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SOLUTIONS Multiple Choice Questions 1.

a

2.

d

3.

c

4.

b

5.

b

6.

c

The assets will be valued upward by $90,000 which, allocated on a 2:3:5 basis, yields $18,000 to McCune, $27,000 to Nall, and $45,000 to Oakely.

7.

d

After the revaluation, the assets will be recorded at $602,500. If Pavic is admitted for a one-fifth interest, the $602,500 represents 80% of the total implied capital. Dividing $602,500 by 80% gives a total capitalization of $753,150 for which $150,625 is required from Pavic for a 20% interest.

8.

d

Each of the original partners has given up 20% of their interest to Pavic. Their profit and loss sharing ratios will therefore be 80% of what they were before the admission of Pavic. McCune 20% x 80% = 16% Nall 30% x 80% = 24% Oakely 50% x 80% = 40% Pavic = 20% Expressed as: 4:6:10:5

9.

c

Albion: [($100,000 x 6) + ($88,000 x 1) + ($128,000 x 5)]/12 = $110,667 Blaze: [($120,000 x 5) + ($105,000 x 5) + ($155,000 x 2)]/12 = $119,583

10.

b

Capital: ($112,000 + $119,000)x(10%) = $23,100 Salary: ($20,000 + $30,000) = $50,000 Total: $23,100 + $50,000 = $73,100

11.

b

Albion: ($100,000 x 10%) + $20,000 + $24,000 = $54,000 Blaze: ($120,000 x 10%) + $30,000 + $24,000 = $66,000

12.

b

Interest: ($500,000 x 10%) = $50,000 Salary: ($10,000 + $20,000) = $30,000 Bonus: Condition not met = $0 Total allocations = $80,000 and over-allocations = $80,000 - $60,000 = $20,000

13.

b

Bloom: Interest allocation: $20,000 Salary allocation: $10,000 Carnes: Interest allocation: $30,000 Salary allocation: $20,000 There is a total of $80,000 for positive allocations. To bring them down to a $20,000 loss, a residual adjustment of ($100,000) is needed which is allocated ($40,000) to Bloom and ($60,000) to Carnes. After these amounts are assigned to the partners, each partner’s capital account will be reduced by a net $10,000.

14.

a

15.

d

16.

d

17.

d

18.

c

19.

c

20.

d

B = .1x($121,000 - B) B = $12,100 - .1B 1.1B = $12,100 B = $11,000

Exercise 1 Requirement 1 Goodwill Cesar, capital Damon, capital

200,000

Cesar, capital Damon, capital Egan, capital

210,000 190,000

120,000 80,000

400,000

If a $400,000 payment represents 50% of total capital, then twice that amount, or $800,000, is the implied total capital including goodwill. If the present total capital is $600,000, and the implied total capital is $800,000, the amount of goodwill to record is $200,000. This goodwill is allocated 60% to Cesar and 40% to Damon. After the first entry is posted, the balances in the Cesar and Damon capital accounts will be $420,000 and $380,000, respectively. If one-half of each partner’s interest is given to Egan, Cesar’s capital account is reduced by $210,000, and Damon’ capital account is reduced by $190,000. Requirement 2 Goodwill Cash Egan, capital

100,000 500,000 600,000

If we focus on the current capital of the partnership, $600,000, and say that it is fairly valued, then, if it represents 50% of final capital after Egan’s investment, final capital should be $1,200,000. Egan’s share of final capital will be $600,000, and, if Egan invests $500,000 for this interest, there must be $100,000 of goodwill that is allocated to Egan. Requirement 3 Goodwill Cesar, capital Damon, capital

100,000

Cash Egan, capital

700,000

60,000 40,000 700,000

If Egan invests $700,000 for a 50% interest, it implies that total partnership capital should be $1,400,000. After Egan’s investment, total capital will be $1,300,000, and goodwill is therefore $100,000. The goodwill is allocated to Cesar and Damon. Exercise 2

Net income

$

Income 25,000

Flores

Gilroy

Hansen

Bonus to Gilroy Salaries Interest Residual loss Loss allocation Allocation

( ( ( (

1,250 20,000 5,000 1,250 1,250 0

$

) ) ) )

$ $ $( $

1,250

10,000 1,250 250 ) 11,000

$

10,000 1,250

( $

250 ) 11,000

2,500 ( $

750 ) 3,000

Exercise 3 1/25/07

Office Equipment Quade, capital Reid, capital Scott, capital

12,000 6,000 3,600 2,400

Correction of journal entry error from 12/29/03. To record office equipment and to adjust partner capital accounts.

