CHAPTER 12

ACCOUNTING FOR PARTNERSHIPS

CHAPTER STUDY OBJECTIVES

1. Describe the characteristics of the partnership form of business organization. The main characteristics of a partnership are (1) the association of individuals, (2) mutual agency, (3) co-ownership of property, (4) limited life, and (5) unlimited liability for a general partnership.

2. Account for the formation of a partnership. When a partnership is formed, each partner’s initial investment should be recorded at the assets’ fair value at the date of their transfer to the partnership. If accounts receivable are contributed, both the gross amount and an allowance for doubtful accounts should be recorded. Accumulated depreciation is not carried forward into a partnership.

3. Allocate and record profit or loss to partners. Profit or loss is divided based on the profit and loss ratio, which may be any of the following: (1) a fixed ratio; (2) a ratio based on beginning, ending, or average capital balances; or (3) salary and interest allowances and the remainder in a fixed ratio.

4. Prepare partnership financial statements. The financial statements of a partnership are similar to those of a proprietorship. The main differences are that (1) the statement of owners’ equity is called the statement of partners’ equity, and (2) each partner’s capital account is usually reported on the balance sheet or in a supporting schedule.

5. Account for the admission of a partner. The entry to record the admission of a new partner by purchase of a partner’s interest affects only partners’ capital accounts. The entry to record the admission by investment of assets in the partnership (1) increases both net assets and total capital, and (2) may result in the recognition of a bonus to either the old partners or the new partner.

6. Account for the withdrawal of a partner. The entry to record a withdrawal from the firm when payment is made from partners’ personal assets affects only partners’ capital accounts. The entry to record a withdrawal when payment is made from partnership assets (1) decreases net assets and total capital, and (2) may result in recognizing a bonus to either the departing partner or the remaining partners.

7. Account for the liquidation of a partnership. When a partnership is liquidated, it is necessary to record (1) the sale of noncash assets, (2) the allocation of the gain or loss on realization based on the profit and loss ratio, (3) the payment of partnership liabilities, (4) the removal of any capital deficiency either by repayment or by allocation to the other partners, and (5) the distribution of cash to the partners based on their capital balances.

TRUE-FALSE STATEMENTS

1. All provinces in Canada have a Partnership Act that sets out the basic rules for the forming and operating of partnerships.

Difficulty: Easy

Learning Objective: Describe the characteristics of the partnership form of business organization.

Section Reference: Partnership Form of Organization

CPA: Financial Reporting

AACSB: Analytic

2. A partnership is a relationship between people who do business with the intention of making a profit.

Difficulty: Easy

Learning Objective: Describe the characteristics of the partnership form of business organization.

Section Reference: Partnership Form of Organization

CPA: Financial Reporting

AACSB: Analytic

3. A partnership must make a profit.

Difficulty: Easy

Learning Objective: Describe the characteristics of the partnership form of business organization.

Section Reference: Partnership Form of Organization

CPA: Financial Reporting

AACSB: Analytic

4. A partnership may be based on a handshake.

Difficulty: Easy

Learning Objective: Describe the characteristics of the partnership form of business organization.

Section Reference: Partnership Form of Organization

CPA: Financial Reporting

AACSB: Analytic

5. A partnership must have a legal written agreement.

Difficulty: Easy

Learning Objective: Describe the characteristics of the partnership form of business organization.

Section Reference: Partnership Form of Organization

CPA: Financial Reporting

AACSB: Analytic

6. A partnership is not an accounting entity for financial reporting purposes.

Difficulty: Easy

Learning Objective: Describe the characteristics of the partnership form of business organization.

Section Reference: Partnership Form of Organization

CPA: Financial Reporting

AACSB: Analytic

7. Two proprietorships cannot combine and form a partnership.

Difficulty: Medium

Learning Objective: Describe the characteristics of the partnership form of business organization.

Section Reference: Partnership Form of Organization

CPA: Financial Reporting

AACSB: Analytic

8. A partnership is taxed as a single legal entity.

Difficulty: Easy

Learning Objective: Describe the characteristics of the partnership form of business organization.

Section Reference: Partnership Form of Organization

CPA: Financial Reporting

AACSB: Analytic

9. In a limited liability partnership, all the partners have limited liability for the debts of the partnership.

Difficulty: Easy

Learning Objective: Describe the characteristics of the partnership form of business organization.

Section Reference: Partnership Form of Organization

CPA: Financial Reporting

AACSB: Analytic

10. A partner pays income tax on the amount of money he or she withdrew from the partnership during the year.

Difficulty: Easy

Learning Objective: Describe the characteristics of the partnership form of business organization.

Section Reference: Partnership Form of Organization

CPA: Financial Reporting

AACSB: Analytic

11. A partnership has unlimited life.

Difficulty: Easy

Learning Objective: Describe the characteristics of the partnership form of business organization.

Section Reference: Partnership Form of Organization

CPA: Financial Reporting

AACSB: Analytic

12. Mutual agency means that each partner acts for the partnership when he or she does partnership business.

Difficulty: Easy

Learning Objective: Describe the characteristics of the partnership form of business organization.

Section Reference: Partnership Form of Organization

CPA: Financial Reporting

AACSB: Analytic

13. When a partner exceeds his or her authority and the act looks appropriate for the partnership, the act is not binding on the other partners and the partnership.

Difficulty: Easy

Learning Objective: Describe the characteristics of the partnership form of business organization.

Section Reference: Partnership Form of Organization

CPA: Financial Reporting

AACSB: Analytic

14. Each partner is jointly and severally liable for only their portion of the partnership liabilities.

Difficulty: Easy

Learning Objective: Describe the characteristics of the partnership form of business organization.

Section Reference: Partnership Form of Organization

CPA: Financial Reporting

AACSB: Analytic

15. In a limited partnership, the amount of debt that a partner is liable for is the amount of capital that they have contributed to the partnership.

Difficulty: Easy

Learning Objective: Describe the characteristics of the partnership form of business organization.

Section Reference: Partnership Form of Organization

CPA: Financial Reporting

AACSB: Analytic

16. Because of the unlimited liability of partners in a partnership, it is easier for a partnership to gain large amounts of investment capital.

Difficulty: Easy

Learning Objective: Describe the characteristics of the partnership form of business organization.

Section Reference: Partnership Form of Organization

CPA: Financial Reporting

AACSB: Analytic

17. A partnership is more difficult to form than a corporation.

Difficulty: Easy

Learning Objective: Describe the characteristics of the partnership form of business organization.

Section Reference: Partnership Form of Organization

CPA: Financial Reporting

AACSB: Analytic

18. A corporation is subject to less government restrictions than a partnership.

Difficulty: Easy

Learning Objective: Describe the characteristics of the partnership form of business organization.

Section Reference: Partnership Form of Organization

CPA: Financial Reporting

AACSB: Analytic

19. When assets are rolled into a partnership, the value that they are allocated in the partnership is the same as the value in the previous entity.

Difficulty: Easy

Learning Objective: Account for the formation of a partnership.

Section Reference: Forming a Partnership

CPA: Financial Reporting

AACSB: Analytic

20. When a long-lived asset is contributed to a partnership by a partner, the entry will record the fair value of the asset and the accumulated depreciation that has accumulated on it.

Difficulty: Easy

Learning Objective: Account for the formation of a partnership.

Section Reference: Forming a Partnership

CPA: Financial Reporting

AACSB: Analytic

21. When accounts receivable are contributed to a partnership, they are valued at their expected realizable value.

Difficulty: Easy

Learning Objective: Account for the formation of a partnership.

Section Reference: Forming a Partnership

CPA: Financial Reporting

AACSB: Analytic

22. The investment of an asset into a partnership should be recorded at the higher value of the asset’s original cost or the asset’s fair value.

