Solution manual financial accounting 4e by wild appendix d

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Appendix D
Reporting and Analyzing Partnerships
QUESTIONS
1.

Under the circumstances described, the death, bankruptcy, or legal inability of a
partner to execute a contract ends a partnership. In addition, if a partnership is
organized for the purpose of completing a specific business project, the partnership
ends when the project is completed. If the business for which the partnership was
organized cannot be completed, but goes on indefinitely, the partnership may be
dissolved at the will of any one of its partners.

2.

Mutual agency means that each partner is an agent of the partnership and can
commit it to contracts that are within the normal scope of its business.

3.

Yes, partners can limit the right of a partner. Such an agreement is binding on
members of the partnership. It is also binding on outsiders who know of the
agreement. However, it is not binding on outsiders who do not know of the
agreement.

4.

No, he does not have this right. A partnership is a voluntary association and
partners have the right to select the people with whom they associate as partners.

5.

If partners agree on the method of sharing incomes, but say nothing of losses, then
any losses are shared in the same manner as income.

6.

The allocation of net income to the partners is reported on the statement of partners'
equity.

7.

Unlimited liability means that the creditors of a partnership have the right to require
each partner to be personally responsible for all debts of the partnership.

8.

All partners in a general partnership have unlimited liability. A limited partnership
includes both general and limited partners, and the limited partners have no
personal liability for partnership debts. Also, the general partners assume the
management duties of the partnership.

9.

George's claim is not valid unless the previously agreed upon method of sharing net
incomes and losses granted George an annual salary allowance of $25,000. Unless
the partnership agreement says otherwise, partners have no claim to a salary
allowance in payment for their services.

10. No. Kay is still liable to her former partners for her share of the losses.

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11. At all times in the accounting history of a partnership (or any organization), assets
must equal liabilities plus equity. When the assets are converted to cash, any gains
or losses are allocated to the capital accounts of the partners; and when creditors'
claims are paid, assets and liabilities are reduced by equal amounts. Therefore,
when the remaining assets are in the form of cash, the amount of cash must equal
the claims (equity) of the partners.
12. The remaining partners should share the decline in their equities in accordance with
their income-and-loss-sharing ratio.

QUICK STUDIES
Quick Study D-1 (10 minutes)
a. The partnership will need to pay because it is a merchandising firm.
That is, if the vendor knows nothing to the contrary, the vendor can
assume that Leon has the right, because of mutual agency, to bind the
firm to contracts for the purchase of merchandise.
b. A public accounting firm is not in the merchandising business.
Consequently, because the purchase of merchandise to be sold is not
within the normal scope of the business of this firm, the vendor has no
right to assume Leon is acting as the agent for the partnership. Hence,
the partnership probably will not have to pay.

Quick Study D-2 (15 minutes)
Stolton
Net income.............................................
Salary allowances
Stolton ................................................. $15,000
Bright ...................................................
Total salary allowances .....................
Balance of income ................................
Balance allocated equally
Stolton .................................................
8,500
Bright ...................................................
Total allocated equally .......................
Balance of income ................................ ______
Shares of the partners .......................... $23,500

Bright

Total
52,000

$20,000
35,000
17,000

8,500
______
$28,500

17,000

$
0

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Quick Study D-3 (10 minutes)
If Blake is allocated a $100,000 salary allowance and there remains $4,000
to be divided equally, giving Matthai $2,000, then this shows that the
partnership must have earned net income of $104,000.

Quick Study D-4 (10 minutes)
Since Mourlan is a limited partner, he is not personally liable for any unpaid
debts of the partnership. Therefore, the partnership’s creditors cannot
pursue Mourlan’s personal assets.

Quick Study D-5 (10 minutes)
Choi, Capital .............................................................................. 10,000
Amal, Capital ............................................................................. 10,000
Stein, Capital ........................................................................

20,000

To record admission of Stein by purchase.

Quick Study D-6 (10 minutes)
Cash ........................................................................................... 40,000
Kwon, Capital .......................................................................

40,000

To record admission of Kwon.

