CHAPTER 12

ACCOUNTING FOR PARTNERSHIPS

SUMMARY OF QUESTIONS BY STUDY OBJECTIVES AND BLOOMS TAXONOMY
Item SO BT Item SO BT Item SO BT Item SO BT Item SO BT
True-False Statements
sg
1. 1 K 9. 2 C 17. 3 K 25. 5 K 33. 2 K
a sg
2. 1 K 10. 2 C 18. 3 K 26. 6 K 34. 3 C
a sg
3. 1 K 11. 3 K 19. 4 C 27. 6 C 35. 5 K
a sg,a
4. 1 K 12. 3 K 20. 4 C 28. 6 C 36. 6 K
a sg,a
5. 1 K 13. 3 K 21. 4 K 29. 6 C 37. 7 K
a
6. 2 K 14. 3 K 22. 4 K 30. 7 C
sg
7. 2 AP 15. 3 C 23. 4 K 31. 1 K
sg
8. 2 K 16. 3 K 24. 5 K 32. 1 K
Multiple Choice Questions
a
38. 1 K 63. 3 K 88. 4 K 113. 5 AP 138. 6 C
a
39. 1 K 64. 2 C 89. 4 K 114. 5 AP 139. 6 C
a
40. 1 K 65. 2 AP 90. 4 K 115. 5 AP 140. 7 AP
a
41. 2 K 66. 2 AP 91. 4 C 116. 5 AP 141. 7 AP
a
42. 1 K 67. 2 AP 92. 4 AP 117. 5 AP 142. 7 AP
a
43. 1 K 68. 2 AP 93. 4 AP 118. 5 AP 143. 7 AP
a
44. 1 K 69. 2 AP 94. 4 AP 119. 5 AP 144. 7 C
a
45. 1 K 70. 3 AP 95. 4 AP 120. 5 AP 145. 7 K
a a
46. 1 K 71. 3 AP 96. 4 K 121. 6 AP 146. 7 AP
a a
47. 1 K 72. 3 AP 97. 4 K 122. 6 AP 147. 7 AP
a a
48. 1 K 73. 3 AP 98. 4 K 123. 6 AP 148. 7 AP
a st
49. 1 K 74. 3 AP 99. 5 K 124. 6 AP 149. 1 K
a sg
50. 1 K 75. 3 AP 100. 5 K 125. 6 AP 150. 1 C
a st
51. 1 K 76. 3 AP 101. 5 K 126. 6 AP 151. 2 K
a sg
52. 5 C 77. 3 C 102. 5 AP 127. 6 AP 152. 3 C
a st
53. 3 K 78. 3 K 103. 5 AP 128. 6 AP 153. 3 K
a sg
54. 1 K 79. 3 K 104. 5 AP 129. 6 C 154. 5 K
a st
55. 1 K 80. 3 AP 105. 5 AP 130. 6 C 155. 5 K
a sg
56. 3 K 81. 3 C 106. 5 K 131. 6 AP 156. 5 K
a st
57. 1 AP 82. 3 C 107. 5 C 132. 6 AP 157. 5 K
a sg,a
58. 2 AP 83. 3 C 108. 5 K 133. 6 AP 158. 6 C
a sg.a
59. 2 AP 84. 3 C 109. 5 K 134. 6 C 159. 6 AP
a
60. 2 K 85. 3 AP 110. 5 K 135. 6 C
a
61. 2 C 86. 3 AP 111. 5 K 136. 6 C
a
62. 2 K 87. 3 AP 112. 5 C 137. 6 K
Brief Exercises
a a
160. 2 AP 162. 3 AP 164. 5 AP 166. 6 AP 168. 7 AP
a a
161. 2 AP 163. 4 AP 165. 5 AP 167. 6 AP 169. 7 AP
sg
This question also appears in the Study Guide.
st
This question also appears in a self-test at the student companion website.
a
This question covers a topic in an appendix to the chapter.
12 - 2 Test Bank for Accounting Principles, Ninth Edition

SUMMARY OF QUESTIONS BY STUDY OBJECTIVES AND BLOOMS TAXONOMY

Exercises
a
170. 2 AP 175. 3 AP 180. 4 AP 185. 5 AP 190. 6 AP
a
171. 2 AP 176. 3 AP 181. 5 AP 186. 5 AP 191. 6 AP
a
172. 2 AP 177. 3 AP 182. 4 AP 187. 5 AP 192. 6,7 AP
a a
173. 3 AP 178. 3 AP 183. 5 AP 188. 6 AP 193. 7 AP
a a
174. 3 AP 179. 3,4 AP 184. 5 AP 189. 6 AP 194. 7 AP
Completion Statements
a
195. 1 K 198. 3 K 201. 3 K 204. 6 K
a
196. 1 K 199. 3 K 202. 5 K 205. 6 K
a
197. 1 K 200. 3 K 203. 5 K 206. 6 K
Matching Statements
207. 1 K
Short-Answer Essay
208. 1 S 210. 4 S 212. 1 S
209. 3 S 211. 5 S 213. 1 S

SUMMARY OF STUDY OBJECTIVES BY QUESTION TYPE

Item Type Item Type Item Type Item Type Item Type Item Type Item Type
Study Objective 1
1. TF 31. TF 42. MC 47. MC 52. MC 150. MC 208. SA
2. TF 32. TF 43. MC 48. MC 54. MC 195. C 212. SA
3. TF 38. MC 44. MC 49. MC 55. MC 196. C 213. SA
4. TF 39. MC 45. MC 50. MC 57. MC 197. C
5. TF 40. MC 46. MC 51. MC 149. MC 207. MA
Study Objective 2
6. TF 10. TF 58. MC 62. MC 66. MC 151. MC 171. Ex
7. TF 33. TF 59. MC 63. MC 67. MC 160. BE 172. Ex
8. TF 41. MC 60. MC 64. MC 68. MC 161. BE
9. TF 56. MC 61. MC 65. MC 69. MC 170. Ex
Study Objective 3
11. TF 18. TF 72. MC 79. MC 86. MC 175. Ex 199. C
12. TF 34. TF 73. MC 80. MC 87. MC 176. Ex 200. C
13. TF 53. MC 74. MC 81. MC 152. MC 177. Ex 201. C
14. TF 56. MC 75. MC 82. MC 153. MC 178. Ex 209. SA
15. TF 63. MC 76. MC 83. MC 162. BE 179. Ex
16. TF 70. MC 77. MC 84. MC 173. Ex 187. Ex
17. TF 71. MC 78. MC 85. MC 174. Ex 198. C
Study Objective 4
19. TF 22. TF 89. MC 92. MC 95. MC 98. MC 180. Ex
20. TF 23. TF 90. MC 93. MC 96. MC 163. BE 182. Ex
21. TF 88. MC 91. MC 94. MC 97. MC 179. Ex 210. SA
 Accounting for Partnerships 12 - 3

SUMMARY OF STUDY OBJECTIVES BY QUESTION TYPE

Study Objective 5
24. TF 101. MC 107. MC 113. MC 119. MC 164. BE 186. Ex
25. TF 102. MC 108. MC 114. MC 120. MC 165. BE 187. Ex
35. TF 103. MC 109. MC 115. MC 154. MC 181. Ex 202. C
52. MC 104. MC 110. MC 116. MC 155. MC 183. Ex 203. C
99. MC 105. MC 111. MC 117. MC 156. MC 184. Ex 211. SA
100. MC 106. MC 112. MC 118. MC 157. MC 185. Ex
a
Study Objective 6
a a a
26. TF 122. MC 128. MC a134. MC a158. MC a
190. Ex
a a a
27. TF 123. MC 129. MC a135. MC a159. MC a
191. Ex
a a a
28. TF 124. MC 130. MC a136. MC 166. BE a
192. Ex
a a a
29. TF 125. MC 131. MC a137. MC 167. BE a
204. C
a a a
36. TF 126. MC 132. MC a138. MC a188. Ex a
205. C
a a a
121. MC 127. MC 133. MC a139. MC a189. Ex a
206. C
Study Objective a7
a a a
30. TF 141. MC 144. MC a147. MC a169. BE a
194. Ex
a a a
37. TF 142. MC 145. MC a148. MC a192. Ex
a a a
140. MC 143. MC 146. MC a168. BE a193. Ex

Note: TF = True-False BE = Brief Exercise C = Completion

MC = Multiple Choice Ex = Exercise MA = Matching
SA = Short-Answer Essay

CHAPTER STUDY OBJECTIVES

1. Identify the characteristics of the partnership form of business organization. The
principal characteristics of a partnership are: (a) association of individuals, (b) mutual agency,
(c) limited life, (d) unlimited liability, and (e) co-ownership of property.

2. Explain the accounting entries for the formation of a partnership. When formed, a
partnership records each partner's initial investment at the fair market value of the assets at
the date of their transfer to the partnership.

3. Identify the bases for dividing net income or net loss. Partnerships divide net income or
net loss on the basis of the income ratio, which may be (a) a fixed ratio, (b) a ratio based on
beginning or average capital balances, (c) salaries to partners and the remainder on a fixed
ratio, (d) interest on partners' capital and the remainder on a fixed ratio, and (e) salaries to
partners, interest on partners' capital, and the remainder on a fixed ratio.
 12 - 4 Test Bank for Accounting Principles, Ninth Edition

4. Describe the form and content of partnership financial statements. The financial
statements of a partnership are similar to those of a proprietorship. The principal differences
are: (a) The partnership shows the division of net income on the income statement. (b) The
owners' equity statement is called a partners' capital statement. (c) The partnership reports
each partner's capital on the balance sheet.

5. Explain the effects of the entries to record the liquidation of a partnership. When a
partnership is liquidated, it is necessary to record the (a) sale of noncash assets, (b)
allocation of the gain or loss on realization, (c) payment of partnership liabilities, and (d)
distribution of cash to the partners on the basis of their capital balances.
a
6. Explain the effects of the entries when a new partner is admitted. The entry to record the
admittance of a new partner by purchase of a partner's interest affects only partners' capital
accounts. The entries to record the admittance by investment of assets in the partnership (a)
increase both net assets and total capital and (b) may result in recognition of a bonus to either
the old partners or the new partner.
a
7. Describe the effects of the entries when a partner withdraws from the firm. The entry to
record a withdrawal from the firm when the partners pay from their personal assets affects
only partners' capital accounts. The entry to record a withdrawal when payment is made from
partnership assets (a) decreases net assets and total capital and (b) may result in recognizing
a bonus either to the retiring partner or the remaining partners.

TRUE-FALSE STATEMENTS
1. The personal assets, liabilities, and personal transactions of partners are excluded from
the accounting records of the partnership.
Ans: T, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

2. The act of any partner is binding on all other partners if the act appears to be appropriate
for the partnership.
Ans: T, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

3. A major advantage of the partnership form of organization is that the partners have
unlimited liability.
Ans: F, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

4. Partnership creditors may have a claim on the personal assets of any of the partners if the
partnership assets are not sufficient to settle claims.
Ans: T, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

5. The partnership agreement between partners must be in writing.

Ans: F, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics
 Accounting for Partnerships 12 - 5

6. If a partner invests noncash assets in a partnership, they should be recorded by the

partnership at their fair market value.
Ans: T, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None,
IMA: FSA

7. L. Hill invests the following assets in a new partnership: $15,000 in cash, and equipment
that cost $30,000 but has a book value of $17,000 and fair market value of $20,000. Hill,
Capital will be credited for $32,000.
Ans: F, SO: 2, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None,
IMA: FSA

8. Two proprietorships cannot combine and form a partnership.

Ans: F, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

9. If a partner's investment in a partnership consists of equipment that has accumulated

depreciation of $8,000, it would not be appropriate for the partnership to record the
accumulated depreciation.
Ans: T, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None,
IMA: FSA

10. If a partner's investment in a partnership consists of Accounts Receivable of $25,000 and

an Allowance for Doubtful Accounts of $7,000, it would not be appropriate for the
partnership to record the Allowance for Doubtful Accounts.
Ans: F, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None,
IMA: FSA

11. Unless stated otherwise in the partnership contract, profits and losses are shared among
the partners in the ratio of their capital equity balances.
Ans: F, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None,
IMA: Business Economics

12. If salary allowances and interest on capital are stipulated in the partnership profit and loss
sharing agreement, they are implemented only if income is sufficient to cover the amounts
required by these features.
Ans: F, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None,
IMA: Business Economics

13. Unless the partnership agreement specifically indicates an income ratio, partnership net
income or loss is not allocated to the partners.
Ans: F, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None,
IMA: Business Economics

14. Partnership income or loss need not be closed to partners' capital accounts each period
because of the unlimited life characteristic of partnerships.
Ans: F, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Reporting

15. If a partnership has a loss for the period, the closing entry to transfer the loss to the
partners will require a credit to the Income Summary account.
Ans: T, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None,
IMA: FSA
12 - 6 Test Bank for Accounting Principles, Ninth Edition

16. The partners' drawing accounts are closed each period into the Income Summary
account.
Ans: F, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None,
IMA: FSA

17. Salary allowances to partners are a major expense on most partnership income
statements.
Ans: F, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Reporting

18. An interest allowance in sharing partnership net income (or net loss) is related to the
amount of partners' invested capital during the period.
Ans: T, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

19. The financial statements of a partnership are similar to those of a proprietorship.

Ans: T, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Reporting

20. The income earned by a partnership will always be greater than the income earned by a
proprietorship because in a partnership there is more than one owner contributing to the
success of the business.
Ans: F, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

21. The function of the Partners' Capital Statement is to explain the changes in partners'
capital account balances during a period.
Ans: T, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Reporting

22. A detailed listing of all the assets invested by a partner in a partnership appears on the
Partners' Capital Statement.
Ans: F, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Reporting

23. Total partners' equity of a partnership is equal to the sum of all partners' capital account
balances.
Ans: T, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Reporting

24. The distribution of cash to partners in a partnership liquidation is always made based on
the partners' income sharing ratio.
Ans: F, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None,
IMA: Business Economics

25. The liquidation of a partnership means that a new partner has been admitted to the
partnership.
Ans: F, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

a
26. The admission of a new partner results in the legal dissolution of the existing partnership
and the beginning of a new partnership.
Ans: T, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective , AICPA FN: Reporting, AICPA
PC: None, IMA: Business Economics
 Accounting for Partnerships 12 - 7
a
27. If a new partner is admitted into a partnership by investment, the total assets and total
capital will change.
Ans: T, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

a
28. A bonus to old partners results when the new partner's capital credit on the date of
admittance is greater than his or her investment in the firm.
Ans: F, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Reporting

a
29. If a new partner invests in a partnership at book value and acquires a 1/4 interest in total
partnership capital, it indicates that a bonus was paid to the original partners.
Ans: F, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None,
IMA: Business Economics

a
30. A bonus to the remaining partners results when a retiring partner receives partnership
assets which are less than his or her capital balance on the date of withdrawal.
Ans: T, SO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None,
IMA: FSA

