Accounting Principles 7Th Canadian Edition Volume 2 By Jerry J. Weygandt

$25.00

Category:

Description

Purchase For download full PDF With answers

 

Sample CHAPTER 12

 

Accounting for partnerships

 

CHAPTER STUDY OBJECTIVES

 

 

  1. 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.

 

 

  1. 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.

 

 

  1. 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.

 

 

  1. 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.

 

 

  1. 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.

 

 

  1. 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.

 

 

  1. 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

  1. 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

  1. 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

  1. 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.

  1. 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

  1. Furlong, Capital…………………………………………..                            62,500

 

1     Cash……………………………………………………………………..         10,000

Accounts Receivable………………………………………………           6,000

Office Furniture………………………………………………………         24,000

Allowance for Doubtful Accounts……………………..                              1,500

  1. Pippy, Capital……………………………………………. 38,500

 

(2)

Dec 31     S. Furlong, Capital…………………………………………………..           9,750

  1. Pippy, Capital……………………………………………………. 9,750

Income Summary…………………………………………..                            19,500

 

(3)   2017

Jan    1     S. Furlong, Capital [$62,500 – $9,750) × 30%]……………         15,825

  1. Adams, Capital………………………………………….. 15,825

 

1     M. Pippy, Capital [($38,500 – $9,750) × 20%]…………….           5,750

  1. 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

  1. 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.

  1. 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

  1. Nero, Capital……………………………………………… 185,000
  2. Piper, Capital…………………………………………….. 185,000

 

(2)

Dec 31     Income Summary…………………………………………………..         28,000

  1. Nero, Capital………………………………………………                            14,000
  2. 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

  1. Smith, Capital…………………………………………….. 140,750
  2. Nero, Capital………………………………………………                            12,125
  3. 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

  1. a) Prepare the journal entry to record the two partners’ contributions on January 1, 2017.
  2. 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

  1. Baer, Capital……………………………………………………………………. 10,500
  2. Choo, Capital…………………………………………………………………….. 10,500

 

  1. 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:

  1. A salary allowance of $30,000 to Brewer and $15,000 to Tony.
  2. An interest allowance of 10% on capital balances at the beginning of the year.
  3. 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

  1. a) Calculate each partner’s share of profit assuming that profit for the year ended December 31, 2017 is $196,000.
  2. 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.)

  1. a) Profit is $80,000 and the profit ratio is Laroche 40%, Kennedy 35%, and White 25%.
  2. 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.
  3. 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:

  1. A salary allowance of $310,000 to Kirby and $250,000 to Simon.
  2. The remainder is to be divided equally.

 

Instructions

  1. a) Prepare a schedule which shows the division of profit to each partner.
  2. b) Prepare the closing entries for the division of profit and for the drawings accounts at December 31, 2017.

 

Solution 9 (15 min.)
  1. 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

 

  1. 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

  1. a) Prepare a schedule that shows the division of profit to each partner.
  2. b) Prepare the closing entries at December 31, 2017, for the Art World partnership.
  3. c) Prepare a statement of partners’ equity for 2017.

 

Solution 10 (15 min.)

  1. 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

 

  1. b) Sales……………………………………………………………………………………. 850,000

Expenses……………………………………………………………………….                          520,000

Income Summary……………………………………………………………                          330,000

Income Summary………………………………………………………………….       330,000

  1. Spade, Capital……………………………………………………………. 132,000
  2. Lundy, Capital…………………………………………………………….. 198,000
  3. Spade, Capital………………………………………………………………….. 16,000
  4. Lundy, Capital…………………………………………………………………… 22,000
  5. Spade, Drawings………………………………………………………… 16,000
  6. Lundy, Drawings…………………………………………………………. 22,000

 

c)

Art World Partnership

Statement of Partners’ Equity

Year Ended December 31, 2017

  1. 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

  1. a) Prepare the Statement of Partners’ Equity for the year ended June 30, 2017.
  2. b) Prepare a partial balance sheet at June 30, 2017, showing the Partners’ Equity section.
  3. 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

