Chapter 14 Partnerships

Chapter 14 - Partnerships: Formation and Operation
CHAPTER 14
PARTNERSHIPS: FORMATION AND OPERATION
Answers to Questions
1. The advantages of operating a business as a partnership include the ease of formation and
the avoidance of the double taxation effect that inherently reduces the profits distributed to
the owners of a corporation. In addition, because the losses of a partnership pass, for tax
purposes, directly through to the owners, partnerships have historically been used
(especially in certain industries) to reduce or defer income taxes.
Several disadvantages also accrue from the partnership format. Each general partner, for
example, has unlimited liability for all debts of the business. This potential liability can be
especially significant in light of the concept of mutual agency, the right that each partner has
to create liabilities in the name of the partnership. Because of the risks created by unlimited
liability and mutual agency, the growth potential of most partnerships is severely limited.
Few people are willing to become general partners in an organization unless they can
maintain some day-to-day contact and control over the business.
Further discussion of these issues can be found in the Answer to the first Discussion
Question that appears above.
2. Specific partnership accounting problems center in the equity (or capital) section of the
balance sheet. In a corporation, stockholders' equity is divided between earned capital and
contributed capital. Conversely, for a partnership, each partner has an individual capital
account that is not differentiated according to its sources. Virtually all accounting issues
encountered purely in connection with the partnership format are related to recording and
maintaining these capital balances.
3. The balance in each partner's capital account measures that partner's interest in the book
value of the business’ net assets. This figure arises from contributions, earnings, drawings,
and other capital transactions.
4. A Subchapter S corporation is formed legally as a corporation so that its owners enjoy

limited legal liability and easy transferability of ownership. However, if a company qualifies
and becomes a Subchapter S Corporation, it will be taxed in virtually the same manner as a
partnership. Hence, income will be taxed only once and that is to the owners at the time that
it is earned by the corporation.
Use of this designation is quite restricted. To qualify as a Subchapter S Corporation, a

company can only have one class of stock and must have no more than 100 owners. These
owners can only be individuals, estates, certain tax-exempt entities, and certain types of
trusts. Most corporations that do not qualify as Subchapter S Corporations are automatically
Subchapter C Corporations. These entities are also corporations but they pay income taxes
when the income is earned. Additionally, the owners are liable for a second income tax
when dividends are distributed to them. Thus, the income earned by a Subchapter C
Corporation faces the double taxation effect commonly associated with corporations.
5. In a general partnership, each partner can have unlimited liability for the debts of the
business. Therefore, a partner may face a significant risk, especially in connection with the
actions and activities of other partners. However, general partnerships are easy to form and
often serve well in smaller businesses where all partners know each other. The major
advantage of a general partnership is that all income earned by the business is only taxed
once when earned by the business so that no second tax is incurred when distributions are
made to owners.
A limited liability partnership (LLP) is very similar to a general partnership except in the
method by which a partner’s liability is measured. In an LLP, the partners can still lose their
entire investment and be held responsible for all contractual debts of the business such as
loans. However, partners cannot be held responsible for damages caused by other partners.
For example, if one partner carelessly causes damage and is sued, the other partners are
not held responsible.
A limited liability company can now be created in certain situations. This type of organization
is classified as a partnership for tax purposes so that the double-taxation effect is avoided.
However, the liability of the owners is limited to their individual investments like a
Subchapter C Corporation. Depending on state law, the number of owners is not restricted
in the same manner as a Subchapter S Corporation so that there is a greater potential for
growth.
6. The Articles of Partnership is a legal agreement that should be created as a prerequisite for
the formation of a partnership. This document defines the rights and responsibilities of the
partners in relation to the business and in relation to each other. Thus, it serves as a
governing document for the partnership. The Articles of Partnership may contain any
number of provisions but should normally specify each of the following:
a. Name and address of each partner

b. Business location
c. Description of the nature of the business
d. Rights and responsibilities of each partner
e. Initial investment to be made by each partner along with the method to be used for
valuation
f. Specific method by which profits and losses are to be allocated
g. Periodic withdrawals to be allowed each partner
h. Procedure for admitting new partners
i. Method for arbitrating partnership disputes
j. Method for settling a partner's share in the business upon withdrawal, retirement, or
death
7. To give fair recognition to noncash contributions, all assets donated by the partners (such as
land or inventory) should be recorded by the partnership at their fair values at the date of
investment. However, for taxation purposes, the partner’s book value is retained.
8. In forming a partnership, one or more of the partners may be contributing some factor (such
as an established clientele or an expertise) which is not viewed normally as an asset in the
traditional accounting sense. In effect, the partner will be receiving a larger capital balance
than the identifiable contributions would warrant.
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Education.
The bonus method of recording this transaction is to value and record only the identifiable
assets such as land and buildings. The capital accounts are then aligned to recognize the
proportionate interest being assigned to each partner's investment. If, for example, the
capital balances are to be equal, they are set at identical amounts that correspond in total to
the value of the identifiable assets.
As an alternative, the amounts contributed along with the established capital percentages
can be used to determine mathematically the implied total value of the business and the
presence of any goodwill brought into the business. This goodwill is recognized at the time
that the partnership is created so that the amount can be credited to the appropriate partner.
9. The Drawing account measures the amount of assets that a particular partner takes from
the business during the current period. Often, only regularly allowed distributions are
recorded in the Drawing account with larger, more sporadic withdrawals being recorded as
direct reductions to the partner's capital balance.
10. At the end of each fiscal year, when revenues and expenses are closed out, some
assignment must be made of the resulting income figure Because a partnership will have
two or more capital accounts rather than a single retained earnings balance. This allocation
to the capital accounts is based on the agreement established by the partners preferably as
a part of the Articles of Partnership.
11. The allocation process can be based on any number of factors. The actual assignment of
income should be designed to give fair and equitable treatment to each of the partners.
Often, an interest factor is used to reward the capital investment of the partners. A salary
allowance is utilized as a means of recognizing the amount of time worked by an individual
or a certain degree of business expertise. The allocation process can be further refined by a
ratio that is either divided evenly among the partners or weighted in favor of one or more
members.
12. If agreement as to the allocation of income has not been specified, an equal division among
all partners is presumed. If an agreement has been reached for assigning profits but no
mention is made concerning losses, the assumption is made that the same method is
intended in either case.
13. The dissolution of a partnership is the breakup or cessation of the partnership. Many
reasons can exist for a partnership to dissolve. One partner may withdraw, retire, or die. A
new partner may be admitted to the partnership. The original partnership terminates
whenever the identity of the individuals serving as partners has changed.
Dissolution, however, does not necessarily lead to the liquidation of the business. In most
cases, but not all, a new partnership is formed which takes over the business. Such
dissolutions are no more than changes in the composition of the ownership and should not
affect operations.
14. A new partner can join a partnership by acquiring part or all of the interest of one or more of
the present partners. This transaction is carried out with the individual partners directly and
not with the partnership. A new partner may also enter through a contribution to the
business. In such cases, the investment is made to the partnership rather than to the
individuals.
15. In selling an interest in a partnership, three rights are conveyed to the new owner:
a. The right of co-ownership of the business property;

b. The right to a specified allocation of profits and losses generated by the partnership's
business; and
c. The right to participate in the management of the business.
No problem exists in selling or assigning the first two of these rights. However, the right to
participate in management decisions can only be transferred with the consent of all partners.
16. Goodwill recognized in a capital transaction is allocated to the original partners based on the
profit and loss ratio. The amount is assumed to represent unrealized gains in the value of
the business. To determine the amount of goodwill, the implied value of the business as a
whole must be calculated based on the price being paid for a portion by the new partner.
The difference between this implied value and the total capital is assumed to be goodwill or
some other adjustment to asset value.
17. Allocating goodwill to an entering partner may be necessary for several reasons. One of the
most common is that the partner is bringing to the partnership an attribute that is not an
asset in the traditional accounting sense. For example, a new partner with an excellent
business reputation might be credited with goodwill at the time of entrance. Other factors
such as an established clientele or a professional expertise can justify attributing goodwill to
the new partner. The partnership might make this same concession to an entering partner if
cash is urgently needed by the business and a larger share of the capital has to be offered
as an enticement to generate the new investment.
18. Book values in most cases measure historical cost expenditures which often have
undergone years of allocation and changes in value. For this reason, book value will
frequently fail to mirror or even resemble the actual worth of a business. In addition, the
goodwill that is assumed to be present in a business as a going concern is not a factor that
is always reflected within book values. Therefore, distributing partnership property to a
withdrawing partner based on book value would not necessarily be fair. Hence, the Articles
of Partnership should spell out a method by which an equitable settlement can be achieved.
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Answers to Problems
1. B
2. C
3. D
4. C Mary Ann's investment equals 1/3 of total capital ($50,000 ÷ $150,000).

However, she receives only a 1/4 interest capital balance. One explanation
for the difference is that the business assets are worth more than book
value. To achieve agreement, the net assets could be valued upward to fair
value with the adjustment credited to the original partners’ capital
accounts. Alternatively, a bonus could be credited to the original partners.
5. D Based on the new contribution, the company’s implied value is $350,000

($105,000 ÷ 30%) which is less than the capital balances ($315,000 in
original capital plus $105,000 to be invested). Thus, either the assets are
overvalued or the new partner is contributing goodwill in addition to a cash
investment. Because the problem indicates that goodwill is recognized,
goodwill must be computed. Note that the $105,000 is going into the
business and, thus, increases capital.
David's investment = 30% (Original capital plus David's investment)

$105,000 + Goodwill = .30 ($315,000 + $105,000 + Goodwill)
$105,000 + Goodwill = $126,000 + .30 Goodwill
.70 Goodwill = $21,000
Goodwill = $30,000
David's investment (Capital) = $105,000 + $30,000 = $135,000
6. B The implied value of the company is $960,000 ($240,000 ÷ 25%). Because

the current capital total is only $760,000, goodwill of $200,000 must be
recognized. Krystal's investment is paid directly to the partners and does
not affect the capital total. Of the $200,000 in goodwill, 30 percent or
$60,000 is attributed to Dane which brings that capital balance to $340,000.
Because a 25% interest is conveyed to the new partner, Dane's balance
decreases by 25% or $85,000—resulting in a new balance of $255,000.
7. B Total capital is $200,000 ($110,000 + $40,000 + $50,000) after the new

investment. As Kansas's portion is 30 percent, the capital balance becomes
$60,000 ($200,000 × 30%). Because only $50,000 was paid, a bonus of
$10,000 is taken from the two original partners based on their profit and
loss ratios: Bolcar – $7,000 (70%) and Neary – $3,000 (30%). The reduction
drops Neary's capital balance from $40,000 to $37,000.
8. B Total capital is $270,000 ($120,000 + $90,000 + $60,000) after the new

investment. However, the implied value of the business based on the new
investment is $300,000 ($60,000 ÷ 20%). Thus, goodwill of $30,000 must be
recognized with the offsetting allocation to the original partners based on
their profit and loss ratio: Bishop – $18,000 (60%) and Cotton $12,000
(40%). The increase raises Cotton's capital from $90,000 to $102,000.
9. A Total capital is $450,000 ($210,000 + $140,000 + $100,000) after the new

investment. As Claudius' portion is to be 20 percent, the new capital
balance would be $90,000 ($450,000 × 20%). Because $100,000 was paid, a
bonus of $10,000 is being given to the two original partners based on their
profit and loss ratio: Messalina – $6,000 (60%) and Romulus – $4,000 (40%).
The increase raises Messalina's capital balance from $210,000 to $216,000
and Romulus's capital balance from $140,000 to $144,000.
10. D ASSIGNMENT OF INCOME

ALFRED BERNARD COLLINS TOTAL
Interest—5% of
beginning capital ................... $ 2,500 $ 3,000 $ 3,500 $ 9,000
Salary ....................................... 18,000 18,000
Allocation of remaining income
($33,000 divided on a 3:3:4 basis) 9,900 9,900 13,200 33,000
Totals ............................ $12,400 $30,900 $16,700 $60,000
STATEMENT OF CAPITAL
ALFRED BERNARD COLLINS TOTAL
Beginning capital ................... $50,000 $60,000 $70,000 $180,000
Net income (above) ................ 12,400 30,900 16,700 60,000
Drawings (given) .................... (5,000) (5,000) (5,000) (15,000)
Ending capital ........................ $57,400 $85,900 $81,700 $225,000
11. A ASSIGNMENT OF INCOME—YEAR ONE

WINSTON DURHAM SALEM TOTAL
Interest—10% of
beginning capital .............. $11,000 $ 8,000 $11,000 $30,000
Salary ....................................... 20,000 -0- 10,000 30,000
Allocation of remaining loss
($80,000 divided on a 5:2:3 basis) (40,000) (16,000) (24,000) (80,000)
Totals ............................ $(9,000) $ (8,000) $ (3,000) $(20,000)
STATEMENT OF CAPITAL—YEAR ONE

Beginning capital ................... $110,000 $80,000 $110,000 $300,000
Net loss (above) ..................... (9,000) (8,000) (3,000) (20,000)
Drawings (given) .................... (10,000) (10,000) (10,000) (30,000)
Ending capital ................... $ 91,000 $62,000 $ 97,000 $250,000
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11. (continued)
ASSIGNMENT OF INCOME—YEAR TWO

Interest—10% of
beginning capital .............. $ 9,100 $ 6,200 $ 9,700 $25,000
Salary ....................................... 20,000 -0- 10,000 30,000
Allocation of remaining loss
($15,000 divided on a 5:2:3 basis) (7,500) (3,000) (4,500) (15,000)
Totals ............................ $21,600 $3,200 $15,200 $ 40,000
STATEMENT OF CAPITAL—YEAR TWO

