QUIZ 1 – P2

1. A
2. B
3. B
4. B
5. C
6. C
7. B
8. A
9. B
10. D
11. A
12. C
13. B
14. C
15. D
16. C
17. C
18. B
19. B
20. C
21. B
22. A
23. A
24. C
25. D
26. B
27. D
28. C
29. D
30. A
31. C
32. D
33. A
34. A
35. D
Partnerships: Formation and Operation

LO 9-1
1.
Which of the following is not a reason for the popularity of partnerships as a legal form
for businesses?
a. Partnerships may be formed merely by an oral agreement.
b. Partnerships can more easily generate significant amounts of capital.
c. Partnerships avoid the double taxation of income that is found in corporations.
d. In some cases, losses may be used to offset gains for tax purposes.
1. B

Partnerships: Formation and Operation

LO 9-1
2.
How does partnership accounting differ from corporate accounting?
a. The matching principle is not considered appropriate for partnership accounting.
b. Revenues are recognized at a different time by a partnership than is appropriate for a
corporation.
c. Individual capital accounts replace the contributed capital and retained earnings
balances found in corporate accounting.
d. Partnerships report all assets at fair value as of the latest balance sheet date.
2. C

Partnerships: Formation and Operation

LO 9-2
3.
Which of the following best describes the articles of partnership agreement?
a. The purpose of the partnership and partners' rights and responsibilities are required
elements of the articles of partnership.
b. The articles of partnership are a legal covenant and must be expressed in writing to
be valid.
c. The articles of partnership are an agreement that limits partners' liability to
partnership assets.
d. The articles of partnership are a legal covenant that may be expressed orally or in
writing, and forms the central governance for a partnership's operations.
3. D
Partnerships: Formation and Operation
LO 9-9
4.
Pat, Jean Lou, and Diane are partners with capital balances of $50,000, $30,000, and
$20,000, respectively. These three partners share profits and losses equally. For an
investment of $50,000 cash (paid to the business), MaryAnn will be admitted as a
partner with a one-fourth interest in capital and profits. Based on this information, which
of the following best justifies the amount of MaryAnn's investment?
a. MaryAnn will receive a bonus from the other partners upon her admission to the
partnership.
b. Assets of the partnership were overvalued immediately prior to MaryAnn's
investment.
c. The book value of the partnership's net assets was less than the fair value
immediately prior to MaryAnn's investment.
d. MaryAnn is apparently bringing goodwill into the partnership, and her capital account
will be credited for the appropriate amount.
4. C

Mary Ann's investment equals 1/3 of total capital ($50,000 ÷ $150,000). However, she
receives only a 1/4 interest capital balance. One explanation for the difference is that
the business assets are worth more than book value. To achieve agreement, the net
assets could be valued upward to fair value with the adjustment credited to the original
partners' capital accounts. Alternatively, a bonus could be credited to the original
partners.

Partnerships: Formation and Operation

LO 9-9
5.
A partnership has the following capital balances:

Arlo (50% of gains and losses).................. $120,000

Band (30%)..... 95,000
Carlyle (20%)..... 100,000
David is going to invest $105,000 into the business to acquire a 30 percent ownership
interest. Goodwill is to be recorded. What will be David's beginning capital balance?
a. $94,500.
b. $105,000.
c. $126,000.
d. $135,000.
5. D

Based on the new contribution, the company's implied value is $350,000 ($105,000 ÷
30%) which is less than the capital balances ($315,000 in original capital plus $105,000
to be invested). Thus, either the assets are overvalued or the new partner is contributing
goodwill in addition to a cash investment. Because the problem indicates that goodwill is
recognized, goodwill must be computed. Note that the $105,000 is going into the
business and, thus, increases capital.

