Question 1

In admitting a new partner who purchases an interest, the capital interest of the new partner is obtained from the current partners and both the total assets and total capital are increased.

Accepted Answer

When a new partner purchases an interest directly from existing partners, the capital interest of the new partner is indeed obtained from the current partners, but the total capital of the partnership increases only if the new partner contributes more than the book value of the purchased interest. The total assets of the partnership increase only if the new partner contributes assets to the partnership, not when purchasing an interest from existing partners.

Question 2

If a new partner is to be admitted to a partnership and a bonus is attributed to the old partnership, the bonus should be divided between the capital accounts of the original partners according to their capital balances.

Accepted Answer

When a bonus is attributed to the old partnership upon the admission of a new partner, it is typically divided between the original partners according to their profit-sharing ratio, not their capital balances.

Question 3

When a new partner is admitted to a partnership, bonuses attributable to either the old partnership or to the incoming partner may be recognized in accordance with the agreement among the partners.

Accepted Answer

The allocation of bonuses upon the admission of a new partner is typically outlined in the partnership agreement and can be attributed to either the existing partners or the incoming partner.

Question 4

Sarno has a capital balance of $42,000 after adjusting the assets to fair market value. Minton contributes $22,000 to receive a 30% interest in the new partnership. The bonus paid by Minton is $2,800.

Accepted Answer

To calculate the new total capital balance after Minton's contribution, we add Minton's contribution of $22,000 to Sarno's existing capital balance of $42,000:

$22,000 + $42,000 = $64,000

Next, we need to determine the value of the partnership's total assets before the adjustment to fair market value. We know that Sarno's capital balance of $42,000 represents 70% of the partnership's equity (since Minton is contributing $22,000 for a 30% interest), so we can set up the following equation to solve for the total equity:

$42,000 / 0.7 = Total equity
$60,000 = Total equity

This means that the partnership's total assets before the adjustment to fair market value were $60,000.

To adjust the assets to fair market value, we need to add $2,800 to the partnership's assets, since that was the bonus paid by Minton:

$60,000 + $2,800 = $62,800

Finally, we can calculate the value of Minton's 30% interest in the partnership by multiplying the total capital balance by 30%:

$64,000 x 0.3 = $19,200

So Minton's interest in the partnership is worth $19,200.

Question 5

When a partner withdraws from the partnership, the partnership dissolves.

Accepted Answer

In many legal systems, the withdrawal of a partner typically results in the dissolution of the partnership, unless otherwise agreed upon in the partnership agreement.

Question 6

When a new partner is admitted by making an investment in the partnership, the old partners' capital accounts are always credited.

Accepted Answer

When a new partner is admitted and makes an investment in the partnership, the new partner's capital account is credited with the amount of the investment. The old partners' capital accounts are not directly affected by this transaction; adjustments to their capital accounts, if any, would occur based on the agreement for revaluation of assets or redistribution of ownership percentages, not from the new partner's investment itself.

Question 7

When a partner withdraws from the partnership by selling his or her interest back to the partnership, the remaining partners must pay the withdrawing partner a specified amount from their personal assets.

Accepted Answer

When a partner withdraws from the partnership by selling his or her interest back to the partnership, the remaining partners must pay the withdrawing partner a specified amount from the partnership's assets, not their personal assets.

Question 8

When a partner invests noncash assets in a partnership, the assets are recorded at the partner's book value.

Accepted Answer

Noncash assets contributed by a partner are recorded at their fair market value, not the partner's book value. This is because book value may not accurately reflect the current value of the asset.

Question 9

When a new partner is admitted to a partnership, all partnership assets should be revised to reflect current values.

Accepted Answer

When a new partner is admitted to a partnership, the partnership agreement should be revised and all partnership assets should be revalued to reflect their current values. This can help ensure an accurate determination of each partner's ownership percentage and prevent misunderstandings or disputes in the future.

Question 10

A partnership's asset accounts should be changed from cost to fair market value when a new partner is admitted to a firm or an existing partner withdraws or dies.

