets into
P23,200 of cash. After paying the liabilities amounting to P3,000, they have P22,000 to
divide.

● Assume that a debit balance in any of partner’s capital is uncollectible. The share
of Jurado in the loss upon conversion of the non-cash assets into cash was:
5,400

● Assume that a debit balance in any of partner’s capital is uncollectible. The book
value of non-cash assets amounted to:
P61,000

● Assume that a debit balance in any of partner’s capital is uncollectible. When the
P22,200 was divided, Lazaro got
8,320

2. The statement of Financial Position for the partnership of Eclavo, Eclara, and Elorda,
who share profits and losses in the ratio 4:5:1, is as follows:
Cash P100,000 Accounts Payable P300,000
Inventory 720,000 Eclavo, Capital 320,000
Eclara, Capital 90,000
Elorda, Capital 110,000
 P820,000 P820,000

● Assuming Elorda is a limited partner, and the inventory is sold for P360,000, how
much should she receive upon liquidation of the partnership?
74,000
 ● Assuming Eclara is an insolvent partner, and the inventory is sold for P360,000,
how much should Eclavo receive upon liquidation of the partnership?
104,000

● If the inventory is sold for P600,000, how much should Eclavo receive upon
liquidation of the partnership?
P272,000

1. The following is the priority sequence on which liquidation proceeds will be distributed for
a partnership:
Partnership liabilities, partnership loans, partnership capital balances

2. Statement 1: Solvent partners are partners with sufficient remaining personal assets
after deducting or liquidating the personal liabilities.
Statement 2: Right of offset is a legal right to apply a part or all of the amount owing to a
partner against his or her capital deficiency.
Both statements are true

3. Statement 1: A deficient partner has to make an additional investment to make up for his
deficiency in all instances.
Statement 2: Partnership creditors have priority over partnership properties; in the same
manner that the partners’ personal creditors have priority over partners’ personal
properties.
Only the second statement is true

4. Iyah, Ayah and Mia operate a business as a partnership and share net income and net
loss in a 3:3:4 ratio, respectively. The personal assets and liabilities of the partners,
gathered from their personal records show:

Partner Assets Liabilities

Iyah (General Partner) P470,000 P450,000

Ayah (General Partner) 200,000 280,000

Mia (Limited Partner) 305,000 300,000

The statement of financial position is as shown below. Assets are sold for P175,000.
Liabilities are paid as soon as cash is available. Creditors collect from solvent partners
whenever necessary.

Cash P10,000 Accounts Payable P200,000

Non-Cash 375,000 Loan, Mia 5,000

 Iyah, Capital 50,000

Ayah, Capital 70,000

Mia, Capital 60,000

● How much cash was received by Mia in the final settlement?

20,000
5,000
0
10,000
 ● How much is the capital balance of Iyah after the sale of non-cash assets?
(P10,000)

● How much additional investment was made by Mia?

P0

● How much cash was received by Ayah in the final settlement?

0

● Who among the partners have received the cash in the final settlement?
Mia

● How much is the additional investment made by Ayah?

0

● How much is the share of Mia from the gain (loss) on sale of non-cash assets?
(P80,000)

● How much is the additional investment made by Iyah?

20,000

1. Partners Roger, Sergio and Tito, who share profit and loss in the ratio of 3:5:2,
respectively have decided to liquidate their partnership. The Statement of Financial
Position of the partnership at the time of liquidation is shown below:
Assets Liabilities and Capital
Cash P120,000 Accounts Payable
P93,000
Other Assets 360,000 Loan from Sergio 30,000
Roger, Capital
108,000
Sergio, Capital
120,000
Tito, Capital
129,000
P480,000
P480,000

The partners desire to prepare an installment distribution schedule showing how cash
would be distributed to partners as assets are realized.

● The schedule of possible losses on capital balances would indicate that the first
cash distributed after the payment of outside creditors would be distributed to
Tito, in the amount of P57,000
● If Roger has received P30,000, how much would Sergio had received?
20,000

● In the schedule of maximum absorbable loss, the maximum absorbable loss for
each partner would be
Roger, 360,000; Sergio, 300,000; Tito, 645,000
 ● Assuming that the first sale of other assets having book value of P150,000
realized P45,000 and all available cash is distributed, the partners would receive
Roger, P9,000; Sergio, P0; Tito, P63,00

1. Statement 1: A deficient and insolvent partner will still have a chance to receive cash
from the partnership if there is a loan payable to him which is higher than his capital
deficiency.
Statement 2: A deficient and limited partner who has a loan to the partnership can apply
the right of offset to eliminate his deficiency.
Both statements are true
Both statements are false
Only the first statement is true
Only the second statement is true

2. In lump-sum liquidation, capital deficiency resulting from division of loss from realization
must be eliminated before making any payment to partners. Any resulting capital
deficiency of an insolvent partner is eliminated by charging the capital accounts of the
remaining partners.
Both statements are true

3. Statement 1: A limited partner is liable only to the extent of his her contribution in the
partnership.
Statement 2: A limited partner can use the right of offset against his capital deficiency,
but he is not required to make additional contribution out of his/her personal properties.
Only the first statement is true

4. An entry is not required in the liquidation of a partnership to record the

Allocation of a capital deficiency to partners with credit balances when the
deficient partner is solvent

5. Statement 1: In case the partnership is insolvent, the general partners are liable to pay
the partnership creditors from his/her personal properties
Statement 2: A deficient partner may apply the right of offset to a loan balance owing to
him or her by the partnership.
Both statements are true

6. Statement 1: In the event of liquidation, outside creditors has priority claim over the
partnership assets.
Statement 2: When a partner becomes insolvent, the claim against his separate
properties shall be paid first to his personal creditors.
Both statements are true
7. In a cash priority program for use in installment liquidation, the partner with the highest
loss absorption balance is the most vulnerable partner. The amount of cash to be
distributed to partners in installment liquidation can be determined by preparing a cash
priority program.
Only statement 2 is true

8. A deficiency occurs for a partner when

Hi share in the losses of the partnership is more than his capital balance
2/20/23, 9:16 PM Submissions - Courses - Practice Exercise # 2 - DLSU-D College/GS
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Partnership Operation/Division of Profit or Loss

Practice Exercise # 2
Submissions
Here are your latest answers:

Question 1
In 20x5, the partners of Julio & Fong Partnership shared net income and losses equally, but in 20x6 the income-sharing ratio was changed to 60% for Julio and 40% for
Fong. On December 31, 20x5, inventories were understated by P12,000. On December 31, 20x6, employees' salaries payable in the amount of P5,400 and short-term
prepayments of P2,700 had not been recognized in the accounting records.

1. Net correction to the capital account of Fong is _____. (Use parentheses to indicate decrease.. Do not use comma, peso sign, decimal.)

Response: 4920

Score: 0 out of 1 No

Question 2
Tamayo, Banson, and Vidal, a partnership formed on January 1, 2018, had the following initial investments:

Tamayo 100,000
Banson 150,000
Vidal 225,000

The partnership agreement stated that profits and losses are to be shared equally by the partners after consideration is made for the following:

a. Salaries allowed to partners: P60,000 for Tamayo; P48,000 for Banson and P36,000 for Vidal.

b. Average partner's capital balances during the year shall be allowed 10% interest.

Additional information:

a. On June 30,2018, Tamayo invested an additional P60,000.

b. Vidal withdrew P70,000 from the partnership on September 30,2018.

c. Share on the remaining profit was P3,000 for each partner.

1. The partnership net profit for 2018 before salaries, interest and partners' share on the remainder is _____. (Please do not use peso sign, comma, or decimal.)

Response: [none]

Score: 0 out of 1 No

Question 3
On January 1,20x4, the dental partnership of LL, CC, and RR was formed when the partners contributed P20,000, P60,000, and P50,000, respectively. Over the next three
years, the business reported net income and (loss) as follows: 20x4, P (30,000); 20x5, P20,000 and 20x6, P40,000. During this period, each partner withdrew cash of
P10,000 per year. RR invested an additional 12,000 in cash on February 9, 20x5. 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:

• Each partner is entitled to interest computed at the rate of 12 percent per year based on the individual capital balances at the beginning of that year.
• Because of prior work experience, LL is entitled to an annual salary allowance of P12,000, and CC is credited with P8,000 per year.
• Any remaining profit will be split as follows: LL, 20 percent; CC, 40 percent; and RR, 40 percent. If a loss remains, the balance will be allocated: LL, 30 percent; CC, 50
percent; and RR, 20 percent.

1. Determine the ending capital balance of CC as of the end of three years. _____ (Do not use comma, peso sign, or decimal.)

Response: [none]

Score: 0 out of 1 No

Question 4

https://dlsud.edu20.org/student_quiz_assignment/submissions/38554604 1/7
2/20/23, 9:16 PM Submissions - Courses - Practice Exercise # 2 - DLSU-D College/GS
Jaime, Madrid,  and Soriano are partners sharing profits on a 5:3:2 ratio. On January 1, 2018, Matias was admitted into the partnership with a 20% share in the profits. The
old partners continue to participate in profits proportionate to their original ratios. For the year 2018, the partnership books showed a net profit of P250,000. It was disclosed
however, that the errors shown below were made:

Errors 2017 2018

Accrued expenses not recorded at year-end 12,000
Inventory overstated 31,000
Purchases not recorded, for which goods have been received and inventoried 20,000
Income received in advance not adjusted 15,000
Unused supplies not take up at year-end 9,000

1. Assuming that income tax rate is 35%, the share of Matias in the corrected net profit is _____. (please do not use peso sign, comma , and decimal)

Response: [none]

Score: 0 out of 1 No

Question 5
Partnership residual profit and loss percentages do not have to be the last component applied in the profit and loss allocation process.

Response: True

Score: 0 out of 1 No

Question 6
Garlic, Pepper, and Salt are partners in a plumbing service. The business reported net income of P108,000 for 20x4. The partnership agreement provides that profits and
losses are to be divided equally after Pepper receives a P60,000 salary, Salt receives a P24,000 salary, and each partner receives 10% interest on his beginning capital
balance. Beginning capital balances were P40,000 for Garlic, P48,000 for Pepper, and P32,000 for Salt.

1. Pepper’s share of partnership income for 20x4 is _____. (Do not use comma, peso sign, or decimal.)

Response: 68800

Score: 1 out of 1 Yes

Question 7
Sison, Torres and Velasco are partners in an accounting firm. Their capital account balances at year-end were: Sison, P50,000; Torres, P110,000; Velasco, P50,000. They
share profits and losses on a 4:4:2 ratio, after the following terms;
a. Partners Velasco is to receive a bonus of 10% of net profit after bonus.
b. Interest of 10% shall be paid on that portion of a partner's capital in excess of P100,000.
c. Salaries of P10,000 and p12,000 shall be paid to partners Sison and Velasco, respectively.

1. Assuming a net profit of P44,000 for the year, the profit share of Torres was _____. (Please do not use peso sign, comma, and decimal. Use parentheses to indicate
negative sign.)

Response: 7800

Score: 1 out of 1 Yes

Question 8
Suzanne, Thomas, and Vicky are partners. They have average capital account balances of P200,000, P250,000, and P400,000, respectively. In addition, they have residual
profit and loss ratios of 15%, 25%, and 60%, respectively.

1. If income for the year is P300,000 and the partners earn 8 percent return on invested capital, how much will be allocated to Thomas? _____ (Do not use comma, peso
sign, or decimal.)

Response: 90000

Score: 0 out of 1 No

Question 9
Sison, Torres and Velasco are partners in an accounting firm. Their capital account balances at year-end were: Sison, P50,000; Torres, P110,000; Velasco, P50,000. They
share profits and losses on a 4:4:2 ratio, after the following terms;
a. Partners Velasco is to receive a bonus of 10% of net profit after bonus.
b. Interest of 10% shall be paid on that portion of a partner's capital in excess of P100,000.
c. Salaries of P10,000 and p12,000 shall be paid to partners Sison and Velasco, respectively.

1. Assuming a net profit of P44,000 for the year, the profit share of Sison was _____. (pleas do not use peso sign, comma, and decimal)

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Response: 16800

Score: 1 out of 1 Yes

Question 10
Harriet, Bob, and Tim are partners. Income for the current year is P500,000. The profit and loss agreement states that salaries are P35,000, P50,000, and P40,000,
respectively. In addition, the residual profit and loss ratios are 40%, 30%, and 30%, respectively.

1. How much of the profit is allocated to Harriet? _____ (Do not use comma, peso sign, or decimal.)

Response: 185000

Score: 1 out of 1 Yes

Question 11
Mariano and Lucas entered into partnership on March 1,2018, investing P125,000 and P75,000, respectively. It was agreed that Mariano, the managing partner, was to
receive a salary of P12,000 per year and also 10% bonus on the net profit after adjustment for the salary; the balance of the profit was to be divided in the ratio of their
original capital. On December 31,2018, account balances are as follows:

Cash 70,000 Accounts Payable 60,000

Accounts Receivable 67,000 Sales 233,000
Furniture & Fixtures 45,000 Mariano, Capital 125,000
Purchases 196,000 Lucas, Capital 75,000
Sales Returns & Allowances 5,000 Mariano, Drawing (20,000)
Operating Expenses 60,000 Lucas, Drawing (30,000)

Inventories on December 31,2018 were: Merchandise, P73,000; Supplies, P2,500. Prepaid  Insurance was P950 and accrued liabilities  totaled P1,550. Depreciation on
Furniture 7 Fixtures is to be computed at 20% per year. Income tax rate is 35%.

1. The distribution of net profit to Mariano is _____. (Please do not use peso sign, comma, and decimal.)

Response: [none]

Score: 0 out of 1 No

Question 12
Hope & Faith Co. reports net income after 30% tax of P235,000 by the end of 2018. The partnership agreement provides for division of profit or loss on the ratio of the
partners’ capital balances. At the end of 2017, each partner had capital balance of P220,000. During 2018, Hope made additional investment of P50,000 on Aril 1 and
withdrew P70,000 of her capital on September 30. Faith, on the other hand, made additional investment of of P80,000 on October 1.

The share of Hope in the net profit using the ratio of weighted average capital is __

Response: [none]

Score: 0 out of 1 No

Question 13
A, B, and C are capitalist partners while D is an industrial partner. The partnership reported a net loss of P100,000. How much is the share of D in the reported net loss?

Response: P-0-

Score: 1 out of 1 Yes

Question 14
Tamayo, Banson, and Vidal, a partnership formed on January 1, 2018, had the following initial investments:

Tamayo 100,000
Banson 150,000
Vidal 225,000

The partnership agreement stated that profits and losses are to be shared equally by the partners after consideration is made for the following:

a. Salaries allowed to partners: P60,000 for Tamayo; P48,000 for Banson and P36,000 for Vidal.

b. Average partner's capital balances during the year shall be allowed 10% interest.

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Additional information:

a. On June 30,2018, Tamayo invested an additional P60,000.

b. Vidal withdrew P70,000 from the partnership on September 30,2018.

c. Share on the remaining profit was P3,000 for each partner.

1. The average capital of Vidal is _____. (Please do not use peso sign, comma, or decimal.)

Response: [none]

Score: 0 out of 1 No

Question 15
Lori and Mike enter into a partnership and decide to share profits and losses as follows:
• The first allocation is a salary allowance with Lori receiving P12,000 and Mike receiving P25,000.
• The second allocation is 20% of the partners' capital balances at year end. On December 31, 2019, the capital balances for Lori and Mike are P86,000 and P344,000,
respectively.
• Any remaining profit or loss is allocated equally.

For the year ending December 31, 2019, the partnership reported a net loss of P122,000. The journal entry to record the loss allocation will ________.

Response: debit Lori, Capital for P93,300

Score: 1 out of 1 Yes

Question 16
Jaime, Madrid,  and Soriano are partners sharing profits on a 5:3:2 ratio. On January 1, 2018, Matias was admitted into the partnership with a 20% share in the profits. The
old partners continue to participate in profits proportionate to their original ratios. For the year 2018, the partnership books showed a net profit of P250,000. It was disclosed
however, that the errors shown below were made:

Errors 2017 2018

Accrued expenses not recorded at year-end 12,000
Inventory overstated 31,000
Purchases not recorded, for which goods have been received and inventoried 20,000
Income received in advance not adjusted 15,000
Unused supplies not take up at year-end 9,000

1. Assuming that income tax rate is 35%, the share of Madrid in the corrected net profit is _____. (please do not use peso sign, comma , and decimal)

Response: [none]

Score: 0 out of 1 No

Question 17
The partnership agreement of Rossi and Olson provides for salary allowances of P45,000 to Rossi and P35,000 to Olson, with the remaining income or loss to be divided
equally. During the year, Rossi and Olson each withdraw cash equal to 80% of their salary allowances. If partnership net income is P100,000, Rossi's equity in the
partnership would

Response: increase more than Olson's

Score: 1 out of 1 Yes

Question 18
The salary portion of the profit and loss allocation is set in the articles of partnership and will not change over time.

Response: True

Score: 0 out of 1 No

Question 19
A partner's share of net income is recognized in the accounts through

Response: closing entries

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Score: 1 out of 1 Yes

Question 20
Carlin and Maley have a partnership agreement which includes the following provisions regarding sharing net income or net loss:
• A salary allowance of P120,000 to Carlin and P100,000 to Maley.
• An interest allowance of 10% on capital balances at the beginning of the year.
• A bonus of 20% Carlin
• The remainder to be divided 40% to Carlin and 60% to Maley.

The capital balance on January 1, 2018, for Carlin and Maley was P90,000 and P120,000, respectively. During 2018, the Carlin and Maley Partnership had sales of
P2,000,000, cost of goods sold of P1,100,000, and operating expenses of P400,000. Income Tax rate is 30%.

If bonus is computed based on net income after bonus, salary allowances, and interest on capital, the total share of C in the partnership is _____________.

Response: P180,000

Score: 0 out of 1 No

Question 21
James and Bruce are partners. They have shared profits and losses 70/30 for several years. The partnership profit allocation agreement is currently being modified to 60/40.
At the date of the change, the partners choose to revalue assets with market value different from book value. One asset revalued is a building with a book value of P370,000
and a market value of P520,000. One year after the profit and loss ratio is changed the building is sold for P650,000.

1. What is the amount of change to James’ capital account at the date the building is sold? _____ (Do not use comma, peso sign, or decimal.)

Response: [none]

Score: 0 out of 1 No

Question 22
Jaime, Madrid,  and Soriano are partners sharing profits on a 5:3:2 ratio. On January 1, 2018, Matias was admitted into the partnership with a 20% share in the profits. The
old partners continue to participate in profits proportionate to their original ratios. For the year 2018, the partnership books showed a net profit of P250,000. It was disclosed
however, that the errors shown below were made:

Errors 2017 2018

Accrued expenses not recorded at year-end 12,000
Inventory overstated 31,000
Purchases not recorded, for which goods have been received and inventoried 20,000
Income received in advance not adjusted 15,000
Unused supplies not take up at year-end 9,000

1. The new profit and loss ratio of Soriano is _____. (express in percentage)

Response: [none]

Score: 0 out of 1 No

Question 23
Sison, Torres and Velasco are partners in an accounting firm. Their capital account balances at year-end were: Sison, P50,000; Torres, P110,000; Velasco, P50,000. They
share profits and losses on a 4:4:2 ratio, after the following terms;
a. Partners Velasco is to receive a bonus of 10% of net profit after bonus.
b. Interest of 10% shall be paid on that portion of a partner's capital in excess of P100,000.
c. Salaries of P10,000 and p12,000 shall be paid to partners Sison and Velasco, respectively.

1. Assuming a net profit of P44,000 for the year, the profit share of Torres was _____. (pleas do not use peso sign, comma, and decimal)

Response: 7800

Score: 1 out of 1 Yes

Question 24
Sison, Torres and Velasco are partners in an accounting firm. Their capital account balances at year-end were: Sison, P50,000; Torres, P110,000; Velasco, P50,000. They
share profits and losses on a 4:4:2 ratio, after the following terms;
a. Partners Velasco is to receive a bonus of 10% of net profit after bonus.
b. Interest of 10% shall be paid on that portion of a partner's capital in excess of P100,000.
c. Salaries of P10,000 and p12,000 shall be paid to partners Sison and Velasco, respectively.

1. Assuming a net profit of P22,000 for the year, the profit share of Sison was _____. (pleas do not use peso sign, comma, and decimal)
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Response: 8000

Score: 0 out of 1 No

Question 25
The BLUE Company, a partnership, was formed on January 1,2018 with four partners; Belen, Lorna, Ursula, and Edna. Capital contributions were as follows:

Belen 100,000
Lorna 50,000
Ursula 50,000
Edna 40,000

The partnership agreement provides that each partner shall receive 5% interest on the amount of his/her capital contribution. In addition, Belen is to receive a salary of
P10,000 and Lorna a salary of P6,000 per annum which are to be charged as expenses of the business. The agreement further provides that Ursula shall receive a minimum
of P5,000 per annum from the partnership and Edna a minimum of P12,000 per annum, both including amounts allowed as interest on capital and their respective share of
profits. The balance of the profits is to be distributed in the following proportion: Belen, 30%; Lorna, 30%; Ursula, 20%; and Edna, 20%. 

1. Using the amount that must be earned by the partnership during 2018, before any charge for interest on capital or partners' salaries in order that Belen may receive an
aggregate of P25,000, including interest, salary and share of profits, the total earnings of Ursula would be _____. (Disregard income tax. Round your final answer to the
nearest peso. Do not use peso sign, comma, and decimal.)

Response: [none]

Score: 0 out of 1 No

Question 26
With the exception of the residual profit and loss ratio, partners can agree to apply profit and loss allocation components in any order.

Response: False

Score: 0 out of 1 No

Question 27
Carlin and Maley have a partnership agreement which includes the following provisions regarding sharing net income or net loss:
• A salary allowance of P120,000 to Carlin and P100,000 to Maley.
• An interest allowance of 10% on capital balances at the beginning of the year.
• A bonus of 20% Carlin
• The remainder to be divided 40% to Carlin and 60% to Maley.

The capital balance on January 1, 2018, for Carlin and Maley was P90,000 and P120,000, respectively. During 2018, the Carlin and Maley Partnership had sales of
P2,000,000, cost of goods sold of P1,100,000, and operating expenses of P400,000. Income Tax rate is 30%.
If bonus is computed based on net income before bonus, salary allowances, and interest on capital, the total share of C in the partnership is _____________

Response: [none]

Score: 0 out of 1 No

Question 28
Partners AA and BB have profit and loss agreement with the following provisions: salaries of P30,000 and P45,000 for AA and BB, respectively; a bonus to AA of 10% of
net income after salaries and bonus; and interest of 10% on average capital balances of P20,000 and P35,000 for AA and BB, respectively. One-third of any remaining
profits will be allocated to AA and the balance to BB. If the partnership had net income of P102, 500, how much should be allocated to Partner AA?

Response: P41,000

Score: 1 out of 1 Yes

Question 29
The BLUE Company, a partnership, was formed on January 1,2018 with four partners; Belen, Lorna, Ursula, and Edna. Capital contributions were as follows:

Belen 100,000
Lorna 50,000
Ursula 50,000
Edna 40,000

The partnership agreement provides that each partner shall receive 5% interest on the amount of his/her capital contribution. In addition, Belen is to receive a salary of
P10,000 and Lorna a salary of P6,000 per annum which are to be charged as expenses of the business. The agreement further provides that Ursula shall receive a minimum

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of P5,000 per annum from the partnership and Edna a minimum of P12,000 per annum, both including amounts allowed as interest on capital and their respective share of
profits. The balance of the profits is to be distributed in the following proportion: Belen, 30%; Lorna, 30%; Ursula, 20%; and Edna, 20%. 

1. Using the amount that must be earned by the partnership during 2018, before any charge for interest on capital or partners' salaries in order that Belen may receive an
aggregate of P25,000, including interest, salary and share of profits, the total earnings of Lorna would be _____. (Disregard income tax.  Do not use peso sign, comma, and
decimal.)

Response: [none]

Score: 0 out of 1 No

Question 30
Jaime, Madrid,  and Soriano are partners sharing profits on a 5:3:2 ratio. On January 1, 2018, Matias was admitted into the partnership with a 20% share in the profits. The
old partners continue to participate in profits proportionate to their original ratios. For the year 2018, the partnership books showed a net profit of P250,000. It was disclosed
however, that the errors shown below were made:

Errors 2017 2018

Accrued expenses not recorded at year-end 12,000
Inventory overstated 31,000
Purchases not recorded, for which goods have been received and inventoried 20,000
Income received in advance not adjusted 15,000
Unused supplies not take up at year-end 9,000

1. The new profit and loss ratio of Madrid is _____. (express in percentage)

Response: [none]

Score: 0 out of 1 No

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 CHAPTER 7
PARTNERSHIP FORMATION, OPERATION,
AND CHANGE IN OWNERSHIP
SUMMARY OF ITEMS BY TOPIC

Conceptual Computational
True- Multiple Multiple Short
False Choice Choice Problems Answer
Contrasting partnerships, 1-15 107-112 333-336
proprietorships, and
corporations
Equity theories applied to 16-21 113-115 337-338
partnerships
Articles of partnership 22-25 116-117
Initial capital 26-28 118-119 275-277 339-340
contributions
Carrying value assigned 29-30 120 169 275-276
noncash assets
Tax basis assigned 31-33 121 276
noncash assets
Market value assigned 34-36 122 277
noncash assets
Liabilities assumed by 37-40 123 170 278 341
partnership
Partnership formation, 41-47, 124-126 171-173 279-280 342-343
bonus method 49
Partnership formation, 41-44, 127-129 174-176 281-282 344-345
goodwill method 48-50
Drawing accounts 51-53 130-132 346
Sharing profits and losses 54-55 133 347
Interest on capital 56-59 134, 136 177-178, 185, 283-284, 348-349
balances portion of profit 187 288-289
and loss allocation
Salary portion of profit 60-62 135, 137 185-186 288-289 350
and loss allocation
Bonus portion of profit 63-65 138-139 179-181, 185 285-286, 351
and loss allocation 288-289
Residual ratio portion of 66-71 140-142 182-187 287-289 352-353
profit and loss allocation
 Unrealized holding gains 72-74 143-144 188-205 290-295, 354-355
and losses 297
Changes in ownership 75-77 145 356
Admission of new partner 78-80 146-148 206-207 296-297 357-358
- no change in net assets
Admission of new partner 81-83 149-150 208-209 298-299, 359-361
- change in net assets - 302, 305,
revaluation of existing 308
assets
Admission of new partner 84-86 151-153 210-219 300-302 362-363
- bonus to existing
partners
Admission of new partner 87-89 154-155 220-230 303-305 364-365
- bonus to new partner
Admission of new partner 90-92 153, 156- 231-240 306-308 366-368
- goodwill to existing 157
partners
Admission of new partner 90, 93- 158-159 241-249 309-311 368-369
- goodwill to new partner 94
Withdrawal of partner - 95-100 160-162 250-253 312-317
revaluation of existing
assets
Withdrawal of partner - 95-97, 163-165 254-261 318-320 370-371
bonus method 101-103
Withdrawal of partner - 95-97, 166-168 262-274 321-332
goodwill method 104-106

True-False Statements

1. A partnership is an association of two or more investors to carry on as co-owners a

business for profit.

2. Only individuals are allowed to be partners in a partnership.

3. Proprietorships and partnerships are similar in that they are both easily formed.

4. Proprietorships and partnerships are different in that proprietors have unlimited legal
liability while each partner’s legal liability is limited to his/her percentage ownership in
the partnership.

5. A partner’s personal assets may be taken by creditors to pay partnership debts if the
partnership is unable to meet its obligations.
6. Partnerships are not required to prepare financial statements in accordance with
Generally Accepted Accounting Principles unless they have publicly traded debt or are
required to follow GAAP by a creditor.

7. For a partnership to get an unqualified audit opinion, the financial records must conform
to Generally Accepted Accounting Principles.

8. Most small partnerships maintain their financial information in accordance with

Generally Accepted Accounting Principles.

9. Tax authorities basically view partnerships and proprietorships as extensions of their

owners.

10. Partnerships are not required to pay any taxes.

11. The taxable income of all partners does not necessarily sum to the net income of the
partnership.

12. The only accounting difference that must exist between partnerships and corporations is
the reporting of the ownership equity.

13. The manner in which a partnership and a corporation are formed is very similar.

14. It is generally easier to transfer ownership interest in a corporate form of business than in
a partnership.

15. A partnership legally ceases to exist each time a new partner joins the partnership or an
existing partner leaves the partnership

16. The proprietary theory of equity is based on the notion that a business entity is distinct
from the owners.

17. The entity theory of equity is based on the notion that a business entity is distinct from
the owners.

18. An individual partner’s personal responsibility for partnership debts is an example of the
entity theory of equity.

19. The dissolution of a partnership because of the admission of a new partner or withdrawal
of an existing partner is an example of the proprietary theory of equity.

20. The fact that partnerships can enter into contracts is an example of the proprietary theory
of equity.

21. Contributed assets becoming property of the partnership is an example of the entity
theory of equity.
22. The Uniform Partnership Act is the basis for partnership laws in many states.

23. A written agreement is required to form a partnership.

24. When a partnership is formed without a written agreement, the state laws where the
partnership is formed will establish the legal relationship between partners.

25. All provisions of state partnership law must be applied when a partnership is formed.

26. Partners make contributions of equal size when forming a partnership

27. There are different ways the partnership can value noncash assets contributed to the
partnership.

28. Appraisals are not necessarily required when assigning value to noncash assets
contributed to the partnership.

29. Assigning a noncash asset the contributor’s carrying value could result in a misallocation
of gain or loss if the asset is sold.

30. An asset’s carrying value should not be considered when establishing the initial capital
accounts of partners.

31. The tax basis of contributed noncash assets must be used to determine partnership
income allocation for tax reporting purposes.

32. Partnerships are required to file an informational return (Form 1065) with the IRS
indicating the amount of partnership income allocated to each partner.

33. The income assigned to each partner for financial accounting purposes will equal the
partner’s partnership income included on the partner’s individual income tax return.

34. The market value of noncash assets contributed to the partnership may be used for
computing the partners’ taxable income.

35. A contributing partner’s capital account may be assigned the market value of noncash
assets contributed but a market value assignment is not required.

36. The market value of noncash assets contributed to a partnership is the only relevant value
when determining the partners’ beginning capital balances.

37. The assumption of a liability by the partnership with regard to a noncash asset
contributed to the partnership by a partner will affect the value assigned to the partner’s
capital account.
38. The tax basis of a noncash asset contributed to a partnership with an accompanying
liability will not change as a result of the contribution.

39. When a noncash asset is contributed to a partnership with an accompanying liability, the
book value of the asset must become the cost basis of the asset on the partnership’s
financial records.

40. The assumption of a liability related to a noncash asset contributed to a partnership

reduces the value contributed.

41. Initial partner capital balances must equal the sum of the net assets contributed to the
partnership by the partner.

42. Initial partner capital balances are determined by agreement among the partners.

43. Only tangible assets contributed to the partnership can be considered when creating
initial capital balances.

44. There are two ways to consider unidentifiable intangible assets contributed to a
partnership: the bonus method and the goodwill method.

45. The bonus method of recognizing unidentifiable intangible assets contributed at a

partnership’s formation does not result in a net increase in total owners’ equity.

46. The bonus method of recognizing unidentifiable intangible assets contributed at a

partnership’s formation has to make the capital account balances for all partners equal.

47. The bonus method of recognizing unidentifiable intangible assets contributed at a

partnership’s formation will result in all of the partner’s capital accounts increasing.

48. Application of the goodwill method when forming a partnership requires partners to
agree on the amount of goodwill to be assigned to a partner(s).

49. At the date the partnership is formed, the total partner capital will be the same regardless
of whether the bonus method or the goodwill method is used to recognize unidentifiable
intangible assets.

50. Goodwill can be assigned to more than one partner at the date the partnership is formed.

51. The ability of partners to withdraw resources from the partnership is controlled
exclusively by the laws of the state where the partnership resides.
52. The articles of partnership often control the size of withdrawals partners are allowed to
make.

53. If a partnership makes a payment on behalf of a partner, a withdrawal has occurred.

54. Partnerships are required to indicate the manner in which profits and losses are to be
allocated among the partners.

55. With the exception of the residual profit and loss ratio, partners can agree to apply profit
and loss allocation components in any order.

56. The interest component of partnership profit and loss allocation rewards the partner for
labor and expertise brought into the partnership.

57. The purpose of the interest on capital balances component of partnership profit and loss
allocation is to reward partners for contributing economic resources to the partnership.

58. The interest on capital balances component of partnership profit and loss allocation is
always based on each partner’s beginning or period capital balance.

59. The interest on capital balances component of partnership profit and loss allocation is
generally stated as a percentage of the capital balance.

60. The salary portion of the profit and loss allocation is set in the articles of partnership and
will not change over time.

61. The salary portion of the partnership profit and loss allocation is not included in the
partnership’s income statement.

62. The salary portion of the partnership profit and loss allocation is used to compensate
partners for the time and effort expected in the business.

63. Partnerships are required to have bonus clauses in the articles of partnership.

64. Bonus to partners can be based on any criteria on which the partners agree.

65. Partnership bonus arrangements must consider net income as part of the bonus
calculation.

66. A residual interest is always a component of partnership profit and loss allocation.

67. Partnership profit and loss residual percentages must be equal.

68. Partnership profit and loss residual percentages must be the same for profits as they are
for losses.
69. Partnership profit and loss residual percentages are used to allocate any remaining profit
or loss to partners after all other allocation components have been considered.

70. Partnership residual profit and loss percentages may be changed by agreement of the
partners.
71. Partnership residual profit and loss percentages do not have to be the last component
applied in the profit and loss allocation process.

72. When partnership profit and loss ratios are changed, the difference between market and
book values should be determined and allocated to partners based on the currently
existing profit and loss ratios.

73. Partnerships must revalue assets up and/or down when the profit and loss ratios are
adjusted.

74. When an error is discovered in the financial records of a partnership, it should be

corrected immediately. Allocation of any change to capital accounts as a result of an
error correction should be based on the profit and loss ratios that existed when the error
occurred.

75. The dissolution of a partnership occurs only when the partnership is terminating
operations and going out of business.

76. One reason a change in the number of partners in a partnership through the addition or
withdrawal of a partner is important because the partners have unlimited liability.

77. A new partner in a partnership accepts unlimited liability for actions that occurred before
that partner joined the partnership.

78. The admission of a new partner into a partnership can occur without any new assets
being invested into the partnership.

79. If a new partner is going to acquire an ownership interest in a partnership directly from
another partner, the other partners do not need to approve the admission.

80. If a new partner acquires 40 percent of an existing partner’s equity in the partnership, the
new partner is also entitled to 40 percent of the existing partner’s profit and loss
allocation.

81. When a new partner is joining a partnership by making a payment to the partnership for
an amount more than book value, the partners are required to choose one of three
methods of recording the new partner’s payment in excess of book value.

82. The revaluation of assets and liabilities at the date a new partner joins the partnership, by
investing assets directly into the partnership, does not eliminate the possibility that the
partnership might need to record bonuses or goodwill as part of the admission of the new
partner.

83. The amount that assets are revalued when a new partner joins a partnership is always
shared by existing partners equally.
84. If a new partner’s capital account is created for an amount less than the value of net
assets contributed, an error has been made in the partnership’s accounting records.

85. The recognition of a bonus to existing partners at the date a new partner is admitted to a
partnership often occurs in lieu of the recognition of goodwill for the existing partners.

86. The bonus recognized by existing partners when a new partner is admitted to a
partnership is commonly shared among the existing partners based on the existing
partners’ relative profit and loss residual ratios.

87. It is possible for a new partner’s capital account to be established at an amount greater
than the market value of the identifiable assets invested.

88. New partners are never recipients of bonuses when they join the partnership.

89. A bonus paid to a new partner results in a reduction to the capital accounts of the existing
partners in proportion to their profit and loss sharing ratios.

90. The goodwill method of admitting a new partner to a partnership results in greater total
assets than the bonus method of admitting a new partner.

91. When the goodwill method is applied to recognize the admission of a new partner and
the existing partners are responsible for the goodwill, the new partner’s capital account
will always be established equal to the amount of the contribution to the partnership.

92. The existing partners will always recognize goodwill when a new partner is admitted to
the company and the goodwill method is applied.

93. When the goodwill method is applied to recognize the admission of a new partner and
the new partner is responsible for the goodwill, the new partner’s capital account will be
established at the amount of the contribution.

94. When new partner goodwill is recognized at the date the partner joins the partnership, the
existing partners’ capital accounts do not change as a result of the new partner’s
admission

95. A partner may withdraw from a partnership at any time without notice given to the
existing partners.

96. A withdrawing partner may have his/her partnership interest acquired by an outside
investor agreed to by the remaining partners, the remaining partners, or the partnership.

97. If existing partners acquire a withdrawing partner’s equity, the existing partners must
purchase the withdrawing partner’s equity in proportion to their residual profit and loss
ratios.
98. The revaluation of assets when a partner withdraws from the partnership may be a
complete revaluation or a partial revaluation, reflecting the change in value with regard
to the withdrawing partner’s ownership interest.

99. A partnership’s assets must be revalued when a partner withdraws.

100. When a partnership’s assets are revalued at the date a partner withdraws from the
partnership, the withdrawing partner’s equity must be acquired by the partnership. It
cannot be acquired by an outside investor or the existing partners personally.

101. Withdrawing partners from a partnership may receive a bonus or pay a bonus to
remaining partners.

102. If the assets of a partnership are revalued at the date of a partner’s withdrawal, there can
be no bonus recorded.

103. A bonus can be recorded for a retiring partner only if the partnership acquires the equity
of the partner.

104. At the date a partner withdraws from a partnership, the partners must choose to either
recognize the goodwill with respect to the withdrawing partner or they can choose to
recognize all of the partnership’s goodwill.

105. Any goodwill recognized at the date a partner withdraws from a partnership is usually
allocated to partners based on their residual profit and loss ratios.

106. Partnerships may have both a revaluation of assets and liabilities as well as goodwill
recognition at the date a partner withdraws from a partnership.

True-False Statement Solutions

1. T
2. F, Individuals, partnerships, and corporations are allowed to be partners in a partnership.
3. T
4. F, All of the general partners are liable for all the partnership’s debts.
5. T
6. T
7. F, Partnerships may receive an unqualified audit opinion when using a comprehensive
basis of accounting other that accrual such as cash, modified accrual, or the tax basis.
8. F, Most small partnerships maintain their financial information using the tax basis.
9. T
10. F, While the partnership does not pay income taxes, it is responsible for other taxes such
as payroll taxes and franchise taxes.
11. T
12. T
13. F, Partnerships and corporations are formed by two are more parties. A written
agreement is not necessary and state approval is not required for a partnership but a
corporation must file articles of incorporation with the state to attain a corporate charter.
14. T
15. T
16. F, The proprietary theory is based on the notion that the business entity is an aggregation
of the owners
17. T
18. F, This is an example of the proprietary theory of equity.
19. T
20. F, This is an example of the entity theory of equity.
21. T
22. T
23. F, While a written agreement is generally recommended when forming a partnership, it is
not required.
24. T
25. F, Most provisions only apply if there is no agreement among the partners with regard to
that specific issue.
26. F, Initial capital contributions are determined by agreement among the partners and do
not have to be equal in size.
27. T
28. T
29. T
30. F, Any basis (i.e., carrying value, tax basis, or market value) can be used to value
noncash assets contributed to a partnership
31. T
32. T
33. F, There are numerous differences that can cause the income assigned to partners for
accounting purposes to differ from income assigned to partners for tax purposes such as
noncash assets contributed to the partnership valued at an amount different than the
contributing partner’s tax basis
34. F, The tax basis of noncash assets contributed to the partnership must be used to
determine taxable income.
35. T
36. F, Partners should agree on the method to be used to value noncash asset contributions
when preparing the articles of partnership. A variety of bases can be used and the market
value is one of the alternatives.
37. T
38. F, The amount of the liability assumed by the partnership, excluding the contributing
partners share of that liability, will reduce the tax basis of the asset contributed.
39. F, The assumption of a liability has no impact on the valuation approach by the
partnership.
40. T
41. F, The capital balances established can be any amounts agreed by the partners.
42. T
43. F, Partners may contribute tangible and intangible assets to the partnership. It is possible
to consider both when determining initial partnership capital account balances.
44. T
45. T
46. F, The bonus method reallocates the total partnership capital among the partners’ capital
based on the agreed value of unidentifiable intangible assets contributed. Capital
accounts do not have to be the same when the process is completed.
47. F, The bonus method reallocates the total partnership capital among the partners based on
the agreed value of unidentifiable intangible assets contributed. It will always result in
one or more partner’s capital accounts decreasing while the remaining partner(s) capital
accounts increase.
48. T
49. F, The goodwill method requires an additional asset (Goodwill) to be recognized on the
balance sheet. As a result, the partners’ capital accounts will be greater in aggregate.
The bonus method results in a reallocation of capital among the partners and does not
result in a change in total partnership capital.
50. T
51. F, While states may have laws indicating that the partners cannot withdraw resources and
make the partnership insolvent, withdrawals are typically controlled by the articles of
partnership.
52. T,
53. T
54. F, If the partnership agreement is silent with regard to profit and loss allocation, profits
and losses are shared equally.
55. T
56. F, The interest component of partnership profit and loss allocation rewards partners for
capital contributions.
57. T
58. F, The interest on capital balances component of partnership profit and loss allocation
may be based on the beginning, ending, simple average capital balance, or weighted
average capital balance.
59. T
60. F, The salary component of the partnership profit and loss allocation would be expected
to be renegotiated periodically as the duties of the partners change.
61. T
62. T
63. F, Partnerships can offer bonuses to anyone. The choice is up to the partners. On the
other hand, there is no requirement to ever offer a bonus.
64. T
65. F, While many bonuses are based on a measure of income, it is not required. Bonus can
be based on other criteria such as market share, revenue, or average cost per unit.
66. T
67. F, Residual interests may be equal but they are not required to be equal.
68. F, While profit residual ratios and loss residual ratios are generally the same, they can
differ.
69. T
70. T
71. F, Residual profit and loss percentages are the last component of the profit and loss
allocation process applied because they are designed to allocate any remaining amount to
the partners.
72. T
73. F, There are several ways that the difference between market and book value of assets
can be addressed when the profit and loss ratios are changed. Revaluing the assets is one
of the possibilities along with maintaining a record of assets with market and book value
differences as well as directly adjusting capital accounts while leaving asset values
unchanged.
74. T
75. F, A dissolution occurs every time there is a change in relationship among the partners.
This can occur when a new partner enters the partnership or an existing partner leaves the
partnership. A dissolution occurs when the partnership is going out of business but the
termination of business is not a requirement for a dissolution.
76. T
77. F, A new partner's liability for actions that occurred before joining the partnership is
limited to the amount invested in the partnership.
78. T
79. F, Regardless how a new partner enters a partnership, the other partners have to approve
the admission because they must accept unlimited liability due to actions of the new
partner taken on behalf of the partnership.
80. F, There is no necessary relationship between the percentage of equity acquired and the
amount of profit or loss received. These are separate contractual issues.
81. F, There are three methods that may be used when a new partner is paying an amount
more than book value for the investment: revaluation of existing assets, bonus method,
and goodwill method. The partners do not have to choose one method. It would not be
inconsistent to revalue the assets and apply either the bonus or the goodwill method to
record the investment.
82. T
83. F, Existing partners share the difference between market value and book value equally if
that is the manner in which profits and losses are shared. If profits and losses are shared
in some other manner, then the difference between market and book values are shared in
that manner.
84. F, While it is possible that an error has been made, it is more likely that the existing
partners recognized an increase in their capital accounts via a bonus. The difference
between the amount credited to the new partner’s capital account and the amount
invested is shared by the existing partners.
85. T
86. T
87. T
88. F, New partners may receive a bonus if they bring value to the partnership in excess of
the tangible assets invested. This additional amount may be from such things as
expertise, experience, or business contacts. The bonus allocated to the new partner is
payment for these types of unidentifiable assets contributed to the partnership.
89. T
90. T
91. T
92. F, Goodwill may be recognized with regard to the existing partners but it may also be
recognized with regard to the new partner.
93. F, When goodwill is recognized with regard to the new partner, the new partner’s capital
account will be greater than the amount invested by the recognized goodwill.
94. T
95. F, The articles of partnership may include an agreement on the length of advanced notice
a partner must give before withdrawing from a partnership. Failure to provide the agreed
notice may result in the withdrawing partner being liable for damages suffered by the
partnership.
96. T
97. F, If existing partners acquire a withdrawing partner’s equity, they can divide the
purchase of that equity among themselves in any manner they choose.
98. T
99. F, Partnership assets may be revalued but they may also remain at their carrying value.
100. F, The revaluation of the partnership’s assets is unrelated to the purchase of the
withdrawing partners ownership interest in the partnership.
101. T
102. F, The revaluation of partnership assets at the time of a partner’s withdrawal has no
impact on the recognition of a bonus or goodwill.
103. T
104. F, While the partners can recognize either the withdrawing partner’s goodwill or the
entire partnership’s goodwill, there is no requirement to recognize any goodwill when a
partner withdraws from a partnership.
105. T
106. T

Conceptual Multiple Choice Questions

107. Which of the following is not a reason for forming a partnership?

a. Combine economic resources
b. Share managerial talent
c. Avoid complicated tax laws
d. Undertake a specific business objective

108. Which of the following business entity forms is (are) required to maintain their financial
information in accordance with Generally Accepted Accounting Principles?
a. Corporations
b. Corporation and Partnership
c. Partnership and Proprietorships
d. Corporation, Partnerships, and Proprietorships

109. Which of the following statements is not true with regard to tax issues of partnerships?
a. Partnerships are viewed as an extension of the owners
b. Partnerships are required to pay some forms of taxes
 c. The IRS must be informed as to the manner partnership income is allocated to the
partners
d. All of the above are true

110. Which of the following is not a similarity that exists between proprietorships and
partnerships?
a. Neither requires approval by a state to form
b. Both can use an accounting method that does not conform to GAAP
c. Owners put the company’s income on the owner’s individual tax return
d. All of the above are similarities of proprietorships and partnerships

111. Which of the following is not an area where there are differences when comparing
partnerships and corporations?
a. The ease of formation
b. The level of owner legal liability
c. The ease of ownership transferability
d. All of the above are areas where partnerships and corporations differ

112. Which of the following is not a difference when comparing partnerships and
corporations?
a. Corporations must conform to GAAP whereas partnerships are not required to
conform to GAAP
b. Partnerships and corporations neither are required to attain state approval to form
c. Partners have unlimited liability while corporation shareholders generally do not
have unlimited liability
d. Corporations are required to pay income tax while partnerships are not required to
pay income taxes

113. What theory of equity is applicable for partnerships?

a. Proprietary theory
b. Entity theory
c. A mix of proprietary and entity theory
d. Partnership theory

114. Which of the following is not an example of the proprietary theory of equity?
a. Partners do not have claims to specific assets
b. Individual partners are liable for all debts of the partnership
c. A partner’s income tax includes the partner’s share of partnership net income, and
the partnership does not pay income taxes
d. Salaries of partners are viewed as distributions of income, not components of net
income

115. Which of the following is not an example of the entity theory of equity?
a. Continuity of the partnership when admission or withdrawal of partners occurs
b. A partnership can enter into contracts
 c. Assets contributed to the partnership retain the existing tax basis to the partner
contributing
d Partnership creditors have priority claim to partnership assets and the creditors of
partners have priority claim to the partner’s assets in the event of liquidation

116. Which of the following statements is not true with regard to articles of partnership?
a. Written articles of partnership are not required to form a partnership
b. The Uniform Partnership Act provides a list of items that must be included in
articles of partnership
c. A written partnership agreement enables the partners to detail the agreed working
relationship among the partners
d. State law applies only if there is not agreement among the partners with regard to
that specific issue

117. When a partnership agreement is silent with regard to any aspect of a partnership
operation, who/what decides on that aspect of the partnership’s operations?
a. State law
b. Uniform Partnership Act
c. Majority vote of stockholders
d. Decision by senior partner

118. Which of the following valuation amounts is not allowed when assigning values to
noncash assets in a partnership formation?
a. Contributor’s carrying value
b. Contributor’s tax basis
c. Market (appraised) value
d. All of the above valuation amounts are allowed

119. Which of the following statements is correct with regard to the creation of initial capital
account balances on a partnership’s financial records?
a. The capital accounts can be created for any dollar amount agreed by all partners
b. The market value of noncash assets must be considered when creating the initial
capital balances
c. Each partner’s capital account must have a non-zero value assigned to it
d. All of the above statements are correct

120. Which of the following statements is not true with regard to assigning the carrying value
of noncash assets contributed to those assets at the date of a partnership’s formation?
a. Use of the noncash asset’s historical cost can result in the misstatement of the
partners’ capital accounts
b. Assigning the historical cost to noncash assets contributed to a partnership may
require the partnership agreement to address profit/loss distribution that will
occur when the contributed asset is sold
c. Assigning the historical cost to noncash assets contributed to a partnership will
not cause partner taxable income to differ from the partner’s share of partnership
income
 d. All of the above statements are correct

121. Which of the following statements is true with regard to assigning a noncash asset
contributed to a partnership the tax basis of the contributing partner?
a. The tax basis of noncash assets contributed must be used if the partnership is a
taxable entity
b. The tax basis must be considered when determine each partner’s allocation of
taxable partnership income
c. The contributing partner’s tax basis may not be used for financial accounting
records
d. None of the above statements are true

122. Which of the following statements is not true with regard to assigning the market value
of noncash assets contributed to those assets at the date of a partnership’s formation?
a. Gains or losses would likely not be recorded if the asset were sold at the date for
partnership is formed
b. The contributing partner’s share of the partnership’s income would be adjusted by
the difference between the market value and tax basis at the date the asset is
contributed to the partnership
c. The market value is the most commonly assigned value to contributed noncash
assets
d. All of the above statements are correct

123. Which of the following statements is correct with regard to the contribution of assets and
associated liabilities to a partnership?
a. Liabilities associated with assets contributed to a partnership remain the liability
of the contributing partner
b. Liabilities associated with assets contributed to a partnership become the liability
of the partnership
c. Liabilities associated with assets contributed to a partnership become the liability
of both the contributing partner and the partnership
d. Assets may not be contributed to a partnership if there is a liability associated
with the asset

124. The bonus method of recognizing unidentifiable intangible asset contributions to a

partnership does which of the following?
a. It recognizes that partners may contribute more than the observable assets to the
partnership
b. It increases total partnership capital
c. Can only increase partner capital accounts
d. b and c are correct

125. This method of recognizing unidentifiable intangible assets does not result in a change to
total contributed capital.
a. Goodwill method
b. Bonus method
 c. Reciprocal method
d. None of these methods will result in a change to total contributed capital

126. When can the bonus method be applied?

a. When a partnership is formed
b. When a new partner is added to the partnership
c. When an existing partner retires from the partnership
d. The bonus method can be applied in all three of the above circumstances

127. Shawn, Harris, and Derek are forming a partnership. The partners agree that Harris
should be assigned goodwill because of his knowledge of the business. Which partners’
capital accounts will have the dollar assigned dollar amounts altered due to the
recognition of the goodwill?
a. Shawn
b. Harris
c. Derek
d. All dollar amount assigned to all three partners’ capital accounts will be altered.

128. This method of recognizing unidentifiable intangible assets results in a change to total
contributed capital.
a. Goodwill method
b. Bonus method
c. Reciprocal method
d. None of these methods will result in a change to total contributed capital

129. The goodwill method always results in which of the following?

a. A change in the dollar value assigned to two or more partners’ capital accounts
b. A decrease in a partner’s capital account
c. An increase in a partner’s capital account
d. An increase in a partner’s capital account and a decrease in at least one partners’
capital account

130. For what purpose(s) might a drawing account be used for a partnership?
a. To keep a list of business contacts made by a partner
b. To recognize a loan made to a partner
c. To recognize inventory removed from the partnership by the partner
d. None of the above ore possible uses of a drawing account

131. Which of the following is not a withdrawal that may be found in a partnership’s drawing
account?
a. Removal of cash by a partner
b. Payment of a partner’s speeding ticket by the partnership
c. Removal of inventory by a partner
d. All of the above may be found in a drawing account
132. Which of the following statements is correct with regard to drawing accounts that may be
used by a partnership?
a. Drawing accounts are closed to the partners’ capital accounts at the end of the
accounting period
b. Drawing accounts establish the amount that may be taken from the partnership by
a partner in a given time period
c. Drawing accounts are similar to Retained Earnings in a corporation
d. Drawing accounts appear on the balance sheet as a contra-equity account

133. Which of the following should not be done by the accountant with regard to partnership
profit and loss allocation?
a. Prepare an analysis of alternative methods to allocate profits and losses
b. Recommend a particular method for allocating profits and losses
c. Inform partners of different ways that profits and losses could be allocated
d. All of the above are reasonable duties of the accountant

134. What is the underlying purpose of the interest on capital balances component of
allocating partnership profits and losses?
a. Compensate partners who contribute economic resources to the partnership
b. Reward labor and expertise contributions
c. Reward for special responsibilities undertaken
d. None of the above

135. What is the underlying purpose of the salary component of allocating partnership profits
and losses?
a. Compensate partners who contribute economic resources to the partnership
b. Reward labor and expertise contributions
c. Reward for special responsibilities undertaken
d. None of the above

136. Which of the following interest component calculation bases is least susceptible to
manipulation when allocating profits and losses to partners?
a. Beginning capital account balance
b. Average of beginning and ending capital account balances
c. Weighted average capital account balance
d. Ending capital account balance

137. Which component of the partnership profit and loss allocation compensates partners for
the routine time and effort expended in the business?
a. Interest on capital balance
b. Bonus
c. Salary
d. Residual interest

138. Which component of the partnership profit and loss allocation is most commonly offered
to the partner who manages the business?
 a. Interest on capital balance
b. Bonus
c. Salary
d. Residual interest

139. Which of the following may be a basis for determining the amount of a partner’s bonus?
a. Operating income
b. Market share
c. Average cost per unit
d. All of the three may be bases for determining the amount of a partner’s bonus

140. Which component of the partnership profit and loss allocation must be performed last?
a. Interest on capital balance
b. Bonus
c. Salary
d. Residual interest

141. Which of the following statements is true with regard to partnership residual profit and
loss ratios?
a. A partner’s residual profit ratio must be the same as the loss ratio
b. Residual profit and loss ratios can be changed by agreement
c. The residual profit and loss ratio must always be applied
d. All of the above are true statements

142. Applying the partnership residual profit and loss ratio can have which of the following
effects on a partner’s allocation of profit and/or loss?
a. Increase
b. Decrease
c. Increase or decrease
d. The residual profit and loss ratio is not used for the allocation or profit and/or loss

143. Which of the following should be done when the partnership profit and loss ratios are
changed?
a. The book and market value of assets and liabilities should be evaluated
b. The capital accounts should be modified to reflect the new profit and loss ratios
c. The creditors should be informed that the profit and loss ratios have been changed
d. The partners must draft new articles of partnership.

144. Which of the following is not a common way to address the difference between market
and book values of assets and liabilities when the partnership profit and loss ratios are
changed?
a. Assets and liabilities are revalued to market value
b. Assets with a difference between market and book value are sold and the profit is
distributed to partners based on existing profit and loss ratios
c. A list of differences between market value and book value are made
 d. Capital accounts of the partners are altered to reflect the difference between
market and book values at the date the profit and loss ratios change

145. Which of the following occurs every time a new partner is admitted to a partnership or an
existing partner leaves the partnership?
a. Dissolution
b. Termination
c. Dissolution and termination
d. None of the above occurs

146. Which of the following forms of new partner admission will not result in a change in the
partnership’s net assets?
a. Purchase of an ownership interest directly from the partnership
b. Purchase of an ownership interest directly from an existing partner
c. Either of the above
d. Neither of the above

147. Which of the following must occur for a new partner to enter the partnership by
acquiring an ownership interest directly from an existing partner?
a. Existing partners must know the amount the new partner is paying for the
ownership interest
b. The new partner must acquire all of the current partner’s ownership interest
c. Existing partners must approve the admission of the new partner into the
partnership
d. The new partner must live in the same state as the other partners

148. Which of the following must be true when a new partner acquires an ownership interest
directly from an existing partner?
a. Capital must be assigned to the new partner
b. The new partner’s profit and loss allocation must be proportionate to the capital
account balance
c. The new partner must be allocated some amount of profit and loss
d. The existing partners must provide a list of all the partnership’s outstanding
liabilities to the new partner

149. When a new partner joins a partnership by investing assets into the partnership, what
method may be used to record the admission of the new partner?
a. Revaluation of existing assets
b. Recognition of goodwill
c. Application of the bonus method
d. Any of the three or a combination may be applied

150. Which of the following is a reason to not revalue partnership assets at the date a new
partner is admitted to the partnership?
a. There has been a change in ownership
b. A new legal entity exists
 c. The partnership has not ceased operations
d. All three are reasons to not revalue partnership assets at the date of a new
partner’s admission

151. A bonus is recognized by existing partners at the date a new partner joins a partnership
when which of the following relationships occur?
a. The new partner’s contribution exceeds his/her percentage of total partnership
capital after the investment is made
b. The new partner’s contribution is less than his/her percentage of total partnership
capital after the investment is made
c. The new partner’s contribution is equal to his/her percentage of total partnership
capital after the investment is made
d. It is not possible to determine the answer to this question

152. Which of the following is not a criterion for recognizing a bonus to existing partners
when a new partner joins the partnership?
a. Only cash assets were contributed to the partnership by the new partner
b. The existing partners desire to not recognize goodwill on the balance sheet
c. The articles of partnership indicate that the bonus method will be used to admit
new partners
d. The new partner invests more into the partnership that his/her share of total
partnership capital after the investment is made

153. Which method of recording the admission of a new partner into a partnership potentially
results in the existing partners’ capital accounts changing in value?
a. Bonus method
b. Goodwill method
c. Either bonus method or goodwill method
d. Existing partners’ capital accounts never change when a new partner is admitted
into a partnership.

154. A bonus recognized by a new partner at the date of admission into the partnership is
generally shared by the existing partners in what way?
a. Equally
b. In proportion to capital account balances
c. In proportion to profit and loss residual ratios
d. In proportion to salaries

155. Which of the following is not a criterion for recognizing a bonus to a new partner when
the new partner joins the partnership?
a. Only cash assets were contributed to the partnership by the new partner
b. The existing partners desire to not recognize goodwill on the balance sheet
c. The articles of partnership indicate that the bonus method will be used to admit
new partners
d. The new partner invests less into the partnership that his/her share of total
partnership capital after the investment is made
156. When the goodwill method of recognizing the admission of a new partner is applied and
the existing partners contribute the goodwill, which of the following will result?
a. An increase in the capital accounts of existing partners
b. A decrease in the amount invested by the new partner
c. A decrease in the partnership’s total assets
d. A new partner’s capital account less than the amount invested

157. Which of the following will occur when the existing partners contribute goodwill and a
new partner is admitted to the partnership?
a. The existing partner’s capital accounts will be decreased
b. The existing partner will receive cash from the partnership
c. The partnership’s total assets will be increased
d. The new partner will be required to reduce his/her profit and loss sharing ratio

158. Which of the following statements is false with regard to the goodwill recognized for a
new partner entering a partnership?
a. The new partner’s capital account balance will exceed the amount invested
b. The existing partners’ capital accounts will remain unchanged
c. The amount invested by the new partner will be less than his/her proportion of the
partnership’s book value before goodwill is recognized
d. The three partners will have equal capital account balances when the transaction
is completed

159. Which of the following statements presents a reason that goodwill may be recorded with
regard to a new partner at the date of that partner’s admission to the partnership?
a. The existing partnership is worth more than the appraised value of the tangible
net assets
b. The new partner has a strong desire to become a member of the partnership
c. The total value of the new partner’s contribution to the partnership is greater than
the value of the identifiable net assets contributed
d. The new partner’s residual interest in profits and losses is greater than 30 percent

160. What portion of the partnership’s assets must be revalued when a partner withdraws from
the partnership?
a. The withdrawing partner’s share must be revalued
b. All of the partnership’s assets must be revalued
c. Any or all of the partnership’s assets may be revalued but none have to be
revalued
d. Partnership assets may not be revalued when a partner withdraws

161. Who may acquire the ownership interest of a partner who is withdrawing from a
partnership?
a. Existing partners
b. New investor
c. The partnership
 d. All of the above

162. If existing partners acquire the equity of a withdrawing partner, in what manner do they
divide the equity?
a. In any manner they choose
b. Equally
c. Proportionate to their residual profit and loss ratios
d. Existing partners are not permitted to acquire the equity of a withdrawing partner

163. Which of the following must exist to create the potential for a retiring partner to have a
bonus recognized at the date of withdrawal?
a. The retiring partner must be paid more than the book value of his equity
b. The existing partners must decide to not admit a new partner to the partnership
c. The retiring partner’s equity must be acquired by the partnership
d. All of the above are necessary for a bonus to be recognized

164. In what manner do the remaining partners share in the bonus paid to a withdrawing
partner?
a. In proportion to their residual profit and loss ratios
b. Equally
c. In proportion to their capital account balances
d. The partner with the greatest capital account is assigned the bonus

165. Which of the following statements is true with regard to a withdrawing partner?
a. A bonus must be paid to the retiring partner
b. A bonus may be paid to the retiring partner
c. A bonus must be paid to the retiring partner or to the remaining partners
d. Recognizing a bonus is not appropriate when a partner retires

166. What change occurs to continuing partners’ capital accounts when a withdrawing partner
is assigned goodwill at the date of withdrawal?
a. Continuing partners’ capital accounts decease by their profit and loss ratio
proportion of the goodwill assigned to the withdrawing partner
b. Continuing partners’ capital accounts increase
c. Continuing partners’ capital accounts do not change
d. Goodwill cannot be recognized with regard to withdrawing partners

167. What amount of goodwill can be recognized at the date a partner withdraws from a
partnership?
a. The withdrawing partner’s portion of goodwill
b. The continuing partners’ portion of goodwill
c. Goodwill may not be recognized at the date a partner withdraws
d. Either the withdrawing partner’s portion of goodwill or the goodwill attributable
to the entire partnership
168. Which of the following will occur when the goodwill method is used to recognize the
withdrawal of a partner?
a. The partnership must acquire the equity of the withdrawing partner
b. The withdrawing partner will be paid the book value of his/her equity after the
goodwill is recognized
c. The existing partners will divide the salary of the withdrawing partner
d. The total equity of the partnership will not change as a result of the partner’s
withdrawal

Conceptual Multiple Choice Question Difficulty and Solutions

107. easy c
108. moderate a
109. moderate d
110. easy d
111. easy d
112. moderate b
113. moderate c
114. difficult a
115. difficult c
116. moderate b
117. moderate a
118. easy d
119. moderate a
120. difficult c
121. moderate b
122. moderate d
123. easy b
124. easy a
125. easy b
126. moderate d
127. easy b
128. easy a
129. moderate c
130. easy c
131. moderate d
132. moderate a
133. easy b
134. easy a
135. easy b
136. easy c
137. easy c
138. easy b
139. moderate d
140. easy d
141. moderate b
142. easy c
143. moderate a
144. easy b
145. easy a
146. easy b
147. easy c
148. moderate c
149. easy d
150. moderate c
151. moderate b
152. easy a
153. easy c
154. easy c
155. easy a
156. moderate a
157. easy c
158. easy d
159. moderate c
160. easy c
161. easy d
162. moderate a
163. moderate d
164. easy a
165. easy b
166. easy c
167. easy d
168. easy b

Computational Multiple Choice Questions

169. Paul, Jeremy, and Juan are forming a partnership. Juan contributes a building having an
historical cost, accumulated depreciation, and market value of $290,000, $100,000, and
$400,000, respectively. The building is initially recorded on the partnership’s books at
Juan’s book value ($190,000). Two years later the building is sold for a $270,000 gain.
What portion of the profit or loss should be allocated to Juan?
a. $20,000
b. $230,000
c. $210,000
d. $90,000

170. Philip, Ray, and Sarah are forming a partnership. Philip contributes cash of $100,000;
Ray contributes inventory with a value of $100,000; and Sarah contributes a building
with a market value of $300,000. The partnership also assumed the $210,000 mortgage
on the building. What is the amount of capital assigned to each partner?
Philip Ray Sarah
a. $30,000 $30,000 $230,000
b. $56,000 $56,000 $174,000
 c. $100,000 $100,000 $90,000
d. $100,000 $100,000 $300,000

171. Max, Ike, and Tony are forming a partnership. The appraised value of assets contributed
is $60,000, $80,000, and $100,000, respectively. In addition, Max and Tony agree that
Ike’s experience is worth $30,000. The partners desire to apply the bonus method where
applicable. What is the total capital recorded at the date the partnership is formed?
a. $210,000
b. $240,000
c. $270,000
d. Some other dollar amount

172. Richardson, Peterson, and Wilkerson are forming a partnership. The partners contribute
cash and noncash assets valued at $30,000, $50,000, and $25,000, respectively. The
partners choose to apply the bonus method where applicable. If the partners agree to
establish equal capital account balances when the partnership is formed, how much of a
bonus is received by Richardson?
a. $15,000
b. $10,000
c. $5,000
d. Richardson does not receive a bonus

173. Richardson, Peterson, and Wilkerson are forming a partnership. The partners contribute
cash and noncash assets valued at $30,000, $50,000, and $25,000, respectively. The
partners choose to apply the bonus method where applicable. If the partners agree to
establish equal capital account balances when the partnership is formed, how much
capital is Peterson sacrificing to give a bonus to Richardson and Wilkerson?
a. $15,000
b. $10,000
c. $5,000
d. Richardson does not receive a bonus

174. Albert, Claude, and Jamie form a partnership by contributing $25,000, $70,000, and
$80,000, respectively. In addition, the partners agree that Albert should receive $20,000
of goodwill because of his special skills relevant to this business. What amount of
capital will exist for Albert when the partnership is formed?
a. $20,000
b. $25,000
c. $65,000
d. $45,000

175. Albert, Claude, and Jamie form a partnership by contributing $25,000, $70,000, and
$80,000, respectively. In addition, the partners agree that Albert should receive $20,000
of goodwill because of his special skills relevant to this business. What amount of
capital will exist for Claude when the partnership is formed?
a. $60,000
 b. $65,000
c. $70,000
d. Some other amount

176. Chris and David are forming a partnership with contributions of $75,000 and $125,000,
respectively. In addition, they agree that they will recognize $25,000 goodwill with
regard to David’s contacts in the area. What is the total amount of capital that will exist
for the partnership immediately after it is formed?
a. $75,000
b. $125,000
c. $150,000
d. $225,000

177. Chris is a partner in a local partnership. The profit and loss sharing agreement includes
an interest allocation of 7 percent on the invested capital. The capital account of Chris
reveals that he had a beginning capital account balance of $50,000. He withdrew
$10,000 on May 1 and invested $25,000 on October 31. Rounded to the nearest dollar,
what is Chris’ weighted average capital balance?
a. $57,500
b. $51,667
c. $47,500
d. $28,333

178. Richard is a partner in a local partnership. The profit and loss sharing agreement
includes an interest allocation of 8 percent on the invested capital. Richard had a
beginning capital balance of $60,000. He invested $30,000 on March 1, withdrew
$20,000 on August 1, and invested $40,000 on December 1. Rounded to the nearest
dollar, what dollar amount is allocated to Richard as interest on capital balance if the
weighted average capital balance is used as the basis of the computation?
a. $82,500
b. $6,400
c. $80,000
d. $6,600

179. Shawn is a managing partner in a local business. Part of his profit allocation is a bonus
based on the store’s operating income. The bonus is 8 percent of operating income in
excess of $200,000 after deducting the bonus. If operating income for the year is
$250,000, what is Shawn’s bonus (rounded to the nearest dollar)?
a. $3,703
b. $40,000
c. $20,000
d. $4,000

180. James has a bonus as part of his partner profit allocation. The bonus is based on the
partnerships net income. James receives a bonus equal to 5 percent that the net income
 exceeds $150,000. If the net income in the current year is $180,000, how much bonus
does James receive?
a. $30,000
b. $7,500
c. $1,500
d. $9,000

181. Cheryl is the manager of a local store. She is also a partner in the company and she
receives a bonus as part of the profit and loss allocation. Cheryl’s bonus is based on the
increase in revenues recorded during the period. The bonus arrangement is that Cheryl
receives 1 percent of net income for every full percentage point growth for revenues in
excess of a 5 percent revenue growth. During the most recent period, revenues grew
from $500,000 to $540,000 and net income grew from $98,000 to $120,000. How much
bonus does Cheryl receive for this period?
a. $2,000
b. $1,100
c. $6,000
d. $3,600

182. Norman, Sarah, and Taylor are partners. The partnership income for the period is
$130,000. The partnership agreement assigns salaries to the partners of $10,000,
$15,000, and $18,000, respectively. In addition, the partners have profit and loss
residual ratios of 30%, 45%, and 25%. What is the amount of profit and loss allocated to
Sarah as a result of applying the residual ratios?
a. $39,150
b. $54,150
c. $58,500
d. $51,750

183. Jim and Scott are partners who have residual profit and loss ratios of 55% and 45%,
respectively. The partnership has income of $60,000 for the current period. How much
of this income is allocated to Scott?
a. $30,000
b. $33,000
c. $14,850
d. $27,000

184. Mike and Michelle are partners in a local business. The business has a $25,000 loss this
year. How much of this loss is allocated to Mike?
a. $12,500
b. $0
c. $25,000
d. Losses cannot be allocated without residual profit and loss ratios
185. Nick, Joe, and Mike are partners. The company has $150,000 net income for the period.
How is this income divided to the partners if the following profit and loss allocation
process is followed?
Nick Joe Mike
Weighted average capital $200,000 $350,000 $180,000
Salary 25,000 15,000 35,000
Bonus .1 (NI - $100,000)
Residual profit/loss ratios .25 .45 .30
Return on invested capital 9%

Nick Joe Mike

a. $43,000 $46,500 $60,500
b. $45,325 $50,685 $53,990
c. $50,000 $50,000 $50,000
d. $44,075 $48,435 $57,490

186. Harriet, Bob, and Tim are partners. Income for the current year is $500,000. The profit
and loss agreement states that salaries are $35,000, $50,000, and $40,000, respectively.
In addition, the residual profit and loss ratios are 40%, 30%, and 30%, respectively.
How much of the profit is allocated to Harriet?
a. $150,000
b. $185,000
c. $162,500
d. $152,500

187. Suzanne, Thomas, and Vicky are partners. They have average capital account balances
of $200,000, $250,000, and $400,000, respectively. In addition, they have residual profit
and loss ratios of 15%, 25%, and 60%, respectively. If income for the year is $300,000
and the partners earn 8 percent return on invested capital, how much will be allocated to
Thomas?
a. $78,000
b. $100,000
c. $50,800
d. $171,200

188. Johnson and Pritchard are partners. They are changing the profit and loss ratios from the
current 60/40 to 70/30. At the date of the change, vacant land owned by the partnership
has a book value of $50,000 and a market value of $60,000. The partners choose to
prepare an itemized list of assets with market values different from book values. If the
land is sold in the future for $80,000, how much of the gain will be assigned to Johnson?
a. $21,000
b. $18,000
c. $27,000
d. $20,000
189. Johnson and Pritchard are partners. They are changing the profit and loss ratios from the
current 60/40 to 70/30. At the date of the change, vacant land owned by the partnership
has a book value of $50,000 and a market value of $60,000. The partners choose to
prepare an itemized list of assets with market values different from book values. If the
land is sold in the future for $80,000, how much of the gain will be assigned to
Pritchard?
a. $12,000
b. $10,000
c. $9,000
d. $13,000

190. Karen and Andrea are currently changing their partnership profit and loss ratios from
75/25 to 60/40. They have created a list of assets that have market and book value
differences. One of the assets is a building with a $300,000 market value and $200,000
book value. Two years after changing the profit and loss ratios, the building is sold for
$380,000. How much of the profit is allocated to Karen?
a. $135,000
b. $108,000
c. $123,000
d. $183,000

191. Karen and Andrea are currently changing their partnership profit and loss ratios from
75/25 to 60/40. They have created a list of assets that have market and book value
differences. One of the assets is a building with a $300,000 market value and $200,000
book value. Two years after changing the profit and loss ratios, the building is sold for
$380,000. How much of the profit is allocated to Andrea?
a. $57,000
b. $45,000
c. $72,000
d. $97,000

192. Peter and Ronald are partners. They have shared profits and losses 65/35 for a number of
years. Peter has indicated that he is going to reduce his involvement in the partnership so
the profit and loss ratio is being modified to 45/55. At the date of the change in the
profit and loss ratio, the partnership own vacant land with a market value of $300,000
and a book value of $100,000. Peter and Ronald compile a list of assets with market and
book value differences. Two years after the change in the profit and loss ratios, the land
is sold for $450,000. How much of the gain is allocated to Peter?
a. $197,500
b. $227,500
c. $157,500
d. $287,500

193. Peter and Ronald are partners. They have shared profits and losses 65/35 for a number of
years. Peter has indicated that he is going to reduce his involvement in the partnership so
the profit and loss ratio is being modified to 45/55. At the date of the change in the
 profit and loss ratio, the partnership own vacant land with a market value of $300,000
and a book value of $100,000. Peter and Ronald compile a list of assets with market and
book value differences. Two years after the change in the profit and loss ratios, the land
is sold for $450,000. How much of the gain is allocated to Ronald?
a. $122,500
b. $192,500
c. $152,500
d. $262,500

194. Jennifer and Robert are partners who are changing their profit and loss ratios from 60/40
to 45/55. At the date of the change, the partners choose to revalue assets with market
value different from book value. One asset revalued is land with a book value of
$50,000 and a market value of $120,000. Two years after the profit and loss ratio is
changed, the land is sold for $200,000. What is the amount of change to Jennifer’s
capital account at the date the land is revalued?
a. $72,000
b. $42,000
c. $30,000
d. $28,000

195. Jennifer and Robert are partners who are changing their profit and loss ratios from 60/40
to 45/55. At the date of the change, the partners choose to revalue assets with market
value different from book value. One asset revalued is land with a book value of
$50,000 and a market value of $120,000. Two years after the profit and loss ratio is
changed, the land is sold for $200,000. What is the amount of change to Robert’s capital
account at the date the land is revalued?
a. $72,000
b. $42,000
c. $30,000
d. $28,000

196. Jennifer and Robert are partners who are changing their profit and loss ratios from 60/40
to 45/55. At the date of the change, the partners choose to revalue assets with market
value different from book value. One asset revalued is land with a book value of
$50,000 and a market value of $120,000. Two years after the profit and loss ratio is
changed, the land is sold for $200,000. What is the amount of change to Jennifer’s
capital account at the date the land is sold?
a. $48,000
b. $67,500
c. $31,500
d. $36,000

197. Jennifer and Robert are partners who are changing their profit and loss ratios from 60/40
to 45/55. At the date of the change, the partners choose to revalue assets with market
value different from book value. One asset revalued is land with a book value of
$50,000 and a market value of $120,000. Two years after the profit and loss ratio is
 changed, the land is sold for $200,000. What is the amount of change to Robert’s capital
account at the date the land is sold?
a. $44,000
b. $82,500
c. $32,000
d. $60,000

198. James and Bruce are partners. They have shared profits and losses 70/30 for several
years. The partnership profit allocation agreement is currently being modified to 60/40.
At the date of the change, the partners choose to revalue assets with market value
different from book value. One asset revalued is a building with a book value of
$370,000 and a market value of $520,000. One year after the profit and loss ratio is
changed the building is sold for $650,000. What is the amount of change to James’
capital account at the date the building is revalued?
a. $105,000
b. $91,000
c. $45,000
d. $39,000

199. James and Bruce are partners. They have shared profits and losses 70/30 for several
years. The partnership profit allocation agreement is currently being modified to 60/40.
At the date of the change, the partners choose to revalue assets with market value
different from book value. One asset revalued is a building with a book value of
$370,000 and a market value of $520,000. One year after the profit and loss ratio is
changed the building is sold for $650,000. What is the amount of change to Bruce’s
capital account at the date the building is revalued?
a. $105,000
b. $91,000
c. $45,000
d. $39,000

200. James and Bruce are partners. They have shared profits and losses 70/30 for several
years. The partnership profit allocation agreement is currently being modified to 60/40.
At the date of the change, the partners choose to revalue assets with market value
different from book value. One asset revalued is a building with a book value of
$370,000 and a market value of $520,000. One year after the profit and loss ratio is
changed the building is sold for $650,000. What is the amount of change to James’
capital account at the date the building is sold?
a. $91,000
b. $78,000
c. $39,000
d. $52,000

201. James and Bruce are partners. They have shared profits and losses 70/30 for several
years. The partnership profit allocation agreement is currently being modified to 60/40.
At the date of the change, the partners choose to revalue assets with market value
 different from book value. One asset revalued is a building with a book value of
$370,000 and a market value of $520,000. One year after the profit and loss ratio is
changed the building is sold for $650,000. What is the amount of change to Bruce’s
capital account at the date the building is sold?
a. $91,000
b. $78,000
c. $39,000
d. $52,000

202. Theresa and Craig are partners. Their current profit and loss ratios (70/30) are being
changed to (60/40). The partners decide to adjust their capital accounts at the date of the
change in the profit and loss ratios to reflect the difference between market value and
book value of assets and liabilities. At the date of the change, land has a market value of
$250,000 and a book value of $120,000. How much will Theresa’s capital account be
adjusted at the date of the change in the profit and loss ratios?
a. $52,000 increase
b. $13,000 increase
c. $52,000 decrease
d. $13,000 decrease

203. Theresa and Craig are partners. Their current profit and loss ratios (70/30) are being
changed to (60/40). The partners decide to adjust their capital accounts at the date of the
change in the profit and loss ratios to reflect the difference between market value and
book value of assets and liabilities. At the date of the change, land has a market value of
$250,000 and a book value of $120,000. How much will Craig’s capital account be
adjusted at the date of the change in the profit and loss ratios?
a. $52,000 increase
b. $13,000 increase
c. $52,000 decrease
d. $13,000 decrease

204. Eric and Phillip have been partners for several years. During that time they have shared
profits and losses (60/40). They are currently revising the profit and loss ratios to
(70/30). Eric and Phillip decide to adjust the capital accounts at the date of the change to
reflect the difference between market value and book value of assets and liabilities. At
the date of the change, the partnership owns a building with a book value of $350,000
and a market value of $600,000. How much will Eric’s capital account be adjusted at the
date of the change in the profit and loss ratios?
a. $25,000 increase
b. $50,000 increase
c. $25,000 decrease
d. $50,000 decrease

205. Eric and Phillip have been partners for several years. During that time they have shared
profits and losses (60/40). They are currently revising the profit and loss ratios to
(70/30). Eric and Phillip decide to adjust the capital accounts at the date of the change to
 reflect the difference between market value and book value of assets and liabilities. At
the date of the change, the partnership owns a building with a book value of $350,000
and a market value of $600,000. How much will Phillip’s capital account be adjusted at
the date of the change in the profit and loss ratios?
a. $25,000 increase
b. $50,000 increase
c. $25,000 decrease
d. $50,000 decrease

206. Jenna is about to purchase some of Cynthia’s partnership interest. Cynthia currently has
partnership equity of $84,500. If Jenna pays Cynthia $30,000 for 30 percent of her
capital, what amount will be recorded in the partnership accounting records?
Jenna Cynthia
a. $30,000 credit $25,350 debit
b. $25,350 credit $25,350 debit
c. $30,000 credit $30,000 debit
d. $25,350 debit $25,350 credit

