GAAP ACCOUNTING FOR PARTNERSHIPS

Formation
1
. The Revised Uniform Partnership Act defines a partnership as
a. Any association of two or more persons or entities.
b. An association of two or more persons to carry on as co-owners a business for profit.
c. A separate legal entity for most legal purposes.
d. An entity created by following statutory requirements. leim
!
. The partnership agreement is an e"press contract among the partners #the owners of the
business$. %uch an agreement generally does not include
a. A limitation on a partner&s liability to creditors.
b. The rights and duties of the partners.
c. The allocation of income between the partners.
d. The rights and duties of the partners in the event of partnership dissolution. leim
'. A partnership records a partner&s investment of assets in the business at
a. The mar(et value of the assets invested.
b. A special value set by the partners.
c. The partner&s boo( value of the assets invested.
d. Any of the above) depending upon the partnership agreement. RP*PA +,-.
/
. 0hen property other than cash is invested in a partnership) at what amount should the
noncash property be credited to the contributing partner&s capital account1
a. 2air value at the date of recognition.
b. *ontributing partner&s original cost.
c. Assessed valuation for property ta" purposes.
d. *ontributing partner&s ta" basis. A3*PA +,-4 2-/,
4
. 0hen property other than cash is invested in a partnership) at what amount should the
noncash property be credited to the contributing partner&s capital account1
a. 2air value at the date of contribution.
b. *ontributing partner&s original cost.
c. Assessed valuation for property ta" purposes.
d. *ontributing partner&s ta" basis. A3*PA +,-4 2-/,
'. 2our individuals who were previously sole proprietors form a partnership. 5ach partner
contributes inventory and equipment for use by the partnership. 0hat basis should the
partnership use to record the contributed assets1
a. 3nventory at the lower of 2326 cost or mar(et.
b. 3nventory at the lower of weighted-average cost or mar(et.
c. 5quipment at each proprietor&s carrying amount.
d. 5quipment at fair value. A3*PA +,-1 T-/-
'. 7ayes and 8en(ins formed a partnership) each contributing assets to the business. 7ayes
contributed inventory with a current mar(et value in e"cess of its carrying amount. 8en(ins
contributed real estate with a carrying amount in e"cess of its current mar(et value. At what
amount should the partnership record each of the following assets1 A3*PA 11-+ T-4+
3nventory Real estate
a. 9ar(et value 9ar(et value
b. 9ar(et value *arrying amount
c. *arrying amount 9ar(et value
d. *arrying amount *arrying amount
,
. Partnership capital and drawing accounts are similar to the corporate
a. Paid-in capital) retained earnings) and dividend accounts.
b. Retained earnings account.
c. Paid-in capital and retained earnings accounts.
d. Preferred and common stoc( accounts. leim
:
. 6n April /+) 1--/) Algee) ;elger) and *eda formed a partnership by combining their separate
business proprietorships. Algee contributed cash of <,+)+++) ;elger contributed property with
a </:)+++ carrying amount) a <4+)+++ original cost) and <.+)+++ fair value. The partnership
accepted responsibility for the </,)+++ mortgage attached to the property. *eda contributed
equipment with a </+)+++ carrying amount) a <=,)+++ original cost) and <,,)+++ fair value.
The partnership agreement specifies that profits and losses are to be shared equally but is
silent regarding capital contributions. 0hich partner has the largest April /+) 1--/) capital
account balance1
a. Algee. c. *eda. A3*PA +,-/ T--
b. ;elger. d. All capital account balance are equal.
;onus 9ethod
oodwill 9ethod
Admission of New Partners
=
. The goodwill and bonus methods are two means of ad>usting for differences between the net
boo( value and the fair value of partnerships when new partners are admitted. 0hich of the
following statement about these methods is correct1
a. The bonus method does not revalue assets to mar(et values.
b. The bonus method revalues assets to mar(et values.
c. ;oth methods result in the same balances in partner capital accounts.
d. ;oth methods result in the same total value of partner capital accounts) but the individual
capital accounts vary. leim
Purchase 9ethod
'. Assume that * has a P,+)+++ equity in the partnership of ?A) ;) and *.@ Partner * arranges to
sell his entire interest to A for P.+)+++ *ash. Partners A and ; agree to the admission of A.
