Chapter 15 Partnership (Foundation) Flashcards
On May 1, 20X1, Cathy and Mort formed a partnership and agreed to share profits and losses in the ratio of 3:7, respectively. Cathy contributed a parcel of land that cost her $10,000. Mort contributed $40,000 cash. The land was sold for $18,000 immediately after the partnership’s formation. What amount should be recorded in Cathy’s capital account at the time the partnership is formed the partnership’s?
$18,000.
On July 1, 20X1, James and Short formed a partnership. James contributed cash. Short, previously a sole proprietor, contributed property other than cash, including realty subject to a mortgage, which the partnership assumed. Short’s capital account on July 1, 20X1, should be recorded at
The property’s fair value less the mortgage payable on July 1, 20X1.
Two individuals who were previously sole proprietors form a partnership. Property other than cash that is part of the initial investment in the partnership is recorded for financial accounting purposes at the
Property’s fair value at the date of the investment.
Mutt and Jeff formed a partnership on April 1 and contributed the following assets:
Mutt Jeff
Cash $ 150,000 $ 50,000
Land $ 310,000
The land was subject to a $30,000 mortgage, which the partnership assumed. Under the partnership agreement, Mutt and Jeff share profit and loss in the ratio of one-third and two-thirds, respectively. Jeff’s capital account at April 1 should be
$330,000.
$330,000 = $50,000 + ($310,000 − $30,000)
On July 1, Mabel and Pierre formed a partnership, agreeing to share profits and losses in the ratio of 4:6, respectively. Mabel contributed a parcel of land that cost her $25,000. Pierre contributed $50,000 cash. The land was sold for $50,000 on July 1, four hours after formation of the partnership. How much should be recorded in Mabel’s capital account on the partnership formation?
$50,000.
The partnership of Jordan and O’Neal began business on January 1, 20X7. Each partner contributed the following assets (the noncash assets are stated at their fair values on January 1, 20X7):
Jordan O’Neal Cash $ 60,100 $ 50,900 Inventories 81,200 –0– Land –0– 131,000 Equipment 101,200 –0–
The land was subject to a $51,700 mortgage, which the partnership assumed on January 1, 20X7. The equipment was subject to an installment note payable that had an unpaid principal amount of $21,200 on January 1, 20X7. The partnership also assumed this note payable. Jordan and O’Neal agreed to share partnership income and losses in the following manner:
Jordan O’Neal Interest on beginning capital balances 3% 3% Salaries $13,400 $13,400 Remainder 60 % 40 %
During 20X7, the following events occurred:
- Inventory was acquired at a cost of $30,400. At December 31, 20X7, the partnership owed $6,800 to its suppliers.
- Principal of $6,000 was paid on the mortgage. Interest expense incurred on the mortgage was $1,800, all of which was paid by December 31, 20X7.
- Principal of $3,900 was paid on the installment note. Interest expense incurred on the installment note was $2,000, all of which was paid by December 31, 20X7.
- Sales on account amounted to $163,000. At December 31, 20X7, customers owed the partnership $22,400.
- Selling and general expenses, excluding depreciation, amounted to $34,100. At December 31, 20X7, the partnership owed $6,800 of accrued expenses. Depreciation expense was $6,300.
- Each partner withdrew $230 each week in anticipation of partnership profits.
- The partnership’s inventory at December 31, 20X7, was $21,300.
- The partners allocated the net income for 20X7 and closed the accounts.
Additional Information
On January 1, 20X8, the partnership decided to admit Hill to the partnership. On that date, Hill invested $109,920 of cash into the partnership for a 20 percent capital interest. Total partnership capital after Hill was admitted totaled $466,000.
A. Prepare journal entries to record the formation of the partnership on January 1, 20X7, and to record the events that occurred during 20X7.
Debit Credit Cash 111,000 Inventory 81,200 Land 131,000 Equipment 101,200 Mortgage payable 51,700 Installment note payable 21,200 Jordan, Capital 221,300 O’Neal, Capital 130,200 (To Record formation of partnership)
a.
