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Partnerships—Formation, Operations, and Changes in Ownership Interests 549

Joint Ventures
Joint ventures have the characteristics of partnerships, except that the joint venture is usually set
up for a specific limited purpose. When the activity is complete, the venture is terminated. For this
reason, the agency power of joint ventures is limited. Joint ventures are covered in Chapter 11 of
this book.

SuMMARY
Partnership accounting procedures are similar to those for other forms of business organization,
except for procedures relating to the measurement of partnership capital interests. Accounting meas-
urements relating to the capital and income interests of partners are based on the partnership agree-
ment or, in the absence of an agreement, on the UPA, except for partnerships in states that have not
adopted the act. The partnership agreement should be in writing and should cover matters relating
to the amount and valuation of capital contributions, additional investments with withdrawals, loans
to partners, profit-sharing arrangements, changes in partnership interests, and various other matters.

QuESTIONS
1. What are the characteristics of a partnership?
2. What should be included in the articles of a partnership?
3. How would partners appraise an initial noncash investment value?
4. Why do some profit-sharing agreements provide for salary and interest allowances?
5. Are partner salary allowances expenses of the partnership?
6. When a profit-sharing agreement specifies that profits should be divided using the ratio of capital balances,
how should capital balances be computed?
7. Explain how a partner could have a loss from partnership operations for a period even though the partner-
ship had net income.
8. The concept of partnership dissociation has a technical meaning under the provisions of UPA. Explain
the concept.
9. If a partner sells his or her partnership interest directly to a third party, the partnership may or may not be
dissolved. Under what conditions is the partnership dissolved?
10. How does the purchase of an interest from existing partners differ from the acquisition of an interest by
investment in a partnership?
11. What alternative approaches can be used in recording the admission of a new partner?
12. Why is the goodwill procedure best described as a revaluation procedure?
13. Explain the bonus procedure for recording an investment in a partnership. When is the bonus applicable
to old partners, and when is it applicable to new partners?
14. The goodwill procedure was used to record the investment of a new partner in the XYZ Partnership, but
immediately thereafter, the entire business was sold for an amount equal to the recorded capital of the
partnership. Under what conditions would the amounts received in final liquidation of the partnership have
been the same as if the bonus procedure had been used?
15. Bob invests $10,000 cash for a 25 percent interest in the capital and earnings of the BOP Partnership.
Explain how this investment could give rise to (a) recording goodwill, (b) the write-down of the partnership
assets, (c) a bonus to old partners, and (d) a bonus to Bob.

ExERcISES

E 16-1
Initial investments
Michelle and Devina are forming a partnership. Both of them agree to have equal capital interest. Below are the initial
investments for the partnership:
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550 CHAPTER 16

Michelle Michelle Devina Devina

(Cost) (Fair Value) (Cost) (Fair Value)
Cash $450,000 $450,000 $300,000 $300,000
Land 6,000,000 10,000,000
Truck 7,000,000 6,500,000
Computer 1,500,000 1,300,000
Inventory 200,000 200,000

REQuIRED
1. Calculate the capital balances for Michelle and Devina using the bonus approach.
2. Calculate the capital balances for Michelle and Devina using the goodwill approach.
3. Under the goodwill approach, what is the amount of goodwill that should be recognized by the
partnership?

E 16-2
Partnership income allocation—Bonus
Arn, Bev, and Car are partners who share profits and losses 30:30:40, respectively, after Bev, who manages the partner-
ship, receives a bonus of 10 percent of income, net of the bonus. Partnership income for the year is $198,000.

R E Q u I R E D : Prepare a schedule to allocate partnership income to Arn, Bev, and Car.

E 16-3
Partnership income allocation—Salary allowance
Mel and Dav created a partnership to own and operate a health-food store. The partnership agreement provided that
Mel receive a salary of $10,000 and Dav a salary of $5,000 to recognize their relative time spent in operating the store.
Remaining profits and losses were divided 60:40 to Mel and Dav, respectively. Income of $13,000 for 2016, the first
year of operations, was allocated $8,800 to Mel and $4,200 to Dav.
On January 1, 2017, the partnership agreement was changed to reflect the fact that Dav could no longer devote any
time to the store’s operations. The new agreement allows Mel a salary of $18,000, and the remaining profits and losses
are divided equally. In 2017, an error was discovered such that the 2016 reported income was understated by $4,000.
The partnership income of $25,000 for 2017 included this $4,000 related to 2016.

R E Q u I R E D : Prepare a schedule to allocate the $25,000 reported 2017 partnership income to Mel and Dav.

E 16-4
Partnership income allocation–Salary allowance, bonus, and interest
Rama, Shinta, and Lesmana created a partnership to own and operate a video rental store. The partnership agreement
provides that profits are to be divided as follows:
■ Rama receives bonus equal to 10 percent of income net of the bonus.
■ Rama receives a salary of $12,000 and Shinta receives a salary of $10,000.
■ All partners receive 10 percent interest on weighted average capital balances.
■ Remaining profits or losses are divided equally among the three partners.
Additional information is summarized as follows:

Rama Shinta Lesmana

Capital, January 1, 2016 $200,000 $125,000 $75,000
Addition (Drawing):
July 1, 2016 20,000 (10,000)
October 1, 2016 (12,000) 15,000 5,000

R E Q u I R E D : Prepare a schedule to allocate partnership net income of $110,000 for 2016.

