Acc 9 Testbank

PRACTICAL ACCOUNTING 2
THEORY & PRACTICE

ADVANCE ACCOUNTING
PARTNERSHIP – FORMATION & ADMISSION
QUIZZER
Partnership Formation & Admission of a Partner
Partnership
I. Introduction
A partnership is defined as an association of two or more persons who contributes money,
property or industry to a common fund with the intention of dividing the profits among
themselves. Accounting for partnerships should comply with the legal requirements as set forth
by the Partnership Law as Well as complying with the partnership agreement itself.
//. Partnership Formation and Capital Accounts

All assets contributed to the partnership are recorded by the partnership at their agreed values
(or fair market values, in the absence of agreed values). All liabilities that the partnership
assumes are recorded at their net present values. Thus, if a partner contributes a noncash
asset to the partnership (e.g., land or equipment) subject to mortgage, the contributing partner's
capital account is credited for the agreed value (or fair values) of the noncash asset less the
mortgage assumed by the partnership.
The capital account is an equity account similar to the shareholders' equity accounts in a
corporation. It is used to account for permanent withdrawals and additional contributions. Other
important accounts include a drawing account and loans to or from partners. The drawing
account is used to account for net income or loss and personal or normal withdrawals, i.e.,
share against net income. It is closed at the end of the period into the capital account. Loan
accounts are set up for amounts intended as loans, rather than as additional capital
investments. In liquidation proceedings, a loan to or from a partner is in essence treated as an
increase or decrease in a partner's capital account.
///.Division of Profits and Losses

As a rule profits and losses are allocated based on agreement.
Methods
Various methods
Exist for the division of partnership profits and losses including the following:
1. Equally,
2. Arbitrary ratio,
3. Capital contribution ratio:
a. Original Capital or initial investment
b. Beginning Capital of each year
c. Average Capital
d. Ending Capital of each year
4. Interest on capital balance and/or loan balances and the balance on agreed ratio,
5. Salaries to partners and the balance on agreed ratio,
6. Bonus to partners and the balance on agreed ratio,
Partnership Formation & Admission of a Partner - Lecture Page 3

Advance Accounting
a. Bonus as an "expense" in computing the bonus amount. Here, bonus is computed

based on net income after bonus.
b. Bonus as a distribution of profit. Here, the bonus is computed based on net income
before deducting the bonus.
7. Interest on capitals and/or loan balances, salaries to partners, and bonus to partner and
the balance on agreed ratio.
The method of division to be used in any given situation is generally the method specified in
the partnership agreement. This agreement must always be consulted first, since it is legally
binding on the partners. If no profit and loss sharing arrangement is specified in the partnership
agreement, the partnership requires that profits and losses be shared according to capital
contribution. Capital contribution should be interpreted to be original capital/beginning capital
of each year in the absence of original capital; similarly, if the agreement specifies how profits
are to be shared but is silent as to losses, losses are to be shared in the same manner as
profits. Notice that the profit and loss sharing ratio is totally independent of the partners'
ownership interests. Thus, two partners may have ownership interests of 70% and 30% but
share profits and losses equally.
IV. Dissolution
A. Admission of a New Partner
A new partner may be admitted to the partnership by purchasing the interest of one or more of
the existing partners or by contributing cash or other assets (i.e., investment of additional
capital). These two situations are discussed below.
1. Purchase of Interest - When a new partner enters the partnership by purchasing the
interest of an existing partner, the price paid for that interest is irrelevant to the
partnership accounting records because it is a private or personal transaction between
the buyer and seller. The assets and liabilities of the partnership are not affected. The
capital account of the new partner is recorded by merely reclassifying the capital account
of the old partner.
2. Admission by Investment of Additional Assets - A new partner may be granted an
interest in the partnership in exchange for contributed assets and/or goodwill (e.g.,
business expertise, an established clientele, etc.). The admission of the new partner and
contribution of assets may be recorded on the basis of the bonus method.
Bonus method
This method is based upon the historical cost principle. Admittance of a new partner involves
debiting cash or other assets for the FMV of the assets contributed and crediting the new
partner's capital for the agreed (i.e., purchased) percentage of total capital. Total capital equals
the book value of the net assets prior to admittance of the new partner, plus the FMV of the
assets contributed by the new partner. A difference between the FMV of the assets contributed
Partnership Formation & Admission of a Partner Page 4

and the interest granted to the new partner results in the recognition of a bonus.
a. No bonus recognized - When an incoming partner's capital account (ownership interest)
is to be equal to his purchase price, the partnership books merely debit cash or other
assets and credit capital.
b. Bonus granted to the old partners - When the FMV of the assets contributed by an
incoming partner exceeds the amount of ownership interest to be credited to his capital
account, the old partners recognize a bonus equal to this excess. This bonus is allocated
on the basis of the same ratio used for income allocation (unless otherwise specified in
the partnership agreement). Recording involves crediting the old partners' capital
accounts by the allocated amounts.
c. Bonus granted to new partner - An incoming partner may contribute assets having a
FMV smaller than the partnership interest granted to that new partner. Similarly, the new
partner may not contribute any assets at all. The incoming partner is therefore presumed
to contribute an intangible asset, such as managerial expertise or personal business
reputation. In this case, a bonus is granted to the new partner, and the capital accounts
of the old partners are reduced on the basis of their profit and loss ratio.
Goodwill method.
In PFRS No. 3, goodwill represents the excess of the cost of the business combination over
the fair value of the identifiable net assets obtained. Therefore, the standard provides that
goodwill attaches only to a business as a whole and is recognized only when a business is
acquired. This provision of PFRS No. 3 outlawed the use of the goodwill method in partnership
accounting particularly admission and retirement of a partner because there is no business
involved. The term "business" is defined in the Appendix A of PFRS No. 3 as:
An integrated set of activities and assets conducted and managed for the purpose of providing:
{a) a return to investor; or
[b) Lower costs or other economic benefits directly and proportionately to policyholders or
participants.
A business generally consists of inputs, processes applied to those inputs, and resulting
outputs that are, or will be, used to generate revenues. If goodwill is present in a transferred
set of activities and assets, the transferred set shall be presumed to be a business.
Refer to Appendix of this chapter for further discussion and illustration.
Note to the Examinees:
According to PFRS No. 3, goodwill represents the excess of the cost of the business
combination over the fair value of the identifiable net assets obtained. Therefore, the standard
provides that goodwill attaches only to a business as a whole and is recognized only when a
business is acquired. This provision of PFRS No. 3 outlawed the use of the goodwill method in
partnership particularly admission and retirement of a partner because there is no business
involved.
Partnership Formation & Admission of a Partner - Lecture Page 5

Advance Accounting
MCQ - Theory
1. Which of the following is not a characteristic of most partnership?
a. Limited liability c. Mutual agency
b. Limited life d. Ease of formation Punzalan 2014
2. Which of the following is not a characteristic of the proprietary theory that influences
accounting for partnerships?
a. Partners' salaries are viewed as a distribution of income rather than a component of net
income.
b. A partnership is not viewed as separate entity, distinct, taxable entity.
c. A partnership is characterized by limited liability,
d. Changes in the ownership structure of a partnership result in the dissolution of the
partnership. Punzalan 2014
3. Which of the following statements is correct with respect to a limited partnership?

a. A limited partner may not be an unsecured creditor of the limited partnership.
b. A general partner may not also be limited partner at the same time.
c. A general partner may be a secured creditor of the limited partnership.
d. A limited partnership can be formed with limited liability for all partners. Punzalan 2014
4. An advantage of the partnership as a form of business organization would be

a. Partners do not pay income taxes on their share in. partnership income.
b. A partnership is bound by the act of the partners.
c. A partnership is created by mere agreements of the partners. Punzalan 2014
d. A partnership may be terminated by the death or withdrawal of a partner.
5. When property other than cash is invested in a partnership, at what amount should the noncash
property be credited to the contributing partner's capital account?
a. Fair value at the date of contribution.
b. Contributing partner's original cost.
c. Assessed valuation for property tax purposes.
d. Contributing partner's tax basis. Punzalan 2014
6. Partnership capital and drawings accounts are similar to the corporate

a. Paid in capital, retained earnings, and dividends accounts.
b. Retained earnings account.
c. Paid in capital and retained earnings accounts.
d. Preferred and common stock accounts. Punzalan 2014
Partnership Formation & Admission of a Partner MCQ Theoy Page 6

7. The Flat and Iron partnership agreement provides for Flat to receive a 20% bonus on profits
before bonus. Remaining profits and losses are divided between Flat and Iron in the ratio of
2:3, respectively. Which partner has a greater advantage when the partnership has a profit or
when it has a loss?
Profit Loss Profit Loss

a. Flat Iron c. Iron Flat
b. Flat Flat d. Iron Iron Punzalan 2014
8. If the partnership agreement does not specify how income is to be allocated, profits and loss
should be allocated
a. Equally.
b. In proportion to the weighted average of capital invested during the period.
c. Equitably so that partners are compensated for the time and effort expended on behalf of
the partnership.
d. In accordance with their capital contribution. Punzalan 2014
9. Which of the following is not a component of the formula used to distribute income?
a. Salary allocation to those partners working.
b. After all other allocation, the remainder divided according to the profit and loss sharing
ratio.
c. Interest on the average capital investments,
d. Interest on notes to partners. Punzalan 2014
10. Which of the following is not considered a legitimate expense of a partnership?

a. Interest paid to partners based on the amount of invested capital.
b. Depreciation on assets contributed to the partnership by partners.
c. Salaries for management hired to run the business.
d. Supplies used in the partners' offices. Punzalan 2014
11. The fact that salaries paid to partners are not a component of partnership income is indicative
of
a. A departure from generally accepted accounting principles.
b. Being characteristic of the entity theory.
c. Being characteristic of the proprietary theory.
d. Why partnerships are characterized by unlimited liability. Punzalan 2014
Partnership Formation & Admission of a Partner MCQ Theory Page 7

Advance Accounting
12. If a new partner acquires a partnership interest directly from the partners rather than from the
partnership itself,
a. No entry is required.
b. The partnership assets should be revalued.
c. The existing partners' capital accounts should be reduced and the new partner's account
increased.
d. The partnership has undergone a quasi-reorganization. Punzalan 2014
13. Which of the following results in dissolution of a partnership?

a. The contribution of additional assets to the partnership by an existing partner.
b. The receipt of a draw by an existing partner.
c. The winding up of the partnership and the distribution of remaining assets to the
partners.
d. The withdrawal of a partner from a partnership. Punzalan 2014
14. When a new partner is admitted to a partnership, an original partner's capital account may be
adjusted for
a. A proportionate share of the incoming partner's investment.
b. His or her share of previously unrecorded intangible assets traceable to the original
partners.
c. His or her share of previously unrecorded intangible assets traceable to the incoming
partner.
d. None of the above. Punzalan 2014
15. Which of the following best characterizes the bonus method of recording a new partner's
investment in a partnership?
a. Net assets of the previous partnership are not revalued.
b. The new partner's initial capital balance is equal to his or her investment.
c. Assuming that recorded assets are properly valued, the book value of the new
partnership is equal to the book value of the previous partnership and the investment of
the new partner. Punzalan 2014
d. The bonus always results in an increase to the previous partners capital balances.
16. If goodwill is traceable to the previous partners, it is

a. Allocated among the previous partners according to their interest in capital.
b. Allocated among the previous partners only if there are not other assets to be revalued.
c. Allocated among the previous partners according to their original profit and loss sharing
percentages.
d. Not possible for goodwill to also be traceable to the incoming partner. Punzalan 2014

17. The goodwill and the bonus methods are two means of adjusting for differences between the
net book value and the fair market value of partnership when new partners are admitted. Which
of the following statements about these methods is correct?
a. The bonus method does not revalue assets to market values.
b. The bonus method revalues assets to market values.
c. Both methods result in the same balances in the partner capital accounts.
d. Both methods result in the same total value of partner capital account, but the individual
capital account vary. Punzalan 2014
18. The following is the priority sequence in which liquidation proceeds will be distributed for a
partnership:
a. Partnership drawings, partnership liabilities, partnership loans, partnership capital

balances
b. Partnership liabilities, partnership loans, partnership capital balances.
c. Partnership liabilities, partnership loans, partnership drawings, partnership capital
balances. Punzalan 2014
d. Partnership liabilities, partnership capital balances, partnership loans.
19. The doctrine of marshaling of assets

a. Is applicable only if the partnership is insolvent.
b. Allows partners to first contribute personal assets to unsatisfied partnership creditors.
c. Is applicable if either the partnership is insolvent or individual partners are insolvent.
d. Amount owed to personal creditors and to the partnership for debit capital balances are
shared proportionately from the personal assets of the partners. Punzalan 2014
20. In the liquidation of a partnership it is necessary to (1.) distribute cash to the partners; (2.) sell
non-cash assets; (3.) allocate any gain or loss on realization to the partners; and (4.) pay
liabilities. These steps should be performed in the following order:
a. (2),(3),(4),(1)
b. (2), (3), (1), (4)
c. (3), (2), (1), (4)
d. (3), (2), (4), (T) Punzalan 2014
Partnership Formation & Admission of a Partner MCQ Theory Page 9

Advance Accounting
21. In the AA-BB partnership, AA and BB had a capital ratio of 3:1 and a profit and loss ratio of
2:1, respectively. The bonus method was used to record CC's admittance as a new partner.
What ratio would be used to allocate, to AA and BB, the excess of CC's contribution over the
amount credited to CC's capital account?
a. AA and BB's new relative ratio.
b. AA and BB's new relative profit and loss ratio.
c. AA and BB's old capital ratio.
d. AA and BB's old profit and loss ratio. Dayag 2013
22. The FF and II partnership agreement provides for FF to receive a 20% bonus on profits
before the bonus. Remaining profits and losses are divided between FF and II in the ratio of 2
to 3, respectively. Which partner has a greater advantage when the partnership has a profit
or when it has a loss?
Profit Loss
a. FF II
b. FF FF
c. II FF
d. II II Dayag 2013

MCQ - Problems
FORMATION
No Bonus, No Revaluation
Cash Contributed by Partner
23. As of July 1, 2012, FF and GG decided to form a partnership. Their balance sheets on this
date are:
FF GG
Cash P 15,000 P 37,500
Accounts receivable 540,000 225,000
Merchandise Inventory - 202,500
Machinery and equipment 150,000 270,000
Total P705,000 P735,000
Accounts Payable P135,000 P240,000

FF, capital 570,000
GG, capital - 495,000
Total P705,000 P735,000
The partners agreed that the machinery and equipment of FF is under depreciated by P15,000
and that of GG by P45.000. Allowance for doubtful accounts is to be set up amounting to
P120,000 for FF and P45,000 for GG. The partnership agreement provides for a profit and loss
ratio and capital interest of 60% to FF and 40% to GG. How much cash must FF invest to bring
the partners' capital balances proportionate to their profit and loss ratio?
a. 142,500 c. 172,500
b. 52,500 d. 102,500 Dayag 2013
24. Mary admits Jane as a partner in the business. Balance sheet accounts of Mary just before the
admission of Jane show: Cash, P26,000, Accounts receivable, PI20,000, Merchandise
inventory, PI80,000, and Accounts payable, P62,000. It' was agreed that for purposes of
establishing Mary's interest, the following adjustments be made: 1.) an allowance for doubtful
accounts of 3% of accounts receivable is to be established; 2.) merchandise inventory is to be
adjusted upward by P25,000; and 3.) prepaid expenses of P3,600 and accrued liabilities of
P4,000 are to be recognized.
If Jane is to invest sufficient cash to obtain 2/5 interest in the partnership, how much would
Jane contribute to the new partnership?
a. 176,000 c. 95,000
b. 190,000 d. 113,980 Punzalan 2014
Partnership Formation & Admission of a Partner MCQ Problems Page 11

Advance Accounting
25. Red, White, and Blue form a partnership on May 1,2013. They agree that Red will contribute office
equipment with a total fair value of P40,000; White will contribute delivery equipment with a fair
value of P80,000; and Blue will contribute cash. If Blue wants a one third interest in the capital
and profits, he should contribute cash of:
a. P 40,000 c. P60,000
b. P120,000 d. P180,000 Guerrero 2013
Noncash Contribution
26. On December 1, 2012, EE and FF formed a partnership, agreeing to share for profits and
losses in the ratio of 2:3, respectively. EE invested a parcel of land that cost him P25,000. FF
invested P30,000 cash. The land was sold for P50,000 on the same date, three hours after
formation of the partnership. How much should be the capital balance of EE right after
formation?
a. 25,000 c. 60,000
b. 30,000 d. 50,000 Dayag 2013
27. On May 1, 2010, Cobb and Mott formed a partnership and agreed to share profits and losses
in the ratio of 3:7, respectively. Cobb contributed a parcel of land that cost him PI0,000. Mott
contributed P40,000 cash. The land was sold for PI8,000 on May 1, 2010, immediately after
formation of the partnership. What amount should be recorded in Cobb's capital account on
formation of the partnership?
a. 18,000 c. 15,000
b. 17,400 d. 10,000 Punzalan 2014
28. On July 1,2013, Monuz and Pardo form a partnership, agreeing to share profits and losses in
the ratio of 4:6, respectively. Monuz contributed a parcel of land that cost him P25,000. Pardo
contributed P50,000 cash. The land was sold for P50,000 on July 1,2013 four hours after
formation of the partnership. How much should be recorded in Monuz capital account on formation
of the partnership?
a. PI0,000 c. P25,000
b. P20,000 d. P50,000 Guerrero 2013

Cash, noncash contribution

29. Jones and Smith formed a partnership with each partner contributing the following items:
Jones Smith
Cash P 80,000 P40,000
Building - cost to Jones 300,000
- fair value 400,000
Inventory - cost to Smith 200,000
- fair value 280,000
Mortgage payable 120,000
Accounts payable 60,000
Assume that for tax purposes Jones and Smith agree to share equally in the liabilities
assumed by the Jones and Smith partnership. What is the balance in each partner's capital
account for financial accounting purposes?
Jones Smith
A. P350,000 P270,000
B. P260,O00 PI 80,000
C. P360,O00 P260,000
D. P500,000 P300,000
a. Option A c. Option C
b. Option B d. Option D Dayag 2013
Questions 1 & 2 are based on the following: Dayag 2013

30. On March 1, 2012, II and JJ formed a partnership with each contributing the following assets:
II JJ
Cash P300,000 P700,000
Building - 2,250,000
Furniture and fixtures 100,000
The building is subject to mortgage loan of P800,000, which is to be assumed by the
partnership agreement provides that II and JJ share profits and losses 30% and 70%,
respectively. On March 1, 2012 the balance in JJ's capital account should be:
a. 3,700,000 c. 3,050,000
b. 3,140,000 d. 2,900,000
31. The same information in Number 2, except that the mortgage loan is not assumed by the
partnership. On March 1, 2012 the balance in JJ's capital account should be:
a. 3,700,000 c. 3,050,000
b. 3,140,000 d. 2,900,000

Advance Accounting
32. On January 2, 2010, Abel, Cain, and Josuah formed a partnership. Abel contributed cash of
PI00,000 and a delivery equipment that originally costs him PI20,000, but with a second hand
value of P50,000. Cain contributed PI60,000 in cash. Josuah, whose family sells office
equipment, contributed P50,000 in cash and office equipment that cost his family's dealership
PI00,000 but with a regular selling price of PI20,000. In 2010, the partnership reported net
income of P 120,000. On December 31, 2010, what would be the capital balance of the
partners?
Abel Cain Josuah
a. 257,500 200,000 192,500
b. 190,000 200,000 210,000
c. 260,000 200,000 190,000
d. 187,500 200,000 212,500 Punzalan 2014
33. Roberts and Smith drafted a partnership agreement that lists the following assets contributed
at the partnership's formation:
Contributed by
Roberts Smith
Cash P20,000 P30,000
Inventory 15,000
Building 40,000
Furniture & equipment 15,000
The building is subject to a mortgage of PI0,000, which the partnership has assumed. The
partnership agreement also specifies that profits and losses are to be distributed evenly. What
amounts should be recorded as capital for Roberts and Smith at the formation of the
partnership?
Roberts Smith
a. 35,000 85,000
b. 35,000 75,000
c. 55,000 55,000
d. 60,000 60,000 Punzalan 2014
34. Ben, Joe and Fortune are new CPA's and are to form a partnership. Ben is to contribute cash
of P50,000 and his computer originally costing P60,000 but has a second hand value of P25,000.
Joe is to contribute cash of P80,000. Fortune, whose family is selling computers, is to contribute cash
of P25,000 and a brand new computer plus printer with regular price at P60,000 but which cost
their family's computer dealership, P50,000. Partners agree to share profits equally.

The capital balances upon formation are:

a. Ben, P 75,000; Joe, P80,000; and Fortune, P85,000.
b. Ben, P110,000; Joe, P80,000; and Fortune, P75,000.
c. Ben, P 80,000; Joe, P80,000; and Fortune, P80,000.
d. Ben, P 88,333; Joe, P88,333; and Fortune, P88,335. Guerrero 2013
Cash, noncash contribution, assumption of debt

35. On April 30, 2010, Alex, Benjie, and Cesar formed a partnership by combining their separate
business proprietorships. Alex contributed cash of P500,000. Benjie contributed property with
a P360,000 carrying amount, a P400,000 original cost, and P800,000 fair market value. The
partnership accepted responsibility for the P3 50,000 mortgage attached to the property. Cesar
contributed equipment with a P300,000 carrying amount, a P750,000 original cost, and P5
50,000 fair value. The partnership agreement specifies that profits and losses are to be shared
equally but is silent regarding capital contributions. What are the capital balances of the
partners at April 30, 2010?
Alex Benjie Cesar
a. 500,000 800,000 550,000
b. 500,000 450,000 550,000
c. 500,000 360,000 300,000
d. 500,000 400,000 750,000 Punzalan 2014
36. On March 1,2013, Santos and Pablo formed a partnership with each contributing the following assets.
Santos Pablo
Cash P30,000 P70,000
Building - 225,000
Furniture and fixtures 10,000 -
The building is subject to a mortgage loan of P80,000, which is to be assumed by the partnership.
The partnership agreement provides that Santos and Pablo share profits and losses 30% and
70%, respectively. On March 1, 2013 the balance in Pablo's capital account should be:
a. P290,000 c. P314,000
b. P305,000 d. P370,000 Guerrero 2013
Partner with biggest capital balance

37. On April 30, 2012, XX, YY and ZZ formed a partnership by combining their separate business
proprietorships. XX contributed cash of P75.000. YY contributed property with a P54.000
carrying amount, a P60,000 original cost, and PI20,000 fair value. The partnership accepted
responsibility for the P52.500 mortgage attached to the property. ZZ contributed equipment
with a P45.000 carrying amount, a PI 12,500 original cost, and P82.500 fair value.

Advance Accounting
The partnership agreement specifies that profits and losses are to be shared equally but is
silent regarding capital contributions. Which partner has the largest April 30, 2012, capital
balance?
a. XX c. ZZ Dayag 2013
b. YY d. All capital account balances are equal
38. On April 30, 2010, Al, Ben, and Ces formed a partnership by combining their separate business
proprietorships. Al contributed cash of P50,000. Ben contributed property with a P36,000
carrying amount, a P40,000 original cost, and P80,000 fair value. The partnership accepted
responsibility for the P35,000 mortgage attached to the property. Ces contributed equipment
with a P3 0,000 carrying amount, a P75,000 original cost, and P55,000 fair value. The
partnership agreement specifies that profits and losses are to be shared equally but is silent
regarding capital contributions.
Which partner has the largest capital account balance at April 30, 2010?
a. Ai c. Ces Punzalan 2014
b. Ben d. All capital balances are equal
Bonus Method
Adjustment to Unidentifiable Net Assets
39. RR and XX formed a partnership and agreed to divide initial capital equally, even though RR
contributed P25,000 and XX contributed P21,000 in identifiable assets. Under the bonus
approach to adjust the capital accounts. XX's unidentifiable assets should be debited for:
a. 11,500 c. 2,000
b. 4,000 d. 0 Dayag 2013
Cash Settlement
40. Aldo, Bert, and Chris formed a partnership on April 30, with the following assets, measured at their
fair values, contributed by each partner:
Aldo Bert Chris
Cash PI 0,000 PI2,000 P30.000
Delivery trucks 150,000 28,000
Computers 8,500 5,100
Office furniture 3,500 2,500
Totals PI 68,500 P48,600 P32,500
Although Chris has contributed the most cash to the partnership, he did not have the full amount of
P30,000 available and was forced to borrow P20,000. The delivery truck contributed by Aldo has a
mortgage of P90,000 and the partnership is to assume responsibility for the loan.
The partners agreed to equalize their interest.

Cash settlement among the partners are to be made outside the partnership. Using the Bonus
Method:
a. Bert and Chris should pay Aldo, P4,600 and P20,700 respectively.
b. Aldo should pay Bert and Chris, P25,300.
c. Bert should pay Aldo, P2.5,300 and Chris, P20,700.
d. Chris should pay Aldo, P25,300 and Bert, P4,600. Guerrero 2013
Revaluation
Net adjustments to partners' capital
41. On March 1,2013, Jose and Kiko decides to combine their businesses to form a partnership.
Statement of financial position on March 1 before the formation, showed the following:
Jose Kiko
Cash P9,000 P3,750
Inventories 30,000 19,500
Furniture and fixture (net) 30,000 9,000
Office equipment (net) 11,500 2,750
Prepaid expenses 6,375 3,000
Total PI 05,375 P51,500
Accounts payable P45/750 P18,000
Capital 59,625 33,500
Total PI 05,375 P51,500
They agreed to following adjustments before the formation:
a. Provide 2% allowance for doubtful accounts.
b. Jose's furniture should be valued at P31,000, while Kiko's office equipment is
underdepreciated by P250.
c. Rent expense incurred previously by Jose was not yet recorded amounting to P1,000, while
salary expense incurred by Kiko was not also recorded amounting to P800.
d. The fair value of inventories amounted to P29,500 for Jose and P21,000 for Kiko.
The net (debit) credit adjustment to partner's capital accounts are:

Jose Kiko
a. (P2,870) (P2,820)
b. P1,870 P2,820
c. P 870 (P180)
d. (P870) P 180 Guerrero 2013

Advance Accounting
Withdrawal by a partner
42. Cong and Dong have just formed a partnership. Cong contributed cash of P126,000 and computer
equipment that cost P54,000. The computer had been used in his sole proprietorship and had
been depreciated to P24,000. The fair value of the equipment is P36,000. Cong also contributed
a note payable of PI2,000 to be assumed by the partnership. Cong is to have 60% interest in the
partnership. Dong contributed only P90,000 cash.
Cong should make an additional investment (withdrawal) of:
a. P96,000 c. (P 7 6,800)
b. 84,000 d. (P15,000) Guerrero 2013
Partners’ Contribution
43. On June 1, 2013, May and Nora formed a partnership. May is to invest assets at fair value which
are yet to be agreed upon. She is to transfer her liabilities and is to contribute sufficient cash to bring
her total capital to P210,000 which is 70% of the total capital of the partnership.
Details regarding the book values of May's business assets and liabilities and their corresponding
valuations are:
Book Agreed
values valuations
Accounts receivable P58,000 P58,000
Allowance for doubtful accounts 4,200 5,000
Merchandise inventory 98,400 107,000
Store equipment 32,000 32,000
Accumulated depreciation - Store equipment 19,000 16,400
Office equipment 27,000 27,000
Accumulated depreciation - Office equipment 14,200 8,600
Accounts payable 56,000 56,000
Nora agrees to invest cash of P42,000 and merchandise valued at current market price. The value
of the merchandise to be invested by Nora and the cash to be invested by May are:
a. P 90,000 and P 62,000 respectively
b. P 252,000 and PI38,000 respectively
c. P 48,000 and PI38,000 respectively
d. P 48,000 and P 62,000 respectively Guerrero 2013

Partner's adjusted capital balances

44. On August 1, AA and BB pooled their assets to form a partnership, with the firm to take over
their business assets and assume the liabilities. Partners capitals are to be based on net
assets transferred after the following adjustments. (Profit and loss are allocated equally.)
BB's inventory is to be increased by P4,000; an allowance for doubtful accounts of P1,000 and
P1,500 are to be set up in the books of AA and BB, respectively; and accounts payable of
P4,000 is to be recognized in AA's books. The individual trial balances on August 1, before
adjustments, follow:
AA BB
Assets P75.000 PI 13,000
Liabilities 5,000 34,500
What is the capital of AA and BB after the above adjustments?
a. AA, P68,750; BB, P77,250 c. AA, P65,000; BB, P76,000
b. AA,P75,000;BB,P8i;000 d. AA, P65,000; BB, P81.000 Dayag 2013
45. On January 1, 2010, Atta and Boy agreed to form a partnership contributing their respective
assets and equities subject to adjustments. On that date, the following were provided;
Atta Boy
Cash P28,000 P62,000
Land 600,000
Building 500,000
Furniture & fixtures 50,000 35,000
Intangible assets 2,000 3,000
Other liabilities 200,000 350,000
Capital 620,000 800,000
The following adjustments were agreed upon:

a. Accounts receivable of P20.000 and P40,000 are uncollectible in A's and B's respective
books.
b. Inventories of P6,000 and P7,000 are worthless in A's and B's respective books.
c. Intangible assets are to be written off in both books.

Advance Accounting
What will be the capital balances of the partners after adjustments?

