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EXERCISES: SETB
E12-1B Sammie Davis has prepared the following list of statements about partnerships. 1. A partnership is an association of two or more persons to carry on as co-owners of a business for profit. 2. The legal requirements for forming a partnership can be quite burdensome. 3. A partnership is an accounting entity for financial reporting purposes. 4. The net income of a partnership is taxed as a separate entity. 5. The act of any partner is binding on all other partners, even when partners perform business acts beyond the scope of their authority. 6. Each partner is personally and individually liable for all partnership liabilities. 7. When a partnership is dissolved, the assets legally revert to the original contributor. 8. In a limited partnership, only one partner can have unlimited liability. 9. Mutual agency is a major advantage of the partnership form of business. Instructions Identify each statement as true or false. If false, indicate how to correct the statement. E12-2B Ron Meissner, Spring Larkland, and Brook Diann are forming a partnership. Meissner is transferring $60,000 of personal cash to the partnership. Larkland owns land worth $20,000 and a small building worth $70,000, which she transfers to the partnership. Diann transfers to the partnership cash of $11,000, accounts receivable of $34,000 and equipment worth $21,000. The partnership expects to collect $30,000 of the accounts receivable. Instructions (a) Prepare the journal entries to record each of the partners investments. (b) What amount would be reported as total owners equity immediately after the investments? E12-3B Peanut Tillman has owned and operated a proprietorship for several years. On January 1, he decides to terminate this business and become a partner in the firm of Tillman and Vasher. Tillmans investment in the partnership consists of $14,000 in cash, and the following assets of the proprietorship: accounts receivable $20,000 less allowance for doubtful accounts of $3,000, and equipment $25,000 less accumulated depreciation of $5,000. It is agreed that the allowance for doubtful accounts should be $4,000 for the partnership. The fair market value of the equipment is $17,500. Instructions Journalize Tillmans admission to the firm of Tillman and Vasher. E12-4B D. Jiggets and R. Dent have capital balances on January 1 of $40,000 and $70,000, respectively. The partnership income-sharing agreement provides for (1) annual salaries of $24,000 for Jiggets and $15,000 for Dent, (2) interest at 10% on beginning capital balances, and (3) remaining income or loss to be shared 60% by Jiggets and 40% by Dent. Instructions (a) Prepare a schedule showing the distribution of net income, assuming net income is (1) $60,000 and (2) $42,000. (b) Journalize the allocation of net income in each of the situations above. E12-5B J. Dye (beginning capital, $50,000) and J. Thome (beginning capital $80,000) are partners. During 2008, the partnership earned net income of $75,000, and Dye made drawings of $15,000 while Thome made drawings of $20,000. Instructions (a) Assume the partnership income-sharing agreement calls for income to be divided 55% to Dye and 45% to Thome. Prepare the journal entry to record the allocation of net income. (b) Assume the partnership income-sharing agreement calls for income to be divided with a salary of $30,000 to Dye and $20,000 to Thome, with the remainder divided 55% to Dye and 45% to Thome. Prepare the journal entry to record the allocation of net income. (c) Assume the partnership income-sharing agreement calls for income to be divided with a salary of $40,000 to Dye and $30,000 to Thome, interest of 10% on beginning capital, and the remainder divided 50%50%. Prepare the journal entry to record the allocation of net income. (d) Compute the partners ending capital balances under the assumption in part (c).
Prepare journal entries to record allocation of net income. (SO 3) Prepare schedule showing distribution of net income and closing entry. (SO 3) Journalize entry for formation of a partnership. (SO 2) Journalize entry for formation of a partnership. (SO 2) Identify characteristics of partnership. (SO 1)
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E12-7B Groucho, Zeppo, and Harpo are forming The Marx Partnership. Groucho is transferring $40,000 of personal cash and equipment worth $30,000 to the partnership. Zeppo owns land worth $22,000 and a small building worth $80,000, which he transfers to the partnership. There is a longterm mortgage of $25,000 on the land and building, which the partnership assumes. Harpo transfers cash of $11,000, accounts receivable of $37,000, supplies worth $5,000, and equipment worth $26,000 to the partnership. The partnership expects to collect $34,000 of the accounts receivable. Instructions Prepare a classified balance sheet for the partnership after the partners investments on December 31, 2008.
