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Chapter 13Accounting for Partnerships and Limited Liability CorporationsCHAPTERR 13ACCOUNTTING FFOR PAARTNERRSHIPSS ANDLIMITEDD LIABBILITYY CORPPORATIIONS375Chapterr 13AAccounnting for PPartneershipps andd Limiited LLiabillity CCorporrationnsTRUE/FAALSE1.Theere arre onlly fouur leggal sttructuures tto forrm andd operrate aa busiiness.ANS:FDIF:1OBJ:012.In a genneral partnnershiip, eaach paartnerr is iindiviiduallly liaable tto creeditorrs forr debtts inccurredd by tthe paartnerrship, to tthe exxtent of thhe parrtners cappital balannce.ANS:FDIF:1OBJ:013.A ppartneershipp is aa legaal enttity sseparaate frrom itts ownners.ANS:FDIF:1OBJ:014.A ppartneershipp is ssubjecct to federral inncome taxess.ANS:FDIF:1OBJ:015.A ddisadvvantagge of partnnershiips iss the mutuaal ageency oof alll parttners.ANS:TDIF:1OBJ:016.Eacch parrtnersship mmust hhave aa writtten ppartneershipp agreeementt.ANS:TDIF:1OBJ:017.Eacch parrtner may wwithdrraw thhe asssets hhe or she ccontriibutedd to tthe paartnerrship at anny timme.ANS:FDIF:2OBJ:018.Wheen commparedd to aa corpporatiion, oone off the majorr disaadvanttages of thhe parrtnersship iis itss limiited llife.ANS:TDIF:1OBJ:019.Wheen commparedd to aa corpporatiion, oone off the majorr advaantagees of a parrtnersship iis itss easee of fformattion.ANS:TDIF:1OBJ:0110.Unnder aa Subcchapteer S CCorporrationn, thee IRS allowws inccome tto passs thrrough the ccorporrationn to tthe inndividdual sstockhholderrs witthout the ccorporrationn haviing too pay taxess on tthe inncome.ANS:TDIF:2OBJ:0111.A Limitted Liiabiliity Coorporaation is a businness eentityy formm thatt combbines the aadvanttages of thhe corrporattion aand thhe parrtnersship fforms.ANS:TDIF:1OBJ:0112.Foor taxx purpposes, a Liimitedd Liabbilityy Corpporatiion maay eleect too be ttreateed as a parrtnersship.ANS:TDIF:1OBJ:0113.Thhe Limmited Liabiility Corpooratioon mayy elecct to be maanagerr manaaged rratherr thann membber maanagedd whicch meaans thhat onnly auuthoriized mmemberrs mayy legaally bbind tthe coorporaation.ANS:TDIF:1OBJ:0114.Eaach paartnerr has a sepparatee capiital aand wiithdraawal aaccounnt.ANS:TDIF:1OBJ:0215.Thhe chaart off accoounts for aa parttnershhip, wwith tthe exxceptiion off drawwing aand caapitall accoounts, doess not diiffer from the cchart of acccountts forr a soole prroprieetorshhip.ANS:TDIF:1OBJ:0216.Whhen thhere aare siignifiicant changges inn stocckholdders eequityy, gennerallly, a retaiined eearninngs sttatemeent iss not suffiicientt, reqquirinng a sstatemment oof stoockhollders equiity too be ppreparred.ANS:TDIF:1OBJ:0217.Thhe equuity rreportting ffor a Limitted Liiabiliity Coorporaation is siimilarr to tthat oof a ppartneershipp but the cchangees in capittal arre shoown onn a sttatemeent off membbers equitty.ANS:TDIF:1OBJ:0218.Whhen a partnner innvestss nonccash aassetss in aa parttnershhip, tthe asssets are rrecordded att the partnners book valuee.ANS:FDIF:2OBJ:0319.Acccountts recceivabble coontribbuted to thhe parrtnersship aare reecordeed at theirr facee valuue.ANS:TDIF:1OBJ:0320.A new ppartneer conntribuutes aaccounnts reeceivaable tto a ppartneershipp whicch apppear iin thee ledgger off his sole proprrietorrship at $ 20,5000 andd therre wass an aallowaance ffor dooubtfuul acccountss of $ 750. If $600 of thhe acccountss receeivablles arre commpleteely woorthleess, tthe paartnerrship accouunts rreceivvable shoulld be debitted foor $199,900.ANS:TDIF:2OBJ:0321.Onne reaason tthat ddistriibutioons off incoome annd losss aree preppared is too obtaain thhe