Atta Boy
a. 592,000 750,000
b. 600,000 700,000
c. 592,000 756,300
d. 600,000 750,000 Punzalan 2014
46. The business assets and liabilities of John and Paul appear below:
John Paul
Cash PI 1,000 P22,354
Land 603,000
Building - 428,267
Furniture and fixtures 50,345 34,789
Other Assets 2,000 3,600
Total , PI,020,916 P 1,317,002

Notes payable 200,000 345,000
John, capital 641,976
Paul, capital - 728,352
Total P 1,020,916 1,317,002
John and Paul agreed to form a partnership contributing their respective assets and equities subject
to the following adjustments:
a. Accounts receivable of P20,000 in John's books and P35,000 in Paul's are uncollectible.
b. Inventories of P5,500 and P6,700 are worthless in John's and Paul's respective books.
c. Other assets of P2,000 and P3,600 in John's and Paul's respective books are to be written
off.
The capital account of the partners after the adjustments will be:
a. John's P614,476
Paul's 683,052
b. John's P615,942
Paul's 717,894
c. John's P 649,876
Paul's 712,345
d. John's P613,576
Paul's 683,350 Guerrero 2013

47. On March 1,2013, Eva and Helen decides to combine their businesses and form a partnership.
Statement of financial position on March 1, before adjustments, showed the following:
Eva Helen
Cash P9,000 P3,750
Furniture and fixtures (net) 30,000 9,000
Prepaid expenses 6375 3,000
Total P105375 P51,500
Capital 59,625 33,500
Total P105375 P51,500
They agreed to provide 3% for doubtful accounts receivable, and also agree that Helen's furniture
and fixture are underdepreciated by P900.
If each partner's share in equity is to be equal to the net assets invested, the capital accounts of Eva
and Helen would be:
a. PI04,820 and P50,195, respectively
b. P59,070 and P32,195, respectively
c. P58,320 and P32,945, respectively
d. P58,170 and P33,095, respectively Guerrero 2013
Goodwil
48. On September 1,2013, the business assets and liabilities of Amor and Bhea were as follows:
Amor Bhea
Cash P28,000 P62,000
Land 600,000
Building - 500,000
Furniture and fixtures 50,000 35,000
Other assets 2,000 3,000

Advance Accounting
Amor and Bhea agreed to form a partnership contributing, their respective assets and liabilities
subject to the following agreements:
a. Accounts receivable of P20,000 in Amor's books and P40,000 in Bhea's books are
uncollectible.
b. Inventories of P6,000 and P7,000 are obsolete in Amor's and Bhea's respective books.
c. Other assets of P2,000 and P3,000 in Amor's and Bhea's rspective books are to be written
off.
d. Accrued expenses of P2,000 and P5,000 in Amor's and Bhea's books are to be
recognized.
e. Goodwill is to be recognized to equalize their capital accounts after the above adjustments.
The amount of goodwill-to be recognized is:
a. P155,000 c. P151,000
b. P158,000 d. P159,000. Guerrero 2013
Comprehensive
Questions 1 thru 4 are based on the following: Dayag 2013
49. The partnership of A, B, C, and D has agreed to combine with the partnership of X and Y. The
individual capital accounts and profit and loss sharing percentage of each partner follow:
P &L Sharing %
Capital Accounts Now Proposed
A P 50,000 40 28
B 35,000 30 21
C 40,000 20 14
D 25,000 10 7
150,000 100 70
X P 60,000 50 15
Y 40,000 50 15
P100,000 100 30
A, B, C, and D's partnership has undervalued tangible assets of P20.000, and X and Y
partnership has undervalued tangible assets of P8,000. All the partners agree that:
(a) the partnership of A, B, C, and D possesses goodwill of P30,000 and
(b) the partnership of X and Y possesses goodwill of P10,000.
The combined businesses will continue to use the general ledger of A, B, C, and D.
Assume that tangible assets are to be revalued and goodwill is to be recorded. Compute the
amount of goodwill recognized in the partnership books:
a. Zero c. 40.000
b. 30,000 d. 68,000

50. Using the same information in No. 49, compute the capital balances of A and X respectively:
a. A, P70,000; X, P69.000 c. A, P58,000; X, P64,000
b. A, P62,000; X, P65,000 d. A, P50,000; X, P60,000
51. Using the same information in No. 49 except that bonus method is to be used with respect to
undervalued assets and goodwill. Compute the amount of goodwill recognized in the books:
a. Zero c. 40,000
b. P30,000 d. 68,000
52. Using the same information in No. 49 except that bonus method is to be used with respect to
undervalued assets and goodwill. Compute the capital balances of A and X, respectively:
a. A, P70,000; X, P69.000 c. A, P58.000; X, P64,000
b. A, P50.000; X, P60.000 d. A, P50,960; X, P58,800

53. On March 1, 2012, PP and QQ decide to combine their businesses and form a partnership.
Their balance sheets on March 1, before adjustments, showed the following:
PP QQ
Cash P 9,000 P 3,750
Furniture and fixtures (net) ' 30,000 9,000
Prepaid expenses 6,375 3,000
Total P105,375 P51.500
Accounts payable P 45,750 P18,000

Capital 59,625 33,500
Total P105.375 P51.50
They agreed to have the following items recorded in their books:
1. Provide 2% allowance for doubtful accounts.
2. PP's furniture and fixtures should be P31,000, while QQ's office equipment is under-
depreciated by P250.
3. Rent expense incurred previously by PP was not yet recorded amounting to PI,000,
while salary expense incurred by QQ was not also recorded amounting to P800.
4. The fair market value of inventory amounted to:
For PP P29.500
For QQ 21,000

Advance Accounting
Compute the net (debit) credit adjustment for PP and QQ:

PP QQ PP QQ
a. 2,870 2,820 c. (870) 180
b. (2,870) (2,820) d. 870 (180)
54. The same information in Number 11, compute the total liabilities after information:
a. 61,950 c. 65,550
b. 63,750 d. 63,950
55. The same information in Number 11, compute the total assets after information:
a. 157,985 c. 160,765
b. 156,875 d. 152,985
Questions 1 & 2 are based on the following: Dayag 2013

56. The business assets of LL and MM appear below:
LL MM
Cash P11,000 P22,354
Land 603,000 -
Building - 428,267
Furniture and fixture 50,345 34,789
Other assets 2,000 3,600
Total P1,020,916 P1.317.002
Accounts payable P178,940 P243,650
LL, capital 641,976 -
MM, capital - 728,352
Total P1,020,916 P1,317.002
LL and MM agreed to form a partnership by contributing their respective assets and equities
subject to the following adjustments:
a. Accounts receivable of P20,000 in LL's books and P35,000 in MM's are uncollectible.
b. Inventories of P5,500 and P6700 are worthless in LL's and MM's respective books.
c. Other assets of P2.000 and P3.600 in LL's and MM's respective books are to be written
off.
a. LL, P615,942; MM, P717,894 c. LL, P640.876; MM, P683,050
b. LL,P640,876; MM, P712,345 d. LL, P614,476; MM, P683,052

57. The same information in Number 56, how much total assets does the partnership have after
formation?
a. 2,337,918 c. 2,265,118
b. 2,237,918 d. 2,365,218
58. MM, NN, and OO are partners with capital balances on December 31, 2012 of P300,000,
P300,000 and P200,000, respectively. Profits are shared equally. OO wishes to withdraw and
it is agreed that OO is to take certain equipment with second-hand value of P50,000 and a
note for the balance of OO's interest. The equipment are carried on the books at P65,000.
Brand new equipment may cost P80,000. Compute for: (1) OO's acquisition of the second-
hand equipment will result to reduction in capital; (2) the value of the note that will OO get
from the partnership's liquidation.
a. (1) P15,000 each for MM and NN, (2) P150,000.
b. (1) P5,000eachforMM, NN and OO, (2) P145,000.
c. (1) P5,000 each for MM, NN and OO, (2) P195,000.
d. (1) P7,500eachforMMandNN, (2) P145,000. Dayag 2013
59. CC admits DD as a partner in business. Accounts in the ledger for CC on November 30,
2012, just before the admission of DD, show the following balances:
Cash P 6,800
Accounts receivable 14,200
Merchandise inventory 20,000
Accounts payable 8,000
CC, capital 33,000
It is agreed that for purposes of establishing CC's interest, the following adjustments shall be
made:
(a) An allowance for doubtful accounts of 3% of accounts receivable is to be established.
(b) The merchandise inventory is to be valued at P23,000.
(c) Prepaid salary expenses of P600 and accrued rent expense of P800 are to be
recognized.
DD is to invest sufficient cash to obtain a 1 /3 interest in the partnership. Compute for: (1)
CC's adjusted capital before the admission of DD; and (2) the amount of cash investment by
DD:
a. (1) P35,347; (2) PI 1,971 c. (1) P35,374; (2) P17,687
b. (1) 36,374; (2) 18,487 d. (1) 28,174; (2) 14,087 Dayag 2013

Advance Accounting
Questions 1 & 2 are based on the following: Punzalan 2014

The Grey and Redd Partnership was formed on January 2, 2010, Under the partnership agreement,
each partner has an equal initial capital balance. Partnership net income or loss is allocated 60% to
Grey and 40% to Redd. To form the partnership, Grey originally contributed assets costing P3 0,000
with a fair value of P60,000 on January 2, 2010, and Redd contributed P20,000 cash. Drawings by
the partners during 2010 totaled P3,000 by Grey and P9,000 by Redd. The partnership net income
in 2010 was P25,000.
60. Under the goodwill method, what is Redd's initial capital balance in the partnership?
a. 20,000 c. 40,000
b. 25,000 d. 60,000
61. Under the bonus method, what is the amount of bonus?

a. 20,000 bonus to Grey c. 40,000 bonus to Grey
b. 20,000 bonus to Redd d. 40,000 bonus to Redd
62. The partnership of Perez and Reyes was formed on March 31,2013. On this date, Perez
invested P50,000 cash and office equipment valued at P30,000. Reyes in¬ vested P70.000
cash, merchandise valued at PI 10,000, and furniture valued at P100,000, subject to a notes
payable of P50,000 (which the partnership assumes). The partnership provides that Perez and
Reyes share profits and losses 25:75, respectively. The agreement further provides that the
partners should initially have, an equal interest in the partnership capital. Under the goodwill and the
bonus method, what is the total capital of the partners after the formation?
Bonus Goodwill Method
a. P310,000 P4 60,000
b. P360,000 P510,000
c. P3 00,000 P410,000
d. P3 50,000 P 400,000 Guerrero 2013
ADMISSION
Assignment of Interest
63. Capital balances and profit and loss sharing ratios of the partners in the BIG Entertainment
Gallery are as follows:
Betty, capital (50%) P140.000
Iggy, capital (30%) 160,000
Grabby, capital (20%) 100,000
Total P400,000

Betty needs money and agrees to assign half of her interest in the partnership to Yessir for
P90,000 cash. Yessir pays directly to Betty. Yessir does not become a partner. What is the
total capital of the BIG Partnership immediately after the assignment of the interest to Yessir?
a. 310,000 c. 490,000
b. 200,000 d. 400,000 Dayag 2013
By Purchase
New partner's capital balance
No Revaluation of Assets
64. Ranken purchases 50% of Lark's capital interest in the K and L partnership for P22,000. If the
capital balances of Kim and Lark are P40.000 and P30,000, respectively, Ranken's capital
balance following the purchase is
a. 22,000 c. 20,000
b. 35,000 d. 15,000 Punzalan 2014
Bonus Method
65. On June 30, 2012, the balance sheet of Western Marketing, a partnership, is summarized as
follows:
Sundry assets P150,000
West, capital 90,000
Tern, capital 60,000
West and Tern share profit and losses at a 60:40 ratio, respectively. They agreed to take in
Cuba as a new partner, who purchases 1/8 interest of West and Tern for P25,000. What is the
amount of Cuba's capital to be taken up in the partnership books if book value method is used?
a. 12,500 c. 25,000
b. 18,750 d. 31,250 Dayag 2013
66. Partners Andy, Boy and Ken sharing profit and loss based on 4:3:2 ratio have the following
condensed statement of financial position:
Total assets P1,880,000
Liabilities P480,000
Andy, capital 620,000
Boy, capital 400,000
Ken, capital 380,000
Total liabilities and capital P1,880,000

Advance Accounting
Dondon will be admitted as a new partner for 20% interest after he pays the three partners with a
minimum of 10%. Thus, the old partner will have to transfer to Dondon 20% of their interest.
a. P376,000 c. P350,000
b. P280,000 d. P200,000 Guerrero 2013
67. Moonbits partnership had a net income of P8,000.00 for the month ended September 30,2013.
Sunshine purchased an interest in the Moonbits partnership of Liz and Dick by paying Liz
P32,000 for half of her capital and half of her 50% percent profit sharing interest on October
1,2013. At this time Liz capital balance was P24,000 and Dick capital balance was P56,000. Liz
should receive a debit to her capital account of:
a. P12,000 c. P16,000
b. P20,000 d. P26,667 Guerrero 2013
Realized gains of old partners

68. The capital accounts of the partnership of NN, VV, and JJ on June 1, 2011 are presented
below with their respective profit and loss ratios:
NN P139,200 1/2
W 208,800 1/3
JJ 96,000 1/6
On June 1, 2011, LL is admitted to the partnership when LL purchased, for PI32,000, a
proportionate interest from NN and JJ in the net assets and profits of the partnership. As a
result of a transaction LL acquired a one fifth interest in the net assets and profits of the firm.
What is the combined gain realized by NN and JJ upon the sale of a portion of their interest in
the partnership to LL?
a. 0 c. 62,400
b. 43,200 d. 82,000 Dayag 2013
Partner's balance after admission of new partner

69. Presented below is the condensed balance sheet of the partnership of KK,
LL and MM who share profits and losses in the ratio of 6:3:1, respectively:
Cash P 85,000 Liabilities P80,000
Other assets 415,000 KK, capital 252,000
LL, capital 126,000
MM, capital 42,000
Total P500,000 Total P500,000

The partner agree to sell NN 20% of their respective capital and profit and loss interests for a
total payment of P90,000. The payment by NN is to be made directly to the individual partners.
The capital balances of KK, LL and MM, respectively after admission of NN are:
a. P198,000; P 99,000: P33,000.
b. P201,600; P100,800; P33.600.
c. P216,000; P108,000; P36,000.
d. P255,600; P127,800; P42,600. Dayag 2013
70. Presented below is the condensed statement of financial position of the partnership of Go, Lee and
Mao who share profits and losses in the ratio of 6:3:1, respectively:
Cash P85,000 Liabilities P80,000

Other assets 415,000 Go, capital 252,000
Lee, capital 126,000
Mao, capital 42,000
The partner agree to sell Gaw 20% of their respective capital and profit and loss interest for a total
payment of P90,000. The payment by Gaw is to be made directly to the individual partners. The
partners agree that implied goodwill is to be recorded prior to-the acquisition by Gaw. The capital
balance of Go, Lee, and Mao respectively after admission of Gaw are:
a. PI98.000; P 99,000 P33,000.
b. P201,600; PI 00,800 P33,600.
c. P216,000; PI08,000 P3 6,000.
d. P255,600; PI26,799 P42,000. Guerrero 2013
71. A, B and C are partners who share profits and losses in the ratio of 5:3:2, respectively. They
agree to sell D 25% of their respective capital and profits and losses ratio for a total payment
directly to the partners in the amount of P140,000,00. They agree that goodwill of P60,000.00 is
to be recorded prior to admission of D. The condensed statement of financial position of the
ABC Partnership is presented in the next page.
Cash P 60,000 Liabilities PI00,000

Non-cash assets 540,000 A, Capital 250,000
B, Capital 150,000
C, Capital 100,000

Advance Accounting
The capital of A, B and C, respectively after the payment and admission of D are:
A B C
a. P187,500; PU2,500; P 75,000;
b. P210,000; PI26,000; P 84,000;
c. P280,000; PI68,000; P112,000;
d. P250,000; PI50,000; PI00,000; Guerrero 2013
Payment to Old Partners

72. PP contributed P24.000 and CC contributed P48.000 to form a partnership, and they agreed
to share profits in the ratio of their original capital contributions. During the first year of
operations, they made a profit of PI 6,290; PP withdrew P5,050 and CC P8,000. At the start
of the following year, they agreed to admit GG into the partnership. He was to receive a one-
fourth interest in the capital and profits upon payment of P30.000 to PP and CC, whose
capital accounts were to be reduced by transfers to GG's capital account of amounts
sufficient to bring them back to their original capital ratio.
How should the P30.000 paid by GG be divided between PP and CC? Dayag 2013
a. PP,P 9,825; CC, P20,175. c. PP,P10,000; CC, P20,000.
b. PP.P15,000; CC, PI5,000 d. PP,P 9,300; CC, P20,700
73. The following information pertains to ABC Partnership of Amor, Bing, and
Cora:
Amor, capital (20%) P200,000
Bing, capital (30%) 200,000
Cora, capital (50%) 300,000
On this date, the partners agreed to admit Dolly into the partnership.
Assuming Dolly purchased fifty percent of the partners capital and pays P500,000 to the old
partners, how would this amount be distributed to them?
a. 100,000 150,000 250,000
b. 130,000 145,000 225,000
c. 166,667 166,667 166,666
d. 150,000 150,000 200,000 Punzalan 2014

By Investment
Interest/Capital Ratio
74. Partnership A has an existing capital of P70,000. Two partners currently own the partnership
and split profits 50/50. A new partner is to be admitted and will contribute net assets with a fair
value of P90,000. For no goodwill or bonus (depending on whichever method is used) to be
recognized, what is the interest in the partnership granted the new partner?
a. 33.33% c. 56.25%
b. 50.00% d. 75.00% Punzalan 2014
Cash contribution of new partner

75. The following condensed balance sheet is presented for the partnership of LL, PP, and QQ,
who share profits and losses in the ratio of 4:3:3, respectively:
Cash P 90,000
Other assets 830,000
LL, loan 20,000
P940,000
Accounts payable P210,000

QQ, loan 30,000
LL, capital 310,000
PP, capital 200,000
QQ, capital 190,000
P940.000
Assume that the assets and liabilities are fairly valued on the balance sheet and that the
partnership decides to admit FF as a new partner, with a 20% interest. No goodwill or bonus is
to be recorded. How much should FF contribute in cash or other assets?
a. 140,000 c. 175,000
b. 142,000 d. 177,500 Dayag 2013

Advance Accounting
76. Partners AA, BB, and CC divide profits and losses 5:3:2, respectively, and their balance
sheet on September 30, 2012 is as follows:
ABC Partnership
Balance Sheet
September 30,2012
Cash P 80,000
Other assets 720,000
Total assets P800,000
Accounts payable P200,000

AA, capital 148,000
BB, capital 260,000
CC, capital 192,000
Total liabilities and capital P800,000
The assets and liabilities are recorded at approximate current fair values. DD is to be admitted
as a new partner with a 20% interest in capital and earnings in exchange for a cash investment.
Goodwill or bonus will not be considered. How much cash should DD contribute?
a. 120,000 c. 150,000
b. 144,000 d. 160,000 Dayag 2013
77. The following balance sheet is presented for the partnership of A, B, and C, who share profits
and losses in the respectively ratio of 5:3:2.
Assets Liabilities and Capital

Cash 120,000 Liabilities 280,000
Other assets 1,080,000 A, capital 560,000
B, capital 320,000
C, capital 40,000
Total 1,200,000 Total 1,200,000
Assume that the assets and liabilities are fairly valued on the balance sheet, and the
partnership decided to admit D as a new partner with a one-fifth interest and no goodwill or
bonus is to be recorded. How much should D contribute in cash or other assets?
a. 147,200 c. 230,000
b. 184,000 d. 240,000 Punzalan 2014

78. A condensed statement of financial position for Alba, Barba, and Clara appears below. Alba, Barba, and
Clara share profits and losses in a ratio of 2:3:5, respectively.
Assets
Cash P100,000
Inventory 125,000
Marketable Securities 200,000
Land 100,000
Building-net 500,000
Equities
Alba, capital P425,000
Barba, capital 400,000
Clara, capital 200,000
The partners agreed to admit Darna. The fair market value of the land is appraised at P200,000
and the market value of the marketable securities is P250,000. The assets are to be revalued
prior to the admission of Darna and there is P30,000 goodwill that attaches to the old
partnership.
How much cash will Darna have to invest to acquire a (1) one-fifth interest? or a (2) four-fifth
interest?
a. (1) P301,250; (2) P4,820,000
b. (I) P205,000; (2) PI,205,000
c. (I) P241,000; (2) P2,410,000
d. (1) P300,000; (2) Pl,506,250 Guerrero 2013
79. The following is the condensed statement of financial position of the partnership Jo, Li and Bi
who share profits and losses in the ratio of 4:3:3.
Cash P 180,000 Accounts, payable P 420,000

Other assets 1,660,000 Bi,Loan 60,000
Jo, receivable 40,000 Jo, Capital 620,000
Li, Capital 400,000
Bi, Capital 380,000
Total P1,880,000 Total P1,880,000
Assume that the assets and liabilities are fairly valued on the balance sheet and the partnership
decides to admit Mac as a new partner, with a 20% interest. No goodwill or bonus is to be
recorded. How much Mac should contribute in cash or other assets?
a. P350,000 c. 355,000
b. P280,000 d. P284,000 Guerrero 2013

Advance Accounting
80. Partners Alba, Basco, and Castro share profits and losses 50: 30:20, respectively. The
statement of financial position at April 30,2013 follows:
Cash P40,000 Accounts payable PI00,000

Other assets 360,000 Alba, capital 74,000
Basco, capital 130,000
Castro, capital 96,000
The assets and liabilities arc recorded and presented at their respective fair values, Jocson is to be
admitted as a new partner with a 20% capital interest and a 20% share of profits and losses in
exchange for a cash contribution. No goodwill or bonus is to be recorded. How much cash should
Jocson contribute?
a. P60,000 c. P75,000
b. P72,000 d. P80,000 Guerrero 2013
Goodwill
81. Dunn and Grey are partners with capital account balances of P60,000 and P90,000,
respectively. They agree to admit Zorn as a partner with one-third interest in capital and profits,
for an investment of P100,000, after revaluing the assets of Dunn and Grey. Goodwill to the
original partners should be
a. 0 c. 50,000
b. 33,333 d. 66,667 Punzalan 2014
Bonus to incoming partner

New Partner’s Capital Balance
82. OO and TT are partners with capital balances P60.000 and P20,000, respectively. Profits and
losses are divided in the ratio of 60:40. OO and TT decided to form a new partnership with
GG, who invested land valued at PI 5,000 for a 20% capital interest in the new partnership.
GG's cost of the land was PI2,000. The partnership elected to use the bonus method to
record the admission of GG into the partnership. GG's capital account should be credited for:
a. 12,000 c. 16,000
b. 15,000 d. 19,000 Dayag 2013

83. On January 31, 2011, partners of Lon, Mac & Nan, LLP, had the following loan and capital
account balances (after closing entries for January):
Loan receivable from Lon P 20,000 dr.

Loan payable to Nan 60,000 cr.
Lon, capital 30,000 dr.
Mac, capital 120,000 cr.
Nan, capital 70,000 cr.
The partnership's income sharing ratio was Lon, 50%; Mac, 20%, and Nan, 30%. On January
31, 2011, Ole was admitted to the partnership for a 20% interest in total capital of the
partnership in exchange for an investment of P40,000 cash. Prior to Ole's admission, the
existing partners agreed to increase the carrying amount of the partnership's inventories to
current fair value, a P60,000 increase. The capital account to be credited to Ole:
a. P60,000 c. P52,000
b. P40,000 d. P46.000 Dayag 2013
Original partner's capital balances

84. Blau and Rubi are partners who share profits and losses in the ratio of 6:4, respectively. On
May 1, 2010, their respective capital accounts were as follows:
Blau P60,000
Rubi 50,000
On that date, Lind was admitted as a partner with one-third interest in capital, and profits for an
investment of P40,000. The new partnership began with total capital of PI 50,000.
Immediately after Lind's admission, Blau's capital should be
a. 50,000 c. 56,667
b. 54,000 d. 60,000 Punzalan 2014
85. The partnership of Cat and Dog provides for 3:2 sharing in profits and losses. Prior to the
admission of a third partner Elf, the capital accounts are Cat, PI 20,000 and Dog, P80,000. Elf
invests P50,000 for a P75,000 interest and partners agreed that the net assets of the new
partnership would be P300,000.
How much is Dog's capital in the new partnership?

a. P105,000 c. P110,000
b. P90,000 d. P136,000 Guerrero 2013

Advance Accounting
86. Partners Chito and Ditas share profits in the ratio of 6:4 respectively. On December 31, 2013
their respective capital balances were Chito, P120,000 and Ditas, P100,000. On that date
Meng was admitted as partner with a one-third interest in capital and profits for an investment of
P80,000. The new partnership began in 2011 with total capital of P300,000. Immediately after
Meng's admission, Chito's capital should be:
a. P120,000 c. P100,000
b. P108,000 d. P160,000 Guerrero 2013
87. Ell and Emm are partners sharing profits 60% and 40%, respectively. On January 1, Ell and
Emm decided to admit Enn as a new partner upon his investment of P8,000. On this date, their
interests in the partnership are as follows: Ell, P11,500; Emm,P9,300.
Assuming that the new partner is given a 1/3 interest in the firm, with bonus being allowed the new
partner, the new capital balances of Ell, Emm and Enn, respectively, would be:
a. P11,500, P9,300, and P8,000
b. P12,480, P8,320, and P8,000
c. P11,520, P7,680, and P9,600
d. P 10,540, P8,660, and P9,600. Guerrero 2013
88. The capital account for the partnership of Lucas and Mateo at October 31, 2013 are as
follows:
Lucas, capital P 80,000

Mateo, capital 40,000
The partners share profits and losses in the ratio of 6:4 respectively.
The partnership is in desperate need of cash, and the partners agree to admit Naron as a
partner with one-third in the capital and profits and losses upon his investment of P3 0,000.
Immediately after Naron's admission, what should be the capital balance of Lucas, Mateo and
Naron respectively, assuming goodwill is not to be recognized?
a. P50,000; P50,000 P50,000.
b. P60,000; P60,000; P50,000.
c. P66,667; P33,333; P50,000.
d. P68,000; P32,000; P50,000. Guerrero 2013

89. Carlos and Deo are partners who share profits and losses in the ratio of 7:3, respectively.
On October 5, 2013, their respective capital accounts were as follows:
Carlos P35,000
Deo 30,000
On that date they agreed to admit Sotto as a partner with a one-third interest in the capital
and profits and losses, and upon his investment of P25,000. The new partnership will begin
with a total capital of P90,000. Immediately after Sotto's admission, what are the capital
balances of Carlos, Deo, and Sotto, respectively?
a. P30,000 P30,000; P30,000
b. P31,500 P28,500; P30,000
c. P31,667, P28,333; P3 0,000
d. P35,000 P3 0,000 P25,000 Guerrero 2013
Capital balance of all partners

90. The capital accounts for the partnership of LL and MM at October 31,2012 are as follows:
LL, capital P 80,000

MM, capital 40,000
P120,000
The partners share profits and losses in the ratio of 3:2 respectively.
The partnership is in desperate need of cash, and the partners agree to admit NN as a partner
with one-third in the capital and profits and losses upon his investment of P30.000. Immediately
after NN's admission, what should be the capital balances of LL, MM and NN respectively,
assuming bonus is to be recognized? Dayag 2013
a. P50.000; P50.000; P50,000. c. P66.667; P33,333; P50,000.
b. P60.000; P60,000; P60,000. d. P68.000; P3Z000; P50,000.
91. CC and DD are partners who share profits and losses in the ratio of 7:3, respectively. On
October 21,2012, their respective capital accounts were as follows:
CC P35,000
DD 30,000
P65,000
On that date they agreed to admit EE as a partner with a one-third interest in the capital and
profits and losses, and upon his investment of P25,000. The new partnership will begin with a
total capital of P90.000. Immediately after EE's admission, what are the capital balance of CC,
DD, and EE, respectively? Dayag 2013
a. P30,000; P30,000; P30,000; c. P31.667; P28.333; P30.000;
b. P31,500; P28,500; P30,000; d. P35,000; P30,000; P25,000;

Advance Accounting
92. Pal and Mall are partners with capitals of P200,000 and P100,000 and sharing profits and
losses 3:1 respectively. They agree to admit Kent as partner, Kent invests P150,000 for a 50%
interest in the firm. Pal and Mall transfer part of their capitals to Kent as a bonus.
The capital balances of the partners after Kent's admission are:
a. Pal, P168,750; Mall, P56,250; and Kent, P225,000.

b. Pal, P112,500; Mall, P 37,500; and Kent, P150,000.
c. Pal, P200,000; Mall, P100,000; and Kent, P150,000.
d. Pal, P143,750; Mall, P 81,250; and Kent, P225,000 Guerrero 2013
Bonus to Original Partners

Capital balance of original partner
93. Mitz, Marc and Mart are partners sharing earnings in the ratio of 5:3:2 respectively. As of
December 31, 2010, their capital balance showed P95,000 for Mitz, P80,000 for Marc, and
P60,000 for Mart.
On January 1,2013 the partnership admitted Vince as a new partner and according to the
partnership agreement, Vince will contribute P80,000 in cash to the partnership and will also pay PI
0,000.00 for 15% of Marc's share. Vince will share 20% in the earnings while the ratio of the original
partners will remain proportionately the same as before Vince admission. After Vince' admission,
the total capital of the partnership will be P330,000 while Vince' capital account will be P70,000.
The balance of Marc's capital account after the admission of Vince would be:
a. P81,100 c. P74,600
b. P79,100 d. P72,600 Guerrero 2013
Bonus given to original

94. The capital balances in DEA Partnership are: D, capital P60,000; E, capital P50,000; and A,
capital P40,000 and income ratios are: 5:3:2, respectively. The DEAR Partnership is formed by
admitting R to the firm with cash investment of P60,000 for a 25% interest in capital. What is
the amount of bonus to be credited to A capital in admitting R?
a. 10,000 c. 3,750
b. 7,500 d. 1,500 Punzalan 2014

95. Pol and Loc are partners with capitals of P200,000 and PI00,000 and sharing profits and
losses 3:1 respectively. They agree to admit Chic as partner. Chic invests P125,000 for a 25%
interest in the firm. Parties agree that the total firm capital after Chic's admission is to be
P425,000.