  1. Zhou, Capital……………………………………………………………………..         81,600
  2. Higgins, Capital………………………………………………………………….         61,200
  3. O’Neill, Capital……………………………………………………………………         61,200

 

  1. Zhou, Capital…………………………………………………………………………… 70,000
  2. Higgins, Capital……………………………………………………………………….. 50,000
  3. O’Neill, Capital…………………………………………………………………………. 25,000
  4. Zhou, Drawings………………………………………………………………….         70,000
  5. Higgins, Drawings………………………………………………………………         50,000
  6. 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

  1. a) Prepare a schedule that shows the division of profit to each partner.
  2. b) Prepare the closing entries at December 31, 2017, for the MCJW partnership.
  3. c) Prepare a statement of partners’ equity for 2017.

 

Solution 12 (15 min.)

  1. 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

 

  1. b) Sales……………………………………………………………………………………. 300,000

Expenses……………………………………………………………………….                          220,000

Income Summary……………………………………………………………                            80,000

Income Summary………………………………………………………………….         80,000

  1. Cummerford, Capital………………………………………………….. 52,500
  2. Wheeler, Capital………………………………………………………….. 27,500
  3. Cummerford, Capital………………………………………………………… 30,000
  4. Wheeler, Capital………………………………………………………………… 34,000
  5. Cummerford, Drawings………………………………………………. 30,000
  6. Wheeler, Drawings………………………………………………………. 34,000

 

c)

MCJW Partnership

Statement of Partners’ Equity

Year Ended December 31, 2017

  1. 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:

  1. a) The allocation of the loss to the partners on December 31, 2017.
  2. b) The closing of the drawings accounts on December 31, 2017.
  3. c) The liquidation of the partnership on January 1, 2018.

 

Solution 13 (15 min.)

a)

2017

Dec    31       J. Harris, Capital……………………………………………………….           7,000

  1. Gosse, Capital…………………………………………………….. 7,000
  2. Ryan, Capital……………………………………………………….. 7,000

Income Summary…………………………………………….                            21,000

 

b)

Dec    31       J. Harris, Capital……………………………………………………….         80,000

  1. Gosse, Capital…………………………………………………….. 140,000
  2. Harris, Drawings…………………………………………… 80,000
  3. 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

  1. Gosse, Capital…………………………………………………….. 12,000
  2. Ryan, Capital……………………………………………………….. 12,000

Loss on Realization……………………………………………..                            36,000

 

1       Accounts Payable……………………………………………………..         46,000

Cash………………………………………………………………….                            46,000

 

1       J. Harris, Capital……………………………………………………….         21,000

  1. Gosse, Capital…………………………………………………….. 21,000
  2. 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

  1. a) Prepare the statement of partners’ equity for the year ended December 31, 2017.
  2. 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

  1. a) Record the transaction on September 30, 2017 admitting Walker into the partnership.
  2. b) Calculate the balance of each partner’s capital account after the transaction.
  3. c) Prepare the Statement of Partners’ Equity for the year ended September 20, 2018.

 

Solution 15 (20 min.)

a)

Cash…………………………………………………………………………………………..         40,000

  1. Walker, Capital…………………………………………………………………. 30,000
  2. Saber, Capital…………………………………………………………………… 5,000
  3. 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

 

  1. 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:

  1. Walker (calculated in part a)………………………………………………. $30,000
  2. 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:

  1. Choudrey, Capital…………………………………………………………… $ 70,000
  2. Gilker, Capital………………………………………………………………… 45,000
  3. Godfrey, Capital……………………………………………………………… 20,000
  4. Choudrey, Drawings……………………………………………………….. 50,000
  5. Gilker, Drawings…………………………………………………………….. 28,000
  6. 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

  1. a) Prepare the statement of partners’ equity for the year ended December 31, 2017.
  2. 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

 

