12.1

Activation Exercise 12-1: Forming a Partnership

Terms and Definitions

A partnership is a - Select your answer -company owned by a single individualcompany owned by two or more persons. Partnerships are typically - Select your answer -simple to formmoderately complex to form and - Select your answer -taxablenot taxable.

Understanding the Business Transaction

To form a partnership, each partner contributes personal assets in exchange for a share of ownership in the partnership. Net income or net loss is distributed among the partners - Select your answer -equallyaccording to the terms of the partnership agreement. If the partnership agreement does not provide for distribution of income and losses, then income and losses are divided equally among the partners. When a partner dies or retires, - Select your answer -the departing partner's share is soldthe partnership ceases to exist. Any property owned by the partnership is - Select your answer -assigned to a specific partnerjoint property of all the partners. When a partnership is dissolved, an individual partner's share of the partnership's assets is - Select your answer -equal to the total partnership capital divided by the number of partnersthe balance in their capital account.

Partners may contribute either cash or noncash assets to form a partnership. Noncash assets contributed are recorded at - Select your answer -their original costsvalues agreed upon by the partners.

Marco Polo contributed cash of $23,590 and noncash assets to a partnership. The partnership agreed to value noncash assets contributed in the formation of the partnership at market value. The partnership also assumed a $24,980 note payable owed by Polo. Details on the noncash assets are provided below:

Coburn Company purchases equipment on January 1, 20x1 with the following information:

	Book Value	Market Value
Inventory	$62,980	$42,330
Equipment	$80,520	$100,590

Marco Polo's capital account will have an initial balance of $ based upon his contribution to the partnership.

Recording in the Accounting System

In forming a partnership, the investments of each partner are recorded in a single journal entry. If any liabilities are assumed by the partnership, the partnership - Select your answer -capitalliability account(s) are - Select your answer -debitedcredited.

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Provide the journal entry to record Marco Polo's contribution to the partnership, based on the data provide in part 2.

If an amount box does not require an entry, leave it blank.

Financial Statement Impact

Don Quixote contributed cash of $35,000 and noncash assets to a partnership. The partnership agreed to value noncash assets contributed in the formation of the partnership at market value. The partnership also assumed a note payable owed by Quixote. Details on the noncash assets are provided below:

	Book Value	Market Value
Cash	$35,000	$35,000
Inventory	$62,000	$68,000
Equipment	$104,000	see below
Note Payable Assumed		see below

Use the sliders to select the fair market value of the equipment contributed and the amount of the note payable assumed to answer the following questions.

1.	What will be the initial balance in Don Quixote's capital account if the fair market value of the equipment contributed is $115,000 and a note payable is assumed for $30,000?
	$

2.	What will be the initial balance in Don Quixote's capital account if the fair market value of the equipment contributed is $110,000 and a note payable is assumed for $60,000?
	$

3.	What will be the initial balance in Don Quixote's capital account if the fair market value of the equipment contributed is $100,000 and a note payable is assumed for $80,000?
	$

4.	If the amount of cash contributed, fair market value of inventory, and value of note payable assumed remain constant, Don Quixote's capital account will - Select your answer -increasedecreasestay the same as the fair market value of the equipment contributed decreases.

5.	If the amount of cash contributed, fair market value of inventory, and fair market value of equipment remain constant, Don Quixote's capital account will - Select your answer -increasedecreasestay the same as the value of the note payable assumed increases.