Deck 12: Accounting for Partnerships

Question 1

Total partnership income is reported to the IRS on Form 1065.

Answer 1

True

Question 2

The income or loss of a partnership is allocated to the partners according to the partnership agreement, and it is included in determining the taxable income for each partner's tax return.

Answer 2

True

Question 3

Partners' withdrawals are debited to their separate withdrawals accounts.

Answer 3

True

Question 4

Accounting procedures for both C corporations and S corporations are the same in all aspects.

Question 5

Mutual agency means each partner can commit or bind the partnership to any contract within the scope of the partnership business.

Question 6

In a limited partnership the general partner has unlimited liability.

Question 7

The withdrawals account of each partner is closed to income summary at the end of the accounting period.

Question 8

Limited liability partnerships are designed to protect innocent partners from malpractice or negligence claims resulting from the acts of another partner.

Question 9

Partners are taxed on their withdrawals, not on their share of partnership income.

Question 10

A partnership may allocate salary allowances to the partners reflecting the relative value of services provided.

Question 11

Certain corporations with 100 or fewer stockholders can elect to be treated as a partnership for income tax purposes. These corporations are called Subchapter S or simply S corporations.

Question 12

The end of a partnership is referred to as its dissolution.

Question 13

A partnership is an incorporated association of two or more people to pursue a business for profit as co-owners.

Question 14

Partners in a partnership are taxed on the partnership income, not the amounts they withdraw from the partnership.

Question 15

Feldt is a partner in Feldt & Dodson Company. Feldt's share of the partnership income is $18,600 and her average partnership equity is $155,000. Her partner return on equity equals 8.33.

Question 16

When partners invest in a partnership, their capital accounts are debited for the amount invested.

Question 17

A partnership has a limited life.

Question 18

Partner return on equity can be used by each partner to help decide whether additional investment or withdrawal of resources is best for that partner.

Question 19

Partners can invest assets but not liabilities into a partnership.

Question 20

When a new partner is admitted, all parties usually must agree to the admission.

Question 21

When a partner leaves a partnership, the present partnership ends, but the business can still continue to operate.

Question 22

Even if partners devote their time and services to their partnership, their salaries are not expenses on the income statement.

Question 23

In a Limited Partnership, there must be more than one general partner.

Question 24

Admitting a partner by accepting assets is a personal transaction between one or more current partners and the new partner.

Question 25

Current partners usually require any new partner to pay a bonus for the privilege of joining when the current value of a partnership is greater than the recorded amounts of equity.

Question 26

Assets invested by a partner into a partnership become the property of the business.

Question 27

When a partner leaves a partnership, the withdrawing partner is entitled to a bonus if the recorded equity is overstated.

Question 28

A capital deficiency exists when at least one partner has a debit balance in his or her capital account at the point of final cash distribution during liquidation.

Question 29

In closing the accounts at the end of a period, the partners' capital accounts are credited for their share of the partnership net income or debited for their share of the partnership loss.

Question 30

When a partner leaves a partnership, the present partnership ends.

Question 31

If the partners agree on a formula to share income and say nothing about losses, then the losses are shared using the same formula.

Question 32

The owners of a limited liability company (LLC), who are called members, are protected with the same limited liability feature as owners of corporations.

Question 33

The equity section of the balance sheet of a partnership can report the separate capital account balances of each partner.

Question 34

When a partnership is liquidated, its business is ended.

Question 35

In the absence of a partnership agreement, the law says that income of a partnership will be shared equally by the partners.

Question 36

The statement of changes in partners' equity shows the beginning balance in retained earnings, plus investments, less withdrawals, plus the income (or less the loss)and the ending balance in retained earnings.

Question 37

A Limited Liability Partnership (LLP)is designed to protect innocent partners from malpractice or negligence claims resulting from the acts of another partner.

Question 38

Assume that the M & L partnership agreement gave March 60% and Ludwig 40% of partnership income and losses. The partnership lost $27,000 in the current period. This implies that March's share of the loss equals $16,200, and Ludwig's share equals $10,800.

Question 39

To buy into an existing partnership, the new partner must contribute cash to the partnership.

Question 40

Salary allowances are reported as salaries expense on a partnership income statement.

Question 41

A capital deficiency can arise from liquidation losses, excessive withdrawals before liquidation, or recurring losses in prior periods.

