- Describe the characteristics of the partnership form of business organization. The main characteristics of a partnership are (1) the association of individuals, (2) mutual agency, (3) co-ownership of property, (4) limited life, and (5) unlimited liability for a general partnership.
- Account for the formation of a partnership. When a partnership is formed, each partner’s initial investment should be recorded at the assets’ fair value at the date of their transfer to the partnership. If accounts receivable are contributed, both the gross amount and an allowance for doubtful accounts should be recorded. Accumulated depreciation is not carried forward into a partnership.
- Allocate and record profit or loss to partners. Profit or loss is divided based on the profit and loss ratio, which may be any of the following: (1) a fixed ratio; (2) a ratio based on beginning, ending, or average capital balances; or (3) salary and interest allowances and the remainder in a fixed ratio.
- Prepare partnership financial statements. The financial statements of a partnership are similar to those of a proprietorship. The main differences are that (1) the statement of owners’ equity is called the statement of partners’ equity, and (2) each partner’s capital account is usually reported on the balance sheet or in a supporting schedule.
- Account for the admission of a partner. The entry to record the admission of a new partner by purchase of a partner’s interest affects only partners’ capital accounts. The entry to record the admission by investment of assets in the partnership (1) increases both net assets and total capital, and (2) may result in the recognition of a bonus to either the old partners or the new partner.
- Account for the withdrawal of a partner. The entry to record a withdrawal from the firm when payment is made from partners’ personal assets affects only partners’ capital accounts. The entry to record a withdrawal when payment is made from partnership assets (1) decreases net assets and total capital, and (2) may result in recognizing a bonus to either the departing partner or the remaining partners.
- Account for the liquidation of a partnership. When a partnership is liquidated, it is necessary to record (1) the sale of noncash assets, (2) the allocation of the gain or loss on realization based on the profit and loss ratio, (3) the payment of partnership liabilities, (4) the removal of any capital deficiency either by repayment or by allocation to the other partners, and (5) the distribution of cash to the partners based on their capital balances.
Exercises
Exercise 1
Three types of partnerships were described in the text. Explain how limited partnerships (LP) and limited liability partnerships (LLP) differ from each other and from a traditional partnership.
Solution 1 (5 min.)
The differences among the three types of partnerships are with respect to the roles of the partners and their liability for losses:
Traditional partnership – All partners have equal authority to conduct business on behalf of the partnership, and all partners have equal liability for losses that may be incurred. Thus, if there is insufficient partnership assets to settle liabilities, individual partners may be required to pay the debts out of their personal assets.
Limited partnership – A general partner manages the business of the partnership and has unlimited liability. The other (limited) partners are primarily investors, and are not active in the management of the business. If losses occur, the limited partners’ liability and losses are restricted to the amount which they initially invested in the partnership.
Limited liability partnership – All partners may conduct business on behalf of the partnership. However, if losses occur that are a result of a specific partner’s negligence, the liability of the other partners is limited to their share of partnership assets. Only the partner whose negligence caused the loss is personally liable beyond his or her share of partnership assets.
Bloomcode: Comprehension
Difficulty: Easy
Learning Objective: Describe the characteristics of the partnership form of business organization.
Section Reference: Partnership Form of Organization
CPA: Financial Reporting
Exercise 2
Jim Steele and John Rich operate separate auto repair shops as proprietorships. On January 1, 2017, they decide to combine their separate businesses to form Steele Rich Auto Repair, a partnership. Information from their separate balance sheets is presented below:
Steele Auto Repair Rich Auto Repair
Cash…………………………………………………………………… $ 5,000 $10,000
Accounts receivable……………………………………………… 8,000 5,000
Allowance for doubtful accounts…………………………….. 1,000 500
Accounts payable…………………………………………………. 3,000 6,000
Notes payable……………………………………………………… — 5,000
Salaries payable…………………………………………………… 1,000 500
Equipment…………………………………………………………… 12,000 26,000
Accumulated depreciation—equipment…………………… 2,000 4,000
It is agreed that the expected realizable value of Steele’s accounts receivable is $5,000 and Rich’s receivables is $4,000. The fair value of Steele’s equipment is $15,000 and Rich’s equipment is $24,000. It is further agreed that the new partnership will assume all liabilities of the proprietorships with the exception of the notes payable on Rich’s balance sheet that he will pay himself.
Instructions
Prepare the journal entries necessary to record the formation of the partnership.
Solution 2 (15 min.)
Cash………………………………………………………………………………………….. 5,000
Accounts Receivable…………………………………………………………………… 8,000
Equipment………………………………………………………………………………….. 15,000
Allowance for Doubtful Accounts……………………………………………. 3,000
Salaries Payable…………………………………………………………………… 1,000
Accounts Payable…………………………………………………………………. 3,000
- Steele, Capital…………………………………………………………………… 21,000
To record J. Steele’s investment
Cash………………………………………………………………………………………….. 10,000
Accounts Receivable…………………………………………………………………… 5,000
Equipment………………………………………………………………………………….. 24,000
Allowance for Doubtful Accounts……………………………………………. 1,000
Salaries Payable…………………………………………………………………… 500
Accounts Payable…………………………………………………………………. 6,000
- Rich, Capital……………………………………………………………………… 31,500
To record J. Rich’s investment
Bloomcode: Application
Difficulty: Medium
Learning Objective: Account for the formation of a partnership.
Section Reference: Basic Partnership Accounting
CPA: Financial Reporting
Exercise 3
On January 1, 2016, Steve Furlong and Mark Pippy agreed to pool their assets and form a partnership called F&P Computing. They agree to share all profits equally and make the following initial investments:
Pippy Furlong
……….. Cash……………………………………… $ 10,000 $30,000
……….. Accounts receivable………………… 6,000 4,000
……….. Allowance for doubtful accounts.. 1,500 500
……….. Office furniture……………………….. 24,000 29,000
On December 31, 2016, the partnership reported a loss for the year of $19,500. On January 1, 2017, Furlong and Pippy agreed to accept Nicholas Adams into the partnership by purchasing 20% of Pippy’s interest in the partnership and 30% of Furlong’s interest. The partnership agreement is amended to provide for the following sharing of profit and losses:
Adams Pippy Furlong
…… Salary allowance………………… $20,000 $30,000 $60,000
…… Remaining ratio………………….. 5 3 2
For the year ended December 31, 2017, profit was $350,000.
Instructions
- a) Journalize the following transactions:
(1) the initial contributions to the partnership by Furlong and Pippy on January 1, 2016.
(2) the allocation of the loss to the partners at the end of December 2016.
(3) the purchase of the partnership interest by Adams on January 1, 2017.
- b) Prepare a schedule to show the division of profit at December 31, 2017.
Solution 3 (10 min.)
a)
(1) 2016
Jan 1 Cash…………………………………………………………………….. 30,000
Accounts Receivable……………………………………………… 4,000
Office Furniture……………………………………………………… 29,000
Allowance for Doubtful Accounts…………………….. 500
- Furlong, Capital………………………………………….. 62,500
1 Cash…………………………………………………………………….. 10,000
Accounts Receivable……………………………………………… 6,000
Office Furniture……………………………………………………… 24,000
Allowance for Doubtful Accounts…………………….. 1,500
- Pippy, Capital……………………………………………. 38,500
(2)
Dec 31 S. Furlong, Capital………………………………………………….. 9,750
- Pippy, Capital……………………………………………………. 9,750
Income Summary………………………………………….. 19,500
(3) 2017
Jan 1 S. Furlong, Capital [$62,500 – $9,750) × 30%]…………… 15,825
- Adams, Capital………………………………………….. 15,825
1 M. Pippy, Capital [($38,500 – $9,750) × 20%]……………. 5,750
- Adams, Capital………………………………………….. 5,750
b)
Division of Profit
Year Ended December 31, 2017
Adams Pippy Furlong Total
Profit $350,000
Salary allowance $ 20,000 $30,000 $60,000 110,000
Profit remaining for allocation 240,000
Fixed ratio
Adams ($240,000 × 5 ÷ 10) 120,000
Pippy ($240,000 × 3 ÷ 10) 72,000
Furlong ($240,000 × 2 ÷ 10) 48,000 240,000
Profit remaining for allocation _______ _______ _______ ______0
Division of profit $140,000 $102,000 $108,000 $350,000
Bloomcode: Application
Difficulty: Medium
Learning Objective: Account for the formation of a partnership.
Section Reference: Basic Partnership Accounting
Learning Objective: Allocate and record profit or loss to partners.
Section Reference: Dividing Partnership Profit or Loss
Learning Objective: Account for the admission of a partner.
