LearnSmart Chapters 9-10

Partners A and B allocate annual partnership income as follows. Each partner receives 20% of their beginning capital balances. Each partner also receives a $10,000 salary. Remaining income is distributed 60% to partner A and 40% to partner B. If current year net income is $58,000 and beginning capital balance for A and B are $90,000 and $75,000, respectively, how much net income is allocated to partner B?

$27,000 Reason: (75,000 x 20%) + 10,000 + (5,000 x 40%)

Select all that apply What are some partnership activities that are considered capital transactions? Retirement of a partner. Allocation of partnership profits and losses. The partnership acquisition of a building in exchange for partnership cash. Admission of a new partner.

Retirement of a partner. Allocation of partnership profits and losses. Admission of a new partner.

Select all that apply Accounting techniques for recognizing a partner's contribution of a special valuable talent to a partnership include the equal capital method. the mutual agency method. the goodwill method. the bonus method.

the goodwill method. the bonus method.

True or false: An advantage of a limited liability company (LLC) is that the number of owners is not restricted.

True

True or false: Individual partners can be held personally liable for all partnership obligations.

True

True or false: The Uniform Partnership Act was created in part to provide consistent standards and application of partnership law across state lines.

True

At the time of partnership termination, Partner A is personally insolvent and has a negative capital balance. Partners B and C must absorb A's deficit through

a reduction in their capital accounts.

A partner brings valuable expertise to a partnership. The partnership records no asset for this expertise, but the contributing partner nonetheless receives an additional capital credit. By crediting this partners capital account, the partnership has employed the _____ method.

bonus

Preparation of a proposed schedule of liquidation is based on the assumption that the partnership's noncash assets

cannot be sold for cash.

When partners make cash contributions to a partnership, a credit to each individual partner's _____ account records the contribution.

capital

Select all that apply Potential future effects of the valuation of property contributed to a partnership include depreciation of the contributed property can affect cash flows to the partnership. capital account balances often affect partnership profit and loss distribution. settlement of a partner's interest upon partnership liquidation. settlement of a partner's interest upon partner retirement.

capital account balances often affect partnership profit and loss distribution. settlement of a partner's interest upon partnership liquidation. settlement of a partner's interest upon partner retirement.

Select all that apply Partnership capital contributions often include cash. tangible asset contributions. intangible asset contributions. loans to the partnership.

cash. tangible asset contributions. intangible asset contributions.

Select all that apply Assume all periodic partnership revenues and expenses have been closed to an Income Summary account. Final closing entries are then needed to close the partners' drawing accounts to their individual capital accounts. close the partners' drawing accounts to the retained earnings of the partnership. close the Income Summary account to the retained earnings of the partnership. close the Income Summary account by distributing the total profit or loss to the individual partners' capital accounts.

close the partners' drawing accounts to their individual capital accounts. close the Income Summary account by distributing the total profit or loss to the individual partners' capital accounts.

In a partnership liquidation, individual partners

could be asked to personally satisfy all of the partnership's liabilities.

Frequent statements of partnership liquidation allow both partners and partnership _____ to stay apprised of the liquidation process.

creditors

Select all that apply A statement of partnership liquidation discloses current capital balances. future cash distributions to individual partners. partnership liabilities remaining to be paid. assets still held by the partnership.

current capital balances. partnership liabilities remaining to be paid. assets still held by the partnership.

When other partners are unable to recover any part of an insolvent partner's deficit capital balance, the insolvent partner's capital account should be closed and the other partners' capital accounts should be

debited for each partner's share of the deficit.

Select all that apply Compared to a corporation's balance sheet, the owners' equity section of a partnership does not usually distinguish between contributed and earned capital. typically consists of solely partner's capital accounts. shows separate balances for invested capital and retained earnings. typically provides a much more limited range of information.

does not usually distinguish between contributed and earned capital. typically consists of solely partner's capital accounts. typically provides a much more limited range of information.