Jordan, Capital ($60,100 + $81,200 + $101,200 – $21,200) = $221,300
O’Neal, Capital ($50,900 + $131,000 – $51,700) = $130,200
Jordan, Drawing ($230 × 52) = 11,960
$90,300 = $81,200 beginning inventory + 30,400 purchases – 21,300 ending inventory
- Inventory 30,400
Cash 23,600
Accounts payable 6,800
(To record purchase of inventory) - Mortgage payable 6,000
Interest expense 1,800
Cash 7,800 - Installment note payable 3,900
Interest expense 2,000
Cash 5,900 - Accounts receivable 22,400
Cash 140,600
Sales 163,000
5(a). Selling and general expenses 34,100
Cash 27,300
Accrued expenses payable 6,800
5(b) Depreciation expense 6,300
Accumulated depreciation 6,300
- Jordan, Drawing 11,960
O’Neal, Drawing 11,960
Cash 23,920 - Sales 163,000
Income summary 163,000
8(a) Cost of goods sold 90,300
Inventory 90,300
8 (b) Income summary 134,500
Cost of goods sold 90,300
Selling and general expenses 34,100
Depreciation expense 6,300
Interest expense 3,800
8 (c) Income summary 28,500
Jordan, Capital 14,732
O’Neal, Capital 13,768
8 (d) Jordan, Capital 11,960
O’Neal, Capital 11,960
Jordan, Drawing 11,960
O’Neal, Drawing 11,960
The partnership of Jordan and O’Neal began business on January 1, 20X7. Each partner contributed the following assets (the noncash assets are stated at their fair values on January 1, 20X7):
Jordan O’Neal Cash $ 60,100 $ 50,900 Inventories 81,200 –0– Land –0– 131,000 Equipment 101,200 –0–
The land was subject to a $51,700 mortgage, which the partnership assumed on January 1, 20X7. The equipment was subject to an installment note payable that had an unpaid principal amount of $21,200 on January 1, 20X7. The partnership also assumed this note payable. Jordan and O’Neal agreed to share partnership income and losses in the following manner:
Jordan O’Neal Interest on beginning capital balances 3% 3% Salaries $13,400 $13,400 Remainder 60 % 40 %
During 20X7, the following events occurred:
- Inventory was acquired at a cost of $30,400. At December 31, 20X7, the partnership owed $6,800 to its suppliers.
- Principal of $6,000 was paid on the mortgage. Interest expense incurred on the mortgage was $1,800, all of which was paid by December 31, 20X7.
- Principal of $3,900 was paid on the installment note. Interest expense incurred on the installment note was $2,000, all of which was paid by December 31, 20X7.
- Sales on account amounted to $163,000. At December 31, 20X7, customers owed the partnership $22,400.
- Selling and general expenses, excluding depreciation, amounted to $34,100. At December 31, 20X7, the partnership owed $6,800 of accrued expenses. Depreciation expense was $6,300.
- Each partner withdrew $230 each week in anticipation of partnership profits.
- The partnership’s inventory at December 31, 20X7, was $21,300.
- The partners allocated the net income for 20X7 and closed the accounts.
Additional Information
On January 1, 20X8, the partnership decided to admit Hill to the partnership. On that date, Hill invested $109,920 of cash into the partnership for a 20 percent capital interest. Total partnership capital after Hill was admitted totaled $466,000.
b. Prepare the income statement for the Jordan-O’Neal Partnership for the year ended December 31, 20X7.
JORDAN — O’NEAL PARTNERSHIP
Income Statement
For the Year Ended December 31, 20X7
Sales $163,000
Less: Cost of Goods Sold:
Inventory, January 1 $81,200
Purchases 30,400
Goods Available for Sale $111,600
Less: Inventory, December 31 21,300 90,300
Gross Profit $72,700
Less: Selling and general expenses$34,100
Less: Depreciation expense 6,300
40,400
Operating income $32,300
Nonoperating expense – Interest 3,800
Net Income $28,500
The partnership of Jordan and O’Neal began business on January 1, 20X7. Each partner contributed the following assets (the noncash assets are stated at their fair values on January 1, 20X7):
Jordan O’Neal Cash $ 60,100 $ 50,900 Inventories 81,200 –0– Land –0– 131,000 Equipment 101,200 –0–
The land was subject to a $51,700 mortgage, which the partnership assumed on January 1, 20X7. The equipment was subject to an installment note payable that had an unpaid principal amount of $21,200 on January 1, 20X7. The partnership also assumed this note payable. Jordan and O’Neal agreed to share partnership income and losses in the following manner:
Jordan O’Neal Interest on beginning capital balances 3% 3% Salaries $13,400 $13,400 Remainder 60 % 40 %
During 20X7, the following events occurred:
- Inventory was acquired at a cost of $30,400. At December 31, 20X7, the partnership owed $6,800 to its suppliers.
- Principal of $6,000 was paid on the mortgage. Interest expense incurred on the mortgage was $1,800, all of which was paid by December 31, 20X7.
- Principal of $3,900 was paid on the installment note. Interest expense incurred on the installment note was $2,000, all of which was paid by December 31, 20X7.
- Sales on account amounted to $163,000. At December 31, 20X7, customers owed the partnership $22,400.
- Selling and general expenses, excluding depreciation, amounted to $34,100. At December 31, 20X7, the partnership owed $6,800 of accrued expenses. Depreciation expense was $6,300.
- Each partner withdrew $230 each week in anticipation of partnership profits.
- The partnership’s inventory at December 31, 20X7, was $21,300.
- The partners allocated the net income for 20X7 and closed the accounts.
