Mutual agency implies that each partner in a partnership

1. Shelby and Mortonson formed a partnership with capital contributions of $300,000 and $400,000, respectively. Their partnership agreement calls for Shelby to receive a $60,000 per year salary. Also, each partner is to receive an interest allowance equal to 10% of a partner's beginning capital investments. The remaining income or loss is to be divided equally. If the net income for the current year is $135,000, then Shelby and Mortonson's respective shares are:

A. $67,500; $67,500.

B. $92,500; $42,500.

C. $57,857; $77,143.

D. $90,000; $40,000.

E. $35,000; $100,000.

2. A partnership agreement:

A. Is not binding unless it is in writing.

B. Is the same as a limited liability partnership.

C. Is binding even if it is not in writing.

D. Does not generally address the issue of the rights and duties of the partners.

E. Is also called the articles of incorporation.

3. In closing the accounts at the end of a period, the partners' capital accounts are credited for their share of the partnership loss or debited for their share of the partnership net income.
True
False

4. Accounting procedures for all items are the same for both C corporations and S corporations in all aspects.
True
False

5. McCartney, Harris, and Hussin are dissolving their partnership. Their partnership agreement allocates income and losses equally among the partners. The current period's ending capital account balances are McCartney, $15,000, Harris, $15,000, Hussin, $(2,000). After all the assets are sold and liabilities are paid, but before any contributions to cover any deficiencies, there is $28,000 in cash to be distributed. Hussin pays $2,000 to cover the deficiency in his account. The general journal entry to record the final distribution would be:

A. McCartney, Capital 15,000 Harris, Capital 15,000 Cash 30,000

B. McCartney, Capital 14,000 Harris, Capital 14,000 Cash 28,000

C. McCartney, Capital 15,000 Harris, Capital 15,000 Hussin, Capital 2,000 Cash 28,000

D. Cash 28,000 Hussin, Capital 2,000 McCartney, Capital 15,000 Harris, Capital 15,000

E. McCartney, Capital 9,334 Harris, Capital 9,333 Hussin, Capital 9,333 Cash 28,000

6. Partnership accounting:

A. Is the same as accounting for a sole proprietorship.

B. Is the same as accounting for a corporation.

C. Is the same as accounting for a sole proprietorship, except that separate capital and withdrawal accounts are kept for each partner.

D. Is the same as accounting for an S corporation.

E. Is the same as accounting for a corporation, except that retained earnings is used to keep track of partners' withdrawals.

7. Limited liability partnerships are designed to protect innocent partners from malpractice or negligence claims resulting from the acts of another partner.
True
False

8. Assume that the S & B partnership agreement gave Steely 60% and Breck 40% of partnership income and losses. The partnership lost $27,000 in the current period. This implies that Steely's share of the loss equals $16,200, and Breck's share equals $10,800.
True
False

9. McCartney, Harris and Hussin are dissolving their partnership. Their partnership agreement allocates each partner 1/3 of all income and losses. The current period's ending capital account balances are McCartney, $13,000; Harris, $13,000; and Hussin, $(2,000). After all assets are sold and liabilities are paid, there is $24,000 in cash to be distributed. Hussin is unable to pay the deficiency. The journal entry to record the distribution should be:

A. McCartney, Capital 8,000 Harris, Capital 8,000 Hussin, Capital 8,000 Cash 24,000

B. McCartney, Capital 12,000 Harris, Capital 12,000 Cash 24,000

C. McCartney, Capital 13,000 Harris, Capital 13,000 Hussin, Capital 2,000 Cash 24,000

D. Cash 24,000 Hussin, Capital 2,000 McCartney, Capital 13,000 Harris, Capital 13,000

E. Cash 24,000 McCartney, Capital 8,000 Harris, Capital 8,000 Hussin, Capital 8,000

10. Groh and Jackson are partners. Groh's capital balance in the partnership is $64,000, and Jackson's capital balance $61,000. Groh and Jackson have agreed to share equally in income or loss. Groh and Jackson agree to accept Block with a 25% interest. Block will invest $35,000 in the partnership. The bonus that is granted to Block equals:

A. $5,000.

B. $2,500.

C. $6,667

D. $3,333

E. $0, because Block must actually grant a bonus to Groh and Jackson.

Total partnership equity = $64,000 + $61,000 + $35,000 = $160,000
Equity of Block = $160,000 x 0.25 = $40,000
Bonus to Block = $40,000 - $35,000 = $5,000

11. Rice, Hepburn, and DiMarco formed a partnership with Rice contributing $60,000, Hepburn contributing $50,000 and DiMarco contributing $40,000. Their partnership agreement called for the income (loss) division to be based on the ratio of capital investments. If the partnership had income of $75,000 for its first year of operation, what amount of income (rounded to the nearest dollar) would be credited to DiMarco's capital account?

A. $20,000.

B. $25,000.

C. $30,000.

D. $40,000.

E. $75,000.

$75,000 x ($40,000/($60,000 + $50,000 + $40,000)) = $20,000

12. Partners' withdrawals of assets are:

A. Credited to their withdrawals accounts.

B. Debited to their withdrawals accounts.

C. Credited to their retained earnings.

D. Debited to their retained earnings.

E. Debited to their asset accounts.

13. When a partnership is liquidated:

A. Noncash assets are converted to cash.

B. Any gain or loss on liquidation is allocated to the partners' capital accounts using the income and loss sharing ratio.

