Dr. M. D.

Chase
Advanced Accounting 1310-88B

Exercises in Partnership Accounting

Long Beach State University

Page 1

ILLUSTRATRIVE EXCERCISES IN PARTNERSHIP ACCOUNTING

Exercise 1
A,B and C share partnership profits and losses as follows:
A
B
Salaries...................
$ 6,000
$ 5,000
Interest on Capital........
15,000
18,000
Profits and losses
1/3
1/3

C
$ 4,000
24,000
1/3

In 19x1 total profits of $12,000 were made by the partnership. After the books were closed the following errors were discovered:
1.
Equipment purchased on 1/1/w9 at of cost of $15,000, with a ten year life and no salvage value was charged to expense. The
partnership uses straight line depreciation.
2. Employees' accrued salaries of $1,200 had not been recorded.
REQUIRED:
A. Compute the original distribution of net income for 19x1.

B. Prepare a journal entry to correct the errors discovered.

C. Prepare a journal entry to correct the errors discovered assuming the P/L ratio in 19w9 was 40:30:30.

Dr. M. D. Chase
Advanced Accounting 1310-88B

Exercises in Partnership Accounting

Long Beach State University

Page 2

Exercise 2
The XYZ partnership was organized on 12/31/x1 with the following capital investments:
X, Capital - $50,000

Y, Capital - $60,000

Z, Capital - $80,000

--The partnership agreement provided for interest on capital contributions at the rate of 8% of average capital.
--Salaries were provided for on the basis of the ratio of time spent working for the partnership. A total salary allowance of $24,000 was
provided for. "X" averaged 50 hours per week, "Y" 30 hours and "Z" 20 hours.
--You are asked to determine the appropriate P/L ratio taking into account the following parameters:
1. The ratio must provide "X" with a $12,000 share of income and "Z" with a $9,200 share of net income based on expected net income of
$25,200.
A. What is the appropriate P/L ratio?

B. Assuming the above information except that the P/L ration is 5:1:4 and the salaries are $20,000; $24,000 and $10,000 respectively, what
net income would be necessary so that "X" would receive a distribution of $0 for the year ended 12/31/x1?

Dr. M. D. Chase
Advanced Accounting 1310-88B

Exercises in Partnership Accounting

Long Beach State University

Page 3

EXERCISE 3
P,Q AND R form a partnership and agree to maintain average capital investments of $100,000, $50,000 and 50,000 respectively. Interest on
an excess or on a deficiency is to be earned or charged at 6%. After interest allowances, P,Q and R are to share any balance in the ratio
of 5:3:2. A summary of the changes in each partners capital account is presented below:
P Capital
Q Capital
R Capital
Beginning Balance 1/1
100,000
50,000
50,000
4/1
20,000
6/1
<10,000>
8/1
30,000
20,000
9/1
20,000
10/1
<30,000>
Ending Balance 12/31
150,000
60,000
40,000
REQUIRED:
A. Assuming a $10,000 loss from operations was incurred for 19x1, prepare a schedule of distribution of partnership net income.

Dr. M. D. Chase
Advanced Accounting 1310-88B

Exercises in Partnership Accounting

Long Beach State University

Page 4

EXERCISE 4: CHANGES IS PARTNERSHIP EQUITY ACCOUNTS

--Pop and Pam have decided to admit Pow to their partnership in order to take advantage of Pow's managerial expertise. Prior to Pow's entry,
the capital interests of Pop and Pam are $24,000 and $36,000 respectively. They share profits and losses in a 70:30 ratio. Several
alternative plans for admitting Pow are being considered. Assume assets are fairly valued.
REQUIRED: For each of the alternatives presented below, present journal entries to reflect both the goodwill and bonus (book value
method in the case of a purchase) methods of recording the entry of Pow.
Situation #1:
Pow contributes $18,000 cash to the partnership in exchange for a 25% interest in capital, profits and losses.
Goodwill Method:
Bonus Method:

Situation #2:
Pow pays $10,000 to the partners in exchange for a 2% interest in capital, profits and losses. Pop and Pam would transfer 25% of their
respective capitals to Pow and would divide the $10,000 by distributing $4,000 to Pop and $6,000 to Pam.
Goodwill Method:

Book Value Method:

Situation #3:
Pow contributes $18,000 to the partnership in exchange for a 20% interest in capital profits and losses.
Goodwill Method:
Bonus Method:

Dr. M. D. Chase
Advanced Accounting 1310-88B

Exercises in Partnership Accounting

Long Beach State University

Page 5

EXERCISE 5: Changes in Partnership Equity Accounts

--The capital accounts of the partners in Niner Shops as of 6/30/x1 are as follows:
Mike: $432,000;
John: $288,000;
Dave: $180,000
--The partners share profits and losses 1/2, 2/5 and 1/10 respectively.
--On 7/1/x1, Bob invests $170,600 in the business for a 1/6 interest in net assets and profits.
REQUIRED: Present the necessary journal entries under each of the following independent situations.
1. The partners do not wish to recognize any goodwill on the investment.

