Answer & Question : Conklin plans to leave the CAP Partnership. The recorded value of his capital account is $48,000. The remaining partners Arthurs and Preston agree to pay Conklin $40,000 cash and Conklin accepts. The partners share income and loss equally. Prepare the general journal entry to record the withdrawal from the partnership.

135. Conklin plans to leave the CAP Partnership. The recorded value of his capital account is $48,000. The remaining partners Arthurs and Preston agree to pay Conklin $40,000 cash and Conklin accepts. The partners share income and loss equally. Prepare the general journal entry to record the withdrawal from the partnership.

Conklin, Capital 48,000
Cash 40,000
Arthurs, Capital 4,000
Preston, Capital 4,000

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 12-P3 Account for the admission and withdrawal of partners.
Topic: Admission and Withdrawal of Partners

136. Conklin plans to leave the CAP Partnership. The recorded balance in her capital account is $48,000. The remaining partners, Arthurs and Preston, agree to pay Conklin $58,000 cash and Conklin accepts. The partners share income and loss equally. Prepare the journal entry to record the transaction.

Conklin, Capital 48,000
Arthurs, Capital 5,000
Preston, Capital 5,000
Cash 58,000

137. Kramer and Jones allow Sanders to purchase a 25% interest in their partnership for $50,000 cash. Kramer and Jones both have capital balances of $55,000 each, and have agreed to share income and loss equally. Prepare the journal entry to record the admission of Sanders to the partnership.

Cash 50,000
Kramer, Capital 5,000
Jones, Capital 5,000
Sanders, Capital 40,000

138. The Redtail Partnership agrees to dissolve. The remaining cash balance after liquidating partnership assets and liabilities is $70,000. The final capital account balances are: Paulson, $35,000; Gray, $25,000; and Chang, $10,000. Prepare the journal entry to distribute the remaining cash to the partners.

Paulson, Capital 35,000
Gray, Capital 25,000
Chang, Capital 10,000
Cash 70,000

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 12-P4 Prepare entries for partnership liquidation.
Topic: Liquidation of a Partnership

139. The Redtail Partnership agrees to dissolve. The cash balance after selling all assets and paying all liabilities is $56,000. The final capital account balances are: Paulson, $33,000; Gray, $27,000; and Chang, ($4,000). Chang agrees to pay $4,000 cash from personal funds to settle his deficiency. Prepare the journal entries to record the transactions required to dissolve this partnership.

1. Cash 4,000
Chang, Capital 4,000
2 Paulson, Capital 33,000
Gray, Capital 27,000
Cash 60,000

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 12-P4 Prepare entries for partnership liquidation.
Topic: Liquidation of a Partnership

140. The Redtail Partnership agrees to dissolve. The cash balance after selling all assets and paying all liabilities is $60,000. The final capital account balances are: Paulson, $35,000; Gray, $29,000; and Chang, ($4,000). Chang is unable to pay the capital deficiency. Prepare the journal entries to record the transactions required to dissolve this partnership.

1. Paulson, Capital 2,000
Gray, Capital 2,000
Chang, Capital 4,000
2. Paulson, Capital 33,000
Gray, Capital 27,000
Cash 60,000

141. Sharon and Nancy formed a partnership by making capital contributions of $130,000 and $195,000 respectively. They predict annual partnership income of $230,000 and are considering the following alternative plans of sharing income and loss: (a) in the ratio of their initial capital investments; or (b) salary allowances of $40,000 to Sharon and $35,000 to Nancy; interest allowances of 12% on their initial capital investments; and the balance shared equally. Assuming that both partners put about the same amount of time into the business, which method of allocating income would be best?

Plan Calculation Sharon Nancy Total
(a) $230,000 × ($130,000/$325,000) $92,000
$230,000 × ($195,000/$325,000) $138,000 $230,000
Total Allocated $92,000 $138,000 $230,000
(b) Net income $230,000
Salary allowances $40,000 $35,000 $(75,000)
Balance of income $155,000
Interest allowances
12% × $130,000 $15,600
12% × $195,000 $23,400
Total interest $(39,000)
Balance of income $116,000
Balance allocated equally $58,000 $58,000 $(116,000)
Balance of income $ –
Shares of partners $113,600 $116,400

Plan (b) would be the better distribution of income because it takes into account all factors and still allows a reasonable return on the initial investment.

