Chapter 12-Accounting for PDF

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Chapter 12--Accounting for Partnerships and Limited Liability Companies Student: ___________________________________________________________________________ 1. There are only four legal structures to form and operate a business. True False

2. 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. True False

3. A partnership is a legal entity separate from its owners. True False

4. A partnership is subject to federal income taxes. True False

5. A disadvantage of partnerships is the mutual agency of all partners. True False

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

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

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

9. When compared to a corporation, one of the major advantages of a partnerships is its relative ease of formation. True False

10. 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. True False

11. A Limited Liability Company is a business entity form designed to overcome some of the disadvantages of the partnership form. True False

12. For tax purposes, a Limited Liability Company may elect to be treated as a partnership. True False

13. 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. True False

14. Each partner has a separate capital and withdrawal account. True False

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

16. 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. True False

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

18. Accounts receivable contributed to the partnership are recorded at their face value. True False

19. A new partner contributes accounts receivable to a partnership which appear 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 receivables are completely worthless, the partnership accounts receivable should be debited for $19,900. True False

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

21. If nothing is stated, partnership income is divided in proportion to the individual partner's capital balance. True False

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

23. 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. True False

24. 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. True False

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

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

27. 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. True False

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

29. Whenever a partnership is dissolved, the assets are liquidated. True False

30. When a partnership dissolves, a new partnership is formed and a new partnership agreement should be prepared. True False

31. 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. True False

32. A person may be admitted to a partnership only with the consent of all the current partners. True False

33. 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 and dies. True False

34. In admitting a new partner, where the company chooses to use the purchase of an interest method, the capital interest of the new partner is obtained from the current partners and both the total assets and total capital are increased. True False

35. 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. True False

36. If a new partner is given a 20% interest in the firm then the new partner will receive a 20% interest in earnings. True False

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

38. 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. True False

39. 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. True False

40. When a partner withdraws from the partnership, the partnership dissolves. True False

41. 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. True False

42. 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. True False

43. 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. True False

44. When a new partner is admitted to a partnership, all partnership assets should be revised to reflect current prices. True False

45. 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. True False

46. 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. True False

47. Dissolution is the term which solely means to liquidate the partnership. True False

48. 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. True False

49. 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. True False

50. 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. True False

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

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

53. 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. True False

54. 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. True False

55. 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. True False

56. The statement of members’ equity is used for equity reporting of a partnership. True False

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

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

59. Which of the following is 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.

60. Which of the following is not a characteristic of a general partnership? A. the partnership is created by a contract B. mutual agency C. partners share equally in net income or net losses unless an agreement states differently D. dissolution occurs only when all partners agree

61. 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.

62. 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.

63. An advantage of the partnership form of business organization is A. unlimited liability B. mutual agency C. ease of formation D. limited life

64. 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

65. When a limited partnership 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 have limited liability

66. Which of the following below 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

67. Which of the following below is not a characteristic of a Limited Liability Company? A. unlimited life B. limited legal liability C. taxable D. moderate ability to raise capital

68. The operating agreement for a Limited Liability Company is sometimes called: A. articles of organization B. articles of partnership C. Schedule C D. the Uniform Partnership Act

69. 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 purposes

70. As part of the initial investment, a partner 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 $38,000 for the contributed equipment, what amount should be debited to the equipment account? A. $38,000 B. $150,000 C. $125,000 D. $100,000

71. As part of the initial investment, Omar contributes accounts receivable that had a balance of $22,500 in the accounts of a sole proprietorship. Of this amount, $2,000 is 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. $19,000 B. $22,500 C. $21,000 D. $20,500

72. Radley and Smithers share income and losses in a 2:1 ratio after allowing for salaries to Radley of $48,000 and $60,000 to Smithers. Net income for the partnership is $96,000. Income should be divided as follows: A. Radley, $48,000; Smithers, $48,000 B. Radley, $56,000; Smithers, $40,000 C. Radley, $64,000; Smithers, $32,000 D. Radley, $40,000; Smithers, $56,000

73. Franco and Elisa share income equally. During the current year the partnership net income was $40,000. Franco made withdrawals of $12,000 and Elisa made withdrawals of $17,000. At the beginning of the year, the capital account balances were: Franco capital, $40,000; Elisa capital, $58,000. Franco’s capital account balance at the end of the year is A. $74,500 B. $62,500 C. $60,000 D. $48,000