Quick Study D-7 (15 minutes)
Total partnership return on equity

= Net Income/Average equity
= $25,000 / ($150,000 + $200,000)/2
= $25,000 / $175,000
= 14.3%

Howe partner return on equity

= Partner net income/Average partner equity
= $20,000 / ($100,000 + $140,000)/2
= $20,000 / $120,000
= 16.7%

Duley partner return on equity

= Partner net income/Average partner equity
= $5,000 / ($50,000 + $60,000)/2
= $5,000 / $55,000
= 9.1%

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EXERCISES
Exercise D-1 (15 minutes)
Characteristic

General Partnerships

1. Life

Limited

2. Owners’ liability

Unlimited

3. Legal status

Not separate from partners

4. Tax status of income

Taxed only once

5. Owners’ authority

Mutual agency

6. Ease of formation

Requires only an agreement

7. Transferability of ownership

Difficult to transfer

8. Ability to raise large amounts of capital Low ability

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Exercise D-2 (20 minutes)
a. Recommended Organization:
Sharif, Henry, and Korb might first
consider organizing their business as a general partnership. However, a
problem for these new graduates is that they do not have funds and with
no past business experience will probably have trouble getting a
business loan. Therefore, instead of a partnership, a better course of
action is probably to incorporate. In this way they might be able to find

investors to contribute capital for stock. They can structure the
financing so that they remain the major stockholders in the company.
Taxation: As a corporation, any income will be subject to corporate
income tax. Any dividends paid to the stockholders will also normally
be taxed, but at a much lower level. Moreover, some lower income
taxpayers could potentially pay little or no dividend tax. Any salaries
that Sharif, Henry, and Korb pay themselves will be a tax-deductible
expense for the business.
Advantages: Several key advantages to the corporate form include its
limited liability and the potential to sell more stock if additional funds
are needed.
b. Recommended Organization:
The two doctors should form a
partnership. A general partnership will have the disadvantage of
unlimited liability so they probably want to consider a limited liability
partnership. The partnership can borrow funds from the bank to obtain
the initial needed capital for the business.
Taxation: The owners will pay individual taxes on income earned by the
partnership but the partnership will not be taxed.
Advantages: The advantages of the partnership are ease of formation
and owner authority.
c. Recommended Organization: Munson should consider setting up a
limited partnership. Given his real estate expertise, he can manage the
day-to-day activities of the partnership and serve as its general partner.
He can raise the necessary capital by admitting limited partners.
Taxation: All partners will pay individual taxes on income distributed to
them, but the partnership entity will not pay income tax.
Advantages: The advantages to Milan will be the authority over the
partnership that he will have as general partner and the ease of raising
capital.

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Exercise D-3 (25 minutes)
1a. 2008
Mar. 1 Cash .......................................................................... 82,500
Land .......................................................................... 60,000
Building .................................................................... 100,000
Long-Term Note Payable ..................................
Eckert, Capital ....................................................
Kelley, Capital ....................................................

92,500
82,500
67,500

To record initial capital investments.

1b. 2008
Oct. 20

Eckert, Withdrawals ................................................. 34,000
Kelley, Withdrawals.................................................. 20,000
Cash .....................................................................

54,000

To record partners’ withdrawals.

1c. 2008
Dec. 31

Eckert, Capital .......................................................... 34,000
Kelley, Capital ........................................................... 20,000
Eckert, Withdrawals ...........................................
Kelley, Withdrawals............................................

34,000
20,000

To close withdrawals accounts.

Dec. 31

Income Summary ..................................................... 90,000
Eckert, Capital ....................................................
Kelley, Capital .....................................................

58,250
31,750

To close Income Summary account.*

2.

Capital account balances
Eckert
Initial investment ................................ $ 82,500
Withdrawals ........................................ (34,000)
Share of income* ................................ 58,250
Ending balances ................................. $106,750
*Supporting calculations
Eckert
Kelley
Net income .................................................................
Salary allowance
Eckert .........................................................................
$25,000
Total salary allowance ...............................................
Balance of income .....................................................
Interest allowances
Eckert (10% on $82,500) ..........................................
8,250
Kelley (10% on $67,500) ...........................................
$ 6,750
Total interest allowances...........................................
Balance of income .....................................................
Balance allocated equally
Eckert ........................................................................
25,000
Kelley ........................................................................
25,000
Total allocated equally ...............................................
_______
_______

Balance of income .......................................................
Shares of the partners .................................................
$58,250
$31,750

Kelley
$ 67,500
(20,000)
31,750
$ 79,250
Total
$90,000
25,000
65,000

15,000
50,000

$

50,000
0

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Exercise D-4 (30 minutes)
Kramer
Plan (1)

$160,000 x 1/2 ...............................................
$80,000

Plan (2)

($60,000/$140,000) x $160,000 .....................
$68,571
($80,000/$140,000) x $160,000 .....................
$68,571

Plan (3)

Net income ....................................................
Salary allowances ........................................
$50,000
Interest allowances
($60,000 x 10%)...........................................
6,000
($80,000 x 10%)...........................................
Total salary and interest ..............................
Balance of income ........................................

