Advanced Financial Accounting 10th Edition Christensen Cottrell Baker Solutions Chapter 15
Advanced Financial Accounting 10th Edition Christensen Cottrell Baker Solutions Chapter 15
Advanced Financial Accounting 10th Edition Christensen Cottrell Baker Solutions Chapter 15
CHAPTER 15
ANSWERS TO QUESTIONS
Q15-1 Partnerships are a popular form of business because they are easy to form
(informal methods of organization), and because they allow several individuals to
combine their talents and skills in a particular business venture. In addition, partnerships
provide a means of obtaining more equity capital than a single individual can invest and
allow the sharing of risks for rapidly growing businesses. Partnerships are also allowed
to exercise greater freedom in their choice of accounting methods.
Q15-2 The major provisions of the Uniform Partnership Act (UPA) of 1997 have been
enacted by most states to regulate partnerships operating in those states. The UPA
1997 describes many of the rights of each partner and of creditors during creation,
operation, or liquidation of the partnership.
Q15-3 The types of items that are typically included in the partnership agreement
include:
Q15-4 (a) Separate business entity means that the partnership is a legal entity
separate and distinct from its partners. The partnership can own property in its own
name, can sue, be sued, and can continue as an entity even though the membership of
the partners changes with new admissions or with partner dissociations
(b) Creditors view each partner as an agent of the partnership capable of transacting in
the ordinary course of the partnership business. Creditors may use this reliance unless
the creditors receive a notification that the partner lacks authority for engaging in a
specific type of transaction that would be used between the creditor and that partner.
The partnership should file a Statement of Partnership Authority to specifically state any
limitations of authority of specific partners. This voluntary statement is filed with the
Secretary of State and the clerk of the county in which the partnership operates. The
Statement of Partnership Authority is sufficient notice to state a partner’s authority for
real estate transactions.
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(c) In the event the partnership fails and its assets are not sufficient to pay its liabilities,
each partner has joint and several personal liability for the partnership obligations. Each
partner with a capital account that has a debit balance must make a contribution to the
partnership to reduce the debit balance to zero. These contributions are then used to
settle the remaining amounts of the partnership liabilities. If a partner fails to make the
required contribution, then all other partners must make additional contributions, in
proportion to the ratio used to allocate partnership losses, until the partnership
obligations are settled. Thus, a partner can be held legally responsible to make
additional contributions to a partnership in dissolution if one or more other partners fail to
make a contribution to remedy their capital deficits.
Q15-5 A deficiency in a partner's capital account would exist when the partner's share
of losses and withdrawals exceeds the capital contribution and share of profits. A
deficiency is usually eliminated by additional capital contributions.
Q15-6 The percentage of profits each partner will receive, along with the allocation of
$60,000 profit, is calculated as follows:
Percentage Profit to be
of Profits Allocated Allocation
Q15-7 The choices of capital balances available to the partners include beginning
capital balances, ending capital balances, or an average (usually weighted-average)
capital balance for the period. The preferred capital balance is the weighted-average
capital balance because this method explicitly recognizes the time span each capital
level was maintained during the period.
Q15-8 Salaries to partners are generally not an expense of the partnership because
salaries, like interest on capital balances, are widely interpreted to be a result of the
respective investments and are used not in the determination of income, but rather in the
determination of the proportion of income to be credited to each partner's capital
account. This treatment is based on the proprietary concept of owners’ equity that
interprets salaries to partners as equivalent to a withdrawal in anticipation of profits.
Salaries are sometimes specified in the partnership agreement; however, in larger
partnerships, salaries are typically determined by a partners’ compensation committee.
And also, under the old partnership law, a partnership was not an independent legal
entity, but rather an aggregation of some of the rights of the individual partners. With the
advent of the UPA 1997 which defines a partnership as a separate legal entity, a
theoretical argument could be made that salaries and capital interest paid to partners
does cross the entity border and could be accounted for as a business expense. Few
partnerships need audited financial statements prepared in accordance with GAAP so
the financial statement treatment of partners’ salaries has not been a major issue
because the financial reporting for partnerships is more focused on meeting the
information needs of the partners.
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Q15-9 In most cases a partner’s dissociation does not result in the dissolution and
winding up of the partnership. The UPA 1997 provides for a process whereby the
dissociating partner’s interest in the partnership can be purchased by the partnership.
The buyout price of a dissociated partner’s partnership interest is computed as the
estimated amount that would have been distributable to the dissociating partner if the
assets of the partnership were sold at the greater of the liquidation value or the value
based on the sale of the entire business and the partnership was wound up, including
payment of all partnership liabilities. There are some specific events that cause
dissolution and winding up of the partnership business. These events are covered in
Section 801 of the UPA 1997 and will be discussed at length in chapter 16. Students
wishing to expand their understanding of dissolution are encouraged to examine Section
801 of the Act.
