Deck 15: Partnerships: Formation, Operation and Reporting

Question 1

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.

Answer 1

D

Question 2

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 or loss summary account.
D) income statement.

Answer 2

B

Question 3

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

Answer 3

D

Question 4

Which of these would not normally be referred to in a partnership agreement?

A) Profit and loss sharing ratios
B) Arrangements to terminate the partnership
C) Procedures to follow in the event of a dispute
D) How GST is calculated

Question 5

Accounting for a partnership is similar to accounting for a sole trader, except that:

A) tax must be calculated by the partnership on each partner's share of profit.
B) each partner's share of equity must be recorded separately.
C) two income statements must be prepared.
D) each partner has limited liability.

Question 6

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

A) No person may be introduced as a partner without the consent of all existing partners.
B) Each partner is allowed to withdraw a maximum of 25% of their capital per annum.
C) A partner is not entitled to interest on the capital subscribed by him/her.
D) Partners are entitled to share equally in the partnership profits.

Question 7

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

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

Question 8

The legislation in Australia that is concerned with the formation, operation and dissolution of partnerships is the:

A) Corporations Legislation.
B) Partnership Act.
C) Bankruptcy Act.
D) Business law Act.

Question 9

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 10

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 11

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 or loss distribution account is closed to the partner's retained earnings accounts.

Question 12

If a partner is a limited partner it means that there are limits on his/her:

A) right to share in profits and losses.
B) liability for partnership debts.
C) obligation to contribute capital.
D) management rights.

Question 13

Michael and Brian each invested $65 000 in a partnership where they agreed to share profits 40% Michael, 60% Brian. The partnership business was not successful and now has no assets. In addition they are being sued for $70 000 by a supplier for non- payment of invoices. What is the amount for which Michael could be held personally responsible if the lawsuit is successful? (Ignore any possible legal costs.)

A) Zero
B) $28 000
C) $65 000
D) $75 000

Question 14

Which statement concerning partnerships is true?

A) A partnership agreement must be in writing.
B) If all existing partners must approve a new partner this may make it difficult to sell an interest in a partnership.
C) Partner's capital accounts must always have equal balances.
D) The profit or loss is determined in the profit distribution account and is distributed to the partners in the profit summary account.

Question 15

The characteristic of a partnership whereby each partner is liable for partnership debts to the full extent of his or her private assets is known as:

A) limited life.
B) unlimited liability.
C) limited liability.
D) mutual agency.

Question 16

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

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

Question 17

There are two methods of accounting for equity in a partnership referred to in the text, method 1 and method 2; these are:

A) variable and fixed capital balances methods.
B) equal and unequal profit sharing methods.
C) interest and no interest methods.
D) debit and credit methods.

Question 18

Which of the following is not a feature of the variable capital balances method (method 1) of accounting for partnership equity?

A) Interest on capital is credited to the partner's retained earnings accounts.
B) Each partner has one permanent capital account.
C) Partner's drawings are closed to their capital accounts.
D) The profit or loss distribution account is closed to the partner's capital accounts.

Question 19

Which of these is a not a disadvantage of operating as a partnership rather than as a company?

A) Greater difficulty in selling a share of the business
B) Unlimited liability
C) Mutual agency
D) Fewer disclosure requirements

Question 20

The relationship that exists between persons carrying on a business in common with a view to profit is referred to as a:

A) company.
B) proprietorship.
C) partnership.
D) retailer.

Question 21

Which of these are ways to record partnership equity?
I) Record partner's capital contributions in separate capital accounts for each partner and record all profits, losses and drawings in a common retained earnings account.
Ii) Record all equity transactions in a capital account for each partner.
Iii) For each partner to use a capital account only for capital contributed or withdrawn and record profits, losses and drawings in a retained earnings account.
Iv) Record all partnership equity in a common account held jointly by all partners.

