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?

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

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.

AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: BB Industry
AICPA: FN Risk Analysis
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 12-A1 Compute partner return on equity and use it to evaluate partnership performance.
Topic: Partner Return on Equity

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.

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

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%

AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: BB Industry
AICPA: FN Risk Analysis
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 12-A1 Compute partner return on equity and use it to evaluate partnership performance.
Topic: Partner Return on Equity

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 payable 114,000

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

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 12-P1 Prepare entries for partnership formation.
Topic: Organizing a 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.

Cash 15,000
Accounts Receivable 11,000
Montez, Capital 26,000
Cash 5,000
Inventory 16,000
Supplies 2,000
Flair, Capital 23,000

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 12-P1 Prepare entries for partnership formation.
Topic: Organizing a 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.

Cash ($190,000 + $200,000) 390,000
Equipment 215,000
MacArthur, Capital 190,000
Strong, Capital 200,000
Viet, Capital 215,000

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 12-P1 Prepare entries for partnership formation.
Topic: Organizing a Partnership

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-

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 12-P2 Allocate and record income and loss among partners.
Topic: Dividing Income or Loss

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)
Balance of income 181,050
Allocated equally 90,525 90,525 (181,050)
Shares of the partners $101,525 $100,475 $0

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 12-P2 Allocate and record income and loss among partners.
Topic: Dividing Income or Loss

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 Wilder Total
Total net income $82,000
Salary allowance $70,000 (70,000)
Allocated as interest
Bannister (5% on $110,000) 5,500 (5,500)
Wilder (5% on $99,000) 4,950 (4,950)
Balance of income 1,550
Allocated equally 775 775 (1,550)
Shares of the partners $6,275 $75,725 $0

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 12-P2 Allocate and record income and loss among partners.
Topic: Dividing Income or Loss

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?

Bannister Wilder Total
Total net income $90,000
Salary allowance $70,000 (70,000)
Balance of income 20,000
Allocated equally 10,000 10,000 (20,000)
Shares of the partners $10,000 $80,000 $0

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 12-P2 Allocate and record income and loss among partners.
Topic: Dividing Income or Loss