Exercise 4 Requirement 1

Net income Bonus to Gault Salary allocation Interest allocation Residual Final allocation

$ ( ( ( ( $

Income 250,000 25,000 25,000 70,000 130,000 0

Evans ) ) $ ) ) $

10,000 24,000 26,000 60,000

Fitch

$

$

15,000 20,000 39,000 74,000

Gault $

25,000

$

26,000 65,000 116,000

Requirement 2 Income summary Evans, capital Fitch, capital Gault, capital

Exercise 5 Requirement 1

250,000 60,000 74,000 116,000

Net loss Bonus to Gault Salary allocation Interest allocation Subtotal Residual allocation Totals

$ ( ( ( ( ( $

Loss 36,000 0 25,000 70,000 131,000 131,000 0

Evans ) ) ) $ ) ) ( $

Fitch

Gault $

10,000 24,000 34,000 26,200 ) 7,800

$

( $(

15,000 20,000 35,000 39,300 ) 4,300 )

$ ( $(

0 26,000 26,000 65,500 ) 39,500 )

Requirement 2 Fitch, capital Gault, capital Evans, capital Income summary

4,300 39,500 7,800 36,000

Exercise 6

Jan, Feb Mar Apr, May, Jun, Jul Aug, Sep Oct, Nov, Dec Total capital Average capital Interest allocation

Jan, Feb, Mar Apr, May, Jun, Jul Aug, Sep Oct, Nov, Dec Total capital Average capital Interest allocation

Jan, Feb, Mar, Apr May, Jun, Jul, Aug, Sep Oct, Nov Dec Total capital

$ 200,000 x 2 = 250,000 x 1 = 260,000 x 4 = 253,000 x 2 = 258,000 x 3 =

$

$ $ $

$ 300,000 x 3 = 320,000 x 4 = 330,000 x 2 = 334,000 x 3 =

$

$ $ $

$ 250,000 x 4 = 240,000 x 5 = 245,000 x 2 = 250,000 x 1 =

$

$

Grech 400,000 250,000 1,040,000 506,000 774,000 2,970,000 247,500 19,800 Harris 900,000 1,280,000 660,000 1,002,000 3,842,000 320,167 25,613

Ivers 1,000,000 1,200,000 490,000 250,000 2,940,000

Average capital Interest allocation

$ $

245,000 19,600

Exercise 7

Net income Bonus Salary Interest Subtotal Balance Totals

$ ( ( ( ( $

Income 88,000 13,200 18,000 6,000 50,800 50,800 0

Sealy ) ) )

$

) $

4,400 7,500 11,900 17,780 29,680

Teske $

$

Ubank

4,400 10,500 14,900 12,700 27,600

$

4,400

$

6,000 10,400 20,320 30,720

Exercise 8 Requirement 1 The assets of the partnership must be adjusted to fair market value. Land will increase by $100,000, and Inventory by $75,000. The profit and loss ratio elements add up to 25. Partner Ivory will then be allocated 9/25 of the $175,000, etc. Land Inventory Ivory, capital Jacoby, capital Kato, capital

100,000 75,000 63,000 42,000 70,000

Requirement 2 The partnership's total assets after revaluation are $900,000. If Lange acquires a 10% interest, it implies that the $900,000 represents 90% of the partnership’s value after Lange's investment. Therefore, $900,000/90% = $1,000,000, and $1,000,000 x 10% = $100,000. The entry to record Lange’s investment would be: Cash Lange, capital

100,000 100,000

Requirement 3 Cash Lange, capital Ivory, capital Jacoby, capital Kato, capital

200,000 100,000 36,000 24,000 40,000

Exercise 9 1/1/04 Yang, capital Vail, capital ($90,000 x 4/9) Wacker, capital ($90,000 x 5/9) Cash

137,500 40,000 50,000 227,500

Exercise 10 Requirement 1 Almond and Clack give a bonus to Brand which reduces their capital in a 2 to 1 ratio. Brandt, capital Almond, capital Clack, capital Cash

105,000 20,000 10,000 135,000

Requirement 2 Revalue the total partnership capital to reflect the value at Brandt’s retirement’s excess payment of $30,000. Goodwill Almond, capital Clack, capital Brandt, capital Brandt, capital Cash

60,000 20,000 10,000 30,000 135,000 135,000

Requirement 3 Add goodwill equal to the excess payment Brandt, capital Goodwill Cash

105,000 30,000 135,000...