Fundamental Accounting Principles - Wikispaces · PDF fileSolutions Manual to accompany Fundamental Accounting Principles, ... Chapter 12 Partnerships Chapter Opening Critical Thinking

Last revised: Jan 2013

Solutions Manual to accompany Fundamental Accounting Principles, 14th Canadian Edition. © 2013 McGraw-Hill Ryerson Ltd. 12-1

SOLUTIONS MANUAL

to accompany

Fundamental Accounting Principles 14th Canadian Edition

by Larson/Jensen

Prepared by:

Tilly Jensen, Athabasca University Wendy Popowich, Northern Alberta Institute of Technology Susan Hurley, Northern Alberta Institute of Technology Ruby So Koumarelas, Northern Alberta Institute of Technology Technical checks by:

Ross Meacher Betty Young, Red River College, ANSR Source



Chapter 12 Partnerships Chapter Opening Critical Thinking Challenge Questions* Why would Jennifer form a partnership when her business appeared to be already doing well?

- Jennifer's business needed to relocate out of her parent's garage into larger premises to accommodate increasing sales. Bringing in a partner might help to finance such growth and also spread any associated risk. Additionally, a partner might have expertise needed to sustain and/or expand the business. A partner might also be desirable to spread the workload.

The Chapter 12 Critical Thinking Challenge questions are asked at the beginning of this chapter. Students are reminded at the conclusion of the chapter to refer to the Critical Thinking Challenge questions at the beginning of the chapter. The solutions to the Critical Thinking Challenge questions are available here in the Solutions Manual and accessible to students on Connect.



Concept Review Questions 1. No. Partners have the right to select the people with whom they associate

themselves as partners. 2. Death, bankruptcy, or the legal inability of a partner to contract ends a

partnership. In addition, if a partnership is organized for the purpose of completing a specific business project, the partnership ends when the project is completed. If the business for which the partnership was organized cannot be completed but goes on indefinitely, the partnership may be dissolved at the will of any one of its partners.

3. Mutual agency means that each partner is an agent of the partnership and can commit it to contracts that are within the scope of its business.

4. Yes. Such an agreement is binding on members of the partnership. It is also binding on outsiders who know of the agreement. However, it is not binding on outsiders who do not know of the agreement.

5. Unlimited liability means that the creditors of a partnership have the right to require each partner to be personally responsible for all debts of the partnership.

6. All partners in a general partnership have unlimited liability. A limited partnership includes both general and limited partners, but the limited partners have no personal liability for partnership debts. Also, the general partners assume the management duties of the partnership.

7. George’s claim is not valid unless the previously agreed upon method of sharing net incomes and losses granted George an annual salary of $25,000. Unless the partnership agreement says otherwise, partners have no claim to a salary allowance in payment for their services.

8. If partners agree on the method of sharing income, but say nothing of losses, any losses are shared in the same manner as income.

9. The allocation of net income to the partners is reported on the statement of changes in equity.

10. At all times in the accounting history of a partnership, assets must equal liabilities plus owners’ equity. When the assets are converted to cash, any gains or losses are allocated to the capital accounts of the partners; and when creditors’ claims are paid, assets and liabilities are reduced by equal amounts. Therefore, when the remaining assets are in the form of cash, the amount of cash must equal the proprietary claims of the partners.

11. No. Kay is still liable to her former partners for her share of the losses. 12. The remaining partners should share the decline in their equities in accordance

with their income-and-loss-sharing ratio



QUICK STUDY

Quick Study 12-1 (10 minutes)

The partnership will probably have to pay because it is a merchandising firm. That is, if the vendor knows nothing to the contrary, the vendor may assume that Campbell has the right, because of mutual agency, to bind the firm to contracts for the purchase of merchandise. Under these circumstances, the public accounting firm is not in the merchandising business. Because the purchase of merchandise to be sold is not within the normal scope of the business of this firm, the vendor has no right to assume Campbell is acting as the agent for the partnership. Hence, the firm probably will not have to pay.


Since Hillier is a limited partner, he is not personally liable for any debts of the partnership.


2014 Mar. 1 Cash ......................................................................................... 50,000 Len Peters, Capital ............................................................ 20,000 Beau Silver, Capital .......................................................... 30,000 To record initial capital investments.




a. Net incomes and losses are split equally in the absence of a partnership agreement. Therefore, $120,000/2 = $60,000 should be allocated to each partner.

b.

2014 Mar. 31 Income Summary .................................................................... 120,000 Bill Ace, Capital ................................................................ 60,000 Dennis Bud, Capital ......................................................... 60,000 To allocate net income and close the Income

Summary account

c.

2014 Mar. 31 Bill Ace, Capital ....................................................................... 60,000 Dennis Bud, Capital ................................................................ 60,000 Income Summary ............................................................. 120,000 To allocate net loss and close the Income

Summary account




2014 Dec. 31 Income Summary ............................................................. 48,000

Lisa Montgomery, Capital ........................................ 41,500 Joel Calmar, Capital ................................................. 6,500 To transfer net income of $48,000 from the

Income Summary account to the partners’ capital accounts.

Calculations:

Montgomery Calmar Total

Net income ..................................................... $48,000 Salary allowances: Montgomery ................................................. $45,000 Calmar .......................................................... $10,000 Total salaries allocation ................................ (55,000) Balance of net income over allocated ......... ($7,000) Balance allocated equally: Montgomery (50% × −$7,000) ..................... (3,500) Calmar (50% × −$7,000) ............................... (3,500) Total allocated equally ................................ 7,000 Balance of net income .................................. $ 0 Allocation to each partner ........................... $41,500 $ 6,500 $48,000




2014 Dec. 31 Jenn Smith, Capital ........................................................... 56,000

Mike Yang, Capital ............................................................. 24,000 Income Summary .......................................................... 80,000 To transfer net loss of $80,000 from the Income

Summary account to the partners’ capital accounts.

Calculations:

Smith Yang Total

Net loss ........................................................... $(80,000) Salary allowances: Smith ............................................................. $115,000 Yang .............................................................. $90,000 Total salaries allocation ............................... (205,000) Balance of net loss over allocated ............... ($285,000) Balance allocated 3:2 Smith (3/5 × −$285,000) ............................... (171,000) Yang (2/5 × −$285,000) ................................ (114,000) Total allocated 3:2 ....................................... 285,000 Balance of net loss ........................................ $ 0 Allocation to each partner ........................... $(56,000) $(24,000) $(80,000)


2014 Oct. 1 Cash ...................................................................................................... 30,000

Fontaine, Capital ........................................................................... 30,000 To record admission of Fontaine by investment;

$30,000 + $30,000 + $30,000 = $90,000 × 1/3 = $30,000 to Fontaine.


2014 Mar. 12 Ramos, Capital ..................................................................................... 10,000

Briley, Capital ....................................................................................... 10,000 Fontaine, Capital ........................................................................... 20,000 To record admission of Fontaine by purchase;

$60,000 total equity × 1/3 = $20,000 to Fontaine.




2014 June 17 Cash ...................................................................................................... 30,000

Pollard, Capital .................................................................................... 3,000 Mission, Capital ................................................................................... 3,000 Bishop, Capital ............................................................................... 36,000 To record Bishop’s admission and bonus;

$6,000* × ½ = $3,000.

*$60,000 + $30,000 = $90,000 total equity × 40% = $36,000 Bishop equity; $36,000 − $30,000 = $6,000.


2014 Apr. 21 Cash ...................................................................................................... 30,000

Wilson, Capital ................................................................................ 18,000 Beacon, Capital ............................................................................... 6,000 Metcalf, Capital ............................................................................... 6,000 To record admission of Wilson and bonus to old

partners; $12,000* × ½ = $6,000.

*$60,000 + $30,000 = $90,000 total equity × 20% = $18,000,.equity of Wilson; $30,000 − $18,000 = $12,000.


2014 Nov. 23 Stuart, Capital ...................................................................................... 35,000

Cash ................................................................................................. 35,000 To record retirement of Stuart.


2014 Nov. 23 Peter, Capital ........................................................................................ 22,000

Cash ................................................................................................. 15,000 Oliver, Capital ................................................................................. 5,250 Wendell, Capital .............................................................................. 1,750 To record retirement of Peter;

$22,000 − $15,000 = $7,000 × 3/4 = $5,250 bonus to Oliver; $7,000 × 1/4 = $1,750 bonus to Wendell.




2014

Mar. 15 Darlene, Capital ................................................................................... 250,000 Linda, Capital ....................................................................................... 25,000 Sue, Capital .......................................................................................... 25,000 Cash ................................................................................................. 300,000 To record retirement of Darlene;

$300,000 − $250,000 = $50,000 × 2/4 = $25,000 allocated to each remaining partner as a reduction.


2014 Apr. 1 Sam, Capital ............................................................................................ 87,500

Andrews, Capital .................................................................................... 63,000 Mary, Capital ........................................................................................... 56,500 Cash ................................................................................................... 207,000 To record final distribution of cash to partners.

Calculations:

Cash

Equipment

Accum. Deprec.

Sam, Capital

Andrews, Capital

Mary, Capital

Account balances immediately prior to liquidation ................................ $ 32,000 $151,000 $36,000 $ 65,000 $ 48,000 $34,000 Sale of Equipment and allocation of gain 3:2:3 .................................. +175,000 −151,000 −36,000 +22,500 +15,000 +22,500 Balance ..................................... $ 207,000 $ 0 $ 0 $ 87,500 $ 63,000 $ 56,500




2014 Apr. 1 Sam, Capital ................................................................ 53,750

Andrews, Capital ........................................................ 40,500 Mary, Capital ............................................................... 22,750 Cash ....................................................................... 117,000 To record final distribution of cash to partners.

Calculations:

Cash

Equipment Accum. Deprec.

Sam, Capital

Andrews, Capital

Mary, Capital

Account balances immediately prior to liquidation ........................................... $ 32,000 $151,000 $36,000 $ 65,000 $ 48,000 $34,000 Sale of Equipment and allocation of loss 3:2:3 ......................

+85,000 −151,000 −36,000 −11,250 −7,500 −11,250

Balance ............................................... $ 117,000 $ 0 $ 0 $ 53,750 $ 40,500 $ 22,750 EXERCISES

Exercise 12-1 (20 minutes)

1. Keith, Scott, and Brian might first consider organizing their business as a general partnership. However, a problem for the new graduates is that they do not have funds and with no past business experience will probably have trouble getting a business loan. Therefore, instead of a partnership, another option is to incorporate. They can find investors to contribute capital for shares. They can structure the financing so that they remain the major shareholders in the company. Several key advantages to the corporate form is that they will have limited liability and potential to sell more shares if additional funds are needed. As a corporation any profits will be subject to corporate income tax. Any dividends paid to the shareholders will also be taxed at the individual level. However, any salaries that Keith, Scott, and Brian pay themselves will be tax-deductible expenses. A possible downside however is that a bank is likely to ask for a personal guarantee and then they will actually lose the limited liability feature.

