Question 1

A major advantage of the partnership form of organization is that the partners have unlimited liability.

Accepted Answer

The statement is false. Unlimited liability is actually a disadvantage of the partnership form of organization, as it means that the partners are personally responsible for all debts and obligations of the business.

Question 2

An interest allowance in sharing partnership net income (or net loss) is related to the amount of partners' invested capital during the period.

Accepted Answer

An interest allowance is based on the partners' capital balances and represents the return on their investment in the partnership. Therefore, it is directly related to the amount of partners' invested capital during the period.

Question 3

Unless stated otherwise in the partnership contract profits and losses are shared among the partners in the ratio of their capital equity balances.

Accepted Answer

Unless stated otherwise in the partnership contract, profits and losses are typically shared equally among the partners, not based on their capital equity balances.

Question 4

Unless the partnership agreement specifically indicates an income ratio partnership net income or loss is not allocated to the partners.

Accepted Answer

Partnership net income or loss is always allocated to the partners, even if the partnership agreement does not specify a certain income ratio. The allocation is usually based on the partnership agreement or state law.

Question 5

Partnership income or loss need not be closed to partners' capital accounts each period because of the unlimited life characteristic of partnerships.

Accepted Answer

Partnership income or loss must be closed to partners' capital accounts at the end of each accounting period to ensure that each partner's capital account accurately reflects their share of the partnership's profits and losses. This is necessary regardless of the unlimited life characteristic of partnerships.

Question 6

If a partnership has a loss for the period the closing entry to transfer the loss to the partners will require a credit to the Income Summary account.

Accepted Answer

When a partnership experiences a loss for the period, the closing entry to transfer the loss to the partners' capital accounts would require a credit to the Income Summary account. The Income Summary account represents the net income or loss for the period and is closed to the partners' capital accounts according to their profit and loss sharing percentages. In the case of a loss, this means the Income Summary account would have a credit balance that needs to be transferred to the partners' capital accounts as a debit, which would be offset by a credit to the Income Summary account.

Question 7

The financial statements of a partnership are similar to those of a proprietorship.

Accepted Answer

The financial statements of a partnership include an income statement, a statement of partners' equity, and a balance sheet, which are similar to the financial statements of a proprietorship. However, the income statement and statement of partners' equity will show the individual share of each partner in the partnership's profit or loss.

Question 8

The personal assets liabilities and personal transactions of partners are excluded from the accounting records of the partnership.

Accepted Answer

This is true, as only the partnership's assets, liabilities, and transactions are recorded in the accounting records of the partnership. Each partner's personal financial information is kept separate from the partnership's financial records.

Question 9

If a partner's investment in a partnership consists of Accounts Receivable of $35000 and an Allowance for Doubtful Accounts of $7000 it would not be appropriate for the partnership to record the Allowance for Doubtful Accounts.

Accepted Answer

The Allowance for Doubtful Accounts should be recorded in the partnership's books as it reflects the estimated amount of accounts receivable that may not be collectible. By recording the allowance, the partnership can present a more accurate and conservative picture of its financial position.

Question 10

The partnership agreement between partners must be in writing.

Accepted Answer

A partnership agreement can be oral, written, or implied based on the actions of the partners, although a written agreement is recommended for clarity and to resolve disputes.

Question 11

Salary allowances to partners are a major expense on most partnership income statements.

Accepted Answer

Salary allowances to partners are not considered a major expense on partnership income statements; they are typically treated as distributions of profit rather than expenses.

Question 12

The partners' drawing accounts are closed each period into the Income Summary account.

Accepted Answer

The partners' drawing accounts are not closed into the Income Summary account; instead, they are closed directly to the partners' capital accounts to reflect withdrawals from the business.

Question 13

If salary allowances and interest on capital are stipulated in the partnership profit and loss sharing agreement they are implemented only if income is sufficient to cover the amounts required by these features.

Accepted Answer

Salary allowances and interest on capital for partners as stipulated in the partnership agreement are typically paid out regardless of whether the firm makes a profit or not, as these are considered as expenses and are accounted for before calculating the net profit or loss of the business.

Question 14

Two proprietorships cannot combine and form a partnership.

Accepted Answer

Two proprietorships can combine and form a partnership.

Question 15

If a partner's investment in a partnership consists of equipment that has accumulated depreciation of $8000 it would not be appropriate for the partnership to record the accumulated depreciation.

Accepted Answer

When a partner contributes equipment to a partnership, the partnership records the equipment at its fair market value at the time of contribution, not its historical cost or accumulated depreciation. Accumulated depreciation is relevant to the partner's personal or previous business accounting but not to the new partnership accounting.

Question 16

If a partner invests noncash assets in a partnership they should be recorded by the partnership at their fair value.

Accepted Answer

This is true according to generally accepted accounting principles (GAAP). Noncash assets contributed by a partner should be recorded at their fair value in the partnership's books to reflect their true market value. This helps to maintain accurate and transparent accounting records and ensures that each partner's capital account reflects their actual investment in the business.

Question 17

L. Hampton invests the following assets in a new partnership: $30000 in cash and equipment that cost $70000 but has a book value of $34000 and fair value of $40000. Hampton Capital will be credited for $64000.

Accepted Answer

The answer of L. Hampton invests the following assets in...

Question 18

The act of any partner is binding on all other partners if the act appears to be appropriate for the partnership.

Accepted Answer

This is known as the principle of apparent authority. It means that if a partner acts in a way that is within the scope of the partnership's business and is perceived by a third party as authorized to act on behalf of the partnership, then all partners can be held legally responsible for that act.

Question 19

Partnership creditors may have a claim on the personal assets of any of the partners if the partnership assets are not sufficient to settle claims.

Accepted Answer

Partnership creditors have the ability to go after the personal assets of any of the partners to settle claims if the partnership assets are not enough. This is the risk that partners take on when entering a partnership agreement.

Question 20

The income earned by a partnership will always be greater than the income earned by a proprietorship because in a partnership there is more than one owner contributing to the success of the business.

Accepted Answer

The income earned by a business, whether a partnership or a proprietorship, depends on various factors such as the nature of the business, market conditions, and management efficiency, not solely on the number of owners.

Quiz 12: Accounting for Partnerships