Ch15_Test Bank Jeter Advanced Accounting 3rd Edition

Chapter 15

Partnerships: Formation, Operation, and Ownership Changes

Multiple Choice

1. When a partner retires and withdraws assets in excess of his book value, the remaining partners

absorb the excess

a. equally.

b. in their profit-sharing ratio.

c. based on their average capital balances.

d. based on their ending capital balances.

2. In a partnership, interest on capital investment is accounted for as a(n)

a. return on investment.

b. expense.

c. allocation of net income.

d. reduction of capital.

3. A partnership in which one or more of the partners are general partners and one or more are not is

called a(n)

a. joint venture.

b. general partnership.

c. limited partnership.

d. unlimited partnership.

4. Which of the following is an advantage of a partnership?

a. mutual agency

b. limited life

c. unlimited liability

d. none of these

5. Bob and Fred form a partnership and agree to share profits in a 2 to 1 ratio. During the first year of

operation, the partnership incurs a $20,000 loss. The partners should share the losses

a. based on their average capital balances.

b. in a 2 to 1 ratio.

c. equally.

d. based on their ending capital balances.

6. When the goodwill method is used to record the admission of a new partner, total partnership capital

increases by an amount

a. equal to the new partner’s investment.

b. greater than the new partner’s investment.

c. less than the new partner’s investment.

d. that may be more or less than the new partner’s investment.

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Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd

Edition

15-2

7. The bonus and goodwill methods of recording the admission of a new partner will produce the same

result if the:

1. new partner’s profit-sharing ratio equals his capital interest

2. old partners’ profit-sharing ratio in the new partnership is the same relatively as it was in the

old partnership.

a. 1

b. 2

c. both 1 and 2 are met.

d. none of these.

8. When the goodwill method is used and the book value acquired is less than the value of the assets

invested, total implied capital is computed by

a. multiplying the new partner’s capital interest by the capital balances of existing partners.

b. dividing the total capital balances of existing partners by their collective capital interest.

c. dividing the new partner’s investment by his (her) capital interest.

d. dividing the new partner’s investment by the existing partners’ collective capital interest.

9. The partnership of Adams and Baker was formed on February 28, 2011. At that date the following

assets were invested:

Adams Baker

Cash $ 120,000 $200,000

Merchandise -0- 320,000

Building -0- 840,000

Furniture and equipment 200,000 -0-

The building is subject to a mortgage loan of $280,000, which is to be assumed by the partnership.

The partnership agreement provides that Adams and Baker share profits or losses 30% and 70%,

respectively. Baker’s capital account at February 28, 2011, should be

a. $1,080,000.

b. $1,360,000.

c. $1,176,000.

d. $952,000.

10. The following balance sheet information is for the partnership of Abel, Ball, and Catt:

Cash $ 210,000 Liabilities $ 510,000

Other assets 1,500,000 Abel, Capital (40%) 300,000

Ball, Capital (40%) 480,000

Catt, Capital (20%) 420,000

$1,710,000 $1,710,000

Figures shown parenthetically reflect agreed profit and loss sharing percentages.

If the assets are fairly valued on the above balance sheet and the partnership wishes to admit Dent as

a new 1/5 partner without recording goodwill or bonus, Dent should invest cash or other assets of

a. $427,500.

b. $240,000.

c. $300,000.

d. $342,000.




Chapter 15 Partnerships: Formation, Operation, and Ownership Changes

15-3

11. The following balance sheet information is for the partnership of Abel, Ball, and Catt:


Other assets 1,500,000 Abel, Capital (40%) 300,000

Ball, Capital (40%) 480,000

Catt, Capital (20%) 420,000

$1,710,000 $1,710,000


If assets on the initial balance sheet are fairly valued, Abel and Ball consent and Dent pays Catt

$225,000 for his interest; the revised capital balances of the partners would be

a. Abel, $315,000; Ball, $495,000; Dent, $450,000.

b. Abel, $315,000; Ball, $495,000; Dent, $420,000.

c. Abel, $300,000; Ball, $570,000; Dent, $450,000.

d. Abel, $300,000; Ball, $480,000; Dent, $420,000.

