Problems

LO 14-1

1.

Which of the following is not a reason for the popularity of

partnerships as a legal form for businesses?
a. Partnerships may be formed merely by an oral agreement.
b. Partnerships can more easily generate significant amounts of capital.
c. Partnerships avoid the double taxation of income that is found in
corporations.
d. In some cases, losses may be used to offset gains for tax purposes.

LO 14-1

2.

How does partnership accounting differ from corporate accounting?

a. The matching principle is not considered appropriate for partnership
accounting.
b. Revenues are recognized at a different time by a partnership than is
appropriate for a corporation.
c. Individual capital accounts replace the contributed capital and retained
earnings balances found in corporate accounting.
d. Partnerships report all assets at fair value as of the latest balance sheet
date.

LO 14-2

3.

Which of the following best describes the articles of partnership

agreement?
a. The purpose of the partnership and partners' rights and responsibilities
are required elements of the articles of partnership.
b. The articles of partnership are a legal covenant and must be expressed in
writing to be valid.
c. The articles of partnership are an agreement that limits partners' liability
to partnership assets.
d. The articles of partnership are a legal covenant that may be expressed
orally or in writing, and forms the central governance for a partnership's
operations.

LO 14-9

4.

Pat, Jean Lou, and Diane are partners with capital balances of
$50,000, $30,000, and $20,000, respectively. These three partners
share profits and losses equally. For an investment of $50,000 cash
(paid to the business), MaryAnn will be admitted as a partner with a
one-fourth interest in capital and profits. Based on this information,
which of the following best justifies the amount of MaryAnn's
investment?
a. MaryAnn will receive a bonus from the other partners upon her
admission to the partnership.
b. Assets of the partnership were overvalued immediately prior to
MaryAnn's investment.
c.

Page 657

The book value of the partnership's net assets was less than the fair value
immediately prior to MaryAnn's investment.

d. MaryAnn is apparently bringing goodwill into the partnership, and her

capital account will be credited for the appropriate amount.

LO 14-10

5.

A partnership has the following capital balances:

David is going to invest $105,000 into the business to acquire a 30

percent ownership interest. Goodwill is to be recorded. What will be
David's beginning capital balance?
a. $94,500.
b. $105,000.
c. $126,000.
d. $135,000.
LO 14-8

6.

A partnership has the following capital balances:

Krystal is going to pay a total of $240,000 directly to these three

partners to acquire a 25 percent ownership interest from each.
Goodwill is to be recorded. What is Dane's capital balance after the
transaction?
a. $210,000.
b. $255,000.
c. $340,000.
d. $352,000.
LO 14-9

7.

The capital balance for Bolcar is $110,000 and for Neary is $40,000.
These two partners share profits and losses 70 percent (Bolcar) and
30 percent (Neary). Kansas invests $50,000 in cash into the
partnership for a 30 percent ownership. The bonus method will be
used. What is Neary's capital balance after Kansas's investment?
a. $35,000.
b. $37,000.
c. $40,000.
d. $43,000.

LO 14-9

8.

Bishop has a capital balance of $120,000 in a local partnership, and

Cotton has a $90,000 balance. These two partners share profits and
losses by a ratio of 60 percent to Bishop and 40 percent to Cotton.
Lovett invests $60,000 in cash in the partnership for a 20 percent
ownership. The goodwill method will be used. What is Cotton's capital
balance after this new investment?
a. $99,600.
b. $102,000.
c. $112,000.
d. $126,000.

LO 14-9

9.

The capital balance for Messalina is $210,000 and for Romulus is

$140,000. These two partners share profits and losses 60 percent
(Messalina) and 40 percent (Romulus). Claudius invests $100,000 in
cash in the partnership for a 20 percent ownership. The bonus method
will be used. What are the capital balances for Messalina, Romulus,
and Claudius after this investment is recorded?
a. $216,000, $144,000, $90,000.
b. $218,000, $142,000, $88,000.
c. $222,000, $148,000, $80,000.
d. $240,000, $160,000, $100,000.