David's investment = 30% (Original capital plus David's investment)

$105,000 + Goodwill = .30 ($315,000 + $105,000 + Goodwill)
$105,000 + Goodwill = $126,000 + .30 Goodwill
.70 Goodwill = $21,000
Goodwill = $30,000
David's investment (Capital) = $105,000 + $30,000 = $135,000

Partnerships: Formation and Operation

LO 9-8
6.
A partnership has the following capital balances:

Carpenter (40% of gains and losses).................. $140,000

Dane (30%)..... 280,000
Elkhart (30%)..... 340,000
Krystal is going to pay a total of $240,000 directly to these three partners to acquire a
25 percent ownership interest from each. Goodwill is to be recorded. What is Dane's
capital balance after the transaction?
a. $210,000.
b. $255,000.
c. $340,000.
d. $352,000.
6. B The implied value of the company is $960,000 ($240,000 ÷ 25%). Because the
current capital total is only $760,000, goodwill of $200,000 must be recognized.
Krystal's investment is paid directly to the partners and does not affect the capital total.
Of the $200,000 in goodwill, 30 percent or $60,000 is attributed to Dane which brings
that capital balance to $340,000. Because a 25% interest is conveyed to the new
partner, Dane's balance decreases by 25% or $85,000—resulting in a new balance of
$255,000.

Partnerships: Formation and Operation

LO 9-9
7.
The capital balance for Bolcar is $110,000 and for Neary is $40,000. These two
partners share profits and losses 70 percent (Bolcar) and 30 percent (Neary). Kansas
invests $50,000 in cash into the partnership for a 30 percent ownership. The bonus
method will be used. What is Neary's capital balance after Kansas's investment?
a. $35,000.
b. $37,000.
c. $40,000.
d. $43,000.
7. B Total capital is $200,000 ($110,000 + $40,000 + $50,000) after the new investment.
As Kansas's portion is 30 percent, the capital balance becomes $60,000 ($200,000 ×
30%). Because only $50,000 was paid, a bonus of $10,000 is taken from the two
original partners based on their profit and loss ratios: Bolcar - $7,000 (70%) and Neary -
$3,000 (30%). The reduction drops Neary's capital balance from $40,000 to $37,000.

Partnerships: Formation and Operation

LO 9-9
8.
Bishop has a capital balance of $120,000 in a local partnership, and Cotton has a
$90,000 balance. These two partners share profits and losses by a ratio of 60 percent to
Bishop and 40 percent to Cotton. Lovett invests $60,000 in cash in the partnership for a
20 percent ownership. The goodwill method will be used. What is Cotton's capital
balance after this new investment?
a. $99,600.
b. $102,000.
c. $112,000.
d. $126,000.
8. B

Total capital is $270,000 ($120,000 + $90,000 + $60,000) after the new investment.
However, the implied value of the business based on the new investment is $300,000
($60,000 ÷ 20%). Thus, goodwill of $30,000 must be recognized with the offsetting
allocation to the original partners based on their profit and loss ratio: Bishop - $18,000
(60%) and Cotton $12,000 (40%). The increase raises Cotton's capital from $90,000 to
$102,000.

Partnerships: Formation and Operation

LO 9-9
9
The capital balance for Messalina is $210,000 and for Romulus is $140,000. These two
partners share profits and losses 60 percent (Messalina) and 40 percent (Romulus).
Claudius invests $100,000 in cash in the partnership for a 20 percent ownership. The
bonus method will be used. What are the capital balances for Messalina, Romulus, and
Claudius after this investment is recorded?
a. $216,000, $144,000, $90,000.
b. $218,000, $142,000, $88,000.
c. $222,000, $148,000, $80,000.
d. $240,000, $160,000, $100,000.
9. A

Total capital is $450,000 ($210,000 + $140,000 + $100,000) after the new investment.
As Claudius' portion is to be 20 percent, the new capital balance would be $90,000
($450,000 × 20%). Because $100,000 was paid, a bonus of $10,000 is being given to
the two original partners based on their profit and loss ratio: Messalina - $6,000 (60%)
and Romulus - $4,000 (40%). The increase raises Messalina's capital balance from
$210,000 to $216,000 and Romulus's capital balance from $140,000 to $144,000.
Partnerships: Formation and Operation

