ACCOUNTING FOR PARTNERSHIP THEORIES b. Inventory at the lower of weighted-average cost or market.

Formation c. Equipment at each proprietor’s carrying amount.

1
. The Revised Uniform Partnership Act defines a partnership as d. Equipment at fair value. AICPA 0591 T-39
a. Any association of two or more persons or entities.
b. An association of two or more persons to carry on as co-owners a business for profit. *. Hayes and Jenkins formed a partnership, each contributing assets to the business. Hayes
c. A separate legal entity for most legal purposes. contributed inventory with a current market value in excess of its carrying amount. Jenkins
d. An entity created by following statutory requirements. Gleim contributed real estate with a carrying amount in excess of its current market value. At what
amount should the partnership record each of the following assets? AICPA 1190 T-40
2
. The partnership agreement is an express contract among the partners (the owners of the Inventory Real estate
business). Such an agreement generally does not include a. Market value Market value
a. A limitation on a partner’s liability to creditors. b. Market value Carrying amount
b. The rights and duties of the partners. c. Carrying amount Market value
c. The allocation of income between the partners. d. Carrying amount Carrying amount
d. The rights and duties of the partners in the event of partnership dissolution. Gleim
5
. Partnership capital and drawing accounts are similar to the corporate
*. A partnership records a partner’s investment of assets in the business at a. Paid-in capital, retained earnings, and dividend accounts.
a. The market value of the assets invested. b. Retained earnings account.
b. A special value set by the partners. c. Paid-in capital and retained earnings accounts.
c. The partner’s book value of the assets invested. d. Preferred and common stock accounts. Gleim
d. Any of the above, depending upon the partnership agreement. RPCPA 0598
6
3
. On April 30, 1993, Algee, Belger, and Ceda formed a partnership by combining their separate
. When property other than cash is invested in a partnership, at what amount should the business proprietorships. Algee contributed cash of $50,000, Belger contributed property with
noncash property be credited to the contributing partner’s capital account? a $36,000 carrying amount, a $40,000 original cost, and $80,000 fair value. The partnership
a. Fair value at the date of recognition. accepted responsibility for the $35,000 mortgage attached to the property. Ceda contributed
b. Contributing partner’s original cost. equipment with a $30,000 carrying amount, a $75,000 original cost, and $55,000 fair value.
c. Assessed valuation for property tax purposes. The partnership agreement specifies that profits and losses are to be shared equally but is
d. Contributing partner’s tax basis. AICPA 0594 F-35 silent regarding capital contributions. Which partner has the largest April 30, 1993, capital
4
account balance?
. When property other than cash is invested in a partnership, at what amount should the a. Algee. c. Ceda. AICPA 0593 T-9
noncash property be credited to the contributing partner’s capital account? b. Belger. d. All capital account balance are equal.
a. Fair value at the date of contribution.
b. Contributing partner’s original cost. Bonus Method
c. Assessed valuation for property tax purposes. Goodwill Method
d. Contributing partner’s tax basis. AICPA 0594 F-35 Admission of New Partners
7
. The goodwill and bonus methods are two means of adjusting for differences between the net
*. Four individuals who were previously sole proprietors form a partnership. Each partner book value and the fair value of partnerships when new partners are admitted. Which of the
contributes inventory and equipment for use by the partnership. What basis should the following statement about these methods is correct?
partnership use to record the contributed assets? a. The bonus method does not revalue assets to market values.
a. Inventory at the lower of FIFO cost or market. b. The bonus method revalues assets to market values.
 c. Both methods result in the same balances in partner capital accounts. balances, and residual profit or loss is divided equally. Partnership profit before interest was
d. Both methods result in the same total value of partner capital accounts, but the individual $4,000. By what amount should Zinc’s capital account change for the year?
capital accounts vary. Gleim a. $1,000 decrease. c. $11,000 decrease.
b. $2,000 increase. d. $12,000 increase. AICPA 1195 F-23
Purchase Method
*. Assume that C has a P50,000 equity in the partnership of “A, B, and C.” Partner C arranges to Partner’s Share in Profits
sell his entire interest to D for P80,000 Cash. Partners A and B agree to the admission of D. Bonus Computation
11
At what amount will the equity of the incoming partner, D, be shown in the balance sheet? . The Oxide and Ferris partnership agreement provides for Oxide to receive a 20% bonus on
a. at P50,000. profits before the bonus. Remaining profits and losses are divided between Oxide and Ferris
b. at P50,000 and the P30,000 will be divided equally among the original partners. in the ratio of 2 to 3, respectively. Which partner has a greater advantage when the
c. at P80,000 partnership has a profit or when it has a loss?
d. at P80,000 and the P30,000 will represent Goodwill which will be apportioned between AICPA 1191 T-15 a. b. c. d.