Beginning capital (above) ..... $ 91,000 $62,000 $ 97,000 $250,000
Net income (above) ................ 21,600 3,200 15,200 40,000
Drawings (given) .................... (10,000) (10,000) (10,000) (30,000)
Ending capital ................... $102,600 $55,200 $102,200 $260,000
12. A Costello receives a $10,000 bonus ($100,000 less $90,000 capital balance).
This bonus is deducted from the two remaining partners according to their
profit and loss ratio (2:3). A 60 percent (3/5) reduction is assigned to Burns
which decreases that partner’s capital balance from $30,000 to $24,000.
13. D Clark receives an additional $10,000. Because Clark receives 20 percent of

profits and losses, this allocation indicates total goodwill of $50,000.
20% of Goodwill = $10,000
Goodwill = $10,000 ÷ .20 = $50,000
Goodwill 50,000
Manning, capital (30%) 15,000
Gonzalez, capital(30%) 15,000
Clark, capital (20%) 10,000
Freeney, capital(20%) 10,000
The above entry raises Manning’s capital from $130,000 to $145,000.
14. B Under the bonus method, Clark’s excess payment is deducted from the
remaining partners’ capital accounts according to their relative profit and loss
ratios, 3:3:2. Manning’s balance is then $126,250 = $130,000 – $3,750.
Manning, capital 3,750

Gonzalez, capital 3,750
Freeney, capital 2,500
Clark, capital 80,000
Cash 90,000
15. A The implied value of the company is $900,000 ($270,000 ÷ 30%). Because
the money is going to the partners rather than into the business, the capital
total is $490,000 before realigning the balances. Hence, goodwill of
$410,000 is recognized based on the implied value ($900,000 – $490,000).
This goodwill is assumed to represent unrealized business gains and is
attributed to the original partners according to their profit and loss ratio.
They will then each convey 30 percent ownership of the $900,000
partnership to Darrow for a capital balance of $270,000.
16.D Because the money goes into the business, total capital becomes $740,000
($490,000 + $250,000). Darrow is allotted 30 percent of this total or
$222,000. Because Darrow invested $250,000, the extra $28,000 is assumed
to be a bonus to the original partners. Jennings will be assigned 40 percent
of this extra amount or $11,200. This bonus increases Jennings’ capital
from $160,000 to $171,200.
17. (10 Minutes) (Compute capital balances under both goodwill and bonus
methods)
a. Goodwill Method
Implied value of partnership ($80,000 ÷ 40%) .............. $200,000
Total capital after investment ($70,000 + $40,000 + $80,000) 190,000
Goodwill .......................................................................... $ 10,000
Goodwill to Hamlet (7/10) .............................................. $ 7,000
Goodwill to MacBeth (3/10) ........................................... $ 3,000
Hamlet, capital (original balance plus goodwill) ......... $ 77,000
MacBeth, capital (original balance plus goodwill) ...... $ 43,000
Lear, capital (payment) (40% of total capital) .............. $ 80,000
b. Bonus Method
Total capital after investment ($70,000 + 40,000 + $80,000) $190,000
Ownership portion—Lear .............................................. 40%
Lear, capital .................................................................... $ 76,000
Bonus payment made by Lear ($80,000 – $76,000) ...... $ 4,000
Bonus to Hamlet (7/10) .................................................. $ 2,800
Bonus to MacBeth (3/10) ............................................... $ 1,200
Hamlet, capital (original balance plus bonus) ............. $ 72,800
MacBeth, capital (original balance plus bonus) .......... $ 41,200
Lear, capital (40% of total capital) ................................ $ 76,000
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Education.
18. (15 Minutes) (Prepare journal entries to record admission of new partner under
both the goodwill and the bonus methods)
Part a.
Total capital is $300,000 ($85,000 + $60,000 + $55,000 + $100,000) after the
new investment. As Sergio's portion is 25 percent, this partner's capital
balance would be $75,000. Because $100,000 was paid, a bonus of $25,000
is given to the three original partners based on their profit and loss ratio:
Tiger—$12,500 (50%), Phil—$7,500 (30%), and Ernie—$5,000 (20%).
Cash .......................................................................... 100,000

Sergio, capital ...................................................... 75,000
Tiger, capital ........................................................ 12,500
Phil, capital .......................................................... 7,500
Ernie, capital ........................................................ 5,000
Part b.
new investment. As Sergio's portion is 25 percent, this partner's capital
balance is $65,000. Because only $60,000 was paid, a bonus of $5,000 is
taken from the three original partners based on their profit and loss ratio:
Tiger—$2,500 (50%), Phil—$1,500 (30%), and Ernie—$1,000 (20%).
Cash .......................................................................... 60,000

Tiger, capital ............................................................. 2,500
Phil, capital ................................................................ 1,500
Ernie, capital ............................................................. 1,000
Sergio, capital ...................................................... 65,000
Part c.
new investment. However, the implied value of the business based on the
new investment is $288,000 ($72,000 ÷ 25%). Consequently, goodwill of
$16,000 must be recognized with the offsetting allocation to the original
partners based on their profit and loss ratio: Tiger—$8,000 (50%), Phil—
$4,800 (30%), and Ernie—$3,200 (20%).
Goodwill ................................................................... 16,000

Tiger, capital ........................................................ 8,000
Phil, capital .......................................................... 4,800
Ernie, capital ........................................................ 3,200
Cash ........................................................................... 72,000
Sergio, capital ...................................................... 72,000
19. (16 Minutes) (Determine capital balances after admission of new partner using
both goodwill and bonus methods)
Part a.
new investment. However, the implied value of the business based on the
new investment is only $444,444 ($80,000 ÷ 18%). According to the goodwill
method, this situation indicates that the new partner must be bringing
some intangible attribute to the partnership other than just cash. This
contribution must be computed algebraically and is recorded as goodwill
to the new partner.
G's Investment = .18 ($200,000 + $120,000 + $90,000 + G's Investment)

.82 Goodwill = $8,200
Goodwill = $10,000
The above goodwill balance indicates that Grant's total investment is

$90,000 (cash of $80,000 and goodwill of $10,000). A $90,000 contribution
raises the total capital to $500,000 so that Grant does, indeed, have an 18
percent interest ($90,000 ÷ $500,000).
CAPITAL BALANCES:
Nixon .................................................................... $200,000
Hoover .................................................................. 120,000
Polk .................................................................... 90,000
Grant .................................................................... 90,000
Part b.
Total capital is $510,000 ($200,000 + $120,000 + $90,000 + $100,000) after
the new investment. As Grant's portion is to be 20 percent, this partner's
capital balance will be $102,000. Because only $100,000 was paid, a bonus
of $2,000 is taken from the three original partners based on their profit and
loss ratio: Nixon—$1,000 (50%), Hoover—$400 (20%), and Polk—$600
(30%).
CAPITAL BALANCES
Original Investment Bonus Total
Nixon .................... $200,000 $(1,000) $199,000
Hoover .................. 120,000 (400) 119,600
Polk ....................... 90,000 (600) 89,400
Grant ..................... -0- 100,000 2,000 102,000
Total ................ $510,000
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Education.
20. (10 Minutes) (Record admission of new partner and allocation of new income)
Part a.
Total capital is $167,000 ($70,000 + $60,000 + $37,000) after the new

investment. However, the implied value of the business based on the new
investment is $185,000 ($37,000 ÷ 20%). Consequently, goodwill of $18,000
must be recognized with the offsetting allocation to the original two
partners based on their profit and loss ratio: Prince—$14,400 (80%) and
Robbins—$3,600 (20%).
Goodwill ................................................................ 18,000

Prince, capital ................................................ 14,400
Robbins, capital ............................................. 3,600
Cash .................................................................... 37,000
Jeffrey, capital ................................................ 37,000
Part b.
Prince Robbins Jeffrey Total
Interest .................................. $8,440 $6,360 $3,700 $18,500
Remaining loss ..................... (1,750) (1,050) (700) (3,500)
Income allocation ........... $6,690 $5,310 $3,000 $15,000
21. (5 Minutes) (Allocation of income to partners)
Jones King Lane Total

Bonus (20%) ......................... $18,000 $ -0- $ -0- $18,000
Interest (15% of average capital) 15,000 30,000 45,000 90,000
Remaining loss ($18,000) ... (6,000) (6,000) (6,000) (18,000)
Income assignment ............. $27,000 $24,000 $39,000 $90,000
22. (15 Minutes) (Allocate income and determine capital balances)
ALLOCATION OF INCOME
Purkerson Smith Traynor Totals
Interest (10%) $ 6,600 (below) $ 4,000 $ 2,000 $12,600
Salary 18,000 25,000 8,000 51,000
Remaining income (loss):
$ 23,600
(12,600)
(51,000)
$(40,000) (16,000) (8,000) (16,000) (40,000)
Totals $ 8,600 $21,000 $(6,000) $23,600
CALCULATION OF PURKERSON'S INTEREST ALLOCATION
Balance, January 1—April 1 ($60,000 × 3) $180,000

Balance, April 1—December 31 ($68,000 × 9) 612,000
Total ................................................................................ $792,000
Months .............................................................................  12
Average monthly capital balance ................................. $ 66,000
Interest rate .................................................................... × 10%
Interest allocation (above) ............................................ $ 6,600
STATEMENT OF PARTNERS' CAPITAL

Purkerson Smith Traynor Totals
Beginning balances .............. $60,000 $40,000 $20,000 $120,000
Additional contribution ........ 8,000 -0- -0- 8,000
Income (above) ...................... 8,600 21,000 (6,000) 23,600
Drawings ($1,000 per month) (12,000) (12,000) (12,000) (36,000)
Ending capital balances ........ $64,600 $49,000 $ 2,000 $115,600
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23. (30 Minutes) (Allocate income for several years and determine ending capital
balances)
INCOME ALLOCATION—2014
Left Center Right Total

Interest (12% of beginning capital) $2,400 $ 7,200 $ 6,000 $ 15,600
Salary 12,000 8,000 -0- 20,000
Remaining income/loss:
$(30,000)
(15,600)
(20,000)
$(65,600) (19,680) (32,800) (13,120) (65,600)
Totals $(5,280) $(17,600) $(7,120) $(30,000)
STATEMENT OF PARTNERS' CAPITAL—DECEMBER 31, 2014

Beginning balances ........... $20,000 $60,000 $50,000 $130,000
Income allocation ............... (5,280) (17,600) (7,120) (30,000)
Drawings ............................. (10,000) (10,000) (10,000) (30,000)
Ending balances ........... $ 4,720 $32,400 $32,880 $ 70,000
Interest(12% of beginning capital above) *$566 $3,888 $3,946 $ 8,400
Salary ................................. 12,000 8,000 -0- 20,000
Remaining income/loss:
$20,000
(8,400)
(20,000)
$(8,400) (2,520) (4,200) (1,680) (8,400)
Totals.................. $10,046 $7,688 $2,266 $20,000
*Rounded

Beginning balances (above) $ 4,720 $32,400 $32,880 $70,000
Additional investment ....... -0- -0- 12,000 12,000
Income allocation ............... 10,046 7,688 2,266 20,000
Drawings ............................. (10,000) (10,000) (10,000) (30,000)
Ending balances ........... $ 4,766 $30,088 $37,146 $72,000
23. (continued)
Interest (12% of beginning capital
above)* .......................... $ 572 $ 3,611 $4,457 $ 8,640
Salary .................................. 12,000 8,000 -0- 20,000
Remaining income:
$40,000
(8,640)
(20,000)
$11,360 ........................ 2,272 4,544 4,544 11,360
Totals ........................ $14,844 $16,155 $9,001 $40,000
*Rounded

Beginning balances (above) $ 4,766 $30,088 $37,146 $72,000
Income allocation 14,844 16,155 9,001 40,000
Drawings (10,000) (10,000) (10,000) (30,000)
Ending balances $ 9,610 $36,243 $36,147 $82,000
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24. (12 Minutes) (Determine capital balances after retirement of a partner using
both the goodwill and the bonus approaches)
a. Fergie receives $30,000 more than her capital balance. Because Fergie is
assigned 20 percent of all profits and losses, this extra allocation indicates
total goodwill of $150,000, which must be split among all partners.
20% of Goodwill = $30,000

.20 G = $30,000
G = $150,000
CAPITAL BALANCES AFTER WITHDRAWAL

Original Balance Goodwill Withdrawal Final Balance
Pineda $230,000 $45,000 $275,000
Adams 190,000 45,000 235,000
Fergie 160,000 30,000 $(190,000) -0-
Gomez 140,000 30,000 170,000
Total $680,000
b. A $50,000 bonus is paid to Pineda ($280,000 is paid rather than the $230,000
capital balance). This bonus is deducted from the three remaining partners
according to their relative profit and loss ratio (3:2:1). A reduction of 50
percent (3/6) is assigned to Adams or a decrease of $25,000 which drops this
partner's capital balance from $190,000 to $165,000. A reduction of 33.3
percent (2/6) is assigned to Fergie or a decrease of $16,667 which drops this
partner's capital balance from $160,000 to $143,333. A reduction of 16.7
percent (1/6) is assigned to Gomez or a decrease of $8,333 which drops this
partner's capital balance from $140,000 to $131,667.
25. (10 minutes) (Hybrid method for recording a partner withdrawal)
Because the continuing partners do not wish to record goodwill, a hybrid approach
records identifiable asset fair value changes and corresponding capital
adjustments, but no goodwill. The remaining excess payment to the withdrawing
partner after the revaluation is then treated as a bonus.
Building 40,000
Matteson, capital 12,000
Richton, capital 20,000
O’Toole, capital 8,000
O’Toole, capital 108,000

