MGAB01H3 Lecture : Basic Partnership Accounting

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10 Nov 2010

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MGAB01H3 Full Course Notes

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Initial investments are to be entered in the partnership records. These investments should be recorded at the fair market value of the assets at the date of their transfer to the partnership (no amortization should be included). However, investments of a/r should be recorded at full value, with the addition of doubtful accounts. The division of net income or loss is known as the income ratio. It is necessary to divide income and loss among the numerous capital accounts. Income ratios: fixed ratio (i. e. 2:1), ratio based on capital balances or average capital during the year, salaries and then a fixed ratio, interest and then fixed ratio, salariesinterest and then fixed ratio. Division of salaries or interest to partners are not expenses. Salaries, interest, and remainder in a fixed ratio: salaries and interest must be allocated before the remainder is divided according to the specified fixed ratio, even if these provisions exceed net income.

Related Questions

Carter Pearson is a partner in Event Promoters. His beginningpartnership capital balance for the current year is $55,500, andhis ending partnership capital balance for the current year is$62,500. His share of this year's partnership income was $5,750.What is his partner return on equity?

9.65%

9.75%

10.87%

9.20%

10.36%

Design Services is organized as a limited partnership, with MikoToori as one of its partners. Miko's capital account began the yearwith a balance of $46,900. During the year, Miko's share of thepartnership income was $9,400, and Miko received $5,900 indistributions from the partnership. What is Miko's partner returnon equity?

12.1%

19.3%

12.6%

20.0%

18.7%

The following information isavailable regarding Grace Smit's capital account in EnterpriseConsulting Group, a general partnership, for a recent year:

Beginning of theyear balance	$ 30,000
Share of partnershipincome	$ 10,500
Withdrawals madeduring the year	$ 6,800

What is Smit's partner return onequity during the year in question?

33.0%

11.6%

51.3%

12.3%

31.2%

Maxwell and Smart are forming a partnership. Maxwell isinvesting a building that has a market value of $81,000. However,the building carries a $55,000 mortgage that will be assumed by thepartnership. Smart is investing $22,000 cash. The balance ofMaxwell's Capital account will be:

$55,000.

$81,000.

$59,000.

$26,000.

$48,000.

Harvey and Quick have decided to form a partnership. Harvey isgoing to contribute a depreciable asset to the partnership as hisequity contribution to the partnership. The following informationregarding the asset to be contributed by Harvey is available:

Historical cost ofthe asset	$81,000
Accumulateddepreciation on the asset	$42,500
Note payable securedby the asset*	$23,000
Agreed-upon marketvalue of the asset	$47,500
*willbe assumed by the partnership

Based on this information,Harvey's beginning equity balance in the partnership will be:

$23,000

$47,500

$81,000

$38,500

$24,500

Wheadon, Davis, and Singer formed a partnership with Wheadoncontributing $58,800, Davis contributing $49,000 and Singercontributing $39,200. Their partnership agreement called for theincome (loss) division to be based on the ratio of capitalinvestments. If the partnership had income of $72,000 for its firstyear of operation, what amount of income (rounded to the nearestthousand) would be credited to Singer's capital account?

$19,200.

$28,800.

$72,000.

$24,000.

$39,200.

Christie and Jergens formed a partnership with capitalcontributions of $210,000 and $310,000, respectively. Theirpartnership agreement calls for Christie to receive a $51,000 peryear salary. Also, each partner is to receive an interest allowanceequal to 9% of a partner's beginning capital investments. Theremaining income or loss is to be divided equally. If the netincome for the current year is $117,000, then Christie andJergens's respective shares are:

$58,500; $58,500.

$69,900; $27,900.

$47,250; $69,750.

$79,500; $37,500.

$38,100; $78,900.

The partnership agreement for Wilson, Pickett & Nelson, ageneral partnership, provided that profits be shared between thepartners in the ratio of their financial contributions to thepartnership. Wilson contributed $90,000, Pickett contributed$54,000 and Nelson contributed $18,000. In the partnership's firstyear of operation, it incurred a loss of $207,000. What amount ofthe partnership's loss, rounded to the nearest dollar, should beabsorbed by Nelson?

$23,000

$69,000

$103,500

$51,750

erinlocust257

Daria and Farrah began a partnership by investing $41,000 and$60,000, respectively. During its first year, the partnershipearned $185,000. Prepare calculations showing how the $185,000income should be allocated to the partners under each of thefollowing three separate plans for sharing income and loss.
b) The partners agreed to share income and loss in proportion totheir initial investments
(c) The partners agreed to share income by granting a $50,000 peryear salary allowance to Daria, a $40,000 per year salary allowanceto Farrah, 11% interest on their initial capital investments, andthe remaining balance shared equally.

pucelouse578

Steve Reese is a well-known interior designer in Fort Worth, Texas. He wants to start his own business and convinces Rob OâDonnell, a local merchant, to contribute the capital to form a partnership. On January 1, 2016, OâDonnell invests a building worth $76,000 and equipment valued at $48,000 as well as $36,000 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 OâDonnell to join this partnership, Reese draws up the following profit and loss agreement:

OâDonnell will be credited annually with interest equal to 20 percent of the beginning capital balance for the year.
OâDonnell will also have added to his capital account 20 percent of partnership income each year (without regard for the preceding interest figure) or $7,000, whichever is larger. All remaining income is credited to Reese.
Neither partner is allowed to withdraw funds from the partnership during 2016. Thereafter, each can draw $6,000 annually or 10 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, 2017, Terri Dunn becomes a third partner in this business by contributing $24,000 cash to the partnership. Dunn receives a 25 percent share of the businessâs capital. The profit and loss agreement is altered as follows:

OâDonnell 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 2017 is reported as $68,000. Each partner withdraws the full amount that is allowed.

On January 1, 2018, Dunn becomes ill and sells her interest in the partnership (with the consent of the other two partners) to Judy Postner. Postner pays $105,000 directly to Dunn. Net income for 2018 is $69,000 with the partners again taking their full drawing allowance.

On January 1, 2019, 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.

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.
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.

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MGAB01H3 Lecture : Basic Partnership Accounting

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