the existing equities of A and B. RPCPA 1079 Profit Oxide Oxide Ferris Ferris
Loss Ferris Oxide Oxide Ferris
Bonus Method
8
. In the Adel-Brick partnership, Adel and Brick had a capital ratio of 3:1 and a profit and loss Total Partnership Income
ratio of 2:1, respectively. The bonus method was used to record Colter’s admittance as a new Retirement of Partners
partner. What ratio would be used to allocate, to Adel and Brick, the excess of Colter’s Revaluation of Assets
contribution over the amount credited to Colter’s capital account? 35. Before the withdrawal of Alice from their partnership, the partners agreed to adjust assets to
a. Adel and Brick’s new relative capital ratio. their fair values. Accordingly, the appraisal increase was credited to (M)
b. Adel and Brick’s new relative profit and loss ratio. a. Income Summary. c. Appraisal Capital.
c. Adel and Brick’s old capital ratio. b. Deferred Credit. d. Partners’ Capital Accounts. RPCPA 0598
d. Adel and Brick’s old profit and loss ratio. AICPA 0r92 T-35
Bonus Method
Goodwill Method 12
. Aimee Allen retires from the partnership of Allen, Beck, and Chale. Allen’s cash settlement
Distribution of Income from the partnership was based on new goodwill determined at the date of retirement plus the
9
. If the partnership agreement does not specify how income is to be allocated, profits should be carrying amount of the other net assets. As a consequence of the settlement, the capital
allocated accounts of Beck and Chale were decreased. In accounting for Allen’s withdrawal, the
a. Equally. partnership could have used the
b. In proportion to the weighted-average of capital invested during the period. AICPA, adapted a. b. c. d.
c. Equitably so that partners are compensated for the time and effort expended on behalf of
Bonus method No No Yes Yes
the partnership
Goodwill method Yes No Yes No
d. In accordance with an established ratio. Gleim
13
Interest . When Mill retired from the partnership of Mill, Yale, and Lear, the final settlement of Mill’s
Change in Capital Account interest exceeded Mill’s capital balance. Under the bonus method, the excess
10
. During 1994, Young and Zinc maintained average capital balances in their partnership of a. Was recorded as goodwill.
$160,000 and $100,000 respectively. The partners receive 10% interest on average capital b. Was recorded as an expense.
c. Reduced the capital balances of Yale and Lear.
d. Had no effect on the capital balances of Yale and Lear. AICPA 1194 F-35
 c. Indicates the distribution of successive amounts of available cash to each partner.
41. When NANA retired from the partnership of NANA, NINA, and NONA, the final settlement of d. Assumes contribution of personal assets by partners unless there is a substantial
NANA’s interest exceeded her capital balance. Under the bonus method, the excess is presumption of personal insolvency by the partners. Gleim
a. Recorded as goodwill.
b. Recorded as an expense. *. The final cash distribution to the partners in a partnership in liquidation should be made in
c. Of no effect to the capital accounts of Nina and Nona. accordance with
d. Deducted from the capital account balances of Nina and None. RPCPA 1096 a. Balances of the partners’ capital accounts.
b. Partners’ profit and loss sharing ratio.
Goodwill Method c. Ratio of capital contributions made by the partners.
Liquidation of Partnerships d. Ratio of capital contributions less withdrawals made by the partners. RPCPA 1081, 0586
14
. Quinn, Rob, Sam and Tod are partners sharing profits and losses equally. The partnership is
insolvent and is to be liquidated. The status of the partnership and each partner is as follows: *. In a partnership liquidation, the final cash distribution to the partners should be made in
Partnership Personal Assets (Exclusive Personal Liabilities (Exclusive accordance with the
Capital Balance of Partnership Interest) of Partnership Interest) a. Partners’ profit and loss sharing ratio.
Quinn $ 15,000 $100,000 $40,000 b. Balances of the partners’ capital accounts.
Rob 10,000 30,000 60,000 c. Ratio of capital contributions made by the partners.
Sam (20,000) 80,000 5,000 d. Ratio of capital contributions less withdrawals made by the partners. RPCPA 1079
Tod (30,000) 1,000 28,000
$(25,000)
Assuming the partnership operates in a state where the Uniform Partnership Act applies, the
partnership creditors
a. Must first seek recovery against Sam because he is solvent personally and has a negative
capital balance.
b. Will not be paid in full regardless of how they proceed legally because the partnership
assets are less than the partnership liabilities.
c. Will have to share Rob’s interest in the partnership on a pro rata basis with his personal
creditors.
d. Have first claim to the partnership assets before any partner’s personal creditors have
rights to the partnership assets. AICPA 0575 T-6

Lump Sum Liquidation

Installment Liquidation
15
. Prior to partnership liquidation, a schedule of possible losses is frequently prepared to
determine the amount of cash that may be safely distributed to the partners. The schedule of
possible losses
a. Consists of each partner’s capital account plus loan balance, divided by that partner’s
profit-and-loss sharing ratio.
b. Shows the successive losses necessary to eliminate the capital accounts of partners
(assuming no contribution of personal assets by partners).