Question 42

Carter Pearson is a partner in Event Promoters. His beginning partnership capital balance for the current year is $55,000, and his ending partnership capital balance for the current year is $62,000. His share of this year's partnership income was $6,250. What is his partner return on equity?

A)5.34%
B)10.08%
C)10.68%
D)8.93%
E)11.36%

Question 43

Partners' withdrawals of assets are:

A)Credited to their retained earnings.
B)Debited to their asset accounts.
C)Credited to their withdrawals accounts.
D)Debited to their withdrawals accounts.
E)Debited to their retained earnings.

Question 44

The following information is available regarding Grace Smit's capital account in Enterprise Consulting Group, a general partnership, for a recent year: $\begin{array}{ll}\text { Beginning of the ye ar balance } & \$ 22,000 \\\text { Share of partnership income } & \$ 8,500 \\\text { Withdrawals made during the year } & \$ 6,000\end{array}$ What is Smit's partner return on equity during the year in question?

A)34.7%
B)55.7%
C)10.8%
D)36.6%
E)11.4%

Question 45

Advantages of a partnership include:

A)Tax-free designation of all income earned
B)Limited life.
C)Unlimited liability.
D)Voluntary association.
E)Mutual agency.

Question 46

Partnership accounting is the same as accounting for:

A)A sole proprietorship, except that separate capital and withdrawal accounts are kept for each partner.
B)A sole proprietorship.
C)A corporation.
D)A corporation, except that retained earnings is used to keep track of partners' withdrawals.
E)An S corporation.

Question 47

A partnership that has two classes of partners, general and limited, where the limited partners have no personal liability beyond the amounts they invest in the partnership, and no active role in the partnership, except as specified in the partnership agreement is a:

A)Limited liability company.
B)Limited partnership.
C)Mutual agency partnership.
D)Limited liability partnership.
E)General partnership.

Question 48

The withdrawals account of each partner is:

A)A permanent account that is not closed.
B)Credited with that partner's share of net income.
C)Closed to that partner's capital account.
D)Closed to the Income Summary account.
E)Debited with that partner's share of net loss.

Question 49

A partnership designed to protect innocent partners from malpractice or negligence claims resulting from acts of another partner is a(n):

A)Limited liability partnership.
B)Limited partnership.
C)General partnership.
D)Partnership.
E)Unlimited liability company.

Question 50

Partnership accounting does not:

A)Use a withdrawals account for each partner.
B)Allocate net income to each partner according to the partnership agreement.
C)Tax the business entity.
D)Allocate net loss to each partner according to the partnership agreement.
E)Use a capital account for each partner.

Question 51

A partnership in which all partners have mutual agency and unlimited liability is called:

A)S corporation.
B)Limited partnership.
C)Limited liability company.
D)Limited liability partnership.
E)General partnership.

Question 52

Pat and Nicole formed Here & There as a limited liability company. Unless the member owners elect to be treated otherwise, the Internal Revenue Service will tax the LLC as:

A)A joint venture.
B)An S corporation.
C)A partnership.
D)A C corporation.
E)A non-taxable entity.

Question 53

A partnership agreement:

A)Is also called the articles of incorporation.
B)Does not generally address the issue of the rights and duties of the partners.
C)Is the same as a limited liability partnership.
D)Is not binding unless it is in writing.
E)Is binding even if it is not in writing.

Question 54

Design Services is organized as a limited partnership, with Miko Toori as one of its partners. Miko's capital account began the year with a balance of $35,000. During the year, Miko's share of the partnership income was $7,500, and Miko received $4,000 in distributions from the partnership. What is Miko's partner return on equity?

A)10.2%
B)22.7%
C)20.4%
D)21.4%
E)19.5%

Question 55

R. Stetson contributed $14,000 in cash plus office equipment valued at $7,000 to the SJ Partnership. The journal entry to record the transaction for the partnership is:

A)Debit R. Stetson, Capital $21,000; credit SJ Partnership, Capital $21,000.
B)Debit Cash $14,000; debit Office Equipment $7,000; credit SJ Partnership, Capital $21,000.
C)Debit Cash $14,000; debit Office Equipment $7,000; credit Common Stock $21,000.
D)Debit Cash $14,000; debit Office Equipment $7,000; credit R Stetson, Capital $21,000.
E)Debit SJ Partnership $21,000; credit R. Stetson, Capital $21,000.