A) ii and iii
B) ii and iv
C) i and ii
D) i, ii and iii

Question 22

A) $7000
B) $5000
C) $1000
D) $Nil

Question 23

Goodwill is classified in the balance sheet as:

A) equity.
B) a current asset.
C) a non-current asset.
D) a liability.

Question 24

The objective of allocating profits and losses is to reward each partner fairly for the resources and services contributed to the partnership. Which factors would not be directly relevant in negotiating a profit and loss sharing agreement for a partnership?

A) Work done by each partner in the partnership
B) The size of each partner's non-partnership assets
C) Capital contributed by each partner to the partnership
D) The risks assumed by each partner

Question 25

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

A) historic cost.
B) book value.
C) carrying value.
D) fair value.

Question 26

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

Question 27

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 28

Goodwill represents the future benefits of unidentifiable assets. How many of the factors listed below contribute to the value of goodwill?
$\bullet$ Favourable location
$\bullet$ Efficient management
$\bullet$ Good customer relations
$\bullet$ Staff skills and experience

A) 1
B) 2
C) 3
D) 4

Question 29

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 30

A) $34 000.
B) $32 500.
C) $26 500.
D) $(12 500).

Question 31

L and B agree to share profits and losses in the ratios 8:2. If the net loss is $25 000, how much loss is allocated to each partner?

A) L $20 000; B $5000
B) L $5000; B $20 000
C) L $16 000; B $9000
D) L $23 000; B $2000

Question 32

After the closing entries have been completed the profit distribution account in a partnership always has a:

A) debit balance.
B) nil balance.
C) credit balance.
D) negative balance.

Question 33

Allocation of the partnership's profit or loss to the partners is recorded in the:

A) profit or loss summary account.
B) balance sheet.
C) profit distribution account.
D) drawings account.

Question 34

P, Q and R agree to share profits in the ratio 5: 4: 2. This means:

A) P is entitled to 5/6 of the profits.
B) Q is entitled to 4/11 of the profits.
C) R is entitled to 1/2 of the profits.
D) P is entitled to 1/3 of the profits.

Question 35

Assets contributed to a partnership should be initially recorded at:

A) fair value.
B) carrying amount.
C) replacement value.
D) written down value.

Question 36

If accounts receivable are contributed when a partnership is established its fair value is recorded as the:

A) gross amount.
B) gross amount less a separate credit entry for allowance for doubtful debts.
C) historical cost.
D) disposal value.

Question 37

Unless otherwise agreed amongst the partners, partners salaries, interest on capital and interest on drawings are assumed in partnership accounting to be settled by means of:

A) a cash payment.
B) an adjusting entry in the accounting records (book entry).
C) by private arrangement by the partners.
D) by offsetting entries.

Question 38

Internally generated goodwill is not recorded by accountants because:

A) it cannot be measured reliably.
B) it is not important.
C) it does not belong to the partners.
D) it is immaterial.

Question 39

Sole proprietors X and Y decide to form a partnership. X contributes inventory with a fair value of $30 000, equipment with a fair value of $100 000 and it is agreed that the partnership will take over X's bank loan of $20 000. What is X's capital balance assuming that the partners have agreed that his capital balance will be equal to the fair value of the net assets he contributes?

A) $110 000
B) $130 000
C) $150 000
D) $20 000

Question 40

With the fixed capital balances method (method 2) 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 profit accounts.
C) debit profit or loss summary account; credit partner's capital accounts.
D) debit profit or loss summary account; credit partner's retained earnings accounts.

Question 41

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 or loss summary account; credit partner's capital accounts.
D) debit profit or loss summary account; credit partner's retained earnings accounts.

Question 42

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 43

Simon and Keith have a profit and loss sharing agreement where: (1) salaries of $25 000 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 $40 000 for Simon and $20 000 for Keith. There was a profit of $50 000 before distributions to the partners. What is Keith's year-end capital account balance assuming capital balances are adjusted to reflect profits and losses?

