300374

Question 1

When Mill retired from the partnership of Mill, Yale, and Lear, the final settlement of Mill’s interest exceeded Mill’s capital balance. Under the bonus method, the excess:

was recorded as an expense.

was recorded as goodwill.

reduced the capital balances of Yale and Lear.

had no effect on the capital balances of Yale and Lear.

Answer 1

reduced the capital balances of Yale and Lear.

Under the bonus method, the excess of assets distributed to Mill over Mill’s capital balance is considered to come from the other partners’ capital balances. The summary journal entry illustrating this is:

                        Dr.     Cr.   Mill, Capital            DR   Yale, Capital             DR   Lear, Capital              DR
Assets                        CR

Note: The net effect is that Mill receives a “bonus” from Yale and Lear.

Question 2

Partnership

Answer 2

A partnership is an association of two or more persons to carry on as co-owners of a business for profit. Partnerships are governed in the various states of the United States by the Uniform Partnership Act (UPA). A partnership may be general, limited, or joint venture.

Characteristics of a partnership include the following:

• Voluntary association of persons as individuals (the partnership has no separate legal identity under common law, but under the UPA it is now an entity for most purposes)
• Simple agreement without governmental sanction
• A fiduciary relationship (mutual agency—each partner is an agent for the others and for the partnership)
• Co-ownership
• Mutual agency of partners
• Joint and several liability

A partnership does not pay income tax. It is a pass-through entity, so profits and losses of the partnership pass through to its partners. A partnership does file an informational tax return using IRS Form 1065, U.S. Return of Partnership Income.

Question 3

2296.17

Answer 3