Homework Lance
A) $15,000
B) $20,000
C) $25,000
D) $28,000
E) $60,000
Answer: E
Learning Objective: 14-09
Topic: New partner―Goodwill to original partners
Topic: New partner―Partnership valuation
Difficulty: 2 Medium
Blooms: Apply
AACSB: Knowledge Application
AICPA: BB Legal
AICPA: FN Measurement
Feedback: $40,000 = 20% of the partnership value as a whole after C is admitted. $40,000 ÷ .20 = $200,000 total capital of the partnership after C is admitted. However, total capital after C’s investment and before goodwill = $140,000 ($50,000 + $30,000 + $20,000 + $40,000). $200,000 –$140,000 = $60,000 Goodwill.
[QUESTION]
REFER TO: 14-04
56. C contributes $10,000 to the partnership and the goodwill method is used. What will be the result of the goodwill calculation?
A) Goodwill of $15,000; split among the original partners.
B) Goodwill of $15,000; all to C.
C) Goodwill of $15,000; split among all four partners: P, L, O, and C.
D) Goodwill of $12,000; all to C.
E) Goodwill of $12,000; split among original partners.
Answer: B
Learning Objective: 14-09
Topic: New partner―Goodwill to new partner
Topic: New partner―Partnership valuation
Difficulty: 3 Hard
Blooms: Apply
AACSB: Knowledge Application
AICPA: BB Legal
AICPA: FN Measurement
Feedback: Total capital after C’s investment and before goodwill = $110,000 ($50,000 + $30,000 + $20,000 + $10,000). However, the value of the firm is calculated as only $50,000 ($10,000 ÷ .20). Goodwill will be attributed to C calculated as: ($10,000 + Goodwill) = .20 × ($110,000 + Goodwill). Thus, ($10,000 + Goodwill) = $22,000 + (.20 Goodwill). .80 Goodwill = $12,000. Goodwill = $12,000 ÷ .80 = $15,000.
REFERENCE: 14-05
Peter, Roberts, and Dana have the following capital balances; $80,000, $100,000 and $60,000, respectively. The partners share profits and losses 20%, 40%, and 40% respectively.
[QUESTION]
REFER TO: 14-05
57. Roberts retires and is paid $160,000 based on an independent appraisal of the business. If the goodwill method is used, what is the capital balance of Peter?
A) $ 20,000.
B) $ 60,000.
C) $110,000.
D) $120,000.
E) $230,000.
Answer: C
Learning Objective: 14-10
Topic: Withdrawal of partner―Goodwill method
Difficulty: 2 Medium
Blooms: Apply
AACSB: Knowledge Application
AICPA: BB Legal
AICPA: FN Measurement
Feedback: Roberts receives an additional $60,000 above her capital balance. Since she is assigned 40 percent of all profits and losses, this extra allocation indicates total goodwill of $150,000, which must be split among all partners.
40% of Goodwill = $60,000. $60,000 ÷ .40 = $150,000 Goodwill.
Peter receives 20% × $150,000 = $30,000.
Peter’s balance = $80,000 + $30,000 = $110,000.
[QUESTION]
REFER TO: 14-05
58. Roberts retires and is paid $160,000 based on an independent appraisal of the business. If the goodwill method is used, what is the capital balance of Dana?
A) $ 20,000.
B) $ 60,000.
C) $110,000.
D) $120,000.
E) $230,000.
Answer: D
Learning Objective: 14-10
Topic: Withdrawal of partner―Goodwill method
Difficulty: 2 Medium
Blooms: Apply
AACSB: Knowledge Application
AICPA: BB Legal
AICPA: FN Measurement
Feedback: Roberts receives an additional $60,000 above her capital balance. Since she is assigned 40 percent of all profits and losses, this extra allocation indicates total goodwill of $150,000, which must be split among all partners.
40% of Goodwill = $60,000. $60,000 ÷ .40 = $150,000 Goodwill.