Q15-10 The book value of a partnership is the total value of the capital, which is also
the difference between total assets and total liabilities. The book value may or may not
represent the market value of the partnership.
Q15-11 The arguments for the bonus method include preservation of the historical cost
principle and the accounting principles stated in FASB 142 (ASC 350). The arguments
against the bonus method include a necessity for a fair valuation of the partnership
assets and the new partner may dislike having a capital balance less than his or her
investment in the partnership.
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Q15-12 The new partner's capital credit is equal to the investment made when (1) the
investment equals the proportionate present book value, (2) the assets of the
partnership are revalued prior to admission of the new partner, or (3) goodwill is
recognized for the present partners. The new partner's capital credit is not equal to the
tangible investment made when bonus is recognized or when goodwill is recognized for
the new partner.
Q15-14 The implied fair value of the ABC partnership is $36,000 ($12,000 / 0.33333…).
The entry the ABC partnership would make upon the admission of Caine follows.
Cash 12,000
Goodwill [$36,000 - ($12,000 + $21,000)] 3,000
Other Partners' Capitals 3,000
Caine, Capital 12,000
Q15-15A The basis of Horton's contribution for tax purposes is $3,500 and is calculated
as follows:
$5,000 book value less ($2,000 assumed liability x 0.75) = $3,500
The basis of Horton's contribution for GAAP purposes is $8,000 and is calculated as
follows:
$10,000 market value less $2,000 assumed liability = $8,000
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SOLUTIONS TO CASES
b. Salaries and bonuses to partners are part of the income distribution process
regardless of how they are reported by the partnership. Some partnerships prefer to
report these within the partnership's income statement in order to compare the
results of the partnership with other business entities.
c. Not recording salaries and bonuses to partners in the income statement reflects the
true nature of these items and reports income from the partnership before any
distributions. Thus, the income statement reflects the total profit to be distributed to
the partners.
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This memo discusses the three alternative methods of accounting for the admission of
Newt, a new partner. To state the present positions, Bill favors the bonus method,
George favors the goodwill method, and Anne favors the revaluation of existing tangible
assets. First, all three methods are used in practice to account for the admission of a
new partner.
The goodwill method results in the recognition of goodwill, either the goodwill generated
by the prior partners during the existence of the old partnership, or the goodwill being
contributed by the new partner. Goodwill is subject to an impairment test under the
provisions of Statement of Financial Accounting Standards No. 142, “Goodwill and Other
Intangible Assets” (FASB 142; ASC 350). Any future impairment loss recognitions will
affect all partners’ capital accounts in proportion to their profit and loss sharing ratios in
the future periods as goodwill impairments are recognized. If new partners are allowed
into the partnership, or a present partner withdraws, the effect on each partner's capital
account will be different than if the bonus method is used. New partners will have to
share in the write-off of goodwill, even goodwill created before a new partner's
admission.
The revaluation of existing assets could be done under either of the two above cases.
This provides for the proper recognition of the assets and the distribution of any holding
gain to the partners who were part of the partnership while the market increase took
place. For example, the assets could be revalued to their market value on the basis of
appraisals and then the bonus or goodwill method could be used. This would preclude a
new partner from sharing in the holding gain that was appreciated before the new
partner's admission.
The final decision must be made by the partners. All partners should agree to the
specific method, or methods, to be used to account for the admission of Newt. The
decision should be formalized, written, and signed by all partners.
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This solution uses the Uniform Partnership Act of 1997 (UPA 1997) for its references.
This Act is available on the World Wide Web and can be found using most internet
search engines.
a. Section 301 of the UPA 1997 specifies that every partner does have the right to act as
an agent of the partnership for carrying on in the ordinary course the partnership
business, unless the partner has in fact no authority to act for the partnership in the
particular manner, and the person with whom the partner is dealing has knowledge of
the fact that the partner has no such authority.
b. Section 306 of the UPA 1997 specifies that a new partner is not personally liable for
any partnership obligation incurred before the person’s admission as a partner. But, the
new partner may still lose the capital contribution made to be admitted to the
partnership. The key point is that the new partner is not at risk beyond the capital
contribution made for admission
c. Section 403 of the UPA 1997 specifies that each partner, their agents and attorneys,
may inspect the partnership’s books and records, and copy any of them, during normal
business hours.
d. Section 406 of the UPA 1997 specifies that if the initial term of the partnership is
completed, and the partnership continues, the rights and duties of the partners remain
the same but the partnership is now viewed as a partnership at will. A partnership at will
means that the partners are not committing to a term of time or to a project. A partner in
a partnership at will has more legal protection from possible damages from the other
partners if he or she wishes to dissociate from the partnership. A new partnership
agreement is not needed for the continuation, but is a good idea to make sure that all
continuing partners are in agreement with the ongoing partnership efforts.
e. While it is very easy to form a partnership, it is not easy to simply leave a partnership.