Knox

Total

$80,000

$160,000

$91,429
$91,429

$ 68,571
91,429
$160,000

$40,000

$160,000
90,000

8,000

Balance allocated equally
($56,000)/2 .....................................................
28,000
28,000
Balance of income .........................................
.
Shares of each partner ................................
$84,000 $76,000

6,000
8,000

104,000
56,000

56,000
$
0

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Exercise D-5 (35 minutes)
Kramer
1.

Net income....................................................
Salary allowances ........................................
$50,000
Interest allowances
($60,000 x 10%) ..........................................
6,000
($80,000 x 10%) ..........................................
Total salaries and interest ..........................
Balance of income .......................................
Remainder equally
($5,200)/2.......................................................

(2,600)
_______
Balance of income .......................................
Shares each partner ....................................
$53,400

2.

Net income....................................................
Salary allowances ........................................
$50,000
Interest allowances
($60,000 x 10%) ..........................................
6,000
($80,000 x 10%) ..........................................
Total salaries and interest ..........................
Balance of income .......................................
Remainder equally
$(120,800)/2...................................................
(60,400)
Balance of income .......................................
_______
Shares of each partner ................................
$ (4,400)

Knox

Total
$ 98,800
90,000

$ 40,000

6,000
8,000
104,000
(5,200)

8,000

(2,600)
_______

(5,200)
$

0

$ 45,400

$ 40,000

8,000

(60,400)
_______
$(12,400)

$ (16,800)
90,000

6,000
8,000
104,000
(120,800)
120,800
$
0

Exercise D-6 (10 minutes)
Sept. 30

Mandy, Capital ..........................................................
100,000
Brittney, Capital ..................................................

100,000

To record admission of Brittney.

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Exercise D-7 (25 minutes)
1.
Nov.

1

Cash ...........................................................................90,000
Madison, Capital .................................................

90,000

To record admission of Madison
[($510,000 + $90,000) x 15%].

2.
Nov. 1

Cash ..........................................................................
120,000
Madison, Capital.................................................
Main, Capital .......................................................
First, Capital .......................................................

94,500
20,400
5,100

To record admission of Madison.
Supporting computations
$510,000 + $120,000 = $630,000
$630,000 x 15% = $94,500
$120,000 - $94,500 = $25,500
$25,500 x 80% = $20,400

$25,500 x 20% = $5,100

3.
Nov. 1

Cash ..........................................................................80,000
Main, Capital ............................................................. 6,800
First, Capital ............................................................. 1,700
Madison, Capital.................................................

88,500

To record admission of Madison.
Supporting computations
$510,000 + $80,000 = $590,000
$590,000 x 15% = $88,500
$80,000 - $88,500 = $(8,500)
$(8,500) x 80% = $(6,800)
$(8,500) x 20% = $(1,700)

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Exercise D-8 (15 minutes)
1.

Jan. 31

Tulip, Capital .............................................................60,000
Cash ....................................................................

60,000

To record retirement of Tulip.

2.
Jan. 31

Tulip, Capital .............................................................60,000
Holland, Capital* .......................................................12,500
Flowers, Capital** ..................................................... 7,500
Cash ....................................................................

80,000

To record retirement of Tulip.
* (5/8 x $20,000)
**(3/8 x $20,000)

3.
Jan. 31

Tulip, Capital .............................................................60,000
Holland, Capital*.................................................
Flowers, Capital** ...............................................
Cash ....................................................................

18,750
11,250
30,000

To record retirement of Tulip.
* (5/8 x $30,000)
**(3/8 x $30,000)

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Exercise D-9 (30 minutes)
1.
Red
$180,000

Initial investments ..............
Allocation of all losses
($630,000 - $60,000)/3 ....... (190,000)
Capital balances ................. $ (10,000)

White
$240,000

Blue
$210,000

Total
$630,000

(190,000) (190,000) (570,000)
$ 50,000 $ 20,000
$ 60,000

2. a)
Aug. 31 Cash ..........................................................................10,000
Red, Capital ........................................................

