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Business LibreTexts

15.8: Practice Questions

  • Page ID
    10110
  • Multiple Choice

    1.

    LO 15.1A partnership ________.

    1. has one owner
    2. can issue stock
    3. pays taxes on partnership income
    4. can have more than one general partner
    2.

    LO 15.1Any assets invested by a particular partner in a partnership ________.

    1. do not become a partnership asset but instead remain with the partner
    2. can be used only by the investing partner
    3. become the property of all the partners
    4. are the basis for all profit sharing
    3.

    LO 15.1Which of the following is a disadvantage of the partnership form of organization?

    1. limited life
    2. no taxation at the partnership level
    3. flexibility in business operations
    4. combining of financial resources
    4.

    LO 15.1Mutual agency is defined as:

    1. a mutual agreement
    2. the right of all partners to represent the company’s normal business operations
    3. a synonym for partnership
    4. a partnership between two partnerships
    5.

    LO 15.2Chani contributes equipment to a partnership that she purchased 2 years ago for $10,000. The current book value is $7,500 and the market value is $9,000. At what value should the partnership record the equipment?

    1. $10,000
    2. $9,000
    3. $7,500
    4. none of the above
    6.

    LO 15.2Juan contributes marketable securities to a partnership. The book value of the securities is $7,000 and they have a current market value of $10,000. What amount should the partnership record in Juan’s Capital account due to this contribution?

    1. $10,000
    2. $7,000
    3. $3,000
    4. none of the above
    7.

    LO 15.2Which one of the following would not be considered in the development of a partnership agreement?

    1. profit and loss levels
    2. processing disputes
    3. stock options
    4. asset contributions
    8.

    LO 15.3A well written partnership agreement should include each of the following except ________.

    1. how to settle disputes
    2. the name of the partnership
    3. division of responsibilities
    4. Partner’s individual tax rate
    9.

    LO 15.3What type of assets may a partner not contribute to a partnership?

    1. accounts receivable
    2. furniture
    3. equipment
    4. personal credit cards
    10.

    LO 15.3How does a newly formed partnership handle the contribution of previously depreciated assets?

    1. continues the depreciation life as if the owner had not changed
    2. starts over, using the contributed value as the new cost basis
    3. shortens the useful life of the asset per the partnership agreement
    4. does not depreciate the contributed asset
    11.

    LO 15.4Thandie and Marco are partners with capital balances of $60,000. They share profits and losses at 50% each. Chris contributes $30,000 to the partnership for a 1/3 share. What amount should the partnership record as a bonus to Chris?

    1. $20,000
    2. $15,000
    3. $10.500
    4. $5,000
    12.

    LO 15.4Thandie and Marco are partners with capital balances of $60,000. They share profits and losses at 50%. Chris contributes $30,000 to the partnership for a 1/3 share. What amount should Thandie’s capital balance in the partnership be?

    1. $60,000
    2. $50,000
    3. $45,000
    4. $30,000
    13.

    LO 15.4Thandie and Marco are partners with capital balances of $60,000. They share profits and losses at 50%. Chris contributes $90,000 to the partnership for a 1/3 share. What amount should the partnership record as an individual bonus to each of the old partners?

    1. $10,000
    2. $7,000
    3. $3,000
    4. $20,000
    14.

    LO 15.4Thandie and Marco are partners with capital balances of $60,000. They share profits and losses at 50%. Chris contributes $60,000 to the partnership for a 1/3 share. What amount should the partnership record as an individual bonus to each of the old partners?

    1. $10,000
    2. $7,000
    3. $0
    4. $5,000
    15.

    LO 15.5When a partnership dissolves, the first step in the dissolution process is to ________.

    1. allocate the gain or loss on sale based on income sharing ratio
    2. pay off liabilities
    3. sell noncash assets
    4. divide the remaining cash among the partners
    16.

    LO 15.5When a partnership dissolves, the last step in the dissolution process is to ________.

    1. allocate the gain or loss on sale based on income sharing ratio
    2. pay off liabilities
    3. sell noncash assets
    4. divide the remaining cash among the partners
    17.

    LO 15.5Prior to proceeding with the liquidation, the partnership should ________.

    1. prepare adjusting entries without closing
    2. complete the accounting cycle for final operational period
    3. prepare only closing entries
    4. complete financial statements only

    Questions

    1.

    LO 15.1Does a partnership pay income tax?

    2.

    LO 15.1Can a partner’s personal assets in a limited liability partnership be at risk?

    3.

    LO 15.2Can a partnership assume liabilities as part of one of the partner’s contributions?

    4.

    LO 15.2Does each partner have to contribute an equal amount of assets in order to split profit and losses?

    5.

    LO 15.3What types of bases for dividing partnership net income or net loss are available?

    6.

    LO 15.3Angela and Agatha are partners in Double A Partners. When they withdraw cash for personal use, how should that be recorded in the accounting records?

    7.

    LO 15.3On February 3, 2016 Sam Singh invested $90,000 cash for a 1/3 interest in a newly formed partnership. Prepare the journal entry to record the transaction.

    8.

    LO 15.5Why do partnerships dissolve?

    9.

    LO 15.5What are the four steps involved in liquidating a partnership?

    10.

    LO 15.5When a partner withdraws from the firm, which accounts are affected?

    11.

    LO 15.5What is the first step in a partnership liquidation (termination and sale of assets)?

    12.

