02PEF_1301059872_Oliviane Wenno

QUESTIONS
1. The characteristics of a partnership include the following: (a)
association of individuals, (b) limited life, and (c) co-ownership of
property. Explain each of these terms!
a. Association of individuals
At least two persons must joint together to form a
partnership. Furthermore, there must be an agreement between
persons desirous of forming a partnership.
b. Limited Life
A partnership may be ended voluntarily at anytime through the
acceptance of a new partner or withdrawal of a partner. It may be
ended involuntarily by the death or incapacity of a partner.
c. Co-Ownership of Property
Property co-ownership refers to a situation where two or more people
share the ownership of a property. Put simply, it involves your assets
and liabilities because co-ownership is base on the equity.

2. Jerry Kerwin is confused about the partnership characteristics of (a)

mutual agency and (b) unlimited liability. Explain these two
characteristics for Jerry.
a. Mutual Agency
The business of partnership may be carried on by all the partners or by
any of them acting for all. Thus every partner is an agent of other
partners and at the same time of the firm.
b. Unlimited Liability
The unlimited liability of partners is the legal relationship among
general partners of a partnership that makes each general partner
responsible for paying all the debts of the partnership if the other
partners are unable to pay their shares.

11.Are the financial statements of a partnership similar to those of a

proprietorship? Discuss!
Yes, the differences are due to the number of owners involved. The income
statement for a partnership is identical to the income statement for a
proprietorship except for the division of net income.

12.How does the liquidation of a partnership differ from the dissolution

of a partnership?
Liquidation is the process of converting all assets into cash. Proceeds of
which will be used to pay-out its obligations in the order set-out by the
standards/court. Whereas partnership dissolution occurs whenever a partner
withdraws or a new partner is admitted. Dissolution doesn’t necessarily mean
that the business ends. But, dissolution may be the cause of the liquidation. A
lot of case shows that if a business dissolves they will have to liquidate their
 02PEF_1301059872_Oliviane Wenno

assets (including office furniture, computers, etc) in order to pay off creditors
(or just to get rid of the stuff)

P12-1A
The post-closing trial balances of two proprietorships on January 1, 2010
are presented below:
Patrick Company Samuelson
Company

Dr. Cr. Dr. Cr.

Cash $ $
14,000 12,000

Account receivable 17,500 26,000

Allowance for doubtful account $ $

3,000 4,400

Merchandise inventory 26,500 18,400

Equipment 40,000 29,000

Accumulated depreciation- 24,000 11,000

equipment

Notes payable 18,000 15,000

Account payable 22,000 31,000

Patrick, Capital 36,000

Samuelson, Capital 24,000

$ $ $ $
103,000 103,000 85,400 85,400

Patrick and Samuelson decide to form a partnership, Pasa Company, with

the following agreed upon valuations for noncash assets.
Patrick Samuelson
Company Company

Account receivable $ 17,500 $ 26,000

Allowance for doubtful 4500 4,000

account

Merchandise inventory 28,000 20,000

 02PEF_1301059872_Oliviane Wenno

Equipment 23,000 16,000

All cash will be transferred to the partnership, and the partnership will
assume all the liabilities of the two proprietorships. Further, it is agreed
that Patrick will invest an additional $5,000 in cash, and Samuelson will
invest an additional $19,000 in cash.
Instructions:
a. Prepare separate journal entries to record the transfer of each
proprietorship’s assets and liabilities to the partnership.
$
Cash 14,000
Account Receivable 17,500
Merchandise Inventory 28,000
$
Equipment 23,000
$
Notes Payable 18,000
Accounts Payable 22,000
Allowance for Doubtful
Account 4,500
$
Patrick, Capital 38,000

$
Cash 12,000
26,
Account Receivable 000
20,
Merchandise Inventory 000
$
Equipment 16,000
$
Notes Payable 15,000
31,0
Accounts Payable 00
Allowance for Doubtful 4,
Account 000
$
Samuelson, Capital 24,000
b. Journalize the additional cash investment by each partner.
Cas $
h 5,000
$
Patrick, Capital 5,000
Cas $
h 19,000
 02PEF_1301059872_Oliviane Wenno

Samuelson, $
Capital 19,000
c. Prepare a classified balance sheet for the partnership on January 1,
2010.
PASA COMPANY
BALANCE SHEET
January 1st 2010
Assets
$
Cash 50,000
43,5
Account Receivable 00
48,0
Merchandise Inventory 00
Equipme 39,0
nt 00
(8,5
Allowance for Doubtful Account 00)
$
Total Assets 172,000
Liabilities and Owners' Equity
Liabilitie
s
$
Notes Payable 33,000
53,0
Account Payable 00
86,0
Total Liabilities 00
Owners' Equity
$
Patrick, Capital 43,000
43,
Samuelson, Capital 000
Additional Cash
86,0
Total Owners' Equity 00
Total Liabilities and Owners' $
Equity 172,000
 02PEF_1301059872_Oliviane Wenno

P12-2A
At the end of its first year of operations on December 31, 2010, CNU
Company’s accounts show the following:
Patrick Samuelson
Company Company

Reese $ 23,000 $ 48,000

Caplin

Phyliss 14,000 30,000

Newell

Betty 10,000 25,000

Uhrich

The capital balance represents each partner’s initial capital investment.