LO 9-6

10.
A partnership begins its first year with the following capital balances:

Alfred, Capital.................. $50,000

Bernard, Capital.................. 60,000
Collins, Capital.................. 70,000
The articles of partnership stipulate that profits and losses be assigned in the following
manner:
• Each partner is allocated interest equal to 5 percent of the beginning capital balance.
• Bernard is allocated compensation of $18,000 per year.
• Any remaining profits and losses are allocated on a 3:3:4 basis, respectively.
• Each partner is allowed to withdraw up to $5,000 cash per year.
Assuming that the net income is $60,000 and that each partner withdraws the maximum
amount allowed, what is the balance in Collins capital account at the end of that year?
a. $70,800.
b. $86,700.
c. $73,500.
d. $81,700.
10. D
ASSIGNMENT OF INCOME
ALFRED BERNARD COLLINS TOTAL
Interest—5% of
beginning capital $ 2,500 $ 3,000 $ 3,500 $ 9,000
Salary 18,000 18,000
Allocation of remaining income
($33,000 divided on a 3:3:4 basis) 9,900 9,900 13,200 33,000
Totals $12,400 $30,900 $16,700 $60,000

STATEMENT OF CAPITAL

ALFRED BERNARD COLLINS TOTAL

Beginning capital $50,000 $60,000 $70,000 $180,000
Net income (above) 12,400 30,900 16,700 60,000
Drawings (given) (5,000) (5,000) (5,000) (15,000)
Ending capital $57,400 $85,900 $81,700 $225,000
Partnerships: Formation and Operation

11.
A partnership begins its first year of operations with the following capital balances:

Winston, Capital.................. $110,000

Durham, Capital 80,000
Salem, Capital.................. 110,000
According to the articles of partnership, all profits will be assigned as follows:
• Winston will be awarded an annual salary of $20,000 with $10,000 assigned to Salem.
• The partners will be attributed interest equal to 10 percent of the capital balance as of
the first day of the year.
• The remainder will be assigned on a 5:2:3 basis, respectively.
• Each partner is allowed to withdraw up to $10,000 per year.
The net loss for the first year of operations is $20,000 and net income for the
subsequent year is $40,000. Each partner withdraws the maximum amount from the
business each period. What is the balance in Winston's capital account at the end of the
second year?
a. $102,600.
b. $104,400.
c. $108,600.
d. $109,200.
11. A ASSIGNMENT OF INCOME—YEAR ONE
WINSTON DURHAM SALEM TOTAL
Interest—10% of
beginning capital $11,000 $ 8,000 $11,000 $30,000
Salary 20,000 0 10,000 30,000
Allocation of remaining loss
($80,000 divided on a 5:2:3 basis) (40,000) (16,000) (24,000) (80,000)
Totals $(9,000) $ (8,000) $ (3,000) $(20,000)

STATEMENT OF CAPITAL—YEAR ONE

WINSTON DURHAM SALEM TOTAL
Beginning capital $110,000 $80,000 $110,000 $300,000
Net loss (above) (9,000) (8,000) (3,000) (20,000)
Drawings (given) (10,000) (10,000) (10,000) (30,000)
Ending capital $ 91,000 $62,000 $ 97,000 $250,000

ASSIGNMENT OF INCOME—YEAR TWO

WINSTON DURHAM SALEM TOTAL
Interest—10% of
beginning capital $ 9,100 $ 6,200 $ 9,700 $25,000
Salary 20,000 0 10,000 30,000
Allocation of remaining loss
($15,000 divided on a 5:2:3 basis) (7,500) (3,000) (4,500) (15,000)
Totals $21,600 $3,200 $15,200 $ 40,000

STATEMENT OF CAPITAL—YEAR TWO

WINSTON DURHAM SALEM TOTAL
Beginning capital (above) $ 91,000 $62,000 $ 97,000 $250,000
Net income (above) 21,600 3,200 15,200 40,000
Drawings (given) (10,000) (10,000) (10,000) (30,000)
Ending capital $102,600 $55,200 $102,200 $260,000
Partnerships: Formation and Operation

LO 9-10
12.
A partnership has the following capital balances:

