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Chapter 13Accounting for Partnerships and Limited Liability CorporationsCHAPTER 13ACCOUNTING FOR PARTNERSHIPS ANDLIMITED LIABILITY CORPORATIONS341Chapter 13Accounting for Partnerships and Limited Liability CorporationsTRUE/FALSE1.There are only four legal structures to form and operate a business.ANS:FDIF:1OBJ:012.In a general partnership, each partner is individually liable to creditors for debts incurred by the partnership, to the extent of the partners capital balance.ANS:FDIF:1OBJ:013.A partnership is a legal entity separate from its owners.ANS:FDIF:1OBJ:014.A partnership is subject to federal income taxes.ANS:FDIF:1OBJ:015.A disadvantage of partnerships is the mutual agency of all partners.ANS:TDIF:1OBJ:016.Each partnership must have a written partnership agreement.ANS:TDIF:1OBJ:017.Each partner may withdraw the assets he or she contributed to the partnership at any time.ANS:FDIF:2OBJ:018.When compared to a corporation, one of the major disadvantages of the partnership is its limited life.ANS:TDIF:1OBJ:019.When compared to a corporation, one of the major advantages of a partnership is its ease of formation.ANS:TDIF:1OBJ:0110.Under a Subchapter S Corporation, the IRS allows income to pass through the corporation to the individual stockholders without the corporation having to pay taxes on the income.ANS:TDIF:2OBJ:0111.A Limited Liability Corporation is a business entity form that combines the advantages of the corporation and the partnership forms.ANS:TDIF:1OBJ:0112.For tax purposes, a Limited Liability Corporation may elect to be treated as a partnership.ANS:TDIF:1OBJ:0113.The Limited Liability Corporation may elect to be manager managed rather than member managed which means that only authorized members may legally bind the corporation.ANS:TDIF:1OBJ:0114.Each partner has a separate capital and withdrawal account.ANS:TDIF:1OBJ:0215.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.ANS:TDIF:1OBJ:0216.When there are significant changes in stockholders equity, generally, a retained earnings statement is not sufficient, requiring a statement of stockholders equity to be prepared.ANS:TDIF:1OBJ:0217.The equity reporting for a Limited Liability Corporation is similar to that of a partnership but the changes in capital are shown on a statement of members equity.ANS:TDIF:1OBJ:0218.When a partner invests noncash assets in a partnership, the assets are recorded at the partners book value.ANS:FDIF:2OBJ:0319.Accounts receivable contributed to the partnership are recorded at their face value.ANS:TDIF:1OBJ:0320.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.ANS:TDIF:2OBJ:0321.One reason that distributions of income and loss are prepared is to obtain the information to record a closing entry.ANS:TDIF:1OBJ:0422.If nothing is stated, partnership income is divided in proportion to the individual partners capital balance.ANS:FDIF:2OBJ:0423.The salary allocation to partners used in dividing net income would also appear as salary expense on the partnership income statement.ANS:FDIF:2OBJ:0424.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, Xs share of net income is $20,000.ANS:FDIF:2OBJ:0425.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.ANS:FDIF:2OBJ:0426.The amount that a partner withdraws as a monthly salary allowance does not affect the division of net income.ANS:TDIF:2OBJ:0427.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.ANS:FDIF:2OBJ:0428.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.ANS:TDIF:2OBJ:0429.Details of the division of partnership income should normally be disclosed in the financial statements.ANS:TDIF:2OBJ:0430.Whenever a partnership is dissolved, the assets are liquidated.ANS:FDIF:1OBJ:0531.When a partnership dissolves, a new partnership is formed and a new partnership agreement should be prepared.ANS:TDIF:1OBJ:0532.Many partnerships provide for the admission of new partners or withdrawals of present partners in the partnership agreement so that the firm may continue to operate without executing a new agreement.ANS:TDIF:1OBJ:0533.A person may be admitted to a partnership only with the consent of all the current partners.ANS:TDIF:1OBJ:0534.Partnerships 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.ANS:TDIF:2OBJ:0535.In admitting a new partner, 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.ANS:FDIF:2OBJ:0536.When a new partner purchases the entire interest of an old partner, the new partners capital account should be credited for the amount he or she paid to the old partner.ANS:FDIF:2OBJ:0537.If a new partner is given a 20% interest in the firm then the new partner will receive a 20% interest in earnings.ANS:FDIF:2OBJ:0538.When a new partner is admitted by making an investment in the partnership, the old partners capital accounts are always credited.ANS:FDIF:1OBJ:0539.