12. Linda desires to purchase a one-fourth capital and profit and loss interest in the partnership of Hank,

Greg, and Jim. The three partners agree to sell Linda one-fourth of their respective capital and profit

and loss interests in exchange for a total payment of $100,000. The payment is made directly to the

individual partners. The capital accounts and the respective percentage interests in profits and losses

immediately before the sale to Linda follow

Percentage

Capital Interests in

Accounts Profits and Losses

Hank $168,000 50%

Greg 104,000 35

Jim 48,000 15

Total $320,000

All other assets and liabilities are fairly valued and implied goodwill is to be recorded prior to the

acquisition by Linda. Immediately after Linda’s acquisition, what should be the capital balances of

Hank, Greg, and Jim, respectively?

a. $126,000; $78,000; $36,000

b. $156,000; $99,000; $45,000

c. $178,000; $111,000; $51,000

d. $208,000; $132,000; $60,000

13. At December 31, 2011, Barb and Kim are partners with capital balances of $250,000 and $150,000,

and they share profits and losses in the ratio of 2:1, respectively. On this date, Jack invests $125,000

cash for a one-fifth interest in the capital and profit of the new partnership. The partners agree that

the implied partnership goodwill is to be recorded simultaneously with the admission of Jack. The

total implied goodwill of the firm is

a. $25,000.

b. $20,000.

c. $45,000.

d. $100,000.





Edition

15-4

14. Pete, Joe, and Ron are partners with capital balances of $135,000, $90,000, and $60,000,

respectively. The partners share profits and losses equally. For an investment of $120,000 cash,

Jerry is to be admitted as a partner with a one-fourth interest in capital and profits. Based on this

information, the amount of Jerry’s investment can best be justified by which of the following?

a. Jerry will receive a bonus from the other partners upon his admission to the partnership.

b. Assets of the partnership were overvalued immediately prior to Jerry’s investment.

c. The book value of the partnership’s net assets were less than their fair value immediately prior

to Jerry’s investment.

d. Jerry is apparently bringing goodwill into the partnership and his capital account will be

credited for the appropriate amount.

15. The partnership of Amos, Cole, and Eddy had total capital of $570,000 on December 31, 2011 as

follows:

Amos, Capital (30%) $180,000

Cole, Capital (45%) 255,000

Eddy, Capital (25%) 135,000

Total $570,000

Profit and loss sharing percentages are shown in parentheses. If Flynn purchases a 25 percent

interest from each of the old partners for a total payment of $270,000 directly to the old partners

a. total partnership net assets can logically be revalued to $1,080,000 on the basis of the price paid

by Flynn.

b. the payment of Flynn does not constitute a basis for revaluation of partnership net assets

because the capital and income interests of the old partnership were not aligned.

c. total capital of the new partnership should be $760,000.

d. total capital of the new partnership will be $840,000 assuming no revaluation.


follows:

Amos, Capital (30%) $180,000



Total $570,000

Profit and loss sharing percentages are shown in parentheses. Assume that Flynn became a partner

by investing $150,000 in the Amos, Cole, and Eddy partnership for a 25 percent interest in capital

and profits and that partnership net assets are not revalued. Flynn’s capital credit should be

a. $180,000.

b. $142,500.

c. $150,000.

d. $190,000.





15-5


follows:

Amos, Capital (30%) $180,000



Total $570,000

Profit and loss sharing percentages are shown in parentheses.

Assume that Flynn became a partner by investing $100,000 in the Amos, Cole, and Eddy

partnership for a 25 percent interest in the capital and profits, and the partnership assets are

revalued. Under this assumption

a. Flynn’s capital credit will be $150,000.

b. Amos’s capital will be increased to $147,000.

c. total partnership capital after Flynn’s admission to the partnership will be $600,000.

d. net assets of the partnership will increase by $190,000, including Flynn’s interest.

18. In the absence of an agreement among the partners

a. interest is allowed on capital investments.

b. interest is charged on partners’ drawings.

c. interest is allowed on advances to the firm made by partners beyond agreed investments.

d. compensation is allowed partners for extra time devoted to the partnership.

19. The profit and loss sharing ratio should be

a. in the same ratio as the percentage interest owned by each partner.

b. based on relative effort contributed to the firm by the partners.

c. a weighted average of capital and effort contributions.

d. based on any formula that the partners choose.