The capital balance of the partners after Chic's admission are:

a. Pol, P214,062.50; Loc, P104,687.50; and Chic, P106,250.00
b. Pol, P200,000.00; Loc, P100,000.00; and Chic, P125,000.00
c. Pol, P239,062.50; Loc, P 79,687.50; and Chic, P125,000.00
d. Pol, P250,000.00; Loc, P125,000.00; and Chic, P100,000.00 Guerrero 2013
Revaluation
Original partner's capital balance
96. Gerber, Williams, and George are partners with present capital balances of P50,000, P60,000,
and P20,000, respectively. The partners share profit and losses according to the following
percentages: 60% for Gerber, 20% for Williams, and 20% for George. Larsen is to join the
partnership upon contributing P60,000 to the partnership in exchange for a 25% interest in
capital and a 20% interest in profits and losses. The existing assets of the original partnership
are undervalued by P22,000. The original partners will share the balance of profits and losses
in proportion to their original percentages. What would be the capital balances of the old
partners in the new partnership using the goodwill method?
Gerber Williams George
a. 63,200 64,400 24,400
b. 93,200 74,400 34,400
c. 76,800 65,600 25,600
d. 80,000 70,000 30,000 Punzalan 2014
97. Rio, Sol, and Tom have a partnership. Their capital balances are P96,000, P72,000, and P54,000,
respectively. They split profits equally. They are considering on what basis to admit Vic, a
prospective new partner. Based on appraisal analysis, the net assets of the partnership are
worth P240,000. Vic is willing to put up cash of P24,000, plus a computer with a fair value
of P42,000.
Calculate the capital balances if the existing partners recognize the difference between the fair
value and book value of the partnership's net assets as goodwill.
a. Rio, P102,000; Sol, P78,000; Tom, P60,000; Vic, P66,000
b. Rio, 96,000; Sol, 72,000; Tom, 54,000; Vic, 66,000
c. Rio, 102,000; Sol, 78,000; Tom, 54,000; Vic, 66,000
d. Rio, 96,000; Sol, 78,000; Tom, 60,000; Vic, 66,000 Guerrero 2013

Advance Accounting

98. NN, OO, and PP are partners with present capital balances of P50,000, P60,000, and P20,000,
respectively. The partners share profits and losses according to the following percentages; 60%
for NN, 20% for OO, and 20% for PP, QQ is to join the partnership upon contributing P20,000
cash, plus a machine with a fair market value of P40,000 to the partnership in exchange for a
25% interest in the capital and a 20% interest in the profits and losses. The existing assets of
the original partnership are undervalued by P22,000. The original partners will share the balance
of profits and losses in their original ratios.
Calculate the capital balances of each partner in the new partnership using goodwill method.
NN OO PP QQ
a. P67,400; P65,800; P25,800; P53,000
b. P50,000; P60,000; P20,000; P60,000
c. P80,000; P70,000; P20,000; P20,000
d. P80,000; P70,000; P30,000; P60,000 Guerrero 2013
Comprehensive
99. In the AD partnership, Allen's capital is P140,000 and Daniel's is P40,000 and they share
income in a 3:1 ratio, respectively. They decide to admit David to the partnership. Each of the
following questions is independent of the others.
Allen and Daniel agree that some of the inventory is obsolete. The inventory account is
decreased before David is admitted. David invests P40.000 for a one-fifth interest. What is the
amount of inventory written down?
a. P 4,000 c. P15,000
b. P10,000 d. P20,000
100. Using the same information in No. 99, David directly purchases a one-fifth interest by paying
Allen P34,000 and Daniel P10,000. The land account is increased before David is admitted.
By what amount is the land account increased?
a. P40.000 c. P20.000
b. P36.000 d. PI 0,000
101. Using the same information in No. 99, David invests P40.000 for a one-fifth interest in the
total capital of P220,000. The journal to record David's admission into the partnership will
include:
a. A credit to Cash for P40.000.
b. A debit to Allen, Capital for P3,000.
c. A credit to David, Capital for P40.000.
d. A credit to Daniel, Capital for P1,000


Fernando and Jose are partners with capital balances of P30,000 and P70,000, respectively.
Fernando has a 30% interest in profits and losses. All assets of the partnership are at fair market
value except equipment with book value of P300,000 and fair market value of P320,000. At this time,
the partnership has decided to admit Rosa and Linda as new partners. Rosa contributes cash of
P55,000 for a 20% interest in capital and a 30% interest in profits and losses. Linda contributes cash
of P10,000 and an equipment with a fair market value of P50,000 for a 25% interest in capital and a
35% interest in profits and losses. Linda is also bringing special expertise and clients contact into
the new partnership.
102. Using the bonus method, what is the amount of bonus?
a. 24,750 c. 14,000
b. 18,250 d. 7,500
103 Using the goodwill method, what is the amount of goodwill traceable to the original partners?
a. 60,000 c. 31,250
b. 40,000 d. 28,750

Mitz, Marc, and Mart are partners sharing profits in the ratio of 5:3:2, respectively. As of December
31, 2009, their capital balances were P95,000 for Mitz, P80,000 for Marc, and P60,000 for Mart.
On January 1, 2010, the partners admitted Vince as a new partner and according to their
agreement, Vince will contribute P80,000 in cash to the partnership and also pay P10,000 for 15%
of
Marc's share. Vince will be given a 20% share in profits, while the original partners' share will
be proportionately the same as before. After the admission of Vince, the total capital will be
P330,000 and Vince's capital will be P70,000.
104. The total amount of goodwill to the old partners, upon the admission of Vince would be:
a. 7,000 c. 22,000
b. 15,000 d. 37,000
105 The balance of Marc's capital, after the admission of Vince would be:
a. 72,600 . c. 79,100
b. 74,600 d. 81,100

Advance Accounting
106. Ace, Boy and Cid are partners sharing profits in the ratio of 3:3:2. On July 31, their capital
balances are as follows:
Ace P700,000
Boy 500,000
Cid 400,000
The partners agree to admit Deo on the following agreement:
1. Deo is to pay Ace P500,000 for 1/2 interest of Ace's interest.

2. Deo is also to invest P400,000 in the partnership.
3. The total capital of the partnership is to be P2,400,000, of which Dco's interest is to be 25%
What are the capital balances of the partners after the admission of Deo?
Ace Boy Cid
a. P206,250 P206,250 PI 3 7,500
b. 350,000 500,000 400,000
c. 556,250 706,250 537,500
d. 500,000 400,000 350,000 Guerrero 2013
107. Partners Jay and Kay share profits in the ratio of 6:4, respectively. On December 31, 2010, their
respective accounts were Jay, P120,000 and Kay, P100,000. On that date, Loi was admitted as
partner with 1/3 interest in capital and profits for an investment of P80,000. The new partnership
began in 2013 with a total capital of P360,000. Immediately after Loi's admission:
Amount of goodwill to Jay's capital account

be credited to Loi would be
a. P 40,000 PI 08,000
b. 20,000 120,000
c. 40,000 132,000
d. 60,000 132,000 Guerrero 2013

ANSWER SHEET
1.A 26.D 51.A 76.C 101.B
2.C 27.A 52.D 77.C 102.B
3.C 28.D 53.C 78.A 103.C
4.C 29.C 54.C 79.A 104.B
5.A 30.D 55.A 80.C 105.C
6.A 31.A 56.D 81.C 106.C
7.B 32.D 57.C 82.D 107.C
8.D 33.B 58.B 83.C
9.D 34.A 59.C 84.B
10.A 35.B 60.B 85.B
11.C 36.A 61.D 86.B
12.C 37.C 62.A 87.D
13.D 38.C 63.D 88.D
14.C 39.D 64.D 89.B
15.C 40.A 65.B 90.D
16.C 41.D 66.B 91.B
17.A 42.D 67.A 92.D
18.B 43.D 68.B 93.B
19.C 44.D 69.B 94.D
20.A 45.A 70.C 95.A
21.D 46.A 71.B 96.D
22.B 47.B 72.D 97.A
23.C 48.A 73.B 98.D
24.B 49.C 74.B 99.D
25.C 50.A 75.C 100.A
ANSWER KEY Page 43

Problems:
Partnership Formation
On December 1, 20x5, EE and FF formed a partnership, agreeing to share for profits and losses in the ratio of
2:3, respectively. EE invested a parcel of land that cost him P25,000. FF invested P30,000 cash. The land was
sold for P50,000 on the same date, three hours after formation of the partnership. How much should be the
capital balance of EE right after the formation?
Answer: D. 50,000
On March 1, 20x5, II and JJ formed a partnership with each contributing the following assets:
____II ____ ____ JJ_____
Cash ……………………………………………………….. P300,000 P 700,000
Machinery and Equipment ………………………………... 250,000 750,000
Building ……………………………………………………  2,250,000
Furniture and fixtures …………………………………....... 100,000 
The building is subject to mortgage loan of P800,000, which is to be assumed by the partnership agreement
provides that II and JJ share profits and losses 30% and 70% respectively. On March 1, 20x5 the balance in JJ’s
capital account should be:
Answer: D. 2,900,000
The same information in Number 2, except that the mortgage loan is not assumed by the partnership. On March 1,
20x5 the balance in JJ’s capital account should be:
Answer: A. P 3,700,000
As of July 1, 20x5, FF and GG decided to form a partnership. Their balance sheets on this date are:
____FF ____ ____ GG_____
Cash ……………………………………………………….. P 15,000 P 37,500
Accounts Receivable ……………………………………… 540,000 225,000
Merchandise Inventory ……………………………………  202,500

Machinery and Equipment ………………………………... _150,000 __270,000
Total P 705,000 P 735,000
Accounts Payable… ……………………………………… P 135,000 P 240,000
FF, Capital …………………………………………….. 570,000
GG, Capital ………………………………...................... _____ __495,000
Total P 705,000 P 735,000
The partners agreed that the machinery and equipment of FF is underdepreciated by P15,000 and that of GG
by P 45,000. Allowance for doubtful accounts is to be set up amounting to P120,000 For FF and P 45,000 for
GG. The partnership agreement provides for a profit and loss ratio and capital interest of 60% to FF and 40% to
GG. How much cash must FF invest to bring the partners’ capital balances proportionate to their profit and loss
ratio?
Answer: D. 172,500
On August 1, AA and BB pooled their assets to form a partnership, with the frim to take over their business assets and
assume the liabilities. Partners capitals are to be based on net assets transferred after the following adjustments.
(Profit and loss are allocated equally.)
BB’s inventory is to be increased by P 4,000; an allowance for doubtful accounts of P 1,000 and P 1,500 are to be set
up in the books of AA and BB, respectively; and accounts payable of P 4,000 is to be recognized in AA’s books. The
individual balances on August 1, before adjustments, follow:
____AA ___ ___ BB____
Assets ……………………………………………………… P 75,000 P 113,000
Liabilities ………………………………………………….. 5,000 34,500
What is the capital of AA and BB after the above adjustments?
Answer: D. AA, P65,000; BB, P81,000
CC admits DD as a partner in business. Accounts in the ledger for CC on November 30, 20x5, just before the admission of
DD, show the following balances:
Cash …………………………………………………………………………….. P 6,800
Accounts Receivable …………………………………………………………… 14,200

Merchandise Inventory ………………………………………………………… 20,000
Accounts Payable………………………………................................................. 8,000

CC, Capital …………………………………………………………………….. 33,000
It is agreed that for purposes of establishing CC’s interest, the following adjustments shall be made:
An allowance for doubtful accounts of 3% of accounts receivable is to be established.
The merchandise inventory is to be valued at P23,000.
Prepaid salary expenses of P600 and accrued rent expense of P800 are to be recognized.
DD is to invest sufficient cash to obtain a 1/3 interest in the partnership.
Compute for: (1) CC’s adjusted capital before the admission of DD; and (2) the amount of cash investment
by DD:
Answer: C. (1) P 35,374; (2) P17,687
MM, NN, and OO are partners with capital balances on December 31, 20x5 of P300,000, P300,000 and
P200,000, respectively. Profits are shared equally. OO wishes to withdraw and it is agreed that OO is to take
certain equipment with second-hand value of P50,000 and a note for the balance of OO’s interest. The
equipment are carried on the books at P65,000. Brand new equipment may cost P80,000. Compute for: (1)
OO’s acquisition of the second-hand equipment will result to reduction in capital; (2) the value of the note
that will OO get from the partnership liquidation.
Answer: B. (1) P 5,000 each for MM, NN and OO, (2) P145,000.
Jones and Smith formed a partnership with each partner contributing the following items:
Jones Smith
Cash …………………………………………………. P 80,000 P 40,000
Building – cost to Jones ……………………………… 300,000
fair value …………………………………... 400,000
Inventory – cost to Smith ……………………………. 200,000
fair value …………………………………... 280,000

Mortgage payable ……………………………………. 120,000
Accounts Payable ……………………………………. 60,000
Assume that for tax purposes Jones and Smith agree to share equally in the liabilities assumed by the Jones
and Smith partnership. What is the balance in each partner’s capital account for financial accounting
purposes?
Jones Smith
Answer: C. P360,000 P260,000
The business assets of LL and MM appear below:

____LL ____ ____ MM_____
Cash …………………………………………………… P 11,000 P 22,354
Accounts Receivable ………………………………….. 234,536 567,890
Inventories …………………………………………….. 120,035 260,102
Land …………………………………………………… 603,000 

Building ………………………………………………..  428,267
Furniture and fixture ………………………………….. 50,345 34,789
Other Assets …………………………………………... __2,000 __3,600
Total P 1,020,916 P 1,317,002
Accounts Payable… ………………………………….. P 178.940 P 243,650
Notes Payable ………………………………………… 200,000 345,000
LL, Capital …………………………………………… 641,976 
MM, Capital ………………………………................... ____ _728,352
Total P 1,020,916 P 1,317,002
LL and MM agreed to form a partnership by contributing their respective assets and equities subject to the
following adjustments:
Accounts receivable of P20,000 in LL’S books and P35,000 in MM’s are uncollectible.
Inventories of P5,500 and P6,700 are worthless in LL’s nd MM’s respective books.
Other assets of P2,000 and P3,600 in LL’S and MM’s respective books are to be written off.
Answer: D. LL, P614,476; MM, P683,052
The same information in Number 9, how much total assets does the partnership have after formation?
Answer: C. P 2,265, 118
On March 1, 20x5, PP and QQ decide to combine their businesses and form a partnership. Their balance sheets on March 1,
before adjustments showed the following:
___PP____ ___ QQ____
Cash …………………………………………………… P 9,000 P 3,750
Accounts Receivable ………………………………….. 18,500 13,500
Inventories …………………………………………….. 30,000 19,500
Furniture and fixture (net)…………………………….. 30,000 9,000

Office Equipment (net) ………………………………. 11,500 2,750
Prepaid Expenses ……………………………………... __6,375 __3,000
Total P 105,375 P 51,500
Accounts Payable… …………………………………. P 45,750 P 18,000
Capital ……………………………….................. ___59,625 _33,500
Total P 105,375 P 51,500
They agreed to have the following items recorded in their books:

Provide 2% allowance for doubtful accounts
PP’s furniture and fixtures should be P31,000, while QQ’s office equipment is under-depreciated by P250.
Rent expense incurred previously by PP was not yet recorded amounting to P1,000, while salary expense incurred by
QQ was not also recorded amounting to P800.
The fair market value of inventory amounted to:
For PP ……………………………………………… P29,500
For QQ …………………………………………….. P21,000
Compute the net (debit) credit adjustment for PP and QQ:
____PP ___ ____QQ____

Answer: C. P (870) P 180
The same information in number 11, compute the total liabilities after formation:
Answer: C. P 65,550
The same information in number 11, compute the total assets after formation:
Answer: A. P 157,985
On April 30, 20x5, XX, YY and ZZ formed a partnership by combining their separate business proprietorships. XX
contributed cash of P75,000. YY contributed property with P54,000 carrying amount, a P60,000 original cost, and a
P120,000 fair value. The partnership accepted responsibility for the P52,500 mortgage attached to the property. ZZ
contributed equipment with a P45,000 carrying amount, a P112,500 original cost, and P82,500 fair value. The
partnership agreement specifies that profits and losses are to be shared equally but is silent regarding capital
contributions. Which partner has the largest April 30, 2015 capital balance?
Answer: C. ZZ
Items 15 to 17 are based on the following data:
On January 1, 20x4, Jackson and Kendall formed a partnership. Jackson, who has many years of experience
in this line of business, contributed P100,000 in cash. Kendall contributed assets having the following book
values and fair market values:
Book Value Market Value

Merchandise P 15,000 P 25,000
Building 40,000 150,000
Equipment 60,000 85,000
The partnership assumed a mortgage of P40,000 on the building. Capital accounts are set equal to net assets
invested.
15. The increase in capital of Kendall:
Answer: B. by P100,000
16. The partners have an equal interest in the initial total partnership capital, and the bonus method is used, the
increase in capital of Jackson:
Answer: C by P160,000
17. The partners have an equal interest in the initial total partnership capital, and the goodwill method is used, the
increase in capital of Jackson:
Answer: D. by P220,000
CHAPTER 7
PARTNERSHIP FORMATION, OPERATION,
AND CHANGE IN OWNERSHIP
SUMMARY OF ITEMS BY TOPIC
Conceptual Computational
True- Multiple Multiple Short
False Choice Choice Problems Answer
Contrasting partnerships, 1-15 107-112 333-336
proprietorships, and
corporations
Equity theories applied to 16-21 113-115 337-338
partnerships
Articles of partnership 22-25 116-117
Initial capital 26-28 118-119 275-277 339-340
contributions
Carrying value assigned 29-30 120 169 275-276
noncash assets
Tax basis assigned 31-33 121 276
noncash assets
Market value assigned 34-36 122 277
noncash assets
Liabilities assumed by 37-40 123 170 278 341
partnership
Partnership formation, 41-47, 124-126 171-173 279-280 342-343
bonus method 49
Partnership formation, 41-44, 127-129 174-176 281-282 344-345
goodwill method 48-50
Drawing accounts 51-53 130-132 346
Sharing profits and losses 54-55 133 347
Interest on capital 56-59 134, 136 177-178, 185, 283-284, 348-349
balances portion of profit 187 288-289
and loss allocation
Salary portion of profit 60-62 135, 137 185-186 288-289 350
and loss allocation
Bonus portion of profit 63-65 138-139 179-181, 185 285-286, 351
and loss allocation 288-289
Residual ratio portion of 66-71 140-142 182-187 287-289 352-353
profit and loss allocation
Unrealized holding gains 72-74 143-144 188-205 290-295, 354-355
and losses 297
Changes in ownership 75-77 145 356
Admission of new partner 78-80 146-148 206-207 296-297 357-358
- no change in net assets
Admission of new partner 81-83 149-150 208-209 298-299, 359-361
- change in net assets - 302, 305,
revaluation of existing 308
assets
- bonus to existing
partners
- bonus to new partner
Admission of new partner 90-92 153, 156- 231-240 306-308 366-368
- goodwill to existing 157
partners
Admission of new partner 90, 93- 158-159 241-249 309-311 368-369
- goodwill to new partner 94
Withdrawal of partner - 95-100 160-162 250-253 312-317
revaluation of existing
assets
Withdrawal of partner - 95-97, 163-165 254-261 318-320 370-371
bonus method 101-103
Withdrawal of partner - 95-97, 166-168 262-274 321-332
goodwill method 104-106
True-False Statements
1. A partnership is an association of two or more investors to carry on as co-owners a
business for profit.
2. Only individuals are allowed to be partners in a partnership.
3. Proprietorships and partnerships are similar in that they are both easily formed.
4. Proprietorships and partnerships are different in that proprietors have unlimited legal
liability while each partner’s legal liability is limited to his/her percentage ownership in
the partnership.
5. A partner’s personal assets may be taken by creditors to pay partnership debts if the
partnership is unable to meet its obligations.
6. Partnerships are not required to prepare financial statements in accordance with

Generally Accepted Accounting Principles unless they have publicly traded debt or are
required to follow GAAP by a creditor.
7. For a partnership to get an unqualified audit opinion, the financial records must conform
to Generally Accepted Accounting Principles.
8. Most small partnerships maintain their financial information in accordance with

Generally Accepted Accounting Principles.
9. Tax authorities basically view partnerships and proprietorships as extensions of their

owners.
10. Partnerships are not required to pay any taxes.
11. The taxable income of all partners does not necessarily sum to the net income of the
partnership.
12. The only accounting difference that must exist between partnerships and corporations is
the reporting of the ownership equity.
13. The manner in which a partnership and a corporation are formed is very similar.
14. It is generally easier to transfer ownership interest in a corporate form of business than in
a partnership.
15. A partnership legally ceases to exist each time a new partner joins the partnership or an
existing partner leaves the partnership
16. The proprietary theory of equity is based on the notion that a business entity is distinct
from the owners.
17. The entity theory of equity is based on the notion that a business entity is distinct from
the owners.
18. An individual partner’s personal responsibility for partnership debts is an example of the
entity theory of equity.
19. The dissolution of a partnership because of the admission of a new partner or withdrawal
of an existing partner is an example of the proprietary theory of equity.
20. The fact that partnerships can enter into contracts is an example of the proprietary theory
of equity.
21. Contributed assets becoming property of the partnership is an example of the entity
theory of equity.
22. The Uniform Partnership Act is the basis for partnership laws in many states.
23. A written agreement is required to form a partnership.

24. When a partnership is formed without a written agreement, the state laws where the
partnership is formed will establish the legal relationship between partners.
25. All provisions of state partnership law must be applied when a partnership is formed.
26. Partners make contributions of equal size when forming a partnership
27. There are different ways the partnership can value noncash assets contributed to the
partnership.
28. Appraisals are not necessarily required when assigning value to noncash assets
contributed to the partnership.
29. Assigning a noncash asset the contributor’s carrying value could result in a misallocation
of gain or loss if the asset is sold.
30. An asset’s carrying value should not be considered when establishing the initial capital
accounts of partners.
31. The tax basis of contributed noncash assets must be used to determine partnership
income allocation for tax reporting purposes.
32. Partnerships are required to file an informational return (Form 1065) with the IRS
indicating the amount of partnership income allocated to each partner.
33. The income assigned to each partner for financial accounting purposes will equal the
partner’s partnership income included on the partner’s individual income tax return.
34. The market value of noncash assets contributed to the partnership may be used for
computing the partners’ taxable income.
35. A contributing partner’s capital account may be assigned the market value of noncash
assets contributed but a market value assignment is not required.
36. The market value of noncash assets contributed to a partnership is the only relevant value
when determining the partners’ beginning capital balances.
37. The assumption of a liability by the partnership with regard to a noncash asset
contributed to the partnership by a partner will affect the value assigned to the partner’s
capital account.
38. The tax basis of a noncash asset contributed to a partnership with an accompanying
liability will not change as a result of the contribution.
39. When a noncash asset is contributed to a partnership with an accompanying liability, the
book value of the asset must become the cost basis of the asset on the partnership’s
financial records.
40. The assumption of a liability related to a noncash asset contributed to a partnership
reduces the value contributed.
41. Initial partner capital balances must equal the sum of the net assets contributed to the
partnership by the partner.
42. Initial partner capital balances are determined by agreement among the partners.
43. Only tangible assets contributed to the partnership can be considered when creating
initial capital balances.
44. There are two ways to consider unidentifiable intangible assets contributed to a
partnership: the bonus method and the goodwill method.
45. The bonus method of recognizing unidentifiable intangible assets contributed at a

partnership’s formation does not result in a net increase in total owners’ equity.

partnership’s formation has to make the capital account balances for all partners equal.

partnership’s formation will result in all of the partner’s capital accounts increasing.
48. Application of the goodwill method when forming a partnership requires partners to
agree on the amount of goodwill to be assigned to a partner(s).
49. At the date the partnership is formed, the total partner capital will be the same regardless
of whether the bonus method or the goodwill method is used to recognize unidentifiable
intangible assets.
50. Goodwill can be assigned to more than one partner at the date the partnership is formed.
51. The ability of partners to withdraw resources from the partnership is controlled
exclusively by the laws of the state where the partnership resides.
52. The articles of partnership often control the size of withdrawals partners are allowed to
make.
53. If a partnership makes a payment on behalf of a partner, a withdrawal has occurred.
54. Partnerships are required to indicate the manner in which profits and losses are to be
allocated among the partners.
55. With the exception of the residual profit and loss ratio, partners can agree to apply profit
and loss allocation components in any order.
56. The interest component of partnership profit and loss allocation rewards the partner for
labor and expertise brought into the partnership.
57. The purpose of the interest on capital balances component of partnership profit and loss
allocation is to reward partners for contributing economic resources to the partnership.
58. The interest on capital balances component of partnership profit and loss allocation is
always based on each partner’s beginning or period capital balance.
59. The interest on capital balances component of partnership profit and loss allocation is
generally stated as a percentage of the capital balance.
60. The salary portion of the profit and loss allocation is set in the articles of partnership and
will not change over time.
61. The salary portion of the partnership profit and loss allocation is not included in the
partnership’s income statement.
62. The salary portion of the partnership profit and loss allocation is used to compensate
partners for the time and effort expected in the business.
63. Partnerships are required to have bonus clauses in the articles of partnership.
64. Bonus to partners can be based on any criteria on which the partners agree.
65. Partnership bonus arrangements must consider net income as part of the bonus
calculation.
66. A residual interest is always a component of partnership profit and loss allocation.
67. Partnership profit and loss residual percentages must be equal.
68. Partnership profit and loss residual percentages must be the same for profits as they are
for losses.
69. Partnership profit and loss residual percentages are used to allocate any remaining profit
or loss to partners after all other allocation components have been considered.
70. Partnership residual profit and loss percentages may be changed by agreement of the
partners.
71. Partnership residual profit and loss percentages do not have to be the last component
applied in the profit and loss allocation process.
72. When partnership profit and loss ratios are changed, the difference between market and
book values should be determined and allocated to partners based on the currently
existing profit and loss ratios.
73. Partnerships must revalue assets up and/or down when the profit and loss ratios are
adjusted.
74. When an error is discovered in the financial records of a partnership, it should be
corrected immediately. Allocation of any change to capital accounts as a result of an
error correction should be based on the profit and loss ratios that existed when the error
occurred.
75. The dissolution of a partnership occurs only when the partnership is terminating
operations and going out of business.
76. One reason a change in the number of partners in a partnership through the addition or
withdrawal of a partner is important because the partners have unlimited liability.
77. A new partner in a partnership accepts unlimited liability for actions that occurred before
that partner joined the partnership.
78. The admission of a new partner into a partnership can occur without any new assets
being invested into the partnership.
79. If a new partner is going to acquire an ownership interest in a partnership directly from
another partner, the other partners do not need to approve the admission.
80. If a new partner acquires 40 percent of an existing partner’s equity in the partnership, the
new partner is also entitled to 40 percent of the existing partner’s profit and loss
allocation.
81. When a new partner is joining a partnership by making a payment to the partnership for
an amount more than book value, the partners are required to choose one of three
methods of recording the new partner’s payment in excess of book value.
82. The revaluation of assets and liabilities at the date a new partner joins the partnership, by
investing assets directly into the partnership, does not eliminate the possibility that the
partnership might need to record bonuses or goodwill as part of the admission of the new
partner.
83. The amount that assets are revalued when a new partner joins a partnership is always
shared by existing partners equally.
84. If a new partner’s capital account is created for an amount less than the value of net
assets contributed, an error has been made in the partnership’s accounting records.
85. The recognition of a bonus to existing partners at the date a new partner is admitted to a
partnership often occurs in lieu of the recognition of goodwill for the existing partners.
86. The bonus recognized by existing partners when a new partner is admitted to a
partnership is commonly shared among the existing partners based on the existing
partners’ relative profit and loss residual ratios.
87. It is possible for a new partner’s capital account to be established at an amount greater
than the market value of the identifiable assets invested.
88. New partners are never recipients of bonuses when they join the partnership.
89. A bonus paid to a new partner results in a reduction to the capital accounts of the existing
partners in proportion to their profit and loss sharing ratios.
90. The goodwill method of admitting a new partner to a partnership results in greater total
assets than the bonus method of admitting a new partner.
91. When the goodwill method is applied to recognize the admission of a new partner and
the existing partners are responsible for the goodwill, the new partner’s capital account
will always be established equal to the amount of the contribution to the partnership.
92. The existing partners will always recognize goodwill when a new partner is admitted to
the company and the goodwill method is applied.
93. When the goodwill method is applied to recognize the admission of a new partner and
the new partner is responsible for the goodwill, the new partner’s capital account will be
established at the amount of the contribution.
94. When new partner goodwill is recognized at the date the partner joins the partnership, the
existing partners’ capital accounts do not change as a result of the new partner’s
admission
95. A partner may withdraw from a partnership at any time without notice given to the
existing partners.
96. A withdrawing partner may have his/her partnership interest acquired by an outside
investor agreed to by the remaining partners, the remaining partners, or the partnership.
97. If existing partners acquire a withdrawing partner’s equity, the existing partners must
purchase the withdrawing partner’s equity in proportion to their residual profit and loss
ratios.
98. The revaluation of assets when a partner withdraws from the partnership may be a
complete revaluation or a partial revaluation, reflecting the change in value with regard
to the withdrawing partner’s ownership interest.
99. A partnership’s assets must be revalued when a partner withdraws.
100. When a partnership’s assets are revalued at the date a partner withdraws from the
partnership, the withdrawing partner’s equity must be acquired by the partnership. It
cannot be acquired by an outside investor or the existing partners personally.
101. Withdrawing partners from a partnership may receive a bonus or pay a bonus to
remaining partners.
102. If the assets of a partnership are revalued at the date of a partner’s withdrawal, there can
be no bonus recorded.
103. A bonus can be recorded for a retiring partner only if the partnership acquires the equity
of the partner.
104. At the date a partner withdraws from a partnership, the partners must choose to either
recognize the goodwill with respect to the withdrawing partner or they can choose to
recognize all of the partnership’s goodwill.
105. Any goodwill recognized at the date a partner withdraws from a partnership is usually
allocated to partners based on their residual profit and loss ratios.
106. Partnerships may have both a revaluation of assets and liabilities as well as goodwill
recognition at the date a partner withdraws from a partnership.
True-False Statement Solutions