2. The partners elect to recognize goodwill, if applicable, and the assets are fairly valued.

3. The partners elect to recognize goodwill, if applicable and recognize that the assets are overvalued on the books at present.

4. The partners will record this as a purchase but recognize goodwill, if applicable.

5. The partners will record this as a purchase but choose not to recognize goodwill, if applicable.

Dr. M. D. Chase
Advanced Accounting 1310-88B

Exercises in Partnership Accounting

Long Beach State University

Page 6

EXERCISE 6: CHANGES IN PARTNERSHIP EQUITY ACCOUNTS

Dixon, a partner in an accounting firm, has decided to retire. Her P/L ratio was 20%. Upon withdrawing from the firm, she was paid $74,000
in final settlement for her interest. The total of the partners' capital accounts before recognition of partnership goodwill prior to
Dixon's withdrawal was $210,000. After her withdrawal the remaining partners capital accounts, excluding their share of goodwill,
totaled $160,000.
1. What is the goodwill attributed to Dixon on her retirement?

2. What was the total agreed upon goodwill of the firm ?

The balance sheet of the partnership of Lang, Monte and Newton on April 30, 19x5 follows. The partners share profits and losses in the
ration of 2:2:6, respectively.
Assets at cost.......................... $
100,000
========
Lang, loan..............................
$
9,000
Lang, capital...........................
15,000
Monte, capital..........................
31,000
Newton, capital.........................
45,000
Total.............................. $
100,000
========
Lang is retiring from a partnership. By mutual agreement, the assets are to be adjusted to their FMV of $130,000 at April 30, 19x5. Monte
and Newton agree that the partnership will pay Lang $37,000 cash for his partnership interest, exclusive of his loan which is to be paid
in full.
REQUIRED:
3. Present the journal entry to record Lang's retirement if:
(A) partners agree not to recognize any goodwill

(B) partners agree to recognzize goodwill

4. What are Monte and Newton's capital balances after the retirement if:
(A) partners agree not to recognize any goodwill
(B) partners agree to recognzize goodwill

Dr. M. D. Chase
Advanced Accounting 1310-88B

Exercises in Partnership Accounting

Long Beach State University

Page 7

Solutions:
Exercise 1:
A: Original distribution of Net Income for 19x1 (as originally recorded on books)
"A"

"B"

"C"

Total

Salary:

6,000

5,000

4,000

15,000

Interest on Capital:

15,000

18,000

24,000

57,000

Hypothetical Distrib:

21,000

23,000

28,000

72,000

Profit/Loss Distrib:

<20,000>

<20,000>

<20,000>

<60,000>

3,000

8,000

12,000

Actual Distribution:

1,000

B: Journal entry to correct errors discovered:

Equipment.............................
15,000
Salary payable....................
Acum. Depr (15,000/10)(3 yrs).....
"A" Capital (9,300/3).............
"B" Capital (9,300/3).............
"C" Capital (9,300/3).............

1,200
4,500
3,100
3,100
3,100

$15,000
<1,200>
<4,500>
$ 9,300

C: Journal entry to correct errors discovered assuming a P/L ratio of 40:30:20.

Equipment.............................
15,000
Salary payable....................
1,200
Acum. Depr (15,000/10)(3 yrs).....
4,500
"A" Capital (9,3000(.4)...........
3,720
"B" Capital (9,300)(.3)...........
2,790
"C" Capital (9,300)(.3)...........
2,790
Exercise 2:
A: What is the appropriate P/L ratio?
"X"

Salary:

12,000

Interest on Capital:

4,000

Hypothetical Distrib:

16,000

Profit/Loss Distrib:
Actual Distribution:
given

"Y"
7,200
4,800

"Z"
4,800
6,400

Total
24,000
15,200

12,000

11,200

39,200

<4,000>

<8,000>

<2,000>

<14,000>

12,000

4,000

<9,200>

25,300*

Dr. M. D. Chase
Advanced Accounting 1310-88B

Exercises in Partnership Accounting

Long Beach State University

Page 8

B: Assuming the above information except that the P/L ration is 5:1:4 and the salaries are $20,000; $24,000 and $10,000 respectively, what
net income would be necessary so that "X" would receive a distribution of $0 for the year ended 12/31/x1?