1
. REQUIRED: The definition of a partnership.
DISCUSSION: (B) A partnership, as defined by the Revised Uniform Partnership Act, is “the association of two or more
persons to carry on as co-owners a business for profit.”
Answer (A) is incorrect because a partnership must be a profit-oriented business arrangement among co-owners.
Answer (C) is incorrect because a partnership is viewed for most legal purposes as a group of individuals rather than a
separate entity. Answer (D) is incorrect because no statutory requirements need be met to create a general partnership.
A partnership may arise regardless of the intent of the parties when an arrangement satisfies the definition. However,
specific statutory requirements must be followed to create a limited partnership.
2
. REQUIRED: The item not usually included in the partnership agreement.
DISCUSSION: (A) Unlike corporations, general partnerships do not insulate a partner from liability to creditors. Each
general partner has unlimited liability for partnership debts. The partners may agree among themselves to limit a
partner’s liability, but such a provision cannot limit direct liability to creditors.
Answers (B), (C), and (D) are incorrect because each is typically found in the agreement among partners that
establishes the partnership. A written agreement is not necessary for the creation of a partnership, but such an
agreement is commonly used to define the rights and duties among the partners.
3
. REQUIRED: The credit to the contributing partner’s capital account when noncash assets are invested.
DISCUSSION: (A) The capital account should be credited for the current fair vaue of the assets at the date of the
contribution. This approach is consistent with APB 29, which states that “in general, accounting for nonmonetary
transactions should be based on the fair values of the assets (or services) involved.” APB 21, specifically applies this
principle to nonmonetary assets received in nonreciprocal transfers.
Answers (B), (C), and (D) are incorrect because fair value best reflects the economic substance of the transaction.
4
. REQUIRED: The credit to the contributing partner’s capital account when noncash assets are invested.
DISCUSSION: (A) The capital account should be credited for the current fair value of the assets at the date of the
contribution.
Answers (B), (C), and (D) are incorrect because fair value best reflects the economic substance of the transaction.
5
. REQUIRED: The corporate accounts similar to partnership capital and drawing accounts.
DISCUSSION: (A) Partnership capital accounts are similar to corporate paid-in capital and retained earnings accounts.
Partnership drawing accounts are similar to corporate dividend accounts. They are nominal accounts that are closed to
partnership capital and corporate retained earnings, respectively, at the end of each period.
Answers (B) and (C) are incorrect because drawing accounts are comparable to dividends accounts. Answer (D) is
incorrect because drawing accounts are not like preferred and common stock accounts.
6
. REQUIRED: The partner with the largest capital account balance after contributions of monetary and nonmonetary
asset.
DISCUSSION: (C) When partners invest nonmonetary assets in the business, those assets should be recorded at their
current fair value (market value) at the date they are contributed. Hence, Algee’s capital account balance is $50,000
and Ceda’s account is $55,000. Likewise, the amount in Belger’s capital account should represent the fair value of the
assets contributed. For this purpose, the property is valued net of the mortgage. Thus, Belger’s capital account should
be $45,000 ($80,000 market value of property – $35,000 mortgage assumed by the partnership).
Answers (A), (B), and (D) are incorrect because Ceda’s balance is the largest.
7
. REQUIRED: The true statement about the bonus and goodwill methods.
DISCUSSION: (A) The goodwill method revalues assets to adjust the total value of partnership capital. The bonus
method simply readjusts capital accounts and makes no changes in existing asset accounts.
Answer (B) is incorrect because the bonus method does not revalue assets. Answers (C) and (D) are incorrect because
the goodwill method revalues assets and the bonus method adjusts capital accounts. Consequently, total partnership
capital differs between the two methods.
8
. REQUIRED: The ratio used to allocated to the original partners, the excess of the new partner’s contribution over
the amount credited to his/her capital account.
DISCUSSION: (D) The bonus method simply readjusts capital accounts and makes no changes in existing asset
accounts. The existing partners will share 2:1 in the allocation of the bonus. The entry will be to debit cash (or the fair
value of the property) contributed, and the credit Colter’s capital account for a lesser amount. The excess will be
credited in the ratio 2:1 to the original partners’ capital balances.
Answers (A), (B), and (C) are incorrect because the bonus to the original partners is effectively a profit and should be
allocated based on the old profit and loss ratio.
9
. REQUIRED: The profit and loss allocation among partners absent a provision in the partnership agreement.
