Chapter 15 Partnership (Foundation)

Question 1

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?

Answer 1

$18,000.

Question 2

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

Answer 2

The property’s fair value less the mortgage payable on July 1, 20X1.

Question 3

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

Answer 3

Property’s fair value at the date of the investment.

Question 4

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

Answer 4

$330,000.

$330,000 = $50,000 + ($310,000 − $30,000)

Question 5

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?

Answer 5

$50,000.

Question 6

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:

1. Inventory was acquired at a cost of $30,400. At December 31, 20X7, the partnership owed $6,800 to its suppliers.
2. 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.
3. 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.
4. Sales on account amounted to $163,000. At December 31, 20X7, customers owed the partnership $22,400.
5. 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.
6. Each partner withdrew $230 each week in anticipation of partnership profits.
7. The partnership’s inventory at December 31, 20X7, was $21,300.
8. 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.

Answer 6

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

1. Inventory 30,400
   Cash 23,600
   Accounts payable 6,800
   (To record purchase of inventory)
2. Mortgage payable 6,000
   Interest expense 1,800
   Cash 7,800
3. Installment note payable 3,900
   Interest expense 2,000
   Cash 5,900
4. 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

6. Jordan, Drawing 11,960
   O’Neal, Drawing 11,960
   Cash 23,920
7. 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

Question 7

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:

1. Inventory was acquired at a cost of $30,400. At December 31, 20X7, the partnership owed $6,800 to its suppliers.
2. 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.
3. 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.
4. Sales on account amounted to $163,000. At December 31, 20X7, customers owed the partnership $22,400.
5. 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.
6. Each partner withdrew $230 each week in anticipation of partnership profits.
7. The partnership’s inventory at December 31, 20X7, was $21,300.
8. 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.

Answer 7

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

Question 8

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:

1. Inventory was acquired at a cost of $30,400. At December 31, 20X7, the partnership owed $6,800 to its suppliers.
2. 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.
3. 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.
4. Sales on account amounted to $163,000. At December 31, 20X7, customers owed the partnership $22,400.
5. 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.
6. Each partner withdrew $230 each week in anticipation of partnership profits.
7. The partnership’s inventory at December 31, 20X7, was $21,300.
8. 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.

Answer 8

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

Question 9

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:

1. Inventory was acquired at a cost of $30,400. At December 31, 20X7, the partnership owed $6,800 to its suppliers.
2. 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.
3. 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.
4. Sales on account amounted to $163,000. At December 31, 20X7, customers owed the partnership $22,400.
5. 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.
6. Each partner withdrew $230 each week in anticipation of partnership profits.
7. The partnership’s inventory at December 31, 20X7, was $21,300.
8. 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.

Answer 9

Cash 109,920
Jordan, Capital 10,032
O’Neal, Capital 6,688
Hill, Capital 93,200

Question 10

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

Answer 10

Equally

Question 11

Profit distributions are similar to a corporation’s dividends:

Answer 11

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.

Question 12

Most partnerships use one or more of the following distribution methods:

Answer 12

Preselected ratio.

Interest on capital balances.

Salaries to partners.

Bonuses to partners.

Question 13

What are preselected ratios?

Answer 13

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.

Question 14

Distributing partnership income based on interest on capital balances means?

Answer 14

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.

Question 15

If one or more of the partners’ services are important to the partnership, the profit distribution agreement may provide for ____________

Answer 15

Salaries & Bonuses

Question 16

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

Answer 16

Fixed

Question 17

Whats a salary to a partner?

Answer 17

Think of a salary as a fixed amount of company profits allocated to a given partner

Question 18

Whats a bonus to a partner?

Answer 18

a bonus is a portion of profits allocated to a partner based on a predetermined performance formula.

Question 19

How is the profit or loss distribution recorded at the end of each period?

Answer 19

The profit or loss distribution is recorded with a closing entry at the end of each period

Question 20

How are the revenue and expense accounts recorded?

Answer 20

The revenue and expenses are often closed into an income summary account that is then allocated to the partners’ capital accounts based on the formula prescribed in the partnership agreement (which could include one or more of the four methods described earlier).