Difficulty: Easy

Learning Objective: Account for the formation of a partnership.

Section Reference: Forming a Partnership

CPA: Financial Reporting

AACSB: Analytic

23. Partnership profit or loss must be divided equally in a partnership.

Difficulty: Easy

Learning Objective: Allocate and record profit or loss to partners.

Section Reference: Dividing Partnership Profit or Loss

CPA: Financial Reporting

AACSB: Analytic

24. Partnership profit or loss must be divided according to the formulas that are outlined in the partnership agreement.

Difficulty: Easy

Learning Objective: Allocate and record profit or loss to partners.

Section Reference: Dividing Partnership Profit or Loss

CPA: Financial Reporting

AACSB: Analytic

25. A profit allocation in a partnership may be allocated in a different ratio than a loss allocation.

Difficulty: Easy

Learning Objective: Allocate and record profit or loss to partners.

Section Reference: Dividing Partnership Profit or Loss

CPA: Financial Reporting

AACSB: Analytic

26. When profit is allocated in a 2:1 ratio, it means that one partner will get 2/3 of the profit.

Difficulty: Easy

Learning Objective: Allocate and record profit or loss to partners.

Section Reference: Dividing Partnership Profit or Loss

CPA: Financial Reporting

AACSB: Analytic

27. When profit is allocated in a 3:2:1 ratio, it means that one partner will get 50% of the profit.

Difficulty: Easy

Learning Objective: Allocate and record profit or loss to partners.

Section Reference: Dividing Partnership Profit or Loss

CPA: Financial Reporting

AACSB: Analytic

28. Partners are never allocated a salary in a partnership.

Difficulty: Easy

Learning Objective: Allocate and record profit or loss to partners.

Section Reference: Dividing Partnership Profit or Loss

CPA: Financial Reporting

AACSB: Analytic

29. A partner may receive interest on their partnership account.

Difficulty: Easy

Learning Objective: Allocate and record profit or loss to partners.

Section Reference: Dividing Partnership Profit or Loss

CPA: Financial Reporting

AACSB: Analytic

30. Salaries to partners and interest on partner’s capital balances are expenses of the partnership.

Difficulty: Easy

Learning Objective: Allocate and record profit or loss to partners.

Section Reference: Dividing Partnership Profit or Loss

CPA: Financial Reporting

AACSB: Analytic

31. Partnership profit/loss allocation is determined in accordance with the partnership agreement.

Difficulty: Easy

Learning Objective: Allocate and record profit or loss to partners.

Section Reference: Dividing Partnership Profit or Loss

CPA: Financial Reporting

AACSB: Analytic

32. On the financial statement of a partnership, a separate statement of the division of partnership profit or loss is prepared.

Difficulty: Easy

Learning Objective: Prepare partnership financial statements.

Section Reference: Partnership Financial Statements

CPA: Financial Reporting

AACSB: Analytic

33. A detailed listing of all the assets invested by a partner in a partnership appears on the Statement of Partners' Equity.

Difficulty: Easy

Learning Objective: Prepare partnership financial statements.

Section Reference: Partnership Financial Statements

CPA: Financial Reporting

AACSB: Analytic

34. The balance sheet for a partnership is the same as for a proprietorship.

Difficulty: Easy

Learning Objective: Prepare partnership financial statements.

Section Reference: Partnership Financial Statements

CPA: Financial Reporting

AACSB: Analytic

35. If a new partner is purchasing the interests of an existing partner, the purchase price passes directly from the new partner to the old partner and does not flow through the partnership.

Difficulty: Easy

Learning Objective: Account for the admission of a partner.

Section Reference: Admission of a Partner

CPA: Financial Reporting

AACSB: Analytic

36. The admission of a new partner may result in a bonus to the existing partners.

Difficulty: Easy

Learning Objective: Account for the admission of a partner.

Section Reference: Admission of a Partner

CPA: Financial Reporting

AACSB: Analytic

37. The admission of a new partner may result in a bonus to the new partner from the existing partners.

Difficulty: Easy

Learning Objective: Account for the admission of a partner.

Section Reference: Admission of a Partner

CPA: Financial Reporting

AACSB: Analytic

38. A withdrawal of a partner may result in a payment from remaining partners’ personal assets.

Difficulty: Easy

Learning Objective: Account for the withdrawal of a partner.

Section Reference: Withdrawal of a Partner

CPA: Financial Reporting

AACSB: Analytic

39. A partner may only withdraw from a partnership on a voluntary basis.

Difficulty: Easy

Learning Objective: Account for the withdrawal of a partner.

Section Reference: Withdrawal of a Partner

CPA: Financial Reporting

AACSB: Analytic

40. In the withdrawal of a partner, a payment from the partnership assets will affect only the remaining partners’ personal assets.

Difficulty: Easy

Learning Objective: Account for the withdrawal of a partner.

Section Reference: Withdrawal of a Partner

CPA: Financial Reporting

AACSB: Analytic

41. When a partner withdraws from a partnership, asset revaluations should be recorded for the remaining assets in the partnership.

Difficulty: Easy

Learning Objective: Account for the withdrawal of a partner.

Section Reference: Withdrawal of a Partner

CPA: Financial Reporting

AACSB: Analytic

42. A bonus to the departing partner may be paid if the fair value of the partnership assets is less than their carrying amount.

Difficulty: Easy

Learning Objective: Account for the withdrawal of a partner.

Section Reference: Withdrawal of a Partner

CPA: Financial Reporting

AACSB: Analytic

43. The departing partner may have to pay a bonus to the partnership if the remaining partners are anxious to remove the partner.

Difficulty: Easy

Learning Objective: Account for the withdrawal of a partner.

Section Reference: Withdrawal of a Partner

CPA: Financial Reporting

AACSB: Analytic

44. A bonus to a departing partner may be paid if there is unrecorded goodwill resulting from the partnership’s superior earnings record.

Difficulty: Easy

Learning Objective: Account for the withdrawal of a partner.

Section Reference: Withdrawal of a Partner

CPA: Financial Reporting

AACSB: Analytic

45. A bonus to the remaining partners may be paid if the recorded assets are overvalued.

Difficulty: Easy

Learning Objective: Account for the withdrawal of a partner.

Section Reference: Withdrawal of a Partner

CPA: Financial Reporting

AACSB: Analytic

46. If a partnership is dissolved, an asset does not legally return to the partner who originally contributed it.

Difficulty: Easy

Learning Objective: Account for the withdrawal of a partner.

Section Reference: Withdrawal of a Partner

CPA: Financial Reporting

AACSB: Analytic

47. The procedures for withdrawal of a partner from a partnership must be specified in the partnership agreement.

Difficulty: Easy

Learning Objective: Account for the withdrawal of a partner.

Section Reference: Withdrawal of a Partner

CPA: Financial Reporting

AACSB: Analytic

48. At the death of a partner, the partnership is dissolved.

Difficulty: Easy

Learning Objective: Account for the withdrawal of a partner.

Section Reference: Withdrawal of a Partner

CPA: Financial Reporting

AACSB: Analytic

49. The liquidation of a partnership is done to ensure that the fair value of the remaining assets is recorded accurately.

Difficulty: Easy

Learning Objective: Account for the liquidation of a partnership.

Section Reference: Liquidation of a Partnership

CPA: Financial Reporting

AACSB: Analytic

50. No capital deficiency means that all partners have credit balances prior to the final distribution of cash.

Difficulty: Easy

Learning Objective: Account for the liquidation of a partnership.

Section Reference: Liquidation of a Partnership

CPA: Financial Reporting

AACSB: Analytic

51. In the liquidation of a partnership, the sale of noncash assets for cash is called revaluation.

Difficulty: Easy

Learning Objective: Account for the liquidation of a partnership.