2. The two doctors should form a partnership. The partnership can borrow funds from

the bank to obtain the initial needed capital for the business. The advantages of the partnership are ease of formation and owner authority. Also the owners will pay individual taxes on profits from the partnership but the partnership will not be taxed.



3. Matt should consider using a limited partnership. Given his real estate expertise he

can manage the day to day activities of the partnership and serve as its general partner. He can raise the necessary capital by admitting limited partners. The advantages to Matt will be the authority over the partnership that he will have as general partner and the ease of raising capital. All partners will pay individual taxes on profits distributed to them but the partnership entity will not pay income tax.

Exercise 12-2 (25 minutes) 1)

2014 Feb. 1 Cash ................................................................................... 80,000 Land .................................................................................... 120,000 Building .............................................................................. 180,000 Long-Term Notes Payable .......................................... 130,000 Tessa Williams, Capital .............................................. 80,000 Audrey To, Capital ...................................................... 170,000 To record initial capital investments.

Nov. 20 Tessa Williams, Withdrawals .......................................... 60,000 Audrey To, Withdrawals .................................................. 45,000 Cash ............................................................................ 105,000 To record partners’ withdrawals. Dec. 31 Income Summary ............................................................ 160,000 Tessa Williams, Capital ............................................ 116,000 Audrey To, Capital .................................................... 44,000 To allocate income and close the Income

Summary account.

Dec. 31 Tessa Williams, Capital ................................................... 60,000 Audrey To, Capital ........................................................... 45,000 Tessa Williams, Withdrawals .................................... 60,000 Audrey To, Withdrawals ............................................ 45,000 To close withdrawals accounts.

2) Capital account balances: Williams To Initial investment ............................................................................... $ 80,000 $170,000 Withdrawals ........................................................................................ (60,000) (45,000) Share of income* ............................................................................... 116,000 44,000 Ending balances ................................................................................ $136,000 $169,000 *See calculations next page.



Exercise 12-2 (concluded) *Calculations: Williams To Total Net income ................................................................... $160,000 Salary allowance: Williams ...................................................................... $ 90,000 Interest allowances: Williams (20% on $80,000) ........................................ 16,000 To (20% on $170,000) ................................................ $34,000 Total salaries and interest allocation ......................... $106,000 $34,000 (140,000) Balance of income to be allocated ............................. $ 20,000 Balance allocated equally: Williams (50% × $20,000) .......................................... 10,000 To (50% × $20,000) ..................................................... 10,000 Total allocated equally ................................................ (20,000) Balance of income ....................................................... $ -0- Shares of the partners ................................................. $116,000 $44,000 $160,000


Share to Dallas

Share to Weiss

Total

Plan (a) $394,000 × 1/2 .......................................... $197,000 $197,000 $394,000 Plan (b) ($115,000/$250,000) × $394,000 ............. $181,240 $181,240 ($135,000/$250,000) × $394,000 ............. _ _____ $212,760 212,760 $181,240 $212,760 $394,000 Plan (c) Net income .............................................. $394,000 Salary allowances ................................... $140,000 $70,000 Interest allowances: ($115,000 × 25%) ..................................... 28,750 ($135,000 × 25%) ..................................... 33,750 Total salaries and interest allocation ... $168,750 $103,750 (272,500) Balance of income .................................. $121,500 Balance allocated equally: ($121,500 × 50%) ..................................... 60,750 60,750 (121,500) Balance of income .................................. _ _____ __ ____ $ - 0 - Shares of each partner ........................... $229,500 $164,500 $394,000




Share to Jensen

Share to Stafford

Total

1. Net income ...................................... $420,000 Salary allowances .......................... $150,000 $75,000 Interest allowances: ($160,000 × 20%) ............................. 32,000 ($200,000 × 20%) ............................. 40,000 Total salaries and interest allocation $182,000 $115,000 (297,000) Balance of income .......................... $ 123,000 Remainder 3:2 ratio: ($123,000 × 3/5; $123,000 × 2/5) ..... 73,800 49,200 (123,000) Balance of income .......................... $ -0- Shares to each partner .................. $255,800 $164,200 $420,000

Share to Jensen

Share to Stafford

Total

2. Net loss ........................................... $ (95,000) Salary allowances .......................... $150,000 $ 75,000 Interest allowances: ($160,000 × 20%) ............................ 32,000 ($200,000 × 20%) ............................ 40,000 Total salaries and interest allocation

......................................................... $182,000 $115,000 (297,000)

Balance of loss .............................. $(392,000) Remainder 3:2 ratio: (−$392,000 × 3/5;−$392,000 × 2/5) . (235,200) (156,800) 392,000 Balance of loss .............................. ___ ____ $ -0-

Shares to each partner

$( 53,200)

$(41,800) $ (95,000)




1. 2014

Dec. 31 Income Summary ............................................................. 30,000 Katano, Capital ................................................................ 96,750 Liam, Capital ............................................................... 126,750 To transfer net income of $30,000 to partners’ capital accounts.

Calculations:

Liam Katano Total

Net income .......................................................... $ 30,000 Salary allowances: Liam ................................................................... $150,000 Interest allowances: Liam (15% × $95,000) ...................................... 14,250 Katano (15% × $105,000) ................................. ___ __ 15,750 Total salaries and interest allocation .............. $164,250 $ 15,750 (180,000) Balance of net income over allocated .............. $(150,000) Balance allocated 1:3: Liam (1/4 × −$150,000) ...................................... (37,500) Katano (3/4 × −$150,000) .................................. (112,500) Total allocated 1:3 ............................................ 150,000 Balance of net income ....................................... $ 0 Allocation to each partner ................................ $126,750 $ (96,750) $ 30,000

2.

Capital account balances: Liam Katano Initial investment ............................................................................... $ 95,000 $105,000 Withdrawals ........................................................................................ (7,000) (24,000) Share of income ................................................................................. 126,750 (96,750) Ending balances ................................................................................ $214,750 $(15,750)




Debra Glen Total Net income ............................................................. $116,000 4 Salary allowances: Debra ..................................................................... $100,000 Glen ....................................................................... $ 0 Total salaries allocation .......................................... (100,000 ) Balance of net income to be allocated ................ $ 16,000 3

Balance allocated equally: Debra (50% × −$ ? ) ........................................ 8,000 2 Glen (50% × −$ ? ) .......................................... 8,000 1 Total allocated equally ........................................ (16,000) Balance of net income .......................................... $ 0 Allocation to each partner .................................... $108,000 5 $ 8,000 $116,000

1. If Glen’s capital account was credited $8,000 and he was allocated $0 salaries,

then his allocation of income is based on his 50% share of the balance remaining after salaries are allocated; $8,000.

2. Since Glen’s 50% share is $8,000, Debra’s 50% share must be $8,000. 3. If 50% of the balance remaining = $8,000, then the balance remaining to be

allocated must be equal to 2 × $8,000 = $16,000. 4. If the balance remaining to be allocated is $16,000 and total salaries allocated is

$100,000, then net income must be equal to $16,000 + $100,000 = $116,000. 5. Debra’s share of net income is $100,000 + $8,000 = $108,000.




1. Williams Adams Total Net income ................................................................... $ 378,000 Salary allowance: Williams ...................................................................... $ 90,000 Adams ......................................................................... $150,000 Total salaries allocation .............................................. (240,000) Balance of income to be allocated ............................. $ 138,000 Balance allocated on a 3:2 ratio: Williams (3/5 × $138,000) ........................................... 82,800 Adams (2/5 × $138,000) ............................................. 55,200 Total allocated .............................................................. (138.000) Balance of income ....................................................... $ -0- Shares of the partners ................................................. $172,800 $205,200 $ 378,000

2.

2014 Dec. 31 Income Summary ................................................................................. 378,000

Keith Williams, Capital .............................................................. 172,800 Brian Adams, Capital ................................................................ 205,200 To record closing of net income to capital.

3.

MUSIC WORKS Statement of Changes in Equity

For Year Ended December 31, 2014 Williams Adams Total

Capital, December 31, 2013 ............. $ 28,300 $ 22,000 $ 50,300 Plus: Net income ................................... 172,800 205,200 378,000 Total ................................................. $201,100 $227,200 $428,300 Less: Partners’ withdrawals ......... 50,000 60,000 110,000 Capital, December 31, 2014 ............. $151,100 $167,200 $318,300



Exercise 12-7 (concluded)

MUSIC WORKS Balance Sheet

December 31, 2014 Assets Current assets: Cash .................................................................................. $208,000 Office supplies ................................................................. 16,000 Total current assets ...................................................... $224,000 Property, plant and equipment: Equipment ........................................................................ $300,000 Less: Accumulated depreciation ................................. 75,000 225,000 Total assets ............................................................................. $449,000 Liabilities Current liabilities: Accounts payable ............................................................ $ 9,500 Utilities payable ............................................................... 1,200 Current portion of notes payable ................................... 40,000 Total current liabilities ............................................. $ 50,700 Long-term liabilities: Notes payable, due May, 2016 (less current portion) .............................................................................

80,000

Total liabilities ..................................................................... $130,700 Equity Keith Williams, capital ......................................................... $151,100 Brian Adams, capital ........................................................... 167,200 Total equity .......................................................................... 318,300 Total liabilities and equity ...................................................... $449,000 Analysis component The partners’ capital accounts might be so small relative to the amount of the withdrawals made because the balance in capital changes during each accounting period. A partner’s capital account would increase when they are allocated a share of net income and would then decrease if a withdrawal was made. For example, if Partner A had a beginning balance in capital of $100 and receiving a $600 allocation of net income for the period, the capital balance would be $700. If Partner A then made a withdrawal of $500, the capital balance would decrease to $200. In this case, Partner A’s capital account balance of $200 seems small relative to the $500 withdrawal made.