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Partnerships—Formation, Operations, and Changes in Ownership Interests 551

E 16-5
Profit allocation
Wero and Amy are members of a partnership. The partnership agrees to use weighted average capital balances for its
profit- and loss-sharing. The changes in partnership capital during the year are as follows:

Wero Amy
January 1, 2013 $7,500,000 $6,000,000
Investment March 1 $400,000 —
Investment May 1 — $150,000
Drawing June 1 $200,000 $500,000
Withdrawal October 1 $1,300,000 —
Investment November 31 — $700,000
Investment December 31 $2,000,000 —

The partnership net income for the year is $9,000,000.

REQuIRED
1. Determine the weighted average capital balances for Wero and Amy.
2. Determine profit that should be allocated to Wero and Amy.

E 16-6
Partnership income allocation—Assignment of interest to a third party
Capital balances and profit- and loss-sharing ratios of the partners in the BIG Entertainment Galley are as follows:
Ben capital (50%) $900,000
Irv capital (30%) 680,000
Geo capital (20%) 500,000
Total $2,080,000

Ben needs money and agrees to assign half of his interest in the partnership to Pet for $280,000 cash. Pet pays
$280,000 directly to Ben.

REQuIRED
1. Prepare a journal entry to record the assignment of half of Ben’s interest in the partnership to Pet.
2. What is the total capital of the BIG partnership immediately after the assignment of the interest to Pet?

E 16-7
Investing in existing partnership
Liu and Wang are in a partnership with a profit-sharing ratio of 40 percent and 60 percent, respectively. Liu has a capital
balance of $3,000,000 and Wang has a capital balance of $2,500,000. The partners agree to admit Ping into the partner-
ship for a 40 percent interest with an investment of $6,000,000.

REQuIRED
1. Calculate the balance of each partner’s capital if the assets of the partnership are revalued.
2. Calculate the balance of each partner’s capital if the assets of the partnership are not revalued.

E 16-8
Recording new partner investment—Revaluation case
Wang, Sun, and Cong are partners in a book store business and, in accordance to their partnership agreement, divide
profits or losses at 40 percent to Wang, 40 percent to Sun, and 20 percent to Cong. Their capital balances at December
31, 2016, are as follows:
Wang capital $50,000
Sun capital 50,000
Cong capital 50,000
Total capital $150,000

Partnership net assets have a book value equal to fair value. On January 1, 2017, the partners agree to admit Singh
into the partnership. Singh directly purchases half of the interest in partnership capital and profits from Wang, Sun, and
Cong for $100,000.
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552 CHAPTER 16

R E Q u I R E D : Prepare journal entries for the admission of Singh into the partnership, assuming that partner-
ship assets are revalued.

E 16-9
Recording new partner investment—Revaluation cases
The capital balances and profits- and loss-sharing percentages for the Sip, Jog, and Run partnership at December 31,
2016, are as follows:
Sip capital (30%) $160,000
Jog capital (50%) $180,000
Run capital (20%) $140,000

The partners agree to admit Wal into the partnership on January 1, 2017, for a 20 percent interest in the capital and
income of the business.

REQuIRED
1. Prepare the journal entry or entries to record Wal’s admission to the partnership assuming that he invests
$100,000 in the partnership for the 20 percent interest and that partnership capital is revalued. Assume that
the book value of partnership assets equals the fair value.
2. Prepare the journal entry or entries to record Wal’s admission to the partnership assuming that he invests
$140,000 in the partnership for the 20 percent interest and that partnership capital is revalued.

E 16-10
Calculating new partner investment—Nonrevaluation case
Capital balances and profit sharing percentages for the partnership of Shin and Miku on January 1, 2016, are as follows:

Shin (64%) $240,000

Miku (36%) 120,000
$360,000

On January 2, 2016, the partners agree to admit Tora into the partnership for a 24 percent interest in capital and
profits in the partnership of $100,000. Partnership assets are not to be revalued.

REQuIRED
1. Determine the capital balances of the three partners immediately after the admission of Tora.
2. What is the profit-sharing ratio for Shin, Miku, and Tora?

E 16-11
Recording partner retirement—Revaluation case
Capital balances and profit-sharing percentages for the Achmad, Fakhry, and Fatimah partnership on December 31,
2016, just before the retirement of Fatimah, are as follows:

Achmad capital (30%) $120,000

Fakhry capital (40%) 180,000
Fatimah capital (30%) 120,000
$420,000

On January 1, 2017, Fatimah is paid $150,000 cash on her retirement. The net assets have a book value equal to
fair value.