31. A partnership is an association of no more than two persons to carry on as co-owners of a

business for profit.
Ans: F, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

32. Once assets have been invested in the partnership, they are owned jointly by all partners.
Ans: T, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

33. Each partner's initial investment in a partnership should be recorded at book value.
Ans: F, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None,
IMA: FSA

34. Partnership income is shared in proportion to each partner's capital equity interest unless
the partnership contract specifically indicates the manner in which net income or net loss
is to be divided.
Ans: F, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None,
IMA: Business Economics

35. In a liquidation, the final distribution of cash to partners should be on the basis of their
income ratios.
Ans: F, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None,
IMA: Business Economics

a
36. In an admission of a partner by investment of assets, the total net assets and total capital
of the partnership do not change.
Ans: F, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None,
IMA: Business Economics

a
37. The withdrawal of a partner legally dissolves the partnership.
Ans: T, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Reporting
12 - 8 Test Bank for Accounting Principles, Ninth Edition

Answers to True-False Statements

Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.
a
1. T 7. F 13. F 19. T 25. F 31. F 37. T
a
2. T 8. F 14. F 20. F 26. T 32. T
a
3. F 9. T 15. T 21. T 27. T 33. F
a
4. T 10. F 16. F 22. F 28. F 34. F
a
5. F 11. F 17. F 23. T 29. F 35. F
a a
6. T 12. F 18. T 24. F 30. T 36. F

MULTIPLE CHOICE QUESTIONS

38. A hybrid form of business organization with certain features like a corporation is a(n)
a. limited liability partnership.
b. limited liability company.
c. "S" corporation.
d. sub-chapter "S" corporation.
Ans: B, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

39. A partnership
a. has only one owner.
b. pays taxes on partnership income.
c. must file an information tax return.
d. is not an accounting entity for financial reporting purposes.
Ans: C, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

40. A general partner in a partnership

a. has unlimited liability for all partnership debts.
b. is always the general manager of the firm.
c. is the partner who lacks a specialization.
d. is liable for partnership liabilities only to the extent of that partner's capital equity.
Ans: A, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

41. The individual assets invested by a partner in a partnership

a. revert back to that partner if the partnership liquidates.
b. determine that partner's share of net income or loss for the year.
c. are jointly owned by all partners.
d. determine the scope of authority of that partner.
Ans: C, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

42. Which one of the following would not be considered a disadvantage of the partnership
form of organization?
a. Limited life
b. Unlimited liability
c. Mutual agency
d. Ease of formation
Ans: D, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics
 Accounting for Partnerships 12 - 9

43. The partnership form of business is

a. restricted to law and medical practices.
b. restricted to firms having fewer than 10 partners.
c. not restricted to any particular type of business.
d. most often used in relatively large companies.
Ans: C, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

44. Which of the following is not a principal characteristic of the partnership form of business
organization?
a. Mutual agency
b. Association of individuals
c. Limited liability
d. Limited life
Ans: C, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

45. The partnership agreement should include each of the following except the
a. date of the partnership inception.
b. principal location of the firm.
c. surviving family members in the event of a partner's death.
d. Each of these should be included.
Ans: C, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

46. Which of the following statements is true regarding the form of a legally binding
partnership contract?
a. The partnership contract must be in writing.
b. The partnership contract may be based on a handshake.
c. The partnership contract may be implied.
d. The partnership contract cannot be oral.
Ans: B, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

47. Which of the following statements about a partnership is correct?

a. The personal assets of a partner are included in the partnership accounting records.
b. A partnership is not required to file an information tax return.
c. Each partner's share of income is taxable to the partnership.
d. A partnership represents an accounting entity for financial reporting purposes.
Ans: D, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

48. In a partnership, mutual agency means

a. each partner acts on his own behalf when engaging in partnership business.
b. the act of any partner is binding on all other partners, only if partners act within their
scope of authority.
c. an act by a partner is judged as binding on other partners depending on whether the
act appears to be appropriate for the partnership.
d. that partners must pay taxes on a mutual or combined basis.
Ans: C, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None,
IMA: Business Economics
12 - 10 Test Bank for Accounting Principles, Ninth Edition

49. A partnership
a. is dissolved only by the withdrawal of a partner.
b. is dissolved upon the acceptance of a new partner.
c. dissolution means the business must liquidate.
d. has unlimited life.
Ans: B, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

50. The partner in a limited partnership that has unlimited liability is referred to as the
a. lead partner.
b. head partner.
c. general partner.
d. unlimited partner.
Ans: C, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None,
IMA: Business Economics

51. Limited partnerships

a. must have at least one general partner.
b. guarantee that a partner will receive a return.
c. guarantee that a partner will get back his original investment.
d. are limited to only three partners.
Ans: A, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

52. The Polen-James partnership is terminated when creditor claims exceed partnership
assets by $40,000. James is a millionaire and Polen has no personal assets. Polen's
partnership interest is 75% and James's is 25%. Creditors
a. must collect their claims equally from Polen and James.
b. may collect the entire $40,000 from James.
c. must collect their claims 75% from Polen and 25% from James.
d. may not require James to use his personal assets to satisfy the $40,000 in claims.
Ans: B, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None,
IMA: Business Economics

53. Which of the following statements about partnerships is incorrect?

a. Partnership assets are co-owned by partners.
b. If a partnership is terminated, the assets do not legally revert to the original contributor.
c. If the partnership agreement does not specify the manner in which net income is to be
shared, it is distributed according to capital contributions.
d. Each partner has a claim on assets equal to the balance in the partner's capital
account.
Ans: C, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

54. Which of the following is not an advantage of the partnership form of business?
a. Mutual agency
b. Ease of formation
c. Ease of decision making
d. Freedom from governmental regulations and restrictions
Ans: A, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics
 Accounting for Partnerships 12 - 11

55. The largest companies in the United States are primarily organized as
a. limited partnerships.
b. partnerships.
c. corporations.
d. proprietorships.
Ans: C, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

56. The basis for dividing partnership net income or net loss is referred to as any of the
following except the
a. income ratio.
b. income and loss ratio.
c. profit and loss ratio.
d. income sharing ratio.
Ans: D, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

57. Which of the following statements is incorrect regarding partnership agreements?

a. It may be referred to as the articles of co-partnership.
b. Oral agreements are preferable to written articles.
c. It should specify the different relationships that are to exist among the partners.
d. It should state procedures for submitting disputes to arbitration.
Ans: B, SO: 1, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

58. Horton invests personally owned equipment, which originally cost $110,000 and has
accumulated depreciation of $30,000 in the Horton and Matile partnership. Both partners
agree that the fair market value of the equipment was $60,000. The entry made by the
partnership to record Horton's investment should be
a. Equipment........................................................................... 110,000
Accumulated DepreciationEquipment...................... 30,000
Horton, Capital............................................................ 80,000
b. Equipment........................................................................... 80,000
Horton, Capital............................................................ 80,000
c. Equipment........................................................................... 60,000
Loss on Purchase of Equipment.......................................... 20,000
Accumulated DepreciationEquipment.............................. 30,000
Horton, Capital............................................................ 110,000
d. Equipment........................................................................... 60,000
Horton, Capital............................................................ 60,000
Ans: D, SO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA

59. Bob is investing in a partnership with Andy. Bob contributes as part of his initial
investment, Accounts Receivable of $80,000; an Allowance for Doubtful Accounts of
$12,000; and $8,000 cash. The entry that the partnership makes to record Bob's initial
contribution includes a
a. credit to Bob, Capital for $88,000.
b. debit to Accounts Receivable for $68,000.
c. credit to Bob, Capital for $76,000.
d. debit to Allowance for Doubtful Accounts for $12,000.
Ans: C, SO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA
12 - 12 Test Bank for Accounting Principles, Ninth Edition

60. Which of the following would not be recorded in the entry for the formation of a
partnership?
a. Accumulated depreciation
b. Allowance for doubtful accounts
c. Accounts receivable
d. All of these would be recorded.
Ans: A, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None,
IMA: FSA

61. Sam is investing in a partnership with Jerry. Sam contributes equipment that originally
cost $63,000, has a book value of $30,000, and a fair market value of $39,000. The entry
that the partnership makes to record Sam's initial contribution includes a
a. debit to Equipment for $33,000.
b. debit to Equipment for $63,000.
c. debit to Equipment for $39,000.
d. credit to Accumulated Depreciation for $33,000.
Ans: C, SO: 2, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA

62. Amber contributes, as part of her initial investment, accounts receivable with an allowance
for doubtful accounts. Which of the following reflects a proper treatment?
a. The balance of the accounts receivable account should be recorded on the books of
the partnership at its net realizable value.
b. The allowance account may be set up on the books of the partnership because it
relates to the existing accounts that are being contributed.
c. The allowance account should not be carried onto the books of the partnership.
d. The accounts receivable and allowance should not be recorded on the books of the
partnership because a partner must invest cash in the business.
Ans: B, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None,
IMA: FSA

63. Which one of the following would not be considered an expense of a partnership in
determining income for the period?
a. Expired insurance
b. Salary allowance to partners
c. Supplies used
d. Freight-out
Ans: B, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Reporting

64. A partner invests into a partnership a building with an original cost of $90,000 and
accumulated depreciation of $40,000. This building has a $70,000 fair market value. As a
result of the investment, the partners capital account will be credited for
a. $70,000.
b. $50,000.
c. $90,000.
d. $120,000.
Ans: A, SO: 2, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA
 Accounting for Partnerships 12 - 13

65. Danny and Vicky are forming a partnership. Danny will invest a truck with a book value of
$10,000 and a fair market value of $14,000. Vicky will invest a building with a book value
of $30,000 and a fair market value of $42,000 with a mortgage of $15,000. At what
amount should the building be recorded?
a. $30,000
b. $27,000
c. $42,000
d. $45,000
Ans: C, SO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA

66. Danny and Vicky are forming a partnership. Danny will invest a truck with a book value of
$10,000 and a fair market value of $14,000. Vicky will invest a building with a book value
of $30,000 and a fair market value of $42,000 with a mortgage of $15,000. What amount
should be recorded in Vickys capital account?
a. $30,000
b. $27,000
c. $42,000
d. $14,000
Ans: B, SO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA

67. Danny and Vicky are forming a partnership. Danny will invest a truck with a book value of
$10,000 and a fair market value of $14,000. Vicky will invest a building with a book value
of $30,000 and a fair market value of $42,000 with a mortgage of $15,000. What amount
should be recorded in Dannys capital account?
a. $30,000
b. $27,000
c. $42,000
d. $14,000
Ans: D, SO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA

68. Rosen and Noble decide to organize a partnership. Rosen invests $15,000 cash, and
Noble contributes $12,000 cash and equipment having a book value of $6,000. Choose
the entry to record Nobles investment in the partnership assuming the equipment has a
fair market value of $9,000.
a. Cash.................................................................................... 12,000
Equipment .......................................................................... 6,000
Noble, Capital ............................................................ 18,000
b. Equipment .......................................................................... 6,000
Noble, Capital ............................................................ 6,000
c. Cash.................................................................................... 12,000
Noble, Capital ............................................................ 12,000
d. Cash.................................................................................... 12,000
Equipment .......................................................................... 9,000
Noble, Capital ............................................................ 21,000
Ans: D, SO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA
12 - 14 Test Bank for Accounting Principles, Ninth Edition

69. L. Trevino and B. Hogan combine their individual sole proprietorships to start the Trevino-
Hogan partnership. L. Trevino and B. Hogan invest in the partnership as follows:
Book Value Market Value
Trevino Hogan Trevino Hogan
Cash $21,000 $6,000 $21,000 $6,000
Accounts Receivable 9,000 3,000 9,000 3,000
Allowance for Doubtful
Accounts (1,500) (600) (2,100) (900)
Equipment 15,000 24,000 13,500 9,000
Accumulated Depreciation (3,000) (9,000)
The entries to record the investment will include a credit to:
a. Trevino, Capital of $40,500.
b. Hogan, Capital of $17,100.
c. Trevino, Capital of $42,000.
d. Hogan, Capital of $23,100.
Ans: B, SO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA

70. Partners Don and Ron have agreed to share profits and losses in an 80:20 ratio
respectively, after Don is allowed a salary allowance of $80,000 and Ron is allowed a
salary allowance of $40,000. If the partnership had net income of $80,000 for 2010, Rons
share of the income would be
a. $40,000
b. $32,000
c. $48,000
d. $8,000
Ans: B, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA

71. The partnership agreement of Nieto, Keller, and Pickert provides for the following income
ratio: (a) Nieto, the managing partner, receives a salary allowance of $36,000, (b) each
partner receives 15% interest on average capital investment, and (c) remaining net
income or loss is divided equally. The average capital investments for the year were: Nieto
$200,000, Keller $400,000, and Pickert $600,000. If partnership net income is $240,000,
the amount distributed to Keller should be:
a. $60,000
b. $62,000
c. $68,000
d. $80,000
Ans: C, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA
 Accounting for Partnerships 12 - 15

72. The partnership agreement of Nieto, Keller, and Pickert provides for the following income
ratio: (a) Nieto, the managing partner, receives a salary allowance of $36,000, (b) each
partner receives 15% interest on average capital investment, and (c) remaining net
income or loss is divided equally. The average capital investments for the year were: Nieto
$200,000, Keller $400,000, and Pickert $600,000. If partnership net income is $180,000,
the amount distributed to Nieto should be:
a. $30,000
b. $54,000
c. $60,000
d. $66,000
Ans: B, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA

73. Partners Acer and Barr have capital balances in a partnership of $40,000 and $60,000,
respectively. They agree to share profits and losses as follows:
Acer Barr
As salaries $10,000 $12,000
As interest on capital at the beginning of the year 10% 10%
Remaining profits or losses 50% 50%

If income for the year was $50,000, what will be the distribution of income to Barr?
a. $23,000
b. $27,000
c. $20,000
d. $10,000
Ans: B, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA

74. Partners Acer and Barr have capital balances in a partnership of $40,000 and $60,000,
respectively. They agree to share profits and losses as follows:
Acer Barr
As salaries $10,000 $12,000
As interest on capital at the beginning of the year 10% 10%
Remaining profits or losses 50% 50%

If income for the year was $30,000, what will be the distribution of income to Acer?
a. $13,000
b. $77,000
c. $10,000
d. $14,000
Ans: A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA
12 - 16 Test Bank for Accounting Principles, Ninth Edition

75. Partners Acer and Barr have capital balances in a partnership of $40,000 and $60,000,
respectively. They agree to share profits and losses as follows:
Acer Barr
As salaries $10,000 $12,000
As interest on capital at the beginning of the year 10% 10%
Remaining profits or losses 50% 50%

If net loss for the year was $2,000, what will be the distribution to Barr?
a. $12,000 income
b. $1,000 income
c. $1,000 loss
d. $2,000 loss
Ans: B, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Problem Solving, IMA: Reporting