Page 658

LO 14-6

10. A partnership begins its first year with the following capital balances:

The articles of partnership stipulate that profits and losses be

assigned in the following manner:

Each partner is allocated interest equal to 5 percent of the

beginning capital balance.

Bernard is allocated compensation of $18,000 per year.

Any remaining profits and losses are allocated on a 3:3:4

basis, respectively.

Each partner is allowed to withdraw up to $5,000 cash per

year.

Assuming that the net income is $60,000 and that each partner
withdraws the maximum amount allowed, what is the balance in
Collins capital account at the end of that year?
a. $70,800.
b. $86,700.
c. $73,500.
d. $81,700.
LO 14-4, 145, 14-6

11. A partnership begins its first year of operations with the following
capital balances:

According to the articles of partnership, all profits will be assigned as

follows:

Winston will be awarded an annual salary of $20,000 with

$10,000 assigned to Salem.

The partners will be attributed interest equal to 10 percent of

the capital balance as of the first day of the year.

The remainder will be assigned on a 5:2:3 basis, respectively.

Each partner is allowed to withdraw up to $10,000 per year.

The net loss for the first year of operations is $20,000 and net income
for the subsequent year is $40,000. Each partner withdraws the
maximum amount from the business each period. What is the balance
in Winston's capital account at the end of the second year?
a. $102,600.
b. $104,400.
c. $108,600.
d. $109,200.
LO 14-10

12. A partnership has the following capital balances:

Profits and losses are split as follows: Allen (20 percent), Burns (30
percent), and Costello (50 percent). Costello wants to leave the
partnership and is paid $100,000 from the business based on
provisions in the articles of partnership. If the partnership uses the
bonus method, what is the balance of Burns's capital account after
Costello withdraws?
a. $24,000.
b. $27,000.
c. $33,000.
d. $36,000.
Page 659

Problems 13 and 14 are independent problems based on the

following scenario:
At year-end, the Circle City partnership has the following capital
balances:

Profits and losses are split on a 3:3:2:2 basis, respectively. Clark

decides to leave the partnership and is paid $90,000 from the
business based on the original contractual agreement.
LO 14-10

13. Using the goodwill method, what is Manning's capital balance after
Clark withdraws?
a. $133,000.
b. $137,500.
c. $140,000.
d. $145,000.

LO 14-10

14. If instead the partnership uses the bonus method, what is the balance
of Manning's capital account after Clark withdraws?
a. $100,000.
b. $126,250.

c. $130,000.
d. $133,750.
Problems 15 and 16 are independent problems based on the
following capital account balances:

LO 14-8

15. Darrow invests $270,000 in cash for a 30 percent ownership interest.

The money goes to the original partners. Goodwill is to be recorded.
How much goodwill should be recognized, and what is Darrow's
beginning capital balance?
a. $410,000 and $270,000.
b. $140,000 and $270,000.
c. $140,000 and $189,000.
d. $410,000 and $189,000.

LO 14-9

16. Darrow invests $250,000 in cash for a 30 percent ownership interest.

The money goes to the business. No goodwill or other revaluation is to
be recorded. After the transaction, what is Jennings's capital balance?
a. $160,000.
b. $168,000.
c. $170,200.
d. $171,200.

LO 14-9

17. Lear is to become a partner in the WS partnership by paying $80,000

in cash to the business. At present, the capital balance for Hamlet is
$70,000 and for MacBeth is $40,000. Hamlet and MacBeth share
profits on a 7:3 basis. Lear is acquiring 40 percent of the new
partnership.
a. If the goodwill method is applied, what will the three capital balances be
following the payment by Lear?
b. If the bonus method is applied, what will the three capital balances be
following the payment by Lear?

LO 14-9

18. The Distance Plus partnership has the following capital balances at
the beginning of the current year:

Each of the following questions should be viewed independently.

a.

