Partnership Accounting

Question 1

Info

Answer 1

Started on 2 September 2014 @ 1.00 PM
Total questions 24
To do at a time 24
Practice session 94

Question 2

The partnership of Metcalf, Petersen, and Russell shared profits and losses equally. When Metcalf withdrew from the partnership, the partners agreed that there was unrecorded goodwill in the partnership. Under the bonus method, the capital balances of Petersen and Russell were

Answer 2

Each reduced by one half of Metcalf’s share of the total amount of the unrecorded goodwill.
When the bonus method is used to account for the withdrawal of a partner from a partnership with unrecorded goodwill, the withdrawing partner’s (Metcalf’s) capital balance is removed from the books and the remaining partners’ (Peterson’s and Russell’s) capital accounts are reduced by the withdrawing partner’s share of the partnership’s total unrecorded goodwill in relation to their respective profit-loss ratios. Since the partners agreed to share profits and losses equally, remaining partners’ capital accounts will each be reduced by one half of the withdrawing partner’s share of the partnership’s unrecorded goodwill.

Question 3

Cor-Eng Partnership was formed on January 2, year 1. Under the partnership agreement, each partner has an equal initial capital balance accounted for under the goodwill method. Partnership net income or loss is allocated 60% to Cor and 40% to Eng. To form the partnership, Cor originally contributed assets costing $30,000 with a fair value of $60,000 on January 2, year 1, while Eng contributed $20,000 in cash. Drawings by the partners during year 1 totaled $3,000 by Cor and $9,000 by Eng. Cor-Eng’s year 1 net income was $25,000. Eng’s initial capital balance in Cor-Eng is

Answer 3

Under the goodwill method, it is assumed that the actual value of the partnership is $120,000 (Cor’s contribution of $60,000 ÷ 50%). Resulting goodwill of the partnership must therefore be $40,000 ($120,000 – $80,000). Eng’s initial capital is $60,000 (either $120,000 x 50%, or $20,000 + $40,000).

Question 4

Partners C and K share profits and losses equally after each has been credited in all circumstances with annual salary allowances of $15,000 and $12,000, respectively. Under this arrangement, C will benefit by $3,000 more than K in which of the following circumstances?

Answer 4

In all earnings or loss situations.
Since the salary allowances are credited to the partners’ accounts before sharing the profits and losses, C will always benefit by $3,000 ($15,000 - $12,000). In the event of a profit situation, C will receive $3,000 additional income. In a loss situation, C’s salary will offset $3,000 additional loss and therefore C will benefit by this amount.

Question 5

Which statement is true under the installment method of cash distribution for partnerships?

Answer 5

The final cash distribution is not based on the profit (loss) ratio.
because the final cash distribution is not based on the profit (loss) ratio, but instead is based upon the balance in each partner’s capital account.

Question 6

what is the combined gain realized by Newton and Sharman upon the sale of a portion of their interests in the partnership to Sidney?

Answer 6

1/5 of the partnership purchased by Sidney is $88,800 ($444,000 ÷ 5). Thus the gain to be recognized is $43,200 ($132,000 selling price – $88,800 book value). Note there is no need to allocate gains or losses and capital balances between Newton and Sharman, as the requirement is in terms of the combined gain.