C. Liabilities are paid or settled.

D. Any remaining cash is distributed to the partners based on their capital balances.

E. All of the above.

14. Renee Jackson is a partner in Sports Promoters. Her beginning partnership capital balance for the current year $55,000, and her ending partnership capital balance for the current year is $62,000. Her share of this year's partnership income was $5,250. What is her partner return on equity?

A. 8.47%

B. 8.97%

C. 9.54%

D. 1047%

E. 1060%

$5,250/[($55,000 + $62,000)/2] = 8.97%

15. To buy into an existing partnership, the new partner must contribute cash.
True
False

16. Partnership accounting:

A. Uses a capital account for each partner.

B. Uses a withdrawals account for each partner.

C. Allocates net income to each partner according to the partnership agreement.

D. Allocates net loss to each partner according to the partnership agreement.

E. All of the above.

17. The partnership agreement for Smith Wesson & Davis, a general partnership, provided that profits be shared between the partners in the ratio of their financial contributions to the partnership. Smith contributed $100,000, Wesson contributed $60,000 and Davis contributed $20,000. In the partnership’s first year of operation, it incurred a loss of $210,000. What amount of the partnership’s loss, rounded to the nearest dollar, should be absorbed by Smith?

A. $70,000

B. $116,667

C. $23,333

D. $105,000

E. $52,500

If the partnership agreement does not specifically address how losses are to be allocated between the partners, the losses are to be shared in the same manner as profits.
Therefore, since Smith's capital contribution ($100,000) represented 5/9 of the total capital upon formation ($100,000 + $60,000 + $20,000), Smith should be allocated 5/9 of the $210,000 loss or $116,667.

18. A partner can withdraw from a partnership by:

A. Selling his/her interest to another person who pays for it in cash.

B. Selling his/her interest to another person who pays for it with assets.

C. Receiving cash of the partnership in the amount of his/her interest.

D. Receiving assets of the partnership in the amount of his/her interest.

E. All of the above.

19. If a partner is unable to cover a deficiency and the other partners absorb the deficiency, then the partner with the deficiency is thus relieved of all liability.
True
False

20. Mutual agency implies that each partner in a partnership is a fully authorized agent of the partnership. Which of the following statements is correct regarding the authority of a partner to bind the partnership in dealings with third parties?

A. The partner’s authority must be derived from the partnership agreement.

B. The partner’s authority may be effectively limited by a formal resolution of the other partners, even if third parties are not aware of that limitation.

C. Only a partner with a majority interest in a partnership has the authority to represent the partnership to third parties.

D. A partner has authority to deal with third parties on the behalf of the other partners only if he has written permission to do so.

E. A partner may be able to legally bind the partnership to actions even if the other partners are unaware of his actions.

21. A partnership cannot use salary allowances or interest allowances if it uses the stated ratio method to allocate income and losses to the partners.
True
False

22. Partner return on equity can be used by each partner to help decide whether additional investment or withdrawal of resources is best for that partner.
True
False

23. When a partner is added to a partnership:

A. The previous partnership ends.

B. The underlying business operations end.

C. The underlying business operations must close and then re-open.

D. The partnership must continue.

E. The partnership equity always increases

24. Partners' withdrawals are credited to their separate withdrawals accounts.
True
False

25. Groh and Jackson are partners. Groh's capital balance in the partnership is $64,000, and Jackson's capital balance $61,000. Groh and Jackson have agreed to share equally in income or loss. Groh and Jackson agree to accept Block with a 20% interest. Block will invest $35,000 in the partnership. The bonus that is granted to Groh and Jackson equals:

A. $1,500 each.

B. $1,875 each.

C. $3,750 each

D. 1,920 to Groh; $1,830 to Jackson.

E. $0, because Groh and Jackson actually grant a bonus to Block.

Total partnership equity = $64,000 + $61,000 + $35,000 = $160,000
Equity of Block = $160,000 x 0.20 = $32,000
Bonus to old partners = $35,000 - $32,000 = $3,000, split equally

26. Chen and Wright are forming a partnership. Chen will invest a building that currently is being used by another business owned by Chen. The building has a market value of $90,000. Also, the partnership will assume responsibility for a $30,000 note secured by a mortgage on that building. Wright will invest $50,000 cash. For the partnership, the amounts to be recorded for the building and for Chen's Capital account are:

A. Building, $90,000 and Chen, Capital, $90,000.

B. Building, $60,000 and Chen, Capital, $60,000.

C. Building, $60,000 and Chen, Capital, $50,000.

D. Building, $90,000 and Chen, Capital, $60,000.

E. Building, $60,000 and Chen, Capital, $90,000.

27. Mutual agency means

A. Creditors can apply their claims to partners' personal assets.

B. Partners are taxed on partnership withdrawals.

C. All partners must agree before the partnership can act.

D. The partnership has a limited life.

E. A partner can commit or bind the partnership in any contract within the scope of the partnership business.

28. Collins and Farina are forming a partnership. Collins is investing a building that has a market value of $80,000. However, the building carries a $56,000 mortgage that will be assumed by the partnership. Farina is investing $20,000 cash. The balance of Collins' Capital account will be:

A. $80,000.

B. $24,000.

C. $56,000.

D. $44,000.

E. $60,000.

29. An unincorporated association of two or more persons to carry on a business for profit as co-owners is a(n):

A. Partnership.

B. Proprietorship.

C. Contractual company.

D. Mutual agency.

E. Voluntary organization

30. A partnership has an unlimited life.
True
False