Question 1

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 the division of profits depends on the agreement between the partners, and in the absence of such an agreement, an equal division is a standard practice.

Question 2

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 calculated as 3/5 of $40,000, which is $24,000. Adding this to his initial capital balance of $95,000 gives a new capital balance of $119,000.

Question 3

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

Accepted Answer

The partnership income statement shows the revenue, expenses, and resulting net income of the partnership. It also includes a section that outlines how the net income is divided among the partners based on their agreed-upon profit-sharing arrangement. Therefore, the division of net income for a partnership should be disclosed in the partnership income statement.

Question 4

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

Accepted Answer

All LLCs have limited legal liability, meaning that the personal assets of the owners are protected. While LLCs do have some ability to raise capital, it may be more difficult than for corporations. LLCs do not have unlimited life, as they may dissolve if an owner leaves or if there is a specified end date. However, all LLCs are not automatically taxable; they can choose to be taxed like a partnership or like a corporation.

Question 5

When a limited liability company is formed,

Accepted Answer

The name "limited liability company" itself implies that all partners have limited liability. This means that their personal assets are protected and the company's debts and legal obligations are separate from their own.

Question 6

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, we calculate the total interest to be paid to both Seth and Rachel:

($50,000 x 0.15) + ($100,000 x 0.15) = $7,500 + $15,000 = $22,500

Next, we subtract the interest and salary allowances from the net income:

$90,000 - $22,500 - ($24,000 + $20,000) = $90,000 - $66,500 = $23,500

This $23,500 is the remainder to be divided equally between Seth and Rachel:

$23,500 / 2 = $11,750

Finally, we add Seth's interest and salary allowance to his share of the remainder:

$7,500 + $24,000 + $11,750 = $42,250

Therefore, Seth's allocation of the net income is $43,250.

Question 7

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, their profit-sharing ratio is 1:1. Therefore, the net income of $40,000 will be split equally, with each partner receiving $20,000.

Sadie's beginning capital balance was $42,000, and she made withdrawals of $14,000. Therefore, her ending capital balance is $42,000 - $14,000 + $20,000 = $48,000.

Sam's beginning capital balance was $58,000, and he made withdrawals of $15,000. Therefore, his share of the net income is also $20,000, and his ending capital balance is $58,000 - $15,000 + $20,000 = $63,000.

Therefore, the correct answer is (C) $63,000.

Question 8

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

Accepted Answer

If there is no written agreement, the partners will default to sharing income and losses equally. This is known as a partnership at will, which is the default type of partnership if one is not specified in the agreement.

Question 9

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 shared in a 3:2 ratio. Paul's share of the income is 2/5 of $40,000, which is $16,000. Adding this to his initial capital gives $130,000 + $16,000 = $146,000.

Question 10

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 accounts receivable contributed by Jackson had a balance of $22,500. Out of this, $3,000 was deemed completely worthless which means it cannot be recovered. Therefore, the total value of accounts receivable that can be contributed to the partnership is $19,500 ($22,500 - $3,000).

Additionally, the partnership will establish a provision for possible future uncollectible accounts of $1,500. This provision is created to account for the fact that some of the accounts receivable may not be collected in the future.

Therefore, the amount debited to Accounts Receivable for the new partnership would be $19,500 - $1,500 = $18,000.

Hence, the correct answer is D.

Question 11

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 amount to be debited to the equipment account should reflect the agreed valuation of the contributed equipment, which is $29,000. The original cost, accumulated depreciation, and replacement cost are not relevant for this entry.

Question 12

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

Accepted Answer

When a partnership is formed, assets contributed by the partners should be recorded on the partnership books at their fair market value at the time of the contribution, as this represents the true economic value of the assets being contributed to the partnership. Recording assets at book value, original cost, or assessed value for tax purposes may not accurately reflect their current value and could result in inaccurate financial statements.

Question 13

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 the chapter are sole proprietorship, partnership, corporation, and limited liability company (LLC). Subchapter S corporation is a tax election status that can be used by corporations to avoid double taxation.

Question 14

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

Accepted Answer

To convert the ratio to a proportion, we need to add up the parts to find the total number of parts. In this case, 4+2+1=7. Then, we can express each part as a fraction of the total. 
- The first part is 4/7 or 57.14%
- The second part is 2/7 or 28.57%
- The third part is 1/7 or 14.29%

Option B expresses these fractions in a ratio format, so it is the correct answer. Option A expresses the parts as percentages, but these percentages do not add up to 100%. Option C uses a different denominator for the third part. Option D also does not add up to the correct total of 21 (which is 4+2+1 multiplied by 7).

Question 15

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

First, we need to calculate the total interest on the original investments:
Seth's interest = $50,000 x 10% = $5,000
Beth's interest = $100,000 x 10% = $10,000

Next, we need to calculate the total salary allowances:
Total salary allowance = $27,000 + $18,000 = $45,000

We subtract the total interest and salary allowances from the net income to find the remainder to be divided equally:
$42,000 - $5,000 - $10,000 - $45,000 = -$18,000

The negative result shows that the partnership incurred a loss and there is no net income to divide between the partners. Therefore, the answer is D) $0.

Question 16

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 interest on original investments: Seth: $50,000 * 10% = $5,000; Rachel: $100,000 * 10% = $10,000. Then, add salary allowances: Seth: $5,000 + $27,000 = $32,000; Rachel: $10,000 + $18,000 = $28,000. Since it's a net loss, these allocations don't apply directly. The loss is divided equally because there's no profit to distribute according to the specified allocations. Therefore, Seth's share of the $16,000 loss is $8,000, but since the allocations don't apply, the loss is simply divided equally, making Seth's share $8,000, which is not an option. The mistake in the explanation indicates a misunderstanding of how losses are allocated given the initial conditions. Without specific instructions for loss allocation in the partnership agreement, losses are typically shared in the same ratio as profits. However, given the options and the typical approach to partnership agreements, the correct allocation might be misunderstood based on the provided options and explanation. The correct approach should consider the partnership agreement's specific terms for loss allocation, which isn't detailed in the question. Therefore, without explicit instructions for handling losses, and based on the options provided, the answer selection might have been made in error. The correct answer should reflect how losses are allocated according to the partnership agreement or, in the absence of such details, follow a logical allocation based on the information given.

Question 17

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 18

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 19

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 the...

Question 20

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 agreement to the contrary, partners divide profits and losses equally regardless of their capital contributions or time devoted to the partnership. Therefore, Jefferson and Washington would divide net income in a 1:1 ratio.

Quiz 12: Accounting for Partnerships and Limited Liability Companies