Page 660

If Sergio invests $100,000 in cash in the business for a 25 percent

interest, what journal entry is recorded? Assume that the bonus method
is used.

b. If Sergio invests $60,000 in cash in the business for a 25 percent interest,

what journal entry is recorded? Assume that the bonus method is used.
c. If Sergio invests $72,000 in cash in the business for a 25 percent interest,

what journal entry is recorded? Assume that the goodwill method is

used.
LO 14-9

19. A partnership has the following account balances: Cash $50,000;

Other Assets $600,000; Liabilities $240,000; Nixon, Capital (50
percent of profits and losses) $200,000; Hoover, Capital (20 percent)
$120,000; and Polk, Capital (30 percent) $90,000. Each of the
following questions should be viewed as an independent situation:
a. Grant invests $80,000 in the partnership for an 18 percent capital
interest. Goodwill is to be recognized. What are the capital accounts
thereafter?
b. Grant invests $100,000 in the partnership to get a 20 percent capital
balance. Goodwill is not to be recorded. What are the capital accounts
thereafter?

LO 14-9

20. The Prince-Robbins partnership has the following capital account

balances on January 1, 2015:
Prince is allocated 80 percent of all profits and losses with the
remaining 20 percent assigned to Robbins after interest of 10 percent
is given to each partner based on beginning capital balances.
On January 2, 2015, Jeffrey invests $37,000 cash for a 20 percent
interest in the partnership. This transaction is recorded by the goodwill
method. After this transaction, 10 percent interest is still to go to each
partner. Profits and losses will then be split as follows: Prince (50
percent), Robbins (30 percent), and Jeffrey (20 percent). In 2015, the
partnership reports a net income of $15,000.
a. Prepare the journal entry to record Jeffrey's entrance into the partnership
on January 2, 2015.
b. Determine the allocation of income at the end of 2015.

LO 14-6

21. The partnership agreement of Jones, King, and Lane provides for the
annual allocation of the business's profit or loss in the following
sequence:

Jones, the managing partner, receives a bonus equal to 20

percent of the business's profit.

Each partner receives 15 percent interest on average capital

investment.

Any residual profit or loss is divided equally.

The average capital investments for 2015 were as follows:

How much of the $90,000 partnership profit for 2015 should be

assigned to each partner?
LO 14-4, 14-

22. Purkerson, Smith, and Traynor have operated a bookstore for a

5, 14-6

number of years as a partnership. At the beginning of 2015, capital

balances were as follows:

Due to a cash shortage, Purkerson invests an additional $8,000 in the

business on April 1, 2015.
Each partner is allowed to withdraw $1,000 cash each month.
The partners have used the same method of allocating profits and
losses since the business's inception:

Each partner is given the following compensation allowance

for work done in the business: Purkerson, $18,000; Smith,
$25,000; and Traynor, $8,000.

Each partner is credited with interest equal to 10 percent of

the average monthly capital balance for the year without regard
for normal drawings.

Any remaining profit or loss is allocated 4:2:4 to Purkerson,

Smith, and Traynor, respectively. The net income for 2015 is
$23,600. Each partner withdraws the allotted amount each
month.

What are the ending capital balances for 2015?

Page 661

LO 14-4, 145, 14-6

23. On January 1, 2014, the dental partnership of Left, Center, and Right
was formed when the partners contributed $20,000, $60,000, and
$50,000, respectively. Over the next three years, the business
reported net income and (loss) as follows:

During this period, each partner withdrew cash of $10,000 per year.
Right invested an additional $12,000 in cash on February 9, 2015.
At the time that the partnership was created, the three partners
agreed to allocate all profits and losses according to a specified plan
written as follows:

Each partner is entitled to interest computed at the rate of 12

percent per year based on the individual capital balances at the
beginning of that year.

Because of prior work experience, Left is entitled to an annual

salary allowance of $12,000, and Center is credited with $8,000
per year.

Any remaining profit will be split as follows: Left, 20 percent;

Center, 40 percent; and Right, 40 percent. If a loss remains, the
balance will be allocated: Left, 30 percent; Center, 50 percent;
and Right, 20 percent.

Determine the ending capital balance for each partner as of the end of

each of these three years.

