Deck 12: Accounting for Partnerships and Limited Liability Companies

Question 1

A partnership is a legal entity separate from its owners.

Answer 1

False

Question 2

A disadvantage of partnerships is the mutual agency of all partners.

Answer 2

True

Question 3

For tax purposes, a Limited Liability Company may elect to be treated as a partnership.

Answer 3

True

Question 4

A partnership requires only an agreement between two or more persons to organize.

Question 5

The Limited Liability Company may elect to be manager managed rather than member managed which means that only authorized members may legally bind the corporation.

Question 6

When compared to a corporation, one of the major advantages of a partnerships is its relative ease of formation.

Question 7

In a general partnership, each partner is individually liable to creditors for debts incurred by the partnership, to the extent of the partner's capital balance.

Question 8

An advantage of the partnership form of business is that each partner's potential loss is limited to that partner's investment in the partnership.

Question 9

A new partner contributes accounts receivable to a partnership which appear in the ledger of his sole proprietorship at $20,500 and there was an allowance for doubtful accounts of $750. If $600 of the accounts receivables are completely worthless, the partnership accounts receivable should be debited for $19,900.

Question 10

When a partner invests noncash assets in a partnership, the assets are recorded at the partner's book value.

Question 11

Each partner may withdraw the assets he or she contributed to the partnership at any time.

Question 12

A Limited Liability Company is a business entity form designed to overcome some of the disadvantages of the partnership form.

Question 13

One reason that distributions of income and loss are prepared is to obtain the information to record a closing entry.

Question 14

Accounts receivable contributed to the partnership are recorded at their face value.

Question 15

Each partner has a separate capital and withdrawal account.

Question 16

The equity reporting for a Limited Liability Company is similar to that of a partnership but the changes in capital are shown on a statement of members' equity.

Question 17

A partnership is subject to federal income taxes.

Question 18

There are only four legal structures to form and operate a business.

Question 19

The chart of accounts for a partnership, with the exception of drawing and capital accounts, does differ from the chart of accounts for a sole proprietorship.

Question 20

When compared to a corporation, one of the major disadvantages of the partnership is its limited life.

Question 21

Sarno has a capital balance of $42,000 after adjusting the assets to fair market value. Minton contributes $22,000 to receive a 30% interest in the new partnership. The bonus paid by Minton is $2,800.

Question 22

If nothing is stated, partnership income is divided in proportion to the individual partner's capital balance.

Question 23

The amount that a partner withdraws as a monthly salary allowance does affect the division of net income.

Question 24

In admitting a new partner, where the company chooses to use the purchase of an interest method, the capital interest of the new partner is obtained from the current partners and both the total assets and total capital are increased.

Question 25

A devotes full time and B devotes one-half time to their partnership. If the partnership agreement is silent concerning the division of net income, A will receive a $20,000 share of a net income of $30,000.

Question 26

The salary allocation to partners used in dividing net income would also appear as salary expense on the partnership income statement.

Question 27

A person may be admitted to a partnership only with the consent of all the current partners.

Question 28

Details of the division of partnership income should normally be disclosed in the financial statements.

Question 29

If the net income of a partnership is less than the total of the allowances provided by the partnership agreement, the difference must be divided among the partners in the income-sharing ratio.

Question 30

Partnership's asset accounts should be changed from cost to fair market value when a new partner is admitted to a firm or an existing partner withdraws and dies.

Question 31

Whenever a partnership is dissolved, the assets are liquidated.

Question 32

In the distribution of income, the net income is less than the salary and interest allowances granted; the remaining balance will be a negative amount that must be divided among the partners as though it were a loss.

Question 33

When a new partner is admitted by making an investment in the partnership, the old partners' capital accounts are always credited.

Question 34

Many partnerships provide for the admission of new partners or withdrawals of present partners by amending existing partnership agreements, so that the firm may continue to operate without executing a new agreement.

Question 35

If a new partner is given a 20% interest in the firm then the new partner will receive a 20% interest in earnings.

Question 36

When a partner withdraws from the partnership, the partnership dissolves.

Question 37

When a new partner purchases the entire interest of an old partner, the new partner's capital account should be credited for the amount he or she paid to the old partner.

Question 38

When a partnership dissolves, a new partnership is formed and a new partnership agreement should be prepared.