E12-8B The Better Company at December 31 has cash $15,000, noncash assets $110,000, liabilities $60,000, and the following capital balances: Estavez $40,000 and Juarez $25,000. The firm is liquidated, and $80,000 in cash is received for the noncash assets. Estavez and Juarez income ratios are 60% and 40%, respectively. Instructions Prepare a cash distribution schedule.
E12-9B
Instructions Prepare the entries to record: (a) (b) (c) (d) The sale of noncash assets. The allocation of the gain or loss on liquidation to the partners. Payment of creditors. Distribution of cash to the partners.
E12-10B Prior to the distribution of cash to the partners, the accounts in the CLL Company are: Cash $45,000, Conan Capital (Cr.) $27,000, Letterman Capital (Cr.) $24,000, and Leno Capital (Dr.) $6,000. The income ratios are 6 : 3 : 1, respectively. Instructions (a) Prepare the entry to record (1) Lenos payment of $6,000 in cash to the partnership and (2) the distribution of cash to the partners with credit balances. (b) Prepare the entry to record (1) the absorption of Lenos capital deficiency by the other partners and (2) the distribution of cash to the partners with credit balances.
*E12-11B J. Alba, S. Johannson, and E. Bart share income on a 2 : 2 : 1 basis. They have capital balances of $40,000, $30,000, and $17,000, respectively, when S. Hayek is admitted to the partnership. Instructions Prepare the journal entry to record the admission of S. Hayek under each of the following assumptions. (a) Purchase of 50% of Albas equity for $25,000. (b) Purchase of 50% of Johannsons equity for $13,000. (c) Purchase of 40% of Barts equity for $8,000.
*E12-12B A. Coot and B. Kidd share income on a 7 : 3 basis. They have capital balances of $95,000 and $55,000, respectively, when A. Yupp is admitted to the partnership. Instructions Prepare the journal entry to record the admission of A. Yupp under each of the following assumptions. (a) Investment of $80,000 cash for a 30% ownership interest with bonuses to the existing partners. (b) Investment of $45,000 cash for a 30% ownership interest with a bonus to the new partner.
Problems: Set C
*E12-13B R. Davis, D. Hesler, and M. Bradley have capital balances of $60,000, $50,000, and $45,000, respectively. Their income ratios are 4 : 3 : 3. Bradley withdraws from the partnership under each of the following independent conditions. 1. Davis and Hesler agree to purchase Bradleys equity by paying $25,000 each from their personal assets. Each purchaser receives 50% of Bradleys equity. 2. Hesler agrees to purchase all of Bradleys equity by paying $33,000 cash from her personal assets. 3. Davis agrees to purchase all of Bradleys equity by paying $38,000 cash from her personal assets. Instructions Journalize Bradleys withdrawal under each of the assumptions above. *E12-14B T. Jones, C. Benson, and A. Petersen have capital balances of $80,000, $60,000, and $50,000, respectively. They share income or loss on a 4 : 3 : 3 basis. Petersen withdraws from the partnership under each of the following conditions. 1. Petersen is paid $57,000 in cash from partnership assets, and a bonus is granted to the retiring partner. 2. Petersen is paid $36,000 in cash from partnership assets, and bonuses are granted to the remaining partners. Instructions Journalize the withdrawal of Petersen under each of the assumptions above. *E12-15B McMahon, Schaeffer, and Richter are partners who share profits and losses 60%, 20%, and 20%, respectively. Their capital balances are $90,000, $40,000, and $30,000, respectively. Instructions (a) Assume Carell joins the partnership by investing $70,000 for a 25% interest with bonuses to the existing partners. Prepare the journal entry to record his investment. (b) Assume instead that McMahon leaves the partnership. McMahon is paid $110,000 with a bonus to the retiring partner. Prepare the journal entry to record McMahons withdrawal.
Journalize withdrawal of a partner with payment from partnership assets. (SO 7) Journalize withdrawal of a partner with payment from partners personal assets. (SO 7)
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PROBLEMS: SET C
P12-1C The post-closing trial balances of two proprietorships on January 1, 2008, are presented below.
Prepare entries for formation of a partnership and a balance sheet. (SO 2, 4)
John and Calvin decide to form a partnership, John Calvin Company, with the following agreed upon valuations for noncash assets.