R E Q u I R E D : Prepare journal entries to record Fatimah’s retirement assuming that Fatimah’s share of assets
are revalued.
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Partnerships—Formation, Operations, and Changes in Ownership Interests 553

E 16-12
Partner retirement entries—Fair value adjustment
A balance sheet at December 31, 2016, for the Bec, Dee, and Lyn partnership is summarized as follows:

Assets $800,000 Liabilities $200,000

Loan to Dee 100,000 Bec capital (50%) 300,000
$900,000 Dee capital (40%) 300,000
Lyn capital (10%) 100,000
$900,000

Dee is retiring from the partnership. The partners agree that partnership assets, excluding Dee’s loan, should be
adjusted to their fair value of $1,000,000 and that Dee should receive $310,000 for her capital balance net of the
$100,000 loan. The bonus approach is used; therefore, no goodwill is recorded.

R E Q u I R E D : Determine the capital balances of Bec and Lyn immediately after Dee’s retirement.

E 16-13
Partnership income allocation—Salary allowance, bonus, and additional contributions
during the year
Kat and Edd formed the K & E partnership several years ago. Capital account balances on January 1, 2016, were as follows:

Kat $496,750
Edd $268,250

The partnership agreement provides Kat with an annual salary of $10,000 plus a bonus of 5 percent of part-
nership net income for managing the business. Edd is provided an annual salary of $15,000 with no bonus. The
remainder is shared evenly. Partnership net income for 2016 was $30,000. Edd and Kat each invested an additional
$5,000 during the year to finance a special purchase. Year-end drawing account balances were $15,000 for Kat
and $10,000 for Edd.

REQuIRED
1. Prepare an income allocation schedule.
2. Create the journal entries to update the equity accounts at the end of the year.
3. Determine the capital balances as of December 31, 2016.

E 16-14
Partnership retirement—revaluation and nonrevaluation
The capital account balances and profit-sharing ratios of the Akamu, Nani, Kalena, and Maile partnership on December
31, 2016, after closing entries are as follows:

Akamu (20%) $55,000

Nani (30%) 75,000
Kalena (30%) 80,000
Maile (20%) 60,000
Total capital $270,000

Akamu is retiring from the partnership on 1 January 2017, and the partners agree that he will receive a cash payment
of $70,000 in final settlement of his interest. The book value of partnership net assets is equal to fair value, except for
equipment with a book value of $25,000 and a fair value of $30,000.

REQuIRED
1. Prepare journal entries to record Akamu’s retirement assuming that his share of assets are revalued.
2. Prepare journal entries to record Akamu’s retirement assuming that total partnership capital is revalued.
3. Prepare journal entries to record Akamu’s retirement assuming the bonus approach is used.
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554 CHAPTER 16

E 16-15
Recording new partner investment and partner retirements—Various situations
1. Bil and Ken enter into a partnership agreement in which Bil is to have a 60 percent interest in capital and profits
and Ken is to have a 40 percent interest in capital and profits. Bil contributes the following:

Cost Fair Value

Land $10,000 $20,000
Building 100,000 60,000
Equipment 20,000 15,000

There is a $30,000 mortgage on the building that the partnership agrees to assume. Ken contributes $50,000 cash
to the partnership. Bil and Ken agree that Ken’s capital account should equal Ken’s $50,000 cash contribution and
that goodwill should be recorded. Goodwill should be recorded in the amount of:
a $10,000
b $15,000
c $16,667
d $20,000
2. Tho and Mar are partners having capital balances of $50,000 and $60,000, respectively. They admit Jay to a one-
third interest in partnership capital and profits for an investment of $65,000. If the goodwill procedure is used in
recording Jay’s admission to the partnership:
a Jay’s capital will be $58,333
b Total capital will be $175,000
c Mar’s capital will be $70,000
d Goodwill will be recorded at $15,000
3. On December 31, 2016, Tin and Web, who share profits and losses equally, have capital balances of $170,000 and
$200,000, respectively. They agree to admit Zen for a one-third interest in capital and profits for his investment
of $200,000. Partnership net assets are not to be revalued. Capital accounts of Tin, Web, and Zen, respectively,
immediately after Zen’s admission to the partnership are:
a $170,000, $200,000, and $200,000
b $165,000, $195,000, and $200,000
c $175,000, $205,000, and $190,000
d $185,000, $215,000, and $200,000
4. Fin and Rho have capital balances of $100,000 and $80,000, respectively, and they share profits equally. The part-
ners agree to accept Che for a 25 percent interest in capital and profits for her investment of $90,000. If goodwill is
recorded, the capital account balances of Fin and Rho immediately after Che’s admittance to the partnership will be:
a Fin, $100,000; Rho, $120,000
b Fin, $111,250; Rho, $91,250
c Fin, $145,000; Rho, $125,000
d Fin, $120,000; Rho, $120,000
5. The balance sheet of the Fre, Gin, and Peg partnership on December 31, 2016, together with profit-sharing ratios,
revealed the following:

Cash $240,000 Fre capital (30%) $200,000

Other assets 360,000 Gin capital (30%) 170,000
Peg capital (40%) 230,000
$600,000 $600,000

Gin is retiring from the partnership, and the partners agreed that she should receive $200,000 cash as payment in
full for her share of partnership assets. If the goodwill implied by the settlement with Gin is recorded on the partner-
ship books, total partnership assets after Gin’s withdrawal should be:
a $566,667
b $500,000
c $430,000
d $400,000
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Partnerships—Formation, Operations, and Changes in Ownership Interests 555