Section Reference: Liquidation of a Partnership

CPA: Financial Reporting

AACSB: Analytic

MULTIPLE CHOICE QUESTIONS

52. A partnership

a) is an association of one or more individuals.

b) pays income tax on partnership profit.

c) has a limited life.

d) is not an accounting entity for financial reporting purposes.

Difficulty: Easy

Learning Objective: Describe the characteristics of the partnership form of business organization.

Section Reference: Partnership Form of Organization

CPA: Financial Reporting

AACSB: Analytic

53. A general partner in a limited partnership

a) has unlimited liability for all partnership debts.

b) is always the general manager of the firm.

c) is the partner who lacks a specialization.

d) is liable for partnership liabilities only to the extent of that partner's capital equity.

Difficulty: Easy

Learning Objective: Describe the characteristics of the partnership form of business organization.

Section Reference: Partnership Form of Organization

CPA: Financial Reporting

AACSB: Analytic

54. The individual assets invested by a partner in a partnership

a) revert back to that partner if the partnership liquidates.

b) determine that partner's share of profit or loss for the year.

c) are jointly owned by all partners.

d) determine the scope of authority of that partner.

Difficulty: Easy

Learning Objective: Describe the characteristics of the partnership form of business organization.

Section Reference: Partnership Form of Organization

CPA: Financial Reporting

AACSB: Analytic

55. Which one of the following would not be considered a disadvantage of the partnership form of organization?

a) limited life

b) unlimited liability

c) mutual agency

d) ease of formation

Difficulty: Easy

Learning Objective: Describe the characteristics of the partnership form of business organization.

Section Reference: Partnership Form of Organization

CPA: Financial Reporting

AACSB: Analytic

56. A limited liability partnership is designed to

a) protect innocent partners from the negligent acts of employees working on behalf of the partners.

b) ensure all partners get an equal share of partnership earnings.

c) allow partners to enter into several different partnerships simultaneously.

d) protect partners from the negligence claims resulting from the acts of other partners.

Difficulty: Easy

Learning Objective: Describe the characteristics of the partnership form of business organization.

Section Reference: Partnership Form of Organization

CPA: Financial Reporting

AACSB: Analytic

57. Which of the following is not a principal characteristic of the partnership form of business organization?

a) mutual agency

b) association of individuals

c) limited liability

d) limited life

Difficulty: Easy

Learning Objective: Describe the characteristics of the partnership form of business organization.

Section Reference: Partnership Form of Organization

CPA: Financial Reporting

AACSB: Analytic

58. Which of the following statements is true regarding the form of a legally binding partnership contract?

a) The partnership contract must be in writing.

b) The partnership contract may be based on a handshake.

c) The partnership contract may be implied.

d) The partnership contract cannot be oral.

Difficulty: Easy

Learning Objective: Describe the characteristics of the partnership form of business organization.

Section Reference: Partnership Form of Organization

CPA: Financial Reporting

AACSB: Analytic

59. Which of the following statements is true regarding a partnership?

a) A partnership is taxed as a separate entity.

b) Only professionals, such as doctors and lawyers may form a partnership.

c) A partnership must file an information return that reports the partnership profit and the partners’ share in that profit.

d) A partner’s income tax is based on the amount of money the partner withdrew from the partnership during the year.

Difficulty: Easy

Learning Objective: Describe the characteristics of the partnership form of business organization.

Section Reference: Partnership Form of Organization

CPA: Financial Reporting

AACSB: Analytic

60. Which of the following statements about a partnership is correct?

a) The personal assets of a partner are included in the partnership accounting records.

b) A partnership is required to file an income tax return.

c) Each partner's share of profit is taxable to the partnership.

d) A partnership represents an accounting entity for financial reporting purposes.

Difficulty: Easy

Learning Objective: Describe the characteristics of the partnership form of business organization.

Section Reference: Partnership Form of Organization

CPA: Financial Reporting

AACSB: Analytic

61. In a partnership, mutual agency means

a) each partner acts on his own behalf when engaging in partnership business.

b) the act of any partner is binding on all other partners, only if partners act within their scope of authority.

c) an act by a partner is judged as binding on other partners depending on whether the act appears to be appropriate for the partnership.

d) that partners are mutually respectful of each other.

Difficulty: Medium

Learning Objective: Describe the characteristics of the partnership form of business organization.

Section Reference: Partnership Form of Organization

CPA: Financial Reporting

AACSB: Analytic

62. A partnership agreement generally contains all of the following except

a) the names and capital contributions of all the partners.

b) the expected life of the partnership.

c) the rights and duties of all partners.

d) the basis for sharing profit or loss among the partners.

Difficulty: Easy

Learning Objective: Describe the characteristics of the partnership form of business organization.

Section Reference: Partnership Form of Organization

CPA: Financial Reporting

AACSB: Analytic

63. The partner in a limited partnership that has unlimited liability is referred to as the

a) lead partner.

b) head partner.

c) general partner.

d) unlimited partner.

Difficulty: Easy

Learning Objective: Describe the characteristics of the partnership form of business organization.

Section Reference: Partnership Form of Organization

CPA: Financial Reporting

AACSB: Analytic

64. Limited partnerships

a) must have at least one general partner.

b) guarantee that a partner will receive a return.

c) guarantee that a partner will get back his original investment.

d) are only permitted in Ontario.

Difficulty: Easy

Learning Objective: Describe the characteristics of the partnership form of business organization.

Section Reference: Partnership Form of Organization

CPA: Financial Reporting

AACSB: Analytic

65. Which of the following statements about partnerships is incorrect?

a) Partnership assets are co-owned by partners.

b) If a partnership is terminated, the assets do not legally revert to the original contributor.

c) If the partnership agreement does not specify the manner in which profit is to be shared, it is distributed according to capital contributions.

d) Each partner has a claim on assets equal to the balance in the partner's capital account.

Difficulty: Easy

Learning Objective: Describe the characteristics of the partnership form of business organization.

Section Reference: Partnership Form of Organization

CPA: Financial Reporting

AACSB: Analytic

66. All of the following are correct except

a) a partnership is a legal entity.

b) the partnership can sue or be sued.

c) the personal assets, liabilities, and transactions of the partners are recorded in the partnership.

d) the partnership must file an information tax return.

Difficulty: Easy

Learning Objective: Describe the characteristics of the partnership form of business organization.

Section Reference: Partnership Form of Organization

CPA: Financial Reporting

AACSB: Analytic

67. If division of profits in a partnership is not specified, profit (loss) is assumed to be

a) allocated to general partners first.

b) allocated based on capital contribution.

c) held within the partnership.

d) allocated equally.

Difficulty: Easy

Learning Objective: Describe the characteristics of the partnership form of business organization.

Section Reference: Partnership Form of Organization

CPA: Financial Reporting

AACSB: Analytic

68. Which of the following is not an advantage of the partnership form of business?

a) mutual agency

b) ease of formation

c) ease of decision making

d) freedom from governmental regulations and restrictions

Difficulty: Easy

Learning Objective: Describe the characteristics of the partnership form of business organization.

Section Reference: Partnership Form of Organization

CPA: Financial Reporting

AACSB: Analytic

69. Which of the following statements is incorrect regarding a partnership agreement?

a) Common law provinces are governed by the Partnership Act.

b) Oral agreements are preferable to written articles.

c) It should specify the different relationships that are to exist among the partners.

d) It should state procedures for submitting disputes to arbitration.

Difficulty: Easy

Learning Objective: Describe the characteristics of the partnership form of business organization.

Section Reference: Partnership Form of Organization

CPA: Financial Reporting

AACSB: Analytic

70. Which of the following is considered an advantage of a general partnership?

a) Partnerships have an indefinite life.

b) Partners cannot make routine business decisions without consent from other partners.

c) Partnerships allow for combining skills and resources.

d) Partners have limited liability.