Exercise 12-8 (25 minutes) a)

July 1 Cash ................................................................................... 190,000 Morris, Capital ............................................................. 190,000 To record admission of Morris

[($760,000 + $190,000) × 20%].

b) July 1 Cash .................................................................................. 230,000 Morris, Capital ............................................................ 198,000 Hall, Capital ................................................................. 24,000 Reynolds, Capital ....................................................... 8,000 To record admission of Morris.* *Supporting computations: $760,000 + $230,000 = $990,000 $990,000 × 20% = $198,000 $230,000 − $198,000 = $32,000 $ 32,000 × 75% = $24,000 $ 32,000 × 25% = $8,000

c) July 1 Cash .................................................................................. 110,000 Hall, Capital ....................................................................... 48,000 Reynolds, Capital ............................................................. 16,000 Morris, Capital ............................................................ 174,000 To record admission of Morris.* *Supporting computations: $760,000 + $110,000 = $870,000 $870,000 × 20% = $174,000 $ 110,000 − $174,000 = −$64,000 −$ 64,000 × 75% = −$48,000

−$ 64,000 × 25% = −$16,000




a) 2014 Sept. 1 Cash .............................................................................. 105,000

Wil Court, Capital .................................................. 105,000 To record the admission of new partner;

$50,000 + $195,000 + $105,000 = $350,000 total equity; $350,000 × 30% = $105,000.

b)

Sept. 1 Cash .............................................................................. 105,000 Wil Court, Capital .................................................. 70,000 Gunnar Schwiede, Capital .................................... 14,000 Dietar Loris, Capital .............................................. 21,000 To record admission of new partner with bonus to old partners;

$350,000 × 20% = $70,000 equity to Court; $105,000 − $70,000 = $35,000 bonus to old partners; $35,000 × 2/5 = $14,000 to Schwiede; $35,000 × 3/5 = $21,000 to Loris.

c)

Sept. 1 Cash .............................................................................. 105,000 Gunnar Schwiede, Capital ........................................... 28,000 Dietar Loris, Capital ..................................................... 42,000 Wil Court, Capital .................................................. 175,000 To record admission of new partner with bonus to new partner;

$350,000 × 50% = $175,000 equity to Court; $175,000 − $105,000 = $70,000 bonus to Court to be allocated between old partners; $70,000 × 2/5 = $28,000; $70,000 × 3/5 = $42,000.




Apr. 30 Prince, Capital .................................................................... 140,000 Queen, Capital .............................................................. 140,000 To record admission of Queen.


a) Nov. 30 Tran, Capital ..................................................................... 75,000 Cash ............................................................................ 75,000 To record retirement of Tran.

b) Nov. 30 Tran, Capital ..................................................................... 75,000 Holt, Capital (2/8 × $15,000) ............................................. 3,750 Barth, Capital (6/8 × $15,000) .......................................... 11,250 Cash ............................................................................ 90,000 To record retirement of Tran.

c) Nov. 30 Tran, Capital ..................................................................... 75,000 Holt, Capital (2/8 × $7,500) ......................................... 1,875 Barth, Capital (6/8 × $7,500) ...................................... 5,625 Cash ............................................................................ 67,500 To record retirement of Tran.




a) 2014 Oct. 14 Doug Morris, Capital .................................................... 120,000

Accumulated Depreciation, Car .................................. 44,000 Car .......................................................................... 84,000 Cash ....................................................................... 80,000 To record retirement of a partner;

cost of $84,000 − book value of $40,000 = accum. deprec. of $44,000.

b) Oct. 14 Doug Morris, Capital .................................................... 160,000

Accumulated Depreciation, Car .................................. 44,000 Car .......................................................................... 84,000 Cash ....................................................................... 80,000 Barb Rusnak, Capital ............................................ 20,000 Len Peters, Capital ................................................ 20,000 To record retirement of a partner;

$160,000 − $120,000 = $40,000 bonus to old partners; $40,000 × 40/80 = 20,000 bonus allocated to each of Rusnak and Peters.

c)

Oct. 14 Doug Morris, Capital .................................................... 60,000 Barb Rusnak, Capital ................................................... 30,000 Len Peters, Capital ....................................................... 30,000 Accumulated Depreciation, Car .................................. 44,000 Car .......................................................................... 84,000 Cash ....................................................................... 80,000 To record retirement of a partner;

$120,000 − $60,000 = $60,000 bonus to Morris; $60,000 × 40/80 = $30,000 allocated to each of Rusnak and Peters.




2015 Jan. 1 Cash ...................................................................................... 56,000

Accumulated Depreciation, Equipment ............................. 89,000 Loss on Sale of Equipment* ................................................ 7,000 Equipment ........................................................................ 152,000 To record sale of equipment.

1 Les Wallace, Capital ($7,000 × 2/4) ..................................... 3,500 Mavis Dunn, Capital ($7,000 × 1/4) ..................................... 1,750 Sig Jensen, Capital ($7,000 × 1/4) ....................................... 1,750 Loss on Sale of Equipment ............................................ 7,000 To distribute loss on sale of equipment to

partners.

1 Accounts Payable ................................................................ 7,000

Notes Payable ...................................................................... 12,000 Cash ................................................................................. 19,000 To pay creditors.

1 Les Wallace, Capital ............................................................ 27,500 Mavis Dunn, Capital ............................................................. 12,250 Sig Jensen, Capital .............................................................. 10,250 Cash ................................................................................. 50,000 To distribute remaining cash to partners.

Calculations:

Cash

Equipment

Accum. Deprec.,

Equipment

Accounts Payable

Notes

Payable

Les Wallace, Capital

Mavis Dunn, Capital

Sig Jensen, Capital

Account balances December 31, 2014 ....................

$ 13,000

$ 152,000

$ 89,000

$ 7,000

$ 12,000

$31,000

$14,000

$12,000 Sale of equipment for a loss of $7,000 .....................................

+56,000

−152,000

−89,000

−3,500

−1,750

−1,750

Balance ....................................... $ 69,000 $ 0 $ 0 $ 7,000 $ 12,000 $27,500 $12,250 $10,250 Payment of liabilities ................. −19,000 −7,000 −12,000 Balance ....................................... $50,000 $ 0 $ 0 $ 0 $ 0 $27,500 $12,250 $10,250



Exercise 12-13 (concluded)

*Note – Students may wish to combine the entries for the sale of the equipment and distribution of the loss on sale of equipment as follows :

2015 Jan. 1 Cash ...................................................................................... 56,000

Accumulated Depreciation, Equipment ............................. 89,000 Les Wallace, Capital (7,000 × 2/4) ....................................... 3,500 Mavis Dunn, Capital (7,000 × 1/4) ....................................... 1,750 Sig Jensen, Capital (7,000 × 1/4) ......................................... 1,750 Equipment ................................................................... 152,000 To record sale of equipment and distribution of

$7,000 loss on sale of equipment to partners.


2015 Jan. 1 Martha Wheaton, Capital ..................................................... 380,000 Sam Dun, Capital ................................................................. 376,000 Cash ................................................................................. 756,000 To distribute remaining cash to partners.

Cash

Building

Accum. Deprec., Building

Land

Accounts Payable

Martha Wheaton,

Capital

Bess Jones, Capital

Sam Dun,

Capital Account balances December 31, 2014 ....................

$ 184,000

$ 824,000

$ 480,000

$ 208,000

$128,000

$ 316,000

$(52,000)

$ 344,000 Sale of land and building* ..................................... + 680,000 −824,000 −480,000 −208,000 + 64,000 + 32,000 + 32,000 Balance ....................................... $ 864,000 $ 0 $ 0 $ 0 $128,000 $ 380,000 $ (20,000) $ 376,000 Payment of liabilities ................. − 128,000 − 128,000 Balance ....................................... $ 736,000 $ 0 $ 0 $ 0 $ 0 $ 380,000 $ (20,000) $ 376,000 Payment of deficiency .............. + 20,000 +$20,000 Balance ....................................... $ 756,000 $ 0 $ 0 $ 0 $ 0 $ 380,000 $ 0 $ 376,000 *$680,000 − ($824,000 − $480,000 + $208,000) = $128,000 gain $128,000 × 2/4 or 50% = $64,000 to Wheaton $128,000 × 1/4 or 25% = $32,000 to each of Jones and Dun




2015 Jan. 1 Martha Wheaton, Capital ..................................................... 366,667

Sam Dun, Capital ................................................................. 369,333 Cash ................................................................................. 736,000 To distribute remaining cash to partners.

Calculations:

Cash

Building

Accum. Deprec., Building

Land

Accounts Payable

Martha Wheaton,

Capital

Bess Jones, Capital

Sam Dun,

Capital Account balances December 31, 2014 ....................

$ 184,000

$ 824,000

$ 480,000

$ 208,000

$ 128,000

$316,000

$(52,000)

$344,000 Sale of land and building* ..................................... + 680,000 −824,000 −480,000 −208,000 + 64,000 + 32,000 + 32,000 Balance ....................................... $ 864,000 $ 0 $ 0 $ 0 $ 128,000 $380,000 $(20,000) $376,000 Payment of liabilities ................. − 128,000 − 128,000 Balance ....................................... $ 736,000 $ 0 $ 0 $ 0 $ 0 $380,000 $(20,000) $376,000 Absorption of deficiency** ................................ − 13,333 + 20,000 − 6,667 Balance ....................................... $ 736,000 $ 0 $ 0 $ 0 $ 0 $366,667 $ 0 $369,333 *$680,000 − ($824,000 − $480,000 + $208,000) = $128,000 gain; $128,000 × 2/4 or 50% = $64,000 to Wheaton; $128,000 × 1/4 or 25% = $32,000 to each of Jones and Dun. **$20,000 × 2/3 = $13,333 to Wheaton (based on a remaining ratio of 2:1 or 2/3); $20,000 × 1/3 = $6,667 to Dun (based on a remaining ratio of 2:1 or 1/3).



Exercise 12-16 (30 minutes) 1. Whiz Bam Boom Total Initial investments .................... $231,200 $ 177,200 $191,600 $600,000 Allocation of all losses: ($600,000 − $60,000)/3 ............ (180,000) (180,000) (180,000) (540,000) Capital balances ....................... $ 51,200 $ (2,800) $ 11,600 $ 60,000 2.

Dec. 31 Cash ................................................................................... 2,800 Bam, Capital ................................................................ 2,800 To record payment of deficiency.

31 Whiz, Capital ..................................................................... 51,200

Boom, Capital ................................................................... 11,600 Cash ............................................................................. 62,800 To distribute remaining cash.

3. a)

Dec. 31 Whiz, Capital ..................................................................... 1,400 Boom, Capital ................................................................... 1,400 Bam, Capital ................................................................ 2,800 To transfer deficiency to other partners.

b)

Dec. 31 Whiz, Capital .................................................................... 49,800 Boom, Capital .................................................................. 10,200 Cash ............................................................................ 60,000 To distribute remaining cash.



