Accounting for Partnerships

1. Hasselback, Krooch & Kinney, a partnership, is considering admitting Ken Rosenzweig as a

new partner. On July 31 of the current year, the capital accounts of the three existing partners

and their shares of profits and losses are as follows:

Requirements

Journalize the admission of Rosenzweig as a partner on July 31 for each of the following

independent situations:

R1. Rosenzweig pays Kinney $110,000 cash to purchase Kinney’s interest.

R2. Rosenzweig invests $60,000 in the partnership, acquiring a 1/4 interest in the business.

R3. Rosenzweig invests $60,000 in the partnership, acquiring a 1/6 interest in the business.

2. Evans, Furr, and Good formed the EF&G partnership. Evans invested $20,000; Furr, $40,000;

and Good, $60,000. Evans will manage the store; Furr will work in the store three-quarters of the

time; and Good will not work.

Requirements

R1. Compute the partners’ shares of profits and losses under each of the following plans:

a. Net loss is $40,000, and the partnership agreement allocates 45% of profits to Evans, 35% to

Furr, and 20% to Good. The agreement does not discuss the sharing of losses.

b. Net income for the year ended September 30, 2009, is $90,000. The first $30,000 is allocated

on the basis of partner capital balances. The next $30,000 is based on service, with $20,000

going to Evans and $10,000 going to Furr. Any remainder is shared equally.

R2. Revenues for the year ended September 30, 2009, were $190,000, and expenses were

$100,000. Under plan (b) above, prepare the partnership income statement for the year.

Decision Case

Jana Bell invested $20,000 and Matt Fischer $10,000 in a public relations firm that has operated

for 10 years. Bell and Fischer have shared profits and losses in the 2:1 ratio of their investments

in the business. Bell manages the office, supervises employees, and does the accounting.

Fischer, the moderator of a television talk show, is responsible for marketing. His high profile

generates important revenue for the business. During the year ended December 2006, the

partnership earned net income of $220,000, shared in the 2:1 ratio. On December 31, 2006,

Bell’s capital balance was $150,000, and Fischer’s capital balance was $100,000. (Bell drew

more cash out of the business than Fischer.)

Requirements

Respond to each of the following situations.

R1. During January 2007, Bell learned that revenues of $60,000 were omitted from the reported

2006 income. She brings this omission to Fischer’s attention, pointing out that Bell’s share of this

added income is two-thirds, or $40,000, and Fischer’s share is one-third, or $20,000. Fischer

believes they should share this added income on the basis of their capital balances—60%, or

$36,000, to Bell and 40%, or $24,000, to himself. Which partner is correct? Why?

R2. Assume that the 2006 omission of $60,000 was an account payable for an operating

expense. On what basis would the partners share this amount?