Section Reference: Admission and Withdrawal of a Partner
CPA: Financial Reporting
Exercise 4
On January 1, 2016, Bonnie Nero and Randy Piper decided to form a partnership, dividing all profits and losses equally and by making the following investments:
Nero Piper
……….. Cash……………………………………… $ 150,000 $0
……….. Land………………………………………. 0 65,000
……….. Building………………………………….. 0 120,000
……….. Furniture………………………………… 35,000 0
On December 31, 2016, the partnership reported a profit for the year of $28,000. On January 1, 2017, Nero and Piper agreed to accept Jody Smith into the partnership by purchasing 25% of partnership interest for $165,000 cash. The partnership agreement is amended to provide for the following sharing of profit and losses:
Nero Piper Smith
…… Salary allowance………………… $60,000 $60,000 $30,000
…… Remaining ratio………………….. 1/3 1/3 1/3
For the year ended December 31, 2017, profit was $330,000.
Instructions
- a) Journalize the following transactions:
(1) the initial contributions to the partnership by Nero and Piper on January 1, 2016.
(2) the allocation of the profit to the partners at the end of December 2016.
(3) the purchase of the partnership interest by Smith on January 1, 2017.
- b) Prepare a schedule to show the division of profit at December 31, 2017.
Solution 4 (10 min.)
a)
(1) 2016
Jan 1 Cash…………………………………………………………………….. 150,000
Land 65,000
Building…………………………………………………………………. 120,000
Furniture……………………………………………………………….. 35,000
- Nero, Capital……………………………………………… 185,000
- Piper, Capital…………………………………………….. 185,000
(2)
Dec 31 Income Summary………………………………………………….. 28,000
- Nero, Capital……………………………………………… 14,000
- Piper, Capital…………………………………………….. 14,000
(3) Partnership capital balance after admission of Smith = $185,000 + $185,000 + $28,000 + $165,000 = $563,000. J. Smith, Capital = $563,000 x 25% = $140,750. Bonus to old partners = $165,000 – $140,750 = $24,250.
2017
Jan 1 Cash 165,000
- Smith, Capital…………………………………………….. 140,750
- Nero, Capital……………………………………………… 12,125
- Piper, Capital…………………………………………….. 12,125
b)
Division of Profit
Year Ended December 31, 2017
Nero Piper Smith Total
Profit $330,000
Salary allowance $ 60,000 $60,000 $30,000 150,000
Profit remaining for allocation 180,000
Fixed ratio
Nero ($180,000 × 1/3) 60,000
Piper ($180,000 × 1/3) 60,000
Smith ($180,000 × 1/3) 60,000 180,000
Profit remaining for allocation _______ _______ _______ ______0
Division of profit $120,000 $120,000 $90,000 $330,000
Bloomcode: Application
Difficulty: Medium
Learning Objective: Account for the formation of a partnership.
Section Reference: Basic Partnership Accounting
Learning Objective: Allocate and record profit or loss to partners.
Section Reference: Dividing Partnership Profit or Loss
Learning Objective: Account for the admission of a partner.
Section Reference: Admission and Withdrawal of a Partner
CPA: Financial Reporting
Exercise 5
Max Baer and Jimmy Choo are two proprietors who decide to merge their businesses into a partnership on January 1, 2017. The assets each contributed to the partnership are as follows:
| Max Baer | Jimmy Choo |
| Book Value | Fair Value | Book Value | Fair Value |
| Cash | $3,000 | $3,000 | $ 500 | $ 500 |
| Accounts receivable | 8,000 | 7,500 | 0 | 0 |
| Allowance for doubtful accounts | (500) | | 0 | 0 |
| Equipment | | | 30,000 | 10,000 |
| Accumulated depreciation | | | (18,000) | |
During the year ended December 31, 2017, the business, Bear-Chew Pet Services, had revenues of $180,000, rent expenses of $12,000, depreciation expense of $2,500, and other operating expenses of $8,400. Other than depreciation expense, all revenues and expenses incurred by the business were for cash. As well, cash of $7,500 was collected on the accounts receivable, with the remainder of the accounts receivable written off. The partnership agreement specifies that Max and Jimmy will share the partnership profit equally. During the year, Max withdrew $40,000 for personal use, and Jimmy withdrew $28,000.
Instructions
- a) Prepare the journal entry to record the two partners’ contributions on January 1, 2017.
- b) Prepare the partnership’s income statement, statement of partners’ equity, and balance sheet at December 31, 2017.
Solution 5 (25 min.)
a)
January 1, 2017
Cash ($3,000 + $500)………………………………………………………………….. 3,500
Accounts Receivable…………………………………………………………………… 8,000
Equipment………………………………………………………………………………….. 10,000
Allowance for Doubtful Accounts……………………………………………. 500
- Baer, Capital……………………………………………………………………. 10,500
- Choo, Capital…………………………………………………………………….. 10,500
- b)
Bear-Chew Pet Services
Income Statement
Year ended December 31, 2017 |
| Revenue | | | $ 180,000 | |
| Expenses | | | | |
| Rent expense | | $ 12,000 | | |
| Depreciation expense | | 2,500 | | |
| Other operating expenses | | 8,400 | 22,900 | |
| Profit | | | $ 157,100 | |
Bear-Chew Pet Services
Statement of Partners’ Equity
Year ended December 31, 2017 |
| | M. Baer | J. Choo | Total |
| Capital, January 1, 2017 | | $ – | $ – | $ – |
| Add: Investments | | 10,500 | 10,500 | 21,000 |
| Profit | | 78,550 | 78,550 | 157,100 |
| | 89,050 | 89,050 | 178,100 |
| Less: Drawings | | 40,000 | 28,000 | 68,000 |
| Capital, December 31, 2017 | | $ 49,050 | $ 61,050 | $ 110,100 |
Bear-Chew Pet Services
Balance Sheet
December 31, 2017 |
| | | | |
| Assets |
| Current assets | | | | |
| Cash | $ 102,600 |
| | | | |
| Equipment | | | $ 10,000 | |
| Less: Accumulated depreciation | | | 2,500 | 7,500 |
| Total assets | | | | $ 110,100 |
| | | | |
| Liabilities and Partners’ Equity |
| | | | |
| Partners’ equity | | | | |
| M. Baer, capital | | | $ 49,050 | |
| J. Choo, capital | | | 61,050 | $ 110,100 |
Cash: $102,600 = $3,500 + $7,500 + $180,000 – $12,000 – $8,400 – $40,000 – $28,000
Bloomcode: Application
Difficulty: Medium
Learning Objective: Account for the formation of a partnership.
Section Reference: Basic Partnership Accounting
Learning Objective: Prepare partnership financial statements.
Section Reference: Partnership Financial Statements
CPA: Financial Reporting
Exercise 6
Brewer and Tony have a partnership agreement that includes the following provisions regarding sharing profit or loss:
- A salary allowance of $30,000 to Brewer and $15,000 to Tony.
- An interest allowance of 10% on capital balances at the beginning of the year.
- The remainder to be divided 30% to Brewer and 70% to Tony.
The capital balances on January 1, 2017, for Brewer and Tony were $80,000 and $100,000, respectively. During 2017, the Brewer and Tony Merchandising Partnership had sales of $330,000, cost of goods sold of $190,000, and operating expenses of $60,000.
Instructions
Prepare an income statement for the Brewer and Tony Merchandising Partnership for the year ended December 31, 2017. As a part of the income statement, include a division of profit to each of the partners.
Solution 6 (15 min.)
BREWER AND TONY MERCHANDISING PARTNERSHIP
Income Statement
Year Ended December 31, 2017
Sales……………………………………………………………………………………………………………… $330,000
Cost of goods sold…………………………………………………………………………………………… 190,000
Gross profit………………………………………………………………………………………………………. 140,000
Operating expenses…………………………………………………………………………………………. 60,000
Profit………………………………………………………………………………………………………………. $ 80,000
Division of Profit
Brewer Tony Total
Profit………………………………………………… $80,000
Salary allowance……………………………….. $30,000 $15,000 45,000
Profit remaining for allocation……………… 35,000
Interest allowance
Brewer ($80,000 × 10%)………………. 8,000
Tony ($100,000 × 10%)……………….. 10,000 18,000
Profit remaining for allocation……………… 17,000
Fixed ratio
Brewer ($17,000 × 30%)………………. 5,100
Tony ($17,000 × 70%)…………………. 11,900 17,000
Profit remaining for allocation……………… ______ ______ 0
Profit allocated to partners………………….. $43,100 $36,900 $80,000
Bloomcode: Application
Difficulty: Medium
Learning Objective: Allocate and record profit or loss to partners.