A) $43 080
B) $44 680
C) $46 600
D) $24 680

Question 44

Mary and Paul have capital account balances at the end of the year of
$100 000 and $80 000 respectively. Profit of the partnership is $90 000. The profit and loss sharing agreement calls for (1) a salary of $25 000 to Mary and $15 000 to Paul, (2) 10 % p.a. interest on capital balances, (3) the residual profit to be split 60:40 in favour of Mary. What is Mary's share of the distribution?

A) $51 000
B) $29 200
C) $65 000
D) $54 200

Question 45

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 46

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 $75 000 and $50 000 respectively at the end of the accounting period. If profit is $38 000 the profit allocations of each of the partners is:

A) R $19 000; B $19 000.
B) R $22 800; B $15 200.
C) R $20 000; B $18 000.
D) unable to be calculated from the information provided.

Question 47

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

Question 48

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 increase the income of the partnership.
D) To encourage partner's to draw extra amounts.

Question 49

Which statement concerning drawings by partners in a partnership is true?

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 50

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 Fatima's capital balance after the net loss of $60 000 is distributed.

A) $74 000
B) $26 000
C) $50 000
D) $20 000

Question 51

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 variable capital balances method (method 1), which of the following is the accounting entry torecord 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 52

Louise and Billy are in partnership sharing residual profits and losses 50:50. The profit for the year is $120 000. Louise is entitled to a salary of $50 000 per annum (to be paid by means of a book entry). Calculate the amount credited to Louise's retained earnings account after the final distribution of profits.

A) $170 000
B) $50 000
C) $85 000
D) $60 000

Question 53

Sally and Amanda have capital balances of $60 000 and $75 000, respectively and use the variable capital balances method. If their profit/loss sharing ratios are Sally 40% and Amanda 60% calculate Amanda's capital balance after a net loss of $40 000 is distributed.

A) $35 000
B) $51 000
C) $75 000
D) $99 000

Question 54

When a partner makes an advance or loan to the partnership, how many of these statements are true?
$\bullet$ He/she is entitled to interest at the rate of 7% p.a. unless there is an agreement to the contrary.
$\bullet$ The amount loaned is added to the partners equity account balance.
$\bullet$ 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 55

If a partner makes a cash advance to a partnership to be repaid in five years time and does not wish it to be included as a capital contribution, how will it be classified in the balance sheet?

A) Current liability
B) Non-current asset
C) Non-current liability
D) Current asset

Question 56

Partner's drawings are:

A) cash amounts withdrawn or private expenses paid by the partnership on behalf of a partner, in anticipation of profits.
B) amounts credited for working in the partnership.
C) partner's artwork.
D) money borrowed from the partnership.

Question 57

If the fixed capital balances method (method 2) is used to account for partnership equity, both the profit or loss and the partner's drawings are closed to the:

A) retained earnings account.
B) capital accounts.
C) profit or loss summary account.
D) profit distribution account.

Question 58

A partner's loan is a liability and any interest paid on the loan by the partnership should be treated as:

A) an expense in the profit or loss summary account.
B) a distribution of profit in the profit or loss distribution account.
C) income in the profit or loss summary account.
D) a prepaid adjustment in the balance sheet.

Question 59

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 60

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

Question 61

When the final financial statements are prepared the profit or loss allocation for a partnership is normally shown in the:

A) profit or loss allocation statement.
B) statement of changes in partner's equity.
C) extended profit statement.
D) cash flow statement.

Question 62

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 63

A partnership that is a reporting entity must produce which of these financial statements?
I) Income statement
Ii) Statement of changes in partners' equity
Iii) Balance sheet
Iv) Statement of cash flows

A) i, ii, iii, iv
B) i, ii, iii
C) i, iii
D) None of these statements

Question 64

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 65

The part of the financial statements of a partnership that differs most from that of a sole trader is the:

A) assets section of the balance sheet.
B) equity section of the balance sheet.
C) income section of the income statement.
D) expense section of the income statement.