At what amount will the equity of the incoming partner) A) be shown in the balance sheet1
a. at P,+)+++.
b. at P,+)+++ and the P/+)+++ will be divided equally among the original partners.
c. at P.+)+++
d. at P.+)+++ and the P/+)+++ will represent oodwill which will be apportioned between
the e"isting equities of A and ;. RP*PA 1+=-
;onus 9ethod
.
. 3n the Adel-;ric( partnership) Adel and ;ric( had a capital ratio of /B1 and a profit and loss
ratio of !B1) respectively. The bonus method was used to record *olter&s admittance as a new
partner. 0hat ratio would be used to allocate) to Adel and ;ric() the e"cess of *olter&s
contribution over the amount credited to *olter&s capital account1
a. Adel and ;ric(&s new relative capital ratio.
b. Adel and ;ric(&s new relative profit and loss ratio.
c. Adel and ;ric(&s old capital ratio.
d. Adel and ;ric(&s old profit and loss ratio. A3*PA +r-! T-/,
oodwill 9ethod
Distribution of Income
-
. 3f the partnership agreement does not specify how income is to be allocated) profits should be
allocated
a. 5qually.
b. 3n proportion to the weighted-average of capital invested during the period.
c. 5quitably so that partners are compensated for the time and effort e"pended on behalf of
the partnership
d. 3n accordance with an established ratio. leim
3nterest
*hange in *apital Account
1+
. Auring 1--4) Coung and Dinc maintained average capital balances in their partnership of
<1:+)+++ and <1++)+++ respectively. The partners receive 1+E interest on average capital
balances) and residual profit or loss is divided equally. Partnership profit before interest was
<4)+++. ;y what amount should Dinc&s capital account change for the year1
a. <1)+++ decrease. c. <11)+++ decrease.
b. <!)+++ increase. d. <1!)+++ increase. A3*PA 11-, 2-!/
Partner&s %hare in Profits
;onus *omputation
11
. The 6"ide and 2erris partnership agreement provides for 6"ide to receive a !+E bonus on
profits before the bonus. Remaining profits and losses are divided between 6"ide and 2erris
in the ratio of ! to /) respectively. 0hich partner has a greater advantage when the
partnership has a profit or when it has a loss1
A3*PA 11-1 T-1, a. b. c. d.
Profit 6"ide 6"ide 2erris 2erris
Foss 2erris 6"ide 6"ide 2erris
Total Partnership 3ncome
Retirement of Partners
Revaluation of Assets
/,. ;efore the withdrawal of Alice from their partnership) the partners agreed to ad>ust assets to
their fair values. Accordingly) the appraisal increase was credited to #9$
a. 3ncome %ummary. c. Appraisal *apital.
b. Aeferred *redit. d. Partners& *apital Accounts. RP*PA +,-.
;onus 9ethod
1!
. Aimee Allen retires from the partnership of Allen) ;ec() and *hale. Allen&s cash settlement
from the partnership was based on new goodwill determined at the date of retirement plus the
carrying amount of the other net assets. As a consequence of the settlement) the capital
accounts of ;ec( and *hale were decreased. 3n accounting for Allen&s withdrawal) the
partnership could have used the
A3*PA) adapted a. b. c. d.
;onus method Go Go Ces Ces
oodwill method Ces Go Ces Go
1/
. 0hen 9ill retired from the partnership of 9ill) Cale) and Fear) the final settlement of 9ill&s
interest e"ceeded 9ill&s capital balance. Under the bonus method) the e"cess
a. 0as recorded as goodwill.
b. 0as recorded as an e"pense.
c. Reduced the capital balances of Cale and Fear.
d. 7ad no effect on the capital balances of Cale and Fear. A3*PA 11-4 2-/,
41. 0hen GAGA retired from the partnership of GAGA) G3GA) and G6GA) the final settlement of
GAGA&s interest e"ceeded her capital balance. Under the bonus method) the e"cess is
a. Recorded as goodwill.
b. Recorded as an e"pense.
c. 6f no effect to the capital accounts of Gina and Gona.