E 16-16
Recording new partner investment and partner retirements—Various situations
1. Shi purchased an interest in the Ton and Olg partnership by paying Ton $40,000 for half of his capital and half of
his 50 percent profit-sharing interest. At the time, Ton’s capital balance was $30,000 and Olg’s capital balance was
$70,000. Shi should receive a credit to her capital account of:
a $15,000
b $20,000
c $25,000
d $33,333
2. Lin and Que are partners with capital balances of $50,000 and $70,000, respectively, and they share profits and
losses equally. The partners agree to take Dun into the partnership for a 40 percent interest in capital and profits,
while Lin and Que each retain a 30 percent interest. Dun pays $60,000 cash directly to Lin and Que for his 40 percent
interest, and goodwill implied by Dun’s payment is recognized on the partnership books. If Lin and Que transfer
equal amounts of capital to Dun, the capital balances after Dun’s admittance will be:
a Lin, $35,000; Que, $55,000; Dun, $60,000
b Lin, $45,000; Que, $45,000; Dun, $60,000
c Lin, $36,000; Que, $36,000; Dun, $48,000
d Lin, $26,000; Que, $46,000; Dun, $48,000
use the following information in answering questions 3 and 4:
McC and New are partners with capital balances of $70,000 and $50,000, respectively, and they share profit and
losses equally. Oak is admitted to the partnership with a contribution to the partnership of $50,000 cash for a one-
third interest in the partnership capital and in future profits and losses.
3. If the goodwill is recognized in accounting for the admission of Oak, what amount of goodwill will be recorded?
a $60,000
b $20,000
c $10,000
d $6,667
4. If no goodwill is recognized, the capital balances of McC and New immediately after the admission of Oak will be:
a McC, $65,000; New, $45,000
b McC, $66,667; New, $46,666
c McC, $67,500; New, $47,500
d McC, $70,000; New, $50,000
5. The December 31, 2016, balance sheet of the Ben, Car, and Das partnership is summarized as follows:

Cash $100,000 Car loan $100,000

Other assets, at cost 500,000 Ben capital 100,000
Car capital 200,000
Das capital 200,000
$600,000 $600,000

The partners share profits and losses as follows: Ben, 20 percent; Car 30 percent; and Das, 50 percent. Car is retir-
ing from the partnership, and the partners have agreed that “other assets” should be adjusted to their fair value of
$600,000 at December 31, 2016. They further agree that Car will receive $244,000 cash for his partnership interest
exclusive of his loan, which is to be paid in full, and that no goodwill implied by Car’s payment will be recorded.
After Car’s retirement, the capital balances of Ben and Das, respectively, will be:
a $116,000 and $240,000
b $101,714 and $254,286
c $100,000 and $200,000
d $73,143 and $182,857

E 16-17
Partnership income allocation and new partner investment—Various situations
1. Cob, Inc., a partner in TLC Partnership, assigns its partnership interest to Ben, who is not made a partner. After the
assignment, Ben asserts the rights to:
I. Participate in the management of TLC
II. Cob’s share of TLC’s partnership profits
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556 CHAPTER 16

Ben is correct as to which of these rights?

a I only
b II only
c I and II
d Neither I nor II
2. When property other than cash is invested in a partnership, at what amount should the noncash property be credited
to the contributing partner’s capital account?
a Fair value at the date of contribution
b Contributing partner’s original cost
c Assessed valuation for property tax purposes
d Contributing partner’s tax basis
3. Pla, a partner in the Bri Partnership, has a 30 percent participation in partnership profits and losses. Pla’s capital
account had a net decrease of $60,000 during the calendar year 2016. During 2016, Pla withdrew $130,000
(charged against his capital account) and contributed property with a fair value of $25,000 to the partnership. What
was the net income of the Bri Partnership for 2016?
a $150,000
b $233,333
c $350,000
d $550,000
4. Fox, Gre, and How are partners with average capital balances during 2016 of $120,000, $60,000, and $40,000,
respectively. Partners receive 10 percent interest on their average capital balances. After deducting salaries
of $30,000 to Fox and $20,000 to How, the residual profit or loss is divided equally. In 2016, the partnership
sustained a $33,000 loss before interest and salaries to partners. By what amount should Fox’s capital account
change?
a $7,000 increase
b $11,000 decrease
c $35,000 decrease
d $42,000 increase
5. Bec, an active partner in the Bec and Cri partnership, receives an annual bonus of 25 percent of partnership net
income after deducting the bonus. For the year ended December 31, 2016, partnership net income before the bonus
amounted to $300,000. Bec’s 2016 bonus should be:
a $56,250
b $60,000
c $62,500
d $75,000

E 16-18
Partnership retirement—Various situations
1. Partners All, Bak, and Coe share profits and losses 50:30:20, respectively. The balance sheet at April 30, 2016,
follows:
Assets Equities
Cash $40,000 Accounts payable $100,000
Other assets 360,000 All capital 74,000
Bak capital 130,000
Coe capital 96,000
$400,000 $400,000