Matteson, capital 4,500
Richton, capital 7,500
Cash 120,000
26. (45 Minutes) (P&L allocations and admission of a new partner)
a. The interest factor was probably inserted to reward Hugh for contributing
$50,000 more to the partnership than Jacobs. The salary allowance gives
an additional $20,000 to Jacobs in recognition of the full-time (rather than
part-time) employment. The 40:60 split of the remaining income was
probably negotiated by the partners based on other factors such as
business experience, reputation, etc.
b. The drawings show the assets removed by a partner during a period of

time. A salary allowance is added to each partner's capital for the year
(usually in recognition of work done) and is a component of net income
allocation. The two numbers are often designed to be equal but agreement
is not necessary. For example, a salary allowance might be high to
recognize work contributed by one partner. The allowance increases the
appropriate capital balance. The partner might, though, remove little or no
money so that the partnership could maintain its liquidity.
c. Hugh, drawings ......................................................... 7,500

Repair expense .................................................... 7,500
(To reclassify payment made to repair personal residence.)
Hugh, capital ............................................................. 16,500
Jacobs, capital .......................................................... 14,000
Hugh, drawings (adjusted for home repairs) .... 16,500
Jacobs, drawings ................................................ 14,000
(To close drawings accounts for 2014.)
Revenues ................................................................... 175,000
Expenses (adjusted by first entry) ..................... 138,500
Income summary ................................................. 36,500
(To close revenue and expense accounts for 2014.)
Income summary ...................................................... 36,500

Hugh, capital ........................................................ 12,600
Jacobs, capital .................................................... 23,900
(To close net income to partners' capital–see allocation plan shown below.)
Allocation of Income Hugh Jacobs

Interest (10% of beginning balance) $ 15,000 $ 10,000
Salary allowances 5,000 25,000
Remaining income (loss):
Net income $ 36,500
Interest (25,000)
Salary (30,000)
Remainder $ (18,500) (7,400) (40%) (11,100) (60%)
Profit allocation $12,600 $23,900
14-16
Education.
26. (continued)
d. Total capital (original balances of $250,000 plus 2014

net income less drawings) ................................. $256,000
Investment by Thomas ............................................. 64,000
Total capital after investment .................................. $320,000
Ownership portion acquired by Thomas ................ 15%
Thomas, capital ........................................................ $ 48,000
Amount paid .............................................................. 64,000
Bonus paid by Thomas—assigned to original partners $ 16,000
Bonus to Hugh (40%) ............................................... $6,400
Bonus to Jacobs (60%) ............................................ $9,600
Cash .......................................................................... 64,000

Thomas, capital (20% of total capital) ............... 48,000
Hugh, capital ........................................................ 6,400
Jacobs, capital .................................................... 9,600
27. (40 Minutes) (Reporting a change in the composition of a partnership)
a. Exact amount of investment can only be computed algebraically:
E Investment = 25% (Original Capital + E Investment)

El = .25 ($270,000 + El)
El = $67,500 + .25 El
.75 El = $67,500
E Investment = $90,000
b. Implied value of partnership ($36,000 ÷ 10%) ......... $360,000

Total capital after investment by E ($270,000 + $36,000) 306,000
Goodwill .................................................................... $ 54,000
Allocation of Goodwill:
A (30%) ............................................................... $16,200
B (10%) ............................................................... 5,400
C (40%) ............................................................... 21,600
D (20%) ............................................................... 10,800
Total ................................................................ $54,000
CAPITAL BALANCES
A B C D E
Original balances $20,000 $40,000 $ 90,000 $120,000 $-0-
Goodwill (above) 16,200 5,400 21,600 10,800 -0-
Investment -0- -0- -0- -0- 36,000
Capital balances $ 36,200 $45,400 $111,600 $130,800 $36,000
c. Because E's investment of $42,000 is less than 20% of the resulting capital
($312,000). E is apparently bringing some other attribute to the partnership
(goodwill) that must be computed:
E Investment = 20% (Original Capital + E Investment)

.80 Goodwill = $20,400
Goodwill = $25,500
E's investment is, therefore, $42,000 in cash and $25,500 in goodwill for a total
capital balance of $67,500; the other capital accounts remain unchanged. Note
that E's capital of $67,500 is 20% of the new total capital $337,500 ($270,000 +
$67,500).
14-18
Education.
27. (continued)
d. Total capital after investment ($270,000 + $55,000) $325,000

Amount acquired by E ............................................. 20%
E's capital balance .................................................... $ 65,000
E's payment .............................................................. 55,000
Bonus being given to E ............................................ $ 10,000
Bonus from:
A (10%) ............................................................... $1,000
B (30%) ............................................................... 3,000
C (20%) ............................................................... 2,000
D (40%) ............................................................... 4,000 $10,000
CAPITAL BALANCES
A B C D E
Original balances $20,000 $40,000 $90,000 $120,000 $-0-
Investment -0- -0- -0- -0- 55,000
Bonus (above) (1,000) (3,000) (2,000) (4,000) 10,000
Capital balances $19,000 $37,000 $88,000 $116,000 $65,000
e. C's capital balance $ 90,000

C's collection (125%) 112,500
Bonus being paid to C $ 22,500
Bonus from:
A (1/3) $7,500
B (1/3) 7,500
D (1/3) 7,500 $22,500
CAPITAL BALANCES
A B C D
Original balances ................. $20,000 $40,000 $ 90,000 $120,000
Bonus (above) ...................... (7,500) (7,500) 22,500 (7,500)
Payment ................................ -0- -0- (112,500) -0-
Capital balances ................... $12,500 $32,500 $ -0- $112,500
28. (55 Minutes) (Allocation of income to the partners and determination of capital
balances)
ALLOCATION OF INCOME—2013
Boswell Johnson Total
Salary (8 months) ................. $8,000 $-0- $ 8,000
Remaining $3,000 ................. 1,200 (40%) 1,800 (60%) 3,000
Totals ............................... $9,200 $1,800 $11,000

Boswell Johnson Total
Beginning Balances ($114,000
Invested capital split evenly—
market value used for assets) $57,000 $57,000 $114,000
Income allocation (above) ... 9,200 1,800 11,000
Drawings ............................... -0- -0- -0-
Ending balances ............. $66,200 $58,800 $125,000
WALPOLE INVESTMENT JANUARY 1, 2014

Walpole's $54,000 investment increases total capital to $179,000. Walpole is
credited with a 40% interest or $71,600. According to the problem, the excess
$17,600 is a bonus from the original partners. Of this amount, $10,560 is
allocated from Johnson (60%) and $7,040 from Boswell (40%).
Boswell Johnson Walpole Total

Salary .................................... $12,000 $-0- $24,000 $36,000
Remaining $8,000 loss ($28,000 –
$36,000) ........................... (960) (3,840) (3,200) (8,000)
Totals .......................... $11,040 $(3,840) $20,800 $28,000
Boswell Johnson Walpole Total

Beginning balances ............. $66,200 $58,800 $ -0- $125,000
Walpole's contribution ........ (7,040) (10,560) 71,600 54,000
Income allocation (above) ... 11,040 (3,840) 20,800 28,000
Drawings ............................... (5,000) (5,000) (10,000) (20,000)
Ending balances ............. $65,200 $39,400 $82,400 $187,000
14-20
Education.
28. (continued)
ADMISSION OF POPE—JANUARY 1, 2015
Pope's payment was made directly to the partners. Therefore, neither goodwill
nor a bonus need be recognized. Instead, 10% of each capital balance shown
above will be reclassified to Pope. The journal entry would be as follows:
Boswell, capital .............................................................. 6,520

Johnson, capital ............................................................. 3,940
Walpole, capital. .............................................................. 8,240
Pope, capital ............................................................. 18,700
Boswell Johnson Walpole Pope Total

Salary $12,000 $-0- $24,000 $9,600 $45,600
Remaining $400 income 54 162 144 40 400
Totals $12,054 $162 $24,144 $9,640 $46,000
STATEMENT OF PARTNERSHIP CAPITAL—DECEMBER 31, 2015
Boswell Johnson Walpole Pope Total

Beginning balances $65,200 $39,400 $82,400 $-0- $187,000
Admission of Pope (6,520) (3,940) (8,240) 18,700 -0-
Allocation of income
(above) 12,054 162 24,144 9,640 46,000
Drawings (5,000) (5,000) (10,000) (4,000) (24,000)
Ending balances $65,734 $30,622 $88,304 $24,340 $209,000
29. (60 Minutes) (Allocate income and prepare a statement of partners' capital)
a. Income Allocation—2013
Gray Stone Lawson Totals
Salary allowance ($8 per billable
hour) $13,680 $11,520 $10,400 $35,600
Interest (see Note A) 25,928 21,600 10,800 58,328
Bonus (not applicable because
salary and interest would
necessitate a negative bonus) -0- -0- -0- -0-
Remaining loss (split evenly):
$ 65,000
(35,600)
(58,328)
$(28,928) (9,643) (9,643) (9,642) (28,928)
Profit allocation $29,965 $23,477 $11,558 $65,000
Note A: Interest for Stone and Lawson is calculated at 12% of their beginning
capital balances ($180,000 and $90,000, respectively) while for Gray the
computation is based on a $210,000 balance for 4/12 of the year and $219,100
for the remaining 8/12.
Capital Account Balances—1/1/13 – 12/31/13
Gray Stone Lawson Totals

Beginning contributions $210,000 $180,000 $90,000 $480,000
Added Investment 9,100 -0- -0- 9,100
Profit allocation (from above) 29,965 23,477 11,558 65,000
Drawing (10% of beginning
balances) (21,000) (18,000) (9,000) (48,000)
Ending balances $228,065 $185,477 $92,558 $506,100
Prior to developing the information for 2014, a computation of Monet's

investment must be made:
Monet's Investment = 25% ($506,100 + Monet's Investment)

Ml = $126,525 + .25 Ml
.75 Ml = $126,525
Ml = $168,700
14-22
Education.
29. a. (continued)
Income Allocation—2014
Gray Stone Lawson Monet Totals
Salary allowance ($8
per billable hour) $14,400 $ 12,000 $ 11,040 $ 9,520 $ 46,960
Interest (12% of begin-
ning capital balances
for the year) 27,368 22,257 11,107 20,244 80,976
Bonus (not applicable) -0- -0- -0- -0- -0-
Remaining loss (split
evenly):
$ (20,400)
(46,960)
(80,976)
$(148,336) (37,084) (37,084) (37,084) (37,084) (148,336)
Loss allocation $ 4,684 $(2,827) $(14,937) $ (7,320) $(20,400)
Capital Account Balances 1/1/14 – 12/31/14

Beginning balances $228,065 $185,477 $92,558 $168,700 $674,800
Loss allocation (from
above) 4,684 (2,827) (14,937) (7,320) (20,400)
Drawings (10% of
beginning
balances) (22,806) (18,548) (9,256) (16,870) (67,480)
Ending balances $209,943 $164,102 $68,365 $144,510 $586,920
Income Allocation—2015
Salary allowance ($8
per billable hour) $15,040 $12,960 $10,480 $12,640 $ 51,120
Interest (12% of
beginning capital
balances for the
year) 25,193 19,692 8,204 17,341 70,430
Bonus (see Note B) 2,604 2,604 -0- -0- 5,208
Remaining profit split
evenly:
$152,800
(51,120)
(70,430)
(5,208)
$ 26,042 6,510 6,510 6,511 6,511 26,042
Profit allocation $49,347 $41,766 $25,195 $36,492 $152,800
29. a. (continued)
Note B: The bonus to Gray and Stone can only be derived algebraically.
Because each of the two partners is entitled to 10% of net income as defined,
the total bonus is 20% and can be computed as follows:
Bonus = 20% (Net income – Salary – Interest – Bonus)
B = .2 ($152,800 – $51,120 – $70,430 – B)
B = .2 ($31,250 – B)
B = $6,250 – .2B
1.2 B = $6,250
B = $5,208 (or $2,604 per person)
Capital Account Balances 1/1/15 – 12/31/15

Profit allocation (from
above) 49,347 41,766 25,195 36,492 152,800
Drawings (10% of
beginning
balances) (20,994) (16,410) (6,837) (14,451) (58,692)
Ending balances $238,296 $189,458 $86,723 $166,551 $681,028
b.
GRAY, STONE, LAWSON, and MONET
Statement of Partners' Capital
For Year Ending December 31, 2015

Profit allocation (from
above) 49,347 41,766 25,195 36,492 152,800
Drawings (10% of
beginning
balances) (20,994) (16,410) (6,837) (14,451) (58,692)
Ending balances $238,296 $189,458 $86,723 $166,551 $681,028
14-24
Education.
30. (40 Minutes) (Recording admission and retirement of partners using both the
bonus and goodwill methods)
a. Porthos, capital ......................................................... 35,000

D'Artagnan, capital .............................................. 35,000
(To reclassify Porthos's capital balance to reflect transfer of interest to
D'Artagnan.)
b. Goodwill .................................................... 50,000

Athos, capital (50%) ........................................... 25,000
Porthos, capital (30%) ........................................ 15,000
Aramis, capital (20%) ......................................... 10,000
(To record goodwill based on $250,000 implied value of partnership [$25,000
÷ 10%]. Because current capital is only $200,000 [the $25,000 goes directly
to the partners], goodwill of $50,000 has to be recorded and allocated using
profit and loss ratio.)
Athos, capital (10% of balance) ............................... 10,500

Porthos, capital (10% of balance) ........................... 8,500
Aramis, capital (10% of balance) ............................. 6,000
D'Artagnan, capital ............................................... 25,000
(To reclassify 10% of each partner's capital to reflect transfer of interest to
D'Artagnan.)
c. Cash .......................................................................... 30,000

D'Artagnan, capital (10% of total capital) ........... 23,000
Athos, capital (50% of excess payment) ........... 3,500
Porthos, capital (30% of excess payment) ........ 2,100
Aramis, capital (20% of excess payment) ......... 1,400
(To record $30,000 payment by D'Artagnan which increases total capital to
$230,000. D'Artagnan is credited for only 10% of that balance with the extra
$7,000 payment being recorded as a bonus to the original partners.)
d. Cash .......................................................................... 30,000

