Deck 15: Partnerships: Formation,operation and Reporting

Question 1

Fatima and Jaddon have capital balances of $50 000 and $80 000,respectively and use the variable capital balances method.If their profit/loss sharing ratios are Fatima 40% and Jaddon 60% calculate Jaddon's capital balance after a net loss of $60 000 is distributed.

A)$80 000
B)$116 000
C)$44 000
D)$50 000

Answer 1

C

Question 2

Smiles and Scowls,two sole traders form a partnership by combining their net assets. $\begin{array}{lcc} \text { Smiles contributes: }\\& \text { Cost value } & \text { Fair value } \\\text { Accounts Receivable } & \$ 10000 & \$ 8500 \\\text { Cash } & \$ 20000 &\\\text { Scowls contributes: }\\\text { Plant } & \$ 30000 & \$ 25000 \\\text { Accumulated Depreciation } & \$ 8000 & \\\text { Bank Overdraft } & \$ 11000 &\end{array}$ What will be the amount shown in the Allowance for Doubtful Debts account in the Balance sheet prepared after the formation of the partnership of Smiles and Scowls?

A)Nil
B)$1500
C)$1000
D)$500

Answer 2

$1500

Question 3

With the variable capital balances method method 1)of accounting for partnership equity,the general journal entry to record interest on capital is:

A)Debit profit distribution account; credit partner's capital accounts
B)Debit profit distribution account; credit partner's retained earnings accounts
C)Debit profit and loss summary account; credit partner's capital accounts
D)Debit profit and loss summary account; credit partner's retained earnings accounts

Answer 3

A

Question 4

Internally generated goodwill is not recorded by accountants because:

A)It does not exist
B)It is not important
C)It cannot be measured reliably
D)It is immaterial

Question 5

When assets are contributed to a partnership they should be recorded in the books of the new entity at:

A)Fair value
B)Book value
C)Cost minus accumulated depreciation
D)Tax value

Question 6

Which of these is not a feature of the fixed capital balances method method 2)of accounting for partnership equity?

A)Each partner has two permanent equity accounts,a capital account and a retained earnings account
B)Apart from the initial investment very few adjustments are made to the capital account
C)Partner's drawings are closed to their capital accounts
D)The profit and loss distribution account is closed to the partner's retained earnings accounts

Question 7

If the variable capital balances method method 1 is used,the profit or loss and partner's drawings are closed to the:

A)Retained earnings accounts
B)Capital accounts
C)Profit and loss summary account
D)Profit distribution account

Question 8

It is agreed in the partnership agreement of R and B that profit and loss sharing arrangements will be based on the ratio of the partner's capital balances.R and B have capital balances of $100 000 and $50 000 respectively at the end of the accounting period.If profit is $42 000 the profit allocations of each of the partners is:

A)R $21 000; B $21 000
B)R $24 000; B $18 000
C)R $28 000; B $14 000
D)R $14 000; B $28 000

Question 9

Douglas and Johnson each invested $50 000 in a partnership where they agreed to share profits 60% Douglas,40% Johnson.The partnership business was not successful and now has no assets.In addition they are being sued for $80 000 by a supplier for non-payment of invoices.What is the amount for which Douglas could be held personally responsible if the lawsuit is successful ignore any possible legal costs.

A)Zero
B)$40 000
C)$48 000
D)$80 000

Question 10

Mutual agency means:

A)Unlimited liability for partnership debts
B)Sharing partnership resources
C)That each partner is an agent for the partnership and can bind the other partners when acting within the normal scope of business
D)Consigning goods to other entities on a commission basis to increase sales

Question 11

Fair value is defined in the accounting standards as:

A)Vendor value
B)The amount for which an asset could be exchanged between knowledgeable willing parties in an arm's-length transaction.
C)Trade value
D)Retail value

Question 12

Which event would not result in the automatic dissolution of a partnership?

A)A partner's illness
B)The admission of a new partner
C)The retirement of an old partner
D)The bankruptcy of a partner

Question 13

Which of these is not a provision of the Partnership Act?

A)Partners are entitled to share equally in the partnership profits
B)A partner is not entitled to interest on the capital subscribed by him/her
C)No person may be introduced as a partner without the consent of all existing partners
D)Each partner is allowed to withdraw a maximum of10% of their capital per annum

Question 14

The legislation with the most significant influence on the formation,operation and dissolution of partnerships is the:

A)Federal Partnership Act
B)Common Partnership Program
C)Partnership Formation,Operation and Liquidation Rules
D)Partnership Act

Question 15

Which of these is not a disadvantage of a partnership?

