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Biboso&Racines WILEY
Biboso&Racines WILEY
multiplying the new partners capital interest by the capital balances of existing partners.
dividing the total capital balances of existing partners by their collective capital interest.
dividing the new partners investment by his (her) capital interest.
dividing the new partners investment by the existing partners collective capital interest.
Salary
Interest
Residual
Bryant
--$15,000
(72,000)
Milton
$45,000
12,000
(24,000)
Pine
$ 36,000
9,000
(48,000)
Total
$ 81,000
36,000
(144,000)
Total
$(57,000)
$33,000
$ (3,000)
$(27,000)
12. 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.
What is the amount of bonus to be allocated to Rice?
A. 13,000
B. 16,000
C. 25,000
D. 27,000
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
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
13. What is the net income (loss) allocated to Kiney assuming the partnership incurred a $15,000
net income?
A. 5,000
B. 500
C. 0
D. 1,000
Residual
Stone
$ --13,500
13,500
(6,000)
Miles
$1,500
9,000
10,500
(3,000)
Kiney
$ --6,000
6,000
(6,000)
Total
$ 1,500
28,500
30,000
(15,000)
Total
$7,500
$7,500
-0-
$15,000
Bonus
Interest
14. What is the net income (loss) allocated to Miles assuming the partnership incurred a $75,000
net income?
A.
B.
C.
D.
29,100
24,300
21,600
75,000
Bonus
Interest
Stone
$ --13,500
Miles
$7,500
9,000
Kiney
$ --6,000
Total
$ 7,500
28,500
Residual
13,500
15,600
16,500
7,800
6,000
15,600
36,000
39,000
Total
$29,100
$24,300
$21,600
$75,000
15. What is the net income (loss) allocated to Miles assuming the partnership incurred a $30,000
net loss?
A.
B.
C.
D.
9,000 loss
2,700 loss
17,400 income
12,000 income
Residual
Stone
$ --13,500
13,500
(23,400)
Miles
$ --9,000
10,500
(11,700)
Kiney
$ --6,000
6,000
(23,400)
Total
$ --28,500
28,500
(58,500)
Total
($9,000)
($2,700)
($17,400)
($30,000)
Bonus
Interest
Bloom and Carnes share profits and losses in a ratio of 2:3, respectively. Bloom and Carnes
receive salary allowances of $10,000and $20,000, also respectively, and both partners receive
10%interest based upon the balance in their capital accounts on January1. Partners drawings are
not used in determining the average capital balances. Total net income for 2006 is $60,000. If net
income after deducting the interest and salary allocations is greater than $20,000, Carnes
receives a bonus of 5% of the original amount of net income.
January 1 capital balances
Yearly drawings ($1,500 a month)
Bloom
$ 200,000
18,000
Carnes
$ 300,000
18,000
16. What are the total amounts for the allocation of interest, salary, and bonus, and, how much
over-allocation is present?
A. $60,000 and $0.
B. $80,000 and $20,000.
C. $83,000 and $0.
D. $83,000 and $23,000.
Interest: ($500,000 x 10%) = $50,000
Salary: ($10,000 + $20,000) = $30,000
Bonus: Condition not met = $0
Total allocations = $80,000 and over-allocations = $80,000 - $60,000 = $20,000
17. If the partnership experiences a net loss of $20,000 for the year, what will be the final amount
of profit or (loss) closed to each partners capital account?
A.
B.
C.
D.
Bloom:
Interest allocation: $20,000
Salary allocation: $10,000
Carnes:
Interest allocation: $30,000
Salary allocation: $20,000
There is a total of $80,000 for positive allocations. To bring them down to a $20,000 loss, a
residual adjustment of ($100,000) is needed which is allocated ($40,000) to Bloom and
($60,000) to Carnes. After these amounts are assigned to the partners, each partners capital
account will be reduced by a net $10,000.
18. The XYZ partnership provides a 10% bonus to Partner Y that is based upon partnership
income, after deduction of the bonus. If the partnership's income is $121,000, how much is
Partner Y's bonus allocation?