LO 14-10

24. The E.N.D. partnership has the following capital balances as of the
end of the current year:

Answer each of the following independent questions:

a. Assume that the partners share profits and losses 3:3:2:2, respectively.
Fergie retires and is paid $190,000 based on the terms of the original
partnership agreement. If the goodwill method is used, what is the
capital balance of the remaining three partners?
b. Assume that the partners share profits and losses 4:3:2:1, respectively.
Pineda retires and is paid $280,000 based on the terms of the original
partnership agreement. If the bonus method is used, what is the capital
balance of the remaining three partners?
LO 14-10

25. The partnership of Matteson, Richton, and O'Toole has existed for a
number of years. At the present time the partners have the following
capital balances and profit and loss sharing percentages:

O'Toole elects to withdraw from the partnership, leaving Matteson and

Richton to operate the business. Following the original partnership
agreement, when a partner withdraws, the partnership and all of its
individual assets are to be reassessed to current fair values by an
independent appraiser. The withdrawing partner will receive cash or
other assets equal to that partner's current capital balance after
including an appropriate share of any adjustment indicated by the
appraisal. Gains and losses indicated by the appraisal are allocated
using the regular profit and loss percentages.
An independent appraiser is hired and estimates that the partnership
as a whole is worth $600,000. Regarding the individual assets, the
appraiser finds that a building with a book value of $180,000 has a fair
value of $220,000. The book values for all other identifiable assets
and liabilities are the same as their appraised fair values.
Page 662

Accordingly, the partnership agrees to pay O'Toole $120,000 upon

withdrawal. Matteson and Richton, however, do not wish to record any
goodwill in connection with the change in ownership.
Prepare the journal entry to record O'Toole's withdrawal from the
partnership.
LO 14-2, 14-

26. In the early part of 2015, the partners of Hugh, Jacobs, and Thomas

4, 14-6, 14-9

sought assistance from a local accountant. They had begun a new

business in 2014 but had never used an accountant's services.
Hugh and Jacobs began the partnership by contributing $150,000 and
$100,000 in cash, respectively. Hugh was to work occasionally at the
business, and Jacobs was to be employed full-time. They decided that
year-end profits and losses should be assigned as follows:

Each partner was to be allocated 10 percent interest

computed on the beginning capital balances for the period.

A compensation allowance of $5,000 was to go to Hugh with a

$25,000 amount assigned to Jacobs.

Any remaining income would be split on a 4:6 basis to Hugh

and Jacobs, respectively.

In 2014, revenues totaled $175,000, and expenses were $146,000

(not including the partners' compensation allowance). Hugh withdrew
cash of $9,000 during the year, and Jacobs took out $14,000. In
addition, the business paid $7,500 for repairs made to Hugh's home
and charged it to repair expense.
On January 1, 2015, the partnership sold a 15 percent interest to
Thomas for $64,000 cash. This money was contributed to the
business with the bonus method used for accounting purposes.
Answer the following questions:
a. Why was the original profit and loss allocation, as just outlined,
designed by the partners?
b. Why did the drawings for 2014 not agree with the compensation
allowances provided for in the partnership agreement?
c. What journal entries should the partnership have recorded on December
31, 2014?
d. What journal entry should the partnership have recorded on January 1,
2015?
LO 14-3, 149, 14-10

27. Following is the current balance sheet for a local partnership of

doctors:

The following questions represent independent situations:

a. E is going to invest enough money in this partnership to receive a 25
percent interest. No goodwill or bonus is to be recorded. How much
should E invest?
b. E contributes $36,000 in cash to the business to receive a 10 percent
interest in the partnership. Goodwill is to be recorded. Profits and losses
have previously been split according to the following percentages: A, 30
percent; B, 10 percent; C, 40 percent; and D, 20 percent. After E makes

this investment, what are the individual capital balances?