Difficulty: Easy

Learning Objective: Describe the characteristics of the partnership form of business organization.

Section Reference: Partnership Form of Organization

CPA: Financial Reporting

AACSB: Analytic

71. Which of the following is a factor that should be included in a partnership agreement?

a) the basis for sharing profit or loss

b) procedures for the withdrawal, or addition, of a partner

c) the rights and duties of all partners

d) all of the above

Difficulty: Easy

Learning Objective: Describe the characteristics of the partnership form of business organization.

Section Reference: Partnership Form of Organization

CPA: Financial Reporting

AACSB: Analytic

72. Each partner’s initial noncash investment in the partnership should be recorded at the

a) fair value of the assets at the date of their transfer into the business.

b) fair value of the assets at the date the partnership begins operations.

c) original cost of the assets at the time they were purchased by the contributing partner.

d) carrying amount of the assets at the date of their transfer into the partnership.

Difficulty: Easy

Learning Objective: Account for the formation of a partnership.

Section Reference: Forming a Partnership

CPA: Financial Reporting

AACSB: Analytic

73. Stella Bella invests personally owned equipment, which originally cost $ 30,000 and has accumulated depreciation of $ 6,000, in the Bella and Duck partnership. Both partners agree that the fair value of the equipment was $ 25,000. The entry made by the partnership to record Bella's investment should be

a) Equipment 30,000
Accumulated Depreciation—Equipment 6,000
S. Bella, Capital 24,000

b) Equipment 24,000
S. Bella, Capital 24,000

c) Equipment 25,000
Accumulated Depreciation—Equipment 6,000
Gain on Purchase of Equipment 1,000
S. Bella , Capital 30,000

d) Equipment 25,000
S. Bella , Capital 25,000

Difficulty: Medium

Learning Objective: Account for the formation of a partnership.

Section Reference: Forming a Partnership

CPA: Financial Reporting

AACSB: Analytic

74. Piccard is investing in a partnership with Borg. Piccard contributes equipment that originally cost $ 21,000, has a carrying amount of $ 14,000, and a fair value of $ 16,000. The entry that the partnership makes to record Piccard’s initial contribution includes a

a) debit to Equipment for $ 14,000.

b) debit to Equipment for $ 21,000.

c) debit to Equipment for $ 16,000.

d) credit to Accumulated Depreciation for $ 7,000.

Difficulty: Medium

Learning Objective: Account for the formation of a partnership.

Section Reference: Forming a Partnership

CPA: Financial Reporting

AACSB: Analytic

75. A partner contributes, as part of her initial investment, accounts receivable with an allowance for doubtful accounts. Which of the following reflects a proper treatment?

a) The allowance for doubtful accounts should be recorded at its fair value.

b) The allowance account may be set up on the books of the partnership because it relates to the existing accounts that are being contributed.

c) The allowance account should not be carried onto the books of the partnership.

d) The accounts receivable and allowance should not be recorded on the books of the partnership because a partner must invest cash in the business.

Difficulty: Medium

Learning Objective: Account for the formation of a partnership.

Section Reference: Forming a Partnership

CPA: Financial Reporting

AACSB: Analytic

76. In a limited liability partnership, a partner has unlimited liability

a) for the negligent acts of the other partners.

b) for only his or her share of capital contributed.

c) for the actions of employees whom they directly supervise and control.

d) only during the first 5 years of the partnership.

Difficulty: Easy

Learning Objective: Account for the formation of a partnership.

Section Reference: Forming a Partnership

CPA: Financial Reporting

AACSB: Analytic

77. There are three accounting issues where there are some differences between partnerships and proprietorships. Which one of the following is not a difference?

a) private partnerships may follow ASPE

b) formation of a partnership

c) preparing partnership financial statements

d) dividing the partnership profit and loss

Difficulty: Easy

Learning Objective: Account for the formation of a partnership.

Section Reference: Forming a Partnership

CPA: Financial Reporting

AACSB: Analytic

78. Partnerships are sometimes publicly accountable enterprises and these entities must follow

a) ASPE.

b) IFRS.

c) partnership accounting standards.

d) public sector accounting standards.

Difficulty: Easy

Learning Objective: Account for the formation of a partnership.

Section Reference: Forming a Partnership

CPA: Financial Reporting

AACSB: Analytic

79. Jody Johnson and Ben Bear formed a partnership on September 1. Jody contributed cash of $ 100,000 and furniture with a cost of $ 50,000 and fair value of $ 28,000. Ben contributed cash of $ 70,000 and equipment with a cost of $ 75,000 and a fair value of $ 50,000. The appropriate amount to be credited to each partner’s capital account on September 1 is

a) J. Johnson, Capital = $ 128,000; B. Bear, Capital = $ 120,000.

b) J. Johnson, Capital = $ 150,000; B. Bear, Capital = $ 145,000.

c) J. Johnson, Capital = $ 150,000; B. Bear, Capital = $ 120,000.

d) J. Johnson, Capital = $ 128,000; B. Bear, Capital = $ 145,000.

Difficulty: Medium

Learning Objective: Account for the formation of a partnership.

Section Reference: Forming a Partnership

CPA: Financial Reporting

AACSB: Analytic

80. The Peppa and Duggy partnership agreement stipulates that profits and losses will be shared equally after salary allowances of $ 80,000 for Peppa and $ 40,000 for Duggy. At the beginning of the year, Peppa's capital account had a balance of $ 80,000, while Duggy's capital account had a balance of $ 70,000. Profit for the year was $ 100,000. The balance of Duggy's capital account at the end of the year after closing is

a) $ 70,000.

b) $ 40,000.

c) $ 120,000.

d) $ 100,000.

Difficulty: Medium

Learning Objective: Allocate and record profit or loss to partners.

Section Reference: Dividing Partnership Profit or Loss

CPA: Financial Reporting

AACSB: Analytic

81. Ms. Manchester, Mr. Robertson, and Ms. Allison formed a partnership with a 4:2:1 partnership on profit. Mr. Robertson will receive what percentage of the profit at the end of the year?

a) 20%

b) 33%

c) 50%

d) 29%

Difficulty: Medium

Learning Objective: Allocate and record profit or loss to partners.

Section Reference: Dividing Partnership Profit or Loss

CPA: Financial Reporting

AACSB: Analytic

82. At the end of December 2021, Ray Telsenburg, a partner in Telsenburg-Goldblum Company, had a balance in his drawings account of $ 18,000. Ray’s capital account at the beginning of 2021 was $ 80,000. $ 5,000 of partnership profit was allocated to Ray in 2021. The entry to close Ray’s drawings account at the end of 2021 would include a

a) debit to Income Summary for $ 18,000.

b) credit to Telsenburg, Capital for $ 13,000.

c) debit to Telsenburg, Capital for $ 18,000.

d) credit to Telsenburg, Capital for $ 5,000.

Difficulty: Medium

Learning Objective: Allocate and record profit or loss to partners.

Section Reference: Dividing Partnership Profit or Loss

CPA: Financial Reporting

AACSB: Analytic

83. The partnership of Melissa and Janet reports profit of $ 30,000. The partners share equally in profit and losses. The entry to record the partners' share of profit will include a

a) credit to Income Summary for $ 30,000.

b) credit to Melissa, Capital for $ 15,000.

c) debit to Janet, Capital for $ 15,000.

d) credit to Melissa, Drawings for $ 15,000.

Difficulty: Medium

Learning Objective: Allocate and record profit or loss to partners.

Section Reference: Dividing Partnership Profit or Loss

CPA: Financial Reporting

AACSB: Analytic

84. Partner A receives $ 60,000 and Partner B receives $ 40,000 in a split of $ 100,000 profit. Which expression does not reflect the profit-splitting arrangement?

a) 3:2

b) 3/5 and 2/5

c) 6:4

d) 2:1

Difficulty: Medium

Learning Objective: Allocate and record profit or loss to partners.