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

142. Sharon and Nancy formed a partnership by making capital contributions of $130,000 and $195,000 respectively. The annual partnership income of $230,000 is to be allocated assuming a salary allowance of $40,000 to Sharon and $35,000 to Nancy; interest allowances of 12% on their initial capital investments; and the balance shared equally. Prepare the entries to record the initial capital investments, the allocation of net income, and close the partner’s withdrawal accounts assuming that Sharon withdrew $50,000 and Nancy withdrew $45,000.

(a) Cash 325,000
Sharon, Capital 130,000
Nancy, Capital 195,000

(b) Income Summary 230,000
Sharon, Capital 113,600
Nancy, Capital 116,400

AACSB: Analytical Thinking
AICPA: BB Industry
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 12-P1 Prepare entries for partnership formation.
Learning Objective: 12-P2 Allocate and record income and loss among partners.
Topic: Dividing Income or Loss
Topic: Organizing a Partnership

143. Kramer and Feldman Company is organized as a partnership. At the prior year-end, Kramer’s equity balance was $352,000 and Feldman’s was $256,000. For the current year, partnership net income is $137,000 ($77,000 allocated to Kramer and $60,000 allocated to Feldman); withdrawals are $87,000 ($45,000 for Kramer and $42,000 for Feldman). Compute the total partnership return on equity and the individual partner return on equity ratios.

Total partnership return on equity = Net Income/Average equity
= $137,000/[($608,000 + $658,000)/2]
= $137,000/$633,000 = 21.6%

Kramer partner return on equity = Partner net income/Average partner equity
= $77,000/[($352,000 + $384,000)/2]
= $77,000/$368,000 = 20.9%

Feldman partner return on equity = Partner net income/Average partner equity
= $60,000/[($256,000 + $274,000)/2]
= $60,000/$265,000 = 22.6%

AACSB: Analytical Thinking
AICPA: BB Resource Management
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

144. Masco, Short, and Henderson who are partners in the MSH Company share income and loss in a 2:2:1 ratio. They plan to liquidate their partnership. At liquidation, their balance sheet appears as follows. Prepare journal entries for (a) the sale of land and equipment sold as a package for $500,000, (b) the allocation of the gain or loss, (c) the payment of the liabilities, and (d) the distribution of cash to the individual partners.

MSH Company
Balance Sheet
January 31
Assets Liabilities and Equity
Cash $200,000 Accounts Payable $221,500
Equipment 200,000 Masco, Capital 210,000
Land 350,000 Short, Capital 178,000
Henderson, Capital 140,500
Total assets $750,000 Total liabilities and equity $750,000

(a) Cash 500,000
Loss from liquidation 50,000
Equipment 200,000
Land 350,000
(b) Masco, Capital (50,000 * 2/5) 20,000
Short, Capital (50,000 * 2/5) 20,000
Henderson, Capital (50,000 * 1/5) 10,000
Loss from liquidation 50,000
(c) Accounts Payable 221,500
Cash 221,500
(d) Masco, Capital (210,000 – 20,000) 190,000
Short, Capital (178,000 – 20,000) 158,000
Henderson, Capital (140,500 – 10,000) 130,500
Cash (200,000 + 500,000 – 221,500) 478,500

145. Tower, Knight, and Spears are partners who share income and loss in a 3:2:2 ratio. The partnership’s capital balances are as follows: Tower, $332,000; Knight, $124,000; and Spears, $214,000. Spears decides to withdraw from the partnership, and the partners agree not to have the assets revalued upon Spears’ retirement. Prepare journal entries to record Spears’ withdrawal from the partnership under each of the following separate assumptions: Spears (a) sells his interest to Conner for $200,000 after Tower and Knight approve the entry of Conner as a partner; (b) is paid $214,000 in partnership cash for his equity; (c) is paid $205,000 in partnership cash for his equity; (d) is paid $220,000 in partnership cash for his equity.

(a) Spears, Capital 214,000
Conner, Capital 214,000

(b) Spears, Capital 214,000
Cash 214,000

(d) Spears, Capital 214,000
Tower, Capital (6,000 * 3/5) 3,600
Knight, Capital (6,000 * 2/5) 2,400
Cash 220,000

146. Tower, Knight, and Spears are partners who share income and loss in a 4:2:2 ratio. The partnership’s capital balances are as follows: Tower, $292,000; Knight, $114,000; and Spears, $194,000. Damsel is admitted to the partnership on March 1 with a 25% equity. Prepare the journal entries to record Damsel’s entry into the partnership under each of the following separate assumptions: Damsel invests (a) $200,000; (b) $180,000; and (c) $240,000.