1. T
2. F, Individuals, partnerships, and corporations are allowed to be partners in a partnership.
3. T
4. F, All of the general partners are liable for all the partnership’s debts.
5. T
6. T
7. F, Partnerships may receive an unqualified audit opinion when using a comprehensive
basis of accounting other that accrual such as cash, modified accrual, or the tax basis.
8. F, Most small partnerships maintain their financial information using the tax basis.
9. T
10. F, While the partnership does not pay income taxes, it is responsible for other taxes such
as payroll taxes and franchise taxes.
11. T
12. T
13. F, Partnerships and corporations are formed by two are more parties. A written
agreement is not necessary and state approval is not required for a partnership but a
corporation must file articles of incorporation with the state to attain a corporate charter.
14. T
15. T
16. F, The proprietary theory is based on the notion that the business entity is an aggregation
of the owners
17. T
18. F, This is an example of the proprietary theory of equity.
19. T
20. F, This is an example of the entity theory of equity.
21. T
22. T
23. F, While a written agreement is generally recommended when forming a partnership, it is
not required.
24. T
25. F, Most provisions only apply if there is no agreement among the partners with regard to
that specific issue.
26. F, Initial capital contributions are determined by agreement among the partners and do
not have to be equal in size.
27. T
28. T
29. T
30. F, Any basis (i.e., carrying value, tax basis, or market value) can be used to value
noncash assets contributed to a partnership
31. T
32. T
33. F, There are numerous differences that can cause the income assigned to partners for
accounting purposes to differ from income assigned to partners for tax purposes such as
noncash assets contributed to the partnership valued at an amount different than the
contributing partner’s tax basis
34. F, The tax basis of noncash assets contributed to the partnership must be used to
determine taxable income.
35. T
36. F, Partners should agree on the method to be used to value noncash asset contributions
when preparing the articles of partnership. A variety of bases can be used and the market
value is one of the alternatives.
37. T
38. F, The amount of the liability assumed by the partnership, excluding the contributing
partners share of that liability, will reduce the tax basis of the asset contributed.
39. F, The assumption of a liability has no impact on the valuation approach by the
partnership.
40. T
41. F, The capital balances established can be any amounts agreed by the partners.
42. T
43. F, Partners may contribute tangible and intangible assets to the partnership. It is possible
to consider both when determining initial partnership capital account balances.
44. T
45. T
46. F, The bonus method reallocates the total partnership capital among the partners’ capital
based on the agreed value of unidentifiable intangible assets contributed. Capital
accounts do not have to be the same when the process is completed.
47. F, The bonus method reallocates the total partnership capital among the partners based on
the agreed value of unidentifiable intangible assets contributed. It will always result in
one or more partner’s capital accounts decreasing while the remaining partner(s) capital
accounts increase.
48. T
49. F, The goodwill method requires an additional asset (Goodwill) to be recognized on the
balance sheet. As a result, the partners’ capital accounts will be greater in aggregate.
The bonus method results in a reallocation of capital among the partners and does not
result in a change in total partnership capital.
50. T
51. F, While states may have laws indicating that the partners cannot withdraw resources and
make the partnership insolvent, withdrawals are typically controlled by the articles of
partnership.
52. T,
53. T
54. F, If the partnership agreement is silent with regard to profit and loss allocation, profits
and losses are shared equally.
55. T
56. F, The interest component of partnership profit and loss allocation rewards partners for
capital contributions.
57. T
58. F, The interest on capital balances component of partnership profit and loss allocation
may be based on the beginning, ending, simple average capital balance, or weighted
average capital balance.
59. T
60. F, The salary component of the partnership profit and loss allocation would be expected
to be renegotiated periodically as the duties of the partners change.
61. T
62. T
63. F, Partnerships can offer bonuses to anyone. The choice is up to the partners. On the
other hand, there is no requirement to ever offer a bonus.
64. T
65. F, While many bonuses are based on a measure of income, it is not required. Bonus can
be based on other criteria such as market share, revenue, or average cost per unit.
66. T
67. F, Residual interests may be equal but they are not required to be equal.
68. F, While profit residual ratios and loss residual ratios are generally the same, they can
differ.
69. T
70. T
71. F, Residual profit and loss percentages are the last component of the profit and loss
allocation process applied because they are designed to allocate any remaining amount to
the partners.
72. T
73. F, There are several ways that the difference between market and book value of assets
can be addressed when the profit and loss ratios are changed. Revaluing the assets is one
of the possibilities along with maintaining a record of assets with market and book value
differences as well as directly adjusting capital accounts while leaving asset values
unchanged.
74. T
75. F, A dissolution occurs every time there is a change in relationship among the partners.
This can occur when a new partner enters the partnership or an existing partner leaves the
partnership. A dissolution occurs when the partnership is going out of business but the
termination of business is not a requirement for a dissolution.
76. T
77. F, A new partner's liability for actions that occurred before joining the partnership is
limited to the amount invested in the partnership.
78. T
79. F, Regardless how a new partner enters a partnership, the other partners have to approve
the admission because they must accept unlimited liability due to actions of the new
partner taken on behalf of the partnership.
80. F, There is no necessary relationship between the percentage of equity acquired and the
amount of profit or loss received. These are separate contractual issues.
81. F, There are three methods that may be used when a new partner is paying an amount
more than book value for the investment: revaluation of existing assets, bonus method,
and goodwill method. The partners do not have to choose one method. It would not be
inconsistent to revalue the assets and apply either the bonus or the goodwill method to
record the investment.
82. T
83. F, Existing partners share the difference between market value and book value equally if
that is the manner in which profits and losses are shared. If profits and losses are shared
in some other manner, then the difference between market and book values are shared in
that manner.
84. F, While it is possible that an error has been made, it is more likely that the existing
partners recognized an increase in their capital accounts via a bonus. The difference
between the amount credited to the new partner’s capital account and the amount
invested is shared by the existing partners.
85. T
86. T
87. T
88. F, New partners may receive a bonus if they bring value to the partnership in excess of
the tangible assets invested. This additional amount may be from such things as
expertise, experience, or business contacts. The bonus allocated to the new partner is
payment for these types of unidentifiable assets contributed to the partnership.
89. T
90. T
91. T
92. F, Goodwill may be recognized with regard to the existing partners but it may also be
recognized with regard to the new partner.
93. F, When goodwill is recognized with regard to the new partner, the new partner’s capital
account will be greater than the amount invested by the recognized goodwill.
94. T
95. F, The articles of partnership may include an agreement on the length of advanced notice
a partner must give before withdrawing from a partnership. Failure to provide the agreed
notice may result in the withdrawing partner being liable for damages suffered by the
partnership.
96. T
97. F, If existing partners acquire a withdrawing partner’s equity, they can divide the
purchase of that equity among themselves in any manner they choose.
98. T
99. F, Partnership assets may be revalued but they may also remain at their carrying value.
100. F, The revaluation of the partnership’s assets is unrelated to the purchase of the
withdrawing partners ownership interest in the partnership.
101. T
102. F, The revaluation of partnership assets at the time of a partner’s withdrawal has no
impact on the recognition of a bonus or goodwill.
103. T
104. F, While the partners can recognize either the withdrawing partner’s goodwill or the
entire partnership’s goodwill, there is no requirement to recognize any goodwill when a
partner withdraws from a partnership.
105. T
106. T
Conceptual Multiple Choice Questions

107. Which of the following is not a reason for forming a partnership?
a. Combine economic resources
b. Share managerial talent
c. Avoid complicated tax laws
d. Undertake a specific business objective
108. Which of the following business entity forms is (are) required to maintain their financial
information in accordance with Generally Accepted Accounting Principles?
a. Corporations
b. Corporation and Partnership
c. Partnership and Proprietorships
d. Corporation, Partnerships, and Proprietorships
109. Which of the following statements is not true with regard to tax issues of partnerships?
a. Partnerships are viewed as an extension of the owners
b. Partnerships are required to pay some forms of taxes
c. The IRS must be informed as to the manner partnership income is allocated to the
partners
d. All of the above are true
110. Which of the following is not a similarity that exists between proprietorships and
partnerships?
a. Neither requires approval by a state to form
b. Both can use an accounting method that does not conform to GAAP
c. Owners put the company’s income on the owner’s individual tax return
d. All of the above are similarities of proprietorships and partnerships
111. Which of the following is not an area where there are differences when comparing
partnerships and corporations?
a. The ease of formation
b. The level of owner legal liability
c. The ease of ownership transferability
d. All of the above are areas where partnerships and corporations differ
112. Which of the following is not a difference when comparing partnerships and
corporations?
a. Corporations must conform to GAAP whereas partnerships are not required to
conform to GAAP
b. Partnerships and corporations neither are required to attain state approval to form
c. Partners have unlimited liability while corporation shareholders generally do not
have unlimited liability
d. Corporations are required to pay income tax while partnerships are not required to
pay income taxes
113. What theory of equity is applicable for partnerships?

a. Proprietary theory
b. Entity theory
c. A mix of proprietary and entity theory
d. Partnership theory
114. Which of the following is not an example of the proprietary theory of equity?
a. Partners do not have claims to specific assets
b. Individual partners are liable for all debts of the partnership
c. A partner’s income tax includes the partner’s share of partnership net income, and
the partnership does not pay income taxes
d. Salaries of partners are viewed as distributions of income, not components of net
income
115. Which of the following is not an example of the entity theory of equity?
a. Continuity of the partnership when admission or withdrawal of partners occurs
b. A partnership can enter into contracts
c. Assets contributed to the partnership retain the existing tax basis to the partner
contributing
d Partnership creditors have priority claim to partnership assets and the creditors of
partners have priority claim to the partner’s assets in the event of liquidation
116. Which of the following statements is not true with regard to articles of partnership?
a. Written articles of partnership are not required to form a partnership
b. The Uniform Partnership Act provides a list of items that must be included in
articles of partnership
c. A written partnership agreement enables the partners to detail the agreed working
relationship among the partners
d. State law applies only if there is not agreement among the partners with regard to
that specific issue
117. When a partnership agreement is silent with regard to any aspect of a partnership
operation, who/what decides on that aspect of the partnership’s operations?
a. State law
b. Uniform Partnership Act
c. Majority vote of stockholders
d. Decision by senior partner
118. Which of the following valuation amounts is not allowed when assigning values to
noncash assets in a partnership formation?
a. Contributor’s carrying value
b. Contributor’s tax basis
c. Market (appraised) value
d. All of the above valuation amounts are allowed
119. Which of the following statements is correct with regard to the creation of initial capital
account balances on a partnership’s financial records?
a. The capital accounts can be created for any dollar amount agreed by all partners
b. The market value of noncash assets must be considered when creating the initial
capital balances
c. Each partner’s capital account must have a non-zero value assigned to it
d. All of the above statements are correct
120. Which of the following statements is not true with regard to assigning the carrying value
of noncash assets contributed to those assets at the date of a partnership’s formation?
a. Use of the noncash asset’s historical cost can result in the misstatement of the
partners’ capital accounts
b. Assigning the historical cost to noncash assets contributed to a partnership may
require the partnership agreement to address profit/loss distribution that will
occur when the contributed asset is sold
c. Assigning the historical cost to noncash assets contributed to a partnership will
not cause partner taxable income to differ from the partner’s share of partnership
income
121. Which of the following statements is true with regard to assigning a noncash asset
contributed to a partnership the tax basis of the contributing partner?
a. The tax basis of noncash assets contributed must be used if the partnership is a
taxable entity
b. The tax basis must be considered when determine each partner’s allocation of
taxable partnership income
c. The contributing partner’s tax basis may not be used for financial accounting
records
d. None of the above statements are true
122. Which of the following statements is not true with regard to assigning the market value
of noncash assets contributed to those assets at the date of a partnership’s formation?
a. Gains or losses would likely not be recorded if the asset were sold at the date for
partnership is formed
b. The contributing partner’s share of the partnership’s income would be adjusted by
the difference between the market value and tax basis at the date the asset is
contributed to the partnership
c. The market value is the most commonly assigned value to contributed noncash
assets
123. Which of the following statements is correct with regard to the contribution of assets and
associated liabilities to a partnership?
a. Liabilities associated with assets contributed to a partnership remain the liability
of the contributing partner
b. Liabilities associated with assets contributed to a partnership become the liability
of the partnership
c. Liabilities associated with assets contributed to a partnership become the liability
of both the contributing partner and the partnership
d. Assets may not be contributed to a partnership if there is a liability associated
with the asset
124. The bonus method of recognizing unidentifiable intangible asset contributions to a

partnership does which of the following?
a. It recognizes that partners may contribute more than the observable assets to the
partnership
b. It increases total partnership capital
c. Can only increase partner capital accounts
d. b and c are correct
125. This method of recognizing unidentifiable intangible assets does not result in a change to
total contributed capital.
a. Goodwill method
b. Bonus method
c. Reciprocal method
d. None of these methods will result in a change to total contributed capital
126. When can the bonus method be applied?

a. When a partnership is formed
b. When a new partner is added to the partnership
c. When an existing partner retires from the partnership
d. The bonus method can be applied in all three of the above circumstances
127. Shawn, Harris, and Derek are forming a partnership. The partners agree that Harris
should be assigned goodwill because of his knowledge of the business. Which partners’
capital accounts will have the dollar assigned dollar amounts altered due to the
recognition of the goodwill?
a. Shawn
b. Harris
c. Derek
d. All dollar amount assigned to all three partners’ capital accounts will be altered.
128. This method of recognizing unidentifiable intangible assets results in a change to total
contributed capital.
a. Goodwill method
b. Bonus method
c. Reciprocal method
d. None of these methods will result in a change to total contributed capital
129. The goodwill method always results in which of the following?

a. A change in the dollar value assigned to two or more partners’ capital accounts
b. A decrease in a partner’s capital account
c. An increase in a partner’s capital account
d. An increase in a partner’s capital account and a decrease in at least one partners’
capital account
130. For what purpose(s) might a drawing account be used for a partnership?
a. To keep a list of business contacts made by a partner
b. To recognize a loan made to a partner
c. To recognize inventory removed from the partnership by the partner
d. None of the above ore possible uses of a drawing account
131. Which of the following is not a withdrawal that may be found in a partnership’s drawing
account?
a. Removal of cash by a partner
b. Payment of a partner’s speeding ticket by the partnership
c. Removal of inventory by a partner
d. All of the above may be found in a drawing account
132. Which of the following statements is correct with regard to drawing accounts that may be
used by a partnership?
a. Drawing accounts are closed to the partners’ capital accounts at the end of the
accounting period
b. Drawing accounts establish the amount that may be taken from the partnership by
a partner in a given time period
c. Drawing accounts are similar to Retained Earnings in a corporation
d. Drawing accounts appear on the balance sheet as a contra-equity account
133. Which of the following should not be done by the accountant with regard to partnership
profit and loss allocation?
a. Prepare an analysis of alternative methods to allocate profits and losses
b. Recommend a particular method for allocating profits and losses
c. Inform partners of different ways that profits and losses could be allocated
d. All of the above are reasonable duties of the accountant
134. What is the underlying purpose of the interest on capital balances component of
allocating partnership profits and losses?
a. Compensate partners who contribute economic resources to the partnership
b. Reward labor and expertise contributions
c. Reward for special responsibilities undertaken
d. None of the above
135. What is the underlying purpose of the salary component of allocating partnership profits
and losses?
a. Compensate partners who contribute economic resources to the partnership
b. Reward labor and expertise contributions
c. Reward for special responsibilities undertaken
d. None of the above
136. Which of the following interest component calculation bases is least susceptible to
manipulation when allocating profits and losses to partners?
a. Beginning capital account balance
b. Average of beginning and ending capital account balances
c. Weighted average capital account balance
d. Ending capital account balance
137. Which component of the partnership profit and loss allocation compensates partners for
the routine time and effort expended in the business?
a. Interest on capital balance
b. Bonus
c. Salary
d. Residual interest
138. Which component of the partnership profit and loss allocation is most commonly offered
to the partner who manages the business?
b. Bonus
c. Salary
139. Which of the following may be a basis for determining the amount of a partner’s bonus?
a. Operating income
b. Market share
c. Average cost per unit
d. All of the three may be bases for determining the amount of a partner’s bonus
140. Which component of the partnership profit and loss allocation must be performed last?
b. Bonus
c. Salary
141. Which of the following statements is true with regard to partnership residual profit and
loss ratios?
a. A partner’s residual profit ratio must be the same as the loss ratio
b. Residual profit and loss ratios can be changed by agreement
c. The residual profit and loss ratio must always be applied
d. All of the above are true statements
142. Applying the partnership residual profit and loss ratio can have which of the following
effects on a partner’s allocation of profit and/or loss?
a. Increase
b. Decrease
c. Increase or decrease
d. The residual profit and loss ratio is not used for the allocation or profit and/or loss
143. Which of the following should be done when the partnership profit and loss ratios are
changed?
a. The book and market value of assets and liabilities should be evaluated
b. The capital accounts should be modified to reflect the new profit and loss ratios
c. The creditors should be informed that the profit and loss ratios have been changed
d. The partners must draft new articles of partnership.
144. Which of the following is not a common way to address the difference between market
and book values of assets and liabilities when the partnership profit and loss ratios are
changed?
a. Assets and liabilities are revalued to market value
b. Assets with a difference between market and book value are sold and the profit is
distributed to partners based on existing profit and loss ratios
c. A list of differences between market value and book value are made
d. Capital accounts of the partners are altered to reflect the difference between
market and book values at the date the profit and loss ratios change
145. Which of the following occurs every time a new partner is admitted to a partnership or an
existing partner leaves the partnership?
a. Dissolution
b. Termination
c. Dissolution and termination
d. None of the above occurs
146. Which of the following forms of new partner admission will not result in a change in the
partnership’s net assets?
a. Purchase of an ownership interest directly from the partnership
b. Purchase of an ownership interest directly from an existing partner
c. Either of the above
d. Neither of the above
147. Which of the following must occur for a new partner to enter the partnership by
acquiring an ownership interest directly from an existing partner?
a. Existing partners must know the amount the new partner is paying for the
ownership interest
b. The new partner must acquire all of the current partner’s ownership interest
c. Existing partners must approve the admission of the new partner into the
partnership
d. The new partner must live in the same state as the other partners
148. Which of the following must be true when a new partner acquires an ownership interest
directly from an existing partner?
a. Capital must be assigned to the new partner
b. The new partner’s profit and loss allocation must be proportionate to the capital
account balance
c. The new partner must be allocated some amount of profit and loss
d. The existing partners must provide a list of all the partnership’s outstanding
liabilities to the new partner
149. When a new partner joins a partnership by investing assets into the partnership, what
method may be used to record the admission of the new partner?
a. Revaluation of existing assets
b. Recognition of goodwill
c. Application of the bonus method
d. Any of the three or a combination may be applied
150. Which of the following is a reason to not revalue partnership assets at the date a new
partner is admitted to the partnership?
a. There has been a change in ownership
b. A new legal entity exists
c. The partnership has not ceased operations
d. All three are reasons to not revalue partnership assets at the date of a new
partner’s admission
151. A bonus is recognized by existing partners at the date a new partner joins a partnership
when which of the following relationships occur?
a. The new partner’s contribution exceeds his/her percentage of total partnership
capital after the investment is made
b. The new partner’s contribution is less than his/her percentage of total partnership
c. The new partner’s contribution is equal to his/her percentage of total partnership
d. It is not possible to determine the answer to this question
152. Which of the following is not a criterion for recognizing a bonus to existing partners
when a new partner joins the partnership?
a. Only cash assets were contributed to the partnership by the new partner
b. The existing partners desire to not recognize goodwill on the balance sheet
c. The articles of partnership indicate that the bonus method will be used to admit
new partners
d. The new partner invests more into the partnership that his/her share of total
partnership capital after the investment is made
153. Which method of recording the admission of a new partner into a partnership potentially
results in the existing partners’ capital accounts changing in value?
a. Bonus method
b. Goodwill method
c. Either bonus method or goodwill method
d. Existing partners’ capital accounts never change when a new partner is admitted
into a partnership.
154. A bonus recognized by a new partner at the date of admission into the partnership is
generally shared by the existing partners in what way?
a. Equally
b. In proportion to capital account balances
c. In proportion to profit and loss residual ratios
d. In proportion to salaries
155. Which of the following is not a criterion for recognizing a bonus to a new partner when
the new partner joins the partnership?
a. Only cash assets were contributed to the partnership by the new partner
b. The existing partners desire to not recognize goodwill on the balance sheet
c. The articles of partnership indicate that the bonus method will be used to admit
new partners
d. The new partner invests less into the partnership that his/her share of total
partnership capital after the investment is made
156. When the goodwill method of recognizing the admission of a new partner is applied and
the existing partners contribute the goodwill, which of the following will result?
a. An increase in the capital accounts of existing partners
b. A decrease in the amount invested by the new partner
c. A decrease in the partnership’s total assets
d. A new partner’s capital account less than the amount invested
157. Which of the following will occur when the existing partners contribute goodwill and a
new partner is admitted to the partnership?
a. The existing partner’s capital accounts will be decreased
b. The existing partner will receive cash from the partnership
c. The partnership’s total assets will be increased
d. The new partner will be required to reduce his/her profit and loss sharing ratio
158. Which of the following statements is false with regard to the goodwill recognized for a
new partner entering a partnership?
a. The new partner’s capital account balance will exceed the amount invested
b. The existing partners’ capital accounts will remain unchanged
c. The amount invested by the new partner will be less than his/her proportion of the
partnership’s book value before goodwill is recognized
d. The three partners will have equal capital account balances when the transaction
is completed
159. Which of the following statements presents a reason that goodwill may be recorded with
regard to a new partner at the date of that partner’s admission to the partnership?
a. The existing partnership is worth more than the appraised value of the tangible
net assets
b. The new partner has a strong desire to become a member of the partnership
c. The total value of the new partner’s contribution to the partnership is greater than
the value of the identifiable net assets contributed
d. The new partner’s residual interest in profits and losses is greater than 30 percent
160. What portion of the partnership’s assets must be revalued when a partner withdraws from
the partnership?
a. The withdrawing partner’s share must be revalued
b. All of the partnership’s assets must be revalued
c. Any or all of the partnership’s assets may be revalued but none have to be
revalued
d. Partnership assets may not be revalued when a partner withdraws
161. Who may acquire the ownership interest of a partner who is withdrawing from a
partnership?
a. Existing partners
b. New investor
c. The partnership
d. All of the above
162. If existing partners acquire the equity of a withdrawing partner, in what manner do they
divide the equity?
a. In any manner they choose
b. Equally
c. Proportionate to their residual profit and loss ratios
d. Existing partners are not permitted to acquire the equity of a withdrawing partner
163. Which of the following must exist to create the potential for a retiring partner to have a
bonus recognized at the date of withdrawal?
a. The retiring partner must be paid more than the book value of his equity
b. The existing partners must decide to not admit a new partner to the partnership
c. The retiring partner’s equity must be acquired by the partnership
d. All of the above are necessary for a bonus to be recognized
164. In what manner do the remaining partners share in the bonus paid to a withdrawing
partner?
a. In proportion to their residual profit and loss ratios
b. Equally
c. In proportion to their capital account balances
d. The partner with the greatest capital account is assigned the bonus
165. Which of the following statements is true with regard to a withdrawing partner?
a. A bonus must be paid to the retiring partner
b. A bonus may be paid to the retiring partner
c. A bonus must be paid to the retiring partner or to the remaining partners
d. Recognizing a bonus is not appropriate when a partner retires
166. What change occurs to continuing partners’ capital accounts when a withdrawing partner
is assigned goodwill at the date of withdrawal?
a. Continuing partners’ capital accounts decease by their profit and loss ratio
proportion of the goodwill assigned to the withdrawing partner
b. Continuing partners’ capital accounts increase
c. Continuing partners’ capital accounts do not change
d. Goodwill cannot be recognized with regard to withdrawing partners
167. What amount of goodwill can be recognized at the date a partner withdraws from a
partnership?
a. The withdrawing partner’s portion of goodwill
b. The continuing partners’ portion of goodwill
c. Goodwill may not be recognized at the date a partner withdraws
d. Either the withdrawing partner’s portion of goodwill or the goodwill attributable
to the entire partnership
168. Which of the following will occur when the goodwill method is used to recognize the
withdrawal of a partner?
a. The partnership must acquire the equity of the withdrawing partner
b. The withdrawing partner will be paid the book value of his/her equity after the
goodwill is recognized
c. The existing partners will divide the salary of the withdrawing partner
d. The total equity of the partnership will not change as a result of the partner’s
withdrawal
Conceptual Multiple Choice Question Difficulty and Solutions

107. easy c
108. moderate a
109. moderate d
110. easy d
111. easy d
112. moderate b
113. moderate c
114. difficult a
115. difficult c
116. moderate b
117. moderate a
118. easy d
119. moderate a
120. difficult c
121. moderate b
122. moderate d
123. easy b
124. easy a
125. easy b
126. moderate d
127. easy b
128. easy a
129. moderate c
130. easy c
131. moderate d
132. moderate a
133. easy b
134. easy a
135. easy b
136. easy c
137. easy c
138. easy b
139. moderate d
140. easy d
141. moderate b
142. easy c
143. moderate a
144. easy b
145. easy a
146. easy b
147. easy c
148. moderate c
149. easy d
150. moderate c
151. moderate b
152. easy a
153. easy c
154. easy c
155. easy a
156. moderate a
157. easy c
158. easy d
159. moderate c
160. easy c
161. easy d
162. moderate a
163. moderate d
164. easy a
165. easy b
166. easy c
167. easy d
168. easy b
Computational Multiple Choice Questions