207. Sam and Ray are partners with capital accounts of $150,000 and $225,000, respectively.
They are considering allowing Richard to purchase 30 percent of Ray’s equity. At the
date of the proposed transaction, Sam and Ray want to revalue the partnership’s assets
and allocate any differences based on their 40/60 profit sharing agreement. Assume that
the net market versus book value differences is $100,000. What amount would Richard
pay for the 30 percent interest?
a. $67,500
b. $76,500
c. $97,500
d. The amount cannot be determined from the information provided

208. Jesse, Joseph, and Leslie are partners with capital accounts of $70,000, $120,000, and
$90,000, respectively. The partnership share profits and losses 45%, 30%, and 25%,
respectively. They are considering allowing Hans to join the partnership by investing
directly into the partnership. The partners intend to revalue the assets before Hans’
admission. Neither bonus nor goodwill are required. If the asset’s market value exceeds
book value $150,000, how much will Hans invest to acquire a 20% equity interest in the
partnership?
a. $107,500
b. $86,000
c. $70,000
d. $100,000

209. Sandra and Joshua are partners. They have capital account balances of $250,000 and
$200,000, respectively, and they share profits and losses 70/30. The partners are
considering admitting Judy as a new partner with a 25 percent equity interest for an
investment in the partnership of $180,000. Before admission, Sandra and Joshua will
revalue the partnership’s assets. If the net increase in the partnership’s assets is
 $125,000, what will be the balance in Sandra’s capital account immediately before
Judy’s admission?
a. $575,000
b. $337,500
c. $528,500
d. $262,500

210. Ken and Robert are partners who share profits and losses 75/25. They have capital
account balances of $270,000 and $300,000, respectively at the date they admit Susan
into the partnership. Susan invests $150,000 in the partnership for a 20 percent equity
interest and the bonus method is applied. What is the dollar amount of Susan’s capital
account at the date of admission?
a. $142,500
b. $150,000
c. $144,000
d. The dollar amount cannot be determined from this information

211. Ken and Robert are partners who share profits and losses 75/25. They have capital
account balances of $270,000 and $300,000, respectively at the date they admit Susan
into the partnership. Susan invests $150,000 in the partnership for a 20 percent equity
interest and the bonus method is applied. What is the dollar amount of bonus recognized
in Ken’s capital account at the date of admission?
a. $4,500
b. $34,500
c. $6,000
d. $1,500

212. Ken and Robert are partners who share profits and losses 75/25. They have capital
account balances of $270,000 and $300,000, respectively at the date they admit Susan
into the partnership. Susan invests $150,000 in the partnership for a 20 percent equity
interest and the bonus method is applied. What is the dollar amount of bonus recognized
in Robert’s capital account at the date of admission?
a. $6,000
b. $1,500
c. $144,000
d. $4,500

213. Ken and Robert are partners who share profits and losses 75/25. They have capital
account balances of $270,000 and $300,000, respectively at the date they admit Susan
into the partnership. Susan invests $150,000 in the partnership for a 20 percent equity
interest and the bonus method is applied. What is the dollar amount of Ken’s capital
account at the date of admission?
a. $274,500
b. $304,500
c. $144,000
d. $271,500
214. Ken and Robert are partners who share profits and losses 75/25. They have capital
account balances of $270,000 and $300,000, respectively at the date they admit Susan
into the partnership. Susan invests $150,000 in the partnership for a 20 percent equity
interest and the bonus method is applied. What is the dollar amount of Robert’s capital
account at the date of admission?
a. $271,500
b. $301,500
c. $144,000
d. $304,500

215. John and Sam are partners who share profits and losses 60/40. They have capital account
balances of $625,000 and $480,000, respectively at the date they admit Pierre into the
partnership. Pierre invests $450,000 in the partnership for a 25 percent equity interest
and the bonus method is applied. What is the dollar amount of Pierre’s capital account at
the date of admission?
a. $933,000
b. $450,000
c. $388,750
d. $622,000

216. John and Sam are partners who share profits and losses 60/40. They have capital account
balances of $625,000 and $480,000, respectively at the date they admit Pierre into the
partnership. Pierre invests $450,000 in the partnership for a 25 percent equity interest
and the bonus method is applied. What is the dollar amount of bonus recognized in
John’s capital account at the date of admission?
a. $98,000
b. $61,250
c. $24,500
d. $36,750

217. John and Sam are partners who share profits and losses 60/40. They have capital account
balances of $625,000 and $480,000, respectively at the date they admit Pierre into the
partnership. Pierre invests $450,000 in the partnership for a 25 percent equity interest
and the bonus method is applied. What is the dollar amount of bonus recognized in
Sam’s capital account at the date of admission?
a. $98,000
b. $61,250
c. $24,500
d. $36,750

218. John and Sam are partners who share profits and losses 60/40. They have capital account
balances of $625,000 and $480,000, respectively at the date they admit Pierre into the
partnership. Pierre invests $450,000 in the partnership for a 25 percent equity interest
and the bonus method is applied. What is the dollar amount of John’s capital account at
the date of admission?
 a. $516,750
b. $661,750
c. $649,500
d. $504,500

219. John and Sam are partners who share profits and losses 60/40. They have capital account
balances of $625,000 and $480,000, respectively at the date they admit Pierre into the
partnership. Pierre invests $450,000 in the partnership for a 25 percent equity interest
and the bonus method is applied. What is the dollar amount of John’s capital account at
the date of admission?
a. $516,750
b. $661,750
c. $649,500
d. $504,500

220. Kris and Mark are partners who share profits and losses 70/30. They have capital
account balances of $170,000 and $260,000, respectively at the date they admit Frank
into the partnership. Frank invests $120,000 in the partnership for a 25 percent equity
interest and the bonus method is applied. What is the dollar amount of Frank’s capital
account at the date of admission?
a. $137,500
b. $120,000
c. $143,333
d. The dollar amount cannot be determined from this information

221. Kris and Mark are partners who share profits and losses 70/30. They have capital
account balances of $170,000 and $260,000, respectively at the date they admit Frank
into the partnership. Frank invests $120,000 in the partnership for a 25 percent equity
interest and the bonus method is applied. What is the dollar amount of bonus recognized
in Frank’s capital account at the date of admission?
a. $70,000
b. $23,333
c. $17,500
d. $52,500

222. Kris and Mark are partners who share profits and losses 70/30. They have capital
account balances of $170,000 and $260,000, respectively at the date they admit Frank
into the partnership. Frank invests $120,000 in the partnership for a 25 percent equity
interest and the bonus method is applied. What is the dollar amount of the reduction to
Kris’ capital account at the date of admission?
a. $5,250
b. $12,250
c. $17,500
d. $100,333
223. Kris and Mark are partners who share profits and losses 70/30. They have capital
account balances of $170,000 and $260,000, respectively at the date they admit Frank
into the partnership. Frank invests $120,000 in the partnership for a 25 percent equity
interest and the bonus method is applied. What is the dollar amount of the reduction to
Mark’s capital account at the date of admission?
a. $5,250
b. $12,250
c. $17,500
d. $100,333

224. Kris and Mark are partners who share profits and losses 70/30. They have capital
account balances of $170,000 and $260,000, respectively at the date they admit Frank
into the partnership. Frank invests $120,000 in the partnership for a 25 percent equity
interest and the bonus method is applied. What is the dollar amount of Kris’ capital
account at the date of admission?
a. $157,750
b. $254,750
c. $164,750
d. $247,750

225. Kris and Mark are partners who share profits and losses 70/30. They have capital
account balances of $170,000 and $260,000, respectively at the date they admit Frank
into the partnership. Frank invests $120,000 in the partnership for a 25 percent equity
interest and the bonus method is applied. What is the dollar amount of Mark’s capital
account at the date of admission?
a. $157,750
b. $254,750
c. $164,750
d. $247,750

226. Tom and Barbara are partners who share profits and losses 40/60. They have capital
account balances of $265,000 and $180,000, respectively at the date they admit Greg into
the partnership. Greg invests $60,000 in the partnership for a 15 percent equity interest
and the bonus method is applied. What is the dollar amount of Greg’s capital account at
the date of admission?
a. $60,000
b. $78,530
c. $429,250
d. $75,750

227. Tom and Barbara are partners who share profits and losses 40/60. They have capital
account balances of $265,000 and $180,000, respectively at the date they admit Greg to
the partnership. Greg invests $60,000 in the partnership for a 15 percent equity interest
and the bonus method is applied. What is the dollar amount of reduction to Tom’s
capital account at the date of admission?
a. $6,300
 b. $9,450
c. $54,300
d. $81,450

228. Tom and Barbara are partners who share profits and losses 40/60. They have capital
account balances of $265,000 and $180,000, respectively at the date they admit Greg to
the partnership. Greg invests $60,000 in the partnership for a 15 percent equity interest
and the bonus method is applied. What is the dollar amount of reduction to Barbara’s
capital account at the date of admission?
a. $6,300
b. $9,450
c. $54,300
d. $81,450

229. Tom and Barbara are partners who share profits and losses 40/60. They have capital
account balances of $265,000 and $180,000, respectively at the date they admit Greg to
the partnership. Greg invests $60,000 in the partnership for a 15 percent equity interest
and the bonus method is applied. What is the dollar amount of Tom’s capital account at
the date of admission?
a. $255,550
b. $258,700
c. $173,700
d. $170,550

230. Tom and Barbara are partners who share profits and losses 40/60. They have capital
account balances of $265,000 and $180,000, respectively at the date they admit Greg to
the partnership. Greg invests $60,000 in the partnership for a 15 percent equity interest
and the bonus method is applied. What is the dollar amount of Barbara’s capital account
at the date of admission?
a. $255,550
b. $258,700
c. $173,700
d. $170,550

231. Michelle and Steve are partners in a local business. They currently share profits and
losses 60/40 and have capital account balances of $150,000 and $200,000, respectively.
They are considering admitting Jacob to the partnership. He will receive a 20 percent
equity interest in the partnership for a $120,000 investment. Assuming that goodwill is
to be recognized, which partner(s) are contributing the goodwill?
a. Both new and existing partners are contributing goodwill
b. New partner is contributing goodwill
c. Existing partners are contributing goodwill
d. There is not enough information to answer this question

232. Michelle and Steve are partners in a local business. They currently share profits and
losses 60/40 and have capital account balances of $150,000 and $200,000, respectively.
 They are considering admitting Jacob to the partnership. He will receive a 20 percent
equity interest in the partnership for a $120,000 investment. Assuming that goodwill is
to be recognized, what amount of goodwill would be disclosed on the partnership balance
sheet immediately after Jacob is admitted?
a. $130,000
b. $26,000
c. $87,500
d. $32,500

233. Michelle and Steve are partners in a local business. They currently share profits and
losses 60/40 and have capital account balances of $150,000 and $200,000, respectively.
They are considering admitting Jacob to the partnership. He will receive a 20 percent
equity interest in the partnership for a $120,000 investment. Assuming that goodwill is
to be recognized, what will be the capital account balance of Jacob immediately after he
is admitted?
a. $228,000
b. $252,000
c. $250,000
d. $120,000

234. Michelle and Steve are partners in a local business. They currently share profits and
losses 60/40 and have capital account balances of $150,000 and $200,000, respectively.
They are considering admitting Jacob to the partnership. He will receive a 20 percent
equity interest in the partnership for a $120,000 investment. Assuming that goodwill is
to be recognized, what will be the capital account balance of Michelle immediately after
Jacob is admitted?
a. $228,000
b. $252,000
c. $250,000
d. $120,000

235. Michelle and Steve are partners in a local business. They currently share profits and
losses 60/40 and have capital account balances of $150,000 and $200,000, respectively.
They are considering admitting Jacob to the partnership. He will receive a 20 percent
equity interest in the partnership for a $120,000 investment. Assuming that goodwill is
to be recognized, what will be the capital account balance of Steve immediately after
Jacob is admitted?
a. $228,000
b. $252,000
c. $250,000
d. $120,000

236. Susan and David are partners in a local business. They currently share profits and losses
45/55 and have capital account balances of $250,000 and $300,000, respectively. They
are considering admitting Jane to the partnership. She will receive a 25 percent equity
 interest in the partnership for a $225,000 investment. Assuming that goodwill is to be
recognized, which partner(s) are contributing the goodwill?
a. New partner is contributing goodwill
b. Existing partners are contributing goodwill
c. Both new and existing partners are contributing goodwill
d. There is not enough information to answer this question

237. Susan and David are partners in a local business. They currently share profits and losses
45/55 and have capital account balances of $250,000 and $300,000, respectively. They
are considering admitting Jane to the partnership. She will receive a 25 percent equity
interest in the partnership for a $225,000 investment. Assuming that goodwill is to be
recognized, what amount of goodwill would be disclosed on the partnership balance
sheet immediately after Jane is admitted?
a. $31,250
b. $125,000
c. $183,333
d. $41,667

238. Susan and David are partners in a local business. They currently share profits and losses
45/55 and have capital account balances of $250,000 and $300,000, respectively. They
are considering admitting Jane to the partnership. She will receive a 25 percent equity
interest in the partnership for a $225,000 investment. Assuming that goodwill is to be
recognized, what will be the capital account balance of Jane immediately after she is
admitted?
a. $225,000
b. $281,250
c. $293,750
d. $183,333

239. Susan and David are partners in a local business. They currently share profits and losses
45/55 and have capital account balances of $250,000 and $300,000, respectively. They
are considering admitting Jane to the partnership. She will receive a 25 percent equity
interest in the partnership for a $225,000 investment. Assuming that goodwill is to be
recognized, what will be the capital account balance of Susan immediately after Jane is
admitted?
a. $318,750
b. $356,250
c. $368,750
d. $306,250

240. Susan and David are partners in a local business. They currently share profits and losses
45/55 and have capital account balances of $250,000 and $300,000, respectively. They
are considering admitting Jane to the partnership. She will receive a 25 percent equity
interest in the partnership for a $225,000 investment. Assuming that goodwill is to be
recognized, what will be the capital account balance of David immediately after Jane is
admitted?
 a. $318,750
b. $356,250
c. $368,750
d. $306,250

241. Dan and Stephanie are partners in a local business They currently share profits and
losses 30/70 and have capital account balances of $250,000 and $320,000, respectively.
They are considering admitting Jason to the partnership. He will receive a 25 percent
equity interest in the partnership for a $175,000 investment. Assuming that goodwill is
to be recognized, what amount of goodwill would be disclosed on the partnership balance
sheet immediately after Jason is admitted?
a. $11,250
b. $8,438
c. $186,250
d. $15,000

242. Dan and Stephanie are partners in a local business They currently share profits and
losses 30/70 and have capital account balances of $250,000 and $320,000, respectively.
They are considering admitting Jason to the partnership. He will receive a 25 percent
equity interest in the partnership for a $175,000 investment. Assuming that goodwill is
to be recognized, what will be the capital account balance of Jason immediately after he
is admitted?
a. $190,000
b. $175,000
c. $15,000
d. $186,250

243. Dan and Stephanie are partners in a local business They currently share profits and
losses 30/70 and have capital account balances of $250,000 and $320,000, respectively.
They are considering admitting Jason to the partnership. He will receive a 25 percent
equity interest in the partnership for a $175,000 investment. Assuming that goodwill is
to be recognized, what will be the capital account balance of Dan immediately after Jason
is admitted?
a. $285,000
b. $186,250
c. $250,000
d. $320,000

244. Dan and Stephanie are partners in a local business They currently share profits and
losses 30/70 and have capital account balances of $250,000 and $320,000, respectively.
They are considering admitting Jason to the partnership. He will receive a 25 percent
equity interest in the partnership for a $175,000 investment. Assuming that goodwill is
to be recognized, what will be the capital account balance of Stephanie immediately after
Jason is admitted?
a. $285,000
b. $186,250
 c. $250,000
d. $320,000

245. Juan and Felix are partners in a local business. They currently share profits and losses
70/30 and have capital account balances of $240,000 and $320,000, respectively. They
are considering admitting Julia to the partnership. She will receive a 20 percent equity
interest in the partnership for a $150,000 investment. Assuming that goodwill is to be
recognized, which partner(s) are contributing the goodwill?
a. New partner is contributing goodwill
b. Existing partners are contributing goodwill
c. Both new and existing partners are contributing goodwill
d. There is not enough information to answer this question

246. Juan and Felix are partners in a local business. They currently share profits and losses
70/30 and have capital account balances of $240,000 and $320,000, respectively. They
are considering admitting Julia to the partnership. She will receive a 20 percent equity
interest in the partnership for a $150,000 investment. Assuming that goodwill is to be
recognized, what amount of goodwill would be disclosed on the partnership balance
sheet immediately after Julia is admitted?
a. $142,000
b. $150,000
c. $10,000
d. $8,000

247. Juan and Felix are partners in a local business. They currently share profits and losses
70/30 and have capital account balances of $240,000 and $320,000, respectively. They
are considering admitting Julia to the partnership. She will receive a 20 percent equity
interest in the partnership for a $150,000 investment. Assuming that goodwill is to be
recognized, what will be the capital account balance of Julia immediately after she is
admitted?
a. $160,000
b. $150,000
c. $152,000
d. $158,000

248. Juan and Felix are partners in a local business. They currently share profits and losses
70/30 and have capital account balances of $240,000 and $320,000, respectively. They
are considering admitting Julia to the partnership. She will receive a 20 percent equity
interest in the partnership for a $150,000 investment. Assuming that goodwill is to be
recognized, what will be the capital account balance of Juan immediately after Julia is
admitted?
a. $280,000
b. $142,000
c. $320,000
d. $240,000
249. Juan and Felix are partners in a local business. They currently share profits and losses
70/30 and have capital account balances of $240,000 and $320,000, respectively. They
are considering admitting Julia to the partnership. She will receive a 20 percent equity
interest in the partnership for a $150,000 investment. Assuming that goodwill is to be
recognized, what will be the capital account balance of Felix immediately after Julia is
admitted?
a. $280,000
b. $142,000
c. $320,000
d. $240,000

250. Harry, Susan, and Walter are partners who share profits and losses 35, 40, and 25
percent, respectively. Harry is withdrawing from the partnership. At the date of
withdrawal, the partners are revaluing Harry’s portion of the partnership’s assets. If the
value of the partnership’s assets are $200,000 greater than book value, what is the dollar
amount of capital account adjustment that will be recorded?
a. $50,000
b. $70,000
c. $80,000
d. $200,000

251. Harry, Susan, and Walter are partners who share profits and losses 35, 40, and 25
percent, respectively. Harry is withdrawing from the partnership. At the date of
withdrawal, the partners are revaluing all of the partnership’s assets. If the value of the
partnership’s assets are $200,000 greater than book value, what is the dollar amount of
capital account adjustment that will be recorded?
a. $50,000
b. $70,000
c. $80,000
d. $200,000

252. Harry, Susan, and Walter are partners who share profits and losses 35, 40, and 25
percent, respectively. The partners have capital account balances of $80,000, $110,000,
and $55,000, respectively. Harry is withdrawing from the partnership. At the date of
withdrawal, the partners are revaluing all of the partnership’s assets, an increase of
$200,000. If Susan and Walter acquire Harry’s equity, what will be the amount of
Susan’s capital on the partnership’s balance sheet immediately after Harry’s withdrawal,
rounded to the nearest dollar?
a. $110,000
b. $230,000
c. $282,308
d. Susan’s capital account balance cannot be determined from the information given

253. Harry, Susan, and Walter are partners who share profits and losses 35, 40, and 25
percent, respectively. The partners have capital account balances of $80,000, $110,000,
and $55,000, respectively. Harry is withdrawing from the partnership. At the date of
 withdrawal, the partners are revaluing all of the partnership’s assets, an increase of
$200,000. If Susan and Walter acquire Harry’s equity, what will be the amount of total
capital on the partnership’s balance sheet immediately after Harry’s withdrawal?
a. $245,000
b. $445,000
c. $365,000
d. $295,000

254. Frank, George, and Scott are partners with capital accounts of $160,000, $120,000, and
$210,000, respectively. Scott has informed Frank and George that he must withdraw
from the partnership. The partners have agreed that the partnership will purchase Scott’s
ownership interest for $250,000. The profit and loss residual ratios before Scott’s
retirement are 45 percent, 30 percent, and 25 percent, respectively. How much will
Frank’s capital account be reduced if the bonus method is applied for the withdrawal?
a. $40,000
b. $24,000
c. $20,000
d. $16,000

255. Frank, George, and Scott are partners with capital accounts of $160,000, $120,000, and
$210,000, respectively. Scott has informed Frank and George that he must withdraw
from the partnership. The partners have agreed that the partnership will purchase Scott’s
ownership interest for $250,000. The profit and loss residual ratios before Scott’s
retirement are 45 percent, 30 percent, and 25 percent, respectively. What will be the
balance in Frank’s capital account if the bonus method is applied for the withdrawal?
a. $160,000
b. $104,000
c. $184,000
d. $136,000

256. Frank, George, and Scott are partners with capital accounts of $160,000, $120,000, and
$210,000, respectively. Scott has informed Frank and George that he must withdraw
from the partnership. The partners have agreed that the partnership will purchase Scott’s
ownership interest for $250,000. The profit and loss residual ratios before Scott’s
retirement are 45 percent, 30 percent, and 25 percent, respectively. How much will
George’s capital account be reduced if the bonus method is applied for the withdrawal?
a. $40,000
b. $24,000
c. $20,000
d. $16,000

257. Frank, George, and Scott are partners with capital accounts of $160,000, $120,000, and
$210,000, respectively. Scott has informed Frank and George that he must withdraw
from the partnership. The partners have agreed that the partnership will purchase Scott’s
ownership interest for $250,000. The profit and loss residual ratios before Scott’s
 retirement are 45 percent, 30 percent, and 25 percent, respectively. What will be the
balance in George’s capital account if the bonus method is applied for the withdrawal?
a. $120,000
b. $104,000
c. $184,000
d. $136,000

258. Melissa, Randy, and Sarah are partners with capital accounts of $300,000, $180,000, and
$270,000, respectively. Randy has informed Melissa and Sarah that he must withdraw
from the partnership. The partners have agreed that the partnership will purchase
Randy’s ownership interest for $240,000. The profit and loss residual ratios before
Randy’s retirement are 42 percent, 30 percent, and 28 percent, respectively. How much
will Melissa’s capital account be reduced if the bonus method is applied for the
withdrawal?
a. $36,000
b. $60,000
c. $24,000
d. $30,000

259. Melissa, Randy, and Sarah are partners with capital accounts of $300,000, $180,000, and
$270,000, respectively. Randy has informed Melissa and Sarah that he must withdraw
from the partnership. The partners have agreed that the partnership will purchase
Randy’s ownership interest for $240,000. The profit and loss residual ratios before
Randy’s retirement are 42 percent, 30 percent, and 28 percent, respectively. What will
be the balance in Melissa’s capital account if the bonus method is applied for the
withdrawal?
a. $336,000
b. $300,000
c. $264,000
d. $246,000

260. Melissa, Randy, and Sarah are partners with capital accounts of $300,000, $180,000, and
$270,000, respectively. Randy has informed Melissa and Sarah that he must withdraw
from the partnership. The partners have agreed that the partnership will purchase
Randy’s ownership interest for $240,000. The profit and loss residual ratios before
Randy’s retirement are 42 percent, 30 percent, and 28 percent, respectively. How much
will Sarah’s capital account be reduced if the bonus method is applied for the
withdrawal?
a. $36,000
b. $60,000
c. $24,000
d. $30,000

261. Melissa, Randy, and Sarah are partners with capital accounts of $300,000, $180,000, and
$270,000, respectively. Randy has informed Melissa and Sarah that he must withdraw
from the partnership. The partners have agreed that the partnership will purchase
 Randy’s ownership interest for $240,000. The profit and loss residual ratios before
Randy’s retirement are 42 percent, 30 percent, and 28 percent, respectively. What will
be the balance in Sarah’s capital account if the bonus method is applied for the
withdrawal?
a. $336,000
b. $300,000
c. $264,000
d. $246,000

262. Bob, Claire, and Jack are partners who share profits and losses 30 percent, 25 percent,
and 45 percent, respectively. Bob informed Claire and Jack that he is withdrawing from
the partnership. The partners’ capital accounts at the date of Bob’s withdrawal are
$150,000, $135,000, and $225,000, respectively. The partnership agreement states that
the goodwill, if any, of the withdrawing partner will be recognized for all partners
immediately prior to the withdrawal of any partner. In this instance, the partners
determine that the goodwill associated with Bob is $22,500. Assuming that Bob’s equity
is purchased by a new partner (Deborah) approved by Claire and Jack, what is the
amount of Deborah’s initial capital account?
a. $150,000
b. $170,000
c. $172,500
d. The amount cannot be determined because the amount Deborah paid for Bob’s
equity is not known

263. Bob, Claire, and Jack are partners who share profits and losses 30 percent, 25 percent,
and 45 percent, respectively. Bob informed Claire and Jack that he is withdrawing from
the partnership. The partners’ capital accounts at the date of Bob’s withdrawal are
$150,000, $135,000, and $225,000, respectively. The partnership agreement states that
the goodwill, if any, of the withdrawing partner will be recognized for all partners
immediately prior to the withdrawal of any partner. In this instance, the partners
determine that the goodwill associated with Bob is $22,500. Assuming that Bob’s equity
is purchased by Claire (60 percent) and Jack (40 percent), what is the amount of Claire’s
capital account at the date of Bob’s withdrawal?
a. $238,500
b. $307,500
c. $186,750
d. $180,000

264. Bob, Claire, and Jack are partners who share profits and losses 30 percent, 25 percent,
and 45 percent, respectively. Bob informed Claire and Jack that he is withdrawing from
the partnership. The partners’ capital accounts at the date of Bob’s withdrawal are
$150,000, $135,000, and $225,000, respectively. The partnership agreement states that
the goodwill, if any, of the withdrawing partner will be recognized for all partners
immediately prior to the withdrawal of any partner. In this instance, the partners
determine that the goodwill associated with Bob is $22,500. Assuming that Bob’s equity
 is purchased by Claire (60 percent) and Jack (40 percent), what is the amount of Jack’s
capital account at the date of Bob’s withdrawal?
a. $397,500
b. $294,000
c. $285,000
d. $159,000

265. Bob, Claire, and Jack are partners who share profits and losses 30 percent, 25 percent,
and 45 percent, respectively. Bob informed Claire and Jack that he is withdrawing from
the partnership. The partners’ capital accounts at the date of Bob’s withdrawal are
$150,000, $135,000, and $225,000, respectively. The partnership agreement states that
the goodwill of the partnership will be recognized for all partners immediately prior to
the withdrawal of any partner. In this instance, the partners determine that the
partnership’s goodwill $75,000. Assuming that Bob’s equity is purchased by a new
partner (Deborah) approved by Claire and Jack, what is the amount of Deborah’s initial
capital account?
a. $150,000
b. $170,000
c. $172,500
d. The amount cannot be determined because the amount Deborah paid for Bob’s
equity is not known

266. Bob, Claire, and Jack are partners who share profits and losses 30 percent, 25 percent,
and 45 percent, respectively. Bob informed Claire and Jack that he is withdrawing from
the partnership. The partners’ capital accounts at the date of Bob’s withdrawal are
$150,000, $135,000, and $225,000, respectively. The partnership agreement states that
the goodwill of the partnership will be recognized for all partners immediately prior to
the withdrawal of any partner. In this instance, the partners determine that the
partnership’s goodwill $75,000. Assuming that Bob’s equity is purchased by Claire (60
percent) and Jack (40 percent), what is the amount of Claire’s capital account at the date
of Bob’s withdrawal?
a. $175,500
b. $247,500
c. $257,250
d. $327,750

267. Bob, Claire, and Jack are partners who share profits and losses 30 percent, 25 percent,
and 45 percent, respectively. Bob informed Claire and Jack that he is withdrawing from
the partnership. The partners’ capital accounts at the date of Bob’s withdrawal are
$150,000, $135,000, and $225,000, respectively. The partnership agreement states that
the goodwill of the partnership will be recognized for all partners immediately prior to
the withdrawal of any partner. In this instance, the partners determine that the
partnership’s goodwill $75,000. Assuming that Bob’s equity is purchased by Claire (60
percent) and Jack (40 percent), what is the amount of Jack’s capital account at the date of
Bob’s withdrawal?
a. $175,500
 b. $247,500
c. $257,250
d. $327,750

268. Bonnie, Gwen, and Sally are partners with capital account balances of $350,000,
$280,000, and $200,000 respectively. Sally informed Bonnie and Gwen that she is
withdrawing from the partnership. The partners’ share profits and losses 45 percent, 30
percent, and 25 percent, respectively. The partnership agreement states that the goodwill,
if any, of the withdrawing partner will be recognized at the date of withdrawal. In this
instance, the partners determine that the goodwill associated with Sally is $40,000.
Assuming that Sally’s equity is purchased by a new partner (Mary) approved by Bonnie
and Gwen, what is the amount of Mary’s initial capital account?
a. $240,000
b. $390,000
c. $320,000
d. The amount cannot be determined because the amount Mary paid for Sally’s
equity is not known

269. Bonnie, Gwen, and Sally are partners with capital account balances of $350,000,
$280,000, and $200,000 respectively. Sally informed Bonnie and Gwen that she is
withdrawing from the partnership. The partners’ share profits and losses 45 percent, 30
percent, and 25 percent, respectively. The partnership agreement states that the goodwill,
if any, of the withdrawing partner will be recognized at the date of withdrawal. In this
instance, the partners determine that the goodwill associated with Sally is $40,000.
Assuming that Sally’s equity is purchased by Bonnie (60 percent) and Gwen (40
percent), what is the amount of Bonnie’s capital account at the date of Sally’s
withdrawal?
a. $446,000
b. $494,000
c. $424,000
d. $376,000

270. Bonnie, Gwen, and Sally are partners with capital account balances of $350,000,
$280,000, and $200,000 respectively. Sally informed Bonnie and Gwen that she is
withdrawing from the partnership. The partners’ share profits and losses 45 percent, 30
percent, and 25 percent, respectively. The partnership agreement states that the goodwill,
if any, of the withdrawing partner will be recognized at the date of withdrawal. In this
instance, the partners determine that the goodwill associated with Sally is $40,000.
Assuming that Sally’s equity is purchased by Bonnie (60 percent) and Gwen (40
percent), what is the amount of Gwen’s capital account at the date of Sally’s withdrawal?
a. $446,000
b. $494,000
c. $424,000
d. $376,000
271. Bonnie, Gwen, and Sally are partners with capital account balances of $350,000,
$280,000, and $200,000 respectively. Sally informed Bonnie and Gwen that she is
withdrawing from the partnership. The partners’ share profits and losses 45 percent, 30
percent, and 25 percent, respectively. The partnership agreement states that the goodwill
of the partnership will be recognized at the date of withdrawal. In this instance, the
partners determine that the partnership’s goodwill $150,000. Assuming that Sally’s
equity is purchased by a new partner (Mary) approved by Bonnie and Gwen, what is the
amount of Mary’s initial capital account?
a. $87,500
b. $237,500
c. $350,000
d. The amount cannot be determined because the amount Mary paid for Sally’s
equity is not known

272. Bonnie, Gwen, and Sally are partners with capital account balances of $350,000,
$280,000, and $200,000 respectively. Sally informed Bonnie and Gwen that she is
withdrawing from the partnership. The partners’ share profits and losses 45 percent, 30
percent, and 25 percent, respectively. The partnership agreement states that the goodwill
of the partnership will be recognized at the date of withdrawal. In this instance, the
partners determine that the partnership’s goodwill $150,000. Assuming that Sally’s
equity is purchased by Bonnie (60 percent) and Gwen (40 percent), what is the amount of
Bonnie’s capital account at the date of Sally’s withdrawal?
a. $441,000
b. $490,000
c. $560,000
d. $420,000

273 Bonnie, Gwen, and Sally are partners with capital account balances of $350,000,
$280,000, and $200,000 respectively. Sally informed Bonnie and Gwen that she is
withdrawing from the partnership. The partners’ share profits and losses 45 percent, 30
percent, and 25 percent, respectively. The partnership agreement states that the goodwill
of the partnership will be recognized at the date of withdrawal. In this instance, the
partners determine that the partnership’s goodwill $150,000. Assuming that Sally’s
equity is purchased by Bonnie (60 percent) and Gwen (40 percent), what is the amount of
Bonnie’s capital account at the date of Sally’s withdrawal?
a. $441,000
b. $490,000
c. $560,000
d. $420,000

274. Bonnie, Gwen, and Sally are partners with capital account balances of $350,000,
$280,000, and $200,000 respectively. Sally informed Bonnie and Gwen that she is
withdrawing from the partnership. The partners’ share profits and losses 45 percent, 30
percent, and 25 percent, respectively. The partnership agreement states that the goodwill
of the partnership will be recognized at the date of withdrawal. In this instance, the
partners determine that the partnership’s goodwill $150,000. Assuming that Sally’s
 equity is purchased by Bonnie (60 percent) and Gwen (40 percent), what is total
partnership equity after the withdrawal?
a. $980,000
b. $780,000
c. $830,000
d. $630,000

Computational Multiple Choice Question Difficulty and Solutions

169. difficult b
($400,000 - $190,000) + [$270,000 - ($400,000 - $190,000)]/3 = $230,000
170. easy c
171. easy b
$60,000 + $80,000 + $100,000 = $240,000
172. easy c
$30,000 + $50,000 + $25,000 = $105,000/3 = $35,000 - $30,000 = $5,000
173. moderate a
$30,000 + $50,000 + $25,000 = $105,000/3 = $35,000
$50,000 - $30,000 = $15,000
174. easy d
175. easy c
176. easy d
177. moderate c
[($50,000 x 4) + ($40,000 x 6) + ($65,000 x 2)]/12 = $47,500
178. moderate b
[($60,000 x 2) + ($90,000 x 5) + ($70,000 x 4) + $110,000] (.08) = $6,400
179. difficult a
B = .08($250,000 - $200,000 - B)
180. moderate c
B = .05($180,000 - $150,000)
181. difficult d
B = {[($540,000 - $500,000)/$500,000] - .05} $120,000
182. moderate a
($130,000 - $10,000 - $15,000 - $18,000) .45
183. easy d
$60,000 x .45
184. easy a
Profits and losses are allocated equally if there is no allocation provided
185. difficult d
Nick Joe Mike Total
Interest on capital
$200,000 x .09 $18,000
$350,000 x .09 $31,500
$180,000 x .09 $16,200 $65,700
Salary 25,000 15,000 35,000 75,000
Bonus .1($150,000 - $100,000) 5,000 5,000
Residual
 $4,300 x .25 1,075
$4,300 x .45 1,935
$4,500 x .30 1,290 4,300
Totals $44,075 $48,435 $57,490 $150,000
186. moderate b
$35,000 + ($500,000 - $35,000 - $50,000 - $40,000) .4
187. moderate a
($250,000 x .08) + [$300,000 - ($200,000 + $250,000 + $400,000)(.08)] .25
188. moderate d
($60,000 - $50,000)(.60) + ($80,000 - $60,000)(.70)
189. moderate b
($60,000 - $50,000)(.40) + ($80,000 - $60,000)(.30)
190. moderate c
($300,000 - $200,000)(.75) + ($380,000 - $300,000)(.60)
191. moderate a
($300,000 - $200,000)(.25) + ($380,000 - $300,000)(.40)
192. moderate a
($300,000 - $100,000)(.65) + ($450,000 - $300,000)(.45)
193. moderate c
($300,000 - $100,000)(.35) + ($450,000 - $300,000)(.55)
194. easy b
($120,000 - $50,000)(.60)
195. easy d
($120,000 - $50,000)(.40)
196. easy d
($200,000 - $120,000)(.45)
197. easy a
($200,000 - $120,000)(.55)
198. moderate a
($520,000 - $370,000)(.70)
199. moderate c
($520,000 - $370,000)(.30)
200. moderate b
($650,000 - $520,000)(.60)
201. moderate d
($650,000 - $520,000)(.40)
202. difficult b
($250,000 - $120,000)(.70 - .60)
203. difficult d
($250,000 - $120,000)(.30 - .40)
204. difficult c
($600,000 - $350,000)(.70 - .60)
205. difficult a
($600,000 - $350,000)(.40 - .30)
206. easy b
$84,500 x .3
207. difficult d
The amount that Richard will pay Ray depends on many factors and cannot be
determined from the information provided here.
208. difficult a
[($70,000 + $120,000 + $90,000 + $150,000)/.80](.20)
209. easy b
$250,000 + ($125,000 x .70)
210. moderate c
($270,000 + $300,000 + $150,000)(.20)
211. moderate a
[$150,000 - ($270,000 + $300,000 + $150,000)(.20)](.75)
212. moderate b
[$150,000 - ($270,000 + $300,000 + $150,000)(.20)](.25)
213. difficult a
[$150,000 - ($270,000 + $300,000 + $150,000)(.20)](.75) + $270,000
214. difficult b
[$150,000 - ($270,000 + $300,000 + $150,000)(.20)](.25) + $300,000
215. moderate c
($625,000 + $480,000 + $450,000)(.25)
216. moderate d
[$450,000 - ($625,000 + $480,000 + $450,000)(.25)](.60)
217. moderate c
[$450,000 - ($625,000 + $480,000 + $450,000)(.25)](.40)
218. difficult b
[$450,000 - ($625,000 + $480,000 + $450,000)(.25)](.60) + $625,000
219. difficult d
[$450,000 - ($625,000 + $480,000 + $450,000)(.25)](.40) + $480,000
220. moderate a
($170,000 + $260,000 + $120,000)(.25)
221. moderate c
[$120,000 - ($170,000 + $260,000 + $120,000)(.25)]
222. moderate b
[$120,000 - ($170,000 + $260,000 + $120,000)(.25)](.70)
223. moderate a
[$120,000 - ($170,000 + $260,000 + $120,000)(.25)](.30)
224. difficult a
$170,000 - [$120,000 - ($170,000 + $260,000 + $120,000)(.25)](.70)
225. difficult b
$260,000 - [$120,000 - ($170,000 + $260,000 + $120,000)(.25)](.30)
226. moderate d
($265,000 + $180,000 + $60,000)(.15)
227. moderate a
[$60,000 - ($265,000 + $180,000 + $60,000)(.15)](.40)
228. moderate b
[$60,000 - ($265,000 + $180,000 + $60,000)(.15)](.60)
229. difficult b
 $265,000 - [$60,000 - ($265,000 + $180,000 + $60,000)(.15)](.40)
230. difficult d
$180,000 - [$60,000 - ($265,000 + $180,000 + $60,000)(.15)](.60)
231. moderate c
($150,000 + $200,000 + $120,000)(.20) = $94,000
232. difficult a
($150,000 + $200,000 + $120,000)(.20) = $94,000, goodwill to existing partners
$120,000 + $0 = .2($150,000 + $200,000 + $120,000 + goodwill)
$120,000 = $94,000 + .2 goodwill
$26,000 = .2 goodwill
Goodwill = $130,000
233. moderate d
($150,000 + $200,000 + $120,000)(.20) = $94,000, goodwill to existing partners; new
partner capital account recognized at amount invested
234. difficult a
($150,000 + $200,000 + $120,000)(.20) = $94,000, goodwill to existing partners
$120,000 + $0 = .2($150,000 + $200,000 + $120,000 + goodwill)
$120,000 = $94,000 + .2 goodwill
$26,000 = .2 goodwill
Goodwill = $130,000
$150,000 + $130,000 x .60
235. difficult b
($150,000 + $200,000 + $120,000)(.20) = $94,000, goodwill to existing partners
$120,000 + $0 = .2($150,000 + $200,000 + $120,000 + goodwill)
$120,000 = $94,000 + .2 goodwill
$26,000 = .2 goodwill
Goodwill = $130,000
$200,000 + $130,000 x .40
236. moderate b
($250,000 + $300,000 + $225,000)(.25) = $193,750
237. difficult b
($250,000 + $300,000 + $225,000)(.25) = $193,750, goodwill to existing partners
$225,000 + $0 = .25($250,000 + $300,000 + $225,000 + goodwill)
$225,000 = $193,750 + .25 goodwill
$31,250 = .25 goodwill
Goodwill = $125,000
238. moderate a
($250,000 + $300,000 + $225,000)(.25) = $193,750, goodwill to existing partners; new
partner capital account recognized at amount invested
239. difficult d
($250,000 + $300,000 + $225,000)(.25) = $193,750, goodwill to existing partners
$225,000 + $0 = .25($250,000 + $300,000 + $225,000 + goodwill)
$225,000 = $193,750 + .25 goodwill
$31,250 = .25 goodwill
Goodwill = $125,000
$250,000 + $125,000 x .45
240. difficult c
($250,000 + $300,000 + $225,000)(.25) = $193,750, goodwill to existing partners
$225,000 + $0 = .25($250,000 + $300,000 + $225,000 + goodwill)
$225,000 = $193,750 + .25 goodwill
$31,250 = .25 goodwill
Goodwill = $125,000
$300,000 + $125,000 x .55
241. difficult d
($250,000 + $320,000 + $175,000)(.25) = $186,250, goodwill to new partner
$175,000 + goodwill = .25($250,000 + $320,000 + $175,000 + goodwill)
$175,000 + goodwill = $186,250 + .25 goodwill
.75 goodwill = 11,250
Goodwill = $15,000
242. difficult a
($250,000 + $320,000 + $175,000)(.25) = $186,250, goodwill to new partner
$175,000 + goodwill = .25($250,000 + $320,000 + $175,000 + goodwill)
$175,000 + goodwill = $186,250 + .25 goodwill
.75 goodwill = 11,250
Goodwill = $15,000
$175,000 + $15,000
243. moderate c
($250,000 + $320,000 + $175,000)(.25) = $186,250, goodwill to new partner; existing
partners’ capital accounts do not change
244. moderate d
($250,000 + $320,000 + $175,000)(.25) = $186,250, goodwill to new partner; existing
partners’ capital accounts do not change
245. moderate a
($240,000 + $320,000 + $150,000)(.20) = $142,000
246. difficult c
($240,000 + $320,000 + $150,000)(.20) = $142,000, goodwill to new partner
$150,000 + goodwill = .20($240,000 + $320,000 + $150,000 + goodwill)
$150,000 + goodwill = $142,000 + .20 goodwill
.80 goodwill = $8,000
Goodwill = $10,000
247. difficult a
($240,000 + $320,000 + $150,000)(.20) = $142,000, goodwill to new partner
$150,000 + goodwill = .20($240,000 + $320,000 + $150,000 + goodwill)
$150,000 + goodwill = $142,000 + .20 goodwill
.80 goodwill = $8,000
Goodwill = $10,000
$160,000 + $10,000
248. moderate d
($240,000 + $320,000 + $150,000)(.20) = $142,000, goodwill to new partner, capital
accounts of existing partners do not change
249. moderate c
 ($240,000 + $320,000 + $150,000)(.20) = $142,000, goodwill to new partner, capital
accounts of existing partners do not change
250. easy b
$200,000 x .35
251. easy d
252. moderate d
253. moderate b
$80,000 + $110,000 + $55,000 + $200,000
254. moderate b
($250,000 - $210,000)(45/75)
255. moderate d
$160,000 - ($250,000 - $210,000)(45/75)
256. moderate d
($250,000 - $210,000)(30/75)
257. moderate b
$120,000 - ($250,000 - $210,000)(30/75)
258. moderate a
($240,000 - $180,000)(42/70)
259. moderate c
$300,000 - ($240,000 - $180,000)(42/70)
260. moderate c
($240,000 - $180,000)(28/70)
261. moderate d
$270,000 - ($240,000 - $180,000)(28/70)
262. easy c
$150,000 + $22,500
263. moderate a
$135,000 + ($150,000 + $22,500)(.60)
264. moderate b
$225,000 + ($150,000 + $22,500)(.40)
265. easy c
$150,000 + ($75,000 x .3)
266. difficult c
$135,000 + ($75,000 x .25) + [$150,000 + ($75,000 x .30)](.60)
267. difficult d
$225,000 + ($75,000 x .45) + [$150,000 + ($75,000 x .30)](.40)
268. easy a
$200,000 + $40,000
269. moderate b
$350,000 + ($200,000 + $40,000)(.60)
270. moderate c
$280,000 + ($200,000 + $40,000)(.40)
271. easy b
$200,000 + ($150,000 x .25)
272. difficult c
$350,000 + ($150,000 x .45) + [$200,000 + ($150,000 x .25)](.60)
273 difficult d
$280,000 + ($150,000 x .30) + [$200,000 + ($150,000 x .25)](.40)
274. moderate a
$350,000 + $280,000 + $200,000 + $150,000

Problems

275. (10 Points) moderate

Alan, Betty, and Carl are forming a partnership. Each will contribute cash and noncash
assets. Assume the initial capital account balances will be determined based on the value
of the assets contributed. Information regarding the initial contributions is provided
below:

Alan Betty Carl__

Cash $150,000 $275,000 $125,000
Plant Assets - historical cost 280,000 350,000 540,000
Plant Assets - carrying value 215,000 225,000 300,000
Plant Assets - tax basis 200,000 190,000 230,000
Plant Assets - market value 350,000 260,000 310,000

Required:
a. Record the journal entry to establish the initial partners’ capital accounts and the
assets assuming the carrying value is used to determine the value assigned to
noncash assets contributed. Assume also that each partner’s capital account is
assigned a value equal to the cash and noncash assets contributed by that partner.
b. Record the journal entry to establish the initial partners’ capital accounts and the
assets assuming the carrying value is used to determine the value assigned to
noncash assets contributed. Assume also that all of the partners’ capital accounts
are equal when the journal entry is completed.
c. Contrast the entries in parts a. and b. Why might the partners agree to equal
capital accounts as presented in b.?

Answer:
Part a.
Cash ($150,000 + $275,000 + $125,000) 550,000
Plant Assets ($215,000 + $225,000 + $300,000) 740,000
Alan, Capital ($150,000 + $215,000) 365,000
Betty, Capital ($275,000 + $225,000) 500,000
Carl, Capital ($125,000 + $300,000) 425,000
Part b.
Cash ($150,000 + $275,000 + $125,000) 550,000
Plant Assets ($215,000 + $225,000 + $300,000) 740,000
Alan, Capital ($550,000 + $740,000)/3 430,000
Betty, Capital ($550,000 + $740,000)/3 430,000
Carl, Capital ($550,000 + $740,000)/3 430,000
 Part c. Alan has significantly more capital when it is divided equally when compared to
assigning the sum of the carrying values of assets contributed. On the other hand,
Betty has significantly less capital when it is divided equally. Carl has
approximately the same amount under either assignment method. One possibility
is that Betty is giving up some capital to Alan because Alan has substantially
more expertise in running the business. Thus, Betty is paying a bonus to Alan.

276. (10 Points) moderate

Alan, Betty, and Carl are forming a partnership. Each will contribute cash and noncash
assets. Assume the initial capital account balances will be determined based on the value
of the assets contributed. Information regarding the initial contributions is provided
below:

Alan Betty Carl__

Cash $150,000 $275,000 $125,000
Plant Assets - historical cost 280,000 350,000 540,000
Plant Assets - carrying value 220,000 225,000 300,000
Plant Assets - tax basis 200,000 190,000 230,000
Plant Assets - market value 350,000 260,000 310,000

Required:
a. Record the journal entry to establish the initial partners’ capital accounts and the
assets assuming the tax basis is used to determine the value assigned to noncash
assets contributed. Assume also that each partner’s capital account is assigned a
value equal to the cash and noncash assets contributed by that partner.
b. Record the journal entry to establish the initial partners’ capital accounts and the
assets assuming the tax basis is used to determine the value assigned to noncash
assets contributed. Assume also that all of the partners’ capital accounts are equal
when the journal entry is completed.
c. Contrast the entries in parts a. and b. Why might the partners agree to equal
capital accounts as presented in b.?

Answer:
Part a.
Cash ($150,000 + $275,000 + $125,000) 550,000
Plant Assets ($200,000 + $190,000 + $230,000) 620,000
Alan, Capital ($150,000 + $200,000) 350,000
Betty, Capital ($275,000 + $190,000) 465,000
Carl, Capital ($125,000 + $230,000) 355,000

Part b.
Cash ($150,000 + $275,000 + $125,000) 550,000
Plant Assets ($200,000 + $190,000 + $230,000) 620,000
Alan, Capital ($550,000 + $620,000)/3 390,000
Betty, Capital ($550,000 + $620,000)/3 390,000
Carl, Capital ($550,000 + $620,000)/3 390,000
 Part c. Alan and Carl each have significantly more capital when it is divided equally
when compared to assigning the sum of the carrying values of assets contributed.
On the other hand, Betty has significantly less capital when it is divided equally.
One possibility is that Betty is giving up some capital to Alan and Carl because
they have substantially more expertise in running the business. Thus, Betty is
paying a bonus to Alan and Carl.

277. (10 Points) moderate

Alan, Betty, and Carl are forming a partnership. Each will contribute cash and noncash
assets. Assume the initial capital account balances will be determined based on the value
of the assets contributed. Information regarding the initial contributions is provided
below:

Alan Betty Carl__

Cash $150,000 $275,000 $125,000
Plant Assets - historical cost 280,000 350,000 540,000
Plant Assets - carrying value 220,000 225,000 300,000
Plant Assets - tax basis 200,000 190,000 230,000
Plant Assets - market value 350,000 260,000 310,000

Required:
a. Record the journal entry to establish the initial partners’ capital accounts and the
assets assuming the market value is used to determine the value assigned to
noncash assets contributed. Assume also that each partner’s capital account is
assigned a value equal to the cash and noncash assets contributed by that partner.
b. Record the journal entry to establish the initial partners’ capital accounts and the
assets assuming the market value is used to determine the value assigned to
noncash assets contributed. Assume also that all of the partners’ capital accounts
are equal when the journal entry is completed.
c. Contrast the entries in parts a. and b. Why might the partners agree to equal
capital accounts as presented in b.?

Answer:
Part a.
Cash ($150,000 + $275,000 + $125,000) 550,000
Plant Assets ($350,000 + $260,000 + $310,000) 920,000
Alan, Capital ($150,000 + $350,000) 500,000
Betty, Capital ($275,000 + $260,000) 535,000
Carl, Capital ($125,000 + $310,000) 435,000

Part b.
Cash ($150,000 + $275,000 + $125,000) 550,000
Plant Assets ($350,000 + $260,000 + $310,000) 920,000
Alan, Capital ($550,000 + $920,000)/3 490,000
Betty, Capital ($550,000 + $920,000)/3 490,000
 Carl, Capital ($550,000 + $920,000)/3 490,000

Part c. Carl has significantly more capital when it is divided equally when compared to
assigning the sum of the carrying values of assets contributed. On the other hand,
Betty has significantly less capital when it is divided equally. Alan has
approximately the same amount under either assignment method. One possibility
is that Betty is giving up some capital to Carl because Carl has substantially more
expertise in running the business. Thus, Betty is paying a bonus to Carl.

278. (5 Points) easy

Alex, Bill, and Martha contribute the following assets to begin partnership operations:

Alex Bill Martha_

Cash $150,000 $225,000 $175,000
Inventory 57,000 89,000
Plant Assets 350,000 100,000
Accounts Payable 14,000 40,000
Notes Payable 160,000

Record the journal entry to establish the assets and owners’ equity of the partnership.

Answer:
Cash ($150,000 + $225,000 + $175,000) 550,000
Inventory ($57,000 + $89,000) 146,000
Plant Assets ($350,000 + $100,000) 450,000
Accounts Payable ($14,000 + $40,000) 54,000
Notes Payable 160,000
Alex, capital ($150,000 + $57,000 - $14,000) 193,000
Bill, capital ($225,000 + $350,000 - $160,000) 415,000
Martha, capital ($175,000 + $89,000 + 324,000
$100,000 - $40,000)

279. (10 Points) moderate

William, Casey, and Samantha are forming a partnership. Below is a table outlining the
contributions of each partner.

William Casey Samantha

Cash $ 15,000 $20,000 $ 10,000
Inventory 100,000 60,000 80,000
Plant Assets 250,000 160,000
Liabilities Assumed by Partnership 130,000 90,000

In addition, Casey brings significant experience needed to run the business. It is agreed
that partners will receive capital allocations equal to the market value of the net assets
contributed and that Casey will receive additional capital of $75,000 and the bonus
 method will be applied. Two-thirds of the bonus is to come from William and one-third
from Samantha. Record the journal entry for the creation of the partnership.

Answer:
Cash ($15,000 + $20,000 + $10,000) 45,000
Inventory ($100,000 + $60,000 + $80,000) 240,000
Plant Assets ($250,000 + $160,000) 410,000
Liabilities ($130,000 + $90,000) 220,000
Casey, Capital ($20,000 + $60,000 + $75,000) 155,000
Samantha, Capital [$10,000 + $80,000 + 135,000
$160,000 - $90,000 - ($75,000/3)]
William, Capital [$15,000 + $100,000 + 185,000
$250,000 - $130,000 - ($75,000 x 2/3)]

280. (10 Points) moderate

Bonnie, Connie, and Deborah are forming a partnership. The partners will contribute the
following identifiable assets:

Bonnie Connie Deborah

Cash $150,000 $200,000 $140,000
Inventory 160,000 190,000 180,000
Plant Assets 300,000 340,000
Liabilities Assumed by Partnership 180,000 130,000

In addition, Bonnie brings significant experience because she has run a similar type of
business. It is agreed that Bonnie will receive additional capital of $80,000 and the
bonus method will be applied. Sixty percent of the bonus is to come from Deborah and
forty percent from Connie. Record the journal entry for the creation of the partnership.

Answer:
Cash ($150,000 + $200,000 + $140,000) 490,000
Inventory ($160,000 + $190,000 + $180,000) 530,000
Plant Assets ($300,000 + $340,000) 640,000
Liabilities ($180,000 + $130,000) 310,000
Bonnie, Capital ($150,000 + $160,000 + 510,000
$300,000 - $180,000 + $80,000)
Connie, Capital [$200,000 + $190,000 - 358,000
($80,000 x .4)]
Deborah, Capital [$140,000 + $180,000 + 482,000
$340,000 - $130,000 - ($80,000 x .6)]

281. (10 Points) moderate

Able, Baker, and Charlie are forming a partnership. Charlie has significant experience in
the type of business the partners are starting. As a result, Able and Baker agree that
goodwill of $50,000 should be recognized with regard to Charlie. The partners
contribute the following tangible assets:
 Able Baker Charlie
Cash $20,000 $35,000 $55,000
Plant Assets 75,000 90,000 60,000
Liabilities 25,000 45,000 15,000

Record the journal entry to establish the partnership.

Answer:
Cash ($20,000 + $35,000 + $55,000) 110,000
Plant Assets ($75,000 + $90,000 + $60,000) 225,000
Goodwill 50,000
Liabilities ($25,000 + $45,000 + $15,000) 85,000
Able, Capital ($20,000 + $75,000 - $25,000) 70,000
Baker, Capital ($35,000 + $90,000 - $45,000) 80,000
Charlie, Capital ($55,000 + $60,000 - $15,000 + 150,000
$50,000)

282. (15 Points) moderate

Jessica, Mary, and Susan currently operate three separate businesses. They are planning
to combine and form a partnership to operate as one business. The prospective partners
agree that, in addition to the net market value of the tangible assets contributed to the
partnership, Jessica and Susan should have goodwill recognized in the amounts of
$80,000 and $40,000, respectively. The following table presents the market value of the
assets and liabilities contributed to the partnership.

Jessica Mary Susan

Cash $100,000 $250,000 $170,000
Inventory 280,000 400,000 450,000
Plant Assets 750,000 500,000 600,000
Accounts Payable 190,000 270,000 260,000
Mortgage Payable 340,000 200,000 320,000

Required:
a. Record the journal entry to establish the partnership.
b. What appears to be the partners’ intent when creating the new
partnership?

Answer:
Part a.
Cash ($100,000 + $250,000 + $170,000) 520,000
Inventory ($280,000 + $400,000 + $450,000) 1,130,000
Plant Assets ($750,000 + $500,000 + $600,000) 1,850,000
Goodwill 120,000
Accounts Payable ($190,000 + $270,000 + 720,000
$260,000)
 Mortgage Payable ($340,000 + $200,000 + 860,000
$320,000)
Jessica, Capital ($100,000 + $280,000 + 680,000
$750,000 - $190,000 - $340,000 + $80,000)
Mary, Capital ($250,000 + $400,000 + 680,000
$500,000 - $270,000 - $200,000)
Susan, Capital ($170,000 + $450,000 + 680,000
$600,000 - $260,000 - $320,000 + $40,000)

Part b.
The apparent intent of the partners is to make all three partner capital accounts of equal
dollar amount when the partnership is formed.

283. (20 Points) moderate

Tom, Jon, and Sandy are partners in a thriving business. You work for the firm that
provides accounting services to the partnership. The accounting period recently ended
and you have been assigned the task of helping with the profit allocation to the partners.
The following information has been extracted from the partnership’s accounting records:

Date Tom Jon Sandy____

1/1 Balance $850,000 Balance $680,000 Balance $450,000
4/30 Withdraw $75,000 Withdraw $30,000
9/1 Invest $120,000 Withdraw $100,000
12/1 Invest $90,000 Invest $40,000 Withdraw $60,000

The partnership agreement stipulates that the weighted-average capital balance is the
basis for the interest on capital component of profit and loss allocation and the rate of
return on invested capital is 12 percent. What is the amount of interest on capital
allocated to each partner as a part of the profit and loss allocation?

Answer:
TOM’S AVERAGE CAPITAL BALANCE
Capital Time Average
Date Invest/Withdraw Balance Invested Capital__
January 1 $850,000 4 months $ 3,400,000
April 30 Withdraw $75,000 775,000 4 months 3,100,000
September 1 Invest $120,000 895,000 3 months 2,685,000
December 1 Invest $90,000 985,000 1 month 985,000
$10,170,000
Average capital ($10,170,000 / 12) $847,500

JON’S AVERAGE CAPITAL BALANCE

Capital Time Average
Date Invest/Withdraw Balance Invested Capital__
January 1 $680,000 8 months $5,440,000
September 1 Withdraw $100,000 580,000 3 months 1,740,000
 December 1 Invest $40,000 620,000 1 month 620,000
$7,800,000
Average capital ($7,800,000 / 12) $650,000

SANDY’S AVERAGE CAPITAL BALANCE

Capital Time Average
Date Invest/Withdraw Balance Invested Capital__
January 1 $450,000 4 months $1,800,000
April 30 Withdraw $30,000 420,000 7 months 2,940,000
December 1 Withdraw $60,000 360,000 1 month 360,000
$5,100,000
Average capital ($5,100,000 / 12) $425,000

Interest on capital contributions:

Tom: $847,500 x .12 = $101,700
Jon: $650,000 x .12 = $78,000
Sandy: $425,000 x .12 = $51,000

284. (20 Points) moderate

John, Roger, and Troy are partners in a local business. You are a staff accountant at a
firm that provides accounting services to the partnership. You were just assigned the task
of helping prepare the profit allocation to the partners. The following information was
extracted from the partnership’s accounting records:

Date John Roger Troy_____

1/1 Balance $250,000 Balance $350,000 Balance $500,000
3/31 Withdraw $30,000 Invest $50,000
8/31 Invest $40,000 Withdraw $90,000
11/1 Invest $25,000 Invest $60,000 Withdraw $60,000

The partnership agreement stipulates that the weighted-average capital balance is the
basis for the interest on capital component of profit and loss allocation and the rate of
return on invested capital is 10 percent. What is the amount of interest on capital
allocated to each partner as a part of the profit and loss allocation?

Answer:
JOHN’S AVERAGE CAPITAL BALANCE
Capital Time Average
Date Invest/Withdraw Balance Invested Capital__
January 1 $250,000 3 months $ 750,000
March 31 Withdraw $30,000 220,000 5 months 1,100,000
August 31 Invest $40,000 260,000 2 months 520,000
November 1 Invest $25,000 285,000 2 months 570,000
$2,940,000
Average capital ($2,940,000 / 12) $245,000
 ROGER’S AVERAGE CAPITAL BALANCE
Capital Time Average
Date Invest/Withdraw Balance Invested Capital__
January 1 $350,000 8 months $2,800,000
August 31 Withdraw $90,000 260,000 2 months 520,000
November 1 Invest $60,000 320,000 2 months 640,000
$3,960,000
Average capital ($3,960,000 / 12) $330,000

TROY’S AVERAGE CAPITAL BALANCE

Capital Time Average
Date Invest/Withdraw Balance Invested Capital__
January 1 $500,000 3 months $1,500,000
March 31 Invest $50,000 550,000 7 months 3,850,000
November 1 Withdraw $60,000 490,000 2 months 980,000
$6,330,000
Average capital ($6,660,000 / 12) $527,500

Interest on capital contributions:

John: $245,000 x .10 = $24,500
Roger: $330,000 x .10 = $33,000
Troy: $527,500 x .10 = $52,750

285. (10 Points) easy

Philip is the managing partner of a local company. Part of his profit and loss allocation
is a bonus based on the store operating income. The bonus arrangement is 8 percent of
operating income in excess of $200,000 after deducting the bonus. How much is Philip’s
bonus this year if operating income before deducting the bonus is $350,000?

Answer:
Bonus = .08($350,000 - $200,000 - B)
1.08 Bonus = $12,000
Bonus = $11,111.11

286. (10 Points) easy

Sally is a partner, and business manager, in a local partnership. Part of the profit and loss
agreement in the articles of partnership is a bonus to be paid to the business manager.
The bonus is currently calculated at 12 percent of income in excess of $250,000 after
subtracting the bonus.

How much bonus will Sally receive if income is $400,000?

Answer:
Bonus = .12 ($400,000 - $250,000 - B)
Bonus = $16,071.43
287. (10 Points) easy
Frank, George, and Hank are partners. Partnership profits for the year are $90,000.

Required:
a. How much is allocated to each partner if the profit and loss residual ratios are
30%, 20%, and 50%, respectively?

b. How would the profit be allocated if there were no profit and loss residual ratios?

Answer:
Part a.
Frank $90,000 x .30 = $27,000
George $90,000 x .20 = $18,000
Hank $90,000 x .50 = $45,000

Part b.
Frank, George and Hank $90,000/3 = $30,000

288. (30 Points) difficult

Beverly, Brad, and Bob are partners in the 3Bs company. The partners have been in
business for a number of years. The following information exists with regard to the
allocation of profits and losses.

Beverly _ Brad Bob__

Weighted-average capital balance $400,000 $650,000 $550,000
Salary 40,000 65,000 80,000
Bonus .1(Net income - $200,000)
Residual 40% 35% 25%

The interest portion of the profit and loss allocation is 8 percent of the weighted-average
capital balance. Profit allocation is determined in the order presented above. Assume the
allocation is completed regardless of the level of profit. Partnership losses, on the other
hand, are allocated by the residual ratios only.

Required:
a. Determine the profit allocation if the partnership net income is $580,000.
b. Determine the profit allocation if the partnership net income is $250,000.
c. Determine the loss allocation if the partnership net loss is ($50,000).

Solution:
Part a.
Beverly Brad Bob Total__
Interest on capital
$400,000 x .08 $ 32,000
$650,000 x .08 $ 52,000
 $550,000 x .08 $ 44,000 $128,000
Salary 40,000 65,000 80,000 185,000
Bonus
.1($580,000 - $200,000) 38,000 38,000
Residual
$229,000 x .4 91,600
$229,000 x .35 80,150
$229,000 x .25 57,250 229,000
$163,600 $235,150 $181,250 $580,000

Part b.
Beverly Brad Bob Total__
Interest on capital
$400,000 x .08 $32,000
$650,000 x .08 $ 52,000
$550,000 x .08 $44,000 $128,000
Salary 40,000 65,000 80,000 185,000
Bonus
.1($250,000 - $200,000) 5,000 5,000
Residual
($68,000) x .4 (27,200)
($68,000) x .35 (23,800)
($68,000) x .25 (17,000) (68,000)
$44,800 $98,200 $107,000 $250,000

Part c.
Beverly Brad Bob Total__
Residual
($50,000) x .4 ($20,000)
($50,000) x .35 ($17,500)
($50,000) x .25 ($12,500) ($50,000)

289. (15 Points) difficult

Tiffany, Jason, and Shanel are partners in a marketing firm. They allocate profits and
losses based on four criteria: (1) 6 percent return on invested capital; (2) salary, based on
$40 per billable hour; (3) bonus to Jason for managing the business [.15 (net income -
$250,000 - bonus)]; and (4) residual allocation. For the year, the partners have the
following average invested capital and billable hours.

Tiffany Jason Shanel_

Average invested capital $200,000 $180,000 $160,000
Billable hours 1,500 1,700 2,200

Prepare a schedule allocating the partnership’s $450,000 profit. Round all

amounts to the nearest dollar.
 Solution:
Tiffany Jason Shanel Total_
Interest on capital
$200,000 x .06 $ 12,000
$180,000 x .06 $ 10,800
$160,000 x .06 $ 9,600 $ 32,400
Salary
1,500 x $40 60,000
1,700 x $40 68,000
2,200 x $40 88,000 216,000
Bonus
.15($450,000 - $250,000 - B) 26,087 26,087
Residual
$175,513/3 58,504 58,504 58,505 175,513
$130,504 $163,391 $156,105 $450,000

290. (10 Points) moderate

Stan and Allan have been partners for several years. Their current partnership profit and
loss ratios are being changed from 75/25 to 60/40. As part of the change, they have
created a list of assets that have market and book value differences. One of the assets is
vacant land with a $200,000 market value and a $110,000 book value. One year after
changing the profit and loss ratios, the building is sold for $280,000. Record (1) the sale
of the land and (2) the distribution of the gain on sale to the partners.

Solution:
Cash 280,000
Land 110,000
Gain on Sale of Land 170,000

Gain on Sale of Land 170,000

Stan, capital ($200,000 - $110,000)(.75) + 115,500
($280,000 - $200,000)(.60)
Allan, capital ($200,000 - $110,000)(.25) + 54,500
($280,000 - $200,000)(.40)

291. (10 Points) moderate

Susan and Mary have been partners for several years. Their current partnership profit
and loss ratios are being changed from 65/35 to 55/45. As part of the change, they have
created a list of assets that have market and book value differences. One of the assets is a
building with a $370,000 market value and a $150,000 book value. One year after
changing the profit and loss ratios, the building is sold for $500,000. Record (1) the sale
of the building and (2) the distribution of the gain on sale to the partners.

Solution:
Cash 500,000
 Building 150,000
Gain on Sale of Building 350,000

Gain on Sale of Land 350,000

Susan, capital ($370,000 - $150,000)(.65) + 214,500
($500,000 - $370,000)(.55)
Mary, capital ($370,000 - $150,000)(.35) + 135,500
($500,000 - $370,000)(.45)

292. (10 Points) easy

Janice and Richard are partners who are changing their profit and loss ratios from 40/60
to 55/45. At the date of the change, the partners chooses to revalue assets with market
value different from book value. One asset revalued is land with a book value of
$250,000 and a market value of $420,000. Two years after the profit and loss ratio is
changed, the land is sold for $600,000. Record (1) the revaluation of the land, (2) the
sale of the land, and (3) the distribution of the gain on sale of land to the partners.

Solution:
Land ($420,000 - $250,000) 170,000
Janice, capital ($170,000 x .40) 68,000
Richard, capital ($170,000 x .60) 102,000

Cash 600,000
Land 420,000
Gain on Sale of Land ($600,000 - $420,000) 180,000

Gain on Sale of Land 180,000

Janice, capital ($180,000 x .55) 99,000
Richard, capital ($180,000 x .45) 81,000

293. (10 Points) moderate

John and Renee are partners who are changing their profit and loss ratios from 70/30 to
60/40. At the date of the change, the partners chooses to revalue assets with market
value different from book value. One asset revalued is a building with a net book value
of $100,000 and a market value of $340,000. One year after the profit and loss ratio is
changed, the building is sold for $270,000. Record (1) the revaluation of the building,
(2) the sale of the building, and (3) the distribution of the loss on sale of the building to
the partners.

Solution:
Building ($340,000 - $100,000) 240,000
John, capital ($240,000 x .70)
168,000
Renee, capital ($240,000 x .30) 72,000

Cash 270,000
 Loss on Sale of Building ($270,000 - $340,000) 70,000
Building 340,000

John, capital ($70,000 x .60) 42,000

Renee, capital ($70,000 x .40) 28,000
Loss on Sale of Building 70,000

294. (10 Points) moderate

Tom and Darris are partners. Their current profit and loss ratios (80/20) are being
changed to (70/30). The partners decide to adjust their capital accounts at the date of the
change in the profit and loss ratios to reflect the difference between market value and
book value of assets and liabilities. At the date of the change, land has a market value of
$350,000 and a book value of $140,000. Record the adjustment to the capital accounts at
the date of the change in the profit and loss ratios.

Solution:
Darris, capital [($340,000 - $150,000)(.20-.30)] 21,000
Tom, capital [($340,000 - $150,000)(.80 - .70)] 21,000

295. (10 Points) moderate

Tim and Donna are partners. Their current profit and loss ratios (60/40) are being
changed to (45/55). The partners decide to adjust their capital accounts at the date of the
change in the profit and loss ratios to reflect the difference between market value and
book value of assets and liabilities. At the date of the change, a building has a book
value of $400,000 and a market value of $650,000. Record the adjustment to the capital
accounts at the date of the change in the profit and loss ratios.

Solution:
Donna, capital [($650,000 - $400,000)(.40-.55)] 37,500
Tim, capital [($650,000 - $400,000)(.60 - .45)] 37,500

296. (5 Points) easy

Wesley, Slyvia, and Mel are partners. They have capital accounts of $60,000, $95,000,
and $105,000, respectively. Heather is talking to Mel about joining the partnership and
acquiring 1/3 of his equity. Wesley and Slyvia know Heather and they have approved
her admission into the partnership. Record Heather’s admission assuming she pays
$50,000 to acquire 1/3 of Mel’s equity.

Solution:
Mel, capital ($105,000/3) 35,000
Heather, capital 35,000

297. (10 Points) moderate

John, Linda, and Bill are partners with capital accounts of $78,000, $59,000, and
$183,000, respectively. In addition, they share profits and losses 30%, 25%, and 45%,
respectively. Bill is planning to partially retire and has asked John and Linda if they
 would approve Mitch as a new partner. John and Linda respond that Mitch is acceptable
but they want to revalue the partnership’s assets before Mitch is admitted. At the date of
the admission, the net assets are written up $250,000. Mitch pays Bill $200,000 for 60
percent of his equity. Record the revaluation of the assets and the admission of Mitch
into the partnership.

Solution:
Assets 250,000
John, capital ($250,000 x .30)
75,000
Linda, capital ($250,000 x .25) 62,500
Bill, capital ($250,000 x .45) 112,500

Bill, capital ($183,000 + $112,500)(.60) 177,300

Mitch, capital 177,300

298. (20 Points) moderate

Susan and Tom are partners with capital accounts of $280,000 and $182,500,
respectively. The partners share profits and losses 60/40. They are considering
admitting Scott into the partnership as a 25% equity ownership for an investment into the
partnership of $187,500. Before admission of Scott, the partnership’s assets will be
revalued up $100,000. Record the revaluation of the assets and the admission of Scott
into the partnership.

Solution:
Assets 100,000
Susan, capital ($100,000 x .60) 60,000
Tom, capital ($100,000 x .40)
40,000

Book value of capital before the investment $562,500

($280,000 + $182,500 + $100,000)
Scott’s investment 187,500
Total book value of capital after the investment $750,000
Scott’s percentage ownership 0.25
Book value of Scott’s ownership percentage capital $187,500

Cash 187,500
Scott, capital 187,500

299. (20 Points) moderate

Wayne and Dennis are partners with capital accounts of $250,000 and $300,000,
respectively. The partners share profits and losses 30/70. They are considering
admitting Dorothy into the partnership with a 20% equity ownership for an investment
into the partnership of $193,750. Before admission of Dorothy, the partnership’s assets
 will be revalued up $225,000. Record the revaluation of the assets and the admission of
Dorothy into the partnership.

Answer:
Assets 225,000
Wayne, capital ($225,000 x .30) 67,500
Dennis, capital ($225,000 x .70) 157,500

Book value of capital before the investment $775,000

($250,000 + $300,000 + $225,000)
Dorothy’s investment 193,750
Total book value of capital after the investment $968,750
Dorothy’s percentage ownership 0.20
Book value of Scott’s ownership percentage capital $193,750

Cash 193,750
Dorothy, capital 193,750

300. (10 Points) easy

Louise and Jane are considering admitting Mary into their partnership. Louise and Jane
share profits at losses 70/30 and their capital account balances are $260,000 and
$190,000, respectively. The partnership agreement indicates that the bonus method will
be applied when new partners are admitted to the company. Louise and Jane want to
know what the journal entry would look like if Mary is admitted with a 20 percent equity
interest in the partnership for an investment of $140,000. Prepare the journal entry at the
date of admission.

Answer:
Cash 140,000
Jane, capital ($140,000 - $118,000)(.30) 6,600
Louise, capital ($140,000 - $118,000)(.70) 15,400
Mary, capital ($260,000 + $190,000 + $140,000)(.20) 118,000

301. (10 Points) easy

Steve and Ray are partners with capital accounts of $300,000 and $460,000, respectively.
They share profits and losses 60/40. Their business is growing and they need to admit a
new partner. Sheila has indicated that she would like to be part of the business.
Negotiations occur and Sheila is admitted with a 25 percent equity interest for $325,000.
Record the admission of Sheila if the bonus method is applied.

Answer:
Cash 325,000
Sheila, capital ($300,000 + $460,000 + 271,250
$325,000)(.25)
Ray, capital ($325,000 - $271,250)(.40) 21,500
Steve, capital ($325,000 - $271,250)(.60) 32,250
302. (20 Points) moderate
Deborah and Randy are partners who share profits and losses 55/45. They have capital
account balances of $450,000 and $380,000, respectively. The partners have been
negotiating with Marsha about her joining the partnership. The parties agree that the
partnership will revalue assets to their market value ($150,000 above book value) and
that Marsha will invest $250,000 for a 15 percent equity interest. Record the revaluation
and the admission of Marsha into the partnership assuming the bonus method is applied.

Answer:
Assets 150,000
Deborah, capital ($150,000 x .55) 82,500
Randy, capital ($150,000 x .45) 67,500

Cash 250,000
Deborah, capital ($250,000 - $184,500)(.55) 36,025
Marsha, capital ($450,000 + $380,000 + 184,500
$150,000 + $250,000)(.15)
Randy, capital ($250,000 - $184,500)(.45) 29,475

303. (10 Points) easy

Jennifer and Juan are partners with capital accounts of $100,000 and $160,000,
respectively. They share profits and losses 45/55. The business is expanding and they
need to admit a new partner. Kathryn has indicated that she would like to join the
partnership. Negotiations occur and Kathryn is admitted with a 25 percent equity interest
for $75,000. Record the admission of Kathryn assuming the bonus method is applied.

Answer:
Cash 80,000
Jennifer, capital ($85,000 - $80,000)(.45) 2,250
Juan, capital ($85,000 - $80,000)(.55) 2,750
Kathryn, capital ($100,000 + $160,000 + 85,000
$80,000)(.25)

304. (10 Points) easy

Fred and Laurie are considering admitting John into their partnership. Fred and Laurie
share profits at losses 60/40 and their capital account balances are $160,000 and
$290,000, respectively. The partnership agreement indicates that the bonus method will
be applied when new partners are admitted to the company. Fred and Laurie have asked
you to prepare the journal entry to admit John with a 25 percent equity interest in the
partnership for an investment of $125,000.

Answer:
Cash 125,000
Fred, capital ($143,750 - $125,000)(.60) 11,250
Laurie, capital ($143,750 - $125,000)(.40) 7,500
 John, capital ($160,000 + $290,000 + 143,750
$125,000)(.25)

305. (20 Points) moderate

Jo Ann and Robert are partners who share profits and losses 30/70. They have capital
account balances of $150,000 and $280,000, respectively. The partners have been
negotiating with Bill about him joining the partnership. The parties agree that the
partnership will revalue assets to their market value ($80,000 above book value) and that
Bill will invest $100,000 for a 20 percent equity interest. Record the revaluation and the
admission of Bill into the partnership assuming the bonus method is applied.

Answer:
Assets 80,000
Jo Ann, capital ($80,000 x .30) 24,000
Robert, capital ($80,000 x .70) 56,000

Cash 100,000
Jo Ann, capital ($122,000 - $100,000)(.30) 6,600
Robert, capital ($122,000 - $100,000)(.70) 15,400
Bill, capital ($280,000 + $150,000 + 122,000
$80,000 + $100,000)(.20)

306. (20 Points) moderate

Robert and Steven are partners in a local company. They have capital accounts in the
amounts of $250,000 and $320,000, respectively, when they agree to admit a new
partner, Don, to the company. Don has agreed to contribute $225,000 for a 25 percent
interest in the owners’ equity of the partnership. Before Don’s admission to the
partnership, Robert and Steven share profits and losses 80 percent and 20 percent,
respectively. Record the admission of Don assuming the goodwill method is applied.

Answer:
Book value of capital before the investment $570,000
Don’s investment 225,000
Total book value of capital after the investment $795,000
Don’s percentage ownership 0.25
Book value of Don’s ownership percentage capital $198,750

Goodwill to existing partners

$225,000 = (.25)($795,000 + Goodwill)

$225,000 = $198,750 + .25 (Goodwill)
$26,250 = .25 (Goodwill)
Goodwill = $105,000

Cash 225,000
Goodwill 105,000
 Don, capital 225,000
Robert, capital ($105,000 x .80) 84,000
Steve, capital ($105,000 x .20) 21,000

307. (20 Points) moderate

Ann and Sarah are partners in a local company. They have capital accounts in the
amounts of $150,000 and $220,000, respectively, when they agree to admit a new
partner, John, to the company. John has agreed to contribute $175,000 for a 25 percent
interest in the owners’ equity of the partnership. Before John’s admission to the
partnership, Ann and Sarah share profits and losses 40 percent and 60 percent,
respectively. Record the admission of John assuming the goodwill method is applied.

Answer:
Book value of capital before the investment $370,000
John’s investment 175,000
Total book value of capital after the investment 545,000
John’s percentage ownership 0.25
Book value of John’s ownership percentage capital 136,250

Goodwill to existing partners

$175,000 = (.25)($495,000 + Goodwill)

$175,000 = $136,250 + .25 (Goodwill)
$38,750 = .25 (Goodwill)
Goodwill = $155,000

Cash 175,000
Goodwill 155,000
Ann, capital ($155,000 x .40) 62,000
John, capital 175,000
Sarah, capital ($155,000 x .60) 93,000

308. (30 Points) difficult

Bob and Norman are partners and they share profits and losses 70/30. They have capital
accounts balances of $350,000 and $480,000, respectively, when they agree to admit
Richard to the company. All parties have agreed that the partnership will first revalue
tangible assets to their market value ($150,000 above book value) and then Richard will
invest $300,000 for a 20 percent interest in the partnership’s owners’ equity. Record the
revaluation and the admission of Richard into the partnership assuming the goodwill
method is applied.