Section Reference: Dividing Partnership Profit or Loss

CPA: Financial Reporting

AACSB: Analytic

85. Ms. Drew, Mr. Fraser, and Ms. Percy had a 1:2:3 partnership split on profit in their partnership. In 2021, the partnership had a profit of $ 150,000. How much would Ms. Drew receive as her share of the profit?

a) $ 15,000

b) $ 50,000

c) $ 75,000

d) $ 25,000

Difficulty: Medium

Learning Objective: Allocate and record profit or loss to partners.

Section Reference: Dividing Partnership Profit or Loss

CPA: Financial Reporting

AACSB: Analytic

86. A profit ratio based on capital balances might be appropriate when

a) service is a primary consideration.

b) some, but not all, partners plan to work in the business.

c) funds invested in the partnership are considered the critical factor.

d) little profit is expected.

Difficulty: Easy

Learning Objective: Allocate and record profit or loss to partners.

Section Reference: Dividing Partnership Profit or Loss

CPA: Financial Reporting

AACSB: Analytic

87. The profit of the Miskell and Leblanc partnership is $ 30,000. The partnership agreement specifies that Miskell and Leblanc have a salary allowance of $ 8,000 and $ 12,000, respectively. The partnership agreement also specifies an interest allowance of 10% on capital balances at the beginning of the year. Each partner had a beginning capital balance of $ 20,000. Any remaining profit or loss is shared equally. What is Miskell's share of the $ 30,000 profit?

a) $ 8,000

b) $ 10,000

c) $ 11,000

d) $ 13,000

Difficulty: Medium

Learning Objective: Allocate and record profit or loss to partners.

Section Reference: Dividing Partnership Profit or Loss

CPA: Financial Reporting

AACSB: Analytic

88. The profit of the Miskell and Leblanc partnership is $ 30,000. The partnership agreement specifies that Miskell and Leblanc have a salary allowance of $ 8,000 and $ 12,000, respectively. The partnership agreement also specifies an interest allowance of 10% on capital balances at the beginning of the year. Each partner had a beginning capital balance of $ 20,000. Any remaining profit or loss is shared equally. What is the balance of Leblanc's Capital account at the end of the year after profit has been distributed?

a) $ 34,000

b) $ 32,000

c) $ 37,000

d) $ 35,000

Difficulty: Medium

Learning Objective: Allocate and record profit or loss to partners.

Section Reference: Dividing Partnership Profit or Loss

CPA: Financial Reporting

AACSB: Analytic

89. The profit of the Busch and Ford partnership is $ 45,000. The partnership agreement specifies that profits and losses will be shared equally after salary allowances of $ 25,000 (Busch) and $ 10,000 (Ford) have been allocated. At the beginning of the year, Busch's Capital account had a balance of $ 50,000 and Ford's Capital account had a balance of $ 65,000. What is the balance of Ford's Capital account at the end of the year after profits and losses have been distributed?

a) $ 65,000

b) $ 10,000

c) $ 75,000

d) $ 80,000

Difficulty: Medium

Learning Objective: Allocate and record profit or loss to partners.

Section Reference: Dividing Partnership Profit or Loss

CPA: Financial Reporting

AACSB: Analytic

90. Lesley Arsenault and Darcy Campbell formed a partnership by contributing $ 80,000 and $ 100,000, respectively. The company reported net income of $ 78,000 in its first year of operations. Assuming the partners share profits and losses based on the beginning of year capital balances, how much would be distributed to each partner?

a) L. Arsenault = $ 34,667; D. Campbell = $ 43,333

b) L. Arsenault = $ 80,000 D. Campbell = $ 100,000

c) L. Arsenault = $ 39,000; D. Campbell = $ 39,000

d) L. Arsenault = $ 78,000; D. Campbell = $ 78,000

Difficulty: Medium

Learning Objective: Allocate and record profit or loss to partners.

Section Reference: Dividing Partnership Profit or Loss

CPA: Financial Reporting

AACSB: Analytic

91. The Statement of Partners' Equity explains

a) the amount of legal liability of each of the partners.

b) the types of assets invested in the business by each partner.

c) how the partnership will be capitalized if a new partner is admitted to the partnership.

d) the changes in each partner's capital account and in total partnership capital during a period.

Difficulty: Easy

Learning Objective: Prepare partnership financial statements.

Section Reference: Partnership Financial Statements

CPA: Financial Reporting

AACSB: Analytic

92. All of the following are required to prepare a statement of partners’ equity except

a) a list of all assets initially transferred into the partnership.

b) the partnership income statement.

c) the opening balance in the partners’ capital accounts.

d) the balance in the partners’ drawings accounts.

Difficulty: Easy

Learning Objective: Prepare partnership financial statements.

Section Reference: Partnership Financial Statements

CPA: Financial Reporting

AACSB: Analytic

93. Which of the following would not cause an increase in partnership capital?

a) drawings

b) profit

c) additional capital investment by the partners

d) initial capital investment by the partners

Difficulty: Easy

Learning Objective: Prepare partnership financial statements.

Section Reference: Partnership Financial Statements

CPA: Financial Reporting

AACSB: Analytic

94. Barbara Elliott is one of the partners in Elliott & Wan. Her drawings during the year were $ 10,000. She made an additional capital investment of $ 5,000 and her share of the loss for the year was $ 2,000. Her ending capital balance was $ 40,000. What was Barbara's beginning capital balance?

a) $ 45,000

b) $ 37,000

c) $ 47,000

d) $ 52,000

Difficulty: Medium

Learning Objective: Prepare partnership financial statements.

Section Reference: Partnership Financial Statements

CPA: Financial Reporting

AACSB: Analytic

95. Kelly Chaytor started the year with a capital balance of $ 28,000. During the year, her share of partnership profit was $ 16,000 and she withdrew $ 4,000 from the partnership for personal use. She made an additional capital contribution of $ 5,000 during the year. The amount of Kelly Chaytor's capital balance that will be reported on the year-end balance sheet will be

a) $ 33,000.

b) $ 49,000.

c) $ 29,000.

d) $ 45,000.

Difficulty: Medium

Learning Objective: Prepare partnership financial statements.

Section Reference: Partnership Financial Statements

CPA: Financial Reporting

AACSB: Analytic

96. The Statement of Partners' Equity for the Allied Centre reported the following information in total:
Capital, January 1 $ 60,000
Additional investment 20,000
Drawings 40,000
Profit 50,000
The partnership has three partners: Hum, Pippy, and Collis with ending capital balances in a ratio of 40:20:40. What are the respective ending balances of the three partners?

a) Hum, $ 40,000; Pippy, $ 20,000; Collis, $ 40,000

b) Hum, $ 36,000: Pippy, $ 18,000; Collis, $ 36,000

c) Hum, $ 68,000; Pippy, $ 34,000; Collis, $ 68,000

d) Hum, $ 48,000; Pippy, $ 24,000; Collis, $ 48,000

Difficulty: Medium

Learning Objective: Prepare partnership financial statements.

Section Reference: Partnership Financial Statements

CPA: Financial Reporting

AACSB: Analytic

97. On January 1, 2021, the opening balances in the Ho-Hum partnership were Ho, $ 12,000 and Hum, $ 14,000. During the year, the partnership earned $ 80,000. Profit is split equally between the partners. Ho worked a significant amount during the year and withdrew $ 50,000. Hum was mainly a silent partner and withdrew only $ 10,000. At the end of the year, after all accounts have been closed, the balance in Hum’s capital account was

a) $ 19,000.

b) $ 44,000.

c) $ 54,000.

d) $ 4,000.

