Chapter 1: Partnership Formation On January 1, 2015, Ernie and Bert both sole proprietors decided to form a partnership to expand both of their businesses. According to their agreement, they will split profits and losses 75:25 and their initial capital wi

Chapter 1: Partnership Formation On January 1, 2015, Ernie and Bert both sole proprietors decided to form a partnership to expand both of their businesses. According to their agreement, they will split profits and losses 75:25 and their initial capital will also reflectthatratio. The following are Ernie and Bert’s Statement of Financial Position: Ernie Proprietor Statement of Financial Position December 31, 2014 ASSETS LIABILITIES AND EQUITY Cash 50,000 Accounts payable 65,000 Accounts Receivable 100,000 Accrued expenses 55,000 Inventories 75,000 Notes payable 80,000 Equipment 250,000 Ernie, capital 90,000 Accumulated depreciation- Equipment (185,000) TOTAL ASSETS 290,000 TOTAL LIABILITIES&EQUITY 290,000 Bert Proprietor Statement of Financial Position December 31, 2014 ASSETS LIABILITIES AND EQUITY Cash 30,000 Accounts Payable 75,000 Accounts receivable 110,000 Accrued expenses 90,000 Inventories 85,000 Notes Payable 100,000 Equipment 300,000 Bert, Capital 160,000 Accumulated Depreciation- Equipment (100,000) TOTAL ASSETS 425,000 TOTAL LIABILITIES&EQUITY 425,000 The values reflected in the Statement of Financial Position are already at fair values except fo the following accounts: Ernie’s Accounts Receivable is now 20,000 less than what is stated in his Statement of Financial Position. Both inventories of Ernie and Bert are now 90,000 and 70,000 respectively. Equipment for Bert has an assessed value of 275,000, appraised value of 250,000 and book value of 200,000. Additional accrued expenses are to be established in the amount of 10,000 for Bert only while additional accounts payable in the amount of 5,000 for Ernie. It is also agreed that all liabilities will be assumed by the partnership, except for the notes payable of Bert which will be personally paid by him. 1. How much is the adjusted capital balance of Bert upon formation? A. 91,250 B. 185,000 C. 285,000 D. 310,000 Answer: ( C ) 2. How much is the capital credit to Ernie upon formation? A. 80,000 B. 273,750 C. 292,000 D. 255,500 Answer: ( B ) 3. How much should Ernie invest as additional cash to be in conformity with their initial capital agreement? A. 193,750 B. 212,000 C. 175,500 D. 205,000 Answer: ( A ) Bonnie and Clyde enters into a partnership agreement in which Bonnie is to have 55% interest in the partnership and 35% in the profits and losses, while Clyde will have 45% interest in the partnership and 65% in the profits and losses. Bonnie contributed the following: Cost Fair value Building 235,000 255,000 Equipment 168,000 156,000 Land 500,000 525,000 The building and the equipment has a mortgage of 50,000 and 35,000 respectively. Clyde is to contribute 150,000 cash and equipment. The partners agreed that only the building mortgage will be assumed by the partnership. 1. How much is the fair market value of the equipment which Clyde contributed? A. 615,818 B. 989,143 C. 546,273 D. 574,909 Answer: ( D ) 2. How much is the total asset of the partnership upon formation? A. 1,892,143 B. 1,701,818 C. 1,660,909 D. 1,632,273 Answer: ( C ) 2. How much is the capital credit to Ernie upon formation? A. 80,000 B. 273,750 C. 292,000 D. 255,500 Answer: ( B ) 3. How much should Ernie invest as additional cash to be in conformity with their initial capital agreement? A. 193,750 B. 212,000 C. 175,500 D. 205,000 Answer: ( A ) Bonnie and Clyde enters into a partnership agreement in which Bonnie is to have 55% interest in the partnership and 35% in the profits and losses, while Clyde will have 45% interest in the partnership and 65% in the profits and losses. Bonnie contributed the following: Cost Fair value Building 235,000 255,000 Equipment 168,000 156,000 Land 500,000 525,000 The building and the equipment has a mortgage of 50,000 and 35,000 respectively. Clyde is to contribute 150,000 cash and equipment. The partners agreed that only the building mortgage will be assumed by the partnership. 1. How much is the fair market value of the equipment which Clyde contributed? A. 615,818 B. 989,143 C. 546,273 D. 574,909 Answer: ( D ) 2. How much is the total asset of the partnership upon formation? A. 1,892,143 B. 1,701,818 C. 1,660,909 D. 1,632,273 Answer: ( C ) Theories (letter of answer is underlined) 1 The partnership agreement is an express contract among the partners (the owners of the business). Such an agreement generally does not include a. A limitation on a partner’s liability to creditors. b.The rights and duties of the partners. c.The allocation of income between the partners. d.The rights and duties of the partners in the event of partnership dissolution. 2.A partnership records a partner’s investment of assets in the business at a.The market value of the assets invested. b.A special value set by the partners. c. The partner’s book value of the assets invested. d.Any of the above, depending upon the partnership agreement. ?3. When property other than cash is invested in a partnership, at what amount should the noncash property be credited to the contributing partner’s capital account? a. Fair value at the date of recognition. b. Contributing partner’s original cost. c.Assessed valuation for property tax purposes. d. Contributing partner’s tax basis. ?4. When property other than cash is invested in a partnership, at what amount should the noncash property be credited to the contributing partner’s capital account? a. Fair value at the date of contribution. b. Contributing partner’s original cost. c.Assessed valuation for property tax purposes. d. Contributing partner’s tax basis. 5.Four individuals who were previously sole proprietors form a partnership. Each partner contributes inventory and equipment for use by the partnership. What basis should the partnership use to record the contributed assets? a. Inventory at the lower of FIFO cost or market. b.Inventory at the lower of weighted-average cost or market. c. Equipment at each proprietor’s carrying amount. d.Equipment at fair value.