TBChap 012

Chapter 12
Accounting for Partnerships
True / False Questions
1. A partnership has a limited life.
True False
2. A partnership is an incorporated association of two or more people to pursue a business for profit as co-
owners.
True False
3. Mutual agency means each partner can commit or bind the partnership to any contract within the scope of
the partnership business.
True False
4. Accounting procedures for both C corporations and S corporations are the same in all aspects.
True False
5. Partners in a partnership are taxed on the partnership income, not the amounts they withdraw from the
partnership.
True False
6. Limited liability partnerships are designed to protect innocent partners from malpractice or negligence
claims resulting from the acts of another partner.
True False
7. A partnership may allocate salary allowances to the partners reflecting the relative value of services
provided.
True False
8. In a limited partnership the general partner has unlimited liability.
True False
9. Partner return on equity can be used by each partner to help decide whether additional investment or
withdrawal of resources is best for that partner.
True False
12-1
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10. Feldt is a partner in Feldt & Dodson Company. Feldt's share of the partnership income is $18,600 and her
average partnership equity is $155,000. Her partner return on equity equals 8.33.
True False
11. When partners invest in a partnership, their capital accounts are debited for the amount invested.
True False
12. Partners' withdrawals are debited to their separate withdrawals accounts.
True False
13. Partners can invest assets but not liabilities into a partnership.
True False
14. The withdrawals account of each partner is closed to retained earnings at the end of the accounting period.
True False
15. In closing the accounts at the end of a period, the partners' capital accounts are credited for their share of
the partnership net income or debited for their share of the partnership loss.
True False
16. In the absence of a partnership agreement, the law says that income of a partnership will be shared equally
by the partners.
True False
17. Salary allowances are reported as salaries expense on a partnership income statement.
True False
18. The statement of changes in partners' equity shows the beginning balance in retained earnings, plus
investments, less withdrawals, plus the income (or less the loss) and the ending balance in retained
earnings.
True False
19. The equity section of the balance sheet of a partnership can report the separate capital account balances of
each partner.
True False
20. Even if partners devote their time and services to their partnership, their salaries are not expenses on the
income statement.
True False
21. If the partners agree on a formula to share income and say nothing about losses, then the losses are shared
using the same formula.
True False
12-2
22. Assume that the M & L partnership agreement gave March 60% and Ludwig 40% of partnership income
and losses. The partnership lost $27,000 in the current period. This implies that March's share of the loss
equals $16,200, and Ludwig's share equals $10,800.
True False
23. When a partner leaves a partnership, the present partnership ends.
True False
24. To buy into an existing partnership, the new partner must contribute cash to the partnership.
True False
25. When a partner leaves a partnership, the present partnership ends, but the business can still continue to
operate.
True False
26. Assets invested by a partner into a partnership become the property of the business.
True False
27. Admitting a partner by accepting assets is a personal transaction between one or more current partners and
the new partner.
True False
28. Current partners usually require any new partner to pay a bonus for the privilege of joining when the
current value of a partnership is greater than the recorded amounts of equity.
True False
29. When a partner leaves a partnership, the withdrawing partner is entitled to a bonus if the recorded equity is
overstated.
True False
30. When a partnership is liquidated, its business is ended.
True False
31. A capital deficiency exists when at least one partner has a debit balance in his or her capital account at the
point of final cash distribution during liquidation.
True False
32. A capital deficiency can arise from liquidation losses, excessive withdrawals before liquidation, or
recurring losses in prior periods.
True False
33. If a partner is unable to cover a deficiency and the other partners absorb the deficiency, then the partner
with the deficiency is thus relieved of all liability.
True False
12-3
34. If at the time of partnership liquidation, a partner has a $5,000 capital deficiency and pays the partnership
$5,000 out of personal assets to cover the deficiency, then that partner is entitled to share in the final
distribution of cash.
True False
Multiple Choice Questions
35. An unincorporated association of two or more persons to pursue a business for profit as co-owners is a:
A. Partnership.
B. Proprietorship.
C. Contractual company.
D. Mutual agency.
E. Voluntary organization.
36. Advantages of a partnership include:
A. Limited
life.
B. Mutual agency.
C. Unlimited liability.
D. Co-ownership of property.
E. Voluntary association.
37. A partnership agreement:
A. Is not binding unless it is in writing.

B. Is the same as a limited liability partnership.
C. Is binding even if it is not in writing.
D. Does not generally address the issue of the rights and duties of the partners.
E. Is also called the articles of incorporation.
38. Mutual agency means
A. Creditors can apply their claims to partners' personal assets.

B. Partners are taxed on partnership withdrawals.
C. All partners must agree before the partnership can act.
D. The partnership has a limited life.
E. A partner can commit or bind the partnership in any contract within the scope of the partnership
business.
12-4
39. A partnership that has two classes of partners, general and limited, where the limited partners have no
personal liability beyond the amounts they invest in the partnership, and no active role in the partnership,
except as specified in the partnership agreement is a:
A. Mutual agency partnership.

B. Limited partnership.
C. Limited liability partnership.
D. General partnership.
E. Limited liability company.
40. A partnership designed to protect innocent partners from malpractice or negligence claims resulting from
acts of another partner is a(n):
A. Partnership.
E. Unlimited liability company.
41. Mutual agency implies that each partner in a partnership is a fully authorized agent of the partnership.
Which of the following statements is correct regarding the authority of a partner to bind the partnership in
dealings with third parties?
A. The partner's authority must be derived from the partnership agreement.

B. The partner's authority may be effectively limited by a formal resolution of the other partners, even if
third parties are not aware of that limitation.
C. Only a partner with a majority interest in a partnership has the authority to represent the partnership to
third parties.
D. A partner has authority to deal with third parties on the behalf of the other partners only if he has written
permission to do so.
E. A partner may be able to legally bind the partnership to actions even if the other partners are unaware of
his actions.
42. Pat and Nicole formed Here & There as a limited liability company. Unless the member owners elect to be
treated otherwise, the Internal Revenue Service will tax the LLC as:
A. An S corporation.
B. A C corporation.
C. A non-taxable entity.
D. A joint venture.
E. A partnership.
12-5
43. A partnership in which all partners have mutual agency and unlimited liability is called:
A. Limited partnership.
B. Limited liability partnership.
C. General partnership.
D. S corporation.
44. Carter Pearson is a partner in Event Promoters. His beginning partnership capital balance for the current
year is $55,000, and his ending partnership capital balance for the current year is $62,000. His share of this
year's partnership income was $6,250. What is his partner return on equity?
A. 5.34%
B. 8.93%
C. 10.08
%
D. 11.36
%
E. 10.68
%
45. Design Services is organized as a limited partnership, with Miko Toori as one of its partners. Miko's capital
account began the year with a balance of $35,000. During the year, Miko's share of the partnership income
was $7,500, and Miko received $4,000 in distributions from the partnership. What is Miko's partner return
on equity?
A. 10.2
%
B. 22.7%
C. 19.5
%
D. 20.4%
E. 21.4
%
12-6
46. The following information is available regarding Grace Smit's capital account in Enterprise Consulting
Group, a general partnership, for a recent year:
Beginning of the year balance $22,000

Share of partnership income $8,500
Withdrawals made during the year $6,000
What is Smit's partner return on equity during the year in question?
A. 36.6%
B. 34.7%
C. 10.8
%
D. 11.4
%
E. 55.7%
47. Partnership accounting does not:
A. Use a capital account for each partner.

B. Use a withdrawals account for each partner.
C. Allocate net income to each partner according to the partnership agreement.
D. Allocate net loss to each partner according to the partnership agreement.
E. Tax the business entity.
48. Partnership accounting is the same as accounting for:
A. A sole proprietorship.
B. A corporation.
C. A sole proprietorship, except that separate capital and withdrawal accounts are kept for each partner.
D. An S corporation.
E. A corporation, except that retained earnings is used to keep track of partners' withdrawals.
49. Partners' withdrawals of assets are:
A. Credited to their withdrawals accounts.

B. Debited to their withdrawals accounts.
C. Credited to their retained earnings.
D. Debited to their retained earnings.
E. Debited to their asset accounts.
12-7
50. The withdrawals account of each partner is:
A. Closed to that partner's capital account with a credit.

B. Closed to that partner's capital account with a debit.
C. A permanent account that is not closed.
D. Credited with that partner's share of net income.
E. Debited with that partner's share of net loss.
51. R. Stetson contributed $14,000 in cash plus office equipment valued at $7,000 to the SJ Partnership. The
journal entry to record the transaction for the partnership is:
A. Debit Cash $14,000; debit Office Equipment $7,000; credit R Stetson, Capital $21,000.
B. Debit Cash $14,000; debit Office Equipment $7,000; credit SJ Partnership, Capital $21,000.
C. Debit SJ Partnership $21,000; credit R. Stetson, Capital $21,000.
D. Debit R. Stetson, Capital $21,000; credit SJ Partnership, Capital $21,000.
E. Debit Cash $14,000; debit Office Equipment $7,000; credit Common Stock $21,000.
52. T. Andrews contributed $14,000 in to the T & B Partnership. The journal entry to record the transaction for
the partnership is:
A. Debit Cash $14,000; credit T & B Partnership, Capital $14,000.

B. Debit Cash $14,000; credit T. Andrews, Capital $14,000.
C. Debit T & B Partnership $14,000; credit T. Andrews, Capital $14,000.
D. Debit T. Andrews, Capital $14,000; credit T & B Partnership, Capital $14,000.
E. Debit Cash $14,000; credit Common Stock $14,000.
53. Forman and Berry are forming a partnership. Forman will invest a building that currently is being used by
another business owned by Forman. The building has a market value of $80,000. Also, the partnership will
assume responsibility for a $20,000 note secured by a mortgage on that building. Berry will invest $50,000
cash. For the partnership, the amounts to be recorded for the building and for Forman's Capital account
are:
A. Building, $80,000 and Forman, Capital, $80,000.

B. Building, $60,000 and Forman, Capital, $60,000.
C. Building, $60,000 and Forman, Capital, $50,000.
D. Building, $80,000 and Forman, Capital, $60,000.
E. Building, $60,000 and Forman, Capital, $80,000.
54. Maxwell and Smart are forming a partnership. Maxwell is investing a building that has a market value of
$180,000. However, the building carries a $56,000 mortgage that will be assumed by the partnership. Smart
is investing $120,000 cash. The balance of Maxwell's Capital account will be:
A. $180,000.
B. $124,000.
C. $56,000.
D. $64,000.
E. $60,000.
12-8
55. Harvey and Quick have decided to form a partnership. Harvey is going to contribute a depreciable asset to
the partnership as his equity contribution to the partnership. The following information regarding the asset
to be contributed by Harvey is available:
Historical cost of the asset $76,000

Accumulated depreciation on the asset $40,000
Note payable secured by the asset* $18,000
Agreed-upon market value of the asset $45,000
*will be assumed by the partnership
Based on this information, Harvey's beginning equity balance in the partnership will be:
A. $76,000
B. $36,000
C. $18,000
D. $27,000
E. $45,000
56. Dalworth and Minor have decided to form a partnership. Minor is going to contribute a depreciable asset to
the partnership as her equity contribution to the partnership. The following information regarding the asset
to be contributed by Minor is available:

Note payable secured by the asset and assumed by the partnership $118,000
Based on this information, Minor's beginning equity balance in the partnership will be:
A. $276,000
B. $158,000
C. $136,000
D. $127,000
E. $18,000
57. In the absence of a partnership agreement, the law says that income (and loss) should be allocated based on:
A. A fractional basis.
B. The ratio of capital investments.
C. Salary allowances.
D. Equal shares.
E. Interest allowances.
12-9
58. In a partnership agreement, if the partners agreed to an interest allowance of 10% annually on each
partner's investment, the interest allowance:
A. Is ignored when earnings are not sufficient to pay interest.

B. Can make up for unequal capital contributions.
C. Is an expense of the business.
D. Must be paid because the partnership contract has unlimited life.
E. Legally becomes a liability of the general partner.
59. Wheadon, Davis, and Singer formed a partnership with Wheadon contributing $60,000, Davis contributing
$50,000 and Singer contributing $40,000. Their partnership agreement called for the income (loss) division
to be based on the ratio of capital investments. If the partnership had income of $75,000 for its first year of
operation, what amount of income (rounded to the nearest thousand) would be credited to Singer's capital
account?
A. $20,000.
B. $25,000.
C. $30,000.
D. $40,000.
E. $75,000.
60. Wheadon, Davis, and Singer formed a partnership with Wheadon contributing $60,000, Davis contributing
$50,000 and Singer contributing $40,000. Their partnership agreement called for the income (loss) division
to be based on the ratio of capital investments. If the partnership had income of $75,000 for its first year of
operation, what amount of income (rounded to the nearest thousand) would be credited to Wheadon's
capital account?
A. $20,000.
B. $25,000.
C. $30,000.
D. $40,000.
E. $75,000.
61. Christie and Jergens formed a partnership with capital contributions of $300,000 and $400,000,
respectively. Their partnership agreement calls for Christie to receive a $60,000 per year salary. Also, each
partner is to receive an interest allowance equal to 10% of a partner's beginning capital investments. The
remaining income or loss is to be divided equally. If the net income for the current year is $135,000, then
Christie and Jergens's respective shares are:
A. $67,500; $67,500.
B. $92,500; $42,500.
C. $57,857; $77,143.
D. $90,000; $40,000.
E. $35,000; $100,000.
12-10
62. Farmer and Taylor formed a partnership with capital contributions of $200,000 and $250,000, respectively.
Their partnership agreement calls for Farmer to receive a $70,000 per year salary. The remaining income or
loss is to be divided equally. If the net income for the current year is $135,000, then Farmer and Taylor's
respective shares are:
A. $67,500; $67,500.
B. $130,000; $5,000.
C. $106,140; $28,860.
D. $90,000; $45,000.
E. $102,500; $32,500.
63. Which of the following statements is true?
A. Partners are employees of the partnership.

B. Salaries to partners are expenses on the partnership income statement.
C. Salary allowances usually reflect the relative value of services provided by partners.
D. Salary allowances are expenses.
E. Interest allowances are expenses.
64. Zheng invested $100,000 and Murray invested $200,000 in a partnership. They agreed to share incomes
and losses by allowing a $60,000 per year salary allowance to Zheng and a $40,000 per year salary
allowance to Murray, plus an interest allowance on the partners' beginning-year capital investments at 10%,
with the balance to be shared equally. Under this agreement, the shares of the partners when the partnership
earns $105,000 in income are:
A. $52,500 to Zheng; $52,500 to Murray.

B. $35,000 to Zheng; $70,000 to Murray.
C. $57,500 to Zheng; $47,500 to Murray.
D. $42,500 to Zheng; $62,500 to Murray.
E. $70,000 to Zheng; $60,000 to Murray.
65. Brown invested $200,000 and Freeman invested $150,000 in a partnership. They agreed to an interest
allowance on the partners' beginning-year capital investments at 10%, with the balance to be shared
equally. Under this agreement, the shares of the partners when the partnership earns $205,000 in income
are:
A. $102,500 to Brown; $102,500 to Freeman.

B. $117,143 to Brown; $87,857 to Freeman.
C. $122,500 to Brown; $82,500 to Freeman.
D. $105,000 to Brown; $100,000 to Freeman.
E. $112,750 to Brown; $92,250 to Freeman.
12-11
66. The partnership agreement for Wilson, Pickett & Nelson, a general partnership, provided that profits be
shared between the partners in the ratio of their financial contributions to the partnership. Wilson
contributed $100,000, Pickett contributed $50,000 and Nelson contributed $50,000. In the partnership's first
year of operation, it incurred a loss of $110,000. What amount of the partnership's loss, rounded to the
nearest dollar, should be absorbed by Nelson?
A. $50,000
B. $27,500
C. $36,667
D. $0
E. $40,000
67. Olivia Greer is a partner in Made for You. An analysis of Greer's capital account indicates that during the
most recent year, she withdrew $30,000 from the partnership. Her share of the partnership's net loss was
$16,000 and she made an additional equity contribution of $10,000. Her capital account ended the year at
$150,000. What was her capital balance at the beginning of the year?
A. $154,000
B. $170,000
C. $180,000
D. $186,000
E. $196,000
68. The following information is available on TGR Enterprises, a partnership, for the most recent fiscal year:
Total partnership capital at beginning of the year $180,000

Partnership net income for the year $150,000
Withdrawals by partners during the year $120,000
Additional investments by partners during the year $60,000
There are three partners in TGR Enterprises: Tracey, Gregory and Rodgers. At the end of the year, the
partners' capital accounts were in the ratio of 2:1:2, respectively. Compute the ending capital balances of
the three partners.
A. Tracey = $108,000; Gregory = $54,000; Rodgers = $108,000.

B. Tracey = $90,000; Gregory = $90,000; Rodgers = $90,000.
C. Tracey = $204,000; Gregory = $102,000; Rodgers = $204,000.
D. Tracey = $84,000; Gregory = $102,000; Rodgers = $84,000.
E. Tracey = $60,000; Gregory = $30,000; Rodgers = $60,000.
12-12
69. The following information is available on PDC Enterprises, a partnership, for the most recent fiscal year:
Total
partnership
$1,080,00
capital at
0
beginning of the
year
Partnership net
$1,250,00
income for the
0
year
Withdrawals by
partners during $320,000
the year
Additional
investments by
$70,000
partners during
the year
There are three partners in TGR Enterprises: Pearson, Darling and Cathay. At the end of the year, the
partners' capital accounts were in the ratio of 2:2:1, respectively. Compute the ending capital balances of
Cathay.
A. $466,000.
B. $402,000.
C. $416,000.
D. $544,000.
E. $388,000.
70. A partner can withdraw from a partnership by any of the following means except:
A. Selling his/her interest to another person for cash.