Dana receives 40% × $150,000 = $60,000.
Dana’s Balance = $60,000 + $60,000 = $120,000.
[QUESTION]
REFER TO: 14-05
59. What is the total partnership capital after Roberts retires receiving $160,000 and using the goodwill method?
A) $290,000.
B) $176,000.
C) $ 80,000.
D) $120,000.
E) $230,000.
Answer: E
Learning Objective: 14-10
Topic: Withdrawal of partner―Goodwill method
Difficulty: 3 Hard
Blooms: Apply
AACSB: Knowledge Application
AICPA: BB Legal
AICPA: FN Measurement
Feedback: Roberts receives an additional $60,000 above her capital balance. Since she is assigned 40 percent of all profits and losses, this extra allocation indicates total goodwill of $150,000, which must be split among all partners.
40% of Goodwill = $60,000. $60,000 ÷ .40 = $150,000 Goodwill.
Total Capital is $240,000 ($80,000 + $100,000 + $60,000) + Goodwill $150,000 = $390,000.
Roberts receives $160,000 and Partnership Capital is then $390,000 − $160,000 = $230,000.
REFERENCE: 14-06
Donald, Anne, and Todd have the following capital balances; $40,000, $50,000 and $30,000 respectively. The partners share profits and losses 20%, 40%, and 40% respectively.
[QUESTION]
REFER TO: 14-06
60. Anne retires and is paid $80,000 based on an independent appraisal of the business. If the goodwill method is used, what is the capital of the remaining partners?
A) Donald, $55,000; Todd, $60,000
B) Donald, $40,000; Todd, $30,000
C) Donald, $65,000; Todd, $55,000
D) Donald, $15,000; Todd, $30,000
E) Donald, $25,000; Todd, $0
Answer: A
Learning Objective: 14-10
Topic: Withdrawal of partner―Goodwill method
Difficulty: 3 Hard
Blooms: Apply
AACSB: Knowledge Application
AICPA: BB Legal
AICPA: FN Measurement
Feedback: Anne receives an additional $30,000 above her capital balance. Since she is assigned 40 percent of all profits and losses, this extra allocation indicates total goodwill of $75,000, which must be split among all partners.
40% of Goodwill = $30,000. $30,000 ÷ .40 = $75,000 Goodwill.
Donald = 20% Goodwill = $75,000 × .20 = $15,000. Donald’s capital balance is [$40,000 + $15,000] = $55,000.
Todd = 40% Goodwill = $75,000 × .40 = $30,000. Todd’s capital balance is [$30,000 + $30,000] = $60,000.
[QUESTION]
REFER TO: 14-06
61. Anne retires and is paid $80,000 based on the terms of the original partnership agreement. If the bonus method is used, what is the capital of the remaining partners?
A) Donald, $40,000; Todd, $30,000
B) Donald, $30,000; Todd, $10,000
C) Donald, $50,000; Todd, $50,000
D) Donald, $24,000; Todd, $18,000
E) Donald, $70,000; Todd, $40,000
Answer: B
Learning Objective: 14-10
Topic: Withdrawal of partner―Bonus method
Difficulty: 2 Medium
Blooms: Apply
AACSB: Knowledge Application
AICPA: BB Legal
AICPA: FN Measurement
Feedback: The $30,000 bonus is deducted from the remaining partners according to their relative profit and loss ratio. Donald = 20% and Todd = 40% which is a 1/3, 2/3 split
Donald = $40,000 – (1/3 × $30,000) = $30,000
Todd = $30,000 – (2/3 × $30,000) = $10,000
[QUESTION]
REFER TO: 14-06
62. What is the total partnership capital after Anne retires receiving $80,000 and using the bonus method?
A) $70,000.
B) $40,000.
C) $60,000.
D) $80,000.
E) $42,000.