20. The partnership agreement of Flynn, Gant, and Hill allows Gant a bonus of 10% of income after the

bonus, salaries of $30,000 per partner and interest of 6% on average capital balances of $120,000,

$150,000, and $180,000 for Flynn, Gant, and Hill, respectively. The amount of Gant’s bonus,

assuming income before bonus, salaries, and interest of $315,000, is

a. $18,000.

b. $22,000.

c. $19,800.

d. $31,500.

21. Steve and Robby are partners operating an electronics repair shop. For 2011, net income was

$50,000. Steve and Robby have salary allowances of $90,000 and $60,000, respectively, and

remaining profits and losses are shared 4:6.

The division of profits would be:

a. $20,000 and $30,000

b. $50,000 and $-0-

c. $30,000 and $20,000

d. $25,000 and $25,000





Edition

15-6

22. Steve and Robby are partners operating an electronics repair shop. For 2011, net income was

$50,000. Steve and Robby have salary allowances of $90,000 and $60,000, respectively, and

remaining profits and losses are shared 4:6.

If their agreement specifies that salaries are allowed only to the extent of income, based on a prorata

share of their salary allowances, the division of profits would be:

a. $20,000 and $30,000

b. $50,000 and $-0-

c. $30,000 and $20,000

d. $25,000 and $25,000

23. Carter, Wynn, and Norton are partners in a janitorial service. The business reported net income of

$54,000 for 2011. The partnership agreement provides that profits and losses are to be divided

equally after Wynn receives a $60,000 salary, Norton receives a $24,000 salary, and each partner

receives 10% interest on his beginning capital balance. Beginning capital balances were $40,000 for

Carter, $48,000 for Wynn, and $32,000 for Norton. Norton’s share of partnership income for 2011

is:

a. $68,800

b. $36,000

c. $31,200

d. $27,200

24. Bell and Carson are partners who share profits and losses 3:7. The capital accounts on January 1,

2011, are $120,000 and $160,000, respectively. Elston is to be admitted as a partner with a one-

fourth interest in the capital and profits and losses by investing $80,000. Goodwill is not to be

recorded. The capital balances after admission should be:

a. Bell, $117,000; Carson, $153,000; Elston, $90,000

b. Bell, $120,000; Carson, $160,000; Elston, $90,000

c. Bell, $123,000; Carson, $160,000; Elston, $80,000

e. Bell, $120,000; Carson, $167,000; Elston, $80,000

25. The balance sheet for the partnership of Nen, Pap, and Sup at January 1, 2011 follows. The partners

share profits and losses in the ratio of 3:2:5, respectively.

Assets at cost $480,000

Liabilities $135,000

Nen, capital 75,000

Pap, capital 120,000

Sup, capital 150,000

$480,000

Nen is retiring from the partnership. By mutual agreement, the assets are to be adjusted to their fair

value of $540,000 at January 1, 2011. Pap and Sup agree that the partnership will pay Nen $135,000

cash for his partnership interest. NO goodwill is to be recorded. What is the balance of Pap’s capital

account after Nen’s retirement?

a. $138,000

b. $108,000

c. $120,000

d. $132,000





15-7

26. The following balance sheet information is for the partnership of Axe, Barr, and Cole:


Other assets 1,500,000 Axe, Capital (40%) 300,000

Barr, Capital (40%) 480,000


$1,710,000 $1,710,000


If the assets are fairly valued on the above balance sheet and the partnership wishes to admit Dent as a

new 1/5 partner without recording goodwill or bonus, Dent should invest cash or other assets of

a. $427,500.

b. $240,000.

c. $300,000.

d. $342,000.

27. Susan desires to purchase a one-fourth capital and profit and loss interest in the partnership of Tony,

Mary, and Ron. The three partners agree to sell Susan one-fourth of their respective capital and profit

and loss interests in exchange for a total payment of $125,000. The payment is made directly to the

individual partners. The capital accounts and the respective percentage interests in profits and losses

immediately before the sale to Susan follow

Percentage

Capital Interests in

Accounts Profits and Losses

Tony $210,000 50%

Mary 130,000 35

Ron 60,000 15

Total $400,000

All other assets and liabilities are fairly valued and implied goodwill is to be recorded prior to the

acquisition by Susan. Immediately after Susan’s acquisition, what should be the capital balances of

Tony, Mary, and Ron, respectively?