DISCUSSION: (A) Under the RUPA, profits are to be distributed equally among partners and losses are to be distributed
in the same manners are profits unless the partnership agreement provides otherwise. This equal distribution should be
based on the number of partners rather than in proportion to the partners’ capital balances.
Answers (B), (C), and (D) are incorrect because each may be a basis for allocation only if it is provided in the
partnership agreement.
10
. REQUIRED: The change in a partner’s capital account.
DISCUSSION: (A) The partners are to receive 10% interest and then split the residual profit or loss. Because interest
exceeds partnership profit before interest, the residual loss is $22,000 {[10% x ($160,000 + $100,000)] - $4,000}. Zinc’s
account is increased by $10,000 (10% x $100,000) and decreased by $110,000 (50% x $22,000 loss), a net decrease of
$1,000.
Answer (B) is incorrect because $2,000 is 50% of the partnership profit before interest. Answer (C) is incorrect because
an $11,000 decrease does not include the $10,000 of interest owed to Zinc. Answer (D) is incorrect because a $12,000
increase equals 10% of capital plus 50% of residual profit.
11
. REQUIRED: The partner with a greater advantage when the partnership has a profit or when it has a loss.
DISCUSSION: (B) When the partnership has a loss, Ferris is allocated 60% and Oxide 40%. Hence, Oxide has the
advantage when the partnership has a loss. When the partnership has a profit, Oxide receives 20% plus 40% of the
remaining 80%, a total of 52% [20% + (40% x 80%)]. Thus, Oxide also that the advantage in this situation.
Answers (A), (C), and (D) are incorrect because Oxide has the advantage in the cah of either a profit or a loss.
12
. REQUIRED: The method(s) that could have been used to account for the partner’s withdrawal.
DISCUSSION: (D) Under the bonus method, revaluation of assets to reflect goodwill is not permitted. Consequently, if
the partnership had unrecorded goodwill, Allen would have received the balance in her capital account plus a share of
the unrecorded goodwill. The payment to Allen of a share of the unrecorded goodwill therefore would have resulted in
reductions of the capital balances of the remaining partners. Under the goodwill method, goodwill would be debited, and
the capital accounts would be credited in proportion to the partners’ profit and loss sharing percentages. Accordingly, no
decrease in the capital balances of the other partners would be necessary under the goodwill method.
Answers (A), (B), and (C) are incorrect because the bonus but not the goodwill method could have been used.
13
. REQUIRED: The treatment of the excess of the settlement of a partner’s interest over the capital balance.
DISCUSSION: (C) The bonus method reduces the capital accounts of the other partners because the bonus, that is, the
excess of settlement value over the retiring partner’s capital balance, is deemed to be paid to the withdrawing partner by
the remaining partners.
Answer (A) is incorrect because goodwill is not recorded under the bonus method. Answers (B) and (D) are incorrect
because the excess reduces the capital accounts; it is not an expense.
14
. REQUIRED: The rights of partnership creditors under the Uniform Partnership Act.
DISCUSSION: (D) The Uniform Partnership Act follows the legal concept of marshaling of assets. Accordingly, the
assets of the partnership are made available first to the partnership creditors. Only after their claims are fully satisfied
will the personal creditors of the partners be able to proceed against partnership assets. Similarly, the personal creditors
of each general partner have first claim to the personal assets of that general partner. The Federal Bankruptcy Reform
Act of 1978, however, altered the marshaling of assets concept with regard to the personal asset of a bankrupt partner
 when the partnership is also bankrupt. The trustee of a bankrupt partnership shares pro rata with the other general
unsecured creditors of a bankrupt general partner. However, partnership creditors retain their priority in partnership
assets under bankruptcy law. The Revised Uniform Partnership Act follows the federal law.
Answer (A) is incorrect because, after exhausting the partnership assets, the creditors must seek recovery against all
partners in one legal proceeding; i.e., the partners are jointly liable. Answer (B) is incorrect because the partnership
creditors ultimately have recourse to the personal assets of all the general partners. Answer (C) is incorrect because,
under the UPA, the partnership creditors have first claim to the partnership assets.
15
. REQUIRED: The true statement about a schedule of possible losses.
DISCUSSION: (B) A schedule of possible losses presents a series of incremental losses to indicate the amount of loss
in a liquidation that will eliminate each partner’s capital account. The presumption is that losses or partners’ capital
deficits will not be repaid by individual partners. The schedule is used to determine the amount of cash that may be
safely distributed to the individual partners without potential impairment of the rights of any party.
Answer (A) is incorrect because it describes the computation that determines the order in which partners’ capital
accounts will be eliminated by losses, not the amounts thereof. Answer (C) is incorrect because it describes a cash
distribution schedule. Answer (D) is incorrect because the presumption (for the schedule) is that losses or deficits will
not be repaid by individual partners.