Question 1

With the variable capital balances method (method 1) of accounting for partnership equity, the general journal entry to record interest on capital is:
A) debit profit distribution account; credit partner's capital accounts.
B) debit profit distribution account; credit partner's retained earnings accounts.
C) debit profit or loss summary account; credit partner's capital accounts.
D) debit profit or loss summary account; credit partner's retained earnings accounts.

Accepted Answer

Interest on capital is considered a distribution of profits to partners based on their capital balances. Therefore, the profit distribution account is debited, and the partner's capital accounts are credited to reflect this allocation.

Question 2

Hodges and Burton formed a partnership with capital of $30 000 and $45 000 respectively. The partnership agreement provides for the crediting of annual salaries of $45 000 to Hodges and $75 000 to Burton. Each partner is entitled to 20% interest on capital. The remaining profit or loss is divided equally. How much, in total, will be credited to Hodges' capital account if profit for the year is $240 000 assuming capital balances are adjusted to reflect profits and losses?
A) $120 000
B) $103 500
C) $118 500
D) $105 000

Accepted Answer

First, calculate the interest on capital for both partners: Hodges: $30,000 * 20% = $6,000 Burton: $45,000 * 20% = $9,000 Then, add the annual salaries: Hodges: $45,000 + $6,000 = $51,000 Burton: $75,000 + $9,000 = $84,000 Total allocated so far: $51,000 (Hodges) + $84,000 (Burton) = $135,000 The remaining profit to be divided equally: $240,000 - $135,000 = $105,000 Each gets half: $105,000 / 2 = $52,500 Adding Hodges' share of the remaining profit to his salary and interest: $51,000 + $52,500 = $103,500

Question 3

Simon and Keith have a profit and loss sharing agreement where: (1) salaries of $25 000 each are credited, (2) 8% interest is allowed on capital balances (3) the remaining profit or loss is split 60-40, respectively. At the end of the year, before the distribution of profits or losses, capital account balances were $40 000 for Simon and $20 000 for Keith. There was a profit of $50 000 before distributions to the partners. What is Keith's year-end capital account balance assuming capital balances are adjusted to reflect profits and losses?
A) $43 080
B) $44 680
C) $46 600
D) $24 680

Accepted Answer

First, we need to calculate the interest on the capital balances:
Simon's interest = 8% x $40 000 = $3 200
Keith's interest = 8% x $20 000 = $1 600
Next, we add the salaries for the year:
Simon's capital account = $40 000 + $3 200 + $25 000 = $68 200
Keith's capital account = $20 000 + $1 600 + $25 000 = $46 600
Now we can calculate the profit distribution:
Total profit to be distributed = $50 000 - ($25 000 + $25 000) - ($3 200 + $1 600) = $5 200
Simon's share = 60% x $5 200 = $3 120
Keith's share = 40% x $5 200 = $2 080
Finally, we add the profit distribution to the capital accounts:
Simon's year-end capital account = $68 200 + $3 120 = $71 320
Keith's year-end capital account = $46 600 + $2 080 = $48 680
Therefore, the answer is B.

Question 4

Mary and Paul have capital account balances at the end of the year of
$100 000 and $80 000 respectively. Profit of the partnership is $90 000. The profit and loss sharing agreement calls for (1) a salary of $25 000 to Mary and $15 000 to Paul, (2) 10 % p.a. interest on capital balances, (3) the residual profit to be split 60:40 in favour of Mary. What is Mary's share of the distribution?
A) $51 000
B) $29 200
C) $65 000
D) $54 200

Accepted Answer

First, calculate the salary and interest allocations: Mary gets a $25,000 salary and Paul gets a $15,000 salary. Interest on Mary's capital is $100,000 * 10% = $10,000, and on Paul's capital is $80,000 * 10% = $8,000. Total allocations before splitting the residual profit are $25,000 + $10,000 for Mary and $15,000 + $8,000 for Paul. The total profit to be distributed is $90,000. Subtracting the allocated amounts ($25,000 + $15,000 + $10,000 + $8,000 = $58,000) from the total profit leaves $32,000 to be split 60:40 between Mary and Paul. Mary's share of the residual profit is $32,000 * 60% = $19,200. Adding this to her salary and interest gives Mary a total of $25,000 + $10,000 + $19,200 = $54,200.

Question 5

How is the allocation of partnership profits affected by drawings?
A) Drawings must be added back to profits before they are allocated.
B) Drawings must be deducted from profits before they are allocated.
C) Drawings only affect profit allocation if the partnership agreement provides for interest on drawings.
D) Drawings must be deducted from salaries due to the partners.

Accepted Answer

Drawings typically do not affect the allocation of profits unless the partnership agreement specifies adjustments like interest on drawings.

Question 6

It is agreed in the partnership agreement of R and B that profit and loss sharing arrangements will be based on the ratio of the partner's capital balances. R and B have capital balances of $75 000 and $50 000 respectively at the end of the accounting period. If profit is $38 000 the profit allocations of each of the partners is:
A) R $19 000; B $19 000.
B) R $22 800; B $15 200.
C) R $20 000; B $18 000.
D) unable to be calculated from the information provided.