Section Reference: Dividing Partnership Profit or Loss
CPA: Financial Reporting
Exercise 7
Pac-link Technologies is a partnership owned and operated by Tom Kennedy and Mike McConnell. To recognize the fact that the partners have invested significantly different amounts of capital and that Tom works full time, while Mike works only part time, the partnership agreement states that the profit will be allocated as follows: An interest allowance of 3% of each partner’s beginning capital balance plus a salary allowance of $85 per hour worked. Any remaining profit or loss after calculation of these allowances will be allocated equally. At January 1, 2017, Tom’s capital account balance was $15,000 and Mike’s was $20,000. During the year ended December 31, 2017, Tom worked 1,200 hours and Mike worked 550 hours.
Instructions
- a) Calculate each partner’s share of profit assuming that profit for the year ended December 31, 2017 is $196,000.
- b) Calculate each partner’s share of profit assuming that profit for the year ended December 31, 2017 is $88,000.
Solution 7 (15 min.)
a)
| Kennedy | McConnell | Total |
| Profit | | | $196,000 |
| Interest allowance | | | |
| $15,000 x 3% | 450 | | |
| $20,000 x 3% | | $600 | 1,050 |
| Profit remaining for allocation | | | 194,950 |
| Salary allowance | | | |
| 1,200 hours x $85 | 102,000 | | |
| 550 hours x $85 | | 46,750 | 148,750 |
| Profit remaining for allocation | | | 46,200 |
| Fixed ratio | | | |
| $46,200 ÷ 2 | 23,100 | 23,100 | 46,200 |
| Profit remaining for allocation | | | 0 |
| Profit allocated to partners | $125,550 | $70,450 | $196,000 |
b)
| Kennedy | McConnell | Total |
| Profit | | | $ 88,000 |
| Interest allowance | | | |
| $15,000 x 3% | $ 450 | | |
| $20,000 x 3% | | $ 600 | 1,050 |
| Profit remaining for allocation | | | 86,950 |
| Salary allowance | | | |
| 1,200 hours x $85 | 102,000 | | |
| 550 hours x $85 | | 46,750 | 148,750 |
| Profit (deficiency) remaining for allocation | | | (61,800) |
| Fixed ratio | | | |
| ($61,800) ÷ 2 | (30,900) | (30,900) | (61,800) |
| Profit remaining for allocation | | | 0 |
| Profit allocated to partners | $ 71,550 | $ 16,250 | $ 88,000 |
Bloomcode: Application
Difficulty: Hard
Learning Objective: Allocate and record profit or loss to partners.
Section Reference: Dividing Partnership Profit or Loss
CPA: Financial Reporting
Exercise 8
Laroche, Kennedy, and White formed a partnership on January 1, 2017. Laroche invested $40,000, Kennedy $30,000 and White $50,000. Laroche will manage the store and work 40 hours per week in the store. Kennedy will work 20 hours per week in the store, and White will not work. Each partner withdrew 30 percent of his profit distribution during 2017. If there was no profit distribution to a partner, there were no withdrawals of cash.
Instructions
Calculate the partners’ capital balances at the end of 2017 under the following independent conditions: (Hint: use T accounts to determine each partner’s capital balance.)
- a) Profit is $80,000 and the profit ratio is Laroche 40%, Kennedy 35%, and White 25%.
- b) Profit is $100,000 and the partnership agreement specifies a salary of $35,000 to Laroche and $20,000 to Kennedy. Any remaining amount is to be shared equally among the partners.
- c) Profit is $35,000 and the partnership agreement provides for (a) a salary of $20,000 to Laroche and $20,000 to Kennedy, (b) interest on beginning capital balances at the rate of 6%, and (c) any remaining profit or loss is to be shared by Laroche 50%, Kennedy 35%, and White 15%.
Solution 8 (25 min.)
a)
Laroche, Capital Kennedy, Capital White, Capital
9,600 40,000 8,400 30,000 6,000 50,000
32,000 28,000 20,000
62,400 49,600 64,000
Profit % Distribution % Drawings
Laroche $80,000 × 40 $32,000 × 30 $ 9,600
Kennedy 80,000 × 35 28,000 × 30 8,400
White 80,000 × 25 20,000 × 30 6,000
$80,000 $24,000
b)
Laroche, Capital Kennedy, Capital White, Capital
15,000 40,000 10,500 30,000 4,500 50,000
50,000 35,000 15,000
75,000 54,500 60,500
Laroche Kennedy White Total
Salary $35,000 $20,000 $ 0 $ 55,000
Remainder 15,000 15,000 15,000 45,000
Total $50,000 $35,000 $15,000 $100,000
× 30% = Drawings $15,000 $10,500 $ 4,500 $30,000
c)
Laroche, Capital Kennedy, Capital White, Capital
4,890 40,000 5,259 30,000 351 50,000
16,300 17,530 1,170
51,410 42,271 50,819
Laroche Kennedy White Total
Salary $20,000 $20,000 $ 0 $40,000
Interest 2,400 1,800 3,000 7,200
Remainder ($12,200) (6,100) (4,270) (1,830) (12,200)
Total $16,300 $17,530 $1,170 $35,000
× 30% = Drawings $ 4,890 $ 5,259 $ 351 $10,500
Bloomcode: Application
Difficulty: Hard
Learning Objective: Allocate and record profit or loss to partners.
Section Reference: Dividing Partnership Profit or Loss
CPA: Financial Reporting
Exercise 9
The condensed, adjusted trial balance of the Kirby and Simon Partnership as at December 31, 2017, appears below:
KIRBY AND SIMON PARTNERSHIP
Adjusted Trial Balance
December 31, 2017
Debit Credit
Current assets…………………………………………………………………………….. $ 25,000
Property, plant, and equipment……………………………………………………… 80,000
Current liabilities………………………………………………………………………….. $ 7,000
Long-term debt……………………………………………………………………………. 44,000
Kirby, capital……………………………………………………………………………….. 26,000
Kirby, drawings……………………………………………………………………………. 270,000
Simon, capital……………………………………………………………………………… 18,000
Simon, drawings………………………………………………………………………….. 245,000
Service revenue………………………………………………………………………….. 593,000
Operating expenses ……………………………………………………………………. 68,000
$688,000 $688,000
The partnership agreement stipulates that a division of partnership profit or loss is to be made as follows:
- A salary allowance of $310,000 to Kirby and $250,000 to Simon.
- The remainder is to be divided equally.
Instructions
- a) Prepare a schedule which shows the division of profit to each partner.
- b) Prepare the closing entries for the division of profit and for the drawings accounts at December 31, 2017.
Solution 9 (15 min.)
- a) Schedule for division of profit:
Sales……………………………………………………………………………………. $593,000
Less: Operating expenses………………………………………………………. 68,000
Profit……………………………………………………………………………………. $525,000
Kirby Simon Total
Profit $525,000
Salary allowance $310,000 $250,000 560,000
Deficiency remaining for allocation (35,000)
Fixed ratio
Kirby ($35,000) × 50% (17,500)
Simon ($35,000) × 50% (17,500) (35,000)
Deficiency remaining for allocation 0
Division of profit $292,500 $232,500 $525,000
- b) Dec 31 Income Summary………………………………………………….. 525,000
Kirby, Capital…………………………………………………… 292,500
Simon, Capital…………………………………………………. 232,500
To close profit to capital
31 Kirby, Capital…………………………………………………………. 270,000
Simon, Capital……………………………………………………….. 245,000
Kirby, Drawings……………………………………………….. 270,000
Simon, Drawings……………………………………………… 245,000
To close drawings accounts to capital
Bloomcode: Application
Difficulty: Medium
Learning Objective: Allocate and record profit or loss to partners.
Section Reference: Dividing Partnership Profit or Loss
CPA: Financial Reporting
Exercise 10
Bob Spade and Ken Lundy have formed the partnership Art World, and have capital balances of $120,000 and $105,000 respectively on January 1, 2017. On June 1, 2017, Lundy invested an additional $20,000. Also during the year, Spade withdrew $16,000 and Lundy withdrew $22,000. Sales for the year amounted to $850,000 and expenses were $520,000. After taking salary allowances of $60,000 and $90,000 respectively, Spade and Lundy share any remaining profit and losses on a 40% and 60% ratio respectively.
Instructions
- a) Prepare a schedule that shows the division of profit to each partner.
- b) Prepare the closing entries at December 31, 2017, for the Art World partnership.
- c) Prepare a statement of partners’ equity for 2017.
Solution 10 (15 min.)
