CHAPTER 12: AIS FOR PARTNERSHIP REVIEWER

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 not required to file an information tax return. c. Each partner's share of income is taxable to the partnership. d. A partnership represents an accounting entity for financial reporting purposes.

A partnership represents an accounting entity for financial reporting purposes.

Which of the following would not cause an increase in partnership capital? a. Drawings b. Net income c. Additional capital investment by the partners d. Initial capital investment by the partners

Drawings

If a new partner is admitted into a partnership by investment, the total assets and total capital will change.

True

Partnership creditors may have a claim on the personal assets of any of the partners if the partnership assets are not sufficient to settle claims.

True

The balance sheet of a partnership will a. report retained earnings below the partnership capital accounts. b. show a separate capital account for each partner. c. show a separate drawing account for each partner. d. show the amount of income that was distributed to each partner.

show a separate capital account for each partner.

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.

terminates the business.

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 income ratios before the admission of the new partner. d. a seniority basis.

the basis of income ratios before the admission of the new partner.

When a partnership interest is purchased a. every 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.

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

In 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 income-sharing ratio. d. only after all creditors have been paid.

to the partners on the basis of their income-sharing ratio.

All of the following are characteristics of partnerships except a. co-ownership of property. b. mutual agency. c. unlimited life. d. association of individuals.

unlimited life.

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 on their income 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.

3, 2, 1, 4.

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.

The partnership contract may be based on a handshake.

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 net income or loss for the year. c. are jointly owned by all partners. d. determine the scope of authority of that partner.

are jointly owned by all partners.

Each of the following is used in preparing the partners' capital statement except the a. balance sheet. b. income statement. c. partners' capital accounts. d. partners' drawing accounts.

balance sheet.

If the partnership agreement specifies salaries to partners, interest on partners' capital, and the remainder on a fixed ratio, and partnership net income is not sufficient to cover both salaries and interest, a. only salaries are allocated to the partners. b. only interest is allocated to the partners. c. the entire net income is shared on a fixed ratio. d. both salaries and interest are allocated to the partners.

both salaries and interest are allocated to the partners.

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.

causes a legal dissolution of the existing partnership.

The partners' drawing 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.

closed to the partners' capital accounts.

A partner's share of net income is recognized in the accounts through a. adjusting entries. b. closing entries. c. correcting entries. d. accrual entries.

closing entries.

The largest companies in the United States are primarily organized as a. limited partnerships. b. partnerships. c. corporations. d. proprietorships.

corporations.

When a partner invests noncash assets in a partnership, the assets should be recorded at their a. book value. b. carrying value. c. fair market value. d. original cost.

fair market value.

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.

general partner.

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 income-sharing ratio. d. is not obligated to make up the capital deficiency.

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

The basis for dividing partnership net income or net loss is referred to as any of the following except the a. income ratio. b. income and loss ratio. c. profit and loss ratio. d. income sharing ratio.

income sharing ratio.

A hybrid form of business organization with certain features like a corporation is a(n) a. limited liability partnership. b. limited liability company. c. "S" corporation. d. sub-chapter "S" corporation.

limited liability company.

A partnership a. has only one owner. b. pays taxes on partnership income. c. must file an information tax return. d. is not an accounting entity for financial reporting purposes.

must file an information tax return.

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 limited to only three partners.

must have at least one general partner.

The partnership form of business is a. restricted to law and medical practices. b. restricted to firms having fewer than 10 partners. c. not restricted to any particular type of business. d. most often used in relatively large companies.

not restricted to any particular type of business.

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 income ratios. c. on the basis of the remaining capital balances. d. regardless of capital deficiencies.

on the basis of the remaining capital balances.

A bonus to a new partner a. is prohibited by GAAP. 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 book values are lower than market values. d. results when the new partner's capital credit is greater than his or her investment of assets in the firm.

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

The liquidation of a partnership may result from each of the following except the a. bankruptcy of the partnership. b. death of a partner. c. retirement of a partner. d. sale of the business by the partners.

retirement of a partner.