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.ANS:TDIF:2OBJ:0540.Williams has a capital balance of $42,000 after adjusting the assets to fair market value. Mantle contributes $22,000 to receive a 30% interest in the new partnership. The bonus paid by Mantle is $2,800.ANS:TDIF:2OBJ:0541.When a partner withdraws from the partnership, the partnership dissolves.ANS:TDIF:1OBJ:0542.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.ANS:TDIF:1OBJ:0543.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.ANS:FDIF:2OBJ:0544.X sells to A one-half of a partnership capital interest that totals $70,000 for $40,000. As capital account in the partnership should be credited for $40,000.ANS:FDIF:2OBJ:0545.When a new partner is admitted to a partnership, all partnership assets should be revised to reflect current prices.ANS:TDIF:1OBJ:0546.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.ANS:FDIF:2OBJ:0547.If retiring partner A sells his or her interest to B, the partnership should record the assets paid to A in its accounts at their book values.ANS:FDIF:2OBJ:0548.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.ANS:TDIF:1OBJ:0549.Dissolution is the term which solely means to liquidate the partnership.ANS:FDIF:1OBJ:0650.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.ANS:FDIF:2OBJ:0651.If the share of losses on realization of the sale of noncash assets exceed the balance in a partners capital account, the resulting balance is called a deficiency.ANS:TDIF:1OBJ:0652.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.ANS:TDIF:2OBJ:0653.The process of winding up the affairs of a partnership is referred to as realization.ANS:FDIF:1OBJ:0654.The distribution of cash, as the final process in winding up the affairs of a partnership, is based on the income-sharing ratio.ANS:FDIF:2OBJ:0655.If a partners capital balance is a debit after it has absorbed its share of the loss on realization, the balance is referred to as a deficiency.ANS:TDIF:1OBJ:0656.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.ANS:TDIF:2OBJ:0657.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.ANS:TDIF:2OBJ:0658.After all noncash assets have been converted to cash and all liabilities paid, A, B, and C have capital balances of $15,000 (credit), $10,000 (debit), and $30,000 (credit). Cs share of the cash to be distributed is $30,000.ANS:FDIF:2OBJ:0659.A venture capitalist is an individual or firm that provides credit financing to the company.ANS:FDIF:1OBJ:0760.IPO is an acronym that stands for initial public offeringANS:TDIF:1OBJ:0761.Underwriting firms or investment bankers help a company not only determine the offering price for it stock, but also help market the stock to their clients and the public.ANS:TDIF:1OBJ:07MULTIPLE CHOICE1.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.ANS:ADIF:1OBJ:012.Which of the following is not a characteristic of a general partnership?a.the partnership is created by a contractb.mutual agencyc.partners share equally in net income or net losses unless an agreement states differentlyd.dissolution occurs only when all partners agreeANS:DDIF:1OBJ:013.Which of the following is an advantage of a partnership when compared to a corporation?a.The partnership is more likely have a net income.b.The partnership is relatively inexpensive to organize.c.The partnership involves fewer people to operate.d.The partnership usually hires professional managers.ANS:BDIF:1OBJ:014.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.ANS:DDIF:1OBJ:015.An advantage of the partnership form of business organization is a.unlimited liabilityb.mutual agencyc.ease of formationd.limited lifeANS:CDIF:1OBJ:016.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 liabilityb.ease of formationc.mutual agencyd.dissolutionANS:CDIF:1OBJ:017.When a limited partnership is formed a.the partnership activities are limitedb.all partners have limited liabilityc.some of the partners have limited liabilityd.none of the partners have limited liabilityANS:CDIF:1OBJ:018.Which of the following below is not one of the four major forms of business entities that are discussed in this chapter?a.sole proprietorshipb.corporationc.partnershipd.subchapter s corporationANS:DDIF:1OBJ:019.Which of the following below is not a characteristic of a Limited Liability Corporation?a.limited lifeb.limited liabilityc.file articles of organization with the state governmentd.avoids mutual agencyANS:DDIF:2OBJ:0110.Accounting for the day-to-day activities for a partnership or Limited Liability Corporation is a.the same as the accounting for any other form of businessb.the same as the accounting for a sole proprietorship onlyc.is not the same as the accounting for any other form of businessd.the same as the accounting for a corporation onlyANS:ADIF:1OBJ:0211.