169. Paul, Jeremy, and Juan are forming a partnership. Juan contributes a building having an
historical cost, accumulated depreciation, and market value of $290,000, $100,000, and
$400,000, respectively. The building is initially recorded on the partnership’s books at
Juan’s book value ($190,000). Two years later the building is sold for a $270,000 gain.
What portion of the profit or loss should be allocated to Juan?
a. $20,000
b. $230,000
c. $210,000
d. $90,000
170. Philip, Ray, and Sarah are forming a partnership. Philip contributes cash of $100,000;
Ray contributes inventory with a value of $100,000; and Sarah contributes a building
with a market value of $300,000. The partnership also assumed the $210,000 mortgage
on the building. What is the amount of capital assigned to each partner?
Philip Ray Sarah
a. $30,000 $30,000 $230,000
b. $56,000 $56,000 $174,000
c. $100,000 $100,000 $90,000
d. $100,000 $100,000 $300,000
171. Max, Ike, and Tony are forming a partnership. The appraised value of assets contributed
is $60,000, $80,000, and $100,000, respectively. In addition, Max and Tony agree that
Ike’s experience is worth $30,000. The partners desire to apply the bonus method where
applicable. What is the total capital recorded at the date the partnership is formed?
a. $210,000
b. $240,000
c. $270,000
d. Some other dollar amount
172. Richardson, Peterson, and Wilkerson are forming a partnership. The partners contribute
cash and noncash assets valued at $30,000, $50,000, and $25,000, respectively. The
partners choose to apply the bonus method where applicable. If the partners agree to
establish equal capital account balances when the partnership is formed, how much of a
bonus is received by Richardson?
a. $15,000
b. $10,000
c. $5,000
d. Richardson does not receive a bonus
173. Richardson, Peterson, and Wilkerson are forming a partnership. The partners contribute
cash and noncash assets valued at $30,000, $50,000, and $25,000, respectively. The
partners choose to apply the bonus method where applicable. If the partners agree to
establish equal capital account balances when the partnership is formed, how much
capital is Peterson sacrificing to give a bonus to Richardson and Wilkerson?
a. $15,000
b. $10,000
c. $5,000
d. Richardson does not receive a bonus
174. Albert, Claude, and Jamie form a partnership by contributing $25,000, $70,000, and
$80,000, respectively. In addition, the partners agree that Albert should receive $20,000
of goodwill because of his special skills relevant to this business. What amount of capital
will exist for Albert when the partnership is formed?
a. $20,000
b. $25,000
c. $65,000
d. $45,000
175. Albert, Claude, and Jamie form a partnership by contributing $25,000, $70,000, and
$80,000, respectively. In addition, the partners agree that Albert should receive $20,000
of goodwill because of his special skills relevant to this business. What amount of capital
will exist for Claude when the partnership is formed?
a. $60,000
b. $65,000
c. $70,000
d. Some other amount
176. Chris and David are forming a partnership with contributions of $75,000 and $125,000,
respectively. In addition, they agree that they will recognize $25,000 goodwill with
regard to David’s contacts in the area. What is the total amount of capital that will exist
for the partnership immediately after it is formed?
a. $75,000
b. $125,000
c. $150,000
d. $225,000
177. Chris is a partner in a local partnership. The profit and loss sharing agreement includes
an interest allocation of 7 percent on the invested capital. The capital account of Chris
reveals that he had a beginning capital account balance of $50,000. He withdrew
$10,000 on May 1 and invested $25,000 on October 31. Rounded to the nearest dollar,
what is Chris’ weighted average capital balance?
a. $57,500
b. $51,667
c. $47,500
d. $28,333
178. Richard is a partner in a local partnership. The profit and loss sharing agreement
includes an interest allocation of 8 percent on the invested capital. Richard had a
beginning capital balance of $60,000. He invested $30,000 on March 1, withdrew
$20,000 on August 1, and invested $40,000 on December 1. Rounded to the nearest
dollar, what dollar amount is allocated to Richard as interest on capital balance if the
weighted average capital balance is used as the basis of the computation?
a. $82,500
b. $6,400
c. $80,000
d. $6,600
179. Shawn is a managing partner in a local business. Part of his profit allocation is a bonus
based on the store’s operating income. The bonus is 8 percent of operating income in
excess of $200,000 after deducting the bonus. If operating income for the year is
$250,000, what is Shawn’s bonus (rounded to the nearest dollar)?
a. $3,703
b. $40,000
c. $20,000
d. $4,000
180. James has a bonus as part of his partner profit allocation. The bonus is based on the
partnerships net income. James receives a bonus equal to 5 percent that the net income
exceeds $150,000. If the net income in the current year is $180,000, how much bonus
does James receive?
a. $30,000
b. $7,500
c. $1,500
d. $9,000
181. Cheryl is the manager of a local store. She is also a partner in the company and she
receives a bonus as part of the profit and loss allocation. Cheryl’s bonus is based on the
increase in revenues recorded during the period. The bonus arrangement is that Cheryl
receives 1 percent of net income for every full percentage point growth for revenues in
excess of a 5 percent revenue growth. During the most recent period, revenues grew
from $500,000 to $540,000 and net income grew from $98,000 to $120,000. How much
bonus does Cheryl receive for this period?
a. $2,000
b. $1,100
c. $6,000
d. $3,600
182. Norman, Sarah, and Taylor are partners. The partnership income for the period is
$130,000. The partnership agreement assigns salaries to the partners of $10,000,
$15,000, and $18,000, respectively. In addition, the partners have profit and loss residual
ratios of 30%, 45%, and 25%. What is the amount of profit and loss allocated to Sarah
as a result of applying the residual ratios?
a. $39,150
b. $54,150
c. $58,500
d. $51,750
183. Jim and Scott are partners who have residual profit and loss ratios of 55% and 45%,
respectively. The partnership has income of $60,000 for the current period. How much
of this income is allocated to Scott?
a. $30,000
b. $33,000
c. $14,850
d. $27,000
184. Mike and Michelle are partners in a local business. The business has a $25,000 loss this
year. How much of this loss is allocated to Mike?
a. $12,500
b. $0
c. $25,000
d. Losses cannot be allocated without residual profit and loss ratios
185. Nick, Joe, and Mike are partners. The company has $150,000 net income for the period.
How is this income divided to the partners if the following profit and loss allocation
process is followed?
Nick Joe Mike
Weighted average capital $200,000 $350,000 $180,000
Salary 25,000 15,000 35,000
Bonus .1 (NI - $100,000)
Residual profit/loss ratios .25 .45 .30
Return on invested capital 9%
Nick Joe Mike
a. $43,000 $46,500 $60,500
b. $45,325 $50,685 $53,990
c. $50,000 $50,000 $50,000
d. $44,075 $48,435 $57,490
186. Harriet, Bob, and Tim are partners. Income for the current year is $500,000. The profit
and loss agreement states that salaries are $35,000, $50,000, and $40,000, respectively.
In addition, the residual profit and loss ratios are 40%, 30%, and 30%, respectively.
How much of the profit is allocated to Harriet?
a. $150,000
b. $185,000
c. $162,500
d. $152,500
187. Suzanne, Thomas, and Vicky are partners. They have average capital account balances
of $200,000, $250,000, and $400,000, respectively. In addition, they have residual profit
and loss ratios of 15%, 25%, and 60%, respectively. If income for the year is $300,000
and the partners earn 8 percent return on invested capital, how much will be allocated to
Thomas?
a. $78,000
b. $100,000
c. $50,800
d. $171,200
188. Johnson and Pritchard are partners. They are changing the profit and loss ratios from the
current 60/40 to 70/30. At the date of the change, vacant land owned by the partnership
has a book value of $50,000 and a market value of $60,000. The partners choose to
prepare an itemized list of assets with market values different from book values. If the
land is sold in the future for $80,000, how much of the gain will be assigned to Johnson?
a. $21,000
b. $18,000
c. $27,000
d. $20,000
189. Johnson and Pritchard are partners. They are changing the profit and loss ratios from the
current 60/40 to 70/30. At the date of the change, vacant land owned by the partnership
has a book value of $50,000 and a market value of $60,000. The partners choose to
prepare an itemized list of assets with market values different from book values. If the
land is sold in the future for $80,000, how much of the gain will be assigned to
Pritchard?
a. $12,000
b. $10,000
c. $9,000
d. $13,000
190. Karen and Andrea are currently changing their partnership profit and loss ratios from
75/25 to 60/40. They have created a list of assets that have market and book value
differences. One of the assets is a building with a $300,000 market value and $200,000
book value. Two years after changing the profit and loss ratios, the building is sold for
$380,000. How much of the profit is allocated to Karen?
a. $135,000
b. $108,000
c. $123,000
d. $183,000
191. Karen and Andrea are currently changing their partnership profit and loss ratios from
75/25 to 60/40. They have created a list of assets that have market and book value
differences. One of the assets is a building with a $300,000 market value and $200,000
book value. Two years after changing the profit and loss ratios, the building is sold for
$380,000. How much of the profit is allocated to Andrea?
a. $57,000
b. $45,000
c. $72,000
d. $97,000
192. Peter and Ronald are partners. They have shared profits and losses 65/35 for a number of
years. Peter has indicated that he is going to reduce his involvement in the partnership so
the profit and loss ratio is being modified to 45/55. At the date of the change in the profit
and loss ratio, the partnership own vacant land with a market value of $300,000 and a
book value of $100,000. Peter and Ronald compile a list of assets with market and book
value differences. Two years after the change in the profit and loss ratios, the land is sold
for $450,000. How much of the gain is allocated to Peter?
a. $197,500
b. $227,500
c. $157,500
d. $287,500
193. Peter and Ronald are partners. They have shared profits and losses 65/35 for a number of
years. Peter has indicated that he is going to reduce his involvement in the partnership so
the profit and loss ratio is being modified to 45/55. At the date of the change in the profit
and loss ratio, the partnership own vacant land with a market value of $300,000 and a
book value of $100,000. Peter and Ronald compile a list of assets with market and book
value differences. Two years after the change in the profit and loss ratios, the land is sold
for $450,000. How much of the gain is allocated to Ronald?
a. $122,500
b. $192,500
c. $152,500
d. $262,500
194. Jennifer and Robert are partners who are changing their profit and loss ratios from 60/40
to 45/55. At the date of the change, the partners choose to revalue assets with market
value different from book value. One asset revalued is land with a book value of
$50,000 and a market value of $120,000. Two years after the profit and loss ratio is
changed, the land is sold for $200,000. What is the amount of change to Jennifer’s
capital account at the date the land is revalued?
a. $72,000
b. $42,000
c. $30,000
d. $28,000
changed, the land is sold for $200,000. What is the amount of change to Robert’s capital
account at the date the land is revalued?
a. $72,000
b. $42,000
c. $30,000
d. $28,000
changed, the land is sold for $200,000. What is the amount of change to Jennifer’s
capital account at the date the land is sold?
a. $48,000
b. $67,500
c. $31,500
d. $36,000
changed, the land is sold for $200,000. What is the amount of change to Robert’s capital
account at the date the land is sold?
a. $44,000
b. $82,500
c. $32,000
d. $60,000
198. James and Bruce are partners. They have shared profits and losses 70/30 for several
years. The partnership profit allocation agreement is currently being modified to 60/40.
At the date of the change, the partners choose to revalue assets with market value
different from book value. One asset revalued is a building with a book value of
$370,000 and a market value of $520,000. One year after the profit and loss ratio is
changed the building is sold for $650,000. What is the amount of change to James’
capital account at the date the building is revalued?
a. $105,000
b. $91,000
c. $45,000
d. $39,000
changed the building is sold for $650,000. What is the amount of change to Bruce’s
capital account at the date the building is revalued?
a. $105,000
b. $91,000
c. $45,000
d. $39,000
changed the building is sold for $650,000. What is the amount of change to James’
capital account at the date the building is sold?
a. $91,000
b. $78,000
c. $39,000
d. $52,000
changed the building is sold for $650,000. What is the amount of change to Bruce’s
capital account at the date the building is sold?
a. $91,000
b. $78,000
c. $39,000
d. $52,000
202. Theresa and Craig are partners. Their current profit and loss ratios (70/30) are being
changed to (60/40). The partners decide to adjust their capital accounts at the date of the
change in the profit and loss ratios to reflect the difference between market value and
book value of assets and liabilities. At the date of the change, land has a market value of
$250,000 and a book value of $120,000. How much will Theresa’s capital account be
adjusted at the date of the change in the profit and loss ratios?
a. $52,000 increase
b. $13,000 increase
c. $52,000 decrease
d. $13,000 decrease
203. Theresa and Craig are partners. Their current profit and loss ratios (70/30) are being
$250,000 and a book value of $120,000. How much will Craig’s capital account be
adjusted at the date of the change in the profit and loss ratios?
a. $52,000 increase
b. $13,000 increase
c. $52,000 decrease
d. $13,000 decrease
204. Eric and Phillip have been partners for several years. During that time they have shared
profits and losses (60/40). They are currently revising the profit and loss ratios to
(70/30). Eric and Phillip decide to adjust the capital accounts at the date of the change to
reflect the difference between market value and book value of assets and liabilities. At
the date of the change, the partnership owns a building with a book value of $350,000
and a market value of $600,000. How much will Eric’s capital account be adjusted at the
date of the change in the profit and loss ratios?
a. $25,000 increase
b. $50,000 increase
c. $25,000 decrease
d. $50,000 decrease
205. Eric and Phillip have been partners for several years. During that time they have shared
profits and losses (60/40). They are currently revising the profit and loss ratios to
(70/30). Eric and Phillip decide to adjust the capital accounts at the date of the change to
reflect the difference between market value and book value of assets and liabilities. At
the date of the change, the partnership owns a building with a book value of $350,000
and a market value of $600,000. How much will Phillip’s capital account be adjusted at
the date of the change in the profit and loss ratios?
a. $25,000 increase
b. $50,000 increase
c. $25,000 decrease
d. $50,000 decrease
206. Jenna is about to purchase some of Cynthia’s partnership interest. Cynthia currently has
partnership equity of $84,500. If Jenna pays Cynthia $30,000 for 30 percent of her
capital, what amount will be recorded in the partnership accounting records?
Jenna Cynthia
a. $30,000 credit $25,350 debit
b. $25,350 credit $25,350 debit
c. $30,000 credit $30,000 debit
d. $25,350 debit $25,350 credit
207. Sam and Ray are partners with capital accounts of $150,000 and $225,000, respectively.
They are considering allowing Richard to purchase 30 percent of Ray’s equity. At the
date of the proposed transaction, Sam and Ray want to revalue the partnership’s assets
and allocate any differences based on their 40/60 profit sharing agreement. Assume that
the net market versus book value differences is $100,000. What amount would Richard
pay for the 30 percent interest?
a. $67,500
b. $76,500
c. $97,500
d. The amount cannot be determined from the information provided
208. Jesse, Joseph, and Leslie are partners with capital accounts of $70,000, $120,000, and
$90,000, respectively. The partnership share profits and losses 45%, 30%, and 25%,
respectively. They are considering allowing Hans to join the partnership by investing
directly into the partnership. The partners intend to revalue the assets before Hans’
admission. Neither bonus nor goodwill are required. If the asset’s market value exceeds
book value $150,000, how much will Hans invest to acquire a 20% equity interest in the
partnership?
a. $107,500
b. $86,000
c. $70,000
d. $100,000
209. Sandra and Joshua are partners. They have capital account balances of $250,000 and
$200,000, respectively, and they share profits and losses 70/30. The partners are
considering admitting Judy as a new partner with a 25 percent equity interest for an
investment in the partnership of $180,000. Before admission, Sandra and Joshua will
revalue the partnership’s assets. If the net increase in the partnership’s assets is
$125,000, what will be the balance in Sandra’s capital account immediately before Judy’s
admission?
a. $575,000
b. $337,500
c. $528,500
d. $262,500
210. Ken and Robert are partners who share profits and losses 75/25. They have capital
account balances of $270,000 and $300,000, respectively at the date they admit Susan
into the partnership. Susan invests $150,000 in the partnership for a 20 percent equity
interest and the bonus method is applied. What is the dollar amount of Susan’s capital
account at the date of admission?
a. $142,500
b. $150,000
c. $144,000
d. The dollar amount cannot be determined from this information
interest and the bonus method is applied. What is the dollar amount of bonus recognized
in Ken’s capital account at the date of admission?
a. $4,500
b. $34,500
c. $6,000
d. $1,500
in Robert’s capital account at the date of admission?
a. $6,000
b. $1,500
c. $144,000
d. $4,500
interest and the bonus method is applied. What is the dollar amount of Ken’s capital
a. $274,500
b. $304,500
c. $144,000
d. $271,500
interest and the bonus method is applied. What is the dollar amount of Robert’s capital
a. $271,500
b. $301,500
c. $144,000
d. $304,500
215. John and Sam are partners who share profits and losses 60/40. They have capital account
balances of $625,000 and $480,000, respectively at the date they admit Pierre into the
partnership. Pierre invests $450,000 in the partnership for a 25 percent equity interest
and the bonus method is applied. What is the dollar amount of Pierre’s capital account at
the date of admission?
a. $933,000
b. $450,000
c. $388,750
d. $622,000
and the bonus method is applied. What is the dollar amount of bonus recognized in
John’s capital account at the date of admission?
a. $98,000
b. $61,250
c. $24,500
d. $36,750
and the bonus method is applied. What is the dollar amount of bonus recognized in
Sam’s capital account at the date of admission?
a. $98,000
b. $61,250
c. $24,500
d. $36,750
and the bonus method is applied. What is the dollar amount of John’s capital account at
a. $516,750
b. $661,750
c. $649,500
d. $504,500
and the bonus method is applied. What is the dollar amount of John’s capital account at
a. $516,750
b. $661,750
c. $649,500
d. $504,500
220. Kris and Mark are partners who share profits and losses 70/30. They have capital
account balances of $170,000 and $260,000, respectively at the date they admit Frank
into the partnership. Frank invests $120,000 in the partnership for a 25 percent equity
interest and the bonus method is applied. What is the dollar amount of Frank’s capital
a. $137,500
b. $120,000
c. $143,333
d. The dollar amount cannot be determined from this information
in Frank’s capital account at the date of admission?
a. $70,000
b. $23,333
c. $17,500
d. $52,500
interest and the bonus method is applied. What is the dollar amount of the reduction to
Kris’ capital account at the date of admission?
a. $5,250
b. $12,250
c. $17,500
d. $100,333
interest and the bonus method is applied. What is the dollar amount of the reduction to
Mark’s capital account at the date of admission?
a. $5,250
b. $12,250
c. $17,500
d. $100,333
interest and the bonus method is applied. What is the dollar amount of Kris’ capital
a. $157,750
b. $254,750
c. $164,750
d. $247,750
interest and the bonus method is applied. What is the dollar amount of Mark’s capital
a. $157,750
b. $254,750
c. $164,750
d. $247,750
226. Tom and Barbara are partners who share profits and losses 40/60. They have capital
account balances of $265,000 and $180,000, respectively at the date they admit Greg into
the partnership. Greg invests $60,000 in the partnership for a 15 percent equity interest
and the bonus method is applied. What is the dollar amount of Greg’s capital account at
a. $60,000
b. $78,530
c. $429,250
d. $75,750
account balances of $265,000 and $180,000, respectively at the date they admit Greg to
and the bonus method is applied. What is the dollar amount of reduction to Tom’s capital
a. $6,300
b. $9,450
c. $54,300
d. $81,450
and the bonus method is applied. What is the dollar amount of reduction to Barbara’s
capital account at the date of admission?
a. $6,300
b. $9,450
c. $54,300
d. $81,450
and the bonus method is applied. What is the dollar amount of Tom’s capital account at
a. $255,550
b. $258,700
c. $173,700
d. $170,550
and the bonus method is applied. What is the dollar amount of Barbara’s capital account
at the date of admission?
a. $255,550
b. $258,700
c. $173,700
d. $170,550
231. Michelle and Steve are partners in a local business. They currently share profits and
losses 60/40 and have capital account balances of $150,000 and $200,000, respectively.
They are considering admitting Jacob to the partnership. He will receive a 20 percent
equity interest in the partnership for a $120,000 investment. Assuming that goodwill is
to be recognized, which partner(s) are contributing the goodwill?
a. Both new and existing partners are contributing goodwill
b. New partner is contributing goodwill
c. Existing partners are contributing goodwill
d. There is not enough information to answer this question
to be recognized, what amount of goodwill would be disclosed on the partnership balance
sheet immediately after Jacob is admitted?
a. $130,000
b. $26,000
c. $87,500
d. $32,500
to be recognized, what will be the capital account balance of Jacob immediately after he
is admitted?
a. $228,000
b. $252,000
c. $250,000
d. $120,000
to be recognized, what will be the capital account balance of Michelle immediately after
Jacob is admitted?
a. $228,000
b. $252,000
c. $250,000
d. $120,000
to be recognized, what will be the capital account balance of Steve immediately after
Jacob is admitted?
a. $228,000
b. $252,000
c. $250,000
d. $120,000
236. Susan and David are partners in a local business. They currently share profits and losses
45/55 and have capital account balances of $250,000 and $300,000, respectively. They
are considering admitting Jane to the partnership. She will receive a 25 percent equity
interest in the partnership for a $225,000 investment. Assuming that goodwill is to be
recognized, which partner(s) are contributing the goodwill?
a. New partner is contributing goodwill
b. Existing partners are contributing goodwill
c. Both new and existing partners are contributing goodwill
recognized, what amount of goodwill would be disclosed on the partnership balance
sheet immediately after Jane is admitted?
a. $31,250
b. $125,000
c. $183,333
d. $41,667
recognized, what will be the capital account balance of Jane immediately after she is
admitted?
a. $225,000
b. $281,250
c. $293,750
d. $183,333
recognized, what will be the capital account balance of Susan immediately after Jane is
admitted?
a. $318,750
b. $356,250
c. $368,750
d. $306,250
recognized, what will be the capital account balance of David immediately after Jane is
admitted?
a. $318,750
b. $356,250
c. $368,750
d. $306,250
241. Dan and Stephanie are partners in a local business They currently share profits and
They are considering admitting Jason to the partnership. He will receive a 25 percent
to be recognized, what amount of goodwill would be disclosed on the partnership balance
sheet immediately after Jason is admitted?
a. $11,250
b. $8,438
c. $186,250
d. $15,000
to be recognized, what will be the capital account balance of Jason immediately after he
is admitted?
a. $190,000
b. $175,000
c. $15,000
d. $186,250
to be recognized, what will be the capital account balance of Dan immediately after Jason
is admitted?
a. $285,000
b. $186,250
c. $250,000
d. $320,000
to be recognized, what will be the capital account balance of Stephanie immediately after
Jason is admitted?
a. $285,000
b. $186,250
c. $250,000
d. $320,000
245. Juan and Felix are partners in a local business. They currently share profits and losses
are considering admitting Julia to the partnership. She will receive a 20 percent equity
recognized, which partner(s) are contributing the goodwill?
a. New partner is contributing goodwill
b. Existing partners are contributing goodwill
c. Both new and existing partners are contributing goodwill
recognized, what amount of goodwill would be disclosed on the partnership balance
sheet immediately after Julia is admitted?
a. $142,000
b. $150,000
c. $10,000
d. $8,000
recognized, what will be the capital account balance of Julia immediately after she is
admitted?
a. $160,000
b. $150,000
c. $152,000
d. $158,000
recognized, what will be the capital account balance of Juan immediately after Julia is
admitted?
a. $280,000
b. $142,000
c. $320,000
d. $240,000
recognized, what will be the capital account balance of Felix immediately after Julia is
admitted?
a. $280,000
b. $142,000
c. $320,000
d. $240,000
250. Harry, Susan, and Walter are partners who share profits and losses 35, 40, and 25 percent,
respectively. Harry is withdrawing from the partnership. At the date of withdrawal, the
partners are revaluing Harry’s portion of the partnership’s assets. If the value of the
partnership’s assets are $200,000 greater than book value, what is the dollar amount of
capital account adjustment that will be recorded?
a. $50,000
b. $70,000
c. $80,000
d. $200,000
respectively. Harry is withdrawing from the partnership. At the date of withdrawal, the
partners are revaluing all of the partnership’s assets. If the value of the partnership’s
assets are $200,000 greater than book value, what is the dollar amount of capital account
adjustment that will be recorded?
a. $50,000
b. $70,000
c. $80,000
d. $200,000
respectively. The partners have capital account balances of $80,000, $110,000, and
$55,000, respectively. Harry is withdrawing from the partnership. At the date of
withdrawal, the partners are revaluing all of the partnership’s assets, an increase of
$200,000. If Susan and Walter acquire Harry’s equity, what will be the amount of
Susan’s capital on the partnership’s balance sheet immediately after Harry’s withdrawal,
rounded to the nearest dollar?
a. $110,000
b. $230,000
c. $282,308
d. Susan’s capital account balance cannot be determined from the information given
respectively. The partners have capital account balances of $80,000, $110,000, and
$55,000, respectively. Harry is withdrawing from the partnership. At the date of
withdrawal, the partners are revaluing all of the partnership’s assets, an increase of
$200,000. If Susan and Walter acquire Harry’s equity, what will be the amount of total
capital on the partnership’s balance sheet immediately after Harry’s withdrawal?
a. $245,000
b. $445,000
c. $365,000
d. $295,000
254. Frank, George, and Scott are partners with capital accounts of $160,000, $120,000, and
$210,000, respectively. Scott has informed Frank and George that he must withdraw
from the partnership. The partners have agreed that the partnership will purchase Scott’s
ownership interest for $250,000. The profit and loss residual ratios before Scott’s
retirement are 45 percent, 30 percent, and 25 percent, respectively. How much will
Frank’s capital account be reduced if the bonus method is applied for the withdrawal?
a. $40,000
b. $24,000
c. $20,000
d. $16,000
retirement are 45 percent, 30 percent, and 25 percent, respectively. What will be the
balance in Frank’s capital account if the bonus method is applied for the withdrawal?
a. $160,000
b. $104,000
c. $184,000
d. $136,000
retirement are 45 percent, 30 percent, and 25 percent, respectively. How much will
George’s capital account be reduced if the bonus method is applied for the withdrawal?
a. $40,000
b. $24,000
c. $20,000
d. $16,000
retirement are 45 percent, 30 percent, and 25 percent, respectively. What will be the
balance in George’s capital account if the bonus method is applied for the withdrawal?
a. $120,000
b. $104,000
c. $184,000
d. $136,000
258. Melissa, Randy, and Sarah are partners with capital accounts of $300,000, $180,000, and
$270,000, respectively. Randy has informed Melissa and Sarah that he must withdraw
from the partnership. The partners have agreed that the partnership will purchase
Randy’s ownership interest for $240,000. The profit and loss residual ratios before
Randy’s retirement are 42 percent, 30 percent, and 28 percent, respectively. How much
will Melissa’s capital account be reduced if the bonus method is applied for the
withdrawal?
a. $36,000
b. $60,000
c. $24,000
d. $30,000
Randy’s retirement are 42 percent, 30 percent, and 28 percent, respectively. What will be
the balance in Melissa’s capital account if the bonus method is applied for the
withdrawal?
a. $336,000
b. $300,000
c. $264,000
d. $246,000
Randy’s retirement are 42 percent, 30 percent, and 28 percent, respectively. How much
will Sarah’s capital account be reduced if the bonus method is applied for the
withdrawal?
a. $36,000
b. $60,000
c. $24,000
d. $30,000
Randy’s retirement are 42 percent, 30 percent, and 28 percent, respectively. What will be
the balance in Sarah’s capital account if the bonus method is applied for the withdrawal?
a. $336,000
b. $300,000
c. $264,000
d. $246,000
262. Bob, Claire, and Jack are partners who share profits and losses 30 percent, 25 percent,
and 45 percent, respectively. Bob informed Claire and Jack that he is withdrawing from
the partnership. The partners’ capital accounts at the date of Bob’s withdrawal are
$150,000, $135,000, and $225,000, respectively. The partnership agreement states that
the goodwill, if any, of the withdrawing partner will be recognized for all partners
immediately prior to the withdrawal of any partner. In this instance, the partners
determine that the goodwill associated with Bob is $22,500. Assuming that Bob’s equity
is purchased by a new partner (Deborah) approved by Claire and Jack, what is the
amount of Deborah’s initial capital account?
a. $150,000
b. $170,000
c. $172,500
d. The amount cannot be determined because the amount Deborah paid for Bob’s
equity is not known
is purchased by Claire (60 percent) and Jack (40 percent), what is the amount of Claire’s
capital account at the date of Bob’s withdrawal?
a. $238,500
b. $307,500
c. $186,750
d. $180,000
is purchased by Claire (60 percent) and Jack (40 percent), what is the amount of Jack’s
capital account at the date of Bob’s withdrawal?
a. $397,500
b. $294,000
c. $285,000
d. $159,000
the goodwill of the partnership will be recognized for all partners immediately prior to
the withdrawal of any partner. In this instance, the partners determine that the
partnership’s goodwill $75,000. Assuming that Bob’s equity is purchased by a new
partner (Deborah) approved by Claire and Jack, what is the amount of Deborah’s initial
capital account?
a. $150,000
b. $170,000
c. $172,500
d. The amount cannot be determined because the amount Deborah paid for Bob’s
equity is not known
partnership’s goodwill $75,000. Assuming that Bob’s equity is purchased by Claire (60
percent) and Jack (40 percent), what is the amount of Claire’s capital account at the date
of Bob’s withdrawal?
a. $175,500
b. $247,500
c. $257,250
d. $327,750
partnership’s goodwill $75,000. Assuming that Bob’s equity is purchased by Claire (60
percent) and Jack (40 percent), what is the amount of Jack’s capital account at the date of
Bob’s withdrawal?
a. $175,500
b. $247,500
c. $257,250
d. $327,750
268. Bonnie, Gwen, and Sally are partners with capital account balances of $350,000,
$280,000, and $200,000 respectively. Sally informed Bonnie and Gwen that she is
withdrawing from the partnership. The partners’ share profits and losses 45 percent, 30
percent, and 25 percent, respectively. The partnership agreement states that the goodwill,
if any, of the withdrawing partner will be recognized at the date of withdrawal. In this
instance, the partners determine that the goodwill associated with Sally is $40,000.
Assuming that Sally’s equity is purchased by a new partner (Mary) approved by Bonnie
and Gwen, what is the amount of Mary’s initial capital account?
a. $240,000
b. $390,000
c. $320,000
d. The amount cannot be determined because the amount Mary paid for Sally’s
equity is not known
Assuming that Sally’s equity is purchased by Bonnie (60 percent) and Gwen (40
percent), what is the amount of Bonnie’s capital account at the date of Sally’s
withdrawal?
a. $446,000
b. $494,000
c. $424,000
d. $376,000
Assuming that Sally’s equity is purchased by Bonnie (60 percent) and Gwen (40
percent), what is the amount of Gwen’s capital account at the date of Sally’s withdrawal?
a. $446,000
b. $494,000
c. $424,000
d. $376,000
percent, and 25 percent, respectively. The partnership agreement states that the goodwill
of the partnership will be recognized at the date of withdrawal. In this instance, the
partners determine that the partnership’s goodwill $150,000. Assuming that Sally’s
equity is purchased by a new partner (Mary) approved by Bonnie and Gwen, what is the
amount of Mary’s initial capital account?
a. $87,500
b. $237,500
c. $350,000
d. The amount cannot be determined because the amount Mary paid for Sally’s
equity is not known
equity is purchased by Bonnie (60 percent) and Gwen (40 percent), what is the amount of
Bonnie’s capital account at the date of Sally’s withdrawal?
a. $441,000
b. $490,000
c. $560,000
d. $420,000
273 Bonnie, Gwen, and Sally are partners with capital account balances of $350,000,
equity is purchased by Bonnie (60 percent) and Gwen (40 percent), what is the amount of
Bonnie’s capital account at the date of Sally’s withdrawal?
a. $441,000
b. $490,000
c. $560,000
d. $420,000
equity is purchased by Bonnie (60 percent) and Gwen (40 percent), what is total
partnership equity after the withdrawal?
a. $980,000
b. $780,000
c. $830,000
d. $630,000
Computational Multiple Choice Question Difficulty and Solutions
169. difficult b
($400,000 - $190,000) + [$270,000 - ($400,000 - $190,000)]/3 = $230,000
170. easy c
171. easy b
$60,000 + $80,000 + $100,000 = $240,000
172. easy c
$30,000 + $50,000 + $25,000 = $105,000/3 = $35,000 - $30,000 = $5,000
173. moderate a
$30,000 + $50,000 + $25,000 = $105,000/3 = $35,000
$50,000 - $30,000 = $15,000
174. easy d
175. easy c
176. easy d
177. moderate c
[($50,000 x 4) + ($40,000 x 6) + ($65,000 x 2)]/12 = $47,500
178. moderate b
[($60,000 x 2) + ($90,000 x 5) + ($70,000 x 4) + $110,000] (.08) = $6,400
179. difficult a
B = .08($250,000 - $200,000 - B)
180. moderate c
B = .05($180,000 - $150,000)
181. difficult d
B = {[($540,000 - $500,000)/$500,000] - .05} $120,000
182. moderate a
($130,000 - $10,000 - $15,000 - $18,000) .45
183. easy d
$60,000 x .45
184. easy a
Profits and losses are allocated equally if there is no allocation provided
185. difficult d
Nick Joe Mike Total
Interest on capital
$200,000 x .09 $18,000
$350,000 x .09 $31,500
$180,000 x .09 $16,200 $65,700
Salary 25,000 15,000 35,000 75,000
Bonus .1($150,000 - $100,000) 5,000 5,000
Residual
$4,300 x .25 1,075
$4,300 x .45 1,935
$4,500 x .30 1,290 4,300
Totals $44,075 $48,435 $57,490 $150,000
186. moderate b
$35,000 + ($500,000 - $35,000 - $50,000 - $40,000) .4
187. moderate a
($250,000 x .08) + [$300,000 - ($200,000 + $250,000 + $400,000)(.08)] .25
188. moderate d
($60,000 - $50,000)(.60) + ($80,000 - $60,000)(.70)
189. moderate b
($60,000 - $50,000)(.40) + ($80,000 - $60,000)(.30)
190. moderate c
($300,000 - $200,000)(.75) + ($380,000 - $300,000)(.60)
191. moderate a
($300,000 - $200,000)(.25) + ($380,000 - $300,000)(.40)
192. moderate a
($300,000 - $100,000)(.65) + ($450,000 - $300,000)(.45)
193. moderate c
($300,000 - $100,000)(.35) + ($450,000 - $300,000)(.55)
194. easy b
($120,000 - $50,000)(.60)
195. easy d
($120,000 - $50,000)(.40)
196. easy d
($200,000 - $120,000)(.45)
197. easy a
($200,000 - $120,000)(.55)
198. moderate a
($520,000 - $370,000)(.70)
199. moderate c
($520,000 - $370,000)(.30)
200. moderate b
($650,000 - $520,000)(.60)
201. moderate d
($650,000 - $520,000)(.40)
202. difficult b
($250,000 - $120,000)(.70 - .60)
203. difficult d
($250,000 - $120,000)(.30 - .40)
204. difficult c
($600,000 - $350,000)(.70 - .60)
205. difficult a
($600,000 - $350,000)(.40 - .30)
206. easy b
$84,500 x .3
207. difficult d
The amount that Richard will pay Ray depends on many factors and cannot be
determined from the information provided here.
208. difficult a
[($70,000 + $120,000 + $90,000 + $150,000)/.80](.20)
209. easy b
$250,000 + ($125,000 x .70)
210. moderate c
($270,000 + $300,000 + $150,000)(.20)
211. moderate a
[$150,000 - ($270,000 + $300,000 + $150,000)(.20)](.75)
212. moderate b
[$150,000 - ($270,000 + $300,000 + $150,000)(.20)](.25)
213. difficult a
[$150,000 - ($270,000 + $300,000 + $150,000)(.20)](.75) + $270,000
214. difficult b
[$150,000 - ($270,000 + $300,000 + $150,000)(.20)](.25) + $300,000
215. moderate c
($625,000 + $480,000 + $450,000)(.25)
216. moderate d
[$450,000 - ($625,000 + $480,000 + $450,000)(.25)](.60)
217. moderate c
[$450,000 - ($625,000 + $480,000 + $450,000)(.25)](.40)
218. difficult b
[$450,000 - ($625,000 + $480,000 + $450,000)(.25)](.60) + $625,000
219. difficult d
[$450,000 - ($625,000 + $480,000 + $450,000)(.25)](.40) + $480,000
220. moderate a
($170,000 + $260,000 + $120,000)(.25)
221. moderate c
[$120,000 - ($170,000 + $260,000 + $120,000)(.25)]
222. moderate b
[$120,000 - ($170,000 + $260,000 + $120,000)(.25)](.70)
223. moderate a
[$120,000 - ($170,000 + $260,000 + $120,000)(.25)](.30)
224. difficult a
$170,000 - [$120,000 - ($170,000 + $260,000 + $120,000)(.25)](.70)
225. difficult b
$260,000 - [$120,000 - ($170,000 + $260,000 + $120,000)(.25)](.30)
226. moderate d
($265,000 + $180,000 + $60,000)(.15)
227. moderate a
[$60,000 - ($265,000 + $180,000 + $60,000)(.15)](.40)
228. moderate b
[$60,000 - ($265,000 + $180,000 + $60,000)(.15)](.60)
229. difficult b
$265,000 - [$60,000 - ($265,000 + $180,000 + $60,000)(.15)](.40)
230. difficult d
$180,000 - [$60,000 - ($265,000 + $180,000 + $60,000)(.15)](.60)
231. moderate c
($150,000 + $200,000 + $120,000)(.20) = $94,000
232. difficult a
($150,000 + $200,000 + $120,000)(.20) = $94,000, goodwill to existing partners
$120,000 + $0 = .2($150,000 + $200,000 + $120,000 + goodwill)
$120,000 = $94,000 + .2 goodwill
$26,000 = .2 goodwill
Goodwill = $130,000
233. moderate d
($150,000 + $200,000 + $120,000)(.20) = $94,000, goodwill to existing partners; new
partner capital account recognized at amount invested
234. difficult a
$120,000 + $0 = .2($150,000 + $200,000 + $120,000 + goodwill)
$120,000 = $94,000 + .2 goodwill
$26,000 = .2 goodwill
Goodwill = $130,000
$150,000 + $130,000 x .60
235. difficult b
$120,000 + $0 = .2($150,000 + $200,000 + $120,000 + goodwill)
$120,000 = $94,000 + .2 goodwill
$26,000 = .2 goodwill
Goodwill = $130,000
$200,000 + $130,000 x .40
236. moderate b
($250,000 + $300,000 + $225,000)(.25) = $193,750
237. difficult b
$225,000 + $0 = .25($250,000 + $300,000 + $225,000 + goodwill)
$225,000 = $193,750 + .25 goodwill
$31,250 = .25 goodwill
Goodwill = $125,000
238. moderate a
($250,000 + $300,000 + $225,000)(.25) = $193,750, goodwill to existing partners; new
partner capital account recognized at amount invested
239. difficult d
$225,000 + $0 = .25($250,000 + $300,000 + $225,000 + goodwill)
$225,000 = $193,750 + .25 goodwill
$31,250 = .25 goodwill
Goodwill = $125,000
$250,000 + $125,000 x .45
240. difficult c
$225,000 + $0 = .25($250,000 + $300,000 + $225,000 + goodwill)
$225,000 = $193,750 + .25 goodwill
$31,250 = .25 goodwill
Goodwill = $125,000
$300,000 + $125,000 x .55
241. difficult d
($250,000 + $320,000 + $175,000)(.25) = $186,250, goodwill to new partner
$175,000 + goodwill = .25($250,000 + $320,000 + $175,000 + goodwill)
$175,000 + goodwill = $186,250 + .25 goodwill
.75 goodwill = 11,250
Goodwill = $15,000
242. difficult a
.75 goodwill = 11,250
Goodwill = $15,000
$175,000 + $15,000
243. moderate c
($250,000 + $320,000 + $175,000)(.25) = $186,250, goodwill to new partner; existing
partners’ capital accounts do not change
244. moderate d
($250,000 + $320,000 + $175,000)(.25) = $186,250, goodwill to new partner; existing
partners’ capital accounts do not change
245. moderate a
($240,000 + $320,000 + $150,000)(.20) = $142,000
246. difficult c
.80 goodwill = $8,000
Goodwill = $10,000
247. difficult a
.80 goodwill = $8,000
Goodwill = $10,000
$160,000 + $10,000
248. moderate d
($240,000 + $320,000 + $150,000)(.20) = $142,000, goodwill to new partner, capital
accounts of existing partners do not change
249. moderate c
($240,000 + $320,000 + $150,000)(.20) = $142,000, goodwill to new partner, capital
accounts of existing partners do not change
250. easy b
$200,000 x .35
251. easy d
252. moderate d
253. moderate b
$80,000 + $110,000 + $55,000 + $200,000
254. moderate b
($250,000 - $210,000)(45/75)
255. moderate d
$160,000 - ($250,000 - $210,000)(45/75)
256. moderate d
($250,000 - $210,000)(30/75)
257. moderate b
$120,000 - ($250,000 - $210,000)(30/75)
258. moderate a
($240,000 - $180,000)(42/70)
259. moderate c
$300,000 - ($240,000 - $180,000)(42/70)
260. moderate c
($240,000 - $180,000)(28/70)
261. moderate d
$270,000 - ($240,000 - $180,000)(28/70)
262. easy c
$150,000 + $22,500
263. moderate a
$135,000 + ($150,000 + $22,500)(.60)
264. moderate b
$225,000 + ($150,000 + $22,500)(.40)
265. easy c
$150,000 + ($75,000 x .3)
266. difficult c
$135,000 + ($75,000 x .25) + [$150,000 + ($75,000 x .30)](.60)
267. difficult d
$225,000 + ($75,000 x .45) + [$150,000 + ($75,000 x .30)](.40)
268. easy a
$200,000 + $40,000
269. moderate b
$350,000 + ($200,000 + $40,000)(.60)
270. moderate c
$280,000 + ($200,000 + $40,000)(.40)
271. easy b
$200,000 + ($150,000 x .25)
272. difficult c
$350,000 + ($150,000 x .45) + [$200,000 + ($150,000 x .25)](.60)
273 difficult d
$280,000 + ($150,000 x .30) + [$200,000 + ($150,000 x .25)](.40)
274. moderate a
$350,000 + $280,000 + $200,000 + $150,000
Problems
275. (10 Points) moderate
Alan, Betty, and Carl are forming a partnership. Each will contribute cash and noncash
assets. Assume the initial capital account balances will be determined based on the value
of the assets contributed. Information regarding the initial contributions is provided
below:
Alan Betty Carl__