The assets and liabilities are recorded and presented at their respective fair values. Jon is to be admitted as a
new partner with a 20 percent capital interest and a 20 percent share of profits and losses in exchange for a cash
contribution. No goodwill or bonus is to be recorded. How much cash should Jon contribute?
a $60,000
b $72,000
c $75,000
d $80,000
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Partnerships—Formation, Operations, and Changes in Ownership Interests 557

2. Elt and Don are partners who share profits and losses in the ratio of 7:3, respectively. On November 5, 2016, their
respective capital accounts were as follows:
Elt $70,000
Don 60,000
$130,000

On that date they agreed to admit Kra as a partner with a one-third interest in the capital and profits and losses
upon his investment of $50,000. The new partnership will begin with a total capital of $180,000. Immediately after
Kra’s admission, what are the capital balances of Elt, Don, and Kra, respectively?
a $60,000, $60,000, $60,000
b $63,000, $57,000, $60,000
c $63,333, $56,667, $60,000
d $70,000, $60,000, $50,000
3. Wil desires to purchase a one-fourth capital and profit and loss interest in the partnership of Eli, Geo, and Dic. The
three partners agree to sell Wil one-fourth of their respective capital and profit and loss interests in exchange for
a total payment of $40,000. The capital accounts and the respective percentage interests in profits and losses
immediately before the sale to Wil are as follows:
Eli capital (60%) $80,000
Geo capital (30%) 40,000
Dic capital (10%) 20,000
$140,000

All other assets and liabilities are fairly valued, and implied goodwill is to be recorded prior to the acquisition by Wil.
Immediately after Wil’s acquisition, what should be the capital balances of Eli, Geo, and Dic, respectively?
a $60,000, $30,000, $15,000
b $69,000, $34,500, $16,500
c $77,000, $38,500, $19,500
d $92,000, $46,000, $22,000
4. The capital accounts of the partnership of New, Sha, and Jac on June 1, 2016, are presented, along with their
respective profit and loss ratios:
New $139,200 1/2
Sha 208,800 1/3
Jac 96,000 1/6
$444,000

On June 1, 2016, Sid was admitted to the partnership when he purchased, for $132,000, a proportionate interest
from New and Sha in the net assets and profits of the partnership. As a result of this transaction, Sid acquired a
one-fifth interest in the net assets and profits of the firm. Assuming that implied goodwill is not to be recorded, what
is the combined gain realized by New and Sha upon the sale of a portion of their interests in the partnership to Sid?
a $0
b $43,200
c $62,400
d $82,000
5. Ker and Pat are partners with capital balances of $60,000 and $20,000, respectively. Profits and losses are divided
in the ratio of 60:40. Ker and Pat decide to admit Gra, who invested land with a fair value of $15,000 for a 20 percent
capital interest in the partnership. Gra’s capital account should be credited for:
a $12,000
b $15,000
c $16,000
d $19,000
6. Dix, a partner in an accounting firm, decided to withdraw from the partnership. Dix’s share of the partnership profits
and losses was 20 percent. Upon withdrawing from the partnership, he was paid $74,000 in final settlement for
his partnership interest. The total of the partners’ capital accounts before recognition of partnership goodwill prior
to Dix’s withdrawal was $210,000. After his withdrawal, the remaining partners’ capital accounts, excluding their
share of goodwill, totaled $160,000. The total agreed-upon goodwill of the firm was:
a $120,000
b $140,000
c $160,000
d $250,000
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558 CHAPTER 16

7. On June 30, 2016, the balance sheet for the partnership of Wil, Bro, and Low, together with their respective profit
and loss ratios, is summarized as follows:

Assets, at cost $300,000 Wil loan $15,000

Wil capital (20%) 70,000
Bro capital (20%) 65,000
Low capital (60%) 150,000
$300,000

Wil has decided to retire from the partnership, and by mutual agreement the assets are to be adjusted to their fair
value of $360,000 at June 30, 2016. It is agreed that the partnership will pay Wil $102,000 cash for his partner-
ship interest exclusive of his loan, which is to be repaid in full. Goodwill is to be recorded in this transaction, as
implied by the excess payment to Wil. After Wil’s retirement, what are the capital account balances of Bro and Low,
respectively?
a $65,000 and $150,000
b $97,000 and $246,000
c $73,000 and $174,000
d $77,000 and $186,000

E 16-19
Statement of partner’s capital
Financial information for the Park, Lee, and Jeon partnership for 2016 is summarized below:

Park (30%) Lee (30%) Jeon (40%)

Capital balance January 1, 2016 $100,000 $120,000 $180,000
Addition (drawing):
July 1, 2016 10,000 — 15,000
October 1, 2016 (12,000) (12,000) (12,000)

In accordance to the partnership agreement, the net income is to be divided as follows:

■ Bonus equal to 10 percent of net income to Park
■ Salary allowance of $12,000 to Park and $5,000 to Lee
■ 10 percent of interest on beginning capital balance
■ Remaining profits to be divided according to profit-sharing agreement
Total capital balance on December 31, 2016, was $461,000.

R E Q u I R E D : Prepare a statement of each partner’s capital for the year ended December 31, 2016.