Question 21

If the partnership earns $100,000 for the period, what tells the accountant how to allocate this amount to the partners’ capital accounts?

Answer 21

If the partnership earns $100,000 for the period, the formula provided in the partnership agreement tells the accountant how to allocate this amount to the partners’ capital accounts

Question 22

What if the partnership experiences losses? Can salaries to the partners during the year be treated as a distribution of profits?

Answer 22

Although any amounts actually paid to partners during the year are really drawings made in anticipation of profits, the agreed salary amounts usually are added to the loss, and that total is then distributed to the partners’ capital accounts. Caution should be exercised if the partnership experiences a loss during the year. Some partnership agreements specify different distributions for profit than for losses. The accountant must be especially careful to follow precisely the partnership agreement when distributing the period’s profit or loss to the partners.

Question 23

Roberts and Smith drafted a partnership agreement that lists the following assets contributed at the partnership’s formation:

(See Note for problem)

The building is subject to a mortgage of $10,000, 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 Roberts and Smith at the formation of the partnership?

(See Note for Solutions)

Answer 23

Option B- $35,000 (Robert) $75,000 (Smith)

Question 24

The partnership of X and Y shares profits and losses in the ratio of 60 percent to X and 40 percent to Y. For the year 20X8, partnership net income was double X’s withdrawals. Assume X’s beginning capital balance was $80,000, and ending capital balance (after closing) was $140,000. Partnership net income for the year was:

Answer 24

$600,000

Question 25

Which of the following accounts could be found in the PQ partnership’s general ledger?

I. Due from P
II. P, Drawing
III. Loan Payable to Q

Answer 25

I, II, and III

Question 26

Transferable interest of a partner includes all of the following except:

• the partner’s share of the profits and losses of the partnership.
• the right to receive distributions.
• the right to receive any liquidating distribution.
• the authority to transact any of the partnership’s business operations.

Answer 26

the authority to transact any of the partnership’s business operations.

Question 27

A partnership is a(n):

I. accounting entity.
II. taxable entity.

Answer 27

I only

Question 28

Jones and Smith formed a partnership with each partner contributing the following items:

(See notes)

Assume that for tax purposes Jones and Smith agree to share equally in the liabilities assumed by the Jones and Smith partnership.

Refer to the above information. What is the balance in each partner’s capital account for financial accounting purposes?

Answer 28

Option C

Jones-$360,000
Smith-$260,000

Question 29

A limited liability company (LLC):

I. is governed by the laws of the state in which it is formed.
II. provides liability protection to its investors.
III. does not offer pass-through taxation benefits of partnerships.

Answer 29

both I & II

Question 30

Which of the following accounts is not maintained for each partner in its accounting records?

Capital account
Drawing account
Earnings account
Loan account

Answer 30

Earnings Account

Question 31

RD formed a partnership on February 10, 20X9. R contributed cash of $150,000, while D contributed inventory with a fair value of $120,000. Due to R’s expertise in selling, D agreed that R should have 60 percent of the total capital of the partnership. R and D agreed to recognize goodwill. What is the total capital of the RD partnership and the capital balance of R after the goodwill is recognized?

Answer 31

$300k Total Capital

$180K R Capital

Question 32

When a partnership is formed, noncash assets contributed by partners should be recorded:

I. at their respective book values for income tax purposes.
II. at their respective fair values for financial accounting purposes.

Answer 32

Both I and II

Question 33

What are salaries to partners?

Answer 33

Recall that salaries to partners are simply fixed amounts allocated to partners as part of the regular allocation of profits. They are generally included as part of the profit distribution plan to recognize and compensate partners for differing amounts of personal services provided to the business.

Question 34

Can a partner be entitled to compensation for services performed for the partnership?

Answer 34

Section 401 of the UPA 1997 states that a partner is not entitled to compensation for services performed for the partnership except for reasonable compensation for services in winding up the partnership business.

Question 35

Are salaries to partners operating expenses?

Answer 35

A general precept of partnership accounting is that salaries to partners are not operating expenses but are part of the profit distribution plan. This precept is closely related to the proprietary concept of owner’s equity. According to the proprietary theory, the proprietor invests capital and personal services in pursuit of income. The earnings are a result of those two investments

Question 36

How are partners who invest capital rewarded? how about those who invest time?