Answer:
Assets 150,000
Bob, capital ($150,000 x .70) 105,000
Norman, capital ($150,000 x .30) 45,000
 Book value of capital before the investment $ 980,000
($350,000 + $480,000 + $150,000)
Richard’s investment 300,000
Total book value of capital after the investment $1,280,000
Richard’s percentage ownership 0.20
Book value of Richard’s ownership percentage capital $ 256,000

Goodwill to existing partners

$300,000 = (.20)($1,280,000 + Goodwill)

$300,000 = $256,000 + .20 (Goodwill)
$44,000 = .20 (Goodwill)
Goodwill = $220,000

Cash 300,000
Goodwill 220,000
Bob, capital ($220,000 x .70) 154,000
Norman, capital ($220,000 x .30) 66,000
John, capital 300,000

309. (10 Points) moderate

Skip and Amy are partners in a struggling company. An investor, James, has offered to
join the partnership and provide the needed expertise. Skip and Amy have capital
account balances in the amount of $120,000 and $160,000, respectively, at the date
James is admitted to the partnership and their respective profit and loss ratios are 60
percent and 40 percent. James agrees to invest $60,000 for a 20 percent interest in the
partnership capital. Assuming the goodwill method is applied, record the admission of
James.

Answer:
Book value of capital before the investment $280,000
($120,000 + $160,000)
James’ investment 60,000
Total book value of capital after the investment $340,000
James’ percentage ownership 0.20
Book value of James’ ownership percentage capital $ 68,000

Goodwill to new partner

$60,000 + goodwill = (.20)($340,000 + Goodwill)

$60,000 + goodwill = $68,000 + .20 (Goodwill)
.80 goodwill = $8,000
Goodwill = $10,000

Cash 60,000
Goodwill 10,000
 James, capital 70,000

310. (10 Points) moderate

Rich and Barbara are partners who share profits and losses 70/30. They have been
looking for a new partner to help with the expanding business. Frank has expressed an
interest and discussions are underway. Frank is willing to join the partnership by
investing $270,000 for a 25 percent equity interest. At the date Frank joins the
partnership, Rich and Barbara have capital account balances of $370,000 and $500,000,
respectively. Assuming the goodwill method is applied, record Frank’s admission to the
partnership.

Answer:
Book value of capital before the investment $ 870,000
($370,000 + $500,000)
Frank’s investment 270,000
Total book value of capital after the investment 1,140,000
Frank’s percentage ownership 0.25
Book value of Frank’s ownership percentage capital $ 285,000

Goodwill to new partner

$270,000 + goodwill = (.25)($1,140,000 + Goodwill)

$270,000 + goodwill = $285,000 + .25 (Goodwill)
.75 goodwill = $15,000
Goodwill = $20,000

Cash 270,000
Goodwill 20,000
Frank, capital 290,000

311. (30 Points) difficult

Clark and Nick are partners and they share profits and losses 75/25. They have capital
accounts balances of $250,000 and $380,000, respectively, when they agree to admit Ron
to the company. All parties have agreed that the partnership will first revalue tangible
assets to their market value ($200,000 above book value) and then Ron will invest
$170,000 for a 20 percent interest in the partnership’s owners’ equity. Record the
revaluation and Ron’s admission into the partnership assuming the goodwill method is
applied.

Answer:
Assets 200,000
Clark, capital ($200,000 x .75) 150,000
Nick, capital ($200,000 x .25) 50,000

Book value of capital before the investment $ 830,000

($250,000 + $380,000 + $200,000)
 Ron’s investment $ 170,000
Total book value of capital after the investment $1,000,000
Ron’s percentage ownership 0.20
Book value of Ron’s ownership percentage capital $ 200,000

Goodwill to new partner

$170,000 + goodwill = (.20)($1,000,000 + Goodwill)

$170,000 + goodwill = $200,000 + .20 (Goodwill)
.80 goodwill = $30,000
Goodwill = $37,500

Cash 170,000
Goodwill 37,500
Ron, capital 207,500

312. (10 Points) easy

Sarah, Tanya, and Theresa are partners who share profits and losses 25 percent, 35
percent, and 40 percent, respectively. Theresa has decided to leave the partnership. The
fixed assets of the partnership are undervalued by $50,000. The capital accounts of
Sarah, Tanya, and Theresa before Theresa’s withdrawal are $82,000, $130,000, and
$156,000, respectively. The articles of partnership state that the withdrawing partner’s
share of any differences between market value and carrying value should be recognized
when a partner leaves the partnership. Record the journal entry for the revaluation of the
assets. Record also Theresa’s withdrawal assuming that Marsha purchases Theresa’s
equity.

Answer:
Assets ($50,000 x .40) 20,000
Theresa, capital ($50,000 x .40) 20,000

Theresa, capital ($156,000 + $20,000) 176,000

Marsha, capital 176,000

313. (10 Points) easy

Sarah, Tanya, and Theresa are partners who share profits and losses 25 percent, 35
percent, and 40 percent, respectively. Theresa has decided to leave the partnership. The
fixed assets of the partnership are undervalued by $50,000. The capital accounts of
Sarah, Tanya, and Theresa before Theresa’s withdrawal are $82,000, $130,000, and
$156,000, respectively. The articles of partnership state that the full market value of all
assets and liabilities should be recognized when a partner leaves the partnership. Record
the journal entry for the revaluation of the assets. Record also Theresa’s withdrawal
assuming that Marsha purchases Theresa’s equity.

Answer:
Assets 50,000
 Sarah, capital ($50,000 x .25) 12,500
Tanya, capital ($50,000 x .35) 17,500
Theresa, capital ($50,000 x .40) 20,000

Theresa, capital ($156,000 + $20,000) 176,000

Marsha, capital 176,000

314. (10 Points) moderate

Sam, Tim, and Tyrone are partners who share profits and losses 15 percent, 40 percent,
and 45 percent, respectively. Tyrone has decided to leave the partnership. The fixed
assets of the partnership are undervalued by $80,000. The partners’ capital account
balances before the withdrawal are $70,000, $190,000, and $250,000, respectively. The
articles of partnership state that the withdrawing partner’s share of any differences
between market value and carrying value should be recognized when a partner leaves the
partnership. Record the journal entry for the revaluation of the assets. Record the
withdrawal assuming that Sam purchases 30 percent and Tim purchase 70 percent of
Tyrone’s equity.

Answer:
Assets ($80,000 x .45) 36,000
Tyrone, capital 36,000

Tyrone, capital ($250,000 + $36,000) 286,000

Sam, capital ($286,000 x .30) 85,800
Tim, capital ($286,000 x .70) 200,200

315. (10 Points) moderate

Sam, Tim, and Tyrone are partners who share profits and losses 15 percent, 40 percent,
and 45 percent, respectively. Tyrone has decided to leave the partnership. The fixed
assets of the partnership are undervalued by $80,000. The partners’ capital account
balances before the withdrawal are $70,000, $190,000, and $250,000, respectively. The
articles of partnership state that the full market value of all assets and liabilities should be
recognized when a partner leaves the partnership. Record the journal entry for the
revaluation of the assets. Record the withdrawal assuming that Sam purchases 30 percent
and Tim purchase 70 percent of Tyrone’s equity.

Answer:
Assets 80,000
Sam, capital ($80,000 x .15) 12,000
Tim, capital ($80,000 x .40) 32,000
Tyrone, capital ($80,000 x .45) 36,000

Tyrone, capital ($250,000 + $36,000) 286,000

Sam, capital ($286,000 x .30) 85,800
Tim, capital ($286,000 x .70) 200,200
316. (10 Points) easy
Don, Mark, and James are partners who share profits and losses 25 percent, 20 percent,
and 55 percent, respectively. Mark has decided to leave the partnership. The articles of
partnership state that the withdrawing partner’s share of any differences between market
value and carrying value should be recognized when a partner leaves the partnership.
The fixed assets of the partnership are undervalued by $75,000. The partners’ capital
account balances before the withdrawal are $90,000, $110,000, and $240,000,
respectively. Record the journal entry for the revaluation of the assets. Record the
withdrawal assuming that the partnership acquires Mark’s equity.

Answer:
Assets ($75,000 x .20) 15,000
Mark, capital 15,000

Mark, capital ($110,000 + $15,000) 125,000

Cash 125,000

317. (10 Points) easy

Don, Mark, and James are partners who share profits and losses 25 percent, 20 percent,
and 55 percent, respectively. Mark has decided to leave the partnership. The articles of
partnership state that the full market value of all assets and liabilities should be
recognized when a partner leaves the partnership. The fixed assets of the partnership are
undervalued by $75,000. The partners’ capital account balances before the withdrawal
are $90,000, $110,000, and $240,000, respectively. Record the journal entry for the
revaluation of the assets. Record the withdrawal assuming that the partnership acquires
Mark’s equity.

Answer:
Assets 75,000
Don, capital ($75,000 x .25) 18,750
Mark, capital ($75,000 x .20) 15,000
James, capital ($75,000 x .55) 41,250

Mark, capital ($110,000 + $15,000) 125,000

Cash 125,000

318. (30 Points) difficult

Berry, Carl, and Phil have been partners for many years. Carl has indicated that he plans
to withdraw from the partnership. To prepare for his departure, the following
information is gathered:

Book Market
Value Value_
Current Assets 210,000 210,000
Fixed Assets 850,000 980,000
Total Assets 1,060,000
 Current Liabilities 110,000 110,000
Long-term Debt 220,000 180,000
Berry, Capital (45%) 380,000
Carl, Capital (25%) 180,000
Phil, Capital (30%) 170,000
Total Liabilities and Partnership Equity 1,060,000

The partnership agreement specifies that the withdrawing partner’s portion of the change
in value of any assets and liabilities should be recognized at the date of withdrawal. The
partners agree that $300,000 of partnership assets will be used to purchase Carl’s
ownership equity. The assets are to be financed by borrowing the money on long-term
notes payable. Record these events assuming that the bonus method is used to recognize
the withdrawal.

Answer:
Fixed Assets ($980,000 - $850,000)(.25) 32,500
Long-term Debt ($220,000 - $180,000)(.25) 10,000
Carl, capital 42,500

Cash 300,000
Long-term Debt 300,000

Carl, capital ($180,000 + $42,500) 222,500

Berry, capital ($300,000 - $222,500)(45/75) 46,500
Phil, capital ($300,000 - $222,500)(30/75) 31,000
Cash 300,000

319. (10 Points) moderate

Barbara, Mitch, and Susan are partners with capital accounts of $280,000, $350,000, and
$420,000, respectively. Barbara has informed Mitch and Susan that she is withdrawing
from the partnership. The partners have agreed that the partnership will purchase
Barbara’s ownership interest for $340,000. The profit and loss residual ratios before
Barbara’s retirement are 30 percent, 28 percent, and 42 percent, respectively. Assuming
the bonus method is applied, record Barbara’s withdrawal.

Answer
Barbara, capital 280,000
Mitch, capital ($340,000 - $280,000)(28/70) 24,000
Susan, capital ($340,000 - $280,000)(42/70) 36,000
Cash 340,000

320. (10 Points) easy

Fred, Greg, and Sam are partners with capital accounts of $175,000, $225,000, and
$150,000, respectively. Sam informs Fred and Greg that is withdrawing from the
partnership. The partners agree that the partnership will purchase Sam’s ownership
interest for $200,000. The profit and loss residual ratios before Sam’s retirement are 45
 percent, 35 percent, and 20 percent, respectively. Record Sam’s withdrawal assuming
the bonus method is applied.

Answer:
Sam, capital 150,000
Fred, capital ($200,000 - $150,000)(45/80) 28,125
Greg, capital ($200,000 - $150,000)(35/80) 21,875
Cash 200,000

321. (10 Points) moderate

Jack, Ken, and Laura are partners in a local company. Ken has announced his
withdrawal from the company. The articles of partnership indicate that the withdrawing
partner’s goodwill is to be recognized at the date of withdrawal. Jack, Ken, and Laura
share profits in a 30 percent, 25 percent, and 45 percent ratio, respectively, and their
respective capital accounts just prior to the withdrawal are $225,000, $260,000, and
$325,000, respectively. Estimated goodwill attributable to Ken’s ownership percentage
is $80,000. Prepare the journal entry (entries) necessary to reflect the withdrawal of Ken
assuming that Martin has been approved to become the new partner. Martin pays Ken
$380,000 for 100 percent of his partnership equity.

Answer:
Goodwill 80,000
Ken, capital 80,000

Ken, capital ($260,000 + $80,000) 340,000

Martin, capital 340,000

322. (10 Points) moderate

Doris, Elmer, and Fran are partners in a local company. Doris has announced her
withdrawal from the company. The articles of partnership indicate that the withdrawing
partner’s goodwill is to be recognized at the date of withdrawal. Doris, Elmer, and Fran
share profits in a 20 percent, 35 percent, and 45 percent ratio, respectively, and their
respective capital accounts just prior to the withdrawal are $120,000, $180,000, and
$275,000, respectively. Estimated goodwill attributable to Doris’ ownership percentage
is $50,000. Prepare the journal entry (entries) necessary to reflect the withdrawal of
Doris assuming that Greg has been approved to become the new partner. Greg pays
Doris $190,000 for 100 percent of her partnership equity.

Answer:
Goodwill 50,000
Doris, capital 50,000

Doris, capital ($120,000 + $50,000) 170,000

Greg, capital 170,000

323. (10 Points) moderate

 Shawn, Teresa, and Mark are partners who share profits and losses 25 percent, 35
percent, and 40 percent, respectively. Mark announced his withdrawal from the
company when the partners’ capital accounts were $190,000, $238,000, and $210,000,
respectively. The articles of partnership indicate that the withdrawing partner’s goodwill
is to be recognized at the date of withdrawal. Estimated goodwill attributable to Mark’s
ownership percentage is $75,000. Prepare the journal entry (entries) necessary to reflect
the withdrawal of Mark assuming that Shawn and Teresa acquire Mark’s equity. Shawn
pays Mark $190,000 for 60 percent of Mark’s equity and Teresa pays $130,000 for 40
percent of Mark’s equity.

Answer:
Goodwill 75,000
Mark, capital 75,000

Mark, capital ($210,000 + $75,000) 285,000

Shawn, capital ($285,000 x .60) 171,000
Theresa, capital ($280,000 x .40) 114,000

324. (10 Points) moderate

David, Eric, and Glenn are partners who share profits and losses 35 percent, 40 percent,
and 25 percent, respectively. Eric announced his withdrawal from the company when the
partners’ capital accounts were $220,000, $200,000, and $280,000, respectively. The
articles of partnership indicate that the withdrawing partner’s goodwill is to be
recognized at the date of withdrawal. Estimated goodwill attributable to Eric’s
ownership percentage is $90,000. Prepare the journal entry (entries) necessary to reflect
Eric’s withdrawal assuming that David and Glenn acquire Eric’s equity. David pays
$95,000 for 30 percent of Eric’s equity and Glenn pays $190,000 for 70 percent of Eric’s
equity.

Answer:
Goodwill 90,000
Eric, capital 90,000

Eric, capital ($200,000 + $90,000) 290,000

David, capital ($290,000 x .30) 87,000
Glenn, capital ($290,000 x .70) 203,000

325. (10 Points) easy

Rich, Sam, and Clarence are partners who share profits and losses 15 percent, 45 percent,
and 40 percent, respectively. Sam announced his withdrawal from the company when
the partners’ capital accounts were $90,000, $210,000, and $190,000, respectively. The
articles of partnership indicate that the withdrawing partner’s goodwill is to be
recognized at the date of withdrawal. Estimated goodwill attributable to Sam’s
ownership percentage is $60,000. Prepare the journal entry (entries) necessary to reflect
Sam’s withdrawal assuming that the partnership acquires Sam’s equity.
 Answer:
Goodwill 60,000
Sam, capital 60,000

Sam, capital ($210,000 + $60,000) 270,000

Cash 270,000

326. (10 Points) easy

Hal, Norris, and Eddie are partners who share profits and losses 25 percent, 15 percent,
and 60 percent, respectively. Hal announced his withdrawal from the company when the
partners’ capital accounts were $120,000, $100,000, and $380,000, respectively. The
articles of partnership indicate that the withdrawing partner’s goodwill is to be
recognized at the date of withdrawal. Estimated goodwill attributable to Hal’s ownership
percentage is $30,000. Prepare the journal entry (entries) necessary to reflect Hal’s
withdrawal assuming that the partnership acquires Hal’s equity.

Answer:
Goodwill 30,000
Hal, capital 30,000

Hal, capital ($120,000 + $30,000) 150,000

Cash 150,000

327. (10 Points) moderate

James, Kris, and Lance are partners in a local company. Kris has announced her
withdrawal from the company. The articles of partnership indicate that the entire
partnership’s goodwill is to be recognized at the date of withdrawal. James, Kris, and
Lance share profits in a 30 percent, 25 percent, and 45 percent ratio, respectively, and
their respective capital accounts just prior to the withdrawal are $160,000, $120,000, and
$225,000, respectively. Estimated goodwill is $180,000. Prepare the journal entry
(entries) necessary to reflect the withdrawal of Kris assuming that Felix has been
approved to become the new partner. Felix pays Kris $175,000 for 100 percent of her
partnership equity.

Answer:
Goodwill 180,000
James, capital ($180,000 x .30) 54,000
Kris, capital ($180,000 x .25) 45,000
Lance, capital ($180,000 x .45) 81,000

Kris, capital ($120,000 + $45,000) 165,000

Felix, capital 165,000

328. (10 Points) moderate

Nicole, Melvin, and Joshua are partners in a local company. Melvin has announced his
withdrawal from the company. The articles of partnership indicate that the entire
 partnership’s goodwill is to be recognized at the date of withdrawal. Nicole, Melvin, and
Joshua share profits in a 40 percent, 25 percent, and 35 percent ratio, respectively, and
their respective capital accounts just prior to the withdrawal are $200,000, $150,000, and
$190,000, respectively. Estimated goodwill is $120,000. Prepare the journal entry
(entries) necessary to reflect the withdrawal of Melvin assuming that Hans has been
approved to become the new partner. Hans pays Melvin $160,000 for 100 percent of his
partnership equity.

Answer:
Goodwill 120,000
Nicole, capital ($120,000 x .40) 48,000
Melvin, capital ($120,000 x .25) 30,000
Joshua, capital ($120,000 x .35) 42,000

Melvin, capital ($150,000 + $30,000) 180,000

Hans, capital 180,000

329. (10 Points) moderate

Kim, Jennifer, and David are partners who share profits and losses 40 percent, 25
percent, and 35 percent, respectively. Kim announced her withdrawal from the company
when the partners’ capital accounts were $250,000, $180,000, and $210,000,
respectively. The articles of partnership indicate that the entire partnership’s goodwill is
to be recognized at the date of withdrawal. Estimated goodwill is $95,000. Prepare the
journal entry (entries) necessary to reflect Kim’s withdrawal assuming that Jennifer and
David acquire Kim’s equity. Jennifer pays Kim $180,000 for 60 percent of her equity
and David pays $130,000 for 40 percent of Kim’s equity.

Answer:
Goodwill 95,000
Kim, capital ($95,000 x .40) 38,000
Jennifer, capital ($95,000 x .25) 23,750
David, capital ($95,000 x .35) 33,250

Kim, capital ($250,000 + $38,000) 288,000

Jennifer, capital ($288,000 x .60) 172,800
David, capital ($288,000 x .40) 115,200

330. (10 Points) moderate

Natalie, Oscar, and Paul are partners who share profits and losses 30 percent, 25 percent,
and 45 percent, respectively. Paul announced his withdrawal from the company when
the partners’ capital accounts were $180,000, $160,000, and $320,000, respectively. The
articles of partnership indicate that the entire partnership’s goodwill is to be recognized
at the date of withdrawal. Estimated goodwill is $110,000. Prepare the journal entry
(entries) necessary to reflect Paul’s withdrawal assuming that Natalie and Oscar acquire
Paul’s equity. Natalie pays Paul $140,000 for 30 percent of his equity and Oscar pays
$310,000 for 70 percent of Paul’s equity.
 Answer:
Goodwill 110,000
Natalie, capital ($110,000 x .30) 33,000
Oscar, capital ($110,000 x .25) 27,500
Paul, capital ($110,000 x .45) 49,500

Paul, capital ($320,000 + $49,500) 369,500

Natalie, capital ($369,500 x .30) 110,850
Oscar, capital ($369,500 x .70) 258,650

331. (10 Points) easy

Cindy, Tony, and Ben are partners who share profits and losses 25 percent, 55 percent,
and 20 percent, respectively. Ben announced his withdrawal from the company when the
partners’ capital accounts were $120,000, $250,000, and $100,000, respectively. The
articles of partnership indicate that the entire partnership’s goodwill is to be recognized
at the date of withdrawal. Estimated goodwill is $40,000. Prepare the journal entry
(entries) necessary to reflect Ben’s withdrawal assuming that the partnership acquires
Ben’s equity.

Answer:
Goodwill 40,000
Cindy, capital ($40,000 x .25) 10,000
Tony, capital ($40,000 x .55) 22,000
Ben, capital ($40,000 x .20) 8,000

Ben, capital ($100,000 + $8,000) 108,000

Cash 108,000

332. (10 Points) easy

Mary, Nick, and Shawn are partners who share profits and losses 15 percent, 25 percent,
and 60 percent, respectively. Mary announced her withdrawal from the company when
the partners’ capital accounts were $80,000, $140,000, and $280,000, respectively. The
articles of partnership indicate that the entire partnership’s goodwill is to be recognized
at the date of withdrawal. Estimated goodwill is $50,000. Prepare the journal entry
(entries) necessary to reflect Mary’s withdrawal assuming that the partnership acquires
Mary’s equity.

Answer:
Goodwill 50,000
Mary, capital ($50,000 x .15) 7,500
Nick, capital ($50,000 x .25) 12,500
Shawn, capital ($50,000 x .60) 30,000

Mary, capital ($80,000 + $7,500) 87,500

Cash 87,500
 Short Answer Questions

333. Helen and Richard are considering forming a partnership. They have worked out many
of the issues but they are unsure about how the accounting records have to be maintained.
They come to you for information pertaining to the application of GAAP for partnership
records.

Answer: Partnerships are not required to comply with generally accepted accounting
principles (GAAP) unless the entity has publicly traded debt securities or the entity is
required to comply with GAAP by a creditor.

334. What are the similarities and differences among proprietorships, partnerships, and
corporations with regard income tax filing.

Answer: Partnerships and proprietorships are viewed as an extension of the owners.

Neither entity is separately taxed on income. The taxable income or loss is allocated to
the owners according to the partners’ profit and loss sharing agreement. Once a partner’s
taxable partnership income is determined, the income is included on the partner’s
individual tax return. The partnership is required to file an informational tax return
(Form 1065) to disclose how the taxable income has been allocated to the partners. The
corporation, on the other hand, is a taxable entity and income tax is paid on the
corporation’s taxable income.

335. Three individuals are considering forming a business together. One of their concerns is
the liability exposure from the business. Prepare a short note to these individuals
explaining the extent of liability each has when forming a partnership and a corporation.

Answer: A partner may bind the partnership by contract when conducting business in the
name of the partnership. This results in each partner being liable for the partnership
business dealings of the other partners. In addition, partners have unlimited liability with
regard to partnership debts. On the other hand, stockholders of a corporation do not
share such legal liability. The corporation is a legal entity separate from the owners and
management can commit the corporation to legal contracts in the name of the
corporation, but not the stockholders. Thus, management of the corporation can sue in
the name of the corporation and the corporation can be sued. As a result, the
stockholders are generally not liable for the debts of the corporation beyond the amount
invested.

336. Alex is the owner of a small local business. He has operated as a proprietorship for many
years but his health is starting to fail. As a result, Alex is going to reduce the number of
hours worked in the business. He has asked you to explain how changing his business to
a partnership would affect him (legally). Prepare a brief memo outlining the similarity
and differences between a proprietorship and a partnership with regard to legal issues.
 Answer: Similarities to be discussed include (1) ease of formation and (2) unlimited
owner’s liability. Difference to be discussed is shared management.

337. Compare and contrast the proprietary theory of equity and the entity theory of equity
with regard to partnerships.

Answer: The proprietary theory is based on the notion that the business entity is an
extension of the owners. The entity theory is based on the notion that the business entity
is distinct and separate from the owners. Partnerships contain elements of both the
proprietary and entity theories. Support for the proprietary theory can be found in the
following:
Individual partners are liable for all debts of the partnership
Salaries of partners are viewed as distributions of income, not components of net
income
The admission of a new partner or withdrawal of an existing partner results in the
dissolution of the partnership
Assets contributed to the partnership retain the existing tax basis to the partner
contributing
A partner’s income tax includes the partner’s share of partnership net income, and
the partnership does not pay income taxes

Support for the entity theory can be found in the following:

Assets contributed to the partnership become property of the partnership
A partnership can enter into contracts
Partners do not have claims to specific assets
Partnership creditors have priority claim to partnership assets and the creditors of
partners have priority claim to partner’s assets in the event of liquidation
Continuity of the partnership when admission or withdrawal of partners occurs
338. Partnership accounting applies elements of both the proprietary and entity theories.
Explain the underlying theoretical basis for the proprietary theory and the entity theory.

Answer: The proprietary theory is based on the notion that the business entity is an
extension of the owners. The entity theory is based on the notion that the business entity
is distinct and separate from the owners.

339. Hans and Felix are attempting to work out the final issues for forming a partnership.
They are currently debating the values to assign to noncash assets contributed to the
partnership by each partner. Hans believe that the market value has to be assigned to
these assets while Felix believes there may be other alternatives. Prepare a short note to
the two potential partners clarifying this issue.

Answer: The three most likely valuations that can be assigned to noncash assets are the
1) contributor’s carrying value, 2) contributor’s tax basis, or 3) market or appraised value
of the asset. The amount to be assigned to the noncash assets can be determined by
agreement among the partners or by appraisal (if market values are used).

340. Berry and Charlie plan to start a partnership. One partner is contributing an old building
while the other partner is contributing several delivery trucks. Both partners are also
contributing cash. A difference of opinion exists regarding the amount at which the
building and delivery trucks are to be placed on the partnership’s books. Berry believes
the carrying values should be recorded. Charlie objects because it would give Berry too
great a share of the partnership’s owners’ equity. Charlie believes the tax basis should
be used. Berry objects to the tax basis for the same reason Charlie objects to the book
basis. The partners ask for your opinion. How do you respond?

Answer: The amounts recorded on the partnership’s books do not determine the amounts
assigned to each individual capital account. The amount recorded for the assets will help
determine total capital, not how total capital is divided between the partners.

341. Explain how the assumption of a liability by the partnership on an asset contributed by a
partner impacts the contributing partner’s capital account and tax basis in that asset.

Answer: Generally the value assigned to the asset (e.g., carrying value, tax basis, market
value) is explicitly reduced by the amount of the liability assumed to determine the
contributing partner’s capital account balance. The reduction may be implicit if partners
agree to create capital accounts in equal amounts through such techniques as the
recognition of goodwill for other partners. The tax basis of a contributing partner is only
reduced by the part of the liability assumed by the partnership because the IRS interprets
this event as all partners sharing the obligation so the contributing partner is still
obligated for part of the liability.

342. Clark, Mitchell, and Thomas are forming a partnership. Each partner is contributing cash
and other tangible assets. In addition, Clark has a significant amount of experience in
operating the type of business being created. The partners do not like the idea of
 recording goodwill but they are not sure how to otherwise recognize the additional
contribution Clark is making. Prepare a brief memo explaining a different way to
recognize Clark’s contribution.

Answer: The initial capital accounts can be modified to reflect Clark’s additional
contribution. Mitchell and Thomas would give up an agreed amount of capital to be
assigned to Clark. This approach is called the bonus method. Mitchell and Thomas are
giving a bonus to Clark because of the additional contribution that cannot be measured in
a traditional manner.

343. James and Rachel are forming a partnership. They agree on the values to assign to all of
the assets and liabilities. The partners also want to recognize that Rachel has many
contacts that will be of value to the business. A mutual friend who owns a business has
told them the bank will be unhappy with their balance sheet if they record goodwill for
Rachel. How else can they recognize Rachel’s contacts?

Answer: The bonus method can be used instead of the goodwill method. The bonus
method reallocates capital from James to Rachel to recognize the contribution made by
Rachel in excess of the identifiable assets. As a result, James will have a reduced capital
account balance and Rachel will have a greater balance.

344. Barry, George, and Felix are forming a partnership. Each partner is contributing cash
and other tangible assets. George and Felix are contributing greater amounts of cash and
other tangible assets but Barry has a significant amount of experience in operating the
type of business being created. A mutual friend has suggested that the three make their
initial capital accounts equal in value. George and Felix do not like the idea of recording
their capital accounts at an amount less than the market value of what they are
contributing but they are not sure how to otherwise recognize the additional contribution
Barry is making. Prepare a brief memo explaining a different way to recognize Barry’s
contribution.

Answer: The additional contribution being made by Barry could be recorded as goodwill.
This intangible asset would be created at an amount agreed by the partners. Goodwill
results in an increase in the value of Barry’s capital account but it does not result in a
decrease in the value of the other partners’ capital accounts.

345. Explain how partners may determine the dollar amount of goodwill recognized at the
date a partnership is formed.

Answer: The value assigned to goodwill can be determined in any legal manner
agreeable to the partners. One possibility is to have an independent appraisal of the
intangible asset contributed. Another possibility is for the partners to agree on an
assigned value of the intangible asset.

346. Explain how a drawing account used by a partnership is similar in concept to a dividend
account used by a corporation.
 Answer: Both accounts contain information pertaining to distributions to owners. These
distributions can take any form such as cash, inventory, and other assets. Both accounts
are temporary in nature. They do not exist on the company’s balance sheet and they are
closed at the end of the accounting period to permanent equity accounts (partnership
capital accounts for drawing accounts and retained earnings for dividends).

347. Vicky, Robert, and Ray are forming a partnership. They have asked for some
information regarding the allocation of profits and losses among the partners. While they
believe that each partner will contribute significantly to the partnership, this contribution
will take different forms. They are unsure how to recognize these different types of
contributions. Prepare a short note explaining the different components that might be
considered when allocating partnership profits to individual partners.

Answer: Partnership profits and losses can be allocated in any manner but there are four
common components: interest on capital balance, salary, bonus, and residual percentages.
These different components reward partners for contributions of economic resources,
labor and expertise, taking on special responsibilities, and agreed allocation of any
residual profit or loss remaining after the other components have been considered.

348. Susan is joining an already existing partnership. She is reading the profit and loss
sharing part of the partnership agreement. She calls you with a question regarding a term
she does not understand, weighted average capital balance. Prepare a short note
explaining what is meant by this term.

Answer: The weighted average capital balance is the calculated average dollar amount in
the capital account after considering the length of time that balance existed. This method
of computing the average is less subject to manipulation that the simple average, which is
beginning amount plus ending amount divided by two.

349. Ben is a new partner in a local company. When he became a partner, he received a copy
of the partnership agreement including the profit and loss sharing agreement. Ben is
concerned about the interest on capital balance portion of the profit and loss sharing
agreement because his capital account is very small. Prepare a short note explaining the
reason this component of profit and loss allocation exists.

Answer: The interest on capital balance is meant to reward partners for contributions of
economic resources. As a new partner, a small capital account will likely exist and
therefore this component of the profit allocation will be small. As the capital account
grows through additional investment and profit accumulation, this component of the
profit and loss allocation will also grow.

350. Michelle is a new partner is considering becoming a partner in a small company. She
obtained a copy of the most recent income statement and is surprised when she does not
find salaries on the income statement. She asks you if it is unusual for partners to not
receive a salary from their work in the partnership.
 Answer: The lack of salary expense on the income statement does not mean that the
partners do not receive a salary. Partner salaries are not on the income statement, they
are part of the profit allocation.

351. Are there any differences between bonuses offered to partners and bonuses offered to
managers in corporations?

Answer: Bonuses offered to partners and bonuses offered to managers in corporations

are the same. Both are forms of compensations designed to encourage performance.
Furthermore, both should be based on criteria within the control of the person who will
receive the bonus.

352. Ben and Natalie are forming a partnership. They have worked out many of the details
but they are confused about how to divide profits and losses. They have spoken with
several associates who are in different partnership and there seems to be some
inconsistencies. Some partnerships have residual profit and loss ratios while others do
not. Prepare a note to Ben and Natalie informing them of the reason for this
inconsistency.

Answer: Residual profit and loss ratios are not needed if the ratios are to be equal. The
default profit and loss ratio, if not stated, is that all partners will share the residual profit
and loss equally. If the desire is to share the residual amount of profit or loss in some
other proportion, the allocation must be disclosed.

353. Do partnership residual profit ratios have to be the same as partnership residual loss
ratios? Why or why not.

Answer: Residual profit and loss ratios are part of a contractual agreement among the
partners. As a result, the partnership can apply any ratios agreed by the partners. The
ratios are typically the same for profits and losses but they can differ.

354. Alex, Shawn, and Tammy are partners in a local company. They have been conducting
business for a number of years and Shawn recently told the partners that he is going to
reduce his activities in the partnership. As a result, the partners have agreed that the
profit and loss sharing arrangement should be modified. They have agreed to adjust the
salaries and the profit and loss residuals. They come to you with a concern regarding the
assets that are currently owned by the partnership. The partners know that the assets are
worth more than the amount recorded on the financial records but they do not know how
this should be considered when the profit and loss ratios are changed. Prepare a short
note to the partners outlining the their options.

Answer: The difference between the market and book values of assets that exist when the
profit and loss ratios change can be addressed in several ways. One way is to make a list
of these assets and their market value at the date of the change. When the assets are sold,
the amount of the gain that existed when the profit and loss ratios were changed would be
 allocated based on the previous profit and loss ratios and any change in market value that
occurs after the ratios are changed would be allocated based on the new ratios. Another
approach is to revalue the assets at the date the profit and loss ratios are changed. The
gain would be allocated based on the previous ratios. A third approach is to determine
the impact of the unrealized gains on the capital accounts due to the change in the ratios
and directly adjust the capital accounts. The gain on the assets at the date of sale would
then be allocated based on the new ratios. All three approaches give the same end result,
the choice is a matter of preference by the partners.

355. Partners sometimes change the profit and loss ratios used to determine the allocation of
profits and losses. When this occurs, why would the partners choose to prepare a list of
assets with market values different from book values when they could have chosen to
revalue the assets to market value at the date the profit and loss ratios were changed?

Answer: Some partners and possibly their creditors may not want to have the assets
revalued to market value. The revaluation is a significant departure from GAAP and the
partners and their creditors may prefer to have the partnership’s financial records
maintained in accord with GAAP.

356. Sarah, a friend who knows you are a CPA comes to you with a concern. She has been
asked by a colleague to consider becoming a partner in a small company. She will be the
fourth partner in the company. Sarah has had two meetings with the current partners.
She is concerned that one of the current partners who does not know her has been asking
a variety of questions pertaining to her business practices beliefs and her personal ethics.
Sarah asks if you have any idea why this partner would ask such questions. How do you
respond?

Answer: The current partner may be concerned because the existing partners will have
unlimited liability for the actions of the new partner. Given that this partner does not
know Sarah, he/she is gathering information so a choice can be made about accepting
such risk.

357. Don and Jerry are partners in a publishing company. Don is interested in reducing his
involvement in the company and they have been searching for a new partner to take on
some of the work. They learn that Ted is interested in joining the partnership and they
enter into negotiations. Don is willing to support Ted joining the partnership if Ted will
pay Don $250,000. Don will not transfer any of his equity to Ted but will allocate 30
percent of his profit allocation to Ted. Ted comes to you with a concern about Don’s
unwillingness to allocate any equity to him even though a significant investment is
required. How do you respond?

Answer: There is no requirement for a partner to give up equity to a new partner

acquiring part of his ownership. Ted’s is purchasing an ownership in the income stream
of the partnership. His capital account would start at $0 an increase as the partnership
has income.
358. Sally, Robert, and Stuart are partners in a manufacturing company. They are considering
allowing Dick to acquire an ownership interest in the partnership by purchasing part of
Stuart’s equity. Dick is interested in purchasing 40 percent of Stuart’s equity. Dick
comes to you with a question just before a negotiating session with the current partners.
He asks if his ownership in Stuart’s equity gives him the right to 40 percent of Stuart’s
profit allocation or if that is a separate issue. How do you respond?

Answer: A purchase of Stuart’s equity is a separate issue from the allocation of profits
and losses. These two items have to be negotiated simultaneously but they are
independent. Dick has to be comfortable with the outcome on both issues if he is going
to acquire a part ownership in the partnership.

359. Fred is negotiating an investment to join a partnership. The existing partners are asking
for an investment of $80,000 for a 20 percent ownership in the partnership’s equity.
Fred is encouraged by this proposal but then he learns that the partners plan to revalue
the assets before Fred’s admission. Fred does not understand the reason for the
revaluations. Prepare a note to Fred explaining why the existing partners want to revalue
the assets before he is admitted.

Answer: The partners believe that the difference between market value and book value of
existing assets belong to them because they have been the partners during the time period
when the assets value increased. As a result, they intend to have the unrealized increase
in value added to their capital accounts so that it will not be shared with the new partner.
Any changes in value after Fred becomes a member of the partnership will be allocated
to all of the partners, including Fred.

360. Why are some people opposed to the revaluation of partnership assets when a new
partner is admitted to the partnership?

Answer: These individuals contend that the partnership is still in operation and there
should be no change in the values assigned to assets and liabilities while the partnership
is in operation. There has not been a change in ownership so there is no transaction to
justify the revaluation.

361. You are a staff accountant for a local company. The partners of a client are discussing
the admission of a new partner. Some partners believe that the partnership’s assets
should be revalued before admission of the new partner while other partners are opposed
to the revaluation. Prepare a short note explaining why it may be appropriate to revalue
the partnership’s assets at this time.

Answer: The change in value of the assets has occurred over time and the partners during
that time should share in the increase in value. The new partner should have no claim to
increases in value before that partner’s investment in the company. In addition, when the
new partner joins the company, there is a new legal entity so recording the assets at the
market value at that date is not inappropriate.
362. Sam and Mark are discussing bringing Susan into the partnership. Susan understands
that the partnership’s assets will be revalued before her admission but she does not
understand why she should invest more in the partnership than her share of the market
value of the partnership’s assets. Prepare a short note to Susan explaining the reason that
it may require a greater investment to become a member of this partnership.

Answer: Revaluing the partnership’s assets does not recognize the goodwill that exists in
the company. The partners have chosen to not record goodwill on the company’s
balance sheet but goodwill still exists. The amount that Susan is investing in excess of
the capital account created represents her investment in the goodwill that already exists in
the company. She is paying a bonus to the existing partners for allowing her to share in
the goodwill of the partnership.

363. Steve is negotiating with the partners in a local business. He would like to become a new
partner in the business but there are several issues he does not understand. One of the
primary issues pertains to the amount of his capital account at the date of investment.
The partners told Steve that he would have to invest $100,000 to join the business but his
capital account would be created for $85,000. Prepare a short note to Steve explaining
why his capital account would be recognized at an amount less than his investment.

Answer: The partnership has an unidentified asset (goodwill) that has value to the
company. The partners have chosen to not record goodwill on the company’s balance
sheet but goodwill still exists. The amount that Steve is investing in excess of the capital
account created represents his investment in the goodwill that already exists in the
company. He is paying a bonus to the existing partners for allowing him to share in the
goodwill of the partnership.

364. Jim and Fred have decided to admit Richard into their partnership. Jim and Fred know
that they are going to apply something called the bonus method to record the admission
of Richard into the partnership but they do not understand the technical accounting part
of the transaction. As a result, they do not understand why Richard’s capital account will
be created at an amount greater than the amount of his investment in the partnership.
Prepare a short note to Jim and Fred explaining the reason that Richard’s capital account
is created for this amount.

Answer: The parties have agreed that Richard is going to receive a certain percentage of
the partnership’s equity at the date of the investment. They have also agreed on the
amount that Richard will invest. When the investment takes place, the bonus method
required Richard’s capital account to be created at the agreed percentage of the total
capital after the investment. This amount may be less than, equal to, or more than the
amount invested. If it is less than or more than the amount of the investment, the capital
accounts of the existing partners is adjusted to make up for the difference.

365. John and Joel are negotiating with a potential partner to join their local business. They
would like Laura to become a new partner in the business but there are several issues
they do not understand. One of the primary issues pertains to the amount of his capital
 account at the date of investment. The partners agreed that Laura would have to invest
$75,000 to join the business and they agree that he is going to have a 30% equity interest
in the partnership. What they did not realize is that their capital accounts were going to
decrease when Laura joined the partnership. Prepare a short note to John and Joel
explaining why their capital accounts would be reduced when Laura joins the company.

Answer: The partners have agreed that Laura is contributing something to the partnership
in addition to the tangible assets. They have also agreed on the value of this contribution
when they established the interest she would have in the partnership’s total capital.
When the bonus method is applied, the total capital (based on the existing partners’
capital plus the investment) is allocated to the new and existing partners in the agreed
manner. If the new partner is receiving an equity interest more or less than the amount
invested, the existing partners’ capital accounts must be adjusted. In this instance, the
capital account of the new partner is greater than the amount invested so the existing
partners’ capital accounts must be reduced.

366. Shawn is currently in discussion with Ted and Mark regarding his joining their
partnership. Initial discussions resulted in an agreement that Shawn would contribute
$50,000 for a 20 percent equity interest in the partnership. The last discussion was about
how the transaction would be disclosed in the partnership’s financial statements. Shawn
noticed that the Ted and Mark’s capital accounts were greater in the pro forma balance
sheet and that goodwill had been added to the balance sheet. Shawn asks for an
explanation of this change. You are the accountant attending the meetings, how do you
respond?

Answer: The partnership agreement indicates that the goodwill method is to be applied
when new partners join the company. In this instance, Shawn is contributing more than
his share of the book value of the company. This implies that there exists goodwill in the
company. The goodwill is recorded and allocated to Ted and Mark because they were
the partners when the goodwill was developed. As a result, Shawn’s $50,000 investment
will exactly equal his share of the partnership’s book value after the goodwill is recorded.

367. You are conducting training for new loan officers of a bank. The topic of the day is
partnerships and their changes in ownership. The bank often receives loan requests when
partnerships are expanding. At the same time, the partnership may also be adding a new
partner to increase the company’s capital and improving its potential for a loan from the
bank. You hand out several partnership balance sheets before and after a new partner has
joined. One loan officer asks about the reason for a change in existing partner capital
accounts and the addition of goodwill to the balance sheet. How do you respond?

Answer: Partnerships are permitted to record goodwill when a new partner joins the
company. Estimated goodwill is determined by evaluating the new partner’s investment
and that partner’s share of the partnership’s total equity after the investment. If the
investment results in the new partner receiving less than his/her share of the partnership’s
equity, goodwill is said to exist in the current partners. As a result, this goodwill is
recorded and allocated to the current partners.
368. Three investors have asked for your assistance in planning the formation of a partnership.
After about two hours of discussion the group arrives at the topic of how to admit
additional partners in the future or retire existing partners. You explain that there are two
methods that can be used to account for these events: the bonus method and the goodwill
method. One of the partners listens to the explanation of the two methods and then asks
for you to summarize the criteria that may be used to determine which method this
partnership wants to use. Prepare a response to the partner’s request.

Answer: The difference that exists when comparing the bonus method and the goodwill
method is whether the partners wish to recognize goodwill on the balance sheet. The
goodwill method will result in greater total assets than the bonus method but the
relationship that exists among the partners will be the same regardless of the method
applied.

369. Why would partners in an existing partnership agree to allocate an equity interest to a
new partner that is greater than the value of the identifiable net assets contributed by the
new partner?

Answer: The existing partners would be willing to allocate a capital account to a new
partner greater than the value of the identifiable new assets contributed because the new
partner is contributing unidentifiable assets to the partnership. These other assets may
include business expertise, a good reputation, or existing customers. The additional
assets contributed to the partnership result in the new partner having goodwill.

370. You are an analyst for a local bank. A question just arrived in your email from a new
loan officer. The loan officer is reviewing information from a small partnership
requesting a loan. The partnership indicates that one of the partners is withdrawing from
the partnership. The remaining partners send a current balance sheet and a pro forma
balance sheet after the withdrawal. The loan officer is confused because the withdrawing
partner’s capital account is deleted and all of the other partners’ capital accounts have
been reduced. Why might all of the other partners’ capital accounts be reduced?

Answer: There are two reasons why the remaining partners’ capital accounts could be
reduced. First, the partnership may have revalued assets to their market value. If the
market value were less than book value, the capital accounts would be reduced. The
second, and more likely, reason is that the remaining partners are going to pay a bonus to
the withdrawing partner. As a result, each of the remaining partners’ capital accounts
will be reduced by his/her proportion of the bonus paid.

371. Jennifer is confused with regard to the recognition of the withdrawal of a partner from
the company. The partnership agreement indicates that they will apply the bonus method
to recognize the withdrawal and that any bonus will be shared by the remaining partners
based on their profit and loss ratio. Jennifer was surprised when she is assigned 40
percent of the bonus paid even though she only has a 35 percent ownership interest in the
partnership. How do you respond?
Answer: The remaining partners, based on their profit and loss residual ratios, absorb the
bonus paid to the withdrawing partner. As a result, Jennifer’s 35 percent ownership
became 40 percent of the remaining equity after the existing partner was removed from
consideration.
1. Tom and Jerry formed a management consulting partnership on January 1, 2021. The fair value of net
assets invested by each partner follows:

Tom Jerry

Cash 13,000 12,000

Accounts receivable 8,000 6,000

Office 2,000 800

Office equipment 30,000

Land 30,000

Accounts payable 2,000 5,000

Mortgage payable 18,800

During the year, Tom withdrew P15,000 and Jerry withdrew P12,000 in anticipation of operating
profits.Net profit for 2021 was P50,000 which is to be allocated based on the original net capital
investment.

● The capital balance of Tom on December 31, 2021 is

69,553

● The capital balance of Jerry on December 31, 2021 is

29,447

2. Robert, Mico and Aaron formed a partnership on March 1, 2019 with original capital contributions of
P300,000, P100,000, and P400,000, respectively. On April 30, 2019, agreed to invest additional capital
of P100,000 each. On August 1, all partners agreed to have the same level of contributed capital of
P500,000.

● How much is the average capital balance of Mico for the 10-month period ending December 31,
2019?
330,000

● How much is the average capital balance of Robert for the 10-month period ending December
31, 2019?
430,000

● How much is the average capital balance of Mico for the 10-month period ending December 31,
2019?
Robert of P100,000. Mico of P300,000 and nothing from Aaron

3. Dino, Doods, and Dong have the following accounts and their normal balances on January 31, 2021,
the date the partners agreed to liquidate their 3D Partnership:

Cash P20,000 Accounts Payable P10,000

 Accounts Receivable 25,000 Notes Payable 27,000

Allowance for Bad Debts 5,000 Loans due to Dino 5,000

Merchandise Inventory 60,000 Loans due to Doods 7,000

Furniture & Equipment 50,000 Dino, Capital 20,000

Accumulated Depreciation 5,000 Doods, Capital 40,000

Dong, Capital 36,000

The partners divide profit and losses 4:1:5, respectively. Sales proceed follows:
Accounts Receivable P10,000
Merchandise Inventory 30,000
Furniture & Equipment 20,000

● Assuming that Dino is a limited partner, the cash paid to Dong is?
0

● If Dino is a limited partner, the cash paid to Doods is

32500

● Assuming that Dino is a limited partner, how much additional investment should Dong give?
1500

● How much is the non-cash assets?

125000

● Assuming that any deficiency will be immediately paid, the cash paid to Doods
40500

● Assuming that any deficiency is uncollectible, the cash paid to Dong?

2667

● The sale of non-cash assets resulted in a total loss of

65000

● How much is the cash available for distribution to the partners?

43000

● The sale resulted in a capital deficiency for

Dino

4. Felicity and Gregory are partners with capital balances of P700,000 and P500,000, respectively. They
agree to accept Randell who will contribute land costs him P500,000, but with a market value of
P600,000.

Randell will be given 30% interest in the partnership and bonus is to be recognized.
 ● The revised capital of Felicity after the admission of Randell is
P735,000

● Who gives the bonus?

Randell

Randell will be given 40% interest in the partnership.

● Assuming bonus is to be recognized, how much is the bonus?

120,000

● Assuming bonus is to be recognized, who gets the bonus?

Randell

5. Felicity and Gregory are partners with capital balances of P700,000 and P500,000, respectively. They
agree to accept Randell who will contribute land costs him P500,000 but with a market value of
P600,000. Randell will be given 30% interest in the partnership but assets should first be revalued
using Randell’s investment and interest as basis.

● How much is the total agreed capital?

P2,000,000

● How much is the total asset revaluation?

200,000

6. Felicity and Gregory are partners with capital balances of P700,000 and P500,000, respectively. They
agree to accept Randell who will contribute land costs him P500,000 but with a market value of
P600,000. Randell will be given 40% interest in the partnership but assets should first be revalued
using Randell’s investment and interest as basis.

● Total asset revaluation amounts to

P(300,000)

7. Ara, Bea, and Cai agreed to admit a new partner on January 1, 2021 when their capital balances were
250,000, 150,000, and 200,000, respectively. Profit and loss ratio is 2:1:2, respectively. A new partner,
Dell was admitted for cash investment that will give her 25% interest in the partnership.

How much should Dell invest?

200,000

8. Ara, Bea, and Cai agreed to admit a new partner on January 1, 2021 when their capital balances were
250,000, 150,000, and 200,000, respectively. Profit and loss ratio is 2:1:2, respectively.

Ara retired and the partnership paid her P240,000 after the assets were revalued.

● Bea’s capital after Ara’s retirement is

P145,000

Ara retired and the partnership paid her P280,000 after the assets were revalued.
 ● Total capital after Ara’s retirement is
P395,000

9. Ara, Bea, and Cai agreed to admit a new partner on January 1, 2021 when their capital balances were
250,000, 150,000, and 200,000, respectively. Profit and loss ratio is 2:1:2, respectively. A new partner,
Dell was admitted for cash investment of 100,000 for a 20% interest in an agreed capitalization of
700,000. The accountant recognized
Bonus to new partner

10. Ali and Bebe formed a partnership. The partnership agreement stipulates the following:
a. Ali shall contribute non-cash assets with a carrying amount of P60,000 and fair value of
P100,000.
b. Bebe shall contribute cash of P200,000
c. Ali and Bebe have an interest of 80% and 20%, respectively, on both initial and subsequent
partnership profits and losses
d. No outside cash settlement shall be made between the partners. *

● The entry to record the contribution of Bebe includes a credit to Ali’s capital in the amount of
140000

● The total partnership capital after the formation is ________.

300000

● The adjusted capital account of Bebe after the formation is ________.

60000

11. The partners in the ABC partnership have the capital balances as follows:
A - 70 000 ; B - 70, 000 ; C - 105 000
Profits and losses are shared 30%, 20%, 50%, respectively. On this date, C withdraws and the partners
agree to pay him P140,000 out of partnership cash. *

● Using the total revelation of asset method, the revised capital of B after the withdrawal of C is
84000

● Using partial revaluation of asset method, the revised capital of A after the withdrawal of C is
70000

● Using bonus method, the revised capital of A after the withdrawal of C is

91000 49000

12. Jack holds an ownership interest of 63% and Teresa holds an ownership interest of 37% in the J and T
partnership. This year, in order to fully develop the business, Jack contributes an additional P6800 and
Teresa contributes an additional P3200 to the partnership. Which of the following is TRUE of this
scenario
Individual contributions of P6800 by Jack and P3200 by Teresa will be recorded.

13. Assume that after operations and partners’ withdrawals during 20x2 and 20x3, DE partnership has a
book value of P120,000 and profit and loss (P&L) percentage on January 1, 20x4 as follows:
 a. Capital balances of P72,000 and P48,000 for D and E, respectively.
b. P/L ratio of 7:3 to D and E, respectively.

On this date, G is admitted to the partnership. G purchased one-fourth of D’s interest for P21,600 and
one-fourth of E’s interest for P14,400 making direct payment to D and E. The new partner will have a
one-fourth share in the profits and losses. The old partners continue to use their profit and loss ratios.

● The capital of E after the admission of G is _______.

36000

● The revised profit or loss percentage of D is _______.

52.5%

On this date, G is admitted to the partnership. G paid P28,000 directly in exchange for a one-third
interest of D.

● The capital account credit to G is _______.

24,000

14. Rica is a sole proprietor who invested her grocery when she invited Belle to form a new partnership
business. The following are the assets and liabilities of the grocery:

Cash 50,000

Merchandise 30,000 Book Value

P20,000 Market Value

Fixed Asset (100k less Acc. Depn 10K) 90,000 Book Value

70% of cost Market Value

Accounts Payable 20,000

Accrued Expenses 7,000

Belle invested the following:

Cash P60,000

Land (mortgage balance of 200,000 Book Value

P500k plus accrued interest
for 6 mos at 18%)

500,000 Market Value

Store furniture (costing 30,000

P40k less acc depn of 10k)

The total liabilities of the newly formed partnership would be

81,500
15. A statement of financial position of the partnership of X, Y, Z contains the following account balances:

Cash P240,000 Accounts Payable P300,000

Accounts Receivable 280,000 Notes Payable 200,000

Loans to Z 40,000 Loans from Y 20,000

Inventories 400,000 X, Capital 340,000

Property, Plant, and 440,000 Y, Capital 340,000

Equipment

Z, Capital 200,000

In January 2021, the loan to Z, was offset against his capital balance, P200,000 of accounts receivable
were collected and inventories with carrying value of P160,000 were sold for P200,000. Available cash
was distributed. **

X, Y, and Z share profits and losses in the ratio of 5:3:2, respectively.

● After the first distribution of cash, the equity of Y is ________.

220000

● If Z received P30,000 during the first cash distribution, the amount that should have been
received by X is ________.
15000

● If P40,000 cash was withheld for possible liquidation expenses, the amount of cash received by
Y in the first cash distribution is ________.
100000

● If X received a total of P240,000 in full settlement of his interest in the partnership, the total loss
incurred on the liquidation of the partnership is ________.
200000

● The amount of cash available for distribution to partners is ________.

140000

16. Brian Snow and Wendy Waite formed a partnership on July 1, 20x2. Brian invested P20,000 cash,
inventory valued at P15,000, and equipment valued at P67,000. Wendy invested P50,000 cash and
land valued P120,000. The partnership assumed the P40,000 mortgage on the land.

On June 30, 20x3, the partnership reported a net loss of P24,000. The partnership contract specified
that income and losses were to be allocated by allowing 10% interest on the original capital investment,
salaries of P15,000 to Brian and P20,000 to Wendy, and the remainder to be divided in the ratio of
40:60.
 On July 1, 20x3, Alan Young was admitted into the partnership with a P70,000 cash investment. Alan
was given 30% interest in the partnership because of his special skills. The partners elect to use the
bonus method to record the admission. Any bonus should be divided in the old ratio of 40:60.*

On June 30, 20x4, the partnership reported a net income of P150,000. The new partnership contract
stipulated that income and losses were to be divided a fixed ratio of 20:50:30

On July 2, 20x4, Brian withdrew from the partnership for personal reasons. Brian was given P40,000
cash and a P60,000 note for his capital interest.

● The share of Snow in the net loss for the first year is ________.
(16,320) 7680

● The share of Snow in the net income for the second year is ________.
30000

● The decrease in the capital of Waite upon the admission of Alan is ________.
8040

● Upon formation the amount credited to the capital account of Waite is ________.
130 000

● The entry to record the withdrawal of Snow includes a credit to Waite, Capital in the amount of
11850

17. A 1:3:2 ratio is the same as

⅙:½:⅓

18. Mickey, Donald, and Minnie are partners sharing profit and loss in the ratio of 2:1:1, respectively. Their
capital balances are P400,000 for Mickey, P200,000 for Donald and P100,000 for Minnie. Claims of
suppliers amounted to 500,000 including the loan extended by Minnie, P50,000. The cash balance
amounted to P300,000 and it increased to P1,050,000 as a result of the sale of the non-cash assets.

● How much cash was received by Donald in the final settlement?

162,500

● How much cash was received by Mickey in the final settlement?

325,000

● How much was the non-cash assets of the partnership?

900,000

● How much was the loss from sale of non-cash assets?

150,000

● How much was the cash proceeds from sale of non-cash assets?
750,000

● How much cash will Minnie receive?

 112,500

19. Partnership JB has two partners, Jim and Bill. Jim own 60% of the partnership and Bill owns 40%. In
which of the following transactions will the partnership be held responsible for an individual partners'
actions
Bill signs a contract to buy furniture for official use in the partnership.

20. Carlin and Marley have a partnership agreement which includes the following provisions regarding
sharing net income or net loss.
* A salary allowance of P120,000 to Carlin and P100,000 to Marley.
* An interest allowance of 10% on capital balances at the beginning of the year.
* A bonus of 20% to Carlin,
* The remainder is to be divided 40% to Carlin and 60% to Marley.

The capital balances on January 1, 2018 for Carlin and Marley was P90,000 and P120,000,
respectively. During 2018, the Carlin and Marley partnership had sales of P2,000,000, cost of goods
sold of P1,100,000, and operating expenses of P400,000. Income Tax rate is 30%.

● If bonus is computed based on net income before bonus, salary allowances, and interest on
capital, the total share of C in the partnership is ________.
214600

● If bonus is computed based on net income after bonus, salary allowances, and interest on
capital, the total share of C in the partnership is ________.
183500

21. On January 1, 2021, Am and Boy agreed to form a partnership. The partners’ contribution are as
follows:

Am Boy

Cash 50,000 120,000

AR 360,000 1,080,000

Inventories 216,000 360,000

Land 1,080,000

Building 900,000

Equipment 90,000 90,000

AP 336,000 450,000

Capital 1,460,000 2,100,000

The partners agreed to the following:

A. The recoverable amounts of the partners’ accounts receivable are P300,000 and P760,000 for
and Boy , respectively
B. The inventory contributed by Boy includes obsolete items with a recorded cost of P200,000
 C. The land contributed by Am has an attached mortgage of P180,000. The partnership shall
assume the mortgage
D. The equipment contributed by Boy has a fair value of P130,000
E. Has an unrecorded accounts payable of P100,000. The partnership assumes the obligation of
settling the account *

● The total assets of Amboy Partnership is

3986000

● The adjusted capital balance of Am is

1120000

● The adjusted capital balance of Boy is

1800000

22. Assume that AA and BB partners of AB Partnership (who share net income and loss in 80%:20%)
organize A & B Corporation to take over the net assets of the partnership. The balance sheet of the
partnership on June 20, 20x4, the date of incorporation, is as follows: **

Assets:

Cash 14,400

Trade AR 33,720

Allowance for doubtful accounts (720)

Inventories 30,600

Equipment 72,000

A/D (31,200)

Total Assets 118,800

Liabilities and Partners Capital

Trade AP 42,000

AA, Capital 57,588

BB, Capital 19,212

Total Liabilities and Partners Capital 118,800

After an appraisal of the equipment and an audit of the partnership’s financial statements, the partners
agree that the following adjustments are required to restate the net assets of the partnership to current
fair value:
A. Increase the allowance for doubtful accounts to P1,200
B. Increase the inventories to current replacement cost of P36,000
 C. Increase the equipment to its reproduction cost new, P84,000, less accumulated depreciation on
this basis, P36,600; that is to current fair value , P47,400
D. Recognize accrued liabilities of P1,320
E. Recognize goodwill of P12,000

A & B Corporation is authorized to issue 12,000 shares of P10 par common stock. It issues 9,000
shares of common stock valued at P11 a share to the partnership in exchange for the net assets of the
partnership

● In the books of the corporation, the amount credited to Paid in Capital in Excess of Par is
9000

● The adjusted capital of AA is

75348

● The adjusted capital of BB is

23652

● The total net adjustment is

22200

23. An advantage of the partnership as a form of business

A partnership is created by a mere agreement of the partners

24. Luz, Vi and Minda are partners when the partnership earned a profit of P30,000. Their agreement
provides the following regarding the allocation of profit and losses:
a. 8% interest in partner’s ending capital in excess of P75,000
b. Salaries of P20,000 for Luz and 30,000 for Vi
c. Any balance is to be distributed 2:1:1 for Luz, Vi and Minda, respectively.

Assume ending capital balances of P60,000, P80,000 and P100,000 for partners Luz, Vi and Minda,
respectively. What is the amount of profit allocated for Minda, if each provision of the profit and loss
agreement is satisfied to whatever extent possible using the priority order shown above?
P2,000

25. Partners AA and BB have profit and loss agreement with the following provisions: salaries of P30,000
and P45,000 for AA and BB, respectively; a bonus to AA of 10% of net income after salaries and bonus,
and interest of 10% on average capital balances of P20,000 and P35,000 for AA and BB, respectively.
One-third of any remaining profits will be allocated to AA and the balance to BB.

● If the partnership has net income of P102,500, how much should be allocated to Partner AA?
P41,000

● If the partnership has net income of P102,500, how much should be allocated to Partner BB?
P61,500

● If the partnership had net income of P22,000, how much should be allocated to partner AA,
assuming that the provision of the profit and loss agreement are ranked by order of priority
starting with salaries?
 P8,800

26. Hope & Faith Co. reports net income after 30% tax of P235,000 by the end of 2018. The partnership
agreement provides for division of profit or loss on the ratio of the partners’ capital balances. At the end
of 2017, each partner had a capital balance of P220,000. During 2018, Hope made additional
investment of P50,000 on April 1 and withdrew P70,000 of her capital on September 30. Faith, on the
other hand, made additional investment of P80,000 on October 1.

● The share of Hope in the net profit using the ratio of weighted average capital is ____
P117,500

27. The partnership agreement of Rossi and Olson provides for salary allowances of P45,000 to Rossi and
P35,000 to Olson, with the remaining income or loss to be divided equally. During the year, Rossi and
Olson each withdraw cash equal to 80% of their salary allowances. If partnership net income is
P100,000, Rossi’s equity in the partnership would
Increase more than Olson’s

28. Nancy and Betty enter into a partnership agreement where they decide to share profits according to the
following rules.
● Nancy and Berry will receive salaries of P1700 and P14500 respectively as the from allocation.
● The next allocation is based on 20% of each partner’s capital balances.
● Any remaining profit or loss is to be allocated completely to betty

The partnership net income for the first year is P50,000. Nancy’s capital balance is P83,000 and Betty's
capital is P11,000 at the end of the year. Calculate the share of profit/loss to be allocated to Betty.
P31,700

29. The most appropriate basis for dividing partnership net income when the partners do not plan to take
an active role in daily operation is
On a ratio based average capital balances

30. XYZ Partnership provided for the following in the distribution of profits and losses:
First: X is to receive 10% of net income up to P100,000 and 20% of the amount in excess thereof.
Then: Y and Z are each to receive a 5% of the remaining income in excess of P150,000 after X’s share.
Lastly: The balance is to be distributed equally to the three partners.

● If the partnership income is P250,000, what is the total share of X?

P108,000

31. Tamayo, Banson and Vidal, a partnership formed on january 1, 2018, had the following initial
investments.

Tamayo 100,000

Banson 150,000

Vidal 225,000
 The partnership agreement profits and losses are to be shared equally by the partners after
consideration is made for the following:
a. Salaries allowed to partners: P60,000 for Tamayo; P48,000 for Banson and P36,000 for Vidal.
b. Average partner’s capital balances during the year shall be allowed 10% interest.

Additional information:
A. On June 30,2018, Tamayo invested an additional P60,000.
B. Vidal withrew P70,000 from the partnership on September 30, 2018.
C. Share on the remaining profit was P3,000 for each partner.

● The average capital of Vidal is ________.

207500

● The partnership net profit for 2018 before salaries, interest and partner’s share on the
remainder is _______.
201750

● The average capital of Tamayo is ________.

130000

● Interest on average capital balances of the partners totals

48750

● Total Partnership Capital

666750

32. Mariano and Lucas entered into partnership on March 1, 2018, investing P125,000 and P75,000
respectively. It was agreed that Mariano, the managing partner, was to receive a salary of P12,000 per
year and also 10% bonus on the profit after adjustment for the salary, the balance of the profit was to
be divided in the ratio of the original capital. On December 31, 2018, account balances are as follows:

Cash 70,000 Accounts payable 60,000

Accounts receivable 67,000 Sales 233,000

Furniture and Fixtures 45,000 Mariano, Capital 125,000

Purchases 196,000 Lucas Capital 75,000

Sales returns & allowances 5,000 Mariano Drawing (20,000)

Operating expenses 60,000 Lucas Drawing (30,000)

Inventories on December 31, 2018 were merchandise, P73,000; Supplies P2,500. Prepaid insurance
was P950 and accrued liabilities totaled P1,550. Depreciation on Furniture & Fixtures is to be computed
at 20% per year. Income tax rate is 35%.

● The distribution of net profit to Mariano is _______.

20342
 ● The distribution of net profit to Lucas is _______.
5268

● After closing the net profit and drawing accounts, the capital of Lucas is _______.
50268

● After closing the net profit and drawing accounts, the capital of Mariano is _______.
125342

33. Sison, Torres and Velasco are partners in an accounting firm. Their capital account balances at year-
end were: Sison, P50,000; Torres, P110,000; Velasco, P50,000. They share profits and losses in a
4:4:2 ratio, after the following terms;
a. Partners Velasco is to receive a bonus of 10% of net profit after bonus.
b. Interest of 10% shall be paid on the portion of a partner’s capital in excess of P100,000.
c. Salaries of P10,000 and P12,000 shall be paid to partners Sison and Velasco, respectively.

● Assuming a net profit of P22,000 for the year, the profit share of Sison was ________.
8800

● Assuming a net profit of P22,000 for the year, the profit share of Torres was ________.
(200)

● Assuming a net profit of P22,000 for the year, the profit share of Velasco was ________.
13400

● Assuming a net profit of P44,000 for the year, the profit share of Sison was ________.
16800

● Assuming a net profit of P44,000 for the year, the profit share of Torres was ________.
7800

● Assuming a net profit of P44,000 for the year, the profit share of Velasco was ________.
19400

34. Carlin and Maley have a partnership agreement which includes the following provisions regarding
sharing net income or net loss:
❖ A salary allowance of P120,000 to Carlin and P100,000 to Maley.
❖ An investment allowance of 10% on capital balances at the beginning of the year.
❖ A bonus of 20% Carlin
❖ The remainder to be divided 40% to Carlin and 60% to Maley.

The capital balance on January 1, 2018 for Carlin and Maley was P90,000 and P120,000, respectively.
During 2018, the Carlin and Maley partnership had sales of P2,000,000 cost of goods sold of
P1,100,000 and operating expenses of P400,000. Income tax rate is 30%.

● If bonus is computed based on net income before bonus, salary allowances, and interest on
capital, the total share of C in the partnership is __________.
P214,600
 ● If bonus is computed based on net income after bonus, salary allowances, and interest on
capital, the total share of C in the partnership is __________.
P183,500

35. Which one of the following would not be considered an expense of a partnership in determining income
for the period?
Salary allowance to partners

36. A partners share of net income is recognized in the accounts through

Closing entries

37. Jaime, Madrid and Soriano are partners sharing profits on a 5:3:2 ratio. On January 1, 2018, Matias
was admitted into the partnership with a 20% share in the profits. The old partners continue to
participate in profits proportionate to their original ratios. For the year 2018, the partnership books
showed a net profit of P250,000. It was disclose however, that the errors shown below were made:

● Assuming that income tax rate is 35%, the share of Jaime in the corrected net profit is
________.
96100

● Assuming that income tax rate is 35%, the share of Madrid in the corrected net profit is
________.
57660

● Assuming that income tax rate is 35%, the share of Soriano in the corrected net profit is
________.
38440

● Assuming that income tax rate is 35%, the share of Matias in the corrected net profit is
________.
48050

● The new profit and loss ratio of Jaime is ________.

40%

● The new profit and loss ratio of Madrid is ________.

24%

● The new profit and loss ratio of Soriano is _______.

16%

38. The net income of the Rice and Wynn partnership is P120,000. The partnership agreement specifies
that Rice and Wynn have a salary allowance of P32,000 and P48,000 respectively. The partnership
agreement also specifies an interest allowance of 10% on capital balances at the beginning of the year.
Each partner had a beginning capital balance of P80,000. Any remaining net income or net loss is
shared equally.

● What is Rice’s share of the P120,000 net income?

P52,000
 ● What is the balance of Wynn’s Capital account at the end of the year after net income has been
distributed?
P148,000

39. The BLUE Company, a partnership, was formed on January 1, 2018 with four partners, Belen, Lorna,
and Edna. Capital contributions were as follows:

Belen 100,000

Lorna 50,000

Ursula 50,000

Edna 40,000

The partnership agreement provides that each partner shall receive 5% interest on the amount
of his/her capital contribution. In addition, Belen is to receive a salary of P10,000 and Lorna a salary
of P6,000 per annum which are to be charged as expenses of the business. The agreement further
provides that Ursula shall receive a minimum of P5,000 per annum from the partnership and Edna a
minimum of P12,000 per annum, both including the profits is to be distributed in the following
proportion: Belen 30% Lorna 30% Ursula 20% Edna 20%.

● The amount that must be earned by the partnership during 2018, before any change for interest
on capital or partners salaries in order that Belen may receive an aggregate of P25,000
including interest, salary and share of profits would be _________. (Disregard income tax.
Round your final answer to the nearest peso. Do not use peso sign, comma, and decimal.)
64667

● Using the amount that must be earned by the partnership during 2018, before any change for
interest in capital or partners salaries in order that Belen may receive an aggregate of P25,000,
including interest, salary and share of profits, the total earnings of Ursula would be
_________. (Disregard income tax. Round your final answer to the nearest peso. Do not use
peso sign, comma, and decimal.)
9167

● Using the amount that must be earned by the partnership during 2018, before any change for
interest in capital or partners salaries in order that Belen may receive an aggregate of P25,000,
including interest, salary and share of profits, the total earnings of Lorna would be _________.
(Disregard income tax. Round your final answer to the nearest peso. Do not use peso sign,
comma, and decimal.)
18500

40. On October 31, 2018, Zita and Jones formed a partnership by investing cash of P300,000 and
P200,000, respectively, The partners agreed to receive and annual salary allowance of P360,000 and
to give Zita a bonus 20% of the net income after partner’s salaries, the bonus being treated as an
expense.
 If the profits after salaries and bonuses are to be divided equally, and the profits on December 31,
2018 after partner’s salaries but before bonus of Zita are P360,000, how much is the share of Zita in
the profits?
P270,000

41. RK is trying to decide whether to accept a salary of P40,000 or a salary of P25,000 plus a bonus of
10% of net income after salaries and bonus as a means of allocating profit among partners. Salaries
traceable to the other partners are estimated to be P100,000. What amount of income would be
necessary so that RK would consider choices to be equal?
P290,000

42. A, B, and C are capitalist partners while D is an industrial partner. The partnership reported a net loss of
P100,000. How much is the share of D in the reported net loss?
P-0-

43. A partner’s share of net income is recognized in the accounts through

Closing entries

44. If the partnership agreement does not specify how income is to be allocated, profits and losses should
be allocated
In accordance with their capital contribution

45. Lori and Mike enter into a partnership and decide to share profits and losses as follows:
● The first allocation is a salary allowance with Lori receiving P12,000 and Mike receiving
P25,000.
● The second allocation is 20% of the partners’ capital balances at year end. On December 31,
2019, the capital balances for Lori and Mike are P86,000 and P344,000, respectively.
● Any remaining profit or loss is allocated equally.

For the year ending December 31, 2019, the partnership reported a net loss of P122,000. The journal
entry to record the loss allocation will _______.
Debit Lori, Capital for P93,300

46. The Smith and Jones partnership agreement stipulates that profits and losses will be shared equally
after salary allowances of P120,000 for Smith and P60,000 for Jones. At the beginning of the year,
Smith’s Capital account had a balance of P240,000, while Jones’ Capital account had a balance of
P210,000. Net income for the year was P150,000 The balance of Jones’ Capital account at the end of
the year after closing is
P255,000

47. David, Chris, and John formed a partnership on July 31, 2019. They decided to share profits equally,
but inserted a clause in the partnership agreement where any losses would be allocated in the ratio of
5:2:3, respectively. For the year ended December 31, 2019, the firm earned a net income of P50,000.
However, for the year ended December 31, 2020, the firm incurred a loss of P60,000. Assuming that
John had an initial capital contribution of P43,000 and made no withdrawals, what is the balance of
John’s capital account as of december 30, 2020? (Assume that none of the partners made any further
contributions to their capital accounts. Do not round any percentage calculations. Round all monetary
calculations to the nearest peso)
P41,667
48. DOER partnership was organized on March 1, 2021. On formation date, Dory invested P150,000 and
Erwin invested land and building with fair value of P80,000 and P100,000. Erwin also invested P60,000
cash in the partnership on November 1, 2021 to meet the additional liquidity requirements of the
business. The Article of Co-partnership stipulates the following:
A. Annual salary of P18,000 o Dory and P24,000 to Erwin
B. 10% annual interest on average capital account balance, and the
C. Remainder to be shared 6:4 to Dory and Erwin, respectively.

The annual salary was to be withdrawn by each partner in twelve monthly installments, During the fiscal
year ended, February 28, 2022, DOER had net sales of P500,000, cost of sales of P280,000, and total
operating expenses of P100,000 (excluding salaries and interest on average capital balance of
partners). Each partners made monthly cash drawings in accordance with the agreement.

Assume that the annual salary is to be recognized as operating expenses and the total operating
expenses of P100,000 includes the partners’ salaries but excluding interest on partners’ average capital
account balances.

● The capital balance of Dory at the end of the fiscal year is

216000

● The capital balance of Erwin at the end of the fiscal year is

294000

● The share of Dory in the net income is

66000

● The share of Erwin in the net income is

54000

DOER partnership was organized on March 1, 2021. On formation date, Dory invested P150,000 and
Erwin invested land and building with fair value of P80,000 and P100,000. Erwin also invested P60,000
cash in the partnership on November 1, 2021 to meet the additional liquidity requirements of the
business. The Article of Co-partnership stipulates the following:
D. Annual salary of P18,000 o Dory and P24,000 to Erwin
E. 10% annual interest on average capital account balance, and the
F. Remainder to be shared 6:4 to Dory and Erwin, respectively.

The annual salary was to be withdrawn by each partner in twelve monthly installments, During the fiscal
year ended, February 28, 2022, DOER had net sales of P500,000, cost of sales of P280,000, and total
operating expenses of P100,000 (excluding salaries and interest on average capital balance of
partners). Each partners made monthly cash drawings in accordance with the agreement.

Walang assume that annual salary blablabla.

● The capital balance of Dory at the end of the fiscal year is

190800
49. Mr Chow, Ms. King, Mr. Jolly and Ms. Bee formed a partnership on Jan. 01, 2017 with original capital
contributions of P300,000, P100,000, P200,000 and P400,000, respectively. On Jan. 01, 2019 capital
accounts of Mr. Chow, Ms King, Mr. Jolly and Ms. Bee showed the beginning balance for the year of
P450,000, P300,000, P250,000, and P400,000 , respectively. On Sept. 30 Mr. Chow and Ms. King
invested P100,000 each. Ms. Bee withdrew her investment of P100,000 on Oct. 01 for personal
reasons. The partnership suffered a net loss of P240,000.

● How much is the share of Ms. Jolly on the loss for 2019 if there is no agreement on the
distribution of profit and loss?
(48,000)

● How much is the share of Ms. Chow on the loss for 2019 if there is no agreement on the
distribution of profit and loss?
(72,000)

● How much is the average capital balance of Ms. King for the year 2019?
325,000

● How much is the average capital balance of Mr. Jolly for the year 2019?
250,000

● How much is the average capital balance of Mr. Bee for the year 2019?
375,000

50. YET Partnership began its first year of operations with investment from Y, P143,000, E, P104,000, and
T, P143,000. The Articles of Partnership provides that profit and losses be assigned in the following
manner:
a. Y and T were to be given annual salary of P26,000 and P13,000, respectively,
b. Each partner was to be given interest of 10% on capital balance as of the first day of the year,
c. Remainder was to be distributed on 5:2:3 ratio respectively for Y, E, and T.

Each Partner was allowed to withdraw up to P13,000 each year. For the first year of operation, the
partnership incurred a net loss of P26,000. In the second year, it earned net income of P52,000. Each
partner withdraw the maximum amount from the business each year.*

● E’s share in net loss for the first year is

10400

● The balance of the capital of Y at the end of the first year is

118300

● Y’s share in the net income for the second year is

28080

● The balance of the capital of T at the end of the second year is

132860

51. Assume the following data for GH Partnership:

 Assets Liabilities and Capital

Cash 3,000 Liabilities 9,000

Non-cash Assets 39,000 G, Capital (60%) 24,000

G, Loan 3,000 H, Capital (40%) 12,000

Total 45,000 Total 45,000

The % in parentheses represents the P/L ratio. The partners agree to admit J to the partnership. J must
invest cash of P28,800 equivalent to 37.50% interest in total agreed capital of P76,800. Assets are to
be revalued. *

● The amount of revaluation is

12000

● The revised capital of H after the admission of J is

16800

The % in parentheses represents the P/L ratio. The partners agree to admit J to the Partnership and the
total agreed capital after admission is P48,000. J invests P12,000 for 35% interest in the firm.

● The capital of H after the admission of J is

10,080 12480

● The capital credit of J is

16800

The % in parentheses represent the P/L ratio. The partners agree to admit J to the partnership. J
conveyed a tangible assets with a fair value of P30,000 with an assumed mortgage of P6,000 in
exchange for a 30% interest in capital with bonus being to be recognized, keeping in mind that J would
be acquiring a 1/4 interest in profits.

● The capital of G after the admission of J is

27600

52. Edwin and Darren have decided to form a partnership. Edwin contributes P80,000 cash and
merchandise inventory with a current market value of P20,000. Darren contributes a parcel of land
which was acquired two years ago at P100,000 but with a current value of P130,000. If Darren is to
make additional cash investment to have a 60% in the business, how much cash should he invest?
20000

53. John, Jeff and Jane decided to engage in a real estate venture as a partnership. John invested
P100,000 cash and Jeff provided office equipments that is carried on his books at P82,000. The
partners agree that the equipment has a fair value of P110,000. There is a P30,000 note payable
remaining on the equipment to be assumed by the partnership. Although Jane has non physical assets
to invest in the partnership, both John and Jedd believe that her experience as a real estate appraiser
 is a valuable skill needed by the partnership and is a basis for granting her a capital interest in the
partnership.

Assume that each partner is to receive an equal capital interest in the partnership and an upward
revaluation of assets by P90,000 is to be recorded.

● The capital of Jane upon formation is

90000

Assume that each partner is to receive an equal capital interest in the partnership and bonus method is
applied.
● The amount of capital transferred from John is
40000

● The capital of Jeff upon formation is

60000

54. The partnership of PP, EE and TT asked you to assist in winding up its business. You complete the
following information. The trial balance of the partnership on June 30, 20x4, is:

ACCOUNTS DEBIT CREDIT

Cash 6,000

Accounts receivable (net) 22,000

Inventory 14,000

Plant and equipment (net) 99,000

Accounts payable 17,000

PP, Capital 55,000

EE, Capital 45,000

TT, Capital 24,000

Total 141,000 141,000

The partners share profit and losses as follows: PP, 50 percent; EE, 30 percent; and TT, 20 percent.
Cash is to be distributed to the partners at the end of each month. A summary of the liquidation
transactions follows:

July
1 P16,500 collected on accounts receivable balance is uncollectible
2 P10,000 received for the entire inventory
3 P1,000 liquidation expense paid
4 P17,000 paid to creditors
5 P8,000 cash retained in the business at the end of the month
August
6 P1,500 in liquidation expense paid
7 As part payment of his capital, TT accepted an item that he develop, which had a book value of
P4,000. The part of P10,000 should be placed on this item for liquidation purposes
8 P2,500 cash retained in the business at the end of the month

September
9 P75,000 received on sale of remaining plant and equipment
10 P1,000 liquidation expenses paid. No cash retained in the business

● The amount received by PP in August cash distribution is ______.

