Chapter 15 Partnership (Operations)

Question 1

Left and Right are partners. Their capital accounts during 20X1 were as follows:

                Left, Capital

8/23 6,000 1/1 30,000
4/3 8,000
10/31 6,000

              Right, Capital

3/5 9,000 1/1 50,000
7/6 7,000
10/7 5,000

Partnership net income is $50,000 for the year. The partnership agreement provides for the division of income as follows:

1. Each partner is to be credited 8 percent interest on his or her average capital.
2. Any remaining income or loss is to be divided equally.

Prepare an income distribution schedule

Answer 1

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Question 2

The income statement for the Apple-Jack Partnership for the year ended December 31, 20X5, follows:

         APPLE-JACK PARTNERSHIP
             Income Statement For the Year Ended December 31, 20X5

Net Sales $ 317,000
Cost of Goods Sold (195,000 )

  Gross Margin	       $	122,000	 
  Operating Expenses	 	(32,000	)

Net Income $ 90,000

Additional Information for 20X5
1. Apple began the year with a capital balance of $49,500.
2. Jack began the year with a capital balance of $122,000.
3. On April 1, Apple invested an additional $20,700 into the partnership.
4. On August 1, Jack invested an additional $24,000 into the partnership.
5.
Throughout 20X5, each partner withdrew $500 per week in anticipation of partnership net income. The partners agreed that these withdrawals are not to be included in the computation of average capital balances for purposes of income distributions.

Apple and Jack have agreed to distribute partnership net income according to the following plan:

Apple Jack

1. Interest on average
   capital balances 6 % 6 %
2. Bonus on net income before the bonus but
   after interest on average capital balances
   10 %
3. Salaries $ 15,000 $ 16,000
4. Residual (if positive) 70 % 30 %
   Residual (if negative) 50 % 50 %

A. Prepare a schedule that discloses the distribution of partnership net income for 20X5. (Do not round intermediate calculations. Round your final answers to nearest whole dollar.)

b. Prepare the statement of partners’ capital at December 31, 20X5. (Do not round intermediate calculations. Round your final answers to nearest whole dollar.)
c. How would your answer to part a change if all of the provisions of the income distribution plan were the same except that the salaries were $36,000 to Apple and $36,700 to Jack? (Do not round intermediate calculations. Round your final answers to nearest whole dollar.)

Answer 2

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Question 3

C. Eastwood, A. North, and M. West are manufacturers’ representatives in the architecture business. Their capital accounts in the ENW partnership for 20X1 were as follows:

C. Eastwood, Capital

9/1 9,400 1/1 31,900
5/1 7,000

A. North, Capital

3/1 10,700 1/1 41,600
7/1 6,000
9/1 4,900

M. West, Capital

8/1 13,500 1/1 50,600
4/1 8,400
6/1 4,400

For each of the following independent income-sharing agreements, prepare an income distribution schedule.

a. Salaries are $16,700 to Eastwood, $20,300 to North, and $18,800 to West. Eastwood receives a bonus of 5 percent of net income after deducting his bonus. Interest is 10 percent of ending capital balances. Eastwood, North, and West divide any remainder in a 3:3:4 ratio, respectively. Net income was $79,170.
b. Interest is 10 percent of weighted-average capital balances. Salaries are $25,400 to Eastwood, $21,400 to North, and $25,200 to West. North receives a bonus of 10 percent of net income after deducting the bonus and her salary. Any remainder is divided equally. Net income was $68,810. (Do not round intermediate calculations.)
c. West receives a bonus of 20 percent of net income after deducting the bonus and the salaries. Salaries are $21,500 to Eastwood, $19,400 to North, and $16,000 to West. Interest is 10 percent of beginning capital balances. Eastwood, North, and West divide any remainder in an 8:7:5 ratio, respectively. Net income was $95,900. (Do not round intermediate calculations.

