Exam 14: Partnerships: Formation and Operation

The dissolution of a partnership occurs

REFERENCE: Ref.14_01 Cleary,Wasser,and Nolan formed a partnership on January 1,2007,with investments of $100,000,$150,000,and $200,000,respectively.For division of income,they agreed to (1)interest of 10% of the beginning capital balance each year, (2)annual compensation of $10,000 to Wasser,and (3)sharing the remainder of the income or loss in a ratio of 20% for Cleary,and 40% each for Wasser and Nolan.Net income was $150,000 in 2007 and $180,000 in 2008.Each partner withdrew $1,000 for personal use every month during 2007 and 2008. -What was Wasser's share of income for 2008?

REFERENCE: Ref.14_02 A partnership began its first year of operations with the following capital balances: Young,Capital: $143,000 Eaton,Capital: $104,000 Thurman,Capital: $143,000 The Articles of Partnership stipulated that profits and losses be assigned in the following manner: Young was to be awarded an annual salary of $26,000 with $13,000 salary assigned to Thurman. Each partner was to be attributed with interest equal to 10% of the capital balance as of the first day of the year. The remainder was to be assigned on a 5:2:3 basis,respectively. Each partner was allowed to withdraw up to $13,000 per year. Assume that the net loss for the first year of operations was $26,000 with net income of $52,000 in the second year.Assume further that each partner withdrew the maximum amount from the business each year. -What was the balance in Young's Capital account at the end of the first year?

REFERENCE: Ref.14_01 Cleary,Wasser,and Nolan formed a partnership on January 1,2007,with investments of $100,000,$150,000,and $200,000,respectively.For division of income,they agreed to (1)interest of 10% of the beginning capital balance each year, (2)annual compensation of $10,000 to Wasser,and (3)sharing the remainder of the income or loss in a ratio of 20% for Cleary,and 40% each for Wasser and Nolan.Net income was $150,000 in 2007 and $180,000 in 2008.Each partner withdrew $1,000 for personal use every month during 2007 and 2008. -Jell and Dell were partners with capital balances of $600 and $800 and an income sharing ratio of 2:3.They admitted Zell to a 30% interest in the partnership,and the total amount of goodwill credited to the original partners was $700.What amount did Zell contribute to the business?

REFERENCE: Ref 14_06 Norr and Caylor established a partnership on January 1,2007.Norr invested cash of $100,000 and Caylor invested $30,000 in cash and equipment with a book value of $40,000 and fair value of $50,000.For both partners,the beginning capital balance was to equal the initial investment.Norr and Caylor agreed to the following procedure for sharing profits and losses: - 12% interest on the yearly beginning capital balance - $10 per hour of work that can be billed to the partnership's clients - the remainder divided in a 3:2 ratio The Articles of Partnership specified that each partner should withdraw no more than $1,000 per month. For 2007,the partnership's income was $70,000.Norr had 1,000 billable hours,and Caylor worked 1,400 billable hours.In 2008,the partnership's income was $24,000,and Norr and Caylor worked 800 and 1,200 billable hours respectively.Each partner withdrew $1,000 per month throughout 2007 and 2008. -Determine the amount of income allocated to each partner for 2008 to the nearest dollar.

Under what circumstances does a partner's balance in his or her capital account have practical consequences for the partner?

Partnerships have alternative legal forms including all of the following except:

REFERENCE: Ref.14_05 Donald,Anne,and Todd have the following capital balances;$40,000,$50,000 and $30,000 respectively.The partners share profits and losses 20%,40%,and 40% respectively. -Anne retires and is paid $80,000 based on the terms of the original partnership agreement.If the bonus method is used,what is the capital of the remaining partners?

REFERENCE: Ref.14-09 Assume the partnership of Howell,Madrid,and Waldrop has been in existence for a number of years.Howell decides to withdraw from the partnership when the partners' capital balances are as follows: An appraisal of the business and its net assets estimates the fair value to be $154,000.Land with a book value of $20,000 has a fair value of $35,000.Howell has agreed to receive $84,000 in exchange for her partnership interest. -What are the remaining partners' capital balances after Howell's interest is dissolved,assuming the goodwill method is applied?

Cherryhill and Hace had been partners for several years,and they decided to admit Quincy to the partnership.The accountant for the partnership believed that the dissolved partnership and the newly formed partnership were two separate entities.What method would the accountant have used for recording the admission of Quincy to the partnership?