Goodwill .................................................................... 70,000
Athos, capital (50% of goodwill) ....................... 35,000
Porthos, capital (30% of goodwill) .................... 21,000
Aramis, capital (20% of goodwill) ...................... 14,000
(To record D'Artagnan's contribution to the partnership. The $30,000
payment for 10% interest indicates a $300,000 value for the business
although the capital balances would only increase to $230,000. The $70,000
difference is recorded as goodwill, an amount assigned to the original
partners.)
30. (continued)
e. Cash ........................................................................... 12,222

Goodwill . .................................................................. 10,000
To record investment by D'Artagnan. The implied value of the investment as
a whole would be only $122,220 ($12,222 ÷ 10%). Because the capital
balances are well in excess of this figure, D'Artagnan is apparently bringing
some other factor (goodwill) into the partnership. This goodwill can be
computed as follows:
$12,222 + Goodwill = 10% (Original Capital + $12,222 + Goodwill)
$12,222 + Goodwill = 10% ($200,000 + $12,222 + Goodwill)
.90 Goodwill = $9,000
Goodwill = $10,000
f. Goodwill .................................................................... 80,000

Athos, capital (50%) ............................................ 40,000
Porthos, capital (30%) ......................................... 24,000
Aramis, capital (20%) .......................................... 16,000
(To record goodwill of $80,000 based on $280,000 appraisal of business.)
Aramis, capital .......................................................... 66,000

Cash .................................................................... 66,000
(To distribute cash to retiring partner based on final capital balance.)
14-26
Education.
31. (75 Minutes) (Recording of changes in the composition of a partnership

including allocation of income)
a. 1/1/13 Building ..................................................... 52,000

Equipment .................................................. 16,000
Cash ........................................................... 12,000
O'Donnell, capital ................................ 40,000
Reese, capital ...................................... 40,000
(To record initial investment. Assets recorded at fair value with
two equal capital balances.)
12/31/13 Reese, capital ........................................... 22,000

Income summary ................................. 10,000
(The allocation plan specifies that O'Donnell receives 20% in
interest [or $8,000 based on $40,000 capital balance] plus $4,000
more [Because that amount exceeds 15% of the profits from the
period]. The remaining $22,000 loss is assigned to Reese.)
1/1/14 Cash ........................................................... 15,000

O'Donnell, capital (15%) ........................... 300
Reese, capital (85%) ................................. 1,700
Dunn, capital ........................................ 17,000
(New investment by Dunn brings total capital to $85,000 after 2013
loss [$80,000 – $10,000 + $15,000]. Dunn's 20% interest is $17,000
[$85,000 × 20%] with the extra $2,000 coming from the two original
partners [allocated between them according to their profit and
loss ratio].)
12/31/14 O'Donnell, capital ..................................... 10,340

Reese, capital ........................................... 5,000
Dunn, capital ............................................. 5,000
O'Donnell, drawings............................. 10,340
Reese, drawings .................................. 5,000
Dunn, drawings ................................... 5,000
(To close out drawings accounts for the year based on
distributing 20% of each partner's beginning capital balances
[after adjustment for Dunn's investment] or $5,000 whichever is
greater. O'Donnell's capital is $51,700 [$40,000 + $12,000 – $300])
12/31/14 Income summary ...................................... 44,000

Reese, capital ...................................... 16,236
Dunn, capital ........................................ 10,824
(To allocate $44,000 income figure for 2014 as determined below.)
31. a. (continued)
O'Donnell Reese Dunn
Interest (20% of $51,700
beginning capital balance)........ $10,340
15% of $44,000 income .................. 6,600
60:40 split of remaining $27,060
income ....................................... $16,236 $10,824
Total ................................................ $16,940 $16,236 $10,824
Capital Balances as of December 31, 2014:

Initial 2013 investment ................... $40,000 $40,000
2013 profit allocation ..................... 12,000 (22,000)
Dunn's investment ......................... (300) (1,700) $17,000
2014 drawings ................................ (10,340) (5,000) (5,000)
2014 profit allocation ..................... 16,940 16,236 10,824
12/31/14 balances ........................... $58,300 $27,536 $22,824
1/1/15 Dunn, capital ............................................. 22,824

Postner, capital ................................... 22,824
(To reclassify balance to reflect
acquisition of Dunn's interest.)

Reese, capital ........................................... 5,507
Postner, capital ......................................... 5,000
O'Donnell, drawings ............................ 11,660
Reese, drawings .................................. 5,507
Postner, drawings ............................... 5,000
(To close out drawings accounts for the
year based on 20% of beginning capital
balances [above] or $5,000 [whichever is
greater].)
12/31/15 Income summary ....................................... 61,000

Reese, capital ...................................... 24,114
Postner, capital ................................... 16,076
(To allocate profit for 2015 determined as follows)
O'Donnell Reese Postner

Interest (20% of $58,300 beg. capital) $11,660
15% of $61,000 income ............ 9,150
60:40 split of remaining $40,190 ______ $24,114 $16,076
Totals ............................... $20,810 $24,114 $16,076
14-28
Education.
31. a. (continued)
1/1/16 Postner, capital ......................................... 33,900
O'Donnell, capital (15%) ........................... 509
Reese, capital (85%) ................................. 2,881
Cash ..................................................... 37,290
(Postner's capital is $33,900 [$22,824 –
$5,000 + $16,076]. Extra 10% payment is
deducted from the two remaining
partners' capital accounts.)
b. 1/1/13 Building ...................................................... 52,000

Equipment ................................................. 16,000
Cash ........................................................... 12,000
Goodwill .................................................... 80,000
Reese, capital ...................................... 80,000
(To record initial capital investments.
Reese is credited with goodwill of
$80,000 to match O'Donnell's
investment.)
12/31/13 Reese, capital ........................................... 30,000

Income summary ................................. 10,000
(Interest of $16,000 is credited to
O'Donnell [$80,000 × 20%] along with a
base of $4,000. The remaining amount is
now a $30,000 loss that is attributed
entirely to Reese.)
1/1/14 Cash ........................................................... 15,000

Goodwill .................................................... 22,500
Dunn, capital ........................................ 37,500
(Cash and goodwill being contributed by
Dunn are recorded. Goodwill must be
calculated algebraically.)
$15,000 + Goodwill = 20% (Current Capital + $15,000 + Goodwill)

$15,000 + Goodwill = 20% ($150,000 + $15,000 + Goodwill)
.8 Goodwill = $18,000
Goodwill = $22,500
31. b. (continued)
Reese, capital ........................................... 10,000
Dunn, capital ............................................. 7,500
O'Donnell, drawings............................. 20,000
Reese, drawings .................................. 10,000
Dunn, drawings ................................... 7,500
(To close out drawings accounts for the
year based on 20 % of beginning capital
balances: O'Donnell—$100,000, Reese—
$50,000, and Dunn—$37,500.)
12/31/14 Income summary ...................................... 44,000
Reese, capital ...................................... 10,440
Dunn, capital ........................................ 6,960
(To allocate $44,000 income figure as follows)

beginning capital balance) $20,000
15% of $44,000 income 6,600
60:40 split of remaining $17,400 $10,440 $6,960
Totals $26,600 $10,440 $6,960
Capital balances as of December 31, 2014:

Initial 2013 investment ... $ 80,000 $80,000
2013 profit allocation ..... 20,000 (30,000)
Additional investment ... $37,500
2014 drawings ................ (20,000) (10,000) (7,500)
2014 profit allocation ..... 26,600 10,440 6,960
12/31/14 balances .......... $106,600 $50,440 $36,960
1/1/15 Goodwill .................................................... 26,588
O'Donnell, capital (15%) ..................... 3,988
Reese, capital (51%) ............................ 13,560
Dunn, capital (34%) ............................. 9,040
(To record goodwill indicated by purchase of Dunn's interest.)
In effect, profits are shared 15% to O'Donnell, 51% to Reese – (60% of the 85%
remaining after O'Donnell's income), and 34% to Dunn (40% of the 85%
remaining after O'Donnell's income). Postner is paying $46,000, an amount
$9,040 in excess of Dunn's capital ($36,960). The additional payment for this
34% income interest indicates total goodwill of $26,588 ($9,040 ÷ 34%).
Because Dunn is entitled to 34% of the profits but only holds 19% of the total
capital, an implied value for the company as a whole cannot be
14-30
Education.
determineddirectly from the payment of $46,000. Thus, goodwill can only be

computed based on the excess payment.
31. b. (continued)
1/1/15 Dunn, capital .................................................. 46,000

Postner, capital ......................................... 46,000
(To reclassify capital balance to new partner.)
12/31/15 O'Donnell, capital ........................................... 22,118
Reese, capital ................................................. 12,800
Postner, capital .............................................. 9,200
O'Donnell, drawings ................................. 22,118
Reese, drawings ....................................... 12,800
Postner, drawings .................................... 9,200
(To close out drawings accounts for the year based on 20% of
beginning capital balances [after adjustment for goodwill].)
12/31/15 Income summary ........................................... 61,000
O'Donnell, capital ..................................... 31,268
Reese, capital ........................................... 17,839
Postner, capital ......................................... 11,893
To allocate profit for 2015 as follows:
beginning capital balance) $22,118
15% of $61,000 income ....... 9,150
60:40 split of remaining
$29,732 ............................ $17,839 $11,893
Totals ............................... $31,268 $17,839 $11,893
Capital Balances as of December 31, 2015:
12/31/14 balances ................ $106,600 $50,440 $36,960
Adjustment for goodwill ..... 3,988 13,560 9,040
Drawings ............................... (22,118) (12,800) (9,200)
Profit allocation .................... 31,268 17,839 11,893
12/31/15 balances ................. $119,738 $69,039 $48,693
Postner will be paid $53,562 (110% of the capital balance) for her interest. This
amount exceeds her capital balance by $4,869. Because Postner is only
entitled to a 34% share of profits and losses, the additional $4,869 indicates
that the partnership as a whole is undervalued by $14,321 (4,869 ÷ 34%). Only
in that circumstance is the extra payment to Postner justified:
31. b. (continued)
1/1/16 Goodwill ............................................................... 14,321

O'Donnell, capital (15%) ................................ 2,148
Reese, capital (51%) ...................................... 7,304
Postner, capital (34%) .................................... 4,869
(To recognize implied goodwill.)
1/1/16 Postner, capital ................................................... 53,562
Cash ............................................................... 53,562
(To record final distribution to Postner.)
14-32
Education.
Develop Your Skills
Research Case
This assignment allows the student to make use of the SEC website and, then,
the EDGAR system. It also provides a chance to use actual statements created
for a partnership rather than those typically produced for a corporation.
Probably the most noticeable characteristic of the statements for Buckeye

Partners is that they resemble corporate financial statements in most ways. A
casual overview might not bring any differences to mind. However, a close
reading will show several differences including the following:
 On the income statement, net income is allocated between the general

partner and limited partners.
 Also, on the income statement earnings per share is replaced with a figure
labeled as “earnings per partnership unit.”
 The balance sheet does not present a stockholders’ equity section but
rather partnership capital. That section is comprised of just two figures:
one for the general partner and the other for the limited partners.
 The first two paragraphs of Note One to the financial statements describe
the partnership organization.
 A later paragraph presents a schedule reflecting the changes in
partnership capital for both the general partner and the limited partners.
Analysis Case
An unlimited number of allocation plans can be developed for any partnership.

Here, Wilson will be interested in some reward for investing the capital used to
create the business. Higgins will expect to be recognized for the work put into
the operation. Poncelet should seek some reward for any new clients that she is
able to bring to the business.
One possibility would be to accrue interest to Wilson on her capital balance for
the year based, perhaps, on the prime rate. Poncelet could be assigned a
particularly high share of any revenues generated from new clients. The amount
of income left would result from Higgins’s work in the day-to-day operations of
the business so a large part of that remainder could be assigned to her.
As an alternative, Wilson could be allocated an interest factor but only based on