Sections 601 through 603 of the UPA 1997 discuss a partner’s dissociation and its effect
on the partnership. A partner expressing the request to no longer be in the partnership
may be subject to damages from a wrongful dissociation. This suggests that the initial
partnership agreement should include any specific provisions on resignations of partners
if the partners feel the UPA’s guidelines are not sufficient for their partnership.
f. The items to be included in the partnership agreement are dependent upon the wishes
of the initial partners. The partnership agreement should include any items that the
partners want to reach agreement on as a basis of the partnership, its operations, and its
possible future dissolution. It is better to have agreement on many of the difficult items
“up front” rather than ignoring them and then having them turn into large problems later
on. If an item is not included in the partnership agreement, then the state’s laws on
partnerships regulate the rights and responsibilities of the partners and the rights of
third-parties, including creditors. There are some nonwaivable provisions of the UPA
1997 as presented in Section 103 of the Act. A partnership agreement may not reduce
or change any of the rights and responsibilities stated in Section 103.
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Riverside now files under its parent. As a result, the most recent year available is 2007.
However, the following answers are based on the 2006 10K of the limited partnership.
a. Items 1 and 2 of the 2006 10-KSB state that Riverside Park Associates LP is an operator
of apartment buildings (SIC 6513). The entity was formed on May 14, 1986, and it
operates and holds an investment in the Riverside Park apartment complex located in
Fairfax County, Virginia. There are 1,229 units in the apartment complex.
b. Items 1 and 2 state that the general partner is AIMCO/Riverside Park Associates GP,
LLC. AIMCO is the abbreviation for Apartment Investment and Management Company.
AIMCO GP is a wholly owned subsidiary of AIMCO/Bethesda, an affiliate of AIMCO
which is a publicly traded real estate investment trust. Initially, the general partner made
a capital contribution of $99 and an additional $47,532,600 in capital was raised by the
sale of 566 units of limited partnership interest. The general partner, or agents retained
by the general partner, performs management and administrative services for the limited
partnership.
c. Item 11 states that AIMCO Properties LP and AIMCO IPLP, LP, both affiliates of AIMCO,
together own 383.41 of the 566 units of limited partnership interest, or 67.74 percent of
those outstanding. This means that the general partner and its affiliates are the majority
owners of the limited partnership.
d. Item 7 includes the financial statements and footnotes. The December 31, 2006, balance
sheet reports partners’ deficits in the following amounts (in thousands): General partner,
$(1,510); and Limited partners, $(20,638), for a total partner deficit of $(22,148). The
deficits are a result of total liabilities, particularly mortgage notes, exceeding total assets.
The Statements of Changes in Partners’ Deficits show that the partners’ capital accounts
were initially $47,533,000 but have been decreased because of operating losses.
A deficit in partnership capital could also arise if cash distributions to partners exceeded
income. For many limited partnerships, the investors receive a share of operating losses
that they can report on their own income taxes, and receive cash distributions in excess
of the losses. In 2005 and 2006, the partnership did not make any cash distributions to
the partners, but the 10Ks for prior years show that the partners received cash
distributions in excess of the loss for those years. This is typical for real estate entities
and is one of the main reasons that investors acquire the limited partnership units of
these entities. The real estate assets provide the collateral for mortgages payable and
the partners do not have to provide much in investment capital once the mortgage is
obtained.
e. In the 2006 10-KSB, Note E, in Item 7. Financial Statements, reports that the affiliates of
the general partner charged the partnership for reimbursement of administrative
expenses in the amounts of $1,157,000 and $595,000 for the years 2006 and 2005,
respectively. The limited partnership has no employees and depends on the general
partner and its affiliates for management and administration of the partnership’s
activities. An analysis of these costs shows the following:
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C15-4 (continued)
The Statements of Operations report the $509,000 and $461,000 in general and
administrative expenses, along with some other costs of the partnership. The
capitalized costs are added to the appropriate asset in Investment property.
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Your partnership will be regulated by our state’s laws on partnership. Our state has enacted
the provisions of the Uniform Partnership Act of 1997 (UPA 1997) which is the most recent
model act on partnership laws. The UPA 1997 states, in its Section 301, that,
“Each partner is an agent of the partnership for the purpose of its business. An act of a
partner, including the execution of an instrument in the partnership name, for apparently
carrying on in the ordinary course the partnership business or business of the kind
carried on by the partnership binds the partnership, unless the partner had no authority
to act for the partnership in the particular matter and the person with whom the partner
was dealing knew or had received a notification that the partner lacked authority.”
This means that each partner can bind the partnership for transactions that would be
expected to take place in the type of business in which the partnership would be engaged.