Accepted Answer

When a new partner is admitted to a firm or an existing partner withdraws or dies, the partnership agreement may require that the assets of the partnership be revalued at their fair market value. This is because the admission or withdrawal of a partner can significantly impact the value of the partnership's assets. Fair market value is the price at which the assets could be sold in an arm's length transaction between a willing buyer and a willing seller.

Question 11

Many partnerships provide for the admission of new partners or withdrawals of present partners by amending existing partnership agreements, so that the firm may continue to operate without executing a new agreement.

Accepted Answer

This statement is true. Many partnership agreements contain provisions for admission and withdrawal of partners, allowing for the agreement to be amended rather than creating a new agreement every time a change to the partnership occurs.

Question 12

When a new partner is admitted by making an investment of assets in the partnership and the new partner has to pay a premium for admission, a bonus is divided among the old partners' capital accounts.

Accepted Answer

This statement is true as the premium paid by the new partner increases the total value of the partnership, which results in an increase in the capital accounts of the old partners. The bonus is usually a percentage of the premium paid, which is divided among the old partners' capital accounts.

Question 13

In the distribution of income, the net income is less than the salary and interest allowances granted; the remaining balance will be a negative amount that must be divided among the partners as though it were a loss.

Accepted Answer

This statement is true. If the net income is less than the sum of salary and interest allowances, the remaining amount is considered a loss and it must be allocated among the partners.

Question 14

Partner A devotes full time and partner B devotes one-half time to their partnership. If the partnership agreement is silent concerning the division of net income, Partner A will receive a $20,000 share of a net income of $30,000.

Accepted Answer

If the partnership agreement is silent concerning the division of net income, it is assumed that the net income will be divided equally among the partners regardless of the amount of time each partner devotes to the partnership. Therefore, Partner A and Partner B would each receive $15,000 in this scenario.

Question 15

If a new partner is given a 20% interest in the firm, the new partner will receive a 20% interest in earnings.

Accepted Answer

The new partner's interest in earnings is determined by the partnership agreement and may not necessarily match their ownership interest percentage.

Question 16

When a new partner purchases the entire interest of an old partner, the new partner's capital account should be credited for the amount he or she paid to the old partner.

Accepted Answer

The transaction of a new partner purchasing the interest of an old partner is a private transaction between those two individuals and does not affect the partnership's books. The capital account of the new partner is credited based on the amount agreed upon for the purchase of the partnership interest, which is usually determined by the partnership agreement or a separate agreement between the partners, not necessarily the amount paid to the old partner.

Question 17

If not enough partnership cash or other assets are available to pay the withdrawing partner, a liability may be created for the amount owed the withdrawing partner.

Accepted Answer

If there is not enough partnership cash or assets to pay the withdrawing partner, a liability is created for the amount owed to them. This liability represents a debt that the partnership will need to pay off in the future.

Question 18

A new partner contributes accounts receivable to a partnership, which appears in the ledger of his sole proprietorship at $20,500, and there was an allowance for doubtful accounts of $750. If $600 of the accounts receivable are completely worthless, the partnership Accounts Receivable should be debited for $19,900.

Accepted Answer

To find the correct amount to debit to Accounts Receivable in the partnership's ledger, we need to subtract the allowance for doubtful accounts and the value of completely worthless accounts from the initial balance of accounts receivable contributed. Therefore, the calculation is $20,500 - $750 - $600 = $19,150. Since the question asks us for the amount to debit, we need to subtract this from the partner's capital account, resulting in a debit of $19,900.

Question 19

Details of the division of partnership income should normally be disclosed in the financial statements.

Accepted Answer

According to accounting standards, the division of partnership income should be disclosed in the financial statements so that stakeholders can understand how profits are split among partners. This information is typically presented in the notes to the financial statements or in a separate schedule.

Question 20

X sells to A one-half of a partnership capital interest that totals $70,000 for $40,000. A's capital account in the partnership should be credited for $40,000.

Accepted Answer

A's capital account should be credited for $35,000, which is half of the $70,000 partnership capital interest that X sold to A.

Quiz 12: Accounting for Partnerships and Limited Liability Companies