a. $157,500; $97,500; $45,000

b. $195,000; $123,750; $56,250

c. $222,500; $138,750; $63,750

d. $260,000; $165,000; $75,000





Edition

15-8

28. The partnership of Carr, Eddy, and Howe had total capital of $1,140,000 on December 31, 2011, as

follows:

Carr, Capital (30%) $360,000


Howe, Capital (25%) 270,000

Total $1,140,000


Assume that Klein became a partner by investing $300,000 in the Carr, Eddy, and Howe partnership

for a 25 percent interest in capital and profits and that partnership net assets are not revalued. Klein’s

capital credit should be

a. $360,000.

b. $285,000.

c. $300,000.

d. $380,000.

29. The partnership of Carr, Eddy, and Howe had total capital of $1,140,000 on December 31, 2011, as

follows:

Carr, Capital (30%) $360,000


Howe, Capital (25%) 270,000

Total $1,140,000


Assume that Klein became a partner by investing $300,000 in the Carr, Eddy, and Howe partnership

for a 25 percent interest in the capital and profits, and the partnership assets are revalued. Under this

assumption

a. Klein’s capital credit will be $300,000.

b. Carr’s capital will be increased to $394,000.

c. total partnership capital after Klein’s admission to the partnership will be $1,200,000.

d. net assets of the partnership will increase by $380,000 including Klein interest.

30. Newlin, Vick, and Morton are partners in a plumbing service. The business reported net income of

$108,000 for 2011. The partnership agreement provides that profits and losses are to be divided

equally after Vick receives a $60,000 salary, Morton receives a $24,000 salary, and each partner

receives 10% interest on his beginning capital balance. Beginning capital balances were $40,000 for

Newlin, $48,000 for Vick, and $32,000 for Morton. Vick’s share of partnership income for 2011 is:

a. $68,800.

b. $36,000.

c. $31,200.

d. $27,200.





15-9

Problems

15-1 Unruh, Grey, and Carter are partners with capital balances of $80,000, $200,000, and $120,000,

respectively. Profits and losses are shared in a 3:2:1 ratio. Grey decided to withdraw and the

partnership revalued its assets. The value of inventory was decreased by $20,000 and the value of

land was increased by $50,000. Unruh and Carter then agreed to pay Grey $230,000 for his

withdrawal from the partnership.

Required:

Prepare the journal entry to record Grey’s withdrawal under the

A. bonus method.

B. full goodwill method.

15-2 Dell and Gore are partners in an automobile repair business. Their respective capital balances are

$425,000 and $275,000, and they share profits in a 3:2 ratio. Because of growth in their repair

business, they decide to admit a new partner. Mann is admitted to the partnership, after which Dell,

Gore, and Mann agree to share profits in a 3:2:1 ratio.

Required:

Prepare the necessary journal entries to record the admission of Mann in each of the following

independent situations:

A. Mann invests $300,000 for a one-fourth capital interest, but will not accept a capital balance

of less than his investment.

B. Mann invests $150,000 for a one-fifth capital interest. The partners agree that assets and the

firm as a whole should be revalued.

C. Mann purchases a 20% capital interest from each partner. Dell receives $100,000 and Gore

receives $50,000 directly from Mann.

15-3 Bryant, Milton, and Pine formed a partnership and agreed to share profits in a 3:1:2 ratio after

recognition of 5% interest on average capital balances and monthly salary allowances of $3,750 to

Milton and $3,000 to Pine. Average capital balances were as follows:

Bryant 300,000

Milton 240,000

Pine 180,000

Required:

Compute the net income (loss) allocated to each partner assuming the partnership incurred a

$27,000 net loss.





Edition

15-10

15-4 Rice and Thome formed a partnership on January 2, 2011. Thome invested $120,000 in cash. Rice

invested land valued at $30,000, which he had purchased for $20,000 in 2005. In addition, Rice

possessed superior managerial skills and agreed to manage the firm. The partners agreed to the

following profit and loss allocation formula:

a. Interest —8% on original capital investments.

b. Salary — $5,000 a month to Rice.

c. Bonus — Rice is to be allocated a bonus of 20% of net income after subtracting the bonus,

interest, and salary.

d. Remaining profit is to be divided equally.

At the end of 2011 the partnership reported net income before interest, salaries, and bonus of

$168,000.

