Chapter 17
True-False Statements
1. A partnership is an association of two or more investors to carry on as co-owners a
business for profit.
2. Only individuals are allowed to be partners in a partnership.
3. Proprietorships and partnerships are similar in that they are both easily formed.
4. Proprietorships and partnerships are different in that proprietors have unlimited legal
liability while each partner’s legal liability is limited to his/her percentage ownership in
the partnership.
5. A partner’s personal assets may be taken by creditors to pay partnership debts if the
partnership is unable to meet its obligations.
6. Partnerships are not required to prepare financial statements in accordance with
Generally Accepted Accounting Principles unless they have publicly traded debt or are
required to follow GAAP by a creditor.
7. For a partnership to get an unqualified audit opinion, the financial records must conform
to Generally Accepted Accounting Principles.
8. Most small partnerships maintain their financial information in accordance with
Generally Accepted Accounting Principles.
9. Tax authorities basically view partnerships and proprietorships as extensions of their
owners.
10. Partnerships are not required to pay any taxes.
11. The taxable income of all partners does not necessarily sum to the net income of the
partnership.
12. The only accounting difference that must exist between partnerships and corporations is
the reporting of the ownership equity.
13. The manner in which a partnership and a corporation are formed is very similar.
14. It is generally easier to transfer ownership interest in a corporate form of business than in
a partnership.
15. A partnership legally ceases to exist each time a new partner joins the partnership or an
existing partner leaves the partnership
16. The proprietary theory of equity is based on the notion that a business entity is distinct
from the owners.
17. The entity theory of equity is based on the notion that a business entity is distinct from
the owners.
18. An individual partner’s personal responsibility for partnership debts is an example of the
entity theory of equity.
19. The dissolution of a partnership because of the admission of a new partner or withdrawal
of an existing partner is an example of the proprietary theory of equity.
20. The fact that partnerships can enter into contracts is an example of the proprietary theory
of equity.
21. Contributed assets becoming property of the partnership is an example of the entity
theory of equity.
22. The Uniform Partnership Act is the basis for partnership laws in many states.
23. A written agreement is required to form a partnership.
24. When a partnership is formed without a written agreement, the state laws where the
partnership is formed will establish the legal relationship between partners.
25. All provisions of state partnership law must be applied when a partnership is formed.
26. Partners make contributions of equal size when forming a partnership
27. There are different ways the partnership can value noncash assets contributed to the
partnership.
28. Appraisals are not necessarily required when assigning value to noncash assets
contributed to the partnership.
29. Assigning a noncash asset the contributor’s carrying value could result in a misallocation
of gain or loss if the asset is sold.
30. An asset’s carrying value should not be considered when establishing the initial capital
accounts of partners.
31. The tax basis of contributed noncash assets must be used to determine partnership income
allocation for tax reporting purposes.
32. Partnerships are required to file an informational return (Form 1065) with the IRS
indicating the amount of partnership income allocated to each partner.
33. The income assigned to each partner for financial accounting purposes will equal the
partner’s partnership income included on the partner’s individual income tax return.
34. The market value of noncash assets contributed to the partnership may be used for
computing the partners’ taxable income.
35. A contributing partner’s capital account may be assigned the market value of noncash
assets contributed but a market value assignment is not required.
36. The market value of noncash assets contributed to a partnership is the only relevant value
when determining the partners’ beginning capital balances.
37. The assumption of a liability by the partnership with regard to a noncash asset
contributed to the partnership by a partner will affect the value assigned to the partner’s
capital account.
38. The tax basis of a noncash asset contributed to a partnership with an accompanying
liability will not change as a result of the contribution.
39. When a noncash asset is contributed to a partnership with an accompanying liability, the
book value of the asset must become the cost basis of the asset on the partnership’s
financial records.
40. The assumption of a liability related to a noncash asset contributed to a partnership
reduces the value contributed.
41. Initial partner capital balances must equal the sum of the net assets contributed to the
partnership by the partner.
42. Initial partner capital balances are determined by agreement among the partners.
43. Only tangible assets contributed to the partnership can be considered when creating initial
capital balances.
Answers:
1. T
2. F, Individuals, partnerships, and corporations are allowed to be partners in a partnership.
3. T
4. F, All of the general partners are liable for all the partnership’s debts.
5. T
6. T
7. F, Partnerships may receive an unqualified audit opinion when using a comprehensive
basis of accounting other that accrual such as cash, modified accrual, or the tax basis.
8. F, Most small partnerships maintain their financial information using the tax basis.
9. T
10. F, While the partnership does not pay income taxes, it is responsible for other taxes such
as payroll taxes and franchise taxes.