A)The principle of mutual agency
B)Unlimited liability
C)The difficulty of transferring partnership interests
D)The liability of the partnership for taxation

Question 16

In a partnership,the profit and loss sharing ratio will be based on:

A)The relative capital contributions of the partners
B)The relative effort contributed by the partners
C)The relative business risks assumed by the partners
D)Any formula that the partners may choose

Question 17

As compared to a company with a similar number of shareholder's as there are partners in the partnership,an advantage of a partnership is:

A)Unlimited liability
B)Mutual agency
C)Pooling of resources
D)Less government regulation

Question 18

Which of these is an advantage of a partnership over a sole proprietorship?

A)Pooling of resources
B)Mutual agency
C)Ease of transferring ownership
D)Unlimited liability

Question 19

Smiles and Scowls,two sole traders form a partnership by combining their net assets.
Smiles contributes: $\begin{array}{lcc} & \text { Cost value } & \text { Fair value } \\\text { Accounts Receivable } & \$ 10000 & \$ 8500 \\\text { Cash } & \$ 20000 &\\\text { Scowls contributes: }\\\text { Plant } & \$ 30000 & \$ 25000 \\\text { Accumulated Depreciation } & \$ 8000 & \\\text { Bank Overdraft } & \$ 11000 &\end{array}$
The amount credited to Smiles' Capital account is:

A)$30 000
B)$29 000
C)$28 500
D)$20 000

Question 20

Smiles and Scowls,two sole traders,form a partnership by combining their net assets.
Smiles contributes: $\begin{array}{lcc} & \text { Cost value } & \text { Fair value } \\\text { Accounts Receivable } & \$ 10000 & \$ 8500 \\\text { Cash } & \$ 20000 &\\\text { Scowls contributes: }\\\text { Plant } & \$ 30000 & \$ 25000 \\\text { Accumulated Depreciation } & \$ 8000 & \\\text { Bank Overdraft } & \$ 11000 &\end{array}$
What will be the amount shown in the Accumulated Depreciation account on formation of the partnership of Smiles and Scowls?

A)Nil
B)$3000
C)$5000
D)$8000

Question 21

The major difference in financial reporting for a partnership compared to reporting for other forms of business organisations is in accounting for e_________.

Question 22

John and Jane have capital account balances at the end of the year of
$100 000 and $80 000 respectively.Profit of the partnership is $70 000.The profit and loss sharing agreement calls for 1)a salary of $20,000 to John and $10,000 to Jane,2)10 % p.a.interest on capital balances,3)the residual profit to be split 70 - 30 in favour of John.What is John's share of the distribution?

A)$49 000
B)$45 400
C)$21 000
D)$24 500

Question 23

The partnership agreement of X and Y provides that interest at 5% per annum is to be charged on partners' drawings.During year ended 31 December 2011 drawings by X were: $\begin{array}{lr}&\$\\1 \text { February 2011 } & 2400 \\1 \text { June 2011 } & 4800 \\1 \text { August 2011 } & 960\end{array}$ What is the total amount of interest on drawings chargeable to X's current account for the year?

A)$300
B)$270
C)$100
D)$200

Question 24

The statement concerning drawings by partners in a partnership that is true is:

A)Interest is charged on drawings if the partnership agreement is silent on the matter
B)Charging interest on drawings acts as an incentive to partners to withdraw money from the partnership
C)Drawings are generally regarded as withdrawals of future profits
D)Drawings are taken into account when calculating the final distribution of profit between the partners

Question 25

Connie and Carole have a profit and loss sharing agreement where: 1)salaries of $10 000 each are credited,2)12% interest is allowed on capital balances 3)the remaining profit or loss is split 60-40 in favour of Connie.At the end of the year,before the distribution of profits or losses,capital account balances were $20 000 and $40 000 for Connie and Carole,respectively.Profit was $36 000 before distributions to partners.What is Connie's ending capital account balance assuming capital balances are adjusted to reflect profits and losses?

A)$58 320
B)$57 680
C)$37 680
D)$38 320

Question 26

How is the allocation of partnership profits affected by drawings?

A)Drawings must be added back to profits before they are allocated
B)Drawings must be deducted from profits before they are allocated
C)Drawings only affect profit allocation if the partnership agreement provides for interest on drawings
D)Drawings must be deducted from salaries due to the partners

Question 27

When forming a partnership the non-cash assets and liabilities contributed to the partnership are recorded at their f_________ values.