"X"

"Y"

"Z"

Salary:

20,000

24,000

Interest on Capital:

4,000

4,800

Hypothetical Distrib:

24,000

Profit/Loss Distrib:

<24,000>

Actual Distribution:

-0- *

28,800

Total

10,000
6,400

54,000
15,200

16,400

69,200

<4,800>

<19,200>

<48,000>

24,000

<2,800>

12,000

We know that "X" must end up with a distribution of $0, therefore: 24,000 = .5x; x = $48,000 where x is the P/L distribution

Excercise 3:
A. Assuming a $10,000 loss from operations was incurred for 19x1, prepare a schedule of distribution of partnership net income.
Step 1: Compute average Capital
"P": $100,000 (3/12) = $ 25,000
120,000 (4/12) = 40,000
150,000 (5/12) = 62,500
12/12
$127,500

"Q": $ 50,000 (5/12) = $ 20,833

40,000 (3/12) = 10,000
60,000 (4/12) = 20,000
12/12
$ 50,833

"R": $ 50,000 (7/12) = $ 29,167

70,000 (2/12) = 11,667
40,000 (3/12) = 10,000
12/12
$ 50,833

Step 2: Compute Interest on amounts over/short

Actual Capital:
Agreed upon Capital
Over/Short:
Interest on Capital:

"P"

"Q"

127,500

50,833

50,833

229,166

50,000

50,000

200,000

100,000
27,500

"R"

833

1,650

50

Total

833

29,166

50

1,750

Step 3: Distribute Net Income

"P"
(.5)
Interest on Capital:
Profit/Loss Distrib:
Actual Distribution:

1,650
<5,875>
<4,225>

"Q"
(.3)

"R"
(.2)
50

Total

50

1,750

<3,525>

<2,350>

<11,750)

<3,475>

<2,300>

<10,000>

Dr. M. D. Chase
Advanced Accounting 1310-88B

Exercises in Partnership Accounting

Long Beach State University

Page 9

Excercise 4:
Situation #1: Goodwill
Actual Capital
(A): $60,000 + $18,000 = $78,000
Agreed upon Capital (B): $18,000/.25 = $72,000 Not acceptable
because $72,000 is not >= to actual capital ($78,000)
therefore use Alternative computation: $60,000/.75 =
$80,000 therefore goodwill is $2,000
Cash..................
18,000
GW (80 - 72).......... 2,000
Pow (.25)(80)....

Situation #1 Bonus:
A: $78,000
B: $78,000 (A and B must be equal in a bonus situation therefore no
computations are necessary)
Cash..................
18,000
Pam Cap (1,500)(.3)... 450
Pop Cap (1,500)(.7)... 1,050
Pow (.25)(78)....
19,500

20,000
*

Note this is bonus to new partner; amount paid is less than

partnership interest acquired:
Cost......................
$18,000
BV of investment (78/.25). 19,500
Bonus to Pow..............
$ 1,500

Situation #2: Purchase (recognize Goodwill)

Step #1: record goodwill
Pop (.7) (20).........14,000
Pam (.3) (20)......... 6,000
Assets...........
20,000
Step #2: record admission of new partner
Pop (24-14)(.25)...... 2,500
Pam (36-6)(.25)....... 7,500
Pow (.25)(40)....
10,000
Note: In this case the goodwill is negative indicating that the
assets are overvalued. On the CPA examination, never write down
the value of assets unless told the assets are overvalued or
specifically told to recognize goodwill.

Situation #2 (Book value Method)

Pop (24)(.25)......... 6,000
Pam (36)(.25)......... 9,000
Pow (.25)(60)....
15,000

Situation #3: Goodwill

A: $78,000
B: $18,000/.2 = $90,000 therefore goodwill is $12,000 to old
partners
Step #1: record goodwill
Goodwill..............12,000
Pop (.7) (12)....
8,400
Pam (.3) (12)....
3,600

Situation #3 Bonus:
A: $78,000
B: $78,000 (No computation necessary A=B in a bonus)

Step #2: record admission of new partner

Cash..................18,000
Pow (.2)(90).....
18,000

Cash..................
18,000
Pop Cap (2,400)(.7)
1,680
Pam Cap (2,400)(.3)
720
Pow (.2)(78).....
15,600*
Note this is bonus to old partners; amount paid is greater than
partnership interest acquired:
Cost......................
$18,000
BV of investment (78/.25). 19,500
Bonus to Pow..............
$ 1,500

Dr. M. D. Chase
Advanced Accounting 1310-88B

Exercises in Partnership Accounting

Long Beach State University

Page 10

Excercise #5:
1. The partners do not wish to recognize any goodwill on the investment.
A = $900,000 + $170,600 = $1,070,600
B = 1,070,600 (partners do not wish to recognize goodwill, therefore this must be a bonus; there is no such thing as goodwill = zero)
Cost:
$ 170,600
Interest acquired: 178,433 ($1,070,600/6)
Bonus to new:
$
7,833

Cash.......................
170,600
Mike (.5)(7,833)...........
3,917
John (.4)(7,833)...........
3,133
Dave (.1)(7,833)...........
783
Bob (1,070,600)/6)......