the initial amount invested in the business rather than the capital balance as a
whole. Higgins could be assigned some type of allowance for the number of
hours of work put in each period. Any remaining income could be divided evenly
among the three partners but only up to a certain level. Beyond that, perhaps
only Poncelet and Higgins would share in the income Because they are doing the
work, one in gaining new clients and the other in the day-to-day operations of the
business.
Communication Cases 1 and 2
These two cases ask the student to identify the types of factors that will lend
themselves toward the organization becoming a corporation (in Case 1) or a
partnership (in Case 2). Several issues should be considered when looking into a
legal format for a business enterprise:
 Do state laws play any role in the decision? In some states, particular
types of organizations are prohibited from operating as a corporation. Will
state law come into play in making this decision? If so, the partnership
form of organization will be required.
 How big do the owners expect the company to become? If the business
will remain small, there may be no need to raise additional capital so that
the ability to sell ownership may not be an issue. This favors creation of a
partnership. However, if Birmingham and Roberts expect the business to
prosper and grow, they should consider which type of business will enable
them to attract other capital or debt investments. Usually, it is a
corporation that is best set up to enable growth through the issuance of
securities.
 How risky is the business operation? If the company is operating in a
business where liability is not a significant problem, the limited liability of a
corporation might not be of much interest. However, if there is some risk
involved, the two owners may need the corporate type of organization just
for their own financial security.
 How well do the owners know and trust each other? As with the previous
comment, potential liability can be greatly enhanced if the owners do not
know each other well or if additional owners are expected to join at a later
point in time. Under that circumstance, everyone may feel more
comfortable if the business is created as a corporation or as one of the
limited liability organizations. If the owners, though, are comfortable with
each other, they may not feel the necessity of creating a formalized
corporation.
 What changes will occur in the tax laws? At this writing, dividends paid by
a corporation to its owners are taxable at 15%. However, from time to time
various politicians have proposed the elimination of part or all of that tax.
Corporations gain appeal if dividend income is not taxed.
 How much money do they have available to create a legal organization? In
most states, creation of a partnership can be virtually free whereas the
legal formality of a corporation can cost money. If finances are tight, the
business could begin as a partnership and then convert to a corporation at
a later date as monetary restrictions ease.
14-34
Education.
Excel Case: There are a variety of ways to create a spreadsheet to solve this particular problem.
Here is one possible approach:
In Cell A1, enter text “Net Income” and in Cell B1 enter $200,000.
In Cell A2, enter text “Billable Hours–Red”.In Cell B2 enter 2,000. In Cell C2, enter $20 hourly rate.
In Cell A3, enter text “Billable Hours–Blue”. In Cell B3 enter 1,500. In Cell C3, enter $30 hourly rate.
In Cell A4, enter text “Investment–Red” and in Cell B4 enter $80,000. In Cell C4, enter the rate of
return of 10%.
In Cell A5, enter text “Investment–Blue” and in Cell B5 enter $50,000. In Cell C5, enter the rate of
return of 10%.
Perform calculation:In Cell D2, enter formula to multiply number of hours by hourly rate. Formula:
=+B2*C2
The formula for the next three line items is identical to this first formula; copy the formula to Cells
D3, D4, and D5. (To copy a formula across a range of cells, select the cell containing formula,
then drag the fill handle, which is the small square in the lower right corner of this box, over the
adjacent cells. Note that the formula will adjust automatically for the different lines.)
In Cell A6, enter label text “Subtotal” and SUM the amounts in Cells D2 through D5. Click in Cell
D6, press the  symbol on the standard toolbar. Click and drag across the range of cells to be
summed (D2 through D5) and press enter.
Subtract the subtotal of the partner’s initial allocations (Cell D6) from the Net Income (Cell B1)
with the following formula: In Cell A8, enter the label text “Profit to be Split” and in Cell D8, enter
the following formula: =+B1-D6.
Determine the distribution of Profit between partners:
In Cell A10, enter label text “Profit – Red” and in Cell C10 enter “50%”.
In Cell A11, enter label text “Profit – Blue” and in Cell C11 enter “50%”.
Perform calculations:In Cell D10, enter formula to multiply Profit to be Split (Cell D8) by
distribution percentage (Cell C10). Formula: =+D8*C10
Repeat this calculation for the other partner. In Cell D11, enter the formula: =+D8*C11
Once the spreadsheet is created, any variable may be changed and the results will adjust
automatically. There are eleven variables that can be changed: B1, B2, B3, B4, B5, C2, C3, C4,
and C5, as well as C10 and C11 (which must add up to 100%).
Example:
Net Income $200,000

Billable Hours-Red 2,000 $20 $40,000
Billable Hours-Blue 1,500 $30 45,000
Investment-Red $80,000 10% 8,000
Investment-Blue $50,000 10% 5,000
Subtotal $98,000
Profit to be Split: $102,000
Profit-Red 50% $51,000

Profit-Blue 50% $51,000
Problems
LO 14-1 1. Which of the following is not a reason for the popularity of partnerships
as a legal form for businesses?
a. Partnerships may be formed merely by an oral agreement.
b. Partnerships can more easily generate significant amounts of capital.
c. Partnerships avoid the double taxation of income that is found in
corporations.
d. In some cases, losses may be used to offset gains for tax purposes.
LO 14-1 2. How does partnership accounting differ from corporate accounting?

a. The matching principle is not considered appropriate for partnership
accounting.
b. Revenues are recognized at a different time by a partnership than is
appropriate for a corporation.
c. Individual capital accounts replace the contributed capital and retained
earnings balances found in corporate accounting.
d. Partnerships report all assets at fair value as of the latest balance sheet
date.
LO 14-2 3. Which of the following best describes the articles of partnership

agreement?
a. The purpose of the partnership and partners' rights and responsibilities
are required elements of the articles of partnership.
b. The articles of partnership are a legal covenant and must be expressed in
writing to be valid.
c. The articles of partnership are an agreement that limits partners' liability
to partnership assets.
d. The articles of partnership are a legal covenant that may be expressed
orally or in writing, and forms the central governance for a partnership's
operations.
LO 14-9 4. Pat, Jean Lou, and Diane are partners with capital balances of
$50,000, $30,000, and $20,000, respectively. These three partners
share profits and losses equally. For an investment of $50,000 cash
(paid to the business), MaryAnn will be admitted as a partner with a
one-fourth interest in capital and profits. Based on this information,
which of the following best justifies the amount of MaryAnn's
investment?
a. MaryAnn will receive a bonus from the other partners upon her
admission to the partnership.
b. Assets of the partnership were overvalued immediately prior to
MaryAnn's investment.
c. Page 657
The book value of the partnership's net assets was less than the fair value
immediately prior to MaryAnn's investment.
14-36
Education.
d. MaryAnn is apparently bringing goodwill into the partnership, and her

capital account will be credited for the appropriate amount.
LO 14-10 5. A partnership has the following capital balances:
David is going to invest $105,000 into the business to acquire a 30

percent ownership interest. Goodwill is to be recorded. What will be
David's beginning capital balance?
a. $94,500.
b. $105,000.
c. $126,000.
d. $135,000.
Krystal is going to pay a total of $240,000 directly to these three

partners to acquire a 25 percent ownership interest from each.
Goodwill is to be recorded. What is Dane's capital balance after the
transaction?
a. $210,000.
b. $255,000.
c. $340,000.
d. $352,000.
LO 14-9 7. The capital balance for Bolcar is $110,000 and for Neary is $40,000.
These two partners share profits and losses 70 percent (Bolcar) and
30 percent (Neary). Kansas invests $50,000 in cash into the
partnership for a 30 percent ownership. The bonus method will be
used. What is Neary's capital balance after Kansas's investment?
a. $35,000.
b. $37,000.
c. $40,000.
d. $43,000.
LO 14-9 8. Bishop has a capital balance of $120,000 in a local partnership, and

Cotton has a $90,000 balance. These two partners share profits and
losses by a ratio of 60 percent to Bishop and 40 percent to Cotton.
Lovett invests $60,000 in cash in the partnership for a 20 percent
ownership. The goodwill method will be used. What is Cotton's capital
balance after this new investment?
a. $99,600.
b. $102,000.
c. $112,000.
d. $126,000.
LO 14-9 9. The capital balance for Messalina is $210,000 and for Romulus is
$140,000. These two partners share profits and losses 60 percent
(Messalina) and 40 percent (Romulus). Claudius invests $100,000 in
cash in the partnership for a 20 percent ownership. The bonus method
will be used. What are the capital balances for Messalina, Romulus,
and Claudius after this investment is recorded?
a. $216,000, $144,000, $90,000.
b. $218,000, $142,000, $88,000.
c. $222,000, $148,000, $80,000.
d. $240,000, $160,000, $100,000.
Page 658
10. A partnership begins its first year with the following capital balances:
LO 14-6
The articles of partnership stipulate that profits and losses be assigned

in the following manner:
 Each partner is allocated interest equal to 5 percent of the
beginning capital balance.
 Bernard is allocated compensation of $18,000 per year.
 Any remaining profits and losses are allocated on a 3:3:4 basis,
respectively.
 Each partner is allowed to withdraw up to $5,000 cash per year.
Assuming that the net income is $60,000 and that each partner
withdraws the maximum amount allowed, what is the balance in Collins
capital account at the end of that year?
a. $70,800.
b. $86,700.
c. $73,500.
d. $81,700.
LO 14-4, 14- 11. A partnership begins its first year of operations with the following
5, 14-6 capital balances:
According to the articles of partnership, all profits will be assigned as

follows:
 Winston will be awarded an annual salary of $20,000 with
$10,000 assigned to Salem.
 The partners will be attributed interest equal to 10 percent of the
capital balance as of the first day of the year.
 The remainder will be assigned on a 5:2:3 basis, respectively.
 Each partner is allowed to withdraw up to $10,000 per year.
The net loss for the first year of operations is $20,000 and net income
14-38
Education.
for the subsequent year is $40,000. Each partner withdraws the

maximum amount from the business each period. What is the balance
in Winston's capital account at the end of the second year?
a. $102,600.
b. $104,400.
c. $108,600.
d. $109,200.
Profits and losses are split as follows: Allen (20 percent), Burns (30
percent), and Costello (50 percent). Costello wants to leave the
partnership and is paid $100,000 from the business based on
provisions in the articles of partnership. If the partnership uses the
bonus method, what is the balance of Burns's capital account after
Costello withdraws?
a. $24,000.
b. $27,000.
c. $33,000.
d. $36,000.
Page 659
Problems 13 and 14 are independent problems based on the
following scenario:
At year-end, the Circle City partnership has the following capital
balances:
Profits and losses are split on a 3:3:2:2 basis, respectively. Clark

decides to leave the partnership and is paid $90,000 from the business
based on the original contractual agreement.
LO 14-10 13. Using the goodwill method, what is Manning's capital balance after
Clark withdraws?
a. $133,000.
b. $137,500.
c. $140,000.
d. $145,000.
LO 14-10 14. If instead the partnership uses the bonus method, what is the balance
of Manning's capital account after Clark withdraws?
a. $100,000.
b. $126,250.
c. $130,000.
d. $133,750.
Problems 15 and 16 are independent problems based on the
following capital account balances:
LO 14-8 15. Darrow invests $270,000 in cash for a 30 percent ownership interest.
The money goes to the original partners. Goodwill is to be recorded.
How much goodwill should be recognized, and what is Darrow's
beginning capital balance?
a. $410,000 and $270,000.
b. $140,000 and $270,000.
c. $140,000 and $189,000.
d. $410,000 and $189,000.
LO 14-9 16. Darrow invests $250,000 in cash for a 30 percent ownership interest.
The money goes to the business. No goodwill or other revaluation is to
be recorded. After the transaction, what is Jennings's capital balance?
a. $160,000.
b. $168,000.
c. $170,200.
d. $171,200.
LO 14-9 17. Lear is to become a partner in the WS partnership by paying $80,000

in cash to the business. At present, the capital balance for Hamlet is
$70,000 and for MacBeth is $40,000. Hamlet and MacBeth share
profits on a 7:3 basis. Lear is acquiring 40 percent of the new
partnership.
a. If the goodwill method is applied, what will the three capital balances be
following the payment by Lear?
b. If the bonus method is applied, what will the three capital balances be
following the payment by Lear?
LO 14-9 18. The Distance Plus partnership has the following capital balances at the
beginning of the current year:
Each of the following questions should be viewed independently.

a. Page 660
If Sergio invests $100,000 in cash in the business for a 25 percent
interest, what journal entry is recorded? Assume that the bonus method is
used.
b. If Sergio invests $60,000 in cash in the business for a 25 percent interest,
what journal entry is recorded? Assume that the bonus method is used.
14-40
Education.
c. If Sergio invests $72,000 in cash in the business for a 25 percent interest,

what journal entry is recorded? Assume that the goodwill method is used.
LO 14-9 19. A partnership has the following account balances: Cash $50,000;
Other Assets $600,000; Liabilities $240,000; Nixon, Capital (50 percent
of profits and losses) $200,000; Hoover, Capital (20 percent)
$120,000; and Polk, Capital (30 percent) $90,000. Each of the
following questions should be viewed as an independent situation:
a. Grant invests $80,000 in the partnership for an 18 percent capital interest.
Goodwill is to be recognized. What are the capital accounts thereafter?
b. Grant invests $100,000 in the partnership to get a 20 percent capital
balance. Goodwill is not to be recorded. What are the capital accounts
thereafter?
LO 14-9 20. The Prince-Robbins partnership has the following capital account
balances on January 1, 2015:
Prince is allocated 80 percent of all profits and losses with the

remaining 20 percent assigned to Robbins after interest of 10 percent
is given to each partner based on beginning capital balances.
On January 2, 2015, Jeffrey invests $37,000 cash for a 20 percent
interest in the partnership. This transaction is recorded by the goodwill
method. After this transaction, 10 percent interest is still to go to each
partner. Profits and losses will then be split as follows: Prince (50
percent), Robbins (30 percent), and Jeffrey (20 percent). In 2015, the
partnership reports a net income of $15,000.
a. Prepare the journal entry to record Jeffrey's entrance into the partnership
on January 2, 2015.
b. Determine the allocation of income at the end of 2015.
LO 14-6 21. The partnership agreement of Jones, King, and Lane provides for the
annual allocation of the business's profit or loss in the following
sequence:
 Jones, the managing partner, receives a bonus equal to 20
percent of the business's profit.
 Each partner receives 15 percent interest on average capital
investment.
 Any residual profit or loss is divided equally.
The average capital investments for 2015 were as follows:
How much of the $90,000 partnership profit for 2015 should be

assigned to each partner?
LO 14-4, 14- 22. Purkerson, Smith, and Traynor have operated a bookstore for a
5, 14-6 number of years as a partnership. At the beginning of 2015, capital
balances were as follows:
Due to a cash shortage, Purkerson invests an additional $8,000 in the

business on April 1, 2015.
Each partner is allowed to withdraw $1,000 cash each month.
The partners have used the same method of allocating profits and
losses since the business's inception:
 Each partner is given the following compensation allowance for
work done in the business: Purkerson, $18,000; Smith, $25,000;
and Traynor, $8,000.
 Each partner is credited with interest equal to 10 percent of the
average monthly capital balance for the year without regard for
normal drawings.
 Any remaining profit or loss is allocated 4:2:4 to Purkerson, Smith,
and Traynor, respectively. The net income for 2015 is $23,600.
Each partner withdraws the allotted amount each month.
What are the ending capital balances for 2015?
Page 661
23. On January 1, 2014, the dental partnership of Left, Center, and Right
LO 14-4, 14- was formed when the partners contributed $20,000, $60,000, and
5, 14-6 $50,000, respectively. Over the next three years, the business reported
net income and (loss) as follows:
During this period, each partner withdrew cash of $10,000 per year.
Right invested an additional $12,000 in cash on February 9, 2015.
At the time that the partnership was created, the three partners agreed
to allocate all profits and losses according to a specified plan written as
follows:
 Each partner is entitled to interest computed at the rate of 12
percent per year based on the individual capital balances at the
beginning of that year.
 Because of prior work experience, Left is entitled to an annual
salary allowance of $12,000, and Center is credited with $8,000
per year.
 Any remaining profit will be split as follows: Left, 20 percent;
Center, 40 percent; and Right, 40 percent. If a loss remains, the
balance will be allocated: Left, 30 percent; Center, 50 percent;
and Right, 20 percent.
Determine the ending capital balance for each partner as of the end of
each of these three years.
LO 14-10 24. The E.N.D. partnership has the following capital balances as of the end
of the current year:
14-42
Education.
Answer each of the following independent questions:

a. Assume that the partners share profits and losses 3:3:2:2, respectively.
Fergie retires and is paid $190,000 based on the terms of the original
partnership agreement. If the goodwill method is used, what is the capital
balance of the remaining three partners?
b. Assume that the partners share profits and losses 4:3:2:1, respectively.
Pineda retires and is paid $280,000 based on the terms of the original
partnership agreement. If the bonus method is used, what is the capital
balance of the remaining three partners?
LO 14-10 25. The partnership of Matteson, Richton, and O'Toole has existed for a
number of years. At the present time the partners have the following
capital balances and profit and loss sharing percentages:
O'Toole elects to withdraw from the partnership, leaving Matteson and