- a) Division of Profit
Spade Lundy Total
Profit ($850,000 – $520,000)………………………………………….. $330,000
Salary allowance………………………………………………. $60,000 $90,000 150,000
Profit remaining for allocation…………………………………………. 180,000
Fixed ratio
Spade ($180,000 × 40%)………………………………. 72,000
Lundy ($180,000 × 60%)…………………………………………. 108,000 180,000
Profit remaining for allocation………………………………. ______ ______ ______0
Division of profit………………………………………………. $132,000 $198,000 $330,000
- b) Sales……………………………………………………………………………………. 850,000
Expenses………………………………………………………………………. 520,000
Income Summary…………………………………………………………… 330,000
Income Summary…………………………………………………………………. 330,000
- Spade, Capital……………………………………………………………. 132,000
- Lundy, Capital…………………………………………………………….. 198,000
- Spade, Capital………………………………………………………………….. 16,000
- Lundy, Capital…………………………………………………………………… 22,000
- Spade, Drawings………………………………………………………… 16,000
- Lundy, Drawings…………………………………………………………. 22,000
c)
Art World Partnership
Statement of Partners’ Equity
Year Ended December 31, 2017
- Spade K. Lundy Totals
Capital, January 1……………………………….. . $ 120,000 $ 105,000 $225,000
Add: Additional Investment………………….. ……………… 20,000 20,000
Profit…………………………………………. … 132,000 198,000 330,000
….. 252,000 323,000 575,000
Less: Drawings……………………………………. … 16,000 22,000 38,000
Capital, December 31………………………….. … $236,000 $301,000 $537,000
Bloomcode: Application
Difficulty: Medium
Learning Objective: Allocate and record profit or loss to partners.
Section Reference: Dividing Partnership Profit or Loss
Learning Objective: Prepare partnership financial statements.
Section Reference: Partnership Financial Statements
CPA: Financial Reporting
Exercise 11
Jane Zhou, Ron Higgins and Liz O’Neill are three partners who operate ZHO Consulting, which has a June 30 year end. For the year ended June 30, 2017, the partnership had revenue of $380,000 and operating expenses of $176,000. Information about the partnership accounts is as follows:
| Partner | J. Zhou | R. Higgins | L. O’Neill |
| Capital account, July 1, 2016 | $40,000 | $35,000 | $20,000 |
| Additional investment January 1, 2017 | 10,000 | 10,000 | 5,000 |
| Drawings during year ended June 30, 2017 | 70,000 | 50,000 | 25,000 |
| Profit allocation percentage | 40% | 30% | 30% |
Instructions
- a) Prepare the Statement of Partners’ Equity for the year ended June 30, 2017.
- b) Prepare a partial balance sheet at June 30, 2017, showing the Partners’ Equity section.
- c) Prepare closing entries for the June 30, 2017 year end.
Solution 11 (25 min.)
a)
ZHO Consulting
Statement of Partners’ Equity
Year ended June 30, 2017 |
| J. Zhou | R. Higgins | L. O’Neill | Total |
| Capital, July 1, 2016 | $ 40,000 | $ 35,000 | $ 20,000 | $ 95,000 |
| Add: Investments | 10,000 | 10,000 | 5,000 | 25,000 |
| Profit | 81,600 | 61,200 | 61,200 | 204,000 |
| 131,600 | 106,200 | 86,200 | 324,000 |
| Less: Drawings | 70,000 | 50,000 | 25,000 | 145,000 |
| Capital, June 30, 2017 | $ 61,600 | $ 56,200 | $ 61,200 | $ 179,000 |
| | | | |
| Calculations: | | | | |
| Profit: $380,000 – 176,000 = $204,000 |
| $204,000 x 40% = $81,600;
$204,000 x 30% = $61,200 | | |
| | | | |
| | | | | | | |
b)
ZHO Consulting
Partial Balance Sheet
June 30, 2017 |
| Liabilities and Partners’ Equity |
| Partners’ equity | | | | |
| J. Zhou, capital | | | $ 61,600 | |
| R. Higgins, capital | | | 56,200 | |
| L. O’Neill, capital | | | 61,200 | 179,000 |
c)
Revenue…………………………………………………………………………………….. 380,000
Income Summary…………………………………………………………………. 380,000
Income Summary……………………………………………………………………….. 176,000
Operating Expenses………………………………………………………………. 176,000
Income Summary……………………………………………………………………….. 204,000
- Zhou, Capital…………………………………………………………………….. 81,600
- Higgins, Capital…………………………………………………………………. 61,200
- O’Neill, Capital…………………………………………………………………… 61,200
- Zhou, Capital…………………………………………………………………………… 70,000
- Higgins, Capital……………………………………………………………………….. 50,000
- O’Neill, Capital…………………………………………………………………………. 25,000
- Zhou, Drawings…………………………………………………………………. 70,000
- Higgins, Drawings……………………………………………………………… 50,000
- O’Neill, Drawings……………………………………………………………….. 25,000
Bloomcode: Application
Difficulty: Medium
Learning Objective: Allocate and record profit or loss to partners.
Section Reference: Dividing Partnership Profit or Loss
Learning Objective: Prepare partnership financial statements.
Section Reference: Partnership Financial Statements
CPA: Financial Reporting
Exercise 12
Marty Cummerford and Jane Wheeler have formed the MCJW partnership, and have capital balances of $65,000 and $50,000 respectively on January 1, 2017. On June 1, 2017, Wheeler invested an additional $35,000. Also during the year, Cummerford withdrew $30,000 and Wheeler withdrew $34,000. Sales for the year amounted to $300,000 and expenses were $220,000. After taking salary allowances of $30,000 and $20,000 respectively, Cummerford and Wheeler share any remaining profit and losses on a 3:1 basis.
Instructions
- a) Prepare a schedule that shows the division of profit to each partner.
- b) Prepare the closing entries at December 31, 2017, for the MCJW partnership.
- c) Prepare a statement of partners’ equity for 2017.
Solution 12 (15 min.)
- a) Division of Profit
Cummerford Wheeler Total
Profit…………………………………………………………………………… $80,000
Salary allowance………………………………………………. $30,000 $20,000 50,000
Profit remaining for allocation…………………………………………. 30,000
Fixed ratio
Cummerford ($30,000 × 75%)……………………….. 22,500
Wheeler ($30,000 × 25%)……………………………………….. 7,500 30,000
Profit remaining for allocation………………………………. ______ ______ ______0
Division of profit………………………………………………… $52,500 $27,500 $80,000
- b) Sales……………………………………………………………………………………. 300,000
Expenses………………………………………………………………………. 220,000
Income Summary…………………………………………………………… 80,000
Income Summary…………………………………………………………………. 80,000
- Cummerford, Capital………………………………………………….. 52,500
- Wheeler, Capital………………………………………………………….. 27,500
- Cummerford, Capital………………………………………………………… 30,000
- Wheeler, Capital………………………………………………………………… 34,000
- Cummerford, Drawings………………………………………………. 30,000
- Wheeler, Drawings………………………………………………………. 34,000
c)
MCJW Partnership
Statement of Partners’ Equity
Year Ended December 31, 2017
- Cummerford J. Wheeler Totals
Capital, January 1……………………………….. … $ 65,000 $ 50,000 $115,000
Add: Additional Investment………………….. ……………… 35,000 35,000
Profit…………………………………………. … 52,500 27,500 80,000
….. 117,500 112,500 230,000
Less: Drawings……………………………………. … 30,000 34,000 64,000
Capital, December 31………………………….. … $ 87,500 $ 78,500 $166,000
Bloomcode: Application
Difficulty: Medium
Learning Objective: Allocate and record profit or loss to partners.
Section Reference: Dividing Partnership Profit or Loss
Learning Objective: Prepare partnership financial statements.
Section Reference: Partnership Financial Statements
CPA: Financial Reporting
Exercise 13
Julie Harris, William Gosse, and Regina Ryan started a partnership to provide mobile tax services. The partners’ capital account at the beginning of 2017 was Harris, $120,000; Gosse, $180,000; and Ryan, $90,000. The partnership agreement states that the partners will share profit equally.
On December 31, 2017, the partnership reported a loss of $21,000 for the year. During the year, Harris withdrew $80,000 and Gosse withdrew $140,000. Ryan did not make any withdrawals.
On January 1, 2018, the partners had a major disagreement as to the direction of the partnership and decided to liquidate the business. The December 31, 2017 balance sheet showed the following balances:
…… Cash……………………………………………………… $ 26,000
…… Machinery (net)………………………………………… 169,000
…… Accounts payable……………………………………….. 46,000
…… Partners’ capital………………………………………… 149,000
On January 1, 2018, the machinery was sold for proceeds of $133,000.