178,433

2. The partners elect to recognize goodwill, if applicable, and the assets are fairly valued.
A = $900,000 + $170,600 = $1,070,600
B = $170,600/(1/6)
= $1,023,600 (not >= to A so use alternative computation;
= $900,000/(5/6)
= $1,080,000
Indicated goodwill
= $1,080,000 - 1,070,600 = $9,600
Cost:
$ 170,600
Interest acquired: 180,000 ($1,080,000/6)
Bonus to new:
$
9,600

Cash....................... 170,600
Goodwill................... 9,400
Bob (1,080,000)/6)......

180,000

3. The partners elect to recognize goodwill, if applicable and recognize that the assets are overvalued on the books at present.
A = $900,000 + $170,600 = $1,070,600
B = $170,600/(1/6)
= $1,023,600 (this amount is acceptable if the partners agree that the assets are not fairly
overvaluation = $ 47,000
valued and must be adjusted)

Asset

Cash....................... 170,600
Mike (47,000)(.5)..........
23,500
John (47,000)(.4)..........
18,800
Dave (47,000)(.1)..........
4,700
Bob (1,023,600)/6)......
170,600
4. The partners will record this as a purchase but recognize goodwill, if applicable.
Actual Value:
$ 900,000
Goodwill...................
123,600
Implied Value: $170,600/(1/6) = 1,023,600
Mike (.5)(123,600)......
61,800
Goodwill:
$ 123,600
John (.4)(123,600)......
49,440
Dave (.1)(123,600)......
12,360
Mike (432 + 61.8)/6..... 82,300
John (288 + 49.44)/6... . 56,240
Dave (180 + 12.36)/6.... . 32,060
Bob (1,023,600/6).......

170,600

5. The partners will record this as a purchase but choose not to recognize goodwill, if applicable.
(This is the bookvalue method)
Mike (432/6)............... 72,000
John (288)/6............... 48,000
Dave (180/6................ 30,000
Bob (900,000/6).........
150,000
Excercise #6:
1. What is the goodwill attributed to Dixon on her retirement?
--Dixon is paid $74,000 of which part is a return of capital and part is her share of goodwill; If the capital balance of the partnership was
$210,000 prior to the distribution to Dixon and $160,000 after the distribution to Dixon, Dixon's share of total capital must have been
$50,000. We know that Dixon is to be paid $74,000, therefore $24,000 ($74,000 - $50,000) must be her share of goodwill.

Dr. M. D. Chase
Advanced Accounting 1310-88B

Exercises in Partnership Accounting

Long Beach State University

Page 11

2. What was the total agreed upon goodwill of the firm ?

--Distributions are made in accordance with the p/l ratio unless there are other provisions. Therefore the distribution of $24,000 to Dixon
must represent 20% of total partnership goodwill of $120,000 ($24,000/(.2)).
3. Present the journal entry to record Lang's retirement
(A) Because no goodwill is to be recognized, this must be treated as a bonus situation (in contrast with the Dixon example above).
Amount to be paid to Lang ($37,000 for capital balance + $9,000 loan balance).... $ 46,000
Book value of Lang's interest prior to bonus ($15,000 capital + $9,000 loan).....
24,000
Bonus to Lang:
$ 22,000
Lang loan..........................
9,000
Lang Capital (BV prior to bonus) 15,000
Monte (22)(2/8)*...................
5,500
Newton (22)(6/8)*..................
16,500
Cash (37 + 9)....................
*
new P/L ratio for remaining partners

46,000

(B) If goodwill is to be recognized, the following entries would be made:

Record the goodwill:
Goodwill...........................
30,000
Lang (2/10)(30).................
6,000
Monte (2/10)(30)................
6,000
Newton (6/10)(30)...............
18,000
Record withdrawal and distribution to Lang:
Lang loan..........................
9,000
Lang Capital (15 + 6).......... 21,000
Monte (16)*(2/8)**............. 4,000
Newton (16)(6/8)**............. 12,000
Cash (37 + 9)....................
46,000
*
Distribution to Lang: $ 37,000
Lang Capital (15 + 6):
21,000
Goodwill to Lang:
$ 16,000
**

new P/L ratio for remaining partners

4. What are Monte and Newton's capital balances after the retirement?
(A) Bonus Situation:
Monte
Newton
Before:
$31,000
$45,000
Bonus:
<5,500>
<16,500>
After:
$25,500
$28,500
(A) Goodwill Situation:
Monte
Before:
$31,000
Goodwill:
6,000
<4,000>
After:
$33,000

Newton
$45,000
18,000
< 12,000>
$51,000