Richton to operate the business. Following the original partnership
agreement, when a partner withdraws, the partnership and all of its
individual assets are to be reassessed to current fair values by an
independent appraiser. The withdrawing partner will receive cash or
other assets equal to that partner's current capital balance after
including an appropriate share of any adjustment indicated by the
appraisal. Gains and losses indicated by the appraisal are allocated
using the regular profit and loss percentages.
An independent appraiser is hired and estimates that the partnership
as a whole is worth $600,000. Regarding the individual assets, the
appraiser finds that a building with a book value of $180,000 has a fair
value of $220,000. The book values for all other identifiable assets and
liabilities are the same as their appraised fair values.
Page 662
Accordingly, the partnership agrees to pay O'Toole $120,000 upon
withdrawal. Matteson and Richton, however, do not wish to record any
goodwill in connection with the change in ownership.
Prepare the journal entry to record O'Toole's withdrawal from the
partnership.
LO 14-2, 14- 26. In the early part of 2015, the partners of Hugh, Jacobs, and Thomas
4, 14-6, 14-9 sought assistance from a local accountant. They had begun a new
business in 2014 but had never used an accountant's services.
Hugh and Jacobs began the partnership by contributing $150,000 and
$100,000 in cash, respectively. Hugh was to work occasionally at the
business, and Jacobs was to be employed full-time. They decided that
year-end profits and losses should be assigned as follows:
 Each partner was to be allocated 10 percent interest computed on
the beginning capital balances for the period.
 A compensation allowance of $5,000 was to go to Hugh with a
$25,000 amount assigned to Jacobs.

 Any remaining income would be split on a 4:6 basis to Hugh and
Jacobs, respectively.
In 2014, revenues totaled $175,000, and expenses were $146,000 (not
including the partners' compensation allowance). Hugh withdrew cash
of $9,000 during the year, and Jacobs took out $14,000. In addition,
the business paid $7,500 for repairs made to Hugh's home and
charged it to repair expense.
On January 1, 2015, the partnership sold a 15 percent interest to
Thomas for $64,000 cash. This money was contributed to the business
with the bonus method used for accounting purposes.
Answer the following questions:
a. Why was the original profit and loss allocation, as just outlined, designed
by the partners?
b. Why did the drawings for 2014 not agree with the compensation
allowances provided for in the partnership agreement?
c. What journal entries should the partnership have recorded on December
31, 2014?
d. What journal entry should the partnership have recorded on January 1,
2015?
LO 14-3, 14- 27. Following is the current balance sheet for a local partnership of
9, 14-10 doctors:
The following questions represent independent situations:

a. E is going to invest enough money in this partnership to receive a 25
percent interest. No goodwill or bonus is to be recorded. How much
should E invest?
b. E contributes $36,000 in cash to the business to receive a 10 percent
interest in the partnership. Goodwill is to be recorded. Profits and losses
have previously been split according to the following percentages: A, 30
percent; B, 10 percent; C, 40 percent; and D, 20 percent. After E makes
this investment, what are the individual capital balances?
c. E contributes $42,000 in cash to the business to receive a 20 percent
interest in the partnership. Goodwill is to be recorded. The four original
partners share all profits and losses equally. After E makes this
investment, what are the individual capital balances?
d. E contributes $55,000 in cash to the business to receive a 20 percent
interest in the partnership. No goodwill or other asset revaluation is to be
recorded. Profits and losses have previously been split according to the
following percentages: A, 10 percent; B, 30 percent; C, 20 percent; and
D, 40 percent. After E makes this investment, what are the individual
14-44
Education.
capital balances?
e. C retires from the partnership and, as per the original partnership
agreement, is to receive cash equal to 125 percent of her final capital
balance. No goodwill or other asset revaluation is to be recognized. All
partners share profits and losses equally. After the withdrawal, what are
the individual capital balances of the remaining partners?
Page 663
28. Boswell and Johnson form a partnership on May 1, 2013. Boswell
LO 14-5, 14- contributes cash of $50,000; Johnson conveys title to the following
6, 14-9 properties to the partnership:
The partners agree to start their partnership with equal capital

balances. No goodwill is to be recognized.
According to the articles of partnership written by the partners, profits
and losses are allocated based on the following formula:
 Boswell receives a compensation allowance of $1,000 per month.
 All remaining profits and losses are split 60:40 to Johnson and
Boswell, respectively.
 Each partner can make annual cash drawings of $5,000
beginning in 2014.
Net income of $11,000 is earned by the business during 2013.
Walpole is invited to join the partnership on January 1, 2014. Because
of her business reputation and financial expertise, she is given a 40
percent interest for $54,000 cash. The bonus approach is used to
record this investment, made directly to the business. The articles of
partnership are amended to give Walpole a $2,000 compensation
allowance per month and an annual cash drawing of $10,000.
Remaining profits are now allocated:
All drawings are taken by the partners during 2014. At year-end, the
partnership reports an earned net income of $28,000.
On January 1, 2015, Pope (previously a partnership employee) is
admitted into the partnership. Each partner transfers 10 percent to
Pope, who makes the following payments directly to the partners:
Once again, the articles of partnership must be amended to allow for

the entrance of the new partner. This change entitles Pope to a
compensation allowance of $800 per month and an annual drawing of
$4,000. Profits and losses are now assigned as follows:
For the year of 2015, the partnership earned a profit of $46,000, and
each partner withdrew the allowed amount of cash.

Determine the capital balances for the individual partners as of the end
of each year: 2013 through 2015.
LO 14-4, 14- 29. Gray, Stone, and Lawson open an accounting practice on January 1,
5, 14-6, 14-9 2013, in San Diego, California, to be operated as a partnership. Gray
and Stone will serve as the senior partners because of their years of
experience. To establish the business, Gray, Stone, and Lawson
contribute cash and other properties valued at $210,000, $180,000,
and $90,000, respectively. An articles of partnership agreement is
drawn up. It has the following stipulations:
 Personal drawings are allowed annually up to an amount equal to
10 percent of the beginning capital balance for the year.
 Profits and losses are allocated according to the following plan:
(1) A salary allowance is credited to each partner in an amount equal to
$8 per billable hour worked by that individual during the year.
(2) Interest is credited to the partners' capital accounts at the rate of 12
percent of the average monthly balance for the year (computed
without regard for current income or drawings).
(3) Page 664
An annual bonus is to be credited to Gray and Stone. Each bonus is to
be 10 percent of net income after subtracting the bonus, the salary
allowance, and the interest. Also included in the agreement is the
provision that the bonus cannot be a negative amount.
(4) Any remaining partnership profit or loss is to be divided evenly
among all partners.
Because of monetary problems encountered in getting the business
started, Gray invests an additional $9,100 on May 1, 2013. On January
1, 2014, the partners allow Monet to buy into the partnership. Monet
contributes cash directly to the business in an amount equal to a 25
percent interest in the book value of the partnership property
subsequent to this contribution. The partnership agreement as to
splitting profits and losses is not altered upon Monet's entrance into the
firm; the general provisions continue to be applicable.
The billable hours for the partners during the first three years of
operation follow:
The partnership reports net income for 2013 through 2015 as follows:
Each partner withdraws the maximum allowable amount each year.

a. Determine the allocation of income for each of these three years (to the
nearest dollar).
14-46
Education.
b. Prepare in appropriate form a statement of partners' capital for the year

ending December 31, 2015.
LO 14-8, 14- 30. A partnership of attorneys in the St. Louis, Missouri, area has the
9, 14-10 following balance sheet accounts as of January 1, 2015:
According to the articles of partnership, Athos is to receive an

allocation of 50 percent of all partnership profits and losses while
Porthos receives 30 percent and Aramis, 20 percent. The book value
of each asset and liability should be considered an accurate
representation of fair value.
For each of the following independent situations, prepare the journal
entry or entries to be recorded by the partnership. (Round to nearest
dollar.)
a. Porthos, with permission of the other partners, decides to sell half of his
partnership interest to D'Artagnan for $50,000 in cash. No asset
revaluation or goodwill is to be recorded by the partnership.
b. All three of the present partners agree to sell 10 percent of each
partnership interest to D'Artagnan for a total cash payment of $25,000.
Each partner receives a negotiated portion of this amount. Goodwill is
recorded as a result of the transaction.
c. D'Artagnan is allowed to become a partner with a 10 percent ownership
interest by contributing $30,000 in cash directly into the business. The
bonus method is used to record this admission.
d. Use the same facts as in requirement (c) except that the entrance into the
partnership is recorded by the goodwill method.
e. D'Artagnan is allowed to become a partner with a 10 percent ownership
interest by contributing $12,222 in cash directly to the business. The
goodwill method is used to record this transaction.
f. Aramis decides to retire and leave the partnership. An independent
appraisal of the business and its assets indicates a current fair value of
$280,000. Goodwill is to be recorded. Aramis will then be given the
exact amount of cash that will close out his capital account.
Page 665
31. Steve Reese is a well-known interior designer in Fort Worth, Texas. He
LO 14-2, 14- wants to start his own business and convinces Rob O'Donnell, a local
3, 14-5, 14-6, 14- merchant, to contribute the capital to form a partnership. On January 1,
8, 14-10 2013, O'Donnell invests a building worth $52,000 and equipment
valued at $16,000 as well as $12,000 in cash. Although Reese makes
no tangible contribution to the partnership, he will operate the business
and be an equal partner in the beginning capital balances.
To entice O'Donnell to join this partnership, Reese draws up the
following profit and loss agreement:
 O'Donnell will be credited annually with interest equal to 20
percent of the beginning capital balance for the year.
 O'Donnell will also have added to his capital account 15 percent
of partnership income each year (without regard for the preceding

interest figure) or $4,000, whichever is larger. All remaining
income is credited to Reese.
 Neither partner is allowed to withdraw funds from the partnership
during 2013. Thereafter, each can draw $5,000 annually or 20
percent of the beginning capital balance for the year, whichever is
larger.
The partnership reported a net loss of $10,000 during the first year of
its operation. On January 1, 2014, Terri Dunn becomes a third partner
in this business by contributing $15,000 cash to the partnership. Dunn
receives a 20 percent share of the business's capital. The profit and
loss agreement is altered as follows:
 O'Donnell is still entitled to (1) interest on his beginning capital
balance as well as (2) the share of partnership income just
specified.
 Any remaining profit or loss will be split on a 6:4 basis between
Reese and Dunn, respectively.
Partnership income for 2014 is reported as $44,000. Each partner
withdraws the full amount that is allowed.
On January 1, 2015, Dunn becomes ill and sells her interest in the
partnership (with the consent of the other two partners) to Judy
Postner. Postner pays $46,000 directly to Dunn. Net income for 2015
is $61,000 with the partners again taking their full drawing allowance.
On January 1, 2016, Postner withdraws from the business for personal
reasons. The articles of partnership state that any partner may leave
the partnership at any time and is entitled to receive cash in an amount
equal to the recorded capital balance at that time plus 10 percent.
a. Prepare journal entries to record the preceding transactions on the
assumption that the bonus (or no revaluation) method is used. Drawings
need not be recorded, although the balances should be included in the
closing entries.
b. Prepare journal entries to record the previous transactions on the
assumption that the goodwill (or revaluation) method is used. Drawings
need not be recorded, although the balances should be included in the
closing entries.
(Round all amounts to the nearest dollar.)
Problems
LO 14-1 1. Which of the following is not a reason for the
popularity of partnerships as a legal form
for businesses?
a. Partnerships may be formed merely by an oral
agreement.
b. Partnerships can more easily generate significant
amounts of capital.
14-48
Education.
c. Partnerships avoid the double taxation of income