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 partnershipb.fair market value at the time of the contributionc.original costs to the partner contributing themd.assessed values for property purposesANS:BDIF:2OBJ:0312.As part of the initial investment, a partner contributes equipment that had originally cost $100,000 and on which accumulated depreciation of $75,000 has been recorded. If similar equipment would cost $150,000 to replace and the partners agree on a valuation of $40,000 for the contributed equipment, what amount should be debited to the equipment account?a.$40,000b.$150,000c.$100,000d.$75,000ANS:ADIF:2OBJ:0313.As part of the initial investment, Oswald contributes accounts receivable that had a balance of $25,000 in the accounts of a sole proprietorship. Of this amount, $1,250 is completely worthless. For the remaining accounts, the partnership will establish a provision for possible future uncollectible accounts of $750. The amount debited to Accounts Receivable for the new partnership is a.$23,000b.$25,000c.$24,250d.$23,750ANS:DDIF:2OBJ:0314.Jack and Jill share income and losses in a 2:1 ratio after allowing for salaries to Jack of $24,000 and $30,000 to Jill. Net income for the partnership is $48,000. Income should be divided as follows: a.Jack, $24,000; Jill, $24,000b.Jack, $21,000; Jill, $27,000c.Jack, $32,000; Jill, $16,000d.Jack, $20,000; Jill, $28,000ANS:DDIF:2OBJ:0415.Fred and Ethel share income equally. During the current year the partnership net income was $40,000. Fred made withdrawals of $12,000 and Ethel made withdrawals of $17,000. At the beginning of the year, the capital account balances were: Fred capital, $42,000; Ethel capital, $58,000. Freds capital account balance at the end of the year is a.$76,500b.$64,500c.$62,000d.$50,000ANS:DDIF:2REF:0416.Partnership income and losses are usually divided on the basis of interest, salaries, and stated ratios because a.partners seldom contribute time and resources equallyb.this method reflects the amount of time devoted to the partnership by the partnersc.it is simpler than following the legal rulesd.it prevents arguments among the partnersANS:ADIF:1OBJ:0417.A ratio of 3:2:1 is the same as a.30%:20%:10%b.1/2:1/3:1/6c.3/10:2/10:1/20d.both (a) and (c)ANS:BDIF:2OBJ:0418.C and D form a partnership in which C contributes $50,000 in assets and agrees to devote half time to the partnership. D contributed $40,000 in assets and agrees to devote full time to the partnership. How will C and D share in the division of income?a.5:8b.1:2c.1:1d.5:4ANS:CDIF:2OBJ:0419.X and Y 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 $90,000 is allocated to X?a.$60,000b.$43,000c.$45,000d.$47,000ANS:DDIF:3OBJ:0420.X and Y 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 $50,000 is allocated to X?a.$33,333b.$23,000c.$25,000d.$27,000ANS:DDIF:3OBJ:0421.X and Y 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 $10,000 is allocated to X?a.$10,000b.$3,000c.$5,000d.$7,000ANS:CDIF:3OBJ:0422.The articles of partnership for A B Partnership provide for a salary allowance of $5,000 per month for partner B, with the balance of net income to be divided equally. If B made an additional investment of $10,000 during the year and withdrew $4,000 per month, and net income for the year was $90,000, by what amount did Bs capital increase during the year?a.$85,000b.$10,000c.$37,000d.$60,000ANS:CDIF:3OBJ:0423.If there is no written agreement as to the way income will be divided among partners a.they will share income and losses equallyb.they will share income and losses according to their capital balancesc.they will share income and losses according to the time devoted to the business.d.there really is no partnership agreementANS:ADIF:1OBJ:0424.Partner A has a capital balance of $20,000 and devotes full time to the partnership. Partner B has a capital balance of $30,000 and devotes half time to the partnership. In what ratio is net income to be divided?a.3:5b.1:1c.2:3d.1:2ANS:BDIF:2OBJ:0425.Details of the division of net income for a partnership should be disclosed a.in the asset section of the balance sheetb.in the partners subsidiary ledgerc.in the statement of cash flowsd.in the income statementANS:DDIF:2OBJ:0426.Deng and Dang are partners who share income in the ratio of 3:2. Their capital balances are $40,000 and $60,000 respectively. Income Summary has a credit balance of $20,000. What is Dengs capital balance after closing Income Summary to Capital?a.$30,000b.$52,000c.$28,000d.$32,000ANS:BDIF:2OBJ:0427.
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