Answer: B
Learning Objective: 14-10
Topic: Withdrawal of partner―Bonus method
Difficulty: 1 Easy
Blooms: Apply
AACSB: Knowledge Application
AICPA: BB Legal
AICPA: FN Measurement
Essay:
[QUESTION]
63. What is the dissolution of a partnership?
Answer: The dissolution of a partnership is the breakup of the partnership caused by any change in the members that make up the partnership.
Learning Objective: 14-07
Topic: Partnership dissolution―Concepts
Difficulty: 1 Easy
Blooms: Remember
AACSB: Reflective Thinking
AICPA: BB Legal
AICPA: FN Measurement
[QUESTION]
64. By what methods can a person gain admittance to a partnership?
Answer: A person can gain admittance to a partnership by purchasing all or part of a current partner’s interest or by investing assets in the partnership.
Learning Objective: 14-03
Topic: Capital account―Initial investment
Difficulty: 1 Easy
Blooms: Remember
AACSB: Reflective Thinking
AICPA: BB Legal
AICPA: FN Measurement
[QUESTION]
65. What events cause the dissolution of a partnership?
Answer: The dissolution of a partnership occurs whenever there is a change in the members that make up the partnership. Dissolution does not mean going out of business, although, on occasion, dissolution would be accompanied by liquidation of assets and termination of the business. Dissolution would occur whenever a new partner is admitted to the partnership, dissolving one partnership and forming a new one. Dissolution also occurs when a partner leaves the partnership or when a partner dies or retires. The Articles of Partnership may allow the partners to force dissolution under some circumstances.
Learning Objective: 14-07
Topic: Partnership dissolution―Concepts
Difficulty: 2 Medium
Blooms: Remember
AACSB: Communication
AICPA: BB Legal
AICPA: FN Measurement
[QUESTION]
66. For what events or conditions should the Articles of Partnership make provision?
Answer: The Articles of Partnership should be a comprehensive document that is fair to all the partners. It should contain the following provisions: (i) the amounts that will be invested in the partnership by the founding partners; (ii) the amounts of withdrawals that partners can make. Limiting the amount of withdrawals causes the partners to maintain a reasonable investment in the partnership; (iii) the division of income or loss between the partners; (iv) guidelines for admission of new partners or withdrawal or retirement of partners; and (v) in some cases, guidelines for division of assets when the partnership liquidates. In addition, the Articles of Partnership should specify how much time each partner will spend in the business, the responsibilities of each partner, and procedures for resolution of disputes between partners.
Learning Objective: 14-02
Topic: Articles of partnership
Difficulty: 2 Medium
Blooms: Remember
AACSB: Communication
AICPA: BB Legal
AICPA: FN Risk Analysis
[QUESTION]
67. How is accounting for a partnership different from accounting for a corporation?
Answer: Financial accounting for a partnership differs from corporate accounting only in accounting for owners’ equity. A partnership does not sell capital stock and does not have a retained earnings account. Each partner will have a capital account and a drawing account. On the balance sheet, the balance in each of the partner’s capital accounts should be reported. The accountant for a partnership must divide income or loss among partners, following the provisions of the Articles of Partnership. Income tax accounting differs between corporations and partnerships. A corporation is a taxable entity and must file an income tax return. A partnership is not a taxable entity but is required to file an informational return that reports the various amounts of revenues and expenses attributed to each partner.
Learning Objective: 14-01
Topic: Advantages and disadvantages of partnerships
Difficulty: 2 Medium
Blooms: Understand
AACSB: Communication
AICPA: BB Legal
AICPA: FN Measurement
[QUESTION]
68. Why are the terms of the Articles of Partnership important to partners?
Answer: The Articles of Partnership contain terms that help to protect the interests of each partner and the longevity and profitability of the business. One of the most important terms in the Articles of Partnership is the provision for division of income or loss. The amount of income or loss assigned to partners affects the balances in their capital accounts and may affect the amount of withdrawals the partners can make and the assets they receive upon the liquidation of the partnership. The terms in the Articles of Partnership help to prevent one partner from taking advantage of other partners.