Cash $150,000 $275,000 $125,000
Plant Assets - historical cost 280,000 350,000 540,000
Plant Assets - carrying value 215,000 225,000 300,000
Plant Assets - tax basis 200,000 190,000 230,000
Plant Assets - market value 350,000 260,000 310,000
Required:
a. Record the journal entry to establish the initial partners’ capital accounts and the
assets assuming the carrying value is used to determine the value assigned to
noncash assets contributed. Assume also that each partner’s capital account is
assigned a value equal to the cash and noncash assets contributed by that partner.
b. Record the journal entry to establish the initial partners’ capital accounts and the
assets assuming the carrying value is used to determine the value assigned to
noncash assets contributed. Assume also that all of the partners’ capital accounts
are equal when the journal entry is completed.
c. Contrast the entries in parts a. and b. Why might the partners agree to equal
capital accounts as presented in b.?
Answer:
Part a.
Cash ($150,000 + $275,000 + $125,000) 550,000
Plant Assets ($215,000 + $225,000 + $300,000) 740,000
Alan, Capital ($150,000 + $215,000) 365,000
Betty, Capital ($275,000 + $225,000) 500,000
Carl, Capital ($125,000 + $300,000) 425,000
Part b.
Cash ($150,000 + $275,000 + $125,000) 550,000
Plant Assets ($215,000 + $225,000 + $300,000) 740,000
Alan, Capital ($550,000 + $740,000)/3 430,000
Betty, Capital ($550,000 + $740,000)/3 430,000
Carl, Capital ($550,000 + $740,000)/3 430,000
Part c. Alan has significantly more capital when it is divided equally when compared to
assigning the sum of the carrying values of assets contributed. On the other hand,
Betty has significantly less capital when it is divided equally. Carl has
approximately the same amount under either assignment method. One possibility
is that Betty is giving up some capital to Alan because Alan has substantially
more expertise in running the business. Thus, Betty is paying a bonus to Alan.

below:
Alan Betty Carl__

Cash $150,000 $275,000 $125,000
Required:
assets assuming the tax basis is used to determine the value assigned to noncash
assets contributed. Assume also that each partner’s capital account is assigned a
value equal to the cash and noncash assets contributed by that partner.
assets assuming the tax basis is used to determine the value assigned to noncash
assets contributed. Assume also that all of the partners’ capital accounts are equal
when the journal entry is completed.
Answer:
Part a.
Cash ($150,000 + $275,000 + $125,000) 550,000
Plant Assets ($200,000 + $190,000 + $230,000) 620,000
Alan, Capital ($150,000 + $200,000) 350,000
Betty, Capital ($275,000 + $190,000) 465,000
Carl, Capital ($125,000 + $230,000) 355,000
Part b.
Cash ($150,000 + $275,000 + $125,000) 550,000
Plant Assets ($200,000 + $190,000 + $230,000) 620,000
Alan, Capital ($550,000 + $620,000)/3 390,000
Betty, Capital ($550,000 + $620,000)/3 390,000
Carl, Capital ($550,000 + $620,000)/3 390,000
Part c. Alan and Carl each have significantly more capital when it is divided equally
when compared to assigning the sum of the carrying values of assets contributed.
On the other hand, Betty has significantly less capital when it is divided equally.
One possibility is that Betty is giving up some capital to Alan and Carl because
they have substantially more expertise in running the business. Thus, Betty is
paying a bonus to Alan and Carl.

below:
Alan Betty Carl__

Cash $150,000 $275,000 $125,000
Required:
assets assuming the market value is used to determine the value assigned to
noncash assets contributed. Assume also that each partner’s capital account is
assigned a value equal to the cash and noncash assets contributed by that partner.
assets assuming the market value is used to determine the value assigned to
noncash assets contributed. Assume also that all of the partners’ capital accounts
are equal when the journal entry is completed.
Answer:
Part a.
Cash ($150,000 + $275,000 + $125,000) 550,000
Plant Assets ($350,000 + $260,000 + $310,000) 920,000
Alan, Capital ($150,000 + $350,000) 500,000
Betty, Capital ($275,000 + $260,000) 535,000
Carl, Capital ($125,000 + $310,000) 435,000
Part b.
Cash ($150,000 + $275,000 + $125,000) 550,000
Plant Assets ($350,000 + $260,000 + $310,000) 920,000
Alan, Capital ($550,000 + $920,000)/3 490,000
Betty, Capital ($550,000 + $920,000)/3 490,000
Carl, Capital ($550,000 + $920,000)/3 490,000
Part c. Carl has significantly more capital when it is divided equally when compared to
assigning the sum of the carrying values of assets contributed. On the other hand,
Betty has significantly less capital when it is divided equally. Alan has
approximately the same amount under either assignment method. One possibility
is that Betty is giving up some capital to Carl because Carl has substantially more
expertise in running the business. Thus, Betty is paying a bonus to Carl.
278. (5 Points) easy

Alex, Bill, and Martha contribute the following assets to begin partnership operations:
Alex Bill Martha_

Cash $150,000 $225,000 $175,000
Inventory 57,000 89,000
Plant Assets 350,000 100,000
Accounts Payable 14,000 40,000
Notes Payable 160,000
Record the journal entry to establish the assets and owners’ equity of the partnership.
Answer:
Cash ($150,000 + $225,000 + $175,000) 550,000
Inventory ($57,000 + $89,000) 146,000
Plant Assets ($350,000 + $100,000) 450,000
Accounts Payable ($14,000 + $40,000) 54,000
Notes Payable 160,000
Alex, capital ($150,000 + $57,000 - $14,000) 193,000
Bill, capital ($225,000 + $350,000 - $160,000) 415,000
Martha, capital ($175,000 + $89,000 + 324,000
$100,000 - $40,000)

William, Casey, and Samantha are forming a partnership. Below is a table outlining the
contributions of each partner.
William Casey Samantha

Cash $ 15,000 $20,000 $ 10,000
Inventory 100,000 60,000 80,000
Plant Assets 250,000 160,000
Liabilities Assumed by Partnership 130,000 90,000
In addition, Casey brings significant experience needed to run the business. It is agreed
that partners will receive capital allocations equal to the market value of the net assets
contributed and that Casey will receive additional capital of $75,000 and the bonus
method will be applied. Two-thirds of the bonus is to come from William and one-third
from Samantha. Record the journal entry for the creation of the partnership.
Answer:
Cash ($15,000 + $20,000 + $10,000) 45,000
Inventory ($100,000 + $60,000 + $80,000) 240,000
Plant Assets ($250,000 + $160,000) 410,000
Liabilities ($130,000 + $90,000) 220,000
Casey, Capital ($20,000 + $60,000 + $75,000) 155,000
Samantha, Capital [$10,000 + $80,000 + 135,000
$160,000 - $90,000 - ($75,000/3)]
William, Capital [$15,000 + $100,000 + 185,000
$250,000 - $130,000 - ($75,000 x 2/3)]

Bonnie, Connie, and Deborah are forming a partnership. The partners will contribute the
following identifiable assets:
Bonnie Connie Deborah

Cash $150,000 $200,000 $140,000
Inventory 160,000 190,000 180,000
Plant Assets 300,000 340,000
Liabilities Assumed by Partnership 180,000 130,000
In addition, Bonnie brings significant experience because she has run a similar type of
business. It is agreed that Bonnie will receive additional capital of $80,000 and the
bonus method will be applied. Sixty percent of the bonus is to come from Deborah and
forty percent from Connie. Record the journal entry for the creation of the partnership.
Answer:
Cash ($150,000 + $200,000 + $140,000) 490,000
Inventory ($160,000 + $190,000 + $180,000) 530,000
Plant Assets ($300,000 + $340,000) 640,000
Liabilities ($180,000 + $130,000) 310,000
Bonnie, Capital ($150,000 + $160,000 + 510,000
$300,000 - $180,000 + $80,000)
Connie, Capital [$200,000 + $190,000 - 358,000
($80,000 x .4)]
Deborah, Capital [$140,000 + $180,000 + 482,000
$340,000 - $130,000 - ($80,000 x .6)]

Able, Baker, and Charlie are forming a partnership. Charlie has significant experience in
the type of business the partners are starting. As a result, Able and Baker agree that
goodwill of $50,000 should be recognized with regard to Charlie. The partners
contribute the following tangible assets:
Able Baker Charlie

Cash $20,000 $35,000 $55,000
Plant Assets 75,000 90,000 60,000
Liabilities 25,000 45,000 15,000
Record the journal entry to establish the partnership.
Answer:
Cash ($20,000 + $35,000 + $55,000) 110,000
Plant Assets ($75,000 + $90,000 + $60,000) 225,000
Goodwill 50,000
Liabilities ($25,000 + $45,000 + $15,000) 85,000
Able, Capital ($20,000 + $75,000 - $25,000) 70,000
Baker, Capital ($35,000 + $90,000 - $45,000) 80,000
Charlie, Capital ($55,000 + $60,000 - $15,000 + 150,000
$50,000)

Jessica, Mary, and Susan currently operate three separate businesses. They are planning
to combine and form a partnership to operate as one business. The prospective partners
agree that, in addition to the net market value of the tangible assets contributed to the
partnership, Jessica and Susan should have goodwill recognized in the amounts of
$80,000 and $40,000, respectively. The following table presents the market value of the
assets and liabilities contributed to the partnership.
Jessica Mary Susan

Cash $100,000 $250,000 $170,000
Inventory 280,000 400,000 450,000
Plant Assets 750,000 500,000 600,000
Accounts Payable 190,000 270,000 260,000
Mortgage Payable 340,000 200,000 320,000
Required:
a. Record the journal entry to establish the partnership.
b. What appears to be the partners’ intent when creating the new partnership?
Answer:
Part a.
Cash ($100,000 + $250,000 + $170,000) 520,000
Inventory ($280,000 + $400,000 + $450,000) 1,130,000
Plant Assets ($750,000 + $500,000 + $600,000) 1,850,000
Goodwill 120,000
Accounts Payable ($190,000 + $270,000 + 720,000
$260,000)
Mortgage Payable ($340,000 + $200,000 + 860,000
$320,000)
Jessica, Capital ($100,000 + $280,000 + 680,000
$750,000 - $190,000 - $340,000 + $80,000)
Mary, Capital ($250,000 + $400,000 + 680,000
$500,000 - $270,000 - $200,000)
Susan, Capital ($170,000 + $450,000 + 680,000
$600,000 - $260,000 - $320,000 + $40,000)
Part b.
The apparent intent of the partners is to make all three partner capital accounts of equal
dollar amount when the partnership is formed.

Tom, Jon, and Sandy are partners in a thriving business. You work for the firm that
provides accounting services to the partnership. The accounting period recently ended
and you have been assigned the task of helping with the profit allocation to the partners.
The following information has been extracted from the partnership’s accounting records:
Date Tom Jon Sandy____

1/1 Balance $850,000 Balance $680,000 Balance $450,000
4/30 Withdraw $75,000 Withdraw $30,000
9/1 Invest $120,000 Withdraw $100,000
12/1 Invest $90,000 Invest $40,000 Withdraw $60,000
The partnership agreement stipulates that the weighted-average capital balance is the
basis for the interest on capital component of profit and loss allocation and the rate of
return on invested capital is 12 percent. What is the amount of interest on capital
allocated to each partner as a part of the profit and loss allocation?
Answer:
TOM’S AVERAGE CAPITAL BALANCE
Capital Time Average
Date Invest/Withdraw Balance Invested Capital__
January 1 $850,000 4 months $ 3,400,000
April 30 Withdraw $75,000 775,000 4 months 3,100,000
September 1 Invest $120,000 895,000 3 months 2,685,000
December 1 Invest $90,000 985,000 1 month 985,000
$10,170,000
Average capital ($10,170,000 / 12) $847,500
JON’S AVERAGE CAPITAL BALANCE

January 1 $680,000 8 months $5,440,000
September 1 Withdraw $100,000 580,000 3 months 1,740,000
December 1 Invest $40,000 620,000 1 month 620,000
$7,800,000
Average capital ($7,800,000 / 12) $650,000
SANDY’S AVERAGE CAPITAL BALANCE

January 1 $450,000 4 months $1,800,000
April 30 Withdraw $30,000 420,000 7 months 2,940,000
December 1 Withdraw $60,000 360,000 1 month 360,000
$5,100,000
Average capital ($5,100,000 / 12) $425,000
Interest on capital contributions:

Tom: $847,500 x .12 = $101,700
Jon: $650,000 x .12 = $78,000
Sandy: $425,000 x .12 = $51,000

John, Roger, and Troy are partners in a local business. You are a staff accountant at a
firm that provides accounting services to the partnership. You were just assigned the task
of helping prepare the profit allocation to the partners. The following information was
extracted from the partnership’s accounting records:
Date John Roger Troy_____

1/1 Balance $250,000 Balance $350,000 Balance $500,000
3/31 Withdraw $30,000 Invest $50,000
8/31 Invest $40,000 Withdraw $90,000
11/1 Invest $25,000 Invest $60,000 Withdraw $60,000
The partnership agreement stipulates that the weighted-average capital balance is the
basis for the interest on capital component of profit and loss allocation and the rate of
return on invested capital is 10 percent. What is the amount of interest on capital
allocated to each partner as a part of the profit and loss allocation?
Answer:
JOHN’S AVERAGE CAPITAL BALANCE
January 1 $250,000 3 months $ 750,000
March 31 Withdraw $30,000 220,000 5 months 1,100,000
August 31 Invest $40,000 260,000 2 months 520,000
November 1 Invest $25,000 285,000 2 months 570,000
$2,940,000
Average capital ($2,940,000 / 12) $245,000
ROGER’S AVERAGE CAPITAL BALANCE

January 1 $350,000 8 months $2,800,000
August 31 Withdraw $90,000 260,000 2 months 520,000
November 1 Invest $60,000 320,000 2 months 640,000
$3,960,000
Average capital ($3,960,000 / 12) $330,000
TROY’S AVERAGE CAPITAL BALANCE

January 1 $500,000 3 months $1,500,000
March 31 Invest $50,000 550,000 7 months 3,850,000
November 1 Withdraw $60,000 490,000 2 months 980,000
$6,330,000
Average capital ($6,660,000 / 12) $527,500
Interest on capital contributions:

John: $245,000 x .10 = $24,500
Roger: $330,000 x .10 = $33,000
Troy: $527,500 x .10 = $52,750

Philip is the managing partner of a local company. Part of his profit and loss allocation is
a bonus based on the store operating income. The bonus arrangement is 8 percent of
operating income in excess of $200,000 after deducting the bonus. How much is Philip’s
bonus this year if operating income before deducting the bonus is $350,000?
Answer:
Bonus = .08($350,000 - $200,000 - B)
1.08 Bonus = $12,000
Bonus = $11,111.11
Sally is a partner, and business manager, in a local partnership. Part of the profit and loss
agreement in the articles of partnership is a bonus to be paid to the business manager.
The bonus is currently calculated at 12 percent of income in excess of $250,000 after
subtracting the bonus.
How much bonus will Sally receive if income is $400,000?
Answer:
Bonus = .12 ($400,000 - $250,000 - B)
Bonus = $16,071.43

Frank, George, and Hank are partners. Partnership profits for the year are $90,000.
Required:
a. How much is allocated to each partner if the profit and loss residual ratios are
30%, 20%, and 50%, respectively?
b. How would the profit be allocated if there were no profit and loss residual ratios?
Answer:
Part a.
Frank $90,000 x .30 = $27,000
George $90,000 x .20 = $18,000
Hank $90,000 x .50 = $45,000
Part b.
Frank, George and Hank $90,000/3 = $30,000
288. (30 Points) difficult

Beverly, Brad, and Bob are partners in the 3Bs company. The partners have been in
business for a number of years. The following information exists with regard to the
allocation of profits and losses.
Beverly _ Brad Bob__

Weighted-average capital balance $400,000 $650,000 $550,000
Salary 40,000 65,000 80,000
Bonus .1(Net income - $200,000)
Residual 40% 35% 25%
The interest portion of the profit and loss allocation is 8 percent of the weighted-average
capital balance. Profit allocation is determined in the order presented above. Assume the
allocation is completed regardless of the level of profit. Partnership losses, on the other
hand, are allocated by the residual ratios only.
Required:
a. Determine the profit allocation if the partnership net income is $580,000.
b. Determine the profit allocation if the partnership net income is $250,000.
c. Determine the loss allocation if the partnership net loss is ($50,000).
Solution:
Part a.
Beverly Brad Bob Total__
Interest on capital
$400,000 x .08 $ 32,000
$650,000 x .08 $ 52,000
$550,000 x .08 $ 44,000 $128,000
Salary 40,000 65,000 80,000 185,000
Bonus
.1($580,000 - $200,000) 38,000 38,000
Residual
$229,000 x .4 91,600
$229,000 x .35 80,150
$229,000 x .25 57,250 229,000
$163,600 $235,150 $181,250 $580,000
Part b.
Interest on capital
$400,000 x .08 $32,000
$650,000 x .08 $ 52,000
$550,000 x .08 $44,000 $128,000
Salary 40,000 65,000 80,000 185,000
Bonus
.1($250,000 - $200,000) 5,000 5,000
Residual
($68,000) x .4 (27,200)
($68,000) x .35 (23,800)
($68,000) x .25 (17,000) (68,000)
$44,800 $98,200 $107,000 $250,000
Part c.
Residual
($50,000) x .4 ($20,000)
($50,000) x .35 ($17,500)
($50,000) x .25 ($12,500) ($50,000)