PROBLEMS

Problem 12-1A (50 minutes)

a) Dec. 31 Income Summary ................................................................ 600,000 Jenkins, Capital ............................................................ 200,000 Willis, Capital ................................................................ 200,000 Trent, Capital ................................................................. 200,000 To close Income Summary.

b) Dec. 31 Income Summary ................................................................ 600,000 Jenkins, Capital ............................................................ 120,000 Willis, Capital ................................................................ 210,000 Trent, Capital ................................................................. 270,000 To close Income Summary.* *Supporting computations: ($200,000/$1,000,000) × $600,000 = $120,000 ($350,000/$1,000,000) × $600,000 = $210,000 ($450,000/$1,000,000) × $600,000 = $270,000

c) Dec. 31 Income Summary ................................................................ 600,000 Jenkins, Capital ............................................................ 195,000 Willis, Capital ................................................................ 227,500 Trent, Capital ................................................................. 177,500 To close Income Summary.*

*Supporting calculations: Jenkins Willis Trent Total Net income ..................................................... $600,000 Salary allowances:

Jenkins, Capital ................................................................ $110,000 Willis, Capital .................................................................... $120,000 Trent, Capital ..................................................................... $ 55,000 Interest allowances: Jenkins (15% on $200,000) ........................ 30,000 Willis (15% on $350,000) .............................. 52,500 Trent (15% on $450,000) ............................. 67,500 Total salaries and interest allocation .......... $140,000 $172,500 $122,500 (435,000) Balance of income to be allocated ............... $165,000 Balance allocated equally ............................. 55,000 55,000 55,000 (165,000) Balance of income ......................................... $ 0 Shares of the partners .................................. $195,000 $227,500 $177,500 $600,000




Preliminary calculations:

Plan (a) & Plan (c) Percentages based on initial investments: Phillis = $160,000 / $400,000 = 40% Case = $240,000 / $400,000 = 60% Plan (b) Percentages based on time: Phillis = (1/3) / (1/3 + 1) = 25% Case = (1) / (1/3 + 1) = 75% Plan (c) & Plan (d) Salary allowance: Case = 12 × $5,000 = $60,000 Plan (d) Interest allowances: Phillis = 15% × $160,000 = $ 24,000 Case = 15% × $240,000 = $ 36,000

Plan a.

Year Calculations

Share to Phillis

Share to Case

Total

1 Net loss .................................................................. $(100,000) 40% × $100,000 loss .............................................. $(40,000) 60% × $100,000 loss .............................................. $(60,000)

2 Net income ...................................... $ 150,000

40% × $150,000 income ................. $ 60,000 60% × $150,000 income ................. $ 90,000

3 Net income ...................................... $ 250,000 40% × $250,000 income ................. $ 100,000 60% × $250,000 income ................. $150,000



Problem 12-2A (continued)

Plan b.

Year Calculations

Share to Phillis

Share to Case

Total

1 Net loss ........................................... $(100,000) 25% × $100,000 loss ....................... $(25,000) 75% × $100,000 loss ....................... $ (75,000)

2 Net income ...................................... $ 150,000 25% × $150,000 income ................. $ 37,500 75% × $150,000 income ................. $ 112,500





Plan c.

Year Calculations

Share to Phillis

Share to Case

Total

1 Net loss ........................................... $(100,000) Salary allowances .......................... $ 60,000 Total salaries .................................. $ -0- $ 60,000 (60,000) Balance of loss ............................... $(160,000) Remainder 40/60 (initial

investment ratio):

(−$160,000 × 40%) .......................... (64,000) (−$160,000 × 60%) .......................... (96,000) 160,000 Balance of loss ............................... ___ ____ $ -0-

Shares to each partner $( 64,000) $ (36,000) $(100,000)

2 Net income ...................................... $150,000 Salary allowances .......................... $ 60,000 Total salaries .................................. $ -0- $ 60,000 $ (60,000) Balance of income ......................... $ 90,000 Remainder 40/60 (initial

investment ratio):

($90,000 × 40%) .............................. 36,000 ($90,000 × 60%) .............................. 54,000 (90,000) Balance of income ......................... ____ ____ $ -0-

Shares to each partner $ 36,000 $ 114,000 $150,000

3 Net income ...................................... $250,000 Salary allowances .......................... $ 60,000 Total salaries .................................. $ -0- $ 60,000 (60,000) Balance of income ......................... $190,000 Remainder 40/60 (initial

investment ratio):

($190,000 × 40%) ............................ 76,000 ($190,000 × 60%) ............................ 114,000 (190,000) Balance of income ......................... ___ ____ $ -0-

Shares to each partner $ 76,000 $ 174,000 $250,000



Problem 12-2A (concluded)

Plan d. Year

Calculations

Share to Phillis

Share to Case

Total

1 Net loss ........................................... $(100,000) Salary allowances .......................... $ 60,000 Interest allowances: ($160,000 × 15%) ............................ 24,000 ($240,000 × 15%) ............................ 36,000 Total salaries and interest allocation

......................................................... $ 24,000 $ 96,000 $(120,000)

Balance of loss ............................... $(220,000) Remainder equally: (−$220,000 × 50%) .......................... (110,000) (110,000) 220,000 Balance of loss ............................... ___ ____ $ -0-

Shares to each partner $ (86,000) $(14,000) $(100,000)

2 Net income ...................................... $ 150,000 Salary allowances .......................... $60,000 Interest allowances: ($160,000 × 15%) ............................ 24,000 ($240,000 × 15%) ............................ 36,000 Total salaries and interest allocation

......................................................... $ 24,000 $ 96,000 (120,000)

Balance of income ......................... $ 30,000 Remainder equally: ($30,000 × 50%) .............................. 15,000 15,000 (30,000) Balance of income ......................... ___ ____ $ -0-

Shares to each partner $ 39,000 $111,000 $ 150,000

3 Net income ...................................... $ 250,000 Salary allowances .......................... $ 60,000 Interest allowances: ($160,000 × 15%) ............................ 24,000 ($240,000 × 15%) ............................ 36,000 Total salaries and interest allocation

......................................................... $ 24,000 $ 96,000 (120,000)

Balance of income ......................... $ 130,000 Remainder equally: (130,000 × 50%) .............................. 65,000 65,000 (130,000) Balance of income ......................... ___ ____ $ -0-

Shares to each partner $ 89,000 $ 161,000 $ 250,000




Part 1

Income (Loss) Sharing

Plan

Calculations

Conway

Chan

Seghal

Total

(a) $360,000/3 ................................................... $120,000 $120,000 $120,000 $360,000

(b) $360,000 × ($245,000/$700,000) ............... $126,000 $360,000 × ($280,000/$700,000) ............... $144,000 $360,000 × ($175,000/$700,000) ............... $ 90,000 Total allocated ........................................... $126,000 $144,000 $ 90,000 $360,000

(c) Net income ................................................. $360,000 Salary allowances ..................................... $110,000 $ 85,000 $ 60,000 Interest allowances: 12% × $245,000 ....................................... 29,400 12% × $280,000 ....................................... 33,600 12% × $175,000 ....................................... 21,000 Total salaries and interest allocation ..... $139,400 $ 118,600 $ 81,000 (339,000 ) Balance of income .................................... $21,000 Balance allocated equally ........................ 7,000 7,000 7,000 (21,000 ) Balance of income .................................... $ 0 Shares of partners .................................... $146,400 $125,600 $ 88,000 $360,000

Part 2

CCS Consulting Statement of Changes in Equity

For Year Ended December 31, 2014 Conway Chan Seghal Total

Capital, January 1 ................................. $ -0- $ -0- $ -0- $ -0- Add: Investments by partners ................. 245,000 280,000 175,000 700,000 Net income ....................................... 146,400 125,600 88,000 360,000 Total ..................................................... $391,400 $405,600 $263,000 $1,060,000 Less: Partners’ withdrawals .............. 40,000 30,000 20,000 90,000 Capital, December 31 ........................... $351,400 $375,600 $243,000 $ 970,000




Part 3 2014 Dec. 31 Income Summary ............................................................... 360,000 Ben Conway, Capital .................................................... 146,400 Ida Chan, Capital .......................................................... 125,600 Clair Seghal, Capital .................................................... 88,000 To close Income Summary.

Dec. 31 Ben Conway, Capital .......................................................... 40,000 Ida Chan, Capital ................................................................ 30,000 Clair Seghal, Capital .......................................................... 20,000 Ben Conway, Withdrawals .......................................... 40,000 Ida Chan, Withdrawals ................................................. 30,000 Clair Seghal, Withdrawals ........................................... 20,000 To close withdrawals accounts.




a) 2014 May 1 Cash ...................................................................................... 100,000.00 Dent, Capital* .................................................................. 100,000.00 To record admission of Dent. *Supporting calculations: $84,000 + $69,000 + $147,000 = $300,000 ($300,000 + $100,000) × 25% = $100,000 q No bonus received or paid.

b) 2014 May 1 Cash ........................................................................................ 72,500.00 Zeller, Capital ($20,625* × 3/10) ............................................ 6,187.50 Acker, Capital ($20,625* × 2/10) ............................................ 4,125.00 Benton, Capital ($20,625* × 5/10) .......................................... 10,312.50 Dent, Capital ..................................................................... 93,125.00 To record Dent’s admission and bonus. *Supporting calculations: ($300,000 + $72,500) × 25% = $93,125 $93,125 − $72,500 = $20,625 q Bonus allocated to new partner. c)

2014 May 1 Cash ................................................................................... 131,000.00 Zeller, Capital ($23,250* × 3/10) .................................. 6,975.00 Acker, Capital ($23,250* × 2/10) ................................. 4,650.00 Benton, Capital ($23,250* × 5/10) ............................... 11,625.00 Dent, Capital ................................................................ 107,750.00 To record admission of Dent and bonus to

old partners.

*Supporting calculations: ($300,000 + $131,000) × 25% = $107,750 $107,750 − $131,000 = $23,250 ❑ Bonus received by old partners.



Problem 12-5A (40 minutes) Part 1 a.

2014 June 1 Cash ...................................................................................................... 280,000

Equipment ............................................................................................ 360,000 Jill Bow, Capital ......................................................................... 280,000 Aisha Amri, Capital .................................................................... 320,000 Notes Payable ............................................................................ 40,000 To record formation of partnership.

b.

2014 Nov. 20 Amri, Withdrawals ............................................................................... 100,000

Cash ............................................................................................ 100,000 To record withdrawal by partner.

c.

2015 May 31 Income Summary ................................................................................. 380,000

Jill Bow, Capital ......................................................................... 245,200 Aisha Amri, Capital .................................................................... 134,800 To record closing of net income to capital.

Supporting calculations: Bow Amri Total Net income ................................................................... $380,000 Salary allowance: Bow ............................................................................. $150,000 Interest allowances: Bow (8% on $280,000) ............................................... 22,400 Amri (8% on $320,000) ............................................... $25,600 Total salaries and interest allocation ......................... $172,400 $25,600 (198,000) Balance of income to be allocated ............................. $ 182,000 Balance allocated 40/60: Bow (40% × $182,000) ............................................... 72,800 Amri (60% × $182,000) ............................................... 109,200 Total allocated 40/60 .................................................... (182,000) Balance of income ....................................................... _______ _______ $ -0- Shares of the partners ................................................. $245,200 $134,800 $ 380,000



Problem 12-5A (concluded) d.