B. Selling his/her interest to another person in exchange for assets.
C. Receiving cash from the partnership in the amount of his/her interest.
D. Receiving assets from the partnership in the amount of his/her interest.
E. Close the business and liquidate the assets under the mutual agency principle.
71. A bonus may be paid in all of the following situations except:
A. By a new partner when the current value of a partnership is greater than the recorded amounts of equity.
B. By a withdrawing partner to remaining partners if the recorded value of the equity is overstated.
C. To a new partner with exceptional talents.
D. By remaining partners to a withdrawing partner if the recorded equity is understated.
E. By an existing partner to him or herself when in need of personal cash flow.
12-13
72. When a partner is added to a partnership:
A. The previous partnership ends.

B. The underlying business operations end.
C. The underlying business operations must close and then re-open.
D. The partnership must continue.
E. The partnership equity always increases.
73. A partnership recorded the following journal entry:
Cash 60,000
B. Founder, Capital 10,000
R. Aqui, Capital 10,000
H. Joiner, Capital 80,000
This entry reflects:
A. Acceptance of a new partner who invests $60,000 and receives a $20,000 bonus.
B. Withdrawal of a partner who pays a $10,000 bonus to each of the other partners.
C. Addition of a partner who pays a bonus to each of the other partners.
D. Additional investment into the partnership by Founder and Aqui.
E. Withdrawal of $10,000 each by Founder and Aqui upon the admission of a new partner.
74. Wright, Bell, and Edison are partners and share income in a 2:5:3 ratio. The partnership's capital balances
are as follows: Wright, $33,000, Bell $27,000 and Edison $40,000. Edison decides to withdraw from the
partnership, and the partners agree not to revalue the assets upon Edison's retirement. The journal entry to
record Edison's June 1 withdrawal from the partnership if Edison sells his interest to Whitney for $45,000
after the other two partners approve Whitney as partner is:
A. Debit Edison, Capital $45,000; credit Whitney, Capital $45,000.

B. Debit Edison, Capital $40,000; credit Cash $40,000.
C. Debit Edison, Capital $40,000; debit Wright, Capital $2,500; debit Bell, Capital $2,500; credit Whitney,
Capital $45,000.
D. Debit Edison, Capital $40,000; credit Whitney, Capital $40,000.
E. Debit Edison, Capital $40,000; debit Cash $5,000; credit Whitney, Capital $45,000.
75. Wright, Bell, and Edison are partners and share income in a 2:5:3 ratio. The partnership's capital balances
are as follows: Wright, $33,000, Bell $27,000 and Edison $40,000. Edison decides to withdraw from the
partnership, and the partners agree not to revalue the assets upon Edison's retirement. The journal entry to
record Edison's June 1 withdrawal from the partnership if Edison is paid $40,000 for his equity is:
A. Debit Edison, Capital $40,000; credit Cash $40,000.

B. Debit Wright, Capital $20,000; Debit Bell, Capital $20,000; credit Cash $40,000.
C. Debit Wright, Capital $20,000; Debit Bell, Capital $20,000; credit Edison, Capital $40,000.
D. Debit Edison, Capital $40,000; credit Wright, Capital $20,000; credit Bell, Capital $20,000.
E. Debit Cash $40,000; credit Edison, Capital $40,000.
12-14
76. Hewlett and Martin are partners. Hewlett's capital balance in the partnership is $64,000, and Martin's
capital balance $67,000. Hewlett and Martin have agreed to share equally in income or loss. The existing
partners agree to accept Black with a 20% interest. Black will invest $35,000 in the partnership. The bonus
that is granted to Hewlett and Martin equals:
A. $900 each.
B. $1,500 each.
C. $600 each.
D. 600 to Hewlett; $900 to Martin.
E. $0, because Hewlett and Martin actually grant a bonus to Black.
capital balance $61,000. Hewlett and Martin have agreed to share equally in income or loss. Hewlett and
Martin agree to accept Black with a 25% interest. Black will invest $35,000 in the partnership. The bonus
that is granted to Black equals:
A. $5,000.
B. $2,500.
C. $6,667.
D. $3,333.
E. $0, because Black must actually grant a bonus to Hewlett and Martin.
78. Masters, Hardy, and Rowen are dissolving their partnership. Their partnership agreement allocates income
and losses equally among the partners. The current period's ending capital account balances are Masters,
$15,000; Hardy, $15,000; Rowen, $(2,000). After all the assets are sold and liabilities are paid, but before
any contributions to cover any deficiencies, there is $28,000 in cash to be distributed. Rowen pays $2,000
to cover the deficiency in his account. The general journal entry to record the final distribution would be:
A. Debit Masters, Capital $15,000; debit Hardy, Capital $15,000; credit Cash $30,000.
B. Debit Masters, Capital $14,000; debit Hardy, Capital $14,000; credit Cash $28,000.
C. Debit Masters, Capital $15,000; debit Hardy, Capital $15,000; credit Rowen, Capital $2,000; credit Cash
$28,000.
D. Debit Cash $28,000; debit Rowen, Capital $2,000; credit Masters, Capital $15,000; credit Hardy,
Capital $15,000.
E. Debit Masters, Capital $9,334; debit Hardy, Capital $9,333; debit Rowen, Capital $9,333; credit Cash
$28,000.
12-15
79. Masters, Hardy, and Rowen are dissolving their partnership. Their partnership agreement allocates income
and losses equally among the partners. The current period's ending capital account balances are Masters,
$15,000; Hardy, $15,000; Rowen, $30,000. After all the assets are sold and liabilities are paid, but before
any contributions to cover any deficiencies, there is $54,000 in cash to be distributed. The general journal
entry to record the final distribution would be:
A. Debit Masters, Capital $18,000; debit Hardy, Capital $18,000; debit Rowen, Capital $18,000; credit
Cash $54,000.
B. Debit Masters, Capital $13,500; debit Hardy, Capital $13,500; debit Rowen, Capital $27,000; credit
Cash $54,000.
C. Debit Masters, Capital $15,000; debit Hardy, Capital $15,000; debit Rowen, Capital $30,000; credit
Gain from Liquidation $6,000; credit Cash $54,000.
D. Debit Cash $54,000; credit Rowen, Capital $13,500; credit Masters, Capital $13,500; credit Hardy,
Capital $27,000.
E. Debit Masters, Capital $15,000; debit Hardy, Capital $15,000; debit Rowen, Capital $30,000; credit
Retained Earnings $6000; credit Cash $54,000.
80. When a partnership is liquidated:
A. Noncash assets are distributed to partners.

B. Any gain or loss on liquidation is allocated to the partner with the highest capital account balance.
C. Liabilities are paid or settled.
D. Any remaining cash is distributed to the partners equally.
E. The business may continue to operate.
81. A capital deficiency means that:
A. The partnership has a loss.

B. The partnership has more liabilities than assets.
C. At least one partner has a debit balance in his/her capital account.
D. At least one partner has a credit balance in his/her capital account.
E. The partnership has been sold at a loss.
82. When a partner is unable to pay a capital deficiency:
A. The partner must take out a loan to cover the deficient balance.
B. The deficiency is absorbed by the remaining partners before distribution of cash.
C. The partnership ends before distribution of cash.
D. The deficient partner is relieved of the liability.
E. The remaining partners must wait for the deficiency to be paid before cash is distributed.
12-16
83. Henry, Luther, and Gage are dissolving their partnership. Their partnership agreement allocates each
partner 1/3 of all income and losses. The current period's ending capital account balances are Henry,
$45,000; Luther, $37,000; and Gage, $(5,000). After all assets are sold and liabilities are paid, there is
$77,000 in cash to be distributed. Gage is unable to pay the deficiency. The journal entry to record the
distribution should be:
A. Debit Henry, Capital $25,667; debit Luther, Capital $25,667; debit Gage, Capital $25,666; credit Cash
$77,000.
B. Debit Henry, Capital $42,500; debit Luther, Capital $34,500; credit Cash $77,000.
C. Debit Henry, Capital $45,000; debit Luther, Capital $37,000; credit Gage, Capital $5,000; credit Cash
$77,000.
D. Debit Cash $77,000, debit Gage, Capital $5,000, credit Henry, Capital $45,000, credit Luther, Capital
$37,000.
E. Debit Cash $77,000; credit Henry, Capital $25,667; credit Luther, Capital $25,667; credit Gage, Capital
$25,666.
84. Henry, Luther, and Gage are dissolving their partnership. Their partnership agreement allocates each
partner 1/3 of all income and losses. The current period's ending capital account balances are Henry,
$45,000; Luther, $37,000; and Gage, $(5,000). After all assets are sold and liabilities are paid, there is
$77,000 in cash to be distributed. Gage is unable to pay the deficiency. What amount of cash will Gage
receive upon liquidation?
A. $25,667.
B. $20,667.
C. $30,667.
D. Gage will be invoiced for $5,000.
E. $0.
85. Fontaine and Monroe are forming a partnership. Fontaine invests a building that has a market value of
$250,000; the partnership assumes responsibility for a $75,000 note secured by a mortgage on the property.
Monroe invests $100,000 in cash and equipment that has a market value of $55,000. For the partnership,
the amounts recorded for the building and for Fontaine's Capital account are:
A. Building $250,000; Fontaine, Capital $250,000.

B. Building $175,000; Fontaine, Capital $175,000.
C. Building $250,000; Fontaine, Capital $75,000.
D. Building $250,000; Fontaine, Capital $175,000.
E. Building $175,000; Fontaine, Capital $75,000.
the amounts recorded for Fontaine's Capital account and for Monroe's Capital account are:
A. Fontaine, Capital $175; Monroe, Capital $45,000.

B. Fontaine, Capital $0; Monroe, Capital $100,000.
C. Fontaine, Capital $250,000; Monroe, Capital $100,000.
D. Fontaine, Capital $250,000; Monroe, Capital $155,000.
E. Fontaine, Capital $175,000; Monroe, Capital $155,000.
12-17
the amounts recorded for total assets and for total capital account are:
A. Total assets $405,000; total capital $330,000.

B. Total assets $350,000; total capital $350,000.
C. Total assets $350,000; total capital $275,000.
D. Total assets $305,000; total capital $230,000.
E. Total assets $405,000; total capital $305,000.
88. Cox, North, and Lee form a partnership. Cox contributes $180,000, North contributes $150,000, and Lee
contributes $270,000. Their partnership agreement calls for the income or loss division to be based on the
ratio of capital invested. If the partnership reports income of $150,000 for its first year, what amount of
income is credited to Cox's capital account?
A. $50,000.
B. $64,286.
C. $45,000.
D. $36,000.
E. $60,000.
contributes $270,000. Their partnership agreement calls for the income or loss division to be based on the
ratio of capital invested. If the partnership reports income of $150,000 for its first year, what amount of
income is credited to Lee's capital account?
A. $50,000.
B. $67,500.
C. $45,000.
D. $54,000.
E. $60,000.
contributes $270,000. Their partnership agreement calls for a 5% interest allowance on the partner's capital
balances with the remaining income or loss to be allocated equally. If the partnership reports income of
$150,000 for its first year, what amount of income is credited to North's capital account?
A. $50,000.
B. $63,500.
C. $61,500.
D. $47,500.
E. $45,000.
12-18
contributes $270,000. Their partnership agreement calls for a 5% interest allowance on the partner's capital
balances with the remaining income or loss to be allocated equally. If the partnership reports income of
$174,000 for its first year, what amount of income is credited to Lee's capital account?
A. $58,000.
B. $57,000.
C. $61,500.
D. $55,500.
E. $48,000.
92. Mace and Bowen are partners and share equally in income or loss. Mace's current capital balance is
$135,000 and Bowen's is $120,000. Mace and Bowen agree to accept Kent with a 30% interest in the
partnership. Kent invests $115,000 in the partnership. The amount credited to Kent's capital account is:
A. $111,00
0.
B. $115,000
.
C. $92,500.
D. $120,000.
E. $119,000
.
partnership. Kent invests $115,000 in the partnership. The balances in Mace's and Bowen's capital accounts
after admission of the new partner equal:
A. Mace $135,000; Bowen $120,000.

B. Mace $137,000; Bowen $122,000.
C. Mace $133,000; Bowen $118,000.
D. Mace $139,000; Bowen $120,000.
E. Mace $135,000; Bowen $124,000.
94. Peters and Chong are partners and share equally in income or loss. Peters' current capital balance is
$140,000 and Chong's is $130,000. Peters and Chong agree to accept Aaron with a 30% interest in the
partnership. Aaron invests $98,000 in the partnership. The balances in Peters's and Chong's capital accounts
after admission of the new partner equal:
A. Peters $140,000; Chong $130,000.

B. Peters $146,200; Chong $136,200.
C. Peters $145,000; Chong $135,000.
D. Peters $133,800; Chong $123,800.
E. Peters $166,027; Chong $156,027.
12-19
partnership. Aaron invests $98,000 in the partnership. The amount credited to Aaron's capital account is:
A. $81,000.
B. $102,600.
C. $110,400
.
D. $98,000.
E. $114,533
.
96. Peters, Chong, and Aaron are dissolving their partnership. Their partnership agreement allocates each
partner an equal share of all income and losses. The current period's ending capital account balances are
Peters, $54,000; Chong, $42,000; and Aaron, $(2,000). After all assets are sold and liabilities are paid,
there is $94,000 in cash to be distributed. Aaron is unable to pay the deficiency. The journal entry to record
the distribution should be:
A. Debit Peters, Capital $54,000; debit Chong, Capital $40,000; credit Cash $94,000.
B. Debit Peters, Capital $54,000; debit Chong, Capital $42,000; credit Cash $96,000.
C. Debit Peters, Capital $53,000; debit Chong, Capital $41,000; credit Cash $94,000.
D. Debit Cash $94,000, debit Aaron, Capital $2,000, credit Peters, Capital $54,000, credit Chong, Capital
$42,000.
E. Debit Cash $94,000; credit Peters, Capital $47,000; credit Chong, Capital $47,000.
97. Barber and Atkins are partners in an accounting firm and share net income and loss equally. Barber's
beginning partnership capital balance for the current year is $285,000, and Atkins' beginning partnership
capital balance for the current year is $370,000. The partnership had net income of $250,000 for the year.
Barber withdrew $90,000 during the year and Atkins withdrew $100,000. What is Barber's ending equity?
A. $357,500
B. $362,500
C. $445,000
D. $320,000
E. $195,000
Barber withdrew $90,000 during the year and Atkins withdrew $100,000. What is Barber's return on
equity?
A. 41.3
%
B. 43.9%
C. 32.7%
D. 33.8%
E. 36.5%
12-20
Barber withdrew $90,000 during the year and Atkins withdrew $100,000. What is Atkins's return on
equity?
A. 41.3
%
B. 43.9%
C. 32.7%
D. 33.8%
E. 36.5%
100.Fellows and Marshall are partners in an accounting firm and share net income and loss equally. Fellows'
beginning partnership capital balance for the current year is $185,000, and Marshall's beginning partnership
Fellows withdrew $80,000 during the year and Marshall withdrew $70,000. What is Marshall's return on
equity?
A. 67.3%
B. 60.3%
C. 78.7%
D. 54.3%
E. 56.0%
101.If a company wants to protect its three investors against personal liability risk, which of the following
business forms would not be a suitable option?
A. C Corporation
B. S Corporation
C. Limited liability partnership
D. Partnership
E. Limited liability company
102.Reno contributed $104,000 in cash plus equipment valued at $27,000 to the RD Partnership. The journal
entry to record the transaction for the partnership is:
A. Debit Cash $104,000; debit Equipment $27,000; credit RD Partnership, Capital $131,000.
B. Debit Cash $104,000; debit Equipment $27,000; credit Common Stock $131,000.
C. Debit Cash $104,000; debit Equipment $27,000; credit Reno, Capital $131,000.
D. Debit Reno, Capital $131,000; credit RD Partnership, Capital $131,000.
E. Debit RD Partnership, Capital $131,000; credit Reno, Capital $131,000.
12-21
103.Bloom and Plant organize a partnership on January 1. Bloom's initial investment consists of $800 cash,
$1,700 equipment and a $500 note payable reflecting a bank loan for the new business. Plant's initial
investment is cash of $2,000. These amounts are the values agreed on by both partners. The journal entry to
record Bloom's investment is:
A. Debit Cash $800; debit Equipment $1,700; credit Note Payable $500; credit Bloom, Capital $2,000.
B. Debit Cash $2,000; credit Bloom, Capital $2,000.
C. Debit Cash $800; debit Equipment $1,700; credit Bloom, Capital $2,500.
D. Debit Cash $800; debit Equipment $1,200; credit Bloom, Capital $2,000.
E. Debit Bloom, Capital $3,000; credit Common Stock $3,000.
104.Bloom and Plant organize a partnership on January 1. Bloom's initial investment consists of $800 cash,
investment is cash of $2,000. These amounts are the values agreed on by both partners. The journal entry to
record Plant's investment is:
A. Debit Cash $1,500; debit Note Payable $500; credit Plant, Capital $2,000.
B. Debit Cash $2,000; credit Note Payable $500, credit Plant, Capital $1,500.
C. Debit Bloom, Capital $2,000; credit Cash $2,000.
D. Debit Cash $2,500; credit Note Payable $500; credit Plant, Capital $2,500.
E. Debit Cash $2,000; credit Plant, Capital $2,000.
105.Wallace and Simpson formed a partnership with Wallace contributing $60,000 and Simpson contributing
$40,000. Their partnership agreement calls for the income (loss) division to be based on the ratio of capital
investments. The partnership had income of $150,000 for its first year of operation. When the Income
Summary is closed, the journal entry to allocate partner income is:
A. Debit Income Summary $150,000; credit Wallace, Capital $75,000; credit Simpson, Capital $75,000.
B. Debit Wallace, Capital $75,000; debit Simpson, Capital $75,000; credit Income Summary $150,000.
C. Debit Income Summary $150,000; credit Wallace, Capital $90,000; credit Simpson, Capital $60,000.
D. Debit Cash $150,000; credit Wallace, Capital $90,000; credit Simpson, Capital $60,000.
E. Debit Wallace, Capital $90,000; debit Simpson, Capital $60,000; credit Cash $150,000.
106.Wallace and Simpson formed a partnership with Wallace contributing $60,000 and Simpson contributing
$40,000. Their partnership agreement calls for the income (loss) division to be based on the ratio of capital
investments. Wallace sold one-half of his partnership interest to Prince for $55,000 when his capital
balance was $78,000. The partnership would record the admission of Prince into the partnership as:
A. Debit Wallace, Capital $55,000; credit Prince, Capital $55,000.