76. Partners Bob and Don have agreed to share profits and losses in an 80:20 ratio
respectively, after Bob is allowed a salary allowance of $140,000 and Don is allowed a
salary allowance of $70,000. If the partnership had net income of $140,000 for 2010,
Dons share of the income would be
a. $70,000.
b. $56,000.
c. $84,000.
d. $14,000.
Ans: B, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA

77. The most appropriate basis for dividing partnership net income when the partners do not
plan to take an active role in daily operations is
a. on a fixed ratio.
b. interest on capital balances and salaries to the partners.
c. on a ratio based average capital balances.
d. salaries to the partners and the remainder on a fixed ratio.
Ans: C, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None,
IMA: Business Economics

78. The Raney and Kiser partnership agreement stipulates that profits and losses will be
shared equally after salary allowances of $160,000 for Raney and $80,000 for Kiser. At
the beginning of the year, Raney's Capital account had a balance of $320,000, while Kiser'
Capital account had a balance of $280,000. Net income for the year was $200,000. The
balance of Kiser' Capital account at the end of the year after closing is
a. $380,000.
b. $80,000.
c. $340,000.
d. $360,000.
Ans: C, SO: 3, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Problem Solving, IMA: Reporting
 Accounting for Partnerships 12 - 17

79. A partner's share of net income is recognized in the accounts through

a. adjusting entries.
b. closing entries.
c. correcting entries.
d. accrual entries.
Ans: B, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None,
IMA: FSA

80. The partnership of Lane and Starr reports net income of $60,000. The partners share
equally in income and losses. The entry to record the partners' share of net income will
include a
a. credit to Income Summary for $60,000.
b. credit to Lane, Capital for $30,000.
c. debit to Starr, Capital for $30,000.
d. credit to Starr, Drawing for $30,000.
Ans: B, SO: 3, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None,
IMA: FSA

81. Mel receives $210,000 and Norm receives $140,000 in a split of $350,000 net income.
Which expression does not reflect the income splitting arrangement?
a. 3:2
b. 3/5 & 2/5
c. 6:4
d. 2:1
Ans: D, SO: 3, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: Business Economics

82. An income ratio based on capital balances might be appropriate when

a. service is a primary consideration.
b. some, but not all, partners plan to work in the business.
c. funds invested in the partnership are considered the critical factor.
d. little net income is expected.
Ans: C, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None,
IMA: Business Economics

83. If the partnership agreement specifies salaries to partners, interest on partners' capital,
and the remainder on a fixed ratio, and partnership net income is not sufficient to cover
both salaries and interest,
a. only salaries are allocated to the partners.
b. only interest is allocated to the partners.
c. the entire net income is shared on a fixed ratio.
d. both salaries and interest are allocated to the partners.
Ans: D, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None,
IMA: Business Economics

84. Which of the following would not be considered an expense of a partnership in

determining income for the period?
a. Expired insurance
b. Income tax expense
c. Rent expense
d. Utilities expense
Ans: B, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None,
IMA: Business Economics
12 - 18 Test Bank for Accounting Principles, Ninth Edition

85. The net income of the Rice and Nance partnership is $180,000. The partnership
agreement specifies that Rice and Nance have a salary allowance of $48,000 and
$72,000, respectively. The partnership agreement also specifies an interest allowance of
10% on capital balances at the beginning of the year. Each partner had a beginning
capital balance of $120,000. Any remaining net income or net loss is shared equally.
What is Rice's share of the $180,000 net income?
a. $48,000
b. $60,000
c. $66,000
d. $78,000
Ans: D, SO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: Quantitive Methods

86. The net income of the Rice and Nance partnership is $180,000. The partnership
agreement specifies that Rice and Nance have a salary allowance of $48,000 and
$72,000, respectively. The partnership agreement also specifies an interest allowance of
10% on capital balances at the beginning of the year. Each partner had a beginning
capital balance of $120,000. Any remaining net income or net loss is shared equally.
What is the balance of Nance's Capital account at the end of the year after net income
has been distributed?
a. $204,000
b. $192,000
c. $222,000
d. $210,000
Ans: C, SO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Problem Solving, IMA: Reporting

87. The net income of the Linder and Hill partnership is $250,000. The partnership agreement
specifies that profits and losses will be shared equally after salary allowances of $200,000
(Linder) and $150,000 (Hill) have been allocated. At the beginning of the year, Linder 's
Capital account had a balance of $500,000 and Hill's Capital account had a balance of
$650,000. What is the balance of Hill's Capital account at the end of the year after profits
and losses have been distributed?
a. $650,000
b. $100,000
c. $750,000
d. $775,000
Ans: C, SO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Problem Solving, IMA: Quantitive Methods

88. A partners' capital statement explains

a. the amount of legal liability of each of the partners.
b. the types of assets invested in the business by each partner.
c. how the partnership will be capitalized if a new partner is admitted to the partnership.
d. the changes in each partner's capital account and in total partnership capital during a
period.
Ans: D, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Reporting
 Accounting for Partnerships 12 - 19

89. Each of the following is used in preparing the partners capital statement except the
a. balance sheet.
b. income statement.
c. partners capital accounts.
d. partners drawing accounts.
Ans: A, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Reporting

90. The owners' equity statement for a partnership is called the

a. partners' proportional statement.
b. partners' capital statement.
c. statement of shareholders' equity.
d. capital and drawing statement.
Ans: B, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Reporting

91. Which of the following would not cause an increase in partnership capital?
a. Drawings
b. Net income
c. Additional capital investment by the partners
d. Initial capital investment by the partners
Ans: A, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None,
IMA: FSA

92. Mary Janane's capital statement reveals that her drawings during the year were $50,000.
She made an additional capital investment of $25,000 and her share of the net loss for the
year was $10,000. Her ending capital balance was $200,000. What was Mary Janane's
beginning capital balance?
a. $225,000
b. $185,000
c. $235,000
d. $260,000
Ans: C, SO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Problem Solving, IMA: Quantitive Methods

93. Jeff Lake started the year with a capital balance of $180,000. During the year, his share of
partnership net income was $160,000 and he withdrew $30,000 from the partnership for
personal use. He made an additional capital contribution of $50,000 during the year. The
amount of Jeff Lake's capital balance that will be reported on the year-end balance sheet
will be
a. $160,000.
b. $390,000.
c. $300,000.
d. $360,000.
Ans: D, SO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Problem Solving, IMA: Quantitive Methods
12 - 20 Test Bank for Accounting Principles, Ninth Edition

94. The Partners' Capital Statement for the United Center reported the following information in
total:
Capital, January 1................................................. $120,000
Additional investment............................................ 40,000
Drawings............................................................... 80,000
Net income............................................................ 100,000
The partnership has three partners: Kent, Hall, and Penn with ending capital balances in a
ratio 40:20:40. What are the respective ending balances of the three partners?
a. Kent, $80,000; Hall, $40,000; Penn, $80,000.
b. Kent, $72,000: Hall, $36,000; Penn, $72,000.
c. Kent, $136,000; Hall, $68,000; Penn, $136,000.
d. Kent, $90,000; Hall, $48,000; Penn, $90,000.
Ans: B, SO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Problem Solving, IMA: Quantitive Methods

95. The total column of the Partners' Capital Statement for Orson Company is as follows:
Capital, January 1................................................. $150,000
Additional investment............................................ 60,000
Drawings............................................................... 90,000
Net income............................................................ 180,000
The partnership has three partners. The first two partners have ending capital balances
that are equal. The ending balance of the third partner is half of the ending balance of the
first partner. What is the ending capital balance of the third partner?
a. $72,000
b. $48,000
c. $60,000
d. $66,000
Ans: C, SO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Problem Solving, IMA: Quantitive Methods

96. The partners' drawing accounts are

a. reported on the income statement.
b. reported on the balance sheet.
c. closed to Income Summary.
d. closed to the partners' capital accounts.
Ans: D, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Reporting

97. The Uniform Partnership Act provides that

a. a purchaser of a partnership interest is not a partner until he or she is accepted into
the firm by the continuing partners.
b. a partner must obtain the approval of other partners before selling his or her interest.
c. the price paid in a purchase of partner's interest must be equal to the capital equity
acquired.
d. the price paid in a purchase of partner's interest must be greater than the capital
equity acquired.
Ans: A, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics
 Accounting for Partnerships 12 - 21

98. The balance sheet of a partnership will

a. report retained earnings below the partnership capital accounts.
b. show a separate capital account for each partner.
c. show a separate drawing account for each partner.
d. show the amount of income that was distributed to each partner.
Ans: B, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Reporting

99. The liquidation of a partnership may result from each of the following except the
a. bankruptcy of the partnership.
b. death of a partner.
c. retirement of a partner.
d. sale of the business by the partners.
Ans: C, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

100. In the liquidation of a partnership, any gain or loss on the realization of noncash assets
should be allocated
a. first to creditors and the remainder to partners.
b. to the partners on the basis of their capital balances.
c. to the partners on the basis of their income-sharing ratio.
d. only after all creditors have been paid.
Ans: C, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None,
IMA: Business Economics

101. In the liquidation of a partnership, any partner who has a capital deficiency
a. has a personal debt to the partnership for the amount of the deficiency.
b. is automatically terminated as a partner.
c. will receive a cash distribution only on the basis of his or her income-sharing ratio.
d. is not obligated to make up the capital deficiency.
Ans: A, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None,
IMA: Business Economics

102. Partners Audrey, Betty, and Charles have capital account balances of $120,000 each. The
income and loss ratio is 5:2:3, respectively. In the process of liquidating the partnership,
noncash assets with a book value of $100,000 are sold for $40,000. The balance of
Betty's Capital account after the sale is
a. $90,000.
b. $102,000.
c. $108,000.
d. $132,000.
Ans: C, SO: 5, Bloom: AP, Difficulty: Medium, Min: 1, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Problem Solving, IMA: Reporting
12 - 22 Test Bank for Accounting Principles, Ninth Edition

103. The partners' income and loss sharing ratio is 2:3:5, respectively.
CINDI, JENNI, AND BECKI PARTNERSHIP
Balance Sheet
December 31, 2010

Assets Liabilities and Owners' Equity

Cash $ 90,000 Liabilities $300,000
Noncash assets 570,000 Cindi, Capital 120,000
Jenni, Capital 180,000
Becki, Capital 60,000
Total $660,000 Total $660,000

If the Cindi, Jenni, and Becki Partnership is liquidated by selling the noncash assets for
$390,000 and creditors are paid in full, what is the amount of cash that can be safely
distributed to each partner?
a. Cindi, $72,000; Jenni, $108,000; Becki, $0.
b. Cindi, $84,000; Jenni, $126,000; Becki, $30,000.
c. Cindi, $69,000; Jenni, $111,000; Becki, $0.
d. Cindi, $66,000; Jenni, $114,000; Becki, $0.
Ans: A, SO: 5, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: Business Economics

104. The partners' income and loss sharing ratio is 2:3:5, respectively.
CINDI, JENNI, AND BECKI PARTNERSHIP
Balance Sheet
December 31, 2010

Assets Liabilities and Owners' Equity

Cash $ 90,000 Liabilities $300,000
Noncash assets 570,000 Cindi, Capital 120,000
Jenni, Capital 180,000
Becki, Capital 60,000
Total $660,000 Total $660,000

If the Cindi, Jenni, and Becki Partnership is liquidated by selling the noncash assets for
$750,000, and creditors are paid in full, what is the total amount of cash that Cindi will
receive in the distribution of cash to partners?
a. $36,000
b. $234,000
c. $156,000
d. $150,000
Ans: C, SO: 5, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: Business Economics
 Accounting for Partnerships 12 - 23

105. The partners' income and loss sharing ratio is 2:3:5, respectively.
CINDI, JENNI, AND BECKI PARTNERSHIP
Balance Sheet
December 31, 2010

Assets Liabilities and Owners' Equity

Cash $ 90,000 Liabilities $300,000
Noncash assets 570,000 Cindi, Capital 120,000
Jenni, Capital 180,000
Becki, Capital 60,000
Total $660,000 Total $660,000

If the Cindi, Jenni, and Becki Partnership is liquidated and the noncash assets are
worthless, the creditors will look to what partner's personal assets for settlement of the
creditors' claims?
a. The personal assets of Partner Jenni.
b. The personal assets of Partners Cindi and Becki.
c. The personal assets of Partners Cindi, Jenni, and Becki.
d. The personal assets of the partners are not available for partnership debts.
Ans: C, SO: 5, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: Business Economics

106. If a partner has a capital deficiency and does not have the personal resources to eliminate
it,
a. the creditors will have to absorb the capital deficiency.
b. the other partners will absorb the capital deficiency on the basis of their respective
capital balances.
c. the other partners will have to absorb the capital deficiency on the basis of their
respective income sharing ratios.
d. neither the creditors nor the other partners will have to absorb the capital deficiency.
Ans: C, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None,
IMA: Business Economics

107. When a partnership terminates business, the sale of noncash assets is called
a. liquidation.
b. realization.
c. recognition.
d. disposition.
Ans: B, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

108. The liquidation of a partnership

a. cannot be a voluntary act of the partners.
b. terminates the business.
c. eliminates those partners with a capital deficiency.
d. cannot occur unless all partners approve.
Ans: B, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics
12 - 24 Test Bank for Accounting Principles, Ninth Edition

109. The liquidation of a partnership is a process containing the following steps:

1. Pay partnership liabilities in cash.
2. Allocate the gain or loss on realization to the partners on their income ratios.
3. Sell noncash assets for cash and recognize a gain or loss on realization.
4. Distribute remaining cash to partners on the basis of their remaining capital balances.
Identify the proper sequencing of the steps in the liquidation process.
a. 3, 2, 4, 1.
b. 3, 2, 1, 4.
c. 1, 3, 2, 4.
d. 1, 4, 3, 2.
Ans: B, SO: 5, Bloom: K, Difficulty: Medium, Min: 2, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Problem Solving, IMA: Business Economics

110. In the final step of the liquidation process, remaining cash is distributed to partners
a. on an equal basis.
b. on the basis of the income ratios.
c. on the basis of the remaining capital balances.
d. regardless of capital deficiencies.
Ans: C, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

111. In the liquidation process, if a capital account shows a deficiency

a. the partner with a deficiency has an obligation to the partnership for the amount of the
deficiency.
b. it may be written off to a "Loss" account.
c. it is disregarded until after the partnership books are closed.
d. it can be written off to a "Gain" account.
Ans: A, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None,
IMA: Business Economics

112. Before distributing any remaining cash to partners in a partnership liquidation, it is

necessary to do each of the following except
a. sell noncash assets for cash.
b. recognize a gain or loss on realization.
c. allocate the gain or loss to the partners based on their capital balances.
d. pay partnership liabilities in cash.
Ans: C, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None,
IMA: Business Economics