Additional Information
On January 1, 20X8, the partnership decided to admit Hill to the partnership. On that date, Hill invested $109,920 of cash into the partnership for a 20 percent capital interest. Total partnership capital after Hill was admitted totaled $466,000.
c. Prepare a balance sheet for the Jordon-O’Neal Partnership at December 31, 20X7.
JORDAN — O’NEAL PARTNERSHIP
Balance Sheet
At December 31, 20X7
Assets Cash $163,080 Accounts receivable 22,400 Inventory 21,300 Land 131,000 Equipment (net) 94,900 Total Assets $432,680 Liabilities and Capital Liabilities: Accounts payable $6,800 Accrued expenses payable 6,800 Installment note payable 17,300 Mortgage payable 45,700 Total liabilities $76,600 Capital: Jordan, Capital $224,072 O’Neal, Capital 132,008 Total capital 356,080 Total Liabilities and Capital $432,680
The partnership of Jordan and O’Neal began business on January 1, 20X7. Each partner contributed the following assets (the noncash assets are stated at their fair values on January 1, 20X7):
Jordan O’Neal Cash $ 60,100 $ 50,900 Inventories 81,200 –0– Land –0– 131,000 Equipment 101,200 –0–
The land was subject to a $51,700 mortgage, which the partnership assumed on January 1, 20X7. The equipment was subject to an installment note payable that had an unpaid principal amount of $21,200 on January 1, 20X7. The partnership also assumed this note payable. Jordan and O’Neal agreed to share partnership income and losses in the following manner:
Jordan O’Neal Interest on beginning capital balances 3% 3% Salaries $13,400 $13,400 Remainder 60 % 40 %
During 20X7, the following events occurred:
- Inventory was acquired at a cost of $30,400. At December 31, 20X7, the partnership owed $6,800 to its suppliers.
- Principal of $6,000 was paid on the mortgage. Interest expense incurred on the mortgage was $1,800, all of which was paid by December 31, 20X7.
- Principal of $3,900 was paid on the installment note. Interest expense incurred on the installment note was $2,000, all of which was paid by December 31, 20X7.
- Sales on account amounted to $163,000. At December 31, 20X7, customers owed the partnership $22,400.
- Selling and general expenses, excluding depreciation, amounted to $34,100. At December 31, 20X7, the partnership owed $6,800 of accrued expenses. Depreciation expense was $6,300.
- Each partner withdrew $230 each week in anticipation of partnership profits.
- The partnership’s inventory at December 31, 20X7, was $21,300.
- The partners allocated the net income for 20X7 and closed the accounts.
Additional Information
On January 1, 20X8, the partnership decided to admit Hill to the partnership. On that date, Hill invested $109,920 of cash into the partnership for a 20 percent capital interest. Total partnership capital after Hill was admitted totaled $466,000.
d. Prepare the journal entry for the admission of Hill on January 1, 20X8.
Cash 109,920
Jordan, Capital 10,032
O’Neal, Capital 6,688
Hill, Capital 93,200
If the entity does not have a formal partnership agreement, section 401 of the UPA 1997 indicates that all partners should share profits and losses
Equally
Profit distributions are similar to a corporation’s dividends:
These distributions should not be included on the partnership’s income statement regardless of how the profit is distributed. Profit distributions are recorded directly into the partner’s capital accounts, not treated as expense items.
Most partnerships use one or more of the following distribution methods:
Preselected ratio.
Interest on capital balances.
Salaries to partners.
Bonuses to partners.
What are preselected ratios?
Preselected ratios are usually the result of negotiations between the partners. Ratios for profit distributions may be based on the percentage of total partnership capital, time, and effort invested in the entity, or a variety of other factors. Small partnerships often split profits evenly among the partners. In addition, some partnerships have different ratios if the firm suffers a loss rather than earns a profit. The partnership form of business allows a wide selection of profit distribution ratios to meet the partners’ individual desires.
Distributing partnership income based on interest on capital balances means?
Distributing partnership income based on interest on capital balances simply means that the partners divide some or all of the $100,000 among themselves based on the relative balances they have maintained in their capital accounts. This method recognizes the contribution of the partners’ capital investments to the partnership’s profit-generating capacity and requires the allocation of profits based on a fixed rate multiplied by the partner’s capital account balance. This allocation of profits based on capital balances is generally not an expense of the partnership (like interest on a loan from a bank). It is simply a method for distributing profits.
If one or more of the partners’ services are important to the partnership, the profit distribution agreement may provide for ____________
Salaries & Bonuses
Salaries or bonuses represent ______ amounts allocated to partners from the $100,000 earned during the period. They are simply a form of profit distribution, not a partnership expense
Fixed
Whats a salary to a partner?
Think of a salary as a fixed amount of company profits allocated to a given partner
Whats a bonus to a partner?
a bonus is a portion of profits allocated to a partner based on a predetermined performance formula.