Tiffany, Jason, and Shanel are partners in a marketing firm. They allocate profits and
losses based on four criteria: (1) 6 percent return on invested capital; (2) salary, based on
$40 per billable hour; (3) bonus to Jason for managing the business [.15 (net income -
$250,000 - bonus)]; and (4) residual allocation. For the year, the partners have the
following average invested capital and billable hours.
Tiffany Jason Shanel_
Average invested capital $200,000 $180,000 $160,000
Billable hours 1,500 1,700 2,200
Prepare a schedule allocating the partnership’s $450,000 profit. Round all

amounts to the nearest dollar.
Solution:
Tiffany Jason Shanel Total_
Interest on capital
$200,000 x .06 $ 12,000
$180,000 x .06 $ 10,800
$160,000 x .06 $ 9,600 $ 32,400
Salary
1,500 x $40 60,000
1,700 x $40 68,000
2,200 x $40 88,000 216,000
Bonus
.15($450,000 - $250,000 - B) 26,087 26,087
Residual
$175,513/3 58,504 58,504 58,505 175,513
$130,504 $163,391 $156,105 $450,000

Stan and Allan have been partners for several years. Their current partnership profit and
loss ratios are being changed from 75/25 to 60/40. As part of the change, they have
created a list of assets that have market and book value differences. One of the assets is
vacant land with a $200,000 market value and a $110,000 book value. One year after
changing the profit and loss ratios, the building is sold for $280,000. Record (1) the sale
of the land and (2) the distribution of the gain on sale to the partners.
Solution:
Cash 280,000
Land 110,000
Gain on Sale of Land 170,000

Stan, capital ($200,000 - $110,000)(.75) + 115,500
($280,000 - $200,000)(.60)
Allan, capital ($200,000 - $110,000)(.25) + 54,500
($280,000 - $200,000)(.40)

Susan and Mary have been partners for several years. Their current partnership profit
and loss ratios are being changed from 65/35 to 55/45. As part of the change, they have
created a list of assets that have market and book value differences. One of the assets is a
building with a $370,000 market value and a $150,000 book value. One year after
changing the profit and loss ratios, the building is sold for $500,000. Record (1) the sale
of the building and (2) the distribution of the gain on sale to the partners.
Solution:
Cash 500,000
Building 150,000
Gain on Sale of Building 350,000

Susan, capital ($370,000 - $150,000)(.65) + 214,500
($500,000 - $370,000)(.55)
Mary, capital ($370,000 - $150,000)(.35) + 135,500
($500,000 - $370,000)(.45)

Janice and Richard are partners who are changing their profit and loss ratios from 40/60
to 55/45. At the date of the change, the partners chooses to revalue assets with market
changed, the land is sold for $600,000. Record (1) the revaluation of the land, (2) the
sale of the land, and (3) the distribution of the gain on sale of land to the partners.
Solution:
Land ($420,000 - $250,000) 170,000
Janice, capital ($170,000 x .40) 68,000
Richard, capital ($170,000 x .60) 102,000
Cash 600,000
Land 420,000
Gain on Sale of Land ($600,000 - $420,000) 180,000

Janice, capital ($180,000 x .55) 99,000
Richard, capital ($180,000 x .45) 81,000

John and Renee are partners who are changing their profit and loss ratios from 70/30 to
60/40. At the date of the change, the partners chooses to revalue assets with market value
different from book value. One asset revalued is a building with a net book value of
changed, the building is sold for $270,000. Record (1) the revaluation of the building,
(2) the sale of the building, and (3) the distribution of the loss on sale of the building to
the partners.
Solution:
Building ($340,000 - $100,000) 240,000
John, capital ($240,000 x .70)
168,000
Renee, capital ($240,000 x .30) 72,000
Cash 270,000
Loss on Sale of Building ($270,000 - $340,000) 70,000
Building 340,000
John, capital ($70,000 x .60) 42,000

Renee, capital ($70,000 x .40) 28,000
Loss on Sale of Building 70,000

Tom and Darris are partners. Their current profit and loss ratios (80/20) are being
$350,000 and a book value of $140,000. Record the adjustment to the capital accounts at
the date of the change in the profit and loss ratios.
Solution:
Darris, capital [($340,000 - $150,000)(.20-.30)] 21,000
Tom, capital [($340,000 - $150,000)(.80 - .70)] 21,000

Tim and Donna are partners. Their current profit and loss ratios (60/40) are being
book value of assets and liabilities. At the date of the change, a building has a book
value of $400,000 and a market value of $650,000. Record the adjustment to the capital
accounts at the date of the change in the profit and loss ratios.
Solution:
Donna, capital [($650,000 - $400,000)(.40-.55)] 37,500
Tim, capital [($650,000 - $400,000)(.60 - .45)] 37,500

Wesley, Slyvia, and Mel are partners. They have capital accounts of $60,000, $95,000,
and $105,000, respectively. Heather is talking to Mel about joining the partnership and
acquiring 1/3 of his equity. Wesley and Slyvia know Heather and they have approved her
admission into the partnership. Record Heather’s admission assuming she pays $50,000
to acquire 1/3 of Mel’s equity.
Solution:
Mel, capital ($105,000/3) 35,000
Heather, capital 35,000

John, Linda, and Bill are partners with capital accounts of $78,000, $59,000, and
$183,000, respectively. In addition, they share profits and losses 30%, 25%, and 45%,
respectively. Bill is planning to partially retire and has asked John and Linda if they
would approve Mitch as a new partner. John and Linda respond that Mitch is acceptable
but they want to revalue the partnership’s assets before Mitch is admitted. At the date of
the admission, the net assets are written up $250,000. Mitch pays Bill $200,000 for 60
percent of his equity. Record the revaluation of the assets and the admission of Mitch
into the partnership.
Solution:
Assets 250,000
John, capital ($250,000 x .30)
75,000
Linda, capital ($250,000 x .25) 62,500
Bill, capital ($250,000 x .45) 112,500
Bill, capital ($183,000 + $112,500)(.60) 177,300

Mitch, capital 177,300

Susan and Tom are partners with capital accounts of $280,000 and $182,500,
respectively. The partners share profits and losses 60/40. They are considering admitting
Scott into the partnership as a 25% equity ownership for an investment into the
partnership of $187,500. Before admission of Scott, the partnership’s assets will be
revalued up $100,000. Record the revaluation of the assets and the admission of Scott
Solution:
Assets 100,000
Susan, capital ($100,000 x .60) 60,000
Tom, capital ($100,000 x .40) 40,000
Book value of capital before the investment $562,500

($280,000 + $182,500 + $100,000)
Scott’s investment 187,500
Total book value of capital after the investment $750,000
Scott’s percentage ownership 0.25
Book value of Scott’s ownership percentage capital $187,500
Cash 187,500
Scott, capital 187,500

Wayne and Dennis are partners with capital accounts of $250,000 and $300,000,
respectively. The partners share profits and losses 30/70. They are considering admitting
Dorothy into the partnership with a 20% equity ownership for an investment into the
partnership of $193,750. Before admission of Dorothy, the partnership’s assets will be
revalued up $225,000. Record the revaluation of the assets and the admission of Dorothy
Answer:
Assets 225,000
Wayne, capital ($225,000 x .30) 67,500
Dennis, capital ($225,000 x .70) 157,500

($250,000 + $300,000 + $225,000)
Dorothy’s investment 193,750
Dorothy’s percentage ownership 0.20
Book value of Scott’s ownership percentage capital $193,750
Cash 193,750
Dorothy, capital 193,750

Louise and Jane are considering admitting Mary into their partnership. Louise and Jane
share profits at losses 70/30 and their capital account balances are $260,000 and
$190,000, respectively. The partnership agreement indicates that the bonus method will
be applied when new partners are admitted to the company. Louise and Jane want to
know what the journal entry would look like if Mary is admitted with a 20 percent equity
interest in the partnership for an investment of $140,000. Prepare the journal entry at the
date of admission.
Answer:
Cash 140,000
Jane, capital ($140,000 - $118,000)(.30) 6,600
Louise, capital ($140,000 - $118,000)(.70) 15,400
Mary, capital ($260,000 + $190,000 + $140,000)(.20) 118,000

Steve and Ray are partners with capital accounts of $300,000 and $460,000, respectively.
They share profits and losses 60/40. Their business is growing and they need to admit a
new partner. Sheila has indicated that she would like to be part of the business.
Negotiations occur and Sheila is admitted with a 25 percent equity interest for $325,000.
Record the admission of Sheila if the bonus method is applied.
Answer:
Cash 325,000
Sheila, capital ($300,000 + $460,000 + 271,250
$325,000)(.25)
Ray, capital ($325,000 - $271,250)(.40) 21,500
Steve, capital ($325,000 - $271,250)(.60) 32,250

Deborah and Randy are partners who share profits and losses 55/45. They have capital
account balances of $450,000 and $380,000, respectively. The partners have been
negotiating with Marsha about her joining the partnership. The parties agree that the
partnership will revalue assets to their market value ($150,000 above book value) and
that Marsha will invest $250,000 for a 15 percent equity interest. Record the revaluation
and the admission of Marsha into the partnership assuming the bonus method is applied.
Answer:
Assets 150,000
Deborah, capital ($150,000 x .55) 82,500
Randy, capital ($150,000 x .45) 67,500
Cash 250,000
Deborah, capital ($250,000 - $184,500)(.55) 36,025
Marsha, capital ($450,000 + $380,000 + 184,500
$150,000 + $250,000)(.15)
Randy, capital ($250,000 - $184,500)(.45) 29,475

Jennifer and Juan are partners with capital accounts of $100,000 and $160,000,
respectively. They share profits and losses 45/55. The business is expanding and they
need to admit a new partner. Kathryn has indicated that she would like to join the
partnership. Negotiations occur and Kathryn is admitted with a 25 percent equity interest
for $75,000. Record the admission of Kathryn assuming the bonus method is applied.
Answer:
Cash 80,000
Jennifer, capital ($85,000 - $80,000)(.45) 2,250
Juan, capital ($85,000 - $80,000)(.55) 2,750
Kathryn, capital ($100,000 + $160,000 + 85,000
$80,000)(.25)

Fred and Laurie are considering admitting John into their partnership. Fred and Laurie
share profits at losses 60/40 and their capital account balances are $160,000 and
$290,000, respectively. The partnership agreement indicates that the bonus method will
be applied when new partners are admitted to the company. Fred and Laurie have asked
you to prepare the journal entry to admit John with a 25 percent equity interest in the
partnership for an investment of $125,000.
Answer:
Cash 125,000
Fred, capital ($143,750 - $125,000)(.60) 11,250
Laurie, capital ($143,750 - $125,000)(.40) 7,500
John, capital ($160,000 + $290,000 + 143,750
$125,000)(.25)

Jo Ann and Robert are partners who share profits and losses 30/70. They have capital
account balances of $150,000 and $280,000, respectively. The partners have been
negotiating with Bill about him joining the partnership. The parties agree that the
partnership will revalue assets to their market value ($80,000 above book value) and that
Bill will invest $100,000 for a 20 percent equity interest. Record the revaluation and the
admission of Bill into the partnership assuming the bonus method is applied.
Answer:
Assets 80,000
Jo Ann, capital ($80,000 x .30) 24,000
Robert, capital ($80,000 x .70) 56,000
Cash 100,000
Jo Ann, capital ($122,000 - $100,000)(.30) 6,600
Robert, capital ($122,000 - $100,000)(.70) 15,400
Bill, capital ($280,000 + $150,000 + 122,000
$80,000 + $100,000)(.20)

Robert and Steven are partners in a local company. They have capital accounts in the
amounts of $250,000 and $320,000, respectively, when they agree to admit a new
partner, Don, to the company. Don has agreed to contribute $225,000 for a 25 percent
interest in the owners’ equity of the partnership. Before Don’s admission to the
partnership, Robert and Steven share profits and losses 80 percent and 20 percent,
respectively. Record the admission of Don assuming the goodwill method is applied.
Answer:
Don’s investment 225,000
Don’s percentage ownership 0.25
Book value of Don’s ownership percentage capital $198,750
Goodwill to existing partners
$225,000 = (.25)($795,000 + Goodwill)

$225,000 = $198,750 + .25 (Goodwill)
$26,250 = .25 (Goodwill)
Goodwill = $105,000
Cash 225,000
Goodwill 105,000
Don, capital 225,000
Robert, capital ($105,000 x .80) 84,000
Steve, capital ($105,000 x .20) 21,000

Ann and Sarah are partners in a local company. They have capital accounts in the
amounts of $150,000 and $220,000, respectively, when they agree to admit a new
partner, John, to the company. John has agreed to contribute $175,000 for a 25 percent
interest in the owners’ equity of the partnership. Before John’s admission to the
partnership, Ann and Sarah share profits and losses 40 percent and 60 percent,
respectively. Record the admission of John assuming the goodwill method is applied.
Answer:
John’s investment 175,000
Total book value of capital after the investment 545,000
John’s percentage ownership 0.25
Book value of John’s ownership percentage capital 136,250
$175,000 = (.25)($495,000 + Goodwill)

$175,000 = $136,250 + .25 (Goodwill)
$38,750 = .25 (Goodwill)
Goodwill = $155,000
Cash 175,000
Goodwill 155,000
Ann, capital ($155,000 x .40) 62,000
Sarah, capital ($155,000 x .60) 93,000

Bob and Norman are partners and they share profits and losses 70/30. They have capital
accounts balances of $350,000 and $480,000, respectively, when they agree to admit
Richard to the company. All parties have agreed that the partnership will first revalue
tangible assets to their market value ($150,000 above book value) and then Richard will
invest $300,000 for a 20 percent interest in the partnership’s owners’ equity. Record the
revaluation and the admission of Richard into the partnership assuming the goodwill
method is applied.
Answer:
Assets 150,000
Bob, capital ($150,000 x .70) 105,000
Norman, capital ($150,000 x .30) 45,000
Book value of capital before the investment $ 980,000

($350,000 + $480,000 + $150,000)
Richard’s investment 300,000
Total book value of capital after the investment $1,280,000
Richard’s percentage ownership 0.20
Book value of Richard’s ownership percentage capital $ 256,000
$300,000 = (.20)($1,280,000 + Goodwill)

$300,000 = $256,000 + .20 (Goodwill)
$44,000 = .20 (Goodwill)
Goodwill = $220,000
Cash 300,000
Goodwill 220,000
Bob, capital ($220,000 x .70) 154,000
Norman, capital ($220,000 x .30) 66,000

Skip and Amy are partners in a struggling company. An investor, James, has offered to
join the partnership and provide the needed expertise. Skip and Amy have capital
account balances in the amount of $120,000 and $160,000, respectively, at the date James
is admitted to the partnership and their respective profit and loss ratios are 60 percent and
40 percent. James agrees to invest $60,000 for a 20 percent interest in the partnership
capital. Assuming the goodwill method is applied, record the admission of James.
Answer:
($120,000 + $160,000)
James’ investment 60,000
James’ percentage ownership 0.20
Book value of James’ ownership percentage capital $ 68,000
Goodwill to new partner
$60,000 + goodwill = (.20)($340,000 + Goodwill)

$60,000 + goodwill = $68,000 + .20 (Goodwill)
.80 goodwill = $8,000
Goodwill = $10,000
Cash 60,000
Goodwill 10,000
James, capital 70,000

Rich and Barbara are partners who share profits and losses 70/30. They have been
looking for a new partner to help with the expanding business. Frank has expressed an
interest and discussions are underway. Frank is willing to join the partnership by
investing $270,000 for a 25 percent equity interest. At the date Frank joins the
partnership, Rich and Barbara have capital account balances of $370,000 and $500,000,
respectively. Assuming the goodwill method is applied, record Frank’s admission to the
partnership.
Answer:
($370,000 + $500,000)
Frank’s investment 270,000
Total book value of capital after the investment 1,140,000
Frank’s percentage ownership 0.25
Book value of Frank’s ownership percentage capital $ 285,000
$270,000 + goodwill = (.25)($1,140,000 + Goodwill)

.75 goodwill = $15,000
Goodwill = $20,000
Cash 270,000
Goodwill 20,000
Frank, capital 290,000

Clark and Nick are partners and they share profits and losses 75/25. They have capital
accounts balances of $250,000 and $380,000, respectively, when they agree to admit Ron
to the company. All parties have agreed that the partnership will first revalue tangible
assets to their market value ($200,000 above book value) and then Ron will invest
$170,000 for a 20 percent interest in the partnership’s owners’ equity. Record the
revaluation and Ron’s admission into the partnership assuming the goodwill method is
applied.
Answer:
Assets 200,000
Clark, capital ($200,000 x .75) 150,000
Nick, capital ($200,000 x .25) 50,000

($250,000 + $380,000 + $200,000)
Ron’s investment $ 170,000
Total book value of capital after the investment $1,000,000
Ron’s percentage ownership 0.20
Book value of Ron’s ownership percentage capital $ 200,000
$170,000 + goodwill = (.20)($1,000,000 + Goodwill)

.80 goodwill = $30,000
Goodwill = $37,500
Cash 170,000
Goodwill 37,500
Ron, capital 207,500

Sarah, Tanya, and Theresa are partners who share profits and losses 25 percent, 35
percent, and 40 percent, respectively. Theresa has decided to leave the partnership. The
fixed assets of the partnership are undervalued by $50,000. The capital accounts of
Sarah, Tanya, and Theresa before Theresa’s withdrawal are $82,000, $130,000, and
$156,000, respectively. The articles of partnership state that the withdrawing partner’s
share of any differences between market value and carrying value should be recognized
when a partner leaves the partnership. Record the journal entry for the revaluation of the
assets. Record also Theresa’s withdrawal assuming that Marsha purchases Theresa’s
equity.
Answer:
Assets ($50,000 x .40) 20,000
Theresa, capital ($50,000 x .40) 20,000
Theresa, capital ($156,000 + $20,000) 176,000

Marsha, capital 176,000

Sarah, Tanya, and Theresa are partners who share profits and losses 25 percent, 35
percent, and 40 percent, respectively. Theresa has decided to leave the partnership. The
fixed assets of the partnership are undervalued by $50,000. The capital accounts of
Sarah, Tanya, and Theresa before Theresa’s withdrawal are $82,000, $130,000, and
$156,000, respectively. The articles of partnership state that the full market value of all
assets and liabilities should be recognized when a partner leaves the partnership. Record
the journal entry for the revaluation of the assets. Record also Theresa’s withdrawal
assuming that Marsha purchases Theresa’s equity.
Answer:
Assets 50,000
Sarah, capital ($50,000 x .25) 12,500
Tanya, capital ($50,000 x .35) 17,500
Theresa, capital ($156,000 + $20,000) 176,000

Marsha, capital 176,000

Sam, Tim, and Tyrone are partners who share profits and losses 15 percent, 40 percent,
and 45 percent, respectively. Tyrone has decided to leave the partnership. The fixed
assets of the partnership are undervalued by $80,000. The partners’ capital account
balances before the withdrawal are $70,000, $190,000, and $250,000, respectively. The
articles of partnership state that the withdrawing partner’s share of any differences
between market value and carrying value should be recognized when a partner leaves the
partnership. Record the journal entry for the revaluation of the assets. Record the
withdrawal assuming that Sam purchases 30 percent and Tim purchase 70 percent of
Tyrone’s equity.
Answer:
Assets ($80,000 x .45) 36,000
Tyrone, capital 36,000
Tyrone, capital ($250,000 + $36,000) 286,000

Sam, capital ($286,000 x .30) 85,800
Tim, capital ($286,000 x .70) 200,200

Sam, Tim, and Tyrone are partners who share profits and losses 15 percent, 40 percent,
and 45 percent, respectively. Tyrone has decided to leave the partnership. The fixed
assets of the partnership are undervalued by $80,000. The partners’ capital account
balances before the withdrawal are $70,000, $190,000, and $250,000, respectively. The
articles of partnership state that the full market value of all assets and liabilities should be
recognized when a partner leaves the partnership. Record the journal entry for the
revaluation of the assets. Record the withdrawal assuming that Sam purchases 30 percent
and Tim purchase 70 percent of Tyrone’s equity.
Answer:
Assets 80,000
Sam, capital ($80,000 x .15) 12,000
Tim, capital ($80,000 x .40) 32,000
Tyrone, capital ($80,000 x .45) 36,000
Tyrone, capital ($250,000 + $36,000) 286,000

Sam, capital ($286,000 x .30) 85,800
Tim, capital ($286,000 x .70) 200,200

Don, Mark, and James are partners who share profits and losses 25 percent, 20 percent,
and 55 percent, respectively. Mark has decided to leave the partnership. The articles of
partnership state that the withdrawing partner’s share of any differences between market
value and carrying value should be recognized when a partner leaves the partnership.
The fixed assets of the partnership are undervalued by $75,000. The partners’ capital
account balances before the withdrawal are $90,000, $110,000, and $240,000,
respectively. Record the journal entry for the revaluation of the assets. Record the
withdrawal assuming that the partnership acquires Mark’s equity.
Answer:
Assets ($75,000 x .20) 15,000
Mark, capital 15,000
Mark, capital ($110,000 + $15,000) 125,000

Cash 125,000
Don, Mark, and James are partners who share profits and losses 25 percent, 20 percent,
and 55 percent, respectively. Mark has decided to leave the partnership. The articles of
partnership state that the full market value of all assets and liabilities should be
recognized when a partner leaves the partnership. The fixed assets of the partnership are
undervalued by $75,000. The partners’ capital account balances before the withdrawal
are $90,000, $110,000, and $240,000, respectively. Record the journal entry for the
revaluation of the assets. Record the withdrawal assuming that the partnership acquires
Mark’s equity.
Answer:
Assets 75,000
Don, capital ($75,000 x .25) 18,750
Mark, capital ($75,000 x .20) 15,000
James, capital ($75,000 x .55) 41,250
Mark, capital ($110,000 + $15,000) 125,000

Cash 125,000

Berry, Carl, and Phil have been partners for many years. Carl has indicated that he plans
to withdraw from the partnership. To prepare for his departure, the following
information is gathered:
Book Market
Value Value_
Current Assets 210,000 210,000
Fixed Assets 850,000 980,000
Total Assets 1,060,000
Current Liabilities 110,000 110,000
Long-term Debt 220,000 180,000
Berry, Capital (45%) 380,000
Carl, Capital (25%) 180,000
Phil, Capital (30%) 170,000
Total Liabilities and Partnership Equity 1,060,000
The partnership agreement specifies that the withdrawing partner’s portion of the change
in value of any assets and liabilities should be recognized at the date of withdrawal. The
partners agree that $300,000 of partnership assets will be used to purchase Carl’s
ownership equity. The assets are to be financed by borrowing the money on long-term
notes payable. Record these events assuming that the bonus method is used to recognize
the withdrawal.
Answer:
Fixed Assets ($980,000 - $850,000)(.25) 32,500
Long-term Debt ($220,000 - $180,000)(.25) 10,000
Carl, capital 42,500
Cash 300,000
Long-term Debt 300,000
Carl, capital ($180,000 + $42,500) 222,500

Berry, capital ($300,000 - $222,500)(45/75) 46,500
Phil, capital ($300,000 - $222,500)(30/75) 31,000
Cash 300,000

Barbara, Mitch, and Susan are partners with capital accounts of $280,000, $350,000, and
$420,000, respectively. Barbara has informed Mitch and Susan that she is withdrawing
Barbara’s ownership interest for $340,000. The profit and loss residual ratios before
Barbara’s retirement are 30 percent, 28 percent, and 42 percent, respectively. Assuming
the bonus method is applied, record Barbara’s withdrawal.
Answer
Barbara, capital 280,000
Mitch, capital ($340,000 - $280,000)(28/70) 24,000
Susan, capital ($340,000 - $280,000)(42/70) 36,000
Cash 340,000

Fred, Greg, and Sam are partners with capital accounts of $175,000, $225,000, and
$150,000, respectively. Sam informs Fred and Greg that is withdrawing from the
partnership. The partners agree that the partnership will purchase Sam’s ownership
interest for $200,000. The profit and loss residual ratios before Sam’s retirement are 45
percent, 35 percent, and 20 percent, respectively. Record Sam’s withdrawal assuming the
bonus method is applied.
Answer:
Sam, capital 150,000
Fred, capital ($200,000 - $150,000)(45/80) 28,125
Greg, capital ($200,000 - $150,000)(35/80) 21,875
Cash 200,000

Jack, Ken, and Laura are partners in a local company. Ken has announced his
withdrawal from the company. The articles of partnership indicate that the withdrawing
partner’s goodwill is to be recognized at the date of withdrawal. Jack, Ken, and Laura
share profits in a 30 percent, 25 percent, and 45 percent ratio, respectively, and their
respective capital accounts just prior to the withdrawal are $225,000, $260,000, and
$325,000, respectively. Estimated goodwill attributable to Ken’s ownership percentage is
$80,000. Prepare the journal entry (entries) necessary to reflect the withdrawal of Ken
assuming that Martin has been approved to become the new partner. Martin pays Ken
$380,000 for 100 percent of his partnership equity.
Answer:
Goodwill 80,000
Ken, capital 80,000
Ken, capital ($260,000 + $80,000) 340,000

Martin, capital 340,000

Doris, Elmer, and Fran are partners in a local company. Doris has announced her
withdrawal from the company. The articles of partnership indicate that the withdrawing
partner’s goodwill is to be recognized at the date of withdrawal. Doris, Elmer, and Fran
share profits in a 20 percent, 35 percent, and 45 percent ratio, respectively, and their
respective capital accounts just prior to the withdrawal are $120,000, $180,000, and
$275,000, respectively. Estimated goodwill attributable to Doris’ ownership percentage
is $50,000. Prepare the journal entry (entries) necessary to reflect the withdrawal of
Doris assuming that Greg has been approved to become the new partner. Greg pays
Doris $190,000 for 100 percent of her partnership equity.
Answer:
Goodwill 50,000
Doris, capital 50,000
Doris, capital ($120,000 + $50,000) 170,000

Greg, capital 170,000

Shawn, Teresa, and Mark are partners who share profits and losses 25 percent, 35
percent, and 40 percent, respectively. Mark announced his withdrawal from the company
when the partners’ capital accounts were $190,000, $238,000, and $210,000,
respectively. The articles of partnership indicate that the withdrawing partner’s goodwill
is to be recognized at the date of withdrawal. Estimated goodwill attributable to Mark’s
ownership percentage is $75,000. Prepare the journal entry (entries) necessary to reflect
the withdrawal of Mark assuming that Shawn and Teresa acquire Mark’s equity. Shawn
pays Mark $190,000 for 60 percent of Mark’s equity and Teresa pays $130,000 for 40
percent of Mark’s equity.
Answer:
Goodwill 75,000
Mark, capital 75,000
Mark, capital ($210,000 + $75,000) 285,000

Shawn, capital ($285,000 x .60) 171,000

David, Eric, and Glenn are partners who share profits and losses 35 percent, 40 percent,
and 25 percent, respectively. Eric announced his withdrawal from the company when the
partners’ capital accounts were $220,000, $200,000, and $280,000, respectively. The
articles of partnership indicate that the withdrawing partner’s goodwill is to be
recognized at the date of withdrawal. Estimated goodwill attributable to Eric’s
Eric’s withdrawal assuming that David and Glenn acquire Eric’s equity. David pays
$95,000 for 30 percent of Eric’s equity and Glenn pays $190,000 for 70 percent of Eric’s
equity.
Answer:
Goodwill 90,000
Eric, capital 90,000
Eric, capital ($200,000 + $90,000) 290,000

David, capital ($290,000 x .30) 87,000
Glenn, capital ($290,000 x .70) 203,000

Rich, Sam, and Clarence are partners who share profits and losses 15 percent, 45 percent,
and 40 percent, respectively. Sam announced his withdrawal from the company when
the partners’ capital accounts were $90,000, $210,000, and $190,000, respectively. The
recognized at the date of withdrawal. Estimated goodwill attributable to Sam’s
Sam’s withdrawal assuming that the partnership acquires Sam’s equity.
Answer:
Goodwill 60,000
Sam, capital 60,000
Sam, capital ($210,000 + $60,000) 270,000

Cash 270,000

Hal, Norris, and Eddie are partners who share profits and losses 25 percent, 15 percent,
and 60 percent, respectively. Hal announced his withdrawal from the company when the
recognized at the date of withdrawal. Estimated goodwill attributable to Hal’s ownership
percentage is $30,000. Prepare the journal entry (entries) necessary to reflect Hal’s
withdrawal assuming that the partnership acquires Hal’s equity.
Answer:
Goodwill 30,000
Hal, capital 30,000
Hal, capital ($120,000 + $30,000) 150,000

Cash 150,000

James, Kris, and Lance are partners in a local company. Kris has announced her
withdrawal from the company. The articles of partnership indicate that the entire
partnership’s goodwill is to be recognized at the date of withdrawal. James, Kris, and
Lance share profits in a 30 percent, 25 percent, and 45 percent ratio, respectively, and
their respective capital accounts just prior to the withdrawal are $160,000, $120,000, and
$225,000, respectively. Estimated goodwill is $180,000. Prepare the journal entry
(entries) necessary to reflect the withdrawal of Kris assuming that Felix has been
approved to become the new partner. Felix pays Kris $175,000 for 100 percent of her
partnership equity.
Answer:
Goodwill 180,000
James, capital ($180,000 x .30) 54,000
Kris, capital ($180,000 x .25) 45,000
Lance, capital ($180,000 x .45) 81,000
Kris, capital ($120,000 + $45,000) 165,000

Felix, capital 165,000

Nicole, Melvin, and Joshua are partners in a local company. Melvin has announced his
withdrawal from the company. The articles of partnership indicate that the entire
partnership’s goodwill is to be recognized at the date of withdrawal. Nicole, Melvin, and
Joshua share profits in a 40 percent, 25 percent, and 35 percent ratio, respectively, and
their respective capital accounts just prior to the withdrawal are $200,000, $150,000, and
$190,000, respectively. Estimated goodwill is $120,000. Prepare the journal entry
(entries) necessary to reflect the withdrawal of Melvin assuming that Hans has been
approved to become the new partner. Hans pays Melvin $160,000 for 100 percent of his
partnership equity.
Answer:
Goodwill 120,000
Nicole, capital ($120,000 x .40) 48,000
Melvin, capital ($120,000 x .25) 30,000
Joshua, capital ($120,000 x .35) 42,000
Melvin, capital ($150,000 + $30,000) 180,000

Hans, capital 180,000

Kim, Jennifer, and David are partners who share profits and losses 40 percent, 25
percent, and 35 percent, respectively. Kim announced her withdrawal from the company
when the partners’ capital accounts were $250,000, $180,000, and $210,000,
respectively. The articles of partnership indicate that the entire partnership’s goodwill is
to be recognized at the date of withdrawal. Estimated goodwill is $95,000. Prepare the
journal entry (entries) necessary to reflect Kim’s withdrawal assuming that Jennifer and
David acquire Kim’s equity. Jennifer pays Kim $180,000 for 60 percent of her equity
and David pays $130,000 for 40 percent of Kim’s equity.
Answer:
Goodwill 95,000
Kim, capital ($95,000 x .40) 38,000
Jennifer, capital ($95,000 x .25) 23,750
David, capital ($95,000 x .35) 33,250
Kim, capital ($250,000 + $38,000) 288,000

Jennifer, capital ($288,000 x .60) 172,800
David, capital ($288,000 x .40) 115,200

Natalie, Oscar, and Paul are partners who share profits and losses 30 percent, 25 percent,
and 45 percent, respectively. Paul announced his withdrawal from the company when
articles of partnership indicate that the entire partnership’s goodwill is to be recognized at
the date of withdrawal. Estimated goodwill is $110,000. Prepare the journal entry
(entries) necessary to reflect Paul’s withdrawal assuming that Natalie and Oscar acquire
Paul’s equity. Natalie pays Paul $140,000 for 30 percent of his equity and Oscar pays
$310,000 for 70 percent of Paul’s equity.
Answer:
Goodwill 110,000
Natalie, capital ($110,000 x .30) 33,000
Oscar, capital ($110,000 x .25) 27,500
Paul, capital ($110,000 x .45) 49,500
Paul, capital ($320,000 + $49,500) 369,500

Natalie, capital ($369,500 x .30) 110,850
Oscar, capital ($369,500 x .70) 258,650

Cindy, Tony, and Ben are partners who share profits and losses 25 percent, 55 percent,
and 20 percent, respectively. Ben announced his withdrawal from the company when the
(entries) necessary to reflect Ben’s withdrawal assuming that the partnership acquires
Ben’s equity.
Answer:
Goodwill 40,000
Cindy, capital ($40,000 x .25) 10,000
Tony, capital ($40,000 x .55) 22,000
Ben, capital ($40,000 x .20) 8,000
Ben, capital ($100,000 + $8,000) 108,000

Cash 108,000
Mary, Nick, and Shawn are partners who share profits and losses 15 percent, 25 percent,
and 60 percent, respectively. Mary announced her withdrawal from the company when
(entries) necessary to reflect Mary’s withdrawal assuming that the partnership acquires
Mary’s equity.
Answer:
Goodwill 50,000
Mary, capital ($50,000 x .15) 7,500
Nick, capital ($50,000 x .25) 12,500
Shawn, capital ($50,000 x .60) 30,000
Mary, capital ($80,000 + $7,500) 87,500

Cash 87,500
Short Answer Questions

333. Helen and Richard are considering forming a partnership. They have worked out many
of the issues but they are unsure about how the accounting records have to be maintained.
They come to you for information pertaining to the application of GAAP for partnership
records.
Answer: Partnerships are not required to comply with generally accepted accounting
principles (GAAP) unless the entity has publicly traded debt securities or the entity is
required to comply with GAAP by a creditor.
334. What are the similarities and differences among proprietorships, partnerships, and
corporations with regard income tax filing.
Answer: Partnerships and proprietorships are viewed as an extension of the owners.

