400_1310 ExercisesInPartnershipAcct 88B

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Dr. M. D. Chase Long Beach State UniversityAdvanced Accounting 1310-88B Exercises in Partnership Accounting Page 1

ILLUSTRATRIVE EXCERCISES IN PARTNERSHIP ACCOUNTING

Exercise 1

A,B and C share partnership profits and losses as follows:A B C

Salaries................... $ 6,000 $ 5,000 $ 4,000Interest on Capital........ 15,000 18,000 24,000Profits and losses 1/3 1/3 1/3

In 19x1 total profits of $12,000 were made by the partnership. After the books were closed the following errors were discovered:1. Equipment purchased on 1/1/w9 at of cost of $15,000, with a ten year life and no salvage value was charged to expense. The

partnership uses straight line depreciation.2. Employees' accrued salaries of $1,200 had not been recorded.

REQUIRED:A. Compute the original distribution of net income for 19x1.

B. Prepare a journal entry to correct the errors discovered.

C. Prepare a journal entry to correct the errors discovered assuming the P/L ratio in 19w9 was 40:30:30.




Exercise 2

The XYZ partnership was organized on 12/31/x1 with the following capital investments:

X, Capital - $50,000 Y, Capital - $60,000 Z, Capital - $80,000

--The partnership agreement provided for interest on capital contributions at the rate of 8% of average capital.--Salaries were provided for on the basis of the ratio of time spent working for the partnership. A total salary allowance of $24,000 was

provided for. "X" averaged 50 hours per week, "Y" 30 hours and "Z" 20 hours.--You are asked to determine the appropriate P/L ratio taking into account the following parameters:

1. The ratio must provide "X" with a $12,000 share of income and "Z" with a $9,200 share of net income based on expected net income of$25,200.

A. What is the appropriate P/L ratio?

B. Assuming the above information except that the P/L ration is 5:1:4 and the salaries are $20,000; $24,000 and $10,000 respectively, whatnet income would be necessary so that "X" would receive a distribution of $0 for the year ended 12/31/x1?






EXERCISE 4: CHANGES IS PARTNERSHIP EQUITY ACCOUNTS --Pop and Pam have decided to admit Pow to their partnership in order to take advantage of Pow's managerial expertise. Prior to Pow's entry,

the capital interests of Pop and Pam are $24,000 and $36,000 respectively. They share profits and losses in a 70:30 ratio. Severalalternative plans for admitting Pow are being considered. Assume assets are fairly valued.

REQUIRED: For each of the alternatives presented below, present journal entries to reflect both the goodwill and bonus (book value

method in the case of a purchase) methods of recording the entry of Pow.

Situation #1:Pow contributes $18,000 cash to the partnership in exchange for a 25% interest in capital, profits and losses.

Goodwill Method: │ Bonus Method:│ │ │ │ │ │ │ │ │ │

Situation #2:Pow pays $10,000 to the partners in exchange for a 2% interest in capital, profits and losses. Pop and Pam would transfer 25% of their

respective capitals to Pow and would divide the $10,000 by distributing $4,000 to Pop and $6,000 to Pam.

Goodwill Method: │Book Value Method:│ │ │ │ │ │ │ │ │ │

Situation #3:Pow contributes $18,000 to the partnership in exchange for a 20% interest in capital profits and losses.

Goodwill Method: │Bonus Method:│ │ │ │ │

│ │ │ │ │ │ │ │ │




EXERCISE 5: Changes in Partnership Equity Accounts --The capital accounts of the partners in Niner Shops as of 6/30/x1 are as follows:

Mike: $432,000; John: $288,000; Dave: $180,000--The partners share profits and losses 1/2, 2/5 and 1/10 respectively.--On 7/1/x1, Bob invests $170,600 in the business for a 1/6 interest in net assets and profits.

REQUIRED: Present the necessary journal entries under each of the following independent situations.

1. The partners do not wish to recognize any goodwill on the investment.

2. The partners elect to recognize goodwill, if applicable, and the assets are fairly valued.

3. The partners elect to recognize goodwill, if applicable and recognize that the assets are overvalued on the books at present.