infformattion tto reccord aa clossing eentry.ANS:TDIF:1OBJ:0422.Iff nothhing iis staated, partnnershiip inccome iis divvided in prroporttion tto thee indiividuaal parrtners cappital balannce.ANS:FDIF:2OBJ:0423.Thhe sallary aallocaation to paartnerrs useed in dividding nnet inncome wouldd alsoo appeear ass salaary exxpensee on tthe paartnerrship incomme staatemennt.ANS:FDIF:2OBJ:0424.Iff the articcles oof parrtnersship pprovidde forr annuual saalary allowwancess of $36,0000 andd $18,000 tto X aand Y respeectiveely annd nett incoome iss $30,000, Xs sshare of neet inccome iis $200,000.ANS:FDIF:2OBJ:0425.Iff the net iincomee of aa parttnershhip iss lesss thann the totall of tthe alllowannces pprovidded byy the partnnershiip agrreemennt, thhe diffferennce muust bee diviided aamong the ppartneers inn the incomme-shaaring ratioo.ANS:FDIF:2OBJ:0426.Thhe amoount tthat aa parttner wwithdrraws aas a mmonthlly sallary aallowaance ddoes nnot afffect the ddivisiion off net incomme.ANS:TDIF:2OBJ:0427.A devottes fuull tiime annd B ddevotees onee-halff timee to ttheir partnnershiip. IIf thee parttnershhip aggreemeent iss sileent cooncernning tthe diivisioon of net iincomee, A wwill rreceivve a $20,0000 shaare off a neet inccome oof $300,000.ANS:FDIF:2OBJ:0428.Inn the distrributiion off incoome, tthe neet inccome iis lesss thaan thee salaary annd intterestt alloowancees graanted, the remaiining balannce wiill bee a neegativve amoount tthat mmust bbe divvided amongg the partnners aas thoough iit werre a lloss.ANS:TDIF:2OBJ:0429.Detailss of tthe diivisioon of partnnershiip inccome sshouldd normmally be diisclossed inn the finanncial stateementss.ANS:TDIF:2OBJ:0430.Whheneveer a ppartneershipp is ddissollved, the aassetss are liquiidatedd.ANS:FDIF:1OBJ:0531.Whhen a partnnershiip disssolvees, a new ppartneershipp is fformedd and a neww parttnershhip aggreemeent shhould be prrepareed.ANS:TDIF:1OBJ:0532.Maany paartnerrshipss provvide ffor thhe admmissioon of new ppartneers orr withhdrawaals off pressent ppartneers inn the partnnershiip agrreemennt so that the ffirm mmay coontinuue to operaate wiithoutt execcutingg a neew agrreemennt.ANS:TDIF:1OBJ:0533.A persoon mayy be aadmittted too a paartnerrship only with the cconsennt of all tthe cuurrentt parttners.ANS:TDIF:1OBJ:0534.Paartnerrships assset acccountts shoould bbe chaanged from cost to faair maarket valuee whenn a neew parrtner is addmitteed to a firrm or an exxistinng parrtner withddraws and ddies.ANS:TDIF:2OBJ:0535.Inn admiittingg a neew parrtner, the compaany chhoosess to uuse thhe purrchasee of aan intterestt methhod, tthe caapitall inteerest of thhe neww parttner iis obttainedd fromm the curreent paartnerrs andd bothh the totall asseets annd tottal caapitall are increeased.ANS:FDIF:2OBJ:0536.Whhen a new ppartneer purrchasees thee entiire innteresst of an olld parrtner, the new ppartneers ccapitaal acccount shoulld be crediited ffor thhe amoount hhe or she ppaid tto thee old partnner.ANS:FDIF:2OBJ:0537.Iff a neew parrtner is giiven aa 20% interrest iin thee firmm thenn the new ppartneer willl recceive a 20% inteerest in eaarninggs.ANS:FDIF:2OBJ:0538.Whhen a new ppartneer is admittted bby makking aan invvestmeent inn the partnnershiip, thhe oldd parttners capiital aaccounnts arre alwways ccreditted.ANS:FDIF:1OBJ:0539.Whhen a new ppartneer is admittted bby makking aan invvestmeent off asseets inn the partnnershiip andd the new ppartneer hass to ppay a premiium foor admmissioon, a bonuss is ddivideed amoong thhe oldd parttners capiital aaccounnts.ANS:TDIF:2OBJ:0540.Wiilliamms hass a caapitall