0

● In the final cash distribution, the amount received by PP is ______.

41500

● The amount of cash available for distribution to partners in August is _______.

4000

● The amount of cash available for final distribution to partners is ______.

76500

● The amount of cash available for distribution to partners in July is ______.

6500

● In the final cash distribution, the amount received by TT is ______.

8600

● In the final cash distribution, the amount received by EE is ______.

26400

● The amount received by EE in July cash distribution is ______.

6500

The partners share profit and losses as follows: PP, 50 percent; EE, 30 percent; and TT, 20 percent.

The partners are considering an offer of P100,000 for the accounts receivable, inventory and plant and
equipment as of June 30. The P100,000 will be paid to creditors and the partners in installments, the
number and amount of which are to be negotiated.

● The partner who is most vulnerable to losses is

PP

● If the offer to sell the assets is accepted, the amount of cash to be received by TT is
17000

● The partner who first receives cash is

EE
 ● If the offer to sell the assets is accepted, the amount of cash to be received by EE is
34500

● If the offer to sell the assets is accepted, the amount of cash to be received by PP is
37500

55. In the absence of partnership agreement, the law says that income (and loss) should allocated based
on:
The ratio of capital investments

56. In a cash priority program for use in installment liquidation, the partner with the highest loss absorption
balance is the most vulnerable partner. The amount of cash to be distributed to partners in installment
liquidation can be determined by preparing a cash priority program.
Only statement 2 is true

57. Statement 1: A limited partner is liable only to the extent of his her contribution in the partnership.
Statement 2: A limited partner can use the right of offset against his capital deficiency, but he is not
required to make additional contribution out of his/her personal properties.
Only the first statement is true

58. An entry is not required in the liquidation of a partnership to record the

Allocation of a capital deficiency to partners with credit balances when the deficient partner is
solvent

59. Statement 1: In case the partnership is insolvent, the general partners are liable to pay the partnership
creditors from his/her personal properties
Statement 2: A deficient partner may apply the right of offset to a loan balance owing to him or her by
the partnership.
Both statements are true

60. Statement 1: In the event of liquidation, outside creditors has priority claim over the partnership assets.
Statement 2: When a partner becomes insolvent, the claim against his separate properties shall be paid
first to his personal creditors.
Both statements are true

61. A deficiency occurs for a partner when

Hi share in the losses of the partnership is more than his capital balance

62. Statement 1: Liquidation is the process of winding up the affairs of the business towards its termination.
Statement 2: The deficiency of a partner absorbed by the other partners is allocated based on capital
contribution.
Only the first statement is true

63. Statement 1: If A’s capital is deficient but there is a loan payable to B, the right of offset can be applied.
Statement 2: A partner whose personal assets are less than his personal liabilities is deficient.
Both statements are false

64. Partner Morgan is personally insolvent, owing P600,000. Personal assets will only bring P200,000
when liquidated. At the same time, Morgan has a credit capital balance in the partnership of P120,000.
 The capital amounts of the other partners total a credit balance of P250,000. Under the doctrine of
marshalling of assets, how much the personal creditors of Morgan can collect?
P320,000

65. Statement 1: When a partner dies and the remaining partners decide to terminate the business is called
dissolution.
Statement 2: In liquidation, the sale of non-cash assets is called realization.
Only the second statement is true

66. Statement 1: Gain or loss on realization is the difference between the cash proceeds and the book
value of the assets sold.
Statement 2: Loss on realization would decrease the partner’s capital account.
Both statements are true

67. A, B and C decided to liquidate their partnership business. The financial position of the partnership
shows: A, Capital (30%) P210,000; B, Capital (20%) P150,000; C, Capital (50%) P210,000. Upon
liquidation, all of the partnership’s assets are sold and sufficient cash is realized to pay all liabilities
except on for P30,000. All partners are solvent except C.

● By what amount would the capital of A change?

234,000 decrease

● How much is the additional contribution required of B?

6,000

68. ABC Partnership is liquidated and the non-cash assets are considered worthless. A and C are
general partners while B is a limited partner. The creditors will look to whose partner’s personal
assets for settlement of their claims?
The personal assets of Partners A and C

69. Charlize and Megan are partners with capitals of P80,000 and P40,000, respectively. They share profits
in the ratio of 3:1. The partners agree to admit Caleb as a member of the firm.

● If bonus is recognized and Caleb invests P30,000 for a 15% interest in the firm, what is Megan’s
capital after the admission of Caleb?
P41,875

70. 1. All the partners in a general partnership are personally liable for all debts incurred by the partnership.
2. A limited partnership must have at least one general partner.
Both statements are true

71. The accounts of the partnership of R, S and T at the end of the fiscal year November 30, 2020 are as
follows:
Cash 103,750
Non-cash assets 707,500
Loans to R 15,000
Liabilities 262,500
Loans from S 20,000
R, Capital 266,250
 S, Capital 136,250
T, Capital 141,250

R, S and T have been sharing profits and losses in the ratio 5:3:2 respectively.

● If in the first cash distribution, S received 50,000, the amount received by R is _______.
74167

● The most vulnerable among the partners is _______.

R

● If in the first cash distribution, S received 50,000, the amount realized from the first sale of non-
cash assets is _______.
900000 353,333 333333 559167

● If in the first cash distribution, T received P50,000 and assets with carrying value of P300,000
were sold, the gain or loss recognized on the sale of these assets is _______.
(48750)

72. Egay and Egoe who share profits and losses equally have a capital balance of 200,000 and 240,000
respectively. They admit Engyl for a 1/3 interest in partnership capital and profits for an investment of
250,000.

By how much were the net assets undervalued?

60,000

73. Partners Roger, Sergio and Tito, who share profit and loss in the ratio of 3:5:2, respectively have
decided to liquidate their partnership. The Statement of Financial Position of the partnership at the time
of liquidation is shown below:
Assets Liabilities and Capital
Cash P120,000 Accounts Payable P93,000
Other Assets 360,000 Loan from Sergio 30,000
Roger, Capital 108,000
Sergio, Capital 120,000
Tito, Capital 129,000
P480,000 P480,000

The partners desire to prepare an installment distribution schedule showing how cash would be
distributed to partners as assets are realized.

● The schedule of possible losses on capital balances would indicate that the first cash distributed
after the payment of outside creditors would be distributed to
Tito, in the amount of P57,000

● If Roger has received P30,000, how much would Sergio had received?
20,000

● In the schedule of maximum absorbable loss, the maximum absorbable loss for each partner
would be
 Roger, 360,000; Sergio, 300,000; Tito, 645,000

● Assuming that the first sale of other assets having book value of P150,000 realized P45,000
and all available cash is distributed, the partners would receive
Roger, P9,000; Sergio, P0; Tito, P63,00

74. Statement 1: A deficient and insolvent partner will still have a chance to receive cash from the
partnership if there is a loan payable to him which is higher than his capital deficiency.
Statement 2: A deficient and limited partner who has a loan to the partnership can apply the right of
offset to eliminate his deficiency.
Both statements are true
Both statements are false
Only the first statement is true
Only the second statement is true

75. Jurado, Katindig, Lazaro, and Marcelo are partners sharing earnings in the ratio of 3:4:6:8. The balance
of their capital accounts on December 31, 2015 are as follows:
Jurado P1,000
Katinding 25,000
Lazaro 25,000
Marcelo 9,000

The partners decide to liquidate, and they accordingly convert the non-cash assets into P23,200 of
cash. After paying the liabilities amounting to P3,000, they have P22,000 to divide.

● Assume that a debit balance in any of partner’s capital is uncollectible. The share of Jurado in
the loss upon conversion of the non-cash assets into cash was:
P5,400

● Assume that a debit balance in any of partner’s capital is uncollectible. The book value of non-
cash assets amounted to:
P61,000

● Assume that a debit balance in any of partner’s capital is uncollectible. When the P22,200 was
divided, Lazaro got
P8,320

76. The statement of Financial Position for the partnership of Eclavo, Eclara, and Elorda, who share profits
and losses in the ratio 4:5:1, is as follows:
Cash P100,000 Accounts Payable P300,000
Inventory 720,000 Eclavo, Capital 320,000
Eclara, Capital 90,000
Elorda, Capital 110,000
P820,000 P820,000

● Assuming Elorda is a limited partner, and the inventory is sold for P360,000, how much should
she receive upon liquidation of the partnership?
74,000
 ● Assuming Eclara is an insolvent partner, and the inventory is sold for P360,000, how much
should Eclavo receive upon liquidation of the partnership?
104,000

● If the inventory is sold for P600,000, how much should Eclavo receive upon liquidation of the
partnership?
P272,000

77. The following is the priority sequence on which liquidation proceeds will be distributed for a partnership:
Partnership liabilities, partnership loans, partnership capital balances

78. Statement 1: Solvent partners are partners with sufficient remaining personal assets after deducting or
liquidating the personal liabilities.
Statement 2: Right of offset is a legal right to apply a part or all of the amount owing to a partner against
his or her capital deficiency.
Both statements are true

79. Statement 1: A deficient partner has to make an additional investment to make up for his deficiency in
all instances.
Statement 2: Partnership creditors have priority over partnership properties; in the same manner that
the partners’ personal creditors have priority over partners’ personal properties.
Only the second statement is true

80. Iyah, Ayah and Mia operate a business as a partnership and share net income and net loss in a 3:3:4
ratio, respectively. The personal assets and liabilities of the partners, gathered from their personal
records show:

Partner Assets Liabilities

Iyah (General Partner) P470,000 P450,000

Ayah (General Partner) 200,000 280,000

Mia (Limited Partner) 305,000 300,000

The statement of financial position is as shown below. Assets are sold for P175,000. Liabilities are paid
as soon as cash is available. Creditors collect from solvent partners whenever necessary.

Cash P10,000 Accounts Payable P200,000

Non-Cash 375,000 Loan, Mia 5,000

Iyah, Capital 50,000

Ayah, Capital 70,000

Mia, Capital 60,000

● How much cash was received by Mia in the final settlement?

20,000
 5,000
0
10,000

● How much is the capital balance of Iyah after the sale of non-cash assets?
(P10,000)

● How much additional investment was made by Mia?

P0

● How much cash was received by Ayah in the final settlement?

0

● Who among the partners have received the cash in the final settlement?
Mia

● How much is the additional investment made by Ayah?

0

● How much is the share of Mia from the gain (loss) on sale of non-cash assets?
(P80,000)

● How much is the additional investment made by Iyah?

20,000

81. As of December 31, the books of AME Partnership showed capital balances of: A- P40,000; M-
P25,000; E-P5,000. The partners’ profit and loss ratio was 3:2:1, respectively. The partners decided to
dissolve and liquidate. They sold all the non-cash assets for P37,000 cash. After settlement of all
liabilities amounting to P12,000, they still have P28,000 cash left for distribution.

● The loss on the realization of the non-cash assets was

P42,000

● Assuming that any partner’s capital debit balance is uncollectible, the share of A in the 28,000
cash for distribution would be
P17,800

82. The statement of financial position of the partnership A, B, and C shows: Cash, P22,400; Other Assets,
P212,000; Liabilities, P38,400; A, Capital (50%) P76,000; B, Capital (25%) P64,000, and C, Capital
(25%) P56,000.

● If B received a total of P31,000 from partnership liquidation, how much was the loss on
realization?
P127,000

● If C received P10,000 from the first cash distribution, how much was the total cash distributed to
partners?
P28,000
 ● How much is the additional contribution required of B?
P6,000

● The partners realized P56,000 from the first installment sale of non-cash assets with total
carrying amount of P120,000. How much did B receive from the partial liquidation?
P24,000

● If A received a total of P10,000 from partnership liquidation, how much was the proceeds from
the sale of all non-cash assets?
P85,000

83. The order of the liquidation process is

Sell assets, pay liabilities, disburse cash to partners

84. Jack and Beans, who share profits and losses in the ratio 3:7, decided to liquidate their Talk
Partnership. The partner’s capital balances are P300,000 and P190,000, respectively.

● Before the realization of non-cash assets, the partnership has a zero balance in its cash
account and a P200,000 balance in its liabilities. If on final settlement of partners’ claims Jack
received P261,000, how much was the net proceeds from the sale of non-cash assets?
P560,000

● If all partnership assets and liabilities are realized and settled at their carrying amounts, how
much would Beans receive from liquidation?
P190,000

● If all partnership assets are realized and all liabilities are settled, the partnership has remaining
cash of P120,000, how much would Beans receive from the liquidation?
None

● If on final settlement of partners’ claims Beans received P99,000, how much did Jack receive?
P261,000

● The partnership has total liabilities of P200,000. If all partnership assets are realized for
P500,000, how much would Jack receive from the liquidation?
243,000

85. The liabilities and capital balances of the partners before the sale of the assets and payments of
liabilities including personal assets and liabilities of the partners were:

Partnership Personal Assets Personal Liabilities

Cash P10,000

Liabilities 70,000

Kath 65,000 P1,200,000 P1,500,000

Pau 20,000 2,500,000 2,490,000

 Jas 15,000 3,000,000 3,200,000

After the assets were sold the capital balances of the partners were as follows: Kath, P48,000; Pau,
P12,000; and Jas, (P10,000)

● How much cash was received by Jas in the final settlement?

P0

● What is the P/L ratio of Jas? [34% - Kath; 16% - Pau]

50%

● How much is the gain/(loss) from sale of non-cash assets?

(P50,000)

● How much is the proceeds from sale of non-cash assets?

P110,000

● How much is the non-cash assets?

P160,000

86. Clyde, Warren and Neil formed a partnership on Jan. 1,2020 with investments of 100,000, 150,000, and
200,000 respectively. For division of income, they agreed the following conditions:
a. interest of 10% of the beginning capital balance each year.
b. annual compensation of 10,000 to Warren and
c. sharing of the remainder of the income or loss in a ratio of 20% for Clyde and 40% each for
Warren and Neil.

Net income was 150,000 in 2020 and 180,000 in 2021. Each partner withdrew 1,000 for personal use
every month during 2020 and 2021.

● The capital balance of Clyde at the end of 2021 is _______.

139420

● The capital balance of Warren at the end of 2021 is _______.

264540

● The capital balance of Neil at the end of 2021 is _______.

304040

● The share of Neil in the net income for 2021 is

70040

● The share of Warren in the net income for 2020 is

63000

● The capital balance of Clyde at the end of 2020 is _______.

117000
87. Chua and Wong are forming a partnership. Chua will invest a building that currently is being used by
another business owned by Chua. The building has a market value of P900,000. Also, the partnership
will assume responsibility for a P300,000 note secured by a mortgage on that building. Wong will invest
P500,000 cash. For the partnership, the amounts to be recorded for the building and for Chua’s Capital
account are:
Building, P900,000 and Chua, Capital, P600,000

88. The partner’s personal account which was collected by the partnership and credited to its accounts
receivable is a violation of the
Business entity concept

89. Partner B is investing in a partnership with Partner A. B contributes as part of his initial investments.
Accounts Receivable of P60,000, an Allowance for Doubtful Accounts of P9,000, Furniture of P30,000
with accumulated depreciation of P8,500 and P6,000 cash. The partners agreed that prepaid expenses
of P2,000 and accrued expenses of P1,800 have to be recognized. The entry that the partnership
makes to record B’s initial contribution includes a
Credit to B, Capital at P78,700

90. Jack holds an ownership interest of 63% and Teresa holds an ownership interest of 37% in the J and T
Partnership. This year, in order to further develop the business, Jack contributes an additional P6800
and Teresa contributes an additional P3200 to the partnership. Which of the following is TRUE of this
scenario?
Individual contributions of P6800 by Jack and P3200 by Teresa will be recorded

91. Partners’ non-cash investments are valued at

Market value

92. 1. One of the partners in a proposed partnership is a multi-millionaire. The stipulation in the articles of
partnership that this partner shall be excluded from sharing in the profits of the partnership is void.
2. A partnership may be established for charity.
Only statement 1 is true.

93. 1. The essence of partnership is that each partner must share in the profits or losses of the venture.
2. As long as the action is within the scope of the partnership, any partner can bind the partnership.
Both statements are true

94. In the absence of a partnership agreement, the law says that income (and loss) should be allocated
based on
The ratio of capital investments

95. Steve owns 64% and Mark owns 36% of a partnership business. They purchase equipment with a
suggested value of P9600. The current market value of the equipment at the time of purchase was
P9100. At the time of the balance sheet preparation, depreciation of P160 was recorded. Based on the
information provided, which of the following is TRUE of the partnership?
The equipment account will be debited at P9100 on the date of purchase

96. 1. A partnership has a limited life because any change in the relationship of the partners dissolves the
partnership.
2. In a limited partnership, the general partner’s liability is limited to his investment.
 Only statement 1 is true

97. 1. All partners in a general partnership are personally liable for all debts incurred by the partnership.
2. A limited partnership must have at least one general partner.
Both statements are true

98. Which of the following statements about partnerships is incorrect?

Right over profits and right over assets represent claims of partners that are allocated based on
partners’ capital accounts.

99. 1. A limited partnership normally has one or more general partners whose liability is unlimited.
2. A partnership is a legal entity separate and apart from its owners.
Both statements are true

100. Airamae and Aimery agreed to form AiAi Partnership. Airamae’s business which amounted to
P500,000 was audited and appraised at 75% of its book value.

● If they agreed that Aimery should invest cash equal to 60% of Airamae’s investment, Aimery
should invest?
P225,000

● If they agreed that Aimery should invest P325,000 cash and that each partner should be
credited for an equal share based on total actual contributions, Airamae’s capital credit should
be
P375,000
P350,000
P412,500
P500,000

● If they agreed that Aimery should invest cash equal to 60% of Airamae’s investment, the total
partnership capitalization would be
P600,000

● If they agreed that Aimery should invest P325,000 cash and that each partner should be
credited for an equal share based on total actual contributions, the bookkeeper should
recognize
Bonus for Aimery

101. Edwin and Darren have decided to form a partnership. Edwin contributes P80,000 cash and
merchandise inventory with a current market value of P17,000. Darren contributes P2400 cash and
office furniture with a current market value of P3200.

● When journalizing these transactions _____

Office Furniture will be debited for P3200

● If the partners decide to have equal interest in the partnership and the total actual contributions
is equal to total agreed capital, which statement is true?
There is bonus
102. Alana & Ansley enter into a partnership agreement in which Alana will be given 60% interest in
capital and profits. Alana contributes the following:
Land - P500,000 ?
Building - 5,000,000 fair value is 60% of its cost
Equipment - 1,000,000 fair value is 75% of its cost
There is P1,000,000 mortgage on the building which the partners agreed to assume.
The partners agreed that the total partnership capitalization should be P6M.

● Alana, Capital should be credited for

P3,600,000

● How much should be Ansley’s agreed capitalization?

P2,400,000

● Land should be recorded in the amount of

P850,000

103. Rica is a sole proprietor who invested her grocery when she invited Belle to form a new
partnership business. The following are the assets and liabilities of the grocery:

Cash P50,000

Merchandise 30,000 (book value)

20,000 (market value)

Fixed assets (P100,000 less Accumulated 90,000 (book value)

Depreciation of P10,000)

70% of cost (market value)

Accounts Payable 20,000

Accrued Expenses 7,000

Belle invested the following:

Cash P60,000

Land (mortgaged with a balance of P50,000 200,000 (book value)

plus accrued interest for 6 months at 18%)

500,000 (market value)

Store furniture (costing P40,000 less 30,000

accumulated depreciation of P10,000)

● The total assets of the newly formed partnership would be

P730,000

● If the mortgage note plus interest is to be assumed by the partnership, Belle. Capital should be
credited for
 P535,500

● The total liabilities of the newly formed partnership would be

P81,500

104. In comparison to a corporation, the owners of a general partnership ___

Have an unlimited personal liability for the debts of the business

105. In comparison to a corporation, the owners of a general professional partnership ___

Have an unlimited personal liability for the debts of the business

106. 1. An advantage of the partnership form of business is that each partner’s potential loss is
limited to that partner’s investment in the partnership.
2. Ownership is easily transferred in a partnership.
Both statements are false

107. 1. There is no income tax imposed on a partnership.

2. Mutual agency means that each partner has the right to bind the partnership to contracts
Only statement 2 is true

108. Partnership capital and drawings accounts are similar to the corporate
Paid in capital, retained earnings, and dividends accounts

109. An advantage of the partnership as a form of business organization would be

A partnership is created by mere agreement of the partners

110. Harold and Dwayne formed Hayne’s Partnership, with Harold investing cash of P150,000.

● If Dwayne is given 60% interest in assets and profits, how much is the partnership total agreed
capitalization?
P375,000

● How much should Dwayne invest for a 60% interest in assets and profits?
P225,000

111. The Metro Fashion partnership owned by Mary and May is terminated when creditor claims
exceed partnership assets by P40,000. Partner May is a millionaire and Mary has no personal assets.
Mary’s partnership interest is 75% and May’s 25%. Creditors
May collect the entire P40,000 from May

112. Jameson and Larry are forming a partnership. Jameson will invest a truck with a book value of
P100,000 and fair market value of P140,000. Larry will invest a building with a book value of P300,000
and a fair market value of P420,000, with a mortgage of P150,000.

● What amount should be recorded in Larry’s capital account?

P270,000

● At what amount should the building be recorded?

P420,000
 ● If it was agreed that both partners will have equal share in the net assets, using the cash
method, how much should be the additional cash investment by Jameson?
P130,000

113. Which of the following is specified in the articles of partnership?

Procedures for withdrawal of assets by the partners

114. Partner B is investing in a partnership with Partner A. B contributes as part of his initial
investments. Accounts Receivable of P60,000, an Allowance for Doubtful Accounts of P9,000; and
P6,000 cash. The entry that the partnership makes to record B’s initial contribution includes a
Credit to B, Capital for P57,000

115. Bob is investing in a partnership with Jerry. Bob contributes equipment that originally cost
P63,000, has a book value of P30,000, and a fair market value of P39,000. The entry that the
partnership makes to record Bob’s initial contribution includes a
Debit to Equipment for P39,000

116. A loan due from a partner is classified in the statement of financial position as a/an
Current assets

117. Tim and Michelle have decided to form a partnership with a 60/40 partnership interest ratio. Tim
contributes P7,500 cash and merchandise inventory with a market value of P1,500. While journalizing
this transaction___.
Tim, Capital will be credited for P9,000

118. Which one of the following would not be considered a disadvantage of the partnership form of
organization?
Ease of Formation

119. Andrea invested the following in the partnership:

Cash P10,000

Accounts receivable 50,000

Allowance for Bad Debts 5,000

Merchandise Inventory 120,000

Furnitures & Fixtures 75,000

Accumulated Depreciation 7,500

● If the Accounts Receivable has a net realizable value of P40,000 and there is an Accounts
Payable amounting to P60,000. How much should be credited to Andrea, Capital?
P177,500

● Accounts Receivable, Merchandise Inventory, and Furniture & Fixtures will respectively be
debited at the Partnership books for:
 45,000; 110,000; 60,000

● If the current fair value of the furniture and fixtures is P60,000 and that of the merchandise
inventory is 110,000, Andrea should be credited for
P225,000

120. 1. A nominal partner actively participates in the management of the business.

2. An ostensible partner is unknown to the public that he/she is a partner.
Both statements are false

121. A firm has two partners: Jim and Bill. Jim owns 60% of the partnership and Bill owns 40%. In
which of the following transactions will the partnership be held responsible for an individual partners’
actions?
Bill signs a contract to buy furniture for official use in the partnership

122. Partnership JB has two partners: Jim and Bill. Jim owns 60% of the partnership and Bill owns
40%. In which of the following transactions will the partnership be held responsible for an individual
partners’ transactions?
Bill signs a contract to buy furniture for official use in the partnership

123. If a partner’s capital account is credited with the amount that he or she contributed in cash,
which of the following financial statements will be affected?
The statement of partners’ equity

124. Edwin and Darren have decided to form a partnership. Edwin contributes P80,000 cash and
merchandise inventory with a current market value of P20,000. Darren contributes a parcel of land
which was acquired two years ago at P100,000 but with a current value of P130,000. If Darren is to
make additional cash investment to have a 60% in the business, how much cash should he invest?
P20,000

125. Rica is a sole proprietor who invested her grocery when she invited Belle to form a new
partnership business. The following are the assets and liabilities of the grocery:

Cash P50,000

Merchandise 30,000 (book value)

20,000 (market value)

Fixed assets (P100,000 less Accumulated 90,000 (book value)

Depreciation of P10,000)

70% of cost (market value)

Accounts Payable 20,000

Accrued Expenses 7,000

● Rica’s Capital account should be credited for

P113,000
126. Which of the following is TRUE of a partnership?
Partnership firms have a limited life

127. The partners have the following rights, except?

Transfer ownership at will

128. A characteristic describing a partnership as a judicial personality which can acquire, sell, or
dispose properties and incur obligations is called
Legal Entity

129. A partnership is a _______

Business with two or more owners that is not organized as a corporation

130. Which of the following is TRUE of a partnership balance sheet?

Each partner’s equity will be shown separately

131. In a partnership, mutual agency means that___

Any partner can bind the business to a contract within the scope of its regular business
operations

132. Blau and Rubi are partners who share profits and losses in the ratio of 6:4, respectively. On May
1, 2018, their respective capital accounts were as follows:
Blau 60,000
Rubi 50,000

On that date, Lind was admitted as a partner with one-third interest in capital, and profits for an
investment of P40,000. The new partnership began with a total capital of P150,000 immediately after
Lind’s admission, Blau’s capital should be
P54,000

133. When a partner retires and receives in cash less than his capital balance, how should the
difference be treated?
The difference should be credited to the remaining partners in their remaining profit and loss
ratio

134. LOV Partnership decided to admit E, who purchased a 20% interest from L, whose capital
balance was P400,000. E paid her P100,000.

● The effect of this transaction is a/an

Decrease in L’s capital

● The journal entry to record the admission of E will include a

Debit to L, Capital

135. LOV Partnership decided to admit E, who purchased a 30% interest from L, whose capital
balance was P400,000. E paid her P125,000.

● The effect of this transaction is a/an

Increase in E’s capital
 ● The journal entry to record the admission of E will include a:
Credit to E, Capital

136. Which of the following conditions constitutes a legal dissolution of a partnership?

All of the choices given

137. If the new partner is admitted by purchase of interest of an old partner at an amount higher than
its book value, this will result in
No change in partnership’s net assets

138. The capital accounts of the partnership of R and O on January 30, 2014, are as follows:
R, Capital P80,000
O, Capital P40,000

The partners share profits and losses in the ratio of 6:4. The partnership is desperate for cash and they
agreed to admit Y as a new partner with a 1/3 interest in capital and profits upon the latter’s capital
infusion of P30,000.

After Y’s admission, what are the corresponding capital balances of R, O, and Y, respectively, assuming
assets and liabilities are fairly valued?
P68,000; P32,000; P50,000

139. Charlize and Megan are partners with capitals of P80,000 and P40,000, respectively. They
share profits in the ratio of 3:1. The partners agree to admit Caleb as a member of the firm.

● If no bonus is recognized and Caleb invests P80,000 for a 50% interest in the firm, what is
Charlize’s capital after the admission of Caleb?
P65,000

● If no bonus is recognized and Caleb invests P30,000 for a 20% interest in the firm, what is
Megan's capital after the admission of Caleb?
P40,000

● If total agreed capital is based on Caleb’s contribution and Caleb Invests P30,000 for a 15%
interest in the firm, What is Megan’s capital after the admission of Caleb?
P52,500

● If no bonus is recognized and Caleb invests P80,000 for a 50% interest in the firm, what is the
profit sharing ratio of Charlize after the admission of Caleb?
37.5%

140. Charlize and Megan are partners with capitals of P80,000 and P40,000, respectively. They
share profits in the ratio of 2:3. The partners agree to admit Caleb as a member of the firm.
● If no bonus is recognized and Caleb invests P80,000 for a 50% interest in the firm, what is the
profit sharing ratio of Charlize after the admission of Caleb?
20%
141. CAR Partnership decided to admit E who invested P100,000 for a 25% interest in the
partnership with a total capitalization of P500,000.

● The capital credit of E is

P125,000

● The journal entry to record the admission of E will include

A recognition of bonus to E

● The effect of this transaction is a/an

Increase in capital

142. CAR Partnership decided to admit E who invested P120,000 for a 25% interest in the
partnership with a total capitalization of P500,000.

● The capital credit of E is

P100,000

143. Egay and Egoe who share profits and losses equally have capital balances of P200,000 and
P240,000, respectively. They admit Engyl for a 1/3 interest in partnership capital and profits for an
investment of P260,000.

By how much were the net assets undervalued? (Engyl is credited for his capital contribution)
P80,000

144. Which of the following best describes the admission of new partner by investing an amount
more than his capital credit under the bonus method?
Increase on both net assets and total capital

145. The partnership of Lim and Mallorca provides for equal sharing of profits and losses. Prior to the
admission of a third partner Zamora, the capital accounts are Lim, P75,000 and Mallorca, P105,000.
Zamora invests P90,000 for a P75,000 interest and partners agreed that the net assets of the new
partnership would be P270,000. This admission involves
Bonus to old partners of P15,000

146. Peter, Queen and Roy are partners with capital balances of P300,000. P300,000 and P200,000,
respectively, and sharing profits and losses equally. Roy is to retire and it is agreed that he will take
certain office equipment with a second hand value of P50,000 and a note for his interest. The office
equipment carried in the books at P65,000 but brand new would cost P80,000. Roy’s acquisition of the
office equipment would result in
Reduction in capital of P55,000 for Roy

147. On June 30, 2018 the condensed balance sheet for the partnership of Eddy, Fox and Grimm
together with their respective profit and loss sharing percentage was as follows
Assets, net of liabilities P 320,000
Eddy , Capital (50%) P 160,000
Fox, Capital (30%) P 96,000
Grimm, Capital (20%) P 64,000
P 320,000
 ● Eddy decided to retire from the partnership and by mutual agreement is to be paid P180,000 out
of partnership funds for his interest. Total goodwill implicit in the agreement is to be recorded.
After Eddy’s retirement, what are the capital balances of the other partner?
108,000 (Fox) 72,000 (Grimm)

● Assume that Eddy remains in the partnership and that Hamm is admitted as a new partner with
a 25% interest in the capital of the new partnership for a cash payment of P140,000. Total
goodwill implicit in the transaction is to be recorded. Immediately after admission of Hamm,
Eddy’s capital account balance should be
P210,000

148. Matthew, Paulo and Claude share partnership profits in the ratio 2:3:5. On September, 30
Claude opted to retire from the partnership. Prior to Claude’s investment, the capital balances of the
three partners are P25,000 ,P40,000 and P35,000, respectively.

● How much is Paulo’s capital after Claude’s retirement if Claude is paid P30,000 in full settlement
of his partnership interest?
P43,000

● How much is the capital of Matthew after Claude’s retirement if Claude is paid P39,000 in full
settlement of his partnership interest?
P23,400

● How much is the capital of Matthew after Claude’s retirement if Claude is paid P25,000 in full
settlement of his partnership interest?
P31,000
P29,000
P26,600
P23,400

149. When Jill retired from the partnership of Jill, Bill and Hill, the final settlement of her interest
exceeded her capital balance. Under the bonus method, the excess
Reduced the capital balance of Bill and Hill

150. When Jill retired from the partnership of Jill, Bill and Hill, the final settlement of her interest is
less than her capital balance. Under the bonus method, the difference
Increased the capital balance of Bill and Hill

151. Jeric, Ken, and Lemuel are partners sharing profits in the ratio 5:3:2 respectively, as of
December 31, 2013, their capital balances were P95,000 for Julian, P80,000 for Ken and P60,000 for
Lemuel.

On January 1, 2019 the partners admitted Mark as a new partner and according to their agreement
Mark will contribute P80,000 in cash to the partnership and also pay P10,000 for 15% for Ken’s share.
Mark will be given a 20% share in profits. While the original partners’ share will be proportionately the
same as before. After the admission of Mark, the total capital will be P330,000 and Mark’s capital will
be P70,000
 ● The bonus in the admission of Mark would be
P22,000

● The balance of Ken’s Capital after the admission of Mark would be

P79,100

● The amount of asset revaluation is

P15,000

152. Which of the following best characterizes the bonus method of recording a new partner’s
investment in a partnership?
Assuming that recorded assets are properly valued, the book value of the new partner is equal
to the book value of the previous partnership and the investment of the new partner.

153. B and N are partners sharing profits and losses in the ratio 7:3. On January 1,2013 their credit
balance capital accounts are P30,000 for B and P20,000 for N, W is to be admitted as a partner by
buying 50% of B’s interest for P20,000.

The capital balance of B after W’s admission is

P15,000

154. B and N are partners sharing profits and losses in the ratio 7:3. On January 1,2013 their credit
balance capital accounts are P70,000 for B and P30,000 for N, W is to be admitted as a partner by
buying 50% of B’s interest for P40,000.

The capital balance of B after W’s admission is

P35,000

155. Mike and Tess are partners with capital balances of P70,000 and P50,000 respectively. They
share profits and losses in the ratio of 3:1, respectively. Voce is to be admitted in the partnership for a
cash contribution of P60,000 for a ½ interest in the partnership capital and in future profits and losses.

If Voce would be given a capital credit of P90,000, how much would be charged to Mike’s capital
account?
P15,000

156. Mike and Tess are partners with capital balances of P70,000 and P50,000 respectively. They
share profits and losses in the ratio of 3:1, respectively. Voce is to be admitted in the partnership for a
cash contribution of P70,000 for a ½ interest in the partnership capital and in future profits and losses.

If Voce would be given a capital credit of P80,000, how much would be charged to Mike’s capital
account? (no asset revaluation)
P7,500

157. Partner’s Nitz, Pat and Candy share profits and losses 50:30:20 respectively. Capital balances
are P74,000 P130,000 and P96,000 respectively. The carrying values of assets and liabilities are equal
to their fair values. Emmie is to be admitted as a new partner with a 20% capital interest and a 20%
share of profits and losses in exchange for a cash contribution. No bonus is to be effected.
 How much should Emmie contribute?
P75,000

158. J decided to withdraw from the JOY Partnership. A cash settlement was made by the
partnership this will
Decrease Assets

159. The partnership of Noynoy, Manny and Gibo have capital balances as follows: Noynoy -
P35,000, Manny - P50,000, Gibo - P40,000. Their profit and loss ratio are 30% 50% and 20%
respectively, With the consent of Noynoy and Manny, Gibo sold one-half of his interest to Erap for
P30,000 , Gibo was paid in cash by Erap.

● What is the Capital Balance of Noynoy after the admission of Erap to the partnership?
P35,000

● What is the Capital Balance of Manny after the admission of Erap to the partnership?
P50,000

160. An adjustment of the assets and liabilities of the partnership to their fair market values before
dissolution is called
Asset revaluation

161. Paul, Melvin and Elrick are partners sharing profits and losses in the ratio of 2:2:1. On July 31,
2018, their capital balances are as follows: Paul - P700,000; Melvin - P500,000; Elrick - P400,000. The
partners agree to admit Laurence on the following conditions:
A. Laurence is to pay Paul P400,000 for 1/2 of Paul’s interest:
B. Laurence is also to invest P400,000 in the partnership
C. The total interest of Laurence is 25% of the total partnership capital, which is also his share in
the new partnership profit and loss sharing ratio. The old partners are sharing in their old ratio

● How much is Paul’s capital after the admission of Laurence?

P450,000

● What is the percentage of Elrick’s share in the new profit and loss sharing ratio?
15%

162. A partnership agreement most likely will stipulate that assets be reappraised when
A partner retires

163. A partnership agreement most likely will stipulate that assets be reappraised when
New partner is admitted to the partnership

164. The following transactions will affect the balance of the total partnership capital except
Admission by purchase

165. The following transactions will affect the balance of the total partnership capital except
Retirement of a partner by selling interest to another partner
166. Ben and Ric are partners who share profits and losses in the ratio of 6:4, respectively. On May
1, 2019, their respective capital accounts were as follows:
Ben P60,000
Ric P50,000

On that date, Lito was admitted as a partner with a one-third interest in capital and profits for an
investment of P40,000. The new partnership began with a total capital of P150,000. Immediately after
Lito’s admission, Ben’s capital account balance should be
P54,000

167. The admission of a new partner involving bonus will result in

Bonus to either old or new, but not both

168. Statement 1: The admission of new partner through his direct investment in the partnership will
increase the partnership capital even under bonus method
Statement 2: The admission of new partner through purchase of interest of existing partner will increase
partnership capital
Only statement 1 is true

169. Luke and Mark, who share profits and losses equally, agree to take John into the partnership for
a 40% share in capital and profits. Luke and Mark retain 30% interest each. Luke and Mark have
Capital balances of P100,000 and P140,000 respectively before the admission of John. John pays
P120,000 directly to Luke and Mark for his 40% interest. All assets of the partnership, except for land
are fairly valued.

● What would be the capital balance of Mark, immediately after the admission of John?
P102,000

● By how much was land undervalued?

P60,000

170. Dada and Elma are partners with capital balances of P400,000 and P600,000, respectively.
They share profits and losses equally. They decided to admit Jhai as a partner who will invest P200,000
for a 16% interest. Total agreed capital is P1,250,000. Which of the following statements is true?
There is revaluation of assets equal to P50,000

171. On June 30, 2018 the balance sheet for the partnership of Coll, Maduro and Prieto together with
their respective profit and loss ratios was as follows
Assets, at cost 180,000
Coll, Loan 9,000
Coll, Capital (20%) 42,000
Maduro,Capital (20%) 39,000
Prieto, Capital (60%) 90,000
Total 180,000

Coll decided to retire from the partnership by mutual agreement, the assets are to be adjusted to their
fair value of P216,000 at June 30,2018. It was agreed that the partnership would pay Coll P61,200 cash
for Coll’s partnership interest,including Coll loan which is to be repaid in full. No goodwill is to be
recorded. No goodwill is to be recorded.
 After Coll’s retirement, what is the balance of Maduro's capital account?
P45,450

172. Pascual invested P400,000 for a 10% interest in a partnership that has a total capital of
P3,000,000 after admitting Pascual. Which of the following is true?
The original partners received a bonus of P100,000

173. B and N are partners sharing profits and losses in the ratio 7:3. On January 1, 2014 their credit
balance capital accounts are P30,000 for B and P20,000 for N. W is to be admitted for a 25% interest in
the capital directly from the partners for P45,000.

Each partner’s capital account is to be charged pro rata for amounts in their capital ratio that will
provide W with the 25% interest.

The capital balance of B after W’s admission is

P22,500

174. Partnership A has an existing capital of P70,000. Two partners currently own the partnership
and split profits of 50/50. A new partner is to be admitted and will contribute net assets with a fair value
of P90,000. For no goodwill or bonus (depending in whichever method is used) to be recognized, what
is the interest in the partnership granted the new partner?
56.25%

175. Total partners’ equity remains the same if a new partner is admitted by purchase of interest.
In partnership dissolution, bonus is computed as a percentage of net income.
Only statement 1 is true.

176. The capital accounts of Ed, Nick and Vic are presented below with their respective profit and
loss ratio:
Ed P139,000 (½)
Nick 209,000 (⅓)
Vic 96,000 (⅙)

Tony was admitted to the partnership when he purchased directly, for P132,000 a proportionate interest
from Ed and Nick in the net assets and profits of the partnership. As a result, Tony acquired a one-fifth
interest in the net assets and profits of the firm. Assuming no revaluation of net assets is recorded, what
is the combined gain realized by Ed and Nick upon the sale of a portion of their interests in the
partnership to Tony?
P43,200

177. At December 31, Rod and Sol are partners with capital balances of P40,000 and P20,000, and
they share profits and losses in the ratio of 2:1, respectively. On this date Pete invests P17,000 in cash
for a one-fifth interest in the capital and profit of the new partnership. Assuming that assets are not
revalued, how much should be credited to Pete’s capital account on December 31?
P15,400
178. In lump-sum liquidation, capital deficiency resulting from division of loss from realization must be
eliminated before making any payment to partners. Any resulting capital deficiency of an insolvent
partner is eliminated by charging the capital accounts of the remaining partners.
Both statements are true

179. Partners Ray and Allan received a salary of P150,000 and P300,000, and share profit and loss
at 2:1 ratio, respectively. If the partnership suffered a P150,000 loss in 2020, by how much Allan’s
capital account would increase or decrease?
100,000

180. Two sole proprietors, E and J, agreed to form a partnership on January 1, 2021. The trial
balance for each proprietor is shown below as of January 1, 2021.

E E J J

BV FV BV FV

Cash 40,000 40,000 30,000 30,000

AR (net) 60,000 52,000 70,000 56,000

Merchandise 100,000 94,000 100,000 114,000

Inventory

Building (net) 280,000 320,000 250,000 280,000

Furniture and 60,000 64,000 40,000 44,000

fixtures (net)

AP 110,000 110,000 80,000 80,000

Mortgage Payable 200,000 200,000 150,000 150,000

E, Capital 230,000

J, Capital 260,000

The EJ partnership will take over the assets and assume the liabilities of the proprietors as of January
1, 2021.

● The total capital of the partnership amounts to

554000

● The total assets of the partnership amounts to

1094000

● The total liabilities of the partnership amounts to

540000

181. Total partners’ equity changes if a new partner is admitted by purchase of interest.
In partnership dissolution, bonus is computed as a percentage of net income.
Only statement 2 is true
Only statement 1 is true
 Both statements are false
Both statements are true

182. Partner Fe is investing in a partnership with Partner Ann. Fe contributes as part of her initial
investment. Accounts Receivable of P80,000; an Allowance for Doubtful Accounts of P12,000. Accounts
of P8,000 should be written off. The entry that the partnership makes to record Fe’s initial contribution
includes a
Credit to Fe, Capital for P68,000

183. Faith, Hope, and Love are partners sharing profits and losses in the ratio 2:2:1 and have capital
balances of P800,000, P800,000, and P400,000, respectively. Mercy pays P220,000 directly to Love for
½ of her share in the partnership. Partners agree that it is time to revalue the assets of the partnership
using as a basis, the amount Mercy is willing to pay.

● Total partnership capital after the admission of Mercy is

P2,200,000

184. Partner’s Nitz, Pat and Candy share profits and losses 50:30:20 respectively. Capital balances
are P74,000 P130,000 and P96,000 respectively. The carrying values of assets and liabilities are equal
to their fair values. Emmie is to be admitted as a new partner with a 40% capital interest and a 40%
share of profits and losses in exchange for a cash contribution. No bonus is to be effected.

How much should Emmie contribute?

P200,000

185. Mini Partnership was formed on January 2021. According to the partnership agreement, each
partner has an equal capital balance accounted for under goodwill (revaluation of asset) approach.
Partnership net income or loss is allocated 60:40 to Mi and Ni, respectively. Mi originally contributed
assets costing P30,000 with a fair value of P60,000 on January 1, 2021, while Ni invested P20,000 in
cash. Partners’ drawings during 2021 totaled P3,000 by Mi and P9,000 by Ni. Net income for 2021 was
P25,000.**

● The capital credit of Mi upon partnership formation is

60000

● The share of N in the net income for 2021 is

10000

186. Ben and Ric are partners who share profits and losses in the ratio of 6:4, respectively. On May
1, 2019, their respective capital accounts were as follows:
Ben P50,000
Ric P50,000

On that date, Lito was admitted as a partner with a one-third interest in capital and profits for an
investment of P50,000. The new partnership began with a total capital of P150,000. Immediately after
Lito’s admission, Ben’s capital account balance should be
P60,000
P56,667
P54,000
 P50,000

187. Partners Piolo and Jericho received a salary of P400,000 and P600,000 and share in profit and
loss at 60%; 40% ratio, respectively. If the partnership generated a net profit of P540,000 in 2020, by
how much Jericho’s capital account would increase or decrease?
124,000
(276,000)
416,000
(184,000)

188. Statement 1: When a new partner enters into a partnership by purchasing in existing partner’s
interest, the total assets and equity of the business increase.
Statement 2: When a new partner is admitted to a partnership by purchasing an existing partner’s
interest, the business’s accounting records do not record the transfer of cash from the new partner to
the existing partner.
Only statement 2 is true

189. Ace and Hoby formed a partnership on May 29, 2019 by contributing P300,000 and P500,000,
respectively. Ace and hoby agreed to receive 10% interest on capital contribution, and that Ace will
receive a monthly salary of P10,000 starting August 1, 2019. The remaining balance will be divided
according to capital contribution. At the end of the year, the partnership generated a revenue of
P800,000 and expenses of P650,000.

How much is the share of Hoby from the net profit?

80,000
87,500
62,500

How much is the share of Ace from the net profit?

87,500

190. Faith, Hope, and Love are partners sharing profits and losses in the ratio 2:2:1 and have capital
balances of P800,000, P800,000, and P400,000, respectively. Grace purchases half of Faith’s interest
by paying her directly for an amount that earned her a profit of P60,000.

● The entry to record the admission of Grace in the partnership includes a

Credit to Grace, Capital, P400,000

191. Statement 1: A bonus to the remaining partners results when a retiring partner receives
partnership assets which are less than his or her capital balance on the date of withdrawal.
Statement 2: If a new partner invests in a partnership at book value and acquires ¼ interest in total
partnership capital, it indicates that a bonus was paid to the original partners.
Only statement 1 is true

192. The partnership agreement of Adrian and Arzel provides a 5% capital interest on the initial
capital contributions of P300,000 and P500,000 respectively. The agreement also provides a salary
allowance of P200,000 to Adrian. The agreed profit and loss ratio is 40% for Adrian and 60% for Arzel.
The partnership generated a net profit of P180,000 in 2020. How much is the share of Arzel on the
profit?
 (11,000)

193. Bel and May have capital balances of P900,000, and P1,300,000 as of December 31, 2020. Bel
and May share 40% and 60% in the profits and losses. The partners believe that the following assets
should be adjusted:
Accounts receivable - (book value) - P240,000; (market value) - P200,000
Inventory - (book value) - P400,000; (market value) - P450,000

Len is interested in buying 40% interest from anyone of the partner.

● If May is willing to sell 40% of her interest and profit at a price that will earn her a profit of
P25,000. How much will Len pay?
P547,400
P545,000
P520,000
P522,400
● After recording the adjustments, the revised capital of Bel is
P904,000

194. This method of distributing Profit and Loss discourages additional investments
Capital balances, beginning
Capital balances, end
Average capital balances
Original capital contribution

195. The admission of a new partner involving asset revaluation will result in:
Unequal total agreed equity and total capital contribution

196. One of the provisions in the ABC Partnership is for A to receive a 10% interest on her average
capital balance for the year 2021. A first contributed P20,000 of capital on February 1, 2021. On June 1,
she contributed another P20,000. On September 1, she withdrew P15,000 from the partnership.
Withdrawals in excess of P5,000 are charged to the partner’s capital account. The partnership’s fiscal
year ends in December 31.

The amount of interest allocated to A is ____

2667

197. Partners Deeca and Annel received a salary of P280,000 and P320,00, and share profit and
loss at 3:5 ratio, respectively. If the partnership generated a net profit of P440,000 in 2020, by how
much Deeca’s capital account would increase or decrease?
220,000

198. Statement 1: New partners will always be admitted to a partnership at a contribution equal to or
greater than the book value of their interest.
Statement 2: When a partner sells his interest to another party, the journal entry simply credits the
withdrawing partner’s capital account and debits the new partner’s capital.
Both statements are false

199. What are the considerations in determining the best method in distributing profit?
All of the above
200. Which among the following is not correct in the distribution of profit or loss?
Original capital contribution may prove equitable if there are material changes in the capital
accounts during the year

201. Dada and Elma are partners with capital balances of P400,000 and P600,000, respectively.
They share profits and losses equally. They decided to admit Jhai as a partner who will invest P200,000
for a 15% interest. Total agreed capital is P1,250,000. Which of the following statements is true?
Jhai’s capital is credited for P187,500

202. Statement 1: If the proceeds from sale is less than the book value of the non-cash assets sold,
this will increase the partnership assets but decrease the partner’s equity.
Statement 2: The feature of unlimited liability covers all partners except industrial partner
Both statements are false

203. The admission of a new partner effected through purchase of interest in the partnership is
Recorded in the partnership books as a transfer within equity

204. When mill retired from the partnership, the final settlement of Mill’s interest exceeded Mill’s
capital balance. Under the bonus method, the excess
Reduced the capital balances of the remaining partners

205. In the absence of agreement as to distribution of losses but there is an agreement for
distribution of profits, the industrial partner shall share losses based on
Shall not be liable for any losses

206. The most equitable distribution of partnership profit based on capital contributions uses which of
the following capital concept?
Average Capital
 CHAPTER 12
ACCOUNTING FOR PARTNERSHIPS
SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S TAXONOMY
Ite LO BT Ite LO BT Ite LO BT Ite LO BT Item L BT
True-False Statements
sg
1. 1 K 9. 2 C 17. 3 K 25. 5 K 33. 2 K
a sg
2. 1 K 10. 2 C 18. 3 K 26. 6 K 34. 3 C
a sg
3. 1 K 11. 3 K 19. 4 C 27. 6 C 35. 5 K
a sg,a
4. 1 K 12. 3 K 20. 4 C 28. 6 C 36. 6 K
a sg,a
5. 1 K 13. 3 K 21. 4 K 29. 6 C 37. 7 K
a
6. 2 K 14. 3 K 22. 4 K 30. 7 C
sg
7. 2 AP 15. 3 C 23. 4 K 31. 1 K
sg
8. 2 K 16. 3 K 24. 5 K 32. 1 K
Multiple Choice Questions
a
38. 1 K 63. 3 K 88. 4 K 113. 5 AP 138. 6 C
a
39. 1 K 64. 2 C 89. 4 K 114. 5 AP 139. 6 C
a
40. 1 K 65. 2 AP 90. 4 K 115. 5 AP 140. 7 AP
a
41. 2 K 66. 2 AP 91. 4 C 116. 5 AP 141. 7 AP
a
42. 1 K 67. 2 AP 92. 4 AP 117. 5 AP 142. 7 AP
a
43. 1 K 68. 2 AP 93. 4 AP 118. 5 AP 143. 7 AP
a
44. 1 K 69. 2 AP 94. 4 AP 119. 5 AP 144. 7 C
a
45. 1 K 70. 3 AP 95. 4 AP 120. 5 AP 145. 7 K
a a
46. 1 K 71. 3 AP 96. 4 K 121. 6 AP 146. 7 AP
a a
47. 1 K 72. 3 AP 97. 4 K 122. 6 AP 147. 7 AP
a a
48. 1 K 73. 3 AP 98. 4 K 123. 6 AP 148. 7 AP
a st
49. 1 K 74. 3 AP 99. 5 K 124. 6 AP 149. 1 K
a sg
50. 1 K 75. 3 AP 100. 5 K 125. 6 AP 150. 1 C
a st
51. 1 K 76. 3 AP 101. 5 K 126. 6 AP 151. 2 K
a sg
52. 5 C 77. 3 C 102. 5 AP 127. 6 AP 152. 3 C
a st
53. 3 K 78. 3 K 103. 5 AP 128. 6 AP 153. 3 K
a sg
54. 1 K 79. 3 K 104. 5 AP 129. 6 C 154. 5 K
a st
55. 1 K 80. 3 AP 105. 5 AP 130. 6 C 155. 5 K
a sg
56. 3 K 81. 3 C 106. 5 K 131. 6 AP 156. 5 K
a st
57. 1 AP 82. 3 C 107. 5 C 132. 6 AP 157. 5 K
a sg,a
58. 2 AP 83. 3 C 108. 5 K 133. 6 AP 158. 6 C
a sg.a
59. 2 AP 84. 3 C 109. 5 K 134. 6 C 159. 6 AP
a
60. 2 K 85. 3 AP 110. 5 K 135. 6 C
a
61. 2 C 86. 3 AP 111. 5 K 136. 6 C
a
62. 2 K 87. 3 AP 112. 5 C 137. 6 K
Brief Exercises
a a
160. 2 AP 162. 3 AP 164. 5 AP 166. 6 AP 168. 7 AP
a a
161. 2 AP 163. 4 AP 165. 5 AP 167. 6 AP 169. 7 AP
sg
This question also appears in the Study Guide.
st
This question also appears in a self-test at the student companion website.
a
This question covers a topic in an appendix to the chapter.
12 - 2 Test Bank for Accounting Principles, Eleventh Edition

SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S TAXONOMY

Exercises
a
170. 2 AP 175. 3 AP 180. 4 AP 185. 5 AP 190. 6 AP
a
171. 2 AP 176. 3 AP 181. 5 AP 186. 5 AP 191. 6 AP
a
172. 2 AP 177. 3 AP 182. 4 AP 187. 5 AP 192. 6,7 AP
a a
173. 3 AP 178. 3 AP 183. 5 AP 188. 6 AP 193. 7 AP
a a
174. 3 AP 179. 3,4 AP 184. 5 AP 189. 6 AP 194. 7 AP
Completion Statements
a
195. 1 K 198. 3 K 201. 3 K 204. 6 K
a
196. 1 K 199. 3 K 202. 5 K 205. 6 K
a
197. 1 K 200. 3 K 203. 5 K 206. 6 K
Matching Statements
207. 1 K
Short-Answer Essay
208. 1 S 210. 4 S 212. 1 S
209. 3 S 211. 5 S 213. 1 S

SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE

Ite Typ Ite Typ Ite Typ Ite Typ Ite Typ Ite Typ Ite Typ

Learning Objective 1
1. TF 31. TF 42. MC 47. MC 52. MC 150. MC 208. SA
2. TF 32. TF 43. MC 48. MC 54. MC 195. C 212. SA
3. TF 38. MC 44. MC 49. MC 55. MC 196. C 213. SA
4. TF 39. MC 45. MC 50. MC 57. MC 197. C
5. TF 40. MC 46. MC 51. MC 149. MC 207. MA
Learning Objective 2
6. TF 10. TF 58. MC 62. MC 66. MC 151. MC 171. Ex
7. TF 33. TF 59. MC 63. MC 67. MC 160. BE 172. Ex
8. TF 41. MC 60. MC 64. MC 68. MC 161. BE
9. TF 56. MC 61. MC 65. MC 69. MC 170. Ex
Learning Objective 3
11. TF 18. TF 72. MC 79. MC 86. MC 175. Ex 199. C
12. TF 34. TF 73. MC 80. MC 87. MC 176. Ex 200. C
13. TF 53. MC 74. MC 81. MC 152. MC 177. Ex 201. C
14. TF 56. MC 75. MC 82. MC 153. MC 178. Ex 209. SA
15. TF 63. MC 76. MC 83. MC 162. BE 179. Ex
16. TF 70. MC 77. MC 84. MC 173. Ex 187. Ex
17. TF 71. MC 78. MC 85. MC 174. Ex 198. C
Learning Objective 4
19. TF 22. TF 89. MC 92. MC 95. MC 98. MC 180. Ex
20. TF 23. TF 90. MC 93. MC 96. MC 163. BE 182. Ex
21. TF 88. MC 91. MC 94. MC 97. MC 179. Ex 210. SA

FOR INSTRUCTOR USE ONLY

 Accounting for Partnerships 12 - 3

SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE

Learning Objective 5
24. TF 101. MC 107. MC 113. MC 119. MC 164. BE 186. Ex
25. TF 102. MC 108. MC 114. MC 120. MC 165. BE 187. Ex
35. TF 103. MC 109. MC 115. MC 154. MC 181. Ex 202. C
52. MC 104. MC 110. MC 116. MC 155. MC 183. Ex 203. C
99. MC 105. MC 111. MC 117. MC 156. MC 184. Ex 211. SA
100. MC 106. MC 112. MC 118. MC 157. MC 185. Ex
Learning Objective a6
a a a
26. TF 122. MC 128. MC a134. MC a158. MC a
190. Ex
a a a
27. TF 123. MC 129. MC a135. MC a159. MC a
191. Ex
a a a
28. TF 124. MC 130. MC a136. MC 166. BE a
192. Ex
a a a
29. TF 125. MC 131. MC a137. MC 167. BE a
204. C
a a a a a a
36. TF 126. MC 132. MC 138. MC 188. Ex 205. C
a a a
121. MC 127. MC 133. MC a139. MC a189. Ex a
206. C
Learning Objective a7
a a a
30. TF 141. MC 144. MC a147. MC a169. BE a
194. Ex
a a a
37. TF 142. MC 145. MC a148. MC a192. Ex
a a a
140. MC 143. MC 146. MC a168. BE a193. Ex

Note: TF = True-False BE = Brief Exercise C = Completion

MC = Multiple Choice Ex = Exercise MA = Matching
SA = Short-Answer Essay

CHAPTER LEARNING OBJECTIVES

1. Identify the characteristics of the partnership form of business organization. The principal
characteristics of a partnership are (a) association of individuals, (b) mutual agency, (c) limited
life, (d) unlimited liability, and (e) co-ownership of property.

2. Explain the accounting entries for the formation of a partnership. When formed, a
partnership records each partner's initial investment at the fair value of the assets at the date of
their transfer to the partnership.

3. Identify the bases for dividing net income or net loss. Partnerships divide net income or net
loss on the basis of the income ratio, which may be (a) a fixed ratio, (b) a ratio based on
beginning or average capital balances, (c) salaries to partners and the remainder on a fixed
ratio, (d) interest on partners' capital and the remainder on a fixed ratio, and (e) salaries to
partners, interest on partners' capital, and the remainder on a fixed ratio.

FOR INSTRUCTOR USE ONLY

 12 - 4 Test Bank for Accounting Principles, Eleventh Edition

4. Describe the form and content of partnership financial statements. The financial
statements of a partnership are similar to those of a proprietorship. The principal differences are
(a) The partnership shows the division of net income on the income statement. (b) The owners'
equity statement is called a partners' capital statement. (c) The partnership reports each
partner's capital on the balance sheet.

5. Explain the effects of the entries to record the liquidation of a partnership. When a
partnership is liquidated, it is necessary to record the (a) sale of noncash assets, (b) allocation
of the gain or loss on realization, (c) payment of partnership liabilities, and (d) distribution of
cash to the partners on the basis of their capital balances.
a
6. Explain the effects of the entries when a new partner is admitted. The entry to record the
admittance of a new partner by purchase of a partner's interest affects only partners' capital
accounts. The entries to record the admittance by investment of assets in the partnership (a)
increase both net assets and total capital and (b) may result in recognition of a bonus to either
the old partners or the new partner.
a
7. Describe the effects of the entries when a partner withdraws from the firm. The entry to
record a withdrawal from the firm when the partners pay from their personal assets affects only
partners' capital accounts. The entry to record a withdrawal when payment is made from
partnership assets (a) decreases net assets and total capital and (b) may result in recognizing a
bonus either to the retiring partner or the remaining partners.

TRUE-FALSE STATEMENTS
1. The personal assets, liabilities, and personal transactions of partners are excluded from the
accounting records of the partnership.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

2. The act of any partner is binding on all other partners if the act appears to be appropriate for
the partnership.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

3. A major advantage of the partnership form of organization is that the partners have unlimited
liability.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

4. Partnership creditors may have a claim on the personal assets of any of the partners if the
partnership assets are not sufficient to settle claims.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

5. The partnership agreement between partners must be in writing.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

FOR INSTRUCTOR USE ONLY

 Accounting for Partnerships 12 - 5

6. If a partner invests noncash assets in a partnership, they should be recorded by the

partnership at their fair value.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA:
FSA

7. L. Hampton invests the following assets in a new partnership: $30,000 in cash, and
equipment that cost $70,000 but has a book value of $34,000 and fair value of $40,000.
Hampton, Capital will be credited for $64,000.
Ans: F, LO: 2, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA:
FSA

solution: $30,000  $40,000  $70,000

8. Two proprietorships cannot combine and form a partnership.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

9. If a partner's investment in a partnership consists of equipment that has accumulated

depreciation of $8,000, it would not be appropriate for the partnership to record the
accumulated depreciation.
Ans: T, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA:
FSA

10. If a partner's investment in a partnership consists of Accounts Receivable of $35,000 and an

Allowance for Doubtful Accounts of $7,000, it would not be appropriate for the partnership to
record the Allowance for Doubtful Accounts.
Ans: F, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA:
FSA

11. Unless stated otherwise in the partnership contract, profits and losses are shared among the
partners in the ratio of their capital equity balances.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA:
Business Economics

12. If salary allowances and interest on capital are stipulated in the partnership profit and loss
sharing agreement, they are implemented only if income is sufficient to cover the amounts
required by these features.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA:
Business Economics

13. Unless the partnership agreement specifically indicates an income ratio, partnership net
income or loss is not allocated to the partners.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA:
Business Economics

14. Partnership income or loss need not be closed to partners' capital accounts each period
because of the unlimited life characteristic of partnerships.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Reporting

15. If a partnership has a loss for the period, the closing entry to transfer the loss to the partners
will require a credit to the Income Summary account.
Ans: T, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA:
FSA

FOR INSTRUCTOR USE ONLY

12 - 6 Test Bank for Accounting Principles, Eleventh Edition

16. The partners' drawing accounts are closed each period into the Income Summary account.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA:
FSA

17. Salary allowances to partners are a major expense on most partnership income statements.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Reporting

18. An interest allowance in sharing partnership net income (or net loss) is related to the amount
of partners' invested capital during the period.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

19. The financial statements of a partnership are similar to those of a proprietorship.

Ans: T, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Reporting

20. The income earned by a partnership will always be greater than the income earned by a
proprietorship because in a partnership there is more than one owner contributing to the
success of the business.
Ans: F, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

21. The function of the Partners' Capital Statement is to explain the changes in partners' capital
account balances during a period.
Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Reporting

22. A detailed listing of all the assets invested by a partner in a partnership appears on the
Partners' Capital Statement.
Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Reporting

23. Total partners' equity of a partnership is equal to the sum of all partners' capital account
balances.
Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Reporting

24. The distribution of cash to partners in a partnership liquidation is always made based on the
partners' income sharing ratio.
Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA:
Business Economics

25. The liquidation of a partnership means that a new partner has been admitted to the
partnership.
Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

a
26. The admission of a new partner results in the legal dissolution of the existing partnership
and the beginning of a new partnership.
Ans: T, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective , AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

FOR INSTRUCTOR USE ONLY

 Accounting for Partnerships 12 - 7
a
27. If a new partner is admitted into a partnership by investment, the total assets and total
capital will change.
Ans: T, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

a
28. A bonus to old partners results when the new partner's capital credit on the date of
admittance is greater than his or her investment in the firm.
Ans: F, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Reporting

a
29. If a new partner invests in a partnership at book value and acquires a 1/4 interest in total
partnership capital, it indicates that a bonus was paid to the original partners.
Ans: F, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA:
Business Economics

a
30. A bonus to the remaining partners results when a retiring partner receives partnership
assets which are less than his or her capital balance on the date of withdrawal.
Ans: T, LO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA:
FSA

31. A partnership is an association of no more than two persons to carry on as co-owners of a

business for profit.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

32. Once assets have been invested in the partnership, they are owned jointly by all partners.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

33. Each partner's initial investment in a partnership should be recorded at book value.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA:
FSA

34. Partnership income is shared in proportion to each partner's capital equity interest unless
the partnership contract specifically indicates the manner in which net income or net loss is
to be divided.
Ans: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA:
Business Economics

35. In a liquidation, the final distribution of cash to partners should be on the basis of their
income ratios.
Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA:
Business Economics

a
36. In an admission of a partner by investment of assets, the total net assets and total capital of
the partnership do not change.
Ans: F, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA:
Business Economics

a
37. The withdrawal of a partner legally dissolves the partnership.
Ans: T, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Reporting

FOR INSTRUCTOR USE ONLY

12 - 8 Test Bank for Accounting Principles, Eleventh Edition

Answers to True-False Statements

Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.
a
1. T 7. F 13. F 19. T 25. F 31. F 37. T
a
2. T 8. F 14. F 20. F 26. T 32. T
a
3. F 9. T 15. T 21. T 27. T 33. F
a
4. T 10. F 16. F 22. F 28. F 34. F
a
5. F 11. F 17. F 23. T 29. F 35. F
a a
6. T 12. F 18. T 24. F 30. T 36. F

MULTIPLE CHOICE QUESTIONS

38. A hybrid form of business organization with certain features like a corporation is a(n)
a. limited liability partnership.
b. limited liability company.
c. "S" corporation.
d. sub-chapter "S" corporation.
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

39. A partnership
a. has only one owner.
b. pays taxes on partnership income.
c. must file an information tax return.
d. is not an accounting entity for financial reporting purposes.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

40. A general partner in a partnership

a. has unlimited liability for all partnership debts.
b. is always the general manager of the firm.
c. is the partner who lacks a specialization.
d. is liable for partnership liabilities only to the extent of that partner's capital equity.
Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

41. The individual assets invested by a partner in a partnership

a. revert back to that partner if the partnership liquidates.
b. determine that partner's share of net income or loss for the year.
c. are jointly owned by all partners.
d. determine the scope of authority of that partner.
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

42. Which one of the following would not be considered a disadvantage of the partnership form
of organization?
a. Limited life
b. Unlimited liability
c. Mutual agency
d. Ease of formation
Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

FOR INSTRUCTOR USE ONLY

 Accounting for Partnerships 12 - 9

43. The partnership form of business is

a. restricted to law and medical practices.
b. restricted to firms having fewer than 10 partners.
c. not restricted to any particular type of business.
d. most often used in relatively large companies.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

44. Which of the following is not a principal characteristic of the partnership form of business
organization?
a. Mutual agency
b. Association of individuals
c. Limited liability
d. Limited life
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

45. The partnership agreement should include each of the following except the
a. date of the partnership inception.
b. principal location of the firm.
c. surviving family members in the event of a partner's death.
d. Each of these should be included.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

46. Which of the following statements is true regarding the form of a legally binding partnership
contract?
a. The partnership contract must be in writing.
b. The partnership contract may be based on a handshake.
c. The partnership contract may be implied.
d. The partnership contract cannot be oral.
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

47. Which of the following statements about a partnership is correct?

a. The personal assets of a partner are included in the partnership accounting records.
b. A partnership is not required to file an information tax return.
c. Each partner's share of income is taxable to the partnership.
d. A partnership represents an accounting entity for financial reporting purposes.
Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

48. In a partnership, mutual agency means

a. each partner acts on his own behalf when engaging in partnership business.
b. the act of any partner is binding on all other partners, only if partners act within their
scope of authority.
c. an act by a partner is judged as binding on other partners depending on whether the act
appears to be appropriate for the partnership.
d. that partners must pay taxes on a mutual or combined basis.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA:
Business Economics

FOR INSTRUCTOR USE ONLY

12 - 10 Test Bank for Accounting Principles, Eleventh Edition

49. A partnership
a. is dissolved only by the withdrawal of a partner.
b. is dissolved upon the acceptance of a new partner.
c. dissolution means the business must liquidate.
d. has unlimited life.
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

50. The partner in a limited partnership that has unlimited liability is referred to as the
a. lead partner.
b. head partner.
c. general partner.
d. unlimited partner.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA:
Business Economics

51. Limited partnerships

a. must have at least one general partner.
b. guarantee that a partner will receive a return.
c. guarantee that a partner will get back his original investment.
d. are limited to only three partners.
Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

52. The Salinas-Milliken partnership is terminated when creditor claims exceed partnership
assets by $80,000. Salinas is a millionaire and Milliken has no personal assets. Milliken’s
partnership interest is 75% and Salinas’s is 25%. Creditors
a. must collect their claims equally from Milliken and Salinas.
b. may collect the entire $80,000 from Salinas.
c. must collect their claims 75% from Milliken and 25% from Salinas.
d. may not require Salinas to use his personal assets to satisfy the $80,000 in claims.
Ans: B, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA:
Business Economics

53. Which of the following statements about partnerships is incorrect?

a. Partnership assets are co-owned by partners.
b. If a partnership is terminated, the assets do not legally revert to the original contributor.
c. If the partnership agreement does not specify the manner in which net income is to be
shared, it is distributed according to capital contributions.
d. Each partner has a claim on assets equal to the balance in the partner's capital account.
Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

54. Which of the following is not an advantage of the partnership form of business?
a. Mutual agency
b. Ease of formation
c. Ease of decision making
d. Freedom from governmental regulations and restrictions
Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

FOR INSTRUCTOR USE ONLY

 Accounting for Partnerships 12 - 11

55. The largest companies in the United States are primarily organized as
a. limited partnerships.
b. partnerships.
c. corporations.
d. proprietorships.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

56. The basis for dividing partnership net income or net loss is referred to as any of the following
except the
a. income ratio.
b. income and loss ratio.
c. profit and loss ratio.
d. income sharing ratio.
Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

57. Which of the following statements is incorrect regarding partnership agreements?

a. It may be referred to as the “articles of co-partnership.”
b. Oral agreements are preferable to written articles.
c. It should specify the different relationships that are to exist among the partners.
d. It should state procedures for submitting disputes to arbitration.
Ans: B, LO: 1, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

58. Bagley invests personally owned equipment, which originally cost $220,000 and has
accumulated depreciation of $60,000 in the Bagley and Eggers partnership. Both partners
agree that the fair value of the equipment was $120,000. The entry made by the partnership
to record Bagley’s investment should be
a. Equipment........................................................................... 220,000
Accumulated Depreciation—Equipment...................... 60,000
Bagley, Capital............................................................ 160,000
b. Equipment........................................................................... 160,000
Bagley, Capital............................................................ 160,000
c. Equipment........................................................................... 120,000
Loss on Purchase of Equipment.......................................... 40,000
Accumulated Depreciation—Equipment.............................. 60,000
Bagley, Capital............................................................ 220,000
d. Equipment........................................................................... 120,000
Bagley, Capital............................................................ 120,000
Ans: D, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA

59. Nate is investing in a partnership with Deidre. Nate contributes as part of his initial
investment, Accounts Receivable of $60,000; an Allowance for Doubtful Accounts of $9,000;
and $6,000 cash. The entry that the partnership makes to record Nate’s initial contribution
includes a
a. credit to Nate, Capital for $66,000.
b. debit to Accounts Receivable for $51,000.
c. credit to Nate, Capital for $57,000.
d. debit to Allowance for Doubtful Accounts for $9,000.
Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA

FOR INSTRUCTOR USE ONLY

12 - 12 Test Bank for Accounting Principles, Eleventh Edition

Solution: $60,000  $9,000  $6,000  $57,000

60. Which of the following would not be recorded in the entry for the formation of a partnership?
a. Accumulated depreciation
b. Allowance for doubtful accounts
c. Accounts receivable
d. All of these would be recorded.
Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA:
FSA

61. Todd is investing in a partnership with Joseph. Todd contributes equipment that originally
cost $42,000, has a book value of $20,000, and a fair value of $26,000. The entry that the
partnership makes to record Todd’s initial contribution includes a
a. debit to Equipment for $22,000.
b. debit to Equipment for $42,000.
c. debit to Equipment for $26,000.
d. credit to Accumulated Depreciation for $22,000.
Ans: C, LO: 2, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA

62. Julie contributes, as part of her initial investment, accounts receivable with an allowance for
doubtful accounts. Which of the following reflects a proper treatment?
a. The balance of the accounts receivable account should be recorded on the books of the
partnership at its net realizable value.
b. The allowance account may be set up on the books of the partnership because it relates
to the existing accounts that are being contributed.
c. The allowance account should not be carried onto the books of the partnership.
d. The accounts receivable and allowance should not be recorded on the books of the
partnership because a partner must invest cash in the business.
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA:
FSA

63. Which one of the following would not be considered an expense of a partnership in
determining income for the period?
a. Expired insurance
b. Salary allowance to partners
c. Supplies used
d. Freight-out
Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Reporting

64. A partner invests into a partnership a building with an original cost of $360,000 and
accumulated depreciation of $160,000. This building has a $280,000 fair value. As a result
of the investment, the partner’s capital account will be credited for
a. $280,000.
b. $200,000.
c. $360,000.
d. $480,000.
Ans: A, LO: 2, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA

FOR INSTRUCTOR USE ONLY

 Accounting for Partnerships 12 - 13

65. Brian and Sandy are forming a partnership. Brian will invest a truck with a book value of
$10,000 and a fair value of $14,000. Sandy will invest a building with a book value of
$30,000 and a fair value of $42,000 with a mortgage of $15,000. At what amount should the
building be recorded?
a. $30,000
b. $27,000
c. $42,000
d. $45,000
Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA

66. Brian and Sandy are forming a partnership. Brian will invest a truck with a book value of
$10,000 and a fair value of $14,000. Sandy will invest a building with a book value of
$30,000 and a fair value of $42,000 with a mortgage of $15,000. What amount should be
recorded in Sandy’s capital account?
a. $30,000
b. $27,000
c. $42,000
d. $14,000
Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA

Solution: $42,000  $15,000  $27,000

67. Brian and Sandy are forming a partnership. Brian will invest a truck with a book value of
$10,000 and a fair value of $14,000. Sandy will invest a building with a book value of
$30,000 and a fair value of $42,000 with a mortgage of $15,000. What amount should be
recorded in Brian’s capital account?
a. $30,000
b. $27,000
c. $42,000
d. $14,000
Ans: D, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA

68. Brekke and Fig decide to organize a partnership. Brekke invests $30,000 cash, and Fig
contributes $24,000 cash and equipment having a book value of $12,000. Choose the entry
to record Fig’s investment in the partnership assuming the equipment has a fair value of
$18,000.
a. Cash.................................................................................... 24,000
Equipment .......................................................................... 12,000
Fig, Capital ................................................................. 36,000
b. Equipment .......................................................................... 12,000
Fig, Capital ................................................................. 12,000
c. Cash.................................................................................... 24,000
Fig, Capital ................................................................. 24,000
d. Cash.................................................................................... 24,000
Equipment .......................................................................... 18,000
Fig, Capital ................................................................. 42,000
Ans: D, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA

FOR INSTRUCTOR USE ONLY

12 - 14 Test Bank for Accounting Principles, Eleventh Edition

69. M. Abadie and S. Collier combine their individual sole proprietorships to start the Abadie -
Collier partnership. M. Abadie and S. Collier invest in the partnership as follows
Book Value Fair Value
Abadie Collier Abadie Collier
Cash $21,000 $6,000 $21,000 $6,000
Accounts Receivable 10,000 5,000 10,000 5,000
Allowance for Doubtful
Accounts (1,500) (600) (2,100) (900)
Equipment 15,000 24,000 13,500 9,000
Accumulated Depreciation (3,000) (9,000)
The entries to record the investment will include a credit to:
a. Abadie, Capital of $41,500.
b. Collier, Capital of $19,100.
c. Abadie, Capital of $43,000.
d. Collier, Capital of $25,100.
Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA

Solution: $6,000  $5,000  $9,000  $900  $19,100

70. Partners Gary and Elaine have agreed to share profits and losses in an 80:20 ratio
respectively, after Gary is allowed a salary allowance of $30,000 and Elaine is allowed a
salary allowance of $15,000. If the partnership had net income of $30,000 for 2014, Elaine’s
share of the income would be
a. $15,000.
b. $12,000.
c. $18,000.
d. $3,000.
Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA

Solution: $30,000  $30,000  $15,000   $15,000; $15,000  (20%) ($15,000)  $12,000

71. The partnership agreement of Alix, Gise, and Bosco provides for the following income ratio:
(a) Alix, the managing partner, receives a salary allowance of $108,000, (b) each partner
receives 15% interest on average capital investment, and (c) remaining net income or loss is
divided equally. The average capital investments for the year were: Alix $600,000, Gise
$1,200,000, and Bosco $1,800,000. If partnership net income is $720,000, the amount
distributed to Gise should be:
a. $180,000.
b. $186,000.
c. $204,000.
d. $240,000.
Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA

Solution: $720,000  $108,000  (.15) ($600,000  $1,200,000  $1,800,000)  $72,000; (.15) ($1,200,000)  (72,000  3)  $204,000

FOR INSTRUCTOR USE ONLY

 Accounting for Partnerships 12 - 15

72. The partnership agreement of Alix, Gise, and Bosco provides for the following income ratio:
(a) Alix, the managing partner, receives a salary allowance of $108,000, (b) each partner
receives 15% interest on average capital investment, and (c) remaining net income or loss is
divided equally. The average capital investments for the year were: Alix $600,000, Gise
$1,200,000, and Bosco $1,800,000. If partnership net income is $540,000, the amount
distributed to Alix should be
a. $90,000.
b. $162,000.
c. $180,000.
d. $198,000.
Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA

Solution: $540,000  $108,000  (.15) ($600,000  $1,200,000  $1,800,000)   $108,000; $108,000  (.15) ($600,000)  ( 108,000  3)   162,000

73. Partners Cantor and Dickens have capital balances in a partnership of $160,000 and
$240,000, respectively. They agree to share profits and losses as follows:
Cantor Dickens
As salaries $40,000 $48,000
As interest on capital at the beginning of the year 10% 10%
Remaining profits or losses 50% 50%

If income for the year was $200,000, what will be the distribution of income to Dickens ?
a. $92,000
b. $108,000
c. $80,000
d. $40,000
Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA

Solution: $200,000  $40,000  $48,000  (.10) ($160,000  $240,000)   $72,000; $48,000  (.10) ($240,000)  ($72,0002)  $108,000

74. Partners Cantor and Dickens have capital balances in a partnership of $160,000 and
$240,000, respectively. They agree to share profits and losses as follows:
Cantor Dickens
As salaries $40,000 $48,000
As interest on capital at the beginning of the year 10% 10%
Remaining profits or losses 50% 50%

If income for the year was $120,000, what will be the distribution of income to Cantor?
a. $52,000
b. $64,000
c. $40,000
d. $56,000
Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA

Solution: $120,000  $40,000  $48,000  (.10) ($160,000  $240,000)   $8,000; $40,000  (.10) ($160,000)  ( $8,0002)  $52,000

FOR INSTRUCTOR USE ONLY

12 - 16 Test Bank for Accounting Principles, Eleventh Edition

75. Partners Cantor and Dickens have capital balances in a partnership of $160,000 and
$240,000, respectively. They agree to share profits and losses as follows:
Cantor Dickens

As salaries $40,000 $48,000

As interest on capital at the beginning of the year 10% 10%
Remaining profits or losses 50% 50%

If net loss for the year was $8,000, what will be the distribution to Dickens?
a. $48,000 income
b. $4,000 income
c. $4,000 loss
d. $8,000 loss
Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem
Solving, IMA: Reporting

Solution:  $8,000  $40,000  $48,000  (.10) ($160,000  $240,000)   $136,000; $48,000  (.10) ($240,00)  ($136,0002)  $4,000

76. Partners Eli and Alex have agreed to share profits and losses in an 80:20 ratio respectively,
after Eli is allowed a salary allowance of $70,000 and Alex is allowed a salary allowance of
$35,000. If the partnership had net income of $70,000 for 2014, Alex’s share of the income
would be
a. $35,000.
b. $28,000.
c. $42,000.
d. $7,000.
Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA

Solution: $70,000  $70,000  $35,000   $35,000; $35,000  (.20) ($35,000)  $28,000

77. The most appropriate basis for dividing partnership net income when the partners do not
plan to take an active role in daily operations is
a. on a fixed ratio.
b. interest on capital balances and salaries to the partners.
c. on a ratio based on average capital balances.
d. salaries to the partners and the remainder on a fixed ratio.
Ans: C, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA:
Business Economics