  1. b) (i)
  2. Godfrey, Capital……………………………………………………………………… 45,000
  3. Choudrey ($45,000 x ½)……………………………………………………. 22,500
  4. Gilker………………………………………………………………………………. 22,500

 

  1. b) (ii)
  2. Godfrey, Capital……………………………………………………………………… 45,000
  3. Choudrey, Capital ($100,000 – 45,000) x ½……………………………….. 27,500
  4. Gilker, Capital…………………………………………………………………………. 27,500

Cash…………………………………………………………………………………….                          100,000

 

  1. b) (iii)
  2. Godfrey, Capital……………………………………………………………………… 45,000
  3. Choudrey, Capital ($40,000 – $45,000) x ½…………………………. 2,500
  4. 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

  1. a) Prepare the journal entries to record the admission of Lee and McClure to the partnership.
  2. b) Determine the capital balances of the partners after the admission of Lee and McClure.

 

Solution 17 (10 min.)
  1. a) Cash……………………………………………………………………………………. 55,000

Bob Lee, Capital………………………………………………………………                            55,000

Connie Knox, Capital……………………………………………………………..       180,000

Andrea Cardoza, Capital…………………………………………………………         70,000

Mike McClure, Capital……………………………………………………..                          250,000

 

  1. 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:

  1. a) Betty purchases 50% of Jackie’s partnership interest from him for $115,000.
  2. b) Betty purchases a 1/3 interest in the partnership by contributing cash of $96,500.
  3. c) Betty purchases a 1/3 interest in the partnership by contributing cash of $167,900.

 

Solution 18 (15 min.)

a)

  1. Thompson, Capital ($165,000 × 50%)………………………………………… 82,500
  2. Lo, Capital…………………………………………………………………………         82,500

To record admission of Lo by purchase

b)

Cash…………………………………………………………………………………………..         96,500

  1. Thompson, Capital……………………………………………………………………   21,600
  2. Chung, Capital………………………………………………………………………… 14,400
  3. 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:

  1. Thompson ($36,000 x 3÷ 5)………………………………………………… $21,600
  2. Chung ($36,000 x 2÷ 5)……………………………………………………… 14,400      $36,000

 

c)

Cash…………………………………………………………………………………………..       167,900

  1. Thompson, Capital……………………………………………………………..           6,960
  2. Chung, Capital…………………………………………………………………..           4,640
  3. 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:

  1. Thompson ($11,600 x 3÷ 5)………………………………………………… $6,960
  2. 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:

  1. a) Ryder invests $100,000 for a 25% ownership interest.
  2. b) Ryder invests $40,000 for a 25% ownership interest.
  3. c) Ryder invests an amount that gives him a 20% ownership interest.
Solution 19 (20 min.)
  1. a) Cash……………………………………………………………………………………. 100,000

J.T. Ryder, Capital…………………………………………………………..                            90,000

  1. Tarrant, Capital (3÷ 5 × $10,000)………………………………….. 6,000
  2. 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

 

  1. b) Cash……………………………………………………………………………………. 40,000
  2. Tarrant, Capital ($35,000 × 3÷ 5)…………………………………………. 21,000
  3. 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)

 

  1. 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:

  1. 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.
  2. b) Singh invests $150,000 in the partnership for a one-third interest in partnership capital.
  3. c) Singh invests $1,000,000 in the partnership for a one-third interest in partnership capital.

 

Solution 20 (20 min.)
  1. 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.