Because a Subchapter S corporation pays no income taxes, but passes its income through to the tax returns of the individual owners, it avoids _____ taxation of its income.

double

Corporations pay income taxes. Additionally their owners also often pay taxes when the corporation's income is paid as dividends. In contrast, because partnership income is passed though to the individual partners tax returns, the partnership is said to avoid _____ taxation of the profit earned by the business.

double

In addition to accounting for the transactions that occur during a partnership liquidation, the partnership's accountant should work to ensure the _____ treatment of all parties involved in the liquidation.

equitable

Despite the notion that a partnership is an extension of its individual partners, a noncash asset contributed to the partnership should be recorded at its contribution-date _____ value.

fair

Similar to initial partner contributions to begin a partnership, subsequent partner contributions to support ongoing operations or expansion should be credited to the contributing partner's capital account at _____ value.

fair

Traditionally, the contribution of property by a partner to a partnership is recorded at _____ value.

fair

A partner contributes a building to her partnership that has appreciated in value. The partnership's valuation basis for the building should be

fair value.

According to the Internal Revenue Code, partnership income

flows through to the individual tax returns of the individual partners.

A partner brings valuable website design talent to a partnership. The partnership records goodwill to recognize this talent, and the contributing partner receives an additional capital credit. To account for the contribution of talent, the partnership has employed the _____ method.

goodwill

Select all that apply Under the goodwill method for recognizing a partner's intangible contribution goodwill is recognized as an asset of the partnership to reflect the intangible contribution. no asset is recorded; only partners' capital accounts are affected. the partner contributing the intangible property provides a bonus to the other partners. the partner deemed to be contributing goodwill is given a capital credit to recognize the asset brought to the partnership.

goodwill is recognized as an asset of the partnership to reflect the intangible contribution. the partner deemed to be contributing goodwill is given a capital credit to recognize the asset brought to the partnership.

Select all that apply Accounting for a partnership's owners' equity tends to be much less complex than for a corporation because partnerships tend to have more owners than corporations. absentee ownership tends to characterize partnerships more than corporations. government regulations require greater disclosures for corporations to protect the investing public and others partnerships tend to be smaller and have less complex equity transactions than corporations.

government regulations require greater disclosures for corporations to protect the investing public and others partnerships tend to be smaller and have less complex equity transactions than corporations.

Assume the articles of partnership specify that profits are to be allocated 60% to partner A and 40% to partner B. If, however the articles of partnership are silent concerning the allocation of a partnership loss, then any loss is allocated

in the same manner as partnership profits.

Select all that apply A statement of partnership liquidation should include several columns of information that show changes in individual partners' capital accounts. partnership revenues and expenses. partnership cash. partnership liabilities.

individual partners' capital accounts. partnership cash. partnership liabilities.

A preliminary distribution of cash can be safely made to partners at the beginning of a partnership liquidation by assuming that all partners are personally

insolvent

At the time of the termination of the ABCD partnership, Partner A and Partner B have negative capital balances, and Partner A is personally insolvent. After Partner A's deficit capital balance is written-off, the balance in Partner B's capital account

is a larger negative amount.

Select all that apply A limited liability partnership (LLP) ___. is a popular organizational form for major public accounting firms does not limit individual partner's liability arising from contractual obligations of the partnership limits a partner's legal liability to the amount of the partner's investment in the partnership limits the partners' individual liabilities resulting from damages awarded by a court

is a popular organizational form for major public accounting firms does not limit individual partner's liability arising from contractual obligations of the partnership limits the partners' individual liabilities resulting from damages awarded by a court

At year end, a partner's drawing account

is closed to the partner's capital account.

The difference between the amount of partnership cash on hand at the beginning of a liquidation and the amount of partnership capital needed to pay partnership liabilities and absorb all possible future losses

is the safe balance in cash that can be immediately distributed to partners.

A limited partnership helps the individual partners protect their personal financial position through the avoidance of unlimited _____ from the partnership.

liability

The emergence of several alternative partnership forms derives from the desire to avoid double taxation and

limit the personal liability exposure of individual partners.

To prepare a predistribution plan, the accountant must determine the

maximum amount of loss that can be absorbed by each partner.

The legal term stating that each partner possesses the right to incur liabilities on behalf of the partnership in the normal course of business is _____ _____.

mutual agency

Under the bonus method for recognizing a partner's intangible contribution

no asset is recorded; only partners' capital accounts are affected.

Select all that apply The amount of cash that can be safely distributed to partners at the beginning of a liquidation is determined by assuming that no cash will be received from selling noncash assets. creditors are willing to forego payment of amounts owed by the partnership. partners are personally insolvent.

no cash will be received from selling noncash assets. partners are personally insolvent.