(a) Cash 200,000
Damsel, Capital (800,000 * .25) 200,000

(b) Cash 180,000
Tower, Capital (15,000 * 4/8) 7,500
Knight, Capital (15,000 * 2/8) 3,750
Spears, Capital (15,000 * 2/8) 3,750
Damsel, Capital (780,000 * .25) 195,000

(c) Cash 240,000
Tower, Capital (30,000 * 4/8) 15,000
Knight, Capital (30,000 * 2/8) 7,500
Spears, Capital (30,000 * 2/8) 7,500
Damsel, Capital (840,000 * .25) 210,000

147. On May 1, Gosworth and Jordan formed a partnership. Gosworth contributed cash of $100,000 and equipment valued at $142,000. Jordan contributed land valued at $130,000 and a building valued at $250,000. The partnership also assumed responsibility for Jordan’s $120,000 long-term note payable associated with the land and building. The partners agreed to share income as follows: Gosworth is to receive a salary allowance of $38,000, both are to receive an annual interest allowance of 8% of their beginning-year capital investments, and any remaining income or loss is to be shared equally. During the year, Gosworth withdrew $40,000 and Jordan withdrew $42,000 cash. After the adjusting and closing entries are made to the revenue and expense accounts at the end of the year, the Income Summary account had a credit balance of $140,000. Prepare the journal entries to record (a) the partners’ initial capital investments, (b) their cash withdrawals, and (c) closing of both the Withdrawals and Income Summary accounts.

(a) Cash 100,000
Equipment 142,000
Land 130,000
Building 250,000
Long-term note payable 120,000
Gosworth, Capital 242,000
Jordan, Capital 260,000

(b) Gosworth, Withdrawals 40,000
Jordan, Withdrawals 42,000
Cash 82,000

Income Summary 140,000
Gosworth, Capital 88,280
Jordan, Capital 51,720

Share to Gosworth Share to Jordan Income Allocated
Total net income $140,000
Salary Allowance $38,000 (38,000)
Balance of income $102,000
Allocated as interest
Gosworth (8% on $242,000) 19,360
Jordan (8% on $260,000) 20,800 (40,160)
Balance of income $61,840
Allocated equally 30,920 30,920 (61,840)
Shares of the partners $88,280 $51,720 $0

148. Mesner’s and Sanchez’s company is organized as a partnership. At the prior year-end, Mesner’s equity balance was $258,000 and Sanchez’s was $212,000. For the current year, partnership net income is $125,000 ($75,000 allocated to Mesner and $50,000 allocated to Sanchez); withdrawals are $77,000 ($40,000 for Mesner and $37,000 for Sanchez). Compute the total partnership return on equity and the individual partner return on equity ratios.

Total partnership return on equity = Net Income/Average equity
= $125,000/[($470,000 + $518,000)/2]
= $125,000/$494,000 = 25.3%

Mesner’s partner return on equity = Partner net income/Average partner equity
= $75,000/[($258,000 + $293,000)/2]
= $75,000/$275,500 = 27.2%

Sanchez’s partner return on equity = Partner net income/Average partner equity
= $50,000/[($212,000 + $225,000)/2]
= $50,000/$218,500 = 22.9%

Fill in the Blank Questions

149. The life of a partnership is ____________________ in duration.

limited

AACSB: Communication
AICPA: BB Industry
AICPA: BB Legal
AICPA: FN Decision Making
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 12-C1 Identify characteristics of partnerships and similar organizations.
Topic: Partnership Form of Organization

150. A ________________ is an unincorporated association of two or more people to pursue a business for profit as co-owners.

partnership

151. __________________ means that partners can commit or bind the partnership to any contract within the scope of the partnership business.

Mutual agency

152. __________________ implies that each partner in a partnership can be called on to personally pay a partnership’s debts.

Unlimited liability

153. A partnership that has at least two classes of partners, general and limited, allows the limited partners to have no personal liability beyond the amounts they invest in the partnership, and the limited partners have no active role except as specified in the partnership agreement is a ___________________ partnership.

limited

154. A partnership designed to protect innocent partners from malpractice or negligence claims resulting from the acts of other partners is a ________________________ partnership.

limited liability

155. A relatively new form of business organization that protects partners with limited liability, allows limited partners to assume an active management role, and is taxed as a partnership is a ______________________________.

limited liability company (or LLC)

Answer & Question

Tuesday 23 October 2018

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