balaance oof $422,000 afterr adjuustingg the assetts to fair markeet vallue. Mantlle conntribuutes $22,0000 to receiive a 30% iintereest inn the new ppartneershipp. Thee bonuus paiid by Mantlle is $2,8000.ANS:TDIF:2OBJ:0541.Whhen a partnner wiithdraaws frrom thhe parrtnersship, the ppartneershipp disssolvess.ANS:TDIF:1OBJ:0542.Iff not ennough partnnershiip cassh or otherr asseets arre avaailablle to pay tthe wiithdraawing partnner, aa liabbilityy may be crreatedd for the aamountt owedd the withddrawinng parrtner.ANS:TDIF:1OBJ:0543.Whhen a partnner wiithdraaws frrom thhe parrtnersship bby sellling his oor herr inteerest back to thhe parrtnersship, the rremainning ppartneers muust paay thee withhdrawiing paartnerr a sppecifiied ammount from theirr perssonal assetts.ANS:FDIF:2OBJ:0544.X sellss to AA one-half of a partnnershiip cappital interrest tthat ttotalss $70,000 ffor $440,0000. As cappital accouunt inn the partnnershiip shoould bbe creeditedd for $40,0000.ANS:FDIF:2OBJ:0545.Whhen a new ppartneer is admittted tto a ppartneershipp, alll parttnershhip asssets shoulld be revissed too refllect ccurrennt priices.ANS:TDIF:1OBJ:0546.Iff a neew parrtner is too be aadmittted too a paartnerrship and aa bonuus is attriibutedd to tthe olld parrtnersship, the bbonus shoulld be dividded beetweenn the capittal acccountts of the ooriginnal paartnerrs acccordinng to theirr capiital bbalancces.ANS:FDIF:2OBJ:0547.Iff retiiring partnner A sellss his or heer intterestt to BB, thee parttnershhip shhould recorrd thee asseets paaid too A inn its accouunts aat theeir boook vaalues.ANS:FDIF:2OBJ:0548.Whhen a new ppartneer is admittted tto a ppartneershipp, bonnuses attriibutabble too eithher thhe oldd parttnershhip orr to tthe inncominng parrtner may bbe reccognizzed inn accoordancce witth thee agreeementt amonng thee parttners.ANS:TDIF:1OBJ:0549.Diissoluution is thhe terrm whiich soolely meanss to lliquiddate tthe paartnerrship.ANS:FDIF:1OBJ:0650.Inn a paartnerrship liquiidatioon, gaains aand loosses on thhe salle of partnnershiip asssets aare diividedd amonng thee parttners capiital aaccounnts onn the basiss of ttheir capittal baalancees.ANS:FDIF:2OBJ:0651.Iff the sharee of llossess on rrealizzationn of tthe saale off nonccash aassetss exceeed thhe ballance in a partnners capittal acccountt, thee resuultingg balaance iis callled aa defiicienccy.ANS:TDIF:1OBJ:0652.Inn a paartnerrship liquiidatioon, iff a paartnerr has a debbit caapitall balaance iin hiss or hher caapitall accoount, he orr she is reesponssible for ccontriibutinng perrsonall asseets suufficiient tto eliiminatte thee defiicit.ANS:TDIF:2OBJ:0653.Thhe proocess of wiindingg up tthe afffairss of aa parttnershhip iss refeerred to ass reallizatiion.ANS:FDIF:1OBJ:0654.Thhe disstribuution of caash, aas thee finaal proocess in wiindingg up tthe afffairss of aa parttnershhip, iis bassed onn the incomme-shaaring ratioo.ANS:FDIF:2OBJ:0655.Iff a paartnerrs caapitall balaance iis a ddebit afterr it hhas abbsorbeed itss sharre of the lloss oon reaalizattion, the bbalancce is referrred tto as a defficienncy.ANS:TDIF:1OBJ:0656.Inn the liquiidatinng proocess, any uncolllecteed cassh beccomes a losss to the ppartneershipp and is diividedd amonng thee remaainingg parttners capiital bbalancces baased oon theeir inncome-shariing raatio.ANS:TDIF:2OBJ:0657.Affter aall nooncashh asseets haave beeen coonvertted too cashh and all lliabillitiess paidd, A, B, annd C hhave ccapitaal ballancess of $10,0000 (deebit), $5,0000 (ddebit), andd $25,000 (crediit). The ccash aavailaable ffor diistribbutionn to tthe