d. Aeducted from the capital account balances of Gina and Gone. RP*PA 1+-:
oodwill 9ethod
i!uidation of Partners"i#s
14
. Huinn) Rob) %am and Tod are partners sharing profits and losses equally. The partnership is
insolvent and is to be liquidated. The status of the partnership and each partner is as followsB
Partnership
*apital ;alance
Personal Assets #5"clusive
of Partnership 3nterest$
Personal Fiabilities #5"clusive
of Partnership 3nterest$
Huinn < 1,)+++ <1++)+++ <4+)+++
Rob 1+)+++ /+)+++ :+)+++
%am #!+)+++$ .+)+++ ,)+++
Tod #/+)+++$ 1)+++ !.)+++
<#!,)+++$
Assuming the partnership operates in a state where the Uniform Partnership Act applies) the
partnership creditors
a. 9ust first see( recovery against %am because he is solvent personally and has a negative
capital balance.
b. 0ill not be paid in full regardless of how they proceed legally because the partnership
assets are less than the partnership liabilities.
c. 0ill have to share Rob&s interest in the partnership on a pro rata basis with his personal
creditors.
d. 7ave first claim to the partnership assets before any partner&s personal creditors have
rights to the partnership assets. A3*PA +,=, T-:
Fump %um Fiquidation
3nstallment Fiquidation
1,
. Prior to partnership liquidation) a schedule of possible losses is frequently prepared to
determine the amount of cash that may be safely distributed to the partners. The schedule of
possible losses
a. *onsists of each partner&s capital account plus loan balance) divided by that partner&s
profit-and-loss sharing ratio.
b. %hows the successive losses necessary to eliminate the capital accounts of partners
#assuming no contribution of personal assets by partners$.
c. 3ndicates the distribution of successive amounts of available cash to each partner.
d. Assumes contribution of personal assets by partners unless there is a substantial
presumption of personal insolvency by the partners. leim
'. The final cash distribution to the partners in a partnership in liquidation should be made in
accordance with
a. ;alances of the partners& capital accounts.
b. Partners& profit and loss sharing ratio.
c. Ratio of capital contributions made by the partners.
d. Ratio of capital contributions less withdrawals made by the partners. RP*PA 1+.1) +,.:
'. 3n a partnership liquidation) the final cash distribution to the partners should be made in
accordance with the
a. Partners& profit and loss sharing ratio.
b. ;alances of the partners& capital accounts.
c. Ratio of capital contributions made by the partners.
d. Ratio of capital contributions less withdrawals made by the partners. RP*PA 1+=-
1
. R5HU3R5AB The definition of a partnership.
A3%*U%%36GB #;$ A partnership) as defined by the Revised Uniform Partnership Act) is ?the association of two or more
persons to carry on as co-owners a business for profit.@
Answer #A$ is incorrect because a partnership must be a profit-oriented business arrangement among co-owners.
Answer #*$ is incorrect because a partnership is viewed for most legal purposes as a group of individuals rather than a
separate entity. Answer #A$ is incorrect because no statutory requirements need be met to create a general partnership.
A partnership may arise regardless of the intent of the parties when an arrangement satisfies the definition. 7owever)
specific statutory requirements must be followed to create a limited partnership.
2
. R5HU3R5AB The item not usually included in the partnership agreement.
A3%*U%%36GB #A$ Unli(e corporations) general partnerships do not insulate a partner from liability to creditors. 5ach
general partner has unlimited liability for partnership debts. The partners may agree among themselves to limit a
partner&s liability) but such a provision cannot limit direct liability to creditors.
Answers #;$) #*$) and #A$ are incorrect because each is typically found in the agreement among partners that
establishes the partnership. A written agreement is not necessary for the creation of a partnership) but such an
agreement is commonly used to define the rights and duties among the partners.
3
. R5HU3R5AB The credit to the contributing partner&s capital account when noncash assets are invested.
A3%*U%%36GB #A$ The capital account should be credited for the current fair vaue of the assets at the date of the
contribution. This approach is consistent with AP; !-) which states that ?in general) accounting for nonmonetary
transactions should be based on the fair values of the assets #or services$ involved.@ AP; !1) specifically applies this
principle to nonmonetary assets received in nonreciprocal transfers.