The issue of notice to third parties is important. Section 303 of the UPA 1997 encourages all
partnerships to file a Statement of Partnership Authority with the Secretary of State and also
place a copy with the county clerk. This statement lists the specific authorities for partners
and the Act specifies that the filed statement is sufficient notice for partners engaging in
partnership real estate transactions. However, the statement of authority is not sufficient
notice for other types of transactions. For these other types of transactions, such as
purchasing items from suppliers, ordering goods online, or acquiring equipment for the
business, suppliers may presume any partner has the authority to transact unless that
supplier is given notification of a restriction on a partner’s authority to that supplier. This
notice is best provided by written statement. But this may be difficult to do on a proactive
basis because you may not know with whom an individual partner is transacting in the
partnership’s name.
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You should also require that the specific authority of each partner be specified in the
partnership agreement. If a partner breaches that agreement, you will have legal recourse
against the partner, but that would mean seeking a legal judgment for that breach. That
would take time and involve costs.
You should have a frank and open discussion with both Adam and Bob expressing your
concerns. If they are not interested in working with you to find ways to alleviate your
concerns and take actions to avoid potential future problems of the nature you discuss, then
it may be best for you not to become a partner in the business. If agreements cannot be
worked out prior to the formation of a partnership, it is highly doubtful they will be worked out
after the partnership is formed. Once you are in a partnership it may be difficult and costly to
dissociate (leave) the partnership.
There are online sources of examples of partnership agreements, the Uniform Partnership
Act of 1997, a Statement of Partnership Authority, and you can find our state’s partnership
regulations through our Secretary of State’s website. I urge you to be sure to satisfy your
concerns before you enter the partnership. Joining a partnership is a significant decision that
involves potential personal liability for the partnership’s obligations, including those incurred
by the other partners. Alternative business forms are available such as incorporating, for
which you should consult with an attorney who has had experience in working with small
business corporations.
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Each of your questions will be addressed in this memo, but first, a few general comments
regarding accounting for your partnership. We have discussed that you may select
accounting methods other than those specified by generally accepted accounting principles
(GAAP). For example, you may wish to use accounting methods consistent with those used
for preparing your partnership’s tax-based statement of income and computing your taxable
distributable amounts. In anticipation of preparing your annual tax returns, I keep a running
list of the tax implications of your major transactions and if it would be helpful to you, I can
discuss these tax implications with you in planning future transactions and evaluating
transactions as they occur during the year. But, as we have discussed, tax-based
accounting methods focus on determining what you will owe for taxes, not the economic
foundation or the financial position you have both built since you started your partnership.
We have also discussed the partnership’s need to obtain additional debt financing to
increase the net assets needed for new areas of growth. Bankers and other lenders prefer
financial statements prepared using GAAP because these persons understand how to
properly evaluate the financial position and performance of your business if GAAP is used.
They are familiar with GAAP and their requirement for audited financial statements prior to a
larger loan will allow your business to be eligible for an unqualified audit opinion from the
independent auditors. Thus, GAAP will provide these lenders with financial statements
which they may have confidence fairly report your business’ financial positions. If GAAP is
not used, the lenders may have to ask a lot of questions about our financial position and
performance that will take us much time to analyze and properly answer.
b. Using GAAP to account for admission of a new partner: GAAP provides for recognizing
impairment losses on long-lived assets held and used in the business, does not allow
the recognition of holding gains by increasing the value of these assets on the balance
sheet. These long-lived assets are used in the production process of the business and
you do not expect to sell them before their useful lives are substantially employed in the
business. Instead of increasing the basis of the long-lived assets at the time of admitting
a new partner, you could increase the investment required of the new partner and
allocate a “bonus” to your capital accounts as the prior partners during the increase in
fair value of these long-lived assets. This is a relatively straight-forward process that is
used by many partnerships.
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C15-6 (continued)
c. Analyzing the partnership’s liabilities prior to admission of a new partner: First, Section
306 (b) of the Uniform Partnership Act of 1997 states that, “A person admitted as a
partner into an existing partnership is not personally liable for any partnership obligation
incurred before the person’s admission as a partner.” The person you are considering
asking to join the partnership will expect the partnership to have all of its liabilities
recognized and correctly measured in order to properly calculate the personal liability of
the new partner for only obligations generated after that new partner’s admission.
Furthermore, as negotiations develop with the potential new partner, you will most
certainly be asked to provide statements regarding the financial position of the
partnership. You do not want to misrepresent the correct financial position and be
personally liable for potential future damages sought by the new partner who based the
decision of whether or not to invest in your partnership was based on your financial
representations. And, by analyzing our recognized liabilities we may not only discover
some unrecognized liabilities, but also we can make sure that the proper documentation
is available on all liabilities to show the background of the transaction generating the
liability, but also the basis of the amount and the account. We will need these if we get
into a disputed claim from one of our vendors. And we will need these to clearly
document any loans made to the partnership by its current partners. You can think of
this analysis as a form of insurance against potential future problems concerning the
status of the partnership’s liabilities at the time of admitting the new partner.