 

  1. 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

 

  1. 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:

  1. a) Wright is paid $70,000 in cash from partnership assets.
  2. b) Wright is paid $77,000 in cash from partnership assets.
  3. c) Wright is paid $49,000 in cash from partnership assets.
Solution 21 (10 min.)
  1. a) Wright, Capital………………………………………………………………….. 70,000

Cash………………………………………………………………………………                            70,000

 

  1. b) Wright, Capital………………………………………………………………….. 70,000
  2. Karr, Capital (4 ÷ 7 × $7,000)……………………………………………… 4,000
  3. Shaffer, Capital (3 ÷ 7 × $7,000)…………………………………………. 3,000

Cash………………………………………………………………………………                            77,000

 

  1. c) Wright, Capital………………………………………………………………….. 70,000
  2. Karr, Capital (4 ÷ 7 × $21,000)……………………………………… 12,000
  3. 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:

  1. a) Madden is paid $36,000 from partnership assets.
  2. b) Madden is paid $48,000 from partnership assets.
  3. c) Madden is paid $27,000 from partnership assets.

 

Solution 22 (10 min.)
  1. a) Madden, Capital……………………………………………………………….. 36,000

Cash………………………………………………………………………………                            36,000

 

  1. b) Madden, Capital……………………………………………………………….. 36,000
  2. Ellis, Capital ($12,000 × 4 ÷ 6)…………………………………………….. 8,000
  3. Lake, Capital ($12,000 × 2 ÷ 6)…………………………………………… 4,000

Cash………………………………………………………………………………                            48,000

 

  1. c) Madden, Capital……………………………………………………………….. 36,000
  2. Ellis, Capital ($9,000 × 4 ÷ 6)………………………………………… 6,000
  3. 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:

  1. a) The partners agree that Stine should be paid $70,000 by the partnership for his interest.
  2. b) The partners agree that Stine should be paid $45,000 by the partnership for his interest.
  3. 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.)
  1. 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

 

  1. 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

 

  1. 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:

  1. a) Sanji is paid $425,000 in cash from partnership assets.
  2. b) Sanji is paid $450,000 in cash from partnership assets.
  3. c) Sanji is paid $400,000 in cash from partnership assets.
Solution 24 (10 min.)
  1. a) Patel, Capital…………………………………………………………………….. 425,000

Cash………………………………………………………………………………                          425,000

 

  1. b) Patel, Capital…………………………………………………………………….. 425,000
  2. Hassan, Capital (5 ÷ 8 × $25,000)……………………………………….. 15,625
  3. Badoo, Capital (3 ÷ 8 × $25,000)………………………………………… 9,375

Cash………………………………………………………………………………                          450,000

 

  1. c) Patel, Capital…………………………………………………………………….. 425,000
  2. Hassan, Capital (5 ÷ 8 × $25,000)…………………………………. 15,625
  3. 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:

  1. Mistry $9,000 – ($4,000 x ½) will receive…………………………………… $7,000
  2. 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:

  1. Equipment was sold for $80,000.
  2. Liabilities were paid in full.
  3. 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:

  1. a) Cash available to be distributed to all partners.
  2. b) Any gain or loss on sale of noncash assets.
  3. c) The amount of cash to be received by each partner upon liquidation.

 

Solution 27 (15 min.)
  1. 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

 

  1. b) Loss on sale of equipment

Carrying amount…………………………………………………………………….    $120,000

Proceeds……………………………………………………………………………….        80,000

Loss on disposal……………………………………………………………………..    $  40,000

 

  1. 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

  1. Bilbo, Capital…………………………………………………………………………… 26,000
  2. 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:

  1. 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.
  2. 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:

  1. Bilbo $26,000 – (3/5 x $27,000)…………………………………………… $9,800
  2. 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

  1. Lewis, Capital…………………………………………………………………….           5,800

 

  1. 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:

  1. Bilbo $26,000 + (3/5 x $5,000)……………………………………………. $ 29,000
  2. Lewis $5,000 + (2/5 x $5,000)…………………………………………….. 7,000

 

Cash available before transaction ($2,000 + 57,000 – 8,000 – 15,000) = $36,000

 

  1. Bilbo, Capital…………………………………………………………………………… 29,000
  2. 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

 

 

0.0/5
0 reviews
0
0
0
0
0

There are no reviews yet.

Be the first to review “Accounting Principles 7Th Canadian Edition Volume 2 By Jerry J. Weygandt”