Deck 16: Partnership Accounting

Question 1

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

Answer 1

False

Question 2

A partnership has a limited life.

Answer 2

True

Question 3

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

Answer 3

True

Question 4

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

Question 5

In a limited partnership the general partner has unlimited liability.

Question 6

Partners' withdrawals are debited to their separate withdrawals accounts.

Question 7

Partners can invest assets but not liabilities into a partnership.

Question 8

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.

Question 9

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 10

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 11

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

Question 12

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 13

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

Question 14

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

Question 15

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

Question 16

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

Question 17

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

Question 18

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

Question 19

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

Question 20

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

Question 21

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

Question 22

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

Question 23

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

Question 24

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 25

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 26

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

Question 27

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

Question 28

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

Question 29

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 30

When a partnership is liquidated, its business is ended.

Question 31

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

Question 32

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

Question 33

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

Question 34

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

Question 35

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

Question 36

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 37

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 38

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

Question 39

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 40

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 41

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 42

Partnership accounting is the same as accounting for:

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

Question 43

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

Question 44

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) 8.93%
C) 10.08%
D) 11.36%
E) 10.68%

Question 45

Mutual agency means

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

Question 46

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

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

Question 47

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) The partner's authority must be derived from the partnership agreement.
B) 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.
C) Only a partner with a majority interest in a partnership has the authority to represent the partnership to third parties.
D) 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.
E) A partner may be able to legally bind the partnership to actions even if the other partners are unaware of his actions.

Question 48

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

Question 49

Partnership accounting does not:

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

Question 50

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 51

Partners' withdrawals of assets are:

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

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

Question 53

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) 19.5%
D) 20.4%
E) 21.4%

Question 54

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

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

Question 55

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

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

Question 56

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

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

Question 57

The withdrawals account of each partner is:

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

Question 58

A partnership agreement:

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

Question 59

Advantages of a partnership include:

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

Question 60

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

Question 61

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

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

Question 62

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

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

Question 64

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: Historical cost of the asset $76,000
Accumulated depreciation on the asset $40,000
Note payable secured by the asset* $18,000
Agreed-upon market value of the asset $45,000
*will be assumed by the partnership
Based on this information, Harvey's beginning equity balance in the partnership will be:

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

Question 65

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

Question 66

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

Question 67

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

Question 68

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

Question 69

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

Question 70

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

Question 71

The following information is available on TGR Enterprises, a partnership, for the most recent fiscal year: Total partnership capital at beginning of the year $180,000
Partnership net income for the year $150,000
Withdrawals by partners during the year $120,000
Additional investments by partners during the year $ 60,000
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 = $108,000; Gregory = $54,000; Rodgers = $108,000.
B) Tracey = $90,000; Gregory = $90,000; Rodgers = $90,000.
C) Tracey = $204,000; Gregory = $102,000; Rodgers = $204,000.
D) Tracey = $84,000; Gregory = $102,000; Rodgers = $84,000.
E) Tracey = $60,000; Gregory = $30,000; Rodgers = $60,000.

Question 72

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: Historical cost of the asset $276,000
Accumulated depreciation on the asset $140,000
Note payable secured by the asset and assumed by the partnership $118,000
Agreed-upon market value of the asset $245,000
Based on this information, Minor's beginning equity balance in the partnership will be:

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

Question 73

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

Question 74

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

Question 75

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

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

Question 76

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

Question 77

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) Is an expense of the business.
D) Must be paid because the partnership contract has unlimited life.
E) Legally becomes a liability of the general partner.

Question 78

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

Question 79

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

Question 80

Which of the following statements is true?

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