Exam 14: Partnerships: Formation and Operation

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 balance in both capital accounts at the end of 2008 to the nearest dollar.

REFERENCE: Ref.14_08 Assume the partnership of Dean,Hardin,and Roth has been in existence for a number of years.Dean decides to withdraw from the partnership when the partners' capital balances are as follows: An appraisal of the business and its property estimates the fair value to be $ 100,000.Dean has agreed to receive $64,000 in exchange for his partnership interest. -Prepare the journal entry for the payment to Dean in the dissolution of his partnership interest,assuming the bonus method is to be applied.

REFERENCE: Ref.14-10 On January 1,2008,Lamb and Mona LLP admitted Noris to a 20% interest in net assets for an investment of $50,000 cash.Prior to the admission of Noris,Lamb and Mona had net assets of $100,000 and an income-sharing ratio of Lamb 25%,Mona 75%.After the admission of Noris,the partnership contract included the following provisions: Salary of $40,000 a year to Noris. Remaining net income in ratio Lamb 20%,Mona 60%,Noris 20% During the fiscal year ended December 31,2008,the partnership had income of $90,000 prior to recognition of salary to Noris. -James,Keller,and Rivers have the following capital balances;$48,000,$70,000 and $90,000 respectively.Because of a cash shortage James invests an additional $12,000 on June 1st.Each partner withdraws $1,000 per month.James,Keller,and Rivers receive a salary of $13,000,$15,000 and $20,000,respectively,for work done during the year.Each partner receives interest of 8% on their weighted average capital balance without regard to normal drawings.Any remaining profits are split 20%,30%,and 50% respectively.The net income for the year is $30,000.What are the ending capital balances for each partner?

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 Thurman's share of income or loss for the first year?

When Danny withdrew from John,Daniel,Harry,and Danny LLP,he was paid $80,000,although his capital account balance was only $60,000.The four partners shared net income and losses equally.The journal entry of the partnership to record Danny's withdrawal preferably should include :

The partnership of Clapton,Seidel,and Thomas was insolvent and will be unable to pay $30,000 in liabilities currently due.What recourse was available to the partnership's creditors?

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 capital balance at the end of 2007?

Brown and Green are forming a business as partners.If they do not create a formal written partnership agreement,what risks are they exposing themselves to?

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 second year?

What is the dissolution of a partnership?

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 balance in both capital accounts at the end of 2007.

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 capital balance at the end of 2007?

What events cause the dissolution of a partnership?

Reed,Sharp,and Tucker were partners with capital account balances of $80,000,$100,000,and $70,000,respectively.They agreed to admit Upton to the partnership.Upton purchased 30% of each partner's interest,with payments to Reed,Sharp,and Tucker of $32,000,$40,000,and $28,000,respectively.Before the admission of Upton,the profit and loss sharing ratio was 2:3:2.The partners agreed to use the bonus method to account for the admission of Upton to the partnership. Required: Prepare the journal entry to record the admission of Upton 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 Young's share of income or loss for the first year?

REFERENCE: Ref.14-10 On January 1,2008,Lamb and Mona LLP admitted Noris to a 20% interest in net assets for an investment of $50,000 cash.Prior to the admission of Noris,Lamb and Mona had net assets of $100,000 and an income-sharing ratio of Lamb 25%,Mona 75%.After the admission of Noris,the partnership contract included the following provisions: Salary of $40,000 a year to Noris. Remaining net income in ratio Lamb 20%,Mona 60%,Noris 20% During the fiscal year ended December 31,2008,the partnership had income of $90,000 prior to recognition of salary to Noris. -Record the journal entry to record the net income to the capital accounts

Max,Jones and Waters shared profits and losses 20%,40%,and 40% respectively and their partnership capital balance is $10,000,$30,000 and $50,000 respectively.Max has decided to withdraw from the partnership.An appraisal of the business and its property estimates the fair value to be $ 200,000.Land with a book value of $30,000 has a fair value of $45,000.Max has agreed to receive $20,000 in exchange for her partnership interest.What amount should land be recorded on the partnership books?

REFERENCE: Ref.14_07 -Eden acquired a 20% interest in the partnership by contributing a total of $71,500 directly to the other four partners.No goodwill is to be recorded.Profits and losses have previously been split according to the following percentages: Adams,15%,Barnes,35%,Cordas,30%,and Davis,20%.After Eden made his investment,what were the individual capital balances?

How is accounting for a partnership different from accounting for a corporation?

The disadvantages of the partnership form of business organization,compared to corporations,include