Please do not hesitate to ask me questions about any aspect of accounting and financial
reporting for your partnership. We can discuss the reasons for using specific methods and
the possible alternatives from which you may select in order to have the financial reports
and statements be the most meaningful to each of you as you transact your business and
continue to grow into the future.
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b. Your advanced financial accounting class will have a broad listing of articles that
compare and contrast the UPA 1997 with the UPA 1914. The major differences are:
2. Fiduciary obligations. The UPA 1914 provides very little discussion of the
fiduciary obligations between/among partners. The UPA 1997 expressly states
that each partner has a fiduciary duty of loyalty and care as defined in the UPA
1997 to the partnership and to the other partners.
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5. Rights of partners in dissolution. Under the UPA 1997, partners who are
creditors of the partnership (for example, from personal loans made to the
partnership) have the same rights as other creditors (in pari passu). Under the
UPA 1914, distributions after dissolution were made first to third-party creditors
before distributions to partners who are creditors of the partnership.
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SOLUTIONS TO EXERCISES
1. a
2. c
3. d
5. d
Section 401 of the UPA 1997 states that, “Each partner is entitled to an equal share of
the partnership profits and is chargeable with a share of the partnership losses in
proportion to the partner’s share of the profits.”
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E15-4 (continued)
b.
Apple — Jack Partnership
Statement of Partners' Capital
For the Year Ended December 31, 20X5
c.
Apple — Jack Partnership
Distribution of $80,000 Net Income
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1. F
2. E
3. H
4. C
5. G
6. A
7. I
8. D
9. M
10. B
11. J
12. L
13. J
14. D
15. B
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Step 1:
4/5 estimated total resulting capital $ 400,000
Estimated total resulting capital
($400,000 / 0.80) $ 500,000
Step 2:
Estimated total resulting capital $ 500,000
Total net assets not including goodwill
($400,000 + $80,000) (480,000)
Estimated goodwill to new partner $ 20,000
Cash 80,000
Goodwill 20,000
Elan, Capital 100,000
$100,000 = $500,000 x 0.20
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E15-6 (continued)
Cash 200,000
Mary, Capital ($80,000 x 0.60) 48,000
Gene, Capital ($80,000 x 0.30) 24,000
Pat, Capital ($80,000 x 0.10) 8,000
Elan, Capital ($600,000 x 0.20) 120,000
d. Section 306 of the UPA 1997 states that “A person admitted into an existing
partnership is not personally liable for any partnership obligation incurred before the
person’s admission as a partner.” Although Elan would not be personally liable, she
does have the risk of losing her investment in the partnership.
Step 1:
0.20 estimated total resulting capital $ 50,000
Estimated total resulting capital
($50,000 / 0.20) $ 250,000
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E15-7 (continued)
Step 2:
Estimated total resulting capital $ 250,000
Total net assets not including goodwill
($160,000 + $50,000) (210,000)
Estimated goodwill to prior partners $ 40,000
Cash 50,000
Goodwill 40,000
Pam, Capital ($40,000 x 0.75) 30,000
John, Capital ($40,000 x 0.25) 10,000
Gerry, Capital ($250,000 x 0.20) 50,000
NON- GAAP: Recognition of goodwill at the time a new partner is admitted is not
GAAP. Under GAAP, goodwill is to be recognized only when acquired. An entity
cannot recognize internally generated goodwill.
Cash 50,000
Pam, Capital ($8,000 x 0.75) 6,000
John, Capital ($8,000 x 0.25) 2,000
Gerry, Capital ($210,000 x 0.20) 42,000
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E15-7 (continued)
Cash 35,000
Pam, Capital ($4,000 x 0.75) 3,000
John, Capital ($4,000 x 0.25) 1,000
Gerry, Capital ($195,000 x 0.20) 39,000
GAAP: Partners may allocate capital among themselves, including new capital
received from a partner being admitted into the partnership.
Step 1:
0.80 estimated total resulting capital $ 160,000
Estimated total resulting capital
($160,000 / 0.80) $ 200,000
Step 2:
Estimated total resulting capital $ 200,000
Total net assets not including goodwill
($160,000 + $35,000) (195,000)
Estimated goodwill to new partner $ 5,000
Cash 35,000
Goodwill 5,000
Gerry, Capital 40,000
$40,000 = $200,000 x 0.20
NON- GAAP: Recognition of goodwill at the time a new partner is admitted is not
allowed under GAAP.