78. The Mayer and Rodin partnership agreement stipulates that profits and losses will be shared
equally after salary allowances of $400,000 for Mayer and $200,000 for Rodin. At the
beginning of the year, Mayer’s Capital account had a balance of $800,000, while Rodin’s '
Capital account had a balance of $700,000. Net income for the year was $500,000. The
balance of Rodin’s Capital account at the end of the year after closing is
a. $950,000.
b. $200,000.
c. $850,000.
d. $900,000.
Ans: C, LO: 3, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem
Solving, IMA: Reporting

Solution: $500,000  $400,000  $200,000   $100,000; $200,000  ($100,0002)  $150,000; $700,000  $150,000  $850,000

FOR INSTRUCTOR USE ONLY

 Accounting for Partnerships 12 - 17

79. A partner's share of net income is recognized in the accounts through

a. adjusting entries.
b. closing entries.
c. correcting entries.
d. accrual entries.
Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA:
FSA

80. The partnership of Bher and Dhillips reports net income of $120,000. The partners share
equally in income and losses. The entry to record the partners' share of net income will
include a
a. credit to Income Summary for $120,000.
b. credit to Bher, Capital for $60,000.
c. debit to Dhillips, Capital for $60,000.
d. credit to Dhillips, Drawing for $60,000.
Ans: B, LO: 3, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA:
FSA

Solution: $120,0002  $60,000

81. Michelle receives $210,000 and Stephanie receives $140,000 in a split of $350,000 net
income. Which expression does not reflect the income splitting arrangement?
a. 3:2
b. 3/5 & 2/5
c. 6:4
d. 2:1
Ans: D, LO: 3, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: Business Economics

Solution: $350,0005  $70,000; $70,000  2  $140,000;$70,000  3  $210,000

82. An income ratio based on capital balances might be appropriate when

a. service is a primary consideration.
b. some, but not all, partners plan to work in the business.
c. funds invested in the partnership are considered the critical factor.
d. little net income is expected.
Ans: C, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA:
Business Economics

83. If the partnership agreement specifies salaries to partners, interest on partners' capital, and
the remainder on a fixed ratio, and partnership net income is not sufficient to cover both
salaries and interest,
a. only salaries are allocated to the partners.
b. only interest is allocated to the partners.
c. the entire net income is shared on a fixed ratio.
d. both salaries and interest are allocated to the partners.
Ans: D, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA:
Business Economics

FOR INSTRUCTOR USE ONLY

12 - 18 Test Bank for Accounting Principles, Eleventh Edition

84. Which of the following would not be considered an expense of a partnership in determining
income for the period?
a. Expired insurance
b. Income tax expense
c. Rent expense
d. Utilities expense
Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA:
Business Economics

85. The net income of the Crowe and Browning partnership is $450,000. The partnership
agreement specifies that Crowe and Browninghave a salary allowance of $120,000 and
$180,000, respectively. The partnership agreement also specifies an interest allowance of
10% on capital balances at the beginning of the year. Each partner had a beginning capital
balance of $300,000. Any remaining net income or net loss is shared equally.
What is Crowe’s share of the $450,000 net income?
a. $120,000
b. $150,000
c. $165,000
d. $195,000
Ans: D, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: Quantitive Methods

Solution: $450,000  $120,000  $180,000  (.10) (2) ($300,000)  $90,000; $120,000  (.10 ) ($300,000)  ($90,0002)  $195,000

86. The net income of the Crowe and Browning partnership is $450,000. The partnership
agreement specifies that Crowe and Browning have a salary allowance of $120,000 and
$180,000, respectively. The partnership agreement also specifies an interest allowance of
10% on capital balances at the beginning of the year. Each partner had a beginning capital
balance of $300,000. Any remaining net income or net loss is shared equally.
What is the balance of Browning's Capital account at the end of the year after net income
has been distributed?
a. $510,000
b. $480,000
c. $555,000
d. $525,000
Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem
Solving, IMA: Reporting

Solution: $450,000  $120,000  $180,000  (.10) (2) ($300,000)  $9,0000; $300,000  $180,000  (.10) ($300,000)  ($90,0002)  $555,000

87. The net income of the Travis and Tucker partnership is $125,000. The partnership
agreement specifies that profits and losses will be shared equally after salary allowances of
$100,000 (Travis) and $150,000 (Tucker) have been allocated. At the beginning of the year,
Travis’s Capital account had a balance of $250,000 and Tucker’s Capital account had a
balance of $325,000. What is the balance of Tucker’s Capital account at the end of the year
after profits and losses have been distributed?
a. $325,000
b. $50,000
c. $412,500
d. $387,500
Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem
Solving, IMA: Quantitive Methods

Solution: $125,000  $100,000  $150,000   $125,000; $325,000  $150,000  ($125,0002)  $412,500

FOR INSTRUCTOR USE ONLY

 Accounting for Partnerships 12 - 19

88. A partners' capital statement explains

a. the amount of legal liability of each of the partners.
b. the types of assets invested in the business by each partner.
c. how the partnership will be capitalized if a new partner is admitted to the partnership.
d. the changes in each partner's capital account and in total partnership capital during a
period.
Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Reporting

89. Each of the following is used in preparing the partners’ capital statement except the
a. balance sheet.
b. income statement.
c. partners’ capital accounts.
d. partners’ drawing accounts.
Ans: A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Reporting

90. The owners' equity statement for a partnership is called the

a. partners' proportional statement.
b. partners' capital statement.
c. statement of shareholders' equity.
d. capital and drawing statement.
Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Reporting

91. Which of the following would not cause an increase in partnership capital?
a. Drawings
b. Net income
c. Additional capital investment by the partners
d. Initial capital investment by the partners
Ans: A, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA:
FSA

92. Mary Jessica’s capital statement reveals that her drawings during the year were $50,000.
She made an additional capital investment of $25,000 and her share of the net loss for the
year was $10,000. Her ending capital balance was $200,000. What was Jessica’s beginning
capital balance?
a. $225,000
b. $185,000
c. $235,000
d. $260,000
Ans: C, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem
Solving, IMA: Quantitive Methods

Solution: X  $25,000  $50,000  $10,000  $200,000; X  $235,000

FOR INSTRUCTOR USE ONLY

12 - 20 Test Bank for Accounting Principles, Eleventh Edition

93.Jon Winek started the year with a capital balance of $135,000. During the year, his share of
partnership net income was $120,000 and he withdrew $22,500 from the partnership for
personal use. He made an additional capital contribution of $37,500 during the year. The
amount of Jon Winek’s capital balance that will be reported on the year-end balance sheet
will be
a. $120,000.
b. $292,500.
c. $225,000.
d. $270,000.
Ans: D, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem
Solving, IMA: Quantitive Methods

Solution: $135,000  $120,000  $22,500  $37,500  $270,000

94. The Partners' Capital Statement for TSB Company reported the following information in
total:
Capital, January 1................................................. $240,000
Additional investment............................................ 80,000
Drawings............................................................... 160,000
Net income............................................................ 200,000
The partnership has three partners: Toub, Sauls, and Birch with ending capital balances in a
ratio 40:20:40. What are the respective ending balances of the three partners?
a. Toub, $160,000; Sauls, $80,000; Birch, $160,000.
b. Toub, $144,000: Sauls, $72,000; Birch, $144,000.
c. Toub, $272,000; Sauls, $136,000; Birch, $272,000.
d. Toub, $180,000; Sauls, $96,00000; Birch, $180,000.
Ans: B, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem
Solving, IMA: Quantitive Methods

Solution: $240,000  $80,000  $160,000  $200,000  $360,000; ($360,000) (.4)  $144,000; ($360,000) (.2)  $72,000

95. The total column of the Partners' Capital Statement for DeltaBell Company is as follows:
Capital, January 1................................................. $600,000
Additional investment............................................ 240,000
Drawings............................................................... 360,000
Net income............................................................ 720,000
The partnership has three partners. The first two partners have ending capital balances that
are equal. The ending balance of the third partner is half of the ending balance of the first
partner. What is the ending capital balance of the third partner?
a. $288,000
b. $192,000
c. $240,000
d. $264,000
Ans: C, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem
Solving, IMA: Quantitive Methods

Solution: $600,000  $240,000  $360,000  $720,000  $1,200,000; $1,200,0005  $240,000

96. The partners' drawing accounts are

a. reported on the income statement.
b. reported on the balance sheet.
c. closed to Income Summary.
d. closed to the partners' capital accounts.
Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Reporting

FOR INSTRUCTOR USE ONLY

 Accounting for Partnerships 12 - 21

97. The Uniform Partnership Act provides that

a. a purchaser of a partnership interest is not a partner until he or she is accepted into the
firm by the continuing partners.
b. a partner must obtain the approval of other partners before selling his or her interest.
c. the price paid in a purchase of partner's interest must be equal to the capital equity
acquired.
d. the price paid in a purchase of partner's interest must be greater than the capital equity
acquired.
Ans: A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

98. The balance sheet of a partnership will

a. report retained earnings below the partnership capital accounts.
b. show a separate capital account for each partner.
c. show a separate drawing account for each partner.
d. show the amount of income that was distributed to each partner.
Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Reporting

99. The liquidation of a partnership may result from each of the following except the
a. bankruptcy of the partnership.
b. death of a partner.
c. retirement of a partner.
d. sale of the business by the partners.
Ans: C, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

100. In the liquidation of a partnership, any gain or loss on the realization of noncash assets
should be allocated
a. first to creditors and the remainder to partners.
b. to the partners on the basis of their capital balances.
c. to the partners on the basis of their income ratios.
d. only after all creditors have been paid.
Ans: C, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA:
Business Economics

101. In the liquidation of a partnership, any partner who has a capital deficiency
a. has a personal debt to the partnership for the amount of the deficiency.
b. is automatically terminated as a partner.
c. will receive a cash distribution only on the basis of his or her income-sharing ratio.
d. is not obligated to make up the capital deficiency.
Ans: A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA:
Business Economics

FOR INSTRUCTOR USE ONLY

12 - 22 Test Bank for Accounting Principles, Eleventh Edition

102. Partners Ana, Beth, and Cathy have capital account balances of $90,000 each. The income
and loss ratio is 5:2:3, respectively. In the process of liquidating the partnership, noncash
assets with a book value of $75,000 are sold for $30,000. The balance of Beth’s Capital
account after the sale is
a. $67,500.
b. $76,500.
c. $81,000.
d. $99,000.
Ans: C, LO: 5, Bloom: AP, Difficulty: Medium, Min: 1, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem
Solving, IMA: Reporting

Solution: $90,000  (.20) ($75,000  $30,000)  $81,000

103. The partners' income and loss sharing ratio is 2:3:5, respectively.
CHENARD, JENNINGS, AND BLAIR PARTNERSHIP
Balance Sheet
December 31, 2014

Assets Liabilities and Owners' Equity

Cash $ 45,000 Liabilities $150,000
Noncash assets 285,000 Chenard, Capital 60,000
Jennings, Capital 90,000
Blair, Capital 30,000
Total $330,000 Total $330,000

If the CHENARD, JENNINGS, and BLAIR Partnership is liquidated by selling the noncash
assets for $195,000 and creditors are paid in full, what is the amount of cash that can be
safely distributed to each partner?
a. CHENARD, $36,000; JENNINGS, $54,000; BLAIR, $0.
b. CHENARD, $42,000; JENNINGS, $63,000; BLAIR, $15,000.
c. CHENARD, $34,500; JENNINGS, $55,500; BLAIR, $0.
d. CHENARD, $33,000; JENNINGS, $57,000; BLAIR, $0.
Ans: A, LO: 5, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem
Solving, IMA: Business Economics

Solution: $60,000  (.2) ($195,000  $285,000)  (25) ($15,000)  $36,000; $90,000  (.3) ($195,000  $285,000)  (35) ($15,000)  $54,000; $30,000 
(.5) ($195,000  $285,000)  $15,000  $0

FOR INSTRUCTOR USE ONLY

 Accounting for Partnerships 12 - 23

104. The partners' income and loss sharing ratio is 2:3:5, respectively.
CHENARD, JENNINGS, AND BLAIR PARTNERSHIP
Balance Sheet
December 31, 2014

Assets Liabilities and Owners' Equity

Cash $ 45,000 Liabilities $150,000
Noncash assets 285,000 CHENARD, Capital 60,000
JENNINGS, Capital 90,000
BLAIR, Capital 30,000
Total $330,000 Total $330,000

If the CHENARD, JENNINGS, and BLAIR Partnership is liquidated by selling the noncash
assets for $375,000, and creditors are paid in full, what is the total amount of cash that
CHENARD will receive in the distribution of cash to partners?
a. $18,000
b. $117,000
c. $78,000
d. $75,000
Ans: C, LO: 5, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem
Solving, IMA: Business Economics

Solution: $60,000  (.2) ($375,000  $285,000)  $78,000

105. The partners' income and loss sharing ratio is 2:3:5, respectively.
CHENARD, JENNINGS, AND BLAIR PARTNERSHIP
Balance Sheet
December 31, 2014

Assets Liabilities and Owners' Equity

Cash $ 45,000 Liabilities $150,000
Noncash assets 285,000 CHENARD, Capital 60,000
JENNINGS, Capital 90,000
BLAIR, Capital 30,000
Total $330,000 Total $330,000

If the CHENARD, JENNINGS, and BLAIR Partnership is liquidated and the noncash assets
are worthless, the creditors will look to what partner's personal assets for settlement of the
creditors' claims?
a. The personal assets of Partner JENNINGS.
b. The personal assets of Partners CHENARD and BLAIR.
c. The personal assets of Partners CHENARD, JENNINGS, and BLAIR.
d. The personal assets of the partners are not available for partnership debts.
Ans: C, LO: 5, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem
Solving, IMA: Business Economics

FOR INSTRUCTOR USE ONLY

12 - 24 Test Bank for Accounting Principles, Eleventh Edition

106. If a partner has a capital deficiency and does not have the personal resources to eliminate it,
a. the creditors will have to absorb the capital deficiency.
b. the other partners will absorb the capital deficiency on the basis of their respective
capital balances.
c. the other partners will have to absorb the capital deficiency on the basis of their
respective income sharing ratios.
d. neither the creditors nor the other partners will have to absorb the capital deficiency.
Ans: C, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA:
Business Economics

107. When a partnership terminates business, the sale of noncash assets is called
a. liquidation.
b. realization.
c. recognition.
d. disposition.
Ans: B, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

108. The liquidation of a partnership

a. cannot be a voluntary act of the partners.
b. terminates the business.
c. eliminates those partners with a capital deficiency.
d. cannot occur unless all partners approve.
Ans: B, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

109. The liquidation of a partnership is a process containing the following steps:

1. Pay partnership liabilities in cash.
2. Allocate the gain or loss on realization to the partners on their income ratios.
3. Sell noncash assets for cash and recognize a gain or loss on realization.
4. Distribute remaining cash to partners on the basis of their remaining capital balances.
Identify the proper sequencing of the steps in the liquidation process.
a. 3, 2, 4, 1.
b. 3, 2, 1, 4.
c. 1, 3, 2, 4.
d. 1, 4, 3, 2.
Ans: B, LO: 5, Bloom: K, Difficulty: Medium, Min: 2, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem
Solving, IMA: Business Economics

110. In the final step of the liquidation process, remaining cash is distributed to partners
a. on an equal basis.
b. on the basis of the income ratios.
c. on the basis of the remaining capital balances.
d. regardless of capital deficiencies.
Ans: C, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

FOR INSTRUCTOR USE ONLY

 Accounting for Partnerships 12 - 25

111. In the liquidation process, if a capital account shows a deficiency

a. the partner with a deficiency has an obligation to the partnership for the amount of the
deficiency.
b. it may be written off to a "Loss" account.
c. it is disregarded until after the partnership books are closed.
d. it can be written off to a "Gain" account.
Ans: A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA:
Business Economics

112. Before distributing any remaining cash to partners in a partnership liquidation, it is

necessary to do each of the following except
a. sell noncash assets for cash.
b. recognize a gain or loss on realization.
c. allocate the gain or loss to the partners based on their capital balances.
d. pay partnership liabilities in cash.
Ans: C, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA:
Business Economics

113. Mandy, Annie, and Tammy formed a partnership with income-sharing ratios of 50%, 30%,
and 20%, respectively. Cash of $300,000 was available after the partnership’s assets were
liquidated. Prior to the final distribution of cash, Mandy’s capital balance was $200,000,
Annie’s capital balance was $150,000, and Tammy had a capital deficiency of $50,000.
Assuming Tammy contributes cash to match her capital deficiency, Mandy should receive
a. $175,000.
b. $168,750.
c. $131,250.
d. $200,000.
Ans: D, LO: 5, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem
Solving, IMA: Business Economics

114. Alex, Bob, and Ciera are partners, sharing income 2:1:2. After selling all of the assets for
cash, dividing gains and losses on realization, and paying liabilities, the balances in the
capital accounts are as follows: Alex, $10,000 Cr; Bob, $10,000 Cr; and Ciera, $30,000 Cr.
How much cash should be distributed to Alex?
a. $6,000
b. $20,000
c. $10,000
d. $16,667
Ans: C, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: Business Economics

115. In liquidation, balances prior to the distribution of cash to the partners are: Cash $900,000;
Peterson, Capital $420,000; Laney, Capital $390,000, and Howell, Capital $90,000. The
income ratio is 6:2:2, respectively. How much cash should be distributed to Peterson?
a. $375,000
b. $408,750
c. $420,000
d. $450,000
Ans: C, LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: Business Economics

FOR INSTRUCTOR USE ONLY

12 - 26 Test Bank for Accounting Principles, Eleventh Edition

116. In liquidation, balances prior to the distribution of cash to the partners are: Cash $765,000;
Peterson, Capital $420,000; Laney, Capital $390,000, and Howell, Capital $45,000
deficiency. The income ratio is 6:2:2, respectively. How much cash should be distributed to
Laney if Howell does not pay his deficiency?
a. $367,000
b. $378,750
c. $356,250
d. $390,000
Ans: B, LO: 5, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem
Solving, IMA: Business Economics

Solution: $390,000  (28) ($45,000)  $378,750

117. In liquidation, balances prior to the distribution of cash to the partners are: Cash $240,000;
Paley, Capital $112,000; Stengel, Capital $104,000, and King, Capital $24,000. The income
ratio is 6:2:2, respectively. How much cash should be distributed to Paley?
a. $100,000
b. $104,000
c. $112,000
d. $120,000
Ans: C, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: Business Economics

118. In liquidation, balances prior to the distribution of cash to the partners are: Cash $204,000;
Paley, Capital $112,000; Stengel, Capital $104,000, and King, Capital $12,000 deficiency.
The income ratio is 6:2:2, respectively. How much cash should be distributed to Stengel if
King does not pay his deficiency?
a. $98,000
b. $101,000
c. $95,000
d. $104,000
Ans: B, LO: 5, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem
Solving, IMA: Business Economics

Solution: $104,000  (28) (12,000)  $101,000

119. Use the following account balance information for Granobfin Partnership with income ratios
of 2:4:4 for Granger, Noble, and Finn, respectively.

Assets Liabilities and Owner’s Equity

Cash $ 54,000 Accounts payable $ 126,000
Accounts Granger, Capital $138,000
receivable 132,000 Noble, Capital 48,000
Inventory 438,000 Finn, Capital 312,000
$624,000 $624,000

Assume that, as part of liquidation proceedings, Granobfin sells its noncash assets for
$510,000. The amount of cash that would ultimately be distributed to Finn would be
a. $312,000.
b. $288,000.
c. $204,000.
d. $516,000.
Ans: B, LO: 5, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem
Solving, IMA: Business Economics

Solution: $312,000  (.4) ($510,000  $132,000  $438,000)  $288,000

FOR INSTRUCTOR USE ONLY

 Accounting for Partnerships 12 - 27

120. Use the following account balance information for Granobfin Partnership with income ratios
of 2:4:4 for Granger, Noble, and Finn, respectively.
Assets Liabilities and Owner’s Equity
Cash $ 54,000 Accounts payable $ 126,000
Accounts Granger, Capital 138,000
receivable 132,000 Noble, Capital 48,000
Inventory 438,000 Finn, Capital 312,000
$624,000 $624,000

Assume that, as part of liquidation proceedings, Granobfin sells its noncash assets for
$360,000. As a result, one of the partners has a capital deficiency which that partner
decides not to repay. The amount of cash that would ultimately be distributed to Finn would
be
a. $312,000.
b. $228,000.
c. $144,000.
d. $204,000.
Ans: D, LO: 5, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem
Solving, IMA: Business Economics

Solution: $312,000  (.4) ($360,000  $132,000  $438,000)  (46) ($36,000)  $204,000

a
121. R. Schoen purchases a 25% interest for $60,000 when the Hise, Poole, Lagos partnership
has total capital of $540,000. Prior to the admission of Schoen, each partner has a capital
balance of $180,000. Each partner relinquishes an equal amount of his capital balance to
Schoen. The amount to be relinquished by Lagos is
a. $30,000.
b. $38,000.
c. $45,000.
d. $75,000.
Ans: A, LO: 6, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem
Solving, IMA: Business Economics

Solution: (.25) ($540,000  60,000)  $60,000  $90,000; $90,0003  $30,000

a
122. Jackson is admitted to a partnership with a 25% capital interest by a cash investment of
$360,000. If total capital of the partnership is $1,560,000 before admitting Jackson, the
bonus to Jackson is
a. $120,000.
b. $60,000.
c. $180,000.
d. $240,000.
Ans: A, LO: 6, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem
Solving, IMA: Business Economics

Solution: (.25) ($1,560,000  $360,000)  $360,000  $120,000

FOR INSTRUCTOR USE ONLY

12 - 28 Test Bank for Accounting Principles, Eleventh Edition
a
123. Elkins and Landry are partners who share income and losses in the ratio of 3:2, respectively.
On August 31, their capital balances were: Elkins, $140,000 and Landry, $120,000. On that
date, they agree to admit Neumark as a partner with a one-third capital interest. If Neumark
invests $100,000 in the partnership, what is Elkins’s capital balance after Neumark’s
admittance?
a. $120,000
b. $126,667
c. $128,000
d. $140,000
Ans: C, LO: 6, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem
Solving, IMA: Business Economics

Solution: (13) ($140,000  $120,000  $100,000)  $120,000; $140,000 - (35) ($120,000  $100,000)  $128,000

a
124. Elkins and Landry are partners who share income and losses in the ratio of 3:2, respectively.
On August 31, their capital balances were: Elkins, $140,000 and Landry, $120,000. On that
date, they agree to admit Neumark as a partner with a one-third capital interest. If Neumark
invests $160,000 in the partnership, what is Landry’s capital balance after Neumark’s
admittance?
a. $140,000
b. $128,000
c. $126,000
d. $120,000
Ans: B, LO: 6, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem
Solving, IMA: Reporting

Solution: (13) ($140,000  $120,000  $160,000)  $140,000; $120,000  (25) ($160,000  $140,000)  $128,000

a
125. Encisco and Ollinger are partners who share profits and losses equally and have capital
balances of $280,000 and $245,000, respectively. Parks is admitted into the partnership by
investing $245,000 for a 30% capital interest. The account balance of Ollinger, Capital after
the admission of Parks would be
a. $231,000.
b. $238,000.
c. $252,000.
d. $245,000.
Ans: C, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem
Solving, IMA: Reporting

Solution: (.30) ($280,000  $245,000  $245,000)  $245,000  $14,000; $245,000  ($14,0002)  $252,000

FOR INSTRUCTOR USE ONLY

 Accounting for Partnerships 12 - 29
a
126. Rogers and Wissinger have partnership capital balances of $576,000 and $432,000,
respectively. Wissinger negotiates to sell his partnership interest to Mergenthaler for
$504,000. Rogers agrees to accept Mergenthaler as a new partner. The partnership entry to
record this transaction is
a. Cash.................................................................................... 504,000
Mergenthaler, Capital.................................................. 504,000
b. Wissinger, Capital................................................................ 504,000
Mergenthaler, Capital.................................................. 504,000
c. Cash.................................................................................... 72,000
Wissinger, Capital................................................................ 432,000
Mergenthaler, Capital.................................................. 504,000
d. Wissinger, Capital................................................................ 432,000
Mergenthaler, Capital.................................................. 432,000
Ans: D, LO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA

a
127. Gable and Devito share partnership profits and losses in the ratio of 6:4. Gable’s Capital
account balance is $160,000 and Devito’s Capital account balance is $100,000. Nance is
admitted to the partnership by investing $180,000 and is to receive a one-fourth ownership
interest. Gable, Devito and Nance’s capital balances after Nance’s investment will be
Gable Devito Nance
a. $160,000 $100,000 $180,000
b. $202,000 $128,000 $110,000
c. $198,000 $132,000 $110,000
d. $195,000 $135,000 $110,000
Ans: B, LO: 6, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem
Solving, IMA: Reporting

Solution: (14) ($160,000  $100,000  $180,000)  $110,000; $160,000  (610) ($180,000  $110,000)  $202,000; $100,000  (410) ($180,000 
$110,000)  $128,000

a
128. Jill and Smita have partnership capital account balances of $1,056,000 and $792,000,
respectively and share profits and losses equally. Sierra is admitted to the partnership by
investing $440,000 for a one-fourth ownership interest. The balance of Smita’s Capital
account after Sierra is admitted is
a. $726,000.
b. $792,000.
c. $858,000.
d. $572,000.
Ans: A, LO: 6, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem
Solving, IMA: Reporting

Solution: (.25) ($1,056,000  $792,000  $440,000)  $572,000; $792,000  (.5) ($440,000  $572,000)  $726,000

a
129. The admission of a new partner to an existing partnership
a. may be accomplished only by investing assets in the partnership.
b. requires purchasing the interest of one or more existing partners.
c. causes a legal dissolution of the existing partnership.
d. is almost always accompanied by the liquidation of the business.
Ans: C, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

FOR INSTRUCTOR USE ONLY

12 - 30 Test Bank for Accounting Principles, Eleventh Edition
a
130. When a partnership interest is purchased
a. every partner’s capital account is affected.
b. the transaction is a personal transaction between the purchaser and the selling
partner(s).
c. the buyer receives equity equal to the amount of cash paid.
d. all partners will receive some part of the purchase price.
Ans: B, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

a
131. Wu and Mannis each sell 1/3 of their partnership interest to Patel, receiving $105,000 each.
At the time of the admission, each partner has a $315,000 capital balance. The entry to
record the admission of Patel will show a
a. debit to Cash for $210,000.
b. credit to Patel, Capital for $315,000.
c. debit to Mannis, Capital for $315,000.
d. debit to Wu, Capital for $105,000.
Ans: D, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA

Solution: (2  $315,000)3  $210,000; $315,000  $210,000  $105,000

a
132. Bingham and Ecuyer sell 1/4 of their partnership interest to Ives receiving $600,000 each.
At the time of admission, Bingham and Ecuyer each had a $1,050,000 capital balance. The
admission of Ives will cause the net partnership assets to
a. increase by $1,200,000.
b. remain at $2,100,000.
c. decrease by $1,200,000.
d. remain at $3,300,000.
Ans: B, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA

Solution: (2) ($1,050,000)  $2,100,000

a
133. Faget and Hein sell to Melges a 1/3 interest in the Faget - Hein partnership. Melges will pay
Faget and Hein each $140,000 for admission into the organization. Before this transaction, Faget
and Hein show capital balances of $210,000 each. The journal entry to record the admission
of Melges will
a. show a debit to Cash for $280,000.
b. not show a debit to Cash.
c. show a debit to Hein, Capital for $140,000.
d. show a credit to Melges, Capital for $280,000.
Ans: B, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA

a
134. Letourneau invests $20,000 in cash (admission by investment) in the Seiler-Shaw
partnership to acquire a 1/4 interest. In this case
a. the accounting will be the same as a purchase of an interest.
b. the total net assets of the new partnership are unchanged from the previous partnership.
c. the total capital of the new partnership is greater than the total capital of the old
partnership.
d. Letourneau’s income ratio will automatically be 1/4.
Ans: C, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

FOR INSTRUCTOR USE ONLY

 Accounting for Partnerships 12 - 31
a
135. Which of the following is correct when admitting a new partner into an existing partnership?
Purchase of an Interest Admission by Investment
a. Total net assets unchanged unchanged
b. Total capital increased unchanged
c. Total net assets unchanged increased
d. Total capital unchanged unchanged
Ans: C, LO: 6, Bloom: C, Difficulty: Easy, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA:
Business Economics

a
136. When admitting a new partner by investment, a bonus to old partners
a. is usually unjustified because book values clearly reflect partnership net worth.
b. is sometimes justified because goodwill may exist and it is not reflected in the accounts.
c. results if the debit to cash is less than the new partner's capital credit.
d. results if the debit to cash is equal to the new partner's capital credit.
Ans: B, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA:
Business Economics

a
137. When admitting a new partner by investment, a bonus to old partners is allocated on
a. the basis of capital balances.
b. the basis of the original investment of the old partners.
c. the basis of income ratios before the admission of the new partner.
d. a seniority basis.
Ans: C, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA:
Business Economics

a
138. A bonus to a new partner
a. is prohibited by GAAP.
b. results when the new partner's capital credit is less than his or her investment of assets
in the firm.
c. may occur when recorded book values are lower than market values.
d. results when the new partner's capital credit is greater than his or her investment of
assets in the firm.
Ans: D, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA:
Business Economics

a
139. A bonus to a new partner will
a. increase the capital balances of existing partners based on their income ratios before the
admission of the new partner.
b. increase the capital balances of existing partners based on their income ratios after the
admission of the new partner.
c. decrease the capital balances of existing partners based on their income ratios before
the admission of the new partner.
d. decrease the capital balances of existing partners based on their capital balances before
the admission of the new partner.
Ans: C, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA:
Business Economics

FOR INSTRUCTOR USE ONLY

12 - 32 Test Bank for Accounting Principles, Eleventh Edition
a
140. On November 30, capital balances are Forsyth $720,000, Lagassi $600,000 and Kelly
$600,000. The income ratios are 20%, 20% and 60% respectively. Forsytha decides to retire
from the partnership. The partnership pays Forsyth $600,000 cash for her partnership
interest. After Forsyth’s retirement, what is the balance of Kelly’s capital account?
a. $528,000
b. $600,000
c. $672,000
d. $690,000
Ans: D, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem
Solving, IMA: Reporting

a
141. On November 30, capital balances are Forsytha $720,000, Lagassi $600,000 and Kelly
$600,000. The income ratios are 20%, 20% and 60% respectively. Forsytha decides to retire
from the partnership. In order for Lagassi and Kelly to have equal capital interests after the
retirement of Forsyth, how much partnership cash would have to be paid to Forsytha for her
partnership interest?
a. $0.
b. $640,000
c. $720,000
d. Any amount paid to Forsyth will cause Lagassi and Kelly to still have equal capital
balances.
Ans: C, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: Business Economics

a
142. Dawn, Garret and Josh have partnership capital account balances of $225,000, $450,000
and $105,000, respectively. The income sharing ratio is Dawn, 50%; Garret, 40%; and Josh,
10%. Dawn desires to withdraw from the partnership and it is agreed that partnership assets
of $195,000 will be used to pay Dawn for her partnership interest. The balances of Garret’s
and Josh’s Capital accounts after Dawn’s withdrawal would be
a. Garret, $450,000; Josh, $105,000.
b. Garret, $474,000; Josh, $111,000.
c. Garret, $426,000; Josh, $99,000.
d. Garret, $435,000; Josh, $90,000.
Ans: B, LO: 7, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem
Solving, IMA: Reporting

Solution: $225,000  $195,000  $30,000; $450,000  (45) ($30,000)  $474,000; $105,000  (15) ($30,000)  $111,000

FOR INSTRUCTOR USE ONLY

 Accounting for Partnerships 12 - 33
a
143. Able Baker, and Carter have partnership capital account balances of $600,000 each.
Income and losses are shared equally. Carter agrees to sell three-fourths of his ownership
interest to Able for $525,000 and one-fourth to Baker for $187,500. Able and Baker will use
personal assets to purchase Carter’s interest. The partnership's entry to record Carter’s
withdrawal from the partnership would be
a. Carter, Capital ..................................................................... 712,500
Cash .......................................................................... 712,500
b. Carter, Capital ..................................................................... 712,500
Able, Capital ............................................................... 350,000
Baker, Capital ............................................................. 125,000
c. Carter, Capital ..................................................................... 600,000
Able, Capital ............................................................... 450,000
Baker, Capital ............................................................. 150,000
d. Able, Capital ....................................................................... 534,375
Baker, Capital ..................................................................... 178,125
Carter, Capital ........................................................... 712,500
Ans: C, LO: 7, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA

Solution: $600,000  .25  $150,000; $600,000  .75  $450,000

a
144. When a partner withdraws from the firm, which of the following reflects the correct
partnership effects?
Payment from Payment from
Partners' Personal Assets Partnership Assets
a. Total net assets decreased decreased
b. Total capital decreased decreased
c. Total net assets unchanged decreased
d. Total capital unchanged unchanged
Ans: C, LO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA:
Business Economics

a
145. Which of the following is not a necessary action that the partnership must take upon the
death of a partner?
a. Determine the net income or net loss for the year to date.
b. Discontinue business operations.
c. Close the books.
d. Prepare financial statements.
Ans: B, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA:
Business Economics

a
146. On November 30, capital balances are Roses $300,000, Ellis $250,00 and Gise $250,000.
The income ratios are 20%, 20% and 60%, respectively. Roses decides to retire from the
partnership. The partnership pays Roses $350,000 cash for her partnership interest. After
Rose’s retirement, what is the balance of Ellis’s capital account?
a. $237,500
b. $240,000
c. $250,000
d. $325,000
Ans: A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem
Solving, IMA: Reporting

Solution: $250,000 + (28) ($300,000  $350,000)  $237,500

FOR INSTRUCTOR USE ONLY

12 - 34 Test Bank for Accounting Principles, Eleventh Edition
a
147. On November 30, capital balances are Ross $300,000, Ellis $250,000 and Gise $250,000.
The income ratios are 20%, 20% and 60%, respectively. Ross decides to retire from the
partnership. The partnership pays Ross $250,000 cash for her partnership interest. After
Ross’s retirement, what is the balance of Gise’s capital account?
a. $220,000
b. $250,000
c. $280,000
d. $287,500
Ans: D, LO: 7, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: Business Economics

Solution: $250,000 + (68) ($300,000  $250,000)  $287,500

a
148. On November 30, capital balances are Ross $300,000, Ellis $250,000 and Gise $250,000.
The income ratios are 20%, 20% and 60%, respectively. Ross decides to retire from the
partnership. In order for Ellis and Gise to have equal capital interests after the retirement of
Ross, how much partnership cash would have to be paid to Ross for her partnership
interest?
a. $0
b. $266,667
c. $300,000
d. Any amount paid to Ross will cause Ellis and Gise to still have equal capital balances.
Ans: C, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: Business Economics

149. All of the following are characteristics of partnerships except

a. co-ownership of property.
b. mutual agency.
c. unlimited life.
d. association of individuals.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

150. The Gorni, Chambers, and Hale partnership is terminated when the claims of company
creditors exceed partnership assets by $100,000. The capital balances for Gorni, Chambers,
and Hale are $70,000, $10,000, and $0, respectively. The original claims of the creditors
were negotiated by Chambers and Hale. Which partner(s) is(are) personally and individually
liable for all partnership liabilities?
a. Gorni
b. Chambers
c. Chambers and Hale
d. Gorni, Chambers, and Hale
Ans: D, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA:
Business Economics

151. When a partner invests noncash assets in a partnership, the assets should be recorded at
their
a. book value.
b. carrying value.
c. fair value.
d. original cost.
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA:
Business Economics

FOR INSTRUCTOR USE ONLY

 Accounting for Partnerships 12 - 35

152. The partnership agreement of Ashford and Cohen provides for salary allowances of $90,000
to Ashford and $70,000 to Cohen, with the remaining income or loss to be divided equally.
During the year, Ashford and Cohen each withdraw cash equal to 80% of their salary
allowances. If partnership net income is $200,000, Ashford’s equity in the partnership would
a. increase more than Cohen’s.
b. decrease more than Cohen’s.
c. increase the same as Cohen’s.
d. decrease the same as Cohen’s.
Ans: A, LO: 3, Bloom: C, Difficulty: Medium, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem
Solving, IMA: Reporting

153. Which of the following statements is correct?

a. Salaries to partners and interest on partners' capital are expenses of the partnership.
b. Salaries to partners are expenses of the partnership but not interest on partners' capital.
c. Interest on partners' capital is an expense of the partnership but not salaries to partners.
d. Neither salaries to partners nor interest on partners' capital are expenses of the
partnership.
Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Reporting

154. In the liquidation of a partnership, the gains and losses from assets sold are
a. divided equally among the partners.
b. divided among the partners in the stated income ratio.
c. divided among the partners in proportion to their capital equity interests.
d. ignored.
Ans: B, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA:
Business Economics

155. If a partner with a capital deficiency is unable to pay the amount owed to the partnership, the
deficiency is allocated to the partners with credit balances
a. equally.
b. on the basis of their income ratios.
c. on the basis of their capital balances.
d. on the basis of their original investments.
Ans: B, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA:
Business Economics

156. An entry is not required in the liquidation of a partnership to record the

a. payment of cash to creditors.
b. distribution of cash to the partners.
c. sale of noncash assets.
d. allocation of a capital deficiency to partners with credit balances when the deficient
partner is expected to pay the deficiency.
Ans: D, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA:
Business Economics

FOR INSTRUCTOR USE ONLY

12 - 36 Test Bank for Accounting Principles, Eleventh Edition

157. The first step in the liquidation of a partnership is to

a. allocate a gain or loss on realization to the partners.
b. distribute remaining cash to the partners.
c. pay partnership liabilities.
d. sell noncash assets and recognize a gain or loss on realization.
Ans: D, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA:
Business Economics

158. Leno joins the partnership of Kingsley and Mccaffrey by paying $95,000 in cash. If the net
assets of the partnership are still the same amount after Leno has been admitted as a
partner, then Leno
a. must have been admitted by investment of assets.
b. must have been admitted by purchase of a partner's interest.
c. must have received a bonus upon being admitted.
d. could have been admitted by an investment of assets or by a purchase of a partner's
interest.
Ans: B, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Reporting

159. Motts is admitted to a partnership with a 25% capital interest by a cash investment of
$90,000. If total capital of the partnership is $390,000 before admitting Motts, the bonus to
Mock is
a. $30,000.
b. $15,000.
c. $45,000.
d. $60,000.
Ans: A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: Quantitive Methods

Solution: (.25) ($390,000  $90,000)  $90,000  $30,000

Answers to Multiple Choice Questions

Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.
a a
38. b 56. d 74. a 92. c 110. c 128. a 146. a
a a
39. c 57. b 75. b 93. d 111. a 129. c 147. d
a a
40. a 58. d 76. b 94. b 112. c 130. b 148. c
a
41. c 59. c 77. c 95. c 113. d 131. d 149. c
a
42. d 60. a 78. c 96. d 114. c 132. b 150. d
a
43. c 61. c 79. b 97. a 115. c 133. b 151. c
a
44. c 62. b 80. b 98. b 116. b 134. c 152. a
a
45. c 63. b 81. d 99. c 117. c 135. c 153. d
a
46. b 64. a 82. c 100. c 118. b 136. b 154. b
a
47. d 65. c 83. d 101. a 119. b 137. c 155. b
a
48. c 66. b 84. b 102. c 120. d 138. d 156. d
a a
49. b 67. d 85. d 103. a 121. a 139. c 157. d
a a a
50. c 68. d 86. c 104. c 122. a 140. d 158. b
a a a
51. a 69. b 87. c 105. c 123. c 141. c 159. a
a a
52. b 70. b 88. d 106. c 124. b 142. b
a a
53. c 71. c 89. a 107. b 125. c 143. c
a a
54. a 72. b 90. b 108. b 126. d 144. c
a a
55. c 73. b 91. a 109. b 127. b 145. b

FOR INSTRUCTOR USE ONLY

 Accounting for Partnerships 12 - 37

BRIEF EXERCISES
BE 160
Draper and Becker decide to organize a partnership. Draper invests $25,000 cash, and Becker
contributes $5,000 and equipment having a book value of $7,000 and a fair value of $15,000.

Instructions
Prepare the entry to record each partner’s investment.
Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA

Solution 160 (5 min.)

Cash……...…………............................................................................. 25,000
Draper, Capital…………………………………………………………. 25,000

Cash…………………............................................................................. 5,000
Equipment……………........................................................................... 15,000
Becker, Capital…........................................................................... 20,000

BE 161
Sonoma Company and Woodberry Company decide to merge their proprietorships into a
partnership called Sonberry Company. The balance sheet of Woodberry Company shows:
Accounts Receivable $18,000
Less: Allowance for doubtful accounts 1,500 $16,500

Equipment $20,000
Less: Accumulated depreciation 10,000 $10,000

The partners agree that the net realizable value of the receivables is $16,000 and that the fair value
of the equipment is $15,000.

Instructions
Indicate how the four accounts should appear in the opening balance sheet of the partnership.
Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Problem Solving, IMA: Reporting

FOR INSTRUCTOR USE ONLY

12 - 38 Test Bank for Accounting Principles, Eleventh Edition

Solution 161 (4 min.)

SONBERRY COMPANY
Balance Sheet (partial)
Assets
Accounts Receivable $18,000
Less: Allowance for Doubtful Accounts 2,000 $16,000
Equipment 15,000

BE 162
The Fig & Olive Co. reports net income of $24,000. Interest allowances are Fig $3,000 and Olive
$5,000; partner salary allowances are Fig $18,000 and Olive $10,000 and the remainder is shared
equally.

Instructions
Indicate the division of net income to each partner, and prepare the entry to distribute the net
income.
Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA

Solution 162 (6 min.)

Division of Net Income
Fig Olive Total
Salary allowance $18,000 $10,000 $28,000
Interest allowance on partners’ capital 3,000 5,000 8,000
Total salaries and interest 21,000 15,000 36,000
Remaining income, ($12,000) ($24,000 – $36,000)
Fig ($12,000 × 50%) (6,000)
Olive ($12,000 × 50%) (6,000)
Total remainder (12,000)
Total division of net income $15,000 $ 9,000 $24,000
The entry to record the division of net income is:

Income Summary............................................................................ 24,000

Fig, Capital............................................................................. 15,000
Olive, Capital.......................................................................... 9,000

BE 163
Southern Skies Co. had beginning capital balances on January 1, 2014, as follows: Patty Sharp
$30,000 and Jim O’Connor $25,000. During the year, drawings were Sharp $15,000 and O’Connor
$8,000. Net income was $40,000, and the partners share income equally.

Instructions
Prepare the partners’ capital statement for the year.
Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Problem Solving, IMA: Reporting

FOR INSTRUCTOR USE ONLY

 Accounting for Partnerships 12 - 39

Solution 163 (4 min.)

SOUTHERN SKIES COMPANY

Partners’ Capital Statement

Sharp O’Connor Total

Beginning Capital $30,000 $25,000 $55,000
Add: Net Income 20,000 20,000 40,000
50,000 45,000 95,000
Less: Drawings 15,000 8,000 23,000
Ending Capital $35,000 $37,000 $72,000

BE 164
After liquidating noncash assets and paying creditors, account balances in the Main Co. are Cash
$29,000, Art, Capital (Cr.) $11,000, Bob, Capital (Cr,) $8,000 and Cam, Capital (Cr.) $10,000. The
partners share income equally.

Instructions
Journalize the final distribution of cash to the partners.
Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA

Solution 164 (4 min.)

Art, Capital............................................................................................ 11,000
Bob, Capital........................................................................................... 8,000
Cam, Capital......................................................................................... 10,000
Cash....................................................................................... 29,000

BE 165
Appalachian Company at December 31 has cash $40,000, noncash assets $200,000, liabilities
$110,000, and the following capital balances: Hoffman $90,000 and Mena $40,000. The firm is
liquidated, and $220,000 in cash is received for the noncash assets. Hoffman and Mena income
ratios are 60% and 40%, respectively.

Instructions
Prepare a cash distribution schedule.
Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Problem Solving, IMA: Reporting

FOR INSTRUCTOR USE ONLY

12 - 40 Test Bank for Accounting Principles, Eleventh Edition

Solution 165 (5 min.)

APPALACHIAN COMPANY
Schedule of Cash Payments
Noncash Hoffman Mena
Cash + Assets = Liabilities + Capital + Capital
Balances before
Liquidation $ 40,000 $200,000 $110,000 $ 90,000 $40,000
Sale of noncash assets
and allocation of losses 220,000 (200,000) 12,000 8,000
New balances 260,000 -0- 110,000 102,000 48,000
Pay liabilities (110,000) _____ (110,000)
New balances 150,000 -0- -0- 102,000 48,000

Cash distribution $150,000 $ -0- $ -0- $102,000 $48,000

a
BE 166
In BigEasy Co., capital balances are Adrienne $60,000 and Dino $75,000. The partners share
income equally. Javier is admitted to the firm with a 40% interest by an investment of cash of
$85,000. Journalize the admission of Javier.
Ans: N/A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA

a
Solution 166 (3 min.)
Cash...................................................................................................... 85,000
Adrienne, Capital (50% × $3,000*)........................................................ 1,500
Dino, Capital (50% × $3,000*)............................................................... 1,500
Javier, Capital (40% × $220,000)............................................... 88,000
*[(60,000 + $75,000 + $85,000) × 40%] – $85,000 = $3,000.
a
BE 167
Thao and Leslie are partners who share profits 60% and 40%. Their capital balances were both
$120,000 before Kiley was admitted to the partnership. Kiley contributed $160,000 in cash to the
partnership for a 30% interest.

Instructions
Compute the capital balances of Thao and Leslie after Kiley is admitted to the partnership.
Ans: N/A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Problem Solving, IMA: Reporting

a
Solution 167 (4 min.)
Thao’s capital balance: $120,000 + {$160,000 – [($240,000 + $160,000) × .30]} × .60 = $144,000

Leslie’s capital balance: $120,000 + {$160,000 – [($240,000 + $160,000) ×.30]} × .40 = $136,000

FOR INSTRUCTOR USE ONLY

 Accounting for Partnerships 12 - 41
a
BE 168
Capital balances in Carson Co. are Dene $50,000, Aneta $38,000, and Harriet $25,000. The
partners share income equally. Harriet receives $31,000 from partnership assets in withdrawing
from the firm.

Instructions
Journalize the withdrawal of Harriet.
Ans: N/A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA

a
Solution 168 (3 min.)
Harriet, Capital...................................................................................... 25,000
Dene, Capital (50% × $6,000)............................................................... 3,000
Aneta, Capital (50% × $6,000).............................................................. 3,000
Cash............................................................................................. 31,000
a
BE 169
Rich, Tracy, and Mark are partners who share profits 40%, 20%, and 40%. Their capital balances
were $630,000, $420,000, and $210,000, respectively, before Mark’s retirement. Mark was paid
$240,000 from partnership assets to buy his interest.

Instructions
Compute the capital balances of Rich and Tracy after Mark has withdrawn.
Ans: N/A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Problem Solving, IMA: Reporting

a
Solution 169 (4 min.)
Rich’s capital balance: $630,000 – [($240,000 – $210,000) X 40/60] = $610,000

Tracy’s capital balance: $420,000 – [($240,000 – $210,000) X 20/60] = $410,000

EXERCISES
Ex. 170
Michelle Hamilton and Bill Rossi decide to form a partnership. Hamilton invests $35,000 cash and
accounts receivable of $30,000 less allowance for doubtful accounts of $2,000. Rossi contributes
$25,000 cash and equipment having a $6,000 book value. It is agreed that the allowance account
should be $3,000 and the fair value of the equipment is $10,000.
Instructions
Prepare the necessary journal entry to record the formation of the partnership.
Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA

FOR INSTRUCTOR USE ONLY

12 - 42 Test Bank for Accounting Principles, Eleventh Edition

Solution 170 (6 min.)

Cash ($35,000 + $25,000).................................................................... 60,000
Accounts Receivable............................................................................. 30,000
Equipment............................................................................................. 10,000
Allowance for Doubtful Accounts.................................................. 3,000
Hamiltion, Capital ($35,000 + $30,000 – $3,000)......................... 62,000
Rossi, Capital ($25,000 + $10,000).............................................. 35,000

Ex. 171
Ron Marden and Tip Baker operate separate auto repair shops. On January 1, 2014, they decide to
combine their separate businesses which were operated as proprietorships to form M & B Auto
Repair, a partnership. Information from their separate balance sheets is presented below:
Marden Auto Repair Baker Auto Repair
Cash $10,000 $14,000
Accounts receivable 12,000 10,000
Allowance for doubtful accounts 1,000 500
Accounts payable 5,000 6,000
Notes payable — 3,000
Salaries and wages payable 1,000 1,500
Equipment 12,000 24,000
Accumulated depreciation—equipment 2,000 4,000

It is agreed that the expected realizable value of Marden’s accounts receivable is $11,000 and
Baker’s receivables is $7,000. The fair value of Marden’s equipment is $13,000 and the value of
Baker’s equipment is $20,000. It is further agreed that the new partnership will assume all liabilities
of the proprietorships with the exception of the notes payable on Baker’s balance sheet which he
will pay himself.
Instructions
Prepare the journal entries necessary to record the formation of the partnership.
Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA

Solution 171 (15 min.)

Cash...................................................................................................... 10,000
Accounts Receivable............................................................................. 12,000
Equipment............................................................................................. 13,000
Allowance for Doubtful Accounts.................................................. 1,000
Salaries and Wages Payable........................................................ 1,000
Accounts Payable......................................................................... 5,000
R. Marden, Capital........................................................................ 28,000
(To record R. Marden’s investment)

Cash...................................................................................................... 14,000
Accounts Receivable............................................................................. 10,000
Equipment............................................................................................. 20,000
Allowance for Doubtful Accounts.................................................. 3,000
Salaries and Wages Payable........................................................ 1,500
Accounts Payable......................................................................... 6,000
T. Baker, Capital........................................................................... 33,500
(To record Baker’s investment)

FOR INSTRUCTOR USE ONLY

 Accounting for Partnerships 12 - 43

Ex. 172
A. Wiggins, L. Stokes, and K. Hayes are forming a partnership. Wiggins is transferring $75,000 of
personal cash to the partnership. Stokes owns land worth $25,000 and a small building worth
$120,000, which she transfers to the partnership. Hayes transfers to the partnership cash of
$14,000, accounts receivable of $48,000 and equipment worth $28,000. The partnership expects to
collect $45,000 of the accounts receivable.

Instructions
(a) Prepare the journal entries to record each of the partners’ investments.
(b) What amount would be reported as total owners’ equity immediately after the investments?
Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA

Solution 172 (10 min.)

(a) Cash ............................................................................................ 75,000
Wiggins, Capital................................................................... 75,000

Land ............................................................................................ 25,000

Building........................................................................................ 120,000
Stokes, Capital..................................................................... 145,000

Cash ............................................................................................ 14,000

Accounts Receivable.................................................................... 48,000
Equipment.................................................................................... 28,000
Allowance for Doubtful Accounts.......................................... 3,000
Hayes, Capital..................................................................... 87,000

(b) $75,000 + $145,000 + $87,000 = $307,000

Ex. 173
S. Pellah (beginning capital, $80,000) and M. Berry (beginning capital $120,000) are partners.
During 2014 the partnership earned net income of $90,000, and Pellah made drawings of $24,000
while Berry made drawings of $32,000.

Instructions
(a) Assume the partnership income-sharing agreement calls for income to be divided 40% to Pellah
and 60% to Berry. Prepare the journal entry to record the allocation of net income.
(b) Assume the partnership income-sharing agreement calls for income to be divided with a salary
of $40,000 to Pellah and $35,000 to Berry, with the remainder divided 40% to Pellah and 60% to
Berry. Prepare the journal entry to record the allocation of net income.
(c) Assume the partnership income-sharing agreement calls for income to be divided with a salary
of $50,000 to Pellah and $45,000 to Berry, interest of 10% on beginning capital, and the
remainder divided 50%-50%. Prepare the journal entry to record the allocation of net income.
(d) Compute the partners’ ending capital balances under the assumption in part (c).
Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA

FOR INSTRUCTOR USE ONLY

12 - 44 Test Bank for Accounting Principles, Eleventh Edition

Solution 173 (15 min.)

(a) Income Summary......................................................................... 90,000
Pellah, Capital ($90,000 X 40%)......................................... 36,000
Berry, Capital ($90,000 X 60%)........................................... 54,000

(b) Income Summary......................................................................... 90,000

Pellah, Capital [$40,000 + ($15,000 X 40%)].................... 46,000
Berry, Capital [$35,000 + ($15,000 X 60%)]..................... 44,000

(c) Income Summary......................................................................... 90,000

Pellah, Capital..................................................................... 45,500
Berry, Capital...................................................................... 44,500

Pellah: [$50,000 + $8,000 – ($25,000 X 50%)]

Berry: [$45,000 + $12,000 – ($25,000 X 50%)]

(d) Pellah: $80,000 + $45,500 – $24,000 = $101,500

Berry: $120,000 + $44,500 – $32,000 = $132,500

Ex. 174
The Jamison and Stephens partnership reports net income of $50,000. Partner salary allowances
are Jamison $18,000 and Stephens $12,000. Any remaining income is shared 60:40.

Instructions
Determine the amount of net income allocated to each partner.
Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: Quantitive Methods

Solution 174 (5 min.)

Jamison Stephens Total
Salary allowance $18,000 $12,000 $30,000
Remaining income, $15,000
Jamison ($20,000 × 60%) 12,000
Stephenss ($20,000 × 40%) 8,000 20,000
Total division $30,000 $20,000 $50,000

Ex. 175
Ando, Dadd, and Porter formed a partnership on January 1, 2014. Ando invested $60,000, Dadd
$60,000 and Porter $140,000. Ando will manage the store and work 40 hours per week in the store.
Dadd will work 20 hours per week in the store, and Porter will not work. Each partner withdrew 40
percent of his income distribution during 2014. If there was no income distribution to a partner, there
were no withdrawals of cash.
Instructions
Compute the partners' capital balances at the end of 2014 under the following independent
conditions: (Hint: Use T accounts to determine each partner's capital balances.)

FOR INSTRUCTOR USE ONLY

 Accounting for Partnerships 12 - 45

Ex. 175 (Cont.)

(1) Net income is $120,000 and the income ratio is Ando 40%, Dadd 35%, and Porter 25%.
(2) Net income is $125,000 and the partnership agreement only specifies a salary of $50,000 to
Ando and $30,000 to Dadd.
(3) Net income is $76,000 and the partnership agreement provides for (a) a salary of $40,000 to
Ando and $40,000 to Dadd, (b) interest on beginning capital balances at the rate of 10%, and
(c) any remaining income or loss is to be shared by Ando 40%, Dadd 35%, and Porter 25%.
Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Problem Solving, IMA: Reporting

Solution 175 (15 min.)

(1)
Ando, Capital Dadd, Capital Porter, Capital
19,200 60,000 16,800 60,000 12,000 140,000
48,000 42,000 30,000
88,800 85,200 158,000

Net Income % Distribution % Drawings

Ando $120,000 × 40 $ 48,000 × 40 $19,200
Dadd 120,000 × 35 42,000 × 40 16,800
Porter 120,000 × 25 30,000 × 40 12,000
$120,000 $48,000

(2)
Ando, Capital Dadd, Capital Porter, Capital
26,000 60,000 18,000 60,000 6,000 140,000
65,000 45,000 15,000
99,000 87,000 149,000

Ando Dadd Porter Total

Salary $50,000 $30,000 $ 0 $ 80,000
Remainder 15,000 15,000 15,000 45,000
Total $65,000 $45,000 $15,000 $125,000
× 40% = Drawings $26,000 $18,000 $ 6,000 $ 50,000

(3)
Ando, Capital Dadd, Capital Porter, Capital
13,600 60,000 14,200 60,000 2,600 140,000
34,000 35,500 6,500
80,400 81,300 143,900

Ando Dadd Porter Total

Salary $40,000 $40,000 $ 0 $80,000
Interest 6,000 6,000 14,000 26,000
Remainder ($30,000) (12,000) (10,500) (7,500) (30,000)
Total $34,000 $35,500 $ 6,500 $76,000
× 40% = Drawings $13,600 $14,200 $ 2,600 $30,400

FOR INSTRUCTOR USE ONLY

12 - 46 Test Bank for Accounting Principles, Eleventh Edition

Ex. 176
Carraway and Boos have a partnership agreement which includes the following provisions
regarding sharing net income or net loss:
1. A salary allowance of $48,000 to Carraway and $36,000 to Boos.
2. An interest allowance of 10% on capital balances at the beginning of the year.
3. The remainder to be divided 60% to Carraway and 40% to Boos.
The capital balance on January 1, 2014, for Carraway and Boos was $90,000 and $120,000,
respectively. During 2014, the Carraway and Boos Partnership had sales of $495,000, cost of
goods sold of $290,000, and operating expenses of $85,000.
Instructions
Prepare an income statement for the Carraway and Boos Partnership for the year ended December
31, 2014. As a part of the income statement, include a Division of Net Income to each of the
partners.
Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Problem Solving, IMA: Reporting

Solution 176 (15 min.)

CARRAWAY AND BOOS PARTNERSHIP
Income Statement
For the Year Ended December 31, 2014
Sales revenue......................................................................................................... $495,000
Cost of goods sold.................................................................................................. 290,000
Gross profit............................................................................................................. 205,000
Operating expenses............................................................................................... 85,000
Net income ............................................................................................................ $120,000

Division of Net Income

Carraway Boos Total

Salary allowance $48,000 $36,000 $ 84,000
Interest allowance
($90,000 × 10%) 9,000
($120,000 × 10%) 12,000
Total interest 21,000
Total salaries and interest 57,000 48,000 105,000
Remaining income, $15,000
Carraway ($15,000 × 60%) 9,000
Boosr ($15,000 × 40%) 6,000
Total remainder 15,000
Total division $66,000 $54,000 $120,000

FOR INSTRUCTOR USE ONLY

 Accounting for Partnerships 12 - 47

Ex. 177
Barr & Eglin Co. reports net income of $42,000. The partnership agreement provides for annual
salaries of $24,000 for Barr and $18,000 for Eglin and interest allowances of $4,000 to Barr and
$6,000 to Eglin. Any remaining income or loss is to be shared 70% by Barr and 30% by Eglin.

Instructions
Compute the amount of net income distributed to each partner.
Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Problem Solving, IMA: Reporting

Solution 177 (8 min.)

Barr Eglin Total
Salary allowance $24,000 $18,000 $42,000
Interest allowance 4,000 6,000 10,000
Total salaries and interest 28,000 24,000 52,000
Remaining deficiency ($10,000)
Barr ($10,000 × 70%) (7,000)
Eglin ($10,000 × 30%) (3,000) (10,000)
Total division $21,000 $21,000 $42,000

Ex. 178
The adjusted trial balance of the Ricci and Napoli Partnership for the year ended December 31,
2014, appears below:
RICCI AND NAPOLI PARTNERSHIP
Adjusted Trial Balance
December 31, 2014
Debit Credit
Current Assets....................................................................................... 19,000
Plant Assets.......................................................................................... 80,000
Current Liabilities.................................................................................. 7,000
Long-term Debt..................................................................................... 40,000
Ricci, Capital......................................................................................... 20,000
Ricci, Drawings..................................................................................... 4,000
Napoli, Capital....................................................................................... 18,000
Napoli , Drawings.................................................................................. 7,000
Sales Revenue...................................................................................... 110,000
Cost of Goods Sold............................................................................... 62,000
Operating Expenses.............................................................................. 23,000
195,000 195,000

The partnership agreement stipulates that a division of partnership net income or net loss is to be
made as follows:
1. A salary allowance of $12,000 to Ricci and $23,000 to Napoli.
2. The remainder is to be divided equally.

FOR INSTRUCTOR USE ONLY

12 - 48 Test Bank for Accounting Principles, Eleventh Edition

Ex. 178 (Cont.)

Instructions
(a) Prepare a schedule which shows the division of net income to each partner.
(b) Prepare the closing entries for the division of net income and for the drawings accounts at
December 31, 2014.
Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Problem Solving, IMA: Reporting

Solution 178 (15 min.)

(a) Schedule for Division of Net Income
Sales Revenue $110,000
Cost of goods sold 62,000
Gross profit 48,000
Operating expenses 23,000
Net income $ 25,000

Ricci Napolini Total

Salary allowance $12,000 $23,000 $35,000
Remaining deficiency, ($10,000)
Ricci ($10,000) × 50% (5,000)
Napoli ($10,000) × 50% (5,000)
Total remainder (10,000)
Total division $ 7,000 $18,000 $25,000

(b) Dec. 31 Income Summary........................................................ 25,000

Ricci, Capital........................................................ 7,000
Napoli, Capital..................................................... 18,000
(To close net income to capital)

31 Ricci, Capital............................................................... 4,000

Napoli, Capital............................................................. 7,000
Ricci, Drawings.................................................... 4,000
Napoli, Drawings.................................................. 7,000
(To close drawing accounts to capital)

Ex. 179
Juanita Gomez and Brandi Toomey have formed the GT Partnership, and have capital balances of
$130,000 and $100,000, respectively, on January 1, 2014. On June 1, 2014, Toomey invested an
additional $30,000. Also during the year, Gomez withdrew $60,000 and Toomey withdrew $48,000.
Sales for the year amounted to $360,000 and expenses were $240,000. Gomez and Toomey share
income and losses on a 3:1 basis.

Instructions
(a) Prepare the closing entries at December 31, 2014, for the GT Partnership.
(b) Prepare a partners' capital statement for 2014.
Ans: N/A, LO: 3,4, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA

FOR INSTRUCTOR USE ONLY

 Accounting for Partnerships 12 - 49

Solution 179 (15 min.)

(a) Sales Revenue............................................................................. 360,000
Expenses............................................................................. 240,000
Income Summary................................................................. 120,000

Income Summary......................................................................... 120,000

Gomez, Capital ($120,000 × 75%)....................................... 90,000
Tooney, Capital ($120,000 × 25%)...................................... 30,000

Gomez, Capital............................................................................. 60,000

Toomey, Capital............................................................................ 48,000
Gomez, Drawings................................................................ 60,000
Toomey, Drawings............................................................... 48,000

(b) GT Partnership
Partners' Capital Statement
For the Year Ended December 31, 2014

Gomez Toomey Totals

Capital, January 1, 2014 $130,000 $100,000 $230,000
Add: Additional Investment 30,000 30,000
Net Income 90,000 30,000 120,000
220,000 160,000 380,000
Less: Drawings 60,000 48,000 108,000
Capital, December 31, 2014 $160,000 $112,000 $272,000

Ex. 180
Actor, Brees, and Cotswald are forming The ABC Partnership. Actor is transferring $40,000 of
personal cash and equipment worth $38,000 to the partnership. Brees owns land worth $27,000
and a small building worth $112,000, which he transfers to the partnership. There is a long-term
mortgage of $40,000 on the land and building, which the partnership assumes. Cotswald transfers
cash of $10,000, accounts receivable of $54,000, supplies worth $5,000, and equipment worth
$28,000 to the partnership. The partnership expects to collect $48,000 of the accounts receivable.

Instructions
Prepare a classified balance sheet for the partnership after the partner’s investments on December
31, 2014.
Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Problem Solving, IMA: Reporting

FOR INSTRUCTOR USE ONLY

12 - 50 Test Bank for Accounting Principles, Eleventh Edition

Solution 180 (15 min.)

THE ABC PARTNERSHIP
Balance Sheet
December 31, 2014

Assets
Current Assets
Cash ........................................................................... $50,000
Accounts Receivable................................................... $54,000
Less: Allowance for Doubtful Accounts........................ (6,000) 48,000
Supplies...................................................................... 5,000
Total current assets............................................ $103,000

Property, Plant and Equipment

Land ........................................................................... $27,000
Buildings..................................................................... 112,000
Equipment................................................................... 66,000
Total property, plant, and equipment................... 205,000
Total assets.......................................................................... $308,000

Liabilities and Owners’ Equity

Long-term Liabilities
Mortgage Payable....................................................... $40,000
Owners’ Equity
Actor, Capital............................................................... $78,000
Brees, Capital............................................................. 99,000
Cotswald, Capital........................................................ 91,000
Total owners’ equity............................................ 268,000
Total liabilities and owners’ equity........................................ $308,000

Ex. 181
The Zhuzer Company at December 31 has cash $50,000, noncash assets $250,000, liabilities
$138,000, and the following capital balances: Zhu $112,000 and Zerkel $50,000. The firm is
liquidated, and $265,000 in cash is received for the noncash assets. Zhu and Zerkel income ratios
are 60% and 40%, respectively.

Instructions
Prepare the entries to record:
(a) The sale of noncash assets.
(b) The allocation of the gain or loss on liquidation to the partners.
(c) Payment of creditors.
(d) Distribution of cash to the partners.
Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA

FOR INSTRUCTOR USE ONLY

 Accounting for Partnerships 12 - 51

Solution 181 (10 min.)

(a) Cash ............................................................................................ 265,000

Noncash Assets................................................................... 250,000
Gain on Realization............................................................. 15,000

(b) Gain on Realization...................................................................... 15,000

Zhu, Capital ($15,000 X 60%).............................................. 9,000
Zerkel, Capital ($15,000 X 40%).......................................... 6,000

(c) Liabilities....................................................................................... 138,000

Cash.................................................................................... 138,000

(d) Zhu, Capital.................................................................................. 121,000

Zerkel, Capital.............................................................................. 56,000
Cash.................................................................................... 177,000

Ex. 182
Prepare a partners' capital statement for Whatito Company based on the following information.
Whatley Hito
Beginning capital $30,000 $27,000
Drawings during year 15,000 8,000

Net income was $45,000, and the partners share income 60% to Whatley and 40% to Hito.
Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Problem Solving, IMA: Reporting

Solution 182 (8 min.)

WHATITO COMPANY
Partners' Capital Statement

Whatley Hito Total

Beginning capital $30,000 $27,000 $57,000
Add: Net income 27,000 18,000 45,000
57,000 45,000 102,000
Less: Drawings 15,000 8,000 23,000
Ending capital $42,000 $37,000 $79,000

Ex. 183
On December 31, Nola Company has cash $30,000, noncash assets $150,000, and liabilities
$80,000. Capital balances were Harper $55,000 and Kahle $45,000. The firm is liquidated, and the
noncash assets are sold for $115,000. Harper and Kahle share income in a 60:40 ratio.

Instructions
Prepare entries to record (a) the sale of noncash assets and (b) the allocation of the gain (loss) on
liquidation to the partners.
Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA

FOR INSTRUCTOR USE ONLY

12 - 52 Test Bank for Accounting Principles, Eleventh Edition

Solution 183 (6 min.)

(a) Cash.............................................................................................. 115,000
Loss on Realization........................................................................ 35,000
Noncash Assets................................................................... 150,000

(b) Harper, Capital ($35,000 × 60%).................................................... 21,000

Kahle, Capital ($35,000 × 40%)..................................................... 14,000
Loss on Realization............................................................. 35,000

Ex. 184
The ABC Partnership is to be liquidated and you have been hired to prepare a Schedule of Cash
Payments for the partnership. Partners Alexa, Bitsy, and Coco share income and losses in the ratio
of 4:3:3, respectively. Assume the following:
1. The noncash assets were sold for $70,000.
2. Liabilities were paid in full.
3. The remaining cash was distributed to the partners. (If any partner has a capital
deficiency, assume that the partner is unable to make up the capital deficiency.)

Instructions
Using the above information, complete the Schedule of Cash Payments below:

ABC PARTNERSHIP
Schedule of Cash Payments

Noncash Alexa Bitsy Coco

Item Cash + Assets = Liabilities + Capital + Capital + Capital
Balances before
liquidation 25,000 + 150,000 = 50,000 + 25,000 + 35,000 + 65,000
Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Problem Solving, IMA: Reporting

Solution 184 (20 min.)

ABC PARTNERSHIP
Schedule of Cash Payments

Noncash Alexa Bitsy Coco

Item Cash + Assets = Liabilities + Capital + Capital + Capital
Balances before
liquidation 25,000 + 150,000 = 50,000 + 25,000 + 35,000 + 65,000
Sale of noncash
assets (1) 70,000 + (150,000) = + (32,000) + (24,000) + (24,000)
New balance 95,000 + -0- = 50,000 + (7,000) + 11,000 + 41,000
Pay liabilities (2) (50,000) = (50,000)
New balances 45,000 + -0- = -0- + (7,000) + 11,000 + 41,000
Allocate capital
deficiency 7,000 + (3,500) + (3,500)
New balances 45,000 + -0- = -0- + -0- + 7,500 + 37,500
Cash distribution (3) (45,000) = (7,500) + (37,500)
Final balances -0- -0- -0- -0- -0- -0-

FOR INSTRUCTOR USE ONLY

 Accounting for Partnerships 12 - 53

Ex. 185
The MFP Partnership is to be liquidated when the ledger shows the following:
Cash $ 50,000
Noncash Assets 200,000
Liabilities 50,000
Mossimo, Capital 75,000
Fandango, Capital 100,000
Plank, Capital 25,000

Mossimo, Fandango, and Plank’s income ratios are 6:3:1, respectively.

Instructions
Prepare separate entries to record the liquidation of the partnership assuming that the noncash
assets are sold for $140,000 in cash.
Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA

Solution 185 (15 min.)

1. Cash................................................................................................ 140,000
Loss on Realization......................................................................... 60,000
Noncash Assets...................................................................... 200,000

2. Mossimo, Capital ($60,000 × 6/10).................................................. 36,000

Fandango, Capital ($60,000 × 3/10)................................................ 18,000
Plank, Capital ($60,000 × 1/10)....................................................... 6,000
Loss on Realization................................................................ 60,000

3. Liabilities......................................................................................... 50,000
Cash....................................................................................... 50,000

4. Mossimo, Capital ($75,000 – $36,000)............................................ 39,000

Fandango, Capital ($100,000 – $18,000)........................................ 82,000
Planks, Capital ($25,000 – $6,000)................................................. 19,000
Cash ($50,000 + $140,000 – $50,000)................................... 140,000

Ex. 186
Prior to the distribution of cash to the partners, the accounts of ABC Company are: Cash $35,000,
Acock, Capital (Dr.) $5,000, Buster, Capital (Cr.) $25,000, and Cutter, Capital (Cr.) $15,000. They
share income on a 5:3:2 basis.

Instructions
Prepare entries to record (a) the absorption of Acock’s capital deficiency by the other partners and
(b) the distribution of cash to the partners with credit balances.
Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA

FOR INSTRUCTOR USE ONLY

12 - 54 Test Bank for Accounting Principles, Eleventh Edition

Solution 186 (8 min.)

(a) Buster, Capital ($5,000 × 3/5)....................................................... 3,000
Cutter, Capital ($5,000 × 2/5)....................................................... 2,000
Acock, Capital...................................................................... 5,000

(b) Buster, Capital ($25,000 – $3,000)............................................... 22,000

Cutter, Capital ($15,000 – $2,000)................................................ 13,000
Cash.................................................................................... 35,000

Ex. 187
The HK Partnership is liquidated when the ledger shows:
Cash $60,000
Noncash Assets 90,000
Liabilities 44,000
Howell, Capital 100,000
Kenton, Capital 6,000

Henson and Kaenzig income ratios are 3:2, respectively.

Instructions
Prepare a schedule of cash payments, assuming that the noncash assets were sold for $65,000.
Assume that any partner’s capital deficiencies cannot be paid to the partnership.
Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Problem Solving, IMA: Reporting

Solution 187 (10 min.)

HK Partnership
Schedule of Cash Payments

Noncash Henson Kaenzig

Cash + Assets = Liabilities + Capital + Capital
Balances before
liquidation $ 60,000 $90,000 $44,000 $100,000 $6,000
Sale of noncash assets
and allocation of losses 65,000 (90,000) (15,000) (10,000)
New Balances 125,000 -0- 44,000 85,000 (4,000)
Pay Liabilities (44,000) (44,000)
New Balances 81,000 -0- -0- 85,000 (4,000)
Allocate capital deficiency (4,000) 4,000
Cash Distribution $(81,000) $ -0- $ -0- $(81,000) $ -0-
a
Ex. 188
The Felton and Burchell Partnership has partner capital account balances as follows:
Felton, Capital $550,000
Burchell, Capital 200,000

The partners share income and losses in the ratio of 60% to Felton and 40% to Burchell.

FOR INSTRUCTOR USE ONLY

 Accounting for Partnerships 12 - 55

Instructions
Prepare the journal entry on the books of the partnership to record the admission of Santos as a
new partner under the following three independent circumstances.
1. Santos pays $400,000 to Felton and $150,000 to Burchell for one-half of each of their
ownership interest in a personal transaction.
2. Santos invests $600,000 in the partnership for a one-third interest in partnership capital.
3. Santos invests $240,000 in the partnership for a one-third interest in partnership capital.
Ans: N/A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA

a
Solution 188 (20 min.)
1. Felton, Capital.............................................................................. 275,000
Burchell, Capital........................................................................... 100,000
Santos, Capital.................................................................... 375,000
(To record admission of Santos by purchase)
Total net assets and total capital of the partnership do not change.

2. Cash............................................................................................. 600,000
Felton, Capital...................................................................... 90,000
Burchell, Capital................................................................... 60,000
Santos, Capital.................................................................... 450,000
(To record admission of Santos and bonus to old partners)

Total capital of existing partnership $ 750,000

Investment by new partner, Santos 600,000
Total capital of new partnership $1,350,000

Santos’s capital credit = $1,350,000 × 1/3 = $450,000

Santos’s investment $600,000
Santos’s capital credit 450,000
Bonus to old partners $150,000

Allocation to old partners

Felton (60% × $150,000) $90,000
Burchell (40% × $150,000) 60,000
$150,000

3. Cash............................................................................................. 240,000
Felton, Capital.............................................................................. 54,000
Burchell, Capital........................................................................... 36,000
Santos, Capital.................................................................... 330,000
(To record Santos’s admission and bonus)

FOR INSTRUCTOR USE ONLY

12 - 56 Test Bank for Accounting Principles, Eleventh Edition

a
Solution 188 (Cont.)

Total capital of existing partnership $750,000

Investment by new partner, Santos 240,000
Total capital of new partnership $990,000

Santos’s capital credit = $990,000 × 1/3 = $330,000

Bonus to Santos ($330,000 – $240,000) = $90,000
Reduction of old partners' capital
Felton ($90,000 × 60%) $ 54,000
Burchell ($90,000 × 40%) 36,000
$90,000
a
Ex. 189
Hu, Marcos, and Letterman share income on a 6:3:1 basis. They have capital balances of $80,000,
$60,000, and $45,000, respectively, when Buffett is admitted to the partnership.

Instructions
Prepare the journal entry to record the admission of Buffett into the partnership if Buffett purchases
one-half of Hu’s equity for $45,000; one-half of Marcos’s equity for $22,000; and one-third of
Letterman’s equity for $18,000.
Ans: N/A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA

Solution 189 (5 min.)

Hu, Capital............................................................................................ 40,000
Marcos, Capital..................................................................................... 30,000
Letterman, Capital................................................................................. 15,000
Buffett, Capital.............................................................................. 85,000
a
Ex. 190
Yuanne Sipp and Letitia Grimes share partnership income on a 3:2 basis. They have capital
balances of $560,000 and $280,000, respectively, when Tammy Tuck is admitted to the partnership.

Instructions
Prepare the journal entry to record the admission of Tammy Tuck under each of the following
assumptions:

(a) Tuck invests $320,000 for a 25% ownership interest.

(b) Tuck invests $220,000 for a 25% ownership interest.
(c) Tuck invests an amount that gives him a 25% ownership interest.
Ans: N/A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA

FOR INSTRUCTOR USE ONLY

 Accounting for Partnerships 12 - 57
a
Solution 190 (20 min.)
(a) Cash............................................................................................. 320,000
Tuck, Capital........................................................................ 290,000
Sipp, Capital (3/5 × $30,000)............................................... 18,000
Grimes, Capital (2/5 × $30,000)........................................... 12,000

Total capital of existing partnership $ 840,000

Investment by new partner, Tuck 320,000
Total capital of new partnership $1,160,000

Tuck’s capital credit ($1,160,000 × 25%) $290,000

Investment by new partner, Tuck $320,000

Tuck’s capital credit 290,000
Bonus to existing partners $ 30,000

(b) Cash............................................................................................. 220,000

Sipp, Capital ($45,000 × 3/5)........................................................ 27,000
Grimes, Capital ($45,000 × 2/5)................................................... 18,000
Tuck, Capital........................................................................ 265,000

Total capital of existing partnership $ 840,000

Investment by new partner, Tuck 220,000
Total capital of new partnership $1,060,000

Tuck’s capital credit ($1,060,000 × 25%) $265,000

Investment by new partner, Tuck $220,000

Tuck’s capital credit 265,000
Reduction of existing partners $ (45,000)

(c) Cash............................................................................................. 280,000

Tuck, Capital........................................................................ 280,000

$840,000 ÷ .75 = $1,120,000; $1,120,000 – $840,000 = $280,000

a
Ex. 191
Kim Locke and Mary Leigh Coker have capital accounts of $420,000 and $480,000, respectively.
Jeff Doggett and Danny Cambrey are to join the partnership. Doggett invests $425,000 in the
partnership for which he receives a capital credit of $425,000. Cambrey purchases a one-half
interest from Locke for $300,000 and a one-fourth interest from Coker for $90,000.

Instructions
(a) Prepare the journal entries to record the admission of Doggett and Cambrey to the
partnership.
(b) Determine the capital balances of the partners after the admission of Doggett and Cambrey.
Ans: N/A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA

FOR INSTRUCTOR USE ONLY

12 - 58 Test Bank for Accounting Principles, Eleventh Edition
a
Solution 191 (10 min.)
(a) Cash............................................................................................. 425,000
Doggett, Capital................................................................... 425,000

Locke, Capital............................................................................... 210,000

Coker, Capital............................................................................... 120,000
Cambrey, Capital................................................................. 330,000

(b) Locke ($420,000 – $210,000) $ 210,000

Coker ($480,000 – $120,000) 360,000
Doggett 425,000
Cambrey 330,000
Total Capital $1,325,000
a
Ex. 192
Daggett, Lamppin, and Pendergast are partners who share profits and losses 50%, 30%, and 20%,
respectively. Their capital balances are $150,000, $90,000, and $60,000, respectively.

Instructions
(a) Assume Sanford joins the partnership by investing $140,000 for a 25% interest with bonuses
to the existing partners. Prepare the journal entry to record his investment.
(b) Assume instead that Daggett leaves the partnership. Daggett is paid $170,000 with a bonus to
the retiring partner. Prepare the journal entry to record Daggett’s withdrawal.
Ans: N/A, LO: 6,7, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA

a
Solution 192 (10 min.)
(a) Cash........................................................................... 140,000
Janford, Capital ($440,000  25%)........................ 110,000
Daggett, Capital ($30,000  50%)....................... 15,000
Lamppin, Capital ($30,000  30%)........................ 9,000
Pendergast, Capital ($30,000  20%)................... 6,000

(b) Daggett, Capital.......................................................... 150,000

Lamppin, Capital ($20,000  3/5)................................ 12,000
Pendergast, Capital ($20,000  2/5)............................. 8,000
Cash...................................................................... 170,000
a
Ex. 193
Brislin, Humphreys, and Watkins share income and losses in a ratio of 3:2:5, respectively. The
capital account balances of the partners are as follows:
Brislin Capital $600,000
Humphreys, Capital 360,000
Watkins, Capital 260,000

FOR INSTRUCTOR USE ONLY

 Accounting for Partnerships 12 - 59
a
Ex. 193 (Cont.)