c. E contributes $42,000 in cash to the business to receive a 20 percent
interest in the partnership. Goodwill is to be recorded. The four original
partners share all profits and losses equally. After E makes this
investment, what are the individual capital balances?
d. E contributes $55,000 in cash to the business to receive a 20 percent
interest in the partnership. No goodwill or other asset revaluation is to be
recorded. Profits and losses have previously been split according to the
following percentages: A, 10 percent; B, 30 percent; C, 20 percent; and
D, 40 percent. After E makes this investment, what are the individual
capital balances?
e. C retires from the partnership and, as per the original partnership
agreement, is to receive cash equal to 125 percent of her final capital
balance. No goodwill or other asset revaluation is to be recognized. All
partners share profits and losses equally. After the withdrawal, what are
the individual capital balances of the remaining partners?
Page 663

LO 14-5, 146, 14-9

28. Boswell and Johnson form a partnership on May 1, 2013. Boswell

contributes cash of $50,000; Johnson conveys title to the following
properties to the partnership:

The partners agree to start their partnership with equal capital

balances. No goodwill is to be recognized.
According to the articles of partnership written by the partners, profits
and losses are allocated based on the following formula:

Boswell receives a compensation allowance of $1,000 per

month.

All remaining profits and losses are split 60:40 to Johnson and
Boswell, respectively.

Each partner can make annual cash drawings of $5,000

beginning in 2014.

Net income of $11,000 is earned by the business during 2013.

Walpole is invited to join the partnership on January 1, 2014. Because
of her business reputation and financial expertise, she is given a 40
percent interest for $54,000 cash. The bonus approach is used to
record this investment, made directly to the business. The articles of
partnership are amended to give Walpole a $2,000 compensation
allowance per month and an annual cash drawing of $10,000.
Remaining profits are now allocated:

All drawings are taken by the partners during 2014. At year-end, the
partnership reports an earned net income of $28,000.

On January 1, 2015, Pope (previously a partnership employee) is

admitted into the partnership. Each partner transfers 10 percent to
Pope, who makes the following payments directly to the partners:

Once again, the articles of partnership must be amended to allow for

the entrance of the new partner. This change entitles Pope to a
compensation allowance of $800 per month and an annual drawing of
$4,000. Profits and losses are now assigned as follows:

For the year of 2015, the partnership earned a profit of $46,000, and
each partner withdrew the allowed amount of cash.
Determine the capital balances for the individual partners as of the
end of each year: 2013 through 2015.
LO 14-4, 145, 14-6, 14-9

29. Gray, Stone, and Lawson open an accounting practice on January 1,

2013, in San Diego, California, to be operated as a partnership. Gray
and Stone will serve as the senior partners because of their years of
experience. To establish the business, Gray, Stone, and Lawson
contribute cash and other properties valued at $210,000, $180,000,
and $90,000, respectively. An articles of partnership agreement is
drawn up. It has the following stipulations:

Personal drawings are allowed annually up to an amount

equal to 10 percent of the beginning capital balance for the year.

Profits and losses are allocated according to the following

plan:

(1) A salary allowance is credited to each partner in an amount equal to

$8 per billable hour worked by that individual during the year.
(2) Interest is credited to the partners' capital accounts at the rate of 12
percent of the average monthly balance for the year (computed
without regard for current income or drawings).
(3)

Page 664

An annual bonus is to be credited to Gray and Stone. Each bonus is to

be 10 percent of net income after subtracting the bonus, the salary
allowance, and the interest. Also included in the agreement is the
provision that the bonus cannot be a negative amount.

(4) Any remaining partnership profit or loss is to be divided evenly

among all partners.
Because of monetary problems encountered in getting the business
started, Gray invests an additional $9,100 on May 1, 2013. On
January 1, 2014, the partners allow Monet to buy into the partnership.
Monet contributes cash directly to the business in an amount equal to
a 25 percent interest in the book value of the partnership property

subsequent to this contribution. The partnership agreement as to

splitting profits and losses is not altered upon Monet's entrance into
the firm; the general provisions continue to be applicable.
The billable hours for the partners during the first three years of
operation follow:

The partnership reports net income for 2013 through 2015 as follows:

Each partner withdraws the maximum allowable amount each year.

a. Determine the allocation of income for each of these three years (to the
nearest dollar).
b. Prepare in appropriate form a statement of partners' capital for the year
ending December 31, 2015.
LO 14-8, 149, 14-10