B. Debit Wallace, Capital $39,000; credit Prince, Capital $39,000.
C. Debit Prince, Capital $55,000; credit Wallace, Capital $55,000.
D. Debit Wallace, Capital $30,000; credit Prince, Capital $30,000.
E. Debit Wallace, Capital $39,000; debit Cash $16,000; credit Prince, Capital $55,000.
12-22
107.Wallace, Simpson, and Prince are partners and share income and losses in a 3:4:3 ratio. The partnership's
capital balances are Wallace, $68,000; Simpson, $90,000; and Prince, $42,000. Royal is admitted to the
partnership on July 1 with a 20% equity and invests $50,000. The partnership would record the admission
of Royal into the partnership as:
A. Debit Wallace, Capital $15,000; debit Simpson, Capital, $20,000; debit Prince, Capital $15,000; credit
Royal, Capital $50,000.
B. Debit Cash $20,000; credit Prince, Capital $20,000.
C. Debit Cash $40,000; debit Wallace, Capital $3,000; debit Simpson, Capital, $4,000; debit Prince, Capital
$3,000; credit Royal, Capital $50,000.
D. Debit Cash $50,000; credit Royal, Capital $50,000.
E. Debit Cash $50,000; credit Simpson, Capital $10,000, credit Royal, Capital $40,000.
Matching Questions
12-23
108.Match each of the following terms with the appropriate definitions.
1. The legal relationship among partners whereby

each partner can commit or bind the partnership to
any contract within the scope of the partnership's Statement of
business. partners' equity ____
2. A corporation with 100 or fewer stockholders that
can elect to be treated as a partnership for income tax
purposes but retain the same limited liability as other Limited
corporations. partnership ____
3. The legal relationship among general partners that
makes each of them personally responsible for paying Limited
the debts of the partnership if the partnership cannot liability
pay. partnership ____
4. A financial statement that shows total capital
balances at the beginning of the period, any additional
investment by partners, the income or loss of the Unlimited
period, the partners' withdrawals, and the ending liability of
capital balances. partners ____
5. A partnership that protects innocent partners from
malpractice or negligence claims resulting from the Partnership
acts of another partner. contract ____
6. A corporation that does not qualify for nor elect to
be treated as a partnership for income tax purposes
and therefore is subject to income taxes. Partnership ____
7. A partnership that has two classes of partners,
limited partners and general partners. Limited
partners have no personal liability beyond the amount
they invest in the partnership, and have no active role
except as specified in the partnership agreement. General partner ____
8. The agreement between partners that sets terms
under which the affairs of the partnership are
conducted. Mutual agency ____
9. A partner who assumes unlimited liability for the
debts of the partnership. C corporation ____
10. An unincorporated association of two or more
persons to pursue a business for profit as co-owners. S corporation ____
Short Answer Questions
12-24
109.Identify and discuss the key characteristics of partnerships. Also, identify other organizations that possess
partnership characteristics.
110.Define the partner return on equity ratio and explain how a specific partner would use this ratio.
111.How are partners' investments in a partnership recorded?
112.Discuss the options for the allocation of income and loss among partners, including with and without a
partnership agreement.
12-25
113.What are the ways that a new partner can be admitted to an existing partnership? Explain how to account
for the admission of the new partner under each of these circumstances.
114.What are the ways a partner can withdraw from a partnership? Explain how to account for the withdrawal
of a current partner from a partnership.
115.Explain the steps involved in the liquidation of a partnership.
116.What factors should be considered before establishing a partnership?
12-26
Essay Questions
117.Cinema Products LP is organized as a limited partnership that sells movie props. Information related to
capital balances is given below. Compute the partner return on equity for each limited partner. How would
each partner evaluate the success of the partnership? What would you recommend the partners do with
respect to additional investments or withdrawals?
Turner Kelly Total

Capital balance, beginning of year 890,000 570,000 1,460,000
Net income for current year 85,000 65,000 150,000
Withdrawals for current year 40,000 25,000 65,000
118.Cinema Products LP is organized as a limited partnership that sells movie props. Information related to the
capital balances is given below. Compute the partnership return on equity.
Kelly Turner
Total
570,00
Capital balance, beginning of year 890,000 1,460,000
0
12-27
119.Caroline Meeks and Charlie Fox decide to form a partnership on August 1. Meeks invests the following
assets and liabilities in the new partnership:
Market Value
Land $80,000
Building 250,000
Note
114,000
payable
The note payable is associated with the building and the partnership will assume responsibility for the loan.
Fox invested $100,000 in cash and $95,000 in equipment in the new partnership. Prepare the journal entries
to record the two partners' original investments in the new partnership.
120.Montez and Flair formed a partnership. Montez contributed $15,000 cash and accounts receivable worth
$11,000. Flair contributed cash of $5,000; inventory valued at $16,000; and supplies valued at $2,000.
Prepare the journal entries to record each partner's investment in the new partnership.
121.MacArthur, Strong, and Viet form a partnership. MacArthur contributes $190,000 cash and Strong
contributes $200,000 in cash. Viet contributes equipment worth $215,000. Prepare the single journal entry
to record the formation of this partnership.
12-28
122.Ranger and Sol formed a partnership with capital contributions of $150,000 and $180,000, respectively.
Their partnership agreement called for Ranger to receive a $60,000 annual salary allowance. They also
agreed to allow each partner a share of income equal to 10% of their initial capital investments. The
remaining income or loss is to be divided equally. If the net income for the current year is $110,000, what
are Ranger's and Sol's respective shares?
123.Bannister invested $110,000 and Wilder invested $99,500 in a new partnership. They agreed to an annual
interest allowance of 10% on the partners' beginning-year capital balance, with the balance of income or
loss to be divided equally. Under this agreement, what are the income or loss shares of the partners if the
annual partnership income is $202,000?
124.Bannister invested $110,000 and Wilder invested $99,000 in a new partnership. Their partnership
agreement called for Wilder to receive a $70,000 annual salary allowance. They also agreed to an annual
interest allowance of 5% on the partners' beginning-year capital balance, with the balance of income or loss
to be divided equally. Under this agreement, what are the income or loss shares of the partners if the annual
partnership income is $82,000?
12-29
125.Bannister invested $110,000 and Wilder invested $99,000 in a new partnership. Their partnership
agreement called for Wilder to receive a $70,000 annual salary allowance. Under this agreement, what are
the income or loss shares of the partners if the annual partnership income is $90,000?
126.Fallon and Springer formed a partnership on January 1. Fallon contributed $90,000 cash and equipment
with a market value of $60,000. Springer's investment consisted of: cash, $30,000; inventory, $20,000; all
at market values. Partnership net income for Year 1 and Year 2 was $75,000 and $120,000, respectively.
1. Determine each partner's share of the net income for each year, assuming each of the following
independent situations:
(a) Income is divided based on the partners' failure to sign an agreement.

(b) Income is divided based on a 2:1 ratio (Fallon: Springer).
(c) Income is divided based on the ratio of the partners' original capital investments.
(d) Income is divided based on interest allowance of 12% on the original capital investments; salary
allowance to Fallon of $30,000 and Springer of $25,000; and the remainder to be divided equally.
2. Prepare the journal entry to record the allocation of the Year 1 income under alternative (d) above.
12-30
127.Lin and Coral invested $99,000 and $126,000, respectively, in a partnership they began one year ago.
Assuming the partnership earned $120,000 during the current year; compute the share of the net income
each partner should receive under each of these independent assumptions.
1. The partnership contract specifies salary allowances of $45,000 to Lin and $60,000 to Coral, and any
balance shared equally.
Lin Coral Allocated

Net Income
Salary allowance
Remainder
Allocation of remainder
Total
2. The partnership contract specifies salary allowances of $45,000 to Lin and $60,000 to Coral, interest
allowance of 10% on the partners' beginning capital balance for the year.
Cora
Lin Allocated
l
Net Income
Salary allowance
Interest allowance
Remainder
Total
12-31
128.Glade, Marker, and Walters are partners with beginning-year capital balances of $100,000, $50,000, and
$50,000, respectively. Partnership net income for the year is $84,000. Make the necessary journal entry to
close Income Summary to the capital accounts if:
a. Partners agree to divide income based on their beginning-year capital balances.

b. Partners agree to divide income based on the ratio of 5:3:2 (Glade:Marker:Walters), respectively.
c. Partnership agreement is silent as to division of income and less.
129.Glade, Marker, and Walters are partners with beginning-year capital balances of $250,000, $150,000, and
$100,000, respectively. Partnership net income for the year is $192,000. Make the necessary journal entry
to close Income Summary to the capital accounts if partners agree to divide income based on their
beginning-year capital balances.
130.Jakobs, Penn, and Lundt are partners with beginning-of-year capital balances of $400,000, $320,000, and
$160,000, respectively. The partners agreed to share income and loss as follows: Salary of $30,000 to
Jakobs, $50,000 to Penn, and $36,000 to Lundt. An interest allowance of 8% on beginning-of-year capital
balances. Any remaining balance is to be divided equally. If partnership net income for the year is
$190,000, determine each partner's share and make the appropriate journal entry to close the Income
Summary to the capital accounts.
12-32
131.Darien and Hayden agree to accept Kevin into their partnership. Kevin will contribute $22,000 in cash.
Prepare the journal entry to record this transaction.
132.Palmer withdraws from the FAP Partnership. The remaining partners agree to buy out her share for her
capital balance of $65,000. Prepare the journal entry to record the withdrawal from the partnership.
133.Lemon and Parks are partners. On October 1, Lemon's capital balance is $75,000, and Parks' capital
balance is $125,000. With the partnership's approval, Parks sells ½ of his partnership interest to Tambling
for $70,000. Prepare the journal entry to record this transaction in the partnership records.
12-33
134.Leto and Duncan allow Gunner to purchase a 25% interest in their partnership for $30,000 cash. Gunner
has exceptional talents that will enhance the partnership. Leto's and Duncan's capital account balances are
$55,000 each. The partners have agreed to share income or loss equally. Prepare the general journal entry
to record the admission of Lepley to the partnership.
135.Conklin plans to leave the CAP Partnership. The recorded value of his capital account is $48,000. The
remaining partners Arthurs and Preston agree to pay Conklin $40,000 cash and Conklin accepts. The
partners share income and loss equally. Prepare the general journal entry to record the withdrawal from the
partnership.
136.Conklin plans to leave the CAP Partnership. The recorded balance in her capital account is $48,000. The
remaining partners, Arthurs and Preston, agree to pay Conklin $58,000 cash and Conklin accepts. The
partners share income and loss equally. Prepare the journal entry to record the transaction.
12-34
137.Kramer and Jones allow Sanders to purchase a 25% interest in their partnership for $50,000 cash. Kramer
and Jones both have capital balances of $55,000 each, and have agreed to share income and loss equally.
Prepare the journal entry to record the admission of Sanders to the partnership.
138.The Redtail Partnership agrees to dissolve. The remaining cash balance after liquidating partnership assets
and liabilities is $70,000. The final capital account balances are: Paulson, $35,000; Gray, $25,000; and
Chang, $10,000. Prepare the journal entry to distribute the remaining cash to the partners.
139.The Redtail Partnership agrees to dissolve. The cash balance after selling all assets and paying all liabilities
is $56,000. The final capital account balances are: Paulson, $33,000; Gray, $27,000; and Chang, ($4,000).
Chang agrees to pay $4,000 cash from personal funds to settle his deficiency. Prepare the journal entries to
record the transactions required to dissolve this partnership.
12-35
140.The Redtail Partnership agrees to dissolve. The cash balance after selling all assets and paying all liabilities
is $60,000. The final capital account balances are: Paulson, $35,000; Gray, $29,000; and Chang, ($4,000).
Chang is unable to pay the capital deficiency. Prepare the journal entries to record the transactions required
to dissolve this partnership.
141.Sharon and Nancy formed a partnership by making capital contributions of $130,000 and $195,000
respectively. They predict annual partnership income of $230,000 and are considering the following
alternative plans of sharing income and loss: (a) in the ratio of their initial capital investments; or (b) salary
allowances of $40,000 to Sharon and $35,000 to Nancy; interest allowances of 12% on their initial capital
investments; and the balance shared equally. Assuming that both partners put about the same amount of
time into the business, which method of allocating income would be best?
142.Sharon and Nancy formed a partnership by making capital contributions of $130,000 and $195,000
respectively. The annual partnership income of $230,000 is to be allocated assuming a salary allowance of
$40,000 to Sharon and $35,000 to Nancy; interest allowances of 12% on their initial capital investments;
and the balance shared equally. Prepare the entries to record the initial capital investments, the allocation of
net income, and close the partner's withdrawal accounts assuming that Sharon withdrew $50,000 and
Nancy withdrew $45,000.
12-36
143.Kramer and Feldman Company is organized as a partnership. At the prior year-end, Kramer's equity
balance was $352,000 and Feldman's was $256,000. For the current year, partnership net income is
$137,000 ($77,000 allocated to Kramer and $60,000 allocated to Feldman); withdrawals are $87,000
($45,000 for Kramer and $42,000 for Feldman). Compute the total partnership return on equity and the
individual partner return on equity ratios.
144.Masco, Short, and Henderson who are partners in the MSH Company share income and loss in a 2:2:1
ratio. They plan to liquidate their partnership. At liquidation, their balance sheet appears as follows. Prepare
journal entries for (a) the sale of land and equipment sold as a package for $500,000, (b) the allocation of
the gain or loss, (c) the payment of the liabilities, and (d) the distribution of cash to the individual partners.
MSH Company
Balance Sheet
January 31
Assets Liabilities and Equity
Cash $200,000 Accounts Payable $221,500
Equipment 200,000 Masco, Capital 210,000
Land 350,000 Short, Capital 178,000
Henderson, Capital 140,500
Total assets $750,000 Total liabilities and equity $750,000
12-37
145.Tower, Knight, and Spears are partners who share income and loss in a 3:2:2 ratio. The partnership's capital
balances are as follows: Tower, $332,000; Knight, $124,000; and Spears, $214,000. Spears decides to
withdraw from the partnership, and the partners agree not to have the assets revalued upon Spears'
retirement. Prepare journal entries to record Spears' withdrawal from the partnership under each of the
following separate assumptions: Spears (a) sells his interest to Conner for $200,000 after Tower and Knight
approve the entry of Conner as a partner; (b) is paid $214,000 in partnership cash for his equity; (c) is paid
$205,000 in partnership cash for his equity; (d) is paid $220,000 in partnership cash for his equity.
146.Tower, Knight, and Spears are partners who share income and loss in a 4:2:2 ratio. The partnership's capital
balances are as follows: Tower, $292,000; Knight, $114,000; and Spears, $194,000. Damsel is admitted to
the partnership on March 1 with a 25% equity. Prepare the journal entries to record Damsel's entry into the
partnership under each of the following separate assumptions: Damsel invests (a) $200,000; (b) $180,000;
and (c) $240,000.
12-38
147.On May 1, Gosworth and Jordan formed a partnership. Gosworth contributed cash of $100,000 and
equipment valued at $142,000. Jordan contributed land valued at $130,000 and a building valued at
$250,000. The partnership also assumed responsibility for Jordan's $120,000 long-term note payable
associated with the land and building. The partners agreed to share income as follows: Gosworth is to
receive a salary allowance of $38,000, both are to receive an annual interest allowance of 8% of their
beginning-year capital investments, and any remaining income or loss is to be shared equally. During the
year, Gosworth withdrew $40,000 and Jordan withdrew $42,000 cash. After the adjusting and closing
entries are made to the revenue and expense accounts at the end of the year, the Income Summary account
had a credit balance of $140,000. Prepare the journal entries to record (a) the partners' initial capital
investments, (b) their cash withdrawals, and (c) closing of both the Withdrawals and Income Summary
accounts.
148.Mesner's and Sanchez's company is organized as a partnership. At the prior year-end, Mesner's equity
balance was $258,000 and Sanchez's was $212,000. For the current year, partnership net income is
$125,000 ($75,000 allocated to Mesner and $50,000 allocated to Sanchez); withdrawals are $77,000
($40,000 for Mesner and $37,000 for Sanchez). Compute the total partnership return on equity and the
Fill in the Blank Questions
149.The life of a partnership is ____________________ in duration.
________________________________________
150.A ________________ is an unincorporated association of two or more people to pursue a business for
profit as co-owners.
________________________________________
12-39
151.__________________ means that partners can commit or bind the partnership to any contract within the
scope of the partnership business.
________________________________________
152.__________________ implies that each partner in a partnership can be called on to personally pay a
partnership's debts.
________________________________________
153.A partnership that has at least two classes of partners, general and limited, allows the limited partners to
have no personal liability beyond the amounts they invest in the partnership, and the limited partners have
no active role except as specified in the partnership agreement is a ___________________ partnership.
________________________________________
154.A partnership designed to protect innocent partners from malpractice or negligence claims resulting from
the acts of other partners is a ________________________ partnership.
________________________________________
155.A relatively new form of business organization that protects partners with limited liability, allows limited
partners to assume an active management role, and is taxed as a partnership is a
______________________________.
________________________________________
156.Partners in a partnership are not taxed on their withdrawals, but rather on