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E15-7 (continued)
Cash 35,000
Gerry, Capital ($175,000 x .20) 35,000
GAAP: Note that the write down of inventory to its lower-of-cost-or-market value is
proper under GAAP. This results in the prior partners’ capital of $140,000 ($160,000
less $20,000 write down). Any revaluations of assets or liabilities that are proper
under GAAP should be made before determining the prior partners’ capital that is
used in computing the new partner’s proportionate book value of the total resulting
capital of the partnership.
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Step 1:
1/5 estimated total resulting capital $ 36,000
Estimated total resulting capital
($36,000 / 0.20) $ 180,000
Step 2:
Estimated total resulting capital $ 180,000
Total net assets not including goodwill
($120,000 + $36,000) (156,000)
Estimated goodwill to prior partners $ 24,000
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E15-8 (continued)
Cash 25,000
Fred, Capital ($5,000 x 0.70) 3,500
Ralph, Capital ($5,000 x 0.30) 1,500
Lute, Capital ($90,000 x 1/3) 30,000
8. b
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b. Karl receives $42,000 and only the withdrawing partner's share of goodwill is
recognized:
Goodwill 12,000
Karl, Capital 30,000
Cash 42,000
Record goodwill:
Goodwill 30,000
Luis, Capital ($30,000 x 0.6667) 20,000
Marty, Capital ($30,000 x 0.1667) 5,000
Karl, Capital ($30,000 x 0.1667) 5,000
Withdrawal of Karl:
Karl, Capital 35,000
Cash 35,000
d. Section 701 of the UPA 1997 defines the buyout price of a dissociated partner’s interest
in the partnership as the estimated amount that would be distributable to that partner if the
assets of the partnership were sold at a price equal to the greater of the liquidation value
or the value based on a sale of the entire business as a going concern without the
dissociated partner and the partnership was wound up including all partnership obligations
paid. Thus, the buyout price is equivalent to what the dissociating partner would have
received if the partnership had wound up and terminated.
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SOLUTIONS TO PROBLEMS
Cash 180,000
Wayne, Capital 180,000
Step 1:
3/4 estimated total resulting capital $ 360,000
Estimated total resulting capital ($360,000 / 3/4) $ 480,000
Step 2:
Estimated total resulting capital $ 480,000
Total net assets not including goodwill
($360,000 + $110,000) (470,000)
Estimated goodwill to new partner $ 10,000
Cash 110,000
Goodwill 10,000
Wayne, Capital 120,000
$120,000 = $480,000 total resulting capital x 1/4
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P15-11 (continued)
Step 1:
1/4 estimated total resulting capital $ 100,000
Estimated total resulting capital
($100,000 / 1/4) $ 400,000
Step 2:
Estimated total resulting capital $ 400,000
Total net assets before inventory write-down
($360,000 + $100,000) (460,000)
Inventory write-down required $ (60,000)
Record write-down:
Debra, Capital ($60,000 x 0.60) 36,000
Merina, Capital ($60,000 x 0.40) 24,000
Inventory 60,000
e. Wayne purchases one-fourth interest directly from Debra and Merina; land
revalued:
New partner's proportionate book value
($360,000 x 1/4) $ 90,000
Step 1:
1/4 estimated total resulting capital ($80,000 + $60,000) $ 140,000
Estimated total resulting capital ($140,000 / 1/4) $ 560,000
Step 2:
Estimated total resulting capital $ 560,000
Total net assets before land revaluation
($200,000 + $160,000) (360,000)
Increase in value of land $ 200,000
Revalue land:
Land 200,000
Debra, Capital ($200,000 x 0.60) 120,000
Merina, Capital ($200,000 x 0.40) 80,000
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value of land.
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P15-11 (continued)
Cash 80,000
Debra, Capital ($8,000 x 0.60) 4,800
Merina, Capital ($8,000 x 0.40) 3,200
Wayne, Capital ($440,000 x 1/5) 88,000
Step 1:
1/5 estimated total resulting capital $ 100,000
Estimated total resulting capital ($100,000 / 1/5) $ 500,000
Step 2:
Estimated total resulting capital $ 500,000
Total net assets not including goodwill
($360,000 + $100,000) (460,000)
Estimated goodwill to prior partners $ 40,000
Record goodwill:
Goodwill 40,000
Debra, Capital ($40,000 x 0.60) 24,000
Merina, Capital ($40,000 x 0.40) 16,000
Admission of Wayne:
Cash 100,000
Wayne, Capital 100,000
$100,000 = 1/5 of $500,000 total resulting capital after recording goodwill
of $40,000.
