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Exam 16: Partnership Accounting

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Question 1

Multiple Choice

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A partnership recorded the following journal entry: $\begin{array}{|l|r|r|}\hline \text { Cash } & 60,000 \\\hline \text { B. Founder, Capital } & 10,000 & \\\hline \text { R. Aqui, Capital } & 10,000 & \\\hline \text { H. Joiner, Capital } & & 80,000 \\\hline\end{array}$ This entry reflects:

A) Acceptance of a new partner who invests $60,000 and receives a $20,000 bonus.
B) Withdrawal of a partner who pays a $10,000 bonus to each of the other partners.
C) Addition of a partner who pays a bonus to each of the other partners.
D) Additional investment into the partnership by Founder and Aqui.
E) Withdrawal of $10,000 each by Founder and Aqui upon the admission of a new partner.

F) None of the above
G) B) and C)

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Question 2

Multiple Choice

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Partnership accounting is the same as accounting for:

A) A sole proprietorship.
B) A corporation.
C) A sole proprietorship, except that separate capital and withdrawal accounts are kept for each partner.
D) An S corporation.
E) A corporation, except that retained earnings is used to keep track of partners' withdrawals.

F) A) and B)
G) A) and C)

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Question 3

Multiple Choice

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Fontaine and Monroe are forming a partnership. Fontaine invests a building that has a market value of $250,000; the partnership assumes responsibility for a $75,000 note secured by a mortgage on the property. Monroe invests $100,000 in cash and equipment that has a market value of $55,000. For the partnership, the amounts recorded for total assets and for total capital account are:

Kramer and Jones allow Sanders to purchase a 25% interest in their partnership for $50,000 cash. Kramer and Jones both have capital balances of $55,000 each, and have agreed to share income and loss equally. Prepare the journal entry to record the admission of Sanders to the partnership.

The statement of changes in partners' equity shows the beginning balance in retained earnings, plus investments, less withdrawals, plus the income (or less the loss) and the ending balance in retained earnings.

Assume that the M & L partnership agreement gave March 60% and Ludwig 40% of partnership income and losses. The partnership lost $27,000 in the current period. This implies that March's share of the loss equals $16,200, and Ludwig's share equals $10,800.

Christie and Jergens formed a partnership with capital contributions of $300,000 and $400,000, respectively. Their partnership agreement calls for Christie to receive a $60,000 per year salary. Also, each partner is to receive an interest allowance equal to 10% of a partner's beginning capital investments. The remaining income or loss is to be divided equally. If the net income for the current year is $135,000, then Christie and Jergens's respective shares are:

Wallace, Simpson, and Prince are partners and share income and losses in a 3:4:3 ratio. The partnership's capital balances are Wallace, $68,000; Simpson, $90,000; and Prince, $42,000. Royal is admitted to the partnership on July 1 with a 20% equity and invests $50,000. The partnership would record the admission of Royal into the partnership as:

When a partner is added to a partnership:

A partner can be admitted into a partnership by ________ or by ________.

Sharon and Nancy formed a partnership by making capital contributions of $130,000 and $195,000 respectively. They predict annual partnership income of $230,000 and are considering the following alternative plans of sharing income and loss: (a) in the ratio of their initial capital investments; or (b) salary allowances of $40,000 to Sharon and $35,000 to Nancy; interest allowances of 12% on their initial capital investments; and the balance shared equally. Assuming that both partners put about the same amount of time into the business, which method of allocating income would be best?

What are the ways a partner can withdraw from a partnership? Explain how to account for the withdrawal of a current partner from a partnership.

If a partner is unable to cover a deficiency and the other partners absorb the deficiency, then the partner with the deficiency is thus relieved of all liability.

A partnership designed to protect innocent partners from malpractice or negligence claims resulting from the acts of other partners is a ________ partnership.

Fontaine and Monroe are forming a partnership. Fontaine invests a building that has a market value of $250,000; the partnership assumes responsibility for a $75,000 note secured by a mortgage on the property. Monroe invests $100,000 in cash and equipment that has a market value of $55,000. For the partnership, the amounts recorded for Fontaine's Capital account and for Monroe's Capital account are:

Partner return on equity can be used by each partner to help decide whether additional investment or withdrawal of resources is best for that partner.

Caroline Meeks and Charlie Fox decide to form a partnership on August 1. Meeks invests the following assets and liabilities in the new partnership: Market Value Land $80,000 Building 250,000 Note payable 114,000 The note payable is associated with the building and the partnership will assume responsibility for the loan. Fox invested $100,000 in cash and $95,000 in equipment in the new partnership. Prepare the journal entries to record the two partners' original investments in the new partnership.

The withdrawals account of each partner is closed to income summary at the end of the accounting period.

Cox, North, and Lee form a partnership. Cox contributes $180,000, North contributes $150,000, and Lee contributes $270,000. Their partnership agreement calls for a 5% interest allowance on the partner's capital balances with the remaining income or loss to be allocated equally. If the partnership reports income of $174,000 for its first year, what amount of income is credited to Lee's capital account?

Glade, Marker, and Walters are partners with beginning-year capital balances of $250,000, $150,000, and $100,000, respectively. Partnership net income for the year is $192,000. Make the necessary journal entry to close Income Summary to the capital accounts if partners agree to divide income based on their beginning-year capital balances.