2015 June 1 Cash ...................................................................................................... 120,000

Bow, Capital ......................................................................................... 32,000 Amri, Capital ........................................................................................ 48,000 Wilems, Capital .......................................................................... 200,000 To record admission of Wilems for a 20% interest.

Supporting calculations: Bow, Capital = $280,000 + $245,200 = $ 525,200 Amri, Capital = $320,000 − $100,000 + $134,800 = 354,800 Total equity prior to admission of new partner = $ 880,000 OR

Jill Bow, Capital Aisha Amri,

Capital

Total Equity Prior to Admission of New

Partner 280,000 320,000 245,200 100,000 134,800 525,200 + 354,800 = 880,000

Once the total equity prior to admission of the new partner of $880,000 is determined, THEN: Total equity after admission of new partner = $880,000 + $120,000 = $1,000,000; New partner’s share of equity = $1,000,000 × 20% = $200,000; Bonus to new partner = $200,000 − $120,000 = $80,000; Bow’s share of bonus to new partner = $80,000 × 40% = $32,000; Amri’s share of bonus to new partner = $80,000 × 60% = $48,000.

Part 2

Jill Bow, Capital Aisha Amri, Capital Peter Wilems,

Capital 280,000 320,000 200,000 245,200 100,000 134,800 525,200 354,800

32,000 48,000 493,200 306,800

OR: Bow, capital = $280,000 + $245,200 − 32,000 = $493,200 Amri, capital = $320,000 − $100,000 + $134,800 − 48,000 = $306,800 Wilems, capital = $200,000



Problem 12-6A (30 minutes) a) 2014 May 1 McLean, Capital ................................................................. 69,000 Freedman, Capital ....................................................... 69,000 To record admission of Freedman.

b) May 1 McLean, Capital ................................................................ 69,000 Park, Capital ............................................................... 69,000 To record admission of Park.

c) May 1 McLean, Capital ................................................................. 69,000 Cash ............................................................................. 69,000 To record withdrawal of McLean with no bonus.

d) May 1 McLean, Capital .............................................................. 69,000 Gale, Capital ($132,000 − $69,000) × 3/8 ....................... 23,625 Lux, Capital ($132,000 − $69,000) × 5/8 ........................ 39,375 Cash .......................................................................... 132,000 To record withdrawal of McLean with bonus.

e) May 1 McLean, Capital ................................................................ 69,000.00 Accum. Depreciation, Machinery .................................... 83,000.00 Gale, Capital ($9,750* × 3/8) ...................................... 3,656.25 Lux, Capital ($9,750* × 5/8) ........................................ 6,093.75 Machinery ................................................................... 115,000.00 Cash ............................................................................ 27,250.00 To record withdrawal of McLean with bonus

to old partners.

*$69,000 − ($115,000 − $83,000 + $27,250) = −$9,750




Part 1

a.

Cash

Machinery

Accum. Deprec.,

Machinery

Accounts Payable

Jim Vonne,

Capital

Milton Kent,

Capital

Ty Johnson,

Capital Account balances June 30, 2014 ...

$ 68,750

$ 588,750

$ 137,500

$ 130,375

$ 76,250

$ 200,875

$ 112,500

Sale of Machinery for $488,130* .... +488,130 − 588,750 − 137,500 + 3,688 + 14,752 + 18,440 Balance ............................................ $ 556,880 $ 0 $ 0 $ 130,375 $ 79,938 $ 215,627 $ 130,940 Payment of liabilities ...................... −130,375 −130,375 Balance ............................................ $ 426,505 $ 0 79,938 215,627 130,940 Distribution of cash to partners ... −426,505 −79,938 −215,627 −130,940 Balance ............................................ $ 0 $ 0 $ 0 $ 0

* $588,750 − $137,500 = $451,250; $488,130 − $451,250 = $36,880 gain $36,880 × 1/10 = $3,688 to Vonne $36,880 × 4/10 = $14,752 to Kent $36,880 × 5/10 = $18,440 to Johnson b.

Cash

Machinery

Accum. Deprec.,

Machinery

Accounts Payable

Jim Vonne, Capital

Milton Kent,

Capital

Ty

Johnson, Capital

Account balances June 30, 2014 ...........

$ 68,750

$ 588,750

$137,500

$ 130,375

$ 76,250

$ 200,875

$ 112,500

Sale of Machinery for $375,000* ............ +375,000 − 588,750 − 137,500 − 7,625 −30,500 −38,125 Balance .................................................... $ 443,750 $ 0 $ 0 $130,375 $ 68,625 $ 170,375 $ 74,375 Payment of liabilities .............................. − 130,375 −130,375 Balance .................................................... $ 313,375 $ 0 68,625 170,375 74,375 Distribution of cash to partners ............ −313,375 −68,625 −170,375 −74,375 Balance .................................................... $ 0 $ 0 $ 0 $ 0

* $588,750 − $137,500 = $451,250; $375,000 − $451,250= $76,250 loss $ 76,250 × 1/10 = $7,625 to Vonne $ 76,250 × 4/10 = $30,500 to Kent $ 76,250 × 5/10 = $38,125 to Johnson




c.

Cash

Machinery

(net)

Accum. Deprec.,

Machinery

Accounts Payable

Jim Vonne,

Capital

Milton Kent,

Capital

Ty Johnson,

Capital Account balances June 30, 2014 ................

$ 68,750

$ 588,750

$ 137,500

$ 130,375

$ 76,250

$ 200,875

$112,500

Sale of Machinery for $212,500* ................. +212,500 −588,750 −137,500 − 23,875 −95,500 −119,375 Balance ......................................................... $281,250 $ 0 $ 0 $130,375 $ 52,375 $ 105,375 $ (6,875 ) Payment of liabilities ................................... −130,375 −130,375 Balance ......................................................... $ 150,875 $ 0 $52,375 $105,375 $(6,875) Johnson pays deficiency ............................ + 6,875 + 6,875 $ 157,750 $52,375 $105,375 $ 0 Distribution of cash to partners ................. −157,750 −52,375 −105,375 Balance ......................................................... $ 0 $ 0 $ 0

* $588,750 − $137,500 = $451,250; $212,500 − $451,250= $238,750 loss $238,750 × 1/10 = $23,875 to Vonne $238,750 × 4/10 = $95,500 to Kent $238,750 × 5/10 = $119,375 to Johnson

d.

Cash

Machinery

(net)

Accum. Deprec.,

Machinery

Accounts Payable

Jim Vonne, Capital

Milton Kent,

Capital

Ty Johnson,

Capital

Account balances June 30, 2014 .....

$ 68,750

$ 588,750

$ 137,500

$130,375

$ 76,250

$ 200,875

$ 112,500 Sale of Machinery for $187,500* .......

+187,500 −588,750

−137,500 −26,375 −105,500 −131,875 Balance ............................................... $256,250 $ 0 $ 0 $130,375 $ 49,875 $ 95,375 $ ( 19,375) Payment of liabilities ......................... −130,375 −130,375 Balance ............................................... $ 125,875 $ 0 $49,875 $95,375 $(19,375) Allocation of deficiency** .................. − 3,875 − 15,500 + 19,375 $ 46,000 $ 79,875 $ 0 Distribution of cash to partners ....... −125,875 −46,000 −79,875 Balance ............................................... $ 0 $ 0 $ 0

*$588,750 − $137,500 = $451,250; $187,500 − $451,250= $263,750 loss $263,750 × 1/10 = $26,375 to Vonne $263,750 × 4/10 = $105,500 to Kent $263,750 × 5/10 = $131,875 to Johnson **$19,375 × 1/5 = $3,875 to Vonne $19,375 × 4/5 = $15,500 to Kent




Part 2 2014

June 30 Jim Vonne, Capital .............................................................................. 79,938 Milton Kent, Capital ............................................................................. 215,627 Ty Johnson, Capital ............................................................................ 130,940 Cash ................................................................................................. 426,505 To record the final distribution of cash to the

partners.


a. 2014 Dec. 31 Cash .............................................................................. 720,000

Accumulated Depreciation .......................................... 199,200 Property, Plant and Equipment ............................ 513,600 Gain on Liquidation* ............................................. 405,600 To record sale of property, plant and

equipment.

31 Gain on Liquidation ..................................................... 405,600 Trish Craig, Capital ............................................... 304,200 Ted Smith, Capital ................................................. 101,400 To record allocation of gain to equity;

$405,600 × ¾ = $304,200; $405,600 × ¼ = $101,400.

31 Accounts Payable ........................................................ 50,400 Cash ....................................................................... 50,400 To record payment of liabilities. 31 Trish Craig, Capital ...................................................... 549,000 Ted Smith, Capital ........................................................ 211,800 Cash ....................................................................... 760,800 To record final distribution of cash;

Trish Craig, Capital = $244,800 + $304,200 = $549,000; Ted Smith, Capital = $110,400+ $101,400 = $211,800; Cash = $91,200 + $720,000 − $50,400 = $760,800.




*NOTE: Students may wish to combine the sale and allocation of gain as follows: Dec. 31 Cash .............................................................................. 720,000

Accumulated Depreciation .......................................... 199,200 Property, Plant and Equipment ............................ 513,600 Trish Craig, Capital ............................................... 304,200 Ted Smith, Capital ................................................. 101,400 To record sale of property, plant and

equipment and allocation of gain to partners.

b. 2014 Dec. 31 Cash .............................................................................. 140,000

Accumulated Depreciation .......................................... 199,200 Loss on Liquidation** .................................................. 174,400 Property, Plant and Equipment ............................ 513,600 To record sale of property, plant and equipment. 31 Trish Craig, Capital ...................................................... 130,800 Ted Smith, Capital ........................................................ 43,600 Loss on Liquidation ................................................ 174,400 To record allocation of loss;

$174,400 × ¾ = $130,800; $174,400 × ¼ = $43,600.

31 Accounts Payable ........................................................ 50,400 Cash ....................................................................... 50,400 To record payment of liabilities. 31 Trish Craig, Capital ...................................................... 114,000 Ted Smith, Capital ........................................................ 66,800 Cash ....................................................................... 180,800 To record final distribution of cash;

Trish Craig, Capital = $244,800 − $130,800 = $114,000; Ted Smith, Capital = $110,400 − $43,600 = $66,800; Cash = $91,200 + $140,000 − $50,400 = $180,800.