10,000

To record payment of deficiency.

b)
Aug. 31 White, Capital ...........................................................50,000
Blue, Capital .............................................................20,000
Cash ....................................................................

70,000

To distribute remaining cash.

3. a)
Aug. 31 White, Capital ........................................................... 5,000
Blue, Capital ............................................................. 5,000

Red, Capital ........................................................

10,000

To transfer deficiency to other partners.

b)
Aug. 31 White, Capital ...........................................................45,000
Blue, Capital .............................................................15,000
Cash ....................................................................

60,000

To distribute remaining cash.

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Exercise D-10 (30 minutes)
a. Loss from selling assets
Total book value of assets .............................................
Total liabilities (before liquidation)................................ $78,000
Total liabilities remaining after paying
proceeds of asset sales to creditors .......................... (28,000)
Cash proceeds from sale of assets ...............................

Loss on sale of assets* ..................................................

$126,000

(50,000)
$ 76,000

* Alternative computation
1) $28,000 = $78,000 - Cash from assets’ sale
(This implies cash from assets sale is $50,000)
2) Loss on sale of assets = Book value of assets - Cash received
= $126,000 - $50,000 = $76,000

b. Loss allocation
Turner
Capital balances before
loss liquidation
$ 2,500
Allocation of loss
$76,000 x 1/10 .......................
(7,600)
$76,000 x 4/10 .......................
$76,000 x 5/10 ....................... ______
Capital balances after loss ..... $(5,100)

Roth

Lowe

Total

$ 14,000

$ 31,500

$ 48,000

(30,400)
_______
$(16,400)

(38,000)
$ (6,500)

(76,000)
$(28,000)

c. Liability to be paid
Each partner should pay the amount of the debit (deficit) balance in his
or her own capital account.

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Exercise D-11 (30 minutes)

a. Loss from selling assets
Total book value of assets .............................................
Total liabilities before liquidation ..................................$78,000
Total liabilities remaining after paying proceeds
of asset sales to creditors ............................................ (28,000)
Cash proceeds from sale of assets ...............................
Loss on sale of assets ....................................................

$126,000

(50,000)
$ 76,000

b. Loss and deficit allocation
Turner
$ 2,500

Roth
$ 14,000

Lowe
$ 31,500

(30,400)
_______
(16,400)

(38,000) (76,000)
(6,500) $(28,000)

Allocation of Lowe's deficit
to Turner and Roth
$6,500 x 1/5 ........................... (1,300)
$6,500 x 4/5 ........................... ______
(5,200)
Cash paid by each partner
$(6,400) $(21,600)

6,500 _________
$
0 $(28,000)

Capital balances before loss
Allocation of loss
$76,000 x 1/10 ....................... (7,600)
$76,000 x 4/10 .......................
$76,000 x 5/10 ....................... ______
Capital balances after loss ..... (5,100)

Total
$ 48,000

c. Liability to be paid
As a limited partner, Lowe has no personal liability for the $28,000
liability. Therefore, Turner and Roth must share the loss reflected in
Lowe's capital account deficit as shown above.

Exercise D-12 (20 minutes)
Hunt Sports Enterprises LP:
Return on equity:

$468,032 / [($947,000 + $1,365,032)/2]

= 40.5%

Soccer LP:
Partner return on equity:

$22,134 / [($189,000 + $211,134)/2]

= 11.1%

Football LP:
Partner return on equity:

$445,898 / [($758,000 + $1,153,898)/2]

= 46.6%

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PROBLEM SET A
Problem D-1A (50 minutes)
1.
Dec. 31 Income Summary .....................................................249,000

Kim Ries, Capital ...............................................
Tere Bax, Capital ...............................................
Josh Thomas, Capital .......................................

83,000
83,000
83,000

To close Income Summary.

2.
Dec. 31

Income Summary .....................................................249,000
Kim Ries, Capital ...............................................
Tere Bax, Capital ...............................................
Josh Thomas, Capital .......................................

62,250
87,150
99,600

To close Income Summary*.
*Supporting computations
($80,000/$320,000) x $249,000 = $62,250
($112,000/$320,000) x $249,000 = $87,150
($128,000/$320,000) x $249,000 = $99,600

3.
Dec. 31

Income Summary .....................................................249,000
Kim Ries, Capital ...............................................
Tere Bax, Capital ...............................................
Josh Thomas, Capital .......................................