Required:

Calculate the amount of bonus to be allocated to Rice.

15-5 Wynn and Yates are partners whose capital balances are $400,000 and $300,000 and who share

profits 3:2. Due to a shortage of cash, Wynn and Yates agree to admit Zaun to the firm.

Required:

Prepare the journal entries required to record Zaun’s admission under each of the following

assumptions:

(a) Zaun invests $200,000 for a 1/4 interest. The total firm capital is to be $900,000.

(b) Zaun invests $300,000 for a 1/4 interest. Goodwill is to be recorded.

(c) Zaun invests $150,000 for a 1/5 interest. Goodwill is to be recorded.

(d) Zaun purchases a 1/4 interest in the firm, with 1/4 of the capital of each old partner

transferred to the account of the new partner. Zaun pays the partners cash of $250,000,

which they divide between themselves.

15-6 The partners in the ABC partnership have capital balances as follows:

A. $70,000; B. $70,000 C. $105,000

Profits and losses are shared 30%, 20%, and 50%, respectively.

On this date, C withdraws and the partners agree to pay him $140,000 out of partnership cash.

Required:

A. Prepare journal entries to show three acceptable methods of recording the withdrawal.

(Tangible assets are already stated at values approximating their fair market values.)

B. Which alternative would you recommend if you determined that the agreement to pay C

$140,000 was not the result of arms length bargaining between C and the other partners?

Why?

15-7 Agler, Bates and Colter are partners who share income in a 5:3:2 ratio. Colter, whose capital balance

is $150,000, retires from the partnership.

Required:

Determine the amount paid to Colter under each of the following cases:

(1) $50,000 is debited to Agler capital account; the bonus approach is used.

(2) Goodwill of $60,000 is recorded; the partial goodwill approach is used.





15-11

(3) $66,000 is credited to Bates’ capital account; the total goodwill approach is used.





Edition

15-12

15-8 The partnership agreement of Stone, Miles, and Kiney provides for annual distribution of profit and

loss in the following sequence:

– Miles, the managing partner, receives a bonus of 10% of net income.

– Each partner receives 5% interest on average capital investment.

– Residual profit or loss is to be divided 4:2:4.

Average capital investments for 2011 were:

Stone $270,000

Miles $180,000

Kiney $120,000

Required:

A. Prepare a schedule to allocate net income, assuming operations for the year resulted in:

1. Net income of $75,000.

2. Net income of $15,000.

3. Net loss of $30,000.

B. Prepare the journal entry to close the Income Summary account for each situation above.

Short Answer

1. The principal types of partnerships are general partnerships, limited partnerships, and joint ventures.

Describe the characteristics of each type of partnership.

2. There are two methods of recording changes in the membership of a partnership – the bonus method

and the goodwill method. Describe these two methods of recording changes in partnership

membership.

Short Answer from the Textbook

1. Describe the tax treatment of partnership income.

2. Distinguish between a partner’s interest in capital and his interest in the partnership’s income and losses.

Also, make a general distinction between a partner’s capital account and his drawing account.

3. Explain why a partnership is viewed in accounting as a ―separate economic entity.‖

4. What are some of the methods commonly used in allocating income and losses to the partners?

5. Explain the distinction between the terms ―withdrawals‖ and ―salaries.‖

6. List some of the alternative methods of calculating a bonus that may appear in a partnership agreement.

7. What is meant by dissolution and what are its causes?

8. Discuss the methods used to record changes in partnership membership.

9. Differentiate between the admission of a new partner through assignment of an interest andthrough

investment in the partnership.

10.Under what two conditions will the bonus and goodwill methods of recording the admission ofa partner

yield the same result?





15-13

11.Describe the circumstances where neither the goodwill nor the bonus method should be used to record

the admission of a new partner.

12.How might a partner withdrawing in violation of the partnership agreement and without the con-sent of

the other partners be treated? What about a partner who is forced to withdraw?