Difficulty: Medium

Learning Objective: Prepare partnership financial statements.

Section Reference: Partnership Financial Statements

CPA: Financial Reporting

AACSB: Analytic

98. The partners' drawings accounts are

a) reported on the income statement.

b) reported on the balance sheet.

c) closed to income summary.

d) closed to the partners' capital accounts.

Difficulty: Easy

Learning Objective: Prepare partnership financial statements.

Section Reference: Partnership Financial Statements

CPA: Financial Reporting

AACSB: Analytic

99. A change in total partners’ capital may occur from all of the following except

a) additional capital investments in the partnership.

b) the sale of a partnership interest by a partner to an outside party.

c) the use of partnership cash to pay salaries to the partners.

d) the use of partnership cash to purchase new office equipment.

Difficulty: Easy

Learning Objective: Prepare partnership financial statements.

Section Reference: Partnership Financial Statements

CPA: Financial Reporting

AACSB: Analytic

100. As in a proprietorship, changes in capital for a partnership may result from three causes. Which one of the following is not a cause for change?

a) additional investments by owner

b) drawings

c) allocating profit to the owner or owners

d) collection of account receivable

Difficulty: Easy

Learning Objective: Prepare partnership financial statements.

Section Reference: Partnership Financial Statements

CPA: Financial Reporting

AACSB: Analytic

101. All of the following will result in a change in capital except for

a) additional investments by owner.

b) drawings.

c) partner share of the profit or loss.

d) acquisition of land.

Difficulty: Easy

Learning Objective: Prepare partnership financial statements.

Section Reference: Partnership Financial Statements

CPA: Financial Reporting

AACSB: Analytic

102. Rich and Poore have partnership capital balances of $ 160,000 and $ 120,000, respectively. Poore negotiates to sell his partnership interest to Claudio for $ 140,000. Rich agrees to accept Claudio as a new partner. The partnership entry to record this transaction is

a) Cash 140,000
Claudio, Capital 140,000

b) Poore, Capital 140,000
Claudio, Capital 140,000

c) Cash 20,000
Poore, Capital 120,000
Claudio, Capital 140,000

d) Poore, Capital 120,000
Claudio, Capital 120,000

Difficulty: Medium

Learning Objective: Account for the admission of a partner.

Section Reference: Admission of a Partner

CPA: Financial Reporting

AACSB: Analytic

103. Frodo and Merry share partnership profits and losses in the ratio of 6:4. Frodo's capital account balance is $ 80,000 and Merry’s capital account balance is $ 50,000. Pippen is admitted to the partnership by investing $ 90,000 and is to receive a 25% ownership interest. Frodo, Merry, and Pippen's capital balances after Pippen's investment will be
Frodo Merry Pippen

a) $ 80,000 $ 50,000 $ 90,000.

b) $ 101,000 $ 64,000 $ 55,000.

c) $ 99,000 $ 66,000 $ 55,000.

d) $ 97,500 $ 67,500 $ 55,000.

Difficulty: Medium

Learning Objective: Account for the admission of a partner.

Section Reference: Admission of a Partner

CPA: Financial Reporting

AACSB: Analytic

104. Sung and Ping have partnership capital account balances of $ 180,000 and $ 140,000, respectively and share profits and losses equally. Luing is admitted to the partnership by investing $ 80,000 for a one-fourth ownership interest. The balance of Ping's capital account after Luing is admitted is

a) $ 150,000.

b) $ 130,000.

c) $ 160,000.

d) $ 175,000.

Difficulty: Medium

Learning Objective: Account for the admission of a partner.

Section Reference: Admission of a Partner

CPA: Financial Reporting

AACSB: Analytic

105. The admission of a new partner to an existing partnership

a) may be accomplished only by investing assets in the partnership.

b) requires purchasing the interest of one or more existing partners.

c) causes a legal dissolution of the existing partnership.

d) is almost always accompanied by the liquidation of the business.

Difficulty: Medium

Learning Objective: Account for the admission of a partner.

Section Reference: Admission of a Partner

CPA: Financial Reporting

AACSB: Analytic

106. When a partnership interest is purchased from an existing partner

a) each partner’s capital account is affected.

b) the transaction is a personal transaction between the purchaser and the selling partner(s).

c) the buyer receives equity equal to the amount of cash paid.

d) all partners will receive some part of the purchase price.

Difficulty: Medium

Learning Objective: Account for the admission of a partner.

Section Reference: Admission of a Partner

CPA: Financial Reporting

AACSB: Analytic

107. Wooley and Murley each sell 1/3 of their partnership interest to Downer, receiving $ 20,000 each. At the time of the admission, each partner has a $ 60,000 capital balance. The entry to record the admission of Downer will show a

a) debit to Cash for $ 40,000.

b) credit to Downer, Capital for $ 60,000.

c) debit to Murley, Capital for $ 60,000.

d) debit to Wooley, Capital for $ 20,000.

Difficulty: Medium

Learning Objective: Account for the admission of a partner.

Section Reference: Admission of a Partner

CPA: Financial Reporting

AACSB: Analytic

108. Eaton and Fields sell 1/4 of their partnership interest to O’Reilly receiving $ 25,000 each. At the time of admission, Eaton and Fields each had a $ 45,000 capital balance. The admission of O’Reilly will cause the net partnership assets to

a) increase by $ 50,000.

b) remain at $ 90,000.

c) decrease by $ 50,000.

d) remain at $ 140,000.

Difficulty: Medium

Learning Objective: Account for the admission of a partner.

Section Reference: Admission of a Partner

CPA: Financial Reporting

AACSB: Analytic

109. Crosby and Malkin sell to Staal a 1/3 interest in the Crosby-Malkin partnership. Staal will pay Crosby and Malkin each personally, $ 60,000 for admission into the partnership. Before this transaction, Crosby and Malkin show capital balances of $ 45,000 each. The journal entry to record the admission of Staal will

a) show a debit to Cash of $ 120,000.

b) not show a debit to Cash.

c) show a debit to Malkin, Capital for $ 60,000.

d) show a credit to Staal, Capital for $ 120,000.

Difficulty: Medium

Learning Objective: Account for the admission of a partner.

Section Reference: Admission of a Partner

CPA: Financial Reporting

AACSB: Analytic

110. Hill invests $ 30,000 in cash (admission by investment) in the Morgan-Carr partnership to acquire a 1/4 interest. In this case

a) the accounting will be the same as a purchase of an interest.

b) the total net assets of the new partnership are unchanged from the previous partnership.

c) the total capital of the new partnership is greater than the total capital of the old partnership.

d) Hill's profit ratio will automatically be 1/4.

Difficulty: Easy

Learning Objective: Account for the admission of a partner.

Section Reference: Admission of a Partner

CPA: Financial Reporting

AACSB: Analytic

111. Which of the following is correct when admitting a new partner into an existing partnership?
Purchase of an Interest Admission by Investment

a) Total net assets unchanged unchanged

b) Total capital increased unchanged

c) Total net assets unchanged increased

d) Total capital unchanged unchanged

Difficulty: Easy

Learning Objective: Account for the admission of a partner.

Section Reference: Admission of a Partner

CPA: Financial Reporting

AACSB: Analytic

112. When admitting a new partner by investment, a bonus to old partners

a) is usually unjustified because carrying amounts clearly reflect partnership net worth.

b) is sometimes justified because goodwill may exist and it is not reflected in the accounts.

c) results if the debit to cash is less than the new partner's capital credit.

d) results if the debit to cash is equal to the new partner's capital credit.

Difficulty: Easy

Learning Objective: Account for the admission of a partner.

Section Reference: Admission of a Partner

CPA: Financial Reporting

AACSB: Analytic

113. When admitting a new partner by investment, a bonus to old partners is allocated on

a) the basis of capital balances.

b) the basis of the original investment of the old partners.

c) the basis of profit ratios before the admission of the new partner.

d) the basis of the salaries of the old partners.