Allen, Capital.................. $60,000

Burns, Capital.................. 30,000
Costello, Capital.................. 90,000
Profits and losses are split as follows: Allen (20 percent), Burns (30 percent), and
Costello (50 percent). Costello wants to leave the partnership and is paid $100,000 from
the business based on provisions in the articles of partnership. If the partnership uses
the bonus method, what is the balance of Burns's capital account after Costello
withdraws?
a. $24,000.
b. $27,000.
c. $33,000.
d. $36,000.
12. A

Costello receives a $10,000 bonus ($100,000 less $90,000 capital balance). This bonus
is deducted from the two remaining partners according to their profit and loss ratio (2:3).
A 60 percent (3/5) reduction is assigned to Burns which decreases that partner's capital
balance from $30,000 to $24,000.
Partnerships: Formation and Operation

At year-end, the Circle City partnership has the following capital balances:

Manning, Capital.................. $130,000

Gonzalez, Capital.................. 110,000
Clark, Capital.................. 80,000
Freeney, Capital.................. 70,000
Profits and losses are split on a 3:3:2:2 basis, respectively. Clark decides to leave the
partnership and is paid $90,000 from the business based on the original contractual
agreement.

LO 9-10
13.
Using the goodwill method, what is Manning's capital balance after Clark withdraws?
a. $133,000.
b. $137,500.
c. $140,000.
d. $145,000.
13. D

Clark receives an additional $10,000. Because Clark receives 20 percent of profits and
losses, this allocation indicates total goodwill of $50,000.
20% of Goodwill = $10,000
Goodwill = $10,000 ÷ .20 = $50,000

Goodwill 50,000
Manning, capital (30%) 15,000
Gonzalez, capital (30%) 15,000
Clark, capital (20%) 10,000
Freeney, capital (20%) 10,000

The above entry raises Manning's capital from $130,000 to $145,000.

Partnerships: Formation and Operation

At year-end, the Circle City partnership has the following capital balances:

Manning, Capital.................. $130,000

Gonzalez, Capital.................. 110,000
Clark, Capital.................. 80,000
Freeney, Capital.................. 70,000
Profits and losses are split on a 3:3:2:2 basis, respectively. Clark decides to leave the
partnership and is paid $90,000 from the business based on the original contractual
agreement.

14.
If instead the partnership uses the bonus method, what is the balance of Manning's
capital account after Clark withdraws?
a. $100,000.
b. $126,250.
c. $130,000.
d. $133,750.
14. B

Under the bonus method, Clark's excess payment is deducted from the remaining
partners' capital accounts according to their relative profit and loss ratios, 3:3:2.
Manning's balance is then $126,250 = $130,000 - $3,750.

Manning, capital 3,750

Gonzalez, capital 3,750
Freeney, capital 2,500
Clark, capital 80,000
Cash 90,000
Partnerships: Formation and Operation

William (40% of gains and losses).................. $220,000

Jennings (40%).................. 160,000
Bryan (20%).................. 110,000
LO 9-8
15.
Darrow invests $270,000 in cash for a 30 percent ownership interest. The money goes
to the original partners. Goodwill is to be recorded. How much goodwill should be
recognized, and what is Darrow's beginning capital balance?
a. $410,000 and $270,000.
b. $140,000 and $270,000.
c. $140,000 and $189,000.
d. $410,000 and $189,000.
15. A The implied value of the company is $900,000 ($270,000 ÷ 30%). Because the
money is going to the partners rather than into the business, the capital total is
$490,000 before realigning the balances. Hence, goodwill of $410,000 is recognized
based on the implied value ($900,000 - $490,000). This goodwill is assumed to
represent unrealized business gains and is attributed to the original partners according
to their profit and loss ratio. They will then each convey 30 percent ownership of the
$900,000 partnership to Darrow for a capital balance of $270,000.
Partnerships: Formation and Operation

William (40% of gains and losses).................. $220,000

Jennings (40%).................. 160,000
Bryan (20%).................. 110,000

LO 9-9
16.
Darrow invests $250,000 in cash for a 30 percent ownership interest. The money goes
to the business. No goodwill or other revaluation is to be recorded. After the transaction,
what is Jennings's capital balance?
a. $160,000.
b. $168,000.
c. $170,200.
d. $171,200.
16. D Because the money goes into the business, total capital becomes $740,000
($490,000 + $250,000). Darrow is allotted 30 percent of this total or $222,000. Because
Darrow invested $250,000, the extra $28,000 is assumed to be a bonus to the original
partners. Jennings will be assigned 40 percent of this extra amount or $11,200. This
bonus increases Jennings' capital from $160,000 to $171,200.
Q8

MC Qu. 17 Cleary, Wasser, and Nolan formed a partnersh...

