Question 1

Sarno has a capital balance of $42,000 after adjusting the assets to fair market value. Minton contributes $22,000 to receive a 30% interest in the new partnership. The bonus paid by Minton is $2,800.

Accepted Answer

The new capital balance of the partnership after Minton's contribution and the bonus payment would be:

$42,000 + $22,000 + $2,800 = $66,800

Minton's 30% interest in this capital balance would be:

0.3 x $66,800 = $20,040

This means that Minton's contribution and bonus amount are in line with the percentage of interest he is receiving in the partnership.

Question 2

When a new partner purchases the entire interest of an old partner, the new partner's capital account should be credited for the amount he or she paid to the old partner.

Accepted Answer

The transaction of a new partner purchasing the interest of an old partner is a private transaction between those two individuals and does not affect the partnership's books. The capital account of the new partner is credited based on the amount agreed upon for the purchase of the partnership interest, which is usually determined by the partnership agreement or a separate agreement between the partners, not necessarily the amount paid to the old partner.

Question 3

Partnership's asset accounts should be changed from cost to fair market value when a new partner is admitted to a firm or an existing partner withdraws and dies.

Accepted Answer

When a new partner is admitted or an existing partner withdraws or dies, the partnership's assets should be revalued at their current fair market value. This is necessary to ensure that the incoming partner is contributing and receiving their share of the partnership's assets based on their current value, rather than historical cost. It also ensures that the exiting partner is receiving their share of the assets based on their current value, rather than a potentially outdated cost basis.

Question 4

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 5

Many partnerships provide for the admission of new partners or withdrawals of present partners by amending existing partnership agreements, so that the firm may continue to operate without executing a new agreement.

Accepted Answer

This statement is true. Partnership agreements often have provisions for the admission or withdrawal of partners, allowing for changes to be made without completely rewriting the agreement.

Question 6

The amount that a partner withdraws as a monthly salary allowance does affect the division of net income.

Accepted Answer

When a partner withdraws a monthly salary allowance, it is considered an expense and is deducted from the net income before the profits are divided. This can affect the division of net income as partners who withdraw larger allowances may end up with a smaller share of the profits.

Question 7

In admitting a new partner, where the company chooses to use the purchase of an interest method, the capital interest of the new partner is obtained from the current partners and both the total assets and total capital are increased.

Accepted Answer

The answer of In admitting a new partner, where the...

Question 8

If nothing is stated, partnership income is divided in proportion to the individual partner's capital balance.

Accepted Answer

The answer of If nothing is stated, partnership income is...

Question 9

If a new partner is given a 20% interest in the firm then the new partner will receive a 20% interest in earnings.

Accepted Answer

The answer of If a new partner is given a...

Question 10

When a partnership dissolves, a new partnership is formed and a new partnership agreement should be prepared.

Accepted Answer

When a partnership dissolves and new partners are brought in, a new partnership agreement should be prepared to outline the roles, responsibilities, and profit-sharing arrangements of the new partners.

Question 11

When a new partner is admitted by making an investment in the partnership, the old partners' capital accounts are always credited.

Accepted Answer

When a new partner is admitted and makes an investment in the partnership, the new partner's capital account is credited with the amount of the investment. The old partners' capital accounts are not directly affected by this transaction; adjustments to their capital accounts, if any, would occur based on the agreement for revaluation of assets or redistribution of ownership percentages, not from the new partner's investment itself.

Question 12

Details of the division of partnership income should normally be disclosed in the financial statements.

Accepted Answer

According to generally accepted accounting principles (GAAP), partnership income should be allocated and disclosed in the financial statements. This helps to provide transparency to the users of the financial statements about the division of profit among the partners.

Question 13

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 14

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

Based on the information given, it is not possible to determine X's share of net income. The article only provides information about the annual salary allowances of X and Y, and not about how net income will be distributed among the partners. A formula or method for distribution of profits needs to be stated for that.

Question 15

When a partner withdraws from the partnership, the partnership dissolves.

Accepted Answer

The answer of When a partner withdraws from the partnership,...

Question 16

A person may be admitted to a partnership only with the consent of all the current partners.

Accepted Answer

This is known as the principle of unanimity, which means all partners must agree on any changes to the partnership agreement or admission of a new partner.

Question 17

A devotes full time and B devotes one-half time to their partnership. If the partnership agreement is silent concerning the division of net income, A will receive a $20,000 share of a net income of $30,000.

Accepted Answer

If B is only devoting one-half time to the partnership, it is likely that the division of net income would not be equal between A and B. Without any explicit agreement, it is impossible to determine how the net income should be divided between A and B. Therefore, it cannot be assumed that A will receive a $20,000 share of a net income of $30,000.

Question 18

In the distribution of income, the net income is less than the salary and interest allowances granted; the remaining balance will be a negative amount that must be divided among the partners as though it were a loss.

Accepted Answer

This statement is true. When the net income is less than the total of salaries and interest allowances granted, the remaining amount is negative, which is treated as a loss and must be distributed among the partners in proportion to their share in the partnership.

Question 19

Whenever a partnership is dissolved, the assets are liquidated.

Accepted Answer

The answer of Whenever a partnership is dissolved, the assets...

Question 20

When a new partner is admitted by making an investment of assets in the partnership and the new partner has to pay a premium for admission, a bonus is divided among the old partners' capital accounts.

Accepted Answer

This statement is true. When a new partner pays a premium for admission and invests assets in the partnership, the old partners receive a bonus that is typically divided among their capital accounts. This bonus is meant to compensate the old partners for the increase in the value of the partnership that results from the admission of the new partner.

Quiz 12: Accounting for Partnerships and Limited Liability Companies