A. $11,000.
B. $11,450.
C. $11,650.
D. $12,100.
On February 1, 2005, Flores, Gilroy, and Hansen began a partnership in which Flores and
Hansen contributed cash of $25,000; Gilroy contribute property with a fair value of $50,000 and
a tax basis $40,000. Gilroy receives a 5% bonus of partnership income. Flores and Hansen
receive salaries of $10,000 each. The partnership agreement of Flores, Gilroy, and Hansen
provides all partners to receive a 5% interest on capital and that profits and losses be divided of
the remaining income be distributed to Flores, Gilroy, and Hansen by a 1:3:1 ratio.
19. What is the net income (loss) allocated to Gilroy assuming the partnership incurred a $25,000
net income?
A.
B.
C.
D.
20,000
3,000
6,000
50,000
20. What is the net income (loss) allocated to Hansen assuming the partnership incurred a
$25,000 net income?
A. 11,000
B. 12,000
C. 13,000
D. 14,000
Net income
Bonus to Gilroy
Salaries
Interest
Residual loss
Loss allocation
Allocation
Income
$ 25,000
( 1,250 )
( 20,000)
( 5,000 )
( 1,250 )
1,250
$0
Flores
Gilroy
Hansen
$ 1,250
$ 10,000
1,250
2,500
$ 10,000
1,250
$( 250 )
$ 11,000
( 750 )
$ 3,000 $
( 250 )
11,000
B. the consideration received for that partner's interest may suggest the existence of
undervalued existing assets and/or goodwill.
C. either the bonus or the goodwill method may be used to record the transaction if the
partnership acquires the withdrawing partner's interest.
D. all of the above.
26. Callie is admitted to the Adams & Beal Partnership under the bonus method. Callie
contributes cash of $20,000 and non-cash assets with a market value of $30,000 and book value
of $15,000 in exchange for a 20% ownership interest in the new partnership. Prior to the
admission of Callie, the capital of the existing partnership was $130,000 and an appraisal showed
the partnership net assets were fairly stated.What will be Callies initial capital balance?
A. $36,000
B. $50,000
C. $35,000
D. $30,000
New Partnership Capital = 130,000 + 50,000 = 180,000
Callie Capital = 20% x 180,000
27. 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
D. Bell, $120,000; Carson, $167,000; Elston, $80,000
Davis has decided to retire from the partnership of Davis, Eiser, and Foreman. The partnership
will pay Davis $200,000. Goodwill is to be recorded in the transaction as implied by the excess
payment to Davis. A summary balance sheet for the Davis, Eiser, and Foreman partnership
appears below. Davis, Eiser, and Foreman share profits and losses in a ratio of 1:1:3,
respectively.
Assets
Cash
Inventory
Marketable securities
Land
Building-net
Total assets
Equities
$ 75,000
82,000
38,000
150,000
255,000
$ 600,000
Davis, capital
Eiser, capital
Foreman, capital
Total equities
160,000
140,000
300,000
$ 600,000
D. $200,000.
29. What partnership capital will Eiser have after Davis retires?
A. $100,000.
B. $140,000.
C. $180,000.
D. $220,000.
30. What partnership capital will Foreman have after Davis retires?
A. $240,000.
B. $300,000.
C. $360,000.
D. $420,000.
31. Which of the following statements is correct?
1. Personal creditors have first claim on partnership assets.
2. Partnership creditors have first claim on partnership assets.
3. Partnership creditors have first claim on personal assets.
a. 1
b. 2
c. 3
d. Both 2 and 3
34. Which of the following procedures is acceptable when accounting for a deficit balance in a
partners capital account during partnership liquidation?
a. A partner with a negative capital balance must contribute personal assets to the partnership that
are sufficient to bring the capital account to zero.
b. If a partner with a negative capital balance is personally insolvent, the negative capital balance
may be absorbed by those partners having a positive capital balance according to the residual
profit and loss sharing ratios that apply to all the partners.
c. If a partner with a negative capital balance is personally insolvent, the negative capital
balance may be absorbed by those partners having a positive capital balance according to
the residual profit and loss sharing ratios that apply to those partners having positive
balances.
d. All the above procedures are acceptable.