4. The partners will record this as a purchase but recognize goodwill, if applicable.

5. The partners will record this as a purchase but choose not to recognize goodwill, if applicable.




EXERCISE 6: CHANGES IN PARTNERSHIP EQUITY ACCOUNTS

Dixon, a partner in an accounting firm, has decided to retire. Her P/L ratio was 20%. Upon withdrawing from the firm, she was paid $74,000in final settlement for her interest. The total of the partners' capital accounts before recognition of partnership goodwill prior toDixon's withdrawal was $210,000. After her withdrawal the remaining partners capital accounts, excluding their share of goodwill,totaled $160,000.

1. What is the goodwill attributed to Dixon on her retirement?

2. What was the total agreed upon goodwill of the firm ?

The balance sheet of the partnership of Lang, Monte and Newton on April 30, 19x5 follows. The partners share profits and losses in theration of 2:2:6, respectively.

Assets at cost.......................... $ 100,000========

Lang, loan.............................. $ 9,000Lang, capital........................... 15,000Monte, capital.......................... 31,000Newton, capital......................... 45,000

Total.............................. $ 100,000========

Lang is retiring from a partnership. By mutual agreement, the assets are to be adjusted to their FMV of $130,000 at April 30, 19x5. Monteand Newton agree that the partnership will pay Lang $37,000 cash for his partnership interest, exclusive of his loan which is to be paidin full.

REQUIRED:3. Present the journal entry to record Lang's retirement if:

(A) partners agree not to recognize any goodwill (B) partners agree to recognzize goodwill

4. What are Monte and Newton's capital balances after the retirement if:(A) partners agree not to recognize any goodwill (B) partners agree to recognzize goodwill




Solutions:Exercise 1: A: Original distribution of Net Income for 19x1 (as originally recorded on books)

"A" "B" "C" Total

Salary: 6,000 5,000 4,000 15,000

Interest on Capital: 15,000 18,000 24,000 57,000

Hypothetical Distrib: 21,000 23,000 28,000 72,000

Profit/Loss Distrib: <20,000> <20,000> <20,000> <60,000>

Actual Distribution: 1,000 3,000 8,000 12,000

B: Journal entry to correct errors discovered:Equipment............................. 15,000

Salary payable.................... 1,200Acum. Depr (15,000/10)(3 yrs)..... 4,500"A" Capital (9,300/3)............. 3,100"B" Capital (9,300/3)............. 3,100"C" Capital (9,300/3)............. 3,100

C: Journal entry to correct errors discovered assuming a P/L ratio of 40:30:20.Equipment............................. 15,000

Salary payable.................... 1,200Acum. Depr (15,000/10)(3 yrs)..... 4,500"A" Capital (9,3000(.4)........... 3,720"B" Capital (9,300)(.3)........... 2,790"C" Capital (9,300)(.3)........... 2,790

Exercise 2:

A: What is the appropriate P/L ratio?"X" "Y" "Z" Total

Salary: 12,000 7,200 4,800 24,000




Actual Distribution: 12,000 4,000 <9,200> 25,300 * * given

$15,000<1,200><4,500>$ 9,300




B: Assuming the above information except that the P/L ration is 5:1:4 and the salaries are $20,000; $24,000 and $10,000 respectively, whatnet income would be necessary so that "X" would receive a distribution of $0 for the year ended 12/31/x1?

"X" "Y" "Z" Total

Salary: 20,000 24,000 10,000 54,000




Actual Distribution: -0- * 24,000 <2,800> 12,000* We know that "X" must end up with a distribution of $0, therefore: 24,000 = .5x; x = $48,000 where x is the P/L distribution

Excercise 3:A. Assuming a $10,000 loss from operations was incurred for 19x1, prepare a schedule of distribution of partnership net income.