Answer 36

The same logic applies to the partnership form of organization. Some partners invest capital, and others invest personal time. Those who invest capital are typically rewarded with interest on their capital balances; those who invest personal time are rewarded with salaries. However, both interest and salaries result from the respective investments and are used not to determine income but to determine the proportion of income to credit to each partner’s capital account.

Question 37

What are bonuses and how are they stated?

Answer 37

Bonuses are sometimes used to provide additional compensation to partners who have provided services to the partnership, and are typically stated as a percentage of income either before or after subtracting the bonus.

Question 38

How are bonuses calculated?

Answer 38

Sometimes the partnership agreement requires a minimum income to be earned before a bonus is calculated, which is easily done by deriving and solving an equation. To illustrate the difference between a bonus based on partnership profits before and a bonus after subtracting the bonus, we provide the following example. Assume that a bonus of 10 percent of income in excess of $5,000 is to be credited to Blue’s capital account before distributing the remaining profit. In Case 1, the bonus is computed as a percentage of income before subtracting the bonus amount. In Case 2, the bonus is computed as a percentage of income after subtracting it.

Question 39

How will a partnership agreement allocate the distribution of profit?

Answer 39

A partnership agreement may provide a formula describing several allocation procedures to be used to distribute profit. For example, assume the AB Partnership profit and loss agreement of specifies the following allocation process:

Interest of 15 percent on weighted-average capital balances.

Salaries of $2,000 for Alt and $5,000 for Blue.

A bonus of 10 percent of profits to be paid to Blue on partnership income exceeding $5,000 before subtracting the bonus, partners’ salaries, and interest on capital balances.

Any residual to be allocated in the ratio of 60 percent to Alt and 40 percent to Blue.

Question 40

Should the partnership agreement specify the allocation process in the event that partnership income is not sufficient to satisfy all allocation procedures?

Answer 40

The partnership agreement also should specify the allocation process in the event that partnership income is not sufficient to satisfy all allocation procedures. Some partnerships specify a profit distribution to be followed but only to the extent possible (i.e., stop following the formula once profits are exhausted). Most agreements specify that the entire process is to be completed and any remainder at each step of the process (whether positive or negative) is to be allocated in the profit and loss ratio

Question 41

What other criteria do some partnerships use to distribute net income?

Answer 41

Some partnerships distribute net income on the basis of other criteria. For example, most public accounting partnerships distribute profit on the basis of partnership “units.” A new partner acquires a certain number of units, and a firm wide compensation committee assigns additional units for obtaining new clients, providing the firm specific areas of industrial expertise, serving as a local office’s managing partner, or accepting a variety of other responsibilities.

Other partnerships may devise profit distribution plans that reflect the firms’ earnings. For example, some medical or dental partnerships allocate profit on the basis of billed services. Other criteria may be number or size of clients, years of service with the firm, or the partner’s position within it. An obvious advantage of the partnership form of organization is the flexibility it allows partners for profits distribution.

Question 42

Is a partnership entity distinct from its partners?

Answer 42

At the formation of a partnership, it is necessary to assign a proper value to the noncash assets and liabilities contributed by the partners. Section 201 of the UPA 1997 specifies that a partnership is an entity distinct from its partners.

Question 43

Is an item contributed by a partner considered partnership property?

Answer 43

Yes…an item contributed by a partner becomes partnership property

Question 44

Should the partnership clearly distinguish between capital contributions and loans made to the partnership by individual partners? What kind of support must be provided with loan agreements?

Answer 44

The partnership must clearly distinguish between capital contributions and loans made to the partnership by individual partners. Loan arrangements should be evidenced by promissory notes or other legal documents necessary to show that a loan arrangement exists between the partnership and an individual partner.

Question 45

Should the partnership clearly distinguish between tangible assets that the partnership owns and those specific assets that individual partners own but are used by the partnership?

Answer 45

it is important to clearly distinguish between tangible assets that the partnership owns and those specific assets that individual partners own but are used by the partnership. Accurate records of the partnership’s tangible assets must be maintained.