74. Franco and Elisa share income equally. During the current year the partnership net income was $40,000. Franco made withdrawals of $12,000 and Elisa made withdrawals of $17,000. At the beginning of the year, the capital account balances were: Franco capital, $42,000; Elisa capital, $58,000. Elisa’s capital account balance at the end of the year is A. $81,000 B. $50,000 C. $61,000 D. $95,000

75. 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

76. A ratio of 3:2:1 is the same as A. 30%:20%:10% B. 3/6:2/6:1/6 C. 3/10:2/10:1/20 D. None of these

77. Compton and Danson form a partnership in which Compton contributes $70,000 in assets and agrees to devote half time to the partnership. Danson contributed $50,000 in assets and agrees to devote full time to the partnership. If no additional information is available, how will Compton and Danson share in the division of income? A. 5:7 B. 1:2 C. 1:1 D. 5:2

78. Xavier and Yolonda 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 15%, salary allowances of $22,000 and $20,000 respectively, and the remainder equally. How much of the net income of $90,000 is allocated to Xavier? A. $30,250 B. $47,750 C. $45,000 D. $42,250

79. Xavier and Yolonda 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 equally. How much of the net income of $40,000 is allocated to Xavier? A. $20,000 B. $22,000 C. $32,000 D. $0

80. Xavier and Yolonda 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 equally. How much of the net loss of $6,000 is allocated to Xavier? A. $4,000 B. $1,000 C. $3,000 D. $6,000

81. 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

82. Partner A has a capital balance of $40,000 and devotes full time to the partnership. Partner B has a capital balance of $50,000 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. 4:5 B. 1:1 C. 5:4 D. 1:2

83. Details of the division of net income for a partnership should be disclosed A. in the asset section of the balance sheet B. in the partners’ subsidiary ledger C. in the statement of cash flows D. in the partnership income statement

84. Pia and Ramona are partners who share income in the ratio of 3:2. Their capital balances are $90,000 and $130,000 respectively. Income Summary has a credit balance of $40,000. What is Pia’s capital balance after closing Income Summary to Capital? A. $70,000 B. $114,000 C. $110,000 D. $74,000

85. Pia and Ramona are partners who share income in the ratio of 3:2. Their capital balances are $90,000 and $130,000 respectively. Income Summary has a credit balance of $40,000. What is Ramona’s capital balance after closing Income Summary to Capital? A. $110,000 B. $146,000 C. $106,000 D. $150,000

86. Use the following information to answer the following questions. Izabelle and Marta are forming a partnership. Izabelle will invest a piece of equipment with a book value of $7,500 and a fair market value of $20,000. Marta will invest a building with a book value of $40,000 and a fair market value of $58,000. What amount will be recorded to the building account? A. $28,000 B. $18,000 C. $40,000 D. $58,000

87. Use the following information to answer the following questions. Izabelle and Marta are forming a partnership. Izabelle will invest a piece of equipment with a book value of $7,500 and a fair market value of $20,000. Marta will invest a building with a book value of $40,000 and a fair market value of $58,000. What amount will be recorded to Izabelle’s capital account? A. $20,000 B. $7,500 C. $27,500 D. $12,500

88. Use the following information to answer the following questions. Izabelle and Marta are forming a partnership. Izabelle will invest a piece of equipment with a book value of $7,500 and a fair market value of $20,000. Marta will invest a building with a book value of $40,000 and a fair market value of $58,000. What amount will be recorded to Marta’s capital account ? A. $18,000 B. $20,000 C. $40,000 D. $58,000

89. Robert Johnson contributed equipment, inventory, and $42,000 cash to the partnership. The equipment had a book value of $25,000 and market value of $28,000. The inventory has a book value of $50,000, but only had a market value of $15,000 due to obsolescence. The partnership also assumed a $12,000 note payable owed by Robert that was originally used to purchase the equipment. What amount should Robert’s capital account be recorded? A. $85,000 B. $73,000 C. $117,000 D. $105,000

90. Henry Jones contributed equipment, inventory, and $44,000 cash to the partnership. The equipment had a book value of $35,000 and market value of $28,000. The inventory has a book value of $25,000, but only had a ma...