Instructions
Prepare the journal entry on the books of the partnership to record the withdrawal of Watkins under
the following independent circumstances:
1. The partners agree that Watkins should be paid $280,000 by the partnership for his interest.
2. The partners agree that Watkins should be paid $220,000 by the partnership for his interest.
3. Brislin agrees to pay Watkins $180,000 for one-half of his capital interest and Heller agrees to
pay Watkins $180,000 for one-half of his capital interest in a personal transaction among the
partners.
Ans: N/A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA

a
Solution 193 (15 min.)
1. Watkins, Capital............................................................................... 260,000
Brislin, Capital................................................................................. 12,000
Humphreys, Capital......................................................................... 8,000
Cash....................................................................................... 280,000
(To record withdrawal and bonus to Watkins)
Bonus to Watkins $20,000 ($280,000 – $260,000)
Allocation to reduce remaining partners' capital:
Brislin (3/5 × $20,000) $12,000
Humphreys (2/5 × $20,000) 8,000
$20,000

2. Watkins, Capital............................................................................... 260,000

Brislin, Capital......................................................................... 24,000
Humphreys, Capital................................................................ 16,000
Cash....................................................................................... 220,000
(To record withdrawal of Watkins and bonus to remaining
partners)
Bonus to remaining partners $40,000 ($260,000 – $220,000)
Allocation to increase remaining partners' capital:
Brislin (3/5 × $40,000) $24,000
Humphreys (2/5 × $40,000) 16,000
$40,000

3. Watkins, Capital............................................................................... 260,000

Brislin, Capital......................................................................... 130,000
Humphreys, Capital................................................................ 130,000
(To record withdrawal of Watkins)
Total net assets and total capital of the partnership do not change.

FOR INSTRUCTOR USE ONLY

12 - 60 Test Bank for Accounting Principles, Eleventh Edition
a
Ex. 194
Elam, Kamins, and Rubio have capital balances of $150,000, $100,000, and $75,000, respectively,
and their income ratios are 4:2:4.

Instructions
Record the withdrawal of Rubio from the partnership under each of the following assumptions:
1. Rubio is paid $75,000 from partnership assets.
2. Rubio is paid $93,000 from partnership assets.
3. Rubio is paid $60,000 from partnership assets.
Ans: N/A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA

a
Solution 194 (10 min.)
1. Rubio, Capital.................................................................................. 75,000
Cash....................................................................................... 75,000

2. Rubio, Capital.................................................................................. 75,000

Elam, Capital ($18,000 × 4/6).......................................................... 12,000
Kamins, Capital ($18,000 × 2/6)...................................................... 6,000
Cash....................................................................................... 93,000

3. Rubio, Capital.................................................................................. 75,000

Elam, Capital ($15,000 × 4/6)................................................. 10,000
Kamins, Capital ($15,000 × 2/6)............................................. 5,000
Cash....................................................................................... 60,000

COMPLETION STATEMENTS
195. The ______________ Act provides the basic rules for the formation and operation of
partnerships in more than 90% of the states.
Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

196. A partnership characteristic which enables each partner to act on behalf of the partnership
when engaging in partnership business is called ______________.
Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

197. A major disadvantage of the partnership form of organization is ______________, which

makes each partner personally and individually liable for all partnership liabilities.
Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

198. The capital accounts indicate each partner's ______________ investment, while the
partner's drawing accounts are ______________ owner's equity accounts.
Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Reporting

199. The ______________ ratio specifies the basis for sharing income and losses.
Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

FOR INSTRUCTOR USE ONLY

 Accounting for Partnerships 12 - 61

200. An income ratio based on ______________ balances may be appropriate when the amount
of funds invested in the partnership is critical to the partnership.
Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None,
IMA: Business Economics

201. A ______________ allowance or ______________ on partners' capital accounts are not

expenses of the partnership when they are specified as the basis for sharing income and
losses.
Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Reporting

202. In liquidating a partnership, it is necessary to convert ______________ into cash and to

allocate any ______________ or ______________ to the partners based on their income
ratios.
Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None,
IMA: Business Economics

203. A debit balance in a partner's capital account is called a _____________.

Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Reporting

a
204. A new partner may be admitted to the partnership by ______________ the interest of an
existing partner, or by ______________ assets in the partnership.
Ans: N/A, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

a
205. When a new partner's capital interest on the date of admittance is less than his or her
investment in the firm, a ______________ results for the ______________ partner(s).
Ans: N/A, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

a
206. If a bonus is given to a new partner, the old partners' capital accounts are decreased based
on their ______________ ratio prior to the admission of the new partner.
Ans: N/A, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

Answers to Completion Statements

195. Uniform Partnership 201. salary, interest
196. mutual agency 202. noncash assets, gains, losses
197. unlimited liability 203. capital deficiency
a
198. permanent, temporary 204. purchasing, investing
a
199. income 205. bonus, old
a
200. capital 206. Income

FOR INSTRUCTOR USE ONLY

12 - 62 Test Bank for Accounting Principles, Eleventh Edition

MATCHING
207. Match the items below by entering the appropriate code letter in the space provided.

A. Mutual agency G. Purchase of an interest

B. Unlimited liability H. Partnership liquidation
C. Partnership agreement I. Capital deficiency
D. Income ratio J. Distribution of cash to partners in
E. Partners' capital statement liquidation of a partnership.
F. Admission by investment

______ 1. Each partner is personally and individually liable for partnership debts.

______ 2. Made on basis of partners' capital balances.

______ 3. Explains changes in individual partner's capital accounts during a period.

______ 4. Each partner can bind the partnership so long as the action appears to be appropriate
for the partnership.

______ 5. Business terminates.

______ a6. Results in an increase in total net assets and total capital of the partnership.

______ 7. Capital account with a debit balance.

______ 8. The basis for sharing income and losses.

______ a9. Total net assets and total capital of the partnership do not change.

______ 10. Written contract establishing duties and responsibilities of partners.

Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

Answers to Matching
a
1. B 6. F
2. J 7. I
3. E 8. D
a
4. A 9. G
5. H 10. C

SHORT-ANSWER ESSAY QUESTIONS

S-A E 208
Identify and explain the principal characteristics of the partnership form of business organization.
Ans: N/A, LO: 1, Bloom: S, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
None, IMA: Reporting

FOR INSTRUCTOR USE ONLY

 Accounting for Partnerships 12 - 63

Solution 208
The principal characteristics of a partnership form of organization are as follows:
(a) It is a voluntary association of two or more individuals based on a legally binding contract.
(b) The partners act in a mutual agency relationship; that is, each partner acts on behalf of the
partnership when engaging in partnership business.
(c) A partnership has limited life. That is, a partnership may be ended voluntarily at any time
through the acceptance of a new partner into the firm or the withdrawal of a partner. And, a
partnership may be ended involuntarily by the death or incapacity of a partner.
(d) The partners have unlimited liability. Each partner is personally and individually liable for all
partnership liabilities.
(e) All partnership assets are co-owned by the partners; that is, the assets are owned jointly by all
the partners.

S-A E 209
Castle and Berry are discussing how income and losses should be divided in a partnership they
plan to form. What factors should be considered in determining the division of net income or net
loss?
Ans: N/A, LO: 3, Bloom: S, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
None, IMA: Business Economics

Solution 209
Factors to be considered in determining how income and loss should be divided are: (1) a fixed
ratio is easy to apply and it may be an equitable basis in some circumstances; (2) capital balance
ratios when the funds invested in the partnership are considered the most critical factor; and (3)
salary allowance and/or interest allowance coupled with a fixed ratio. This last approach gives
specific recognition to differences that may exist among partners by providing salary allowances for
time worked and interest allowances for capital invested.

S-A E 210
Are the financial statements of a partnership similar to those of a proprietorship? Discuss.
Ans: N/A, LO: 4, Bloom: S, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
None, IMA: Reporting

Solution 210
The financial statements of a partnership are similar to those of a proprietorship. The differences
are due to the number of partners involved. The income statement for a partnership is identical to
the income statement for a proprietorship except for the division of net income. The owners' equity
statement is called the partners' capital statement. This statement shows the changes in each
partner's capital account and in total partnership capital during the year. On the balance sheet each
partner's capital balance is reported in the owners' equity section.

FOR INSTRUCTOR USE ONLY

12 - 64 Test Bank for Accounting Principles, Eleventh Edition

S-A E 211
A partnership is liquidated by selling the non-cash assets, paying the creditors in full, and
distributing the remaining assets to the partners. Explain why gains and losses on the realization of
non-cash assets are distributed to the partners based on their income ratios, whereas cash is
distributed to the partners based on their equity as shown in their capital accounts. What effects
does the payment or nonpayment of a capital deficiency have on the distribution of cash to the
partners?
Ans: N/A, LO: 5, Bloom: S, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
None, IMA: Reporting

Solution 211
Gains and losses on the realization of non-cash assets are like income and losses; that is, they are
income statement items and, therefore, are distributed to partners based on their income and loss
ratios. Cash is a balance sheet item and is the basis for any residual equity after liquidation;
therefore, the final asset amount cash should be distributed to partners in accordance with their
equity balances.

When the capital deficiency is paid, the payment is credited to the partner with the debit balance in
the capital account. Then, the remaining cash is distributed to the partners with credit balances on
the basis of their balances.

If the capital deficiency is not paid, the deficiency is allocated to the partners with credit balances on
the basis of their income ratios. The remaining cash is then distributed to these partners on the
basis of their capital balances.

S-A E 212 (Ethics)

Three doctors, Marshall Murrey, Andrew Shaw, and Austin Taylor, opened a family medicine clinic.
All three doctors had been lifelong friends. All belonged to the same religious faith. All were very
active in church affairs, and tried to mold their professional behavior to their religious beliefs.

About a year ago, Dr. Murrey announced that he was leaving the church. The others noticed that his
personality also began to change. He began to dress in flamboyant styles, and he started wearing
expensive-looking jewelry. His temper became unstable—one minute he was calm, and the next, he
might be throwing charts down the hall and screaming. He started coming to the office late, and
forgetting to see some of his patients before he left again. The other two at first were stunned at the
changes. His wife asked them whether they thought he might have a drinking problem. After finally
deciding to investigate, they found what looked to them like a large amount of cocaine, (hundreds of
plastic sacks of white powder) tucked away in boxes of old medical equipment.

Frightened, Drs. Shaw and Taylor decided to act quickly. Their partnership agreement said nothing
about dissolving the partnership—only about what to do if one of them died. They therefore secretly
rented office space across town and began to move the most necessary equipment and supplies to
the new office. A month later, they changed the locks on the old office and began seeing patients in
the new office without any notice to Dr. Murrey at all. Dr. Murrey simply came in at around ten
o'clock as usual, and found himself locked out of an empty office.

Required:
Did Drs. Shaw and Taylor l act ethically in their ending of the partnership? Explain.
Ans: N/A, LO: 1, Bloom: S, Difficulty: Easy, Min: 5, AACSB: Ethics, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Decision Modeling, AICPA PC:
Professional Demeanor, IMA: Decision Analysis

FOR INSTRUCTOR USE ONLY

 Accounting for Partnerships 12 - 65

Solution 212
No, Drs. Shaw and Taylor did not act ethically in the way they ended the partnership. It is important
to distinguish between legal obligations and ethical obligations. The partnership may well be legally
dissolved by their action. However, ethically, they had no right to act unilaterally, without giving Dr.
Murrey a chance to defend himself or to correct his behavior. It also looks like they may have had
an obligation to report their apparent cocaine "find" to the appropriate authorities, or at least to
determine whether the substance was, in fact, cocaine. It is clear that the doctors had the right and
obligation to protect Dr. Murrey’s patients, but there is no evidence given that he was actually
endangering his patients. Drs. Shaw and Taylor’ss actions seem to be cowardly, and an attempt to
keep from facing unpleasant realities.

S-A E 213 (Communication)

Walter Bector and Sandy Melos began detail work on automobiles as a hobby. First, they used a
mail-order kit to add "pin striping" to their own cars, a 1968 Mustang and a 1970 GTO Judge,
respectively. Then Walter added more flourishes, including his name. Sandy practiced painting
flames on his Judge. Gradually, their cars became recognized around town and others began to ask
them to add a flourish here or there to their cars. They were talked into attending a "muscle car"
show in a nearby large city to show off their cars. They had more requests for work than they could
handle. Now, they are considering quitting their other jobs and making this a permanent business.
Sandy, for example, turns down more jobs than he accepts and still gets more requests every week.

Walter and Sandy are unsure how to proceed. They like the idea of a partnership, but they only
know they work well together—things like how to split payment have just been settled individually
for each job, depending on which one did more work. Walter’s father suggests a written partnership
agreement. Walter disagrees. He believes that it will spoil the whole arrangement by reducing it to
words.

Required:
Write a brief note to Walter explaining why he needs a partnership agreement.
Ans: N/A, LO: 1, Bloom: S, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
None, IMA: Business Economics

FOR INSTRUCTOR USE ONLY

12 - 66 Test Bank for Accounting Principles, Eleventh Edition

Solution 213

Dear Walter,

Your dad asked me to write to you. I am an accountant with the CPA firm Clinton,
Grant, and Thomas, and I do a lot of work for partnerships.

I understand that you don't want a written partnership agreement. I'd like to share
with you a few things you may not have considered. First, I completely agree that a
written agreement won't solve all your problems. I would even say that a poorly
written agreement is worse than none at all. However, I don't know any partnerships
in this town that have lasted for more than a year or two that don't have a written
agreement. If they didn't have one at first, they learned by hard experience exactly
why they needed one.

I'd say the biggest advantage is that it forces both of you to spell out what you expect
of the other party. You have discussed, I understand, how profits are to be split. Do
both of you agree entirely? What if you decide another method would be more fair?
What do you plan to do if you want to add a partner? Who makes the decisions
about which building to rent, and what kind of help to hire? All these things can be
spelled out in a partnership agreement.

I hope you will seriously consider drawing up a good partnership agreement.

Otherwise, you may condemn yourselves to spending more time clearing up
misunderstandings than on fixing up cars.

Let me know if I can help. I know a couple of attorneys in town who could get the job
done without charging an arm and a leg.

Sincerely,

(signature)

FOR INSTRUCTOR USE ONLY

 CHAPTER 12
ACCOUNTING FOR PARTNERSHIPS
SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S TAXONOMY
Ite LO BT Ite LO BT Ite LO BT Ite LO BT Item L BT
True-False Statements
sg
1. 1 K 9. 2 C 17. 3 K 25. 5 K 33. 2 K
a sg
2. 1 K 10. 2 C 18. 3 K 26. 6 K 34. 3 C
a sg
3. 1 K 11. 3 K 19. 4 C 27. 6 C 35. 5 K
a sg,a
4. 1 K 12. 3 K 20. 4 C 28. 6 C 36. 6 K
a sg,a
5. 1 K 13. 3 K 21. 4 K 29. 6 C 37. 7 K
a
6. 2 K 14. 3 K 22. 4 K 30. 7 C
sg
7. 2 AP 15. 3 C 23. 4 K 31. 1 K
sg
8. 2 K 16. 3 K 24. 5 K 32. 1 K
Multiple Choice Questions
a
38. 1 K 63. 3 K 88. 4 K 113. 5 AP 138. 6 C
a
39. 1 K 64. 2 C 89. 4 K 114. 5 AP 139. 6 C
a
40. 1 K 65. 2 AP 90. 4 K 115. 5 AP 140. 7 AP
a
41. 2 K 66. 2 AP 91. 4 C 116. 5 AP 141. 7 AP
a
42. 1 K 67. 2 AP 92. 4 AP 117. 5 AP 142. 7 AP
a
43. 1 K 68. 2 AP 93. 4 AP 118. 5 AP 143. 7 AP
a
44. 1 K 69. 2 AP 94. 4 AP 119. 5 AP 144. 7 C
a
45. 1 K 70. 3 AP 95. 4 AP 120. 5 AP 145. 7 K
a a
46. 1 K 71. 3 AP 96. 4 K 121. 6 AP 146. 7 AP
a a
47. 1 K 72. 3 AP 97. 4 K 122. 6 AP 147. 7 AP
a a
48. 1 K 73. 3 AP 98. 4 K 123. 6 AP 148. 7 AP
a st
49. 1 K 74. 3 AP 99. 5 K 124. 6 AP 149. 1 K
a sg
50. 1 K 75. 3 AP 100. 5 K 125. 6 AP 150. 1 C
a st
51. 1 K 76. 3 AP 101. 5 K 126. 6 AP 151. 2 K
a sg
52. 5 C 77. 3 C 102. 5 AP 127. 6 AP 152. 3 C
a st
53. 3 K 78. 3 K 103. 5 AP 128. 6 AP 153. 3 K
a sg
54. 1 K 79. 3 K 104. 5 AP 129. 6 C 154. 5 K
a st
55. 1 K 80. 3 AP 105. 5 AP 130. 6 C 155. 5 K
a sg
56. 3 K 81. 3 C 106. 5 K 131. 6 AP 156. 5 K
a st
57. 1 AP 82. 3 C 107. 5 C 132. 6 AP 157. 5 K
a sg,a
58. 2 AP 83. 3 C 108. 5 K 133. 6 AP 158. 6 C
a sg.a
59. 2 AP 84. 3 C 109. 5 K 134. 6 C 159. 6 AP
a
60. 2 K 85. 3 AP 110. 5 K 135. 6 C
a
61. 2 C 86. 3 AP 111. 5 K 136. 6 C
a
62. 2 K 87. 3 AP 112. 5 C 137. 6 K
Brief Exercises
a a
160. 2 AP 162. 3 AP 164. 5 AP 166. 6 AP 168. 7 AP
a a
161. 2 AP 163. 4 AP 165. 5 AP 167. 6 AP 169. 7 AP
sg
This question also appears in the Study Guide.
st
This question also appears in a self-test at the student companion website.
a
This question covers a topic in an appendix to the chapter.
12 - 2 Test Bank for Accounting Principles, Eleventh Edition

SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S TAXONOMY

Exercises
a
170. 2 AP 175. 3 AP 180. 4 AP 185. 5 AP 190. 6 AP
a
171. 2 AP 176. 3 AP 181. 5 AP 186. 5 AP 191. 6 AP
a
172. 2 AP 177. 3 AP 182. 4 AP 187. 5 AP 192. 6,7 AP
a a
173. 3 AP 178. 3 AP 183. 5 AP 188. 6 AP 193. 7 AP
a a
174. 3 AP 179. 3,4 AP 184. 5 AP 189. 6 AP 194. 7 AP
Completion Statements
a
195. 1 K 198. 3 K 201. 3 K 204. 6 K
a
196. 1 K 199. 3 K 202. 5 K 205. 6 K
a
197. 1 K 200. 3 K 203. 5 K 206. 6 K
Matching Statements
207. 1 K
Short-Answer Essay
208. 1 S 210. 4 S 212. 1 S
209. 3 S 211. 5 S 213. 1 S

SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE

Ite Typ Ite Typ Ite Typ Ite Typ Ite Typ Ite Typ Ite Typ

Learning Objective 1
1. TF 31. TF 42. MC 47. MC 52. MC 150. MC 208. SA
2. TF 32. TF 43. MC 48. MC 54. MC 195. C 212. SA
3. TF 38. MC 44. MC 49. MC 55. MC 196. C 213. SA
4. TF 39. MC 45. MC 50. MC 57. MC 197. C
5. TF 40. MC 46. MC 51. MC 149. MC 207. MA
Learning Objective 2
6. TF 10. TF 58. MC 62. MC 66. MC 151. MC 171. Ex
7. TF 33. TF 59. MC 63. MC 67. MC 160. BE 172. Ex
8. TF 41. MC 60. MC 64. MC 68. MC 161. BE
9. TF 56. MC 61. MC 65. MC 69. MC 170. Ex
Learning Objective 3
11. TF 18. TF 72. MC 79. MC 86. MC 175. Ex 199. C
12. TF 34. TF 73. MC 80. MC 87. MC 176. Ex 200. C
13. TF 53. MC 74. MC 81. MC 152. MC 177. Ex 201. C
14. TF 56. MC 75. MC 82. MC 153. MC 178. Ex 209. SA
15. TF 63. MC 76. MC 83. MC 162. BE 179. Ex
16. TF 70. MC 77. MC 84. MC 173. Ex 187. Ex
17. TF 71. MC 78. MC 85. MC 174. Ex 198. C
Learning Objective 4
19. TF 22. TF 89. MC 92. MC 95. MC 98. MC 180. Ex
20. TF 23. TF 90. MC 93. MC 96. MC 163. BE 182. Ex
21. TF 88. MC 91. MC 94. MC 97. MC 179. Ex 210. SA

FOR INSTRUCTOR USE ONLY

 Accounting for Partnerships 12 - 3

SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE

Learning Objective 5
24. TF 101. MC 107. MC 113. MC 119. MC 164. BE 186. Ex
25. TF 102. MC 108. MC 114. MC 120. MC 165. BE 187. Ex
35. TF 103. MC 109. MC 115. MC 154. MC 181. Ex 202. C
52. MC 104. MC 110. MC 116. MC 155. MC 183. Ex 203. C
99. MC 105. MC 111. MC 117. MC 156. MC 184. Ex 211. SA
100. MC 106. MC 112. MC 118. MC 157. MC 185. Ex
Learning Objective a6
a a a
26. TF 122. MC 128. MC a134. MC a158. MC a
190. Ex
a a a
27. TF 123. MC 129. MC a135. MC a159. MC a
191. Ex
a a a
28. TF 124. MC 130. MC a136. MC 166. BE a
192. Ex
a a a
29. TF 125. MC 131. MC a137. MC 167. BE a
204. C
a a a a a a
36. TF 126. MC 132. MC 138. MC 188. Ex 205. C
a a a
121. MC 127. MC 133. MC a139. MC a189. Ex a
206. C
Learning Objective a7
a a a
30. TF 141. MC 144. MC a147. MC a169. BE a
194. Ex
a a a
37. TF 142. MC 145. MC a148. MC a192. Ex
a a a
140. MC 143. MC 146. MC a168. BE a193. Ex

Note: TF = True-False BE = Brief Exercise C = Completion

MC = Multiple Choice Ex = Exercise MA = Matching
SA = Short-Answer Essay

CHAPTER LEARNING OBJECTIVES

1. Identify the characteristics of the partnership form of business organization. The principal
characteristics of a partnership are (a) association of individuals, (b) mutual agency, (c) limited
life, (d) unlimited liability, and (e) co-ownership of property.

2. Explain the accounting entries for the formation of a partnership. When formed, a
partnership records each partner's initial investment at the fair value of the assets at the date of
their transfer to the partnership.

3. Identify the bases for dividing net income or net loss. Partnerships divide net income or net
loss on the basis of the income ratio, which may be (a) a fixed ratio, (b) a ratio based on
beginning or average capital balances, (c) salaries to partners and the remainder on a fixed
ratio, (d) interest on partners' capital and the remainder on a fixed ratio, and (e) salaries to
partners, interest on partners' capital, and the remainder on a fixed ratio.

FOR INSTRUCTOR USE ONLY

 12 - 4 Test Bank for Accounting Principles, Eleventh Edition

4. Describe the form and content of partnership financial statements. The financial
statements of a partnership are similar to those of a proprietorship. The principal differences are
(a) The partnership shows the division of net income on the income statement. (b) The owners'
equity statement is called a partners' capital statement. (c) The partnership reports each
partner's capital on the balance sheet.

5. Explain the effects of the entries to record the liquidation of a partnership. When a
partnership is liquidated, it is necessary to record the (a) sale of noncash assets, (b) allocation
of the gain or loss on realization, (c) payment of partnership liabilities, and (d) distribution of
cash to the partners on the basis of their capital balances.
a
6. Explain the effects of the entries when a new partner is admitted. The entry to record the
admittance of a new partner by purchase of a partner's interest affects only partners' capital
accounts. The entries to record the admittance by investment of assets in the partnership (a)
increase both net assets and total capital and (b) may result in recognition of a bonus to either
the old partners or the new partner.
a
7. Describe the effects of the entries when a partner withdraws from the firm. The entry to
record a withdrawal from the firm when the partners pay from their personal assets affects only
partners' capital accounts. The entry to record a withdrawal when payment is made from
partnership assets (a) decreases net assets and total capital and (b) may result in recognizing a
bonus either to the retiring partner or the remaining partners.

TRUE-FALSE STATEMENTS
1. The personal assets, liabilities, and personal transactions of partners are excluded from the
accounting records of the partnership.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

2. The act of any partner is binding on all other partners if the act appears to be appropriate for
the partnership.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

3. A major advantage of the partnership form of organization is that the partners have unlimited
liability.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

4. Partnership creditors may have a claim on the personal assets of any of the partners if the
partnership assets are not sufficient to settle claims.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

5. The partnership agreement between partners must be in writing.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

FOR INSTRUCTOR USE ONLY

 Accounting for Partnerships 12 - 5

6. If a partner invests noncash assets in a partnership, they should be recorded by the

partnership at their fair value.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA:
FSA

7. L. Hampton invests the following assets in a new partnership: $30,000 in cash, and
equipment that cost $70,000 but has a book value of $34,000 and fair value of $40,000.
Hampton, Capital will be credited for $64,000.
Ans: F, LO: 2, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA:
FSA

solution: $30,000  $40,000  $70,000

8. Two proprietorships cannot combine and form a partnership.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

9. If a partner's investment in a partnership consists of equipment that has accumulated

depreciation of $8,000, it would not be appropriate for the partnership to record the
accumulated depreciation.
Ans: T, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA:
FSA

10. If a partner's investment in a partnership consists of Accounts Receivable of $35,000 and an

Allowance for Doubtful Accounts of $7,000, it would not be appropriate for the partnership to
record the Allowance for Doubtful Accounts.
Ans: F, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA:
FSA

11. Unless stated otherwise in the partnership contract, profits and losses are shared among the
partners in the ratio of their capital equity balances.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA:
Business Economics

12. If salary allowances and interest on capital are stipulated in the partnership profit and loss
sharing agreement, they are implemented only if income is sufficient to cover the amounts
required by these features.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA:
Business Economics

13. Unless the partnership agreement specifically indicates an income ratio, partnership net
income or loss is not allocated to the partners.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA:
Business Economics

14. Partnership income or loss need not be closed to partners' capital accounts each period
because of the unlimited life characteristic of partnerships.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Reporting

15. If a partnership has a loss for the period, the closing entry to transfer the loss to the partners
will require a credit to the Income Summary account.
Ans: T, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA:
FSA

FOR INSTRUCTOR USE ONLY

12 - 6 Test Bank for Accounting Principles, Eleventh Edition

16. The partners' drawing accounts are closed each period into the Income Summary account.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA:
FSA

17. Salary allowances to partners are a major expense on most partnership income statements.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Reporting

18. An interest allowance in sharing partnership net income (or net loss) is related to the amount
of partners' invested capital during the period.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

19. The financial statements of a partnership are similar to those of a proprietorship.

Ans: T, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Reporting

20. The income earned by a partnership will always be greater than the income earned by a
proprietorship because in a partnership there is more than one owner contributing to the
success of the business.
Ans: F, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

21. The function of the Partners' Capital Statement is to explain the changes in partners' capital
account balances during a period.
Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Reporting

22. A detailed listing of all the assets invested by a partner in a partnership appears on the
Partners' Capital Statement.
Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Reporting

23. Total partners' equity of a partnership is equal to the sum of all partners' capital account
balances.
Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Reporting

24. The distribution of cash to partners in a partnership liquidation is always made based on the
partners' income sharing ratio.
Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA:
Business Economics

25. The liquidation of a partnership means that a new partner has been admitted to the
partnership.
Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

a
26. The admission of a new partner results in the legal dissolution of the existing partnership
and the beginning of a new partnership.
Ans: T, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective , AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

FOR INSTRUCTOR USE ONLY

 Accounting for Partnerships 12 - 7
a
27. If a new partner is admitted into a partnership by investment, the total assets and total
capital will change.
Ans: T, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

a
28. A bonus to old partners results when the new partner's capital credit on the date of
admittance is greater than his or her investment in the firm.
Ans: F, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Reporting

a
29. If a new partner invests in a partnership at book value and acquires a 1/4 interest in total
partnership capital, it indicates that a bonus was paid to the original partners.
Ans: F, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA:
Business Economics

a
30. A bonus to the remaining partners results when a retiring partner receives partnership
assets which are less than his or her capital balance on the date of withdrawal.
Ans: T, LO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA:
FSA

31. A partnership is an association of no more than two persons to carry on as co-owners of a

business for profit.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

32. Once assets have been invested in the partnership, they are owned jointly by all partners.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

33. Each partner's initial investment in a partnership should be recorded at book value.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA:
FSA

34. Partnership income is shared in proportion to each partner's capital equity interest unless
the partnership contract specifically indicates the manner in which net income or net loss is
to be divided.
Ans: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA:
Business Economics

35. In a liquidation, the final distribution of cash to partners should be on the basis of their
income ratios.
Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA:
Business Economics

a
36. In an admission of a partner by investment of assets, the total net assets and total capital of
the partnership do not change.
Ans: F, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA:
Business Economics

a
37. The withdrawal of a partner legally dissolves the partnership.
Ans: T, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Reporting

FOR INSTRUCTOR USE ONLY

12 - 8 Test Bank for Accounting Principles, Eleventh Edition

Answers to True-False Statements

Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.
a
1. T 7. F 13. F 19. T 25. F 31. F 37. T
a
2. T 8. F 14. F 20. F 26. T 32. T
a
3. F 9. T 15. T 21. T 27. T 33. F
a
4. T 10. F 16. F 22. F 28. F 34. F
a
5. F 11. F 17. F 23. T 29. F 35. F
a a
6. T 12. F 18. T 24. F 30. T 36. F

MULTIPLE CHOICE QUESTIONS

38. A hybrid form of business organization with certain features like a corporation is a(n)
a. limited liability partnership.
b. limited liability company.
c. "S" corporation.
d. sub-chapter "S" corporation.
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

39. A partnership
a. has only one owner.
b. pays taxes on partnership income.
c. must file an information tax return.
d. is not an accounting entity for financial reporting purposes.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

40. A general partner in a partnership

a. has unlimited liability for all partnership debts.
b. is always the general manager of the firm.
c. is the partner who lacks a specialization.
d. is liable for partnership liabilities only to the extent of that partner's capital equity.
Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

41. The individual assets invested by a partner in a partnership

a. revert back to that partner if the partnership liquidates.
b. determine that partner's share of net income or loss for the year.
c. are jointly owned by all partners.
d. determine the scope of authority of that partner.
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

42. Which one of the following would not be considered a disadvantage of the partnership form
of organization?
a. Limited life
b. Unlimited liability
c. Mutual agency
d. Ease of formation
Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

FOR INSTRUCTOR USE ONLY

 Accounting for Partnerships 12 - 9

43. The partnership form of business is

a. restricted to law and medical practices.
b. restricted to firms having fewer than 10 partners.
c. not restricted to any particular type of business.
d. most often used in relatively large companies.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

44. Which of the following is not a principal characteristic of the partnership form of business
organization?
a. Mutual agency
b. Association of individuals
c. Limited liability
d. Limited life
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

45. The partnership agreement should include each of the following except the
a. date of the partnership inception.
b. principal location of the firm.
c. surviving family members in the event of a partner's death.
d. Each of these should be included.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

46. Which of the following statements is true regarding the form of a legally binding partnership
contract?
a. The partnership contract must be in writing.
b. The partnership contract may be based on a handshake.
c. The partnership contract may be implied.
d. The partnership contract cannot be oral.
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

47. Which of the following statements about a partnership is correct?

a. The personal assets of a partner are included in the partnership accounting records.
b. A partnership is not required to file an information tax return.
c. Each partner's share of income is taxable to the partnership.
d. A partnership represents an accounting entity for financial reporting purposes.
Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

48. In a partnership, mutual agency means

a. each partner acts on his own behalf when engaging in partnership business.
b. the act of any partner is binding on all other partners, only if partners act within their
scope of authority.
c. an act by a partner is judged as binding on other partners depending on whether the act
appears to be appropriate for the partnership.
d. that partners must pay taxes on a mutual or combined basis.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA:
Business Economics

FOR INSTRUCTOR USE ONLY

12 - 10 Test Bank for Accounting Principles, Eleventh Edition

49. A partnership
a. is dissolved only by the withdrawal of a partner.
b. is dissolved upon the acceptance of a new partner.
c. dissolution means the business must liquidate.
d. has unlimited life.
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

50. The partner in a limited partnership that has unlimited liability is referred to as the
a. lead partner.
b. head partner.
c. general partner.
d. unlimited partner.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA:
Business Economics

51. Limited partnerships

a. must have at least one general partner.
b. guarantee that a partner will receive a return.
c. guarantee that a partner will get back his original investment.
d. are limited to only three partners.
Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

52. The Salinas-Milliken partnership is terminated when creditor claims exceed partnership
assets by $80,000. Salinas is a millionaire and Milliken has no personal assets. Milliken’s
partnership interest is 75% and Salinas’s is 25%. Creditors
a. must collect their claims equally from Milliken and Salinas.
b. may collect the entire $80,000 from Salinas.
c. must collect their claims 75% from Milliken and 25% from Salinas.
d. may not require Salinas to use his personal assets to satisfy the $80,000 in claims.
Ans: B, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA:
Business Economics

53. Which of the following statements about partnerships is incorrect?

a. Partnership assets are co-owned by partners.
b. If a partnership is terminated, the assets do not legally revert to the original contributor.
c. If the partnership agreement does not specify the manner in which net income is to be
shared, it is distributed according to capital contributions.
d. Each partner has a claim on assets equal to the balance in the partner's capital account.
Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

54. Which of the following is not an advantage of the partnership form of business?
a. Mutual agency
b. Ease of formation
c. Ease of decision making
d. Freedom from governmental regulations and restrictions
Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

FOR INSTRUCTOR USE ONLY

 Accounting for Partnerships 12 - 11

55. The largest companies in the United States are primarily organized as
a. limited partnerships.
b. partnerships.
c. corporations.
d. proprietorships.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

56. The basis for dividing partnership net income or net loss is referred to as any of the following
except the
a. income ratio.
b. income and loss ratio.
c. profit and loss ratio.
d. income sharing ratio.
Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

57. Which of the following statements is incorrect regarding partnership agreements?

a. It may be referred to as the “articles of co-partnership.”
b. Oral agreements are preferable to written articles.
c. It should specify the different relationships that are to exist among the partners.
d. It should state procedures for submitting disputes to arbitration.
Ans: B, LO: 1, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

58. Bagley invests personally owned equipment, which originally cost $220,000 and has
accumulated depreciation of $60,000 in the Bagley and Eggers partnership. Both partners
agree that the fair value of the equipment was $120,000. The entry made by the partnership
to record Bagley’s investment should be
a. Equipment........................................................................... 220,000
Accumulated Depreciation—Equipment...................... 60,000
Bagley, Capital............................................................ 160,000
b. Equipment........................................................................... 160,000
Bagley, Capital............................................................ 160,000
c. Equipment........................................................................... 120,000
Loss on Purchase of Equipment.......................................... 40,000
Accumulated Depreciation—Equipment.............................. 60,000
Bagley, Capital............................................................ 220,000
d. Equipment........................................................................... 120,000
Bagley, Capital............................................................ 120,000
Ans: D, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA

59. Nate is investing in a partnership with Deidre. Nate contributes as part of his initial
investment, Accounts Receivable of $60,000; an Allowance for Doubtful Accounts of $9,000;
and $6,000 cash. The entry that the partnership makes to record Nate’s initial contribution
includes a
a. credit to Nate, Capital for $66,000.
b. debit to Accounts Receivable for $51,000.
c. credit to Nate, Capital for $57,000.
d. debit to Allowance for Doubtful Accounts for $9,000.
Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA

FOR INSTRUCTOR USE ONLY

12 - 12 Test Bank for Accounting Principles, Eleventh Edition

Solution: $60,000  $9,000  $6,000  $57,000

60. Which of the following would not be recorded in the entry for the formation of a partnership?
a. Accumulated depreciation
b. Allowance for doubtful accounts
c. Accounts receivable
d. All of these would be recorded.
Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA:
FSA

61. Todd is investing in a partnership with Joseph. Todd contributes equipment that originally
cost $42,000, has a book value of $20,000, and a fair value of $26,000. The entry that the
partnership makes to record Todd’s initial contribution includes a
a. debit to Equipment for $22,000.
b. debit to Equipment for $42,000.
c. debit to Equipment for $26,000.
d. credit to Accumulated Depreciation for $22,000.
Ans: C, LO: 2, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA

62. Julie contributes, as part of her initial investment, accounts receivable with an allowance for
doubtful accounts. Which of the following reflects a proper treatment?
a. The balance of the accounts receivable account should be recorded on the books of the
partnership at its net realizable value.
b. The allowance account may be set up on the books of the partnership because it relates
to the existing accounts that are being contributed.
c. The allowance account should not be carried onto the books of the partnership.
d. The accounts receivable and allowance should not be recorded on the books of the
partnership because a partner must invest cash in the business.
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA:
FSA

63. Which one of the following would not be considered an expense of a partnership in
determining income for the period?
a. Expired insurance
b. Salary allowance to partners
c. Supplies used
d. Freight-out
Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Reporting

64. A partner invests into a partnership a building with an original cost of $360,000 and
accumulated depreciation of $160,000. This building has a $280,000 fair value. As a result
of the investment, the partner’s capital account will be credited for
a. $280,000.
b. $200,000.
c. $360,000.
d. $480,000.
Ans: A, LO: 2, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA

FOR INSTRUCTOR USE ONLY

 Accounting for Partnerships 12 - 13

65. Brian and Sandy are forming a partnership. Brian will invest a truck with a book value of
$10,000 and a fair value of $14,000. Sandy will invest a building with a book value of
$30,000 and a fair value of $42,000 with a mortgage of $15,000. At what amount should the
building be recorded?
a. $30,000
b. $27,000
c. $42,000
d. $45,000
Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA

66. Brian and Sandy are forming a partnership. Brian will invest a truck with a book value of
$10,000 and a fair value of $14,000. Sandy will invest a building with a book value of
$30,000 and a fair value of $42,000 with a mortgage of $15,000. What amount should be
recorded in Sandy’s capital account?
a. $30,000
b. $27,000
c. $42,000
d. $14,000
Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA

Solution: $42,000  $15,000  $27,000

67. Brian and Sandy are forming a partnership. Brian will invest a truck with a book value of
$10,000 and a fair value of $14,000. Sandy will invest a building with a book value of
$30,000 and a fair value of $42,000 with a mortgage of $15,000. What amount should be
recorded in Brian’s capital account?
a. $30,000
b. $27,000
c. $42,000
d. $14,000
Ans: D, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA

68. Brekke and Fig decide to organize a partnership. Brekke invests $30,000 cash, and Fig
contributes $24,000 cash and equipment having a book value of $12,000. Choose the entry
to record Fig’s investment in the partnership assuming the equipment has a fair value of
$18,000.
a. Cash.................................................................................... 24,000
Equipment .......................................................................... 12,000
Fig, Capital ................................................................. 36,000
b. Equipment .......................................................................... 12,000
Fig, Capital ................................................................. 12,000
c. Cash.................................................................................... 24,000
Fig, Capital ................................................................. 24,000
d. Cash.................................................................................... 24,000
Equipment .......................................................................... 18,000
Fig, Capital ................................................................. 42,000
Ans: D, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA

FOR INSTRUCTOR USE ONLY

12 - 14 Test Bank for Accounting Principles, Eleventh Edition

69. M. Abadie and S. Collier combine their individual sole proprietorships to start the Abadie -
Collier partnership. M. Abadie and S. Collier invest in the partnership as follows
Book Value Fair Value
Abadie Collier Abadie Collier
Cash $21,000 $6,000 $21,000 $6,000
Accounts Receivable 10,000 5,000 10,000 5,000
Allowance for Doubtful
Accounts (1,500) (600) (2,100) (900)
Equipment 15,000 24,000 13,500 9,000
Accumulated Depreciation (3,000) (9,000)
The entries to record the investment will include a credit to:
a. Abadie, Capital of $41,500.
b. Collier, Capital of $19,100.
c. Abadie, Capital of $43,000.
d. Collier, Capital of $25,100.
Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA

Solution: $6,000  $5,000  $9,000  $900  $19,100

70. Partners Gary and Elaine have agreed to share profits and losses in an 80:20 ratio
respectively, after Gary is allowed a salary allowance of $30,000 and Elaine is allowed a
salary allowance of $15,000. If the partnership had net income of $30,000 for 2014, Elaine’s
share of the income would be
a. $15,000.
b. $12,000.
c. $18,000.
d. $3,000.
Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA

Solution: $30,000  $30,000  $15,000   $15,000; $15,000  (20%) ($15,000)  $12,000

71. The partnership agreement of Alix, Gise, and Bosco provides for the following income ratio:
(a) Alix, the managing partner, receives a salary allowance of $108,000, (b) each partner
receives 15% interest on average capital investment, and (c) remaining net income or loss is
divided equally. The average capital investments for the year were: Alix $600,000, Gise
$1,200,000, and Bosco $1,800,000. If partnership net income is $720,000, the amount
distributed to Gise should be:
a. $180,000.
b. $186,000.
c. $204,000.
d. $240,000.
Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA

Solution: $720,000  $108,000  (.15) ($600,000  $1,200,000  $1,800,000)  $72,000; (.15) ($1,200,000)  (72,000  3)  $204,000

FOR INSTRUCTOR USE ONLY

 Accounting for Partnerships 12 - 15

72. The partnership agreement of Alix, Gise, and Bosco provides for the following income ratio:
(a) Alix, the managing partner, receives a salary allowance of $108,000, (b) each partner
receives 15% interest on average capital investment, and (c) remaining net income or loss is
divided equally. The average capital investments for the year were: Alix $600,000, Gise
$1,200,000, and Bosco $1,800,000. If partnership net income is $540,000, the amount
distributed to Alix should be
a. $90,000.
b. $162,000.
c. $180,000.
d. $198,000.
Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA

Solution: $540,000  $108,000  (.15) ($600,000  $1,200,000  $1,800,000)   $108,000; $108,000  (.15) ($600,000)  ( 108,000  3)   162,000

73. Partners Cantor and Dickens have capital balances in a partnership of $160,000 and
$240,000, respectively. They agree to share profits and losses as follows:
Cantor Dickens
As salaries $40,000 $48,000
As interest on capital at the beginning of the year 10% 10%
Remaining profits or losses 50% 50%

If income for the year was $200,000, what will be the distribution of income to Dickens ?
a. $92,000
b. $108,000
c. $80,000
d. $40,000
Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA

Solution: $200,000  $40,000  $48,000  (.10) ($160,000  $240,000)   $72,000; $48,000  (.10) ($240,000)  ($72,0002)  $108,000

74. Partners Cantor and Dickens have capital balances in a partnership of $160,000 and
$240,000, respectively. They agree to share profits and losses as follows:
Cantor Dickens
As salaries $40,000 $48,000
As interest on capital at the beginning of the year 10% 10%
Remaining profits or losses 50% 50%

If income for the year was $120,000, what will be the distribution of income to Cantor?
a. $52,000
b. $64,000
c. $40,000
d. $56,000
Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA

Solution: $120,000  $40,000  $48,000  (.10) ($160,000  $240,000)   $8,000; $40,000  (.10) ($160,000)  ( $8,0002)  $52,000

FOR INSTRUCTOR USE ONLY

12 - 16 Test Bank for Accounting Principles, Eleventh Edition

75. Partners Cantor and Dickens have capital balances in a partnership of $160,000 and
$240,000, respectively. They agree to share profits and losses as follows:
Cantor Dickens

As salaries $40,000 $48,000

As interest on capital at the beginning of the year 10% 10%
Remaining profits or losses 50% 50%

If net loss for the year was $8,000, what will be the distribution to Dickens?
a. $48,000 income
b. $4,000 income
c. $4,000 loss
d. $8,000 loss
Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem
Solving, IMA: Reporting

Solution:  $8,000  $40,000  $48,000  (.10) ($160,000  $240,000)   $136,000; $48,000  (.10) ($240,00)  ($136,0002)  $4,000

76. Partners Eli and Alex have agreed to share profits and losses in an 80:20 ratio respectively,
after Eli is allowed a salary allowance of $70,000 and Alex is allowed a salary allowance of
$35,000. If the partnership had net income of $70,000 for 2014, Alex’s share of the income
would be
a. $35,000.
b. $28,000.
c. $42,000.
d. $7,000.
Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA

Solution: $70,000  $70,000  $35,000   $35,000; $35,000  (.20) ($35,000)  $28,000

77. The most appropriate basis for dividing partnership net income when the partners do not
plan to take an active role in daily operations is
a. on a fixed ratio.
b. interest on capital balances and salaries to the partners.
c. on a ratio based on average capital balances.
d. salaries to the partners and the remainder on a fixed ratio.
Ans: C, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA:
Business Economics

78. The Mayer and Rodin partnership agreement stipulates that profits and losses will be shared
equally after salary allowances of $400,000 for Mayer and $200,000 for Rodin. At the
beginning of the year, Mayer’s Capital account had a balance of $800,000, while Rodin’s '
Capital account had a balance of $700,000. Net income for the year was $500,000. The
balance of Rodin’s Capital account at the end of the year after closing is
a. $950,000.
b. $200,000.
c. $850,000.
d. $900,000.
Ans: C, LO: 3, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem
Solving, IMA: Reporting

Solution: $500,000  $400,000  $200,000   $100,000; $200,000  ($100,0002)  $150,000; $700,000  $150,000  $850,000

FOR INSTRUCTOR USE ONLY

 Accounting for Partnerships 12 - 17

79. A partner's share of net income is recognized in the accounts through

a. adjusting entries.
b. closing entries.
c. correcting entries.
d. accrual entries.
Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA:
FSA

80. The partnership of Bher and Dhillips reports net income of $120,000. The partners share
equally in income and losses. The entry to record the partners' share of net income will
include a
a. credit to Income Summary for $120,000.
b. credit to Bher, Capital for $60,000.
c. debit to Dhillips, Capital for $60,000.
d. credit to Dhillips, Drawing for $60,000.
Ans: B, LO: 3, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA:
FSA

Solution: $120,0002  $60,000

81. Michelle receives $210,000 and Stephanie receives $140,000 in a split of $350,000 net
income. Which expression does not reflect the income splitting arrangement?
a. 3:2
b. 3/5 & 2/5
c. 6:4
d. 2:1
Ans: D, LO: 3, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: Business Economics

Solution: $350,0005  $70,000; $70,000  2  $140,000;$70,000  3  $210,000

82. An income ratio based on capital balances might be appropriate when

a. service is a primary consideration.
b. some, but not all, partners plan to work in the business.
c. funds invested in the partnership are considered the critical factor.
d. little net income is expected.
Ans: C, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA:
Business Economics

83. If the partnership agreement specifies salaries to partners, interest on partners' capital, and
the remainder on a fixed ratio, and partnership net income is not sufficient to cover both
salaries and interest,
a. only salaries are allocated to the partners.
b. only interest is allocated to the partners.
c. the entire net income is shared on a fixed ratio.
d. both salaries and interest are allocated to the partners.
Ans: D, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA:
Business Economics

FOR INSTRUCTOR USE ONLY

12 - 18 Test Bank for Accounting Principles, Eleventh Edition

84. Which of the following would not be considered an expense of a partnership in determining
income for the period?
a. Expired insurance
b. Income tax expense
c. Rent expense
d. Utilities expense
Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA:
Business Economics

85. The net income of the Crowe and Browning partnership is $450,000. The partnership
agreement specifies that Crowe and Browninghave a salary allowance of $120,000 and
$180,000, respectively. The partnership agreement also specifies an interest allowance of
10% on capital balances at the beginning of the year. Each partner had a beginning capital
balance of $300,000. Any remaining net income or net loss is shared equally.
What is Crowe’s share of the $450,000 net income?
a. $120,000
b. $150,000
c. $165,000
d. $195,000
Ans: D, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: Quantitive Methods

Solution: $450,000  $120,000  $180,000  (.10) (2) ($300,000)  $90,000; $120,000  (.10 ) ($300,000)  ($90,0002)  $195,000

86. The net income of the Crowe and Browning partnership is $450,000. The partnership
agreement specifies that Crowe and Browning have a salary allowance of $120,000 and
$180,000, respectively. The partnership agreement also specifies an interest allowance of
10% on capital balances at the beginning of the year. Each partner had a beginning capital
balance of $300,000. Any remaining net income or net loss is shared equally.
What is the balance of Browning's Capital account at the end of the year after net income
has been distributed?
a. $510,000
b. $480,000
c. $555,000
d. $525,000
Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem
Solving, IMA: Reporting

Solution: $450,000  $120,000  $180,000  (.10) (2) ($300,000)  $9,0000; $300,000  $180,000  (.10) ($300,000)  ($90,0002)  $555,000

87. The net income of the Travis and Tucker partnership is $125,000. The partnership
agreement specifies that profits and losses will be shared equally after salary allowances of
$100,000 (Travis) and $150,000 (Tucker) have been allocated. At the beginning of the year,
Travis’s Capital account had a balance of $250,000 and Tucker’s Capital account had a
balance of $325,000. What is the balance of Tucker’s Capital account at the end of the year
after profits and losses have been distributed?
a. $325,000
b. $50,000
c. $412,500
d. $387,500
Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem
Solving, IMA: Quantitive Methods

Solution: $125,000  $100,000  $150,000   $125,000; $325,000  $150,000  ($125,0002)  $412,500

FOR INSTRUCTOR USE ONLY

 Accounting for Partnerships 12 - 19

88. A partners' capital statement explains

a. the amount of legal liability of each of the partners.
b. the types of assets invested in the business by each partner.
c. how the partnership will be capitalized if a new partner is admitted to the partnership.
d. the changes in each partner's capital account and in total partnership capital during a
period.
Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Reporting

89. Each of the following is used in preparing the partners’ capital statement except the
a. balance sheet.
b. income statement.
c. partners’ capital accounts.
d. partners’ drawing accounts.
Ans: A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Reporting

90. The owners' equity statement for a partnership is called the

a. partners' proportional statement.
b. partners' capital statement.
c. statement of shareholders' equity.
d. capital and drawing statement.
Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Reporting

91. Which of the following would not cause an increase in partnership capital?
a. Drawings
b. Net income
c. Additional capital investment by the partners
d. Initial capital investment by the partners
Ans: A, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA:
FSA

92. Mary Jessica’s capital statement reveals that her drawings during the year were $50,000.
She made an additional capital investment of $25,000 and her share of the net loss for the
year was $10,000. Her ending capital balance was $200,000. What was Jessica’s beginning
capital balance?
a. $225,000
b. $185,000
c. $235,000
d. $260,000
Ans: C, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem
Solving, IMA: Quantitive Methods

Solution: X  $25,000  $50,000  $10,000  $200,000; X  $235,000

FOR INSTRUCTOR USE ONLY

12 - 20 Test Bank for Accounting Principles, Eleventh Edition

93.Jon Winek started the year with a capital balance of $135,000. During the year, his share of
partnership net income was $120,000 and he withdrew $22,500 from the partnership for
personal use. He made an additional capital contribution of $37,500 during the year. The
amount of Jon Winek’s capital balance that will be reported on the year-end balance sheet
will be
a. $120,000.
b. $292,500.
c. $225,000.
d. $270,000.
Ans: D, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem
Solving, IMA: Quantitive Methods

Solution: $135,000  $120,000  $22,500  $37,500  $270,000

94. The Partners' Capital Statement for TSB Company reported the following information in
total:
Capital, January 1................................................. $240,000
Additional investment............................................ 80,000
Drawings............................................................... 160,000
Net income............................................................ 200,000
The partnership has three partners: Toub, Sauls, and Birch with ending capital balances in a
ratio 40:20:40. What are the respective ending balances of the three partners?
a. Toub, $160,000; Sauls, $80,000; Birch, $160,000.
b. Toub, $144,000: Sauls, $72,000; Birch, $144,000.
c. Toub, $272,000; Sauls, $136,000; Birch, $272,000.
d. Toub, $180,000; Sauls, $96,00000; Birch, $180,000.
Ans: B, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem
Solving, IMA: Quantitive Methods

Solution: $240,000  $80,000  $160,000  $200,000  $360,000; ($360,000) (.4)  $144,000; ($360,000) (.2)  $72,000

95. The total column of the Partners' Capital Statement for DeltaBell Company is as follows:
Capital, January 1................................................. $600,000
Additional investment............................................ 240,000
Drawings............................................................... 360,000
Net income............................................................ 720,000
The partnership has three partners. The first two partners have ending capital balances that
are equal. The ending balance of the third partner is half of the ending balance of the first
partner. What is the ending capital balance of the third partner?
a. $288,000
b. $192,000
c. $240,000
d. $264,000
Ans: C, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem
Solving, IMA: Quantitive Methods

Solution: $600,000  $240,000  $360,000  $720,000  $1,200,000; $1,200,0005  $240,000

96. The partners' drawing accounts are

a. reported on the income statement.
b. reported on the balance sheet.
c. closed to Income Summary.
d. closed to the partners' capital accounts.
Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Reporting

FOR INSTRUCTOR USE ONLY

 Accounting for Partnerships 12 - 21

97. The Uniform Partnership Act provides that

a. a purchaser of a partnership interest is not a partner until he or she is accepted into the
firm by the continuing partners.
b. a partner must obtain the approval of other partners before selling his or her interest.
c. the price paid in a purchase of partner's interest must be equal to the capital equity
acquired.
d. the price paid in a purchase of partner's interest must be greater than the capital equity
acquired.
Ans: A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

98. The balance sheet of a partnership will

a. report retained earnings below the partnership capital accounts.
b. show a separate capital account for each partner.
c. show a separate drawing account for each partner.
d. show the amount of income that was distributed to each partner.
Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Reporting

99. The liquidation of a partnership may result from each of the following except the
a. bankruptcy of the partnership.
b. death of a partner.
c. retirement of a partner.
d. sale of the business by the partners.
Ans: C, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

100. In the liquidation of a partnership, any gain or loss on the realization of noncash assets
should be allocated
a. first to creditors and the remainder to partners.
b. to the partners on the basis of their capital balances.
c. to the partners on the basis of their income ratios.
d. only after all creditors have been paid.
Ans: C, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA:
Business Economics

101. In the liquidation of a partnership, any partner who has a capital deficiency
a. has a personal debt to the partnership for the amount of the deficiency.
b. is automatically terminated as a partner.
c. will receive a cash distribution only on the basis of his or her income-sharing ratio.
d. is not obligated to make up the capital deficiency.
Ans: A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA:
Business Economics

FOR INSTRUCTOR USE ONLY

12 - 22 Test Bank for Accounting Principles, Eleventh Edition

102. Partners Ana, Beth, and Cathy have capital account balances of $90,000 each. The income
and loss ratio is 5:2:3, respectively. In the process of liquidating the partnership, noncash
assets with a book value of $75,000 are sold for $30,000. The balance of Beth’s Capital
account after the sale is
a. $67,500.
b. $76,500.
c. $81,000.
d. $99,000.
Ans: C, LO: 5, Bloom: AP, Difficulty: Medium, Min: 1, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem
Solving, IMA: Reporting

Solution: $90,000  (.20) ($75,000  $30,000)  $81,000

103. The partners' income and loss sharing ratio is 2:3:5, respectively.
CHENARD, JENNINGS, AND BLAIR PARTNERSHIP
Balance Sheet
December 31, 2014

Assets Liabilities and Owners' Equity

Cash $ 45,000 Liabilities $150,000
Noncash assets 285,000 Chenard, Capital 60,000
Jennings, Capital 90,000
Blair, Capital 30,000
Total $330,000 Total $330,000

If the CHENARD, JENNINGS, and BLAIR Partnership is liquidated by selling the noncash
assets for $195,000 and creditors are paid in full, what is the amount of cash that can be
safely distributed to each partner?
a. CHENARD, $36,000; JENNINGS, $54,000; BLAIR, $0.
b. CHENARD, $42,000; JENNINGS, $63,000; BLAIR, $15,000.
c. CHENARD, $34,500; JENNINGS, $55,500; BLAIR, $0.
d. CHENARD, $33,000; JENNINGS, $57,000; BLAIR, $0.
Ans: A, LO: 5, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem
Solving, IMA: Business Economics

Solution: $60,000  (.2) ($195,000  $285,000)  (25) ($15,000)  $36,000; $90,000  (.3) ($195,000  $285,000)  (35) ($15,000)  $54,000; $30,000 
(.5) ($195,000  $285,000)  $15,000  $0

FOR INSTRUCTOR USE ONLY

 Accounting for Partnerships 12 - 23

104. The partners' income and loss sharing ratio is 2:3:5, respectively.
CHENARD, JENNINGS, AND BLAIR PARTNERSHIP
Balance Sheet
December 31, 2014

Assets Liabilities and Owners' Equity

Cash $ 45,000 Liabilities $150,000
Noncash assets 285,000 CHENARD, Capital 60,000
JENNINGS, Capital 90,000
BLAIR, Capital 30,000
Total $330,000 Total $330,000

If the CHENARD, JENNINGS, and BLAIR Partnership is liquidated by selling the noncash
assets for $375,000, and creditors are paid in full, what is the total amount of cash that
CHENARD will receive in the distribution of cash to partners?
a. $18,000
b. $117,000
c. $78,000
d. $75,000
Ans: C, LO: 5, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem
Solving, IMA: Business Economics

Solution: $60,000  (.2) ($375,000  $285,000)  $78,000

105. The partners' income and loss sharing ratio is 2:3:5, respectively.
CHENARD, JENNINGS, AND BLAIR PARTNERSHIP
Balance Sheet
December 31, 2014

Assets Liabilities and Owners' Equity

Cash $ 45,000 Liabilities $150,000
Noncash assets 285,000 CHENARD, Capital 60,000
JENNINGS, Capital 90,000
BLAIR, Capital 30,000
Total $330,000 Total $330,000

If the CHENARD, JENNINGS, and BLAIR Partnership is liquidated and the noncash assets
are worthless, the creditors will look to what partner's personal assets for settlement of the
creditors' claims?
a. The personal assets of Partner JENNINGS.
b. The personal assets of Partners CHENARD and BLAIR.
c. The personal assets of Partners CHENARD, JENNINGS, and BLAIR.
d. The personal assets of the partners are not available for partnership debts.
Ans: C, LO: 5, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem
Solving, IMA: Business Economics

FOR INSTRUCTOR USE ONLY

12 - 24 Test Bank for Accounting Principles, Eleventh Edition

106. If a partner has a capital deficiency and does not have the personal resources to eliminate it,
a. the creditors will have to absorb the capital deficiency.
b. the other partners will absorb the capital deficiency on the basis of their respective
capital balances.
c. the other partners will have to absorb the capital deficiency on the basis of their
respective income sharing ratios.
d. neither the creditors nor the other partners will have to absorb the capital deficiency.
Ans: C, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA:
Business Economics

107. When a partnership terminates business, the sale of noncash assets is called
a. liquidation.
b. realization.
c. recognition.
d. disposition.
Ans: B, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

108. The liquidation of a partnership

a. cannot be a voluntary act of the partners.
b. terminates the business.
c. eliminates those partners with a capital deficiency.
d. cannot occur unless all partners approve.
Ans: B, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

109. The liquidation of a partnership is a process containing the following steps:

1. Pay partnership liabilities in cash.
2. Allocate the gain or loss on realization to the partners on their income ratios.
3. Sell noncash assets for cash and recognize a gain or loss on realization.
4. Distribute remaining cash to partners on the basis of their remaining capital balances.
Identify the proper sequencing of the steps in the liquidation process.
a. 3, 2, 4, 1.
b. 3, 2, 1, 4.
c. 1, 3, 2, 4.
d. 1, 4, 3, 2.
Ans: B, LO: 5, Bloom: K, Difficulty: Medium, Min: 2, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem
Solving, IMA: Business Economics

110. In the final step of the liquidation process, remaining cash is distributed to partners
a. on an equal basis.
b. on the basis of the income ratios.
c. on the basis of the remaining capital balances.
d. regardless of capital deficiencies.
Ans: C, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

FOR INSTRUCTOR USE ONLY

 Accounting for Partnerships 12 - 25

111. In the liquidation process, if a capital account shows a deficiency

a. the partner with a deficiency has an obligation to the partnership for the amount of the
deficiency.
b. it may be written off to a "Loss" account.
c. it is disregarded until after the partnership books are closed.
d. it can be written off to a "Gain" account.
Ans: A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA:
Business Economics

112. Before distributing any remaining cash to partners in a partnership liquidation, it is

necessary to do each of the following except
a. sell noncash assets for cash.
b. recognize a gain or loss on realization.
c. allocate the gain or loss to the partners based on their capital balances.
d. pay partnership liabilities in cash.
Ans: C, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA:
Business Economics

113. Mandy, Annie, and Tammy formed a partnership with income-sharing ratios of 50%, 30%,
and 20%, respectively. Cash of $300,000 was available after the partnership’s assets were
liquidated. Prior to the final distribution of cash, Mandy’s capital balance was $200,000,
Annie’s capital balance was $150,000, and Tammy had a capital deficiency of $50,000.
Assuming Tammy contributes cash to match her capital deficiency, Mandy should receive
a. $175,000.
b. $168,750.
c. $131,250.
d. $200,000.
Ans: D, LO: 5, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem
Solving, IMA: Business Economics

114. Alex, Bob, and Ciera are partners, sharing income 2:1:2. After selling all of the assets for
cash, dividing gains and losses on realization, and paying liabilities, the balances in the
capital accounts are as follows: Alex, $10,000 Cr; Bob, $10,000 Cr; and Ciera, $30,000 Cr.
How much cash should be distributed to Alex?
a. $6,000
b. $20,000
c. $10,000
d. $16,667
Ans: C, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: Business Economics

115. In liquidation, balances prior to the distribution of cash to the partners are: Cash $900,000;
Peterson, Capital $420,000; Laney, Capital $390,000, and Howell, Capital $90,000. The
income ratio is 6:2:2, respectively. How much cash should be distributed to Peterson?
a. $375,000
b. $408,750
c. $420,000
d. $450,000
Ans: C, LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: Business Economics

FOR INSTRUCTOR USE ONLY

12 - 26 Test Bank for Accounting Principles, Eleventh Edition

116. In liquidation, balances prior to the distribution of cash to the partners are: Cash $765,000;
Peterson, Capital $420,000; Laney, Capital $390,000, and Howell, Capital $45,000
deficiency. The income ratio is 6:2:2, respectively. How much cash should be distributed to
Laney if Howell does not pay his deficiency?
a. $367,000
b. $378,750
c. $356,250
d. $390,000
Ans: B, LO: 5, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem
Solving, IMA: Business Economics

Solution: $390,000  (28) ($45,000)  $378,750

117. In liquidation, balances prior to the distribution of cash to the partners are: Cash $240,000;
Paley, Capital $112,000; Stengel, Capital $104,000, and King, Capital $24,000. The income
ratio is 6:2:2, respectively. How much cash should be distributed to Paley?
a. $100,000
b. $104,000
c. $112,000
d. $120,000
Ans: C, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: Business Economics

118. In liquidation, balances prior to the distribution of cash to the partners are: Cash $204,000;
Paley, Capital $112,000; Stengel, Capital $104,000, and King, Capital $12,000 deficiency.
The income ratio is 6:2:2, respectively. How much cash should be distributed to Stengel if
King does not pay his deficiency?
a. $98,000
b. $101,000
c. $95,000
d. $104,000
Ans: B, LO: 5, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem
Solving, IMA: Business Economics

Solution: $104,000  (28) (12,000)  $101,000

119. Use the following account balance information for Granobfin Partnership with income ratios
of 2:4:4 for Granger, Noble, and Finn, respectively.

Assets Liabilities and Owner’s Equity

Cash $ 54,000 Accounts payable $ 126,000
Accounts Granger, Capital $138,000
receivable 132,000 Noble, Capital 48,000
Inventory 438,000 Finn, Capital 312,000
$624,000 $624,000

Assume that, as part of liquidation proceedings, Granobfin sells its noncash assets for
$510,000. The amount of cash that would ultimately be distributed to Finn would be
a. $312,000.
b. $288,000.
c. $204,000.
d. $516,000.
Ans: B, LO: 5, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem
Solving, IMA: Business Economics

Solution: $312,000  (.4) ($510,000  $132,000  $438,000)  $288,000

FOR INSTRUCTOR USE ONLY

 Accounting for Partnerships 12 - 27

120. Use the following account balance information for Granobfin Partnership with income ratios
of 2:4:4 for Granger, Noble, and Finn, respectively.
Assets Liabilities and Owner’s Equity
Cash $ 54,000 Accounts payable $ 126,000
Accounts Granger, Capital 138,000
receivable 132,000 Noble, Capital 48,000
Inventory 438,000 Finn, Capital 312,000
$624,000 $624,000

Assume that, as part of liquidation proceedings, Granobfin sells its noncash assets for
$360,000. As a result, one of the partners has a capital deficiency which that partner
decides not to repay. The amount of cash that would ultimately be distributed to Finn would
be
a. $312,000.
b. $228,000.
c. $144,000.
d. $204,000.
Ans: D, LO: 5, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem
Solving, IMA: Business Economics

Solution: $312,000  (.4) ($360,000  $132,000  $438,000)  (46) ($36,000)  $204,000

a
121. R. Schoen purchases a 25% interest for $60,000 when the Hise, Poole, Lagos partnership
has total capital of $540,000. Prior to the admission of Schoen, each partner has a capital
balance of $180,000. Each partner relinquishes an equal amount of his capital balance to
Schoen. The amount to be relinquished by Lagos is
a. $30,000.
b. $38,000.
c. $45,000.
d. $75,000.
Ans: A, LO: 6, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem
Solving, IMA: Business Economics

Solution: (.25) ($540,000  60,000)  $60,000  $90,000; $90,0003  $30,000

a
122. Jackson is admitted to a partnership with a 25% capital interest by a cash investment of
$360,000. If total capital of the partnership is $1,560,000 before admitting Jackson, the
bonus to Jackson is
a. $120,000.
b. $60,000.
c. $180,000.
d. $240,000.
Ans: A, LO: 6, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem
Solving, IMA: Business Economics

Solution: (.25) ($1,560,000  $360,000)  $360,000  $120,000

FOR INSTRUCTOR USE ONLY

12 - 28 Test Bank for Accounting Principles, Eleventh Edition
a
123. Elkins and Landry are partners who share income and losses in the ratio of 3:2, respectively.
On August 31, their capital balances were: Elkins, $140,000 and Landry, $120,000. On that
date, they agree to admit Neumark as a partner with a one-third capital interest. If Neumark
invests $100,000 in the partnership, what is Elkins’s capital balance after Neumark’s
admittance?
a. $120,000
b. $126,667
c. $128,000
d. $140,000
Ans: C, LO: 6, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem
Solving, IMA: Business Economics

Solution: (13) ($140,000  $120,000  $100,000)  $120,000; $140,000 - (35) ($120,000  $100,000)  $128,000

a
124. Elkins and Landry are partners who share income and losses in the ratio of 3:2, respectively.
On August 31, their capital balances were: Elkins, $140,000 and Landry, $120,000. On that
date, they agree to admit Neumark as a partner with a one-third capital interest. If Neumark
invests $160,000 in the partnership, what is Landry’s capital balance after Neumark’s
admittance?
a. $140,000
b. $128,000
c. $126,000
d. $120,000
Ans: B, LO: 6, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem
Solving, IMA: Reporting

Solution: (13) ($140,000  $120,000  $160,000)  $140,000; $120,000  (25) ($160,000  $140,000)  $128,000

a
125. Encisco and Ollinger are partners who share profits and losses equally and have capital
balances of $280,000 and $245,000, respectively. Parks is admitted into the partnership by
investing $245,000 for a 30% capital interest. The account balance of Ollinger, Capital after
the admission of Parks would be
a. $231,000.
b. $238,000.
c. $252,000.
d. $245,000.
Ans: C, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem
Solving, IMA: Reporting

Solution: (.30) ($280,000  $245,000  $245,000)  $245,000  $14,000; $245,000  ($14,0002)  $252,000

FOR INSTRUCTOR USE ONLY

 Accounting for Partnerships 12 - 29
a
126. Rogers and Wissinger have partnership capital balances of $576,000 and $432,000,
respectively. Wissinger negotiates to sell his partnership interest to Mergenthaler for
$504,000. Rogers agrees to accept Mergenthaler as a new partner. The partnership entry to
record this transaction is
a. Cash.................................................................................... 504,000
Mergenthaler, Capital.................................................. 504,000
b. Wissinger, Capital................................................................ 504,000
Mergenthaler, Capital.................................................. 504,000
c. Cash.................................................................................... 72,000
Wissinger, Capital................................................................ 432,000
Mergenthaler, Capital.................................................. 504,000
d. Wissinger, Capital................................................................ 432,000
Mergenthaler, Capital.................................................. 432,000
Ans: D, LO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA

a
127. Gable and Devito share partnership profits and losses in the ratio of 6:4. Gable’s Capital
account balance is $160,000 and Devito’s Capital account balance is $100,000. Nance is
admitted to the partnership by investing $180,000 and is to receive a one-fourth ownership
interest. Gable, Devito and Nance’s capital balances after Nance’s investment will be
Gable Devito Nance
a. $160,000 $100,000 $180,000
b. $202,000 $128,000 $110,000
c. $198,000 $132,000 $110,000
d. $195,000 $135,000 $110,000
Ans: B, LO: 6, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem
Solving, IMA: Reporting

Solution: (14) ($160,000  $100,000  $180,000)  $110,000; $160,000  (610) ($180,000  $110,000)  $202,000; $100,000  (410) ($180,000 
$110,000)  $128,000

a
128. Jill and Smita have partnership capital account balances of $1,056,000 and $792,000,
respectively and share profits and losses equally. Sierra is admitted to the partnership by
investing $440,000 for a one-fourth ownership interest. The balance of Smita’s Capital
account after Sierra is admitted is
a. $726,000.
b. $792,000.
c. $858,000.
d. $572,000.
Ans: A, LO: 6, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem
Solving, IMA: Reporting

Solution: (.25) ($1,056,000  $792,000  $440,000)  $572,000; $792,000  (.5) ($440,000  $572,000)  $726,000

a
129. The admission of a new partner to an existing partnership
a. may be accomplished only by investing assets in the partnership.
b. requires purchasing the interest of one or more existing partners.
c. causes a legal dissolution of the existing partnership.
d. is almost always accompanied by the liquidation of the business.
Ans: C, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

FOR INSTRUCTOR USE ONLY

12 - 30 Test Bank for Accounting Principles, Eleventh Edition
a
130. When a partnership interest is purchased
a. every partner’s capital account is affected.
b. the transaction is a personal transaction between the purchaser and the selling
partner(s).
c. the buyer receives equity equal to the amount of cash paid.
d. all partners will receive some part of the purchase price.
Ans: B, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

a
131. Wu and Mannis each sell 1/3 of their partnership interest to Patel, receiving $105,000 each.
At the time of the admission, each partner has a $315,000 capital balance. The entry to
record the admission of Patel will show a
a. debit to Cash for $210,000.
b. credit to Patel, Capital for $315,000.
c. debit to Mannis, Capital for $315,000.
d. debit to Wu, Capital for $105,000.
Ans: D, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA

Solution: (2  $315,000)3  $210,000; $315,000  $210,000  $105,000

a
132. Bingham and Ecuyer sell 1/4 of their partnership interest to Ives receiving $600,000 each.
At the time of admission, Bingham and Ecuyer each had a $1,050,000 capital balance. The
admission of Ives will cause the net partnership assets to
a. increase by $1,200,000.
b. remain at $2,100,000.
c. decrease by $1,200,000.
d. remain at $3,300,000.
Ans: B, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA

Solution: (2) ($1,050,000)  $2,100,000

a
133. Faget and Hein sell to Melges a 1/3 interest in the Faget - Hein partnership. Melges will pay
Faget and Hein each $140,000 for admission into the organization. Before this transaction, Faget
and Hein show capital balances of $210,000 each. The journal entry to record the admission
of Melges will
a. show a debit to Cash for $280,000.
b. not show a debit to Cash.
c. show a debit to Hein, Capital for $140,000.
d. show a credit to Melges, Capital for $280,000.
Ans: B, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA

a
134. Letourneau invests $20,000 in cash (admission by investment) in the Seiler-Shaw
partnership to acquire a 1/4 interest. In this case
a. the accounting will be the same as a purchase of an interest.
b. the total net assets of the new partnership are unchanged from the previous partnership.
c. the total capital of the new partnership is greater than the total capital of the old
partnership.
d. Letourneau’s income ratio will automatically be 1/4.
Ans: C, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

FOR INSTRUCTOR USE ONLY

 Accounting for Partnerships 12 - 31
a
135. Which of the following is correct when admitting a new partner into an existing partnership?
Purchase of an Interest Admission by Investment
a. Total net assets unchanged unchanged
b. Total capital increased unchanged
c. Total net assets unchanged increased
d. Total capital unchanged unchanged
Ans: C, LO: 6, Bloom: C, Difficulty: Easy, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA:
Business Economics

a
136. When admitting a new partner by investment, a bonus to old partners
a. is usually unjustified because book values clearly reflect partnership net worth.
b. is sometimes justified because goodwill may exist and it is not reflected in the accounts.
c. results if the debit to cash is less than the new partner's capital credit.
d. results if the debit to cash is equal to the new partner's capital credit.
Ans: B, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA:
Business Economics

a
137. When admitting a new partner by investment, a bonus to old partners is allocated on
a. the basis of capital balances.
b. the basis of the original investment of the old partners.
c. the basis of income ratios before the admission of the new partner.
d. a seniority basis.
Ans: C, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA:
Business Economics

a
138. A bonus to a new partner
a. is prohibited by GAAP.
b. results when the new partner's capital credit is less than his or her investment of assets
in the firm.
c. may occur when recorded book values are lower than market values.
d. results when the new partner's capital credit is greater than his or her investment of
assets in the firm.
Ans: D, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA:
Business Economics

a
139. A bonus to a new partner will
a. increase the capital balances of existing partners based on their income ratios before the
admission of the new partner.
b. increase the capital balances of existing partners based on their income ratios after the
admission of the new partner.
c. decrease the capital balances of existing partners based on their income ratios before
the admission of the new partner.
d. decrease the capital balances of existing partners based on their capital balances before
the admission of the new partner.
Ans: C, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA:
Business Economics

FOR INSTRUCTOR USE ONLY

12 - 32 Test Bank for Accounting Principles, Eleventh Edition
a
140. On November 30, capital balances are Forsyth $720,000, Lagassi $600,000 and Kelly
$600,000. The income ratios are 20%, 20% and 60% respectively. Forsytha decides to retire
from the partnership. The partnership pays Forsyth $600,000 cash for her partnership
interest. After Forsyth’s retirement, what is the balance of Kelly’s capital account?
a. $528,000
b. $600,000
c. $672,000
d. $690,000
Ans: D, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem
Solving, IMA: Reporting

a
141. On November 30, capital balances are Forsytha $720,000, Lagassi $600,000 and Kelly
$600,000. The income ratios are 20%, 20% and 60% respectively. Forsytha decides to retire
from the partnership. In order for Lagassi and Kelly to have equal capital interests after the
retirement of Forsyth, how much partnership cash would have to be paid to Forsytha for her
partnership interest?
a. $0.
b. $640,000
c. $720,000
d. Any amount paid to Forsyth will cause Lagassi and Kelly to still have equal capital
balances.
Ans: C, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: Business Economics

a
142. Dawn, Garret and Josh have partnership capital account balances of $225,000, $450,000
and $105,000, respectively. The income sharing ratio is Dawn, 50%; Garret, 40%; and Josh,
10%. Dawn desires to withdraw from the partnership and it is agreed that partnership assets
of $195,000 will be used to pay Dawn for her partnership interest. The balances of Garret’s
and Josh’s Capital accounts after Dawn’s withdrawal would be
a. Garret, $450,000; Josh, $105,000.
b. Garret, $474,000; Josh, $111,000.
c. Garret, $426,000; Josh, $99,000.
d. Garret, $435,000; Josh, $90,000.
Ans: B, LO: 7, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem
Solving, IMA: Reporting

Solution: $225,000  $195,000  $30,000; $450,000  (45) ($30,000)  $474,000; $105,000  (15) ($30,000)  $111,000

FOR INSTRUCTOR USE ONLY

 Accounting for Partnerships 12 - 33
a
143. Able Baker, and Carter have partnership capital account balances of $600,000 each.
Income and losses are shared equally. Carter agrees to sell three-fourths of his ownership
interest to Able for $525,000 and one-fourth to Baker for $187,500. Able and Baker will use
personal assets to purchase Carter’s interest. The partnership's entry to record Carter’s
withdrawal from the partnership would be
a. Carter, Capital ..................................................................... 712,500
Cash .......................................................................... 712,500
b. Carter, Capital ..................................................................... 712,500
Able, Capital ............................................................... 350,000
Baker, Capital ............................................................. 125,000
c. Carter, Capital ..................................................................... 600,000
Able, Capital ............................................................... 450,000
Baker, Capital ............................................................. 150,000
d. Able, Capital ....................................................................... 534,375
Baker, Capital ..................................................................... 178,125
Carter, Capital ........................................................... 712,500
Ans: C, LO: 7, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA

Solution: $600,000  .25  $150,000; $600,000  .75  $450,000

a
144. When a partner withdraws from the firm, which of the following reflects the correct
partnership effects?
Payment from Payment from
Partners' Personal Assets Partnership Assets
a. Total net assets decreased decreased
b. Total capital decreased decreased
c. Total net assets unchanged decreased
d. Total capital unchanged unchanged
Ans: C, LO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA:
Business Economics

a
145. Which of the following is not a necessary action that the partnership must take upon the
death of a partner?
a. Determine the net income or net loss for the year to date.
b. Discontinue business operations.
c. Close the books.
d. Prepare financial statements.
Ans: B, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA:
Business Economics

a
146. On November 30, capital balances are Roses $300,000, Ellis $250,00 and Gise $250,000.
The income ratios are 20%, 20% and 60%, respectively. Roses decides to retire from the
partnership. The partnership pays Roses $350,000 cash for her partnership interest. After
Rose’s retirement, what is the balance of Ellis’s capital account?
a. $237,500
b. $240,000
c. $250,000
d. $325,000
Ans: A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem
Solving, IMA: Reporting

Solution: $250,000 + (28) ($300,000  $350,000)  $237,500

FOR INSTRUCTOR USE ONLY

12 - 34 Test Bank for Accounting Principles, Eleventh Edition
a
147. On November 30, capital balances are Ross $300,000, Ellis $250,000 and Gise $250,000.
The income ratios are 20%, 20% and 60%, respectively. Ross decides to retire from the
partnership. The partnership pays Ross $250,000 cash for her partnership interest. After
Ross’s retirement, what is the balance of Gise’s capital account?
a. $220,000
b. $250,000
c. $280,000
d. $287,500
Ans: D, LO: 7, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: Business Economics

Solution: $250,000 + (68) ($300,000  $250,000)  $287,500

a
148. On November 30, capital balances are Ross $300,000, Ellis $250,000 and Gise $250,000.
The income ratios are 20%, 20% and 60%, respectively. Ross decides to retire from the
partnership. In order for Ellis and Gise to have equal capital interests after the retirement of
Ross, how much partnership cash would have to be paid to Ross for her partnership
interest?
a. $0
b. $266,667
c. $300,000
d. Any amount paid to Ross will cause Ellis and Gise to still have equal capital balances.
Ans: C, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: Business Economics

149. All of the following are characteristics of partnerships except

a. co-ownership of property.
b. mutual agency.
c. unlimited life.
d. association of individuals.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

150. The Gorni, Chambers, and Hale partnership is terminated when the claims of company
creditors exceed partnership assets by $100,000. The capital balances for Gorni, Chambers,
and Hale are $70,000, $10,000, and $0, respectively. The original claims of the creditors
were negotiated by Chambers and Hale. Which partner(s) is(are) personally and individually
liable for all partnership liabilities?
a. Gorni
b. Chambers
c. Chambers and Hale
d. Gorni, Chambers, and Hale
Ans: D, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA:
Business Economics

151. When a partner invests noncash assets in a partnership, the assets should be recorded at
their
a. book value.
b. carrying value.
c. fair value.
d. original cost.
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA:
Business Economics

FOR INSTRUCTOR USE ONLY

 Accounting for Partnerships 12 - 35

152. The partnership agreement of Ashford and Cohen provides for salary allowances of $90,000
to Ashford and $70,000 to Cohen, with the remaining income or loss to be divided equally.
During the year, Ashford and Cohen each withdraw cash equal to 80% of their salary
allowances. If partnership net income is $200,000, Ashford’s equity in the partnership would
a. increase more than Cohen’s.
b. decrease more than Cohen’s.
c. increase the same as Cohen’s.
d. decrease the same as Cohen’s.
Ans: A, LO: 3, Bloom: C, Difficulty: Medium, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem
Solving, IMA: Reporting

153. Which of the following statements is correct?

a. Salaries to partners and interest on partners' capital are expenses of the partnership.
b. Salaries to partners are expenses of the partnership but not interest on partners' capital.
c. Interest on partners' capital is an expense of the partnership but not salaries to partners.
d. Neither salaries to partners nor interest on partners' capital are expenses of the
partnership.
Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Reporting

154. In the liquidation of a partnership, the gains and losses from assets sold are
a. divided equally among the partners.
b. divided among the partners in the stated income ratio.
c. divided among the partners in proportion to their capital equity interests.
d. ignored.
Ans: B, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA:
Business Economics

155. If a partner with a capital deficiency is unable to pay the amount owed to the partnership, the
deficiency is allocated to the partners with credit balances
a. equally.
b. on the basis of their income ratios.
c. on the basis of their capital balances.
d. on the basis of their original investments.
Ans: B, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA:
Business Economics

156. An entry is not required in the liquidation of a partnership to record the

a. payment of cash to creditors.
b. distribution of cash to the partners.
c. sale of noncash assets.
d. allocation of a capital deficiency to partners with credit balances when the deficient
partner is expected to pay the deficiency.
Ans: D, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA:
Business Economics

FOR INSTRUCTOR USE ONLY

12 - 36 Test Bank for Accounting Principles, Eleventh Edition

157. The first step in the liquidation of a partnership is to

a. allocate a gain or loss on realization to the partners.
b. distribute remaining cash to the partners.
c. pay partnership liabilities.
d. sell noncash assets and recognize a gain or loss on realization.
Ans: D, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA:
Business Economics

158. Leno joins the partnership of Kingsley and Mccaffrey by paying $95,000 in cash. If the net
assets of the partnership are still the same amount after Leno has been admitted as a
partner, then Leno
a. must have been admitted by investment of assets.
b. must have been admitted by purchase of a partner's interest.
c. must have received a bonus upon being admitted.
d. could have been admitted by an investment of assets or by a purchase of a partner's
interest.
Ans: B, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Reporting

159. Motts is admitted to a partnership with a 25% capital interest by a cash investment of
$90,000. If total capital of the partnership is $390,000 before admitting Motts, the bonus to
Mock is
a. $30,000.
b. $15,000.
c. $45,000.
d. $60,000.
Ans: A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: Quantitive Methods

Solution: (.25) ($390,000  $90,000)  $90,000  $30,000

Answers to Multiple Choice Questions

Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.
a a
38. b 56. d 74. a 92. c 110. c 128. a 146. a
a a
39. c 57. b 75. b 93. d 111. a 129. c 147. d
a a
40. a 58. d 76. b 94. b 112. c 130. b 148. c
a
41. c 59. c 77. c 95. c 113. d 131. d 149. c
a
42. d 60. a 78. c 96. d 114. c 132. b 150. d
a
43. c 61. c 79. b 97. a 115. c 133. b 151. c
a
44. c 62. b 80. b 98. b 116. b 134. c 152. a
a
45. c 63. b 81. d 99. c 117. c 135. c 153. d
a
46. b 64. a 82. c 100. c 118. b 136. b 154. b
a
47. d 65. c 83. d 101. a 119. b 137. c 155. b
a
48. c 66. b 84. b 102. c 120. d 138. d 156. d
a a
49. b 67. d 85. d 103. a 121. a 139. c 157. d
a a a
50. c 68. d 86. c 104. c 122. a 140. d 158. b
a a a
51. a 69. b 87. c 105. c 123. c 141. c 159. a
a a
52. b 70. b 88. d 106. c 124. b 142. b
a a
53. c 71. c 89. a 107. b 125. c 143. c
a a
54. a 72. b 90. b 108. b 126. d 144. c
a a
55. c 73. b 91. a 109. b 127. b 145. b

FOR INSTRUCTOR USE ONLY

 Accounting for Partnerships 12 - 37

BRIEF EXERCISES
BE 160
Draper and Becker decide to organize a partnership. Draper invests $25,000 cash, and Becker
contributes $5,000 and equipment having a book value of $7,000 and a fair value of $15,000.