11. T
12. T
13. F, Partnerships and corporations are formed by two are more parties. A written
agreement is not necessary and state approval is not required for a partnership but a
corporation must file articles of incorporation with the state to attain a corporate charter.
14. T
15. T
16. F, The proprietary theory is based on the notion that the business entity is an aggregation
of the owners
17. T
18. F, This is an example of the proprietary theory of equity.
19. T
20. F, This is an example of the entity theory of equity.
21. T
22. T
23. F, While a written agreement is generally recommended when forming a partnership, it is
not required.
24. T
25. F, Most provisions only apply if there is no agreement among the partners with regard to
that specific issue.
26. F, Initial capital contributions are determined by agreement among the partners and do
not have to be equal in size.
27. T
28. T
29. T
30. F, Any basis (i.e., carrying value, tax basis, or market value) can be used to value
noncash assets contributed to a partnership
31. T
32. T
33. F, There are numerous differences that can cause the income assigned to partners for
accounting purposes to differ from income assigned to partners for tax purposes such as
noncash assets contributed to the partnership valued at an amount different than the
contributing partner’s tax basis
34. F, The tax basis of noncash assets contributed to the partnership must be used to
determine taxable income.
35. T
36. F, Partners should agree on the method to be used to value noncash asset contributions
when preparing the articles of partnership. A variety of bases can be used and the market
value is one of the alternatives.
37. T
38. F, The amount of the liability assumed by the partnership, excluding the contributing
partners share of that liability, will reduce the tax basis of the asset contributed.
39. F, The assumption of a liability has no impact on the valuation approach by the
partnership.
40. T
41. F, The capital balances established can be any amounts agreed by the partners.
42. T
43. F, Partners may contribute tangible and intangible assets to the partnership. It is possible
to consider both when determining initial partnership capital account balances.
Problems
1. Peter, Paul, and Mary are forming a partnership. Mary contributes a building having an
historical cost, accumulated depreciation, and market value of P348,000, P120,000, and
P480,000, respectively. The building is initially recorded on the partnership’s books at
Mary’s book value (P228,000). Two years later the building is sold for a P324,000 gain.
What portion of the profit or loss should be allocated to Mary?
2. Philip, Ray, and Sarah are forming a partnership. Philip contributes cash of P100,000;
Ray contributes inventory with a value of P100,000; and Sarah contributes a building
with a market value of P300,000. The partnership also assumed the P210,000 mortgage
on the building. What is the amount of capital assigned to each partner?
3. MT and JF formed a partnership on April 1 and contributed the following assets:
MT JF
Cash . . . . . . . . . . . . . . . . . . . . . . . . P 150,000 P 50,000
Land . . . . . . . . . . . . . . . . . . . . . . . . 310,000
The land was subject to a P30,000 mortgage, which the partnership assumed. Under the
partnership agreement, MT and JF will share profit and loss in the ratio of one-third and
respectively. JF’s capital account at April 1 should be:
4 On April 30, 20x4, AA, BB, and CC formed a partnership by combining their separate
business proprietorships. AA contributed P50,000 cash. BB contributed property with a
P36,000 carrying amount, a P40,000 original cost, and P80,000 fair value. The
partnership accepted responsibility for the P35,000 mortgage attached to the property.
CC contributed equipment with a P30,000 carrying amount, a P75,000 original cost, and
P55,000 fair value. The partnership agreement specifies that profits and Iosses are to be
shared equally but is silent regarding capital contributions. Which partner has the largest
April 30, 20x4, capital account balance?
a. AA c. CC
b. BB d. All capital account balances are equal
5. Griffin and Rhodes formed a partnership on January 1, 20x4. Griffin contributed cash of
P120,000 and Rhodes contributed land with a fair value of P160,000. The partnership
assumed the mortgage on the land which amounted to P40,000 on January 1. Rhodes
originally paid P90,000 for the land. On July 31, 20x4, the partnership sold the land for
P190,000. Assuming that Griffin and Rhodes share profits and losses equally. How much
of the gain from sale of land should be credited to Griffin for financial accounting
purposes?
6. On May 1, 20x4, CC and MM formed a partnership and agreed to share profits and losses
in the ratio of 3:7, respectively. CC contributed a parcel of land that cost her P10,000.
MM contributed P40,000 cash. The land was sold for P18,000 immediately after
formation of the partnership. What amount should be recorded in CC’s capital account on
formation of the new partnership?
7. Richardson, Peterson, and Wilkerson are forming a partnership. The partners contribute
cash and noncash assets valued at P30,000, P50,000, and P25,000, respectively. The
partners choose to apply the bonus method where applicable. If the partners agree to
establish equal capital account balances when the partnership is formed, how much
capital is Peterson sacrificing to give a bonus to Richardson and Wilkerson?
