02PEF_1301059872_Oliviane Wenno

QUESTIONS1. The characteristics of a partnership include the following: (a) association of individuals, (b)

limited life, and (c) co-ownership of property. Explain each of these terms!a. Association of individuals

At least two persons must joint together to form a partnership. Furthermore, there must be an agreement between persons desirous of forming a partnership.

b. Limited LifeA partnership may be ended voluntarily at anytime through the acceptance of a new partner or withdrawal of a partner. It may be ended involuntarily by the death or incapacity of a partner.

c. Co-Ownership of PropertyProperty co-ownership refers to a situation where two or more people share the ownership of a property. Put simply, it involves your assets and liabilities because co-ownership is base on the equity.

2. Jerry Kerwin is confused about the partnership characteristics of (a) mutual agency and (b) unlimited liability. Explain these two characteristics for Jerry.

a. Mutual AgencyThe business of partnership may be carried on by all the partners or by any of them acting for all. Thus every partner is an agent of other partners and at the same time of the firm.

b. Unlimited LiabilityThe unlimited liability of partners is the legal relationship among general partners of a partnership that makes each general partner responsible for paying all the debts of the partnership if the other partners are unable to pay their shares.

11. Are the financial statements of a partnership similar to those of a proprietorship? Discuss!Yes, the differences are due to the number of owners involved. The income statement for a partnership is identical to the income statement for a proprietorship except for the division of net income.

12. How does the liquidation of a partnership differ from the dissolution of a partnership? Liquidation is the process of converting all assets into cash. Proceeds of which will be used to pay-out its obligations in the order set-out by the standards/court. Whereas partnership dissolution occurs whenever a partner withdraws or a new partner is admitted. Dissolution doesn’t necessarily mean that the business ends. But, dissolution may be the cause of the liquidation. A lot of case shows that if a business dissolves they will have to liquidate their assets (including office furniture, computers, etc) in order to pay off creditors (or just to get rid of the stuff)

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P12-1AThe post-closing trial balances of two proprietorships on January 1, 2010 are presented below:

Patrick Company Samuelson CompanyDr. Cr. Dr. Cr.

Cash $ 14,000 $ 12,000Account receivable 17,500 26,000Allowance for doubtful account $ 3,000 $ 4,400Merchandise inventory 26,500 18,400Equipment 40,000 29,000Accumulated depreciation-equipment 24,000 11,000Notes payable 18,000 15,000Account payable 22,000 31,000Patrick, Capital 36,000Samuelson, Capital 24,000

$ 103,000

$ 103,000 $ 85,400 $ 85,400

Patrick and Samuelson decide to form a partnership, Pasa Company, with the following agreed upon valuations for noncash assets.

Patrick Company Samuelson CompanyAccount receivable $ 17,500 $ 26,000Allowance for doubtful account 4500 4,000Merchandise inventory 28,000 20,000Equipment 23,000 16,000

All cash will be transferred to the partnership, and the partnership will assume all the liabilities of the two proprietorships. Further, it is agreed that Patrick will invest an additional $5,000 in cash, and Samuelson will invest an additional $19,000 in cash.Instructions:

a. Prepare separate journal entries to record the transfer of each proprietorship’s assets and liabilities to the partnership.

Cash $ 14,000 Account Receivable 17,500 Merchandise Inventory 28,000 Equipment $ 23,000

Notes Payable $ 18,000 Accounts Payable 22,000 Allowance for Doubtful Account 4,500 Patrick, Capital $ 38,000

Cash $ 12,000 Account Receivable 26,000 Merchandise Inventory 20,000

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Equipment $ 16,000

Notes Payable $ 15,000 Accounts Payable 31,000 Allowance for Doubtful Account 4,000 Samuelson, Capital $ 24,000

b. Journalize the additional cash investment by each partner.Cash $ 5,000

Patrick, Capital $ 5,000

Cash $ 19,000

Samuelson, Capital $ 19,000 c. Prepare a classified balance sheet for the partnership on January 1, 2010.

PASA COMPANYBALANCE SHEET

January 1st 2010Assets

Cash $ 50,000 Account Receivable 43,500 Merchandise Inventory 48,000 Equipment 39,000 Allowance for Doubtful Account (8,500)

Total Assets $ 172,000

Liabilities and Owners' EquityLiabilities

Notes Payable $ 33,000 Account Payable 53,000

Total Liabilities 86,000 Owners' Equity

Patrick, Capital $ 43,000 Samuelson, Capital 43,000 Additional Cash

Total Owners' Equity 86,000 Total Liabilities and Owners' Equity $ 172,000

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P12-2AAt the end of its first year of operations on December 31, 2010, CNU Company’s accounts show the following:

Patrick Company Samuelson CompanyReese Caplin $ 23,000 $ 48,000Phyliss Newell

14,000 30,000

Betty Uhrich 10,000 25,000The capital balance represents each partner’s initial capital investment. Therefore, net income or net loss for 2010 has not been closed to the partners’ capital accounts.Instructions:

a. Journalize the entry to record the division of net income for the year 2010 under each of the following independent assumptions.

1. Net income is $30,000. Income is shared 6 : 3 : 1Income Summary $ 30,000

Reese Caplin, Capital $ 18,000 Phyliss Newell, Capital 9,000 Betty Uhrich, Capital $ 3,000

2. Net income is $37,000. Caplin and Newell are given salary allowances of $15,000 and $10,000, respectively. The remainder is shared equally.