John Company
Accounts receivable Allowance for doubtful accounts Merchandise inventory Equipment $18,000 2,500 38,000 40,000
Calvin Company
$30,000 4,000 25,000 22,000
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(a) John, Capital $53,500 Calvin, Capital $41,000 (c) Total assets $204,000 Journalize divisions of net income and prepare a partners capital statement. (SO 3, 4)
Instructions (a) Prepare separate journal entries to record the transfer of each proprietorships assets and liabilities to the partnership. (b) Journalize the additional cash investment by each partner. (c) Prepare a balance sheet for the partnership on January 1, 2008. P12-2C At the end of its first year of operations on December 31, 2008, the KAT Companys accounts show the following.
Partner
H. Kirk N. Andres S. Thabo
Drawings
$15,000 10,000 5,000
Capital
$40,000 25,000 15,000
The capital balance represents each partners initial capital investment. Therefore, net income or net loss for 2008 has not been closed to the partners capital accounts. Instructions (a) Journalize the entry to record the division of net income for 2008 under each of the following independent assumptions. (1) Net income is $50,000. Income is shared 5 : 3 : 2. (2) Net income is $40,000. Kirk and Andres are given salary allowances of $15,000 and $10,000, respectively. The remainder is shared equally. (3) Net income is $37,000. Each partner is allowed interest of 10% on beginning capital balances. Kirk is given an $20,000 salary allowance. The remainder is shared equally. (b) Prepare a schedule showing the division of net income under assumption (3) above. (c) Prepare a partners capital statement for the year under assumption (3) above. P12-3C The partners in Apache Company decide to liquidate the firm when the balance sheet shows the following.
(a) (1) Kirk $25,000 (2) Kirk $20,000 (3) Kirk $27,000
(c) Kirk $52,000 Prepare entries and schedule of cash payments in liquidation of a partnership (SO 5)
APACHE COMPANY
Balance Sheet April 30, 2008
Assets
Cash Accounts receivable Allowance for doubtful accounts Merchandise inventory Equipment Accumulated depreciationequipment Total $30,000) 25,000) (2,000) 35,000) 20,000) (8,000) $100,000)
The partners share income and loss 5 : 3 : 2. During the process of liquidation, the transactions below were completed in the following sequence. 1. A total of $57,000 was received from converting noncash assets into cash. 2. Liabilities were paid in full. 3. Cash was paid to the partners with credit balances.
(a) Loss on realization $13,000 Cash paid: to Scottie $4,500; to Kirk $3,250 Journalize admission of a partner under different assumptions. (SO 6)
Instructions (a) Prepare a cash distribution schedule. (b) Prepare the entries to record the transactions. (c) Post to the cash and capital accounts. *P12-4C At April 30, partners capital balances in BAB Company are: Barney $30,000. Andy $16,000, and Bea $15,000.The income-sharing ratios are 5 : 3 : 2, respectively. On May 1, the BABE Company is formed by admitting Ellen to the firm as a partner.
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(a) (1) Ellen Capital $7,500 (2) Ellen $8,000 (3) Ellen $36,000 (4) Ellen $17,000
Partner
A. Heart L. Club B. Spade
Capital Balance
$100,000 51,000 25,000
Income Ratio
60% 30 10
Instructions (a) Journalize the withdrawal of Spade under each of the following independent assumptions. (1) Each of the remaining partners agrees to pay $15,000 in cash from personal funds to purchase Spades ownership equity. Each receives 50% of Spades equity. (2) Club agrees to purchase Spades ownership interest for $22,000 in cash. (3) From partnership assets, Spade is paid $34,000, which includes a bonus to the retiring partner. (4) Spade is paid $19,000 from partnership assets. Bonuses to the remaining partners are recognized. (b) If Clubs capital balance after Spades withdrawal is $55,000, what were (1) the total bonus to the remaining partners and (2) the cash paid by the partnership to Spade?
(a) (1) Club, Capital $12,500 (2) Club, Capital $25,000 (3) Bonus $9,000 (4) Bonus $6,000
Cookie Creations
$10,000 800 0
450
7,500 10,000
1,200
1,000 0
All assets would be transferred into the partnership. The partnership would assume all of the liabilities of the two proprietorships. The bank loan is due February 17, 2009. Additional information: Katy operates her business from leased premises. She has just signed a lease for 12 months. Monthly rent will be $1,000. Katys landlord has agreed to draw up a new lease agreement that would be signed by both partners.
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