35. X, Y, and Z have capital balances of $90,000, $60,000, and $30,000, respectively. Profits are
allocated 35% to X, 35% to Y, and 30% to Z. The partners have decided to dissolve and liquidate
the partnership. After paying all creditors, the amount available for distribution is $60,000. X, Y,
and Z are all personally solvent. Under the circumstances, Z will
a. receive $18,000.
b. receive $30,000.
c. personally have to contribute an additional $6,000.
d. personally have to contribute an additional $36,000.
36. In partnership liquidation, how are partner salary allocations treated?
a. Salary allocations take precedence over creditor payments.
b. Salary allocations take precedence over amounts due to partners with respect to their capital
interests, but not profits.
c. Salary allocations take precedence over amounts due to partners with respect to their capital
profits, but not capital interests.
d. Salary allocations are disregarded.
38. Under the rule of offset, what is the proper disposition of a partnership loan that was made
from a partner who has a debit balance?
a. The loan is first paid to the debtor partner before cash payments are made to partners.
b. The loan is written off as a partnership loss if the partner does not have the cash to cover
the debit balance.
c. The loan is charged off to the capital accounts of all the partners in their profit and loss sharing
ratios.
d. The loan is charged off to the capital account of the debtor partner.
39. In partnership liquidations, what are safe payments?
a. The amounts of distributions that can be made to the partners, after all creditors have been paid
in full.
b. The amounts of distributions that can be made to the partners with assurance that such
amounts will not have to be returned to the partnership.
c. The amounts of distributions that can be made to the partners, after all non-cash assets have
been adjusted to fair market value.
d. All the above are examples of the safe payments concept.
$ 30,000
Loan to Lang
40,000
50,000
Other assets
480,000
Total assets
$ 550,000
The partners agree to liquidate the business and distribute cash when it becomes available. A
cash distribution plan for the Lang, Maas, and Neal partnership will show that cash available,
after outside creditors are paid, will initially go to
A. Lang in the amount of $20,000.
Maas
Neal
Total
$ 30,000
$ 130,000
$ 150,000
$ 310,000
( 30,000 )
( 30,000 )
( 60,000 )
( 120,000 )
$ 90,000
$ 190,000
( 135,000 )
Loss to eliminate
Lang
Subtotals
$ 100,000
Loss to eliminate
Neal
( 45,000 )
( 90,000 )
Subtotals
$ 55,000
$0
$ 55,000
On June 30, 2006, the Warle, Xin, and Yates partnership had the following fiscal year-end
balance sheet:
Cash
Accounts receivable
$ 4,000
6,000
Accounts payable
Loan from Xin
$ 7,000
5,000
Inventory
14,000
Warle, capital(20%)
14,000
Plant assets-net
12,000
Xin, capital(30%)
10,000
Loan to Warle
6,000
Total assets
$ 42,000
Yates, capital(50%)
Total liab./equity
6,000
$ 42,000
The percentages shown are the residual profit and loss sharing ratios. The partners dissolved the
partnership on July 1, 2006. And began the liquidation process. During July the following events
occurred:
42. The book value of the partnership equity (i.e., total equity of the partners) on June 30, 2006 is
A.
B.
C.
D.
$60,000.
$29,000.
$30,000.
$42,000.
($14,000 Warle capital + $10,000 Xin capital + $6,000 Yates capital + $5,000 Loan from Xin $6,000 Loan to Warle)
43. The cash available for distribution to the partners on July 31, 2006 is
A.
B.
C.
D.
$ 2,000.
$ 4,000.
$ 7,000.
$11,000.
($4,000 beginning balance + $3,000 cash collected + $4,000 for inventory sold - $7,000 of
accounts payable - $2,000 for expenses)
44. How much cash would Xin receive from the cash that is available for distribution on July 31?
A.
B.
C.
D.
$ 0.
$ 600.
