Week 1 Assessment Hickman

1
E15-1-
John, Jeff, and Jane decided to engage in a real estate venture as a partnership. John invested
$100,000 cash and Jeff provided office equipment that is carried on his books at $82,000. The
partners agree that the equipment has a fair value of $110,000. There is a $30,000 note payable
remaining on the equipment to be assumed by the partnership. Although Jane has no physical
assets to invest in the partnership, both John and Jeff 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.
Assuming that each partner is to receive an equal capital interest in the partnership.
A. Record the partnership formation under the bonus method.
John, capital 100,000 Capital balance

Jeff, investment John 100,000
Equipment 110,000 Jeff 80,000
Less: Equipment Payable 30,000 Total 180,000
Jeff capital 80,000
Jane Capital = 10% of each capital from John and Jeff, which would be 20% for Jane.
180,000 X 20% =36,000.

Subtracting Jane’s capital from John and Jeff’s capital: 36,000 / 20%=18,000
New Partnership Capital Bal. Capital
John 100,000 40%
Bonus -18,000 82,000
Jeff 80,000 40%
Bonus -18,000 62,000
Jane 36,000 36,000 20%
Total 180,000
B. Record the partnership formation under the goodwill method, and assume a total goodwill
of $90,000.
Partner Goodwill
John 40% X 90,000 36,000
Jeff 40% X 90,000 36,000
Jane 20% X 90,000 18,000
Total 90,000
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C. Discuss the appropriateness of using either the bonus or goodwill methods to record the
formation of the partnership.
Both the bonus and the goodwill methods deal with the presence of unrecorded assets.
This is indicated by the amount that is invested by the new partner. While the bonus method
recognizes a new basis of asset valuation when a new partner invests assets in the partnership,
the goodwill method does not. There is an increase in unrestricted net assets on the statement of
activities.
E 15-2- Tom and Julie formed a management consulting partnership on January 1, 2014. The fair
value of the net assets invested by each partner follows:
Tom Julie
Cash $13,000 $12,000

Accounts receivable 8,000 6,000
Office supplies 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 $15,000 and Julie withdrew $12,000 in anticipation of operating
profits. Net profit for 2014 was $50,000, which is to be allocated based on the original net capital
investment.
A.1. Prepare journal entries to record the initial investment in the partnership.
Tom
Cash 13,000
3
Accounts receivable 8,000
Office Supplies 2,000
Office equipment 30,000
Less: Accounts payable 2,000
Tom, Capital 51,000
Julie
Cash 12,000
Accounts receivable 6,000
Office Supplies 800
Office equipment 30,000
Less: Accounts payable 5,000
Mortgage payable 18,800
Julie, Capital 25,000
A.2. Record the withdrawals.
Tom, Drawing 15,000
Cash 15,000
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Cash 12,000
A.3. Close the Income Summary and Drawing accounts.
Income Summary 50,000
Tom, Capital 33,553
Tom, Capital 15,000
Tom, Drawing 15,000
Julie, Drawing 12,000
B. Prepare a statement of changes in partners’ capital for the year ended December 31, 2014.
Statement of Changes in Partners’ Capital
For the Year Ended December 31, 2014
Tom Julie Total s
Capital balances, Jan. 1 $ - $ - $ -
Add: Additional investments 51,000 25,000 76,000
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Net income allocation 33,553 16,447 50,000
Totals 84,553 41,447 126,000
Less: Withdrawals 15,000 12,000 27,000
Capital balances, Dec. 31 $69,553 $29,447 $99,000
E 16-2- Simple Liquidation John, Jake, and Joe are partners with capital accounts of $90,000,
$78,000, and $64,000 respectively. They share profits and losses in the ratio of 30:40:30. When
the partners decide to liquidate, the business has $70,000 in cash, noncash assets totaling
$260,000, and $98,000 in liabilities. The noncash assets are sold for $270,000, and the creditors
are paid.
A. Prepare a schedule of partnership liquidation.
Non-cash
Cash Assets liabilities John Jake Joe
Balance before liquidation $ 70,000 $ 260,000 $98,000 $90,000 $78,000 $64,000
Sale of assets and
distribution of Profit $ 270,000 $ 260,000 $ 3,000 $ 4,000 $ 3,000
Pay liabilities $ 98,000 $98,000
Balance $ 242,000 $- $- $93,000 $82,000 $67,000
Final payment to partners $ 242,000 $93,000 $82,000 $67,000
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B. Journal entries to record each of the following transactions.
(1) The sale of the noncash assets.
(2) The payment to the creditors.
(3) The distribution of cash to the partners
(1) Cash 270,000
Other Assets 260,000
John, Capital 3,000
Jake, Capital 4,000
Joe, Capital 3,000
(2) Liabilities 98,000
Cash 98,000
(3) John, Capital 93,000
Jake, Capital 82,000
Joe, Capital 67,000
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Cash 242,000
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1

interest in the partnership.

A. Record the partnership formation under the bonus method.

John, capital 100,000 Capital balance

180,000 X 20% =36,000.

formation of the partnership.

value of the net assets invested by each partner follows:

Cash $13,000 $12,000

Accounts receivable 8,000

Office Supplies 2,000

Office equipment 30,000

Less: Accounts payable 2,000

Tom, Capital 51,000

Accounts receivable 6,000

Office Supplies 800

Office equipment 30,000

Less: Accounts payable 5,000

Mortgage payable 18,800

Julie, Capital 25,000

A.2. Record the withdrawals.

Tom, Drawing 15,000

Julie, Capital 12,000

A.3. Close the Income Summary and Drawing accounts.

Income Summary 50,000

Tom, Capital 33,553

Julie, Capital 16,447

Tom, Capital 15,000

Tom, Drawing 15,000

Julie, Capital 12,000

Julie, Drawing 12,000

Statement of Changes in Partners’ Capital

For the Year Ended December 31, 2014

Tom Julie Total s

Capital balances, Jan. 1 $ - $ - $ -

Add: Additional investments 51,000 25,000 76,000

Net income allocation 33,553 16,447 50,000

Totals 84,553 41,447 126,000

Less: Withdrawals 15,000 12,000 27,000

Capital balances, Dec. 31 $69,553 $29,447 $99,000

A. Prepare a schedule of partnership liquidation.

Sale of assets and

distribution of Profit $ 270,000 $ 260,000 $ 3,000 $ 4,000 $ 3,000

Pay liabilities $ 98,000 $98,000

Balance $ 242,000 $- $- $93,000 $82,000 $67,000

Final payment to partners $ 242,000 $93,000 $82,000 $67,000

B. Journal entries to record each of the following transactions.

(1) The sale of the noncash assets.

(2) The payment to the creditors.

(3) The distribution of cash to the partners

(1) Cash 270,000

Other Assets 260,000

John, Capital 3,000

Jake, Capital 4,000

Joe, Capital 3,000

(2) Liabilities 98,000

(3) John, Capital 93,000

Jake, Capital 82,000

Joe, Capital 67,000

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