Cleary, Wasser, and Nolan formed a partnership on January 1, 2012, 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 2012 and $180,000 in 2013. Each partner withdrew $1,000 for personal use
every month during 2012 and 2013.
What was Nolan's total share of net income for 2013?
$34,420.
$75,540.
$65,540.
$70,040.
$61,420.
...
Q9

MC Qu. 28 A partnership began its first year of operations...

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 to Young, Eaton, and Thurman,
respectively.
Each partner withdrew $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.

What was Thurman's total share of net loss for the first year?
$3,900 loss.
$11,700 loss.
$10,400 loss.
$24,700 loss.
$9,100 loss.
...
Q10

MC Qu. 13 Cleary, Wasser, and Nolan formed a partnersh...

Cleary, Wasser, and Nolan formed a partnership on January 1, 2012, 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 2012 and $180,000 in 2013. Each partner withdrew $1,000 for personal use
every month during 2012 and 2013.

What was the total capital balance for the partnership at December 31, 2012?

$600,000
$564,000
$535,000
$523,000
$545,000
...
Q7

MC Qu. 62 Donald, Anne, and Todd have the following...

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.

What is the total partnership capital after Anne retires receiving $80,000 and using the
bonus method?

$70,000.
$40,000.
$60,000.
$80,000.
$42,000.
...
Q6
MC Qu. 55 P, L, and O are partners with capital...

P, L, and O are partners with capital balances of $50,000, $30,000 and $20,000 and
who share in the profit and loss of the PLO partnership 30%, 20%, and 50%,
respectively, when they agree to admit C for a 20% interest.

If C contributes $40,000 to the partnership and the goodwill method is used, what
amount will be debited for goodwill?

$15,000
$20,000
$25,000
$28,000
$60,000
...
Q5.

MC Qu. 50 The capital account balances for Donald & Hanes...

The capital account balances for Donald & Hanes LLP on January 1, 2013, were as
follows:

Donald, Capital.....$200,000
Hanes, capital...........100,000

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 Hanes's capital account after the new partnership is created?
$84,000.
$100,000.
$140,000.
$176,000.
$200,000.
...
Q4

MC Qu. 16 Cleary, Wasser, and Nolan formed a partnersh...

Cleary, Wasser, and Nolan formed a partnership on January 1, 2012, 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 2012 and $180,000 in 2013. Each partner withdrew $1,000 for personal use
every month during 2012 and 2013.

What was the remainder portion of net income allocated to Nolan for 2013?

$45,440
$58,040
$70,040
$72,000
$82,040
...
Q3

MC Qu. 10 Cleary, Wasser, and Nolan formed a partnersh...

Cleary, Wasser, and Nolan formed a partnership on January 1, 2012, 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 2012 and $180,000 in 2013. Each partner withdrew $1,000 for personal use
every month during 2012 and 2013.

What was Nolan's capital balance at the end of 2012?

$200,000.
$224,000.
$238,000.
$246,000.
$254,000.
...
Q2

MC Qu. 20 Cleary, Wasser, and Nolan formed a partnersh...

Cleary, Wasser, and Nolan formed a partnership on January 1, 2012, 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 2012 and $180,000 in 2013. Each partner withdrew $1,000 for personal use
every month during 2012 and 2013.

What was Wasser's capital balance at the end of 2013?

$201,000.
$263,520.
$264,540.
$304,040.
$313,780.
...
Q1

MC Qu. 35 A partnership began its first year of operations...

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 to Young, Eaton, and Thurman,
respectively.
Each partner withdrew $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.

What was the balance in Young's Capital account at the end of the second year?

$133,380.
$84,760.
$105,690.
$132,860.
$71,760.
...