Deck 12: Accounting for Partnerships and Limited Liability Companies

Question 1

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

Answer 1

True

Question 2

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

Answer 2

True

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.

Answer 3

False

Question 4

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

Question 5

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

Question 6

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

Question 7

Each partner has a separate capital and withdrawal account.

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.

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.

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.

Question 11

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

Question 12

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

Question 13

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

Question 14

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

Question 15

A partnership is a legal entity separate from its owners.

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.

Question 17

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

Question 18

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

Question 19

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

Question 20

A partnership is subject to federal income taxes.

Question 21

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.

Question 22

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.

Question 23

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.

Question 24

A new partner contributes accounts receivable to a partnership,which appears in the ledger of his sole proprietorship at $20,500,and there was an allowance for doubtful accounts of $750.If $600 of the accounts receivable are completely worthless,the partnership Accounts Receivable should be debited for $19,900.

Question 25

In admitting a new partner who purchases an interest,the capital interest of the new partner is obtained from the current partners and both the total assets and total capital are increased.

Question 26

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.

Question 27

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

Question 28

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

Question 29

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

Question 30

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.

Question 31

A 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 or dies.

Question 32

When a partner withdraws from the partnership by selling his or her interest back to the partnership,the remaining partners must pay the withdrawing partner a specified amount from their personal assets.

Question 33

X sells to A one-half of a partnership capital interest that totals $70,000 for $40,000.A's capital account in the partnership should be credited for $40,000.

Question 34

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

Question 35

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

Question 36

When a partner invests noncash assets in a partnership,the assets are recorded at the partner's book value.

Question 37

If a new partner is to be admitted to a partnership and a bonus is attributed to the old partnership,the bonus should be divided between the capital accounts of the original partners according to their capital balances.

Question 38

When a new partner is admitted to a partnership,bonuses attributable to either the old partnership or to the incoming partner may be recognized in accordance with the agreement among the partners.

Question 39

When a new partner is admitted to a partnership,all partnership assets should be revised to reflect current values.

Question 40

If not enough partnership cash or other assets are available to pay the withdrawing partner,a liability may be created for the amount owed the withdrawing partner.

Question 41

Dissolution is the term that solely means to liquidate the partnership.

Question 42

If a partner's capital balance is a debit after it has absorbed its share of the loss on realization,the balance is referred to as a deficiency.

Question 43

The chart of accounts for a partnership,with the exception of additional drawing and capital accounts,does not differ from the chart of accounts for a sole proprietorship.

Question 44

In a partnership liquidation,if a partner has a debit capital balance in his or her capital account,he or she is responsible for contributing personal assets sufficient to eliminate the deficit.

Question 45

In the liquidating process,any uncollected cash becomes a loss to the partnership and is divided among the remaining partners' capital balances based on their income-sharing ratio.

Question 46

Which of the following is an advantage of a general partnership when compared to a corporation?

A)A partnership is more likely to have a positive net income.
B)The partnership is relatively inexpensive to organize.
C)Creditors to a partnership cannot attach personal assets of partners.
D)The partnership usually hires professional managers.

Question 47

In a partnership liquidation,gains and losses on the sale of partnership assets are divided among the partners' capital accounts on the basis of their capital balances.

Question 48

The distribution of cash,as the final process in winding up the affairs of a partnership,is based on the income-sharing ratio.

Question 49

The process of winding up the affairs of a partnership is referred to as realization.

Question 50

Revenue per employee may be used to measure partnership
(LLC)efficiency.

Question 51

Which of the following is a disadvantage of a partnership when compared to a corporation?

A)The partnership is more likely to have a net loss.
B)The partnership is easier to organize.
C)The partnership is less expensive to organize.
D)The partnership has limited life.

Question 52

The statement of members' equity is used for equity reporting of a partnership.

Question 53

The characteristic of a partnership that gives the authority to any partner to legally bind the partnership and all other partners to business contracts is called

A)unlimited liability
B)ease of formation
C)mutual agency
D)dissolution

Question 54

After all noncash assets have been converted to cash and all liabilities paid,A,B,and C have capital balances of $10,000
(debit),$5,000
(debit),and $25,000
(credit).The cash available for distribution to the partners is $10,000.

Question 55

Which of the following is a characteristic of a general partnership?

A)The partners have co-ownership of partnership property.
B)The partnership is subject to federal income tax.
C)The partnership has an unlimited life.
D)The partners have limited liability.

Question 56

Which of the following is not a characteristic of a general partnership?

A)The partnership is created by a contract.
B)Mutual agency exists.
C)Partners share equally in net income or net losses unless an agreement states differently.
D)Dissolution occurs only when all partners agree.

Question 57

An advantage of the partnership form of business organization is

A)unlimited liability
B)mutual agency
C)ease of formation
D)limited life

Question 58

The equity reporting for a limited liability company is similar to that of a partnership,but the changes in capital are shown on a statement of members' equity.

Question 59

The partner capital accounts may change due to capital additions,net income,or withdrawals.

Question 60

If the share of losses on realization of the sale of noncash assets exceed the balance in a partner's capital account,the resulting balance is called a deficiency.

Question 61

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?

A)5:8.5
B)1:2
C)1:1
D)2:1

Question 62

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?

A)$71,000
B)$119,000
C)$146,000
D)$111,000

Question 63

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

A)Assets section of the balance sheet
B)partners' subsidiary ledger
C)statement of cash flows
D)partnership income statement

Question 64

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

A)unlimited life
B)limited legal liability
C)taxable
D)moderate ability to raise capital

Question 65

When a limited liability company is formed,

A)the partnership activities are limited
B)all partners have limited liability
C)some of the partners have limited liability
D)none of the partners has limited liability

Question 66

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?

A)$42,750
B)$47,750
C)$45,000
D)$43,250

Question 67

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

A)$78,000
B)$43,000
C)$63,000
D)$93,000

Question 68

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

A)they will share income and losses equally
B)they will share income and losses according to their capital balances
C)they will share income and losses according to the time devoted to the business
D)there really is no partnership agreement

Question 69

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?

A)$120,000
B)$146,000
C)$164,000
D)$160,000

Question 70

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

A)$18,000
B)$22,500
C)$21,000
D)$19,500

Question 71

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?

A)$29,000
B)$150,000
C)$125,000
D)$100,000

Question 72

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

A)book values on the partners' books prior to their being contributed to the partnership
B)fair market value at the time of the contribution
C)original costs to the partner contributing them
D)assessed values for property tax purposes

Question 73

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

A)sole proprietorship
B)corporation
C)partnership
D)subchapter S corporation

Question 74

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

A)40%:20%:10%
B)4/7:2/7:1/7
C)4/10:2/10:1/20
D)7/4:7/2:7/1

Question 75

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?

A)$20,000
B)$23,000
C)$32,000
D)$0

Question 76

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?

A)$8,000
B)$6,000
C)$4,000
D)$16,000

Question 77

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

A)partners seldom contribute time and resources equally
B)this method reflects the amount of time devoted to the partnership by the partners
C)it is simpler than following the legal rules
D)it prevents arguments among the partners

Question 78

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

A)Luke, $46,500; John, $46,500
B)Luke, $55,000; John, $38,000
C)Luke, $65,000; John, $28,000
D)Luke, $38,000; John, $55,000

Question 79

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

A)$68,000
B)$54,000
C)$74,000
D)$46,000

Question 80

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?

A)6.5:4.5
B)1:1
C)4.5:6.5
D)1:2