Question 1

Sadie and Sam share income equally. For the current year, the partnership net income is $40,000. Sadie made withdrawals of $14,000 and Sam made withdrawals of $15,000. At the beginning of the year, the capital account balances were: Sadie, Capital, $42,000; Sam, Capital, $58,000. Sam's capital account balance at the end of the year is

Accepted Answer

Since Sadie and Sam share income equally, they each should have added $20,000 to their capital account (half of the $40,000 net income). 
Sadie's capital account should be: 
$42,000 (beginning balance) + $20,000 (her share of the net income) - $14,000 (withdrawals) = $48,000

Sam's capital account should be: 
$58,000 (beginning balance) + $20,000 (his share of the net income) - $15,000 (withdrawals) = $63,000

Question 2

As part of the initial investment, Jackson contributes accounts receivable that had a balance of $22,500 in the accounts of a sole proprietorship. Of this amount, $3,000 is deemed 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

Accepted Answer

The amount debited to Accounts Receivable for the new partnership is the net value of the accounts receivable after taking into consideration the bad debt and provision for uncollectible accounts. Therefore, the calculation is: 
$22,500 (original balance) - $3,000 (bad debt) - $1,500 (provision) = $18,000 
So the amount debited to Accounts Receivable is $18,000, which is choice D.

Question 3

Jefferson has a capital balance of $65,000 and devotes full time to a partnership. Washington has a capital balance of $45,000 and devotes half time to the partnership. If no other information is available regarding distributions, in what ratio is net income to be divided?

Accepted Answer

In the absence of any other information, net income is typically divided equally among partners, regardless of capital balance or time devoted.

Question 4

Rex and Kelsey are partners who share income in the ratio of 3:2. Their capital balances are $95,000 and $140,000, respectively, on January 1. The partnership generated net income of $40,000 for the year. What is Rex's capital balance after closing the revenue and expense accounts to the capital accounts?

Accepted Answer

Rex's share of the net income is 3/5 of $40,000, which is $24,000. Adding this to his initial capital balance of $95,000 gives Rex a new capital balance of $119,000.

Question 5

Which of the following is not a characteristic of a limited liability company?

Accepted Answer

The answer of Which of the following is not a...

Question 6

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

Accepted Answer

The four major forms of business entities discussed in this chapter are sole proprietorship, partnership, corporation, and limited liability company (LLC). Subchapter S corporation is a specific type of corporation that elects to be taxed as a pass-through entity, and is therefore a subset of the broader category of corporations.

Question 7

Jordon and Heidi share income equally. For the current year, the partnership net income is $40,000. Jordon made withdrawals of $14,000, and Heidi made withdrawals of $15,000. At the beginning of the year, the capital account balances were: Jordon, Capital, $40,000; Heidi, Capital, $58,000. Jordon's apital account balance at the end of the year is

Accepted Answer

The answer of Jordon and Heidi share income equally. For...

Question 8

Patty and Paul are partners who share income in the ratio of 3:2. Their capital balances are $90,000 and $130,000, respectively, on January 1. The partnership generated net income of $40,000 for the year. What is Paul's capital balance after closing the revenue and expense accounts to the capital accounts?

Accepted Answer

Paul's initial capital balance is $130,000. The net income of $40,000 is divided between Patty and Paul in the ratio of 3:2, which means Paul gets 2/5 of $40,000 = $16,000. Adding this to his initial capital balance, Paul's new capital balance is $130,000 + $16,000 = $146,000.

Question 9

Details of the division of net income for a partnership should be disclosed in the

Accepted Answer

The division of net income for a partnership is typically disclosed in the partnership income statement, which shows the revenues, expenses, and resulting net income for the partnership as a whole. This statement will show how the net income is allocated among the partners based on the partnership agreement. The other options listed do not typically provide details on the division of net income for a partnership.

Question 10

Seth and Rachel 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 investments at 15%; salary allowances of $24,000 and $20,000, respectively; and the remainder to be divided equally. How much of the net income of $90,000 is allocated to Seth?

Accepted Answer

First, calculate the interest on the original investments: Seth: $50,000 * 15% = $7,500 Rachel: $100,000 * 15% = $15,000 Then, add the salary allowances: Seth: $7,500 + $24,000 = $31,500 Rachel: $15,000 + $20,000 = $35,000 The total allocated so far is $31,500 + $35,000 = $66,500. The remainder of the net income to be divided equally is $90,000 - $66,500 = $23,500. Divided equally, each gets $11,750. Adding this to Seth's allocated amount: $31,500 + $11,750 = $43,250.