Business Ethics Question from Textbook

Many companies with defined benefit plans are curtailing or eliminating the plans altogether. With a defined

benefit plan, the company guarantees some set amount(or formula-determined payment) when the employee

retires. Because most pension assets are invested in the stock market, whether a pension plan is fully funded

of-ten depends on the strength of the stock market. Be-cause of this volatility, companies often find

themselves unexpectedly in a position where they must either in-crease funding or disclose significant

underfunding. Because of this, many companies simply reduce or eliminate the plan. Consider the pension

plan of Golden Years Company (GYC). Historically, GYC has been a great company to work for, with

strong employee benefits. GYC’s pension liability is approximately $15 million. However, recently the

company has been experiencing minor financial troubles in a decreasing stock market and, consequently,

announced the termination of the pension plan in an effort to save costs. However, the pension plan was

fully funded by$9 million (the fair value of assets exceeded the expected liability).

1.How does the firm reconcile the trade-off between financial performance and the responsibility to its

employees?





Edition

15-14

ANSWER KEY

Multiple Choice

1. b

2. c

3. c

4. d

5. b

6. b

7. c

8. c

9. a

10. c

11. d

12. b

13. d

14. c

15. a

16. a

17. d

18. c

19. d

20. a

21. b 27. b

22. c 28. a

23. c 29. d

24. a 30. a

25. c

26. c

Problems

15-1 A. Grey, Capital $200,000 + ($30,000 × 2/6) 210,000

Unruh, Capital ($20,000 × 3/4) 15,000

Carter, Capital ($20,000 × 1/4) 5,000

Cash 230,000

B. Goodwill ($20,000 ÷ 2/6) 60,000

Unruh, Capital 30,000

Grey, Capital 20,000

Carter, Capital 10,000

Grey, Capital 230,000

Cash 230,000

15-2 A. Goodwill [($300,000 ÷ .25) - $1,000,000] 200,000

Dell, Capital ($200,000 × 3/5) 120,000

Gore, Capital ($200,000 × 2/5) 80,000

Cash 300,000

Mann, Capital 300,000

B. Cash 150,000

Goodwill [($700,000 ÷ .80) - $850,000] 25,000


C. Dell, Capital ($425,000 × .20) 85,000

Gore, Capital ($275,000 × .20) 55,000






15-15

15-3 Bryant Milton Pine Total

Salary --- $45,000 $ 36,000 $ 81,000

Interest $15,000 12,000 9,000 36,000

Residual (72,000) (24,000) (48,000) (144,000)

Total $(57,000) $33,000 $ (3,000) $(27,000)

15-4 B = Bonus to Rice

B = 0.20(Net Income - interest - salary - bonus)

B = 0.20($168,000 - [0.08($150,000)] - $60,000 – B)

B = 0.20($96,000 - B)

B = $19,200 - 0.20B

1.20B = $19,200

B = $16,000

15-5 (a) Cash 200,000

Wynn, Capital ($25,000 × 0.60) 15,000

Yates, Capital ($25,000 × 0.40) 10,000

Zaun, Capital ($900,000 × 0.25) 225,000

(b) Implied goodwill - 1/4X = $300,000; X = $1,200,000

Goodwill - $1,200,000 - $1,000,000 = $200,000

Goodwill 200,000

Wynn, Capital 120,000

Yates, Capital 80,000

Cash 300,000

Zaun, Capital 300,000

(c) Implied goodwill - 4/5X = $700,000; X = $875,000

Goodwill: $875,000 - $850,000 = $25,000

Goodwill 25,000

Cash 150,000


(d) Wynn, Capital (1/4 of $400,000) 100,000

Yates, Capital (1/4 of $300,000) 75,000






Edition

15-16

15-6 A. 1) C, Capital 105,000

A, Capital 21,000

B, Capital 14,000

Cash 140,000

2) Goodwill 35,000

C, Capital 35,000

C, Capital 140,000

Cash 140,000

3) 0.5X = $35,000

X = $70,000

Goodwill 70,000

A, Capital 21,000

B, Capital 14,000

C, Capital 35,000

C, Capital 140,000

Cash 140,000

B. The bonus method is more objective. That is, the bonus method does not require the allocation

of a subjective value to goodwill. Since this is not an arm’s length transaction, there is no

objective basis to revalue the firm as a whole.

15-7 (1) Since a debit was made to Agler’s capital account, a bonus was paid to the retiring partner of

$80,000 (5/8 goodwill = $50,000), resulting in a total payment to Colter of $230,000. The entry

would be:

Agler, Capital 50,000

Bates, Capital 30,000

Colter, Capital 150,000

Cash 230,000

(2) Under the partial goodwill approach, only the goodwill attributed to the retiring partner is

recorded. Thus, the payment to Colter was $210,000 ($150,000 + $60,000).