Difficulty: Easy

Learning Objective: Account for the admission of a partner.

Section Reference: Admission of a Partner

CPA: Financial Reporting

AACSB: Analytic

114. A bonus to a new partner

a) is prohibited by IFRS.

b) results when the new partner's capital credit is less than his or her investment of assets in the firm.

c) may occur when recorded carrying amounts are lower than fair values.

d) results when the new partner's capital credit is greater than his or her investment of assets in the firm.

Difficulty: Easy

Learning Objective: Account for the admission of a partner.

Section Reference: Admission of a Partner

CPA: Financial Reporting

AACSB: Analytic

115. A bonus to a new partner will

a) increase the capital balances of existing partners based on their profit ratios before the admission of the new partner.

b) increase the capital balances of existing partners based on their profit ratios after the admission of the new partner.

c) decrease the capital balances of existing partners based on their profit ratios before the admission of the new partner.

d) decrease the capital balances of existing partners based on their capital balances before the admission of the new partner.

Difficulty: Easy

Learning Objective: Account for the admission of a partner.

Section Reference: Admission of a Partner

CPA: Financial Reporting

AACSB: Analytic

116. The investment of assets in a partnership by a partner increases both the partnership’s

a) total assets and current liabilities.

b) net assets and total capital.

c) total capital and revenue.

d) current assets and non-current liabilities.

Difficulty: Easy

Learning Objective: Account for the admission of a partner.

Section Reference: Admission of a Partner

CPA: Financial Reporting

AACSB: Analytic

117. Accounting for the admission of a new partner by purchase of a partner’s interest will

a) not affect total assets, liabilities, and capital.

b) increase total assets and total capital.

c) increase total capital.

d) decrease total capital.

Difficulty: Easy

Learning Objective: Account for the admission of a partner.

Section Reference: Admission of a Partner

CPA: Financial Reporting

AACSB: Analytic

118. Dana Peters was admitted to partnership with a 20% ownership interest after investing $ 30,000 cash. The partnership capital before the admission of Peters was $ 130,000. Which of the following best describes the impact on the capital accounts from this transaction?

a) Peters will pay a bonus of $ 4,000 to the old partners.

b) Peters will pay a bonus of $ 2,000 to the old partners.

c) Peters will receive a bonus of $ 2,000 from the old partners.

d) Peters will receive a bonus of $ 4,000 from the old partners.

Difficulty: Medium

Learning Objective: Account for the admission of a partner.

Section Reference: Admission of a Partner

CPA: Financial Reporting

AACSB: Analytic

119. Travis, Jennifer, and Henry have partnership capital account balances of $ 150,000, $ 300,000, and $ 70,000, respectively. The profit-sharing ratio is Travis, 50%; Jennifer, 40%; and Henry, 10%. Travis wishes to withdraw from the partnership and it is agreed that partnership assets of $ 120,000 will be used to pay Travis for her partnership interest. The balances of Jennifer's and Henry's Capital accounts after Travis's withdrawal would be

a) Jennifer, $ 300,000; Henry, $ 70,000.

b) Jennifer, $ 324,000; Henry, $ 76,000.

c) Jennifer, $ 276,000; Henry, $ 64,000.

d) Jennifer, $ 285,000; Henry, $ 55,000.

Difficulty: Medium

Learning Objective: Account for the withdrawal of a partner.

Section Reference: Withdrawal of a Partner

CPA: Financial Reporting

AACSB: Analytic

120. Ace, Bell, and Cole have partnership capital account balances of $ 90,000 each. Profit and losses are shared on a basis of 3:2:1 for Ace, Bell, and Cole, respectively. Cole agrees to sell three-fourths of his ownership interest to Ace for $ 55,000 and one-fourth to Bell for $ 20,000. Ace and Bell will use personal assets to purchase Cole's interest. The partnership's entry to record Cole's withdrawal from the partnership would be

a) Cole, Capital 75,000
Cash 75,000

b) Cole, Capital 75,000
Ace, Capital 55,000
Bell, Capital 20,000

c) Cole, Capital 90,000
Ace, Capital 67,500
Bell, Capital 22,500

d) Ace, Capital 56,250
Bell, Capital 18,750
Cole, Capital 75,000

Difficulty: Medium

Learning Objective: Account for the withdrawal of a partner.

Section Reference: Withdrawal of a Partner

CPA: Financial Reporting

AACSB: Analytic

121. When a partner withdraws from the firm, which of the following reflects the correct partnership effects?
Payment from Payment from
Partners' Personal Assets Partnership Assets

a) Total net assets decreased decreased

b) Total capital decreased decreased

c) Total net assets unchanged decreased

d) Total capital unchanged unchanged

Difficulty: Easy

Learning Objective: Account for the withdrawal of a partner.

Section Reference: Withdrawal of a Partner

CPA: Financial Reporting

AACSB: Analytic

122. Which of the following is not a necessary action that the partnership must take upon the death of a partner?

a) Determine the profit or loss for the year to date.

b) Discontinue business operations.

c) Close the books.

d) Prepare financial statements.

Difficulty: Easy

Learning Objective: Account for the withdrawal of a partner.

Section Reference: Withdrawal of a Partner

CPA: Financial Reporting

AACSB: Analytic

123. When a partner withdraws by payment from the other partner’s personal assets, the impact on net assets is

a) no change in net assets.

b) net assets will increase by the buyout amount.

c) net assets will decrease by the buyout amount.

d) net assets will decrease by the amount of the departed partner’s capital account.

Difficulty: Easy

Learning Objective: Account for the withdrawal of a partner.

Section Reference: Withdrawal of a Partner

CPA: Financial Reporting

AACSB: Analytic

124. The Jackson-Chan partnership is terminated when creditor claims exceed partnership assets by $ 30,000. Chan is a millionaire and Jackson has no personal assets. Jackson's partnership interest is 75% and Chan's is 25%. Creditors

a) must collect their claims equally from Chan and Jackson.

b) may collect the entire $ 30,000 from Chan.

c) must collect their claims 75% from Jackson and 25% from Chan.

d) may not require Chan to use his personal assets to satisfy the $ 30,000 in claims.

Difficulty: Easy

Learning Objective: Account for the liquidation of a partnership.

Section Reference: Liquidation of a Partnership

CPA: Financial Reporting

AACSB: Analytic

125. In accounting for the liquidation of a partnership, any gain or loss on the realization of noncash assets should be allocated

a) first to creditors and the remainder to partners.

b) to the partners on the basis of their capital balances.

c) to the partners on the basis of their profit-sharing ratio.

d) only after all creditors have been paid.

Difficulty: Easy

Learning Objective: Account for the liquidation of a partnership.

Section Reference: Liquidation of a Partnership

CPA: Financial Reporting

AACSB: Analytic

126. In the liquidation of a partnership, any partner who has a capital deficiency

a) has a personal debt to the partnership for the amount of the deficiency.

b) is automatically terminated as a partner.

c) will receive a cash distribution only on the basis of his or her profit-sharing ratio.

d) is not obligated to make up the capital deficiency.

Difficulty: Easy

Learning Objective: Account for the liquidation of a partnership.

Section Reference: Liquidation of a Partnership

CPA: Financial Reporting

AACSB: Analytic

127. Partners A, B, and C have capital account balances of $ 60,000 each. The profit and loss ratio is 5:2:3 respectively. In the process of liquidating the partnership, noncash assets with a carrying amount of $ 50,000 are sold for $ 20,000. The balance of Partner B's Capital account after the sale is

a) $ 45,000.

b) $ 51,000.

c) $ 54,000.

d) $ 66,000.