79,000
72,200
97,800

To close Income Summary*.
*Supporting calculations
Ries
Net income ................................................
Salary allowances
Ries.........................................................
$66,000
Bax..........................................................
Thomas ..................................................
Total salaries ............................................
Balance after salary allowances ..............
Interest allowances
Ries (10% on $80,000) ...........................
8,000
Bax (10% on $112,000) ..........................
Thomas (10% on $128,000) ...................
Total interest .............................................
Bal. after interest and salaries .................
Balance allocated equally ........................
5,000

Total allocated equally .............................
Balance of income ....................................
______
Shares of the partners..............................
$79,000

Bax

Thomas

Total
$249,000

$56,000
$80,000
202,000
47,000

11,200
12,800
32,000
15,000
5,000

5,000

______
$72,200

______

$97,800

$

15,000
0

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Problem D-2A (45 minutes)
Preliminary calculations
Plan (a) & Plan (c)

Percentages based on initial investments
Watts = $42,000/$105,000 = 40%
Lyon = $63,000/$105,000 = 60%

Plan (b)

Percentages based on time
Watts = 0.5/1.5 = 33 1/3%
Lyon = 1.0/1.5 = 66 2/3%

Plan (c) & Plan (d)

Salary allowance
Lyon= 12 x $6,000 = $72,000

Plan (d)

Interest allowances
Watts = 10% x $42,000 = $ 4,200
Lyon= 10% x $63,000 = $ 6,300

Income (Loss)
Sharing Plan

(a)

(b)

(c)

(d)

Year 1
Calculations

Watts

Lyon

40% x $36,000 loss ...................................................
$(14,400)

60% x $36,000 loss ...................................................

$(21,600)

33 1/3% x $36,000 loss .............................................
$(12,000)
66 2/3% x $36,000 loss .............................................

$(24,000)

Salary allowance ......................................................

$ 72,000

40% x ($36,000 loss + $72,000 salary) ....................
$(43,200)
________
60% x ($36,000 loss + $72,000 salary) ....................
Totals .........................................................................
$(43,200)

(64,800)
$ 7,200

Salary allowance ......................................................
Interest allowances ..................................................
$ 4,200

$ 72,000
6,300

50% x ($36,000 loss + $72,000
salary + $10,500 interest) .....................................
(59,250) (59,250)
Totals .........................................................................
$(55,050) $ 19,050

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Problem D-2A (Concluded)
Income (Loss)
Sharing Plan

(a)

(b)

(c)

(d)

(b)

(c)

(d)

Calculations

Watts

Lyon

40% x $90,000 income .............................................
$36,000
60% x $90,000 income .............................................

$54,000

33 1/3% x $90,000 income .......................................
$30,000
66 2/3% x $90,000 income .......................................

$60,000

Salary allowance ......................................................
40% x ($90,000 income - $72,000 salary) ..................
$ 7,200
_______
60% x ($90,000 income - $72,000 salary) ..................
Totals .........................................................................
$ 7,200

$72,000

Salary allowance ......................................................
Interest allowances ..................................................
$ 4,200
50% x ($90,000 income - $72,000
salary - $10,500 interest) ......................................
3,750
Totals .........................................................................
$ 7,950

$72,000
6,300

Income (Loss)
Sharing Plan

(a)

Year 2

10,800
$82,800

3,750
$82,050

Year 3
Calculations

Watts

Lyon

40% x $150,000 income ...........................................
$60,000
60% x $150,000 income ...........................................

$ 90,000

33 1/3% x $150,000 income .....................................
$50,000
66 2/3% x $150,000 income .....................................

$100,000

Salary allowance ......................................................
40% x ($150,000 income - $72,000 salary) .............
$31,200
_______
60% x ($150,000 income - $72,000 salary) .............
Totals .........................................................................
$31,200

$ 72,000

Salary allowance ......................................................
Interest allowances ..................................................
$ 4,200
50% x ($150,000 income - $72,000
salary - $10,500 interest) ......................................33,750

Totals .........................................................................
$37,950

$ 72,000
6,300

46,800
$118,800

33,750
$112,050

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Problem D-3A (40 minutes)
Part 1
Income (Loss)
Sharing Plan

Calculations

Bill

Bruce

Barb

Total

(a)

$450,000/3 .............................................................................
$150,000 $150,000

$150,000

$450,000

(b)

$450,000 x ($67,500/$750,000) ............................................
40,500
$450,000 x ($262,500/$750,000) ..........................................
157,500
$450,000 x ($420,000/$750,000) ..........................................
_______ _______
Total allocated ......................................................................
$ 40,500 $157,500