Question 39

If the articles of partnership provide for annual salary allowances of $36,000 and $18,000 to X and Y respectively and net income is $30,000, X's share of net income is $20,000.

Question 40

When a new partner is admitted by making an investment of assets in the partnership and the new partner has to pay a premium for admission, a bonus is divided among the old partners' capital accounts.

Question 41

If the share of losses on realization of the sale of noncash assets exceed the balance in a partner's capital account, the resulting balance is called a deficiency.

Question 42

If a partner's capital balance is a debit after it has absorbed its share of the loss on realization, the balance is referred to as a deficiency.

Question 43

The process of winding up the affairs of a partnership is referred to as realization.

Question 44

When a new partner is admitted to a partnership, bonuses attributable to either the old partnership or to the incoming partner may be recognized in accordance with the agreement among the partners.

Question 45

Which of the following is not a characteristic of a general partnership?

A) the partnership is created by a contract
B) mutual agency
C) partners share equally in net income or net losses unless an agreement states differently
D) dissolution occurs only when all partners agree

Question 46

In a partnership liquidation, gains and losses on the sale of partnership assets are divided among the partners' capital accounts on the basis of their capital balances.

Question 47

In the liquidating process, any uncollected cash becomes a loss to the partnership and is divided among the remaining partners' capital balances based on their income-sharing ratio.

Question 48

X sells to A one-half of a partnership capital interest that totals $70,000 for $40,000. A's capital account in the partnership should be credited for $40,000.

Question 49

When a partner withdraws from the partnership by selling his or her interest back to the partnership, the remaining partners must pay the withdrawing partner a specified amount from their personal assets.

Question 50

Which of the following is characteristic of a general partnership?

A) The partners have co-ownership of partnership property.
B) The partnership is subject to federal income tax.
C) The partnership has an unlimited life.
D) The partners have limited liability.

Question 51

The statement of members' equity is used for equity reporting of a partnership.

Question 52

Dissolution is the term which solely means to liquidate the partnership.

Question 53

Revenue per employee may be used to measure partnership (LLC) efficiency.

Question 54

After all noncash assets have been converted to cash and all liabilities paid, A, B, and C have capital balances of $10,000 (debit), $5,000 (debit), and $25,000 (credit). The cash available for distribution to the partners is $10,000.

Question 55

When a new partner is admitted to a partnership, all partnership assets should be revised to reflect current prices.

Question 56

If a new partner is to be admitted to a partnership and a bonus is attributed to the old partnership, the bonus should be divided between the capital accounts of the original partners according to their capital balances.

Question 57

In a partnership liquidation, if a partner has a debit capital balance in his or her capital account, he or she is responsible for contributing personal assets sufficient to eliminate the deficit.

Question 58

The distribution of cash, as the final process in winding up the affairs of a partnership, is based on the income-sharing ratio.

Question 59

The partner capital accounts may change due to capital additions, net income, or withdrawals.

Question 60

If enough partnership cash or other assets are available to pay the withdrawing partner, a liability may be created for the amount owed the withdrawing partner.

Question 61

Radley and Smithers share income and losses in a 2:1 ratio after allowing for salaries to Radley of $48,000 and $60,000 to Smithers. Net income for the partnership is $96,000. Income should be divided as follows:

A) Radley, $48,000; Smithers, $48,000
B) Radley, $56,000; Smithers, $40,000
C) Radley, $64,000; Smithers, $32,000
D) Radley, $40,000; Smithers, $56,000

Question 62

Which of the following is an advantage of a general partnership when compared to a corporation?

A) A partnership is more likely to have a positive net income.
B) The partnership is relatively inexpensive to organize.
C) Creditors to a partnership cannot attach personal assets of partners.
D) The partnership usually hires professional managers.

Question 63

Xavier and Yolonda have original investments of $50,000 and $100,000 respectively in a partnership. The articles of partnership include the following provisions regarding the division of net income: interest on original investment at 10%, salary allowances of $27,000 and $18,000 respectively, and the remainder equally. How much of the net income of $40,000 is allocated to Xavier?

A) $20,000
B) $22,000
C) $32,000
D) $0

Question 64

Xavier and Yolonda have original investments of $50,000 and $100,000 respectively in a partnership. The articles of partnership include the following provisions regarding the division of net income: interest on original investment at 15%, salary allowances of $22,000 and $20,000 respectively, and the remainder equally. How much of the net income of $90,000 is allocated to Xavier?