$1,000.
$2,000.
Warle
Xin
Yates
Total
Equities, June 30
$ 8,000
$ 15,000
$ 6,000
$ 29,000
Inventory loss
( 2,000 )
( 3,000 )
( 5,000 )
( 10,000 )
( 400 )
( 600 )
Contingency fund
( 2,000 )
( 1,000 )
Subtotals
5,600
11,400
17,000
Possible losses on
remaining assets
( 3,000 )
( 4,500 )
( 7,500 )
Subtotals
$ 2,600
$ 6,900
Deficit
( 3,000 )
( 4,500 )
7,500
Subtotals
( 400 )
2,400
2,000
Deficit
400
( 400 )
Cash distribution
$0
$0
$ 2,000
$( 7,500 )
( 15,000 )
$ 2,000
Eliminate Yatess
Eliminate Warles
$ 2,000
Hara, Ives, and Jack 12. Hara, Ives, and Jack are in the process of liquidating their partnership.
Since it may take several months to convert the other assets into cash, the partners agree to
distribute all available cash immediately, except for $10,000 that is set aside for contingent
expenses. The balance sheet and residual profit and loss sharing percentages are as follows:
Cash
$ 400,000
Accounts payable
$ 200,000
Other assets
200,000
135,000
Total assets
$ 600,000
216,000
49,000
Total liability/equity
45. How much cash should Ives receive in the first distribution?
A.
B.
C.
D.
$146,000.
$147,000.
$153,000.
$156,000
46. How much cash should Hara receive in the first distribution?
A. 49,000
B. 47,000
$ 600,000
C. 43,000
D. 59,000
Losses
Equities
Possible loss on remaining assets
Contingencies
Hara
Ives
$ 135,000
Jack
$ 216,000
$ 49,000
$ 200,000
( 80,000 )
( 60,000 )
( 60,000 )
10,000
( 4,000 )
( 3,000 )
( 3,000 )
$ 153,000
$( 14,000 )
Subtotals
$ 51,000
Eliminate Jacks
debit balance
( 8,000 )
( 6,000 )
14,000
Safe payments
$ 43,000
$ 147,000
$0
Jade, Kahl, and Lane are in the process of liquidating their partnership. Lane has agreed to accept
the inventory, which has a fair value of $60,000, as part of her settlement. A balance sheet and
the residual profit and loss sharing percentages are as follows:
Cash
$ 198,000
Inventory
Accounts payable
$ 149,000
80,000
79,000
Plant assets
230,000
140,000
Total assets
$ 508,000
140,000
Total liab./equity
$ 508,000
47. If the partners distribute the available cash, Lane will receive
A.
B.
C.
D.
$23,000.
$29,000
$30,000.
$34,000.
48. If the partners distribute the available cash, Kahl will receive
A.
B.
C.
D.
26,000
23,000
33,000
41,000
Jade
Kahl
Lane
Equities
$ 79,000
$ 140,000
$ 140,000
( 60,000 )
( 8,000 )
( 8,000 )
( 4,000 )
( 92,000 )
( 92,000 )
( 46,000 )
Subtotal $
( 21,000 )
$ 40,000
$ 30,000
21,000
( 14,000 )
( 7,000 )
$0
$ 26,000
$ 23,000
The NOR Partnership is being liquidated. A balance sheet prepared prior to liquidation is
presented below:
Assets Liabilities & Equities
Cash
$240,000
Liabilities
$ 160,000
Other Assets
300,000
Reese, Loan
60,000
Total Assets
$540,000
Nen, Capital
180,000
Ott, Capital
60,000
Reese, Capital
80,000
Total Equities
$540,000
Nen, Ott, and Reese share profits and losses in a 40:40:20 ratio. All partners are personally
insolvent.
49. How much loss Nen incurred?
A.
B.
C.
D.