252,000
$252,000

$450,000

(c)

Net income............................................................................
Salary allowances ................................................................
$ 80,000 $ 60,000
Balance of income ...............................................................
Interest allowances
10% x $67,500 ....................................................................
6,750
10% x $262,500 ..................................................................
26,250
10% x $420,000 ..................................................................
Total interest.........................................................................
Bal. of income ......................................................................
Balance allocated ....................................................
48,333 equally
48,333
Balance of income ...............................................................
Shares of partners .................................................
$135,083 partners
$134,583
*

$ 90,000

$450,000
(230,000)
220,000

42,000

48,333

(75,000)
145,000
(145,000)*
$
0

$180,333

Rounding difference of $1.

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Problem D-3A (Concluded)
Part 2
BBB PARTNERSHIP
Statement of Partners' Equity
For Year Ended December 31
Bill
Bruce
Barb
Beginning capital balances ..............

$
0
$
0 $
0

Total
$

0

Plus
Investments by owners ..................
67,500

262,500

420,000

Net income
Salary allowances ..........................
80,000

60,000

90,000

Interest allowances .......................
6,750

26,250

42,000

Balance allocated equally .............
(32,000)

(32,000)

(32,000)

Total net income ............................
54,750

54,250

100,000

209,000

Total ....................................................
122,250

316,750

520,000

959,000

Less partners' withdrawals .............

(34,000)

(48,000)

(64,000)

(146,000)

Ending capital balances ...................
$ 88,250

$268,750

$456,000

750,000

$813,000

Part 3
Dec. 31

Income Summary .....................................................
209,000
Bill Beck, Capital ................................................
Bruce Beck, Capital............................................
Barb Beck, Capital..............................................

54,750
54,250

100,000

To close Income Summary.

Dec. 31

Bill Beck, Capital ......................................................
34,000
Bruce Beck, Capital..................................................
48,000
Barb Beck, Capital ....................................................
64,000
Bill Beck, Withdrawals .......................................
Bruce Beck, Withdrawals ..................................
Barb Beck, Withdrawals ....................................

34,000
48,000
64,000

To close withdrawals accounts.

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Problem D-4A (50 minutes)
Part 1
a)
Feb. 1

Benson, Capital ........................................................ 138,000
North, Capital .....................................................
138,000
To record admission of North.

b)
Feb. 1

Benson, Capital ........................................................ 138,000
Schmidt, Capital .................................................
138,000
To record admission of Schmidt.

c)
Feb. 1

Benson, Capital ........................................................ 138,000
Cash ....................................................................
138,000
To record withdrawal of Benson with no bonus.

d)
Feb. 1

Benson, Capital ........................................................ 138,000

Meir, Capital* ............................................................ 28,500
Lau, Capital** ............................................................ 47,500
Cash ....................................................................
214,000
To record withdrawal of Benson with bonus.
* ($214,000 - $138,000) x 3/8
**($214,000 - $138,000) x 5/8

e)
Feb. 1

Benson, Capital ........................................................ 138,000
Accumulated Depreciation—Equipment ............... 23,200
Meir, Capital* ......................................................
Lau, Capital** ......................................................
Equipment ..........................................................
Cash ....................................................................

22,950
38,250
70,000
30,000

To record withdrawal of Benson with bonus to
old partners.
* [$138,000 - ($70,000 - $23,200 + $30,000)] x 3/8.
**[$138,000 - ($70,000 - $23,200 + $30,000)] x 5/8.

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Problem D-4A (Concluded)
Part 2
a)
Feb. 1

Cash .......................................................................... 200,000
Rhodes, Capital* ................................................
200,000
To record admission of Rhodes.
*Supporting calculations
$168,000 + $138,000 + $294,000 = $600,000
($600,000 + $200,000) x 25% = $200,000
Thus, no bonus is received or paid.

b)
Feb. 1

Cash .......................................................................... 145,000
Meir, Capital ($41,250* x 3/10) ................................. 12,375
Benson, Capital ($41,250* x 2/10) ........................... 8,250
Lau, Capital ($41,250* x 5/10) .................................. 20,625
Rhodes, Capital ..................................................
186,250
To record Rhode’s admission and bonus.