Instructions
Prepare the journal entry to record the following:
- a) The allocation of the loss to the partners on December 31, 2017.
- b) The closing of the drawings accounts on December 31, 2017.
- c) The liquidation of the partnership on January 1, 2018.
Solution 13 (15 min.)
a)
2017
Dec 31 J. Harris, Capital………………………………………………………. 7,000
- Gosse, Capital…………………………………………………….. 7,000
- Ryan, Capital……………………………………………………….. 7,000
Income Summary……………………………………………. 21,000
b)
Dec 31 J. Harris, Capital………………………………………………………. 80,000
- Gosse, Capital…………………………………………………….. 140,000
- Harris, Drawings…………………………………………… 80,000
- Gosse, Drawings…………………………………………. 140,000
c)
| HARRIS, GOSSE, AND RYAN PARTNERSHIP
Liquidation Schedule
January 1, 2018 |
| Cash |
Noncash
Assets | Accounts Payable | Harris,
Capital* | Gosse,
Capital* | Ryan,
Capital* |
| Balances | $ 26,000 | $169,000 | $46,000 | $33,000 | $33,000 | $83,000 |
| Sale of machinery and allocation of $36,000 loss |
133,000 |
(169,000) |
000000 |
(12,000) |
(12,000) |
(12,000) |
| Remaining balances | 159,000 | 0 | 46,000 | 21,000 | 21,000 | 71,000 |
| Payment of liabilities | (46,000) | 0000000 | (46,000) | 000 000 | 000 000 | 00 0000 |
| Remaining balances | $113,000 | $ 0 | $ 0 | $21,000 | $21,000 | $71,000 |
*Capital Account Balances: Harris Gosse Ryan
Balance, Jan1, 2017 120,000 180,000 90,000
Withdrawals (80,000) (140,000) —
Loss (7,000) (7,000) (7,000) ………
Balance, Dec 31, 2017 33,000 33,000 83,000
Cash……………………………………………………………………………………. 133,000
Loss on Disposal ………………………………………………………………….. 36,000
Machinery……………………………………………………………………… 169,000
Machinery (net) $169,000
Sale proceeds 133,000
Loss on sale of machinery $ 36,000 ÷ 3 = $12,000
2018
Jan 1 J. Harris, Capital………………………………………………………. 12,000
- Gosse, Capital…………………………………………………….. 12,000
- Ryan, Capital……………………………………………………….. 12,000
Loss on Realization…………………………………………….. 36,000
1 Accounts Payable…………………………………………………….. 46,000
Cash…………………………………………………………………. 46,000
1 J. Harris, Capital………………………………………………………. 21,000
- Gosse, Capital…………………………………………………….. 21,000
- Ryan, Capital……………………………………………………….. 71,000
Cash…………………………………………………………………. 113,000**
** (133,000+26,000-46,000)
Bloomcode: Application
Difficulty: Hard
Learning Objective: Allocate and record profit or loss to partners.
Section Reference: Dividing Partnership Profit or Loss
Learning Objective: Account for the liquidation of a partnership.
Section Reference: Liquidation of a Partnership
CPA: Financial Reporting
Exercise 14
Green Solutions is a partnership owned by F. Sabac and S. Hilton. At January 1, 2017 the partner’s capital accounts were: F. Sabac, $16,500 and S. Hilton $12,300. During 2017, Hilton contributed to the business equipment with a fair value of $5,600. Each partner withdrew $50,000 during the year and profit was $141,900. The partners share profit on a 2:1 ratio (Sabac:Hilton).
Instructions
- a) Prepare the statement of partners’ equity for the year ended December 31, 2017.
- b) Prepare a partial balance sheet, showing the partners’ equity section.
Solution 14 (25 min.)
a)
Green Solutions
Statement of Partners’ Equity
Year ended December 31, 2017 | |
| | F. Sabac | S. Hilton | Total |
| Capital, January 1, 2017 | | $ 16,500 | $ 12,300 | $ 28,800 |
| Add: Investments | | | 5,600 | 5,600 |
| Profit | | 94,600 | 47,300 | 141,900 |
| | 111,100 | 65,200 | 176,300 |
| Less: Drawings | | 50,000 | 50,000 | 100,000 |
| Capital, December 31, 2017 | | $ 61,100 | $ 15,200 | $ 76,300 |
| | | | | |
| Calculations: | | | | | |
| Profit: | | |
| $141,900 x 2/3 = $94,600; $141,900 x 1/3 = $47,300 | | | |
| | | | | | | |
b)
Green Solutions
Partial Balance Sheet
December 31, 2017 |
| Liabilities and Partners’ Equity |
| Partners’ equity | | | | |
| F. Sabac, capital | | | $ 61,100 | |
| S. Hilton, capital | | | 15,200 | 76,300 |
Bloomcode: Application
Difficulty: Medium
Learning Objective: Allocate and record profit or loss to partners.
Section Reference: Dividing Partnership Profit or Loss
CPA: Financial Reporting
Exercise 15
At September 30, 2017, C. Saber and J. Wong, the two partners of City Landscaping, had capital account balances of $25,000 each. D. Walker joined the partnership on September 30, 2017 and received a 1/3 interest in the partnership in exchange for a capital contribution of $40,000.
For the year ended September 30, 2018, City Landscaping had profit of $126,000, which is allocated equally to the three partners. Withdrawals during the year were $18,000 each by Saber and Wong, and $14,000 by Walker.
Instructions
- a) Record the transaction on September 30, 2017 admitting Walker into the partnership.
- b) Calculate the balance of each partner’s capital account after the transaction.
- c) Prepare the Statement of Partners’ Equity for the year ended September 20, 2018.
Solution 15 (20 min.)
a)
Cash………………………………………………………………………………………….. 40,000
- Walker, Capital…………………………………………………………………. 30,000
- Saber, Capital…………………………………………………………………… 5,000
- Wong, Capital……………………………………………………………………. 5,000
Calculations
Total capital of existing partnership ($25,000 x 2)……………………………. $ 50,000
Investment by new partner, D. Walker…………………………………………… 40,000
Total capital of new partnership…………………………………………………….. $ 90,000
- Walker’s share of equity ($90,000 x 1/ 3)…………………………………… $ 30,000
Bonus [($40,000 – $30,000) x 50%] each to Saber and Wong………….. $5,000 each
b)
Capital accounts after admission of D. Walker:
- Walker (calculated in part a)………………………………………………. $30,000
- Saber and J. Wong (each) ($25,000 + $5,000)…………………….. 30,000
c)
City Landscaping
Statement of Partners’ Equity
Year ended September 30, 2018 |
| | | | |
| C. Saber | J. Wong | D. Walker | Total |
| Capital, Oct 1, 2017 | $ 30,000 | $ 30,000 | $ 30,000 | $ 90,000 |
| Add: Profit | 42,000 | 42,000 | 42,000 | 126,000 |
| 72,000 | 72,000 | 72,000 | 216,000 |
| Less: Drawings | 18,000 | 18,000 | 14,000 | 50,000 |
| Capital, Sep 30, 2018 | $ 54,000 | $ 54,000 | $ 58,000 | $ 166,000 |
Bloomcode: Application
Difficulty: Medium
Learning Objective: Prepare partnership financial statements.
Section Reference: Partnership Financial Statements
Learning Objective: Account for the admission of a partner.
Section Reference: Admission and Withdrawal of a Partner
CPA: Financial Reporting
Exercise 16
The following information is available regarding CGG Company’s partnership accounts at December 31, 2017, before completion of the closing entries:
- Choudrey, Capital…………………………………………………………… $ 70,000
- Gilker, Capital………………………………………………………………… 45,000
- Godfrey, Capital……………………………………………………………… 20,000
- Choudrey, Drawings……………………………………………………….. 50,000
- Gilker, Drawings…………………………………………………………….. 28,000
- Godfrey, Drawings………………………………………………………….. 35,000
Income Summary (shared equally among partners)……………….. 180,000
No new contributions were made during 2017. Godfrey wishes to withdraw from the partnership January 1, 2018.
Instructions
- a) Prepare the statement of partners’ equity for the year ended December 31, 2017.
- b) Prepare the January 1, 2018 entry to record Godfrey’s withdrawal under each of the following three independent alternatives:
(i) Choudrey and Gilker each pay Godfrey $10,000 out of their personal accounts and each receives one-half of Godfrey’s equity.
(ii) Godfrey is paid $100,000 out of partnership cash.
(iii) Godfrey is paid $40,000 out of partnership cash.