Neither entity is separately taxed on income. The taxable income or loss is allocated to
the owners according to the partners’ profit and loss sharing agreement. Once a partner’s
taxable partnership income is determined, the income is included on the partner’s
individual tax return. The partnership is required to file an informational tax return
(Form 1065) to disclose how the taxable income has been allocated to the partners. The
corporation, on the other hand, is a taxable entity and income tax is paid on the
corporation’s taxable income.
335. Three individuals are considering forming a business together. One of their concerns is
the liability exposure from the business. Prepare a short note to these individuals
explaining the extent of liability each has when forming a partnership and a corporation.
Answer: A partner may bind the partnership by contract when conducting business in the
name of the partnership. This results in each partner being liable for the partnership
business dealings of the other partners. In addition, partners have unlimited liability with
regard to partnership debts. On the other hand, stockholders of a corporation do not
share such legal liability. The corporation is a legal entity separate from the owners and
management can commit the corporation to legal contracts in the name of the
corporation, but not the stockholders. Thus, management of the corporation can sue in
the name of the corporation and the corporation can be sued. As a result, the
stockholders are generally not liable for the debts of the corporation beyond the amount
invested.
336. Alex is the owner of a small local business. He has operated as a proprietorship for many
years but his health is starting to fail. As a result, Alex is going to reduce the number of
hours worked in the business. He has asked you to explain how changing his business to
a partnership would affect him (legally). Prepare a brief memo outlining the similarity
and differences between a proprietorship and a partnership with regard to legal issues.
Answer: Similarities to be discussed include (1) ease of formation and (2) unlimited
owner’s liability. Difference to be discussed is shared management.
337. Compare and contrast the proprietary theory of equity and the entity theory of equity
with regard to partnerships.
Answer: The proprietary theory is based on the notion that the business entity is an
extension of the owners. The entity theory is based on the notion that the business entity
is distinct and separate from the owners. Partnerships contain elements of both the
proprietary and entity theories. Support for the proprietary theory can be found in the
following:
Individual partners are liable for all debts of the partnership
Salaries of partners are viewed as distributions of income, not components of net
income
The admission of a new partner or withdrawal of an existing partner results in the
dissolution of the partnership
Assets contributed to the partnership retain the existing tax basis to the partner
contributing
A partner’s income tax includes the partner’s share of partnership net income, and
the partnership does not pay income taxes
Support for the entity theory can be found in the following:

Assets contributed to the partnership become property of the partnership
A partnership can enter into contracts
Partners do not have claims to specific assets
Partnership creditors have priority claim to partnership assets and the creditors of
partners have priority claim to partner’s assets in the event of liquidation
Continuity of the partnership when admission or withdrawal of partners occurs
338. Partnership accounting applies elements of both the proprietary and entity theories.
Explain the underlying theoretical basis for the proprietary theory and the entity theory.
Answer: The proprietary theory is based on the notion that the business entity is an
extension of the owners. The entity theory is based on the notion that the business entity
is distinct and separate from the owners.
339. Hans and Felix are attempting to work out the final issues for forming a partnership.
They are currently debating the values to assign to noncash assets contributed to the
partnership by each partner. Hans believe that the market value has to be assigned to
these assets while Felix believes there may be other alternatives. Prepare a short note to
the two potential partners clarifying this issue.
Answer: The three most likely valuations that can be assigned to noncash assets are the 1)
contributor’s carrying value, 2) contributor’s tax basis, or 3) market or appraised value of
the asset. The amount to be assigned to the noncash assets can be determined by
agreement among the partners or by appraisal (if market values are used).
340. Berry and Charlie plan to start a partnership. One partner is contributing an old building
while the other partner is contributing several delivery trucks. Both partners are also
contributing cash. A difference of opinion exists regarding the amount at which the
building and delivery trucks are to be placed on the partnership’s books. Berry believes
the carrying values should be recorded. Charlie objects because it would give Berry too
great a share of the partnership’s owners’ equity. Charlie believes the tax basis should be
used. Berry objects to the tax basis for the same reason Charlie objects to the book basis.
The partners ask for your opinion. How do you respond?
Answer: The amounts recorded on the partnership’s books do not determine the amounts
assigned to each individual capital account. The amount recorded for the assets will help
determine total capital, not how total capital is divided between the partners.
341. Explain how the assumption of a liability by the partnership on an asset contributed by a
partner impacts the contributing partner’s capital account and tax basis in that asset.
Answer: Generally the value assigned to the asset (e.g., carrying value, tax basis, market
value) is explicitly reduced by the amount of the liability assumed to determine the
contributing partner’s capital account balance. The reduction may be implicit if partners
agree to create capital accounts in equal amounts through such techniques as the
recognition of goodwill for other partners. The tax basis of a contributing partner is only
reduced by the part of the liability assumed by the partnership because the IRS interprets
this event as all partners sharing the obligation so the contributing partner is still
obligated for part of the liability.
342. Clark, Mitchell, and Thomas are forming a partnership. Each partner is contributing cash
and other tangible assets. In addition, Clark has a significant amount of experience in
operating the type of business being created. The partners do not like the idea of
recording goodwill but they are not sure how to otherwise recognize the additional
contribution Clark is making. Prepare a brief memo explaining a different way to
recognize Clark’s contribution.
Answer: The initial capital accounts can be modified to reflect Clark’s additional
contribution. Mitchell and Thomas would give up an agreed amount of capital to be
assigned to Clark. This approach is called the bonus method. Mitchell and Thomas are
giving a bonus to Clark because of the additional contribution that cannot be measured in
a traditional manner.
343. James and Rachel are forming a partnership. They agree on the values to assign to all of
the assets and liabilities. The partners also want to recognize that Rachel has many
contacts that will be of value to the business. A mutual friend who owns a business has
told them the bank will be unhappy with their balance sheet if they record goodwill for
Rachel. How else can they recognize Rachel’s contacts?
Answer: The bonus method can be used instead of the goodwill method. The bonus
method reallocates capital from James to Rachel to recognize the contribution made by
Rachel in excess of the identifiable assets. As a result, James will have a reduced capital
account balance and Rachel will have a greater balance.
344. Barry, George, and Felix are forming a partnership. Each partner is contributing cash
and other tangible assets. George and Felix are contributing greater amounts of cash and
other tangible assets but Barry has a significant amount of experience in operating the
type of business being created. A mutual friend has suggested that the three make their
initial capital accounts equal in value. George and Felix do not like the idea of recording
their capital accounts at an amount less than the market value of what they are
contributing but they are not sure how to otherwise recognize the additional contribution
Barry is making. Prepare a brief memo explaining a different way to recognize Barry’s
contribution.
Answer: The additional contribution being made by Barry could be recorded as goodwill.
This intangible asset would be created at an amount agreed by the partners. Goodwill
results in an increase in the value of Barry’s capital account but it does not result in a
decrease in the value of the other partners’ capital accounts.
345. Explain how partners may determine the dollar amount of goodwill recognized at the
date a partnership is formed.
Answer: The value assigned to goodwill can be determined in any legal manner
agreeable to the partners. One possibility is to have an independent appraisal of the
intangible asset contributed. Another possibility is for the partners to agree on an
assigned value of the intangible asset.
346. Explain how a drawing account used by a partnership is similar in concept to a dividend
account used by a corporation.
Answer: Both accounts contain information pertaining to distributions to owners. These

distributions can take any form such as cash, inventory, and other assets. Both accounts
are temporary in nature. They do not exist on the company’s balance sheet and they are
closed at the end of the accounting period to permanent equity accounts (partnership
capital accounts for drawing accounts and retained earnings for dividends).
347. Vicky, Robert, and Ray are forming a partnership. They have asked for some
information regarding the allocation of profits and losses among the partners. While they
believe that each partner will contribute significantly to the partnership, this contribution
will take different forms. They are unsure how to recognize these different types of
contributions. Prepare a short note explaining the different components that might be
considered when allocating partnership profits to individual partners.
Answer: Partnership profits and losses can be allocated in any manner but there are four
common components: interest on capital balance, salary, bonus, and residual percentages.
These different components reward partners for contributions of economic resources,
labor and expertise, taking on special responsibilities, and agreed allocation of any
residual profit or loss remaining after the other components have been considered.
348. Susan is joining an already existing partnership. She is reading the profit and loss
sharing part of the partnership agreement. She calls you with a question regarding a term
she does not understand, weighted average capital balance. Prepare a short note
explaining what is meant by this term.
Answer: The weighted average capital balance is the calculated average dollar amount in
the capital account after considering the length of time that balance existed. This method
of computing the average is less subject to manipulation that the simple average, which is
beginning amount plus ending amount divided by two.
349. Ben is a new partner in a local company. When he became a partner, he received a copy
of the partnership agreement including the profit and loss sharing agreement. Ben is
concerned about the interest on capital balance portion of the profit and loss sharing
agreement because his capital account is very small. Prepare a short note explaining the
reason this component of profit and loss allocation exists.
Answer: The interest on capital balance is meant to reward partners for contributions of
economic resources. As a new partner, a small capital account will likely exist and
therefore this component of the profit allocation will be small. As the capital account
grows through additional investment and profit accumulation, this component of the
profit and loss allocation will also grow.
350. Michelle is a new partner is considering becoming a partner in a small company. She
obtained a copy of the most recent income statement and is surprised when she does not
find salaries on the income statement. She asks you if it is unusual for partners to not
receive a salary from their work in the partnership.
Answer: The lack of salary expense on the income statement does not mean that the
partners do not receive a salary. Partner salaries are not on the income statement, they
are part of the profit allocation.
351. Are there any differences between bonuses offered to partners and bonuses offered to
managers in corporations?
Answer: Bonuses offered to partners and bonuses offered to managers in corporations

are the same. Both are forms of compensations designed to encourage performance.
Furthermore, both should be based on criteria within the control of the person who will
receive the bonus.
352. Ben and Natalie are forming a partnership. They have worked out many of the details
but they are confused about how to divide profits and losses. They have spoken with
several associates who are in different partnership and there seems to be some
inconsistencies. Some partnerships have residual profit and loss ratios while others do
not. Prepare a note to Ben and Natalie informing them of the reason for this
inconsistency.
Answer: Residual profit and loss ratios are not needed if the ratios are to be equal. The
default profit and loss ratio, if not stated, is that all partners will share the residual profit
and loss equally. If the desire is to share the residual amount of profit or loss in some
other proportion, the allocation must be disclosed.
353. Do partnership residual profit ratios have to be the same as partnership residual loss
ratios? Why or why not.
Answer: Residual profit and loss ratios are part of a contractual agreement among the
partners. As a result, the partnership can apply any ratios agreed by the partners. The
ratios are typically the same for profits and losses but they can differ.
354. Alex, Shawn, and Tammy are partners in a local company. They have been conducting
business for a number of years and Shawn recently told the partners that he is going to
reduce his activities in the partnership. As a result, the partners have agreed that the
profit and loss sharing arrangement should be modified. They have agreed to adjust the
salaries and the profit and loss residuals. They come to you with a concern regarding the
assets that are currently owned by the partnership. The partners know that the assets are
worth more than the amount recorded on the financial records but they do not know how
this should be considered when the profit and loss ratios are changed. Prepare a short
note to the partners outlining the their options.
Answer: The difference between the market and book values of assets that exist when the
profit and loss ratios change can be addressed in several ways. One way is to make a list
of these assets and their market value at the date of the change. When the assets are sold,
the amount of the gain that existed when the profit and loss ratios were changed would be
allocated based on the previous profit and loss ratios and any change in market value that
occurs after the ratios are changed would be allocated based on the new ratios. Another
approach is to revalue the assets at the date the profit and loss ratios are changed. The
gain would be allocated based on the previous ratios. A third approach is to determine
the impact of the unrealized gains on the capital accounts due to the change in the ratios
and directly adjust the capital accounts. The gain on the assets at the date of sale would
then be allocated based on the new ratios. All three approaches give the same end result,
the choice is a matter of preference by the partners.
355. Partners sometimes change the profit and loss ratios used to determine the allocation of
profits and losses. When this occurs, why would the partners choose to prepare a list of
assets with market values different from book values when they could have chosen to
revalue the assets to market value at the date the profit and loss ratios were changed?
Answer: Some partners and possibly their creditors may not want to have the assets
revalued to market value. The revaluation is a significant departure from GAAP and the
partners and their creditors may prefer to have the partnership’s financial records
maintained in accord with GAAP.
356. Sarah, a friend who knows you are a CPA comes to you with a concern. She has been
asked by a colleague to consider becoming a partner in a small company. She will be the
fourth partner in the company. Sarah has had two meetings with the current partners.
She is concerned that one of the current partners who does not know her has been asking
a variety of questions pertaining to her business practices beliefs and her personal ethics.
Sarah asks if you have any idea why this partner would ask such questions. How do you
respond?
Answer: The current partner may be concerned because the existing partners will have
unlimited liability for the actions of the new partner. Given that this partner does not
know Sarah, he/she is gathering information so a choice can be made about accepting
such risk.
357. Don and Jerry are partners in a publishing company. Don is interested in reducing his
involvement in the company and they have been searching for a new partner to take on
some of the work. They learn that Ted is interested in joining the partnership and they
enter into negotiations. Don is willing to support Ted joining the partnership if Ted will
pay Don $250,000. Don will not transfer any of his equity to Ted but will allocate 30
percent of his profit allocation to Ted. Ted comes to you with a concern about Don’s
unwillingness to allocate any equity to him even though a significant investment is
required. How do you respond?
Answer: There is no requirement for a partner to give up equity to a new partner

acquiring part of his ownership. Ted’s is purchasing an ownership in the income stream
of the partnership. His capital account would start at $0 an increase as the partnership
has income.
358. Sally, Robert, and Stuart are partners in a manufacturing company. They are considering
allowing Dick to acquire an ownership interest in the partnership by purchasing part of
Stuart’s equity. Dick is interested in purchasing 40 percent of Stuart’s equity. Dick
comes to you with a question just before a negotiating session with the current partners.
He asks if his ownership in Stuart’s equity gives him the right to 40 percent of Stuart’s
profit allocation or if that is a separate issue. How do you respond?
Answer: A purchase of Stuart’s equity is a separate issue from the allocation of profits
and losses. These two items have to be negotiated simultaneously but they are
independent. Dick has to be comfortable with the outcome on both issues if he is going
to acquire a part ownership in the partnership.
359. Fred is negotiating an investment to join a partnership. The existing partners are asking
for an investment of $80,000 for a 20 percent ownership in the partnership’s equity. Fred
is encouraged by this proposal but then he learns that the partners plan to revalue the
assets before Fred’s admission. Fred does not understand the reason for the revaluations.
Prepare a note to Fred explaining why the existing partners want to revalue the assets
before he is admitted.
Answer: The partners believe that the difference between market value and book value of
existing assets belong to them because they have been the partners during the time period
when the assets value increased. As a result, they intend to have the unrealized increase
in value added to their capital accounts so that it will not be shared with the new partner.
Any changes in value after Fred becomes a member of the partnership will be allocated
to all of the partners, including Fred.
360. Why are some people opposed to the revaluation of partnership assets when a new
partner is admitted to the partnership?
Answer: These individuals contend that the partnership is still in operation and there
should be no change in the values assigned to assets and liabilities while the partnership
is in operation. There has not been a change in ownership so there is no transaction to
justify the revaluation.
361. You are a staff accountant for a local company. The partners of a client are discussing
the admission of a new partner. Some partners believe that the partnership’s assets
should be revalued before admission of the new partner while other partners are opposed
to the revaluation. Prepare a short note explaining why it may be appropriate to revalue
the partnership’s assets at this time.
Answer: The change in value of the assets has occurred over time and the partners during
that time should share in the increase in value. The new partner should have no claim to
increases in value before that partner’s investment in the company. In addition, when the
new partner joins the company, there is a new legal entity so recording the assets at the
market value at that date is not inappropriate.
362. Sam and Mark are discussing bringing Susan into the partnership. Susan understands
that the partnership’s assets will be revalued before her admission but she does not
understand why she should invest more in the partnership than her share of the market
value of the partnership’s assets. Prepare a short note to Susan explaining the reason that
it may require a greater investment to become a member of this partnership.
Answer: Revaluing the partnership’s assets does not recognize the goodwill that exists in
the company. The partners have chosen to not record goodwill on the company’s balance
sheet but goodwill still exists. The amount that Susan is investing in excess of the capital
account created represents her investment in the goodwill that already exists in the
company. She is paying a bonus to the existing partners for allowing her to share in the
goodwill of the partnership.
363. Steve is negotiating with the partners in a local business. He would like to become a new
partner in the business but there are several issues he does not understand. One of the
primary issues pertains to the amount of his capital account at the date of investment.
The partners told Steve that he would have to invest $100,000 to join the business but his
capital account would be created for $85,000. Prepare a short note to Steve explaining
why his capital account would be recognized at an amount less than his investment.
Answer: The partnership has an unidentified asset (goodwill) that has value to the
company. The partners have chosen to not record goodwill on the company’s balance
sheet but goodwill still exists. The amount that Steve is investing in excess of the capital
account created represents his investment in the goodwill that already exists in the
company. He is paying a bonus to the existing partners for allowing him to share in the
goodwill of the partnership.
364. Jim and Fred have decided to admit Richard into their partnership. Jim and Fred know
that they are going to apply something called the bonus method to record the admission
of Richard into the partnership but they do not understand the technical accounting part
of the transaction. As a result, they do not understand why Richard’s capital account will
be created at an amount greater than the amount of his investment in the partnership.
Prepare a short note to Jim and Fred explaining the reason that Richard’s capital account
is created for this amount.
Answer: The parties have agreed that Richard is going to receive a certain percentage of
the partnership’s equity at the date of the investment. They have also agreed on the
amount that Richard will invest. When the investment takes place, the bonus method
required Richard’s capital account to be created at the agreed percentage of the total
capital after the investment. This amount may be less than, equal to, or more than the
amount invested. If it is less than or more than the amount of the investment, the capital
accounts of the existing partners is adjusted to make up for the difference.
365. John and Joel are negotiating with a potential partner to join their local business. They
would like Laura to become a new partner in the business but there are several issues
they do not understand. One of the primary issues pertains to the amount of his capital
account at the date of investment. The partners agreed that Laura would have to invest
$75,000 to join the business and they agree that he is going to have a 30% equity interest
in the partnership. What they did not realize is that their capital accounts were going to
decrease when Laura joined the partnership. Prepare a short note to John and Joel
explaining why their capital accounts would be reduced when Laura joins the company.
Answer: The partners have agreed that Laura is contributing something to the partnership
in addition to the tangible assets. They have also agreed on the value of this contribution
when they established the interest she would have in the partnership’s total capital.
When the bonus method is applied, the total capital (based on the existing partners’
capital plus the investment) is allocated to the new and existing partners in the agreed
manner. If the new partner is receiving an equity interest more or less than the amount
invested, the existing partners’ capital accounts must be adjusted. In this instance, the
capital account of the new partner is greater than the amount invested so the existing
partners’ capital accounts must be reduced.
366. Shawn is currently in discussion with Ted and Mark regarding his joining their
partnership. Initial discussions resulted in an agreement that Shawn would contribute
$50,000 for a 20 percent equity interest in the partnership. The last discussion was about
how the transaction would be disclosed in the partnership’s financial statements. Shawn
noticed that the Ted and Mark’s capital accounts were greater in the pro forma balance
sheet and that goodwill had been added to the balance sheet. Shawn asks for an
explanation of this change. You are the accountant attending the meetings, how do you
respond?
Answer: The partnership agreement indicates that the goodwill method is to be applied
when new partners join the company. In this instance, Shawn is contributing more than
his share of the book value of the company. This implies that there exists goodwill in the
company. The goodwill is recorded and allocated to Ted and Mark because they were the
partners when the goodwill was developed. As a result, Shawn’s $50,000 investment will
exactly equal his share of the partnership’s book value after the goodwill is recorded.
367. You are conducting training for new loan officers of a bank. The topic of the day is
partnerships and their changes in ownership. The bank often receives loan requests when
partnerships are expanding. At the same time, the partnership may also be adding a new
partner to increase the company’s capital and improving its potential for a loan from the
bank. You hand out several partnership balance sheets before and after a new partner has
joined. One loan officer asks about the reason for a change in existing partner capital
accounts and the addition of goodwill to the balance sheet. How do you respond?
Answer: Partnerships are permitted to record goodwill when a new partner joins the
company. Estimated goodwill is determined by evaluating the new partner’s investment
and that partner’s share of the partnership’s total equity after the investment. If the
investment results in the new partner receiving less than his/her share of the partnership’s
equity, goodwill is said to exist in the current partners. As a result, this goodwill is
recorded and allocated to the current partners.
368. Three investors have asked for your assistance in planning the formation of a partnership.
After about two hours of discussion the group arrives at the topic of how to admit
additional partners in the future or retire existing partners. You explain that there are two
methods that can be used to account for these events: the bonus method and the goodwill
method. One of the partners listens to the explanation of the two methods and then asks
for you to summarize the criteria that may be used to determine which method this
partnership wants to use. Prepare a response to the partner’s request.
Answer: The difference that exists when comparing the bonus method and the goodwill
method is whether the partners wish to recognize goodwill on the balance sheet. The
goodwill method will result in greater total assets than the bonus method but the
relationship that exists among the partners will be the same regardless of the method
applied.
369. Why would partners in an existing partnership agree to allocate an equity interest to a
new partner that is greater than the value of the identifiable net assets contributed by the
new partner?
Answer: The existing partners would be willing to allocate a capital account to a new
partner greater than the value of the identifiable new assets contributed because the new
partner is contributing unidentifiable assets to the partnership. These other assets may
include business expertise, a good reputation, or existing customers. The additional
assets contributed to the partnership result in the new partner having goodwill.
370. You are an analyst for a local bank. A question just arrived in your email from a new
loan officer. The loan officer is reviewing information from a small partnership
requesting a loan. The partnership indicates that one of the partners is withdrawing from
the partnership. The remaining partners send a current balance sheet and a pro forma
balance sheet after the withdrawal. The loan officer is confused because the withdrawing
partner’s capital account is deleted and all of the other partners’ capital accounts have
been reduced. Why might all of the other partners’ capital accounts be reduced?
Answer: There are two reasons why the remaining partners’ capital accounts could be
reduced. First, the partnership may have revalued assets to their market value. If the
market value were less than book value, the capital accounts would be reduced. The
second, and more likely, reason is that the remaining partners are going to pay a bonus to
the withdrawing partner. As a result, each of the remaining partners’ capital accounts
will be reduced by his/her proportion of the bonus paid.
371. Jennifer is confused with regard to the recognition of the withdrawal of a partner from
the company. The partnership agreement indicates that they will apply the bonus method
to recognize the withdrawal and that any bonus will be shared by the remaining partners
based on their profit and loss ratio. Jennifer was surprised when she is assigned 40
percent of the bonus paid even though she only has a 35 percent ownership interest in the
partnership. How do you respond?
Answer: The remaining partners, based on their profit and loss residual ratios, absorb the
bonus paid to the withdrawing partner. As a result, Jennifer’s 35 percent ownership
became 40 percent of the remaining equity after the existing partner was removed from
consideration.

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PRACTICAL ACCOUNTING 2

THEORY & PRACTICE

//. Partnership Formation and Capital Accounts

///.Division of Profits and Losses

Partnership Formation & Admission of a Partner - Lecture Page 3

a. Bonus as an "expense" in computing the bonus amount. Here, bonus is computed

Partnership Formation & Admission of a Partner Page 4

Partnership Formation & Admission of a Partner - Lecture Page 5

3. Which of the following statements is correct with respect to a limited partnership?

4. An advantage of the partnership as a form of business organization would be

6. Partnership capital and drawings accounts are similar to the corporate

Partnership Formation & Admission of a Partner MCQ Theoy Page 6

Profit Loss Profit Loss

10. Which of the following is not considered a legitimate expense of a partnership?

Partnership Formation & Admission of a Partner MCQ Theory Page 7

13. Which of the following results in dissolution of a partnership?

16. If goodwill is traceable to the previous partners, it is

Partnership Formation & Admission of a Partner MCQ Theoy Page 8

a. Partnership drawings, partnership liabilities, partnership loans, partnership capital

19. The doctrine of marshaling of assets

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Accounts Payable P135,000 P240,000

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Cash, noncash contribution

Questions 1 & 2 are based on the following: Dayag 2013

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The capital balances upon formation are:

Cash, noncash contribution, assumption of debt

Partner with biggest capital balance

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The net (debit) credit adjustment to partner's capital accounts are:

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Partner's adjusted capital balances

The following adjustments were agreed upon:

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What will be the capital balances of the partners after adjustments?

Accounts payable 178,940 243,6050

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Questions 1 thru 3 are based on the following: Dayag 2013

Accounts payable P 45,750 P18,000

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Compute the net (debit) credit adjustment for PP and QQ:

Questions 1 & 2 are based on the following: Dayag 2013

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Questions 1 & 2 are based on the following: Punzalan 2014

61. Under the bonus method, what is the amount of bonus?

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Realized gains of old partners

Partner's balance after admission of new partner

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Cash P85,000 Liabilities P80,000

Cash P 60,000 Liabilities PI00,000

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II JJ_

FF GG_

GG, Capital ………………………………...................... ___ 495,000

__AA _ _ BB__