Question 1

Partner B invested inventory using the retail selling price for valuation. This error would cause:

Accepted Answer

The answer of Partner B invested inventory using the retail...

Question 2

The two types of allowances that may be considered before the division of profits and losses are:

Accepted Answer

Interest and salary allowances are the two types of allowances that may be considered before the division of profits and losses in a partnership. Interest allowances are given on the capital invested by the partners, and salary allowances are compensation for the services provided by the partners to the partnership.

Question 3

Partners are required to report their share of earnings on their personal tax return.

Accepted Answer

Partnerships are pass-through entities, which means that the partnership itself does not pay income taxes. Instead, the profits and losses of the partnership flow through to the partners, who report their share of the partnership's earnings on their personal tax returns.

Question 4

The basis on which profits and losses are shared is governed by:

Accepted Answer

The basis on which profits and losses are shared in a partnership is determined by the partnership agreement. This agreement sets forth the terms and conditions of the partnership, including the percentage of profits and losses that each partner will receive. It is crucial for partners to have a clear understanding of the agreement before entering into a partnership. While regulations such as those set forth by the SEC and IRS may apply in certain situations, they are not the primary governing document for determining profit and loss sharing among partners. Additionally, partners may choose to divide profits and losses unequally based on factors agreed upon in the partnership agreement. Therefore, D is not a correct answer as equal sharing is not always required.

Question 5

A loss occurs when net income is not large enough to cover salary and interest allowances for the partners.

Accepted Answer

A loss occurs when the total revenue of a business is not sufficient to cover all its expenses, including salaries, interest allowances for partners, and other operational costs.

Question 6

Kate and Joe formed a partnership in 2012. Joe invested $60,000 and Kate invested $30,000. The partnership had $150,000 in income during 2012. There is no agreement as to how income is divided. Kate and Joe's share is:

Accepted Answer

The answer of Kate and Joe formed a partnership in...

Question 7

Applying the ratio based on investment method, compute Taylor and Timmy's share of net income if Taylor invested $200,000 and Timmy invested $800,000. Net income was $75,000.

Accepted Answer

Taylor and Timmy's investments are in the ratio of 1:4 ($200,000:$800,000), so their share of net income will also be in this ratio. Therefore, Taylor gets 1/5 of $75,000, which is $15,000, and Timmy gets 4/5 of $75,000, which is $60,000.

Question 8

John and Brad have average capital balances of $25,000 and $10,000, respectively. The partners have agreed to allow $20,000 salary allowances. The partners will share income and losses in a 1:2 ratio. How much will each partner's capital account change if net income is $70,000?

Accepted Answer

The answer of John and Brad have average capital balances...

Question 9

Applying the interest allowance method, compute Taylor and Timmy's share of net income if Taylor invested $200,000 and Timmy invested $800,000 at a 6% interest rate, with the remainder to be divided equally. Net income was $75,000.

Accepted Answer

First, we need to calculate the interest allowance for each partner using their investment amounts and the agreed upon interest rate:
Taylor's interest allowance = $200,000 x 6% = $12,000
Timmy's interest allowance = $800,000 x 6% = $48,000

Next, we need to calculate the remaining income after the interest allowances have been paid:
Net income - (Taylor's interest allowance + Timmy's interest allowance) = $75,000 - ($12,000 + $48,000) = $15,000

This remaining income will be split equally between both partners:
$15,000 / 2 = $7,500

Finally, we need to add each partner's interest allowance to their share of the remaining income:
Taylor's share = $12,000 + $7,500 = $19,500
Timmy's share = $48,000 + $7,500 = $55,500

Therefore, the answer is C - Taylor's share is $19,500 and Timmy's share is $55,500.

Question 10

The income/loss agreement was ignored when closing the income summary and all income was distributed evenly. This error would cause:

Accepted Answer

The total owner's equity remains the same regardless of how income is distributed among owners; the error affects the individual balances of the owners' equity accounts, not the total.

Question 11

An interest allowance is based on the beginning capital balance of each partner.

Accepted Answer

An interest allowance is typically based on the beginning capital balance of each partner and is calculated as a percentage of that balance. This allows partners to earn interest on their invested capital in the partnership.

Question 12

The profit and loss ratio is required to be equally divided between and among the partners.

Accepted Answer

The profit and loss ratio among partners can be agreed upon in any proportion, and it does not necessarily have to be equally divided. This is typically outlined in the partnership agreement.

Question 13

An interest allowance is based on a partner's individual initial investment of capital.

Accepted Answer

An interest allowance is typically based on a partner's individual initial investment of capital. This allows partners to receive regular payments regardless of the business's profitability.

Question 14

The different partners are taxed on:

Accepted Answer

Partners are taxed on their share of the net profit of the partnership, not on the gross revenue or the amount they withdraw. Each partner's share of the net profit is determined by the partnership agreement, and this is what they will be taxed on.

Question 15

Before calculating salary and interest allowances, it is necessary to determine whether net income will cover these expenses.

Accepted Answer

The answer of Before calculating salary and interest allowances, it...

Question 16

Partners Brian, Josh, and Chad have capital balances of $7,000, $3,000, and $90,000, respectively. The losses for the year are $12,000. What will Josh's capital balance be if the three partners share profits and losses at a 2:2:6 ratio?

Accepted Answer

The answer of Partners Brian, Josh, and Chad have capital...

Question 17

The partnership of Smith and Jones, who have average capital balances of $11,000 and $19,000, respectively, earned $90,000 net income. Under each of the following independent situations, calculate the distribution of the $90,000.
a)No agreement was established.
b)Share based on their average capital balances.

Accepted Answer

The answer of The partnership of Smith and Jones, who...

Question 18

A profit and loss ratio may not be based on capital contributions.

Accepted Answer

Profit and loss ratios are usually based on the distribution of profits and losses among partners, regardless of their capital contributions. However, in some cases, the partnership agreement may specify that the profit and loss allocation be based on the capital contributions of partners.

Question 19

Applying the profit and loss ratio method, compute Taylor and Timmy's share of net income if Taylor invested $200,000 and Timmy invested $800,000 and the profit and loss ratio is 3:2. Net income was $75,000.

Accepted Answer

First, we need to find the total investment: $200,000 + $800,000 = $1,000,000

Next, we need to find the percentage share of each investor:
Taylor's share = (3/5) = 0.6
Timmy's share = (2/5) = 0.4

Then, we multiply the net income by each investor's percentage share:
Taylor's share = 0.6 x $75,000 = $45,000
Timmy's share = 0.4 x $75,000 = $30,000

Therefore, Taylor's share of net income is $45,000 and Timmy's share of net income is $30,000. Choice C is the correct answer.

Question 20

Allison and Josh are partners in a business. Allison's capital is $60,000 and Josh's capital is $100,000. Profits for the year are $80,000. They agree to share profits and losses as follows:  Josh's share of the profit is:

Accepted Answer

The answer of Allison and Josh are partners in a...

Quiz 17: Partnership