Solution 16 (20 min.)
a)
CGG Company
Statement of Partners’ Equity
Year ended December 31, 2017 |
| A. Choudrey | N. Gilker | R. Godfrey | Total |
| Capital, Jan 1, 2017 | $ 70,000 | $ 45,000 | $ 20,000 | $ 135,000 |
| Profit | 60,000 | 60,000 | 60,000 | 180,000 |
| 130,000 | 105,000 | 80,000 | 315,000 |
| Less: Drawings | 50,000 | 28,000 | 35,000 | 113,000 |
| Capital, Dec 31, 2017 | $ 80,000 | $ 77,000 | $ 45,000 | $ 202,000 |
- b) (i)
- Godfrey, Capital……………………………………………………………………… 45,000
- Choudrey ($45,000 x ½)……………………………………………………. 22,500
- Gilker………………………………………………………………………………. 22,500
- b) (ii)
- Godfrey, Capital……………………………………………………………………… 45,000
- Choudrey, Capital ($100,000 – 45,000) x ½……………………………….. 27,500
- Gilker, Capital…………………………………………………………………………. 27,500
Cash……………………………………………………………………………………. 100,000
- b) (iii)
- Godfrey, Capital……………………………………………………………………… 45,000
- Choudrey, Capital ($40,000 – $45,000) x ½…………………………. 2,500
- GIlker, Capital…………………………………………………………………… 2,500
Cash……………………………………………………………………………………. 40,000
Bloomcode: Application
Difficulty: Medium
Learning Objective: Prepare partnership financial statements.
Section Reference: Partnership Financial Statements
Learning Objective: Account for the withdrawal of a partner.
Section Reference: Withdrawal of a Partner
CPA: Financial Reporting
Exercise 17
Connie Knox and Andrea Cardoza have capital accounts of $360,000 and $280,000, respectively. Bob Lee and Mike McClure are to join the partnership. Lee invests $55,000 in the partnership for which he receives a capital credit of $55,000. McClure purchases a one-half interest from Knox for $230,000 and a one-fourth interest from Cardoza for $100,000.
Instructions
- a) Prepare the journal entries to record the admission of Lee and McClure to the partnership.
- b) Determine the capital balances of the partners after the admission of Lee and McClure.
Solution 17 (10 min.)
- a) Cash……………………………………………………………………………………. 55,000
Bob Lee, Capital……………………………………………………………… 55,000
Connie Knox, Capital…………………………………………………………….. 180,000
Andrea Cardoza, Capital………………………………………………………… 70,000
Mike McClure, Capital…………………………………………………….. 250,000
- b) Connie Knox ($360,000 – $180,000)……………………………………….. $180,000
Andrea Cardoza ($280,000 – $70,000)…………………………………….. 210,000
Bob Lee……………………………………………………………………………….. 55,000
Mike McClure……………………………………………………………………….. 250,000
Total Capital…………………………………………………………………… $695,000
Bloomcode: Application
Difficulty: Easy
Learning Objective: Account for the admission of a partner.
Section Reference: Admission and Withdrawal of a Partner
CPA: Financial Reporting
Exercise 18
Jackie Thompson and Rick Chung are partners who share profit on a 3:2 basis, and on July 1, their capital account balances are $165,000 and $136,000 respectively. On July 1, Betty Lo is admitted to the partnership.
Instructions
Prepare the entry to record Betty’s admission to the partnership under the following independent situations:
- a) Betty purchases 50% of Jackie’s partnership interest from him for $115,000.
- b) Betty purchases a 1/3 interest in the partnership by contributing cash of $96,500.
- c) Betty purchases a 1/3 interest in the partnership by contributing cash of $167,900.
Solution 18 (15 min.)
a)
- Thompson, Capital ($165,000 × 50%)………………………………………… 82,500
- Lo, Capital………………………………………………………………………… 82,500
To record admission of Lo by purchase
b)
Cash………………………………………………………………………………………….. 96,500
- Thompson, Capital…………………………………………………………………… 21,600
- Chung, Capital………………………………………………………………………… 14,400
- Lo, Capital………………………………………………………………………… 132,500
Calculations
Total capital of existing partnership ($165,000 + $136,000)………………. $301,000
Investment by new partner, B. Lo………………………………………………….. 96,500
Total capital of new partnership…………………………………………………….. $397,500
New partner’s capital credit ($397,500 x 1/ 3)…………………………………. $132,500
Bonus to new partner ($132,500 – $96,500)……………………………………. $36,000
Allocate bonus to new partner B. Lo:
- Thompson ($36,000 x 3÷ 5)………………………………………………… $21,600
- Chung ($36,000 x 2÷ 5)……………………………………………………… 14,400 $36,000
c)
Cash………………………………………………………………………………………….. 167,900
- Thompson, Capital…………………………………………………………….. 6,960
- Chung, Capital………………………………………………………………….. 4,640
- Lo, Capital………………………………………………………………………… 156,300
Calculations:
Total capital of existing partnership ($165,000 + $136,000)………………. $301,000
Investment by new partner, B. Lo………………………………………………….. 167,900
Total capital of new partnership…………………………………………………….. $468,900
New partner’s capital credit ($468,900 x 1/3)………………………………….. $156,300
Bonus to existing partners ($167,900 – $156,300)…………………………… $11,600
Allocate bonus to existing partners:
- Thompson ($11,600 x 3÷ 5)………………………………………………… $6,960
- Chung ($11,600x 2÷ 5)………………………………………………………. 4,640 $11,600
Bloomcode: Application
Difficulty: Hard
Learning Objective: Account for the admission of a partner.
Section Reference: Admission and Withdrawal of a Partner
CPA: Financial Reporting
Exercise 19
Tim Tarrant and Jim Edmonds share partnership profit on a 3:2 basis. They have capital balances of $170,000 and $90,000, respectively, when JT Ryder is admitted to the partnership.
Instructions
Prepare the journal entry to record the admission of Ryder under each of the following assumptions:
- a) Ryder invests $100,000 for a 25% ownership interest.
- b) Ryder invests $40,000 for a 25% ownership interest.
- c) Ryder invests an amount that gives him a 20% ownership interest.
Solution 19 (20 min.)
- a) Cash……………………………………………………………………………………. 100,000
J.T. Ryder, Capital………………………………………………………….. 90,000
- Tarrant, Capital (3÷ 5 × $10,000)………………………………….. 6,000
- Edmonds (2÷ 5 × $10,000)…………………………………………… 4,000
Total capital of existing partnership………………………. ……………….. $260,000
Investment by new partner, Ryder……………………….. ……………… 100,000
Total capital of new partnership……………………………. ……………….. $360,000
Ryder ‘s capital credit ($360,000 × 25%)………………. ……………….. $ 90,000
Investment by new partner, Ryder……………………….. ……………….. $100,000
Ryder’s capital credit………………………………………….. ……………….. 90,000
Bonus to existing partners……………………………………. ……………….. $ 10,000
- b) Cash……………………………………………………………………………………. 40,000
- Tarrant, Capital ($35,000 × 3÷ 5)…………………………………………. 21,000
- Edmonds ($35,000 × 2÷ 5)…………………………………………………. 14,000
J.T. Ryder, Capital………………………………………………………….. 75,000
Total capital of existing partnership………………………………………….. $260,000
Investment by new partner, Ryder………………………………………….. 40,000
Total capital of new partnership………………………………………………. $300,000
Ryder’s capital credit ($300,000 × 25%)…………………………………… $ 75,000
Investment by new partner, Ryder………………………………………….. $ 40,000
Ryder’s capital credit……………………………………………………………… 75,000
Bonus to Ryder…………………………………………………………………….. (35,000)
- c) Cash……………………………………………………………………………………. 65,000
J.T. Ryder, Capital………………………………………………………….. 65,000
$260,000 ÷ 0.80 = $325,000; $325,000 – $260,000 = $65,000
Bloomcode: Application
Difficulty: Hard
Learning Objective: Account for the admission of a partner.
Section Reference: Admission and Withdrawal of a Partner
CPA: Financial Reporting
Exercise 20
The Felix and Morris Partnership has capital account balances as follows:
Felix, Capital……………………………………….. … $145,000
Morris, Capital…………………………………….. ….. 160,000
The partners share profit and losses in the ratio of 60% to Felix and 40% to Morris.
Instructions
Prepare the journal entry on the books of the partnership to record the admission of Singh as a new partner under the following three independent circumstances:
- a) Singh pays $80,000 to Felix and $95,000 to Morris for one-half of each of their ownership interests in a personal transaction.
- b) Singh invests $150,000 in the partnership for a one-third interest in partnership capital.