113. Mary, Ann, and Tina formed a partnership with income-sharing ratios of 50%, 30%, and
20%, respectively. Cash of $300,000 was available after the partnerships assets were
liquidated. Prior to the final distribution of cash, Marys capital balance was $200,000,
Anns capital balance was $150,000, and Tina had a capital deficiency of $50,000.
Assuming Tina contributes cash to match her capital deficiency, Mary should receive
a. $175,000.
b. $168,750.
c. $131,250.
d. $200,000.
Ans: D, SO: 5, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: Business Economics
 Accounting for Partnerships 12 - 25

114. Arlene, Brad, and Chick are partners, sharing income 2:1:2. After selling all of the assets
for cash, dividing gains and losses on realization, and paying liabilities, the balances in the
capital accounts are as follows: Arlene, $10,000 Cr; Brad, $10,000 Cr; and Chick, $30,000
Cr. How much cash should be distributed to Arlene?
a. $6,000
b. $20,000
c. $10,000
d. $16,667
Ans: C, SO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: Business Economics

115. In liquidation, balances prior to the distribution of cash to the partners are: Cash $300,000;
Presley, Capital $140,000; Laswell, Capital $130,000, and Hunter, Capital $30,000. The
income ratio is 6:2:2, respectively. How much cash should be distributed to Presley?
a. $125,000
b. $136,250
c. $140,000
d. $150,000
Ans: C, SO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: Business Economics

116. In liquidation, balances prior to the distribution of cash to the partners are: Cash $255,000;
Presley, Capital $140,000; Laswell, Capital $130,000, and Hunter, Capital $15,000
deficiency. The income ratio is 6:2:2, respectively. How much cash should be distributed to
Laswell if Hunter does not pay his deficiency?
a. $122,500
b. $126,250
c. $118,750
d. $130,000
Ans: B, SO: 5, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: Business Economics

117. In liquidation, balances prior to the distribution of cash to the partners are: Cash $360,000;
Peterson, Capital $168,000; Staley, Capital $156,000, and Klugman, Capital $36,000. The
income ratio is 6:2:2, respectively. How much cash should be distributed to Peterson?
a. $150,000.
b. $163,500.
c. $168,000.
d. $180,000.
Ans: C, SO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: Business Economics

118. In liquidation, balances prior to the distribution of cash to the partners are: Cash $306,000;
Peterson, Capital $168,000; Staley, Capital $156,000, and Klugman, Capital $18,000
deficiency. The income ratio is 6:2:2, respectively. How much cash should be distributed to
Staley if Klugman does not pay his deficiency?
a. $147,000.
b. $151,500.
c. $142,500.
d. $156,000.
Ans: B, SO: 5, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: Business Economics
12 - 26 Test Bank for Accounting Principles, Ninth Edition

119. Use the following account balance information for Grinotfin Partnership with income ratios
of 2:4:4 for Grigsby, Nott, and Fine, respectively.

Assets Liabilities and Owners Equity

Cash $ 18,000 Accounts payable $ 42,000
Accounts Grigsby, Capital 46,000
receivable 44,000 Nott, Capital 16,000
Inventory 146,000 Fine, Capital 104,000
$208,000 $208,000

Assume that, as part of liquidation proceedings, Grinotfin sells its noncash assets for
$170,000. The amount of cash that would ultimately be distributed to Fine would be:
a. $104,000.
b. $96,000.
c. $68,000.
d. $172,000.
Ans: B, SO: 5, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: Business Economics

120. Use the following account balance information for Grinotfin Partnership with income ratios
of 2:4:4 for Grigsby, Nott, and Fine, respectively.

Assets Liabilities and Owners Equity

Cash $ 18,000 Accounts payable $ 42,000
Accounts Grigsby, Capital 46,000
receivable 44,000 Nott, Capital 16,000
Inventory 146,000 Fine, Capital 104,000
$208,000 $208,000

Assume that, as part of liquidation proceedings, Grinotfin sells its noncash assets for
$120,000. As a result, one of the partners has a capital deficiency which that partner
decides not to repay. The amount of cash that would ultimately be distributed to Fine
would be:
a. $104,000.
b. $76,000.
c. $48,000.
d. $68,000.
Ans: D, SO: 5, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: Business Economics

a
121. D. Dieker purchases a 25% interest for $30,000 when the Reeves, Porter, Kiner
partnership has total capital of $270,000. Prior to the admission of Dieker, each partner
has a capital balance of $90,000. Each partner relinquishes an equal amount of his capital
balance to Dieker. The amount to be relinquished by Kiner is
a. $15,000.
b. $19,000.
c. $22,500.
d. $37,500.
Ans: A, SO: 6, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: Business Economics
 Accounting for Partnerships 12 - 27
a
122. Finney is admitted to a partnership with a 25% capital interest by a cash investment of
$90,000. If total capital of the partnership is $390,000 before admitting Finney, the bonus
to Finney is
a. $30,000.
b. $15,000.
c. $45,000.
d. $60,000.
Ans: A, SO: 6, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: Business Economics

a
123. Eberle and Lankton are partners who share income and losses in the ratio of 3:2,
respectively. On August 31, their capital balances were: Eberle, $175,000 and Lankton,
$150,000. On that date, they agree to admit Newman as a partner with a one-third capital
interest. If Newman invests $125,000 in the partnership, what is Eberle's capital balance
after Newman's admittance?
a. $150,000
b. $158,333
c. $160,000
d. $175,000
Ans: C, SO: 6, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: Business Economics

a
124. Eberle and Lankton are partners who share income and losses in the ratio of 3:2,
respectively. On August 31, their capital balances were: Eberle, $175,000 and Lankton,
$150,000. On that date, they agree to admit Newman as a partner with a one-third capital
interest. If Newman invests $200,000 in the partnership, what is Lankton's capital balance
after Newman's admittance?
a. $175,000
b. $160,000
c. $157,500
d. $150,000
Ans: B, SO: 6, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem
Solving, IMA: Reporting

a
125. King and Otto are partners who share profits and losses equally and have capital
balances of $560,000 and $490,000, respectively. Pitts is admitted into the partnership by
investing $490,000 for a 30% capital interest. The account balance of Otto, Capital after
the admission of Pitts would be
a. $462,000.
b. $476,000.
c. $504,000.
d. $490,000.
Ans: C, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Problem Solving, IMA: Reporting
12 - 28 Test Bank for Accounting Principles, Ninth Edition
a
126. Roper and Walton have partnership capital balances of $320,000 and $240,000,
respectively. Walton negotiates to sell his partnership interest to Molle for $280,000.
Roper agrees to accept Molle as a new partner. The partnership entry to record this
transaction is
a. Cash.................................................................................... 280,000
Molle, Capital.............................................................. 280,000
b. Walton, Capital.................................................................... 280,000
Molle, Capital.............................................................. 280,000
c. Cash.................................................................................... 40,000
Walton, Capital.................................................................... 240,000
Molle, Capital.............................................................. 280,000
d. Walton, Capital.................................................................... 240,000
Molle, Capital.............................................................. 240,000
Ans: D, SO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA

a
127. Gore and Dean share partnership profits and losses in the ratio of 6:4. Gore's Capital
account balance is $320,000 and Deans Capital account balance is $200,000. Naylor is
admitted to the partnership by investing $360,000 and is to receive a one-fourth ownership
interest. Gore, Dean and Naylor's capital balances after Naylor's investment will be
Gore Dean Naylor
a. $320,000 $200,000 $360,000
b. $404,000 $256,000 $220,000
c. $396,000 $264,000 $220,000
d. $390,000 $270,000 $220,000
Ans: B, SO: 6, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem
Solving, IMA: Reporting

a
128. Judy and Sue have partnership capital account balances of $600,000 and $450,000,
respectively and share profits and losses equally. Sara is admitted to the partnership by
investing $250,000 for a one-fourth ownership interest. The balance of Sue's Capital
account after Sara is admitted is
a. $412,500.
b. $450,000.
c. $487,500.
d. $325,000.
Ans: A, SO: 6, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem
Solving, IMA: Reporting

a
129. The admission of a new partner to an existing partnership
a. may be accomplished only by investing assets in the partnership.
b. requires purchasing the interest of one or more existing partners.
c. causes a legal dissolution of the existing partnership.
d. is almost always accompanied by the liquidation of the business.
Ans: C, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics
 Accounting for Partnerships 12 - 29
a
130. When a partnership interest is purchased
a. every partners capital account is affected.
b. the transaction is a personal transaction between the purchaser and the selling
partner(s).
c. the buyer receives equity equal to the amount of cash paid.
d. all partners will receive some part of the purchase price.
Ans: B, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

a
131. Baker and Mays each sell 1/3 of their partnership interest to Pool, receiving $140,000
each. At the time of the admission, each partner has a $420,000 capital balance. The
entry to record the admission of Pool will show a
a. debit to Cash for $280,000.
b. credit to Pool, Capital for $420,000.
c. debit to Mays, Capital for $420,000.
d. debit to Baker, Capital for $140,000.
Ans: D, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA

a
132. Bell and Herr sell 1/4 of their partnership interest to Ives receiving $200,000 each. At the
time of admission, Bell and Herr each had a $350,000 capital balance. The admission of
Ives will cause the net partnership assets to
a. increase by $400,000.
b. remain at $700,000.
c. decrease by $400,000.
d. remain at $1,100,000.
Ans: B, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA

a
133. Diaz and Helms sell to Mayo a 1/3 interest in the Diaz-Helms partnership. Mayo will pay
Diaz and Helms each $70,000 for admission into the organization. Before this transaction, Diaz
and Helms show capital balances of $105,000 each. The journal entry to record the
admission of Mayo will
a. show a debit to Cash for $140,000.
b. not show a debit to Cash.
c. show a debit to Helms, Capital for $70,000.
d. show a credit to Mayo, Capital for $140,000.
Ans: B, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA

a
134. Garr invests $20,000 in cash (admission by investment) in the Massey-Dix partnership to
acquire a 1/4 interest. In this case
a. the accounting will be the same as a purchase of an interest.
b. the total net assets of the new partnership are unchanged from the previous partnership.
c. the total capital of the new partnership is greater than the total capital of the old
partnership.
d. Garr's income ratio will automatically be 1/4.
Ans: C, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics
12 - 30 Test Bank for Accounting Principles, Ninth Edition
a
135. Which of the following is correct when admitting a new partner into an existing
partnership?
Purchase of an Interest Admission by Investment
a. Total net assets unchanged unchanged
b. Total capital increased unchanged
c. Total net assets unchanged increased
d. Total capital unchanged unchanged
Ans: C, SO: 6, Bloom: C, Difficulty: Easy, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None,
IMA: Business Economics

a
136. When admitting a new partner by investment, a bonus to old partners
a. is usually unjustified because book values clearly reflect partnership net worth.
b. is sometimes justified because goodwill may exist and it is not reflected in the accounts.
c. results if the debit to cash is less than the new partner's capital credit.
d. results if the debit to cash is equal to the new partner's capital credit.
Ans: B, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None,
IMA: Business Economics

a
137. When admitting a new partner by investment, a bonus to old partners is allocated on
a. the basis of capital balances.
b. the basis of the original investment of the old partners.
c. the basis of income ratios before the admission of the new partner.
d. a seniority basis.
Ans: C, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None,
IMA: Business Economics

a
138. A bonus to a new partner
a. is prohibited by GAAP.
b. results when the new partner's capital credit is less than his or her investment of
assets in the firm.
c. may occur when recorded book values are lower than market values.
d. results when the new partner's capital credit is greater than his or her investment of
assets in the firm.
Ans: D, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None,
IMA: Business Economics

a
139. A bonus to a new partner will
a. increase the capital balances of existing partners based on their income ratios before
the admission of the new partner.
b. increase the capital balances of existing partners based on their income ratios after
the admission of the new partner.
c. decrease the capital balances of existing partners based on their income ratios before
the admission of the new partner.
d. decrease the capital balances of existing partners based on their capital balances
before the admission of the new partner.
Ans: C, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None,
IMA: Business Economics
 Accounting for Partnerships 12 - 31
a
140. On November 30, capital balances are Gast $120,000, Cook $100,000 and Irving
$100,000. The income ratios are 20%, 20% and 60% respectively. Gast decides to retire
from the partnership. The partnership pays Gast $100,000 cash for her partnership
interest. After Gasts retirement, what is the balance of Irvings capital account?
a. $88,000.
b. $100,000.
c. $112,000.
d. $115,000.
Ans: D, SO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Problem Solving, IMA: Reporting

a
141. On November 30, capital balances are Gast $120,000, Cook $100,000 and Irving
$100,000. The income ratios are 20%, 20% and 60% respectively. Gast decides to retire
from the partnership. In order for Cook and Irving to have equal capital interests after the
retirement of Gast, how much partnership cash would have to be paid to Gast for her
partnership interest?
a. $0.
b. $106,666.
c. $120,000.
d. Any amount paid to Gast will cause Cook and Irving to still have equal capital
balances.
Ans: C, SO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: Business Economics

a
142. Mary, Jim, and Mike have partnership capital account balances of $225,000, $450,000
and $105,000, respectively. The income sharing ratio is Mary, 50%; Jim, 40%; and Mike,
10%. Mary desires to withdraw from the partnership and it is agreed that partnership
assets of $195,000 will be used to pay Mary for her partnership interest. The balances of
Jim's and Mike's Capital accounts after Mary's withdrawal would be
a. Jim, $450,000; Mike, $105,000.
b. Jim, $474,000; Mike, $111,000.
c. Jim, $426,000; Mike, $99,000.
d. Jim, $435,000; Mike, $90,000.
Ans: B, SO: 7, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Problem Solving, IMA: Reporting
12 - 32 Test Bank for Accounting Principles, Ninth Edition
a
143. Ard, Ball, and Dole have partnership capital account balances of $400,000 each. Income
and losses are shared equally. Dole agrees to sell three-fourths of his ownership interest
to Ard for $350,000 and one-fourth to Ball for $125,000. Ard and Ball will use personal
assets to purchase Dole's interest. The partnership's entry to record Dole's withdrawal
from the partnership would be
a. Dole, Capital ....................................................................... 475,000
Cash .......................................................................... 475,000
b. Dole, Capital ....................................................................... 475,000
Ard, Capital ................................................................ 350,000
Ball, Capital ................................................................ 125,000
c. Dole, Capital ....................................................................... 400,000
Ard, Capital ................................................................ 300,000
Ball, Capital ................................................................ 100,000
d. Ard, Capital ......................................................................... 356,250
Ball, Capital ........................................................................ 118,750
Dole, Capital ............................................................. 475,000
Ans: C, SO: 7, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA

a
144. When a partner withdraws from the firm, which of the following reflects the correct
partnership effects?
Payment from Payment from
Partners' Personal Assets Partnership Assets
a. Total net assets decreased decreased
b. Total capital decreased decreased
c. Total net assets unchanged decreased
d. Total capital unchanged unchanged
Ans: C, SO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None,
IMA: Business Economics

a
145. Which of the following is not a necessary action that the partnership must take upon the
death of a partner?
a. Determine the net income or net loss for the year to date.
b. Discontinue business operations.
c. Close the books.
d. Prepare financial statements.
Ans: B, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None,
IMA: Business Economics

a
146. On November 30, capital balances are Howe $90,000, Doss $75,000 and Newlin $75,000.
The income ratios are 20%, 20% and 60%, respectively. Howe decides to retire from the
partnership. The partnership pays Howe $105,000 cash for her partnership interest. After
Howe's retirement, what is the balance of Doss's capital account?
a. $71,250
b. $72,000
c. $75,000
d. $97,500
Ans: A, SO: 7, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Problem Solving, IMA: Reporting
 Accounting for Partnerships 12 - 33
a
147. On November 30, capital balances are Howe $90,000, Doss $75,000 and Newlin $75,000.
The income ratios are 20%, 20% and 60%, respectively. Howe decides to retire from the
partnership. The partnership pays Howe $75,000 cash for her partnership interest. After
Howe's retirement, what is the balance of Newlin's capital account?
a. $66,000
b. $75,000
c. $84,000
d. $86,250
Ans: D, SO: 7, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: Business Economics

a
148. On November 30, capital balances are Howe $90,000, Doss $75,000 and Newlin $75,000.
The income ratios are 20%, 20% and 60%, respectively. Howe decides to retire from the
partnership. In order for Doss and Newlin to have equal capital interests after the
retirement of Howe, how much partnership cash would have to be paid to Howe for her
partnership interest?
a. $0
b. $80,000
c. $90,000
d. Any amount paid to Howe will cause Doss and Newlin to still have equal capital
balances.
Ans: C, SO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: Business Economics