* Supporting calculations
($600,000 + $145,000) x 25% = $186,250
$145,000 - $186,250 = $(41,250)
Thus, a bonus is paid to new partner.

c)
Feb. 1

Cash .......................................................................... 262,000
Meir, Capital ($46,500* x 3/10) ...........................
13,950
Benson, Capital ($46,500* x 2/10) .....................
9,300
Lau, Capital ($46,500* x 5/10) ............................
23,250
Rhodes, Capital ..................................................
215,500
To record admission of Rhodes and bonus to old partners.
* Supporting calculations
($600,000 + $262,000) x 25% = $215,500
$262,000 - $215,500 = $46,500
Thus, old partners receive a bonus.

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Problem D-5A (75 minutes)
Note: All entries in this problem are dated May 31.

1.
(a)

(b)

(c)

(d)

Cash ..........................................................................
600,000
Inventory .............................................................
Gain on Sale of Inventory .................................

537,200
62,800

Gain on Sale of Inventory .......................................62,800
Kendra, Capital ($62,800 x 3/6) .........................
Cogley, Capital ($62,800 x 2/6) .........................
Mei, Capital ($62,800 x 1/6) ...............................

31,400
20,933
10,467

Accounts Payable ....................................................
245,500
Cash ....................................................................

245,500

Kendra, Capital ($93,000+ $31,400) ............................
124,400
Cogley, Capital ($212,500 + $20,933) .........................
233,433
Mei, Capital ($167,000 + $10,467) ...........................
177,467
Cash ....................................................................

535,300

Cash ..........................................................................
500,000
Loss on Sale of Inventory .......................................37,200
Inventory .............................................................

537,200

Kendra, Capital ($37,200 x 3/6) ...............................18,600
Cogley, Capital ($37,200 x 2/6) ...............................12,400
Mei, Capital ($37,200 x 1/6) ..................................... 6,200
Loss on Sale of Inventory .................................

37,200

Accounts Payable ....................................................
245,500
Cash ....................................................................

245,500

Kendra, Capital ($93,000 - $18,600) ........................74,400
Cogley, Capital ($212,500 - $12,400) ......................
200,100
Mei, Capital ($167,000 - $6,200) ..............................
160,800
Cash ....................................................................

435,300

2.
(a)

(b)

(c)

(d)

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Problem D-5A (Concluded)
3.
(a)

(b)

(c)

(d)

Cash .......................................................................... 320,000
Loss on Sale of Inventory ....................................... 217,200
Inventory .............................................................

537,200

Kendra, Capital ($217,200 x 3/6) ............................. 108,600
Cogley, Capital ($217,200 x 2/6) ............................. 72,400
Mei, Capital ($217,200 x 1/6) ................................... 36,200
Loss on Sale of Inventory .................................

217,200

Cash .......................................................................... 15,600
Kendra, Capital ($93,000 - $108,600) ................

15,600

Accounts Payable .................................................... 245,500
Cash ....................................................................

245,500

Cogley, Capital ($212,500 - $72,400) ...................... 140,100
Mei, Capital ($167,000 - $36,200) ............................ 130,800
Cash ....................................................................

270,900

Cash .......................................................................... 250,000
Loss on Sale of Inventory ....................................... 287,200
Inventory .............................................................

537,200

Kendra, Capital ($287,200 x 3/6) ............................. 143,600
Cogley, Capital ($287,200 x 2/6) ............................. 95,733
Mei, Capital ($287,200 x 1/6) ................................... 47,867
Loss on Sale of Inventory .................................

287,200

Cogley, Capital ($50,600 x 2/3) ............................... 33,733
Mei, Capital ($50,600 x 1/3) ..................................... 16,867
Kendra, Capital ($93,000 - $143,600) ...................

50,600

Accounts Payable .................................................... 245,500
Cash ....................................................................

245,500

Cogley, Capital*........................................................ 83,034
Mei, Capital** ............................................................ 102,266
Cash ....................................................................

185,300

4.
(a)

(b)

(c)

(d)

*$212,500 - $95,733 - $33,733
**$167,000 - $47,867 - $16,867

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PROBLEM SET B
Problem D-1B (50 minutes)
1.
Dec. 31

Income Summary .....................................................270,000
Matt Albin, Capital .............................................
Ryan Peters, Capital ..........................................
Seth Ramsey, Capital ........................................

90,000
90,000
90,000

To close Income Summary.