REFERENCE: Ref.14_02 A partnership began its first year of operations with the following capital balances: Young,Capital: $143,000 Eaton,Capital: $104,000 Thurman,Capital: $143,000 The Articles of Partnership stipulated that profits and losses be assigned in the following manner: Young was to be awarded an annual salary of $26,000 with $13,000 salary assigned to Thurman. Each partner was to be attributed with interest equal to 10% of the capital balance as of the first day of the year. The remainder was to be assigned on a 5:2:3 basis,respectively. Each partner was allowed to withdraw up to $13,000 per year. Assume that the net loss for the first year of operations was $26,000 with net income of $52,000 in the second year.Assume further that each partner withdrew the maximum amount from the business each year. -What was the balance in Eaton's Capital account at the end of the second year?

REFERENCE: Ref.14_01 Cleary,Wasser,and Nolan formed a partnership on January 1,2007,with investments of $100,000,$150,000,and $200,000,respectively.For division of income,they agreed to (1)interest of 10% of the beginning capital balance each year, (2)annual compensation of $10,000 to Wasser,and (3)sharing the remainder of the income or loss in a ratio of 20% for Cleary,and 40% each for Wasser and Nolan.Net income was $150,000 in 2007 and $180,000 in 2008.Each partner withdrew $1,000 for personal use every month during 2007 and 2008. -What was Nolan's share of income for 2008?

REFERENCE: Ref.14_03 The capital account balances for Donald & Hanes LLP on January 1,2008,were as follows: Donald and Hanes shared net income and losses in the ratio of 3:2,respectively.The partners agreed to admit May to the partnership with a 35% interest in partnership capital and net income.May invested $100,000 cash,and no goodwill was recognized. -What is the new total balance of the partnership accounts?

REFERENCE: Ref.14_03 The capital account balances for Donald & Hanes LLP on January 1,2008,were as follows: Donald and Hanes shared net income and losses in the ratio of 3:2,respectively.The partners agreed to admit May to the partnership with a 35% interest in partnership capital and net income.May invested $100,000 cash,and no goodwill was recognized. -Which of the following could be used as a basis to allocate profits among partners who are active in the management of the partnership? 1)allocation of salaries. 2)the number of years with the partnership. 3)the amount of time each partner works. 4)the average capital invested.

REFERENCE: Ref.14-09 Assume the partnership of Howell,Madrid,and Waldrop has been in existence for a number of years.Howell decides to withdraw from the partnership when the partners' capital balances are as follows: An appraisal of the business and its net assets estimates the fair value to be $154,000.Land with a book value of $20,000 has a fair value of $35,000.Howell has agreed to receive $84,000 in exchange for her partnership interest. -Prepare the journal entries for the dissolution of Howell's partnership interest,assuming the goodwill method is to be applied.

REFERENCE: Ref.14_01 Cleary,Wasser,and Nolan formed a partnership on January 1,2007,with investments of $100,000,$150,000,and $200,000,respectively.For division of income,they agreed to (1)interest of 10% of the beginning capital balance each year, (2)annual compensation of $10,000 to Wasser,and (3)sharing the remainder of the income or loss in a ratio of 20% for Cleary,and 40% each for Wasser and Nolan.Net income was $150,000 in 2007 and $180,000 in 2008.Each partner withdrew $1,000 for personal use every month during 2007 and 2008. -What was Cleary's capital balance at the end of 2007?

REFERENCE: Ref.14_04 Peter,Roberts,and Dana have the following capital balances;$80,000,$100,000 and $60,000 respectively.The partners share profits and losses 20%,40%,and 40% respectively. -What is the total partnership capital after Roberts retires receiving $160,000 and using the goodwill method?

REFERENCE: Ref.14_03 The capital account balances for Donald & Hanes LLP on January 1,2008,were as follows: Donald and Hanes shared net income and losses in the ratio of 3:2,respectively.The partners agreed to admit May to the partnership with a 35% interest in partnership capital and net income.May invested $100,000 cash,and no goodwill was recognized. -What is the balance of Donald's capital account after the new partnership is created?

For what events or conditions should the Articles of Partnership make provision?

REFERENCE: Ref.14_02 A partnership began its first year of operations with the following capital balances: Young,Capital: $143,000 Eaton,Capital: $104,000 Thurman,Capital: $143,000 The Articles of Partnership stipulated that profits and losses be assigned in the following manner: Young was to be awarded an annual salary of $26,000 with $13,000 salary assigned to Thurman. Each partner was to be attributed with interest equal to 10% of the capital balance as of the first day of the year. The remainder was to be assigned on a 5:2:3 basis,respectively. Each partner was allowed to withdraw up to $13,000 per year. Assume that the net loss for the first year of operations was $26,000 with net income of $52,000 in the second year.Assume further that each partner withdrew the maximum amount from the business each year. -What was Eaton's share of income or loss for the second year?