paartnerrs is $10,0000.ANS:TDIF:2OBJ:0658.Affter aall nooncashh asseets haave beeen coonvertted too cashh and all lliabillitiess paidd, A, B, annd C hhave ccapitaal ballancess of $15,0000 (crredit), $100,000 (debiit), aand $330,0000 (creedit). Css sharre of the ccash tto be distrributeed is $30,0000.ANS:FDIF:2OBJ:0659.A ventuure caapitallist iis an indivviduall or ffirm tthat pproviddes crredit finanncing to thhe commpany.ANS:FDIF:1OBJ:0760.IPPO is an accronymm thatt stannds foor iniitial publiic offferinggANS:TDIF:1OBJ:0761.Unnderwrritingg firmms or invesstmentt bankkers hhelp aa comppany nnot onnly deetermiine thhe offferingg pricce forr it sstock, but also help markeet thee stocck to theirr clieents aand thhe pubblic.ANS:TDIF:1OBJ:07MULTIPLLE CHOOICE1.Whiich off the folloowing is chharactteristtic off a geenerall parttnershhip?a.The parrtnerss havee co-oownersship oof parrtnersship pproperrty.b.The parrtnersship iis subbject to feederall incoome taax.c.The parrtnersship hhas ann unliimitedd lifee.d.The parrtnerss havee limiited lliabillity.ANS:ADIF:1OBJ:012.Whiich off the folloowing is noot a ccharaccterisstic oof a ggeneraal parrtnersship?a.the parrtnersship iis creeated by a contrractb.mutual agenccyc.partnerrs shaare eqquallyy in nnet inncome or neet lossses uunlesss an aagreemment sstatess diffferenttlyd.dissoluution occurrs onlly wheen alll parttners agreeeANS:DDIF:1OBJ:013.Whiich off the folloowing is ann advaantagee of aa parttnershhip whhen coompareed to a corrporattion?a.The parrtnersship iis morre likkely hhave aa net incomme.b.The parrtnersship iis rellativeely innexpennsive to orrganizze.c.The parrtnersship iinvolvves feewer ppeoplee to ooperatte.d.The parrtnersship uusuallly hirres prrofesssionall manaagers.ANS:BDIF:1OBJ:014.Whiich off the folloowing is a disaddvantaage off a paartnerrship when compaared tto a ccorporrationn?a.The parrtnersship iis morre likkely tto havve a nnet looss.b.The parrtnersship iis eassier tto orgganizee.c.The parrtnersship iis lesss exppensivve to organnize.d.The parrtnersship hhas liimitedd lifee.ANS:DDIF:1OBJ:015.An advanntage of thhe parrtnersship fform oof bussinesss orgaanizattion iis a.unlimitted liiabiliityb.mutual agenccyc.ease off formmationnd.limitedd lifeeANS:CDIF:1OBJ:016.Thee charracterristicc of aa parttnershhip thhat giives tthe auuthoriity too any partnner too legaally bbind tthe paartnerrship and aall otther ppartneers too bussinesss conttractss is ccalledd a.unlimitted liiabiliityb.ease off formmationnc.mutual agenccyd.dissoluutionANS:CDIF:1OBJ:017.Wheen a llimiteed parrtnersship iis forrmed a.the parrtnersship aactiviities are llimiteedb.all parrtnerss havee limiited lliabillityc.some off the partnners hhave llimiteed liaabilittyd.none off the partnners hhave llimiteed liaabilittyANS:CDIF:1OBJ:018.Whiich off the folloowing beloww is nnot onne of the ffour mmajor formss of bbusineess enntitiees thaat aree disccussedd in tthis cchapteer?a.sole prroprieetorshhipb.corporaationc.partnerrshipd.subchappter ss corpporatiionANS:DDIF:1OBJ:019.Whiich off the folloowing beloww is not a chaaracteeristiic of a Limmited Liabiility Corpooratioon?a.limitedd lifeeb.limitedd liabbilityyc.file arrticlees of organnizatiion wiith thhe staate goovernmmentd.avoids mutuaal ageencyANS:DDIF:2OBJ:0110.Acccountting ffor thhe dayy-to-dday acctivitties ffor a partnnershiip or Limitted Liiabiliity Coorporaation is a.the samme as the aaccounnting for aany otther fform oof bussinesssb.the samme as the aaccounnting for aa solee propprietoorshipp onlyyc.is not the ssame aas thee accoountinng