Chapter 12

Gwen Delk and Alliesha Johnson decide to form a partnership by combining the assets of their separate businesses. Delk contributes the following assets to the partnership: cash, \(\$ 13,000\); accounts receivable with a face amount of \(\$ 136,000\) and an allowance for doubtful accounts of \(\$ 8,400\); merchandise inventory with a cost of \(\$ 90,000\); and equipment with a cost of \(\$ 155,000\) and accumulated depreciation of \(\$ 100,000\). The partners agree that \(\$ 6,000\) of the accounts receivable are completely worthless and are not to be accepted by the partnership, that \(\$ 10,200\) is a reasonable allowance for the uncollectibility of the remaining accounts, that the merchandise inventory is to be recorded at the current market price of \(\$ 84,700\), and that the equipment is to be valued at \(\$ 69,500\). Journalize the partnership's entry to record Delk's investment.

Candace Hassell and Abby Lawson formed a partnership, investing \(\$ 240,000\) and \(\$ 80,000\), respectively. Determine their participation in the year's net income of \(\$ 200,000\) under each of the following independent assumptions: (a) no agreement concerning division of net income; (b) divided in the ratio of original capital investment; (c) interest at the rate of \(15 \%\) allowed on original investments and the remainder divided in the ratio of \(2: 3\); (d) salary allowances of \(\$ 50,000\) and \(\$ 70,000\), respectively, and the balance divided equally; (e) allowance of interest at the rate of \(15 \%\) on original investments, salary allowances of \(\$ 50,000\) and \(\$ 70,000\), respectively, and the remainder divided equally.

Casey Fisher and Logan Baylor formed a partnership in which the partnership agreement provided for salary allowances of \(\$ 40,000\) and \(\$ 35,000\), respectively. Determine the division of a \(\$ 20,000\) net loss for the current year.

Sixty-year-old Jasmine Howard retired from her computer consulting business in Boston and moved to Florida. There she met 27-year-old Dawn Patel, who had just graduated from Eldon Community College with an associate degree in computer science. Jasmine and Dawn formed a partnership called J\&D Computer Consultants. Jasmine contributed \(\$ 25,000\) for startup costs and devoted one-half time to the business. Dawn devoted full time to the business. The monthly drawings were \(\$ 2,000\) for Jasmine and \(\$ 4,000\) for Dawn. At the end of the first year of operations, the two partners disagreed on the division of net income. Jasmine reasoned that the division should be equal. Although she devoted only one-half time to the business, she contributed all of the startup funds. Dawn reasoned that the income-sharing ratio should be \(2: 1\) in her favor because she devoted full time to the business and her monthly drawings were twice those of Jasmine. Can you identify any flaws in the partners' reasoning regarding the incomesharing ratio?

Ben Bowman and Savannah Mapes formed a limited liability company with an operating agreement that provided a salary allowance of \(\$ 75,000\) and \(\$ 60,000\) to each member, respectively. In addition, the operating agreement specified an income-sharing ratio of 3:2. The two members withdrew amounts equal to their salary allowances. a. Determine the division of \(\$ 188,000\) net income for the year. b. Provide journal entries to close the (1) income summary and (2) drawing accounts for the two members.

Intermedia, LLC, has three members: WYXT Partners, Lindsey Wilson, and Daily Sun Newspaper, LLC. On January 1, 2010, the three members had equity of \(\$ 200,000\), \(\$ 50,000\), and \(\$ 120,000\), respectively. WYXT Partners contributed an additional \(\$ 50,000\) to Intermedia, LLC, on June 1, 2010. Lindsey Wilson received an annual salary allowance of \(\$ 115,600\) during 2010 . The members' equity accounts are also credited with \(12 \%\) interest on each member's January 1 capital balance. Any remaining income is to be shared in the ratio of \(4: 3: 3\) among the three members. The net income for Intermedia, LLC, for 2010 was \(\$ 650,000\). The salary and interest allowances were distributed to the members. a. Determine the division of income among the three members. b. Prepare the journal entry to close the net income and withdrawals to the individual member equity accounts. c. Prepare a statement of members' equity for 2010 .

Lia Wu and Becca Sims are partners who share in the income equally and have capital balances of \(\$ 150,000\) and \(\$ 62,500\), respectively. Wu, with the consent of Sims, sells onethird of her interest to Kara Oliver. What entry is required by the partnership if the sales price is (a) \(\$ 40,000\) ? (b) \(\$ 60,000\) ?