2.
Dec. 31

Income Summary .....................................................270,000
Matt Albin, Capital .............................................
135,000
Ryan Peters, Capital ..........................................
81,000
Seth Ramsey, Capital ........................................
54,000
To close Income Summary.*
*Supporting computations
($164,000/$328,000) x $270,000 = $135,000

($98,400/$328,000) x $270,000 = $81,000
($65,600/$328,000) x $270,000 = $54,000

3.
Dec. 31

Income Summary .....................................................270,000
Matt Albin, Capital .............................................
118,800
Ryan Peters, Capital ..........................................
88,240
Seth Ramsey, Capital ........................................
62,960
To close Income Summary.*
*Supporting calculations
Albin
Peters
Ramsey
Total
Net income ................................................
$270,000
Salary allowances
Albin .......................................................
$ 96,000
Peters .....................................................
$72,000
Ramsey ..................................................
$50,000
Total salaries ............................................
218,000

Balance after salary allowances ..............
52,000
Interest allowances
Albin (10% on $164,000) ........................
16,400
Peters (10% on $98,400) ........................
9,840
Ramsey (10% on $65,600) .....................
6,560
Total interest .............................................
32,800
Bal. after interest and salaries .................
19,200
Balance allocated equally ........................6,400
6,400
6,400
Total allocated equally .............................
19,200
Balance of income ....................................
_______
______ ______ $
0
Shares of the partners..............................
$118,800 $88,240 $62,960

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Problem D-2B (45 minutes)
Preliminary calculations
Plan (a) & Plan (c)

Percentages based on initial investments
Bell = $104,000/$260,000 = 40%
Green = $156,000/$260,000 = 60%

Plan (b)

Percentages based on time
Bell = 0.333/1.333 = 25%
Green = 1.000/1.333 = 75%

Plan (c) & Plan (d)

Salary allowance
Green = 12 x $4,000 = $48,000

Plan (d)

Interest allowances
Bell = 10% x $104,000 = $10,400
Green = 10% x $156,000 = $15,600

Income (Loss)
Sharing Plan

(a)

(b)

(c)

(d)

Year 1
Calculations

Bell

Green

40% x $36,000 loss ...................................................
$(14,400)
60% x $36,000 loss ...................................................

$(21,600)

25% x $36,000 loss ...................................................
$ (9,000)
75% x $36,000 loss ...................................................

$(27,000)

Salary allowance ......................................................
40% x ($36,000 loss + $48,000 salary) ....................

$(33,600)
60% x ($36,000 loss + $48,000 salary) ....................
_______
Totals .........................................................................
$(33,600)
Salary allowance ......................................................
Interest allowances ..................................................
$ 10,400
50% x ($36,000 loss + $48,000 salary +
$26,000 interest) ....................................................
(55,000)
Totals .........................................................................
$(44,600)

$ 48,000
(50,400)
$ (2,400)
$ 48,000
15,600
(55,000)
$ 8,600

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Problem D-2B (Concluded)
Income (Loss)
Sharing Plan

(a)

(b)

(c)

(d)

(b)

(c)

(d)

Calculations

Bell

Green

40% x $76,000 income .............................................
$30,400
60% x $76,000 income .............................................

$45,600

25% x $76,000 income .............................................
$19,000
75% x $76,000 income .............................................

$57,000

Salary allowance ......................................................
40% x ($76,000 income - $48,000 salary) .................
$11,200
60% x ($76,000 income - $48,000 salary) ..................
______
Totals .........................................................................
$11,200

$48,000

Salary allowance ......................................................
Interest allowances ..................................................
$10,400
50% x ($76,000 income - $48,000 salary $26,000 interest) ....................................................
1,000
Totals .........................................................................
$11,400

$48,000
15,600

Income (Loss)
Sharing Plan

(a)

Year 2

16,800
$64,800

1,000
$64,600

Year 3
Calculations

Bell

Green

40% x $188,000 income ...........................................
$75,200
60% x $188,000 income ...........................................

$112,800

25% x $188,000 income ...........................................
$47,000
75% x $188,000 income ...........................................

$141,000

Salary allowance ......................................................

40% x ($188,000 income - $48,000 salary) ................
$56,000
_______
60% x ($188,000 income - $48,000 salary) ................
Totals .........................................................................
$56,000

$ 48,000

Salary allowance ......................................................
Interest allowances ..................................................
$10,400
50% x ($188,000 income - $48,000 salary$26,000 interest) ....................................................
57,000
Totals .........................................................................
$67,400

$ 48,000
15,600

84,000
$132,000

57,000
$120,600

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Solutions Manual, Appendix D

801