149. All of the following are characteristics of partnerships except

a. co-ownership of property.
b. mutual agency.
c. unlimited life.
d. association of individuals.
Ans: C, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

150. The Butkus, Sayers, and Halas partnership is terminated when the claims of company
creditors exceed partnership assets by $50,000. The capital balances for Butkus, Sayers,
and Halas are $35,000, $5,000, and $0, respectively. The original claims of the creditors
were negotiated by Sayers and Halas. Which partner(s) is(are) personally and individually
liable for all partnership liabilities?
a. Butkus
b. Sayers
c. Sayers and Halas
d. Butkus, Sayers, and Halas
Ans: D, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None,
IMA: Business Economics

151. When a partner invests noncash assets in a partnership, the assets should be recorded at
their
a. book value.
b. carrying value.
c. fair market value.
d. original cost.
Ans: C, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None,
IMA: Business Economics
12 - 34 Test Bank for Accounting Principles, Ninth Edition

152. The partnership agreement of Rossi and Petry provides for salary allowances of $45,000
to Rossi and $35,000 to Petry, with the remaining income or loss to be divided equally.
During the year, Rossi and Petry each withdraw cash equal to 80% of their salary
allowances. If partnership net income is $100,000, Rossi's equity in the partnership would
a. increase more than Petrys.
b. decrease more than Petry's.
c. increase the same as Petry's.
d. decrease the same as Petry's.
Ans: A, SO: 3, Bloom: C, Difficulty: Medium, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Problem Solving, IMA: Reporting

153. Which of the following statements is correct?

a. Salaries to partners and interest on partners' capital are expenses of the partnership.
b. Salaries to partners are expenses of the partnership but not interest on partners'
capital.
c. Interest on partners' capital is an expense of the partnership but not salaries to
partners.
d. Neither salaries to partners nor interest on partners' capital are expenses of the
partnership.
Ans: D, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Reporting

154. In the liquidation of a partnership, the gains and losses from assets sold are
a. divided equally among the partners.
b. divided among the partners in the stated income ratio.
c. divided among the partners in proportion to their capital equity interests.
d. ignored.
Ans: B, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None,
IMA: Business Economics

155. If a partner with a capital deficiency is unable to pay the amount owed to the partnership,
the deficiency is allocated to the partners with credit balances
a. equally.
b. on the basis of their income ratios.
c. on the basis of their capital balances.
d. on the basis of their original investments.
Ans: B, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None,
IMA: Business Economics

156. An entry is not required in the liquidation of a partnership to record the

a. payment of cash to creditors.
b. distribution of cash to the partners.
c. sale of noncash assets.
d. allocation of a capital deficiency to partners with credit balances when the deficient
partner is expected to pay the deficiency.
Ans: D, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None,
IMA: Business Economics
 Accounting for Partnerships 12 - 35

157. The first step in the liquidation of a partnership is to

a. allocate a gain or loss on realization to the partners.
b. distribute remaining cash to the partners.
c. pay partnership liabilities.
d. sell noncash assets and recognize a gain or loss on realization.
Ans: D, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None,
IMA: Business Economics

158. Lance joins the partnership of Kubek and Musial by paying $30,000 in cash. If the net
assets of the partnership are still the same amount after Lance has been admitted as a
partner, then Lance
a. must have been admitted by investment of assets.
b. must have been admitted by purchase of a partner's interest.
c. must have received a bonus upon being admitted.
d. could have been admitted by an investment of assets or by a purchase of a partner's
interest.
Ans: B, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Reporting

159. Mock is admitted to a partnership with a 25% capital interest by a cash investment of
$120,000. If total capital of the partnership is $520,000 before admitting Mock, the bonus
to Mock is
a. $40,000.
b. $20,000.
c. $60,000.
d. $80,000.
Ans: A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: Quantitive Methods

Answers to Multiple Choice Questions

Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.
a a
38. b 56. d 74. a 92. c 110. c 128. a 146. a
a a
39. c 57. b 75. b 93. d 111. a 129. c 147. d
a a
40. a 58. d 76. b 94. b 112. c 130. b 148. c
a
41. c 59. c 77. c 95. c 113. d 131. d 149. c
a
42. d 60. a 78. c 96. d 114. c 132. b 150. d
a
43. c 61. c 79. b 97. a 115. c 133. b 151. c
a
44. c 62. b 80. b 98. b 116. b 134. c 152. a
a
45. c 63. b 81. d 99. c 117. c 135. c 153. d
a
46. b 64. a 82. c 100. c 118. b 136. b 154. b
a
47. d 65. c 83. d 101. a 119. b 137. c 155. b
a
48. c 66. b 84. b 102. c 120. d 138. d 156. d
a a
49. b 67. d 85. d 103. a 121. a 139. c 157. d
a a a
50. c 68. d 86. c 104. c 122. a 140. d 158. b
a a a
51. a 69. b 87. c 105. c 123. c 141. c 159. a
a a
52. b 70. b 88. d 106. c 124. b 142. b
a a
53. c 71. c 89. a 107. b 125. c 143. c
a a
54. a 72. b 90. b 108. b 126. d 144. c
a a
55. c 73. b 91. a 109. b 127. b 145. b
12 - 36 Test Bank for Accounting Principles, Ninth Edition

BRIEF EXERCISES
BE 160
Dauber and Jackson decide to organize a partnership. Dauber invests $25,000 cash, and
Jackson contributes $5,000 and equipment having a book value of $3,500 and a fair market value
of $10,000.

Instructions
Prepare the entry to record each partners investment.
Ans: N/A, SO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA

Solution 160 (5 min.)

Cash................................................................................ 25,000
Dauber, Capital. 25,000

Cash............................................................................. 5,000
Equipment........................................................................... 10,000
Jackson, Capital......................................................................... 15,000

BE 161
Santo Company and Renfro Company decide to merge their proprietorships into a partnership
called Crestwood Company. The balance sheet of Renfro Company shows:
Accounts Receivable $15,000
Less: Allowance for doubtful accounts 1,500 $13,500

Equipment $20,000
Less: Accumulated depreciation 10,000 $10,000

The partners agree that the net realizable value of the receivables is $12,500 and that the fair
market value of the equipment is $15,000.

Instructions
Indicate how the four accounts should appear in the opening balance sheet of the partnership.
Ans: N/A, SO: 2, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Problem Solving, IMA: Reporting
 Accounting for Partnerships 12 - 37

Solution 161 (4 min.)

CRESTWOOD COMPANY
Balance Sheet (partial)
Assets
Accounts Receivable $15,000
Less: Allowance for Doubtful Accounts 2,500 $12,500
Equipment 15,000

BE 162
The Frick & Frack Co. reports net income of $28,000. Interest allowances are Frick $3,000 and
Frack $5,000; partner salary allowances are Frick $18,000 and Frack $10,000 and the remainder
is shared equally.

Instructions
Indicate the division of net income to each partner, and prepare the entry to distribute the net
income.
Ans: N/A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA

Solution 162 (6 min.)

Division of Net Income
Frick Frack Total
Salary allowance $18,000 $10,000 $28,000
Interest allowance on partners capital 3,000 5,000 8,000
Total salaries and interest 21,000 15,000 36,000
Remaining income, ($8,000) ($28,000 $36,000)
Frick ($8,000 50%) (4,000)
Frack ($8,000 50%) (4,000)
Total remainder (8,000)
Total division of net income $17,000 $11,000 $28,000
The entry to record the division of net income is:

Income Summary............................................................................ 28,000

Frick, Capital........................................................................... 17,000
Frack, Capital......................................................................... 11,000

BE 163
Northern Co. had beginning capital balances on January 1, 2010, as follows: Andy Golic $30,000
and Jim Carney $25,000. During the year, drawings were Golic $15,000 and Carney $8,000. Net
income was $50,000, and the partners share income equally.

Instructions
Prepare the partners capital statement for the year.
Ans: N/A, SO: 4, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Problem Solving, IMA: Reporting
12 - 38 Test Bank for Accounting Principles, Ninth Edition

Solution 163 (4 min.)

NORTHERN COMPANY
Partners Capital Statement

Golic Carney Total

Beginning Capital $30,000 $25,000 $55,000
Add: Net Income 25,000 25,000 50,000
55,000 50,000 105,000
Less: Drawings 15,000 8,000 23,000
Ending Capital $40,000 $42,000 $82,000

BE 164
After liquidating noncash assets and paying creditors, account balances in the Main Co. are Cash
$29,000, A Capital (Cr.) $11,000, B Capital (Cr,) $8,000 and C Capital (Cr.) $10,000. The partners
share income equally.

Instructions
Journalize the final distribution of cash to the partners.
Ans: N/A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA

Solution 164 (4 min.)

A, Capital.............................................................................................. 11,000
B, Capital.............................................................................................. 8,000
C, Capital.............................................................................................. 10,000
Cash....................................................................................... 29,000

BE 165
Dailey Company at December 31 has cash $40,000, noncash assets $200,000, liabilities
$110,000, and the following capital balances: Dickinson $90,000 and Meierhoff $40,000. The firm
is liquidated, and $240,000 in cash is received for the noncash assets. Dickinson and Meierhoff
income ratios are 60% and 40%, respectively.

Instructions
Prepare a cash distribution schedule.
Ans: N/A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Problem Solving, IMA: Reporting
 Accounting for Partnerships 12 - 39

Solution 165 (5 min.)

DAILEY COMPANY
Schedule of Cash Payments
Noncash Dickinson Meierhoff
Cash + Assets = Liabilities + Capital + Capital
Balances before
Liquidation $ 40,000 $200,000 $110,000 $ 90,000 $40,000
Sale of noncash assets
and allocation of losses 240,000 (200,000) 24,000 16,000
New balances 280,000 -0- 110,000 114,000 56,000
Pay liabilities (110,000) _____ (110,000)
New balances 170,000 -0- -0- 114,000 56,000

Cash distribution $170,000 $ -0- $ -0- $114,000 $56,000

a
BE 166
In Taylor Co., capital balances are Oscor $60,000 and Glenda $75,000. The partners share
income equally. Jared is admitted to the firm with a 40% interest by an investment of cash of
$65,000. Journalize the admission of Jared.
Ans: N/A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA

a
Solution 166 (3 min.)
Cash...................................................................................................... 65,000
Oscor, Capital (50% $15,000*)........................................................... 7,500
Glenda, Capital (50% $15,000*)......................................................... 7,500
Jared, Capital (40% $200,000)............................................... 80,000
*[(60,000 + $75,000 + $65,000) 40%] $65,000 = $15,000.
a
BE 167
Ron and Linda are partners who share profits 60% and 40%. Their capital balances were both
$90,000 before Kelly was admitted to the partnership. Kelly contributed $120,000 in cash to the
partnership for a 30% interest.

Instructions
Compute the capital balances of Ron and Linda after Kelly is admitted to the partnership.
Ans: N/A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Problem Solving, IMA: Reporting

a
Solution 167 (4 min.)
Rons capital balance: $90,000 + {$120,000 [($180,000 + $120,000) .30]} .60 = $108,000

Lindas capital balance: $90,000 + {$120,000 [($180,000 + $120,000) .30]} .40 = $102,000
12 - 40 Test Bank for Accounting Principles, Ninth Edition
a
BE 168
Capital balances in Carson Co. are Donald $50,000, Anne $38,000, and Harry $25,000. The
partners share income equally. Harry receives $35,000 from partnership assets in withdrawing
from the firm.

Instructions
Journalize the withdrawal of Harry.
Ans: N/A, SO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA

a
Solution 168 (3 min.)
Harry, Capital........................................................................................ 25,000
Donald, Capital (50% $10,000).......................................................... 5,000
Anne, Capital (50% $10,000)............................................................. 5,000
Cash............................................................................................. 35,000
a
BE 169
Nick, Alan, and Tim are partners who share profits 40%, 20%, and 40%. Their capital balances
were $630,000, $420,000, and $210,000, respectively, before Tims retirement. Tim was paid
$270,000 from partnership assets to buy his interest.

Instructions
Compute the capital balances of Nick and Alan after Tim has withdrawn.
Ans: N/A, SO: 7, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Problem Solving, IMA: Reporting

a
Solution 169 (4 min.)
Nicks capital balance: $630,000 [($270,000 $210,000) X 40/60] = $590,000

Alans capital balance: $420,000 [($270,000 $210,000) X 20/60] = $400,000

EXERCISES
Ex. 170
Mark Bahr and Robert Engler decide to form a partnership. Bahr invests $25,000 cash and
accounts receivable of $30,000 less allowance for doubtful accounts of $2,000. Engler
contributes $20,000 cash and equipment having a $6,000 book value. It is agreed that the
allowance account should be $3,000 and the fair market value of the equipment is $10,000.
Instructions
Prepare the necessary journal entry to record the formation of the partnership.
Ans: N/A, SO: 2, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA
 Accounting for Partnerships 12 - 41

Solution 170 (6 min.)