that is found in corporations.
d. In some cases, losses may be used to offset gains
for tax purposes.
LO 14-1 2. How does partnership accounting differ from
corporate accounting?
a. The matching principle is not considered
appropriate for partnership
accounting.
b. Revenues are recognized at a different time by a
partnership than is appropriate for a
corporation.
c. Individual capital accounts replace the
contributed capital and retained
earnings balances found in corporate
accounting.
d. Partnerships report all assets at fair value as of
the latest balance sheet date.
LO 14-2 3. Which of the following best describes the articles of
partnership agreement?
a. The purpose of the partnership and partners'
rights and responsibilities are
required elements of the articles of
partnership.
b. The articles of partnership are a legal covenant
and must be expressed in writing to
be valid.
c. The articles of partnership are an agreement that
limits partners' liability to partnership
assets.
d. The articles of partnership are a legal covenant
that may be expressed orally or in
writing, and forms the central
governance for a partnership's
operations.
LO 14-9 4. Pat, Jean Lou, and Diane are partners with capital
balances of $50,000, $30,000, and $20,000,
respectively. These three partners share
profits and losses equally. For an
investment of $50,000 cash (paid to the
business), MaryAnn will be admitted as a
partner with a one-fourth interest in capital
and profits. Based on this information,
which of the following best justifies the

amount of MaryAnn's investment?
a. MaryAnn will receive a bonus from the other
partners upon her admission to the
partnership.
b. Assets of the partnership were overvalued
immediately prior to MaryAnn's
investment.
c. Page 657
The book value of the partnership's net assets
was less than the fair value
immediately prior to MaryAnn's
investment.
d. MaryAnn is apparently bringing goodwill into the
partnership, and her capital account
will be credited for the appropriate
amount.
David is going to invest $105,000 into the business to

acquire a 30 percent ownership interest.
Goodwill is to be recorded. What will be
David's beginning capital balance?
a. $94,500.
b. $105,000.
c. $126,000.
d. $135,000.
Krystal is going to pay a total of $240,000 directly to

these three partners to acquire a 25
percent ownership interest from each.
Goodwill is to be recorded. What is Dane's
capital balance after the transaction?
a. $210,000.
b. $255,000.
c. $340,000.
d. $352,000.
LO 14-9 7. The capital balance for Bolcar is $110,000 and for
Neary is $40,000. These two partners share
14-50
Education.
profits and losses 70 percent (Bolcar) and

30 percent (Neary). Kansas invests $50,000
in cash into the partnership for a 30
percent ownership. The bonus method will
be used. What is Neary's capital balance
after Kansas's investment?
a. $35,000.
b. $37,000.
c. $40,000.
d. $43,000.
LO 14-9 8. Bishop has a capital balance of $120,000 in a local
partnership, and Cotton has a $90,000
balance. These two partners share profits
and losses by a ratio of 60 percent to
Bishop and 40 percent to Cotton. Lovett
invests $60,000 in cash in the partnership
for a 20 percent ownership. The goodwill
method will be used. What is Cotton's
capital balance after this new investment?
a. $99,600.
b. $102,000.
c. $112,000.
d. $126,000.
LO 14-9 9. The capital balance for Messalina is $210,000 and for
Romulus is $140,000. These two partners
share profits and losses 60 percent
(Messalina) and 40 percent (Romulus).
Claudius invests $100,000 in cash in the
partnership for a 20 percent ownership.
The bonus method will be used. What are
the capital balances for Messalina,
Romulus, and Claudius after this
investment is recorded?
a. $216,000, $144,000, $90,000.
b. $218,000, $142,000, $88,000.
c. $222,000, $148,000, $80,000.
d. $240,000, $160,000, $100,000.
Page 658 10. A partnership begins its first year with the following
LO 14-6 capital balances:
The articles of partnership stipulate that profits and

losses be assigned in the following
manner:

Each partner is allocated interest equal to 5
percent of the beginning capital balance.
 Bernard is allocated compensation of $18,000
per year.
 Any remaining profits and losses are allocated
on a 3:3:4 basis, respectively.
 Each partner is allowed to withdraw up to $5,000
cash per year.
Assuming that the net income is $60,000 and that each
partner withdraws the maximum amount
allowed, what is the balance in Collins
capital account at the end of that year?
a. $70,800.
b. $86,700.
c. $73,500.
d. $81,700.
LO 14-4, 14- 11. A partnership begins its first year of operations with
5 the following capital balances:
,
1 According to the articles of partnership, all profits will

4 be assigned as follows:
-  Winston will be awarded an annual salary of
6 $20,000 with $10,000 assigned to Salem.
 The partners will be attributed interest equal to
10 percent of the capital balance as of the first
day of the year.
 The remainder will be assigned on a 5:2:3 basis,
respectively.
 Each partner is allowed to withdraw up to
$10,000 per year.
The net loss for the first year of operations is $20,000
and net income for the subsequent year is
$40,000. Each partner withdraws the
maximum amount from the business each
period. What is the balance in Winston's
capital account at the end of the second
year?
a. $102,600.
b. $104,400.
c. $108,600.
d. $109,200.
14-52
Education.
Profits and losses are split as follows: Allen (20

percent), Burns (30 percent), and Costello
(50 percent). Costello wants to leave the
partnership and is paid $100,000 from the
business based on provisions in the
articles of partnership. If the partnership
uses the bonus method, what is the
balance of Burns's capital account after
Costello withdraws?
a. $24,000.
b. $27,000.
c. $33,000.
d. $36,000.
Page 659
Problems 13 and 14 are independent problems based
on the following scenario:
At year-end, the Circle City partnership has the
following capital balances:
Profits and losses are split on a 3:3:2:2 basis,

respectively. Clark decides to leave the
partnership and is paid $90,000 from the
business based on the original contractual
agreement.
LO 14-10 13. Using the goodwill method, what is Manning's capital
balance after Clark withdraws?
a. $133,000.
b. $137,500.
c. $140,000.
d. $145,000.
LO 14-10 14. If instead the partnership uses the bonus method,
what is the balance of Manning's capital
account after Clark withdraws?
a. $100,000.
b. $126,250.
c. $130,000.
d. $133,750.
Problems 15 and 16 are independent problems based
on the following capital account balances:
LO 14-8 15. Darrow invests $270,000 in cash for a 30 percent

ownership interest. The money goes to the
original partners. Goodwill is to be
recorded. How much goodwill should be
recognized, and what is Darrow's
beginning capital balance?
a. $410,000 and $270,000.
b. $140,000 and $270,000.
c. $140,000 and $189,000.
d. $410,000 and $189,000.
LO 14-9 16. Darrow invests $250,000 in cash for a 30 percent
ownership interest. The money goes to the
business. No goodwill or other revaluation
is to be recorded. After the transaction,
what is Jennings's capital balance?
a. $160,000.
b. $168,000.
c. $170,200.
d. $171,200.
LO 14-9 17. Lear is to become a partner in the WS partnership by
paying $80,000 in cash to the business. At
present, the capital balance for Hamlet is
$70,000 and for MacBeth is $40,000.
Hamlet and MacBeth share profits on a 7:3
basis. Lear is acquiring 40 percent of the
new partnership.
a. If the goodwill method is applied, what will the
three capital balances be following
the payment by Lear?
b. If the bonus method is applied, what will the three
capital balances be following the
payment by Lear?
LO 14-9 18. The Distance Plus partnership has the following
capital balances at the beginning of the
current year:
Each of the following questions should be viewed

independently.
14-54
Education.
a. Page 660
If Sergio invests $100,000 in cash in the business
for a 25 percent interest, what journal
entry is recorded? Assume that the
bonus method is used.
b. If Sergio invests $60,000 in cash in the business
bonus method is used.
c. If Sergio invests $72,000 in cash in the business
goodwill method is used.
LO 14-9 19. A partnership has the following account balances:
Cash $50,000; Other Assets $600,000;
Liabilities $240,000; Nixon, Capital (50
percent of profits and losses) $200,000;
Hoover, Capital (20 percent) $120,000; and
Polk, Capital (30 percent) $90,000. Each of
the following questions should be viewed
as an independent situation:
a. Grant invests $80,000 in the partnership for an 18
percent capital interest. Goodwill is to
be recognized. What are the capital
accounts thereafter?
b. Grant invests $100,000 in the partnership to get a
20 percent capital balance. Goodwill
is not to be recorded. What are the
capital accounts thereafter?
LO 14-9 20. The Prince-Robbins partnership has the following
capital account balances on January 1,
2015:
Prince is allocated 80 percent of all profits and losses

with the remaining 20 percent assigned to
Robbins after interest of 10 percent is
given to each partner based on beginning
capital balances.
On January 2, 2015, Jeffrey invests $37,000 cash for a
20 percent interest in the partnership. This
transaction is recorded by the goodwill
method. After this transaction, 10 percent
interest is still to go to each partner.
Profits and losses will then be split as
follows: Prince (50 percent), Robbins (30

percent), and Jeffrey (20 percent). In 2015,
the partnership reports a net income of
$15,000.
a. Prepare the journal entry to record Jeffrey's
entrance into the partnership on
January 2, 2015.
b. Determine the allocation of income at the end of
2015.
LO 14-6 21. The partnership agreement of Jones, King, and Lane
provides for the annual allocation of the
business's profit or loss in the following
sequence:
 Jones, the managing partner, receives a bonus
equal to 20 percent of the business's profit.
 Each partner receives 15 percent interest on
average capital investment.
 Any residual profit or loss is divided equally.
The average capital investments for 2015 were as
follows:
How much of the $90,000 partnership profit for 2015

should be assigned to each partner?
LO 14-4, 14- 22. Purkerson, Smith, and Traynor have operated a
5 bookstore for a number of years as a
, partnership. At the beginning of 2015,
capital balances were as follows:
1
4
- Due to a cash shortage, Purkerson invests an
6 additional $8,000 in the business on April
1, 2015.
Each partner is allowed to withdraw $1,000 cash each
month.
The partners have used the same method of allocating
profits and losses since the business's
inception:
 Each partner is given the following
compensation allowance for work done in the
business: Purkerson, $18,000; Smith, $25,000;
and Traynor, $8,000.
 Each partner is credited with interest equal to 10
percent of the average monthly capital balance
for the year without regard for normal drawings.
14-56
Education.

Any remaining profit or loss is allocated 4:2:4 to
Purkerson, Smith, and Traynor, respectively.
The net income for 2015 is $23,600. Each partner
withdraws the allotted amount each month.
What are the ending capital balances for 2015?
Page 661 23. On January 1, 2014, the dental partnership of Left,
LO 14-4, 14- Center, and Right was formed when the
5 partners contributed $20,000, $60,000, and
, $50,000, respectively. Over the next three
years, the business reported net income
1 and (loss) as follows:
4
-
6 During this period, each partner withdrew cash of
$10,000 per year. Right invested an
additional $12,000 in cash on February 9,
2015.
At the time that the partnership was created, the three
partners agreed to allocate all profits and
losses according to a specified plan
written as follows:
 Each partner is entitled to interest computed at
the rate of 12 percent per year based on the
individual capital balances at the beginning of
that year.
 Because of prior work experience, Left is
entitled to an annual salary allowance of
$12,000, and Center is credited with $8,000 per
year.
 Any remaining profit will be split as follows:
Left, 20 percent; Center, 40 percent; and Right,
40 percent. If a loss remains, the balance will be
allocated: Left, 30 percent; Center, 50 percent;
and Right, 20 percent.
Determine the ending capital balance for each partner
as of the end of each of these three years.
LO 14-10 24. The E.N.D. partnership has the following capital
balances as of the end of the current year:
Answer each of the following independent questions:

a. Assume that the partners share profits and losses
3:3:2:2, respectively. Fergie retires
and is paid $190,000 based on the
terms of the original partnership

agreement. If the goodwill method is
used, what is the capital balance of
the remaining three partners?
b. Assume that the partners share profits and losses
4:3:2:1, respectively. Pineda retires
and is paid $280,000 based on the
terms of the original partnership
agreement. If the bonus method is
used, what is the capital balance of
the remaining three partners?
LO 14-10 25. The partnership of Matteson, Richton, and O'Toole has
existed for a number of years. At the
present time the partners have the
following capital balances and profit and
loss sharing percentages:
O'Toole elects to withdraw from the partnership,

leaving Matteson and Richton to operate
the business. Following the original
partnership agreement, when a partner
withdraws, the partnership and all of its
individual assets are to be reassessed to
current fair values by an independent
appraiser. The withdrawing partner will
receive cash or other assets equal to that
partner's current capital balance after
including an appropriate share of any
adjustment indicated by the appraisal.
Gains and losses indicated by the
appraisal are allocated using the regular
profit and loss percentages.
An independent appraiser is hired and estimates that
the partnership as a whole is worth
$600,000. Regarding the individual assets,
the appraiser finds that a building with a
book value of $180,000 has a fair value of
$220,000. The book values for all other
identifiable assets and liabilities are the
same as their appraised fair values.
Page 662
Accordingly, the partnership agrees to pay O'Toole
14-58
Education.
$120,000 upon withdrawal. Matteson and