Instructions
Prepare the entry to record each partner’s investment.
Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA

Solution 160 (5 min.)

Cash……...…………............................................................................. 25,000
Draper, Capital…………………………………………………………. 25,000

Cash…………………............................................................................. 5,000
Equipment……………........................................................................... 15,000
Becker, Capital…........................................................................... 20,000

BE 161
Sonoma Company and Woodberry Company decide to merge their proprietorships into a
partnership called Sonberry Company. The balance sheet of Woodberry Company shows:
Accounts Receivable $18,000
Less: Allowance for doubtful accounts 1,500 $16,500

Equipment $20,000
Less: Accumulated depreciation 10,000 $10,000

The partners agree that the net realizable value of the receivables is $16,000 and that the fair value
of the equipment is $15,000.

Instructions
Indicate how the four accounts should appear in the opening balance sheet of the partnership.
Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Problem Solving, IMA: Reporting

FOR INSTRUCTOR USE ONLY

12 - 38 Test Bank for Accounting Principles, Eleventh Edition

Solution 161 (4 min.)

SONBERRY COMPANY
Balance Sheet (partial)
Assets
Accounts Receivable $18,000
Less: Allowance for Doubtful Accounts 2,000 $16,000
Equipment 15,000

BE 162
The Fig & Olive Co. reports net income of $24,000. Interest allowances are Fig $3,000 and Olive
$5,000; partner salary allowances are Fig $18,000 and Olive $10,000 and the remainder is shared
equally.

Instructions
Indicate the division of net income to each partner, and prepare the entry to distribute the net
income.
Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA

Solution 162 (6 min.)

Division of Net Income
Fig Olive Total
Salary allowance $18,000 $10,000 $28,000
Interest allowance on partners’ capital 3,000 5,000 8,000
Total salaries and interest 21,000 15,000 36,000
Remaining income, ($12,000) ($24,000 – $36,000)
Fig ($12,000 × 50%) (6,000)
Olive ($12,000 × 50%) (6,000)
Total remainder (12,000)
Total division of net income $15,000 $ 9,000 $24,000
The entry to record the division of net income is:

Income Summary............................................................................ 24,000

Fig, Capital............................................................................. 15,000
Olive, Capital.......................................................................... 9,000

BE 163
Southern Skies Co. had beginning capital balances on January 1, 2014, as follows: Patty Sharp
$30,000 and Jim O’Connor $25,000. During the year, drawings were Sharp $15,000 and O’Connor
$8,000. Net income was $40,000, and the partners share income equally.

Instructions
Prepare the partners’ capital statement for the year.
Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Problem Solving, IMA: Reporting

FOR INSTRUCTOR USE ONLY

 Accounting for Partnerships 12 - 39

Solution 163 (4 min.)

SOUTHERN SKIES COMPANY

Partners’ Capital Statement

Sharp O’Connor Total

Beginning Capital $30,000 $25,000 $55,000
Add: Net Income 20,000 20,000 40,000
50,000 45,000 95,000
Less: Drawings 15,000 8,000 23,000
Ending Capital $35,000 $37,000 $72,000

BE 164
After liquidating noncash assets and paying creditors, account balances in the Main Co. are Cash
$29,000, Art, Capital (Cr.) $11,000, Bob, Capital (Cr,) $8,000 and Cam, Capital (Cr.) $10,000. The
partners share income equally.

Instructions
Journalize the final distribution of cash to the partners.
Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA

Solution 164 (4 min.)

Art, Capital............................................................................................ 11,000
Bob, Capital........................................................................................... 8,000
Cam, Capital......................................................................................... 10,000
Cash....................................................................................... 29,000

BE 165
Appalachian Company at December 31 has cash $40,000, noncash assets $200,000, liabilities
$110,000, and the following capital balances: Hoffman $90,000 and Mena $40,000. The firm is
liquidated, and $220,000 in cash is received for the noncash assets. Hoffman and Mena income
ratios are 60% and 40%, respectively.

Instructions
Prepare a cash distribution schedule.
Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Problem Solving, IMA: Reporting

FOR INSTRUCTOR USE ONLY

12 - 40 Test Bank for Accounting Principles, Eleventh Edition

Solution 165 (5 min.)

APPALACHIAN COMPANY
Schedule of Cash Payments
Noncash Hoffman Mena
Cash + Assets = Liabilities + Capital + Capital
Balances before
Liquidation $ 40,000 $200,000 $110,000 $ 90,000 $40,000
Sale of noncash assets
and allocation of losses 220,000 (200,000) 12,000 8,000
New balances 260,000 -0- 110,000 102,000 48,000
Pay liabilities (110,000) _____ (110,000)
New balances 150,000 -0- -0- 102,000 48,000

Cash distribution $150,000 $ -0- $ -0- $102,000 $48,000

a
BE 166
In BigEasy Co., capital balances are Adrienne $60,000 and Dino $75,000. The partners share
income equally. Javier is admitted to the firm with a 40% interest by an investment of cash of
$85,000. Journalize the admission of Javier.
Ans: N/A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA

a
Solution 166 (3 min.)
Cash...................................................................................................... 85,000
Adrienne, Capital (50% × $3,000*)........................................................ 1,500
Dino, Capital (50% × $3,000*)............................................................... 1,500
Javier, Capital (40% × $220,000)............................................... 88,000
*[(60,000 + $75,000 + $85,000) × 40%] – $85,000 = $3,000.
a
BE 167
Thao and Leslie are partners who share profits 60% and 40%. Their capital balances were both
$120,000 before Kiley was admitted to the partnership. Kiley contributed $160,000 in cash to the
partnership for a 30% interest.

Instructions
Compute the capital balances of Thao and Leslie after Kiley is admitted to the partnership.
Ans: N/A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Problem Solving, IMA: Reporting

a
Solution 167 (4 min.)
Thao’s capital balance: $120,000 + {$160,000 – [($240,000 + $160,000) × .30]} × .60 = $144,000

Leslie’s capital balance: $120,000 + {$160,000 – [($240,000 + $160,000) ×.30]} × .40 = $136,000

FOR INSTRUCTOR USE ONLY

 Accounting for Partnerships 12 - 41
a
BE 168
Capital balances in Carson Co. are Dene $50,000, Aneta $38,000, and Harriet $25,000. The
partners share income equally. Harriet receives $31,000 from partnership assets in withdrawing
from the firm.

Instructions
Journalize the withdrawal of Harriet.
Ans: N/A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA

a
Solution 168 (3 min.)
Harriet, Capital...................................................................................... 25,000
Dene, Capital (50% × $6,000)............................................................... 3,000
Aneta, Capital (50% × $6,000).............................................................. 3,000
Cash............................................................................................. 31,000
a
BE 169
Rich, Tracy, and Mark are partners who share profits 40%, 20%, and 40%. Their capital balances
were $630,000, $420,000, and $210,000, respectively, before Mark’s retirement. Mark was paid
$240,000 from partnership assets to buy his interest.

Instructions
Compute the capital balances of Rich and Tracy after Mark has withdrawn.
Ans: N/A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Problem Solving, IMA: Reporting

a
Solution 169 (4 min.)
Rich’s capital balance: $630,000 – [($240,000 – $210,000) X 40/60] = $610,000

Tracy’s capital balance: $420,000 – [($240,000 – $210,000) X 20/60] = $410,000

EXERCISES
Ex. 170
Michelle Hamilton and Bill Rossi decide to form a partnership. Hamilton invests $35,000 cash and
accounts receivable of $30,000 less allowance for doubtful accounts of $2,000. Rossi contributes
$25,000 cash and equipment having a $6,000 book value. It is agreed that the allowance account
should be $3,000 and the fair value of the equipment is $10,000.
Instructions
Prepare the necessary journal entry to record the formation of the partnership.
Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA

FOR INSTRUCTOR USE ONLY

12 - 42 Test Bank for Accounting Principles, Eleventh Edition

Solution 170 (6 min.)

Cash ($35,000 + $25,000).................................................................... 60,000
Accounts Receivable............................................................................. 30,000
Equipment............................................................................................. 10,000
Allowance for Doubtful Accounts.................................................. 3,000
Hamiltion, Capital ($35,000 + $30,000 – $3,000)......................... 62,000
Rossi, Capital ($25,000 + $10,000).............................................. 35,000

Ex. 171
Ron Marden and Tip Baker operate separate auto repair shops. On January 1, 2014, they decide to
combine their separate businesses which were operated as proprietorships to form M & B Auto
Repair, a partnership. Information from their separate balance sheets is presented below:
Marden Auto Repair Baker Auto Repair
Cash $10,000 $14,000
Accounts receivable 12,000 10,000
Allowance for doubtful accounts 1,000 500
Accounts payable 5,000 6,000
Notes payable — 3,000
Salaries and wages payable 1,000 1,500
Equipment 12,000 24,000
Accumulated depreciation—equipment 2,000 4,000

It is agreed that the expected realizable value of Marden’s accounts receivable is $11,000 and
Baker’s receivables is $7,000. The fair value of Marden’s equipment is $13,000 and the value of
Baker’s equipment is $20,000. It is further agreed that the new partnership will assume all liabilities
of the proprietorships with the exception of the notes payable on Baker’s balance sheet which he
will pay himself.
Instructions
Prepare the journal entries necessary to record the formation of the partnership.
Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA

Solution 171 (15 min.)

Cash...................................................................................................... 10,000
Accounts Receivable............................................................................. 12,000
Equipment............................................................................................. 13,000
Allowance for Doubtful Accounts.................................................. 1,000
Salaries and Wages Payable........................................................ 1,000
Accounts Payable......................................................................... 5,000
R. Marden, Capital........................................................................ 28,000
(To record R. Marden’s investment)

Cash...................................................................................................... 14,000
Accounts Receivable............................................................................. 10,000
Equipment............................................................................................. 20,000
Allowance for Doubtful Accounts.................................................. 3,000
Salaries and Wages Payable........................................................ 1,500
Accounts Payable......................................................................... 6,000
T. Baker, Capital........................................................................... 33,500
(To record Baker’s investment)

FOR INSTRUCTOR USE ONLY

 Accounting for Partnerships 12 - 43

Ex. 172
A. Wiggins, L. Stokes, and K. Hayes are forming a partnership. Wiggins is transferring $75,000 of
personal cash to the partnership. Stokes owns land worth $25,000 and a small building worth
$120,000, which she transfers to the partnership. Hayes transfers to the partnership cash of
$14,000, accounts receivable of $48,000 and equipment worth $28,000. The partnership expects to
collect $45,000 of the accounts receivable.

Instructions
(a) Prepare the journal entries to record each of the partners’ investments.
(b) What amount would be reported as total owners’ equity immediately after the investments?
Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA

Solution 172 (10 min.)

(a) Cash ............................................................................................ 75,000
Wiggins, Capital................................................................... 75,000

Land ............................................................................................ 25,000

Building........................................................................................ 120,000
Stokes, Capital..................................................................... 145,000

Cash ............................................................................................ 14,000

Accounts Receivable.................................................................... 48,000
Equipment.................................................................................... 28,000
Allowance for Doubtful Accounts.......................................... 3,000
Hayes, Capital..................................................................... 87,000

(b) $75,000 + $145,000 + $87,000 = $307,000

Ex. 173
S. Pellah (beginning capital, $80,000) and M. Berry (beginning capital $120,000) are partners.
During 2014 the partnership earned net income of $90,000, and Pellah made drawings of $24,000
while Berry made drawings of $32,000.

Instructions
(a) Assume the partnership income-sharing agreement calls for income to be divided 40% to Pellah
and 60% to Berry. Prepare the journal entry to record the allocation of net income.
(b) Assume the partnership income-sharing agreement calls for income to be divided with a salary
of $40,000 to Pellah and $35,000 to Berry, with the remainder divided 40% to Pellah and 60% to
Berry. Prepare the journal entry to record the allocation of net income.
(c) Assume the partnership income-sharing agreement calls for income to be divided with a salary
of $50,000 to Pellah and $45,000 to Berry, interest of 10% on beginning capital, and the
remainder divided 50%-50%. Prepare the journal entry to record the allocation of net income.
(d) Compute the partners’ ending capital balances under the assumption in part (c).
Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA

FOR INSTRUCTOR USE ONLY

12 - 44 Test Bank for Accounting Principles, Eleventh Edition

Solution 173 (15 min.)

(a) Income Summary......................................................................... 90,000
Pellah, Capital ($90,000 X 40%)......................................... 36,000
Berry, Capital ($90,000 X 60%)........................................... 54,000

(b) Income Summary......................................................................... 90,000

Pellah, Capital [$40,000 + ($15,000 X 40%)].................... 46,000
Berry, Capital [$35,000 + ($15,000 X 60%)]..................... 44,000

(c) Income Summary......................................................................... 90,000

Pellah, Capital..................................................................... 45,500
Berry, Capital...................................................................... 44,500

Pellah: [$50,000 + $8,000 – ($25,000 X 50%)]

Berry: [$45,000 + $12,000 – ($25,000 X 50%)]

(d) Pellah: $80,000 + $45,500 – $24,000 = $101,500

Berry: $120,000 + $44,500 – $32,000 = $132,500

Ex. 174
The Jamison and Stephens partnership reports net income of $50,000. Partner salary allowances
are Jamison $18,000 and Stephens $12,000. Any remaining income is shared 60:40.

Instructions
Determine the amount of net income allocated to each partner.
Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: Quantitive Methods

Solution 174 (5 min.)

Jamison Stephens Total
Salary allowance $18,000 $12,000 $30,000
Remaining income, $15,000
Jamison ($20,000 × 60%) 12,000
Stephenss ($20,000 × 40%) 8,000 20,000
Total division $30,000 $20,000 $50,000

Ex. 175
Ando, Dadd, and Porter formed a partnership on January 1, 2014. Ando invested $60,000, Dadd
$60,000 and Porter $140,000. Ando will manage the store and work 40 hours per week in the store.
Dadd will work 20 hours per week in the store, and Porter will not work. Each partner withdrew 40
percent of his income distribution during 2014. If there was no income distribution to a partner, there
were no withdrawals of cash.
Instructions
Compute the partners' capital balances at the end of 2014 under the following independent
conditions: (Hint: Use T accounts to determine each partner's capital balances.)

FOR INSTRUCTOR USE ONLY

 Accounting for Partnerships 12 - 45

Ex. 175 (Cont.)

(1) Net income is $120,000 and the income ratio is Ando 40%, Dadd 35%, and Porter 25%.
(2) Net income is $125,000 and the partnership agreement only specifies a salary of $50,000 to
Ando and $30,000 to Dadd.
(3) Net income is $76,000 and the partnership agreement provides for (a) a salary of $40,000 to
Ando and $40,000 to Dadd, (b) interest on beginning capital balances at the rate of 10%, and
(c) any remaining income or loss is to be shared by Ando 40%, Dadd 35%, and Porter 25%.
Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Problem Solving, IMA: Reporting

Solution 175 (15 min.)

(1)
Ando, Capital Dadd, Capital Porter, Capital
19,200 60,000 16,800 60,000 12,000 140,000
48,000 42,000 30,000
88,800 85,200 158,000

Net Income % Distribution % Drawings

Ando $120,000 × 40 $ 48,000 × 40 $19,200
Dadd 120,000 × 35 42,000 × 40 16,800
Porter 120,000 × 25 30,000 × 40 12,000
$120,000 $48,000

(2)
Ando, Capital Dadd, Capital Porter, Capital
26,000 60,000 18,000 60,000 6,000 140,000
65,000 45,000 15,000
99,000 87,000 149,000

Ando Dadd Porter Total

Salary $50,000 $30,000 $ 0 $ 80,000
Remainder 15,000 15,000 15,000 45,000
Total $65,000 $45,000 $15,000 $125,000
× 40% = Drawings $26,000 $18,000 $ 6,000 $ 50,000

(3)
Ando, Capital Dadd, Capital Porter, Capital
13,600 60,000 14,200 60,000 2,600 140,000
34,000 35,500 6,500
80,400 81,300 143,900

Ando Dadd Porter Total

Salary $40,000 $40,000 $ 0 $80,000
Interest 6,000 6,000 14,000 26,000
Remainder ($30,000) (12,000) (10,500) (7,500) (30,000)
Total $34,000 $35,500 $ 6,500 $76,000
× 40% = Drawings $13,600 $14,200 $ 2,600 $30,400

FOR INSTRUCTOR USE ONLY

12 - 46 Test Bank for Accounting Principles, Eleventh Edition

Ex. 176
Carraway and Boos have a partnership agreement which includes the following provisions
regarding sharing net income or net loss:
1. A salary allowance of $48,000 to Carraway and $36,000 to Boos.
2. An interest allowance of 10% on capital balances at the beginning of the year.
3. The remainder to be divided 60% to Carraway and 40% to Boos.
The capital balance on January 1, 2014, for Carraway and Boos was $90,000 and $120,000,
respectively. During 2014, the Carraway and Boos Partnership had sales of $495,000, cost of
goods sold of $290,000, and operating expenses of $85,000.
Instructions
Prepare an income statement for the Carraway and Boos Partnership for the year ended December
31, 2014. As a part of the income statement, include a Division of Net Income to each of the
partners.
Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Problem Solving, IMA: Reporting

Solution 176 (15 min.)

CARRAWAY AND BOOS PARTNERSHIP
Income Statement
For the Year Ended December 31, 2014
Sales revenue......................................................................................................... $495,000
Cost of goods sold.................................................................................................. 290,000
Gross profit............................................................................................................. 205,000
Operating expenses............................................................................................... 85,000
Net income ............................................................................................................ $120,000

Division of Net Income

Carraway Boos Total

Salary allowance $48,000 $36,000 $ 84,000
Interest allowance
($90,000 × 10%) 9,000
($120,000 × 10%) 12,000
Total interest 21,000
Total salaries and interest 57,000 48,000 105,000
Remaining income, $15,000
Carraway ($15,000 × 60%) 9,000
Boosr ($15,000 × 40%) 6,000
Total remainder 15,000
Total division $66,000 $54,000 $120,000

FOR INSTRUCTOR USE ONLY

 Accounting for Partnerships 12 - 47

Ex. 177
Barr & Eglin Co. reports net income of $42,000. The partnership agreement provides for annual
salaries of $24,000 for Barr and $18,000 for Eglin and interest allowances of $4,000 to Barr and
$6,000 to Eglin. Any remaining income or loss is to be shared 70% by Barr and 30% by Eglin.

Instructions
Compute the amount of net income distributed to each partner.
Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Problem Solving, IMA: Reporting

Solution 177 (8 min.)

Barr Eglin Total
Salary allowance $24,000 $18,000 $42,000
Interest allowance 4,000 6,000 10,000
Total salaries and interest 28,000 24,000 52,000
Remaining deficiency ($10,000)
Barr ($10,000 × 70%) (7,000)
Eglin ($10,000 × 30%) (3,000) (10,000)
Total division $21,000 $21,000 $42,000

Ex. 178
The adjusted trial balance of the Ricci and Napoli Partnership for the year ended December 31,
2014, appears below:
RICCI AND NAPOLI PARTNERSHIP
Adjusted Trial Balance
December 31, 2014
Debit Credit
Current Assets....................................................................................... 19,000
Plant Assets.......................................................................................... 80,000
Current Liabilities.................................................................................. 7,000
Long-term Debt..................................................................................... 40,000
Ricci, Capital......................................................................................... 20,000
Ricci, Drawings..................................................................................... 4,000
Napoli, Capital....................................................................................... 18,000
Napoli , Drawings.................................................................................. 7,000
Sales Revenue...................................................................................... 110,000
Cost of Goods Sold............................................................................... 62,000
Operating Expenses.............................................................................. 23,000
195,000 195,000

The partnership agreement stipulates that a division of partnership net income or net loss is to be
made as follows:
1. A salary allowance of $12,000 to Ricci and $23,000 to Napoli.
2. The remainder is to be divided equally.

FOR INSTRUCTOR USE ONLY

12 - 48 Test Bank for Accounting Principles, Eleventh Edition

Ex. 178 (Cont.)

Instructions
(a) Prepare a schedule which shows the division of net income to each partner.
(b) Prepare the closing entries for the division of net income and for the drawings accounts at
December 31, 2014.
Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Problem Solving, IMA: Reporting

Solution 178 (15 min.)

(a) Schedule for Division of Net Income
Sales Revenue $110,000
Cost of goods sold 62,000
Gross profit 48,000
Operating expenses 23,000
Net income $ 25,000

Ricci Napolini Total

Salary allowance $12,000 $23,000 $35,000
Remaining deficiency, ($10,000)
Ricci ($10,000) × 50% (5,000)
Napoli ($10,000) × 50% (5,000)
Total remainder (10,000)
Total division $ 7,000 $18,000 $25,000

(b) Dec. 31 Income Summary........................................................ 25,000

Ricci, Capital........................................................ 7,000
Napoli, Capital..................................................... 18,000
(To close net income to capital)

31 Ricci, Capital............................................................... 4,000

Napoli, Capital............................................................. 7,000
Ricci, Drawings.................................................... 4,000
Napoli, Drawings.................................................. 7,000
(To close drawing accounts to capital)

Ex. 179
Juanita Gomez and Brandi Toomey have formed the GT Partnership, and have capital balances of
$130,000 and $100,000, respectively, on January 1, 2014. On June 1, 2014, Toomey invested an
additional $30,000. Also during the year, Gomez withdrew $60,000 and Toomey withdrew $48,000.
Sales for the year amounted to $360,000 and expenses were $240,000. Gomez and Toomey share
income and losses on a 3:1 basis.

Instructions
(a) Prepare the closing entries at December 31, 2014, for the GT Partnership.
(b) Prepare a partners' capital statement for 2014.
Ans: N/A, LO: 3,4, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA

FOR INSTRUCTOR USE ONLY

 Accounting for Partnerships 12 - 49

Solution 179 (15 min.)

(a) Sales Revenue............................................................................. 360,000
Expenses............................................................................. 240,000
Income Summary................................................................. 120,000

Income Summary......................................................................... 120,000

Gomez, Capital ($120,000 × 75%)....................................... 90,000
Tooney, Capital ($120,000 × 25%)...................................... 30,000

Gomez, Capital............................................................................. 60,000

Toomey, Capital............................................................................ 48,000
Gomez, Drawings................................................................ 60,000
Toomey, Drawings............................................................... 48,000

(b) GT Partnership
Partners' Capital Statement
For the Year Ended December 31, 2014

Gomez Toomey Totals

Capital, January 1, 2014 $130,000 $100,000 $230,000
Add: Additional Investment 30,000 30,000
Net Income 90,000 30,000 120,000
220,000 160,000 380,000
Less: Drawings 60,000 48,000 108,000
Capital, December 31, 2014 $160,000 $112,000 $272,000

Ex. 180
Actor, Brees, and Cotswald are forming The ABC Partnership. Actor is transferring $40,000 of
personal cash and equipment worth $38,000 to the partnership. Brees owns land worth $27,000
and a small building worth $112,000, which he transfers to the partnership. There is a long-term
mortgage of $40,000 on the land and building, which the partnership assumes. Cotswald transfers
cash of $10,000, accounts receivable of $54,000, supplies worth $5,000, and equipment worth
$28,000 to the partnership. The partnership expects to collect $48,000 of the accounts receivable.

Instructions
Prepare a classified balance sheet for the partnership after the partner’s investments on December
31, 2014.
Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Problem Solving, IMA: Reporting

FOR INSTRUCTOR USE ONLY

12 - 50 Test Bank for Accounting Principles, Eleventh Edition

Solution 180 (15 min.)

THE ABC PARTNERSHIP
Balance Sheet
December 31, 2014

Assets
Current Assets
Cash ........................................................................... $50,000
Accounts Receivable................................................... $54,000
Less: Allowance for Doubtful Accounts........................ (6,000) 48,000
Supplies...................................................................... 5,000
Total current assets............................................ $103,000

Property, Plant and Equipment

Land ........................................................................... $27,000
Buildings..................................................................... 112,000
Equipment................................................................... 66,000
Total property, plant, and equipment................... 205,000
Total assets.......................................................................... $308,000

Liabilities and Owners’ Equity

Long-term Liabilities
Mortgage Payable....................................................... $40,000
Owners’ Equity
Actor, Capital............................................................... $78,000
Brees, Capital............................................................. 99,000
Cotswald, Capital........................................................ 91,000
Total owners’ equity............................................ 268,000
Total liabilities and owners’ equity........................................ $308,000

Ex. 181
The Zhuzer Company at December 31 has cash $50,000, noncash assets $250,000, liabilities
$138,000, and the following capital balances: Zhu $112,000 and Zerkel $50,000. The firm is
liquidated, and $265,000 in cash is received for the noncash assets. Zhu and Zerkel income ratios
are 60% and 40%, respectively.

Instructions
Prepare the entries to record:
(a) The sale of noncash assets.
(b) The allocation of the gain or loss on liquidation to the partners.
(c) Payment of creditors.
(d) Distribution of cash to the partners.
Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA

FOR INSTRUCTOR USE ONLY

 Accounting for Partnerships 12 - 51

Solution 181 (10 min.)

(a) Cash ............................................................................................ 265,000

Noncash Assets................................................................... 250,000
Gain on Realization............................................................. 15,000

(b) Gain on Realization...................................................................... 15,000

Zhu, Capital ($15,000 X 60%).............................................. 9,000
Zerkel, Capital ($15,000 X 40%).......................................... 6,000

(c) Liabilities....................................................................................... 138,000

Cash.................................................................................... 138,000

(d) Zhu, Capital.................................................................................. 121,000

Zerkel, Capital.............................................................................. 56,000
Cash.................................................................................... 177,000

Ex. 182
Prepare a partners' capital statement for Whatito Company based on the following information.
Whatley Hito
Beginning capital $30,000 $27,000
Drawings during year 15,000 8,000

Net income was $45,000, and the partners share income 60% to Whatley and 40% to Hito.
Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Problem Solving, IMA: Reporting

Solution 182 (8 min.)

WHATITO COMPANY
Partners' Capital Statement

Whatley Hito Total

Beginning capital $30,000 $27,000 $57,000
Add: Net income 27,000 18,000 45,000
57,000 45,000 102,000
Less: Drawings 15,000 8,000 23,000
Ending capital $42,000 $37,000 $79,000

Ex. 183
On December 31, Nola Company has cash $30,000, noncash assets $150,000, and liabilities
$80,000. Capital balances were Harper $55,000 and Kahle $45,000. The firm is liquidated, and the
noncash assets are sold for $115,000. Harper and Kahle share income in a 60:40 ratio.

Instructions
Prepare entries to record (a) the sale of noncash assets and (b) the allocation of the gain (loss) on
liquidation to the partners.
Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA

FOR INSTRUCTOR USE ONLY

12 - 52 Test Bank for Accounting Principles, Eleventh Edition

Solution 183 (6 min.)

(a) Cash.............................................................................................. 115,000
Loss on Realization........................................................................ 35,000
Noncash Assets................................................................... 150,000

(b) Harper, Capital ($35,000 × 60%).................................................... 21,000

Kahle, Capital ($35,000 × 40%)..................................................... 14,000
Loss on Realization............................................................. 35,000

Ex. 184
The ABC Partnership is to be liquidated and you have been hired to prepare a Schedule of Cash
Payments for the partnership. Partners Alexa, Bitsy, and Coco share income and losses in the ratio
of 4:3:3, respectively. Assume the following:
1. The noncash assets were sold for $70,000.
2. Liabilities were paid in full.
3. The remaining cash was distributed to the partners. (If any partner has a capital
deficiency, assume that the partner is unable to make up the capital deficiency.)

Instructions
Using the above information, complete the Schedule of Cash Payments below:

ABC PARTNERSHIP
Schedule of Cash Payments

Noncash Alexa Bitsy Coco

Item Cash + Assets = Liabilities + Capital + Capital + Capital
Balances before
liquidation 25,000 + 150,000 = 50,000 + 25,000 + 35,000 + 65,000
Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Problem Solving, IMA: Reporting

Solution 184 (20 min.)

ABC PARTNERSHIP
Schedule of Cash Payments

Noncash Alexa Bitsy Coco

Item Cash + Assets = Liabilities + Capital + Capital + Capital
Balances before
liquidation 25,000 + 150,000 = 50,000 + 25,000 + 35,000 + 65,000
Sale of noncash
assets (1) 70,000 + (150,000) = + (32,000) + (24,000) + (24,000)
New balance 95,000 + -0- = 50,000 + (7,000) + 11,000 + 41,000
Pay liabilities (2) (50,000) = (50,000)
New balances 45,000 + -0- = -0- + (7,000) + 11,000 + 41,000
Allocate capital
deficiency 7,000 + (3,500) + (3,500)
New balances 45,000 + -0- = -0- + -0- + 7,500 + 37,500
Cash distribution (3) (45,000) = (7,500) + (37,500)
Final balances -0- -0- -0- -0- -0- -0-

FOR INSTRUCTOR USE ONLY

 Accounting for Partnerships 12 - 53

Ex. 185
The MFP Partnership is to be liquidated when the ledger shows the following:
Cash $ 50,000
Noncash Assets 200,000
Liabilities 50,000
Mossimo, Capital 75,000
Fandango, Capital 100,000
Plank, Capital 25,000

Mossimo, Fandango, and Plank’s income ratios are 6:3:1, respectively.

Instructions
Prepare separate entries to record the liquidation of the partnership assuming that the noncash
assets are sold for $140,000 in cash.
Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA

Solution 185 (15 min.)

1. Cash................................................................................................ 140,000
Loss on Realization......................................................................... 60,000
Noncash Assets...................................................................... 200,000

2. Mossimo, Capital ($60,000 × 6/10).................................................. 36,000

Fandango, Capital ($60,000 × 3/10)................................................ 18,000
Plank, Capital ($60,000 × 1/10)....................................................... 6,000
Loss on Realization................................................................ 60,000

3. Liabilities......................................................................................... 50,000
Cash....................................................................................... 50,000

4. Mossimo, Capital ($75,000 – $36,000)............................................ 39,000

Fandango, Capital ($100,000 – $18,000)........................................ 82,000
Planks, Capital ($25,000 – $6,000)................................................. 19,000
Cash ($50,000 + $140,000 – $50,000)................................... 140,000

Ex. 186
Prior to the distribution of cash to the partners, the accounts of ABC Company are: Cash $35,000,
Acock, Capital (Dr.) $5,000, Buster, Capital (Cr.) $25,000, and Cutter, Capital (Cr.) $15,000. They
share income on a 5:3:2 basis.

Instructions
Prepare entries to record (a) the absorption of Acock’s capital deficiency by the other partners and
(b) the distribution of cash to the partners with credit balances.
Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA

FOR INSTRUCTOR USE ONLY

12 - 54 Test Bank for Accounting Principles, Eleventh Edition

Solution 186 (8 min.)

(a) Buster, Capital ($5,000 × 3/5)....................................................... 3,000
Cutter, Capital ($5,000 × 2/5)....................................................... 2,000
Acock, Capital...................................................................... 5,000

(b) Buster, Capital ($25,000 – $3,000)............................................... 22,000

Cutter, Capital ($15,000 – $2,000)................................................ 13,000
Cash.................................................................................... 35,000

Ex. 187
The HK Partnership is liquidated when the ledger shows:
Cash $60,000
Noncash Assets 90,000
Liabilities 44,000
Howell, Capital 100,000
Kenton, Capital 6,000

Henson and Kaenzig income ratios are 3:2, respectively.

Instructions
Prepare a schedule of cash payments, assuming that the noncash assets were sold for $65,000.
Assume that any partner’s capital deficiencies cannot be paid to the partnership.
Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Problem Solving, IMA: Reporting

Solution 187 (10 min.)

HK Partnership
Schedule of Cash Payments

Noncash Henson Kaenzig

Cash + Assets = Liabilities + Capital + Capital
Balances before
liquidation $ 60,000 $90,000 $44,000 $100,000 $6,000
Sale of noncash assets
and allocation of losses 65,000 (90,000) (15,000) (10,000)
New Balances 125,000 -0- 44,000 85,000 (4,000)
Pay Liabilities (44,000) (44,000)
New Balances 81,000 -0- -0- 85,000 (4,000)
Allocate capital deficiency (4,000) 4,000
Cash Distribution $(81,000) $ -0- $ -0- $(81,000) $ -0-
a
Ex. 188
The Felton and Burchell Partnership has partner capital account balances as follows:
Felton, Capital $550,000
Burchell, Capital 200,000

The partners share income and losses in the ratio of 60% to Felton and 40% to Burchell.

FOR INSTRUCTOR USE ONLY

 Accounting for Partnerships 12 - 55

Instructions
Prepare the journal entry on the books of the partnership to record the admission of Santos as a
new partner under the following three independent circumstances.
1. Santos pays $400,000 to Felton and $150,000 to Burchell for one-half of each of their
ownership interest in a personal transaction.
2. Santos invests $600,000 in the partnership for a one-third interest in partnership capital.
3. Santos invests $240,000 in the partnership for a one-third interest in partnership capital.
Ans: N/A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA

a
Solution 188 (20 min.)
1. Felton, Capital.............................................................................. 275,000
Burchell, Capital........................................................................... 100,000
Santos, Capital.................................................................... 375,000
(To record admission of Santos by purchase)
Total net assets and total capital of the partnership do not change.

2. Cash............................................................................................. 600,000
Felton, Capital...................................................................... 90,000
Burchell, Capital................................................................... 60,000
Santos, Capital.................................................................... 450,000
(To record admission of Santos and bonus to old partners)

Total capital of existing partnership $ 750,000

Investment by new partner, Santos 600,000
Total capital of new partnership $1,350,000

Santos’s capital credit = $1,350,000 × 1/3 = $450,000

Santos’s investment $600,000
Santos’s capital credit 450,000
Bonus to old partners $150,000

Allocation to old partners

Felton (60% × $150,000) $90,000
Burchell (40% × $150,000) 60,000
$150,000

3. Cash............................................................................................. 240,000
Felton, Capital.............................................................................. 54,000
Burchell, Capital........................................................................... 36,000
Santos, Capital.................................................................... 330,000
(To record Santos’s admission and bonus)

FOR INSTRUCTOR USE ONLY

12 - 56 Test Bank for Accounting Principles, Eleventh Edition

a
Solution 188 (Cont.)

Total capital of existing partnership $750,000

Investment by new partner, Santos 240,000
Total capital of new partnership $990,000

Santos’s capital credit = $990,000 × 1/3 = $330,000

Bonus to Santos ($330,000 – $240,000) = $90,000
Reduction of old partners' capital
Felton ($90,000 × 60%) $ 54,000
Burchell ($90,000 × 40%) 36,000
$90,000
a
Ex. 189
Hu, Marcos, and Letterman share income on a 6:3:1 basis. They have capital balances of $80,000,
$60,000, and $45,000, respectively, when Buffett is admitted to the partnership.

Instructions
Prepare the journal entry to record the admission of Buffett into the partnership if Buffett purchases
one-half of Hu’s equity for $45,000; one-half of Marcos’s equity for $22,000; and one-third of
Letterman’s equity for $18,000.
Ans: N/A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA

Solution 189 (5 min.)

Hu, Capital............................................................................................ 40,000
Marcos, Capital..................................................................................... 30,000
Letterman, Capital................................................................................. 15,000
Buffett, Capital.............................................................................. 85,000
a
Ex. 190
Yuanne Sipp and Letitia Grimes share partnership income on a 3:2 basis. They have capital
balances of $560,000 and $280,000, respectively, when Tammy Tuck is admitted to the partnership.

Instructions
Prepare the journal entry to record the admission of Tammy Tuck under each of the following
assumptions:

(a) Tuck invests $320,000 for a 25% ownership interest.

(b) Tuck invests $220,000 for a 25% ownership interest.
(c) Tuck invests an amount that gives him a 25% ownership interest.
Ans: N/A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA

FOR INSTRUCTOR USE ONLY

 Accounting for Partnerships 12 - 57
a
Solution 190 (20 min.)
(a) Cash............................................................................................. 320,000
Tuck, Capital........................................................................ 290,000
Sipp, Capital (3/5 × $30,000)............................................... 18,000
Grimes, Capital (2/5 × $30,000)........................................... 12,000

Total capital of existing partnership $ 840,000

Investment by new partner, Tuck 320,000
Total capital of new partnership $1,160,000

Tuck’s capital credit ($1,160,000 × 25%) $290,000

Investment by new partner, Tuck $320,000

Tuck’s capital credit 290,000
Bonus to existing partners $ 30,000

(b) Cash............................................................................................. 220,000

Sipp, Capital ($45,000 × 3/5)........................................................ 27,000
Grimes, Capital ($45,000 × 2/5)................................................... 18,000
Tuck, Capital........................................................................ 265,000

Total capital of existing partnership $ 840,000

Investment by new partner, Tuck 220,000
Total capital of new partnership $1,060,000

Tuck’s capital credit ($1,060,000 × 25%) $265,000

Investment by new partner, Tuck $220,000

Tuck’s capital credit 265,000
Reduction of existing partners $ (45,000)

(c) Cash............................................................................................. 280,000

Tuck, Capital........................................................................ 280,000

$840,000 ÷ .75 = $1,120,000; $1,120,000 – $840,000 = $280,000

a
Ex. 191
Kim Locke and Mary Leigh Coker have capital accounts of $420,000 and $480,000, respectively.
Jeff Doggett and Danny Cambrey are to join the partnership. Doggett invests $425,000 in the
partnership for which he receives a capital credit of $425,000. Cambrey purchases a one-half
interest from Locke for $300,000 and a one-fourth interest from Coker for $90,000.

Instructions
(a) Prepare the journal entries to record the admission of Doggett and Cambrey to the
partnership.
(b) Determine the capital balances of the partners after the admission of Doggett and Cambrey.
Ans: N/A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA

FOR INSTRUCTOR USE ONLY

12 - 58 Test Bank for Accounting Principles, Eleventh Edition
a
Solution 191 (10 min.)
(a) Cash............................................................................................. 425,000
Doggett, Capital................................................................... 425,000

Locke, Capital............................................................................... 210,000

Coker, Capital............................................................................... 120,000
Cambrey, Capital................................................................. 330,000

(b) Locke ($420,000 – $210,000) $ 210,000

Coker ($480,000 – $120,000) 360,000
Doggett 425,000
Cambrey 330,000
Total Capital $1,325,000
a
Ex. 192
Daggett, Lamppin, and Pendergast are partners who share profits and losses 50%, 30%, and 20%,
respectively. Their capital balances are $150,000, $90,000, and $60,000, respectively.

Instructions
(a) Assume Sanford joins the partnership by investing $140,000 for a 25% interest with bonuses
to the existing partners. Prepare the journal entry to record his investment.
(b) Assume instead that Daggett leaves the partnership. Daggett is paid $170,000 with a bonus to
the retiring partner. Prepare the journal entry to record Daggett’s withdrawal.
Ans: N/A, LO: 6,7, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA

a
Solution 192 (10 min.)
(a) Cash........................................................................... 140,000
Janford, Capital ($440,000  25%)........................ 110,000
Daggett, Capital ($30,000  50%)....................... 15,000
Lamppin, Capital ($30,000  30%)........................ 9,000
Pendergast, Capital ($30,000  20%)................... 6,000

(b) Daggett, Capital.......................................................... 150,000

Lamppin, Capital ($20,000  3/5)................................ 12,000
Pendergast, Capital ($20,000  2/5)............................. 8,000
Cash...................................................................... 170,000
a
Ex. 193
Brislin, Humphreys, and Watkins share income and losses in a ratio of 3:2:5, respectively. The
capital account balances of the partners are as follows:
Brislin Capital $600,000
Humphreys, Capital 360,000
Watkins, Capital 260,000

FOR INSTRUCTOR USE ONLY

 Accounting for Partnerships 12 - 59
a
Ex. 193 (Cont.)

Instructions
Prepare the journal entry on the books of the partnership to record the withdrawal of Watkins under
the following independent circumstances:
1. The partners agree that Watkins should be paid $280,000 by the partnership for his interest.
2. The partners agree that Watkins should be paid $220,000 by the partnership for his interest.
3. Brislin agrees to pay Watkins $180,000 for one-half of his capital interest and Heller agrees to
pay Watkins $180,000 for one-half of his capital interest in a personal transaction among the
partners.
Ans: N/A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA

a
Solution 193 (15 min.)
1. Watkins, Capital............................................................................... 260,000
Brislin, Capital................................................................................. 12,000
Humphreys, Capital......................................................................... 8,000
Cash....................................................................................... 280,000
(To record withdrawal and bonus to Watkins)
Bonus to Watkins $20,000 ($280,000 – $260,000)
Allocation to reduce remaining partners' capital:
Brislin (3/5 × $20,000) $12,000
Humphreys (2/5 × $20,000) 8,000
$20,000

2. Watkins, Capital............................................................................... 260,000

Brislin, Capital......................................................................... 24,000
Humphreys, Capital................................................................ 16,000
Cash....................................................................................... 220,000
(To record withdrawal of Watkins and bonus to remaining
partners)
Bonus to remaining partners $40,000 ($260,000 – $220,000)
Allocation to increase remaining partners' capital:
Brislin (3/5 × $40,000) $24,000
Humphreys (2/5 × $40,000) 16,000
$40,000

3. Watkins, Capital............................................................................... 260,000

Brislin, Capital......................................................................... 130,000
Humphreys, Capital................................................................ 130,000
(To record withdrawal of Watkins)
Total net assets and total capital of the partnership do not change.

FOR INSTRUCTOR USE ONLY

12 - 60 Test Bank for Accounting Principles, Eleventh Edition
a
Ex. 194
Elam, Kamins, and Rubio have capital balances of $150,000, $100,000, and $75,000, respectively,
and their income ratios are 4:2:4.

Instructions
Record the withdrawal of Rubio from the partnership under each of the following assumptions:
1. Rubio is paid $75,000 from partnership assets.
2. Rubio is paid $93,000 from partnership assets.
3. Rubio is paid $60,000 from partnership assets.
Ans: N/A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA

a
Solution 194 (10 min.)
1. Rubio, Capital.................................................................................. 75,000
Cash....................................................................................... 75,000

2. Rubio, Capital.................................................................................. 75,000

Elam, Capital ($18,000 × 4/6).......................................................... 12,000
Kamins, Capital ($18,000 × 2/6)...................................................... 6,000
Cash....................................................................................... 93,000

3. Rubio, Capital.................................................................................. 75,000

Elam, Capital ($15,000 × 4/6)................................................. 10,000
Kamins, Capital ($15,000 × 2/6)............................................. 5,000
Cash....................................................................................... 60,000

COMPLETION STATEMENTS
195. The ______________ Act provides the basic rules for the formation and operation of
partnerships in more than 90% of the states.
Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

196. A partnership characteristic which enables each partner to act on behalf of the partnership
when engaging in partnership business is called ______________.
Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

197. A major disadvantage of the partnership form of organization is ______________, which

makes each partner personally and individually liable for all partnership liabilities.
Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

198. The capital accounts indicate each partner's ______________ investment, while the
partner's drawing accounts are ______________ owner's equity accounts.
Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Reporting

199. The ______________ ratio specifies the basis for sharing income and losses.
Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

FOR INSTRUCTOR USE ONLY

 Accounting for Partnerships 12 - 61

200. An income ratio based on ______________ balances may be appropriate when the amount
of funds invested in the partnership is critical to the partnership.
Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None,
IMA: Business Economics

201. A ______________ allowance or ______________ on partners' capital accounts are not

expenses of the partnership when they are specified as the basis for sharing income and
losses.
Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Reporting

202. In liquidating a partnership, it is necessary to convert ______________ into cash and to

allocate any ______________ or ______________ to the partners based on their income
ratios.
Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None,
IMA: Business Economics

203. A debit balance in a partner's capital account is called a _____________.

Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Reporting

a
204. A new partner may be admitted to the partnership by ______________ the interest of an
existing partner, or by ______________ assets in the partnership.
Ans: N/A, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

a
205. When a new partner's capital interest on the date of admittance is less than his or her
investment in the firm, a ______________ results for the ______________ partner(s).
Ans: N/A, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

a
206. If a bonus is given to a new partner, the old partners' capital accounts are decreased based
on their ______________ ratio prior to the admission of the new partner.
Ans: N/A, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

Answers to Completion Statements

195. Uniform Partnership 201. salary, interest
196. mutual agency 202. noncash assets, gains, losses
197. unlimited liability 203. capital deficiency
a
198. permanent, temporary 204. purchasing, investing
a
199. income 205. bonus, old
a
200. capital 206. Income

FOR INSTRUCTOR USE ONLY

12 - 62 Test Bank for Accounting Principles, Eleventh Edition

MATCHING
207. Match the items below by entering the appropriate code letter in the space provided.

A. Mutual agency G. Purchase of an interest

B. Unlimited liability H. Partnership liquidation
C. Partnership agreement I. Capital deficiency
D. Income ratio J. Distribution of cash to partners in
E. Partners' capital statement liquidation of a partnership.
F. Admission by investment

______ 1. Each partner is personally and individually liable for partnership debts.

______ 2. Made on basis of partners' capital balances.

______ 3. Explains changes in individual partner's capital accounts during a period.

______ 4. Each partner can bind the partnership so long as the action appears to be appropriate
for the partnership.

______ 5. Business terminates.

______ a6. Results in an increase in total net assets and total capital of the partnership.

______ 7. Capital account with a debit balance.

______ 8. The basis for sharing income and losses.

______ a9. Total net assets and total capital of the partnership do not change.

______ 10. Written contract establishing duties and responsibilities of partners.

Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

Answers to Matching
a
1. B 6. F
2. J 7. I
3. E 8. D
a
4. A 9. G
5. H 10. C

SHORT-ANSWER ESSAY QUESTIONS

S-A E 208
Identify and explain the principal characteristics of the partnership form of business organization.
Ans: N/A, LO: 1, Bloom: S, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
None, IMA: Reporting

FOR INSTRUCTOR USE ONLY

 Accounting for Partnerships 12 - 63

Solution 208
The principal characteristics of a partnership form of organization are as follows:
(a) It is a voluntary association of two or more individuals based on a legally binding contract.
(b) The partners act in a mutual agency relationship; that is, each partner acts on behalf of the
partnership when engaging in partnership business.
(c) A partnership has limited life. That is, a partnership may be ended voluntarily at any time
through the acceptance of a new partner into the firm or the withdrawal of a partner. And, a
partnership may be ended involuntarily by the death or incapacity of a partner.
(d) The partners have unlimited liability. Each partner is personally and individually liable for all
partnership liabilities.
(e) All partnership assets are co-owned by the partners; that is, the assets are owned jointly by all
the partners.

S-A E 209
Castle and Berry are discussing how income and losses should be divided in a partnership they
plan to form. What factors should be considered in determining the division of net income or net
loss?
Ans: N/A, LO: 3, Bloom: S, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
None, IMA: Business Economics

Solution 209
Factors to be considered in determining how income and loss should be divided are: (1) a fixed
ratio is easy to apply and it may be an equitable basis in some circumstances; (2) capital balance
ratios when the funds invested in the partnership are considered the most critical factor; and (3)
salary allowance and/or interest allowance coupled with a fixed ratio. This last approach gives
specific recognition to differences that may exist among partners by providing salary allowances for
time worked and interest allowances for capital invested.

S-A E 210
Are the financial statements of a partnership similar to those of a proprietorship? Discuss.
Ans: N/A, LO: 4, Bloom: S, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
None, IMA: Reporting

Solution 210
The financial statements of a partnership are similar to those of a proprietorship. The differences
are due to the number of partners involved. The income statement for a partnership is identical to
the income statement for a proprietorship except for the division of net income. The owners' equity
statement is called the partners' capital statement. This statement shows the changes in each
partner's capital account and in total partnership capital during the year. On the balance sheet each
partner's capital balance is reported in the owners' equity section.

FOR INSTRUCTOR USE ONLY

12 - 64 Test Bank for Accounting Principles, Eleventh Edition

S-A E 211
A partnership is liquidated by selling the non-cash assets, paying the creditors in full, and
distributing the remaining assets to the partners. Explain why gains and losses on the realization of
non-cash assets are distributed to the partners based on their income ratios, whereas cash is
distributed to the partners based on their equity as shown in their capital accounts. What effects
does the payment or nonpayment of a capital deficiency have on the distribution of cash to the
partners?
Ans: N/A, LO: 5, Bloom: S, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
None, IMA: Reporting

Solution 211
Gains and losses on the realization of non-cash assets are like income and losses; that is, they are
income statement items and, therefore, are distributed to partners based on their income and loss
ratios. Cash is a balance sheet item and is the basis for any residual equity after liquidation;
therefore, the final asset amount cash should be distributed to partners in accordance with their
equity balances.

When the capital deficiency is paid, the payment is credited to the partner with the debit balance in
the capital account. Then, the remaining cash is distributed to the partners with credit balances on
the basis of their balances.

If the capital deficiency is not paid, the deficiency is allocated to the partners with credit balances on
the basis of their income ratios. The remaining cash is then distributed to these partners on the
basis of their capital balances.

S-A E 212 (Ethics)

Three doctors, Marshall Murrey, Andrew Shaw, and Austin Taylor, opened a family medicine clinic.
All three doctors had been lifelong friends. All belonged to the same religious faith. All were very
active in church affairs, and tried to mold their professional behavior to their religious beliefs.

About a year ago, Dr. Murrey announced that he was leaving the church. The others noticed that his
personality also began to change. He began to dress in flamboyant styles, and he started wearing
expensive-looking jewelry. His temper became unstable—one minute he was calm, and the next, he
might be throwing charts down the hall and screaming. He started coming to the office late, and
forgetting to see some of his patients before he left again. The other two at first were stunned at the
changes. His wife asked them whether they thought he might have a drinking problem. After finally
deciding to investigate, they found what looked to them like a large amount of cocaine, (hundreds of
plastic sacks of white powder) tucked away in boxes of old medical equipment.

Frightened, Drs. Shaw and Taylor decided to act quickly. Their partnership agreement said nothing
about dissolving the partnership—only about what to do if one of them died. They therefore secretly
rented office space across town and began to move the most necessary equipment and supplies to
the new office. A month later, they changed the locks on the old office and began seeing patients in
the new office without any notice to Dr. Murrey at all. Dr. Murrey simply came in at around ten
o'clock as usual, and found himself locked out of an empty office.

Required:
Did Drs. Shaw and Taylor l act ethically in their ending of the partnership? Explain.
Ans: N/A, LO: 1, Bloom: S, Difficulty: Easy, Min: 5, AACSB: Ethics, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Decision Modeling, AICPA PC:
Professional Demeanor, IMA: Decision Analysis

FOR INSTRUCTOR USE ONLY

 Accounting for Partnerships 12 - 65

Solution 212
No, Drs. Shaw and Taylor did not act ethically in the way they ended the partnership. It is important
to distinguish between legal obligations and ethical obligations. The partnership may well be legally
dissolved by their action. However, ethically, they had no right to act unilaterally, without giving Dr.
Murrey a chance to defend himself or to correct his behavior. It also looks like they may have had
an obligation to report their apparent cocaine "find" to the appropriate authorities, or at least to
determine whether the substance was, in fact, cocaine. It is clear that the doctors had the right and
obligation to protect Dr. Murrey’s patients, but there is no evidence given that he was actually
endangering his patients. Drs. Shaw and Taylor’ss actions seem to be cowardly, and an attempt to
keep from facing unpleasant realities.

S-A E 213 (Communication)

Walter Bector and Sandy Melos began detail work on automobiles as a hobby. First, they used a
mail-order kit to add "pin striping" to their own cars, a 1968 Mustang and a 1970 GTO Judge,
respectively. Then Walter added more flourishes, including his name. Sandy practiced painting
flames on his Judge. Gradually, their cars became recognized around town and others began to ask
them to add a flourish here or there to their cars. They were talked into attending a "muscle car"
show in a nearby large city to show off their cars. They had more requests for work than they could
handle. Now, they are considering quitting their other jobs and making this a permanent business.
Sandy, for example, turns down more jobs than he accepts and still gets more requests every week.

Walter and Sandy are unsure how to proceed. They like the idea of a partnership, but they only
know they work well together—things like how to split payment have just been settled individually
for each job, depending on which one did more work. Walter’s father suggests a written partnership
agreement. Walter disagrees. He believes that it will spoil the whole arrangement by reducing it to
words.

Required:
Write a brief note to Walter explaining why he needs a partnership agreement.
Ans: N/A, LO: 1, Bloom: S, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
None, IMA: Business Economics

FOR INSTRUCTOR USE ONLY

12 - 66 Test Bank for Accounting Principles, Eleventh Edition

Solution 213

Dear Walter,

Your dad asked me to write to you. I am an accountant with the CPA firm Clinton,
Grant, and Thomas, and I do a lot of work for partnerships.

I understand that you don't want a written partnership agreement. I'd like to share
with you a few things you may not have considered. First, I completely agree that a
written agreement won't solve all your problems. I would even say that a poorly
written agreement is worse than none at all. However, I don't know any partnerships
in this town that have lasted for more than a year or two that don't have a written
agreement. If they didn't have one at first, they learned by hard experience exactly
why they needed one.

I'd say the biggest advantage is that it forces both of you to spell out what you expect
of the other party. You have discussed, I understand, how profits are to be split. Do
both of you agree entirely? What if you decide another method would be more fair?
What do you plan to do if you want to add a partner? Who makes the decisions
about which building to rent, and what kind of help to hire? All these things can be
spelled out in a partnership agreement.

I hope you will seriously consider drawing up a good partnership agreement.

Otherwise, you may condemn yourselves to spending more time clearing up
misunderstandings than on fixing up cars.

Let me know if I can help. I know a couple of attorneys in town who could get the job
done without charging an arm and a leg.

Sincerely,

(signature)

FOR INSTRUCTOR USE ONLY

Quiz Accounting

1. The statement of financial position of the partnership A, B and C shows: Cash, P22,400; Other
Assets, P212,000; Liabilities, P38,400; A, Capital (50%) P76,000; B, Capital (25%) P64,000;
and C, Capital (25%) P56,000.

If C received P10,000 from the first cash distribution, how much was the total cash distributed to
partners?

 P20,000
 P18,000
 P44,000
 P28,000

2. Jack and Beans, who share profits and losses in the ratio 3:7, decided to liquidate their Talk
Partnership. The partner’s capital balances are P300,000 and P190,000, respectively.

If on final settlement of partner’s claims Beans received P99,000, how much did Jack receive?

 P89,000
 P261,000
 None
 P234,000

3. The statement of financial position of the partnership A,B and C shows: Cash, P22,400; Other
Assets, P212,000; Liabilities, P38,400; A, Capital (50%) P76,000; B, Capital (25%) P64,000;
and C, Capital (25%) P56,000.

If A received a total of P10,000 from partnership liquidation, how much was the proceeds from
the sale of all non-cash assets?

 Answer not determinable

 P127,000
 P85,000
 P64,000
4. The statement of financial position of the partnership A,B and C shows: Cash, P22,400; Other
Assets, P212,000; Liabilities, P38,400; A, Capital (50%) P76,000; B, Capital (25%) P64,000;
and C, Capital (25%) P56,000.

If B received a total of P31,000 from partnership liquidation, how much was the loss on
realization?

 P85,000
 Answer not determinable
 P127,000
 P64,000

5. Jurado, Katindig, Lazaro, and Marcelo are partners sharing earnings in the ratio of 3:4:6:8.
The balance of their capital accounts on December 31, 2018 are as follows:

Jurado P1,000

Katindig 25,000

Lazaro 25,000

Marcelo 9,000

The partners decided to liquidate, and they accordingly convert the non-cash assets into P23,200
of cash. After paying the liabilities amounting to P3,000, they have P22,200 to divide. Assume
that a debit balance in any of partner’s capital is uncollectible. The book value of non-cash assets
amounted to:

 P63,000
 P45,400
 P25,200
 P61,000

6. Jurado, Katindig, Lazaro, and Marcelo are partners sharing earnings in the ratio of 3:4:6:8.
The balance of their capital accounts on December 31, 2018 are as follows:

Jurado P1,000

Katindig 25,000

Lazaro 25,000

Marcelo 9,000

The partners decided to liquidate, and they accordingly convert the non-cash assets into P23,200
of cash. After paying the liabilities amounting to P3,000, they have P22,200 to divide. Assume
that a debit balance in any of partner’s capital is uncollectible. The share of Jurado in the loss
upon conversion of the non-cash assets into cash was:

 P5,400
 .P5,257
 P1,000
 P4,792

7. In a cash priority program for use in installment liquidation, the partner with the highest loss
absorption balance is the most vulnerable partner. The amount of cash to be distributed to
partners in installment liquidation can be determined by preparing a cash priority program.

 Both statements are true.

 Only statement 2 is true
 Only statement 1 is true
 Both statement are false

8. Partners Roger, Sergio and Tito, who share profit and loss in the ratio of 3:5:2, respectively
have decided to liquidate their partnership. The Statement of Financial Position of the
partnership at the time of liquidation is shown below:

Assets Liabilities and Capital

Cash P120,000 Accounts Payable P93,000

Other Assets 360,000 Loan from Sergio 30,000

Roger, Capital 108,000

Sergio, Capital 120,000

_____ Tito, Capital 129,000

P480,000 P480,000

The partners desire to prepare an installment distribution schedule showing how cash would be
distributed to partners as assets are realized. In the schedule of maximum absorbable loss, the
maximum absorbable loss for each partner would be

 Roger, P360,000; Sergio, P240,000; Tito, P645,000

 Roger, P300,000; Sergio, P600,000; Tito, P225,000
 Roger, P360,000; Sergio, P300,000; Tito, P645,000
 Roger, P450,000; Sergio, P525,000; Tito, P375,000

9. A, B and C decided to liquidate their partnership business. The financial position of the
partnership shows: A, Capital (30%) P210,000; B, Capital (20%) P150,000; C, Capital (50%)
P210,000. Upon liquidation, all of the partnership’s assets are sold and sufficient cash is realized
to pay all liabilities except one for P30,000. All partners are solvent except C.

How much is the additional contribution required of B?

 P24,000
 P0
 P6,000
 P18,000

10. The Statement of Financial Position for the partnership of Eclavo, Eclara, and Elorda, who
share profits and losses in the ratio 4:5:1, is as follows:

Cash P100,000 Accounts Payable P300,000

Inventory 720,000 Eclavo, Capital 320,000

Eclara, Capital 90,000

_____ Elorda, Capital 110,000

P820,000 P820,000

Assuming Eclara is an insolvent partner, and the inventory is sold for P360,000, how much
should Eclavo receive upon liquidation of the partnership?

 P46,000
 P90,000
 None
 P104,000

11. Jurado, Katindig, Lazaro, and Marcelo are partners sharing earnings in the ratio of 3:4:6:8.
The balance of their capital accounts on December 31, 2018 are as follows:

Jurado P1,000

Katindig 25,000

Lazaro 25,000

Marcelo 9,000

The partners decided to liquidate, and they accordingly convert the non-cash assets into P23,200
of cash. After paying the liabilities amounting to P3,000, they have P22,200 to divide. Assume
that a debit balance in any of partner’s capital is uncollectible. When the P22,200 was divided,
Lazaro got
  P8,320
 P14,200
 P6,342
 P10,800

12. The following is the priority sequence in which liquidation proceeds will be distributed for a
partnership:

 Partnership drawings, partnership liabilities, partnership loans, partnership capital

balances
 Partnership liabilities, partnership capital balances, partnership loans
 Partnership liabilities, partnership loans, partnership drawings, partnership capital
balances
 Partnership liabilities, partnership loans, partnership capital balances

13. Partners Roger, Sergio and Tito, who share profit and loss in the ratio of 3:5:2, respectively
have decided to liquidate their partnership. The Statement of Financial Position of the
partnership at the time of liquidation is shown below:

Assets Liabilities and Capital

Cash P120,000 Accounts Payable P93,000

Other Assets 360,000 Loan from Sergio 30,000

Roger, Capital 108,000

Sergio, Capital 120,000

_____ Tito, Capital 129,000

P480,000 P480,000

The partners desire to prepare an installment distribution schedule showing how cash would be
distributed to partners as assets are realized. If Roger has received P30,000, how much would
Sergio had received?

 P30,000
 P77,000
 None
 P20,000

14. Jack and Beans, who share profits and losses in the ratio 3:7, decided to liquidate their Talk
Partnership. The partner’s capital balances are P300,000 and P190,000, respectively.
If all partnership assets and liabilities are realized and settled at their carrying amounts, how
much would Beans receive from the liquidation?

 P190,000
 P120,000
 P300,000
 Answer not determinable

15. Partners Roger, Sergio and Tito, who share profit and loss in the ratio of 3:5:2, respectively
have decided to liquidate their partnership. The Statement of Financial Position of the
partnership at the time of liquidation is shown below:

Assets Liabilities and Capital

Cash P120,000 Accounts Payable P93,000

Other Assets 360,000 Loan from Sergio 30,000

Roger, Capital 108,000

Sergio, Capital 120,000

_____ Tito, Capital 129,000

P480,000 P480,000

The partners desire to prepare an installment distribution schedule showing how cash would be
distributed to partners as assets are realized. The schedule of possible losses on capital balances
would indicate that the first cash distributed after the payment of outside creditors would be
distributed to

 Sergio, in the amount of P60,000

 Tito, in the amount of P30,000
 Roger, in the amount of P48,000
 Tito, in the amount of P57,000

16. Jack and Beans, who share profits and losses in the ratio 3:7, decided to liquidate their Talk
Partnership. The partner’s capital balances are P300,000 and P190,000, respectively.
Before the realization of non-cash assets, the partnership has a zero balance in its cash account
and a P200,000 balance in its liabilities. If on final settlement of partners’ claims Jack received
P261,000, how much was the net proceeds from the sale of the non-cash assets?

 P290,000
 P0
 P360,000
 P560,000

17. The Statement of Financial Position for the partnership of Eclavo, Eclara, and Elorda, who
share profits and losses in the ratio 4:5:1, is as follows:

Cash P100,000 Accounts Payable P300,000

Inventory 720,000 Eclavo, Capital 320,000

Eclara, Capital 90,000

_____ Elorda, Capital 110,000

P820,000 P820,000

Assuming Elorda is a limited partner, and the inventory is sold for P360,000, how much should
she receive upon liquidation of the partnership?

 P74,000
 P56,000
 P65,000
 P110,000

18. An entry is not required in the liquidation of a partnership to record the

 Distribution of cash to partners

 Payment of cash to creditors
 Sale of non-cash assets where proceeds are greater than the book value
 Allocation of a capital deficiency to partners with credit balances when the deficient
partner is solvent

19. Jack and Beans, who share profits and losses in the ratio 3:7, decided to liquidate their Talk
Partnership. The partner’s capital balances are P300,000 and P190,000, respectively.
The partnership has total liabilities of P200,000. If all partnership assets are realized for
P500,000, how much would Jack receive from the liquidation?

 P300,000
 P133,000
 P243,000
 P57,000

20. Partners Roger, Sergio and Tito, who share profit and loss in the ratio of 3:5:2, respectively
have decided to liquidate their partnership. The Statement of Financial Position of the
partnership at the time of liquidation is shown below:

Assets Liabilities and Capital

Cash P120,000 Accounts Payable P93,000

Other Assets 360,000 Loan from Sergio 30,000

Roger, Capital 108,000

Sergio, Capital 120,000

_____ Tito, Capital 129,000

P480,000 P480,000

The partners desire to prepare an installment distribution schedule showing how cash would be
distributed to partners as assets are realized. Assuming that the first sale of other assets having
book value of P150,000 realized P45,000 and all available cash is distributed, the partners would
receive

 Roger, P9,000; Sergio, P0; Tito, P63,000

 Roger, P63,000; Sergio, P0; Tito P9,000
 Roger, P0; Sergio, P18,000; Tito, P54,000
 Roger, P24,000; Sergio, P24,000; Tito, P24,000

21. ABC Partnership is liquidated and the non-cash assets are considered worthless. A and C are
general partners while B is a limited partner. The creditors will look to whose partner’s personal
assets for settlement of their claims?

 The personal assets of Partner B

 The personal assets are not available for partnership debts
 The personal assets of Partners A and C
 The personal assets of all partners
22. The Statement of Financial Position for the partnership of Eclavo, Eclara, and Elorda, who
share profits and losses in the ratio 4:5:1, is as follows:

Cash P100,000 Accounts Payable P300,000

Inventory 720,000 Eclavo, Capital 320,000

Eclara, Capital 90,000

_____ Elorda, Capital 110,000

P820,000 P820,000

If the inventory is sold for P600,000, how much should Eclavo receive upon liquidation of the
partnership?

 P200,000
 P320,000
 P96,000
 P272,000

23. In lump-sum liquidation, a capital deficiency resulting from division of loss from realization
must be eliminated before making any payment to partners. Any resulting capital deficiency of
an insolvent partner is eliminated by charging the capital accounts of the remaining partners.

 Both statements are false

 Only statement 1 is true
 Only statement 2 is true
 Both statements are true

24. Jack and Beans, who share profits and losses in the ratio 3:7, decided to liquidate their Talk
Partnership. The partner’s capital balances are P300,000 and P190,000, respectively.

If all partnership assets are realized and all liabilities are settled, the partnership has remaining
cash of P120,000, how much would Beans receive from the liquidation?

 P99,000
 P189,000
 P120,000
 None

25. As of December 31, the books of AME Partnership showed capital balances of: A – P40,000;
M – P25,000; E – P5,000. The partners’ profit and loss ratio was 3:2:1, respectively. The partners
decided to dissolve and liquidate. They sold all the non-cash assets for P37,000 cash. After
settlement of all liabilities amounting to P12,000, they still have P28,000 cash left for
distribution.

Assuming that any partner’s capital debit balance is uncollectible, the share of A in the P28,000
cash for distribution would be

 P8,000
 P40,000
 P19,000
 P17,800

26. The statement of financial position of the partnership A, B and C shows: Cash, P22,400;
Other Assets, P212,000; Liabilities, P38,400; A, Capital (50%) P76,000; B, Capital (25%)
P64,000; and C, Capital (25%) P56,000.

The partners realized P56,000 from the first installment sale of non-cash assets with total
carrying amount of P120,000. How much did B receive from the partial liquidation?

 P24,000
 P16,000
 P0
 P25,000

27. The order of partnership liquidation process is

 Pay liabilities, sell assets, disburse cash to partners

 Sell assets, pay liabilities, disburse cash to partners
 Disburse cash to partners, pay liabilities, sell assets
 Sell assets, disburse cash to partners, pay liabilities

28. A, B and C decided to liquidate their partnership business. The financial position of the
partnership shows: A, Capital (30%) P210,000; B, Capital (20%) P150,000; C, Capital (50%)
P210,000. Upon liquidation, all of the partnership’s assets are sold and sufficient cash is realized
to pay all liabilities except one for P30,000. All partners are solvent except C.
By what amount would the capital of A change?

 P0
 P24,000 increase
 P234,000 decrease
 P180,000 decrease

29. As of December 31, the books of AME Partnership showed capital balances of: A – P40,000;
M – P25,000; E – P5,000. The partners’ profit and loss ratio was 3:2:1, respectively. The partners
decided to dissolve and liquidate. They sold all the non-cash assets for P37,000 cash. After
settlement of all liabilities amounting to P12,000, they still have P28,000 cash left for
distribution.

The loss on the realization of the non-cash assets was

 P44,000
 P40,000
 P45,000
 P42,000

30. Partner Morgan is personally insolvent, owing P600,000. Personal assets will only bring
P200,000 when liquidated. At the same time, Morgan has a credit balance in the partnership of
P120,000. The capital amounts of the other partners total a credit balance of P250,000. Under the
doctrine of marshalling of assets, how much the personal creditors of Morgan can collect?

 P320,000
 P570,000
 P120,000
 P200,000
CHAPTER 4 - PROBLEM 4: MULTIPLE CHOICE: COMPUTATIONAL

On January 1, 2003, the partners of Cobb, Davis, and Eddy, who share profits and losses in the ratio
of 5:3:2, respectively, decided to liquidate their partnership. On this date the partnership condensed
balance sheet was as follows:

Cash 50,000 Liabilities 60,000

Other assets 250,000 Cobb, capital 80,000
Davis, capital 90,000
Eddy, capital 70,000
Total assets 300,000 Total liabilities and equit 300,000

1. On January 15, 2003, the first cash sale of other assets with a carrying amount of P150,000 realized
P120,000. Safe installment payments to the partners were made the same date. How much cash
should be distributed to each partner?
Cobb Davis Eddy
a. 15,000 51,000 44,000
b. 40,000 45,000 35,000
c. 55,000 33,000 22,000
d. 60,000 36,000 24,000

Answer: A
50% 30%
Cobb Davis
Capital balances before liquidation 80,000 90,000
Actual loss on realization - January 15, 2003 (15,000) (9,000)
Total 65,000 81,000
Maximum loss possible (50,000) (30,000)
First installment payment to partners 15,000 51,000

Allocation of loss on realization

Carrying amount of assets realized 150,000
Cash proceeds (120,000)
Actual loss on realization - January 15, 2003 30,000

Maximum loss possible

Carrying amount of unsold non-cash assets 100,000
Maximum loss possible 100,000

Use the following information for the next five questions:

Jack and Beans, who share in profits and losses in the ratio of 3:7, decided to liquidate their
Talk Partnership. The partners' capital balances were P300,000 and P190,000, respectively.
2. If all partnership assets and liabilities are realized and settled at their carrying amounts,
how much will Beans receive from the liquidation?
a. 300,000
b. 190,000
c. 120,000
d. answer not determinable

Answer: B

Since it is apparent that the partners will have no gains or losses from the sale
of its non-cash assets due to the settlement at its carryig amount.
The partners shall receive equal amounts of their claims.

3. The partnership has total liabilities of P200,000. If all partnership assets are realized
for P500,000, how much will Jack receive from the liquidation?
a. 243,000
b. 57,000
c. 300,000
d. 133,000

Answer: A
ASSETS = LIABILITIES + EQUITY
? = 200,000 + 490,000
690,000 = 200,000 + 490,000

CASH NON-CASH ASSETS

Balances before liquidation - 690,000
Actual loss on realization 500,000 (690,000)
Total 500,000 -
Settlement of liabilities (200,000)
Total 300,000### -
Payment of claims (300,000) -
Total - ### -

Allocation of loss on realization

Carrying amount of assets realized 690,000
Cash proceeds (500,000)
Actual loss on realization 190,000

4. If after all partnership assets are realized and all liabilities are settled. And the partnership has
remaining cash of P120,000, how much will Beans receive from the liquidation?
 a. 189,000
b. 120,000
c. 69,000
d. 0

Answer: D

CASH NON-CASH ASSETS

Remaining cash balance 120,000 -
Actual loss on realization - -
Total 120,000 -
Payment of claims (120,000) -
Total - ### -

Allocation of loss on realization

Carrying amount of assets realized 490,000
Cash proceeds (120,000)
Actual loss on realization 370,000

Beans has already incurred a deficiency on his capital account after allocating the loss on realization.

5. If on the final settlement of the partners' claims Beans received P99,000, how much did Jack receive?
a. 261,000
b. 234,000
c. 89,000
d. 0

Answer:

Answer: A

CASH NON-CASH ASSETS

Remaining cash balance - -
Actual loss on realization (squeezed) 360,000 -
Total 360,000 -
Payment of claims (360,000) -
Total - ### -

Allocation of loss on realization

Carrying amount of assets realized 490,000
 Cash proceeds (360,000)
Actual loss on realization 130,000

6. Before the realization of non-cash assets, the partnership has a zero balance in its cash account and
a P200,000 balance in its liabilities. If Jack received P261,000 on the final settlement of the partners'
claims, how much were the net proceeds from the sale of the non-cash assets?
a. 560,000
b. 360,000
c. 290,000
d. 0

Answer: A

CASH NON-CASH ASSETS

Remaining cash balance - 690,000
Actual loss on realization (squeezed) 560,000 (690,000)
Total 560,000 -
Settlement of liabilities (200,000)
Total 360,000### -
Payment of claims (360,000) -
Total - ### -

Allocation of loss on realization

Carrying amount of assets realized 690,000
Cash proceeds (560,000)
Actual loss on realization 130,000

7. Partners A, B and C decided to liquidate their partnership. A summary of the partnership's statement
of financial position is shown below:

Assets Liabilities Equity

Cash Noncash A (20%)
20,000 480,000 30,000 100,000

One-third of the noncash assets were sold for P70,000. The partnership paid P8,000 liquidation expenses.
Partner C is insolvent. How much cash did A receive from the settlement of the partners' interests?
a. 12,400
b. 16,800
c. 13,600
d. 12,800

Answer: D

CASH NCA
Beginning balances 20,000 480,000
Actual loss on realization 62,000 (160,000)
Total 82,000 320,000
Settlement of liabilities (30,000)
Total 52,000### 320,000
Maximum loss possible (320,000)
Total 52,000### -
Loss absorpotion
Total 52,000### -
Payment of claims (52,000) -
Total - ### -

Allocation of loss on realization

Carrying amount of assets realized 160,000
Cash proceeds (70,000)
Liquidation expenses 8,000
Actual loss on realization 98,000

Maximum loss possible

Carrying amount of unsold non-cash assets (320,000)
Maximum loss possible (320,000)

Use the following information for the next two questions:

A, B and C decided to liquidate their partnership business. The financial position of the partnership
shows the following partners' equity:
A, capital (30%) 210,000
B, capital (20%) 150,000
C, capital (50%) 210,000
Total 570,000

Upon liquidation, all the partnerships' assets are sold and sufficient cash is realized to pay all liabilities
except one for P30,000. All partners are solvent except C.
8. By what amount would the capital of A change?
a. 180,000 decrease
b. 234,000 decrease
c. 24,000 increase
d. 0

Answer: B

CASH NCA
Balances after realization of assets - -
Actual loss on realization - -
Total - -
Loss absorpotion
Total - ### -
Payment of claims - -
Total - ### -

Allocation of loss on realization

Carrying amount of assets realized 600,000
Cash proceeds -
Actual loss on realization 600,000

9. How much is the additional contribution required of B?

a. 6,000
b. 18,000
c. 24,000
d. 0

Answer: A

CASH NCA
Balances after realization of assets - -
Actual loss on realization - -
Total - -
Loss absorpotion
Total - ### -
Payment of claims - -
Total - ### -

Allocation of loss on realization

 Carrying amount of assets realized 600,000
Cash proceeds -
Actual loss on realization 600,000

10. ABC Co. is undergoing liquidation. Information before the start of the liquidation process
is as follows:

Cash 10,000 Accounts payable 80,000

Accounts receivable 80,000 Payable to B 20,000
Receivable from A 10,000 A, Capital (50%) 250,000
Inventory 180,000 B, Capital (30%) 150,000
Equipment, net 320,000 C, Capital (20%) 100,000
Total Assets 600,000 Total Liab. & Equity 600,000

The total cash distributed to the partners after the first and second sales of noncash assets
were P12,000 and P30,000, respectively. How much cash did B receive in the second cash
distribution?
a. 12,000
b. 17,600
c. 3,600
d. 26,000

Answer: B

50% 30%
A B
Capital balances 250,000 150,000
Interest adjustments in the partnership
Receivable from A (10,000)
Payable to B 20,000
Total interest 240,000 170,000
Divded by: P/L ratio 50% 30%
Maximum loss absorption capacity (MLAC) 480,000 566,667
First priority - (66,667)
Adjusted 480,000 500,000
Second priority - (20,000)

Adjusted 480,000 480,000

CASH A
Priority claims -
First available cash for distribution: 12,000
 First payment according to priority (12,000) -

Adjusted priority claims -

Second available cash for distribution: 30,000
Second payment according to priority (18,000)

Adjusted priority claims 12,000 -

Distribution for remaining cash after priority (12,000) (6,000)

B received in the second payment of cash distribution

sses in the ratio
rship condensed

50,000 realized
w much cash

20%
Eddy Total
70,000 240,000
(6,000) (30,000)
64,000 210,000
(20,000) (100,000)
44,000 110,000
or losses from the sale

30% 70%
LIABILITIES JACK BEANS
200,000 300,000 190,000
- (57,000) (133,000)
200,000 243,000 57,000
(200,000)
- 243,000 57,000
- (243,000) (57,000)
- - -
 30% 70%
LIABILITIES JACK BEANS
- 300,000 190,000
- (111,000) (259,000)
- 189,000 (69,000)
- (189,000) 69,000
- - -

ss on realization.

did Jack receive?