Cash ($25,000 + $20,000).................................................................... 45,000
Accounts Receivable............................................................................. 30,000
Equipment............................................................................................. 10,000
Allowance for Doubtful Accounts.................................................. 3,000
Bahr, Capital ($25,000 + $30,000 $3,000)................................. 52,000
Engler, Capital ($20,000 + $10,000)............................................. 30,000

Ex. 171
Joe Mann and Sam Trane operate separate auto repair shops. On January 1, 2010, they decide
to combine their separate businesses which were operated as proprietorships to form M & S Auto
Repair, a partnership. Information from their separate balance sheets is presented below:
Mann Auto Repair Trane Auto Repair
Cash $10,000 $12,000
Accounts receivable 9,000 10,000
Allowance for doubtful accounts 1,000 500
Accounts payable 5,000 6,000
Notes payable 3,000
Salaries payable 1,000 1,500
Equipment 12,000 24,000
Accumulated amortizationEquipment 2,000 4,000

It is agreed that the expected realizable value of Mann's accounts receivable is $8,000 and
Trane's receivables is $7,000. The fair market value of Mann's equipment is $13,000 and the
value of Trane's equipment is $20,000. It is further agreed that the new partnership will assume
all liabilities of the proprietorships with the exception of the notes payable on Trane's balance
sheet which he will pay himself.
Instructions
Prepare the journal entries necessary to record the formation of the partnership.
Ans: N/A, SO: 2, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA
PC: Problem Solving, IMA: FSA

Solution 171 (15 min.)

Cash...................................................................................................... 10,000
Accounts Receivable............................................................................. 9,000
Equipment............................................................................................. 13,000
Allowance for Doubtful Accounts.................................................. 1,000
Salaries Payable.......................................................................... 1,000
Accounts Payable......................................................................... 5,000
J. Mann, Capital........................................................................... 25,000
(To record J. Mann's investment)

Cash...................................................................................................... 12,000
Accounts Receivable............................................................................. 10,000
Equipment............................................................................................. 20,000
Allowance for Doubtful Accounts.................................................. 3,000
Salaries Payable.......................................................................... 1,500
Accounts Payable......................................................................... 6,000
S. Trane, Capital........................................................................... 31,500
(To record S. Trane's investment)
12 - 42 Test Bank for Accounting Principles, Ninth Edition

Ex. 172
M. Flaherty, P. Denny, and G. Newman are forming a partnership. Flaherty is transferring $75,000
of personal cash to the partnership. Denny owns land worth $22,000 and a small building worth
$120,000, which she transfers to the partnership. Newman transfers to the partnership cash of
$14,000, accounts receivable of $48,000 and equipment worth $28,000. The partnership expects
to collect $43,000 of the accounts receivable.

Instructions
(a) Prepare the journal entries to record each of the partners investments.
(b) What amount would be reported as total owners equity immediately after the investments?
Ans: N/A, SO: 2, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA
PC: Problem Solving, IMA: FSA

Solution 172 (10 min.)

(a) Cash ............................................................................................ 75,000
Flaherty, Capital................................................................... 75,000

Land ............................................................................................ 22,000

Building........................................................................................ 120,000
Denny, Capital..................................................................... 142,000

Cash ............................................................................................ 14,000

Accounts Receivable.................................................................... 48,000
Equipment.................................................................................... 28,000
Allowance for Doubtful Accounts.......................................... 5,000
Newman, Capital................................................................. 85,000

(b) $75,000 + $142,000 + $85,000 = $302,000

Ex. 173
L. Pinella (beginning capital, $80,000) and H. Johnston (beginning capital $120,000) are partners.
During 2010, the partnership earned net income of $90,000, and Pinella made drawings of
$24,000 while Johnston made drawings of $32,000.

Instructions
(a) Assume the partnership income-sharing agreement calls for income to be divided 45% to
Pinella and 55% to Johnston. Prepare the journal entry to record the allocation of net income.
(b) Assume the partnership income-sharing agreement calls for income to be divided with a
salary of $40,000 to Pinella and $35,000 to Johnston, with the remainder divided 45% to
Pinella and 55% to Johnston. Prepare the journal entry to record the allocation of net income.
(c) Assume the partnership income-sharing agreement calls for income to be divided with a
salary of $55,000 to Pinella and $45,000 to Johnston, interest of 10% on beginning capital,
and the remainder divided 50%-50%. Prepare the journal entry to record the allocation of net
income.
(d) Compute the partners ending capital balances under the assumption in part (c).
Ans: N/A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA
PC: Problem Solving, IMA: FSA
 Accounting for Partnerships 12 - 43

Solution 173 (15 min.)

(a) Income Summary......................................................................... 90,000
L. Pinella, Capital ($90,000 X 45%)..................................... 40,500
H. Johnston, Capital ($90,000 X 55%)................................. 49,500

(b) Income Summary......................................................................... 90,000

L. Pinella, Capital [$40,000 + ($15,000 X 45%)]................ 46,750
H. Johnston, Capital [$35,000 + ($15,0000 X 55%)]......... 43,250

(c) Income Summary......................................................................... 90,000

L. Pinella, Capital................................................................. 48,000
H. Johnston, Capital............................................................ 42,000

Pinella: [$55,000 + $8,000 ($30,000 X 50%)]

Johnston: [$45,000 + $12,000 ($30,000 X 50%)]

(d) Pinella: $80,000 + $48,000 $24,000 = $104,000

Johnston: $120,000 + $42,000 $32,000 = $130,000

Ex. 174
The Jones and Yancey partnership reports net income of $45,000. Partner salary allowances are
Jones $18,000 and Yancey $12,000. Any remaining income is shared 60:40.

Instructions
Determine the amount of net income allocated to each partner.
Ans: N/A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: Quantitive Methods

Solution 174 (5 min.)

Smith Wilson Total
Salary allowance $18,000 $12,000 $30,000
Remaining income, $15,000
Jones ($15,000 60%) 9,000
Yancey ($15,000 40%) 6,000 15,000
Total division $27,000 $18,000 $45,000

Ex. 175
Cain, Foley, and Hardy formed a partnership on January 1, 2010. Cain invested $60,000, Foley
$60,000 and Hardy $140,000. Cain will manage the store and work 40 hours per week in the
store. Foley will work 20 hours per week in the store, and Hardy will not work. Each partner
withdrew 30 percent of his income distribution during 2010. If there was no income distribution to
a partner, there were no withdrawals of cash.
Instructions
Compute the partners' capital balances at the end of 2010 under the following independent
conditions: (Hint: Use T accounts to determine each partner's capital balances.)
12 - 44 Test Bank for Accounting Principles, Ninth Edition

Ex. 175 (Cont.)

(1) Net income is $120,000 and the income ratio is Cain 40%, Foley 35%, and Hardy 25%.
(2) Net income is $140,000 and the partnership agreement only specifies a salary of $50,000 to
Cain and $30,000 to Foley.
(3) Net income is $86,000 and the partnership agreement provides for (a) a salary of $40,000 to
Cain and $40,000 to Foley, (b) interest on beginning capital balances at the rate of 10%, and
(c) any remaining income or loss is to be shared by Cain 40%, Foley 35%, and Hardy 25%.
Ans: N/A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Problem Solving, IMA: Reporting

Solution 175 (15 min.)

(1)
Cain, Capital Foley, Capital Hardy, Capital
14,400 60,000 12,600 60,000 9,000 140,000
48,000 42,000 30,000
93,600 89,400 161,000

Net Income % Distribution % Drawings

Cain $120,000 40 $ 48,000 30 $14,400
Foley 120,000 35 42,000 30 12,600
Hardy 120,000 25 30,000 30 9,000
$120,000 $36,000

(2)
Bass, Capital Foley, Capital Hardy, Capital
21,000 60,000 15,000 60,000 6,000 140,000
70,000 50,000 20,000
109,000 95,000 154,000

Cain Foley Hardy Total

Salary $50,000 $30,000 $ 0 $ 80,000
Remainder 20,000 20,000 20,000 60,000
Total $70,000 $50,000 $20,000 $140,000
30% = Drawings $21,000 $15,000 $ 6,000 $ 42,000

(3)
Cain, Capital Foley, Capital Hardy, Capital
11,400 60,000 11,700 60,000 2,700 140,000
38,000 39,000 9,000
86,600 87,300 146,300

Cain Foley Hardy Total

Salary $40,000 $40,000 $ 0 $80,000
Interest 6,000 6,000 14,000 26,000
Remainder ($20,000) (8,000) (7,000) (5,000) (20,000)
Total $38,000 $39,000 $ 9,000 $86,000
30% = Drawings $11,400 $11,700 $ 2,700 $25,800
 Accounting for Partnerships 12 - 45

Ex. 176
Decker and Mader have a partnership agreement which includes the following provisions
regarding sharing net income or net loss:
1. A salary allowance of $54,000 to Decker and $36,000 to Mader.
2. An interest allowance of 10% on capital balances at the beginning of the year.
3. The remainder to be divided 60% to Decker and 40% to Mader.
The capital balance on January 1, 2010, for Decker and Mader was $90,000 and $120,000,
respectively. During 2010, the Decker and Mader Partnership had sales of $495,000, cost of
goods sold of $290,000, and operating expenses of $75,000.
Instructions
Prepare an income statement for the Decker and Mader Partnership for the year ended
December 31, 2010. As a part of the income statement, include a Division of Net Income to each
of the partners.
Ans: N/A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Problem Solving, IMA: Reporting

Solution 176 (15 min.)

DECKER AND MADER PARTNERSHIP
Income Statement
For the Year Ended December 31, 2010
Sales...................................................................................................................... $495,000
Cost of goods sold.................................................................................................. 290,000
Gross profit............................................................................................................. 205,000
Operating expenses............................................................................................... 75,000
Net income ............................................................................................................ $130,000

Division of Net Income

Decker Mader Total
Salary allowance $54,000 $36,000 $ 90,000
Interest allowance
($90,000 10%) 9,000
($120,000 10%) 12,000
Total interest 21,000
Total salaries and interest 63,000 48,000 111,000
Remaining income, $19,000
Decker ($19,000 60%) 11,400
Mader ($19,000 40%) 7,600
Total remainder 19,000
Total division $74,400 $55,600 $130,000
12 - 46 Test Bank for Accounting Principles, Ninth Edition

Ex. 177
Fink & Elston Co. reports net income of $34,000. The partnership agreement provides for annual
salaries of $24,000 for Fink and $15,000 for Elston and interest allowances of $4,000 to Fink and
$6,000 to Elston. Any remaining income or loss is to be shared 70% by Fink and 30% by Elston.

Instructions
Compute the amount of net income distributed to each partner.
Ans: N/A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Problem Solving, IMA: Reporting

Solution 177 (8 min.)

Fink Elston Total
Salary allowance $24,000 $15,000 $39,000
Interest allowance 4,000 6,000 10,000
Total salaries and interest 28,000 21,000 49,000
Remaining deficiency ($15,000)
Fink ($15,000 70%) (10,500)
Elston ($15,000 30%) (4,500) (15,000)
Total division $17,500 $16,500 $34,000

Ex. 178
The adjusted trial balance of the Melton and Yount Partnership for the year ended December 31,
2010, appears below:
MELTON AND YOUNT PARTNERSHIP
Adjusted Trial Balance
December 31, 2010
Debit Credit
Current Assets....................................................................................... 19,000
Plant Assets.......................................................................................... 80,000
Current Liabilities.................................................................................. 7,000
Long-term Debt..................................................................................... 50,000
Melton, Capital...................................................................................... 20,000
Melton, Drawing.................................................................................... 4,000
Yount, Capital........................................................................................ 18,000
Yount, Drawing...................................................................................... 7,000
Sales..................................................................................................... 100,000
Cost of Goods Sold............................................................................... 62,000
Operating Expenses.............................................................................. 23,000
195,000 195,000

The partnership agreement stipulates that a division of partnership net income or net loss is to be
made as follows:
1. A salary allowance of $12,000 to Melton and $23,000 to Yount.
2. The remainder is to be divided equally.
 Accounting for Partnerships 12 - 47

Ex. 178 (Cont.)

Instructions
(a) Prepare a schedule which shows the division of net income to each partner.
(b) Prepare the closing entries for the division of net income and for the drawing accounts at
December 31, 2010.
Ans: N/A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Problem Solving, IMA: Reporting

Solution 178 (15 min.)

(a) Schedule for Division of Net Income
Sales $100,000
Cost of goods sold 62,000
Gross profit 38,000
Operating expenses 23,000
Net income $ 15,000

Melton Yount Total

Salary allowance $12,000 $23,000 $35,000
Remaining deficiency, ($20,000)
Melton ($20,000) 50% (10,000)
Yount ($20,000) 50% (10,000)
Total remainder (20,000)
Total division $ 2,000 $13,000 $15,000

(b) Dec. 31 Income Summary........................................................ 15,000

Melton, Capital..................................................... 2,000
Yount, Capital...................................................... 13,000
(To close net income to capital)

31 Melton, Capital............................................................ 4,000

Yount, Capital.............................................................. 7,000
Melton, Drawing................................................... 4,000
Yount, Drawing..................................................... 7,000
(To close drawing accounts to capital)

Ex. 179
Jan Penny and Barb Gant have formed the PG Partnership, and have capital balances of
$130,000 and $100,000, respectively, on January 1, 2010. On June 1, 2010, Gant invested an
additional $30,000. Also during the year, Penny withdrew $60,000 and Gant withdrew $48,000.
Sales for the year amounted to $360,000 and expenses were $260,000. Penny and Gant share
income and losses on a 3:1 basis.

Instructions
(a) Prepare the closing entries at December 31, 2010, for the PG Partnership.
(b) Prepare a partners' capital statement for 2010.
Ans: N/A, SO: 3,4, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA
PC: Problem Solving, IMA: FSA
12 - 48 Test Bank for Accounting Principles, Ninth Edition

Solution 179 (15 min.)

(a) Sales............................................................................................ 360,000
Expenses............................................................................. 260,000
Income Summary................................................................. 100,000

Income Summary......................................................................... 100,000

Penny, Capital ($100,000 75%)........................................ 75,000
Gant, Capital ($100,000 25%).......................................... 25,000

Penny, Capital.............................................................................. 60,000

Gant, Capital................................................................................ 48,000
Penny, Drawing.................................................................... 60,000
Gant, Drawing...................................................................... 48,000

(b) PG Partnership
Partners' Capital Statement
For the Year Ended December 31, 2010

Penny Gant Totals

Capital, January 1, 2010 $130,000 $100,000 $230,000
Add: Additional Investment 30,000 30,000
Net Income 75,000 25,000 100,000
205,000 155,000 360,000
Less: Drawings 60,000 48,000 108,000
Capital, December 31, 2010 $145,000 $107,000 $252,000

Ex. 180
Ace, Goran, and Notte are forming The Acgono Partnership. Ace is transferring $45,000 of
personal cash and equipment worth $38,000 to the partnership. Goran owns land worth $27,000
and a small building worth $112,000, which he transfers to the partnership. There is a long-term
mortgage of $30,000 on the land and building, which the partnership assumes. Notte transfers
cash of $10,000, accounts receivable of $54,000, supplies worth $5,000, and equipment worth
$33,000 to the partnership. The partnership expects to collect $48,000 of the accounts
receivable.

Instructions
Prepare a classified balance sheet for the partnership after the partners investments on
December 31, 2010.
Ans: N/A, SO: 4, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Problem Solving, IMA: Reporting
 Accounting for Partnerships 12 - 49

Solution 180 (15 min.)

