PARTNERSHIP OPERATIONS- Theories Part I

True Explanation A credit balance in the income summary account represents a profit.

A credit balance in the income summary account represents profit after closing into it all the operating accounts.

True

Partners may intend for salary and interest allowances to be deducted in determining the base for computing bonus. In such a case, no bonus is allowed if there is insufficient profit after the redistribution of salaries and interests.

True

Profits and losses, in general, shall be divided in accordance with the agreement among the partners.

False Salaries, interest and bonuses are part of the distribution of profit and not treated as an expense.

Salaries, interests, and bonuses allowed to partners as a distribution of partnership profits are treated as partnership expenses.

True Explanation Debited drawings are treated as temporary withdrawal or share in loss while Credited drawings are treated as share in profits.

The drawing account of a partner may have a debit or a credit balance.

True Explanation Division of profit is added in the income statement of a partnership.

The income statement of a partnership differs from that of a single proprietorship in only one aspect: a final section is added to show the division of profits between or among partners.

True Explanation Books may show incorrect profit because of errors and omission but must be corrected before the distribution of profit.

The partnership books may show an incorrect profit because of errors and omissions that should first be corrected before the profit distributions to the partners.

False Explanation Percentage interest does not guarantee the same amount to profit-sharing ratio

The percentage interest in a partnership is always the same as the profit-sharing ratio.

True Explanation Balance of income summary account is transferred to the drawing accounts if the intention is to keep the capital account intact for investments.

The profit of the partnership is transferred to the drawing accounts of the partners if the intention is to keep the capital account intact for investments and permanent withdrawals of capital.

True Explanation Instead of Statement of Owner's Equity, partnership has a Statement of Changes in Partner's Equity.

The statement of changes in partner's equity takes the place of the capital statement in a sole proprietorship.

True Explanation Salaries and interest shall be provided whether the profit is sufficient or insufficient

Unless otherwise agreed, allowance for salaries and interest are allowed to partners whether there is profit or loss; whether the profit is sufficient or insufficient.

False Explanation Industrial partner shall have no share in the losses

All partners, whether capitalist or industrialist, are to share on whatever partnership profits or losses.

False Explanation A general professional partnership is not subject to the income tax imposed.

All partnerships, just like corporations, are subject to income tax.

True Explanation Interest on capital and the balance on agreed ratio; salary allowances to partners and the balance on agreed ratio.

Allowance for salaries and interest in a partnership agreement are methods of allocating profits and losses to the partners.

False Explanation Adequate accounting system and an accurate measurement of income is needed by a partnership in distribution of profits.

An adequate accounting system and an accurate measurement of income are not needed by a partnership because the profit is divided among two or more partners.

True Explanation Salaries authorized is part of the division of profits and not considered as an expense of the business.

Any salaries authorized for partners are regarded as a preliminary step in the division of profits, not as an expense of the business.

True Explanation No bonus is allowed if there is insufficient profit after distribution of salaries and interests.

Bonus is allowed to partners only if there is a partnership profit, since bonus is based on profit.

False Explanation In the absence of an agreement, division of profits is in accordance with capital contributions.

If the partners did not agree as to how profits are to be divided, then such should be divided among the partners equally.

True Explanation The division of losses will be the same as the agreement on the division of profits.

If the partnership agreement specifies a method for sharing profit but not losses, then losses are shared in the same proportion as profits.

True

In the absence of an agreement, the capitalist-industrial partner in his character as industrial partner shall have no share in the losses, but in his character as a capitalist will share in proportion to his capital contribution.