Therefore, net income or net loss for 2010 has not been closed to the
partners’ capital accounts.
Instructions:
a. Journalize the entry to record the division of net income for the year
2010 under each of the following independent assumptions.
1. Net income is $30,000. Income is shared 6 : 3 : 1
$
Income Summary 30,000
Reese Caplin, $
Capital 18,000
Phyliss Newell, 9,
Capital 000
Betty Uhrich, $
Capital 3,000
2. Net income is $37,000. Caplin and Newell are given salary
allowances of $15,000 and $10,000, respectively. The
remainder is shared equally.
$
Income Summary 37,000
Reese Caplin, $
Capital 19,000
Phyliss Newell, 14,
Capital 000
Betty Uhrich, $
Capital 4,000
 02PEF_1301059872_Oliviane Wenno

3. Net income is $19,000. Each partner is allowed interest of 10%

on beginning capital balances. Caplin is given a $12,000 salary
allowance. The remainder is shared equally.
$
Income Summary
19,000
Reese Caplin, $
Capital 15,700
Phyliss Newell, 1,
Capital 900
Betty Uhrich, $
Capital 1,400

b. Prepare a schedule showing the division of net income under

assumption (3) above.
CNU Company
Income Statement (partial)
December 31st 2010

Net Income $19,000

Division of Net Income
Reese Phyliss Betty
Total
Caplin Newell Uhrich
$ $
Salary Allowance 12,000 12,000
Interest Allowance on
Partner's Capital
4,8
Reese Caplin 00
3,0
Phyliss Newell 00
$
Betty Uhrich 2,500
10,3
Total Interest Allowance 00
 02PEF_1301059872_Oliviane Wenno

16,8 3,0 2,5 22,3

Total Salaries and Interest 00 00 00 00
Remaining Deficiency
($3,300)
(1,1
Reese Caplin ($3,300 : 3) 00)
(1,10
Phyliss Newell ($3,300 : 3) 0)
(1,1
Betty Uhrich ($3,300 : 3) 00)
(3,3
Total Remainder 00)
$ $ $ $
Total Division 15,700 1,900 1,400 19,000

c. Prepare a partners’ capital statement for the year under assumption

(3) above.

CNU Company
Partners' Capital Statement
December 31st 2010

Reese Phyliss Betty

Total
Caplin Newell Uhrich
Capital, January $
1 $ 48,000 $ 30,000 $ 25,000 103,000
15,70 1,40 19,0
Net Income 0 1,900 0 00
(23,00 (14,000 (10,00 (47,0
Drawings 0) ) 0) 00)
Capital, $ $ $
December 31 40,700 $ 17,900 16,400 75,000

P12-4A
At April 30, partners’ capital balances in SKG Company are: S Seger
$52,000, J. Kensington $54,000, and T. Gomez $18,000. The income
sharing ratios are 5 : 4 : 1, respectively. On May 1, the SKGA Company is
formed by admitting D. Atchley to the firm as a partner.
Instructions:
 02PEF_1301059872_Oliviane Wenno

a. Journalize the admission of Atchley under each of the following

independent assumptions.
1. Atchley purchases 50% of Gomez’s ownership interest by
paying Gomez $16,000 in cash.
T. Gomez, $
Capital 9,000
Atchley, $
Capital 9,000
2. Atchley purchases 331/3% of Kensington’s ownership interest
by paying Kensington $15,000 in cash.
J. Kenshington, $
Capital 18,000
$
Atchley, Capital 18,000
3. Atchley invests $66,000 for a 30% ownership interest, and
bonuses are given to the old partners.
$
Cash 66,000
$
S. Seger, Capital 4,500
J. Kenshington, $
Capital 3,600
$
T. Gomez, Capital 900
$
Atchley, Capital 57,000
4. Atchley invests $46,000 for a 30% ownership interest, which
includes a bonus to the new partner.
$
Cash 46,000
$
S. Seger, Capital 2,500
J. Kenshington, $
Capital 2,000
$
T. Gomez, Capital 500
$
Atchley, Capital 51,000
a. Kensington’s capital balance is $32,000 after admitting Atchley to
the partnership by investment. If Kensington’s ownership interest is
20% of total partnership capital, what were:
1. Atchley’s cash investment
2. The bonus to the partner?
 02PEF_1301059872_Oliviane Wenno

P12-5A
On December 31, the capital balances and income ratios in FAD Company
are as follows:
Partner Capital Income
Balance Ratio

J. Fagan $ 60,000 50%

P. Ames 40,000 30%

K. 26,000 20%
Durham

Instructions:
a. Journalize the withdrawal of Durham under each of the following
assumptions:
1. Each of the continuing partners agrees to pay $18,000 in cash
from personal funds to purchase Durham’s ownership equity.
Each receives 50% of Durham’s equity.
K. Durham , $
Capital 26,000
J. Fagan, $
Capital 13,000
P. Ames, $
Capital 13,000
2. Ames agrees to purchase Durham’s ownership interest for
$25,000 cash.
K. Durham , $
Capital 26,000
P. Ames, $
Capital 26,000
3. Durham is paid $34,000 from partnership assets, which
includes a bonus to the retiring partner.
K. Durham , $
Capital 26,000
J. Fagan, $
Capital 5,000
P. Ames, $
Capital 3,000
 02PEF_1301059872_Oliviane Wenno

$
Cash 34,000
4. Durham is paid $22,000 from partnership assets, and bonuses
to the remaining partners are recognized.
K. Durham , $
Capital 26,000
J. Fagan, $
Capital 2,500
P. Ame, $
Capital 1,500
$
Cash 22,000
b. If Ames’s capital balance after Durham’s withdrawal is $42,400 what
were:
1. The total bonus to the remaining partners?
Total bonus to remaining partner = $4,000 + $2,400 = $6,400
2. The cash paid by the partnership to Durham?
Total cash paid by the partnership to Durham = Durham’s capital –
Durham’s bonus
=$26,000 - $6,400 = $19,600
K. Durham , $
Capital 26,000
J. Fagan, $
Capital 4,000
P. Ames, $
Capital 2,400
$
Cash 19,600