The partnership agreement should include each of the following except the a. date of the partnership inception. b. principal location of the firm. c. surviving family members in the event of a partner's death. d. Each of these should be included.

surviving family members in the event of a partner's death.

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

Ease of formation

In an admission of a partner by investment of assets, the total net assets and total capital of the partnership do not change.

False

Partnership income is shared in proportion to each partner's capital equity interest unless the partnership contract specifically indicates the manner in which net income or net loss is to be divided

False

Partnership income or loss need not be closed to partners' capital accounts each period because of the unlimited life characteristic of partnerships.

False

The function of the Partners' Capital Statement is to explain the changes in partners' capital account balances during a period.

False

Unless stated otherwise in the partnership contract, profits and losses are shared among the partners in the ratio of their capital equity balances.

False

Which of the following would not be considered an expense of a partnership in determining income for the period? a. Expired insurance b. Income tax expense c. Rent expense d. Utilities expense

Income tax expense

Which of the following statements is incorrect regarding partnership agreements? a. It may be referred to as the "articles of co-partnership." 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.

Oral agreements are preferable to written articles.

Which of the following is not a necessary action that the partnership must take upon the death of a partner? a. Determine the net income or net loss for the year to date. b. Discontinue business operations. c. Close the books. d. Prepare financial statements.

Discontinue business operations

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

Limited liability

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

Mutual agency

Which of the following statements is correct? a. Salaries to partners and interest on partners' capital are expenses of the partnership. b. Salaries to partners are expenses of the partnership but not interest on partners' capital. c. Interest on partners' capital is an expense of the partnership but not salaries to partners. d. Neither salaries to partners nor interest on partners' capital are expenses of the partnership.

Neither salaries to partners nor interest on partners' capital are expenses of the partnership.

Which one of the following would not be considered an expense of a partnership in determining income for the period? a. Expired insurance b. Salary allowance to partners c. Supplies used d. Freight-out

Salary allowance to partners

A bonus to the remaining partners results when a retiring partner receives partnership assets that are less than his or her capital balance on the date of withdrawal.

True

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

True

An interest allowance in sharing partnership net income (or net loss) is related to the amount of partners' invested capital during the period.

True

If a partner invests noncash assets in a partnership, they should be recorded by the partnership at their fair market value.

True

If a partnership has a loss for the period, the closing entry to transfer the loss to the partners will require a credit to the Income Summary account.

True

Once assets have been invested in the partnership, they are owned jointly by all partners.

True

The act of any partner is binding on all other partners if the act appears to be appropriate for the partnership.

True

The distribution of cash to partners in a partnership liquidation is always made based on the partners' income sharing ratio.

True

The income earned by a partnership will always be greater than the income earned by a proprietorship because in a partnership there is more than one owner contributing to the success of the business.

True

The personal assets, liabilities, and personal transactions of partners are excluded from the accounting records of the partnership.

True

The withdrawal of a partner legally dissolves the partnership.

True

The Uniform Partnership Act provides that a. a purchaser of a partnership interest is not a partner until he or she is accepted into the firm by the continuing partners. b. a partner must obtain the approval of other partners before selling his or her interest. c. the price paid in a purchase of partner's interest must be equal to the capital equity acquired. d. the price paid in a purchase of partner's interest must be greater than the capital equity acquired.

a purchaser of a partnership interest is not a partner until he or she is accepted into the firm by the continuing partners.

Before distributing any remaining cash to partners in a partnership liquidation, it is necessary to do each of the following except a. sell noncash assets for cash. b. recognize a gain or loss on realization. c. allocate the gain or loss to the partners based on their capital balances. d. pay partnership liabilities in cash.

allocate the gain or loss to the partners based on their capital balances.

An entry is not required in the liquidation of a partnership to record the a. payment of cash to creditors. b. distribution of cash to the partners. c. sale of noncash assets. d. allocation of a capital deficiency to partners with credit balances when the deficient partner is expected to pay the deficiency.

allocation of a capital deficiency to partners with credit balances when the deficient partner is expected to pay the deficiency.