forr any otherr formm of bbusineessd.the samme as the aaccounnting for aa corpporatiion onnlyANS:ADIF:1OBJ:0211.Whhen a partnnershiip is formeed, asssets contrributeed by the ppartneers shhould be reecordeed on the ppartneershipp bookks at theirr a.book vaalues on thhe parrtnerss boooks prrior tto theeir beeing ccontriibutedd to tthe paartnerrshipb.fair maarket valuee at tthe tiime off the contrributiionc.originaal cossts too the partnner coontribbutingg themmd.assesseed vallues ffor prropertty purrposessANS:BDIF:2OBJ:0312.Ass partt of tthe innitiall inveestmennt, a partnner coontribbutes equippment that had ooriginnally cost $100,000 aand onn whicch acccumulaated ddeprecciatioon of $75,0000 haas beeen reccordedd. Iff simiilar eequipmment wwould cost $150,000 tto repplace and tthe paartnerrs agrree onn a vaaluatiion off $40,000 ffor thhe conntribuuted eequipmment, what amounnt shoould bbe debbited to thhe equuipmennt acccount?a.$40,0000b.$150,0000c.$100,0000d.$75,0000ANS:ADIF:2OBJ:0313.Ass partt of tthe innitiall inveestmennt, Osswald contrributees acccountss receeivablle thaat hadd a baalancee of $25,0000 in the aaccounnts off a soole prroprieetorshhip. Of thhis ammount, $1,2250 iss comppletelly worrthlesss. FFor thhe remmaininng acccountss, thee parttnershhip wiill esstabliish a proviision for ppossibble fuuture uncolllectiible aaccounnts off $7500. Thhe amoount ddebiteed to Accouunts RReceivvable for tthe neew parrtnersship iis a.$23,0000b.$25,0000c.$24,2500d.$23,7500ANS:DDIF:2OBJ:0314.Jaack annd Jilll shaare inncome and llossess in aa 2:1 ratioo afteer alllowingg for salarries tto Jacck of $24,0000 annd $300,000 to Jiill. NNet inncome for tthe paartnerrship is $448,0000. Inncome shoulld be dividded ass folllows: a.Jack, $24,0000; Jiill, $24,0000b.Jack, $21,0000; Jiill, $27,0000c.Jack, $32,0000; Jiill, $16,0000d.Jack, $20,0000; Jiill, $28,0000ANS:DDIF:2OBJ:0415.Frred annd Ethhel shhare iincomee equaally. Duriing thhe currrent year the ppartneershipp net incomme wass $40,000. Fredd madee withhdrawaals off $12,000 aand Etthel mmade wwithdrrawalss of $17,0000. AAt thee begiinningg of tthe yeear, tthe caapitall accoount bbalancces weere: FFred ccapitaal, $442,0000; Ethhel caapitall, $588,000. Freeds ccapitaal acccount balannce att the end oof thee yearr is a.$76,5000b.$64,5000c.$62,0000d.$50,0000ANS:DDIF:2REF:0416.Paartnerrship incomme andd lossses arre usuually dividded onn the basiss of iintereest, ssalariies, aand sttated ratioos beccause a.partnerrs selldom ccontriibute time and rresourrces eequalllyb.this meethod refleects tthe ammount of tiime deevotedd to tthe paartnerrship by thhe parrtnerssc.it is ssimpleer thaan folllowinng thee legaal rullesd.it prevvents argumments amongg the partnnersANS:ADIF:1OBJ:0417.A ratioo of 33:2:1 is thhe samme as a.30%:20%:10%b.1/2:1/33:1/6c.3/10:2/10:1/20d.both (aa) andd (c)ANS:BDIF:2OBJ:0418.C and DD formm a paartnerrship in whhich CC conttributtes $550,0000 in aassetss and agreees to devotte hallf timme to the ppartneershipp. D contrributeed $400,000 in asssets and aagreess to ddevotee fulll timee to tthe paartnerrship. Howw willl C annd D sshare in thhe divvisionn of iincomee?a.5:8b.1:2c.1:1d.5:4ANS:CDIF:2OBJ:0419.X and YY havee origginal invesstmentts of $50,0000 annd $1000,0000 resppectivvely iin a ppartneershipp. Thee artiicles of paartnerrship incluude thhe folllowinng proovisioons reegardiing thhe divvisionn of nnet inncome: inteerest on orriginaal invvestmeent att 10%, salaary alllowannces oof $277,000 and $18,0000 ress
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