20,000
40,000
60,000
45,000
20,000
40,000
60,000
45,000
Net interest
Potential loss$300,000
Potential loss$60,000
Cash distribution
Nen
$(180,000)
120,000
(60,000)
40,000
$(20,000)
Ott
$(60,000)
120,000
60,000
(60,000)
$ -0-
Reese
$(140,000)
60,000
(80,000)
20,000
$(60,000)
Book Value
$ 10,000
60,000
110,000
70,000
Land
Building-net
Goodwill
20,000
200,000
42,000
$ 512,000
Accounts payable
Wages and salaries
Contributions due to pension plan
Taxes payable
Accrued interest payable (includes
$10,000 from the mortgage payable and
$2,000 from the note payable)
Note payable
Mortgage payable
Capital stock
Deficit
$ 120,000
30,000
20,000
80,000
12,000
40,000
150,000
100,000
100,000
70,000
(20,000)
$ 512,000
The land and building are pledged as security for the mortgage payable as well as any accrued
interest on the mortgage. The note payable is secured with the equipment, but the interest on the
note is unsecured. Wages and salaries were accrued within the last 90 days and pension plan
contributions were accrued within the last 6 months; neither exceeds $4,000 per employee.
Liquidation expenses are expected to be $50,000.
56. What is the expected return on the dollar for unsecured nonpriority claims?
A. $ .50
B. $ .20
C. $ .75
D. $ .15
57. Banyo Corporation was a supplier to Archery Corporation and at the time of Archerys
bankruptcy filing, Banyos account receivable from Archery was $40,000. On the basis of the
estimates, how much can Banyo expect to receive?
A.
B.
C.
D.
35,000
10,000
8,000
14,000
Amount of Claim
$ 110,000
Expected
Estimated
Payment Remaining Cash
$ 390,000
$ 110,000
$ 280,000
reclassified as unsecured)
Unsecured priority claims:
Estimated liquidation expenses
Wages and salaries
Pension fund liability
Taxes payable
Unsecured nonpriority claims:
Accounts payable
Unsecured portion of note
payable
Accrued interest on note
Payable
100,000
70,000
210,000
50,000
30,000
20,000
50,000
30,000
20,000
160,000
130,000
110,000
30,000
80,000
80,000
$ 120,000
30,000
2,000
Hinsch Company is in bankruptcy and is being liquidated under the provisions of Chapter 7 of
the bankruptcy code. The trustee has converted all assets into $120,000 cash and has prepared the
following list of approved claims:
Customer deposits ($1,000 from each of two customers
that ordered products that were never delivered)
Property taxes payable
Accounts payable, unsecured
Trustees fees and other costs of liquidation
Mortgage payable, secured by property that was sold
for $80,000
Note payable to bank, secured by all accounts
receivable of which $30,000 were collected and $10,000
were written off as uncollectible
$ 2,000
4,000
30,000
16,000
60,000
30,000
58. How much will the bank receive on the note payable?
A.
B.
C.
D.
32,000
36,000
38,000
28,000
Cash
Mortgage payable, paid in full
Note payable to bank, secured portion
$ 120,000
( 60,000 )
60,000
( 30,000 )
30,000
( 22,000 )
$ 8,000
$ 10,000
30,000
$ 40,000
$ 32,000
Ingham Corporation is being liquidated under the Bankruptcy Act. The trustee has determined
that the unsecured claims will receive $.30 on the dollar. Platinum Corporation holds a
$35,000mortgage note receivable from Ingham that is secured by equipment with a $17,500
book value and a $7,000 fair value.
59. How much of the mortgage receivable will be recovered by Platinum?
A.
B.
C.
D.
18,725
15,400
12,500
10, 220
$ 35,000
( 7,000 )
$ 28,000
$ 7,000
8,400
$ 15,400
60. Dooley Corporation was forced into bankruptcy and is in the process of liquidating assets and
paying claims. Unsecured claims will be paid at the rate of thirty cents on the dollar. Cerner
holds a note receivable from Dooley for $90,000 collateralized by an asset with a book value of
$60,000 and a liquidation value of $30,000. The amount to be realized by Cerner on this note is:
a. $30,000.
b. $48,000.
c. $60,000.
d. $90,000.