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 cope 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 must pay taxes on a mutual or combined basis

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

A bonus to a new partner will a. increase the capital balances of existing partners based on their income ratios before the admission of the new partner. b. increase the capital balances of existing partners based on their income ratios after the admission of the new partner. c. decrease the capital balances of existing partners based on their income 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.

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

In the liquidation of a partnership, the gains and losses from assets sold are a. divided equally among the partners. b. divided among the partners in the stated income ratio. c. divided among the partners in proportion to their capital equity interests. d. ignored.

divided among the partners in the stated income ratio.

An income 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 net income is expected.

funds invested in the partnership are considered the critical factor.

A general partner in a 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.

has unlimited liability for all partnership debts.

A partnership a. is dissolved only by the withdrawal of a partner. b. is dissolved upon the acceptance of a new partner. c. dissolution means the business must liquidate. d. has unlimited life.

is dissolved upon the acceptance of a new partner.

When admitting a new partner by investment, a bonus to old partners a. is usually unjustified because book values 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.

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

The most appropriate basis for dividing partnership net income when the partners do not plan to take an active role in daily operations is a. on a fixed ratio. b. interest on capital balances and salaries to the partners. c. on a ratio based average capital balances. d. salaries to the partners and the remainder on a fixed ratio.

on a ratio based average capital balances.

If a partner with a capital deficiency is unable to pay the amount owed to the partnership, the deficiency is allocated to the partners with credit balances a. equally. b. on the basis of their income ratios. c. on the basis of their capital balances. d. on the basis of their original investments.

on the basis of their income ratios.

The owners' equity statement for a partnership is called the a. partners' proportional statement. b. partners' capital statement. c. statement of shareholders' equity. d. capital and drawing statement.

partners' capital statement.

When a partnership terminates business, the sale of noncash assets is called a. liquidation. b. realization. c. recognition. d. disposition.

realization.

The first step in the liquidation of a partnership is to a. allocate a gain or loss on realization to the partners. b. distribute remaining cash to the partners. c. pay partnership liabilities. d. sell noncash assets and recognize a gain or loss on realization.

sell noncash assets and recognize a gain or loss on realization.

A partners' capital statement 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.

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

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 income sharing ratios. d. neither the creditors nor the other partners will have to absorb the capital deficiency.

the other partners will have to absorb the capital deficiency on the basis of their respective income sharing ratios.

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.

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

Which of the following would not be recorded in the entry for the formation of a partnership? a. Accumulated depreciation b. Allowance for doubtful accounts c. Accounts receivable d. All of these would be recorded.

Accumulated depreciation

A bonus to old partners results when the new partner's capital credit on the date of admittance is greater than his or her investment in the firm.

False

A major advantage of the partnership form of organization is that the partners have unlimited liability.

False

A partnership is an association of no more than two persons to carry on as co-owners of a business for profit.

False

Each partner's initial investment in a partnership should be recorded at book value.

False

If a new partner invests in a partnership at book value and acquires a 1/4 interest in total partnership capital, it indicates that a bonus was paid to the original partners.

False

If salary allowances and interest on capital are stipulated in the partnership profit and loss sharing agreement, they are implemented only if income is sufficient to cover the amounts required by these features.

False

In a liquidation, the final distribution of cash to partners should be on the basis of their income ratios.

False

Salary allowances to partners are a major expense on most partnership income statements.

False

The admission of a new partner results in the legal dissolution of the existing partnership and the beginning of a new partnership.

False

The liquidation of a partnership means that a new partner has been admitted to the partnership.

False

The partners' drawing accounts are closed each period into the Income Summary account.

False

The partnership agreement between partners must be in writing.

False

Total partners' equity of a partnership is equal to the sum of all partners' capital account balances.

False

Two proprietorships cannot combine and form a partnership.

False

Unless the partnership agreement specifically indicates an income ratio, partnership net income or loss is not allocated to the partners

False

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 net income 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.

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

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 balance of the accounts receivable account should be recorded on the books of the partnership at its net realizable 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.

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