30% 70%
LIABILITIES JACK BEANS
- 300,000 190,000
- (39,000) (91,000)
- 261,000 99,000
- (261,000) (99,000)
- - -
ash account and
of the partners'

30% 70%
LIABILITIES JACK BEANS
200,000 300,000 190,000
- (39,000) (91,000)
200,000 261,000 99,000
(200,000) -
- 261,000 99,000
- (261,000) (99,000)
- - -

rship's statement

Equity
B (30%) C (50%)
170,000 200,000

liquidation expenses.
ners' interests?
 20% 30% 50%
LIABILITIES A B C
30,000 100,000 170,000 200,000
- (19,600) (29,400) (49,000)
30,000 80,400 140,600 151,000
(30,000) -
- 80,400 140,600 151,000
(64,000) (96,000) (160,000)
- 16,400 44,600 (9,000)
(3,600) (5,400) 9,000
- 12,800 39,200 -
- (12,800) (39,200) -
- - - -

he partnership

ed to pay all liabilities

 30% 20% 50%
LIABILITIES A B C
30,000 210,000 150,000 210,000
(30,000) (180,000) (120,000) (300,000)
- 30,000 30,000 (90,000)
(54,000) (36,000) 90,000
- (24,000) (6,000) -
- 24,000 6,000 -
- - - -
(234,000)

30% 20% 50%

LIABILITIES A B C
30,000 210,000 150,000 210,000
(30,000) (180,000) (120,000) (300,000)
- 30,000 30,000 (90,000)
(54,000) (36,000) 90,000
- (24,000) (6,000) -
- 24,000 6,000 -
- - - -
20% CASH PRIORITY
C A B C
100,000

100,000
20%
500,000
- 20,000
500,000
(20,000) 6,000 4,000

480,000 - 26,000 4,000

B C
26,000 4,000
(12,000) -

14,000 4,000

(14,000) (4,000)

- -
(3,600) (2,400)

(17,600)
TOTAL

20,000

10,000

30,000
CHAPTER 4 - PROBLEM 6: FOR CLASSROOM DISCUSSION

CASE 1: LUMP-SUM LIQUIDATION

Done Partnership is undergoing liquidation. Information on Done is as follows:

Cash 20,000 Accounts payable

Accounts receivable 60,000 Payable to B
Receivable from A 10,000 A, Capital (60%)
Inventory 120,000 B, Capital (40%)
Equipment, net 290,000
Total assets 500,000 Total liabilities and equity

The non-cash assets were realized as follows:

a. Only 70% of the accounts receivable was collected; the balance is uncollectible.
b. P20,000 was received for the entire inventory.
c. The equipment was sold for P310,000.
d. P12,000 liquidation expenses were paid.

Requirements:
Compute for the cash distributions to the partners.

Done Partnership
Statement of Liquidation
(Date)

Cash Accounts receivable

Balances before liquidation 20,000 60,000
Interest adjustment
Adjusted interest 20,000### 60,000
Realization of non-cash assets
Accounts receivable 42,000 (60,000)
Inventory 20,000
Equipment 310,000
Total 392,000### -
Liquidation expenses (12,000)
Total 380,000### -
Payment to outside creditors (30,000)
Total 350,000### -
Payment to partners (350,000)
Total -

CASE 2: INSTALLMENT LIQUIDATION

Done will be liquidated on installment basis. Cash distributions to the partners will be
 made as cash becomes available. In the first month of the liquidation process, the
non-cash assets were realized as follows:
a. Half of the accounts receivable was collected. Of the remaining half, P10,000 accounts
are deemed worthless.
b. Seventy-five percent of the inventory was sold at 80% of cost.
c. Equipment with carrying amount of P200,000 was sold for P185,000.
d. P12,000 liquidation expenses were paid. Additional P5,000 liquidation expenses
are expected to be incurred in subsequent periods.

Requirements:
Compute for the cash distributions to the partners.

Done Partnership
Statement of Liquidation
(Date)

Cash Accounts receivable

Balances before liquidation 20,000 60,000
Interest adjustment
Adjusted interest 20,000### 60,000
Realization of non-cash assets
Accounts receivable 30,000 (30,000)
Inventory 72,000
Equipment 185,000
Total 307,000### 30,000
Actual liquidation expenses (12,000)
Total 295,000### 30,000
Allocation of loss on unrealized NCAs & future expenses
Accounts receivable (30,000)
Inventory
Equipment
Cash retained for future expen (5,000)
Total 290,000### -
Payment to outside creditors (30,000)
Total 260,000### -
Payment to partners (260,000)### -
Total -

CASE 3: GAIN ON SETTLEMENT OF LIABILITY

All the non-cash assets, except the receivable from A, were realized for P250,000.
The accounts payable was settled for P24,000, after offset of a P6,000 credit
memorandum.
 Requirements:
Compute for the cash distributions to the partners.

Done Partnership
Statement of Liquidation
(Date)

Cash Accounts receivable

Balances before liquidation 20,000 60,000
Interest adjustment
Adjusted interest 20,000### 60,000
Realization of non-cash assets 250,000
Accounts receivable (60,000)
Inventory
Equipment
Total 270,000### -
Payment to outside creditors (24,000)
Total 246,000### -
Payment to partners (246,000)
### -
Total -### -

Sale of certain non-cash assets 250,000

Less: Carrying amounts of NCA (470,000)
Total loss (220,000)

Beginning balance of cash 20,000

Net cash proceeds 250,000
Payments for liabilities (24,000)
Cash available for distribution to partners 246,000

CASE 4: MARSHALLING OF ASSETS

All the non-cash assets, except the receivable from A, were realized for P65,000.
The personal assets and liabilities of the partners are as follows:
A B

Personal assets 200,000 380,000

Personal liabilities (440,000) (240,000)

Requirements:
Compute for the cash distributions to the partners.

Done Partnership
 Statement of Liquidation
(Date)

Cash Accounts receivable

Balances before liquidation 20,000 60,000
Interest adjustment
Adjusted interest 20,000### 60,000
Realization of non-cash assets 65,000
Accounts receivable (60,000)
Inventory
Equipment
Total 85,000### -
Payment to outside creditors (30,000)
Total 55,000### -
Allocation of capital deficiency of the
personally insolvent partner
Balances 55,000### -
Payment to partners (55,000)
### -
Total -### -

Sale of certain non-cash assets 65,000

Less: Carrying amounts of NCA (470,000)
Total loss (405,000)

Beginning balance of cash 20,000

Net cash proceeds 65,000
Payments for liabilities (30,000)
Cash available for distribution to partners 55,000

CASE 5: RECONSTRUCTION OF INFORMATION

After all the assets (excluding the receivable from A) were realized and the liabilities
to outside creditors were settled, B received P140,000 in the cash distribution to the
partners.

Requirements:
a. Loss on sale
b. Share of A in the cash distribution to the partners
c. Cash available for distribution to the partners
d. Net proceeds from sale of the non-cash assets, excluding the receivable from A.

Done Partnership
Statement of Liquidation
 (Date)

Cash Accounts receivable

Balances before liquidation 20,000 60,000
Interest adjustment
Adjusted interest 20,000### 60,000
Realization of non-cash assets 270,000 (60,000)
Total 290,000### -
Payment to outside creditors (30,000)
Total 260,000### Zyne: -
Payment to partners (260,000) c - answer
Total -

B, received in the cash settlement 140,000

Less: B's interest in the parntership
B, Capital 200,000
Payable to B 20,000 (220,000)
Share in the loss of non cash asset realization (80,000)
Divided by: B's interest ratio in the partnership 40%
Total Loss on realization of non-cash assets (200,000)

CASE 6: NON-CASH ASSET USED AS PAYMENT FOR CLAIM

All the assets (excluding the receivable from A) were realized, except for equipment
with carrying amount of P60,000 which B will take at an equity setoff price of P20,000.
The remaining cash of P35,000 is to be divided among the partners in a manner that
will avoid the possible recovery of cash from a partner.

Requirements:
How much is the total payment to B in cash and in kind?

Done Partnership
Statement of Liquidation
(Date)

Cash Accounts receivable

Balances before liquidation 20,000 60,000
Interest adjustment
Adjusted interest 20,000### 60,000
Realization of non-cash assets 45,000
Accounts receivable (60,000)
Inventory
 Equipment at 20,000 set off price
Remaining CA of equipment after setoff price
Equipment Carrying amount sold to outside parties
Total 65,000### -
Payment to outside creditors (30,000)
Total 35,000### -
Allocation of capital deficiency of the
personally insolvent partner
Balances 35,000### -
Payment to partners (35,000)### -
Total -### -
Zyne:
squeez
e
B's Summary of claims received:
Equipment at set-off price 20,000
Cash received 35,000
Total 55,000

CASE 7: CASH PRIORITY PROGRAM

Done will be liquidated on installment basis. In the first month of the liquidation
process, the non-cash assets were realized as follows:
a. Half of the accounts receivable was collected.
b. Seventy-five percent of the inventory was sold at 80% of cost.
c. Equipment with carrying amount of P200,000 was sold for P185,000.
d. P12,000 liquidation expenses were paid. Additional P5,000 liquidation
expenses are expected to be incurred in subsequent periods.

Requirements:
Compute for the cash distributions to the partners using a cash priority program.

Done Partnership
Statement of Liquidation
(Date)

Cash Accounts receivable

Balances before liquidation 20,000 60,000
Interest adjustment
Adjusted interest 20,000### 60,000
Realization of non-cash assets
Accounts receivable 30,000 (30,000)
Inventory 72,000
Equipment 185,000
Total 307,000### 30,000
Actual liquidation expenses (12,000)
Total 295,000### 30,000
Allocation of loss on unrealized NCAs & future expenses
Accounts receivable (30,000)
Inventory
Equipment
Cash retained for future expen (5,000)
Total 290,000### -
Expected payable to outside credi (30,000)
Total 260,000### -
Payment to partners
First priority (60,000)
Remaining cash for distributio (200,000)
Total -### -

60%
A
Capital balances 250,000
Interest adjustments in the partnership
Receivable from A (10,000)
Payable to B
Total interest 240,000
Divded by: P/L ratio 60%
Maximum loss absorption capacity (MLAC) 400,000
First priority
Adjusted 400,000
 30,000
20,000
250,000
200,000

500,000

Done Partnership
Statement of Liquidation
(Date)
60%
Receivable from Equipment, Accounts
A Inventory net payable Payable to B A, Capital
10,000 120,000 290,000 30,000 20,000 250,000
(10,000) (20,000) (10,000)
- 120,000 290,000 30,000 - 240,000

(10,800)
(120,000) (60,000)
(290,000) 12,000
- - - 30,000 - 181,200
(7,200)
- - - 30,000 - 174,000
(30,000)
- - - - - 174,000
(174,000)
- - - - - -
,000 accounts

Done Partnership
Statement of Liquidation
(Date)
60%
Receivable from Equipment, Accounts
A Inventory net payable Payable to B A, Capital
10,000 120,000 290,000 30,000 20,000 250,000
(10,000) (20,000) (10,000)
- 120,000 290,000 30,000 - 240,000

-
(90,000) (10,800)
(200,000) (9,000)
- 30,000 90,000 30,000 - 220,200
(7,200)
- 30,000 90,000 30,000 - 213,000

(18,000)
(30,000) (18,000)
(90,000) (54,000)
(3,000)
- - - 30,000 - 120,000
(30,000)
- - - - - 120,000
- - - - - (120,000)
- - - - - -
 Done Partnership
Statement of Liquidation
(Date)
60%
Receivable from Equipment, Accounts
A Inventory net payable Payable to B A, Capital
10,000 120,000 290,000 30,000 20,000 250,000
(10,000) (20,000) (10,000)
- 120,000 290,000 30,000 - 240,000
150,000
(36,000)
(120,000) (72,000)
(290,000) (174,000)
- - - 30,000 - 108,000
(30,000) 3,600
- - - - - 111,600
- - - (111,600)
- - - - - -

Done Partnership
Statement of Liquidation
(Date)
60%
Receivable from Equipment, Accounts
A Inventory net payable Payable to B A, Capital
10,000 120,000 290,000 30,000 20,000 250,000
(10,000) (20,000) (10,000)
- 120,000 290,000 30,000 - 240,000
39,000
(36,000)
(120,000) (72,000)
(290,000) (174,000)
- - - 30,000 - (3,000)
(30,000) -
- - - - - (3,000)

3,000
- - - - - -
- - - -
- - - - - -

Test for personal solvency of partners

A B

Personal assets 200,000 380,000

Personal liabilities (440,000) (240,000)
(240,000) 140,000

Done Partnership
Statement of Liquidation
 (Date)
60%
Receivable from Equipment, Accounts
A Inventory net payable Payable to B A, Capital
10,000 120,000 290,000 30,000 20,000 250,000
(10,000) (20,000) (10,000)
- 120,000 290,000 30,000 - 240,000
(120,000) (290,000) - (120,000)
- - - 30,000 - 120,000
(30,000)
- - - - - 120,000
(120,000)
- - - - - -
Zyne:
(b) answer

Carrying amount of Non-cash assets

Accounts receivable 60,000
Inventory 120,000
Equipment, net 290,000
Total 470,000
Total Loss on realization of non-cash assets (200,000)
(a) Net proceeds 270,000 (d)

Done Partnership
Statement of Liquidation
(Date)
60%
Receivable from Equipment, Accounts
A Inventory net payable Payable to B A, Capital
10,000 120,000 290,000 30,000 20,000 250,000
(10,000) (20,000) (10,000)
- 120,000 290,000 30,000 - 240,000
27,000
(36,000)
(120,000) (72,000)
 (20,000)
(40,000) (24,000)
(230,000) (138,000)
- - - 30,000 - (3,000)
(30,000) -
- - - - - (3,000)

3,000
- - - - - -
- - - -
- - - - - -

Done Partnership
Statement of Liquidation
(Date)
60%
Receivable from Equipment, Accounts
A Inventory net payable Payable to B A, Capital
10,000 120,000 290,000 30,000 20,000 250,000
(10,000) (20,000) (10,000)
- 120,000 290,000 30,000 - 240,000

-
(90,000) (10,800)
(200,000) (9,000)
- 30,000 90,000 30,000 - 220,200
 (7,200)
- 30,000 90,000 30,000 - 213,000

(18,000)
(30,000) (18,000)
(90,000) (54,000)
(3,000)
- - - 30,000 - 120,000
(30,000)
- - - - - 120,000

(120,000)
- - - - - -

40% CASH PRIORITY

B A B TOTAL
200,000

20,000
220,000
40%
550,000
(150,000) 60,000 60,000
400,000 - 60,000 60,000
 40%

B, Capital
200,000
20,000
220,000

(7,200)
(40,000)
8,000
180,800
(4,800)
176,000

176,000
(176,000)
-
 40%

B, Capital
200,000
20,000
220,000

-
(7,200)
(6,000)
206,800
(4,800)
202,000

(12,000)
(12,000)
(36,000)
(2,000)
140,000

140,000
(140,000)
-
 40%

B, Capital
200,000
20,000
220,000
100,000
(24,000)
(48,000)
(116,000)
132,000
2,400
134,400
(134,400)
-
 40%

B, Capital
200,000
20,000
220,000
26,000
(24,000)
(48,000)
(116,000)
58,000
-
58,000

(3,000)
55,000
(55,000)
-
 40%

B, Capital
200,000
20,000
220,000
Zyne:
(80,000) squeeze
140,000

140,000
Zyne:
(140,000) start here
-
Zyne:
(b) answer

40%

B, Capital
200,000
20,000
220,000
18,000
(24,000)
(48,000)
 (20,000)
(16,000)
(92,000)
38,000
-
38,000

(3,000)
35,000
(35,000)
-

40%

B, Capital
200,000
20,000
220,000

-
(7,200)
(6,000)
206,800
 (4,800)
202,000

(12,000)
(12,000)
(36,000)
(2,000)
140,000

140,000

(60,000)
(80,000)
-
CHAPTER 4 - PROBLEM 4: MULTIPLE CHOICE: COMPUTATIONAL

On January 1, 2003, the partners of Cobb, Davis, and Eddy, who share profits and losses in the ratio
of 5:3:2, respectively, decided to liquidate their partnership. On this date the partnership condensed
balance sheet was as follows:

Cash 50,000 Liabilities 60,000

Other assets 250,000 Cobb, capital 80,000
Davis, capital 90,000
Eddy, capital 70,000
Total assets 300,000 Total liabilities and equit 300,000

1. On January 15, 2003, the first cash sale of other assets with a carrying amount of P150,000 realized
P120,000. Safe installment payments to the partners were made the same date. How much cash
should be distributed to each partner?
Cobb Davis Eddy
a. 15,000 51,000 44,000
b. 40,000 45,000 35,000
c. 55,000 33,000 22,000
d. 60,000 36,000 24,000

Answer: A
50% 30%
Cobb Davis
Capital balances before liquidation 80,000 90,000
Actual loss on realization - January 15, 2003 (15,000) (9,000)
Total 65,000 81,000
Maximum loss possible (50,000) (30,000)
First installment payment to partners 15,000 51,000

Allocation of loss on realization

Carrying amount of assets realized 150,000
Cash proceeds (120,000)
Actual loss on realization - January 15, 2003 30,000

Maximum loss possible

Carrying amount of unsold non-cash assets 100,000
Maximum loss possible 100,000

Use the following information for the next five questions:

Jack and Beans, who share in profits and losses in the ratio of 3:7, decided to liquidate their
Talk Partnership. The partners' capital balances were P300,000 and P190,000, respectively.
2. If all partnership assets and liabilities are realized and settled at their carrying amounts,
how much will Beans receive from the liquidation?
a. 300,000
b. 190,000
c. 120,000
d. answer not determinable

Answer: B

Since it is apparent that the partners will have no gains or losses from the sale
of its non-cash assets due to the settlement at its carryig amount.
The partners shall receive equal amounts of their claims.

3. The partnership has total liabilities of P200,000. If all partnership assets are realized
for P500,000, how much will Jack receive from the liquidation?
a. 243,000
b. 57,000
c. 300,000
d. 133,000

Answer: A
ASSETS = LIABILITIES + EQUITY
? = 200,000 + 490,000
690,000 = 200,000 + 490,000

CASH NON-CASH ASSETS

Balances before liquidation - 690,000
Actual loss on realization 500,000 (690,000)
Total 500,000 -
Settlement of liabilities (200,000)
Total 300,000### -
Payment of claims (300,000) -
Total - ### -

Allocation of loss on realization

Carrying amount of assets realized 690,000
Cash proceeds (500,000)
Actual loss on realization 190,000

4. If after all partnership assets are realized and all liabilities are settled. And the partnership has
remaining cash of P120,000, how much will Beans receive from the liquidation?
 a. 189,000
b. 120,000
c. 69,000
d. 0

Answer: D

CASH NON-CASH ASSETS

Remaining cash balance 120,000 -
Actual loss on realization - -
Total 120,000 -
Payment of claims (120,000) -
Total - ### -

Allocation of loss on realization

Carrying amount of assets realized 490,000
Cash proceeds (120,000)
Actual loss on realization 370,000

Beans has already incurred a deficiency on his capital account after allocating the loss on realization.

5. If on the final settlement of the partners' claims Beans received P99,000, how much did Jack receive?
a. 261,000
b. 234,000
c. 89,000
d. 0

Answer:

Answer: A

CASH NON-CASH ASSETS

Remaining cash balance - -
Actual loss on realization (squeezed) 360,000 -
Total 360,000 -
Payment of claims (360,000) -
Total - ### -

Allocation of loss on realization

Carrying amount of assets realized 490,000
 Cash proceeds (360,000)
Actual loss on realization 130,000

6. Before the realization of non-cash assets, the partnership has a zero balance in its cash account and
a P200,000 balance in its liabilities. If Jack received P261,000 on the final settlement of the partners'
claims, how much were the net proceeds from the sale of the non-cash assets?
a. 560,000
b. 360,000
c. 290,000
d. 0

Answer: A

CASH NON-CASH ASSETS

Remaining cash balance - 690,000
Actual loss on realization (squeezed) 560,000 (690,000)
Total 560,000 -
Settlement of liabilities (200,000)
Total 360,000### -
Payment of claims (360,000) -
Total - ### -

Allocation of loss on realization

Carrying amount of assets realized 690,000
Cash proceeds (560,000)
Actual loss on realization 130,000

7. Partners A, B and C decided to liquidate their partnership. A summary of the partnership's statement
of financial position is shown below:

Assets Liabilities Equity

Cash Noncash A (20%)
20,000 480,000 30,000 100,000

One-third of the noncash assets were sold for P70,000. The partnership paid P8,000 liquidation expenses.
Partner C is insolvent. How much cash did A receive from the settlement of the partners' interests?
a. 12,400
b. 16,800
c. 13,600
d. 12,800

Answer: D

CASH NCA
Beginning balances 20,000 480,000
Actual loss on realization 62,000 (160,000)
Total 82,000 320,000
Settlement of liabilities (30,000)
Total 52,000### 320,000
Maximum loss possible (320,000)
Total 52,000### -
Loss absorpotion
Total 52,000### -
Payment of claims (52,000) -
Total - ### -

Allocation of loss on realization

Carrying amount of assets realized 160,000
Cash proceeds (70,000)
Liquidation expenses 8,000
Actual loss on realization 98,000

Maximum loss possible

Carrying amount of unsold non-cash assets (320,000)
Maximum loss possible (320,000)

Use the following information for the next two questions:

A, B and C decided to liquidate their partnership business. The financial position of the partnership
shows the following partners' equity:
A, capital (30%) 210,000
B, capital (20%) 150,000
C, capital (50%) 210,000
Total 570,000

Upon liquidation, all the partnerships' assets are sold and sufficient cash is realized to pay all liabilities
except one for P30,000. All partners are solvent except C.
8. By what amount would the capital of A change?
a. 180,000 decrease
b. 234,000 decrease
c. 24,000 increase
d. 0

Answer: B

CASH NCA
Balances after realization of assets - -
Actual loss on realization - -
Total - -
Loss absorpotion
Total - ### -
Payment of claims - -
Total - ### -

Allocation of loss on realization

Carrying amount of assets realized 600,000
Cash proceeds -
Actual loss on realization 600,000

9. How much is the additional contribution required of B?

a. 6,000
b. 18,000
c. 24,000
d. 0

Answer: A

CASH NCA
Balances after realization of assets - -
Actual loss on realization - -
Total - -
Loss absorpotion
Total - ### -
Payment of claims - -
Total - ### -

Allocation of loss on realization

 Carrying amount of assets realized 600,000
Cash proceeds -
Actual loss on realization 600,000

10. ABC Co. is undergoing liquidation. Information before the start of the liquidation process
is as follows:

Cash 10,000 Accounts payable 80,000

Accounts receivable 80,000 Payable to B 20,000
Receivable from A 10,000 A, Capital (50%) 250,000
Inventory 180,000 B, Capital (30%) 150,000
Equipment, net 320,000 C, Capital (20%) 100,000
Total Assets 600,000 Total Liab. & Equity 600,000

The total cash distributed to the partners after the first and second sales of noncash assets
were P12,000 and P30,000, respectively. How much cash did B receive in the second cash
distribution?
a. 12,000
b. 17,600
c. 3,600
d. 26,000

Answer: B

50% 30%
A B
Capital balances 250,000 150,000
Interest adjustments in the partnership
Receivable from A (10,000)
Payable to B 20,000
Total interest 240,000 170,000
Divded by: P/L ratio 50% 30%
Maximum loss absorption capacity (MLAC) 480,000 566,667
First priority - (66,667)
Adjusted 480,000 500,000
Second priority - (20,000)

Adjusted 480,000 480,000

CASH A
Priority claims -
First available cash for distribution: 12,000
 First payment according to priority (12,000) -

Adjusted priority claims -

Second available cash for distribution: 30,000
Second payment according to priority (18,000)

Adjusted priority claims 12,000 -

Distribution for remaining cash after priority (12,000) (6,000)

B received in the second payment of cash distribution

sses in the ratio
rship condensed

50,000 realized
w much cash

20%
Eddy Total
70,000 240,000
(6,000) (30,000)
64,000 210,000
(20,000) (100,000)
44,000 110,000
or losses from the sale

30% 70%
LIABILITIES JACK BEANS
200,000 300,000 190,000
- (57,000) (133,000)
200,000 243,000 57,000
(200,000)
- 243,000 57,000
- (243,000) (57,000)
- - -
 30% 70%
LIABILITIES JACK BEANS
- 300,000 190,000
- (111,000) (259,000)
- 189,000 (69,000)
- (189,000) 69,000
- - -

ss on realization.

did Jack receive?

30% 70%
LIABILITIES JACK BEANS
- 300,000 190,000
- (39,000) (91,000)
- 261,000 99,000
- (261,000) (99,000)
- - -
ash account and
of the partners'

30% 70%
LIABILITIES JACK BEANS
200,000 300,000 190,000
- (39,000) (91,000)
200,000 261,000 99,000
(200,000) -
- 261,000 99,000
- (261,000) (99,000)
- - -

rship's statement

Equity
B (30%) C (50%)
170,000 200,000

liquidation expenses.
ners' interests?
 20% 30% 50%
LIABILITIES A B C
30,000 100,000 170,000 200,000
- (19,600) (29,400) (49,000)
30,000 80,400 140,600 151,000
(30,000) -
- 80,400 140,600 151,000
(64,000) (96,000) (160,000)
- 16,400 44,600 (9,000)
(3,600) (5,400) 9,000
- 12,800 39,200 -
- (12,800) (39,200) -
- - - -

he partnership

ed to pay all liabilities

 30% 20% 50%
LIABILITIES A B C
30,000 210,000 150,000 210,000
(30,000) (180,000) (120,000) (300,000)
- 30,000 30,000 (90,000)
(54,000) (36,000) 90,000
- (24,000) (6,000) -
- 24,000 6,000 -
- - - -
(234,000)

30% 20% 50%

LIABILITIES A B C
30,000 210,000 150,000 210,000
(30,000) (180,000) (120,000) (300,000)
- 30,000 30,000 (90,000)
(54,000) (36,000) 90,000
- (24,000) (6,000) -
- 24,000 6,000 -
- - - -
20% CASH PRIORITY
C A B C
100,000

100,000
20%
500,000
- 20,000
500,000
(20,000) 6,000 4,000

480,000 - 26,000 4,000

B C
26,000 4,000
(12,000) -

14,000 4,000

(14,000) (4,000)

- -
(3,600) (2,400)

(17,600)
TOTAL

20,000

10,000

30,000
CHAPTER 4 - PROBLEM 6: FOR CLASSROOM DISCUSSION

CASE 1: LUMP-SUM LIQUIDATION

Done Partnership is undergoing liquidation. Information on Done is as follows:

Cash 20,000 Accounts payable

Accounts receivable 60,000 Payable to B
Receivable from A 10,000 A, Capital (60%)
Inventory 120,000 B, Capital (40%)
Equipment, net 290,000
Total assets 500,000 Total liabilities and equity

The non-cash assets were realized as follows:

a. Only 70% of the accounts receivable was collected; the balance is uncollectible.
b. P20,000 was received for the entire inventory.
c. The equipment was sold for P310,000.
d. P12,000 liquidation expenses were paid.

Requirements:
Compute for the cash distributions to the partners.

Done Partnership
Statement of Liquidation
(Date)

Cash Accounts receivable

Balances before liquidation 20,000 60,000
Interest adjustment
Adjusted interest 20,000### 60,000
Realization of non-cash assets
Accounts receivable 42,000 (60,000)
Inventory 20,000
Equipment 310,000
Total 392,000### -
Liquidation expenses (12,000)
Total 380,000### -
Payment to outside creditors (30,000)
Total 350,000### -
Payment to partners (350,000)
Total -

CASE 2: INSTALLMENT LIQUIDATION

Done will be liquidated on installment basis. Cash distributions to the partners will be
 made as cash becomes available. In the first month of the liquidation process, the
non-cash assets were realized as follows:
a. Half of the accounts receivable was collected. Of the remaining half, P10,000 accounts
are deemed worthless.
b. Seventy-five percent of the inventory was sold at 80% of cost.
c. Equipment with carrying amount of P200,000 was sold for P185,000.
d. P12,000 liquidation expenses were paid. Additional P5,000 liquidation expenses
are expected to be incurred in subsequent periods.

Requirements:
Compute for the cash distributions to the partners.

Done Partnership
Statement of Liquidation
(Date)

Cash Accounts receivable

Balances before liquidation 20,000 60,000
Interest adjustment
Adjusted interest 20,000### 60,000
Realization of non-cash assets
Accounts receivable 30,000 (30,000)
Inventory 72,000
Equipment 185,000
Total 307,000### 30,000
Actual liquidation expenses (12,000)
Total 295,000### 30,000
Allocation of loss on unrealized NCAs & future expenses
Accounts receivable (30,000)
Inventory
Equipment
Cash retained for future expen (5,000)
Total 290,000### -
Payment to outside creditors (30,000)
Total 260,000### -
Payment to partners (260,000)### -
Total -

CASE 3: GAIN ON SETTLEMENT OF LIABILITY

All the non-cash assets, except the receivable from A, were realized for P250,000.
The accounts payable was settled for P24,000, after offset of a P6,000 credit
memorandum.
 Requirements:
Compute for the cash distributions to the partners.

Done Partnership
Statement of Liquidation
(Date)

Cash Accounts receivable

Balances before liquidation 20,000 60,000
Interest adjustment
Adjusted interest 20,000### 60,000
Realization of non-cash assets 250,000
Accounts receivable (60,000)
Inventory
Equipment
Total 270,000### -
Payment to outside creditors (24,000)
Total 246,000### -
Payment to partners (246,000)
### -
Total -### -

Sale of certain non-cash assets 250,000

Less: Carrying amounts of NCA (470,000)
Total loss (220,000)

Beginning balance of cash 20,000

Net cash proceeds 250,000
Payments for liabilities (24,000)
Cash available for distribution to partners 246,000

CASE 4: MARSHALLING OF ASSETS

All the non-cash assets, except the receivable from A, were realized for P65,000.
The personal assets and liabilities of the partners are as follows:
A B

Personal assets 200,000 380,000

Personal liabilities (440,000) (240,000)

Requirements:
Compute for the cash distributions to the partners.

Done Partnership
 Statement of Liquidation
(Date)

Cash Accounts receivable

Balances before liquidation 20,000 60,000
Interest adjustment
Adjusted interest 20,000### 60,000
Realization of non-cash assets 65,000
Accounts receivable (60,000)
Inventory
Equipment
Total 85,000### -
Payment to outside creditors (30,000)
Total 55,000### -
Allocation of capital deficiency of the
personally insolvent partner
Balances 55,000### -
Payment to partners (55,000)
### -
Total -### -

Sale of certain non-cash assets 65,000

Less: Carrying amounts of NCA (470,000)
Total loss (405,000)

Beginning balance of cash 20,000

Net cash proceeds 65,000
Payments for liabilities (30,000)
Cash available for distribution to partners 55,000

CASE 5: RECONSTRUCTION OF INFORMATION

After all the assets (excluding the receivable from A) were realized and the liabilities
to outside creditors were settled, B received P140,000 in the cash distribution to the
partners.

Requirements:
a. Loss on sale
b. Share of A in the cash distribution to the partners
c. Cash available for distribution to the partners
d. Net proceeds from sale of the non-cash assets, excluding the receivable from A.

Done Partnership
Statement of Liquidation
 (Date)

Cash Accounts receivable

Balances before liquidation 20,000 60,000
Interest adjustment
Adjusted interest 20,000### 60,000
Realization of non-cash assets 270,000 (60,000)
Total 290,000### -
Payment to outside creditors (30,000)
Total 260,000### Zyne: -
Payment to partners (260,000) c - answer
Total -

B, received in the cash settlement 140,000

Less: B's interest in the parntership
B, Capital 200,000
Payable to B 20,000 (220,000)
Share in the loss of non cash asset realization (80,000)
Divided by: B's interest ratio in the partnership 40%
Total Loss on realization of non-cash assets (200,000)

CASE 6: NON-CASH ASSET USED AS PAYMENT FOR CLAIM

All the assets (excluding the receivable from A) were realized, except for equipment
with carrying amount of P60,000 which B will take at an equity setoff price of P20,000.
The remaining cash of P35,000 is to be divided among the partners in a manner that
will avoid the possible recovery of cash from a partner.

Requirements:
How much is the total payment to B in cash and in kind?

Done Partnership
Statement of Liquidation
(Date)

Cash Accounts receivable

Balances before liquidation 20,000 60,000
Interest adjustment
Adjusted interest 20,000### 60,000
Realization of non-cash assets 45,000
Accounts receivable (60,000)
Inventory
 Equipment at 20,000 set off price
Remaining CA of equipment after setoff price
Equipment Carrying amount sold to outside parties
Total 65,000### -
Payment to outside creditors (30,000)
Total 35,000### -
Allocation of capital deficiency of the
personally insolvent partner
Balances 35,000### -
Payment to partners (35,000)### -
Total -### -
Zyne:
squeez
e
B's Summary of claims received:
Equipment at set-off price 20,000
Cash received 35,000
Total 55,000

CASE 7: CASH PRIORITY PROGRAM

Done will be liquidated on installment basis. In the first month of the liquidation
process, the non-cash assets were realized as follows:
a. Half of the accounts receivable was collected.
b. Seventy-five percent of the inventory was sold at 80% of cost.
c. Equipment with carrying amount of P200,000 was sold for P185,000.
d. P12,000 liquidation expenses were paid. Additional P5,000 liquidation
expenses are expected to be incurred in subsequent periods.

Requirements:
Compute for the cash distributions to the partners using a cash priority program.

Done Partnership
Statement of Liquidation
(Date)

Cash Accounts receivable

Balances before liquidation 20,000 60,000
Interest adjustment
Adjusted interest 20,000### 60,000
Realization of non-cash assets
Accounts receivable 30,000 (30,000)
Inventory 72,000
Equipment 185,000
Total 307,000### 30,000
Actual liquidation expenses (12,000)
Total 295,000### 30,000
Allocation of loss on unrealized NCAs & future expenses
Accounts receivable (30,000)
Inventory
Equipment
Cash retained for future expen (5,000)
Total 290,000### -
Expected payable to outside credi (30,000)
Total 260,000### -
Payment to partners
First priority (60,000)
Remaining cash for distributio (200,000)
Total -### -

60%
A
Capital balances 250,000
Interest adjustments in the partnership
Receivable from A (10,000)
Payable to B
Total interest 240,000
Divded by: P/L ratio 60%
Maximum loss absorption capacity (MLAC) 400,000
First priority
Adjusted 400,000
 30,000
20,000
250,000
200,000

500,000

Done Partnership
Statement of Liquidation
(Date)
60%
Receivable from Equipment, Accounts
A Inventory net payable Payable to B A, Capital
10,000 120,000 290,000 30,000 20,000 250,000
(10,000) (20,000) (10,000)
- 120,000 290,000 30,000 - 240,000

(10,800)
(120,000) (60,000)
(290,000) 12,000
- - - 30,000 - 181,200
(7,200)
- - - 30,000 - 174,000
(30,000)
- - - - - 174,000
(174,000)
- - - - - -
,000 accounts

Done Partnership
Statement of Liquidation
(Date)
60%
Receivable from Equipment, Accounts
A Inventory net payable Payable to B A, Capital
10,000 120,000 290,000 30,000 20,000 250,000
(10,000) (20,000) (10,000)
- 120,000 290,000 30,000 - 240,000

-
(90,000) (10,800)
(200,000) (9,000)
- 30,000 90,000 30,000 - 220,200
(7,200)
- 30,000 90,000 30,000 - 213,000

(18,000)
(30,000) (18,000)
(90,000) (54,000)
(3,000)
- - - 30,000 - 120,000
(30,000)
- - - - - 120,000
- - - - - (120,000)
- - - - - -
 Done Partnership
Statement of Liquidation
(Date)
60%
Receivable from Equipment, Accounts
A Inventory net payable Payable to B A, Capital
10,000 120,000 290,000 30,000 20,000 250,000
(10,000) (20,000) (10,000)
- 120,000 290,000 30,000 - 240,000
150,000
(36,000)
(120,000) (72,000)
(290,000) (174,000)
- - - 30,000 - 108,000
(30,000) 3,600
- - - - - 111,600
- - - (111,600)
- - - - - -

Done Partnership
Statement of Liquidation
(Date)
60%
Receivable from Equipment, Accounts
A Inventory net payable Payable to B A, Capital
10,000 120,000 290,000 30,000 20,000 250,000
(10,000) (20,000) (10,000)
- 120,000 290,000 30,000 - 240,000
39,000
(36,000)
(120,000) (72,000)
(290,000) (174,000)
- - - 30,000 - (3,000)
(30,000) -
- - - - - (3,000)

3,000
- - - - - -
- - - -
- - - - - -

Test for personal solvency of partners

A B

Personal assets 200,000 380,000

Personal liabilities (440,000) (240,000)
(240,000) 140,000

Done Partnership
Statement of Liquidation
 (Date)
60%
Receivable from Equipment, Accounts
A Inventory net payable Payable to B A, Capital
10,000 120,000 290,000 30,000 20,000 250,000
(10,000) (20,000) (10,000)
- 120,000 290,000 30,000 - 240,000
(120,000) (290,000) - (120,000)
- - - 30,000 - 120,000
(30,000)
- - - - - 120,000
(120,000)
- - - - - -
Zyne:
(b) answer

Carrying amount of Non-cash assets

Accounts receivable 60,000
Inventory 120,000
Equipment, net 290,000
Total 470,000
Total Loss on realization of non-cash assets (200,000)
(a) Net proceeds 270,000 (d)

Done Partnership
Statement of Liquidation
(Date)
60%
Receivable from Equipment, Accounts
A Inventory net payable Payable to B A, Capital
10,000 120,000 290,000 30,000 20,000 250,000
(10,000) (20,000) (10,000)
- 120,000 290,000 30,000 - 240,000
27,000
(36,000)
(120,000) (72,000)
 (20,000)
(40,000) (24,000)
(230,000) (138,000)
- - - 30,000 - (3,000)
(30,000) -
- - - - - (3,000)

3,000
- - - - - -
- - - -
- - - - - -

Done Partnership
Statement of Liquidation
(Date)
60%
Receivable from Equipment, Accounts
A Inventory net payable Payable to B A, Capital
10,000 120,000 290,000 30,000 20,000 250,000
(10,000) (20,000) (10,000)
- 120,000 290,000 30,000 - 240,000

-
(90,000) (10,800)
(200,000) (9,000)
- 30,000 90,000 30,000 - 220,200
 (7,200)
- 30,000 90,000 30,000 - 213,000

(18,000)
(30,000) (18,000)
(90,000) (54,000)
(3,000)
- - - 30,000 - 120,000
(30,000)
- - - - - 120,000

(120,000)
- - - - - -

40% CASH PRIORITY

B A B TOTAL
200,000

20,000
220,000
40%
550,000
(150,000) 60,000 60,000
400,000 - 60,000 60,000
 40%

B, Capital
200,000
20,000
220,000

(7,200)
(40,000)
8,000
180,800
(4,800)
176,000

176,000
(176,000)
-
 40%

B, Capital
200,000
20,000
220,000

-
(7,200)
(6,000)
206,800
(4,800)
202,000

(12,000)
(12,000)
(36,000)
(2,000)
140,000

140,000
(140,000)
-
 40%

B, Capital
200,000
20,000
220,000
100,000
(24,000)
(48,000)
(116,000)
132,000
2,400
134,400
(134,400)
-
 40%

B, Capital
200,000
20,000
220,000
26,000
(24,000)
(48,000)
(116,000)
58,000
-
58,000

(3,000)
55,000
(55,000)
-
 40%

B, Capital
200,000
20,000
220,000
Zyne:
(80,000) squeeze
140,000

140,000
Zyne:
(140,000) start here
-
Zyne:
(b) answer

40%

B, Capital
200,000
20,000
220,000
18,000
(24,000)
(48,000)
 (20,000)
(16,000)
(92,000)
38,000
-
38,000

(3,000)
35,000
(35,000)
-

40%

B, Capital
200,000
20,000
220,000

-
(7,200)
(6,000)
206,800
 (4,800)
202,000

(12,000)
(12,000)
(36,000)
(2,000)
140,000

140,000

(60,000)
(80,000)
-
1. Assume that AA and BB partners of AB Partnership (who share net income and loss in 80%:20%)
organize A & B Corporation to take over the net assets of the partnership. The balance sheet of the
partnership on June 20, 20x4, the date of incorporation, is as follows: **

Assets:

Cash 14,400

Trade AR 33,720

Allowance for doubtful accounts (720)

Inventories 30,600

Equipment 72,000

A/D (31,200)

Total Assets 118,800

Liabilities and Partners Capital

Trade AP 42,000

AA, Capital 57,588

BB, Capital 19,212

Total Liabilities and Partners Capital 118,800

After an appraisal of the equipment and an audit of the partnership’s financial statements, the partners
agree that the following adjustments are required to restate the net assets of the partnership to current
fair value:
A. Increase the allowance for doubtful accounts to P1,200
B. Increase the inventories to current replacement cost of P36,000
C. Increase the equipment to its reproduction cost new, P84,000, less accumulated depreciation
on this basis, P36,600; that is to current fair value , P47,400
D. Recognize accrued liabilities of P1,320
E. Recognize goodwill of P12,000

A & B Corporation is authorized to issue 12,000 shares of P10 par common stock. It issues 9,000
shares of common stock valued at P11 a share to the partnership in exchange for the net assets of the
partnership

● In the books of the corporation, the amount credited to Paid in Capital in Excess of Par is
9000

● The adjusted capital of AA is

75348

● The adjusted capital of BB is

 23652

● The total net adjustment is

22200
 1. XYZ Partnership provided for the following in the distribution of profits and losses:
First: X is to receive 10% of net income up to P100,000 and 20% of the amount in excess thereof.
Then: Y and Z are each to receive a 5% of the remaining income in excess of P150,000 after X’s share.
Lastly: The balance is to be distributed equally to the three partners.

● If the partnership income is P250,000, what is the total share of X?

P108,000

2. Tamayo, Banson and Vidal, a partnership formed on january 1, 2018, had the following initial
investments.

Tamayo 100,000

Banson 150,000

Vidal 225,000

The partnership agreement profits and losses are to be shared equally by the partners after
consideration is made for the following:
a. Salaries allowed to partners: P60,000 for Tamayo; P48,000 for Banson and P36,000 for Vidal.
b. Average partner’s capital balances during the year shall be allowed 10% interest.

Additional information:
A. On June 30,2018, Tamayo invested an additional P60,000.
B. Vidal withrew P70,000 from the partnership on September 30, 2018.
C. Share on the remaining profit was P3,000 for each partner.

● The average capital of Vidal is ________.

207500

● The partnership net profit for 2018 before salaries, interest and partner’s share on the
remainder is _______.
201750

● The average capital of Tamayo is ________.

130000

● Interest on average capital balances of the partners totals

48750

● Total Partnership Capital

666750
Robert, Mico and Aaron formed a partnership on March 1, 2019 with original capital contributions of P300,000,
P100,000, and P400,000, respectively. On April 30, 2019, agreed to invest additional capital of P100,000 each.
On August 1, all partners agreed to have the same level of contributed capital of P500,000.

● How much is the average capital balance of Mico for the 10-month period ending December 31,
2019?
 330,000

● How much is the average capital balance of Robert for the 10-month period ending December
31, 2019?
430,000

● How much is the average capital balance of Mico for the 10-month period ending December 31,
2019?
Robert of P100,000. Mico of P300,000 and nothing from Aaron

Dino, Doods, and Dong have the following accounts and their normal balances on January 31, 2021, the date
the partners agreed to liquidate their 3D Partnership:

Cash P20,000 Accounts Payable P10,000

Accounts Receivable 25,000 Notes Payable 27,000

Allowance for Bad Debts 5,000 Loans due to Dino 5,000

Merchandise Inventory 60,000 Loans due to Doods 7,000

Furniture & Equipment 50,000 Dino, Capital 20,000

Accumulated Depreciation 5,000 Doods, Capital 40,000

Dong, Capital 36,000

The partners divide profit and losses 4:1:5, respectively. Sales proceed follows:
Accounts Receivable P10,000
Merchandise Inventory 30,000
Furniture & Equipment 20,000

● Assuming that Dino is a limited partner, the cash paid to Dong is?
0

● If Dino is a limited partner, the cash paid to Doods is

32500

● Assuming that Dino is a limited partner, how much additional investment should Dong give?
1500

● How much is the non-cash assets?

125000

● Assuming that any deficiency will be immediately paid, the cash paid to Doods
40500

● Assuming that any deficiency is uncollectible, the cash paid to Dong?

2667
● The sale of non-cash assets resulted in a total loss of
65000

● How much is the cash available for distribution to the partners?

43000

● The sale resulted in a capital deficiency for

Dino
 ● Assuming Eclara is an insolvent partner, and the inventory is sold for P360,000,
how much should Eclavo receive upon liquidation of the partnership?
104,000

● If the inventory is sold for P600,000, how much should Eclavo receive upon
liquidation of the partnership?
P272,000

1. The following is the priority sequence on which liquidation proceeds will be distributed for
a partnership:
Partnership liabilities, partnership loans, partnership capital balances

2. Statement 1: Solvent partners are partners with sufficient remaining personal assets
after deducting or liquidating the personal liabilities.
Statement 2: Right of offset is a legal right to apply a part or all of the amount owing to a
partner against his or her capital deficiency.
Both statements are true

3. Statement 1: A deficient partner has to make an additional investment to make up for his
deficiency in all instances.
Statement 2: Partnership creditors have priority over partnership properties; in the same
manner that the partners’ personal creditors have priority over partners’ personal
properties.
Only the second statement is true

4. Iyah, Ayah and Mia operate a business as a partnership and share net income and net
loss in a 3:3:4 ratio, respectively. The personal assets and liabilities of the partners,
gathered from their personal records show:

Partner Assets Liabilities

Iyah (General Partner) P470,000 P450,000

Ayah (General Partner) 200,000 280,000

Mia (Limited Partner) 305,000 300,000

The statement of financial position is as shown below. Assets are sold for P175,000.
Liabilities are paid as soon as cash is available. Creditors collect from solvent partners
whenever necessary.

Cash P10,000 Accounts Payable P200,000

Non-Cash 375,000 Loan, Mia 5,000

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 Iyah, Capital 50,000

Ayah, Capital 70,000

Mia, Capital 60,000

● How much cash was received by Mia in the final settlement?

20,000
5,000
0
10,000

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 ACT130: ACCOUNTING FOR SPECIAL TRANSACTIONS
PRELIM EXAM
S.Y 2020-2021

On January 1, 2018, A, B, and C formed ABC Partnership with original capital contribution of P300,000.
P500,000, and P200,000, respectively. A is appointed as managing partner.

During 2018, A, B, and C made additional investment of P500,000, P200,000 and P300,000, respectively. At
the end of 2018, A, B, and C made drawings of P200,000, P100,000, and P400,000, respectively. At the end of
2018, the capital balance of C is reported at P320,000. The profit or loss agreement of the partners are as
follows:
• 10% interest on original capital contribution of the partners
• Quarterly salary of P40,000 and P10,000 for A and B, respectively.
• Bonus to A equivalent to 20% of Net Income after interest and salary to all partners
• Remainder is to be distributed equally among the partners.

1. What is the profit or loss of the partnership for the year ended December 31, 2018?
ANSWER: 1,050,000
2. What is the share of A in the partnership profit or loss for 2018?
ANSWER: 540,000
3. What is the share of B in the partnership profit or loss for 2018?
ANSWER: 290,000

Solution:

Ending Balance 320,000 A B C TOTAL

Drawings 400,000 Salary 160,000 40,000 200,000
Orig. Investment (200,000) Interest 30,000 50,000 20,000 100,000
Add'l Investment (300,000) Bonus 15,000 150,000
C's Share in Profit 220,000 Remainder 200,000 200,000 200,000 600,000
TOTAL 540,000 290,000 220,000 1,050,000

C's share in profit for the year 2018 220,000

Interest of C [200000 x 10%] (20,000)
C's share in remaining share 200,000
Number of partners x 3
remaining profit after interest, salary and bonus 600,000
divided by: / 80%
Net profit after interest, salary but before bonus 750,000
add: Total Interest and Salary [200000 + 100000] 300,000
1,050,000

4. On January 1, 2020, K and J formed KJ Partnership and the articles of co-partnership provides the
profit or loss shall be distributed accordingly:
• 10% interest on average capital balance
• P50,000 and P100,000 quarterly salary for K and J, respectively.
• The remainder shall be distributed in the ratio of 3:2 for K and J, respectively.
The following transactions regarding the capital balances of the partners for year 2020 are provided:
Year 2020 K, Capital J, Capital
Jan. 1 investment P1,000,000 P500,000
Mar. 31 investment 100,000
 July 1 withdrawal 200,000
Sept. 30 withdrawal 200,000
Oct. 1 investment 700,000

The chief accountant of the partnership reported net income of P1,000,000 for year 2020.
What is the capital balance of K on December 31, 2020?

ANSWER: 1,951,5000
Solution:

Compute for Average capital of K Compute for average capital of J

Date Capital No. of Date Capital No. of
Balance months Balance months
unchanged unchanged
1/1 100,000 x 6 6,000,000 1/1 500,000 x 3 1,500,000
7/1 800,000 x 3 2,400,000 4/1 600,000 x 6 3,600,000
10/1 1,500,000 x 3 45,000,000 10/1 400,000 x 3 1,200,000
12 12,900,000 12 6,300,000

Average Capital: 12,900,000/12 = 1,075,000 Average Capital: 6,300,000/12= 525,000

K’s Interest: 1,075,000 x 10% = 107,500 J’s Interest: 525,000 x 10% = 52,500

Amount to be Allocated: 1,000,000

K’s Capital Balance
K J
Initial Investment 1,000,000
Salary 200,000 400,000 600,000
Drawings (200,000)
Interest 107,500 52,500 160,000
Add’l Investment 700,000
Remainder (3:2) 144,000 96,000 240,000
Capital Balance 1,500,000
Share of partners
451,500 548,500 1,000,000 Share of K in Net Income 451,500
in Net Income
K’s Capital Balance on 12/31/20 1,951,500

5. On July 1, 2020, K and J formed a partnership with initial investment of P1M and P2M, respectively. K
is appointed as the managing partner.

The articles of co-partnership provide that profit and loss shall be distributed accordingly:
• 30% interest on the original capital contribution.
• Monthly salary of P20,000 and P10,000, respectively for K and J.
• K shall be entitled to bonus equivalent to 20% of net income after salary, interest and bonus.
• The remainder shall be distributed in the ratio of 3:2, respectively.
• The partnership reported a P750,000 net income
What is the share in net income of K for the year ended December 31, 2020?

ANSWER: 350,000
Solution:
Compute for Interest:
K’s interest = 1,000,000 x 30% x 6/12 = 150,000
J’s Interest = 2,000,000 x 30% x 6/12 = 300,000

Compute for salary:

K’s Salary = 20,000 x 6 = 120,000
J’s Salary = 10,000 x 6 = 60,000
 Compute for K’s Bonus:
B= 20% (Net Income – Bonus - Interest – Salary)
B= 20% (750,000 – Bonus – 450,000 – 180,000)
B= 20% (120,000 – B)
B= 24,000 - 0.20B
B+ 0.20B = 24,000
1.2B = 24,000
1.2
B= 20,000

Amount to be Allocated: 750,000

K J
Interest (30%) 150,000 300,000 450,000
Salary 120,000 60,000 180,000
Bonus 20,000 - 20,000
Remainder (3:2) 60,000 40,000 100,000
Share in Net income 350,000 400,000 750,000

6. K and J have just formed a partnership. K contributed cash of P920,000 and office equipment that costs
P422,000. The equipment had been used in her sole proprietorship and had been 70% depreciated. The
current value of the equipment is P295,000. K also contributed a note payable of P87,000 to be assumed
by the partnership. The partners agreed on a profit and loss ratio of 50% each. K is to have a 70% interest
in the partnership. J contributed only the merchandise inventory from his sole proprietorship carried at
P550,000 of a FIFO basis. The current fair value of the merchandise is P525,000. To consummate the
formation of the partnership, K should make additional investment of?

ANSWER: 97,000
Solution:
K J Partnership
Cash 920,000 920,000
Equipment 295,000 295,000
Notes payable (87,000) (87,000)
inventory 525,000 525,000
Total contribution 1,128,000 525,000 1,063,000

J’s share in contribution 525,000

Divided by: / 30%
Capital of partnership 1,750,000
Deduct the partners contribution:
K’s contribution (1,128,00)
J’s contribution (525,000)
Additional Contribution of K 97,000

7. On March 1, 2018, K and J formed a partnership with each contributing the following assets:
K J
Cash 300,000 700,000
Machinery & Equipment 250,000 750,000
Building - 2,250,000
Furnitures & Fixtures 100,000 -
 The building is subject to a mortgage loan of P800,000, which is to be assumed by the partnership.
Agreement provides that K and J share profits and losses 30% and 70%, respectively. On march 1, 2018,
the balance in J’s capital account should be?

ANSWER: 2,900,000
Solution:
J’s Capital
Cash 700,000
Machinery and equipment 750,000
Building 2,250,000
Mortgage (800,000)
J’s capital balance 2,900,000

8. On April 30, 2008, JJ, KK, and LL formed a partnership by combining their separate business
proprietorship. JJ contributed cash of P75,000. KK contributed property with a P54,000 carrying amount,
a P60,000 original cost, and P120,000 fair value. The partnership accepted the responsibility for the
P52,500 mortgage attached to the property. LL contributed equipment with a P45,000 carrying amount,
P112,500 original cost, and P82,500 fair value. The partnership agreement specifies that profits and
losses are to be shared equally but is silent regarding capital contributions. Which part has the largest
April 30, 2008 capital balance? LL

A summary balance sheet for the J, K, and L partnership appears below. The partners share profits and
losses in a ratio of 2:3:5, respectively.
Assets
Cash 50,000
Inventory 62,500
Marketable securities 100,000
Land 50,000
Building-net 250,000
Total assets 512,500

Equities
J, capital 212,500
K, capital 200,000
L, capital 100,000
Total equities 512,500

ANSWER: 82,500
Solution:
JJ KK LL
Cash 75,000
Property 120,000
Mortgage (52,000)
Equipment 82,500
75,000 68,000 82,500

9. The partners agree to admit M for a one-fifth interest. The fair market value of partnership land is
appraised at $100,000 and the fair market value of inventory is $87,500. The assets are to be revalued
prior to the admission of M. How much cash must M invest to acquire a one-fifth interest?
 ANSWER: 146,875
Solution:
Cash Non cash J (20%) K (30%) L (50%)
Unadjusted balance 50,000 462,500 212,500 200,000 100,000
Land (50,000) 10,000 15,000 25,000
Inventory (25,000) 5,000 7,500 12,500
Adjusted Balance 50,000 537,500 227,500 222,500 137,500

J, capital 227,500
K, capital 222,500
L, capital 137,500
Total Capital before M admission 587,500
Divided by (1/5 of 100%=80%) / 80%
Total capital after M admission 734,735
Total Capital Before M admission (587,500)
Cash M should invest in partnership 146,875

10. What will the profit and loss sharing ratio (in percentage) of K after M’s investment?

ANSWER: 24%
Solution:
K’s interest ratio = 30% x 80% = 24%

J has decided to retire from the partnership of J, K, and L. The partnership will pay J $200,000. Bonus is
to be recorded in the transaction as implied by the excess payment to J. A summary balance sheet for the
partnership appears below. The partners share profits and losses in a ratio of 1:1:3, respectively.

Assets
Cash 75,000
Inventory 82,000
Marketable securities 38,000
Land 150,000
Building-net 255,000
Total assets 600,000

Equities
J, capital 160,000
K, capital 140,000
L, capital 300,000
Total equities 600,000

11. What partnership capital will K have after J retires?

ANSWER: 130,000
12. What partnership capital will L have after J retires?
ANSWER:270,000

Solution:
 J K L
J, Capital 160,000
Retirement Payment (200,000) Capital Balance 160,000 140,000 300,000
Allocation to remaining partners 40,000 allocation (160,000) (10,000) (30,000)

ENTRIES: - 130,000 270,000

K, Capital [40,000 x ¼] 10,000
L, Capital [40,000 x ¾] 30,000
J, Capital 160,000
Cash 200,000

The partnership of J, K, and L was dissolved, and by July 1, 2006, all assets had been converted into cash
and all partnership liabilities were paid. The partnership balance sheet on July 1, 2006 (with partner residual
profit and loss sharing percentages) was as follows:

Cash 10,000
J, capital (30%) 40,000
K, capital (40%) (20,000)
L, capital (30%) (10,000)

The value of partners' personal assets and liabilities on July 1, 2006 were as follows:

K L J
Personal assets 45,000 30,000 25,000
Personal liabilities 30,000 20,000 10,000

13. How much will L receive after the liquidation?

ANSWER: 0
14. How much will J receive after liquidation?
ANSWER: 35,000
15. How much will K receive after liquidation?
ANSWER: 0

Solution:
PARTNER’S PERSONAL ASSETS AND LIABILITIES ON JULY 1, 2006
K L J
Personal Assets 45,000 30,000 25,000
Personal Liabilities 30,000 20,000 10,000
Net assets 15,000 10,000 15,000

J K L
Capital Balance 40,000 (20,000) (10,000)
Additional contribution (K&L) 15,000 10,000
Balance after Contribution 40,000 (5,000) -
Allocation of K’s insolvency (5,000) 5,000
Payment to partners 35,000 0 0

The balance sheet of the Omar, Paolo, and Quek partnership on November 1, 2006 (before commencement
of partnership liquidation) was as follows:
Cash $58,000
Inventory 60,000
Loan to Omar 8,000
Loan to Quek 14,000
Plant assets-net 70,000
Total assets $210,000

Accounts payable $34,000

Notes payable 62,000
Omar, capital (40%) 24,000
Paolo, capital (25%) 26,000
Quek, capital (35%) 64,000
Total liab. /equity $210,000

Liquidation events in November were as follows:

• The inventory was sold for $10,000 above book value;
• Plant assets with a book value of $60,000 were sold for $34,000.

16. How much will Omar receive after the liquidation?

ANSWER: 5,600
17. How much will Paolo receive after liquidation?
ANSWER: 19,500
18. How much will Quek receive after liquidation?
ANSWER: 40,900

Solution:
Cash Non cash assets Liability Omar Paolo Quek
Unadjusted Balances 58,000 152,000 96,000 24,000 26,000 64,000
Plant Assets 70,000 (60,000) 4,000 2,500 3,500
Inventory 34,000 (60,000) (10,400) (6,500) (9,100)
162,000 32,000 96,000 17,600 22,000 58,400
Payment of Liability (96,000)
Loans to partners (22,000) (8,000) (14,000)
10,000 - 9,600 22,000 44,400
(10,000) (4,000) (2,500) (3,500)
Adjusted Balance 66,000 - - 5,600 19,500 40,900

Partners Roger, Sergio, and Tito, who share profit and loss in the ratio of 3:5:2, respectively have decided to
liquidate their partnership. The statement of Financial Position of the partnership at the time of liquidation is
shown below:

Cash 120,000
Other Assets 360,000

Accounts payable 93,000

Loan from Sergio 30,000
Roger, Capital 108,000
Sergio, Capital 120,000
Tito, Capital 129,000
19. The partners desire to prepare an installment distribution schedule showing how cash would be
distributed to partners as assets are realized. In the schedule of maximum absorbable loss, the maximum
absorbable loss of Sergio is?

ANSWER: 300,000
Solution:
Sergio (50%) Roger (30%) Tito (20%)
Loan from Sergio 30,000
Capital Balances Before liquidation 120,000 108,000 129,000
Total, Interest 150,000 108,000 129,000
Divided by: P/L ratio 50% 30% 20%
Maximum Loss absorption capacity 300,000 360,000 645,000
Rank of payment 3rd 2nd 1st

Maximum Loss absorption Capacity 300,000 360,000 645,000

Difference between 1st and 2nd (285,000)
Balance 300,000 360,000 360,000
Difference of 1st, 2nd and 3rd (60,000) (60,000)
Equal Balance 300,000 300,000 300,000

20. The schedule of possible losses on capital balances would indicate the cash distribution. After the
payment to outside creditors, what amount would be distributed to Tito?

ANSWER: 57,000
Solution:
Difference between 1st and 2nd 285,000
Tito’s P/L ratio x 20%
Amount to be distributed to Tito 57,000

21. Assuming the first sale of other assets having book value of P150,000, realized P45,000 and all available
cash is distributed. Roger would receive what amount of cash?

ANSWER: 9,000
Solution:
Amount Realized 45,000
Rogers share P/L ratio x 30%
Cash roger would receive 9,000

22. Killua Corporation is undergoing liquidation since August 1, 2011. Five months later, on December 31,
2011, its condensed realization and liquidation statement shows the following:
ASSETS:
To be realized P1,375,000
Acquired 750,000
Realized 1,200,000
Not Realized 1,375,000

LIABILITIES:
Liquidated 1,875,000
Not Liquidated 1,700,000
To be Liquidated 2,250,000
 Assumed 1,625,000

Supplementary:
Charges 3,125,000
Credits 2,800,000
The net gain/loss for the five-month period is?

ANSWER:425,000
Solution:

Debit Credit
Assets to be realized 1375,000 Assets Realized 1,200,000
Assets acquired 750,000 Assets not realized 1,375,000
Liabilities Liquidated 1,875,000 Liabilities to be liquidated 2,250,000
Liabilities not liquidated 1,700,000 Liabilities assumed 1,625,000
5,700,000 6,450,000
Charges 3,125,000 Credits 2,800,000
Supplementary expense 8,825,000 Supplementary Income 9,250,000

Supplementary Income 9,250,000

Supplementary Expense (8,825,000)
Net gain/Loss 425,000

The following date were taken from the statement of affairs of Gon Corporation:
Assets pledged for fully secured liabilities (ERNV: P 75,000) P90,000
Assets pledged for partially secured liabilities (ERNV: P52,000) 74,000
Free Assets (current fair value, P40,000) 70,000
Unsecured liabilities with priority 7,000
Fully secured liabilities 30,000
Partially secured liability 60,000
Unsecured liabilities without priority 112,000

23. The amount that would be paid to creditors with priority is?
ANSWER: Unsecured liabilities with priority = 7,000
24. The amount to be paid to fully secured creditors is?
ANSWER: Fully secured creditors = 30,000
25. The amount to be paid to partially secured creditors is?
ANSWER: 57,200
26. The amount to be paid to unsecured creditors is?
ANSWER: 72,800

Solution:
Assets fully pledged 75,000
Assets partially pledged 52,000
Free Assets 40,000
Realizable value of assets 167,000
Fully secured creditors (30,000)
Partially secured creditors (52,000)
Unsecured Creditors with priorities (7,000)
Total free assets 78,000
Unsecured Liabilities without priority 112,000
Unsecured portion of PSL 8,000
Remaining Liabilities 120,000

Recovery Rate:
Total FA/ RL = 78,000/120,000 = 0.65

Amounts to be paid to Partially Secure creditors:

Assets Partially Pledged 52,000
Estimated recoverable or unsecured portion (8,000*0.65) 5,200
Amount to be paid to Partially Secured Creditors 57,200

Amount to be paid to Unsecure Creditor w/o priority:

Unsecured liabilities without priority 112,000
Recoverable rate x 0.65
Amount to be paid to Unsecure Creditor w/o priority 72,800

27. Netero Company sells some equipment, the cash price of which is P100,000, for P140,000 with a
commitment to service the equipment for a period of two years, with no further charges. Revenue to be
recognized upon sale is?

ANSWER: 100,000. Cash price is used to recognized revenue upon sale.

28. Meruem Corporation provides service contracts for maintenance of their electrical systems. On October
1, 2018 it agrees a four-year contract with a major customer for P154,000. Cost over the period of the
contract are reliably estimated at P51,333. Under PFRS 15, how much revenue should the company
recognize in 2018?

ANSWER: 9,625
Solution:
Transaction price 154,000
Divided by term of contract / 4yrs
Annual allocation of price 38,500
Multiply: 3/12
Revenue to be recognized 9,625

29. On July 1, 2018, Hisoka Company handed over to a client a new computer system. The contract price
for the supply of the system and after-sales support for 12 months was P800,000 and Hisoka estimates
the cost of the after-sales support at P120,000.
It normally marks up such cost by 50% when tendering for support contracts

The revenue Hisoka should recognize in its financial year ended December 31, 2018 is?

ANSWER: 710,000
Solution:
Contract price 800,000
Cost of after sales (120,000 x 150%) (180,000)
Revenue 620,000
 Cost realized for the year (180,000 x 6/12) 90,000
Revenue to be recognize for 12/31/18 710,000

30. Silva has arrangements with its customers that, in any 12-month period ending March 31, if they purchase
goods for a value of at least P1 million, they will receive a retrospective discount of 2%. Silva’s year-end
is December 31, and it has made sales to a customer during the period April 1 to December 31 of
P900,000.
How much revenue should Silva recognize?

ANSWER: 882,000
Solution:
Sales (April 1 – December 31) 900,000
Discount 2% x 98%
Revenue to be recognize 882,000

THEORIES:
1. PFRS 15 does not apply to contracts for insurance and reinsurance.

ANSWER: TRUE

2. Per PFRS 15, it is the amount of consideration in a contract to which an entity expects to be entitled in
exchange for transferring promised goods to services to a customer.

ANSWER: TRANSACTION PRICE

3. Per PFRS 15, revenue is recognized once risk and rewards are transferred to the buyer or purchaser.

ANSWER: FALSE
PFRS 15 shall recognize revenue to depict the transfer of promised goods or services to
customers and not the transfer of risk and rewards.

4. Per PFRS 15, if the stand-alone selling price is not available, the entity cannot estimate it since they are
not allowed to do so, because estimates are sometimes, misleading.

ANSWER: FALSE
Where a contract has multiple performance obligations, an entity will allocate the transaction
price to the performance obligations in the contract by reference to their relative standalone
selling prices. If a standalone selling price is not directly observable, the entity will need to
estimate it.

5. Revenue from an artistic performance is recognized once

a. The audience register for the event online
b. The tickets for the concert are sold
c. Cash has been received from the tickets sales
d. The event takes place

ANSWER: D.
Revenue from artistic performances, banquets and other special events should be
recognized when the event takes place.

6. 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.
All of the choices were disadvantages of partnership.
Mutual Agency is where every partner is an agent and has the authority to act for the
partnership and to enter into contracts on its behalf.
Limited Life is the possibility that the operations of a partnership could not continue after the
withdrawal or death of a partner was considered a major pitfall of this form of business
organization
Unlimited Liability is when partnership creditors having difficulty in collecting from the partnership
may request payment from any partner who has personal assets in excess of personal liabilities.

7. The first step in the liquidation process is to

a. convert noncash assets into cash.
b. pay partnership creditors
c. compute any net income (loss) up to the date of dissolution.
d. allocate any gains or losses to the partners.

ANSWER: C. COMPUTE ANY NET INCOME (LOSS) UP TO THE DATE OF DISSOLUTION

The first step to liquidation process is to compute for any net income (loss) up to the date of
dissolution because when a partnership is liquidated, the book should be adjusted and has
closed the net profit or loss for the period in the manner they have agreed to in the partnership
agreement.

8. Offsetting a partner's loan balance against his debit capital balance is referred to as the.
ANSWER: RIGHT TO OFFSET

9. Which of the following statements is correct?

1. Personal creditors have first claim on partnership assets.
2. Partnership creditors have first claim on partnership assets.
3. Partnership creditors have first claim on personal assets.
a. 1
b. 2
c. 3
d. Both 2 and 3

ANSWER: B. Partnership creditors have first claim on partnership assets.

Statement 1 and 3 are wrong because according to the order of priority outside creditors have
the first claim on the partnership assets, followed by inside creditors then the partners.

10. 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: C. in a 2 to 1 ratio.
According to Partnership Law, if the profit has been agreed upon, the share of each partner in
the losses shall be in the same proportion with the net income allocation.

11. In a liquidation proceeding, if the proceeds on the realization of an asset exceed the lien against that
asset, the excess is assigned to:
a. The holder of the lien
b. Other lien holders whose assets will not realize a sufficient amount to cover liens
c. Meet the claims of the unsecured creditors
d. The stockholders

ANSWER: C. Meet the claims of the unsecured creditors.

If there’s an excess in realization of assets it is assigned to meet the claims of unsecured creditors
because the partnership should pay all its debts to its creditors during the liquidation process.

12. An accounting statement of affairs of a corporation in financial difficulty indicates that unsecured creditors
would receive P0.40 on the peso. Which one of the following assets is most likely to realize the smallest
percentage of its book value?
a. Accounts receivable
b. Inventories
c. Plant and equipment
d. Goodwill

ANSWER: D. Goodwill
Goodwill is most likely to realize the smallest percentage of its book value because it has no
physical substance.

13. In corporate liquidation, these are the assets that have not been pledged and hence are not related to
individual liability items.
ANSWER: FREE ASSETS

14. It is a statement of position from a quitting concern point of view.

ANSWER: STATEMENT OF AFFAIRS

15. The computation of a safe installment payment for the XYZ partnership resulted in only partner Z
receiving cash. Which of the following statements is correct?
I. Partner Z lent the partnership cash, and the partnership had to pay back the loan to Z before
distributing cash to X and Y.
II. After assuming all noncash assets were potentially worthless and that assumed capital deficits
created in X's and Y's capital balances were losses to be allocated to Z; Z's capital balance
was the only capital balance left with a credit.
A. I only
B. II only
C. Either I or II
D. Neither I nor II

ANSWER: B. II only
Statement II is correct because it is assumed that partners with a potential capital deficit
will be unable to pay anything to the partnership (assumed to be personally insolvent) and the
solvent partner shall assume the deficit to eliminate capital debit balances.
ESSAY
1. Explain briefly the distinction between PAS 18 and PFRS 15.
The key difference between PFRS 15 and PAS 18 is that while PFRS 15 provides a
standardized five-step model to recognize all types of revenue earned from customer
contracts, PAS 18 considers different recognition criteria for a different type of incomes
received. PFRS 15 implements a uniform method in recognizing all types of revenue.
While PAS 18 states that the recognition criteria depend on each type of revenue. In
PFRS 15 reporting criteria will be recognized based on the contract and performance
obligation. While in PAS 18 reporting criteria is decided on whether revenue is received
from goods, services, interest, royalties or dividends.

2. Discuss the 5-step method introduced by PFRS 15.

The 5-step method introduced by PFRS 15 is used to recognize revenue. The step one in the five-
step model requires the identification of the contract with the customer. Contracts may be in
different forms (oral, written or implied), but must be enforceable, have commercial substance
and be approved by the parties to the contract. Step two requires the identification of the
separate performance obligations in the contract. The key factor in identifying a separate
performance obligation is the distinctiveness of the good or service, or a bundle of goods or
services. A good or service is distinct if the customer can benefit from the good or service on its
own or together with other readily available resources and is separately identifiable from other
elements of the contract. Step three requires the entity to determine the transaction price, which
is the amount of consideration that an entity expects to be entitled to in exchange for the
promised goods or services. An entity must determine the amount of consideration to which it
expects to be entitled in order to recognize revenue. Step four requires the allocation of the
transaction price to the separate performance obligations. The allocation is based on the
relative standalone selling prices of the goods or services promised and is made at inception of
the contract. Step five requires revenue to be recognized as each performance obligation is
satisfied. An entity satisfies a performance obligation by transferring control of a promised good
or service to the customer, which could occur over time or at a point in time.

3. How does liquidation differ from rehabilitation of financially troubled corporation?

Liquidation differs from rehabilitation of financially troubled corporation in a way that liquidation
is the process where noncash assets are converted into cash and allocate the net income or
loss to the partners based on their profit and loss sharing ratio. It is a formal closing of the books
while the rehabilitation of a financially troubled corporation is a process where an entity
undergoes debt restructuring to continue the operation of the business. During this process, the
entity meets with the creditor to change and adjust the terms of payment until such a time the
debtors can pay their obligations to the creditors.

4. Explain the purpose or purposes of a cash priority program or cash safe payment schedule in partnership
liquidation. Why is it beneficial?

The purpose of cash priority and cash safe payments is to prevent excessive payments to any
partners. It is beneficial because these schedules give an assurance that partners can be in a
 safe way distributed cash as the entity ceases its operations. Also, these schedules identify the
amount of cash to be receive by partners upon liquidation.

5. Why should assets and liabilities be updated to current values prior to accounting for dissolution?

Assets and liabilities should be updated to their current values before accounting for dissolution
to determine the total net worth of a company’s physical assets. And to know how much cash
is left in the partnership after paying all to its creditors and if the partners are able to receive
cash from the partnership.
1. A 1:3:2 ratio is the same as
⅙:½:⅓

2. Brian Snow and Wendy Waite formed a partnership on July 1, 20x2. Brian invested P20,000 cash,
inventory valued at P15,000, and equipment valued at P67,000. Wendy invested P50,000 cash and
land valued P120,000. The partnership assumed the P40,000 mortgage on the land.

On June 30, 20x3, the partnership reported a net loss of P24,000. The partnership contract specified
that income and losses were to be allocated by allowing 10% interest on the original capital investment,
salaries of P15,000 to Brian and P20,000 to Wendy, and the remainder to be divided in the ratio of
40:60.

On July 1, 20x3, Alan Young was admitted into the partnership with a P70,000 cash investment. Alan
was given 30% interest in the partnership because of his special skills. The partners elect to use the
bonus method to record the admission. Any bonus should be divided in the old ratio of 40:60.*

On June 30, 20x4, the partnership reported a net income of P150,000. The new partnership contract
stipulated that income and losses were to be divided a fixed ratio of 20:50:30

On July 2, 20x4, Brian withdrew from the partnership for personal reasons. Brian was given P40,000
cash and a P60,000 note for his capital interest.

● The share of Snow in the net loss for the first year is ________.
(16,320) 7680

● The share of Snow in the net income for the second year is ________.
30000

● The decrease in the capital of Waite upon the admission of Alan is ________.
8040

● Upon formation the amount credited to the capital account of Waite is ________.
130 000

● The entry to record the withdrawal of Snow includes a credit to Waite, Capital in the amount of
11850
1. Mickey, Donald, and Minnie are partners sharing profit and loss in the ratio of 2:1:1, respectively. Their
capital balances are P400,000 for Mickey, P200,000 for Donald and P100,000 for Minnie. Claims of
suppliers amounted to 500,000 including the loan extended by Minnie, P50,000. The cash balance
amounted to P300,000 and it increased to P1,050,000 as a result of the sale of the non-cash assets.

● How much cash was received by Donald in the final settlement?

162,500

● How much cash was received by Mickey in the final settlement?

325,000

● How much was the non-cash assets of the partnership?

900,000

● How much was the loss from sale of non-cash assets?

150,000

● How much was the cash proceeds from sale of non-cash assets?
750,000

● How much cash will Minnie receive?

112,500

1. Ara, Bea, and Cai agreed to admit a new partner on January 1, 2021 when their capital balances were
250,000, 150,000, and 200,000, respectively. Profit and loss ratio is 2:1:2, respectively. A new partner,
Dell was admitted for cash investment that will give her 25% interest in the partnership.

How much should Dell invest?

200,000

2. Ara, Bea, and Cai agreed to admit a new partner on January 1, 2021 when their capital balances were
250,000, 150,000, and 200,000, respectively. Profit and loss ratio is 2:1:2, respectively.

Ara retired and the partnership paid her P240,000 after the assets were revalued.

● Bea’s capital after Ara’s retirement is

P145,000

Ara retired and the partnership paid her P280,000 after the assets were revalued.

● Total capital after Ara’s retirement is

P395,000

3. Ara, Bea, and Cai agreed to admit a new partner on January 1, 2021 when their capital balances were
250,000, 150,000, and 200,000, respectively. Profit and loss ratio is 2:1:2, respectively. A new partner,
Dell was admitted for cash investment of 100,000 for a 20% interest in an agreed capitalization of
700,000. The accountant recognized
Bonus to new partner
1. Rica is a sole proprietor who invested her grocery when she invited Belle to form a new partnership
business. The following are the assets and liabilities of the grocery:

Cash 50,000

Merchandise 30,000 Book Value

P20,000 Market Value

Fixed Asset (100k less Acc. Depn 10K) 90,000 Book Value

70% of cost Market Value

Accounts Payable 20,000

Accrued Expenses 7,000

Belle invested the following:

Cash P60,000

Land (mortgage balance of 200,000 Book Value

P500k plus accrued interest
for 6 mos at 18%)

500,000 Market Value

Store furniture (costing 30,000

P40k less acc depn of 10k)

The total liabilities of the newly formed partnership would be

81,500
2. A statement of financial position of the partnership of X, Y, Z contains the following account balances:

Cash P240,000 Accounts Payable P300,000

Accounts Receivable 280,000 Notes Payable 200,000

Loans to Z 40,000 Loans from Y 20,000

Inventories 400,000 X, Capital 340,000

Property, Plant, and 440,000 Y, Capital 340,000

Equipment

Z, Capital 200,000

In January 2021, the loan to Z, was offset against his capital balance, P200,000 of accounts receivable
were collected and inventories with carrying value of P160,000 were sold for P200,000. Available cash
was distributed. **

X, Y, and Z share profits and losses in the ratio of 5:3:2, respectively.

● After the first distribution of cash, the equity of Y is ________.

220000

● If Z received P30,000 during the first cash distribution, the amount that should have been
received by X is ________.
15000

● If P40,000 cash was withheld for possible liquidation expenses, the amount of cash received by
Y in the first cash distribution is ________.
100000

● If X received a total of P240,000 in full settlement of his interest in the partnership, the total loss
incurred on the liquidation of the partnership is ________.
200000

● The amount of cash available for distribution to partners is ________.

140000