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Interest 13. When Mill retired from the partnership of Mill, Yale, and Lear, the final settlement of Mills
Change in Capital Account interest exceeded Mills capital balance. Under the bonus method, the excess
10. During 1994, Young and Zinc maintained average capital balances in their partnership of a. Was recorded as goodwill.
$160,000 and $100,000 respectively. The partners receive 10% interest on average capital b. Was recorded as an expense.
c. Reduced the capital balances of Yale and Lear.
d. Had no effect on the capital balances of Yale and Lear. AICPA 1194 F-35
c. Indicates the distribution of successive amounts of available cash to each partner.
41. When NANA retired from the partnership of NANA, NINA, and NONA, the final settlement of d. Assumes contribution of personal assets by partners unless there is a substantial
NANAs interest exceeded her capital balance. Under the bonus method, the excess is presumption of personal insolvency by the partners. Gleim
a. Recorded as goodwill.
b. Recorded as an expense. *. The final cash distribution to the partners in a partnership in liquidation should be made in
c. Of no effect to the capital accounts of Nina and Nona. accordance with
d. Deducted from the capital account balances of Nina and None. RPCPA 1096 a. Balances of the partners capital accounts.
b. Partners profit and loss sharing ratio.
Goodwill Method c. Ratio of capital contributions made by the partners.
Liquidation of Partnerships d. Ratio of capital contributions less withdrawals made by the partners. RPCPA 1081, 0586
14. Quinn, Rob, Sam and Tod are partners sharing profits and losses equally. The partnership is
insolvent and is to be liquidated. The status of the partnership and each partner is as follows: *. In a partnership liquidation, the final cash distribution to the partners should be made in
Partnership Personal Assets (Exclusive Personal Liabilities (Exclusive accordance with the
Capital Balance of Partnership Interest) of Partnership Interest) a. Partners profit and loss sharing ratio.
Quinn $ 15,000 $100,000 $40,000 b. Balances of the partners capital accounts.
Rob 10,000 30,000 60,000 c. Ratio of capital contributions made by the partners.
Sam (20,000) 80,000 5,000 d. Ratio of capital contributions less withdrawals made by the partners. RPCPA 1079
Tod (30,000) 1,000 28,000
$(25,000)
Assuming the partnership operates in a state where the Uniform Partnership Act applies, the 1. REQUIRED: The definition of a partnership.
partnership creditors DISCUSSION: (B) A partnership, as defined by the Revised Uniform Partnership Act, is the
a. Must first seek recovery against Sam because he is solvent personally and has a negative association of two or more persons to carry on as co-owners a business for profit.
capital balance. Answer (A) is incorrect because a partnership must be a profit-oriented business arrangement
b. Will not be paid in full regardless of how they proceed legally because the partnership among co-owners. Answer (C) is incorrect because a partnership is viewed for most legal
assets are less than the partnership liabilities. purposes as a group of individuals rather than a separate entity. Answer (D) is incorrect
c. Will have to share Robs interest in the partnership on a pro rata basis with his personal because no statutory requirements need be met to create a general partnership. A
creditors. partnership may arise regardless of the intent of the parties when an arrangement satisfies the
d. Have first claim to the partnership assets before any partners personal creditors have definition. However, specific statutory requirements must be followed to create a limited
rights to the partnership assets. AICPA 0575 T-6 partnership.
Lump Sum Liquidation 2. REQUIRED: The item not usually included in the partnership agreement.
Installment Liquidation DISCUSSION: (A) Unlike corporations, general partnerships do not insulate a partner from
15. Prior to partnership liquidation, a schedule of possible losses is frequently prepared to liability to creditors. Each general partner has unlimited liability for partnership debts. The
determine the amount of cash that may be safely distributed to the partners. The schedule of partners may agree among themselves to limit a partners liability, but such a provision cannot
possible losses limit direct liability to creditors.
a. Consists of each partners capital account plus loan balance, divided by that partners Answers (B), (C), and (D) are incorrect because each is typically found in the agreement
profit-and-loss sharing ratio. among partners that establishes the partnership. A written agreement is not necessary for the
b. Shows the successive losses necessary to eliminate the capital accounts of partners creation of a partnership, but such an agreement is commonly used to define the rights and
(assuming no contribution of personal assets by partners). duties among the partners.