E 16-20
Recording new partner investment
After operating as partners for several years, Gro and Ham decided to sell one-half of each of their partnership interests
to Lot for a total of $70,000, paid directly to Gro and Ham.
At the time of Lot’s admittance to the partnership, Gro and Ham had capital balances of $45,000 and $65,000,
respectively, and shared profits 45 percent to Gro and 55 percent to Ham.

REQuIRED
1. Calculate the capital balances of each of the partners immediately after Lot is admitted as a partner assum-
ing that the assets are not revalued, and prepare a second calculation of the capital balances assuming that
the assets are revalued at the time Lot is admitted.
2. In designing a new partnership agreement, how should profits and losses be divided?
3. If a new partnership agreement is not established, how will profits and losses be divided?
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Partnerships—Formation, Operations, and Changes in Ownership Interests 559

E 16-21
Partnership retirement—Various situations
The Cas, Don, and Ear partnership balance sheet and profit and loss percentages at June 30, 2016, are summarized
as follows:

Assets $500,000 Cas capital (30%) $140,000

Don capital (30%) 175,000
Ear capital (40%) 185,000
$500,000 $500,000

On July 1, 2016, the partners agree that Cas is to retire immediately and receive $161,000 for her partnership
interest.

R E Q u I R E D : Prepare journal entries to illustrate three possible methods of accounting for the retirement
of Cas.

pROBLEMS

P 16-1
Partnership income allocation—Statement of partnership capital
Ell, Far, and Gar are partners who share profits and losses 30 percent, 30 percent, and 40 percent, respec-
tively, after Ell and Far each receive a $32,000 salary allowance. Capital balances on January 1, 2016,
are as follows:
Ell (30%) $69,000
Far (30%) 85,500
Gar (40%) 245,500

During 2016, Gar invested an additional $20,000 in the partnership, and Ell and Far each with-
drew $32,000, equal to their salary allowances as provided by the profit- and loss-sharing agreement.
The partnership net assets at December 31, 2016, were $481,000.

R E Q u I R E D : Prepare a statement of partnership capital for the year ended December 31, 2016.

P 16-2
Recording new partner investment—Revaluation and nonrevaluation cases
The partnership of Mor and Osc is being dissolved, and the assets and equities at book value and fair
value and the profit- and loss-sharing ratios at January 1, 2016, are as follows:
Book Value Fair Value
Cash $ 20,000 $ 20,000
Accounts receivable—net 100,000 100,000
Inventories 50,000 200,000
Plant assets—net 100,000 120,000
$270,000 $440,000
Accounts payable $ 50,000 $ 50,000
Mor capital (50%) 120,000
Osc capital (50%) 100,000
$270,000

Mor and Osc agree to admit Tre into the partnership for a one-third interest. Tre invests $95,000
cash and a building to be used in the business with a book value to Tre of $100,000 and a fair value
of $120,000.
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560 CHAPTER 16

REQuIRED
1. Prepare a balance sheet for the Mor, Osc, and Tre partnership on January 2, 2016, just after the admission
of Tre, assuming that the assets are revalued and goodwill is recognized.
2. Prepare a balance sheet for the Mor, Osc, and Tre partnership on January 2, 2016, after the admission of
Tre, assuming that the assets are not revalued.

P 16-3
Partnership income allocation
Ash and Bar are partners with capital balances on January 1, 2016, of $70,000 and $80,000, respectively.
The partnership agreement provides that each partner is allowed 10 percent interest on beginning capital
balances; that Ash receives a salary allowance of $20,000 per year and a 20 percent bonus of partnership
income after interest, salary allowance, and bonus; and that remaining income is divided equally.

R E Q u I R E D : Prepare an income distribution schedule to show how the $160,000 partnership net income for
2016 should be divided.

P 16-4
Partnership income allocation—Complex, net loss
The partnership agreement of Ale, Car, and Eri provides that profits are to be divided as follows:
1. Ale is to receive a salary allowance of $10,000 for managing the partnership business.
2. Partners are to receive 10 percent interest on average capital balances. Drawings are excluded from
computing these averages.
3. Remaining profits are to be divided 30 percent, 30 percent, and 40 percent to Ale, Car, and Eri,
respectively.
Ale had a capital balance of $60,000 at January 1, 2016, and had drawings of $8,000 on July 1,
2016. Car’s capital balance on January 1, 2016, was $90,000, and he invested an additional $30,000
on September 1, 2016. Eri’s beginning capital balance was $110,000, and she withdrew $10,000 on
July 1 but invested an additional $20,000 on October 1, 2016.
The partnership has a net loss of $12,000 during 2016, and the accountant in charge allocated
the net loss as follows: $200 profit to Ale, $4,800 loss to Car, and $7,400 loss to Eri.

REQuIRED
1. A schedule to show the correct allocation of the partnership net loss for 2016
2. A statement of partnership capital for the year ended December 31, 2016
3. Journal entries to correct the books of the partnership at December 31, 2016, assuming that all closing
entries for the year have been recorded.

P 16-5
Profit or loss allocation
Ahmed, Kamal, and Karim are in a partnership. They agree on a profit- or loss-sharing ratio of 20 percent,
30 percent, and 50 percent, respectively. In the partnership agreement, Ahmed and Kamal each receive
a salary allowance of $100,000, and Karim receives a bonus of 20 percent of net income after salary
allowance and bonus.