(3) Since $66,000 was credited, total goodwill of $220,000 ($66,000/0.3) is recorded. Colter is

allocated $44,000 ($220,000 × 0.20). Thus, the payment to Colter was $194,000 ($150,000 +

$44,000).





15-17

15-8 A. 1. Stone Miles Kiney Total

Bonus $ --- $ 7,500 $ --- $ 7,500

Interest 13,500 9,000 6,000 28,500

13,500 16,500 6,000 36,000

Residual 15,600 7,800 15,600 39,000

Total $29,100 $24,300 $21,600 $75,000

2.

Bonus $ --- $1,500 $ --- $ 1,500

Interest 13,500 9,000 6,000 28,500

13,500 10,500 6,000 30,000

Residual (6,000) (3,000) (6,000) (15,000)

Total $7,500 $7,500 -0- $15,000

3.

Bonus $ --- --- --- ---

Interest 13,500 9,000 6,000 28,500

13,500 9,000 6,000 28,500

Residual (23,400) (11,700) (23,400) (58,500)

Total $(9,000) $(2,700) $(17,400) $(30,000)

B. 1. Income Summary 75,000

Stone, Capital 29,100

Miles, Capital 24,300

Kiney, Capital 21,600

2. Income Summary 15,000

Stone, Capital 7,500


3. Stone, Capital 9,900


Kiney, Capital 17,400

Income Summary 30,000

Short Answer from the Textbook Solutions

1. In a general partnership, the partners can bind the partnership into contracts – each partner is

an agent of both the partnership and every other partner. The primary difference between a

general partnership and a limited partnership is that general partners are personally liable for

the debts of the partnership, while limited partners are only liable for the amount invested in

the partnership.

A joint venture is an arrangement entered into be two or more parties to accomplish a single

or limited purpose for the mutual benefit of the members of the group.

2. Under the bonus method of recording changes in partnership membership, the assets of the

partnership are increased by the amount of the assets invested by the partner being admitted.

Any difference between the assets invested and the credit to the new partner’s capital account





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is adjusted to the existing partners’ capital accounts. When a partner withdraws from a

partnership, any difference between the recorded value of the assets withdrawn and the

withdrawing partner’s capital account is adjusted to the remaining partner’s capital accounts.

Under the goodwill method, a new asset is recorded that is based on the difference between the

value implied by the amount of consideration negotiated in the admission or withdrawal of a

partner and the values reported in the partnership books. Under this method, the firm is

revalued, using the amount invested by the new partner or the amount paid to the withdrawing

partner.

1. A partnership is not subject to an income tax, but the individual partners report their share of

partnership income, whether distributed or not, on their respective individual tax returns.

2. A partner's capital balance represents his or her interest in the net assets of the partnership,

whereas a partner's interest in income and loss represents how his or her interest in capital will

be affected by the subsequent operations of the partnership. Generally, a partner's capital

account is used to recognize asset investments and withdrawals which are not considered

temporary. The partner's drawing account is generally used to record withdrawals of assets in

anticipation of profitable operations of the partnership or any payments of a partner's personal

expenses from partnership assets.

3. A partnership is viewed as a "separate economic entity" in accounting because it has a

"separable and definable existence". The assets, liabilities, and residual capital interest, as well

as the economic events which affect the various partnership accounts, require a "separable

accounting" to provide necessary information to the partners and to others interested in the

partnership's performance.

4. Some common methods used in allocating income and loss to partners are: fixed ratio, a ratio

based on capital balances, interest on capital, and payment for time devoted to partnership

operations, salary and/or bonus.

5. A withdrawal is a reduction in assets, not a distribution of income. A salary is a determinate in

the allocation of income and is a reward to the partner for the amount of time devoted to the

partnership's operations.

6. A bonus may be calculated in several ways. Some of these are: (1) net income before any

income allocations are made; (2) net income after income allocations are made, but before

subtracting the bonus; (3) net income after subtracting the bonus, but before any other income

allocations are made; and (4) net income after all income allocations are made, including the

bonus.

7. The UPA defines "dissolution" as a "change in the relation of the partners caused by any

partner ceasing to be associated in the carrying on as distinguished from the winding up of the

business."