THE ACGONO PARTNERSHIP
Balance Sheet
December 31, 2010

Assets
Current Assets
Cash ........................................................................... $55,000
Accounts Receivable................................................... $54,000
Less: Allowance for Doubtful Accounts........................ (6,000) 48,000
Supplies...................................................................... 5,000
Total current assets............................................ $108,000

Property, Plant and Equipment

Land ........................................................................... $27,000
Building....................................................................... 112,000
Equipment................................................................... 71,000
Total property, plant, and equipment................... 210,000
Total assets.......................................................................... $318,000

Liabilities and Owners Equity

Long-term Liabilities
Mortgage Payable....................................................... $30,000
Owners Equity
Ace, Capital................................................................. $83,000
Goran, Capital............................................................. 109,000
Notte, Capital.............................................................. 96,000
Total owners equity............................................ 288,000
Total liabilities and owners equity........................................ $318,000

Ex. 181
The Mago Company at December 31 has cash $50,000, noncash assets $250,000, liabilities
$138,000, and the following capital balances: Gonzalez $112,000 and Maldonado $50,000. The
firm is liquidated, and $275,000 in cash is received for the noncash assets. Gonzalez and
Maldonado income ratios are 60% and 40%, respectively.

Instructions
Prepare the entries to record:
(a) The sale of noncash assets.
(b) The allocation of the gain or loss on liquidation to the partners.
(c) Payment of creditors.
(d) Distribution of cash to the partners.
Ans: N/A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA
PC: Problem Solving, IMA: FSA
12 - 50 Test Bank for Accounting Principles, Ninth Edition

Solution 181 (10 min.)

(a) Cash ............................................................................................ 275,000

Noncash Assets................................................................... 250,000
Gain on Realization............................................................. 25,000

(b) Gain on Realization...................................................................... 25,000

Gonzalez, Capital ($25,000 X 60%)..................................... 15,000
Maldonado, Capital ($25,000 X 40%).................................. 10,000

(c) Liabilities....................................................................................... 138,000

Cash.................................................................................... 138,000

(d) Gonzalez, Capital......................................................................... 127,000

Maldonado, Capital....................................................................... 60,000
Cash.................................................................................... 187,000

Ex. 182
Prepare a partners' capital statement for Zimmermann Company based on the following
information.
Zimmer Mann
Beginning capital $30,000 $27,000
Drawings during year 15,000 8,000

Net income was $35,000, and the partners share income 60% to Zimmer and 40% to Mann.
Ans: N/A, SO: 4, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Problem Solving, IMA: Reporting

Solution 182 (8 min.)

ZIMMERMANN COMPANY
Partners' Capital Statement

Zimmer Mann Total

Beginning capital $30,000 $27,000 $57,000
Add: Net income 21,000 14,000 35,000
51,000 41,000 92,000
Less: Drawings 15,000 8,000 23,000
Ending capital $36,000 $33,000 $69,000

Ex. 183
On December 31, Thompson Company has cash $30,000, noncash assets $150,000, and
liabilities $80,000. Capital balances were Stine $55,000 and Pine $45,000. The firm is liquidated,
and the noncash assets are sold for $125,000. Stine and Pine share income in a 60:40 ratio.

Instructions
Prepare entries to record (a) the sale of noncash assets and (b) the allocation of the gain (loss)
on liquidation to the partners.
Ans: N/A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA
 Accounting for Partnerships 12 - 51

Solution 183 (6 min.)

(a) Cash.............................................................................................. 125,000
Loss on Realization........................................................................ 25,000
Noncash Assets................................................................... 150,000

(b) Stine, Capital ($25,000 60%)...................................................... 15,000

Pine, Capital ($25,000 40%)....................................................... 10,000
Loss on Realization............................................................. 25,000

Ex. 184
The ABC Partnership is to be liquidated and you have been hired to prepare a Schedule of Cash
Payments for the partnership. Partners Andie, Becka, and Candice share income and losses in
the ratio of 4:3:3, respectively. Assume the following:
1. The noncash assets were sold for $75,000.
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.)

Instructions
Using the above information, complete the Schedule of Cash Payments below:

ABC PARTNERSHIP
Schedule of Cash Payments

Noncash Andie Becka Candice

Item Cash + Assets = Liabilities + Capital + Capital + Capital
Balances before
liquidation 25,000 + 150,000 = 50,000 + 25,000 + 35,000 + 65,000
Ans: N/A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Problem Solving, IMA: Reporting

Solution 184 (20 min.)

ABC PARTNERSHIP
Schedule of Cash Payments

Noncash Andie Becka Candice

Item Cash + Assets = Liabilities + Capital + Capital + Capital
Balances before
liquidation 25,000 + 150,000 = 50,000 + 25,000 + 35,000 + 65,000
Sale of noncash
assets (1) 75,000 + (150,000) = + (30,000) + (22,500) + (22,500)
New balance 100,000 + -0- = 50,000 + (5,000) + 12,500 + 42,500
Pay liabilities (2) (50,000) = (50,000)
New balances 50,000 + -0- = -0- + (5,000) + 12,500 + 42,500
Allocate capital
deficiency 5,000 + (2,500) + (2,500)
New balances 50,000 + -0- = -0- + -0- + 10,000 + 40,000
Cash distribution (3) (50,000) = (10,000) + (40,000)
Final balances -0- -0- -0- -0- -0- -0-
12 - 52 Test Bank for Accounting Principles, Ninth Edition

Ex. 185
The MFP Partnership is to be liquidated when the ledger shows the following:
Cash $ 50,000
Noncash Assets 200,000
Liabilities 50,000
Moss, Capital 75,000
Fairly, Capital 100,000
Pratt, Capital 25,000

Moss, Fairly, and Pratt's income 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 $150,000 in cash.
Ans: N/A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA
PC: Problem Solving, IMA: FSA

Solution 185 (15 min.)

1. Cash................................................................................................ 150,000
Loss on Realization......................................................................... 50,000
Noncash Assets...................................................................... 200,000

2. Moss, Capital ($50,000 6/10)....................................................... 30,000

Fairly, Capital ($50,000 3/10)....................................................... 15,000
Pratt, Capital ($50,000 1/10)........................................................ 5,000
Loss on Realization................................................................ 50,000

3. Liabilities......................................................................................... 50,000
Cash....................................................................................... 50,000

4. Moss, Capital ($75,000 $30,000).................................................. 45,000

Fairly, Capital ($100,000 $15,000)................................................ 85,000
Pratt, Capital ($25,000 $5,000)..................................................... 20,000
Cash ($50,000 + $150,000 $50,000)................................... 150,000

Ex. 186
Prior to the distribution of cash to the partners, the accounts of ABC Company are: Cash $30,000,
Ace, Capital (Dr.) $10,000, Ball, Capital (Cr.) $25,000, and Catt, Capital (Cr.) $15,000. They share
income on a 5:3:2 basis.

Instructions
Prepare entries to record (a) the absorption of Ace's capital deficiency by the other partners and
(b) the distribution of cash to the partners with credit balances.
Ans: N/A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA
 Accounting for Partnerships 12 - 53

Solution 186 (8 min.)

(a) Ball, Capital ($10,000 3/5)......................................................... 6,000
Catt, Capital ($10,000 2/5)........................................................ 4,000
Ace, Capital......................................................................... 10,000

(b) Ball, Capital ($25,000 $6,000)................................................... 19,000

Catt, Capital ($15,000 $4,000)................................................... 11,000
Cash.................................................................................... 30,000

Ex. 187
The HK Partnership is liquidated when the ledger shows:
Cash $60,000
Noncash Assets 90,000
Liabilities 44,000
Howell, Capital 100,000
Kenton, Capital 6,000

Howell and Kenton's income ratios are 3:2, respectively.

Instructions
Prepare a schedule of cash payments, assuming that the noncash assets were sold for $70,000.
Assume that any partners capital deficiencies cannot be paid to the partnership.
Ans: N/A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Problem Solving, IMA: Reporting

Solution 187 (10 min.)

HK Partnership
Schedule of Cash Payments

Noncash Howell Kenton

Cash + Assets = Liabilities + Capital + Capital
Balances before
liquidation $ 60,000 $90,000 $44,000 $100,000 $6,000
Sale of noncash assets
and allocation of losses 70,000 (90,000) (12,000) (8,000)
New Balances 130,000 -0- 44,000 88,000 (2,000)
Pay Liabilities (44,000) (44,000)
New Balances 86,000 -0- -0- 88,000 (2,000)
Allocate capital deficiency (2,000) 2,000
Cash Distribution $(86,000) $ -0- $ -0- $(86,000) $ -0-
a
Ex. 188
The Dobler and Menke Partnership has partner capital account balances as follows:
Dobler, Capital $550,000
Menke, Capital 250,000

The partners share income and losses in the ratio of 60% to Dobler and 40% to Menke.
12 - 54 Test Bank for Accounting Principles, Ninth Edition

Solution 187 (Cont.)

Instructions
Prepare the journal entry on the books of the partnership to record the admission of Sloan as a
new partner under the following three independent circumstances.
1. Sloan pays $350,000 to Dobler and $150,000 to Menke for one-half of each of their
ownership interest in a personal transaction.
2. Sloan invests $850,000 in the partnership for a one-third interest in partnership capital.
3. Sloan invests $175,000 in the partnership for a one-third interest in partnership capital.
Ans: N/A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA
PC: Problem Solving, IMA: FSA

a
Solution 188 (20 min.)
1. Dobler, Capital.............................................................................. 275,000
Menke, Capital............................................................................. 125,000
Sloan, Capital...................................................................... 400,000
(To record admission of Sloan by purchase)
Total net assets and total capital of the partnership do not change.

2. Cash............................................................................................. 850,000
Dobler, Capital..................................................................... 180,000
Menke, Capital..................................................................... 120,000
Sloan, Capital...................................................................... 550,000
(To record admission of Sloan and bonus to old partners)

Total capital of existing partnership $ 800,000

Investment by new partner, Sloan 850,000
Total capital of new partnership $1,650,000

Sloan's capital credit = $1,650,000 1/3 = $550,000

Sloan's investment $850,000
Sloan's capital credit 550,000
Bonus to old partners $300,000

Allocation to old partners

Dobler (60% $300,000) $180,000
Menke (40% $300,000) 120,000
$300,000

3. Cash............................................................................................. 175,000
Dobler, Capital.............................................................................. 90,000
Menke, Capital............................................................................. 60,000
Sloan, Capital...................................................................... 325,000
(To record Sloan's admission and bonus)
 Accounting for Partnerships 12 - 55

a
Solution 188 (Cont.)

Total capital of existing partnership $800,000

Investment by new partner, Sloan 175,000
Total capital of new partnership $975,000

Sloan's capital credit = $975,000 1/3 = $325,000

Bonus to Sloan ($325,000 $175,000) = $150,000
Reduction of old partners' capital
Dobler ($150,000 60%) $ 90,000
Menke ($150,000 40%) 60,000
$150,000
a
Ex. 189
Hoy, Lever, and Stone share income on a 6:3:1 basis. They have capital balances of $80,000,
$60,000, and $45,000, respectively, when Morton is admitted to the partnership.

Instructions
Prepare the journal entry to record the admission of Morton into the partnership if Morton
purchases one-half of Hoy's equity for $45,000; one-half of Lever's equity for $22,000; and one-
third of Stone 's equity for $18,000.
Ans: N/A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA

Solution 189 (5 min.)

Hoy, Capital........................................................................................... 40,000
Lever, Capital........................................................................................ 30,000
Stone, Capital........................................................................................ 15,000
Morton, Capital............................................................................. 85,000
a
Ex. 190
Jim Welch and Sam Thayer share partnership income on a 3:2 basis. They have capital balances
of $560,000 and $280,000, respectively, when Bill Ryan is admitted to the partnership.

Instructions
Prepare the journal entry to record the admission of Ron Ryan under each of the following
assumptions:

(a) Ryan invests $340,000 for a 25% ownership interest.

(b) Ryan invests $200,000 for a 25% ownership interest.
(c) Ryan invests an amount that gives him a 25% ownership interest.
Ans: N/A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA
PC: Problem Solving, IMA: FSA
12 - 56 Test Bank for Accounting Principles, Ninth Edition
a
Solution 190 (20 min.)
(a) Cash............................................................................................. 340,000
Ryan, Capital....................................................................... 295,000
Welch, Capital (3/5 $45,000)............................................ 27,000
Thayer (2/5 $45,000)........................................................ 18,000

Total capital of existing partnership $ 840,000

Investment by new partner, Ryan 340,000
Total capital of new partnership $1,180,000

Ryan's capital credit ($1,180,000 25%) $295,000

Investment by new partner, Ryan $340,000

Ryan's capital credit 295,000
Bonus to existing partners $ 45,000

(b) Cash............................................................................................. 200,000

Welch, Capital ($60,000 3/5)..................................................... 36,000
Thayer ($60,000 2/5)................................................................. 24,000
Ryan, Capital....................................................................... 260,000

Total capital of existing partnership $ 840,000

Investment by new partner, Ryan 200,000
Total capital of new partnership $1,040,000

Ryan's capital credit ($1,040,000 25%) $260,000

Investment by new partner, Ryan $200,000

Ryan's capital credit 260,000
Reduction of existing partners $ (60,000)

(c) Cash............................................................................................. 280,000

Ryan, Capital....................................................................... 280,000

$840,000 .75 = $1,120,000; $1,120,000 $840,000 = $280,000

a
Ex. 191
Donna Leeds and Ann Reeves have capital accounts of $480,000 and $420,000, respectively.
Jeff Evans and Pete Patton are to join the partnership. Evans invests $450,000 in the partnership
for which he receives a capital credit of $450,000. Patton purchases a one-half interest from
Leeds for $300,000 and a one-fourth interest from Reeves for $90,000.

Instructions
(a) Prepare the journal entries to record the admission of Evans and Patton to the partnership.
(b) Determine the capital balances of the partners after the admission of Evans and Patton.
Ans: N/A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA
PC: Problem Solving, IMA: FSA
 Accounting for Partnerships 12 - 57
a
Solution 191 (10 min.)
(a) Cash............................................................................................. 450,000
Evans, Capital...................................................................... 450,000

Mills, Capital................................................................................. 240,000

Reeves, Capital............................................................................ 105,000
Patton, Capital..................................................................... 345,000

(b) Mills ($480,000 $240,000) $ 240,000

Reeves ($420,000 $105,000) 315,000
Evans 450,000
Patton 345,000
Total Capital $1,350,000
a
Ex. 192
Dobson, Lancaster, and Pender are partners who share profits and losses 50%, 30%, and 20%,
respectively. Their capital balances are $150,000, $90,000, and $60,000, respectively.