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P15-11 (continued)
New partner’s
cash investment Cash 100,000 New tangible capital 100,000
Capital prior to
recognizing goodwill $460,000 $460,000
Estimated new
goodwill Goodwill 40,000 Capital from goodwill 40,000
Total resulting
capital Net Assets $500,000 Total resulting capital $500,000
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Profit ratio 3 3 4 10
Ending capital $28,000 $40,000 $48,000
Months Months x
Date Debit Credit Balance Maintained Dollar Balance
1/1 $30,000 4 $120,000
5/1 $6,000 36,000 4 144,000
9/1 $8,000 28,000 4 112,000
Total 12 $376,000
Months Months x
Date Debit Credit Balance Maintained Dollar Balance
1/1 $40,000 2 $ 80,000
3/1 $9,000 31,000 4 124,000
7/1 $5,000 36,000 2 72,000
9/1 4,000 40,000 4 160,000
Total 12 $436,000
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P15-12 (continued)
Average capital for West
Months Months x
Date Debit Credit Balance Maintained Dollar Balance
1/1 $50,000 3 $150,000
4/1 $7,000 57,000 2 114,000
6/1 3,000 60,000 2 120,000
8/1 $12,000 48,000 5 240,000
Total 12 $624,000
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5B = $38,940 - B
6B = $38,940
B = $6,490
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Cash 200,000
Snider, Capital ($800,000 x 1/4) 200,000
Goodwill 30,000
Der, Capital ($30,000 x 0.40) 12,000
Egan, Capital ($30,000 x 0.30) 9,000
Oprins, Capital ($30,000 x 0.30) 9,000
Cash 210,000
Snider, Capital ($840,000 x 1/4) 210,000
Cash 232,000
Der, Capital ($24,000 x 0.40) 9,600
Egan, Capital ($24,000 x 0.30) 7,200
Oprins, Capital ($24,000 x 0.30) 7,200
Snider, Capital ($832,000 x 1/4) 208,000
Cash 190,000
Goodwill 10,000
Snider, Capital ($800,000 x 1/4) 200,000
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P15-13 (continued)
Cash 220,000
Snider, Capital ($880,000 x 1/4) 220,000
Cash 220,000
Der, Capital ($15,000 x 0.40) 6,000
Egan, Capital ($15,000 x 0.30) 4,500
Oprins, Capital ($15,000 x 0.30) 4,500
Snider, Capital ($820,000 x 1/4) 205,000
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P15-13 (continued)
Cash 140,000
Der, Capital ($40,000 x 0.40) 16,000
Egan, Capital ($40,000 x 0.30) 12,000
Oprins, Capital ($40,000 x 0.30) 12,000
Snider, Capital ($720,000 x 1/4) 180,000
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Profit ratio 3 2 5
Average capital $47,500 $72,500
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P15-14 (continued)
Profit ratio 1 1 2
Ending capital balance after
deducting salaries of $24,000
for Luc and $28,000 for Dennis $16,000 $54,500
Profit ratio 4 2 6
Beginning capital balance $50,000 $70,000
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Goodwill 60,000
Ace, Capital (0.20 x $60,000) 12,000
Jack, Capital (0.30 x $60,000) 18,000
Spade, Capital (0.50 x $60,000) 30,000
c. The partnership paid a bonus to Spade upon retirement. Total capital of the
partnership after Spade's retirement was $290,000.
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P15-15 (continued)
d. Spade was given cash and land. Capital of the partnership after Spade's
retirement was $310,000.
Land 20,000
Ace, Capital (0.20 x $20,000) 4,000
Jack, Capital (0.30 x $20,000) 6,000
Spade, Capital (0.50 x $20,000) 10,000
e. Spade was given $150,000 upon retirement, and the goodwill attributable to
Spade was recognized.
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P15-15 (continued)
f. Spade was given $150,000 upon retirement, and goodwill applicable to the entire
business was recorded.
Goodwill 60,000
Ace, Capital (0.20 x $60,000) 12,000
Jack, Capital (0.30 x $60,000) 18,000
Spade, Capital (0.50 x $60,000) 30,000
g. Spade was given land and a note payable upon retirement. Capital of the
partnership after Spade's retirement was $360,000.
Land 40,000
Ace, Capital (0.20 x $40,000) 8,000
Jack, Capital (0.30 x $40,000) 12,000
Spade, Capital (0.50 x $40,000) 20,000
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2. b The capital balances of William and Martha at the date of partnership formation
are determined as follows:
William Martha
Cash $20,000 $ 30,000
Inventory - 15,000
Building - 40,000
Furniture and equipment 15,000 -
Total $35,000 $ 85,000
Less mortgage assumed
by partnership (10,000)
Amounts credited to capital $35,000 $ 75,000
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P15-16 (continued)
5. d Because both partners have equal capital balances, Norbert's capital has to be
increased to equal that of Moon's. Since Moon's capital balance is $60,000 and
Norbert's is $20,000, an additional $40,000 has to be credited to Norbert's
capital to make it equal Moon's capital. This additional amount credited to
Norbert's capital is the goodwill that Norbert is bringing to the partnership.