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8. The two methods used to record changes in partnership membership are (1) the bonus method

and (2) the goodwill method. Under the bonus method, assets of the partnership are increased

by the amount of the assets invested by the new partner or decreased by the amount of the

assets paid to a withdrawing partner. The new (withdrawing) partner's capital account is

debited (credited) for the capital interest acquired (the balance in the capital account). Any

balancing amount is adjusted to the other partners' capital accounts. Under the goodwill

method, an intangible asset is recorded based on the difference between the value implied by

the amount of consideration exchanged in the admission or withdrawal of a partner and the

capital interest of the new or withdrawing partner.

9. An interest in a partnership can be acquired either (1) by purchasing all or part of an interest

directly from one or more partners (outside the partnership), called an assignment of

partnership interest, or (2) by investing assets in the firm to acquire an interest in the

partnership.

10. The bonus and goodwill methods will yield the same result when two conditions relating to the

new profit and loss agreement are met. These are: (1) the new partner's profit sharing interest equals his or her initial interest in capital; and (2) the old partners' profit sharing ratio is in the same relative ratio as in the old partnership.

11. Neither the goodwill method nor the bonus method should be used to record the admission of a

new partner when (1) the book value of the interest acquired is equal to the value of assets invested, or (2) the net assets of the firm are overvalued.

12. A partner withdrawing in violation of the partnership agreement and without the other partners'

approval is entitled only to his or her interest in the firm, without consideration made for any goodwill. The withdrawing partner is also liable to the remaining partners for any damages created by his breach of the partnership agreement. A partner forced to withdraw, however, is entitled to his full interest in the partnership, including any goodwill.

Business Ethics from the Textbook Solutions

Business ethics solutions are merely suggestions of points to address. The objective is to raise the

students' awareness of the topics, and to invite discussion. In most cases, there is clear room for

disagreement or conflicting viewpoints.

1. The defined benefit plan creates a challenge for a firm in a fluctuating market. If the firm is

simultaneously struggling with other financial issues, its manager may indeed consider

reducing or eliminating the plan. However, such a decision should not be taken lightly, as it

would remove an important and valuable benefit to its employees. Certainly, there would be no

reason, particularly when the plan is fully funded as it is here, to eliminate any of the previously

accrued benefits. However, the firm may wish to revisit the types of benefits offered in the

future. One alternative is to switch to a defined contribution plan. This plan is somewhat less

appealing to the employee, but it is certainly more desirable than no pension plan and it greatly

reduces the volatility and risk to the employer.





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It is crucial that the employer take into account the manner in which a change in its pension

plan will affect its ability to attract and keep top quality employees over the long run, as this is

essential to the long-term viability of the company. Changing market dynamics have made

firms realize that in order to maximize long-term profits, they have to be socially responsible.

Firms, therefore, engage in social responsibility by responding to market demands, legal

regulation, including consumer, employment and environmental laws, and by going beyond the

letter of the law. Laws combined with markets are often adequate to make profit-maximizing

and socially responsible behavior converge.

The following points are among those to be considered in reconciling the tradeoffs between

financial performance and responsibility to a firm’s employees:

Employees can insist on socially responsible behavior, both by contract and by deciding

where to work. Employees can contract not only about wages and working conditions, but

also concerning social responsibility of firms. A corporation’s reputation for social

responsibility can attract and retain employees.

Employees derive satisfaction from being associated with, and expect better treatment from,

responsible firms.

The more difficult the skill set and knowledge requirements for the employees’ position are

to fill, the more likely that employee is to be influenced by such benefits as pension plans

and such considerations as social responsibility of the firm.

Workers are also investors and, more importantly, consumers. The firms must not only hire

and contract with its employees, but also motivate them to perform at their maximum level

of effort. Disgruntled workers can erode a firm’s goodwill. As discussed above, unions and

other groups prefer to deal with worker-friendly firms.

For additional information, see the following link:

http://home.law.uiuc.edu/~ribstein/ribsteinpartnershipsocialresponsibility1229.pdf



http://home.law.uiuc.edu/~ribstein/ribsteinpartnershipsocialresponsibility1229.pdf


Ch15_Test Bank Jeter Advanced Accounting 3rd Edition

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Transcript of Ch15_Test Bank Jeter Advanced Accounting 3rd Edition