Instructions
(a) Assume Shannon joins the partnership by investing $120,000 for a 25% interest with
bonuses to the existing partners. Prepare the journal entry to record his investment.
(b) Assume instead that Dobson leaves the partnership. Dobson is paid $180,000 with a bonus
to the retiring partner. Prepare the journal entry to record Dobson's withdrawal.
Ans: N/A, SO: 6,7, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA
PC: Problem Solving, IMA: FSA

a
Solution 192 (10 min.)
(a) Cash........................................................................... 120,000
Shannon, Capital ($420,000 25%)..................... 105,000
Dobson, Capital ($15,000 50%)......................... 7,500
Lancaster, Capital ($15,000 30%)...................... 4,500
Pender, Capital ($15,000 20%).......................... 3,000

(b) Dobson, Capital.......................................................... 150,000

Lancaster, Capital ($30,000 3/5).............................. 18,000
Pender, Capital ($30,000 2/5).................................. 12,000
Cash...................................................................... 180,000
a
Ex. 193
Bale, Heller, and Winrow share income and losses in a ratio of 3:2:5, respectively. The capital
account balances of the partners are as follows:
Bale, Capital $600,000
Heller, Capital 360,000
Winrow, Capital 240,000
12 - 58 Test Bank for Accounting Principles, Ninth Edition
a
Ex. 193 (Cont.)

Instructions
Prepare the journal entry on the books of the partnership to record the withdrawal of Winrow
under the following independent circumstances:
1. The partners agree that Winrow should be paid $280,000 by the partnership for his interest.
2. The partners agree that Winrow should be paid $180,000 by the partnership for his interest.
3. Bale agrees to pay Winrow $180,000 for one-half of his capital interest and Heller agrees to
pay Winrow $180,000 for one-half of his capital interest in a personal transaction among the
partners.
Ans: N/A, SO: 7, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA
PC: Problem Solving, IMA: FSA

a
Solution 193 (15 min.)
1. Winrow, Capital............................................................................... 240,000
Bale, Capital.................................................................................... 24,000
Heller, Capital.................................................................................. 16,000
Cash....................................................................................... 280,000
(To record withdrawal and bonus to Winrow)
Bonus to Winrow $40,000 ($280,000 $240,000)
Allocation to reduce remaining partners' capital:
Bale (3/5 $40,000) $24,000
Heller (2/5 $40,000) 16,000
$40,000

2. Winrow, Capital............................................................................... 240,000

Bale, Capital........................................................................... 36,000
Heller, Capital......................................................................... 24,000
Cash....................................................................................... 180,000
(To record withdrawal of Winrow and bonus to remaining
partners)
Bonus to remaining partners $60,000 ($240,000 $180,000)
Allocation to increase remaining partners' capital:
Bale (3/5 $60,000) $36,000
Heller (2/5 $60,000) 24,000
$60,000

3. Winrow, Capital............................................................................... 240,000

Bale, Capital........................................................................... 120,000
Heller, Capital......................................................................... 120,000
(To record withdrawal of Winrow)
Total net assets and total capital of the partnership do not change.
 Accounting for Partnerships 12 - 59
a
Ex. 194
Eaton, Korman, and Roland have capital balances of $150,000, $100,000, and $75,000,
respectively, and their income ratios are 4:2:4.

Instructions
Record the withdrawal of Roland from the partnership under each of the following assumptions:
1. Roland is paid $75,000 from partnership assets.
2. Roland is paid $90,000 from partnership assets.
3. Roland is paid $55,000 from partnership assets.
Ans: N/A, SO: 7, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA
PC: Problem Solving, IMA: FSA

a
Solution 194 (10 min.)
1. Roland, Capital................................................................................ 75,000
Cash....................................................................................... 75,000

2. Roland, Capital................................................................................ 75,000

Eaton, Capital ($15,000 4/6)......................................................... 10,000
Korman, Capital ($15,000 2/6)..................................................... 5,000
Cash....................................................................................... 90,000

3. Roland, Capital................................................................................ 75,000

Eaton, Capital ($20,000 4/6)................................................ 13,333
Korman, Capital ($20,000 2/6)............................................. 6,667
Cash....................................................................................... 55,000

COMPLETION STATEMENTS
195. The ______________ Act provides the basic rules for the formation and operation of
partnerships in more than 90% of the states.
Ans: N/A, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

196. A partnership characteristic which enables each partner to act on behalf of the partnership
when engaging in partnership business is called ______________.
Ans: N/A, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

197. A major disadvantage of the partnership form of organization is ______________, which

makes each partner personally and individually liable for all partnership liabilities.
Ans: N/A, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

198. The capital accounts indicate each partner's ______________ investment, while the
partner's drawing accounts are ______________ owner's equity accounts.
Ans: N/A, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Reporting

199. The ______________ ratio specifies the basis for sharing income and losses.
Ans: N/A, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics
12 - 60 Test Bank for Accounting Principles, Ninth Edition

200. An income ratio based on ______________ balances may be appropriate when the
amount of funds invested in the partnership is critical to the partnership.
Ans: N/A, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None,
IMA: Business Economics

201. A ______________ allowance or ______________ on partners' capital accounts are not

expenses of the partnership when they are specified as the basis for sharing income and
losses.
Ans: N/A, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Reporting

202. In liquidating a partnership, it is necessary to convert ______________ into cash and to

allocate any ______________ or ______________ to the partners based on their income
ratios.
Ans: N/A, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None,
IMA: Business Economics

203. A debit balance in a partner's capital account is called a _____________.

Ans: N/A, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Reporting

a
204. A new partner may be admitted to the partnership by ______________ the interest of an
existing partner, or by ______________ assets in the partnership.
Ans: N/A, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

a
205. When a new partner's capital interest on the date of admittance is less than his or her
investment in the firm, a ______________ results for the ______________ partner(s).
Ans: N/A, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

a
206. If a bonus is given to a new partner, the old partners' capital accounts are decreased
based on their ______________ ratio prior to the admission of the new partner.
Ans: N/A, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

Answers to Completion Statements

195. Uniform Partnership 201. salary, interest
196. mutual agency 202. noncash assets, gains, losses
197. unlimited liability 203. capital deficiency
a
198. permanent, temporary 204. purchasing, investing
a
199. income 205. bonus, old
a
200. capital 206. Income
 Accounting for Partnerships 12 - 61

MATCHING
207. Match the items below by entering the appropriate code letter in the space provided.

A. Mutual agency G. Purchase of an interest

B. Unlimited liability H. Partnership liquidation
C. Partnership agreement I. Capital deficiency
D. Income ratio J. Distribution of cash to partners in
E. Partners' capital statement liquidation of a partnership.
F. Admission by investment

______ 1. Each partner is personally and individually liable for partnership debts.

______ 2. Made on basis of partners' capital balances.

______ 3. Explains changes in individual partner's capital accounts during a period.

______ 4. Each partner can bind the partnership so long as the action appears to be appropriate
for the partnership.

______ 5. Business terminates.

______ a6. Results in an increase in total net assets and total capital of the partnership.

______ 7. Capital account with a debit balance.

______ 8. The basis for sharing income and losses.

______ a9. Total net assets and total capital of the partnership do not change.

______ 10. Written or verbal contract establishing duties and responsibilities of partners.
Ans: N/A, SO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

Answers to Matching
a
1. B 6. F
2. J 7. I
3. E 8. D
a
4. A 9. G
5. H 10. C

SHORT-ANSWER ESSAY QUESTIONS

S-A E 208
Identify and explain the principal characteristics of the partnership form of business organization.
Ans: N/A, SO: 1, Bloom: S, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
None, IMA: Reporting
12 - 62 Test Bank for Accounting Principles, Ninth Edition

Solution 208
The principal characteristics of a partnership form of organization are as follows:
(a) It is a voluntary association of two or more individuals based on a legally binding contract.
(b) The partners act in a mutual agency relationship; that is, each partner acts on behalf of the
partnership when engaging in partnership business.
(c) A partnership has limited life. That is, a partnership may be ended voluntarily at any time
through the acceptance of a new partner into the firm or the withdrawal of a partner. And, a
partnership may be ended involuntarily by the death or incapacity of a partner.
(d) The partners have unlimited liability. Each partner is personally and individually liable for all
partnership liabilities.
(e) All partnership assets are co-owned by the partners; that is, the assets are owned jointly by
all the partners.

S-A E 209
Drift and Wood are discussing how income and losses should be divided in a partnership they
plan to form. What factors should be considered in determining the division of net income or net
loss?
Ans: N/A, SO: 3, Bloom: S, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA
PC: None, IMA: Business Economics

Solution 209
Factors to be considered in determining how income and loss should be divided are: (1) a fixed
ratio is easy to apply and it may be an equitable basis in some circumstances; (2) capital balance
ratios when the funds invested in the partnership are considered the most critical factor; and (3)
salary allowance and/or interest allowance coupled with a fixed ratio. This last approach gives
specific recognition to differences that may exist among partners by providing salary allowances
for time worked and interest allowances for capital invested.

S-A E 210
Are the financial statements of a partnership similar to those of a proprietorship? Discuss.
Ans: N/A, SO: 4, Bloom: S, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
None, IMA: Reporting

Solution 210
The financial statements of a partnership are similar to those of a proprietorship. The differences
are due to the number of partners involved. The income statement for a partnership is identical to
the income statement for a proprietorship except for the division of net income. The owners'
equity statement is called the partners' capital statement. This statement shows the changes in
each partner's capital account and in total partnership capital during the year. On the balance
sheet each partner's capital balance is reported in the owners' equity section.
 Accounting for Partnerships 12 - 63

S-A E 211
A partnership is liquidated by selling the non-cash assets, paying the creditors in full, and
distributing the remaining assets to the partners. Explain why gains and losses on the realization
of non-cash assets are distributed to the partners based on their income ratios, whereas cash is
distributed to the partners based on their equity as shown in their capital accounts. What effects
does the payment or nonpayment of a capital deficiency have on the distribution of cash to the
partners?
Ans: N/A, SO: 5, Bloom: S, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
None, IMA: Reporting

Solution 211
Gains and losses on the realization of non-cash assets are like income and losses; that is, they
are income statement items and, therefore, are distributed to partners based on their income and
loss ratios. Cash is a balance sheet item and is the basis for any residual equity after liquidation;
therefore, the final asset amount cash should be distributed to partners in accordance with their
equity balances.

When the capital deficiency is paid, the payment is credited to the partner with the debit balance
in the capital account. Then, the remaining cash is distributed to the partners with credit balances
on the basis of their balances.

If the capital deficiency is not paid, the deficiency is allocated to the partners with credit balances
on the basis of their income ratios. The remaining cash is then distributed to these partners on
the basis of their capital balances.

S-A E 212 (Ethics)

Three doctors, Terry Black, Mike Layne, and Danny Powell, opened a family medicine clinic. All
three doctors had been lifelong friends. All belonged to the same religious faith. All were very
active in church affairs, and tried to mold their professional behavior to their religious beliefs.

About a year ago, Dr. Black announced that he was leaving the church. The others noticed that
his personality also began to change. He began to dress in flamboyant styles, and he started
wearing expensive-looking jewelry. His temper became unstableone minute he was calm, and
the next, he might be throwing charts down the hall and screaming. He started coming to the
office late, and forgetting to see some of his patients before he left again. The other two at first
were stunned at the changes. His wife asked them whether they thought he might have a drinking
problem. After finally deciding to investigate, they found what looked to them like a large amount
of cocaine, (hundreds of plastic sacks of white powder) tucked away in boxes of old medical
equipment.

Frightened, Drs. Layne and Powell decided to act quickly. Their partnership agreement said
nothing about dissolving the partnershiponly about what to do if one of them died. They
therefore secretly rented office space across town and began to move the most necessary
equipment and supplies to the new office. A month later, they changed the locks on the old office
and began seeing patients in the new office without any notice to Dr. Black at all. Dr. Black simply
came in at around ten o'clock as usual, and found himself locked out of an empty office.

Required:
Did Drs. Layne and Powell act ethically in their ending of the partnership? Explain.
Ans: N/A, SO: 1, Bloom: S, Difficulty: Easy, Min: 5, AACSB: Ethics, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Decision Modeling, AICPA PC:
Professional Demeanor, IMA: Decision Analysis
12 - 64 Test Bank for Accounting Principles, Ninth Edition

Solution 212
No, Drs. Layne and Powell did not act ethically in the way they ended the partnership. It is
important to distinguish between legal obligations and ethical obligations. The partnership may
well be legally dissolved by their action. However, ethically, they had no right to act unilaterally,
without giving Dr. Black a chance to defend himself or to correct his behavior. It also looks like
they may have had an obligation to report their apparent cocaine "find" to the appropriate
authorities, or at least to determine whether the substance was, in fact, cocaine. It is clear that the
doctors had the right and obligation to protect Dr. Black's patients, but there is no evidence given
that he was actually endangering his patients. Drs. Layne and Powell's actions seem to be
cowardly, and an attempt to keep from facing unpleasant realities.

S-A E 213 (Communication)

Will Kelty and Steve Harlan began detail work on automobiles as a hobby. First, they used a mail-
order kit to add "pin striping" to their own cars, a 1968 Mustang and a 1970 GTO Judge,
respectively. Then Will added more flourishes, including his name. Steve practiced painting
flames on his Judge. Gradually, their cars became recognized around town and others began to
ask them to add a flourish here or there to their cars. They were talked into attending a "muscle
car" show in a nearby large city to show off their cars. They had more requests for work than they
could handle. Now, they are considering quitting their other jobs and making this a permanent
business. Steve, for example, turns down more jobs than he accepts and still gets more requests
every week.

Will and Steve are unsure how to proceed. They like the idea of a partnership, but they only know
they work well togetherthings like how to split payment have just been settled individually for
each job, depending on which one did more work. Will's father suggests a written partnership
agreement. Will disagrees. He believes that it will spoil the whole arrangement by reducing it to
words.

Required:
Write a brief note to Will explaining why he needs a partnership agreement.
Ans: N/A, SO: 1, Bloom: S, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
None, IMA: Business Economics
 Accounting for Partnerships 12 - 65

Solution 213

Dear Will,

Your dad asked me to write to you. I am an accountant with the CPA firm Clinton,
Grant, and Thomas, and I do a lot of work for partnerships.

I understand that you don't want a written partnership agreement. I'd like to share
with you a few things you may not have considered. First, I completely agree that a
written agreement won't solve all your problems. I would even say that a poorly
written agreement is worse than none at all. However, I don't know any
partnerships in this town that have lasted for more than a year or two that don't
have a written agreement. If they didn't have one at first, they learned by hard
experience exactly why they needed one.

I'd say the biggest advantage is that it forces both of you to spell out what you
expect of the other party. You have discussed, I understand, how profits are to be
split. Do both of you agree entirely? What if you decide another method would be
more fair? What do you plan to do if you want to add a partner? Who makes the
decisions about which building to rent, and what kind of help to hire? All these
things can be spelled out in a partnership agreement.

I hope you will seriously consider drawing up a good partnership agreement.

Otherwise, you may condemn yourselves to spending more time clearing up
misunderstandings than on fixing up cars.

Let me know if I can help. I know a couple of attorneys in town who could get the
job done without charging an arm and a leg.

Sincerely,

(signature)