Difficulty: Medium

Learning Objective: Account for the liquidation of a partnership.

Section Reference: Liquidation of a Partnership

CPA: Financial Reporting

AACSB: Analytic

128. The partners' profit and loss sharing ratio is 2:3:5, respectively.

D, E, AND F PARTNERSHIP
Balance Sheet
December 31, 2021
Assets Liabilities and Partners' Equity
Cash $ 35,000 Liabilities $ 40,000
Equipment 90,000 D, Capital 30,000
Accum.dep.—equipment (15,000) E, Capital 25,000
F, Capital 15,000
Total $ 110,000 Total $ 110,000

If the D, E, and F Partnership is liquidated by selling the equipment for $ 45,000 and creditors are paid in full, what is the amount of cash that can be safely distributed to each partner?

a) D, $ 24,000; E, $ 16,000; F, $ 0

b) D, $ 14,000; E, $ 21,000; F, $ 5,000

c) D, $ 20,000; E, $ 25,000; F, $ 5,000

d) D, $ 30,000; E, $ 25,000; F, $ 15,000

Difficulty: Medium

Learning Objective: Account for the liquidation of a partnership.

Section Reference: Liquidation of a Partnership

CPA: Financial Reporting

AACSB: Analytic

129. The partners' profit and loss sharing ratio is 2:3:5, respectively.

D, E, AND F PARTNERSHIP
Balance Sheet
December 31, 2021
Assets Liabilities and Partners' Equity
Cash $ 35,000 Liabilities $ 40,000
Equipment 90,000 D, Capital 30,000
Accum.dep.—equipment (15,000) E, Capital 25,000
F, Capital 15,000
Total $ 110,000 Total $ 110,000

If the D, E, and F Partnership is liquidated by selling the equipment for $ 125,000, and creditors are paid in full, what is the total amount of cash that Partner D will receive in the distribution of cash to partners?

a) $ 10,000

b) $ 39,000

c) $ 40,000

d) $ 25,000

Difficulty: Medium

Learning Objective: Account for the liquidation of a partnership.

Section Reference: Liquidation of a Partnership

CPA: Financial Reporting

AACSB: Analytic

130. The partners' profit and loss sharing ratio is 2:3:5, respectively.

D, E, AND F PARTNERSHIP
Balance Sheet
December 31, 2021
Assets Liabilities and Partners' Equity
Cash $ 35,000 Liabilities $ 40,000
Equipment 90,000 D, Capital 30,000
Accum.dep.—equipment (15,000) E, Capital 25,000
F, Capital 15,000
Total $ 110,000 Total $ 110,000

If the D, E, and F Partnership is liquidated and the equipment is worthless, the creditors will look to what partner's personal assets for settlement of the creditors' claims?

a) the personal assets of Partner E

b) the personal assets of Partners D and F

c) the personal assets of Partners D, E, and F

d) The personal assets of the partners are not available for partnership debts.

Difficulty: Easy

Learning Objective: Account for the liquidation of a partnership.

Section Reference: Liquidation of a Partnership

CPA: Financial Reporting

AACSB: Analytic

131. If a partner has a capital deficiency and does not have the personal resources to eliminate it,

a) the creditors will have to absorb the capital deficiency.

b) the other partners will absorb the capital deficiency on the basis of their respective capital balances.

c) the other partners will have to absorb the capital deficiency on the basis of their respective profit-sharing ratios.

d) neither the creditors nor the other partners will have to absorb the capital deficiency.

Difficulty: Easy

Learning Objective: Account for the liquidation of a partnership.

Section Reference: Liquidation of a Partnership

CPA: Financial Reporting

AACSB: Analytic

132. The liquidation of a partnership

a) cannot be a voluntary act of the partners.

b) terminates the business.

c) eliminates those partners with a capital deficiency.

d) cannot occur unless all partners approve.

Difficulty: Easy

Learning Objective: Account for the liquidation of a partnership.

Section Reference: Liquidation of a Partnership

CPA: Financial Reporting

AACSB: Analytic

133. The liquidation of a partnership is a process containing the following steps:
1. Pay partnership liabilities in cash.
2. Allocate the gain or loss on realization to the partners based on their profit ratios.
3. Sell noncash assets for cash and recognize a gain or loss on realization.
4. Distribute remaining cash to partners on the basis of their remaining capital balances.
Identify the proper sequencing of the steps in the liquidation process.

a) 3, 2, 4, 1

b) 3, 2, 1, 4

c) 1, 3, 2, 4

d) 1, 4, 3, 2

Difficulty: Easy

Learning Objective: Account for the liquidation of a partnership.

Section Reference: Liquidation of a Partnership

CPA: Financial Reporting

AACSB: Analytic

134. In the final step of the liquidation process, remaining cash is distributed to partners

a) on an equal basis.

b) on the basis of the profit ratios.

c) on the basis of the remaining capital balances.

d) regardless of capital deficiencies.

Difficulty: Easy

Learning Objective: Account for the liquidation of a partnership.

Section Reference: Liquidation of a Partnership

CPA: Financial Reporting

AACSB: Analytic

135. In the liquidation process, if a capital account shows a deficiency

a) the partner with a deficiency has an obligation to the partnership for the amount of the deficiency.

b) it may be written off to a "Loss" account.

c) it is disregarded until after the partnership books are closed.

d) it can be written off to a "Gain" account.

Difficulty: Easy

Learning Objective: Account for the liquidation of a partnership.

Section Reference: Liquidation of a Partnership

CPA: Financial Reporting

AACSB: Analytic

136. The liquidation of a partnership ends the business. It involves

a) selling noncash assets.

b) paying liabilities.

c) distributing any remaining assets to partners.

d) all of the above

Difficulty: Easy

Learning Objective: Account for the liquidation of a partnership.

Section Reference: Liquidation of a Partnership

CPA: Financial Reporting

AACSB: Analytic

137. A capital deficiency exists when

a) two or more partners have a credit balance in their capital accounts.

b) at least one partner has a debit balance in their capital account.

c) all partners have a zero balance in their capital accounts.

d) at least one partner has a credit balance in their capital account.

Difficulty: Easy

Learning Objective: Account for the liquidation of a partnership.

Section Reference: Liquidation of a Partnership

CPA: Financial Reporting

AACSB: Analytic

138. A capital deficiency may be caused by

a) recurring losses.

b) excess drawings.

c) losses from realization during liquidation.

d) all of the above

Difficulty: Easy

Learning Objective: Account for the liquidation of a partnership.

Section Reference: Liquidation of a Partnership

CPA: Financial Reporting

AACSB: Analytic

139. In a partnership liquidation situation where one or more of the partners’ capital accounts have a debit balance, this is referred to as

a) a capital deficiency.

b) no capital deficiency.

c) a gain on realization.

d) a loss on realization.

Difficulty: Easy

Learning Objective: Account for the liquidation of a partnership.

Section Reference: Liquidation of a Partnership

CPA: Financial Reporting

AACSB: Analytic

MATCHING QUESTIONs

140. Match the items below by entering the appropriate code letter in the space provided.

A. Mutual agency F. Admission by investment

B. Unlimited liability G. Purchase of an interest

C. Partnership agreement H. Partnership liquidation

D. Profit ratio I. Capital deficiency

E. Statement of Partners' Equity J. Realization

1. Each partner is personally and individually liable for partnership debts.

2. Each partner can bind the partnership so long as the action appears to be appropriate for the partnership.

3. Written or verbal contract establishing duties and responsibilities of partners

4. The basis for sharing profit and losses

5. Explains changes in individual partner's capital accounts during a period.

6. Results in an increase in total net assets and total capital of the partnership.

7. Total net assets and total capital of the partnership do not change.

8. The sale of noncash assets

9. Ends both the legal and economic life of the entity.

10. Capital account with a debit balance