Step 1: Compute average Capital "P": $100,000 (3/12) = $ 25,000 "Q": $ 50,000 (5/12) = $ 20,833 "R": $ 50,000 (7/12) = $ 29,167

120,000 (4/12) = 40,000 40,000 (3/12) = 10,000 70,000 (2/12) = 11,667150,000 (5/12) = 62,500 60,000 (4/12) = 20,000 40,000 (3/12) = 10,000

12/12 $127,500 12/12 $ 50,833 12/12 $ 50,833

Step 2: Compute Interest on amounts over/short

"P" "Q" "R" Total

Actual Capital: 127,500 50,833 50,833 229,166

Agreed upon Capital 100,000 50,000 50,000 200,000

Over/Short: 27,500 833 833 29,166

Interest on Capital: 1,650 50 50 1,750

Step 3: Distribute Net Income

"P"(.5)

"Q"(.3)

"R"(.2)

Total

Interest on Capital: 1,650 50 50 1,750

Profit/Loss Distrib: <5,875> <3,525> <2,350> <11,750)

Actual Distribution: <4,225> <3,475> <2,300> <10,000>




Excercise 4:

Situation #1: Goodwill Actual Capital (A): $60,000 + $18,000 = $78,000Agreed upon Capital (B): $18,000/.25 = $72,000 Not acceptable

because $72,000 is not >= to actual capital ($78,000)therefore use Alternative computation: $60,000/.75 =$80,000 therefore goodwill is $2,000

Cash.................. 18,000GW (80 - 72).......... 2,000

Pow (.25)(80).... 20,000

Situation #1 Bonus: A: $78,000B: $78,000 (A and B must be equal in a bonus situation therefore no

computations are necessary)

Cash.................. 18,000Pam Cap (1,500)(.3)... 450Pop Cap (1,500)(.7)... 1,050

Pow (.25)(78).... 19,500*

* Note this is bonus to new partner; amount paid is less thanpartnership interest acquired:Cost...................... $18,000BV of investment (78/.25). 19,500Bonus to Pow.............. $ 1,500

Situation #2: Purchase (recognize Goodwill) Step #1: record goodwill

Pop (.7) (20).........14,000Pam (.3) (20)......... 6,000

Assets........... 20,000Step #2: record admission of new partner

Pop (24-14)(.25)...... 2,500Pam (36-6)(.25)....... 7,500

Pow (.25)(40).... 10,000Note: In this case the goodwill is negative indicating that theassets are overvalued. On the CPA examination, never write downthe value of assets unless told the assets are overvalued orspecifically told to recognize goodwill.

Situation #2 (Book value Method) Pop (24)(.25)......... 6,000Pam (36)(.25)......... 9,000

Pow (.25)(60).... 15,000

Situation #3: Goodwill A: $78,000B: $18,000/.2 = $90,000 therefore goodwill is $12,000 to old

partnersStep #1: record goodwill

Goodwill..............12,000Pop (.7) (12).... 8,400Pam (.3) (12).... 3,600

Step #2: record admission of new partnerCash..................18,000

Pow (.2)(90)..... 18,000

Situation #3 Bonus:A: $78,000B: $78,000 (No computation necessary A=B in a bonus)

Cash.................. 18,000Pop Cap (2,400)(.7) 1,680Pam Cap (2,400)(.3) 720

Pow (.2)(78)..... 15,600*

* Note this is bonus to old partners; amount paid is greater thanpartnership interest acquired:Cost...................... $18,000

BV of investment (78/.25). 19,500Bonus to Pow.............. $ 1,500




Excercise #5: 1. The partners do not wish to recognize any goodwill on the investment.

A = $900,000 + $170,600 = $1,070,600B = 1,070,600 (partners do not wish to recognize goodwill, therefore this must be a bonus; there is no such thing as goodwill = zero)

Cost: $ 170,600 Cash....................... 170,600

Interest acquired: 178,433 ($1,070,600/6) Mike (.5)(7,833)........... 3,917Bonus to new: $ 7,833 John (.4)(7,833)........... 3,133

Dave (.1)(7,833)........... 783Bob (1,070,600)/6)...... 178,433

2. The partners elect to recognize goodwill, if applicable, and the assets are fairly valued. A = $900,000 + $170,600 = $1,070,600B = $170,600/(1/6) = $1,023,600 (not >= to A so use alternative computation;

= $900,000/(5/6) = $1,080,000Indicated goodwill = $1,080,000 - 1,070,600 = $9,600