Learning Objective: 14-02
Topic: Articles of partnership
Difficulty: 2 Medium
Blooms: Understand
AACSB: Communication
AICPA: BB Legal
AICPA: FN Risk Analysis
[QUESTION]
69. Brown and Green are forming a business as partners. If they do not create a formal written partnership agreement, what risks are they exposing themselves to?
Answer: Due to the fact that business partners are exposed to unlimited liability for their actions, and the actions of their partners, they are advised to document the terms governing the partnership. While a partnership may operate in accordance with an informal, undocumented agreement, the Articles of Partnership documents agreements made between partners regarding the operation of the partnership. By documenting these terms in writing, risk and liability exposure may be limited, providing each partner with protection of his or her interests. If a partnership becomes insolvent, any or all of the partners may be required to use personal assets to settle partnership liabilities. To limit this individual liability exposure, the Articles of Partnership can require that each partner maintain his or her investment in the partnership and to meet other responsibilities, such as working in the business. With a formal written agreement, each partner would have recourse if another partner does not fulfill the terms in the Articles of Partnership.
Learning Objective: 14-01
Learning Objective: 14-02
Topic: Advantages and disadvantages of partnerships
Topic: Articles of partnership
Difficulty: 2 Medium
Blooms: Apply
AACSB: Evaluate
AACSB: Communication
AICPA: BB Legal
AICPA: FN Risk Analysis
[QUESTION]
70. What theoretical argument could be made against the recognition of goodwill when there is a change in the ownership of a partnership?
Answer: Goodwill should be recognized only when a business is purchased in an arms-length transaction — a transaction between independent parties. Generally, partners are not independent parties. Transactions between partners, or between a partner and the partnership, may be influenced by factors other than fair value and bargaining between independent parties. For example, if one partner has been causing trouble for a partnership, the other partners might agree to pay more than fair value to convince that partner to leave the business. The amount of goodwill that could be calculated for such a transaction would not be an indication of the fair value of the business.
Learning Objective: 14-04
Topic: Capital investment―Goodwill method
Difficulty: 2 Medium
Blooms: Analyze
AACSB: Analytical Thinking
AACSB: Communication
AICPA: BB Legal
AICPA: FN Measurement
[QUESTION]
71. Under what circumstances does a partner’s balance in his or her capital account have practical consequences for the partner?
Answer: The most direct practical consequence of a partner’s capital account balance occurs when the partnership is liquidated. After assets are sold and liabilities are paid, each partner receives the balance in his or her capital account. The balance in the capital account may also influence the division of income or loss each year and could affect the amount of cash each partner is allowed to withdraw from the partnership.
Learning Objective: 14-03
Learning Objective: 14-04
Learning Objective: 14-05
Topic: Capital account―Initial investment
Topic: Capital investment or withdrawal after formation
Topic: Net income allocation―Partner ending balance
Difficulty: 1 Easy
Blooms: Understand
AACSB: Communication
AICPA: BB Legal
AICPA: FN Measurement
Problems:
[QUESTION]
72. Reed, Sharp, and Tucker were partners with capital account balances of $80,000, $100,000, and $70,000, respectively. They agreed to admit Upton to the partnership. Upton purchased 30% of each partner’s interest, with payments directly to Reed, Sharp, and Tucker of $32,000, $40,000, and $28,000, respectively. Before the admission of Upton, the profit and loss sharing ratio was 2:3:2. The partners agreed to use the book value method to account for the admission of Upton to the partnership.
Required:
Prepare the journal entry to record the admission of Upton to the partnership.
Answer:
Reed, Capital
24,000
Sharp, Capital
30,000
Tucker, Capital
21,000
Upton, Capital
75,000
Learning Objective: 14-08
Topic: New partner―Transfer of interest
Difficulty: 2 Medium
Blooms: Apply
AACSB: Knowledge Application
AICPA: BB Legal
AICPA: FN Measurement
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