**NOTE: Students may wish to combine the sale and allocation of loss as follows:

Dec. 31 Cash .............................................................................. 140,000 Accumulated Depreciation .......................................... 199,200 Trish Craig, Capital ...................................................... 130,800 Ted Smith, Capital ........................................................ 43,600 Property, Plant and Equipment ............................ 513,600 To record sale of property, plant and equipment.



ALTERNATE PROBLEMS

Problem 12-1B (50 minutes)

a) Dec. 31 Income Summary ................................................................ 25,000 Phung, Capital ............................................................... 8,333 Moier, Capital ................................................................ 8,333 Lister, Capital ................................................................ 8,334* To close Income Summary.

* rounded

b) Dec. 31 Income Summary ................................................................ 25,000 Phung, Capital ............................................................... 8,125 Moier, Capital ................................................................ 9,375 Lister, Capital ................................................................ 7,500 To close Income Summary.* *Supporting computations: ($130,000/$400,000) × $25,000 = $8,125 ($150,000/$400,000) × $25,000 = $9,375 ($120,000/$400,000) × $25,000 = $7,500

c) Dec. 31 Income Summary ................................................................ 25,000 Lister, Capital ...................................................................... 6,000 Phung, Capital ............................................................... 31,000 To close Income Summary.*

*Supporting calculations: Phung Moier Lister Total Net income ................................................. $25,000 Salary allowances:

Phung, Capital ....................................... $75,000 Moier, Capital ........................................ $40,000 Lister, Capital ........................................ $40,000 Interest allowances: Phung (20% on $130,000) ...................... 26,000 Moier (20% on $150,000) ........................ 30,000 Lister (20% on $120,000) ........................ 24,000 Total salaries and interest allocation ...... $101,000 $70,000 $ 64,000 (235,000) Balance of income over allocated. ........... $(210,000) Balance allocated equally ......................... (70,000) (70,000) (70,000) 210,000 Balance of income ..................................... $ 0 Shares of the partners .............................. $ 31,000 $ 0 $ (6,000) $ 25,000




Preliminary calculations:

Plan (a) & Plan (c) Percentages based on initial investments: Bosch = $140,000 / $350,000 = 40% Gilbert = $210,000 / $350,000 = 60% Plan (b) Percentages based on time: Bosch = (1/3) / (1/3 + 1) = 25% Gilbert = (1) / (1/3 + 1) = 75% Plan (c) Salary allowance: Gilbert = 12 × $8,000 = $96,000 Plan (d) Salary allowance: Gilbert = 12 × $10,500 = $126,000 Interest allowances: Bosch = 15% × $140,000 = $21,000 Gilbert = 15% × $210,000 = $31,500



Problem 12-2B (continued)

Plan a.

Year Calculations

Share to Bosch

Share to Gilbert

Total

1 Net income ............................................................. $ 85,000 40% × $85,000 income .......................................... $ 34,000 60% × $85,000 income .......................................... $ 51,000

2 Net loss ........................................... $ (45,000)

40% × $45,000 loss ......................... $ (18,000) 60% × $45,000 loss ......................... $(27,000)


Plan b.

Year Calculations

Share to Bosch

Share to Gilbert

Total

1 Net income ...................................... $ 85,000 25% × $85,000 income ................... $ 21,250 75% × $85,000 income ................... $ 63,750

2 Net loss ........................................... $(45,000) 25% × $45,000 loss ......................... $(11,250) 75% × $45,000 loss ......................... $(33,750)

3 Net income ...................................... $348,000 25% × $348,000 income ................. $ 87,000 75% × $348,000 income ................. $261,000




Plan c.

Year Calculations

Share to Bosch

Share to Gilbert

Total

1 Net income ...................................... $ 85,000 Salary allowances .......................... $ 96,000 Total salaries allocation ................ $ -0- $ 96,000 (96,000) Balance of income ......................... $ (11,000) Remainder 40/60 (initial

investment ratio):

(−$11,000 × 40%) ............................ (4,400) (−$11,000 × 60%) ............................ (6,600) 11,000 Balance of income ......................... __ ____ $ -0-

Shares to each partner $ (4,400) $ 89,400 $ 85,000

2 Net loss ........................................... $ (45,000) Salary allowances .......................... $ 96,000 Total salaries allocation .............. a $ -0- $ 96,000 (96,000) Balance of loss ............................... $(141,000) Remainder 40/60 (initial

investment ratio):

(-$141,000 × 40%) ........................... (56,400) (-$141,000 × 60%) ........................... (84,600) 141,000 Balance of loss ............................... ___ ____ $ -0-

Shares to each partner $(56,400) $ 11,400 $ (45,000)

3 Net income ...................................... $ 348,000 Salary allowances .......................... $ 96,000 Total salaries allocation ................ $ -0- $ 96,000 (96,000) Balance of income ......................... $ 252,000 Remainder 40/60 (initial

investment ratio):

($252,000 × 40%) ............................ 100,800 ($252,000 × 60%) ............................ 151,200 (252,000) Balance of income ......................... __ ____ $ -0-

Shares to each partner $100,800 $247,200 $ 348,000



Problem 12-2B (concluded)

Plan d. Year

Calculations

Share to Bosch

Share to Gilbert

Total

1 Net income ...................................... $ 85,000 Salary allowances .......................... $ 126,000 Interest allowances: ($140,000 × 15%) ............................. $ 21,000 ($210,000 × 15%) ............................. 31,500 Total salaries and interest

allocation $ 21,000 $ 157,500 (178,500)

Balance of income .......................... $(93,500) Remainder equally: (−$93,500 × 50%) ............................. (46,750) (46,750) 93,500 Balance of income .......................... ___ ____ $ -0-

Shares to each partner $ (25,750) $ 110,750 $ 85,000

2 Net loss ........................................... $(45,000) Salary allowances .......................... $126,000 Interest allowances: ($140,000 × 15%) ............................. 21,000 ($210,000 × 15%) ............................. 31,500 Total salaries and interest

allocation ......................................... $ 21,000 $157,500 (178,500)

Balance of loss ............................... $(223,500) Remainder equally: (−$223,500 × 50%) ........................... (111,750) (111,750) 223,500 Balance of loss ............................... ____ ____ $ -0-

Shares to each partner $ (90,750) $ 45,750 $ (45,000)

3 Net income ...................................... $ 348,000 Salary allowances .......................... $ 126,000 Interest allowances: ($140,000 × 15%) ............................. 21,000 ($210,000 × 15%) ............................. 31,500 Total salaries and interest

allocation ......................................... $ 21,000 $ 157,500 (178,500)

Balance of income .......................... $ 169,500 Remainder equally: (169,500 × 50%) ............................... 84,750 84,750 (169,500) Balance of income .......................... ___ ____ $ -0-

Shares to each partner $ 105,750 $ 242,250 $ 348,000




Part 1

Income (Loss) Sharing

Plan

Calculations

Jobs

Alford

Norris

Total (a) $240,000/3 .......................................... $80,000 $80,000 $80,000 $240,000 (b) $240,000 × ($150,000/$500,000) ...... $72,000

$240,000 × ($100,000/$500,000) ...... $48,000 $240,000 × ($250,000/$500,000) ...... $120,000 Total allocated .................................. $72,000 $48,000 $120,000 $240,000

(c) Net income ...................................... $240,000 Salary allowances .......................... $70,000 $40,000 $90,000 Interest allowances: 10% × $150,000 ............................ 15,000 10% × $100,000 ............................ 10,000 10% × $250,000 ............................ _ _____ ____ __ 25,000 Total salaries and interest ............ 85,000 50,000 115,000 (250,000 ) Balance of income ......................... $ (10,000 ) Balance allocated equally ............. (3,333) (3,333) (3,334) * 10,000 Balance of income ......................... _ _____ ____ __ $ 0 Shares of partners ......................... $81,667 $46,667 $111,666 $240,000

*Increased to $3,334 due to rounding. Part 2

JAN PARTNERSHIP Statement of Changes in Equity

For Year Ended December 31, 2014 Jobs Alford Norris Total

Capital, January 1 ............................. $ -0- $ -0- $ -0- $ -0- Plus: Investments by owners ............... 150,000 100,000 250,000 500,000 Net income ................................... 81,667 46,667 111,666 240,000 Total ................................................. $231,667 $146,667 $361,666 $740,000 Less: Partners’ withdrawals ......... 50,000 40,000 60,000 150,000 Capital, December 31 ....................... $181,667 $106,667 $301,666 $590,000




Part 3 2014 Dec. 31 Income Summary ..................................................... 240,000 Jobs, Capital ....................................................... 81,667 Alford, Capital ..................................................... 46,667 Norris, Capital ..................................................... 111,666 To close Income Summary.

Dec. 31 Jobs, Capital ............................................................. 50,000 Alford, Capital ........................................................... 40,000 Norris, Capital ........................................................... 60,000 Jobs, Withdrawals .............................................. 50,000 Alford, Withdrawals ........................................... 40,000 Norris, Withdrawals ........................................... 60,000 To close withdrawals accounts.




a) Nov. 30 Cash .................................................................................... 183,600 Young, Capital* ............................................................. 183,600 To record admission of Young. *Supporting calculations: $734,400 + $183,600 = $918,000 $918,000 × 20% = $183,600 q No bonus received or paid.

b) Nov. 30 Cash .................................................................................... 129,600 Conway, Capital ................................................................. 10,800 Kip, Capital ......................................................................... 21,600 Zack, Capital ....................................................................... 10,800 Young, Capital .............................................................. 172,800 To record Young’s admission and bonus. Supporting calculations: $734,400 + $129,600 = $864,000 $864,000 × 20% = $172,800 to Young $172,800 − $129,600 = $43,200

$43,200 × 1/4 = $10,800 to Conway & Zack $43,200 × 2/4 = $21,600 to Kip

q Bonus paid to new partner. c) Nov. 30 Cash .................................................................................... 295,200 Kip, Capital ($89,280* × 2/4) ........................................ 44,640 Conway, Capital ($89,280* × 1/4) ................................ 22,320 Zack, Capital ($89,280* × 1/4) ...................................... 22,320 Young, Capital .............................................................. 205,920 To record admission of Young and bonus to old

partners.

*Supporting calculations: $734,400 + $295,200 = $1,029,600 $1,029,600 × 20% = $205,920 to Young $295,200 − $205,920 = $89,280 q Bonus received by old partners.



Problem 12-5B (40 minutes) Part 1 a.

2014 Nov. 1 Cash ...................................................................................................... 56,000

Equipment ............................................................................................ 91,000 Truck ..................................................................................................... 42,000 Harris, Capital ............................................................................ 56,000 Davis, Capital ............................................................................. 91,000 Tallis, Capital ............................................................................. 42,000 To record formation of partnership.

b.