_____________________________.
________________________________________
157.Partner net income divided by average partner equity equals ______________________.
________________________________________
158.When a partner invests in a partnership, his/her capital account is __________ for the invested amount.
________________________________________
159.During the closing process, partner's capital accounts are _______________ for their share of net income
and _________________ for their share of net loss.
________________________________________
160.During the closing process, each partner's withdrawals account is closed to _________________________.
________________________________________
161.If partners agree on how to share income, but say nothing about losses, then losses are shared
___________________.
________________________________________
12-40
162.A partner can be admitted into a partnership by _________________________ or by
__________________________________.
________________________________________
163.If a partner withdraws from a partnership and the recorded value of his or her equity is overstated, then a
bonus goes to _________________________; if the recorded value of the withdrawing partner's equity is
understated, then a bonus goes to ____________________.
________________________________________
164.At least one partner having a debit balance in his/her capital account at the point of the final distribution of
cash is known as a _________________________.
________________________________________
12-41
Chapter 12 Accounting for Partnerships Answer Key
True / False Questions
1. A partnership has a limited life.
TRUE
AACSB: Communication
AICPA: BB Legal
AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 12-C1 Identify characteristics of partnerships and similar organizations.
Topic: Partnership Form of Organization
2. A partnership is an incorporated association of two or more people to pursue a business for profit as co-
owners.
FALSE
AICPA: BB Legal
Blooms: Remember
Difficulty: 1 Easy
3. Mutual agency means each partner can commit or bind the partnership to any contract within the scope
of the partnership business.
TRUE
AICPA: BB Legal
Blooms: Remember
Difficulty: 1 Easy
4. Accounting procedures for both C corporations and S corporations are the same in all aspects.
FALSE
AICPA: BB Legal
Blooms: Remember
Difficulty: 1 Easy
12-42
5. Partners in a partnership are taxed on the partnership income, not the amounts they withdraw from the
partnership.
TRUE
AICPA: BB Legal
Blooms: Understand
Difficulty: 2 Medium
6. Limited liability partnerships are designed to protect innocent partners from malpractice or negligence
claims resulting from the acts of another partner.
TRUE
AICPA: BB Legal
Blooms: Remember
Difficulty: 1 Easy
7. A partnership may allocate salary allowances to the partners reflecting the relative value of services
provided.
TRUE
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Understand
Learning Objective: 12-P2 Allocate and record income and loss among partners.
Topic: Dividing Income or Loss
8. In a limited partnership the general partner has unlimited liability.
TRUE
AICPA: BB Legal
Blooms: Remember
Difficulty: 1 Easy
Topic: Partnership and Similar Organizations
9. Partner return on equity can be used by each partner to help decide whether additional investment or
withdrawal of resources is best for that partner.
TRUE
AICPA: BB Resource Management
AICPA: FN Risk Analysis
12-43
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 12-A1 Compute partner return on equity and use it to evaluate partnership performance.
Topic: Partner Return on Equity
10. Feldt is a partner in Feldt & Dodson Company. Feldt's share of the partnership income is $18,600 and
her average partnership equity is $155,000. Her partner return on equity equals 8.33.
FALSE
Partner Return on Equity = Partnership Income/Average Partnership Equity

Partner Return on Equity = $18,600/$155,000 = 0.12 = 12%
AACSB: Analytical Thinking

Blooms: Apply
11. When partners invest in a partnership, their capital accounts are debited for the amount invested.
FALSE
AICPA: BB Industry
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 12-P1 Prepare entries for partnership formation.
Topic: Organizing a Partnership
12. Partners' withdrawals are debited to their separate withdrawals accounts.
TRUE
AICPA: BB Industry
Blooms: Remember
Difficulty: 1 Easy
13. Partners can invest assets but not liabilities into a partnership.
FALSE
AICPA: BB Industry
Blooms: Remember
Difficulty: 1 Easy
12-44
14. The withdrawals account of each partner is closed to retained earnings at the end of the accounting
period.
FALSE
AICPA: BB Industry
Blooms: Remember
Difficulty: 1 Easy
15. In closing the accounts at the end of a period, the partners' capital accounts are credited for their share of
the partnership net income or debited for their share of the partnership loss.
TRUE
AICPA: BB Industry
Blooms: Understand
16. In the absence of a partnership agreement, the law says that income of a partnership will be shared
equally by the partners.
TRUE
AICPA: BB Industry
AICPA: BB Legal
Blooms: Remember
Difficulty: 1 Easy
17. Salary allowances are reported as salaries expense on a partnership income statement.
FALSE
AICPA: BB Industry
Blooms: Remember
Difficulty: 1 Easy
18. The statement of changes in partners' equity shows the beginning balance in retained earnings, plus
investments, less withdrawals, plus the income (or less the loss) and the ending balance in retained
earnings.
FALSE
AICPA: BB Industry
12-45
AICPA: FN Reporting
Blooms: Understand
19. The equity section of the balance sheet of a partnership can report the separate capital account balances
of each partner.
TRUE
AICPA: BB Industry
AICPA: FN Reporting
Blooms: Remember
Difficulty: 1 Easy
20. Even if partners devote their time and services to their partnership, their salaries are not expenses on the
income statement.
TRUE
AICPA: BB Industry
AICPA: FN Reporting
Blooms: Remember
Difficulty: 1 Easy
21. If the partners agree on a formula to share income and say nothing about losses, then the losses are
shared using the same formula.
TRUE
AICPA: BB Industry
AICPA: BB Legal
Blooms: Remember
Difficulty: 1 Easy
12-46
22. Assume that the M & L partnership agreement gave March 60% and Ludwig 40% of partnership
income and losses. The partnership lost $27,000 in the current period. This implies that March's share of
the loss equals $16,200, and Ludwig's share equals $10,800.
TRUE
March's Share of Loss = Net Loss * Allocation Percentage

March's Share of Loss = $27,000 * 60% = $16,200
Ludwig's Share of Loss = Net Loss * Allocation Percentage

Ludwig's Share of Loss = $27,000 * 40% = $10,800

AICPA: BB Industry
AICPA: BB Legal
Blooms: Apply
Difficulty: 3 Hard
23. When a partner leaves a partnership, the present partnership ends.
TRUE
AICPA: BB Industry
AICPA: BB Legal
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 12-P3 Account for the admission and withdrawal of partners.
Topic: Admission and Withdrawal of Partners
24. To buy into an existing partnership, the new partner must contribute cash to the partnership.
FALSE
AICPA: BB Industry
AICPA: BB Legal
Blooms: Remember
Difficulty: 1 Easy
25. When a partner leaves a partnership, the present partnership ends, but the business can still continue to
operate.
TRUE
AICPA: BB Industry
AICPA: BB Legal
Blooms: Remember
Difficulty: 1 Easy
12-47
26. Assets invested by a partner into a partnership become the property of the business.
TRUE
AICPA: BB Industry
AICPA: BB Legal
Blooms: Remember
Difficulty: 1 Easy
27. Admitting a partner by accepting assets is a personal transaction between one or more current partners
and the new partner.
FALSE
AICPA: BB Industry
AICPA: BB Legal
Blooms: Understand
28. Current partners usually require any new partner to pay a bonus for the privilege of joining when the
current value of a partnership is greater than the recorded amounts of equity.
TRUE
AICPA: BB Industry
Blooms: Understand
29. When a partner leaves a partnership, the withdrawing partner is entitled to a bonus if the recorded equity
is overstated.
FALSE
AICPA: BB Industry
Blooms: Understand
12-48
30. When a partnership is liquidated, its business is ended.
TRUE
AICPA: BB Industry
AICPA: BB Legal
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 12-P4 Prepare entries for partnership liquidation.
Topic: Liquidation of a Partnership
31. A capital deficiency exists when at least one partner has a debit balance in his or her capital account at
the point of final cash distribution during liquidation.
TRUE
AICPA: BB Industry
Blooms: Remember
32. A capital deficiency can arise from liquidation losses, excessive withdrawals before liquidation, or
recurring losses in prior periods.
TRUE
AICPA: BB Industry
Blooms: Remember
Difficulty: 1 Easy
33. If a partner is unable to cover a deficiency and the other partners absorb the deficiency, then the partner
with the deficiency is thus relieved of all liability.
FALSE
AICPA: BB Industry
AICPA: BB Legal
Blooms: Remember
Difficulty: 1 Easy
34. If at the time of partnership liquidation, a partner has a $5,000 capital deficiency and pays the
partnership $5,000 out of personal assets to cover the deficiency, then that partner is entitled to share in
the final distribution of cash.
FALSE
12-49
AICPA: BB Industry
Blooms: Understand
Multiple Choice Questions
35. An unincorporated association of two or more persons to pursue a business for profit as co-owners is a:
A. Partnership.
B. Proprietorship.
C. Contractual company.
D. Mutual agency.
E. Voluntary organization.
AICPA: BB Industry
AICPA: BB Legal
Blooms: Remember
Difficulty: 1 Easy
36. Advantages of a partnership include:
A. Limited
life.
B. Mutual agency.
C. Unlimited liability.
D. Co-ownership of property.
E. Voluntary association.
AICPA: BB Industry
AICPA: BB Legal
Blooms: Remember
Difficulty: 1 Easy
12-50
37. A partnership agreement:
A. Is not binding unless it is in writing.

B. Is the same as a limited liability partnership.
C. Is binding even if it is not in writing.
D. Does not generally address the issue of the rights and duties of the partners.
E. Is also called the articles of incorporation.
AICPA: BB Industry
AICPA: BB Legal
Blooms: Remember
Difficulty: 1 Easy
38. Mutual agency means
A. Creditors can apply their claims to partners' personal assets.

B. Partners are taxed on partnership withdrawals.
C. All partners must agree before the partnership can act.
D. The partnership has a limited life.
E. A partner can commit or bind the partnership in any contract within the scope of the partnership
business.
AICPA: BB Industry
AICPA: BB Legal
Blooms: Remember
Difficulty: 1 Easy
39. A partnership that has two classes of partners, general and limited, where the limited partners have no
personal liability beyond the amounts they invest in the partnership, and no active role in the
partnership, except as specified in the partnership agreement is a:
A. Mutual agency partnership.

AICPA: BB Industry
AICPA: BB Legal
Blooms: Remember
Difficulty: 1 Easy
12-51
40. A partnership designed to protect innocent partners from malpractice or negligence claims resulting
from acts of another partner is a(n):
A. Partnership.
E. Unlimited liability company.
AICPA: BB Industry
AICPA: BB Legal
Blooms: Remember
Difficulty: 1 Easy
41. Mutual agency implies that each partner in a partnership is a fully authorized agent of the partnership.
Which of the following statements is correct regarding the authority of a partner to bind the partnership
in dealings with third parties?
A. The partner's authority must be derived from the partnership agreement.

B. The partner's authority may be effectively limited by a formal resolution of the other partners, even
if third parties are not aware of that limitation.
C. Only a partner with a majority interest in a partnership has the authority to represent the partnership
to third parties.
D. A partner has authority to deal with third parties on the behalf of the other partners only if he has
written permission to do so.
E. A partner may be able to legally bind the partnership to actions even if the other partners are
unaware of his actions.
AICPA: BB Industry
AICPA: BB Legal
Blooms: Understand
42. Pat and Nicole formed Here & There as a limited liability company. Unless the member owners elect to
be treated otherwise, the Internal Revenue Service will tax the LLC as:
A. An S corporation.
B. A C corporation.
C. A non-taxable entity.
D. A joint venture.
E. A partnership.
AICPA: BB Industry
AICPA: BB Legal
12-52
Blooms: Understand
43. A partnership in which all partners have mutual agency and unlimited liability is called:
A. Limited partnership.
B. Limited liability partnership.
C. General partnership.
D. S corporation.
AICPA: BB Industry
AICPA: BB Legal
Blooms: Remember
Difficulty: 1 Easy
44. Carter Pearson is a partner in Event Promoters. His beginning partnership capital balance for the current
year is $55,000, and his ending partnership capital balance for the current year is $62,000. His share of
this year's partnership income was $6,250. What is his partner return on equity?
A. 5.34%
B. 8.93%
C. 10.08
%
D. 11.36
%
E. 10.68
%
Partner Return on Equity = Partners' Income/Average Partnership Equity

Partner Return on Equity = $6,250[/($55,000 + $62,000)/2] = 0.1068 = 10.68%

Blooms: Apply
12-53
45. Design Services is organized as a limited partnership, with Miko Toori as one of its partners. Miko's
capital account began the year with a balance of $35,000. During the year, Miko's share of the
partnership income was $7,500, and Miko received $4,000 in distributions from the partnership. What is
Miko's partner return on equity?
A. 10.2
%
B. 22.7%
C. 19.5
%
D. 20.4%
E. 21.4
%
Miko's Ending Equity = Beginning Equity + Share of Income - Distributions

Miko's Ending Equity = $35,000 + $7,500 - $4,000 = $38,500

Partner Return on Equity = $7,500/[($35,000 + $38,500)/2] = 0.204 = 20.4%

Blooms: Apply
Difficulty: 3 Hard
12-54
46. The following information is available regarding Grace Smit's capital account in Enterprise Consulting
Group, a general partnership, for a recent year:
Beginning of the year balance $22,000

Share of partnership income $8,500
Withdrawals made during the year $6,000
What is Smit's partner return on equity during the year in question?
A. 36.6%
B. 34.7%
C. 10.8
%
D. 11.4
%
E. 55.7%
Smit’s Ending Equity = Beginning Equity + Share of Income - Distributions

Smit’s Ending Equity = $22,000 + $8,500 - $6,000 = $24,500
Partner Return on Equity = Partners’ Income/Average Partnership Equity


Blooms: Apply
Difficulty: 3 Hard
47. Partnership accounting does not:
A. Use a capital account for each partner.

B. Use a withdrawals account for each partner.
C. Allocate net income to each partner according to the partnership agreement.
D. Allocate net loss to each partner according to the partnership agreement.
E. Tax the business entity.
AICPA: BB Industry
Blooms: Remember
Difficulty: 1 Easy
12-55
48. Partnership accounting is the same as accounting for:
A. A sole proprietorship.
B. A corporation.
C. A sole proprietorship, except that separate capital and withdrawal accounts are kept for each partner.
D. An S corporation.
E. A corporation, except that retained earnings is used to keep track of partners' withdrawals.
AICPA: BB Industry
Blooms: Remember
Difficulty: 1 Easy
49. Partners' withdrawals of assets are:
A. Credited to their withdrawals accounts.

B. Debited to their withdrawals accounts.
C. Credited to their retained earnings.
D. Debited to their retained earnings.
E. Debited to their asset accounts.
AICPA: BB Industry
Blooms: Understand
50. The withdrawals account of each partner is:
A. Closed to that partner's capital account with a credit.

B. Closed to that partner's capital account with a debit.
C. A permanent account that is not closed.
D. Credited with that partner's share of net income.
E. Debited with that partner's share of net loss.
AICPA: BB Industry
Blooms: Understand
12-56
51. R. Stetson contributed $14,000 in cash plus office equipment valued at $7,000 to the SJ Partnership.
The journal entry to record the transaction for the partnership is:
A. Debit Cash $14,000; debit Office Equipment $7,000; credit R Stetson, Capital $21,000.
B. Debit Cash $14,000; debit Office Equipment $7,000; credit SJ Partnership, Capital $21,000.
C. Debit SJ Partnership $21,000; credit R. Stetson, Capital $21,000.
D. Debit R. Stetson, Capital $21,000; credit SJ Partnership, Capital $21,000.
E. Debit Cash $14,000; debit Office Equipment $7,000; credit Common Stock $21,000.

AICPA: BB Industry
Blooms: Apply
52. T. Andrews contributed $14,000 in to the T & B Partnership. The journal entry to record the transaction
for the partnership is:
A. Debit Cash $14,000; credit T & B Partnership, Capital $14,000.

B. Debit Cash $14,000; credit T. Andrews, Capital $14,000.
C. Debit T & B Partnership $14,000; credit T. Andrews, Capital $14,000.
D. Debit T. Andrews, Capital $14,000; credit T & B Partnership, Capital $14,000.
E. Debit Cash $14,000; credit Common Stock $14,000.

AICPA: BB Industry
Blooms: Apply
53. Forman and Berry are forming a partnership. Forman will invest a building that currently is being used
by another business owned by Forman. The building has a market value of $80,000. Also, the
partnership will assume responsibility for a $20,000 note secured by a mortgage on that building. Berry
will invest $50,000 cash. For the partnership, the amounts to be recorded for the building and for
Forman's Capital account are:
A. Building, $80,000 and Forman, Capital, $80,000.

B. Building, $60,000 and Forman, Capital, $60,000.
C. Building, $60,000 and Forman, Capital, $50,000.
D. Building, $80,000 and Forman, Capital, $60,000.
E. Building, $60,000 and Forman, Capital, $80,000.

AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
12-57
54. Maxwell and Smart are forming a partnership. Maxwell is investing a building that has a market value
of $180,000. However, the building carries a $56,000 mortgage that will be assumed by the partnership.
Smart is investing $120,000 cash. The balance of Maxwell's Capital account will be:
A. $180,000.
B. $124,000.
C. $56,000.
D. $64,000.
E. $60,000.

AICPA: BB Industry
Blooms: Apply
55. Harvey and Quick have decided to form a partnership. Harvey is going to contribute a depreciable asset
to the partnership as his equity contribution to the partnership. The following information regarding the
asset to be contributed by Harvey is available:

Note payable secured by the asset* $18,000
*will be assumed by the partnership
Based on this information, Harvey's beginning equity balance in the partnership will be:
A. $76,000
B. $36,000
C. $18,000
D. $27,000
E. $45,000
Beginning Equity = Market Value of the Asset - Debt Assumed by the Partnership
Beginning Equity = $45,000 - $18,000 = $27,000

AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
12-58
56. Dalworth and Minor have decided to form a partnership. Minor is going to contribute a depreciable
asset to the partnership as her equity contribution to the partnership. The following information
regarding the asset to be contributed by Minor is available:

Note payable secured by the asset and assumed by the partnership $118,000
Based on this information, Minor's beginning equity balance in the partnership will be:
A. $276,000
B. $158,000
C. $136,000
D. $127,000
E. $18,000
Beginning Equity = Market Value of the Asset - Debt Assumed by the Partnership
Beginning Equity = $245,000 - $118,000 = $127,000

AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
57. In the absence of a partnership agreement, the law says that income (and loss) should be allocated based
on:
A. A fractional basis.
B. The ratio of capital investments.
C. Salary allowances.
D. Equal shares.
E. Interest allowances.
AICPA: BB Industry
AICPA: BB Legal
Blooms: Remember
Difficulty: 1 Easy
12-59
58. In a partnership agreement, if the partners agreed to an interest allowance of 10% annually on each
partner's investment, the interest allowance:
A. Is ignored when earnings are not sufficient to pay interest.