Question 56

An unincorporated association of two or more persons to pursue a business for profit as co-owners is a:

A)Voluntary organization.
B)Mutual agency.
C)Partnership.
D)Proprietorship.
E)Contractual company.

Question 57

Mutual agency implies that each partner in a partnership is a fully authorized agent of the partnership. Which of the following statements is correct regarding the authority of a partner to bind the partnership in dealings with third parties?

A)Only a partner with a majority interest in a partnership has the authority to represent the partnership to third parties.
B)A partner has authority to deal with third parties on the behalf of the other partners only if he has written permission to do so.
C)The partner's authority must be derived from the partnership agreement.
D)The partner's authority may be effectively limited by a formal resolution of the other partners, even if third parties are not aware of that limitation.
E)A partner may be able to legally bind the partnership to actions even if the other partners are unaware of his actions.

Question 58

If a partner is unable to cover a deficiency and the other partners absorb the deficiency, then the partner with the deficiency is thus relieved of all liability.

Question 59

If at the time of partnership liquidation, a partner has a $5,000 capital deficiency and pays the partnership $5,000 out of personal assets to cover the deficiency, then that partner is entitled to share in the final distribution of cash.

Question 60

Mutual agency means

A)Partners are taxed on partnership withdrawals.
B)All partners must agree before the partnership can act.
C)A partner can commit or bind the partnership in any contract within the scope of the partnership business.
D)The partnership has a limited life.
E)Creditors can apply their claims to partners' personal assets.

Question 61

Zheng invested $100,000 and Murray invested $200,000 in a partnership. They agreed to share incomes and losses by allowing a $60,000 per year salary allowance to Zheng and a $40,000 per year salary allowance to Murray, plus an interest allowance on the partners' beginning-year capital investments at 10%, with the balance to be shared equally. Under this agreement, the shares of the partners when the partnership earns $105,000 in income are:

A)$70,000 to Zheng; $60,000 to Murray.
B)$35,000 to Zheng; $70,000 to Murray.
C)$52,500 to Zheng; $52,500 to Murray.
D)$57,500 to Zheng; $47,500 to Murray.
E)$42,500 to Zheng; $62,500 to Murray.

Question 62

The following information is available on TGR Enterprises, a partnership, for the most recent fiscal year: $\begin{array}{ll}\text { Total partnership capital at beginning of the year } & \$ 180,000 \\\text { Partnership net income for the year } & \$ 150,000 \\\text { Withdrawals by partners during the year } & \$ 120,000 \\\text { Additional investments by partners during the year } & \$ 60,000\end{array}$ There are three partners in TGR Enterprises: Tracey, Gregory and Rodgers. At the end of the year, the partners' capital accounts were in the ratio of 2:1:2, respectively. Compute the ending capital balances of the three partners.

A)Tracey = $84,000; Gregory = $102,000; Rodgers = $84,000.
B)Tracey = $204,000; Gregory = $102,000; Rodgers = $204,000.
C)Tracey = $60,000; Gregory = $30,000; Rodgers = $60,000.
D)Tracey = $90,000; Gregory = $90,000; Rodgers = $90,000.
E)Tracey = $108,000; Gregory = $54,000; Rodgers = $108,000.

Question 63

Christie and Jergens formed a partnership with capital contributions of $300,000 and $400,000, respectively. Their partnership agreement calls for Christie to receive a $60,000 per year salary. Also, each partner is to receive an interest allowance equal to 10% of a partner's beginning capital investments. The remaining income or loss is to be divided equally. If the net income for the current year is $135,000, then Christie and Jergens's respective shares are:

A)$35,000; $100,000.
B)$90,000; $40,000.
C)$57,857; $77,143.
D)$67,500; $67,500.
E)$92,500; $42,500.

Question 64

Which of the following statements is true?

A)Salaries to partners are expenses on the partnership income statement.
B)Interest allowances are expenses.
C)Salary allowances are expenses.
D)Partners are employees of the partnership.
E)Salary allowances usually reflect the relative value of services provided by partners.

Question 65

The partnership agreement for Wilson, Pickett & Nelson, a general partnership, provided that profits be shared between the partners in the ratio of their financial contributions to the partnership. Wilson contributed $100,000, Pickett contributed $50,000 and Nelson contributed $50,000. In the partnership's first year of operation, it incurred a loss of $110,000. What amount of the partnership's loss, rounded to the nearest dollar, should be absorbed by Nelson?

A)$36,667
B)$40,000
C)$27,500
D)$0
E)$50,000

Question 66

Maxwell and Smart are forming a partnership. Maxwell is investing a building that has a market value of $180,000. However, the building carries a $56,000 mortgage that will be assumed by the partnership. Smart is investing $120,000 cash. The balance of Maxwell's Capital account will be:

A)$56,000.
B)$180,000.
C)$60,000.
D)$64,000.
E)$124,000.

Question 67

Harvey and Quick have decided to form a partnership. Harvey is going to contribute a depreciable asset to the partnership as his equity contribution to the partnership. The following information regarding the asset to be contributed by Harvey is available: $\begin{array}{ll}\text { Historical cost of the asset } & \$ 76,000 \\\text { Accumulated depreciation on the asset } & \$ 40,000 \\\text { Note payable secured by the asset } & \$ 18,000 \\\text { Agreed-upon market value of the asset } & \$ 45,000\end{array}$
*will be assumed by the partnership Based on this information, Harvey's beginning equity balance in the partnership will be:

A)$36,000
B)$27,000
C)$45,000
D)$76,000
E)$18,000

Question 68

Forman and Berry are forming a partnership. Forman will invest a building that currently is being used by another business owned by Forman. The building has a market value of $80,000. Also, the partnership will assume responsibility for a $20,000 note secured by a mortgage on that building. Berry will invest $50,000 cash. For the partnership, the amounts to be recorded for the building and for Forman's Capital account are:

A)Building, $80,000 and Forman, Capital, $60,000.
B)Building, $60,000 and Forman, Capital, $60,000.
C)Building, $60,000 and Forman, Capital, $50,000.
D)Building, $60,000 and Forman, Capital, $80,000.
E)Building, $80,000 and Forman, Capital, $80,000.

Question 69

In the absence of a partnership agreement, the law says that income (and loss)should be allocated based on:

A)Interest allowances.
B)Equal shares.
C)Salary allowances.
D)The ratio of capital investments.
E)A fractional basis.

Question 70

In a partnership agreement, if the partners agreed to an interest allowance of 10% annually on each partner's investment, the interest allowance:

A)Is ignored when earnings are not sufficient to pay interest.
B)Can make up for unequal capital contributions.
C)Must be paid because the partnership contract has unlimited life.
D)Legally becomes a liability of the general partner.
E)Is an expense of the business.

Question 71

Dalworth and Minor have decided to form a partnership. Minor is going to contribute a depreciable asset to the partnership as her equity contribution to the partnership. The following information regarding the asset to be contributed by Minor is available: $\begin{array} { l } \text { Historical cost of the asset}&\$276,000 \\ \text { Accumulated depreciation on the asset}&\$ 140,000\\ \text { Note payable secured by the asset and assumed by the partnership}&\$180,000 \\ \text { Agreed-upon market value of the asset}&\$ 245,000\\\end{array}$
Based on this information, Minor's beginning equity balance in the partnership will be:

A)$158,000
B)$136,000
C)$276,000
D)$18,000
E)$127,000

Question 72

Wheadon, Davis, and Singer formed a partnership with Wheadon contributing $60,000, Davis contributing $50,000 and Singer contributing $40,000. Their partnership agreement called for the income (loss)division to be based on the ratio of capital investments. If the partnership had income of $75,000 for its first year of operation, what amount of income (rounded to the nearest thousand)would be credited to Singer's capital account?

A)$75,000.
B)$40,000.
C)$25,000.
D)$20,000.
E)$30,000.

Question 73

Farmer and Taylor formed a partnership with capital contributions of $200,000 and $250,000, respectively. Their partnership agreement calls for Farmer to receive a $70,000 per year salary. The remaining income or loss is to be divided equally. Assuming net loss for the current year is $15,000, the journal entry to allocate the net loss is:

A)Debit Income Summary, $15,000; Credit Taylor, Capital, $7,500; Credit Farmer, Capital, $7,500.
B)Debit Taylor, Capital, $42,500; Credit Income Summary, $15,000; Credit Farmer, Capital, $27,500.
C)Debit Income Summary, $15,000; Debit Taylor, Capital, $27,500; Credit Taylor, Capital, $32,500.
D)Debit Income Summary, $15,000; Debit Farmer, Capital, $27,500; Credit Taylor, Capital, $42,500.
E)Debit Income Summary, $15,000; Credit Farmer, Capital, $7,500; Credit Taylor, Capital, $7,500.