Richton, however, do not wish to record
any goodwill in connection with the
change in ownership.
Prepare the journal entry to record O'Toole's
withdrawal from the partnership.
LO 14-2, 14- 26. In the early part of 2015, the partners of Hugh, Jacobs,
4 and Thomas sought assistance from a
, local accountant. They had begun a new
business in 2014 but had never used an
1 accountant's services.
4 Hugh and Jacobs began the partnership by
- contributing $150,000 and $100,000 in
6 cash, respectively. Hugh was to work
, occasionally at the business, and Jacobs
was to be employed full-time. They
1 decided that year-end profits and losses
4 should be assigned as follows:
-  Each partner was to be allocated 10 percent
9 interest computed on the beginning capital
balances for the period.
 A compensation allowance of $5,000 was to go
to Hugh with a $25,000 amount assigned to
Jacobs.
 Any remaining income would be split on a 4:6
basis to Hugh and Jacobs, respectively.
In 2014, revenues totaled $175,000, and expenses were
$146,000 (not including the partners'
compensation allowance). Hugh withdrew
cash of $9,000 during the year, and Jacobs
took out $14,000. In addition, the business
paid $7,500 for repairs made to Hugh's
home and charged it to repair expense.
On January 1, 2015, the partnership sold a 15 percent
interest to Thomas for $64,000 cash. This
money was contributed to the business
with the bonus method used for
accounting purposes.
Answer the following questions:
a. Why was the original profit and loss allocation, as
just outlined, designed by the
partners?
b. Why did the drawings for 2014 not agree with the
compensation allowances provided
for in the partnership agreement?
c. What journal entries should the partnership have

recorded on December 31, 2014?
d. What journal entry should the partnership have
recorded on January 1, 2015?
LO 14-3, 14- 27. Following is the current balance sheet for a local
9 partnership of doctors:
,
1
4
-
The following questions
1
represent independent situations:
0
a. E is going to invest enough money in this
partnership to receive a 25 percent
interest. No goodwill or bonus is to be
recorded. How much should E invest?
b. E contributes $36,000 in cash to the business to
receive a 10 percent interest in the
partnership. Goodwill is to be
recorded. Profits and losses have
previously been split according to the
following percentages: A, 30 percent;
B, 10 percent; C, 40 percent; and D,
20 percent. After E makes this
investment, what are the individual
capital balances?
c. E contributes $42,000 in cash to the business to
partnership. Goodwill is to be
recorded. The four original partners
share all profits and losses equally.
After E makes this investment, what
are the individual capital balances?
d. E contributes $55,000 in cash to the business to
partnership. No goodwill or other
asset revaluation is to be recorded.
Profits and losses have previously
been split according to the following
percentages: A, 10 percent; B, 30
percent; C, 20 percent; and D, 40
percent. After E makes this
investment, what are the individual
capital balances?
14-60
Education.
e. C retires from the partnership and, as per the

original partnership agreement, is to
receive cash equal to 125 percent of
her final capital balance. No goodwill
or other asset revaluation is to be
recognized. All partners share profits
and losses equally. After the
withdrawal, what are the individual
capital balances of the remaining
partners?
Page 663 28. Boswell and Johnson form a partnership on May 1,
LO 14-5, 14- 2013. Boswell contributes cash of $50,000;
6 Johnson conveys title to the following
, properties to the partnership:
1
4
- The partners agree to start their partnership with equal
9 capital balances. No goodwill is to be
recognized.
According to the articles of partnership written by the
partners, profits and losses are allocated
based on the following formula:
 Boswell receives a compensation allowance of
$1,000 per month.
 All remaining profits and losses are split 60:40
to Johnson and Boswell, respectively.
 Each partner can make annual cash drawings of
$5,000 beginning in 2014.
Net income of $11,000 is earned by the business
during 2013.
Walpole is invited to join the partnership on January 1,
2014. Because of her business reputation
and financial expertise, she is given a 40
percent interest for $54,000 cash. The
bonus approach is used to record this
investment, made directly to the business.
The articles of partnership are amended to
give Walpole a $2,000 compensation
allowance per month and an annual cash
drawing of $10,000. Remaining profits are
now allocated:
All drawings are taken by the partners during 2014. At

year-end, the partnership reports an
earned net income of $28,000.

On January 1, 2015, Pope (previously a partnership
employee) is admitted into the partnership.
Each partner transfers 10 percent to Pope,
who makes the following payments
directly to the partners:
Once again, the articles of partnership must be

amended to allow for the entrance of the
new partner. This change entitles Pope to
a compensation allowance of $800 per
month and an annual drawing of $4,000.
Profits and losses are now assigned as
follows:
For the year of 2015, the partnership earned a profit of

$46,000, and each partner withdrew the
allowed amount of cash.
Determine the capital balances for the individual
partners as of the end of each year: 2013
through 2015.
LO 14-4, 14- 29. Gray, Stone, and Lawson open an accounting practice
5 on January 1, 2013, in San Diego,
, California, to be operated as a partnership.
Gray and Stone will serve as the senior
1 partners because of their years of
4 experience. To establish the business,
- Gray, Stone, and Lawson contribute cash
6 and other properties valued at $210,000,
, $180,000, and $90,000, respectively. An
articles of partnership agreement is drawn
1 up. It has the following stipulations:
4  Personal drawings are allowed annually up to an
- amount equal to 10 percent of the beginning
9 capital balance for the year.
 Profits and losses are allocated according to the
following plan:
(1) A salary allowance is credited to each partner in
an amount equal to $8 per billable
hour worked by that individual
during the year.
(2) Interest is credited to the partners' capital
14-62
Education.
accounts at the rate of 12 percent of

the average monthly balance for the
year (computed without regard for
current income or drawings).
(3) Page 664
An annual bonus is to be credited to Gray and
Stone. Each bonus is to be 10
percent of net income after
subtracting the bonus, the salary
allowance, and the interest. Also
included in the agreement is the
provision that the bonus cannot be
a negative amount.
(4) Any remaining partnership profit or loss is to be
divided evenly among all partners.
Because of monetary problems encountered in getting
the business started, Gray invests an
additional $9,100 on May 1, 2013. On
January 1, 2014, the partners allow Monet
to buy into the partnership. Monet
contributes cash directly to the business
in an amount equal to a 25 percent interest
in the book value of the partnership
property subsequent to this contribution.
The partnership agreement as to splitting
profits and losses is not altered upon
Monet's entrance into the firm; the general
provisions continue to be applicable.
The billable hours for the partners during the first
three years of operation follow:
The partnership reports net income for 2013 through

2015 as follows:
Each partner withdraws the maximum allowable

amount each year.
a. Determine the allocation of income for each of
these three years (to the nearest
dollar).
b. Prepare in appropriate form a statement of
partners' capital for the year ending

December 31, 2015.
LO 14-8, 14- 30. A partnership of attorneys in the St. Louis, Missouri,
9 area has the following balance sheet
, accounts as of January 1, 2015:
1
4
- According to the articles of partnership, Athos is to
1 receive an allocation of 50 percent of all
0 partnership profits and losses while
Porthos receives 30 percent and Aramis,
20 percent. The book value of each asset
and liability should be considered an
accurate representation of fair value.
For each of the following independent situations,
prepare the journal entry or entries to be
recorded by the partnership. (Round to
nearest dollar.)
a. Porthos, with permission of the other partners,
decides to sell half of his partnership
interest to D'Artagnan for $50,000 in
cash. No asset revaluation or
goodwill is to be recorded by the
partnership.
b. All three of the present partners agree to sell 10
percent of each partnership interest
to D'Artagnan for a total cash
payment of $25,000. Each partner
receives a negotiated portion of this
amount. Goodwill is recorded as a
result of the transaction.
c. D'Artagnan is allowed to become a partner with a
10 percent ownership interest by
contributing $30,000 in cash directly
into the business. The bonus method
is used to record this admission.
d. Use the same facts as in requirement (c) except
that the entrance into the partnership
is recorded by the goodwill method.
e. D'Artagnan is allowed to become a partner with a
10 percent ownership interest by
contributing $12,222 in cash directly
to the business. The goodwill method
is used to record this transaction.
14-64
Education.
f. Aramis decides to retire and leave the

partnership. An independent
appraisal of the business and its
assets indicates a current fair value of
$280,000. Goodwill is to be recorded.
Aramis will then be given the exact
amount of cash that will close out his
capital account.
Page 665 31. Steve Reese is a well-known interior designer in Fort
LO 14-2, 14- Worth, Texas. He wants to start his own
3 business and convinces Rob O'Donnell, a
, local merchant, to contribute the capital to
form a partnership. On January 1, 2013,
1 O'Donnell invests a building worth $52,000
4 and equipment valued at $16,000 as well
- as $12,000 in cash. Although Reese makes
5 no tangible contribution to the
, partnership, he will operate the business
and be an equal partner in the beginning
1 capital balances.
4 To entice O'Donnell to join this partnership, Reese
- draws up the following profit and loss
6 agreement:
,  O'Donnell will be credited annually with interest
equal to 20 percent of the beginning capital
1 balance for the year.
4  O'Donnell will also have added to his capital
- account 15 percent of partnership income each
8 year (without regard for the preceding interest
, figure) or $4,000, whichever is larger. All
remaining income is credited to Reese.
1  Neither partner is allowed to withdraw funds
4 from the partnership during 2013. Thereafter,
- each can draw $5,000 annually or 20 percent of
1 the beginning capital balance for the year,
0 whichever is larger.
The partnership reported a net loss of $10,000 during
the first year of its operation. On January
1, 2014, Terri Dunn becomes a third
partner in this business by contributing
$15,000 cash to the partnership. Dunn
receives a 20 percent share of the
business's capital. The profit and loss
agreement is altered as follows:
 O'Donnell is still entitled to (1) interest on his
beginning capital balance as well as (2) the
share of partnership income just specified.

Any remaining profit or loss will be split on a 6:4
basis between Reese and Dunn, respectively.
Partnership income for 2014 is reported as $44,000.
Each partner withdraws the full amount
that is allowed.
On January 1, 2015, Dunn becomes ill and sells her
interest in the partnership (with the
consent of the other two partners) to Judy
Postner. Postner pays $46,000 directly to
Dunn. Net income for 2015 is $61,000 with
the partners again taking their full drawing
allowance.
On January 1, 2016, Postner withdraws from the
business for personal reasons. The
articles of partnership state that any
partner may leave the partnership at any
time and is entitled to receive cash in an
amount equal to the recorded capital
balance at that time plus 10 percent.
a. Prepare journal entries to record the preceding
transactions on the assumption that
the bonus (or no revaluation) method
is used. Drawings need not be
recorded, although the balances
should be included in the closing
entries.
b. Prepare journal entries to record the previous
transactions on the assumption that
the goodwill (or revaluation) method
is used. Drawings need not be
recorded, although the balances
should be included in the closing
entries.
(Round all amounts to the nearest dollar.)
14-66
Education.

Chapter 14 Partnerships

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Chapter 14 Partnerships

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Chapter 14 - Partnerships: Formation and Operation

4. A Subchapter S corporation is formed legally as a corporation so that its owners enjoy

Use of this designation is quite restricted. To qualify as a Subchapter S Corporation, a

a. Name and address of each partner

a. The right of co-ownership of the business property;

4. C Mary Ann's investment equals 1/3 of total capital ($50,000 ÷ $150,000).

5. D Based on the new contribution, the company’s implied value is $350,000

David's investment = 30% (Original capital plus David's investment)

6. B The implied value of the company is $960,000 ($240,000 ÷ 25%). Because

7. B Total capital is $200,000 ($110,000 + $40,000 + $50,000) after the new

8. B Total capital is $270,000 ($120,000 + $90,000 + $60,000) after the new

9. A Total capital is $450,000 ($210,000 + $140,000 + $100,000) after the new

10. D ASSIGNMENT OF INCOME

11. A ASSIGNMENT OF INCOME—YEAR ONE

STATEMENT OF CAPITAL—YEAR ONE

ASSIGNMENT OF INCOME—YEAR TWO

STATEMENT OF CAPITAL—YEAR TWO

13. D Clark receives an additional $10,000. Because Clark receives 20 percent of

The above entry raises Manning’s capital from $130,000 to $145,000.

Manning, capital 3,750

Cash .......................................................................... 100,000

Cash .......................................................................... 60,000

Goodwill ................................................................... 16,000

G's Investment = .18 ($200,000 + $120,000 + $90,000 + G's Investment)

The above goodwill balance indicates that Grant's total investment is

Total capital is $167,000 ($70,000 + $60,000 + $37,000) after the new

Goodwill ................................................................ 18,000

21. (5 Minutes) (Allocation of income to partners)

Jones King Lane Total

22. (15 Minutes) (Allocate income and determine capital balances)

Totals $ 8,600 $21,000 $(6,000) $23,600

CALCULATION OF PURKERSON'S INTEREST ALLOCATION

Balance, January 1—April 1 ($60,000 × 3) $180,000

STATEMENT OF PARTNERS' CAPITAL

Left Center Right Total

STATEMENT OF PARTNERS' CAPITAL—DECEMBER 31, 2014

Left Center Right Total

STATEMENT OF PARTNERS' CAPITAL—DECEMBER 31, 2015

Left Center Right Total

STATEMENT OF PARTNERS' CAPITAL—DECEMBER 31, 2016

20% of Goodwill = $30,000

CAPITAL BALANCES AFTER WITHDRAWAL

25. (10 minutes) (Hybrid method for recording a partner withdrawal)

O’Toole, capital 108,000

26. (45 Minutes) (P&L allocations and admission of a new partner)

b. The drawings show the assets removed by a partner during a period of

c. Hugh, drawings ......................................................... 7,500

Income summary ...................................................... 36,500

Allocation of Income Hugh Jacobs

d. Total capital (original balances of $250,000 plus 2014

Bonus to Hugh (40%) ............................................... $6,400

Bonus to Jacobs (60%) ............................................ $9,600

Cash .......................................................................... 64,000

27. (40 Minutes) (Reporting a change in the composition of a partnership)

a. Exact amount of investment can only be computed algebraically:

E Investment = 25% (Original Capital + E Investment)

b. Implied value of partnership ($36,000 ÷ 10%) ......... $360,000

E Investment = 20% (Original Capital + E Investment)

d. Total capital after investment ($270,000 + $55,000) $325,000

e. C's capital balance $ 90,000

STATEMENT OF PARTNERS' CAPITAL—DECEMBER 31, 2013

WALPOLE INVESTMENT JANUARY 1, 2014

Boswell Johnson Walpole Total

STATEMENT OF PARTNERS' CAPITAL—DECEMBER 31, 2014