B. Can make up for unequal capital contributions.
C. Is an expense of the business.
D. Must be paid because the partnership contract has unlimited life.
E. Legally becomes a liability of the general partner.

AICPA: BB Industry
Blooms: Understand
59. Wheadon, Davis, and Singer formed a partnership with Wheadon contributing $60,000, Davis
contributing $50,000 and Singer contributing $40,000. Their partnership agreement called for the
income (loss) division to be based on the ratio of capital investments. If the partnership had income of
$75,000 for its first year of operation, what amount of income (rounded to the nearest thousand) would
be credited to Singer's capital account?
A. $20,000.
B. $25,000.
C. $30,000.
D. $40,000.
E. $75,000.
Singer's Share of Income = Partnership Income * Ratio of Capital Investments

Singer's Share of Income = $75,000 * [$40,000/($60,000 + $50,000 + $40,000)]
Singer's Share of Income = $75,000 * ($40,000/$150,000) = $20,000

AICPA: BB Industry
Blooms: Apply
12-60
60. Wheadon, Davis, and Singer formed a partnership with Wheadon contributing $60,000, Davis
contributing $50,000 and Singer contributing $40,000. Their partnership agreement called for the
income (loss) division to be based on the ratio of capital investments. If the partnership had income of
$75,000 for its first year of operation, what amount of income (rounded to the nearest thousand) would
be credited to Wheadon's capital account?
A. $20,000.
B. $25,000.
C. $30,000.
D. $40,000.
E. $75,000.
Wheadon's Share of Income = Partnership Income * Ratio of Capital Investments

Wheadon's Share of Income = $75,000 * [$60,000/($60,000 + $50,000 + $40,000)]
Wheadon's Share of Income = $75,000 * ($60,000/$150,000) = $30,000

AICPA: BB Industry
Blooms: Apply
61 Christie and Jergens formed a partnership with capital contributions of $300,000 and $400,000, respectively.
. Their partnership agreement calls for Christie to receive a $60,000 per year salary. Also, each partner is to
receive an interest allowance equal to 10% of a partner's beginning capital investments. The remaining
income or loss is to be divided equally. If the net income for the current year is $135,000, then Christie and
Jergens's respective shares are:
A. $67,500; $67,500.
B. $92,500; $42,500.
C. $57,857; $77,143.
D. $90,000; $40,000.
E. $35,000; $100,000.
Christie Jergens Total

Net income $135,000
Salary allowance $60,000 (60,000)
Interest allowance 30,000 $40,000 (70,000)
Balance of income 5,000
Balance divided equally 2,500 2,500 (5,000)
Total $92,500 $42,500
12-61
AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
62. Farmer and Taylor formed a partnership with capital contributions of $200,000 and $250,000,
respectively. Their partnership agreement calls for Farmer to receive a $70,000 per year salary. The
remaining income or loss is to be divided equally. If the net income for the current year is $135,000,
then Farmer and Taylor's respective shares are:
A. $67,500; $67,500.
B. $130,000; $5,000.
C. $106,140; $28,860.
D. $90,000; $45,000.
E. $102,500; $32,500.
Farmer Taylor Total

Net income $135,000
Total $102,500 $32,500 $0
AICPA: BB Industry
Blooms: Apply
63. Which of the following statements is true?
A. Partners are employees of the partnership.

B. Salaries to partners are expenses on the partnership income statement.
C. Salary allowances usually reflect the relative value of services provided by partners.
D. Salary allowances are expenses.
E. Interest allowances are expenses.

AICPA: BB Industry
AICPA: FN Reporting
Blooms: Remember
Difficulty: 1 Easy
12-62
64. Zheng invested $100,000 and Murray invested $200,000 in a partnership. They agreed to share incomes
and losses by allowing a $60,000 per year salary allowance to Zheng and a $40,000 per year salary
allowance to Murray, plus an interest allowance on the partners' beginning-year capital investments at
10%, with the balance to be shared equally. Under this agreement, the shares of the partners when the
partnership earns $105,000 in income are:
A. $52,500 to Zheng; $52,500 to Murray.

B. $35,000 to Zheng; $70,000 to Murray.
C. $57,500 to Zheng; $47,500 to Murray.
D. $42,500 to Zheng; $62,500 to Murray.
E. $70,000 to Zheng; $60,000 to Murray.
Zheng Murray Total

Net income $105,000
Salary allowance $60,000 $40,000 (100,000)
Interest allowance 10,000 20,000 (30,000)
Balance of income (25,000)
Balance divided equally (12,500) (12,500) 25,000
Total $57,500 $47,500 $0
AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
12-63
65. Brown invested $200,000 and Freeman invested $150,000 in a partnership. They agreed to an interest
allowance on the partners' beginning-year capital investments at 10%, with the balance to be shared
equally. Under this agreement, the shares of the partners when the partnership earns $205,000 in income
are:
A. $102,500 to Brown; $102,500 to Freeman.

B. $117,143 to Brown; $87,857 to Freeman.
C. $122,500 to Brown; $82,500 to Freeman.
D. $105,000 to Brown; $100,000 to Freeman.
E. $112,750 to Brown; $92,250 to Freeman.
Brown Freeman Total

Net income $205,000
Interest allowance 20,000 15,000 (35,000)
Total $105,000 $100,000 $0
AICPA: BB Industry
Blooms: Apply
66. The partnership agreement for Wilson, Pickett & Nelson, a general partnership, provided that profits be
shared between the partners in the ratio of their financial contributions to the partnership. Wilson
contributed $100,000, Pickett contributed $50,000 and Nelson contributed $50,000. In the partnership's
first year of operation, it incurred a loss of $110,000. What amount of the partnership's loss, rounded to
the nearest dollar, should be absorbed by Nelson?
A. $50,000
B. $27,500
C. $36,667
D. $0
E. $40,000
Nelson's share = $50,000/($100,000 + $50,000 + 50,000) = 25.0%

Nelson's share of loss = $110,000 * 25.0% = $27,500
If the partnership agreement does not specifically address how losses are to be allocated between the
partners, then the losses are to be shared in the same manner as profits.

AICPA: BB Industry
12-64
Blooms: Apply
Difficulty: 3 Hard
67. Olivia Greer is a partner in Made for You. An analysis of Greer's capital account indicates that during
the most recent year, she withdrew $30,000 from the partnership. Her share of the partnership's net loss
was $16,000 and she made an additional equity contribution of $10,000. Her capital account ended the
year at $150,000. What was her capital balance at the beginning of the year?
A. $154,000
B. $170,000
C. $180,000
D. $186,000
E. $196,000
Ending Balance = Beginning Balance + Contribution - Share of Loss - Withdrawals

$150,000 = Beginning Balance + $10,000 - $16,000 - $30,000
$150,000 = Beginning Balance - $36,000
Beginning Balance = $186,000

AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
12-65
68. The following information is available on TGR Enterprises, a partnership, for the most recent fiscal
year:
Total partnership capital at beginning of the year $180,000

Partnership net income for the year $150,000
Withdrawals by partners during the year $120,000
Additional investments by partners during the year $60,000
There are three partners in TGR Enterprises: Tracey, Gregory and Rodgers. At the end of the year, the
partners' capital accounts were in the ratio of 2:1:2, respectively. Compute the ending capital balances
of the three partners.
A. Tracey = $108,000; Gregory = $54,000; Rodgers = $108,000.

B. Tracey = $90,000; Gregory = $90,000; Rodgers = $90,000.
C. Tracey = $204,000; Gregory = $102,000; Rodgers = $204,000.
D. Tracey = $84,000; Gregory = $102,000; Rodgers = $84,000.
E. Tracey = $60,000; Gregory = $30,000; Rodgers = $60,000.
Ending Partnership Capital = Beginning Partnership Capital + Partnership Net Income + Aditional
Investments - Withdrawals by Partners
Ending Partnership Capital = $180,000 + $150,000 + $60,000 - $120,000 = $270,000
Based on the partners' ending capital balances in the ratio of 2:1:2, the partners would have the
following ratios: Tracey has 2/5 of the total, Gregory has 1/5 of the total and Rodgers has 2/5 of the
total. Therefore, Tracey and Rodgers have ending balances of $108,000 ($270,000 * 2/5) and Gregory
has an ending balance of $54,000 ($270,000 * 1/5).

AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
12-66
69. The following information is available on PDC Enterprises, a partnership, for the most recent fiscal
year:
Total
partnership
$1,080,00
capital at
0
beginning of
the year
Partnership net
$1,250,00
income for the
0
year
Withdrawals
by partners $320,000
during the year
Additional
investments by
$70,000
partners during
the year
There are three partners in TGR Enterprises: Pearson, Darling and Cathay. At the end of the year, the
partners' capital accounts were in the ratio of 2:2:1, respectively. Compute the ending capital balances
of Cathay.
A. $466,000.
B. $402,000.
C. $416,000.
D. $544,000.
E. $388,000.
Ending Partnership Capital = Beginning Partnership Capital + Partnership Net Income + Additional
Investments - Withdrawals by Partners
Ending Partnership Capital = $1,080,000 + $1,250,000 + $70,000 - $320,000 = $2,080,000
Pearson ending capital = $2,080,000 * 2/5 = $832,000
Darling ending capital = $2,080,000 * 2/5 = $832,000
Cathay ending capital = $2,080,000 * 1/5 = $416,000

AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
12-67
70. A partner can withdraw from a partnership by any of the following means except:
A. Selling his/her interest to another person for cash.

B. Selling his/her interest to another person in exchange for assets.
C. Receiving cash from the partnership in the amount of his/her interest.
D. Receiving assets from the partnership in the amount of his/her interest.
E. Close the business and liquidate the assets under the mutual agency principle.

AICPA: BB Industry
Blooms: Remember
Difficulty: 1 Easy
71. A bonus may be paid in all of the following situations except:
A. By a new partner when the current value of a partnership is greater than the recorded amounts of
equity.
B. By a withdrawing partner to remaining partners if the recorded value of the equity is overstated.
C. To a new partner with exceptional talents.
D. By remaining partners to a withdrawing partner if the recorded equity is understated.
E. By an existing partner to him or herself when in need of personal cash flow.

AICPA: BB Industry
Blooms: Understand
72. When a partner is added to a partnership:
A. The previous partnership ends.

B. The underlying business operations end.
C. The underlying business operations must close and then re-open.
D. The partnership must continue.
E. The partnership equity always increases.
AICPA: BB Industry
AICPA: BB Legal
Blooms: Remember
Difficulty: 1 Easy
12-68
73. A partnership recorded the following journal entry:
Cash 60,000
B. Founder, Capital 10,000
R. Aqui, Capital 10,000
H. Joiner, Capital 80,000
This entry reflects:
A. Acceptance of a new partner who invests $60,000 and receives a $20,000 bonus.
B. Withdrawal of a partner who pays a $10,000 bonus to each of the other partners.
C. Addition of a partner who pays a bonus to each of the other partners.
D. Additional investment into the partnership by Founder and Aqui.
E. Withdrawal of $10,000 each by Founder and Aqui upon the admission of a new partner.

AICPA: BB Industry
Blooms: Understand
74. Wright, Bell, and Edison are partners and share income in a 2:5:3 ratio. The partnership's capital
balances are as follows: Wright, $33,000, Bell $27,000 and Edison $40,000. Edison decides to withdraw
from the partnership, and the partners agree not to revalue the assets upon Edison's retirement. The
journal entry to record Edison's June 1 withdrawal from the partnership if Edison sells his interest to
Whitney for $45,000 after the other two partners approve Whitney as partner is:
A. Debit Edison, Capital $45,000; credit Whitney, Capital $45,000.

B. Debit Edison, Capital $40,000; credit Cash $40,000.
C. Debit Edison, Capital $40,000; debit Wright, Capital $2,500; debit Bell, Capital $2,500; credit
Whitney, Capital $45,000.
D. Debit Edison, Capital $40,000; credit Whitney, Capital $40,000.
E. Debit Edison, Capital $40,000; debit Cash $5,000; credit Whitney, Capital $45,000.

AICPA: BB Industry
Blooms: Understand
Difficulty: 3 Hard
12-69
75. Wright, Bell, and Edison are partners and share income in a 2:5:3 ratio. The partnership's capital
balances are as follows: Wright, $33,000, Bell $27,000 and Edison $40,000. Edison decides to withdraw
from the partnership, and the partners agree not to revalue the assets upon Edison's retirement. The
journal entry to record Edison's June 1 withdrawal from the partnership if Edison is paid $40,000 for his
equity is:
A. Debit Edison, Capital $40,000; credit Cash $40,000.

B. Debit Wright, Capital $20,000; Debit Bell, Capital $20,000; credit Cash $40,000.
C. Debit Wright, Capital $20,000; Debit Bell, Capital $20,000; credit Edison, Capital $40,000.
D. Debit Edison, Capital $40,000; credit Wright, Capital $20,000; credit Bell, Capital $20,000.
E. Debit Cash $40,000; credit Edison, Capital $40,000.

AICPA: BB Industry
Blooms: Understand
capital balance $67,000. Hewlett and Martin have agreed to share equally in income or loss. The
existing partners agree to accept Black with a 20% interest. Black will invest $35,000 in the partnership.
The bonus that is granted to Hewlett and Martin equals:
A. $900 each.
B. $1,500 each.
C. $600 each.
D. 600 to Hewlett; $900 to Martin.
E. $0, because Hewlett and Martin actually grant a bonus to Black.
Total Partnership Equity = Hewlett's Capital + Martin's Capital + Black's Investment

Total Partnership Equity = $64,000 + $67,000 + $35,000 = $166,000
Equity for Black = $166,000 * 0.20 (or 20%) = $33,200
Bonus to Hewlett and Martin = Cash Investment - Black's Capital (Equity)

Bonus to Hewlett and Martin = $35,000 - $33,200 = $1,800, split equally

AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
12-70
capital balance $61,000. Hewlett and Martin have agreed to share equally in income or loss. Hewlett
and Martin agree to accept Black with a 25% interest. Black will invest $35,000 in the partnership. The
bonus that is granted to Black equals:
A. $5,000.
B. $2,500.
C. $6,667.
D. $3,333.
E. $0, because Black must actually grant a bonus to Hewlett and Martin.
Total Partnership Equity = Hewlett's Capital + Martin's Capital + Black's Investment

Equity for Black = $160,000 * 0.25 (or 25%) = $40,000
Bonus to Black = Black's Capital (Equity) - Cash Investment

Bonus to Black = $40,000 - $35,000 = $5,000

AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
12-71
78. Masters, Hardy, and Rowen are dissolving their partnership. Their partnership agreement allocates
income and losses equally among the partners. The current period's ending capital account balances are
Masters, $15,000; Hardy, $15,000; Rowen, $(2,000). After all the assets are sold and liabilities are paid,
but before any contributions to cover any deficiencies, there is $28,000 in cash to be distributed. Rowen
pays $2,000 to cover the deficiency in his account. The general journal entry to record the final
distribution would be:
A. Debit Masters, Capital $15,000; debit Hardy, Capital $15,000; credit Cash $30,000.
B. Debit Masters, Capital $14,000; debit Hardy, Capital $14,000; credit Cash $28,000.
C. Debit Masters, Capital $15,000; debit Hardy, Capital $15,000; credit Rowen, Capital $2,000; credit
Cash $28,000.
D. Debit Cash $28,000; debit Rowen, Capital $2,000; credit Masters, Capital $15,000; credit Hardy,
Capital $15,000.
Cash $28,000.
Capital
Cash Masters Hardy Rowen
$28,000 $15,000 $15,000 $(2,000)
Contribution by
2,000 2,000
Rowen
Allocate cash (30,000) (15,000) (15,000) 0

AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
12-72
79. Masters, Hardy, and Rowen are dissolving their partnership. Their partnership agreement allocates
income and losses equally among the partners. The current period's ending capital account balances are
Masters, $15,000; Hardy, $15,000; Rowen, $30,000. After all the assets are sold and liabilities are paid,
but before any contributions to cover any deficiencies, there is $54,000 in cash to be distributed. The
general journal entry to record the final distribution would be:
A. Debit Masters, Capital $18,000; debit Hardy, Capital $18,000; debit Rowen, Capital $18,000; credit
Cash $54,000.
B. Debit Masters, Capital $13,000; debit Hardy, Capital $13,000; debit Rowen, Capital $28,000; credit
Cash $54,000.
C. Debit Masters, Capital $15,000; debit Hardy, Capital $15,000; debit Rowen, Capital $30,000; credit
Gain from Liquidation $6,000; credit Cash $54,000.
D. Debit Cash $54,000; credit Rowen, Capital $13,500; credit Masters, Capital $13,500; credit Hardy,
Capital $27,000.
Retained Earnings $6000; credit Cash $54,000.
$54,000 to be distributed.
Capital balances before final distributions are $15,000 + $15,000 + $30,000 = $60,000
$60,000 - $54,000 = $6,000 loss to be distributed in the amount of $2,000 each.
Each partner will receive $2,000 of the $6,000 loss.
Capital
Cash Masters Hardy Rowen
$54,000
Allocate cash (54,000) (13,000) (13,000) (28,000)

AICPA: BB Industry
Blooms: Apply
80. When a partnership is liquidated:
A. Noncash assets are distributed to partners.

B. Any gain or loss on liquidation is allocated to the partner with the highest capital account balance.
C. Liabilities are paid or settled.
D. Any remaining cash is distributed to the partners equally.
E. The business may continue to operate.

AICPA: BB Industry
12-73
Blooms: Remember
Difficulty: 1 Easy
81. A capital deficiency means that:
A. The partnership has a loss.

B. The partnership has more liabilities than assets.
C. At least one partner has a debit balance in his/her capital account.
D. At least one partner has a credit balance in his/her capital account.
E. The partnership has been sold at a loss.