Question 74

T. Andrews contributed $14,000 in to the T & B Partnership. The journal entry to record the transaction for the partnership is:

A)Debit T. Andrews, Capital $14,000; credit T & B Partnership, Capital $14,000.
B)Debit T & B Partnership $14,000; credit T. Andrews, Capital $14,000.
C)Debit Cash $14,000; credit T. Andrews, Capital $14,000.
D)Debit Cash $14,000; credit T & B Partnership, Capital $14,000.
E)Debit Cash $14,000; credit Common Stock $14,000.

Question 75

Farmer and Taylor formed a partnership with capital contributions of $200,000 and $250,000, respectively. Their partnership agreement calls for Farmer to receive a $70,000 per year salary. The remaining income or loss is to be divided equally. Assuming net income for the current year is $135,000, the journal entry to allocate net income is:

A)Debit Income Summary, $135,000; Credit Farmer, Capital, $106,140; Credit Taylor, Capital, $28,860.
B)Debit Income Summary, $130,000; Credit Taylor, Capital, $102,500; Credit Farmer, Capital, $32,500.
C)Debit Income Summary, $135,000; Credit Farmer, Capital, $102,500; Credit Taylor, Capital, $32,500.
D)Debit Income Summary, $135,000; Credit Farmer, Capital, $67,500; Credit Taylor, Capital, $67,500.
E)Debit Income Summary, $135,000; Credit Farmer, Capital, $130,000; Credit Taylor, Capital, $5,000.

Question 76

Zheng invested $100,000 and Murray invested $200,000 in a partnership. They agreed to share incomes and losses by allowing a $60,000 per year salary allowance to Zheng and a $40,000 per year salary allowance to Murray, plus an interest allowance on the partners' beginning-year capital investments at 10%, with the balance to be shared equally. Assuming net income for the current year is $105,000, the journal entry to allocate net income is:

A)Debit Income Summary, $105,000; Credit Zheng, Capital, $52,500, Credit Murray, Capital, $52,500.
B)Debit Zheng, Capital, $57,500, Debit Murray, Capital, $47,500; Credit Income Summary, $105,000;
C)Debit Income Summary, $105,000; Credit Zheng, Capital, $35,000, Credit Murray, Capital, $70,000.
D)Debit Income Summary, $105,000; Credit Zheng, Capital, $57,500, Credit Murray, Capital, $47,500.
E)Debit Income Summary, $105,000; Credit Zheng, Capital, $42,500, Credit Murray, Capital, $62,500.

Question 77

Brown invested $200,000 and Freeman invested $150,000 in a partnership. They agreed to an interest allowance on the partners' beginning-year capital investments at 10%, with the balance to be shared equally. Under this agreement, the shares of the partners when the partnership earns $205,000 in income are:

A)$122,500 to Brown; $82,500 to Freeman.
B)$117,143 to Brown; $87,857 to Freeman.
C)$105,000 to Brown; $100,000 to Freeman.
D)$102,500 to Brown; $102,500 to Freeman.
E)$112,750 to Brown; $92,250 to Freeman.

Question 78

Farmer and Taylor formed a partnership with capital contributions of $200,000 and $250,000, respectively. Their partnership agreement calls for Farmer to receive a $70,000 per year salary. The remaining income or loss is to be divided equally. If the net income for the current year is $135,000, then Farmer and Taylor's respective shares are:

A)$90,000; $45,000.
B)$106,140; $28,860.
C)$67,500; $67,500.
D)$102,500; $32,500.
E)$130,000; $5,000.

Question 79

Olivia Greer is a partner in Made for You. An analysis of Greer's capital account indicates that during the most recent year, she withdrew $30,000 from the partnership. Her share of the partnership's net loss was $16,000 and she made an additional equity contribution of $10,000. Her capital account ended the year at $150,000. What was her capital balance at the beginning of the year?

A)$186,000
B)$196,000
C)$170,000
D)$180,000
E)$154,000

Question 80

Wheadon, Davis, and Singer formed a partnership with Wheadon contributing $60,000, Davis contributing $50,000 and Singer contributing $40,000. Their partnership agreement called for the income (loss)division to be based on the ratio of capital investments. If the partnership had income of $75,000 for its first year of operation, what amount of income (rounded to the nearest thousand)would be credited to Wheadon's capital account?

A)$30,000.
B)$40,000.
C)$25,000.
D)$20,000.
E)$75,000.