The public accounting firm of Grant Thornton LLP disclosed U.S. revenues of \(\$ 940\) million for a recent year. The revenues were attributable to 489 active partners. a. What was the average revenue per partner? Round to the nearest \(\$ 1,000\). b. Assuming that the total partners' capital is \(\$ 195,600,000\) and that it approximates the fair market value of the firm's net assets, what would be considered a minimum contribution for admitting a new partner to the firm, assuming no bonus is paid to the new partner? Round to the nearest \(\$ 1,000\). c. Why might the amount to be contributed by a new partner for admission to the firm exceed the amount determined in (b)?

The capital accounts of Brad Hughes and Mitchell Isaacs have balances of \(\$ 120,000\) and \(\$ 100,000\), respectively. Leah Craft and Jayme Clark are to be admitted to the partnership. Craft buys one-fifth of Hughes's interest for \(\$ 30,000\) and one-fourth of Isaacs' interest for \(\$ 20,000\). Clark contributes \(\$ 50,000\) cash to the partnership, for which she is to receive an ownership equity of \(\$ 50,000\). a. Journalize the entries to record the admission of (1) Craft and (2) Clark. b. What are the capital balances of each partner after the admission of the new partners?

After the tangible assets have been adjusted to current market prices, the capital accounts of Travis Harris and Keelyn Kidd have balances of \(\$ 60,000\) and \(\$ 90,000\), respectively. Felix Flores is to be admitted to the partnership, contributing \(\$ 45,000\) cash to the partnership, for which he is to receive an ownership equity of \(\$ 60,000\). All partners share equally in income. a. Journalize the entry to record the admission of Flores, who is to receive a bonus of \(\$ 15,000\). b. What are the capital balances of each partner after the admission of the new partner?

Excel Medical, LLC, consists of two doctors, Douglass and Finn, who share in all income and losses according to a \(2: 3\) income-sharing ratio. Dr. Lindsey Koster has been asked to join the LLC. Prior to admitting Koster, the assets of Excel Medical were revalued to reflect their current market values. The revaluation resulted in medical equipment being increased by \(\$ 25,000\). Prior to the revaluation, the equity balances for Douglass and Finn were \(\$ 240,000\) and \(\$ 275,000\), respectively. a. Provide the journal entry for the asset revaluation. b. Provide the journal entry for the bonus under the following independent situations: 1\. Koster purchased a \(30 \%\) interest in Excel Medical, LLC, for \(\$ 310,000\). 2\. Koster purchased a \(25 \%\) interest in Excel Medical, LLC, for \(\$ 160,000\).

J. Taylor and K. Garcia are partners in Green Earth Consultants. Taylor and Garcia share income equally. L. Harris will be admitted to the partnership. Prior to the admission, equipment was revalued downward by \(\$ 8,000\). The capital balances of each partner are \(\$ 100,000\) and \(\$ 139,000\), respectively, prior to the revaluation. a. Provide the journal entry for the asset revaluation. b. Provide the journal entry for Harris's admission under the following independent situations: 1\. Harris purchased a \(20 \%\) interest for \(\$ 50,000\). 2\. Harris purchased a \(30 \%\) interest for \(\$ 125,000\).

The partnership of Angel Investor Associates began operations on January 1, 2010, with contributions from two partners as follows: \(\begin{array}{lr}\text { Jen Wilson } & \$ 45,000 \\ \text { Teresa McDonald } & 55,000\end{array}\) The following additional partner transactions took place during the year: 1\. In early January, Jaime Holden is admitted to the partnership by contributing \(\$ 25,000\) cash for a \(20 \%\) interest. 2\. Net income of \(\$ 160,000\) was earned in 2010. In addition, Jen Wilson received a salary allowance of \(\$ 30,000\) for the year. The three partners agree to an income-sharing ratio equal to their capital balances after admitting Holden. 3\. The partners' withdrawals are equal to half of the increase in their capital balances from income. Prepare a statement of partnership equity for the year ended December 31, \(2010 .\)

Luke Gilbert is to retire from the partnership of Gilbert and Associates as of March 31, the end of the current fiscal year. After closing the accounts, the capital balances of the partners are as follows: Luke Gilbert, \(\$ 245,000\); Marissa Cohen, \(\$ 125,000\); and Tyrone Cobb, \(\$ 140,000\). They have shared net income and net losses in the ratio of \(3: 2: 2\). The partners agree that the merchandise inventory should be increased by \(\$ 24,000\), and the allowance for doubtful accounts should be increased by \(\$ 5,800\). Gilbert agrees to accept a note for \(\$ 200,000\) in partial settlement of his ownership equity. The remainder of his claim is to be paid in cash. Cohen and Cobb are to share equally in the net income or net loss of the new partnership. Journalize the entries to record (a) the adjustment of the assets to bring them into agreement with current market prices and (b) the withdrawal of Gilbert from the partnership.

Pryor and Lester are partners, sharing gains and losses equally. They decide to terminate their partnership. Prior to realization, their capital balances are \(\$ 12,000\) and \(\$ 8,000\), respectively. After all noncash assets are sold and all liabilities are paid, there is a cash balance of \(\$ 16,000\). a. What is the amount of a gain or loss on realization? b. How should the gain or loss be divided between Pryor and Lester? c. How should the cash be divided between Pryor and Lester?

Jason Bradley and Abdul Barak, with capital balances of \(\$ 26,000\) and \(\$ 35,000\), respectively, decide to liquidate their partnership. After selling the noncash assets and paying the liabilities, there is \(\$ 76,000\) of cash remaining. If the partners share income and losses equally, how should the cash be distributed?

Bianca Houston, Jana Alsup, and KeKe Cross arranged to import and sell orchid corsages for a university dance. They agreed to share equally the net income or net loss of the venture. Houston and Alsup advanced \(\$ 250\) and \(\$ 380\) of their own respective funds to pay for advertising and other expenses. After collecting for all sales and paying creditors, the partnership has \(\$ 1,020\) in cash. a. How should the money be distributed? b. Assuming that the partnership has only \(\$ 540\) instead of \(\$ 1,020\), do any of the three partners have a capital deficiency? If so, how much?

Hilliard, Downey, and Petrov are partners sharing income 3:2:1. After the firm's loss from liquidation is distributed, the capital account balances were: Hilliard, \$24,000 Dr.; Downey, \(\$ 90,000 \mathrm{Cr}\).; and Petrov, \(\$ 64,000 \mathrm{Cr}\). If Hilliard is personally bankrupt and unable to pay any of the \(\$ 24,000\), what will be the amount of cash received by Downey and Petrov upon liquidation?

After closing the accounts on July 1 , prior to liquidating the partnership, the capital account balances of Dover, Goll, and Chamberland are \(\$ 35,000, \$ 50,000\), and \(\$ 22,000\), respectively. Cash, noncash assets, and liabilities total \(\$ 55,000, \$ 92,000\), and \(\$ 40,000\), respectively. Between July 1 and July 29 , the noncash assets are sold for \(\$ 74,000\), the liabilities are paid, and the remaining cash is distributed to the partners. The partners share net income and loss in the ratio of \(3: 2: 1\). Prepare a statement of partnership liquidation for the period July 1-29, 2010 .

Gordon, Hightower, and Mills are members of Capital Sales, LLC, sharing income and losses in the ratio of 2:2:1, respectively. The members decide to liquidate the limited liability company. The members’ equity prior to liquidation and asset realization on May 1, 2010, are as follows: $$ \begin{array}{lr} \text { Gordon } & \$ 15,000 \\ \text { Hightower } & 35,000 \\ \text { Mills } & 22,000 \\ \hline \text { Total } & \$ 72,000 \\ \hline \end{array} $$ In winding up operations during the month of May, noncash assets with a book value of \(\$ 94,000\) are sold for \(\$ 116,500\), and liabilities of \(\$ 30,000\) are satisfied. Prior to realization, Capital Sales has a cash balance of \(\$ 8,000\). a. Prepare a statement of LLC liquidation. b. Provide the journal entry for the final cash distribution to members.

The accounting firm of Deloitte \& Touche is the largest international accounting firm in the world as ranked by total revenues. For the last two years, Deloitte \& Touche reported the following for its U.S. operations: \begin{tabular}{lrr} & \(\mathbf{2 0 0 7}\) & \multicolumn{1}{c}{\(\mathbf{2 0 0 6}\)} \\ \hline Revenue (in millions) & \(\$ 9,850\) & \(\$ 8,770\) \\ Number of professional staff lincluding partners) & 32,483 & 29,614 \end{tabular} a. For 2007 and 2006, determine the revenue per professional staff. Round to the nearest thousand dollars. b. Interpret the trend between the two years.

Office-Brite Cleaning Services, LLC, provides cleaning services for office buildings. The firm has 10 members in the LLC, which did not change between 2008 and 2009 . During 2009 , the business expanded into four new cities. The following revenue and employee information is provided: \begin{tabular}{lrr} & \(\mathbf{2 0 0 9}\) & \(\mathbf{2 0 0 8}\) \\ \hline Revenues (in thousands) & \(\$ 38,500\) & \(\$ 33,750\) \\ Number of employees (excluding members) & 350 & 250 \end{tabular} a. For 2009 and 2008, determine the revenue per employee (excluding members). b. Interpret the trend between the two years.