- c) Singh invests $1,000,000 in the partnership for a one-third interest in partnership capital.
Solution 20 (20 min.)
- a) Felix, Capital ($145,000 × 50%)………………………………………………. 72,500
Morris, Capital ($160,000 × 50%)……………………………………………. 80,000
Singh, Capital…………………………………………………………………. 152,500
To record admission of Singh by purchase
Total net assets and total capital of the partnership do not change.
- b) Cash……………………………………………………………………………………. 150,000
Felix, Capital…………………………………………………………………………. 1,000
Morris, Capital………………………………………………………………………. 667
Singh, Capital…………………………………………………………………. 151,667
To record admission of Singh and bonus to old partners
Total capital of existing partnership ($145,000 + $160,000)………… $305,000
Investment by new partner, Singh…………………………………………… 150,000
Total capital of new partnership………………………………………………. $455,000
Singh’s capital credit = $455,000 × 1/ 3 = $151,667
Singh’s investment………………………………………………………….. $150,000
Singh’s capital credit……………………………………………………….. 151,667
Bonus to new partner………………………………………………………. $ 1,667
Allocation bonus to new partner:
Felix (60% × $1,667)……………………………………………………….. $1,000
Morris (40% × $1,667)…………………………………………………….. 667
$1,667
- c) Cash……………………………………………………………………………………. 1,000,000
Felix, Capital…………………………………………………………………………. 339,000
Morris, Capital………………………………………………………………………. 226,000
Singh, Capital…………………………………………………………………. 435,000
To record Singh’s admission and bonus
Total capital of existing partnership ($145,000 + $160,000)………… $ 305,000
Investment by new partner, Singh…………………………………………… 1,000,000
Total capital of new partnership………………………………………………. $1,305,000
Singh’s capital credit = $1,305,000 × 1/ 3 =………………………………. $435,000
Bonus to existing partners ($1,000,000 – $435,000) =……………….. $565,000
Allocation to existing partners
Felix ($565,000 × 60%)……………………………………………………. $339,000
Morris ($565,000 × 40%)…………………………………………………. 226,000
$565,000
Bloomcode: Application
Difficulty: Hard
Learning Objective: Account for the admission of a partner.
Section Reference: Admission and Withdrawal of a Partner
CPA: Financial Reporting
Exercise 21
Donna Karr, Alice Wright, and Nancy Shaffer have capital balances of $100,000, $70,000, and $50,000, respectively, and they share profit on a 4:3:3 basis.
Instructions
Journalize the withdrawal of Wright from the partnership under each of the following circumstances:
- a) Wright is paid $70,000 in cash from partnership assets.
- b) Wright is paid $77,000 in cash from partnership assets.
- c) Wright is paid $49,000 in cash from partnership assets.
Solution 21 (10 min.)
- a) Wright, Capital………………………………………………………………….. 70,000
Cash……………………………………………………………………………… 70,000
- b) Wright, Capital………………………………………………………………….. 70,000
- Karr, Capital (4 ÷ 7 × $7,000)……………………………………………… 4,000
- Shaffer, Capital (3 ÷ 7 × $7,000)…………………………………………. 3,000
Cash……………………………………………………………………………… 77,000
- c) Wright, Capital………………………………………………………………….. 70,000
- Karr, Capital (4 ÷ 7 × $21,000)……………………………………… 12,000
- Shaffer, Capital (3 ÷ 7 × $21,000)………………………………… 9,000
Cash……………………………………………………………………………… 49,000
Bloomcode: Application
Difficulty: Easy
Learning Objective: Account for the withdrawal of a partner.
Section Reference: Withdrawal of a Partner
CPA: Financial Reporting
Exercise 22
Julie Ellis, Sara Lake, and Dan Madden have capital balances of $54,000, $82,000, and $36,000, respectively, and their profit ratios are 4:2:4.
Instructions
Record the withdrawal of Madden from the partnership under each of the following assumptions:
- a) Madden is paid $36,000 from partnership assets.
- b) Madden is paid $48,000 from partnership assets.
- c) Madden is paid $27,000 from partnership assets.
Solution 22 (10 min.)
- a) Madden, Capital……………………………………………………………….. 36,000
Cash……………………………………………………………………………… 36,000
- b) Madden, Capital……………………………………………………………….. 36,000
- Ellis, Capital ($12,000 × 4 ÷ 6)…………………………………………….. 8,000
- Lake, Capital ($12,000 × 2 ÷ 6)…………………………………………… 4,000
Cash……………………………………………………………………………… 48,000
- c) Madden, Capital……………………………………………………………….. 36,000
- Ellis, Capital ($9,000 × 4 ÷ 6)………………………………………… 6,000
- Lake, Capital ($9,000 × 2 ÷ 6)………………………………………. 3,000
Cash……………………………………………………………………………… 27,000
Bloomcode: Application
Difficulty: Easy
Learning Objective: Account for the withdrawal of a partner.
Section Reference: Withdrawal of a Partner
CPA: Financial Reporting
Exercise 23
Baker, Gregg, and Stine share profit and losses in a ratio of 4:1:5 respectively. The capital account balances of the partners are as follows:
Baker, Capital……………………………………… … $150,000
Gregg, Capital…………………………………….. ……. 90,000
Stine, Capital………………………………………. ……. 60,000
Instructions
Prepare the journal entry on the books of the partnership to record the withdrawal of Stine under the following independent circumstances:
- a) The partners agree that Stine should be paid $70,000 by the partnership for his interest.
- b) The partners agree that Stine should be paid $45,000 by the partnership for his interest.
- c) Baker agrees to pay Stine $40,000 for one-half of his capital interest and Gregg agrees to pay Stine $40,000 for one-half of his capital interest in a personal transaction among the partners.
Solution 23 (15 min.)
- a) Stine, Capital………………………………………………………………………… 60,000
Baker, Capital……………………………………………………………………….. 8,000
Gregg, Capital………………………………………………………………………. 2,000
Cash……………………………………………………………………………… 70,000
To record withdrawal and bonus to Stine
Bonus to Stine $10,000 ($70,000 – $60,000)
Allocation to reduce remaining partners’ capital:
Baker (4 ÷ 5 × $10,000)…………………………………………………………. $ 8,000
Gregg (1 ÷ 5 × $10,000)…………………………………………………………. 2,000
$10,000
- b) Stine, Capital………………………………………………………………………… 60,000
Baker, Capital………………………………………………………………… 12,000
Gregg, Capital………………………………………………………………… 3,000
Cash……………………………………………………………………………… 45,000
To record withdrawal of Stine and bonus to remaining partners
Bonus to remaining partners $15,000 ($60,000 – $45,000)
Allocation to increase remaining partners’ capital:
Baker (4 ÷ 5 × $15,000)…………………………………………………………. $12,000
Gregg (1 ÷ 5 × $15,000)…………………………………………………………. 3,000
$15,000
- c) Stine, Capital………………………………………………………………………… 60,000
Baker, Capital………………………………………………………………… 30,000
Gregg, Capital………………………………………………………………… 30,000
To record withdrawal of Stine
Total net assets and total capital of the partnership do not change.
Bloomcode: Application
Difficulty: Medium
Learning Objective: Account for the withdrawal of a partner.
Section Reference: Withdrawal of a Partner
CPA: Financial Reporting
Exercise 24
Jabar Hassan, Mohammed Badoo, and Sanji Patel have capital balances of $650,000, $500,000, and $425,000, respectively, and they share profit on a 5:3:2 basis.
Instructions
Journalize the withdrawal of Sanji from the partnership under each of the following circumstances:
- a) Sanji is paid $425,000 in cash from partnership assets.
- b) Sanji is paid $450,000 in cash from partnership assets.
- c) Sanji is paid $400,000 in cash from partnership assets.
Solution 24 (10 min.)
- a) Patel, Capital…………………………………………………………………….. 425,000
Cash……………………………………………………………………………… 425,000
- b) Patel, Capital…………………………………………………………………….. 425,000
- Hassan, Capital (5 ÷ 8 × $25,000)……………………………………….. 15,625
- Badoo, Capital (3 ÷ 8 × $25,000)………………………………………… 9,375
Cash……………………………………………………………………………… 450,000
- c) Patel, Capital…………………………………………………………………….. 425,000
- Hassan, Capital (5 ÷ 8 × $25,000)…………………………………. 15,625
- Badoo, Capital (3 ÷ 8 × $25,000)………………………………….. 9,375
Cash……………………………………………………………………………… 400,000
Bloomcode: Application
Difficulty: Easy
Learning Objective: Account for the withdrawal of a partner.