Question 28

Hodges and Burton formed a partnership with capital of $30 000 and $45 000 respectively.The partnership agreement provides for the crediting of annual salaries of $45 000 to Hodges and $75 000 to Burton.Each partner is entitled to 20% interest on capital.The remaining profit or loss is divided equally.How much,in total,will be credited to Hodges' capital account if profit for the year is $240 000 assuming capital balances are adjusted to reflect profits and losses?

A)$120 000
B)$103 500
C)$118 500
D)$105 000

Question 29

When preparing the closing entries for a partnership at the end of the accounting period which of these statements is true? Assume that capital account balances are not fixed.

A)Income and expenses are closed to the capital accounts
B)The profit and loss summary account is closed to the retained earnings accounts
C)The retained earnings account is closed to the profit and loss summary account
D)The drawings accounts are closed to the capital accounts

Question 30

Hong and Si are in partnership sharing residual profits and losses 50:50.The profit for the year is $140 000.Hong is entitled to a salary of $40 000 per annum to be paid by means of a book entry).Calculate the amount credited to Hong's retained earnings account after the final distribution of profits.

A)$90 000
B)$80 000
C)$100 000
D)$70 000

Question 31

Jemma and Sally are in partnership.Their capital balances at the end of the accounting period are $200 000 and $150 000 respectively.Jemma decides to make a permanent cash withdrawal from her capital account of $50 000.If it is assumed that they use the fixed capital balances method method 2)what is the accounting entry to record this transaction?

A)Debit Jemma capital account $50 000; credit profit distribution account $50 000
B)Debit Jemma retained earnings account $50 000; credit profit distribution account $50 000
C)Debit Jemma capital account $50 000; credit bank account $50 000
D)Debit Jemma retained earnings account $50 000; credit bank account $50 000

Question 32

In the event of the death of a partner the legal arrangement that is a partnership is d_________.

Question 33

When a partner makes an advance or loan to the partnership how many of these statements are true?
.He/she is entitled to interest at the rate of 7% p.a.unless there is an agreement to the contrary
.The loan is treated as a liability
.Interest on the loan is regarded as an expense of the partnership and appears in the income statement

A)0
B)1
C)2
D)3

Question 34

Doreen and Amy have a profit and loss sharing agreement where: 1)salaries of $20 000 each are credited,2)8% interest is allowed on capital balances 3)the remaining profit or loss is split 60-40,respectively.At the end of the year,before the distribution of profits or losses,capital account balances were $20 000 for Doreen and $10 000 for Amy.There was a profit of $30 000 before distributions to the partners.What is Amy's year-end capital account balance assuming capital balances are adjusted to reflect profits and losses?

A)$25 840
B)$22 000
C)$30 800
D)$9360

Question 35

The principle whereby a partner can represent the other partners and bind them to a contract if acting within the normal scope of business is known as m_______________ a_____________.

Question 36

The relationship that exists between people carrying on a business in common with a view to profit is called a p______________.

Question 37

It is best that a written p_____________ a______________ should be established when a partnership is formed so that what has been agreed on is not subject to dispute at a later date.

Question 38

Which statement relating to financial reports for a partnership is not true?

A)Partners' salaries are normally treated as an allocation of profit
B)Income tax expense is deducted from the partnership profit at the end of the income statement
C)Each individual partner's equity in the business is reported separately
D)Interest on capital contributions is treated as an allocation of profits

Question 39

Sometimes the partnership agreement may specify that interest is to be charged on partner's drawings.Which of the following is the main reason for such a charge?

A)To reduce partnership profits
B)To act as a disincentive to partners withdrawing excessive amounts from the partnership
C)To reward partners
D)To encourage partner's to draw extra amounts

Question 40

If no profit and loss sharing agreement exists the Partnership Act specifies that profit or losses are to be shared e__________.

Question 41

Loans by partners to the partnership are treated in the partnership balance sheet as l________________.

Question 42

In closing the books of a partnership the balance of the Profit and Loss Summary account is transferred to the profit d_______________ account.

Question 43

When an incoming partner is given credit for a capital contribution greater than the fair value of the net identifiable assets contributed,the difference is recorded as g____________.

Question 44

If partners A,B and C share profits 4: 5: 1,then partner B receives ______% of the profits.