Question 1

A disadvantage of partnerships is the mutual agency of all partners.

Accepted Answer

In a partnership, all partners have the authority to legally bind the partnership and make decisions on its behalf, which means that each partner can act on behalf of the other partners without specific permission or authorization. This is known as mutual agency, and it can be a disadvantage because one partner's actions can have negative consequences for all partners.

Question 2

When compared to a corporation,one of the major advantages of a partnership is its relative ease of formation.

Accepted Answer

Partnerships are easier to form than corporations as they require fewer legal formalities and documentation.

Question 3

An advantage of the partnership form of business is that each partner's potential loss is limited to that partner's investment in the partnership.

Accepted Answer

In a general partnership, each partner is personally liable for the debts of the partnership, meaning their personal assets can be used to cover the partnership's debts, not just the amount they invested.

Question 4

Each partner may withdraw the assets he or she contributed to the partnership at any time.

Accepted Answer

Each partner may withdraw their share of profits or losses from the partnership, but the assets contributed to the partnership cannot be withdrawn without the consent of all partners or according to the terms of the partnership agreement.

Question 5

If the partnership agreement does not otherwise state,partnership income is divided in proportion to the individual partner's capital balance.

Accepted Answer

Partnership income is typically divided equally among the partners unless the partnership agreement specifies a different arrangement.

Question 6

The salary allocation to partners used in dividing net income would also appear as salary expense on the partnership income statement.

Accepted Answer

The salary allocation to partners is not an expense but a distribution of the net income among the partners according to the partnership agreement. It does not appear as a salary expense on the partnership income statement.

Question 7

Each partner has a separate capital and withdrawal account.

Accepted Answer

In a partnership, each partner typically has a separate capital account to track their initial investment in the business and any subsequent contributions or withdrawals. They may also have a separate withdrawal account to track the amount of money they have taken out of the business for personal use.

Question 8

If the articles of partnership provide for annual salary allowances of $36,000 and $18,000 to X and Y,respectively,and net income is $30,000,X's share of net income is $20,000.

Accepted Answer

X's share of net income should be calculated based on the agreed upon profit sharing ratio in the articles of partnership, not based on their salary allowances. The profit sharing ratio is not given in the question, so it cannot be determined.

Question 9

If the net income of a partnership is less than the total of the allowances provided by the partnership agreement,the difference must be divided among the partners in the income-sharing ratio.

Accepted Answer

If the net income of a partnership is less than the total allowances provided by the partnership agreement, no divided among partners is necessary because there are no profits to divide.

Question 10

The limited liability company may elect to be manager-managed rather than member-managed,which means that only authorized members may legally bind the corporation.

Accepted Answer

In a manager-managed limited liability company, the management and control of the business is delegated to one or more managers, who may or may not be members of the LLC. This means that only the authorized managers have the legal authority to bind the LLC, rather than all members having that authority in a member-managed LLC.

Question 11

A partnership requires only an agreement between two or more persons to organize.

Accepted Answer

A partnership can be created simply by an agreement between two or more individuals, who share profits or losses according to the terms of their agreement. No formal registration or filing is required, although it is always recommended to have a written agreement to avoid confusion or disputes later on.

Question 12

There are only four legal structures to form and operate a business.

Accepted Answer

There are several legal structures to form and operate a business, including sole proprietorship, partnership, limited liability company (LLC), corporation, and more.

Question 13

One reason that distributions of income and loss are prepared is to obtain the information to record a closing entry.

Accepted Answer

Distributions of income and loss are used to determine the final allocation of profits and losses for the accounting period. The resulting amounts are then recorded in a closing entry to transfer the balances to the appropriate equity accounts.

Question 14

For tax purposes,a limited liability company may elect to be treated as a partnership.

Accepted Answer

A limited liability company can choose to be taxed as a partnership by filing Form 8832 with the IRS. This means that the company's income and losses are passed through to the individual members, who report it on their personal tax returns.

Question 15

A partnership is a legal entity separate from its owners.

Accepted Answer

A partnership is not a separate legal entity, but rather a group of individuals who have agreed to work together for a common purpose. The partners in a partnership are personally liable for the debts and obligations of the business.

Question 16

In a general partnership,each partner is individually liable to creditors for debts incurred by the partnership,to the extent of the partner's capital balance.

Accepted Answer

In a general partnership, each partner is individually liable for all debts incurred by the partnership, not just to the extent of their capital balance. This means partners have unlimited personal liability for the partnership's obligations.

Question 17

When compared to a corporation,one of the major disadvantages of the partnership is its limited life.

Accepted Answer

Unlike a corporation, a partnership is not a separate legal entity and is dissolved upon the death, bankruptcy, or withdrawal of one of its partners. Therefore, partnerships have a limited life.

Question 18

A limited liability company is a business entity form designed to overcome some of the disadvantages of the partnership form.

Accepted Answer

A limited liability company (LLC) provides liability protection for its owners (known as members) like a corporation, but has flexible tax options like a partnership. This allows for a balance between personal asset protection and tax advantages.

Question 19

The amount that a partner withdraws as a monthly salary allowance does not affect the division of net income.

Accepted Answer

The answer of The amount that a partner withdraws as...

Question 20

A partnership is subject to federal income taxes.

Accepted Answer

A partnership is a pass-through entity, meaning that the profits and losses of the partnership are passed through to the individual partners who then report it on their personal income tax returns. The partnership itself does not pay federal income taxes.

Quiz 12: Accounting for Partnerships and Limited Liability Companies