Accepted Answer

The total capital balance is $125 000 ($75 000 + $50 000). 
So, R's capital ratio is $75 000/$125 000 = 0.6, while B's is $50 000/$125 000 = 0.4. 
The profit allocation for each partner is then calculated as follows: 
R's share = $38 000 x 0.6 = $22 800
B's share = $38 000 x 0.4 = $15 200
Therefore, the correct option is B.

Question 7

When preparing the closing entries for a partnership at the end of the accounting period which of these statements is true? Assume that capital account balances are not fixed.
A) The drawings accounts are closed to the capital accounts.
B) The retained earnings account is closed to the profit or loss summary account.
C) Income and expenses are closed to the capital accounts.
D) The profit or loss summary account is closed to the retained earnings accounts.

Accepted Answer

In a partnership, the drawings accounts are closed to the capital accounts to adjust the partners' capital balances for any withdrawals made during the period.

Question 8

Sometimes the partnership agreement may specify that interest is to be charged on partner's drawings. Which of the following is the main reason for such a charge?
A) To reduce partnership profits.
B) To act as a disincentive to partners withdrawing excessive amounts from the partnership.
C) To increase the income of the partnership.
D) To encourage partner's to draw extra amounts.

Accepted Answer

Charging interest on partner's drawings acts as a disincentive to partners withdrawing excessive amounts from the partnership, as it increases the cost of the withdrawal. This helps to preserve the cash reserves of the partnership and encourages partners to only withdraw what is necessary for their personal use, thereby ensuring the long-term sustainability of the partnership. Charging interest on drawings does not reduce partnership profits, as it is not a direct expense of the partnership, nor does it increase the income of the partnership. It also does not encourage partners to draw extra amounts, as they will have to pay interest on any excess withdrawals.

Question 9

Which statement concerning drawings by partners in a partnership is true?
A) Interest is charged on drawings if the partnership agreement is silent on the matter.
B) Charging interest on drawings acts as an incentive to partners to withdraw money from the partnership.
C) Drawings are generally regarded as withdrawals of future profits.
D) Drawings are taken into account when calculating the final distribution of profit between the partners.

Accepted Answer

Drawings are considered withdrawals of future profits and do not affect the overall profitability of the partnership. Interest may be charged on drawings if specifically stated in the partnership agreement, but it is not a common practice. Drawings are not taken into account when calculating the final distribution of profit between the partners, as they are already considered to be a withdrawal of future profits.

Question 10

Fatima and Jaddon have capital balances of $50 000 and $80 000, respectively and use the variable capital balances method. If their profit/loss sharing ratios are Fatima 40% and Jaddon 60%, calculate Fatima's capital balance after the net loss of $60 000 is distributed.
A) $74 000
B) $26 000
C) $50 000
D) $20 000

Accepted Answer

Using the variable capital balances method, the profit/loss will be shared according to their profit/loss sharing ratios. Jaddon will bear 60% of the loss while Fatima will bear the remaining 40%.

Fatima's share of the loss = 40% x $60 000 = $24 000

Her new capital balance will be her old capital balance minus her share of the loss:

$50 000 - $24 000 = $26 000

Therefore, Fatima's capital balance after the net loss is distributed is $26 000.

Question 11

Jemma and Sally are in partnership. Their capital balances at the end of the accounting period are $200 000 and $150 000 respectively. Jemma decides to make a permanent cash withdrawal from her capital account of $50 000. If it is assumed that they use the variable capital balances method (method 1), which of the following is the accounting entry torecord this transaction?
A) Debit Jemma capital account $50 000; credit profit distribution account $50 000
B) Debit Jemma retained earnings account $50 000; credit profit distribution account $50 000
C) Debit Jemma capital account $50 000; credit bank account $50 000
D) Debit Jemma retained earnings account $50 000; credit bank account $50 000

Accepted Answer

When using the variable capital balances method, each partner's capital account is adjusted based on any additional investments or withdrawals they make during the accounting period. Therefore, the accounting entry to record Jemma's permanent cash withdrawal of $50,000 would be to debit Jemma's capital account (reducing it by $50,000) and credit the bank account (reflecting the cash withdrawal). Option C reflects this entry. Option A and B are not correct because they reference profit distributions, which are not relevant in this transaction. Option D is not correct because it references retained earnings, which are not affected by Jemma's withdrawal from her capital account.

Question 12

Louise and Billy are in partnership sharing residual profits and losses 50:50. The profit for the year is $120 000. Louise is entitled to a salary of $50 000 per annum (to be paid by means of a book entry). Calculate the amount credited to Louise's retained earnings account after the final distribution of profits.
A) $170 000
B) $50 000
C) $85 000
D) $60 000

Accepted Answer

Firstly, the partnership needs to deduct Louise's salary from the profit:
$120,000 - $50,000 = $70,000

Next, this remaining profit is split 50:50 between Louise and Billy:
$70,000 / 2 = $35,000

Since Louise is entitled to her share of the profit plus her salary, the amount credited to her retained earnings is:
$35,000 + $50,000 = $85,000

Question 13

Sally and Amanda have capital balances of $60 000 and $75 000, respectively and use the variable capital balances method. If their profit/loss sharing ratios are Sally 40% and Amanda 60% calculate Amanda's capital balance after a net loss of $40 000 is distributed.
A) $35 000
B) $51 000
C) $75 000
D) $99 000

Accepted Answer

The total profit/loss sharing ratio is 100% (40% + 60%). To calculate Amanda's share of the loss, we multiply her profit/loss sharing ratio by the total loss: 
60% x $40 000 = $24 000
Her new capital balance is her previous balance minus her share of the loss: 
$75 000 - $24 000 = $51 000.