Answer 3

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Question 4

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	      $	61,500	 	$	51,500	 
  Inventories	 	80,600	 	 	–0–	 
  Land	 	        –0–	 	 	131,100	 
  Equipment	 	101,300	 	 	–0–	 

The land was subject to a $50,100 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 $20,300 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	$	12,700	 	$	12,700	 
  Remainder	 	60	%	 	40	%

During 20X7, the following events occurred:

1. Inventory was acquired at a cost of $31,700. At December 31, 20X7, the partnership owed $7,500 to its suppliers.
2. Principal of $6,100 was paid on the mortgage. Interest expense incurred on the mortgage was $1,900, all of which was paid by December 31, 20X7.
3. Principal of $3,600 was paid on the installment note. Interest expense incurred on the installment note was $1,900, all of which was paid by December 31, 20X7.
4. Sales on account amounted to $161,000. At December 31, 20X7, customers owed the partnership $22,400.
5. Selling and general expenses, excluding depreciation, amounted to $34,500. At December 31, 20X7, the partnership owed $7,000 of accrued expenses. Depreciation expense was $6,300.
6. Each partner withdrew $260 each week in anticipation of partnership profits.
7. The partnership’s inventory at December 31, 20X7, was $20,600.
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 $100,740 of cash into the partnership for a 20 percent capital interest. Total partnership capital after Hill was admitted totaled $454,000.

a. Prepare journal entries to record the formation of the partnership on January 1, 20X7, and to record the events that occurred during 20X7.
b. Prepare the income statement for the Jordan-O’Neal Partnership for the year ended December 31, 20X7.
c. Prepare a balance sheet for the Jordon-O’Neal Partnership at December 31, 20X7.
d. Prepare the journal entry for the admission of Hill on January 1, 20X8.

Answer 4

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Question 5

Champion Play Company is a partnership that sells sporting goods. The partnership agreement provides for 10 percent interest on invested capital, salaries of $24,000 to Luc and $28,000 to Dennis, and a bonus for Luc. The 20X3 capital accounts were as follows:

                       Luc, Capital

8/1 15,000 1/1 50,000
4/1 5,000

           Dennis, Capital

7/1 10,000 1/1 70,000
9/1 22,500

Required:
For each of the following independent situations, prepare an income distribution schedule.

a. Interest is based on weighted-average capital balances. The 5 percent bonus is calculated on net income after deducting the bonus. In 20X3, net income was $64,260. Any remainder is divided between Luc and Dennis in a 3:2 ratio, respectively.
b. Interest is based on ending capital balances after deducting salaries, which the partners normally withdraw during the year. The 8 percent bonus is calculated on net income after deducting the bonus and salaries. Net income was $108,700. Any remainder is divided equally. (Do not round intermediate calculations.)
c. Interest is based on beginning capital balances. The 12.5 percent bonus is calculated on net income after deducting the bonus. Net income was $76,950. Any remainder is divided between Luc and Dennis in a 4:2 ratio, respectively. (Do not round intermediate calculations. Round your final answer to the nearest whole dollar.)

Answer 5

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Question 6

Select the correct answer for each of the following questions.
(Note: The following balance sheet is for the partnership of Alex, Betty, and Claire in questions 1 and 2.)

Cash $ 20,000
Other Assets 180,000

$ 200,000

Liabilities $ 50,000
Alex, Capital (40%) 37,000
Betty, Capital (40%) 65,000
Claire, Capital (20%) 48,000

Total Liabilities and Capital $ 200,000

(Note: Figures shown parenthetically reflect agreed-upon profit and loss–sharing percentages.)

1. If the assets are fairly valued on this balance sheet and the partnership wishes to admit Denise as a new one-sixth-interest partner without recording goodwill or bonus, Denise should contribute cash or other assets of
2. If assets on the initial balance sheet are fairly valued, Alex and Betty give their consent, and Denise pays Claire $51,000 for her interest, the revised capital balances of the partners would be

Answer 6

1. $30,000.

2. Alex, $37,000; Betty, $65,000; Denise, $48,000.

Question 7

On December 31, 20X4, Alan and Dave are partners with capital balances of $80,000 and $40,000, and they share profit and losses in the ratio of 2:1, respectively. On this date, Scott invests $36,000 cash for a 20 percent interest in the capital and profit of the new partnership. The partners agree that the implied partnership goodwill is to be recorded simultaneously with Scott’s admission. The firm’s total implied goodwill is

Answer 7

$24,000.