2015 Oct. 31 Harris, Capital ...................................................................................... 213,500

Davis, Capital ............................................................................. 110,600 Tallis, Capital ............................................................................. 67,900 Income Summary ....................................................................... 35,000 To record closing of net loss to capital.

Supporting calculations: Harris Davis Tallis Total Net loss ......................................................................... $ (35,000) Salary allowance: Harris .......................................................................... $ -0- Davis ........................................................................... $196,000 Tallis ............................................................................ $196,000 Total salaries ................................................................ (392,000) Balance of loss to be allocated .................................. $(427,000) Balance allocated 5:2:3: Harris −(5/10 × $427,000) ........................................... (213,500) Davis − (2/10 × $427,000) .......................................... (85,400) Tallis − (3/10 × $427,000) ........................................... (128,100) Total allocated 5:2:3 .................................................... 427,000 Balance of loss ............................................................ $ -0- Shares of the partners ................................................. $(213,500) $110,600 $67,900 $(35,000)



Problem 12-5B (concluded) c.

2015 Nov. 1 Davis, Capital ....................................................................................... 65,800

Tallis, Capital ....................................................................................... 98,700 Cash ............................................................................................ 7,000 Harris, Capital ............................................................................ 157,500 To record withdrawal of Harris.

Supporting calculations: Harris, Capital = $56,000 − $213,500 = $ (157,500) OR $157,500 + $7,000 = $164,500 loss to allocate to remaining partners $164,500 × 2/5 = $65,800 absorbed by Davis $164,500 × 3/5 = $98,700 absorbed by Tallis

Part 2

Harris, Capital Davis, Capital 56,000 Nov

1/14 91,000 Nov 1/14

Oct 31/15

213,500 157,500 Nov 1/15

Nov 1/15 65,800 110,600 Oct 31/15

0 Balance 135,800 Balance

Tallis, Capital 42,000 Nov

1/14 Nov 1/15

98,700 67,900 Oct 31/15

11,200 Balance

Harris, Capital 56,000 213,500 157,500




a) Nov. 30 LeJeune, Capital ................................................................. 163,200 Devereau, Capital .......................................................... 163,200 To record admission of Devereau.

b) Nov. 30 LeJeune, Capital ................................................................ 163,200 Shulak, Capital ............................................................. 163,200 To record admission of Shulak.

c) Nov. 30 LeJeune, Capital ................................................................. 163,200 Cash ............................................................................... 163,200 To record withdrawal of Lejeune with no bonus.

d) Nov. 30 LeJeune, Capital ................................................................. 163,200 Burke, Capital ($206,400 − $163,200) × 1/3 ....................... 14,400 Comeau, Capital ($206,400 − $163,200) × 2/3 ................... 28,800 Cash ............................................................................... 206,400 To record withdrawal of Lejeune with bonus.

e) Nov. 30 LeJeune, Capital ................................................................. 163,200 Accum. Depreciation, Manufacturing Equipment ............ 72,000 Burke, Capital ($52,800* × 1/3) ..................................... 17,600 Comeau, Capital ($52,800* × 2/3) ................................. 35,200 Manufacturing Equipment ............................................ 124,800 Cash ............................................................................... 57,600 To record withdrawal of LeJeune with bonus to old

partners.

*$163,200 − ($124,800 − $72,000 + $57,600) = $52,800




Part 1 a.

Cash

Equip.

Accum. Deprec., Equip.

A/P

Ernie Poppy, Capital

Lynn Sweetbean

Capital

Ned Olive,

Capital

Account balances Oct. 15, 2014 .

$ 9,450

$206,920

$ 40,600

$ 39,690

$63,840

$ 42,000

$ 30,240 Sale of equipment for $189,000* ....................................... +189,000 −206,920

−40,600

+ 13,608 + 4,536 + 4,536

Balance ......................................... $198,450 $ 0 $ 0 $39,690 $77,448 $ 46,536 $ 34,776 Payment of liabilities ................... − 39,690 − 39,690 Balance ......................................... $158,760 $ 0 77,448 46,536 34,776 Distribution of cash to partners ......................................... −158,760

−77,448 − 46,536 − 34,776

Balance ......................................... $ 0 $ 0 $ 0 $ 0 * $206,920 − $40,600 = $166,320; $189,000 − $166,320 = $22,680 gain $22,680 × 3/5 = $13,608 to Poppy $22,680 × 1/5 = $4,536 to Sweetbean and Olive

b.

Cash

Equip.


A/P


Lynn Sweetbean

Capital

Ned Olive,

Capital Account balances Oct. 15, 2014 ........................................

$ 9,450

$206,920

$ 40,600

$39,690

$63,840

$42,000

$30,240 Sale of equipment for $119,070* ............................... +119,070 −206,920

− 40,600 −28,350 − 9,450 − 9,450

Balance .................................. $128,520 $ 0 $ 0 $39,690 $35,490 $32,550 $20,790 Payment of liabilities ............ − 39,690 −39,690 Balance .................................. $ 88,830 $ 0 35,490 32,550 20,790 Distribution of cash to partners ................................. − 88,830

−35,490 −32,550 −20,790

Balance .................................. $ 0 $ 0 $ 0 $ 0 * $206,920 − $40,600 = $166,320; $119,070 − $166,320 = $47,250 loss $47,250 × 3/5 = $28,350 to Poppy $47,250 × 1/5 = $9,450 to Sweetbean and Olive




c.

Cash

Equip.


A/P


Lynn Sweetbean

Capital

Ned Olive,

Capital Account balances Oct. 15, 2014 .......................................

$ 9,450

$206,920

$ 40,600

$ 39,690

$ 63,840

$ 42,000

$ 30,240 Sale of equipment for $50,820* ................................. +50,820 –206,920

– 40,600 –69,300 –23,100 –23,100

Balance ................................. $ 60,270 $ 0 $ 0 $ (5,460) $ 18,900 $ 7,140 Payment of liabilities ........... –39,690 –39,690 Balance ................................. $ 20,580 $ 0 Poppy pays deficiency ........ + 5,460 + 5,460 $ 26,040 $ 0 Distribution of cash to partners ................................. –26,040

–18,900 –7,140

Balance ................................. $ 0 $ 0 $ 0 * $206,920 – $40,600 = $166,320; $50,820 – $166,320 = $115,500 loss $115,500 × 3/5 = $69,300 to Poppy $115,500 × 1/5 = $23,100 to Sweetbean and Olive

d.

Cash

Equip.


A/P


Lynn Sweetbean

Capital

Ned Olive,

Capital

Account balances Oct. 15, 2014 ........................................

$ 9,450

$206,920

$ 40,600

$ 39,690

$ 63,840

$ 42,000

$ 30,240 Sale of equipment for $38,640* ................................. + 38,640 –206,920

–40,600 –76,608 –25,536 –25,536

Balance .................................. $ 48,090 $ 0 $ 0 $ (12,768) $ 16,464 $ 4,704 Payment of liabilities ............ – 39,690 –39,690 Balance .................................. $ 8,400 $ 0 Allocation of deficiency** ..... + 12,768 – 6,384 – 6,384 $ 0 $ 10,080 $ (1,680) Allocation of deficiency ....... – 1,680 + 1,680 $ 8,400 $ 0 Distribution of cash to partners ................................. – 8,400

– 8,400

Balance .................................. $ 0 $ 0 * $206,920 – $40,600 = $166,320; $38,640 – $166,320 = $127,680 loss $127,680 × 3/5 = $76,608 to Poppy $127,680 × 1/5 = $25,536 to Sweetbean and Olive **$12,768 1/2 = $6,384 to Sweetbean and Olive



Problem 12-7B (concluded) Part 2

2014 Oct. 15 Ernie Poppy, Capital ............................................................................ 77,448

Lynn Sweetbean, Capital .................................................................... 46,536 Ned Olive, Capital ................................................................................ 34,776 Cash ................................................................................................. 158,760 To record the final distribution of cash to the

partners.




a. 2014 Mar. 31 Cash .............................................................................. 270,000

Accumulated Depreciation .......................................... 128,400 Property, Plant and Equipment ............................ 233,400 Gain on Liquidation* ............................................. 165,000 To record sale of property, plant and

equipment.

31 Gain on Liquidation ..................................................... 165,000 Leslie Bjorn, Capital .............................................. 99,000 Jason Douglas, Capital ......................................... 33,000 Tom Pierce, Capital ............................................... 33,000 To record allocation of gain to equity;

$165,000 × 3/5 = $99,000; $165,000 × 1/5 = $33,000.

31 Accounts Payable ........................................................ 27,600 Cash ....................................................................... 27,600 To record payment of liabilities. 31 Leslie Bjorn, Capital ..................................................... 154,200 Jason Douglas, Capital ................................................ 96,600 Tom Pierce, Capital ...................................................... 39,000 Cash ....................................................................... 289,800 To record final distribution of cash;

Leslie Bjorn = $55,200 + $99,000 = $154,200; Jason Douglas = $63,600 + $33,000 = $96,600; Tom Pierce = $6,000 + $33,000 = $39,000; Cash = $47,400 + $270,000 − $27,600 = $289,800.

*NOTE: Students may wish to combine the sale and allocation of gain as follows:

Mar. 31 Cash .............................................................................. 270,000 Accumulated Depreciation .......................................... 128,400 Property, Plant and Equipment ............................ 233,400 Leslie Bjorn, Capital .............................................. 99,000 Jason Douglas, Capital ......................................... 33,000 Tom Pierce, Capital ............................................... 33,000 To record sale of property, plant and

equipment and allocation of gain to partners.




b. 2014 Mar. 31 Cash .............................................................................. 66,000

Accumulated Depreciation .......................................... 128,400 Loss on Liquidation ** ................................................. 39,000 Property, Plant and Equipment ............................ 233,400 To record sale of property, plant and

equipment.

31 Leslie Bjorn, Capital ..................................................... 23,400 Jason Douglas, Capital ................................................ 7,800 Tom Pierce, Capital ...................................................... 7,800 Loss on Liquidation ................................................ 39,000 To record allocation of loss;

$39,000 × 3/5 = $23,400; $39,000 × 1/5 = $7,800.

31 Accounts Payable ........................................................ 27,600 Cash ....................................................................... 27,600 To record payment of liabilities. 31 Cash .............................................................................. 1,800 Tom Pierce, Capital ............................................... 1,800 To record payment of deficiency by Pierce;

Tom Pierce, Capital = $6,000 − $7,800 = $(1,800).