30. A partnership of attorneys in the St. Louis, Missouri, area has the
following balance sheet accounts as of January 1, 2015:

According to the articles of partnership, Athos is to receive an

allocation of 50 percent of all partnership profits and losses while
Porthos receives 30 percent and Aramis, 20 percent. The book value
of each asset and liability should be considered an accurate
representation of fair value.
For each of the following independent situations, prepare the journal
entry or entries to be recorded by the partnership. (Round to nearest
dollar.)
a. Porthos, with permission of the other partners, decides to sell half of his
partnership interest to D'Artagnan for $50,000 in cash. No asset
revaluation or goodwill is to be recorded by the partnership.
b. All three of the present partners agree to sell 10 percent of each
partnership interest to D'Artagnan for a total cash payment of $25,000.
Each partner receives a negotiated portion of this amount. Goodwill is
recorded as a result of the transaction.
c. D'Artagnan is allowed to become a partner with a 10 percent ownership
interest by contributing $30,000 in cash directly into the business. The
bonus method is used to record this admission.
d. Use the same facts as in requirement (c) except that the entrance into the
partnership is recorded by the goodwill method.
e. D'Artagnan is allowed to become a partner with a 10 percent ownership
interest by contributing $12,222 in cash directly to the business. The

goodwill method is used to record this transaction.

f. Aramis decides to retire and leave the partnership. An independent
appraisal of the business and its assets indicates a current fair value of
$280,000. Goodwill is to be recorded. Aramis will then be given the
exact amount of cash that will close out his capital account.
Page 665

LO 14-2, 143, 14-5, 14-6, 148, 14-10

31. Steve Reese is a well-known interior designer in Fort Worth, Texas.

He wants to start his own business and convinces Rob O'Donnell, a
local merchant, to contribute the capital to form a partnership. On
January 1, 2013, O'Donnell invests a building worth $52,000 and
equipment valued at $16,000 as well as $12,000 in cash. Although
Reese makes no tangible contribution to the partnership, he will
operate the business and be an equal partner in the beginning capital
balances.
To entice O'Donnell to join this partnership, Reese draws up the
following profit and loss agreement:

O'Donnell will be credited annually with interest equal to 20

percent of the beginning capital balance for the year.

O'Donnell will also have added to his capital account 15

percent of partnership income each year (without regard for the
preceding interest figure) or $4,000, whichever is larger. All
remaining income is credited to Reese.

Neither partner is allowed to withdraw funds from the

partnership during 2013. Thereafter, each can draw $5,000
annually or 20 percent of the beginning capital balance for the
year, whichever is larger.

The partnership reported a net loss of $10,000 during the first year of
its operation. On January 1, 2014, Terri Dunn becomes a third partner
in this business by contributing $15,000 cash to the partnership. Dunn
receives a 20 percent share of the business's capital. The profit and
loss agreement is altered as follows:

O'Donnell is still entitled to (1) interest on his beginning capital

balance as well as (2) the share of partnership income just
specified.

Any remaining profit or loss will be split on a 6:4 basis

between Reese and Dunn, respectively.

Partnership income for 2014 is reported as $44,000. Each partner

withdraws the full amount that is allowed.
On January 1, 2015, Dunn becomes ill and sells her interest in the
partnership (with the consent of the other two partners) to Judy
Postner. Postner pays $46,000 directly to Dunn. Net income for 2015
is $61,000 with the partners again taking their full drawing allowance.
On January 1, 2016, Postner withdraws from the business for
personal reasons. The articles of partnership state that any partner

may leave the partnership at any time and is entitled to receive cash in
an amount equal to the recorded capital balance at that time plus 10
percent.
a. Prepare journal entries to record the preceding transactions on the
assumption that the bonus (or no revaluation) method is used. Drawings
need not be recorded, although the balances should be included in the
closing entries.
b. Prepare journal entries to record the previous transactions on the
assumption that the goodwill (or revaluation) method is used. Drawings
need not be recorded, although the balances should be included in the
closing entries.
(Round all amounts to the nearest dollar.)