Question 14

When a partner makes an advance or loan to the partnership, how many of these statements are true?
$\bullet$He/she is entitled to interest at the rate of 7% p.a. unless there is an agreement to the contrary.
$\bullet$The amount loaned is added to the partners equity account balance.
$\bullet$Interest on the loan is regarded as an expense of the partnership and appears in the income statement.
A) 0
B) 1
C) 2
D) 3

Accepted Answer

The first statement is true as, in many jurisdictions, interest on a partner's loan to the partnership is payable at a statutory rate (often 7% per annum) unless a different rate is agreed upon. The third statement is also true because interest paid on a partner's loan is considered a business expense for the partnership and is recorded as such in the income statement. The second statement is false because a loan made by a partner to the partnership is recorded as a liability of the partnership, not as an addition to the partner's capital account.

Question 15

If a partner makes a cash advance to a partnership to be repaid in five years time and does not wish it to be included as a capital contribution, how will it be classified in the balance sheet?
A) Current liability
B) Non-current asset
C) Non-current liability
D) Current asset

Accepted Answer

Since the cash advance is to be repaid in five years time, it is classified as a non-current liability in the balance sheet.

Question 16

Partner's drawings are:
A) cash amounts withdrawn or private expenses paid by the partnership on behalf of a partner, in anticipation of profits.
B) amounts credited for working in the partnership.
C) partner's artwork.
D) money borrowed from the partnership.

Accepted Answer

Partner's drawings refer to cash amounts that have been withdrawn from the partnership by a partner for their personal expenses, and are typically considered as an advance against their share of future profits.

Question 17

If the fixed capital balances method (method 2) is used to account for partnership equity, both the profit or loss and the partner's drawings are closed to the:
A) retained earnings account.
B) capital accounts.
C) profit or loss summary account.
D) profit distribution account.

Accepted Answer

The answer of If the fixed capital balances method (method...

Question 18

A partner's loan is a liability and any interest paid on the loan by the partnership should be treated as:
A) an expense in the profit or loss summary account.
B) a distribution of profit in the profit or loss distribution account.
C) income in the profit or loss summary account.
D) a prepaid adjustment in the balance sheet.

Accepted Answer

The interest paid on the partner's loan is considered an expense to the Partnership and should be recorded as such in the profit or loss summary account. This will accurately reflect the profitability of the Partnership and the impact of the loan on the Partnership's bottom line.

Question 19

Connie and Carole have a profit and loss sharing agreement where: (1) salaries of $10 000 each are credited, (2) 12% interest is allowed on capital balances (3) the remaining profit or loss is split 60-40 in favour of Connie. At the end of the year, before the distribution of profits or losses, capital account balances were $20 000 and $40 000 for Connie and Carole, respectively. Profit was $36 000 before distributions to partners. What is Connie's ending capital account balance assuming capital balances are adjusted to reflect profits and losses?
A) $58 320
B) $57 680
C) $37 680
D) $38 320

Accepted Answer

The answer of Connie and Carole have a profit and...

Question 20

A) $300
B) $270
C) $100
D) $200

Accepted Answer

Looking at the given code, it appears to be a product code and not a price. Therefore, none of the answer choices accurately represent a price. We cannot choose any of the given options.

Quiz 15: Partnerships: Formation, Operation and Reporting

With the variable capital balances method (method 1) of accounting for partnership equity, the general journal entry to record interest on capital is:

How is the allocation of partnership profits affected by drawings?

When preparing the closing entries for a partnership at the end of the accounting period which of these statements is true? Assume that capital account balances are not fixed.

Sometimes the partnership agreement may specify that interest is to be charged on partner's drawings. Which of the following is the main reason for such a charge?

Which statement concerning drawings by partners in a partnership is true?

Fatima and Jaddon have capital balances of $50 000 and $80 000, respectively and use the variable capital balances method. If their profit/loss sharing ratios are Fatima 40% and Jaddon 60%, calculate Fatima's capital balance after the net loss of $60 000 is distributed.

Sally and Amanda have capital balances of $60 000 and $75 000, respectively and use the variable capital balances method. If their profit/loss sharing ratios are Sally 40% and Amanda 60% calculate Amanda's capital balance after a net loss of $40 000 is distributed.

If a partner makes a cash advance to a partnership to be repaid in five years time and does not wish it to be included as a capital contribution, how will it be classified in the balance sheet?

Partner's drawings are:

If the fixed capital balances method (method 2) is used to account for partnership equity, both the profit or loss and the partner's drawings are closed to the:

A partner's loan is a liability and any interest paid on the loan by the partnership should be treated as: