Deck 13: Partnerships: Characteristics, Formation, and Accounting for Activities

Question 1

For financial accounting purposes, assets of an individual partner contributed to a partnership are recorded by the partnership at

A)historical cost.
B)book value.
C)fair value.
D)lower of cost or market.

Answer 1

C
Assets that are contributed to a partnership by a partner are recorded by the partnership at fair value.

Question 2

The Uniform Partnership Act

A)defines how partners should distribute profits and losses.
B)sets very specific guidelines as to how a partnership should be set up.
C)defines entity theory which views the partnership as separate from the partners.
D)serves as a default where there is no partnership agreement or where the partnership fails to address a matter.

Answer 2

D
The Uniform Partnership Agreement gives supremacy to the partnership agreement and is a series of "default rules" in those instances where the partnership agreement fails to clearly address a particular matter.

Question 3

A partnership that consists of two classes of partners, one that participates in management of the company and have unlimited liability, and another that does not participate in management and whose liability is limited to a stated amount is a:

A)limited partnership
B)general partnership
C)limited liability partnership
D)mutual agency

Answer 3

A
A limited partnership consists of two classes of partners. One is a general partner that manages the business and has unlimited liability. The others are limited partners who have limited liability, but do not actively participate in management.

Question 4

Jolly is a partner in the HoHoHo Partnership. The articles of partnership states that Jolly's share of partnership income include 10% of his weighted average capital. he may withdraw $12,000 before withdrawals are offset against his capital balance. His capital activity is as follows: What is the weighted average balance of Jolly's capital account?

A)$27,417
B)$19,083
C)$21,500
D)$19,667

Question 5

Partner Alta had a capital balance on January 1, 2008 of $45,000 and made additional capital contributions during 2008 totaling $50,000. During the year 2008, Alta withdrew $8,000 per month. Alta's post-closing capital balance on December 31, 2008 is $30,000. Alta's share of 2008 partnership income is ____.

A)$96,000
B)$50,000
C)$31,000
D)$8,000

Question 6

Which of the following is not an advantage of a partnership over a corporation?

A)Ease of formation
B)Unlimited liability
C)The elimination of taxes at the entity level
D)All of the above

Question 7

Under the entity theory, a partnership is

A)viewed through the eyes of the partners.
B)viewed as having its own existence apart from the partners.
C)a separate legal and tax entity.
D)unable to enter into contracts in its own name.

Question 8

The characteristic of a partnership where a partner is an agent for other partners and the partnership when transacting partnership business is:

A)a fiduciary relationship
B)tenancy in partnership
C)mutual agency
D)the proprietary theory

Question 9

Which of the following is not a characteristic of a partnership consistent with the proprietary theory?

A)Unlimited liability of general partners.
B)Salaries to partners are not expenses of the partnership.
C)An original partnership is dissolved upon a change in partners.
D)Partnership income taxes are paid.

Question 10

Which of the following statements is true when comparing corporations and partnerships?

A)Partnership entities provide for taxes at the same rates used by corporations.
B)In theory, partnerships are more able to attract capital.
C)Like corporations, partnerships have an infinite life.
D)Unlike shareholders, general partners may have liability beyond their capital balances.

Question 11

Which of the following best describes the use of interest on invested capital as a means of allocating profits?

A)If interest on invested capital is used, it must be used for all partners.
B)Interest is allocated only if there is partnership net profit.
C)Invested capital balances are never affected by drawings of the partnerships.
D)The partnership agreement should clearly establish how invested capital is to be determined in the calculation of interest.

Question 12

A partnership has the following accounting amounts:
(1)Sales
$70,000
(2)Cost of Goods Sold = $40,000
(3)Operating Expenses = $10,000
(4)Salary allocations to partners = $13,000
(5)Interest paid to banks = $2,000
(6)Partners' withdrawals = $8,000
Partnership net income (loss) is ____.

A)$20,000
B)$18,000
C)$5,000
D)$(3,000)

Question 13

The articles of partnership should include all but the following:

A)Powers and duties of the partners.
B)Procedures governing the distribution of profit and loss.
C)The basis of accounting for the partnership.
D)All of the above should be included in the articles of partnership.

Question 14

The characteristic of a partnership where specific assets contributed by a partner lose their identity as to source and become shared property of the partnership is:

A)a fiduciary relationship
B)tenancy in partnership
C)mutual agency
D)the proprietary theory

Question 15

Partnership drawings are

A)usually maintained in a separate account from the partner's capital account.
B)equal to partners' salaries.
C)similar to advances made to partners and are included as assets on the balance sheet.
D)not discussed in the specific contract provisions of the partnership.

Question 16

Partner A began the year with $20,000 in capital. On June 1, 2008, the partner contributed another $20,000. On September 1, 2008, the partner withdrew $15,000 from the partnership. Withdrawals in excess of $5,000 are charged to the partner's capital account. The partnership's fiscal year end is December 31. The annual weighted-average capital balance is ____.

A)$25,000
B)$26,667
C)$28,334
D)$30,000

Question 17

Taylor and Tanner formed a partnership. Taylor contributed $50,000 in cash. Tanner contributed land and buildings he purchased for $50,000 some time ago. His tax basis in the property is now $30,000, although it was recently appraised for $70,000. There is a $15,000 mortgage attached to the building that the partnership will assume. What is the amount of Tanner's capital account after his contribution?

A)$50,000
B)$30,000
C)$35,000
D)$55,000

Question 18

Which of the following is not a characteristic of the proprietary theory that influences accounting for partnerships?

A)Partners' salaries are viewed as a distribution of income rather than a component of net income.
B)A partnership is not viewed as a separate, distinct, taxable entity.
C)A partnership is characterized by limited liability.
D)Changes in the ownership structure of a partnership result in the dissolution of the partnership.

Question 19

A partnership where all partners may participate in management of the company, but whose personal liability is limited to that resulting from their own actions or those who are acting under their direct supervision is a:

A)limited partnership
B)general partnership
C)limited liability partnership
D)mutual agency

Question 20

When partnership profits are allocated based on partnership capital, the allocation should be based upon:

A)Capital at the beginning of the period.
B)Capital after withdrawals have been applied.
C)Weighted average capital.
D)Whatever has been established in the partnership agreement.

Question 21

Maxwell is trying to decide whether to accept a salary of $60,000 or a salary of $25,000 plus a bonus of 20% of net income after the bonus as a means of allocating profit among the partners. What amount of income would be necessary so that Maxwell would consider the choices to be equal?

A)$35,000
B)$85,000
C)$140,000
D)$210,000

Question 22

Tupper and Tolin have decided to form a partnership to provide environmental testing services to industry. The individuals will share profits equally and have conveyed the following assets and liabilities to the partnership:
Required:
1) Calculate the capital balance of each partner in the partnership subsequent to the contributions.
2) Prepare the journal entry necessary to record the partners' contributions.

Question 23

Partners A and B have a profit and loss agreement with the following provisions: salaries of $30,000 and $45,000 for A and B, respectively; a bonus to A of 12% of net income after salaries and bonus; and interest of 10% on average capital balances of $50,000 and $65,000 for A and B, respectively. One-fourth of any remaining profits are allocated to A and the balance to B. If the partnership had net income of $108,600, how much should be allocated to Partner A?

A)$43,225
B)$43,816
C)$47,850
D)$65,375

Question 24

The Amato, Bergin, Chelsey partnership profit allocation agreement calls for salaries of $15,000 and $30,000 for Amato & Bergin, respectively. Amato is also to receive a bonus equal to 10% of partnership income after her bonus. Interest at the rate of 10% is to be allocated to Chelsey based on his weighted average capital after draws. Any remaining profit (or loss) is to be allocated equally among the partners. Chelsey began the current year with a capital balance of $54,000 and had the following subsequent activity:
Required:
Assuming the partnership has income of $66,000, determine the amounts to be allocated to each partner.

Question 25

Partners Tuba and Drum share profits and losses of their partnership equally after 1) annual salary allowances of $25,000 for Tuba and $20,000 for Drum and 2) 10% interest is provided on average capital balances. During 2008, the partnership had earnings of $50,000; Tuba's average capital balance was $60,000 and Drum's average capital balance was $90,000. What would be the correct answer if an order of priority was in the partnership agreement whereby salary allowances have a higher priority than interest on capital allocations?

Question 26

Ace & Barnes partnership has income of $110,000 and Partner A is to be allocated a bonus of 10% of income after the bonus, Partner A's bonus would be ____.

A)$11,000
B)$10,000
C)$9,091
D)$9,000

Question 27

Partners A and B have a profit and loss agreement with the following provisions: salaries of $41,600 and $38,400 for A and B, respectively; a bonus to A of 10% of net income after salaries and bonus; and interest of 10% on average capital balances of $20,000 and $35,000 for A and B, respectively. One-third of any remaining profits are allocated to A and the balance to B. If the partnership had a net income of $36,000, how much should be allocated to Partner A, assuming that the provisions of the profit and loss agreement are ranked by order of priority starting with salaries?

A)$12,000
B)$18,000
C)$18,720
D)$41,600

Question 28

Partners A and B have a profit and loss agreement with the following provisions: salaries of $20,000 and $25,000 for A and B, respectively; a bonus to A of 10% of net income after bonus; and interest of 20% on average capital balances of $40,000 and $50,000 for A and B, respectively. Any remainder is split equally. If the partnership had net income of $88,000, how much should be allocated to Partner A?

A)$36,000
B)$44,500
C)$50,000
D)$43,500

Question 29

Partners A and B have a profit and loss agreement with the following provisions: salaries of $40,000 and $45,000 for A and B, respectively; a bonus to A of 10% of net income after salaries and bonus; and interest of 15% on average capital balances of $40,000 and $60,000 for A and B, respectively. One-third of any remaining profits or losses are allocated to B and the balance to A. If the partnership had net income of $52,000, how much should be allocated to Partner A?

A)$14,000
B)$30,000
C)$38,000
D)None of the above

Question 30

A partnership agreement calls for allocation of profits and losses by salary allocations, a bonus allocation, interest on capital, with any remainder to be allocated by preset ratios. If a partnership has a loss to allocate, generally which of the following procedures would be applied?

A)Any loss would be allocated equally to all partners.
B)Any salary allocation criteria would not be used.
C)The bonus criteria would not be used.
D)The loss would be allocated using the profit and loss ratios, only.

Question 31

Maxwell is trying to decide whether to accept a salary of $60,000 or a salary of $25,000 plus a bonus of 20% of net income after salaries and bonus as a means of allocating profit among the partners. Salaries traceable to the other partners are estimated to be $75,000. What amount of income would be necessary so that Maxwell would consider the choices to be equal?

A)$175,000
B)$210,000
C)$285,000
D)$310,000

Question 32

Maxwell is a partner and has an annual salary of $30,000 per year, but he actually draws $3,000 per month. The other partner in the partnership has an annual salary of $40,000 and draws $4,000 per month. What is the total annual salary that should be used to allocate annual net income among the partners?

A)$14,000
B)$50,000
C)$70,000
D)$84,000

Question 33

Partners Acker, Becker & Checker have the following profit and loss agreement:
(1)Acker & Becker receive salaries of $40,000 each
(2)Checker gets a bonus of 10 percent of net income after salaries and bonus (the bonus is zero if salaries exhaust net income)(3)Remaining profits are shared by Acker, Becker & Checker in the following ratios respectively: 3:4:3.
The partnership had a net income of $91,000. How much should be allocated to Checker?

A)$3,300
B)$10,300
C)$1,000
D)$4,000

Question 34

Which of the following would be least likely to be used as a means of allocating profits among partners who are active in the management of the partnership?

A)Salaries
B)Bonus as a percentage of net income before the bonus
C)Bonus as a percentage of sales in excess of a targeted amount
D)Interest on average capital balances

Question 35

Which of the following statements is true concerning the treatment of salaries in partnership accounting?

A)Partner salaries may be used to allocate profits and losses; they are not considered expenses of the partnership
B)Partner salaries are equal to the annual partner draw.
C)The salary of a partner is treated in the same manner as salaries of corporate employees.
D)Partner salaries are directly closed to the capital account.

Question 36

Matt and Jeff organized their partnership on 1/1/00. The following entries were made into their capital accounts during 00:
If partnership profits for the year equaled $66,000, indicate the allocations between the partners under the following independent profit-sharing allocation conditions:
a.Interest of 10% is allocated on weighted average capital balance and the remainder is divided equally
b.A salary of $9,000 will be allocated to Jeff; 10% interest on ending capital is allocated to the partners; remainder is divided 60/40 to Matt and Jeff, respectively
c.Salaries are allocated to Matt and Jeff in the amount of $10,000 and $15,000, respectively and the remainder is allocated in proportion to weighted average capital balances
d.A bonus of 10% of partnership profits after bonus is credited to Matt, a salary of $35,000 is allocated to Jeff, a $20,000 salary is allocated to Matt, 10% interest on weighted capital is allocated, and remainder is split equally

Question 37

Partners active in a partnership business should have their share of partnership profits based on the following

A)a combination of salaries plus interest based on average capital balances.
B)a combination of salaries and percentage of net income after salaries and any other allocation basis.
C)salaries only.
D)percentage of net income after salaries is paid to inactive partners.

Question 38

Carey and Drew formed a partnership on January 1, 2008. Carey invested $100,000, Drew $70,000. Each withdrew $12,000 on each of the following dates during 2008: February 1, August 1, and November 1. These withdrawals in total were equal to salaries for the year. Interest of 8 percent was to be paid partners on the basis of their average capital balances excluding net income. Additionally, Carey was to get a 20 percent bonus based on partnership net income after the bonus, but before the salaries and interest.
Any remaining profit (or loss) was to be allocated equally among the partners.
Required:
1) If partnership net income was $150,000, how was it to be allocated between Carey and Drew?
Order of allocation: bonus, salaries, interest. Round to the nearest whole dollar.
2) Prepare the journal entry to distribute income to the partners.

Question 39

Olsen and Katch organized the OK Partnership on 1/1/01. The following entries were made into their capital accounts during 01:
The partnership agreement called for the following in the allocation of partnership profits and losses:
Salaries of $48,000 and $36,000 would be allocated to Olsen and Katch, respectively
Interest of 8% on average capital balances will be allocated
Katch will receive a bonus of 10% on all partnership billings in excess of $300,000
Any remaining profits/losses will be allocated 60/40 to Olsen and Katch, respectively.
Required (account for each situation independently):
a.Determine the distribution of partnership net income. Assume the following priority of allocation: interest, bonus, salaries, then remaining assuming partnership income of $85,000; partnership billings amounted to $400,000
b.Determine the distribution of partnership net income of $165,000 on billings of $400,000. No specific priority is given to any of the allocation criteria.

Question 40

Partners Tuba and Drum share profits and losses of their partnership equally after 1) annual salary allowances of $25,000 for Tuba and $20,000 for Drum and 2) 10% interest is provided on average capital balances. During 2008, the partnership had earnings of $50,000; Tuba's average capital balance was $60,000 and Drum's average capital balance was $90,000. How should the $50,000 of earnings be divided?

Question 41

There are several differences between a partnership and a corporation. Describe these differences and comment as to whether each is apparent upon review of the financial statements.

Question 42

Turner, Ike, and Gibson formed a partnership in 2009 that provided for each member to receive a salary of $20,000. Gibson was to receive a bonus of 10% of partnership income after the bonus. Interest on ending capital balances of 10% was also used as a component for allocating profits to Turner and Gibson. Any remaining profits/losses were to be allocated 30%, 30%, and 40% for Turner, like, and Gibson, respectively. In early 2010, it was discovered that the 2009 income of $54,000 was overstated by $22,000. Turner and Gibson suggest that the error be offset against the 2010 income. Ike argued that they are being harmed by this decision. Discuss the merits of Ike's position.

Question 43

Barnes and Noble, both lawyers, have decided to form a partnership. They have asked your advice on how the profits and losses should be divided and have provided you with the following information:
Personal facts:
Barnes has an excellent reputation in the community and is very well known. Substantially all new client will come from her efforts.
Noble has a very strong technical and operational background, and is an excellent supervisor of staff lawyers who are expected to do more of the legal research and initial preparation of legal documentation.
Required:
How would you advise the partners to share in profits and losses?

Question 44

Cable and Jones are considering forming a partnership whereby profits will be allocated through the use of salaries and bonuses. Bonuses will be 10% of net income after total salaries and total bonuses. Cable will receive a salary of $30,000 and a 10% bonus. Jones has the option of receiving a salary of $40,000 and a 10% bonus or simply receiving a salary of $52,000.
Required:
Determine the level of income that would be necessary so that Jones would be indifferent to the profit-sharing option selected.

Question 45

Van and Shapiro formed a partnership. As part of the formation, Van contributed equipment whose cost to her was $60,000, with accumulated depreciation for tax purposes of $36,000. The fair value of the equipment was $40,000. The partnership assumed $10,000 of Shapiro's personal debts when she was admitted into the partnership.
After one year of operation, the partnership had the following partial trial balance:
Partners split profits as follows:
(1)A salary of $30,000 is paid to Van.
(2)Remaining profits (or losses) are split 40% to Van, the remainder to Shapiro.
Required:
Calculate the two partners' ending capital balances.