Answers #;$) #*$) and #A$ are incorrect because fair value best reflects the economic substance of the transaction.
4
. R5HU3R5AB The credit to the contributing partner&s capital account when noncash assets are invested.
A3%*U%%36GB #A$ The capital account should be credited for the current fair value of the assets at the date of the
contribution.
Answers #;$) #*$) and #A$ are incorrect because fair value best reflects the economic substance of the transaction.
5
. R5HU3R5AB The corporate accounts similar to partnership capital and drawing accounts.
A3%*U%%36GB #A$ Partnership capital accounts are similar to corporate paid-in capital and retained earnings accounts.
Partnership drawing accounts are similar to corporate dividend accounts. They are nominal accounts that are closed to
partnership capital and corporate retained earnings) respectively) at the end of each period.
Answers #;$ and #*$ are incorrect because drawing accounts are comparable to dividends accounts. Answer #A$ is
incorrect because drawing accounts are not li(e preferred and common stoc( accounts.
6
. R5HU3R5AB The partner with the largest capital account balance after contributions of monetary and nonmonetary
asset.
A3%*U%%36GB #*$ 0hen partners invest nonmonetary assets in the business) those assets should be recorded at their
current fair value #mar(et value$ at the date they are contributed. 7ence) Algee&s capital account balance is <,+)+++
and *eda&s account is <,,)+++. Fi(ewise) the amount in ;elger&s capital account should represent the fair value of the
assets contributed. 2or this purpose) the property is valued net of the mortgage. Thus) ;elger&s capital account should
be <4,)+++ #<.+)+++ mar(et value of property I </,)+++ mortgage assumed by the partnership$.
Answers #A$) #;$) and #A$ are incorrect because *eda&s balance is the largest.
7
. R5HU3R5AB The true statement about the bonus and goodwill methods.
A3%*U%%36GB #A$ The goodwill method revalues assets to ad>ust the total value of partnership capital. The bonus
method simply read>usts capital accounts and ma(es no changes in e"isting asset accounts.
Answer #;$ is incorrect because the bonus method does not revalue assets. Answers #*$ and #A$ are incorrect because
the goodwill method revalues assets and the bonus method ad>usts capital accounts. *onsequently) total partnership
capital differs between the two methods.
8
. R5HU3R5AB The ratio used to allocated to the original partners) the e"cess of the new partner&s contribution over
the amount credited to hisJher capital account.
A3%*U%%36GB #A$ The bonus method simply read>usts capital accounts and ma(es no changes in e"isting asset
accounts. The e"isting partners will share !B1 in the allocation of the bonus. The entry will be to debit cash #or the fair
value of the property$ contributed) and the credit *olter&s capital account for a lesser amount. The e"cess will be
credited in the ratio !B1 to the original partners& capital balances.
Answers #A$) #;$) and #*$ are incorrect because the bonus to the original partners is effectively a profit and should be
allocated based on the old profit and loss ratio.
9
. R5HU3R5AB The profit and loss allocation among partners absent a provision in the partnership agreement.
A3%*U%%36GB #A$ Under the RUPA) profits are to be distributed equally among partners and losses are to be distributed
in the same manners are profits unless the partnership agreement provides otherwise. This equal distribution should be
based on the number of partners rather than in proportion to the partners& capital balances.
Answers #;$) #*$) and #A$ are incorrect because each may be a basis for allocation only if it is provided in the
partnership agreement.
10
. R5HU3R5AB The change in a partner&s capital account.
A3%*U%%36GB #A$ The partners are to receive 1+E interest and then split the residual profit or loss. ;ecause interest
e"ceeds partnership profit before interest) the residual loss is <!!)+++ KL1+E " #<1:+)+++ M <1++)+++$N - <4)+++O. Dinc&s
account is increased by <1+)+++ #1+E " <1++)+++$ and decreased by <11+)+++ #,+E " <!!)+++ loss$) a net decrease of
<1)+++.
Answer #;$ is incorrect because <!)+++ is ,+E of the partnership profit before interest. Answer #*$ is incorrect because
an <11)+++ decrease does not include the <1+)+++ of interest owed to Dinc. Answer #A$ is incorrect because a <1!)+++
increase equals 1+E of capital plus ,+E of residual profit.
11
. R5HU3R5AB The partner with a greater advantage when the partnership has a profit or when it has a loss.
A3%*U%%36GB #;$ 0hen the partnership has a loss) 2erris is allocated :+E and 6"ide 4+E. 7ence) 6"ide has the
advantage when the partnership has a loss. 0hen the partnership has a profit) 6"ide receives !+E plus 4+E of the
remaining .+E) a total of ,!E L!+E M #4+E " .+E$N. Thus) 6"ide also that the advantage in this situation.
Answers #A$) #*$) and #A$ are incorrect because 6"ide has the advantage in the cah of either a profit or a loss.
12
. R5HU3R5AB The method#s$ that could have been used to account for the partner&s withdrawal.
A3%*U%%36GB #A$ Under the bonus method) revaluation of assets to reflect goodwill is not permitted. *onsequently) if
the partnership had unrecorded goodwill) Allen would have received the balance in her capital account plus a share of
the unrecorded goodwill. The payment to Allen of a share of the unrecorded goodwill therefore would have resulted in
reductions of the capital balances of the remaining partners. Under the goodwill method) goodwill would be debited) and
the capital accounts would be credited in proportion to the partners& profit and loss sharing percentages. Accordingly) no
decrease in the capital balances of the other partners would be necessary under the goodwill method.
Answers #A$) #;$) and #*$ are incorrect because the bonus but not the goodwill method could have been used.
13
. R5HU3R5AB The treatment of the e"cess of the settlement of a partner&s interest over the capital balance.
A3%*U%%36GB #*$ The bonus method reduces the capital accounts of the other partners because the bonus) that is) the
e"cess of settlement value over the retiring partner&s capital balance) is deemed to be paid to the withdrawing partner by
the remaining partners.
Answer #A$ is incorrect because goodwill is not recorded under the bonus method. Answers #;$ and #A$ are incorrect
because the e"cess reduces the capital accountsP it is not an e"pense.
14
. R5HU3R5AB The rights of partnership creditors under the Uniform Partnership Act.
A3%*U%%36GB #A$ The Uniform Partnership Act follows the legal concept of marshaling of assets. Accordingly) the
assets of the partnership are made available first to the partnership creditors. 6nly after their claims are fully satisfied
will the personal creditors of the partners be able to proceed against partnership assets. %imilarly) the personal creditors
of each general partner have first claim to the personal assets of that general partner. The 2ederal ;an(ruptcy Reform
Act of 1-=.) however) altered the marshaling of assets concept with regard to the personal asset of a ban(rupt partner
when the partnership is also ban(rupt. The trustee of a ban(rupt partnership shares pro rata with the other general
unsecured creditors of a ban(rupt general partner. 7owever) partnership creditors retain their priority in partnership
assets under ban(ruptcy law. The Revised Uniform Partnership Act follows the federal law.
Answer #A$ is incorrect because) after e"hausting the partnership assets) the creditors must see( recovery against all
partners in one legal proceedingP i.e.) the partners are >ointly liable. Answer #;$ is incorrect because the partnership
creditors ultimately have recourse to the personal assets of all the general partners. Answer #*$ is incorrect because)
under the UPA) the partnership creditors have first claim to the partnership assets.
15
. R5HU3R5AB The true statement about a schedule of possible losses.
A3%*U%%36GB #;$ A schedule of possible losses presents a series of incremental losses to indicate the amount of loss
in a liquidation that will eliminate each partner&s capital account. The presumption is that losses or partners& capital
deficits will not be repaid by individual partners. The schedule is used to determine the amount of cash that may be
safely distributed to the individual partners without potential impairment of the rights of any party.
Answer #A$ is incorrect because it describes the computation that determines the order in which partners& capital
accounts will be eliminated by losses) not the amounts thereof. Answer #*$ is incorrect because it describes a cash
distribution schedule. Answer #A$ is incorrect because the presumption #for the schedule$ is that losses or deficits will
not be repaid by individual partners.