Select all that apply A limited partnership (LP) often has investors that are not allowed to participate in the management of the partnership. has general partners who are designated to assume responsibility for all partnership debts. has investors whose liability may be limited to the amount they have invested in the partnership. does not convey the tax benefits that accompany a regular partnership.

often has investors that are not allowed to participate in the management of the partnership. has general partners who are designated to assume responsibility for all partnership debts. has investors whose liability may be limited to the amount they have invested in the partnership.

At the time of partnership termination, Partner A is personally insolvent and has a negative capital balance. Partners B and C must absorb A's deficit

on the basis of their respective profit and loss ratios.

The negative (deficit) balance in a partner's capital account is closed to zero

only upon final resolution of the amount, if any, the partner will contribute to the partnership to offset the deficit capital balance.

The parties most interested in the financial information produced during a partnership liquidation are the partnership's

partners and creditors.

Receiving a statement of partnership liquidation on a frequent basis can be of value to

partners and partnership creditors.

A statement of partnership liquidation reports updated balances in the partnership's assets, liabilities, and

partners' capital accounts.

Select all that apply The parties most interested in the financial information produced during a partnership liquidation are the partnership's customers. partners. stockholders. creditors.

partners. creditors.

According to the Uniform Partnership Act, an obligation of a limited liability partnership arising from a contract is solely the obligation of the

partnership

If the articles of partnership are silent with regard to partnership income distribution to the individual partners, then

partnership income is allocated equally among all partners.

Select all that apply Partnerships often serve as a preferred organization form for businesses compared to the corporate form because partnerships can usually raise more capital than corporations. partnerships are easier and less costly to form than corporations. tax benefits exist for partnerships relative to corporations. some state regulations prevent doctors and attorneys from forming corporations.

partnerships are easier and less costly to form than corporations. tax benefits exist for partnerships relative to corporations. some state regulations prevent doctors and attorneys from forming corporations.

Select all that apply The Uniform Partnership Act provides a legal definition of a partnership. carries no legal weight in court decisions. has been adopted by all states in some form. establishes uniform standards for many partnership characteristics.

provides a legal definition of a partnership. has been adopted by all states in some form. establishes uniform standards for many partnership characteristics.

Select all that apply A Subchapter S Corporation provides limited liability to its owners. can have an unlimited number of stockholders. must have only one class of stock. is taxed in the same way as a partnership.

provides limited liability to its owners. must have only one class of stock. is taxed in the same way as a partnership.

Select all that apply The articles of partnership document represents a legal agreement that governs the operation of the partnership. is a negotiated agreement created by the partners. largely determines the accounting procedures followed for the partnership. provides guidance to the partnership but is not legally binding.

represents a legal agreement that governs the operation of the partnership. is a negotiated agreement created by the partners. largely determines the accounting procedures followed for the partnership.

A partner's negative capital balance remains on the partnership's books until there is a final _____ of that partner's deficit.

resolution

The statement of partners' capital effectively replaces the statement of _____ _____ for a corporation

retained earnings

When making distributions of cash to partners during the liquidation process, the accountant must ensure that each partner has a _____ capital balance, which is the minimum amount that a partner must retain in their capital account to be able to absorb future losses.

safe

A safe payment is the amount that can be distributed to an individual partner during the liquidation process while ensuring that the partner's capital account maintains a

safe balance.

Select all that apply In addition to accounting for the transactions that transpire during a partnership liquidation, the partnership's accountant should work to make sure that all parties involved in the liquidation are treated equitably. might be asked to make recommendations regarding the distribution of partnership funds. should take the lead role in making sure that the partnership's assets are sold at the highest price possible.

should work to make sure that all parties involved in the liquidation are treated equitably. might be asked to make recommendations regarding the distribution of partnership funds.

Select all that apply Partnerships often serve as a preferred organization form for businesses compared to the corporate form because partnerships can usually raise more capital than corporations. some state regulations prevent doctors and attorneys from forming corporations. tax benefits exist for partnerships relative to corporations. partnerships are easier and less costly to form than corporations.

some state regulations prevent doctors and attorneys from forming corporations. tax benefits exist for partnerships relative to corporations. partnerships are easier and less costly to form than corporations.