7. REQUIRED: The true statement about the bonus and goodwill methods.
3. REQUIRED: The credit to the contributing partners capital account when noncash assets are DISCUSSION: (A) The goodwill method revalues assets to adjust the total value of partnership
invested. capital. The bonus method simply readjusts capital accounts and makes no changes in
DISCUSSION: (A) The capital account should be credited for the current fair vaue of the existing asset accounts.
assets at the date of the contribution. This approach is consistent with APB 29, which states Answer (B) is incorrect because the bonus method does not revalue assets. Answers (C) and
that in general, accounting for nonmonetary transactions should be based on the fair values (D) are incorrect because the goodwill method revalues assets and the bonus method adjusts
of the assets (or services) involved. APB 21, specifically applies this principle to nonmonetary capital accounts. Consequently, total partnership capital differs between the two methods.
assets received in nonreciprocal transfers.
Answers (B), (C), and (D) are incorrect because fair value best reflects the economic 8. REQUIRED: The ratio used to allocated to the original partners, the excess of the new
substance of the transaction. partners contribution over the amount credited to his/her capital account.
DISCUSSION: (D) The bonus method simply readjusts capital accounts and makes no
4. REQUIRED: The credit to the contributing partners capital account when noncash assets are changes in existing asset accounts. The existing partners will share 2:1 in the allocation of the
invested. bonus. The entry will be to debit cash (or the fair value of the property) contributed, and the
DISCUSSION: (A) The capital account should be credited for the current fair value of the credit Colters capital account for a lesser amount. The excess will be credited in the ratio 2:1
assets at the date of the contribution. to the original partners capital balances.
Answers (B), (C), and (D) are incorrect because fair value best reflects the economic Answers (A), (B), and (C) are incorrect because the bonus to the original partners is effectively
substance of the transaction. a profit and should be allocated based on the old profit and loss ratio.
5. REQUIRED: The corporate accounts similar to partnership capital and drawing accounts. 9. REQUIRED: The profit and loss allocation among partners absent a provision in the
DISCUSSION: (A) Partnership capital accounts are similar to corporate paid-in capital and partnership agreement.
retained earnings accounts. Partnership drawing accounts are similar to corporate dividend DISCUSSION: (A) Under the RUPA, profits are to be distributed equally among partners and
accounts. They are nominal accounts that are closed to partnership capital and corporate losses are to be distributed in the same manners are profits unless the partnership agreement
retained earnings, respectively, at the end of each period. provides otherwise. This equal distribution should be based on the number of partners rather
Answers (B) and (C) are incorrect because drawing accounts are comparable to dividends than in proportion to the partners capital balances.
accounts. Answer (D) is incorrect because drawing accounts are not like preferred and Answers (B), (C), and (D) are incorrect because each may be a basis for allocation only if it is
common stock accounts. provided in the partnership agreement.
6. REQUIRED: The partner with the largest capital account balance after contributions of 10. REQUIRED: The change in a partners capital account.
monetary and nonmonetary asset. DISCUSSION: (A) The partners are to receive 10% interest and then split the residual profit or
DISCUSSION: (C) When partners invest nonmonetary assets in the business, those assets loss. Because interest exceeds partnership profit before interest, the residual loss is $22,000
should be recorded at their current fair value (market value) at the date they are contributed. {[10% x ($160,000 + $100,000)] - $4,000}. Zincs account is increased by $10,000 (10% x
Hence, Algees capital account balance is $50,000 and Cedas account is $55,000. Likewise, $100,000) and decreased by $110,000 (50% x $22,000 loss), a net decrease of $1,000.
the amount in Belgers capital account should represent the fair value of the assets Answer (B) is incorrect because $2,000 is 50% of the partnership profit before interest.
contributed. For this purpose, the property is valued net of the mortgage. Thus, Belgers Answer (C) is incorrect because an $11,000 decrease does not include the $10,000 of interest
capital account should be $45,000 ($80,000 market value of property $35,000 mortgage owed to Zinc. Answer (D) is incorrect because a $12,000 increase equals 10% of capital plus
assumed by the partnership). 50% of residual profit.
Answers (A), (B), and (D) are incorrect because Cedas balance is the largest.
11. REQUIRED: The partner with a greater advantage when the partnership has a profit or when it bankrupt partnership shares pro rata with the other general unsecured creditors of a bankrupt
has a loss. general partner. However, partnership creditors retain their priority in partnership assets under
DISCUSSION: (B) When the partnership has a loss, Ferris is allocated 60% and Oxide 40%. bankruptcy law. The Revised Uniform Partnership Act follows the federal law.
Hence, Oxide has the advantage when the partnership has a loss. When the partnership has Answer (A) is incorrect because, after exhausting the partnership assets, the creditors must
a profit, Oxide receives 20% plus 40% of the remaining 80%, a total of 52% [20% + (40% x seek recovery against all partners in one legal proceeding; i.e., the partners are jointly liable.
80%)]. Thus, Oxide also that the advantage in this situation. Answer (B) is incorrect because the partnership creditors ultimately have recourse to the
Answers (A), (C), and (D) are incorrect because Oxide has the advantage in the cah of either personal assets of all the general partners. Answer (C) is incorrect because, under the UPA,
a profit or a loss. the partnership creditors have first claim to the partnership assets.
12. REQUIRED: The method(s) that could have been used to account for the partners withdrawal. 15. REQUIRED: The true statement about a schedule of possible losses.
DISCUSSION: (D) Under the bonus method, revaluation of assets to reflect goodwill is not DISCUSSION: (B) A schedule of possible losses presents a series of incremental losses to
permitted. Consequently, if the partnership had unrecorded goodwill, Allen would have indicate the amount of loss in a liquidation that will eliminate each partners capital account.
received the balance in her capital account plus a share of the unrecorded goodwill. The The presumption is that losses or partners capital deficits will not be repaid by individual
payment to Allen of a share of the unrecorded goodwill therefore would have resulted in partners. The schedule is used to determine the amount of cash that may be safely distributed
reductions of the capital balances of the remaining partners. Under the goodwill method, to the individual partners without potential impairment of the rights of any party.
goodwill would be debited, and the capital accounts would be credited in proportion to the Answer (A) is incorrect because it describes the computation that determines the order in
partners profit and loss sharing percentages. Accordingly, no decrease in the capital which partners capital accounts will be eliminated by losses, not the amounts thereof. Answer
balances of the other partners would be necessary under the goodwill method. (C) is incorrect because it describes a cash distribution schedule. Answer (D) is incorrect
Answers (A), (B), and (C) are incorrect because the bonus but not the goodwill method could because the presumption (for the schedule) is that losses or deficits will not be repaid by
have been used. individual partners.
13. REQUIRED: The treatment of the excess of the settlement of a partners interest over the
capital balance.
DISCUSSION: (C) The bonus method reduces the capital accounts of the other partners
because the bonus, that is, the excess of settlement value over the retiring partners capital
balance, is deemed to be paid to the withdrawing partner by the remaining partners.
Answer (A) is incorrect because goodwill is not recorded under the bonus method. Answers
(B) and (D) are incorrect because the excess reduces the capital accounts; it is not an
expense.
14. REQUIRED: The rights of partnership creditors under the Uniform Partnership Act.
DISCUSSION: (D) The Uniform Partnership Act follows the legal concept of marshaling of
assets. Accordingly, the assets of the partnership are made available first to the partnership
creditors. Only after their claims are fully satisfied will the personal creditors of the partners be
able to proceed against partnership assets. Similarly, the personal creditors of each general
partner have first claim to the personal assets of that general partner. The Federal Bankruptcy
Reform Act of 1978, however, altered the marshaling of assets concept with regard to the
personal asset of a bankrupt partner when the partnership is also bankrupt. The trustee of a