A) $30,250
B) $47,750
C) $45,000
D) $42,250

Question 65

Which of the following below is not a characteristic of a Limited Liability Company?

A) unlimited life
B) limited legal liability
C) taxable
D) moderate ability to raise capital

Question 66

A ratio of 3:2:1 is the same as

A) 30%:20%:10%
B) 3/6:2/6:1/6
C) 3/10:2/10:1/20
D) None of these

Question 67

As part of the initial investment, Omar contributes accounts receivable that had a balance of $22,500 in the accounts of a sole proprietorship. Of this amount, $2,000 is completely worthless. For the remaining accounts, the partnership will establish a provision for possible future uncollectible accounts of $1,500. The amount debited to Accounts Receivable for the new partnership is

A) $19,000
B) $22,500
C) $21,000
D) $20,500

Question 68

The characteristic of a partnership that gives the authority to any partner to legally bind the partnership and all other partners to business contracts is called

A) unlimited liability
B) ease of formation
C) mutual agency
D) dissolution

Question 69

As part of the initial investment, a partner contributes equipment that had originally cost $125,000 and on which accumulated depreciation of $100,000 has been recorded. If similar equipment would cost $150,000 to replace and the partners agree on a valuation of $38,000 for the contributed equipment, what amount should be debited to the equipment account?

A) $38,000
B) $150,000
C) $125,000
D) $100,000

Question 70

Franco and Elisa share income equally. During the current year the partnership net income was $40,000. Franco made withdrawals of $12,000 and Elisa made withdrawals of $17,000. At the beginning of the year, the capital account balances were: Franco capital, $40,000; Elisa capital, $58,000. Franco's capital account balance at the end of the year is

A) $74,500
B) $62,500
C) $60,000
D) $48,000

Question 71

The operating agreement for a Limited Liability Company is sometimes called:

A) articles of organization
B) articles of partnership
C) Schedule C
D) the Uniform Partnership Act

Question 72

When a partnership is formed, assets contributed by the partners should be recorded on the partnership books at their

A) book values on the partners' books prior to their being contributed to the partnership
B) fair market value at the time of the contribution
C) original costs to the partner contributing them
D) assessed values for property purposes

Question 73

Partnership income and losses are usually divided on the basis of interest, salaries, and stated ratios because

A) partners seldom contribute time and resources equally
B) this method reflects the amount of time devoted to the partnership by the partners
C) it is simpler than following the legal rules
D) it prevents arguments among the partners

Question 74

Xavier and Yolonda have original investments of $50,000 and $100,000 respectively in a partnership. The articles of partnership include the following provisions regarding the division of net income: interest on original investment at 10%, salary allowances of $27,000 and $18,000 respectively, and the remainder equally. How much of the net loss of $6,000 is allocated to Xavier?

A) $4,000
B) $1,000
C) $3,000
D) $6,000

Question 75

An advantage of the partnership form of business organization is

A) unlimited liability
B) mutual agency
C) ease of formation
D) limited life

Question 76

Compton and Danson form a partnership in which Compton contributes $70,000 in assets and agrees to devote half time to the partnership. Danson contributed $50,000 in assets and agrees to devote full time to the partnership. If no additional information is available, how will Compton and Danson share in the division of income?

A) 5:7
B) 1:2
C) 1:1
D) 5:2

Question 77

Which of the following is a disadvantage of a partnership when compared to a corporation?

A) The partnership is more likely to have a net loss.
B) The partnership is easier to organize.
C) The partnership is less expensive to organize.
D) The partnership has limited life.

Question 78

When a limited partnership is formed

A) the partnership activities are limited
B) all partners have limited liability
C) some of the partners have limited liability
D) none of the partners have limited liability

Question 79

Which of the following below is not one of the four major forms of business entities that are discussed in this chapter?

A) Sole proprietorship
B) Corporation
C) Partnership
D) Subchapter S corporation

Question 80

Franco and Elisa share income equally. During the current year the partnership net income was $40,000. Franco made withdrawals of $12,000 and Elisa made withdrawals of $17,000. At the beginning of the year, the capital account balances were: Franco capital, $42,000; Elisa capital, $58,000. Elisa's capital account balance at the end of the year is

A) $81,000
B) $50,000
C) $61,000
D) $95,000