Cost: $ 170,600 Cash....................... 170,600Interest acquired: 180,000 ($1,080,000/6) Goodwill................... 9,400Bonus to new: $ 9,600 Bob (1,080,000)/6)...... 180,000

3. The partners elect to recognize goodwill, if applicable and recognize that the assets are overvalued on the books at present.A = $900,000 + $170,600 = $1,070,600B = $170,600/(1/6) = $1,023,600 (this amount is acceptable if the partners agree that the assets are not fairly Asset

overvaluation = $ 47,000 valued and must be adjusted)

Cash....................... 170,600Mike (47,000)(.5).......... 23,500John (47,000)(.4).......... 18,800Dave (47,000)(.1).......... 4,700

Bob (1,023,600)/6)...... 170,600

4. The partners will record this as a purchase but recognize goodwill, if applicable.Actual Value: $ 900,000 Goodwill................... 123,600Implied Value: $170,600/(1/6) = 1,023,600 Mike (.5)(123,600)...... 61,800Goodwill: $ 123,600 John (.4)(123,600)...... 49,440

Dave (.1)(123,600)...... 12,360

Mike (432 + 61.8)/6..... 82,300John (288 + 49.44)/6... . 56,240Dave (180 + 12.36)/6.... . 32,060

Bob (1,023,600/6)....... 170,600

5. The partners will record this as a purchase but choose not to recognize goodwill, if applicable.

(This is the bookvalue method)Mike (432/6)............... 72,000John (288)/6............... 48,000Dave (180/6................ 30,000

Bob (900,000/6)......... 150,000

Excercise #6:1. What is the goodwill attributed to Dixon on her retirement? --Dixon is paid $74,000 of which part is a return of capital and part is her share of goodwill; If the capital balance of the partnership was

$210,000 prior to the distribution to Dixon and $160,000 after the distribution to Dixon, Dixon's share of total capital must have been$50,000. We know that Dixon is to be paid $74,000, therefore $24,000 ($74,000 - $50,000) must be her share of goodwill.




2. What was the total agreed upon goodwill of the firm ?--Distributions are made in accordance with the p/l ratio unless there are other provisions. Therefore the distribution of $24,000 to Dixon

must represent 20% of total partnership goodwill of $120,000 ($24,000/(.2)).

3. Present the journal entry to record Lang's retirement(A) Because no goodwill is to be recognized, this must be treated as a bonus situation (in contrast with the Dixon example above).

Amount to be paid to Lang ($37,000 for capital balance + $9,000 loan balance).... $ 46,000Book value of Lang's interest prior to bonus ($15,000 capital + $9,000 loan)..... 24,000Bonus to Lang: $ 22,000

Lang loan.......................... 9,000Lang Capital (BV prior to bonus) 15,000Monte (22)(2/8) *................... 5,500Newton (22)(6/8) *.................. 16,500

Cash (37 + 9).................... 46,000* new P/L ratio for remaining partners

(B) If goodwill is to be recognized, the following entries would be made:Record the goodwill:Goodwill........................... 30,000

Lang (2/10)(30)................. 6,000Monte (2/10)(30)................ 6,000Newton (6/10)(30)............... 18,000

Record withdrawal and distribution to Lang:Lang loan.......................... 9,000Lang Capital (15 + 6).......... 21,000Monte (16)*(2/8) **............. 4,000Newton (16)(6/8) **............. 12,000

Cash (37 + 9).................... 46,000* Distribution to Lang: $ 37,000

Lang Capital (15 + 6): 21,000Goodwill to Lang: $ 16,000

** new P/L ratio for remaining partners

4. What are Monte and Newton's capital balances after the retirement? (A) Bonus Situation:

Monte NewtonBefore: $31,000 $45,000Bonus: <5,500> <16,500>After: $25,500 $28,500

(A) Goodwill Situation:

Monte NewtonBefore: $31,000 $45,000Goodwill: 6,000 18,000

<4,000> < 12,000>After: $33,000 $51,000

Documents

400_1310 ExercisesInPartnershipAcct 88B