REQuIRED
1. Prepare a schedule to allocate profit or loss if the partnership reports net income of $600,000.
2. Prepare a schedule to allocate profit or loss if the partnership reports net loss of $10,000.
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Partnerships—Formation, Operations, and Changes in Ownership Interests 561

P 16-6
Partner income allocation—Correction of error
The partnership of Jon, Kel, and Gla was created on January 2, 2016, with each of the partners contribut-
ing cash of $30,000. Reported profits, withdrawals, and additional investments were as follows:
Reported Net Income Withdrawals Additional Investments
2016 $19,000 $4,000 Kel $5,000 Gla
5,000 Jon
2017 22,000 8,000 Gla 5,000 Jon
3,000 Kel
2018 29,000 2,000 Gla 6,000 Gla
4,000 Kel

The partnership agreement provides that partners are to be allowed 10 percent interest on the
beginning-of-the-year capital balances, that Jon is to receive a $7,000 salary allowance, and that
remaining profits are to be divided equally.
After the books were closed on December 31, 2018, it was discovered that depreciation had
been understated by $2,000 each year and that the inventory taken at December 31, 2018, was
understated by $8,000.

REQuIRED
1. Calculate the balances in the three capital accounts on January 1, 2019.
2. Calculate the balances that should be in the three capital accounts on January 1, 2019, taking into account
the corrections that must be made for errors made in the calculation of income in the prior years.
3. Give the journal entry (one entry) to correct the books on January 1, 2019.

P 16-7
Purchases of interest from existing partners
Kiyoshi and Masao are partners with capital balances of $1,750,000 and $1,500,000, respectively. They
divide the profits as follows: 70% to Kiyoshi and 30% to Masao. The partners agree to admit Naoki into
the partnership. Naoki purchases 40% interest of each existing partner for $1,800,000 directly to Kiyoshi
and Masao.

REQuIRED:
Assuming the goodwill approach is used:
1. Prepare all necessary journal entries.
2. Prepare a schedule to allocate the capital balances.
Assuming the bonus approach is used:
1. Prepare all necessary journal entries.
2. Prepare a schedule to allocate the capital balances.

P 16-8
Recording new partner investment—Various situations
The capital accounts of the Ann, Bob, and Car partnership at December 31, 2016, together with profit-
and loss-sharing ratios, are as follows:
Ann (25%) $75,000
Bob (25%) 100,000
Car (50%) 125,000

The partners agree to admit Dar into the partnership.

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562 CHAPTER 16

R E Q u I R E D : Prepare the journal entry or entries to admit Dar into the partnership and calculate the partners’
capital balances immediately after his admission under each of the following independent assumptions:
1. Car sells half of her interest to Dar for $90,000, and the partners agree to admit Dar into the partnership.
2. Dar invests $75,000 cash in the partnership for a 25 percent interest in the partnership capital and profits,
and partnership assets are revalued.
3. Dar invests $80,000 cash in the partnership for a 20 percent interest in the capital and profits, and partner-
ship assets are revalued.
4. Dar invests $90,000 cash in the partnership for a 30% interest in the capital and profits, and partnership
assets are not revalued.

P 16-9
Recording new partner investment—Various situations
Three partners, Pat, Mic, and Hay, have capital balances and profit-sharing ratios at December 31, 2016,
as follows:
Pat $144,000 profit ratio 2/5
Mic 216,000 profit ratio 1/2
Hay 90,000 profit ratio 1/10

On January 1, 2017, Con invests $85,080 in the business for a one-sixth interest in capital and
income.

REQuIRED
1. Prepare journal entries giving two alternative solutions for recording Con’s admission to the partnership.
2. Prepare journal entries giving two alternative solutions for recording Con’s admission to the partnership if
she purchased a one-sixth interest from each of the partners, rather than paying the $85,080 into the
business.

P 16-10
Recording new partner investment—Various situations
The AT Partnership was organized several years ago, and on January 1, 2016, the partners agree to admit
Car for a 40 percent interest in capital and earnings. Capital account balances and profit- and loss-sharing
ratios at January 1, 2016, before the admission of Car, are as follows:
Aid (50%) $500,000
Tha (50%) 280,000

R E Q u I R E D : Prepare journal entries to record the admission of Car for a 40 percent interest in the capital
and rights to future profits under the following independent assumptions.
1. Car pays $450,000 directly to Aid and Tha for 40 percent of each of their interests, and the bonus procedure
is used.
2. Car pays $600,000 directly to Aid and Tha for 40 percent of each of their interests, and goodwill is recorded.
3. Car invests $450,000 in the partnership for her 40 percent interest, and goodwill is recorded.
4. Car invests $600,000 in the partnership for her 40 percent interest, and goodwill is recorded.