Section Reference: Withdrawal of a Partner
CPA: Financial Reporting
Exercise 25
At June 30, Fine Balance Partnership is liquidated. Just before the liquidation, Fine Balance has cash of $2,800, equipment of $45,000, accumulated depreciation of $31,000, accounts payable of $6,000, and the following partner capital accounts: R. Mistry $9,000; M. Mohal $1,800. Partners share in profit or losses equally. Upon liquidation, the equipment is sold for $10,000 cash, the accounts payable are paid in full, and any remaining cash is distributed to the partners. If a partner’s capital account is in a deficit balance, he or she will contribute the necessary cash to the partnership to cover it.
Instructions
Calculate how much cash will be paid to, or received from, each partner upon liquidation.
Solution 25 (5 min.)
Proceeds of sale of equipment……………………………………………………… $ 10,000
Less net book value ($45,000 – $31,000)……………………………………….. (14,000)
Loss on sale of equipment……………………………………………………………. $(4,000)
Cash available for distribution:
Beginning cash……………………………………………………………………………. $ 2,800
Sale of equipment……………………………………………………………………….. 10,000
Payment of accounts payable………………………………………………………. (6,000)
Cash available…………………………………………………………………………….. $6,800
Capital accounts after allocation of loss, and amounts to paid/received:
- Mistry $9,000 – ($4,000 x ½) will receive…………………………………… $7,000
- Mohal $1,800 – ($4,000 x ½) deficiency to be paid…………………….. (200)
Net cash distributed (received)……………………………………………………… $6,800
Bloomcode: Application
Difficulty: Medium
Learning Objective: Account for the liquidation of a partnership.
Section Reference: Liquidation of a Partnership
CPA: Financial Reporting
Exercise 26
The RAD Partnership is to be liquidated, the ledger shows the following:
Cash………………………………………………….. ….. $15,000
Noncash Assets………………………………….. ……. 80,000
Liabilities…………………………………………….. ……. 20,000
Reed, Capital………………………………………. ……. 30,000
Ales, Capital……………………………………….. ……. 40,000
Dent, Capital……………………………………….. ……… 5,000
Reed, Ales, and Dent’s profit ratios are 6:3:1 respectively.
Instructions
Prepare separate entries to record the liquidation of the partnership assuming that the noncash assets are sold for $50,000 in cash.
Solution 26 (15 min.)
Cash……………………………………………………………………………………. 50,000
Loss on Realization……………………………………………………………….. 30,000
Noncash Assets……………………………………………………………… 80,000
Reed, Capital ($30,000 × 6 ÷ 10)…………………………………………….. 18,000
Ales, Capital ($30,000 × 3 ÷ 10)………………………………………………. 9,000
Dent, Capital ($30,000 × 1 ÷ 10)……………………………………………… 3,000
Loss on Realization…………………………………………………………. 30,000
Liabilities………………………………………………………………………………. 20,000
Cash……………………………………………………………………………… 20,000
Reed, Capital ($30,000 – $18,000)………………………………………….. 12,000
Ales, Capital ($40,000 – $9,000)……………………………………………… 31,000
Dent, Capital ($5,000 – $3,000)………………………………………………. 2,000
Cash ($15,000 + $50,000 – $20,000)………………………………… 45,000
Bloomcode: Application
Difficulty: Medium
Learning Objective: Account for the liquidation of a partnership.
Section Reference: Liquidation of a Partnership
CPA: Financial Reporting
Exercise 27
The ABC Partnership is to be liquidated and you have been hired to prepare a Schedule of Cash Payments for the partnership. Partners A, B, and C share profit and losses in the ratio of 6:2:2 respectively. Assume the following:
- Equipment was sold for $80,000.
- Liabilities were paid in full.
- The remaining cash was distributed to the partners. (If any partner has a capital deficiency, assume that the partner is unable to make up the capital deficiency.)
ABC PARTNERSHIP
Trial Balance Immediately Prior to Liquidation
…… Cash……………………………………………………………………………………. $ 10,000
…… Equipment …………………………………………………………………………… 120,000
…… Liabilities………………………………………………………………………………. $ 35,000
…… A, Capital……………………………………………………………………………… 21,000
…… B, Capital……………………………………………………………………………… 38,000
…… C, Capital……………………………………………………………………………… 36,000
$130,000 $130,000
Instructions
Using the above information, calculate the following:
- a) Cash available to be distributed to all partners.
- b) Any gain or loss on sale of noncash assets.
- c) The amount of cash to be received by each partner upon liquidation.
Solution 27 (15 min.)
- a) Cash to be distributed
Beginning balance…………………………………………………………………. $10,000
Proceeds from sale of equipment……………………………………………. 80,000
90,000
Less: Payment of liabilities……………………………………………………… 35,000
Cash to be distributed to partners…………………………………………….. $55,000
- b) Loss on sale of equipment
Carrying amount……………………………………………………………………. $120,000
Proceeds………………………………………………………………………………. 80,000
Loss on disposal…………………………………………………………………….. $ 40,000
- c) Distribution to partners
A, Capital B, Capital C, Capital Total
Beginning balance $21,000 $38,000 $36,000 $95,000
Less: Share of loss of equipment (24,000) (8,000) (8,000) (40,000)
(3,000) 30,000 28,000 55,000
Allocation of capital deficiency 3,000 (1,500) (1,500) _______
Cash to be distributed to each partner _______0 $28,500 $26,500 $55,000
Share of Loss A 6/10 × $(40,000) = $(24,000)
B 2/10 × $(40,000) = (8,000)
C 2/10 × $(40,000) = (8,000)
$(40,000)
Bloomcode: Application
Difficulty: Hard
Learning Objective: Account for the liquidation of a partnership.
Section Reference: Liquidation of a Partnership
CPA: Financial Reporting
Exercise 28
Sam Bilbo and Edmond Lewis who operate the Shire Partnership have decided to liquidate their business and retire. Sam and Edmond allocate profit and losses on a 3:2 basis respectively. At December 31, 2016, after all closing entries have been made, the trial balance of the partnership shows the following account balances:
Cash………………………………………………………………………………………….. $ 2,000
Merchandise inventory…………………………………………………………………. 52,000
Accounts payable………………………………………………………………………… $ 8,000
Bank loan…………………………………………………………………………………… 15,000
- Bilbo, Capital…………………………………………………………………………… 26,000
- Lewis, Capital………………………………………………………………………….. 5,000
The inventory is sold on January 1, 2017 for cash, and the liabilities are paid. Both partners have the resources to cover deficits (if any) in their capital accounts.
Instructions
For each of the following independent alternatives:
- a) Assuming the inventory is sold for $25,000, calculate the balance in each partner’s capital account after allocating the gain or loss on sale of inventory and payment of the liabilities. Prepare the entry to record the receipt of cash from, or payment of cash to, each partner to liquidate the partnership.
- b) Assuming the inventory is sold for $57,000, calculate the balance in each partner’s capital account after allocating the gain or loss on sale of inventory and payment of the liabilities. Prepare the entry to record the receipt of cash from, or payment of cash to, each partner to liquidate the partnership.
Solution 28 (20 min.)
a)
Proceeds on sale of inventory………………………………………………………. $25,000
Cost…………………………………………………………………………………………… (52,000)
Loss on sale………………………………………………………………………………… $27,000
Capital account balances after recording of loss:
- Bilbo $26,000 – (3/5 x $27,000)…………………………………………… $9,800
- Lewis $5,000 – (2/5 x $27,000)…………………………………………… (5,800)
Cash available before transaction ($2,000 + 25,000 – 8,000 – 15,000 = $4,000)
Cash………………………………………………………………………………………….. 5,800
- Lewis, Capital……………………………………………………………………. 5,800
- Bilbo, Capital…………………………………………………………………………… 9,800
Cash……………………………………………………………………………………. 9,800
b)
Proceeds on sale of inventory………………………………………………………. $57,000
Cost…………………………………………………………………………………………… (52,000)
Gain on sale……………………………………………………………………………….. $ 5,000
Capital account balances after recording of gain:
- Bilbo $26,000 + (3/5 x $5,000)……………………………………………. $ 29,000
- Lewis $5,000 + (2/5 x $5,000)…………………………………………….. 7,000
Cash available before transaction ($2,000 + 57,000 – 8,000 – 15,000) = $36,000
- Bilbo, Capital…………………………………………………………………………… 29,000
- Lewis, Capital………………………………………………………………………….. 7,000
Cash……………………………………………………………………………………. 36,000
Bloomcode: Application
Difficulty: Hard
Learning Objective: Account for the liquidation of a partnership.
Section Reference: Liquidation of a Partnership
CPA: Financial Reporting