7. d Crowe and Dagwood are getting a bonus from Elman, since the amount of
Elman's investment into the partnership exceeds the amount credited to
Elman's capital account. The bonus should be allocated to Crowe and Dagwood
in their respective profit and loss ratio before the admission of Elman—–the old
profit and loss ratio.
8. b The net income of $80,000 is allocated to Blue and Green in the following
manner:
9. c Jill received a bonus when she retired from the partnership. The bonus is being
given to Jill by Bill and Hill, which means that the bonus is allocated to Bill's and
Hill's capital accounts in their respective profit and loss sharing ratio.
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a. Entries to record the formation of the partnership and the events that occurred
during 20X7:
Cash 110,000
Inventory 80,000
Land 130,000
Equipment 100,000
Mortgage payable 50,000
Installment Note Payable 20,000
Jordan, Capital ($60,000+ $80,000 + $100,000
- $20,000) 220,000
O’Neal, Capital
($50,000 + $130,000 - $50,000) 130,000
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P15-17 (continued)
Sales $155,000
Less: Cost of Goods Sold:
Inventory, January 1 $ 80,000
Purchases 30,000
Goods Available for Sale $110,000
Less: Inventory, December 31 (20,000) (90,000)
Gross Profit $ 65,000
Less: Selling and General Expenses $ 34,000
Depreciation Expense 6,000 (40,000)
Operating Income $ 25,000
Nonoperating Expense – Interest (4,000)
Net Income $ 21,000
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P15-17 (continued)
Assets
Cash $158,900
Accounts Receivable 21,000
Inventory 20,000
Land 130,000
Equipment (net) 94,000
Total Assets $423,900
Cash 99,800
Jordan, Capital (0.60 x $9,800) 5,880
O’Neal, Capital (0.40 x $9,800) 3,920
Hill, Capital 90,000
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Cash 50,000
Computers and Printers 18,000
Office Furniture 23,000
Library 7,000
Building 60,000
Notes Payable 25,000
Mortgage Payable 36,000
Delaney, Capital 32,000
Engstrom, Capital 22,000
Lahey, Capital 15,000
Simon, Capital 28,000
Record initial investments in DELS partnership.
b. Tax bases:
Delaney Engstrom Lahey Simon
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Part I:
Haskins and Sells Partnership
Balance Sheet
At January 2, 20X3
Assets
Current assets:
Cash $ 55,000
Temporary Investments 81,500
Trade Accounts Receivable $70,000
Less: Allowance for uncollectible accounts (4,500) 65,500
Note Receivable 50,000
Inventories 62,500
Total Current Assets $314,500
Intangible Assets:
Customer Lists 60,000
Total Assets $744,500
Current Liabilities:
Current Portion of Mortgage Payable $ 25,000
Long-term Liabilities:
Mortgage Payable, less current portion 150,000
Partnership Capital:
Haskins, Capital $327,000
Sells, Capital 242,500 569,500
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P15-19 (continued)
Part II:
a. Haskins and Sells Partnership
Income Statement
For the Year Ended December 31, 20X3
Revenues $ 650,000
Less: Cost of Goods Sold (320,000)
Gross Profit $ 330,000
Operating Expenses:
Selling, General, and Administrative Expenses (70,000)
Net Income $ 260,000
Note that salaries paid to partners and the bonus paid to Haskins are distributions of
partnership net income and are not expenses of the partnership.
Capital
c. Description Haskins Sells Total
Capital balances, January 3, 20X3 $327,000 $242,500 $569,500
Add: Net income for 20X3 130,800 129,200 260,000
Withdrawals made during the year (10,000) (5,000) (15,000)
Capital balances at December 31, 20X3 $447,800 $366,700 $814,500
d. To find out what partnership net income would have to be for each partner to receive
the same amount of income, determine the amount of income difference that would go to
each partner for each additional dollar of partnership net income. To illustrate, assume
that partnership net income was $261,000 instead of $260,000. How would this
incremental $1,000 affect the distribution of net income? To find out the answer to this
question, see the computation below.
The increase of $1,000 in partnership net income resulted in a $280 increase in Haskins’
share of net income and a $720 increase in Sells’ share of net income. Another way to
look at this is that for a $1,000 increase in partnership net income, Sells will receive
$440 more, or 44% more, than Haskins ($720 minus $280 = $440 divided by $1,000).
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Take this information and use it to answer the question. At partnership net income of
$260,000, Haskins will receive $1,600 more net income than Sells ($130,800 minus
$129,200). Take the difference between these two incomes and divide it by 0.44.
Dividing $1,600 by 0.44 equals $3,636. Add this amount to $260,000 to get $263,636,
the amount of partnership net income that would result in each partner receiving the
same amount of net income.
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