Question 1

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 2

If nothing is stated, partnership income is divided in proportion to the individual partner's capital balance.

Accepted Answer

The answer of If nothing is stated, partnership income is...

Question 3

The amount that a partner withdraws as a monthly salary allowance does affect the division of net income.

Accepted Answer

If a partner withdraws a higher salary allowance, it reduces the net income available for distribution among all partners. This could affect the percentage share of profits that each partner receives. Therefore, the amount of salary allowance does affect the division of net income.

Question 4

In admitting a new partner, where the company chooses to use the purchase of an interest method, 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

In the purchase of an interest method, the new partner buys a portion of the existing partners' capital, so the total assets and total capital remain unchanged.

Question 5

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

Accepted Answer

In the absence of an agreement, partners typically share profits equally, regardless of the time devoted.

Question 6

The salary allocation to partners used in dividing net income would also appear as salary expense on the partnership income statement.

Accepted Answer

The salary allocation to partners is not an expense but a distribution of the net income among the partners according to the partnership agreement. It does not appear as a salary expense on the partnership income statement.

Question 7

A person may be admitted to a partnership only with the consent of all the current partners.

Accepted Answer

This statement is true. Partnership agreements typically require that all existing partners agree to the admission of any new partner. Without unanimous consent, a new partner cannot be admitted to the partnership.

Question 8

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

Accepted Answer

According to generally accepted accounting principles (GAAP), the details of the division of partnership income should be disclosed in the financial statements to provide transparency and ensure accurate reporting of the partnership's financial performance. This information is typically included in the partnership's statement of partners' capital, which outlines each partner's share of the partnership's income or loss.

Question 9

If the net income of a partnership is less than the total of the allowances provided by the partnership agreement, the difference must be divided among the partners in the income-sharing ratio.

Accepted Answer

If the net income of a partnership is less than the total allowances provided by the partnership agreement, no divided among partners is necessary because there are no profits to divide.

Question 10

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 and dies.

Accepted Answer

When a new partner is admitted to a partnership or an existing partner withdraws or dies, the partnership's asset accounts should be revalued at their fair market value. This is done to ensure that the new partner's capital account is properly adjusted to reflect the value of the partnership's assets. Similarly, when an existing partner withdraws or dies, the partnership's assets may need to be revalued to ensure that the departing partner's capital account is adjusted to reflect the value of their share of the partnership.

Question 11

Whenever a partnership is dissolved, the assets are liquidated.

Accepted Answer

The answer of Whenever a partnership is dissolved, the assets...

Question 12

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 salary and interest allowances, the remaining balance will be a negative amount, also known as a loss. This loss must be divided among the partners according to their agreed upon profit sharing ratios.

Question 13

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 14

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 include provisions for admitting new partners or allowing existing partners to withdraw, without requiring a completely new agreement to be executed. This allows for flexibility in the partnership structure over time.

Question 15

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

Accepted Answer

The answer of If a new partner is given a...

Question 16

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

Accepted Answer

The answer of When a partner withdraws from the partnership,...

Question 17

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 18

When a partnership dissolves, a new partnership is formed and a new partnership agreement should be prepared.

Accepted Answer

When a partnership dissolves, the partners may decide to form a new partnership. In such a case, a new partnership agreement should be prepared outlining the terms and conditions of the new partnership. This is necessary to ensure clarity and avoid future disagreements between the partners.

Question 19

If the articles of partnership provide for annual salary allowances of $36,000 and $18,000 to X and Y respectively and net income is $30,000, X's share of net income is $20,000.

Accepted Answer

If the articles of partnership provide for annual salary allowances, they must be subtracted from the net income before calculating the distribution of profits. In this case, the total salary allowance is $54,000 ($36,000 + $18,000), which is more than the net income of $30,000. Therefore, there is no net income available for distribution among the partners, and X would not receive $20,000.

Question 20

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 is called a goodwill bonus, and it is divided among the old partners' capital accounts to compensate them for the increase in value of the partnership resulting from the new partner's admission.

Quiz 12: Accounting for Partnerships and Limited Liability Companies