Alternative legal forms of partnerships have been provided in many state laws that both limit the liability of individual partners while maintaining the _____ benefits of the partnership form of business organization.

tax

A partner's safe capital balance is the amount

that must remain in that partner's capital account to absorb any future losses.

When a partner has a negative capital balance, but is personally solvent,

that partner makes a capital contribution to the partnership.

If an individual partner contributes property to a partnership

that partner no longer has an individual claim to the property.

A partner with a negative capital balance should make a contribution to the partnership in an amount equal to

that partner's negative capital balance.

Select all that apply Included in the advantages of the partnership form of business organization are the requirement of a written agreement that legally binds the partners. the ability to make any arrangement desired among the partners for income distribution and control of business decision making. a lower cost of formation compared to the corporate form. ease of formation.

the ability to make any arrangement desired among the partners for income distribution and control of business decision making. a lower cost of formation compared to the corporate form. ease of formation.

Select all that apply A tax advantage of partnerships over the corporate business organizational form is the avoidance of double taxation. a partner's share of partnership operating losses can be used to offset income on the partner's individual tax return. tax rates for partnership entities are lower than for corporations. partnership income is only taxed when it is distributed in cash to the individual partners.

the avoidance of double taxation. a partner's share of partnership operating losses can be used to offset income on the partner's individual tax return.

Select all that apply Under the goodwill method for recognizing a partner's intangible contribution the partner contributing the intangible property provides a bonus to the other partners. no asset is recorded; only partners' capital accounts are affected. the partner deemed to be contributing goodwill is given a capital credit to recognize the asset brought to the partnership. goodwill is recognized as an asset of the partnership to reflect the intangible contribution.

the partner deemed to be contributing goodwill is given a capital credit to recognize the asset brought to the partnership. goodwill is recognized as an asset of the partnership to reflect the intangible contribution.

Some amount of partnership cash can be safely distributed to partners at the date of partnership termination if

the partnership is solvent.

Select all that apply Typically included in an articles of partnership agreement are the procedures for admitting a new partner. the rights and responsibilities of each partner. how to distribute the profits and losses of the partnership. the number of common shares of stock to be issued to each of the partners.

the procedures for admitting a new partner. the rights and responsibilities of each partner. how to distribute the profits and losses of the partnership.

In preparing a proposed schedule of liquidation,

the results of transactions that have already occurred should be recorded before recording the simulated results from assumed future losses.

Select all that apply As compared to corporations, disadvantages of the partnership business form include mutual agency that limits the risk of the individual partners for overall partnership debts. unlimited personal liability of the individual partners for their proportional share of partnership debts. unlimited personal liability of the individual partners for all partnership debts. mutual agency where individual partners can incur liabilities in the name of the partnership in the normal course of business.

unlimited personal liability of the individual partners for all partnership debts. mutual agency where individual partners can incur liabilities in the name of the partnership in the normal course of business.

Select all that apply A limited liability company (LLC) ___. with respect to restriction on the number of owners is similar to a Subchapter S corporation with respect to partner liability is similar to a Subchapter S entity is classified as a partnership for tax purposes and court purposes in many states limits an owner's risk to his or her own investments

with respect to partner liability is similar to a Subchapter S entity is classified as a partnership for tax purposes and court purposes in many states limits an owner's risk to his or her own investments

If an individual partner's allocation of annual partnership profits exceeds his or her annual partnership withdrawals, what net effect should be reflected in the that partner's capital account?

An increase.

A statement of partnership liquidation reports updated balances in the partnership's assets, liabilities, and capital accounts

at periodic intervals.

The basic format of a statement of partners' capital is

beginning capital balances + income allocations - drawings = ending capital balances

Select all that apply Which of the following is not a reason for forming a partnership as opposed to a corporation for a new business? (Select all that apply.) Ease of formation for partnerships. Partnerships can result in double-taxation. Corporate forms are legally unavailable for some business activities. Partnership income typically flows tax-free to the partners.

Partnerships can result in double-taxation. Partnership income typically flows tax-free to the partners.

A partnership has four partners, two of whom have negative capital balances and one of these is personally insolvent. When the personally insolvent partner's deficit capital balance is written off

all of the other partners absorb the loss.

A partner's capital account represents a claim on the partnership business as a whole, but not a specific claim on any individual

asset