AICPA: BB Industry
Blooms: Remember
Difficulty: 1 Easy
82. When a partner is unable to pay a capital deficiency:
A. The partner must take out a loan to cover the deficient balance.
B. The deficiency is absorbed by the remaining partners before distribution of cash.
C. The partnership ends before distribution of cash.
D. The deficient partner is relieved of the liability.
E. The remaining partners must wait for the deficiency to be paid before cash is distributed.
AICPA: BB Industry
AICPA: BB Legal
Blooms: Understand
12-74
83 Henry, Luther, and Gage are dissolving their partnership. Their partnership agreement allocates each partner
. 1/3 of all income and losses. The current period's ending capital account balances are Henry, $45,000;
Luther, $37,000; and Gage, $(5,000). After all assets are sold and liabilities are paid, there is $77,000 in cash
to be distributed. Gage is unable to pay the deficiency. The journal entry to record the distribution should be:
A. Debit Henry, Capital $25,667; debit Luther, Capital $25,667; debit Gage, Capital $25,666; credit Cash
$77,000.
B. Debit Henry, Capital $42,500; debit Luther, Capital $34,500; credit Cash $77,000.
C. Debit Henry, Capital $45,000; debit Luther, Capital $37,000; credit Gage, Capital $5,000; credit Cash
$77,000.
D. Debit Cash $77,000, debit Gage, Capital $5,000, credit Henry, Capital $45,000, credit Luther, Capital
$37,000.
E. Debit Cash $77,000; credit Henry, Capital $25,667; credit Luther, Capital $25,667; credit Gage, Capital
$25,666.
Capital
Cash Henry Luther
$77,000 $45,000 $37,000 $(5,000)
Allocate deficiency (2,500) (2,500)
Allocate cash (77,000) (42,500) (34,500)
AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
12-75
84 Henry, Luther, and Gage are dissolving their partnership. Their partnership agreement allocates each partner
. 1/3 of all income and losses. The current period's ending capital account balances are Henry, $45,000;
Luther, $37,000; and Gage, $(5,000). After all assets are sold and liabilities are paid, there is $77,000 in cash
to be distributed. Gage is unable to pay the deficiency. What amount of cash will Gage receive upon
liquidation?
A. $25,667.
B. $20,667.
C. $30,667.
D. Gage will be invoiced for $5,000.
E. $0.
Capital
Cash Henry Luther
$77,000 $45,000 $37,000 $(5,000)
Allocate deficiency (2,500) (2,500)
Allocate cash (77,000) (42,500) (34,500)
AICPA: BB Industry
Blooms: Apply
$250,000; the partnership assumes responsibility for a $75,000 note secured by a mortgage on the
property. Monroe invests $100,000 in cash and equipment that has a market value of $55,000. For the
partnership, the amounts recorded for the building and for Fontaine's Capital account are:
A. Building $250,000; Fontaine, Capital $250,000.

B. Building $175,000; Fontaine, Capital $175,000.
C. Building $250,000; Fontaine, Capital $75,000.
D. Building $250,000; Fontaine, Capital $175,000.
E. Building $175,000; Fontaine, Capital $75,000.

AICPA: BB Industry
Blooms: Apply
12-76
partnership, the amounts recorded for Fontaine's Capital account and for Monroe's Capital account are:
A. Fontaine, Capital $175; Monroe, Capital $45,000.

B. Fontaine, Capital $0; Monroe, Capital $100,000.
C. Fontaine, Capital $250,000; Monroe, Capital $100,000.
D. Fontaine, Capital $250,000; Monroe, Capital $155,000.
E. Fontaine, Capital $175,000; Monroe, Capital $155,000.

AICPA: BB Industry
Blooms: Apply
partnership, the amounts recorded for total assets and for total capital account are:
A. Total assets $405,000; total capital $330,000.

B. Total assets $350,000; total capital $350,000.
C. Total assets $350,000; total capital $275,000.
D. Total assets $305,000; total capital $230,000.
E. Total assets $405,000; total capital $305,000.

AICPA: BB Industry
Blooms: Apply
12-77
88. Cox, North, and Lee form a partnership. Cox contributes $180,000, North contributes $150,000, and
Lee contributes $270,000. Their partnership agreement calls for the income or loss division to be based
on the ratio of capital invested. If the partnership reports income of $150,000 for its first year, what
amount of income is credited to Cox's capital account?
A. $50,000.
B. $64,286.
C. $45,000.
D. $36,000.
E. $60,000.
Cox's Share of Income = Partnership Income * Ratio of Capital Investments

Cox's Share of Income = $150,000 *[$180,000/($180,000 + $150,000 + $270,000)]
Cox's Share of Income = $150,000 * ($180,000/$600,000) = $45,000

AICPA: BB Industry
Blooms: Apply
Lee contributes $270,000. Their partnership agreement calls for the income or loss division to be based
on the ratio of capital invested. If the partnership reports income of $150,000 for its first year, what
amount of income is credited to Lee's capital account?
A. $50,000.
B. $67,500.
C. $45,000.
D. $54,000.
E. $60,000.
Lee's Share of Income = Partnership Income * Ratio of Capital Investments

Lee's Share of Income = $150,000 * [$270,000/($180,000 + $150,000 + $270,000)]
Lee's Share of Income = $150,000 * ($270,000/$600,000) = $67,500

AICPA: BB Industry
Blooms: Apply
12-78
Lee contributes $270,000. Their partnership agreement calls for a 5% interest allowance on the partner's
capital balances with the remaining income or loss to be allocated equally. If the partnership reports
income of $150,000 for its first year, what amount of income is credited to North's capital account?
A. $50,000.
B. $63,500.
C. $61,500.
D. $47,500.
E. $45,000.
Interest Allowance = ($180,000 + $150,000 + $270,000) * 0.05 (5%) = $30,000
Share of Income = $150,000 – $30,000 (Interest Allowance) = $120,000/3 = $40,000 remainder

divided equally
North’s Interest Allowance = North Capital Investment * 0.05 (5%) = $150,000 * 0.05 = $7,500
North’s Share of Income = Remainder Divided Equally + Interest Allowance

North’s Share of Income = $40,000 + $7,500 = $47,500

AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
Lee contributes $270,000. Their partnership agreement calls for a 5% interest allowance on the partner's
capital balances with the remaining income or loss to be allocated equally. If the partnership reports
income of $174,000 for its first year, what amount of income is credited to Lee's capital account?
A. $58,000.
B. $57,000.
C. $61,500.
D. $55,500.
E. $48,000.
Interest Allowance = ($180,000 + $150,000 + $270,000) * 0.05 (5%) = $30,000

Share of Income = $174,000 - $30,000 (Interest Allowance) = $144,000/3 = $48,000
remainder divided equally
Lee's Interest Allowance = Lee Capital Investment * 0.05 (5%) = $270,000 * 0.05 (5%) = $13,500
Lee's Share of Income = Remainder Divided Equally + Interest Allowance
Lee's Share of Income = $48,000 + $13,500 = $61,500

AICPA: BB Industry
12-79
Blooms: Apply
Difficulty: 3 Hard
partnership. Kent invests $115,000 in the partnership. The amount credited to Kent's capital account is:
A. $111,00
0.
B. $115,000
.
C. $92,500.
D. $120,000.
E. $119,000
.
Total Partnership Equity = Mace's Capital + Bowen's Capital + Kent's Investment

Equity for Kent = $370,000 * 0.30 (or 30%) = $111,000

AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
12-80
partnership. Kent invests $115,000 in the partnership. The balances in Mace's and Bowen's capital
accounts after admission of the new partner equal:
A. Mace $135,000; Bowen $120,000.

B. Mace $137,000; Bowen $122,000.
C. Mace $133,000; Bowen $118,000.
D. Mace $139,000; Bowen $120,000.
E. Mace $135,000; Bowen $124,000.
Total Partnership Equity = Mace's Capital + Bowen's Capital + Kent's Investment

Equity for Kent = $370,000 * 0.30 (or 30%) = $111,000
Bonus to Mace and Bowen = Cash Investment - Kent's Capital (Equity)

Bonus to Mace and Bowen = $115,000 - $111,000 = $4,000, split equally
Mace's Capital Balance = $135,000 + $2,000 = $137,000

Bowen's Capital Balance = $120,000 + $2,000 = $122,000

AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
12-81
partnership. Aaron invests $98,000 in the partnership. The balances in Peters's and Chong's capital
accounts after admission of the new partner equal:
A. Peters $140,000; Chong $130,000.

B. Peters $146,200; Chong $136,200.
C. Peters $145,000; Chong $135,000.
D. Peters $133,800; Chong $123,800.
E. Peters $166,027; Chong $156,027.
Total Partnership Equity = Peters' Capital + Chong's Capital + Aaron's Investment

Equity for Aaron = $368,000 * 0.30 (or 30%) = $110,400
Bonus from Peters and Chong = Cash Investment - Aaron's Capital (Equity)
Bonus from Peters and Chong = $98,000 - $110,400 = $12,400, split equally and absorbed by original
partners
Peters's Capital Balance = $140,000 - $6,200 = $133,800

Chong's Capital Balance = $130,000 - $6,200 = $123,800

AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
partnership. Aaron invests $98,000 in the partnership. The amount credited to Aaron's capital account
is:
A. $81,000.
B. $102,600.
C. $110,400
.
D. $98,000.
E. $114,533
.
Total Partnership Equity = Peters's Capital + Chong's Capital + Aaron's Investment

Equity for Aaron = $368,000 * 0.30 (or 30%) = $110,400

AICPA: BB Industry
12-82
Blooms: Apply
Difficulty: 3 Hard
96. Peters, Chong, and Aaron are dissolving their partnership. Their partnership agreement allocates each
partner an equal share of all income and losses. The current period's ending capital account balances are
Peters, $54,000; Chong, $42,000; and Aaron, $(2,000). After all assets are sold and liabilities are paid,
there is $94,000 in cash to be distributed. Aaron is unable to pay the deficiency. The journal entry to
record the distribution should be:
A. Debit Peters, Capital $54,000; debit Chong, Capital $40,000; credit Cash $94,000.
B. Debit Peters, Capital $54,000; debit Chong, Capital $42,000; credit Cash $96,000.
C. Debit Peters, Capital $53,000; debit Chong, Capital $41,000; credit Cash $94,000.
D. Debit Cash $94,000, debit Aaron, Capital $2,000, credit Peters, Capital $54,000, credit Chong,
Capital $42,000.
E. Debit Cash $94,000; credit Peters, Capital $47,000; credit Chong, Capital $47,000.
Capital
Cash Peters Chong Aaron
$94,000 $54,000 $42,000 $(2,000)
Allocate deficiency (1,000) (1,000) 2,000
Allocate cash (94,000) (53,000) (41,000) 0
AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
12-83
beginning partnership capital balance for the current year is $285,000, and Atkins' beginning
partnership capital balance for the current year is $370,000. The partnership had net income of $250,000
for the year. Barber withdrew $90,000 during the year and Atkins withdrew $100,000. What is Barber's
ending equity?
A. $357,500
B. $362,500
C. $445,000
D. $320,000
E. $195,000
Barber's Ending Equity = Beginning Equity + Share of Income - Distributions

Barber's Ending Equity = $285,000 + $125,000 - $90,000 = $320,000

Blooms: Apply
for the year. Barber withdrew $90,000 during the year and Atkins withdrew $100,000. What is Barber's
return on equity?
A. 41.3
%
B. 43.9%
C. 32.7%
D. 33.8%
E. 36.5%
Barber's Ending Equity = Beginning Equity + Share of Income - Distributions

Barber's Ending Equity = $285,000 + $125,000 - $90,000 = $320,000


Blooms: Apply
Difficulty: 3 Hard
12-84
for the year. Barber withdrew $90,000 during the year and Atkins withdrew $100,000. What is Atkins's
return on equity?
A. 41.3
%
B. 43.9%
C. 32.7%
D. 33.8%
E. 36.5%
Atkins' Ending Equity = Beginning Equity + Share of Income - Distributions

Atkins' Ending Equity = $370,000 + $125,000 - $100,000 = $395,000


Blooms: Apply
Difficulty: 3 Hard
100. Fellows and Marshall are partners in an accounting firm and share net income and loss equally. Fellows'
beginning partnership capital balance for the current year is $185,000, and Marshall's beginning
for the year. Fellows withdrew $80,000 during the year and Marshall withdrew $70,000. What is
Marshall's return on equity?
A. 67.3%
B. 60.3%
C. 78.7%
D. 54.3%
E. 56.0%
Marshall's Ending Equity = Beginning Equity + Share of Income - Distributions

Marshall's Ending Equity = $260,000 + $175,000 - $70,000 = $365,000


Blooms: Apply
Difficulty: 3 Hard
12-85
101. If a company wants to protect its three investors against personal liability risk, which of the following
business forms would not be a suitable option?
A. C Corporation
B. S Corporation
C. Limited liability partnership
D. Partnership
E. Limited liability company
AICPA: BB Legal
Blooms: Understand
102. Reno contributed $104,000 in cash plus equipment valued at $27,000 to the RD Partnership. The journal
entry to record the transaction for the partnership is:
A. Debit Cash $104,000; debit Equipment $27,000; credit RD Partnership, Capital $131,000.
B. Debit Cash $104,000; debit Equipment $27,000; credit Common Stock $131,000.
C. Debit Cash $104,000; debit Equipment $27,000; credit Reno, Capital $131,000.
D. Debit Reno, Capital $131,000; credit RD Partnership, Capital $131,000.
E. Debit RD Partnership, Capital $131,000; credit Reno, Capital $131,000.

AICPA: BB Industry
Blooms: Apply
103. Bloom and Plant organize a partnership on January 1. Bloom's initial investment consists of $800 cash,
investment is cash of $2,000. These amounts are the values agreed on by both partners. The journal
entry to record Bloom's investment is:
A. Debit Cash $800; debit Equipment $1,700; credit Note Payable $500; credit Bloom, Capital $2,000.
B. Debit Cash $2,000; credit Bloom, Capital $2,000.
C. Debit Cash $800; debit Equipment $1,700; credit Bloom, Capital $2,500.
D. Debit Cash $800; debit Equipment $1,200; credit Bloom, Capital $2,000.
E. Debit Bloom, Capital $3,000; credit Common Stock $3,000.

AICPA: BB Industry
Blooms: Apply
12-86
104. Bloom and Plant organize a partnership on January 1. Bloom's initial investment consists of $800 cash,
investment is cash of $2,000. These amounts are the values agreed on by both partners. The journal
entry to record Plant's investment is:
A. Debit Cash $1,500; debit Note Payable $500; credit Plant, Capital $2,000.
B. Debit Cash $2,000; credit Note Payable $500, credit Plant, Capital $1,500.
C. Debit Bloom, Capital $2,000; credit Cash $2,000.
D. Debit Cash $2,500; credit Note Payable $500; credit Plant, Capital $2,500.
E. Debit Cash $2,000; credit Plant, Capital $2,000.

AICPA: BB Industry
Blooms: Apply
105. Wallace and Simpson formed a partnership with Wallace contributing $60,000 and Simpson
contributing $40,000. Their partnership agreement calls for the income (loss) division to be based on the
ratio of capital investments. The partnership had income of $150,000 for its first year of operation.
When the Income Summary is closed, the journal entry to allocate partner income is:
A. Debit Income Summary $150,000; credit Wallace, Capital $75,000; credit Simpson, Capital
$75,000.
B. Debit Wallace, Capital $75,000; debit Simpson, Capital $75,000; credit Income Summary $150,000.
C. Debit Income Summary $150,000; credit Wallace, Capital $90,000; credit Simpson, Capital
$60,000.
D. Debit Cash $150,000; credit Wallace, Capital $90,000; credit Simpson, Capital $60,000.
E. Debit Wallace, Capital $90,000; debit Simpson, Capital $60,000; credit Cash $150,000.
Partner's Share of Income = Partnership Income * Ratio of Capital Investments

Wallace's Share of Income = $150,000 * [$60,000/($60,000 + $40,000)] = $90,000
Simpson's Share of Income = $150,000 * [$40,000/($60,000 + $40,000]) = $60,000

AICPA: BB Industry
Blooms: Apply
12-87
106. Wallace and Simpson formed a partnership with Wallace contributing $60,000 and Simpson
contributing $40,000. Their partnership agreement calls for the income (loss) division to be based on the
ratio of capital investments. Wallace sold one-half of his partnership interest to Prince for $55,000 when
his capital balance was $78,000. The partnership would record the admission of Prince into the
partnership as:
A. Debit Wallace, Capital $55,000; credit Prince, Capital $55,000.

B. Debit Wallace, Capital $39,000; credit Prince, Capital $39,000.
C. Debit Prince, Capital $55,000; credit Wallace, Capital $55,000.
D. Debit Wallace, Capital $30,000; credit Prince, Capital $30,000.
E. Debit Wallace, Capital $39,000; debit Cash $16,000; credit Prince, Capital $55,000.
Wallace's capital balance at the time of the transaction $78,000 * ½ = $39,000.

The cash received by Wallace from Prince is a personal transaction.

AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
107. Wallace, Simpson, and Prince are partners and share income and losses in a 3:4:3 ratio. The
partnership's capital balances are Wallace, $68,000; Simpson, $90,000; and Prince, $42,000. Royal is
admitted to the partnership on July 1 with a 20% equity and invests $50,000. The partnership would
record the admission of Royal into the partnership as:
A. Debit Wallace, Capital $15,000; debit Simpson, Capital, $20,000; debit Prince, Capital $15,000;
credit Royal, Capital $50,000.
B. Debit Cash $20,000; credit Prince, Capital $20,000.
C. Debit Cash $40,000; debit Wallace, Capital $3,000; debit Simpson, Capital, $4,000; debit Prince,
Capital $3,000; credit Royal, Capital $50,000.
D. Debit Cash $50,000; credit Royal, Capital $50,000.
E. Debit Cash $50,000; credit Simpson, Capital $10,000, credit Royal, Capital $40,000.
($68,000 + $90,000 + $42,000 + 50,000) * 20% = $50,000.

Since the contribution by Royal is equal to 20% of total equity, no bonus is involved.

AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
12-88
Matching Questions
108. Match each of the following terms with the appropriate definitions.
1. The legal relationship among partners whereby

each partner can commit or bind the partnership to
any contract within the scope of the partnership's Statement of
business. partners' equity 4
2. A corporation with 100 or fewer stockholders that
can elect to be treated as a partnership for income tax
purposes but retain the same limited liability as other Limited
corporations. partnership 7
3. The legal relationship among general partners that
makes each of them personally responsible for Limited
paying the debts of the partnership if the partnership liability
cannot pay. partnership 5
4. A financial statement that shows total capital
balances at the beginning of the period, any
additional investment by partners, the income or loss Unlimited
of the period, the partners' withdrawals, and the liability of
ending capital balances. partners 3
5. A partnership that protects innocent partners from
malpractice or negligence claims resulting from the Partnership
acts of another partner. contract 8
6. A corporation that does not qualify for nor elect to
be treated as a partnership for income tax purposes
and therefore is subject to income taxes. Partnership 10
7. A partnership that has two classes of partners,
limited partners and general partners. Limited
partners have no personal liability beyond the amount
they invest in the partnership, and have no active role
except as specified in the partnership agreement. General partner 9
8. The agreement between partners that sets terms
under which the affairs of the partnership are
conducted. Mutual agency 1
9. A partner who assumes unlimited liability for the
debts of the partnership. C corporation 6
10. An unincorporated association of two or more
persons to pursue a business for profit as co-owners. S corporation 2
AICPA: BB Industry
AICPA: BB Legal
Blooms: Remember
Difficulty: 1 Easy
Short Answer Questions
12-89
109. Identify and discuss the key characteristics of partnerships. Also, identify other organizations that
possess partnership characteristics.
Partnerships are unincorporated associations of two or more persons who join to pursue a business for
profit as co-owners. Partners sign a partnership agreement and are subject to mutual agency and
unlimited liability for acts of the partnership. Partnerships have limited life, and are not taxable entities.
Several types of business organizations such as S corporations, limited liability partnerships and limited
liability companies have partnership characteristics related to taxability and/or liability of the partners.
AICPA: BB Industry
AICPA: BB Legal
Blooms: Understand
110. Define the partner return on equity ratio and explain how a specific partner would use this ratio.
The partner return on equity ratio is calculated by dividing the partner's income by the average equity of
that partner. This ratio can be calculated for individual partners or for the total partnership. It can be
used by a partner to help determine whether additional investment or withdrawal of resources is best for
that partner.
Blooms: Understand
111. How are partners' investments in a partnership recorded?
When partners invest in a partnership, their individual contributions are credited to each partner's capital
account at an agreed-on value. The assets contributed are debited to the appropriate asset account.
Partners may contribute assets that are encumbered by liabilities that are credited to the appropriate
liability account and reduce their capital investment.
AICPA: BB Industry
Blooms: Understand
12-90
112. Discuss the options for the allocation of income and loss among partners, including with and without a
partnership agreement.
A partnership agreement should specify how to allocate partnership income or loss among partners.
Allocation can be made based on stated ratios, capital balances, salary allowances, interest allowances
or a combination of the above methods. In the absence of a partnership agreement, income and loss are
shared equally by the partners.
AICPA: BB Industry
Blooms: Understand
113. What are the ways that a new partner can be admitted to an existing partnership? Explain how to
account for the admission of the new partner under each of these circumstances.
A new partner may purchase a partnership interest from one or more existing partners. In this case, a
capital account is established for the new partner equal to the portion of the existing partners' interest
that was purchased from that partner or partners. This transaction is a personal transaction between one
or more current partners and the new partner. A new partner may invest assets in the existing
partnership. This is a transaction between the new partner and the partnership. In this case, a capital
account is established for the new partner equal to the portion of the partnership purchased. When the
current value of a partnership is greater than the recorded amounts of equity, the partners usually require
the new partner to pay a bonus for the privilege of joining. When the partnership needs additional cash
or the new partner has exceptional talents, the existing partners may grant a bonus to the new partner.
AICPA: BB Industry
Blooms: Understand
114. What are the ways a partner can withdraw from a partnership? Explain how to account for the
withdrawal of a current partner from a partnership.
A partner may sell his or her interest in the partnership to a new partner who pays for it in cash or other
assets. In this case, the partnership debits the old partner's capital account and credits the new partner's
capital account. A partner may also withdraw and have cash or other assets of the partnership distributed
to him or her in settlement of his or her interest. If the recorded value of the withdrawing partner's
interest is overstated, then the withdrawing partner would give the remaining partners a bonus. If the
withdrawing partner's interest is understated, the withdrawing partner receives a bonus from the
remaining partners.
12-91
AICPA: BB Industry
Blooms: Understand
115. Explain the steps involved in the liquidation of a partnership.
Four steps are involved in the liquidation process: (1) Record the sale of noncash assets for cash and any
gain or loss from their liquidation; (2) Allocate any gains or losses from liquidation to the partners'
capital accounts using their income-and-loss sharing ratio; (3) Liabilities of the partnership are paid or
settled; and, (4) Any remaining cash is distributed to the partners based on their capital balances.
AICPA: BB Industry
Blooms: Understand
116. What factors should be considered before establishing a partnership?
Anyone considering forming a partnership would be wise to consider the manner in which partnerships
are taxed, the mutual agency aspect of partnerships, the unlimited liability aspect of partnerships and the
fact that partnership assets are considered to be jointly owned by all partners. Moreover, a formal,
written partnership agreement should be developed to detail each partner's expectations.
AICPA: BB Industry
Blooms: Understand
Essay Questions
12-92
117. Cinema Products LP is organized as a limited partnership that sells movie props. Information related to
capital balances is given below. Compute the partner return on equity for each limited partner. How
would each partner evaluate the success of the partnership? What would you recommend the partners do
with respect to additional investments or withdrawals?
Turner Kelly Total

Capital balance, beginning of year 890,000 570,000 1,460,000
Partner return on equity = Partner net income/Average partner equity

Turner's ending equity = $890,000 + 85,000 - $40,000 = $935,000
Turner's partner return on equity = $85,000/[($890,000 + $935,000)/2] = 9.3%
Kelly's ending equity = $570,000 + 65,000 - 25,000 = $610,000
Kelly's partner return on equity = $65,000/[($570,000 + $610,000)/2] = 11.0%
The year shown produced good returns for both partners with Kelly's return being somewhat higher.
Since the capital balances are fairly large amounts, the partners may want to consider withdrawing
larger amounts, reducing the capital balances. If the same earnings stream continues, this would yield a
higher return on partner's equity. Sufficient quick assets would need to be available for the partnership
to do this.

AICPA: BB Critical Thinking
AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
12-93
118. Cinema Products LP is organized as a limited partnership that sells movie props. Information related to
the capital balances is given below. Compute the partnership return on equity.
Kelly Turner
Total
570,00
Capital balance, beginning of year 890,000 1,460,000
0
Partnership return on equity = Partnership net income/Average partnership equity

Partnership ending equity = $1,460,000 + 150,000 - $65,000 = $1,545,000
Partnership average equity = ($1,460,000 + $1,545,000)/2 = $1,502,500
Partnership return on equity = 150,000/$1,502,500 = 10.0%

AICPA: BB Critical Thinking
AICPA: BB Industry
Blooms: Apply
12-94
119. Caroline Meeks and Charlie Fox decide to form a partnership on August 1. Meeks invests the following
assets and liabilities in the new partnership:
Market Value
Land $80,000
Building 250,000
Note
114,000
payable
The note payable is associated with the building and the partnership will assume responsibility for the
loan. Fox invested $100,000 in cash and $95,000 in equipment in the new partnership. Prepare the
journal entries to record the two partners' original investments in the new partnership.
Aug. 1 Land 80,000

Building 250,000
Note Payable 114,000
C. Meeks, Capital 216,000
1 Cash 100,000
Equipment 95,000
C. Fox, Capital 195,000
AICPA: BB Industry
Blooms: Apply
12-95
120. Montez and Flair formed a partnership. Montez contributed $15,000 cash and accounts receivable worth
$11,000. Flair contributed cash of $5,000; inventory valued at $16,000; and supplies valued at $2,000.
Prepare the journal entries to record each partner's investment in the new partnership.
Cash 15,000
Accounts Receivable 11,000
Montez, Capital 26,000
Cash 5,000
Inventory 16,000
Supplies 2,000
Flair, Capital 23,000
AICPA: BB Industry
Blooms: Apply
121. MacArthur, Strong, and Viet form a partnership. MacArthur contributes $190,000 cash and Strong
contributes $200,000 in cash. Viet contributes equipment worth $215,000. Prepare the single journal
entry to record the formation of this partnership.
Cash ($190,000 +
390,000
$200,000)
Equipment 215,000
MacArthur, Capital 190,000
Strong, Capital 200,000
Viet, Capital 215,000
AICPA: BB Industry
Blooms: Apply
12-96
122. Ranger and Sol formed a partnership with capital contributions of $150,000 and $180,000, respectively.
Their partnership agreement called for Ranger to receive a $60,000 annual salary allowance. They also
agreed to allow each partner a share of income equal to 10% of their initial capital investments. The
remaining income or loss is to be divided equally. If the net income for the current year is $110,000,
what are Ranger's and Sol's respective shares?
Ranger Sol Total

Net income $110,000
Salary Allowance $60,000 (60,000)
Interest allowance
$150,000 × 0.10 15,000 (15,000)
$180,000 × 0.10 18,000 (18,000)
Remainder 17,000
Allocation of remainder 8,500 8,500 (17,000)
Total $83,500 $26,500 -0-
AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
12-97
123. Bannister invested $110,000 and Wilder invested $99,500 in a new partnership. They agreed to an
annual interest allowance of 10% on the partners' beginning-year capital balance, with the balance of
income or loss to be divided equally. Under this agreement, what are the income or loss shares of the
partners if the annual partnership income is $202,000?
Bannister Wilder Total

Total net income $202,000
Allocated as interest
Bannister (10% on $110,000) 11,000 (11,000)
Wilder (10% on $99,500) 9,950 (9,950)
Allocated equally 90,525 90,525 (181,050)
Shares of the partners $101,525 $100,475 $0
AICPA: BB Industry
Blooms: Apply
12-98
124. Bannister invested $110,000 and Wilder invested $99,000 in a new partnership. Their partnership
agreement called for Wilder to receive a $70,000 annual salary allowance. They also agreed to an
annual interest allowance of 5% on the partners' beginning-year capital balance, with the balance of
income or loss to be divided equally. Under this agreement, what are the income or loss shares of the
partners if the annual partnership income is $82,000?

Bannister (5% on $110,000) 5,500 (5,500)
Wilder (5% on $99,000) 4,950 (4,950)
Allocated equally 775 775 (1,550)
AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
125. Bannister invested $110,000 and Wilder invested $99,000 in a new partnership. Their partnership
agreement called for Wilder to receive a $70,000 annual salary allowance. Under this agreement, what
are the income or loss shares of the partners if the annual partnership income is $90,000?

AICPA: BB Industry
Blooms: Apply
12-99
12-100
12 Fallon and Springer formed a partnership on January 1. Fallon contributed $90,000 cash and equipment with
6. a market value of $60,000. Springer's investment consisted of: cash, $30,000; inventory, $20,000; all at
market values. Partnership net income for Year 1 and Year 2 was $75,000 and $120,000, respectively.
1. Determine each partner's share of the net income for each year, assuming each of the following
independent situations:
(a) Income is divided based on the partners' failure to sign an agreement.

(b) Income is divided based on a 2:1 ratio (Fallon: Springer).
(c) Income is divided based on the ratio of the partners' original capital investments.
(d) Income is divided based on interest allowance of 12% on the original capital investments; salary
allowance to Fallon of $30,000 and Springer of $25,000; and the remainder to be divided equally.
2. Prepare the journal entry to record the allocation of the Year 1 income under alternative (d) above.
Part 1: Calculation of partners' capital contributions:
Fallon Springer Total

Cash $90,000 $30,000 $120,000
Equipment 60,000 60,000
Inventory 20,000 20,000
Total contribution $150,000 $50,000 $200,000
Year 1
Net income: $75,000
Fallon Springer
(a) Net income distributed on a 1:1 basis $37,500 $37,500
(b) Net income distributed on a 2:1 basis $50,000 $25,000
Net income distributed based on ratio of
(c) $56,250 $18,750
original capital investments (75:25)
(d) Year 1 Year 2

Fallo Sprin Fallo Sprin
Total Total
n ger n ger
Net $75,0 $120,
income 00 000
$30,0 $25,00 (55,0 $30,0 $25,00 (55,00
Salary
00 0 00) 00 0 0)
12% 18,00 6,000 (24,0 18,00 6,000 (24,00
12-101
interest
allowa 0 00) 0 0)
nce
Balance (4,00 41,00
of income 0) 0
Remainde (2,00 (2,000 20,50 (41,00
r allocated 4,000 20,500
0) ) 0 0)
$46,0 $29,00 $68,5 $51,50
Total $0 $0
00 0 00 0
Part 2:
Dec. 75,00
Income summary
31 0
Fallon, Capital 46,000
Springer, Capital 29,000
AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
12-102
127. Lin and Coral invested $99,000 and $126,000, respectively, in a partnership they began one year ago.
Assuming the partnership earned $120,000 during the current year; compute the share of the net income
each partner should receive under each of these independent assumptions.
1. The partnership contract specifies salary allowances of $45,000 to Lin and $60,000 to Coral, and any
balance shared equally.
Lin Coral Allocated

Net Income
Salary allowance
Remainder
Total
2. The partnership contract specifies salary allowances of $45,000 to Lin and $60,000 to Coral, interest
allowance of 10% on the partners' beginning capital balance for the year.
Cora
Lin Allocated
l
Net Income
Salary allowance
Interest allowance
Remainder
Total
Part 1
Lin Coral Allocated

Net
$120,000
income
Salary
$45,000 $60,000 (105,000)
allowance
Remainder 15,000
Allocation
of 7,500 7,500 (15,000)
remainder
12-103
Total $52,500 $67,500 $0
Part 2:
Lin Coral Allocated

Net income $120,000
Salary allowance $45,000 $60,000 (105,000)
Interest Allowance
$99,000 × 0.10 9,900 (9,900)
$126,000 × 0.10 12,600 (12,600)
Remainder $(7,500)
Allocation of remainder (3,750) (3,750) 7,500
Total $51,150 $68,850 $0

AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
12-104
128. Glade, Marker, and Walters are partners with beginning-year capital balances of $100,000, $50,000, and
$50,000, respectively. Partnership net income for the year is $84,000. Make the necessary journal entry
to close Income Summary to the capital accounts if:
a. Partners agree to divide income based on their beginning-year capital balances.

b. Partners agree to divide income based on the ratio of 5:3:2 (Glade:Marker:Walters), respectively.
c. Partnership agreement is silent as to division of income and less.
(a) Income Summary 84,000

Glade, Capital ($84,000 × ($100,000/$200,000)) 42,000
Marker, Capital ($84,000 × ($50,000/$200,000)) 21,000
Walters, Capital ($84,000 × ($50,000/$200,000)) 21,000
(b) Income Summary 84,000

Glade, Capital ($84,000 × 5/10) 42,000
Marker, Capital ($84,000 × 3/10) 25,200
Walters, Capital ($84,000 × 2/10) 16,800
(c) Income Summary 84,000

Glade, Capital ($84,000 × 1/3) 28,000
Marker, Capital ($84,000 × 1/3) 28,000
Walters, Capital ($84,000 × 1/3) 28,000
AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
12-105
129. Glade, Marker, and Walters are partners with beginning-year capital balances of $250,000, $150,000,
and $100,000, respectively. Partnership net income for the year is $192,000. Make the necessary journal
entry to close Income Summary to the capital accounts if partners agree to divide income based on their
beginning-year capital balances.
(a) Income Summary 192,000

Glade, Capital ($192,000 × ($250,000/$500,000)) 96,000
Marker, Capital ($192,000 × ($150,000/$500,000)) 57,600
Walters, Capital ($192,000 × ($100,000/$500,000)) 38,400
AICPA: BB Industry
Blooms: Apply
130. Jakobs, Penn, and Lundt are partners with beginning-of-year capital balances of $400,000, $320,000,
and $160,000, respectively. The partners agreed to share income and loss as follows: Salary of $30,000
to Jakobs, $50,000 to Penn, and $36,000 to Lundt. An interest allowance of 8% on beginning-of-year
capital balances. Any remaining balance is to be divided equally. If partnership net income for the year
is $190,000, determine each partner's share and make the appropriate journal entry to close the Income
Summary to the capital accounts.
Jakobs Penn Lundt Allocated

Income $190,000
Salary allowance $30,000 $50,000 $36,000 (116,000)
Interest at 8% 32,000 25,600 12,800 (70,400)
Remainder $3,600
Balance allocated 1,200 1,200 1,200 ($3,600)
Total $63,200 $76,800 $50,000 $0
Income Summary 190,000

Jakobs, Capital 63,200
Penn, Capital 76,800
Lundt, Capital 50,000

AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
12-106
131. Darien and Hayden agree to accept Kevin into their partnership. Kevin will contribute $22,000 in cash.
Prepare the journal entry to record this transaction.
Cash 22,000
Kevin, Capital 22,000
AICPA: BB Industry
Blooms: Understand
132. Palmer withdraws from the FAP Partnership. The remaining partners agree to buy out her share for her
capital balance of $65,000. Prepare the journal entry to record the withdrawal from the partnership.
65,00
Palmer, Capital
0
Cash 65,000
AICPA: BB Industry
Blooms: Understand
133. Lemon and Parks are partners. On October 1, Lemon's capital balance is $75,000, and Parks' capital
balance is $125,000. With the partnership's approval, Parks sells ½ of his partnership interest to
Tambling for $70,000. Prepare the journal entry to record this transaction in the partnership records.
Parks, Capital 62,500

Tambling, Capital 62,500
AICPA: BB Industry
Blooms: Understand
12-107
134. Leto and Duncan allow Gunner to purchase a 25% interest in their partnership for $30,000 cash. Gunner
has exceptional talents that will enhance the partnership. Leto's and Duncan's capital account balances
are $55,000 each. The partners have agreed to share income or loss equally. Prepare the general journal
entry to record the admission of Lepley to the partnership.
Cash 30,000
Leto, Capital 2,500
Duncan, Capital 2,500
Gunner, Capital 35,000
Existing partnership capital = $110,000; $110,000 + Gunner investment of $30,000 = $140,000;

$140,000 * 25% = $35,000. Gunner receives a bonus of $5,000 split evenly between Leto and Duncan.

AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
135. Conklin plans to leave the CAP Partnership. The recorded value of his capital account is $48,000. The
remaining partners Arthurs and Preston agree to pay Conklin $40,000 cash and Conklin accepts. The
partners share income and loss equally. Prepare the general journal entry to record the withdrawal from
the partnership.
Conklin, Capital 48,000

Cash 40,000
Arthurs, Capital 4,000
Preston, Capital 4,000
AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
12-108
136. Conklin plans to leave the CAP Partnership. The recorded balance in her capital account is $48,000. The
remaining partners, Arthurs and Preston, agree to pay Conklin $58,000 cash and Conklin accepts. The
partners share income and loss equally. Prepare the journal entry to record the transaction.
Conklin, Capital 48,000

Arthurs, Capital 5,000
Preston, Capital 5,000
Cash 58,000
AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
137. Kramer and Jones allow Sanders to purchase a 25% interest in their partnership for $50,000 cash.
Kramer and Jones both have capital balances of $55,000 each, and have agreed to share income and loss
equally. Prepare the journal entry to record the admission of Sanders to the partnership.
Cash 50,000
Kramer, Capital 5,000
Jones, Capital 5,000
Sanders, Capital 40,000
AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
12-109
138. The Redtail Partnership agrees to dissolve. The remaining cash balance after liquidating partnership
assets and liabilities is $70,000. The final capital account balances are: Paulson, $35,000; Gray,
$25,000; and Chang, $10,000. Prepare the journal entry to distribute the remaining cash to the partners.
Paulson, Capital 35,000

Gray, Capital 25,000
Chang, Capital 10,000
Cash 70,000
AICPA: BB Industry
Blooms: Apply
139. The Redtail Partnership agrees to dissolve. The cash balance after selling all assets and paying all
liabilities is $56,000. The final capital account balances are: Paulson, $33,000; Gray, $27,000; and
Chang, ($4,000). Chang agrees to pay $4,000 cash from personal funds to settle his deficiency. Prepare
the journal entries to record the transactions required to dissolve this partnership.
1. Cash 4,000
2 Paulson, Capital 33,000
Cash 60,000
AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
12-110
140. The Redtail Partnership agrees to dissolve. The cash balance after selling all assets and paying all
liabilities is $60,000. The final capital account balances are: Paulson, $35,000; Gray, $29,000; and
Chang, ($4,000). Chang is unable to pay the capital deficiency. Prepare the journal entries to record the
transactions required to dissolve this partnership.
1. Paulson, Capital 2,000

Gray, Capital 2,000
2. Paulson, Capital 33,000
Cash 60,000
AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
12-111
141. Sharon and Nancy formed a partnership by making capital contributions of $130,000 and $195,000
respectively. They predict annual partnership income of $230,000 and are considering the following
alternative plans of sharing income and loss: (a) in the ratio of their initial capital investments; or (b)
salary allowances of $40,000 to Sharon and $35,000 to Nancy; interest allowances of 12% on their
initial capital investments; and the balance shared equally. Assuming that both partners put about the
same amount of time into the business, which method of allocating income would be best?
Plan Calculation Sharon Nancy Total

(a) $230,000 × ($130,000/$325,000) $92,000
$230,000 × ($195,000/$325,000) $138,000 $230,000
Total Allocated $92,000 $138,000 $230,000
(b) Net income $230,000
Salary allowances $40,000 $35,000 $(75,000)
Balance of income $155,000
Interest allowances
12% × $130,000 $15,600
12% × $195,000 $23,400
Total interest $(39,000)
Balance allocated equally $58,000 $58,000 $(116,000)
Balance of income $ –
Shares of partners $113,600 $116,400
Plan (b) would be the better distribution of income because it takes into account all factors and still
allows a reasonable return on the initial investment.

AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
12-112
142. Sharon and Nancy formed a partnership by making capital contributions of $130,000 and $195,000
respectively. The annual partnership income of $230,000 is to be allocated assuming a salary allowance
of $40,000 to Sharon and $35,000 to Nancy; interest allowances of 12% on their initial capital
investments; and the balance shared equally. Prepare the entries to record the initial capital investments,
the allocation of net income, and close the partner's withdrawal accounts assuming that Sharon
withdrew $50,000 and Nancy withdrew $45,000.
(a) Cash 325,000

Sharon,
130,000
Capital
Nancy, Capital 195,000
(b) Income Summary 230,000

Sharon,
113,600
Capital
Nancy,
116,400
Capital
(c) Sharon, Capital 50,000

Nancy 45,000
Sharon,
50,000
Withdrawals
Nancy,
45,000
Withdrawals
AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
12-113
143. Kramer and Feldman Company is organized as a partnership. At the prior year-end, Kramer's equity
balance was $352,000 and Feldman's was $256,000. For the current year, partnership net income is
$137,000 ($77,000 allocated to Kramer and $60,000 allocated to Feldman); withdrawals are $87,000
($45,000 for Kramer and $42,000 for Feldman). Compute the total partnership return on equity and the
Total partnership return on equity = Net Income/Average equity

= $137,000/[($608,000 + $658,000)/2]
= $137,000/$633,000 = 21.6%
Kramer partner return on equity = Partner net income/Average partner equity

= $77,000/[($352,000 + $384,000)/2]
= $77,000/$368,000 = 20.9%
Feldman partner return on equity = Partner net income/Average partner equity

= $60,000/[($256,000 + $274,000)/2]
= $60,000/$265,000 = 22.6%

Blooms: Apply
Difficulty: 3 Hard
12-114
144. Masco, Short, and Henderson who are partners in the MSH Company share income and loss in a 2:2:1
ratio. They plan to liquidate their partnership. At liquidation, their balance sheet appears as follows.
Prepare journal entries for (a) the sale of land and equipment sold as a package for $500,000, (b) the
allocation of the gain or loss, (c) the payment of the liabilities, and (d) the distribution of cash to the
individual partners.
MSH Company
Balance Sheet
January 31
Assets Liabilities and Equity
Cash $200,000 Accounts Payable $221,500
Equipment 200,000 Masco, Capital 210,000
Land 350,000 Short, Capital 178,000
Henderson, Capital 140,500
Total assets $750,000 Total liabilities and equity $750,000
(a) Cash 500,000

Loss from liquidation 50,000
Equipment 200,000
Land 350,000
(b) Masco, Capital (50,000 * 2/5) 20,000
Short, Capital (50,000 * 2/5) 20,000
Henderson, Capital (50,000 * 1/5) 10,000
Loss from liquidation 50,000
(c) Accounts Payable 221,500
Cash 221,500
(d) Masco, Capital (210,000 - 20,000) 190,000
Short, Capital (178,000 - 20,000) 158,000
Henderson, Capital (140,500 - 10,000) 130,500
Cash (200,000 + 500,000 - 221,500) 478,500
AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
12-115
145. Tower, Knight, and Spears are partners who share income and loss in a 3:2:2 ratio. The partnership's
capital balances are as follows: Tower, $332,000; Knight, $124,000; and Spears, $214,000. Spears
decides to withdraw from the partnership, and the partners agree not to have the assets revalued upon
Spears' retirement. Prepare journal entries to record Spears' withdrawal from the partnership under each
of the following separate assumptions: Spears (a) sells his interest to Conner for $200,000 after Tower
and Knight approve the entry of Conner as a partner; (b) is paid $214,000 in partnership cash for his
equity; (c) is paid $205,000 in partnership cash for his equity; (d) is paid $220,000 in partnership cash
for his equity.
(a) Spears, Capital 214,000

Conner,
214,000
Capital
(b) Spears, Capital 214,000

Cash 214,000
(c) Spears, Capital 214,000

Tower,
Capital (9,000 * 5,400
3/5)
Knight,
Capital (9,000 * 3,600
2/5)
Cash 205,000
(d) Spears, Capital 214,000

Tower, Capital
3,600
(6,000 * 3/5)
Knight, Capital
2,400
(6,000 * 2/5)
Cash 220,000
AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
12-116
146. Tower, Knight, and Spears are partners who share income and loss in a 4:2:2 ratio. The partnership's
capital balances are as follows: Tower, $292,000; Knight, $114,000; and Spears, $194,000. Damsel is
admitted to the partnership on March 1 with a 25% equity. Prepare the journal entries to record
Damsel's entry into the partnership under each of the following separate assumptions: Damsel invests
(a) $200,000; (b) $180,000; and (c) $240,000.
(a) Cash 200,000

Damsel,
Capital (800,000 200,000
* .25)
(b) Cash 180,000

Tower, Capital
7,500
(15,000 * 4/8)
Knight, Capital
3,750
(15,000 * 2/8)
Spears, Capital
3,750
(15,000 * 2/8)
Damsel,
Capital (780,000 195,000
* .25)
(c) Cash 240,000

Tower,
Capital (30,000 * 15,000
4/8)
Knight,
Capital (30,000 * 7,500
2/8)
Spears,
Capital (30,000 * 7,500
2/8)
Damsel,
Capital (840,000 210,000
* .25)
AICPA: BB Industry
12-117
Blooms: Apply
Difficulty: 3 Hard
12-118
147. On May 1, Gosworth and Jordan formed a partnership. Gosworth contributed cash of $100,000 and
equipment valued at $142,000. Jordan contributed land valued at $130,000 and a building valued at
$250,000. The partnership also assumed responsibility for Jordan's $120,000 long-term note payable
associated with the land and building. The partners agreed to share income as follows: Gosworth is to
receive a salary allowance of $38,000, both are to receive an annual interest allowance of 8% of their
beginning-year capital investments, and any remaining income or loss is to be shared equally. During
the year, Gosworth withdrew $40,000 and Jordan withdrew $42,000 cash. After the adjusting and
closing entries are made to the revenue and expense accounts at the end of the year, the Income
Summary account had a credit balance of $140,000. Prepare the journal entries to record (a) the
partners' initial capital investments, (b) their cash withdrawals, and (c) closing of both the Withdrawals
and Income Summary accounts.
(a) Cash 100,000

Equipment 142,000
Land 130,000
Building 250,000
Long-term note payable 120,000
Gosworth, Capital 242,000
Jordan, Capital 260,000
(b) Gosworth, Withdrawals 40,000

Jordan, Withdrawals 42,000
Cash 82,000
(c) Gosworth, Capital 40,000

Gosworth, Withdrawals 40,000
Jordan, Withdrawals 42,000
Income Summary 140,000

Gosworth, Capital 88,280
Share to Share to Income

Gosworth Jordan Allocated
12-119
Salary Allowance $38,000 (38,000)
Gosworth (8% on
19,360
$242,000)
Jordan (8% on
20,800 (40,160)
$260,000)
AICPA: BB Industry
Blooms: Apply
Difficulty: 3 Hard
148. Mesner's and Sanchez's company is organized as a partnership. At the prior year-end, Mesner's equity
balance was $258,000 and Sanchez's was $212,000. For the current year, partnership net income is
$125,000 ($75,000 allocated to Mesner and $50,000 allocated to Sanchez); withdrawals are $77,000
($40,000 for Mesner and $37,000 for Sanchez). Compute the total partnership return on equity and the
Total partnership return on equity = Net Income/Average equity

= $125,000/[($470,000 + $518,000)/2]
= $125,000/$494,000 = 25.3%
Mesner's partner return on equity = Partner net income/Average partner equity

= $75,000/[($258,000 + $293,000)/2]
= $75,000/$275,500 = 27.2%
Sanchez's partner return on equity = Partner net income/Average partner equity

= $50,000/[($212,000 + $225,000)/2]
= $50,000/$218,500 = 22.9%

Blooms: Apply
Difficulty: 3 Hard
12-120
Fill in the Blank Questions
149. The life of a partnership is ____________________ in duration.
limited
AICPA: BB Industry
AICPA: BB Legal
Blooms: Remember
Difficulty: 1 Easy
150. A ________________ is an unincorporated association of two or more people to pursue a business for
profit as co-owners.
partnership
AICPA: BB Industry
AICPA: BB Legal
Blooms: Remember
Difficulty: 1 Easy
151. __________________ means that partners can commit or bind the partnership to any contract within the
scope of the partnership business.
Mutual agency
AICPA: BB Industry
AICPA: BB Legal
Blooms: Remember
Difficulty: 1 Easy
152. __________________ implies that each partner in a partnership can be called on to personally pay a
partnership's debts.
Unlimited liability
AICPA: BB Industry
AICPA: BB Legal
Blooms: Remember
Difficulty: 1 Easy
12-121
153. A partnership that has at least two classes of partners, general and limited, allows the limited partners to
have no personal liability beyond the amounts they invest in the partnership, and the limited partners
have no active role except as specified in the partnership agreement is a ___________________
partnership.
limited
AICPA: BB Industry
AICPA: BB Legal
Blooms: Remember
Difficulty: 1 Easy
154. A partnership designed to protect innocent partners from malpractice or negligence claims resulting
from the acts of other partners is a ________________________ partnership.
limited liability
AICPA: BB Industry
AICPA: BB Legal
Blooms: Remember
Difficulty: 1 Easy
155. A relatively new form of business organization that protects partners with limited liability, allows
limited partners to assume an active management role, and is taxed as a partnership is a
______________________________.
limited liability company (or LLC)
AICPA: BB Industry
AICPA: BB Legal
Blooms: Remember
Difficulty: 1 Easy
156. Partners in a partnership are not taxed on their withdrawals, but rather on
_____________________________.
share of partnership income
AICPA: BB Industry
AICPA: BB Legal
Blooms: Remember
Difficulty: 1 Easy
12-122
157. Partner net income divided by average partner equity equals ______________________.
Partner return on equity
AICPA: BB Industry
Blooms: Remember
Difficulty: 1 Easy
158. When a partner invests in a partnership, his/her capital account is __________ for the invested amount.
credited

AICPA: BB Industry
Blooms: Understand
159. During the closing process, partner's capital accounts are _______________ for their share of net
income and _________________ for their share of net loss.
credited; debited
answers must appear in this order

AICPA: BB Industry
Blooms: Understand
160. During the closing process, each partner's withdrawals account is closed to
_________________________.
that partner's capital account

AICPA: BB Industry
Blooms: Understand
161. If partners agree on how to share income, but say nothing about losses, then losses are shared
___________________.
in the same manner as income

AICPA: BB Industry
Blooms: Understand
12-123
162. A partner can be admitted into a partnership by _________________________ or by

__________________________________.
purchasing an interest from a current partner; investing cash or other net assets into the
partnership
answers can appear in any order

AICPA: BB Industry
Blooms: Understand
163. If a partner withdraws from a partnership and the recorded value of his or her equity is overstated, then
a bonus goes to _________________________; if the recorded value of the withdrawing partner's
equity is understated, then a bonus goes to ____________________.
the remaining partners; the withdrawing partner
answers must appear in this order

AICPA: BB Industry
Blooms: Understand
164. At least one partner having a debit balance in his/her capital account at the point of the final distribution
of cash is known as a _________________________.
capital deficiency

AICPA: BB Industry
Blooms: Remember
Difficulty: 1 Easy
12-124

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Chapter 12

Accounting for Partnerships

True / False Questions

1. A partnership has a limited life.

8. In a limited partnership the general partner has unlimited liability.

12. Partners' withdrawals are debited to their separate withdrawals accounts.

23. When a partner leaves a partnership, the present partnership ends.

30. When a partnership is liquidated, its business is ended.

Multiple Choice Questions

36. Advantages of a partnership include:

37. A partnership agreement:

A. Is not binding unless it is in writing.

38. Mutual agency means

A. Creditors can apply their claims to partners' personal assets.

A. Mutual agency partnership.

A. The partner's authority must be derived from the partnership agreement.

Beginning of the year balance $22,000

What is Smit's partner return on equity during the year in question?

47. Partnership accounting does not:

A. Use a capital account for each partner.

48. Partnership accounting is the same as accounting for:

49. Partners' withdrawals of assets are:

A. Credited to their withdrawals accounts.

A. Closed to that partner's capital account with a credit.

A. Debit Cash $14,000; credit T & B Partnership, Capital $14,000.

A. Building, $80,000 and Forman, Capital, $80,000.

Historical cost of the asset $76,000

Historical cost of the asset $276,000

A. Is ignored when earnings are not sufficient to pay interest.

63. Which of the following statements is true?

A. Partners are employees of the partnership.

A. $52,500 to Zheng; $52,500 to Murray.

A. $102,500 to Brown; $102,500 to Freeman.

Total partnership capital at beginning of the year $180,000

A. Tracey = $108,000; Gregory = $54,000; Rodgers = $108,000.

A. Selling his/her interest to another person for cash.

71. A bonus may be paid in all of the following situations except:

A. The previous partnership ends.

73. A partnership recorded the following journal entry:

This entry reflects:

A. Debit Edison, Capital $45,000; credit Whitney, Capital $45,000.

A. Debit Edison, Capital $40,000; credit Cash $40,000.

80. When a partnership is liquidated:

A. Noncash assets are distributed to partners.

81. A capital deficiency means that:

A. The partnership has a loss.

82. When a partner is unable to pay a capital deficiency:

A. Building $250,000; Fontaine, Capital $250,000.

A. Fontaine, Capital $175; Monroe, Capital $45,000.

A. Total assets $405,000; total capital $330,000.

A. Mace $135,000; Bowen $120,000.

A. Peters $140,000; Chong $130,000.

A. Debit Wallace, Capital $55,000; credit Prince, Capital $55,000.

1. The legal relationship among partners whereby

Short Answer Questions

111.How are partners' investments in a partnership recorded?

115.Explain the steps involved in the liquidation of a partnership.

116.What factors should be considered before establishing a partnership?

Turner Kelly Total

(a) Income is divided based on the partners' failure to sign an agreement.

Lin Coral Allocated

a. Partners agree to divide income based on their beginning-year capital balances.

Fill in the Blank Questions