    LO 15.5When a partnership liquidates, do partners get paid first or do creditors get paid first?

    13.

    LO 15.5Coffee Partners decides to close due to the increased competition from the national chains. If after liquidating the noncash assets there is not enough cash to cover accounts payable, what happens?

    Exercise Set A

    EA1.

    LO 15.2On May 1, 2017, BJ and Paige formed a partnership. Each contributed assets with the following agreed-upon valuations.

    BJ contributes Cash of $80,000 and Equipment of 50,000. Paige contributes Cash of $20,000, Equipment of 60,000, Building of 240,000, and Loan payable of 100,000.

    Prepare a separate journal entry to record each partner’s contributions.

    EA2.

    LO 15.3The partnership of Chase and Chloe shares profits and losses in a 70:30 ratio respectively after Chloe receives a $10,000 salary. Prepare a schedule showing how the profit and loss should be divided, assuming the profit or loss for the year is:

    1. $ 30,000
    2. $ 6,000
    3. ($10,000)
    EA3.

    LO 15.4The partnership of Tasha and Bill shares profits and losses in a 50:50 ratio, and the partners have capital balances of $45,000 each. Prepare a schedule showing how the bonus should be divided if Ashanti joins the partnership with a $60,000 investment. The partner’s new agreement will share profit and loss in a 1:3 ratio.

    EA4.

    LO 15.5Cheese Partners has decided to close the store. At the date of closing, Cheese Partners had the following account balances:

    Capital $9,000; Cash $6,000; Inventory $15,000; Store fixtures $10,000; Accounts payable $22,000.

    A competitor agrees to buy the inventory and store fixtures for $20,000. Prepare the journal entries detailing the liquidation, assuming that partners Colette and Swarma are sharing profits on a 50:50 basis:

    Exercise Set B

    EB1.

    LO 15.4The partnership of Michelle, Amal, and Maureen has done well. The three partners have shared profits and losses in a 1:3 ratio, with capital balances of $60,000 each. Maureen wants to retire and withdraw. Prepare a schedule showing how the cost should be divided if Amal and Michelle decide to pay Maureen $70,000 for retirement of her capital account and the new agreement will share profits and losses 50:50.

    Problem Set A

    PA1.

    LO 15.3The partnership of Tatum and Brook shares profits and losses in a 60:40 ratio respectively after Tatum receives a 10,000 salary and Brook receives a 15,000 salary. Prepare a schedule showing how the profit and loss should be divided, assuming the profit or loss for the year is:

    1. $40,000
    2. $25,000
    3. ($5,000)

    In addition, show the resulting entries to each partner’s capital account. Tatum’s capital account balance is $50,000 and Brook’s is $60,000.

    PA2.

    LO 15.4Arun and Margot want to admit Tammy as a third partner for their partnership. Their capital balances prior to Tammy’s admission are $50,000 each. Prepare a schedule showing how the bonus should be divided among the three, assuming the profit or loss agreement will be 1:3 once Tammy has been admitted and her contribution is:

    1. $20,000
    2. $80,000
    3. $50,000.

    In addition, show the resulting journal entries to each of the three partners’ capital accounts.

    PA3.

    LO 15.5When a partnership is liquidated, any gains or losses realized by the sale of noncash assets are allocated to the partners based on their income sharing ratio. Why?

    Problem Set B

    PB1.

    LO 15.3The partnership of Magda and Sue shares profits and losses in a 50:50 ratio after Mary receives a $7,000 salary and Sue receives a $6,500 salary. Prepare a schedule showing how the profit and loss should be divided, assuming the profit or loss for the year is:

    1. $10,000
    2. $5,000
    3. ($12,000)

    In addition, show the resulting entries to each partner’s capital account.

    PB2.

    LO 15.4The partnership of Arun, Margot, and Tammy has been doing well. Arun wants to retire and move to another state for a once-in-a-lifetime opportunity. The partners’ capital balances prior to Arun’s retirement are $60,000 each. Prepare a schedule showing how Arun’s withdrawal should be divided assuming his buyout is:

    1. $70,000
    2. $45,000
    3. $60,000.

    In addition, show the resulting entries to the capital accounts of each of the three.

    PB3.

    LO 15.5Match each of the following descriptions with the appropriate term related to partnership accounting.

    A. Each and every partner can enter into contracts on behalf of the partnership i. liquidation
    B. The business ceases operations. ii. capital deficiency
    C. How partners share in income and loss iii. admission of a new partner
    D. Adding a new partner by contributing cash iv. mutual agency
    E. A partner account with a debit balance v. income sharing ratio

    Thought Provokers

    TP1.

    LO 15.1While sole proprietorships and corporations are the most popular forms of business organization, the limited liability company (LLC) is a close third. Limited liability companies are treated like partnerships in the majority of situations. Why do you think LLCs are gaining in popularity?

    TP2.

    LO 15.5A partnership is thriving. The three partners get along well; they complement each other’s skill sets and enjoy each other’s company. One of the partners, Melinda, begins to behave differently. She begins coming to work late or not at all. On several occasions she is spotted leaving the hotel next door in the afternoon. The other partners are concerned about the change in her behavior. They confront her and Melinda denies that anything is different. She points out that her work is still getting done and that she wants a little more flexibility in her hours. The other partners are not convinced and decide to terminate the partnership agreement. Can the other partners break the agreement? What considerations must the partners take into account?