Question 11

Seth and Rachel 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 divided equally. How much of the net loss of $16,000 is allocated to Seth?

Accepted Answer

First, calculate the interest on original investments: Seth gets $5,000 (10% of $50,000) and Rachel gets $10,000 (10% of $100,000). Next, add the salary allowances: Seth gets $27,000 and Rachel gets $18,000. Total allocations before sharing the remainder are $32,000 for Seth and $28,000 for Rachel. Since there is a net loss of $16,000, the total allocations exceed the net income, so the loss is shared equally. Each partner absorbs half of the $16,000 loss, which is $8,000. Seth's final allocation is $32,000 - $8,000 = $24,000, but since the question asks for the loss allocation, Seth absorbs $6,000 of the loss.

Question 12

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

Accepted Answer

Partners often contribute different amounts of time, resources, and capital to a partnership, leading to the need for income and losses to be divided based on interest, salaries, and stated ratios to reflect these differences fairly.

Question 13

Seth and Beth 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 to be divided equally. How much of the net income of $42,000 is allocated to Seth?

Accepted Answer

1. Calculate the total interest on original investment:
    Seth: $50,000 x 10% = $5,000
    Beth: $100,000 x 10% = $10,000
    Total = $5,000 + $10,000 = $15,000

2. Subtract the total interest from the net income:
    $42,000 - $15,000 = $27,000

3. Subtract the salary allowances:
    $27,000 - $27,000 - $18,000 = $9,000

4. Divide the remaining income equally:
    $9,000 / 2 = $4,500

5. Add Seth's interest and his share of the remaining income:
    $5,000 + $4,500 = $9,500

Therefore, Seth's allocated net income is $9,500, which corresponds to choice B.

Question 14

Carrie and Callie form a partnership in which Carrie contributes $85,000 in assets and agrees to devote half time to the partnership. Callie contributed $50,000 in assets and agrees to devote full time to the partnership. If no additional information is available, how will Carrie and Callie share in the division of income?

Accepted Answer

Without specific information on how profits will be divided, it's common to assume that partners will share profits equally. This is because both capital contribution and time commitment are valuable to the partnership, and without a specified agreement, an equal division is a fair assumption.

Question 15

A ratio of 4:2:1 is the same as

Accepted Answer

To convert the ratio to a proportion, we add the terms together: 4 + 2 + 1 = 7. Then, we divide each term by 7 to get the proportion: 4/7: 2/7: 1/7. Therefore, the answer is B.

Question 16

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

Accepted Answer

Assets should be recorded at their fair market value at the time of contribution to the partnership, as this provides the most accurate reflection of the true value of the assets within the partnership. Book values and original costs may not accurately reflect the current value of the assets, and assessed values for property tax purposes may not reflect fair market value.

Question 17

If there is no written agreement as to the way income will be divided among partners,

Accepted Answer

If there is no written agreement regarding income distribution among partners, the default rule is that the partners will share income and losses equally. This is known as a partnership at will, and it is formed when partners start a business without any formal agreement in place. Option B is incorrect because sharing profits and losses based on capital balances applies only if the partners have agreed to it in writing. Option C is also incorrect because sharing profits and losses based on the time spent in the business is not a customary approach in a partnership at will. Option D may be correct in the sense that there is no formal partnership agreement, but it does not answer the question of how income will be divided.

Question 18

When a limited liability company is formed,

Accepted Answer

In a limited liability company (LLC), all partners (referred to as members) have limited liability, meaning they are protected from personal liability for the debts and obligations of the company beyond the amount of money they have invested in the company.

Question 19

Luke and John share income and losses in a 2:1 ratio after allowing for salaries of $48,000 to Luke and $60,000 to John. Net income for the partnership is $93,000. Income should be divided as

Accepted Answer

The answer of Luke and John share income and losses...

Question 20

As part of the initial investment, Ray Blake 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 $29,000 for the contributed equipment, what amount should be debited to the equipment account?

Accepted Answer

The equipment should be debited at the agreed valuation of $29,000, as the value of assets contributed to a partnership is based on the agreed upon value among the partners, not the historical cost, replacement cost, or the accumulated depreciation.

Quiz 12: Accounting for Partnerships and Limited Liability Companies