8. Albert, Claude, and Jamie form a partnership by contributing P25,000, P70,000, and
P80,000, respectively. In addition, the partners agree that Albert should receive P20,000
of goodwill because of his special skills relevant to this business. What amount of capital
will exist for Albert when the partnership is formed?
9. Chris and David are forming a partnership with contributions of P75,000 and P125,000,
respectively. In addition, they agree that they will recognize P25,000 goodwill with
regard to David’s contacts in the area. What is the total amount of capital that will exist
for the partnership immediately after it is formed?
10. Luca and Mira formed a partnership on 7/1/20x4 and contributed the following assets:
Luca Mira
Cash.......................................................................... P65,000 P100,000
Land.......................................................................... 300,000
The realty was subject to a mortgage of P25,000, which was assumed by the partner-
ship. The partnership agreement provides that Luca and Mira will share profits and losses
in the ratio of one-third and two-thirds, respectively. Mira’s capital account at 7/1/20x4
should be
11. On 7/1/20x4, Burr and Lapp formed a partnership, agreeing to share profits and losses in
the ratio of 4:6, respectively. Burr contributed a parcel of land that cost him P25,000.
Lapp contributed P50,000 cash. The land was sold for P50,000 on 7/2/20x4-one day after
the partnership’s formation. How much should be recorded in Burr’s capital account
upon partnership’s formation?
12. On 7/1/20x4, Pane and Sills formed a partnership, and each contributed assets with
agreed-upon values as follows:
Pane Sill
Cash.......................................................................... P 40,000 P 30,000
Machinery and equipment......................................... 100,000
Land.......................................................................... 350,000
The building is subject to a mortgage loan of P100,000, which is to be assumed by the
partnership. The agreed-upon value of the building is P50,000 more than the tax basis of
P300,000. The partnership agreement provides that Pane and Sills share profits and
losses 60% and 40%, respectively. Using this information, on 7/1/20x4, the balance in
Sills’s capital account should be:
Use the following information for question 13 and 14:
On September 30,20x4, LL admits MM for an interest in his business. On this date, LL’s
capital account shows a balance of P158,400. The following were agreed upon before the
formation of the partnership:
a. Prepaid expenses of P17,500 and accrued expenses of P5,000 are to be recognize
b. 5% of the outstanding accounts receivable of Lopez amounting to P100,000 is to be
recognized as uncollectible.
c. MM is to be credited with a one-third interest in the partnership and is to invest cash
aside from the P50,000 worth of merchandise.
13. How much cash is to be invested by MM?
a. P32,950 c. P82,950
b. P55,300 d. P 5,300
14. The total capital of the partnership is:
a. P221,200 c. P171,200
b. P198,850 d. P248,850
Answers:
1. P276,000 = (P480,000 – P228,000) + [P324,000 - (P480,000 – P228,000)]/3
2. Philip, P100,000; Ray, P100,000 and Sarah, P90,000 (P300,000 – P210,000)
3. P330,000
P330,000 = P50,000 + (P310,000 - P30,000)
4 c The capital balances of each partner are determined as follows:
.
Apple Blue Crown
Cash P50,00
0
Property P 80,000
Mortgage assumed (35,000)
Equipment P 55,000
Amount credited to
capital accounts P50,00 P 45,000 P 55,000
0
5. P15,000
(P190,000 – P160,000) x 1/2 = P15,000
6. P18,000 – the prevailing selling price which is also the fair market value.
7. P15,000
P30,000 + P50,000 + P25,000 = P105,000/3 = P35,000
P50,000 - P35,000 = P15,000
8. P45,000
9. P225,000
10. P375,000 = P400,000 – P25,000
11. P50,000
12. P280,000
Pane Sills
Cash.................................................................................. P 40,000 P 30,000
Machinery and equipment................................................. 100,000
Building............................................................................. 350,000
Subtotal......................................................................... P140,000 P380,000
Less: Liability assumed by the partnership....................... (100,000)
Capital balances, 7/1/06.................................................... P140,000 P280,000
13. d
Adjusted capital of LL P 165,900
Contributed capital of MM 82,950
Total capital P 248,850
14. a
FF, capital:
Unadjusted balance P 57,000
Adjustments:
Accumulated depreciation ( 1,500)
Allowance for doubtful account (12,000)
Adjusted balance P 43,500
GG, capital:
Unadjusted balance P 49,500
Adjustments:
Accumulated depreciation ( 4,500)
Allowance for doubtful account ( 4,500)
Adjusted balance P 40,500