31 Leslie Bjorn, Capital ..................................................... 31,800 Jason Douglas, Capital ................................................ 55,800 Cash ....................................................................... 87,600 To record final distribution of cash;

Bjorn = $55,200 − $23,400 = $31,800; Douglas = $63,600 − $7,800 = $55,800; Cash = $47,400 + $66,000 − $27,600 + $1,800 = $87,600.

**NOTE: Students may wish to combine the sale and allocation of loss as follows:

Mar. 31 Cash .............................................................................. 66,000 Accumulated Depreciation .......................................... 128,400 Leslie Bjorn, Capital ..................................................... 23,400 Jason Douglas, Capital ................................................ 7,800 Tom Pierce, Capital ...................................................... 7,800 Property, Plant and Equipment ............................ 233,400 To record sale of property, plant and

equipment and allocation of loss to partners.



ANALYTICAL AND REVIEW PROBLEMS

A&R 12-1 (30 minutes)

Loss from selling the assets: Total book value of assets ..................................................... $238,000

Total liabilities (before liquidation) ....................................... $200,000 Total liabilities remaining after paying proceeds of asset sales to creditors ..................................................

(45,000 )

Cash proceeds from sale of assets ...................................... (155,000 ) Loss on sale of assets* .......................................................... $ 83,000 *Alternative computation: 1) $45,000 = $200,000 − Cash from assets sale (This implies cash from assets sale is $155,000) 2) Loss on sale of assets = Book value of assets − Cash received = $238,000 − $155,000 = $83,000

Prince Count Earl Total

Capital balances before loss liquidation

$ 8,000

$ 10,000

$ 20,000

$ 38,000

Allocation of loss: $83,000 × 1/8 ................................. (10,375 ) $83,000 × 3/8 ................................. (31,125 ) $83,000 × 4/8 ................................. (41,500 ) (83,000 ) Capital balances after loss ............ $(2,375 ) $(21,125 ) $(21,500 ) $(45,000 ) Each partner should pay an amount equal to the debit balance in his or her capital account.



A&R 12-2 (30 minutes) Loss from selling the assets: Total book value of assets ..................................................... $238,000

Total liabilities (before liquidation) ........................................ $200,000 Total liabilities remaining after paying proceeds of asset sales to creditors ...................................................

(45,000 )

Cash proceeds from sale of assets ....................................... (155,000 ) Loss on sale of assets* ........................................................... $ 83,000 *Alternative computation: 1) $45,000 = $200,000 − Cash from assets sale (This implies cash from assets sale is $155,000) 2) Loss on sale of assets = Book value of assets − Cash received = $238,000 − $155,000 = $83,000

Prince Count Earl Total

Capital balances before loss liquidation

$ 8,000

$ 10,000

$ 20,000

$ 38,000

Allocation of loss: $83,000 × 1/8 ................................. (10,375 ) $83,000 × 4/8 ................................. (31,125 ) $83,000 × 5/8 ................................. (41,500 ) (83,000 ) Capital balances after loss ............. $(2,375 ) $(21,125 ) $(21,500 ) $(45,000 ) Allocation of Earl’s deficit $21,500 × 1/4 (5,375 ) $21,500 × 3/4 (16,125 ) 21,500 Cash to be paid to each partner $(7,750 ) $(37,250 ) $ 0 $(45,000 )

Liability to be paid: As a limited partner, Earl has no personal liability for the $45,000 liability. Therefore, Prince and Count must share the additional loss associated with Earl’s capital account.



A&R 12-3

Part 1

Scott McPeek Total Net income ................................................................... $72,000 First $60,000: Scott ........................................................................... $24,000 McPeek ....................................................................... $36,000 Total interest allowances ............................................ (60,000) Balance of income ....................................................... $12,000 Balance allocated equally: Scott ............................................................................ 6,000 McPeek ....................................................................... 6,000 Total allocated equally ................................................ (12,000) Balance of income ....................................................... _______ _______ $ -0- Shares of the partners ................................................. $30,000 $42,000 $72,000

Part 2 a.

Scott, Capital ...................................................................... 40,000 McPeek, Capital .................................................................. 40,000 Accounts Payable ........................................................ 80,000 Entry to incorporate McPeek’s suggestion

b. Scott, Capital ...................................................................... 34,000 McPeek, Capital .................................................................. 46,000 Accounts Payable ........................................................ 80,000 Entry to incorporate Scott’s suggestion

Supporting calculations: Scott McPeek Credits to capital accounts for 2014, net income of $72,000 ...........................................................

$30,000

$42,000

Debits that would have been made if $80,000 of additional expense had been recognized in 2014 {($72,000 − $80,000/2)} .......................................

4,000

4,000 Debits needed to correct capital accounts ....................................... $34,000 $46,000



A&R 12-3 (concluded) Part 3 Scott’s suggestion appears to be consistent with the partnership agreement. Because the accounts payable were in fact liabilities of the partnership on Dec. 31, 2014 they should have been recognized at that date. In addition, the expenses that created them should have been included in the calculation of net loss for 2014. There would not be an adequate justification for treating the correction of the error as a special charge against capital in 2014. As a matter of equitability, notice that Scott’s capital account would be $6,000 lower under McPeek’s suggestion, and McPeek’s would be larger by the same amount. ETHICS CHALLENGE EC 12-1 Since the net assets approximate $1,500,000, Paul is entitled to 1/3 of this amount. The assets should be revalued to reflect their market value, and $500,000, not $300,000, should be distributed to Paul. Not to do so is clearly unethical on the part of Frank and Basil. The net assets should be revalued by $600,000, resulting in an additional $200,000 credit to each partner’s capital account before Paul’s retirement.



FOCUS ON FINANCIAL STATEMENTS FFS 12-1

WCL Sales Balance Sheet

December 31, 2014 Assets Current assets: Cash .................................................................................. $14,000 Accounts receivable ........................................................ $46,000 Less: Allowance for doubtful accounts ..................... 1,200 44,800 Merchandise inventory ................................................... 22,000 Prepaid rent ...................................................................... 36,000 Total current assets ...................................................... $116,800 Property, plant and equipment: Furniture ........................................................................... $69,000 Less: Accumulated depreciation ................................. 6,000 $63,000 Fixtures ............................................................................. $31,000 Less: Accumulated depreciation ............................... 3,000 28,000 Total property, plant and equipment ............................. 91,000 Intangible assets: Patent (net) ....................................................................... 14,000 Total assets ............................................................................. $221,800 Liabilities Current liabilities: Accounts payable ............................................................ $14,000 Unearned sales ................................................................ 3,000 Current portion of long-term debt .................................. 7,000 Total current liabilities ............................................. $24,000 Long-term liabilities: Notes payable, due 2017 (less $7,000 current portion) 27,000 Total liabilities ..................................................................... $ 51,000 Equity* Les Waruck, capital ............................................................. $26,200 Kim Chau, capital ................................................................ 91,920 Leena Manta, capital ........................................................... 52,680 Total equity .......................................................................... 170,800 Total liabilities and equity ...................................................... $221,800 *Calculations are on the next page.



FFS 12-1 (concluded) *Calculations: Net loss of 48,200 = 102,000 − 3,400 − 2,000 − 2,800 − 3,000 − 6,000 − 84,000 − 49,000 Calculation to determine distribution of $48,200 net loss:

Waruck Chau Manta Total Net loss ................................................................. $ (48,200) Salary allowances ................................................ $ 40,000 $ 80,000 $ 40,000 (160,000) Balance of net loss over allocated ..................... $(208,200) Balance allocated on ratio of beginning- of-period capital balances:

Waruck [−$208,200 × (68,250/273,000)] ......... (52,050) Chau [−$208,200 × (109,200/273,000)] ............ (83,280) Manta [−$208,200 × (95,550/273,000)] ............ (72,870) Total allocated on ratio of capital

balances ............................................................ 208,200

Balance of net loss .............................................. $ -0- Allocation of net loss to each partner ............... $(12,050) $ (3,280) $(32,870) $ (48,200)

Calculation to determine partners’ capital balances at December 31, 2014:

Waruck Chau Manta Total Capital balance at January 11, 2014 .................. $68,250 $109,200 $95,550 $273,000 Allocation of net loss to partners’ capital ......... − 12,050 − 3,280 − 32,870 − 48,200 Partners’ withdrawals during the year .............. − 30,000 − 14,000 − 10,000 − 54,000 Capital balance at December 31, 2014 ............... $26,200 $ 91,920 $52,680 $170,800

Analysis component: WCL’s assets are financed 22.99% ($51,000/$221,800) by debt and 77.01% ($170,800/$221,800) by equity which compares favourably to the industry average of 60% and 40%, respectively. The relationship between type of financing and risk is that the greater the debt, the greater the risk. Therefore, WCL faces less risk in terms of debt financing relative to the industry average. NOTE TO INSTRUCTOR: You may wish to point out to students that although WCL’s debt is low relative to the industry average, it may also indicate that they are not taking advantage of financial leveraging opportunities to grow the business.… There are both positives and negatives associated with debt financing.



FFS 12-2 1. Danier is a corporation because the equity section on the balance sheet is called

Shareholders’ equity, a term restricted for corporate equity. On the income statement, income taxes have been deducted, indicating that Danier is a separate legal entity. Corporations are separate legal entities but sole proprietorships and partnerships are not.

2. Each of High Liner Foods, Shoppers Drug Mart, and WestJet is a corporation because the equity section on the respective balance sheets is called Shareholders’ Equity, a term restricted for corporate equity. On the income statement, income taxes have been deducted, indicating each of these three businesses is a separate legal entity. Corporations are separate legal entities but sole proprietorships and partnerships are not.

CRITICAL THINKING MINI CASE

Note to instructor: Student responses will vary therefore the answer here is only suggested and not inclusive of all possibilities; it is presented in point form for brevity.

Problem: — how to get an additional $200,000 in financing

Goal*: — to get an additional $200,000 in financing (from the perspective of the Mooth

brothers, they will want financing that provides them with the greatest benefits at the least cost possible)

Principles: — incorporate cost/benefit principles (lowest cost with greatest benefit)

Facts: — as provided in the case study

Conclusions/Consequences:

— The Mooth brothers could take on an additional partner(s) but that partner(s) will want to share in the benefits realized by the partnership as a result … a mutually agreeable sharing agreement will have to be arrived at.

— The Mooth brothers could borrow the money which means interest costs will be incurred but then they won’t have to share in any benefits realized by the partnership

— This point has not yet been covered but more advanced students might raise the point: The Mooth brothers could issue preferred and/or common shares (issuing preferred shares would allow them to maintain control of the business).

*The goal is highly dependent on “perspective.”

Documents

Fundamental Accounting Principles - Wikispaces · PDF fileSolutions Manual to accompany Fundamental Accounting Principles, ... Chapter 12 Partnerships Chapter Opening Critical Thinking