Income Summary $ 37,000 Reese Caplin, Capital $ 19,000 Phyliss Newell, Capital 14,000 Betty Uhrich, Capital $ 4,000

3. Net income is $19,000. Each partner is allowed interest of 10% on beginning capital balances. Caplin is given a $12,000 salary allowance. The remainder is shared equally.

Income Summary $ 19,000 Reese Caplin, Capital $ 15,700 Phyliss Newell, Capital

1,900

Betty Uhrich, Capital $ 1,400

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b. Prepare a schedule showing the division of net income under assumption (3) above.CNU Company

Income Statement (partial)

December 31st 2010

Net Income $19,000Division of Net Income

Reese Caplin

Phyliss Newell

Betty Uhrich

Total

Salary Allowance $ 12,000 $ 12,000 Interest Allowance on Partner's Capital

Reese Caplin 4,800 Phyliss Newell 3,000 Betty Uhrich $ 2,500

Total Interest Allowance 10,300 Total Salaries and Interest 16,800 3,000 2,500 22,300 Remaining Deficiency ($3,300)

Reese Caplin ($3,300 : 3) (1,100)Phyliss Newell ($3,300 : 3) (1,100)Betty Uhrich ($3,300 : 3) (1,100)

Total Remainder (3,300)Total Division $ 15,700 $ 1,900 $ 1,400 $ 19,000

c. Prepare a partners’ capital statement for the year under assumption (3) above.

CNU CompanyPartners' Capital Statement

December 31st 2010

Reese Caplin Phyliss Newell Betty Uhrich Total

Capital, January 1 $ 48,000 $ 30,000 $ 25,000 $ 103,000 Net Income 15,700 1,900 1,400 19,000 Drawings (23,000) (14,000) (10,000) (47,000)Capital, December $ 40,700 $ 17,900 $ 16,400 $ 75,000

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P12-4AAt April 30, partners’ capital balances in SKG Company are: S Seger $52,000, J. Kensington $54,000, and T. Gomez $18,000. The income sharing ratios are 5 : 4 : 1, respectively. On May 1, the SKGA Company is formed by admitting D. Atchley to the firm as a partner. Instructions:

a. Journalize the admission of Atchley under each of the following independent assumptions.1. Atchley purchases 50% of Gomez’s ownership interest by paying Gomez $16,000 in

cash.T. Gomez, Capital $ 9,000

Atchley, Capital $ 9,000 2. Atchley purchases 331/3% of Kensington’s ownership interest by paying Kensington

$15,000 in cash.J. Kenshington, Capital $ 18,000

Atchley, Capital $ 18,000 3. Atchley invests $66,000 for a 30% ownership interest, and bonuses are given to the

old partners.Cash $ 66,000

S. Seger, Capital $ 4,500 J. Kenshington, Capital $ 3,600 T. Gomez, Capital $ 900 Atchley, Capital $ 57,000

4. Atchley invests $46,000 for a 30% ownership interest, which includes a bonus to the new partner.

Cash $ 46,000 S. Seger, Capital $ 2,500 J. Kenshington, Capital $ 2,000 T. Gomez, Capital $ 500

Atchley, Capital $ 51,000 b. Kensington’s capital balance is $32,000 after admitting Atchley to the partnership by

investment. If Kensington’s ownership interest is 20% of total partnership capital, what were:1. Atchley’s cash investment2. The bonus to the partner?

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P12-5AOn December 31, the capital balances and income ratios in FAD Company are as follows:

Partner Capital Balance Income RatioJ. Fagan $ 60,000 50%P. Ames 40,000 30%K. Durham 26,000 20%

Instructions:a. Journalize the withdrawal of Durham under each of the following assumptions:

1. Each of the continuing partners agrees to pay $18,000 in cash from personal funds to purchase Durham’s ownership equity. Each receives 50% of Durham’s equity.

K. Durham , Capital $ 26,000 J. Fagan, Capital $ 13,000 P. Ames, Capital $ 13,000

2. Ames agrees to purchase Durham’s ownership interest for $25,000 cash.K. Durham , Capital $ 26,000

P. Ames, Capital $ 26,000 3. Durham is paid $34,000 from partnership assets, which includes a bonus to the retiring

partner.K. Durham , Capital $ 26,000 J. Fagan, Capital $ 5,000 P. Ames, Capital $ 3,000

Cash $ 34,000 4. Durham is paid $22,000 from partnership assets, and bonuses to the remaining

partners are recognized.K. Durham , Capital $ 26,000

J. Fagan, Capital $ 2,500 P. Ame, Capital $ 1,500 Cash $ 22,000

b. If Ames’s capital balance after Durham’s withdrawal is $42,400 what were:1. The total bonus to the remaining partners?

Total bonus to remaining partner = $4,000 + $2,400 = $6,4002. The cash paid by the partnership to Durham?

Total cash paid by the partnership to Durham = Durham’s capital – Durham’s bonus =$26,000 - $6,400 = $19,600

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K. Durham , Capital $ 26,000 J. Fagan, Capital $ 4,000 P. Ames, Capital $ 2,400 Cash $ 19,600