P 16-11
Partnership income allocation—Multiple years
Har, Ion, and Jer formed a partnership on January 1, 2016, with each partner contributing $20,000 cash.
Although the partnership agreement provided that Jer receive a salary of $1,000 per month for managing
the partnership business, Jer has never withdrawn any money from the partnership. Har withdrew $4,000
in each of the years 2016 and 2017, and Ion invested an additional $8,000 in 2016 and withdrew $8,000
during 2017. Due to an oversight, the partnership has not maintained formal accounting records, but the
following information as of December 31, 2017, is available:
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Partnerships—Formation, Operations, and Changes in Ownership Interests 563

Cash on hand $ 28,500

Due from customers 20,000
Merchandise on hand (at cost) 40,000
Delivery equipment—net of 37,000
depreciation
Prepaid expenses 4,000
Total Assets $129,500
Due to suppliers $ 14,600
Wages payable 4,400
Note payable 10,000
Interest payable 500
Total Liabilities $ 29,500

A D D I T I O N A L I N F O R M AT I O N
1. The partners agree that income for 2017 was about half of the total income for the first two years of
operations.
2. Although profits were not divided until 2017, the partnership agreement provides that profits, after allow-
ance for Jer’s salary, are to be divided each year on the basis of beginning-of-the-year capital balances.

R E Q u I R E D : Prepare statements of partnership capital for the years ended December 31, 2016, and Decem-
ber 31, 2017.

P 16-12
Partnership income allocation
The partnership of Par and Boo was formed and commenced operations on March 1, 2016, with Par
contributing $30,000 cash and Boo investing cash of $10,000 and equipment with an agreed-upon valu-
ation of $20,000. On July 1, 2016, Boo invested an additional $10,000 in the partnership. Par made a
capital withdrawal of $4,000 on May 2, 2016, but reinvested the $4,000 on October 1, 2016. During
2016, Par withdrew $800 per month, and Boo, the managing partner, withdrew $1,000 per month.
These drawings were charged to Salaries to partners. A preclosing trial balance taken at December 31,
2016, is as follows:
Debit Credit
Cash $9,000
Receivables—net 15,000
Equipment—net 50,000
Other assets 19,000
Liabilities $17,000
Par capital 30,000
Boo capital 40,000
Service revenue 50,000
Supplies expense 17,000
Utilities expense 4,000
Salaries to partners 18,000
Other miscellaneous 5,000
expenses
Total $137,000 $137,000

REQuIRED
1. Journalize the entries necessary to close the partnership books assuming that there is no agreement regard-
ing profit distribution.
2. Prepare a statement of partnership capital assuming that the partnership agreement provides for monthly
salary allowances of $800 and $1,000 for Par and Boo, respectively, and for the division of remaining profits
in relation to average capital balances.
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564 CHAPTER 16

3. Prepare a profit distribution schedule for the Par and Boo partnership assuming monthly salary allowances
of $800 and $1,000 for Par and Boo, respectively; interest allowances at a 12 percent annual rate on average
capital balances; and remaining profits divided equally.

P 16-13
Recording new partner investment—Complex non-revaluation and revaluation cases
A condensed balance sheet for the Pet, Qua, and She partnership at December 31, 2016, and their profit-
and loss-sharing percentages on that date are as follows:
Condensed Balance Sheet at December 31, 2016
Cash $15,000 Liabilities $50,000
Other assets 185,000 Pet capital (50%) 75,000
Total assets $200,000 Qua capital (30%) 50,000
She capital (20%) 25,000
Total liabilities and capital $200,000

On January 1, 2017, the partners decided to bring Tom into the partnership for a one-fourth
interest in the capital and profits of the partnership. The following proposals for Tom’s admittance
into the partnership were considered:
1. Tom would purchase one-half of Pet’s capital and right to future profits directly from Pet for $60,000.
2. Tom would purchase one-fourth of each partner’s capital and rights to future profits by paying a total
of $45,000 directly to the partners.
3. Tom would invest $55,000 cash in the partnership for a 25 percent interest in capital. Future profits
would be divided 37.5 percent, 22.5 percent, 15 percent, and 25 percent for Pet, Qua, She, and Tom,
respectively.

R E Q u I R E D : Prepare journal entries with supporting computations to show Tom’s admittance into the part-
nership under each of the given proposals assuming that:
1. Partnership net assets are not to be revalued.
2. Partnership net assets are to be revalued.

P 16-14
Partnership income allocation
Tim and Las have been operating an accounting firm as partners for a number of years, and at the begin-
ning of 2016, their capital balances were $60,000 and $75,000, respectively. During 2016, Tim invested
an additional $10,000 on April 1 and withdrew $6,000 on August 30. Las withdrew $12,000 on May 1
and withdrew another $6,000 on November 1. In addition, Tim and Las withdrew their salary allowances
of $18,000 and $24,000, respectively. At year-end 2016, total capital of the Tim-Las partnership was
$182,000. Tim and Las share income after salary allowances in a 60:40 ratio.

REQuIRED
1. Determine average capital balances for Tim and Las for 2016.
2. Allocate 2016 partnership income to Tim and Las.

PROFESSIONAL RESEARCH ASSIGNMENTS

Answer the following questions by reference to the Uniform Partnership Act of 1997. Include
the appropriate reference in your response.

PR 16-1 What defines a business as a partnership? What factors need to be examined to

determine if an individual is a partner, and not some other type of participant in
the business?
PR 16-2 Under what circumstances can a partnership expel a partner?