That stinkin class yet again
Which of the following are true statements regarding a partner's rights and duties?
All partners are entitled to an equal share of the profits or losses unless otherwise agreed to in the partnership agreement. New partners can be admitted only with the consent of all of the partners. Each partner has a right of access to the partnership's books and records.
Which of the following is a true statement about liability in a partnership?
All partners are liable jointly and severally for all the partnership's obligations.
Which of the following statements are true regarding the financial reporting requirements for partnerships?
An independent auditor can issue an opinion that the statements are in accordance with GAAP. The partnership can use non-GAAP accounting methods for internal reporting needs. The financial statements should be prepared in accordance with GAAP if they are issued for external users.
Which of the following items are recorded in a partner's capital account?
Any withdrawals of capital The partner's initial investment Any profit or loss distributions
Which of the following account types may be maintained for each partner in the accounting records?
Drawing account Capital account Loan account
Which of the following statements regarding the drawing account are true?
It records the partner's periodic withdrawals. It is closed to the partner's capital account at the end of the period.
On January 1, 20X1, Jason and Lisa formed JL Partnership. JL Partnership earned a profit of $49,000 during the year. The partnership agreement provides for $3,000 in fixed "salary" allocations to Jason and $6,000 to Lisa. Any remainder is to be distributed in the profit and loss-sharing ratio of 30:70. Which of the following statements is true about the profit distribution to Jason and Lisa?
Lisa receives a total of $34,000 from the partnership during the year. Amount of profit after fixed allocation = $49,000 - ($3,000 + $6,000) = $40,000; Jason's share in the remaining profit = $40,000 × (30/100) = $12,000; Lisa's share in the remaining profit = $40,000 × (70/100) = $28,000; Jason's total share = $3,000 + $12,000 = $15,000; Lisa's total share = $6,000 + $28,000 = $34,000.
What are some of the reasons that a partnership may choose to use accrual accounting and GAAP to maintain their books?
Partnerships can get an unqualified opinion on audited financial statements. The use of accrual accounting and GAAP can allow for better comparability with companies in the same line of business. The use of accrual accounting and GAAP provides better measures of income over time.
Which of the following statements is true regarding profit distributions from partnerships to partners?
Profit distributions are recorded directly into the partner's capital accounts.
Which of the following are true statements about the entry or entries to allocate profits or losses in a partnership?
Revenue and expense accounts can be directly closed to partners' capital accounts. Revenue and expense accounts are usually closed into an income summary account. The income summary account (if used) is closed to the partners' capital accounts based on the formula prescribed in the partnership agreement.
Identify the components affecting the value of the capital account of a partner.
Share of the partnership profit or loss Contribution to the partnership
During 20X1, George and Richard formed GR Partnership and earned $25,000 of revenue and incurred $12,000 in expenses, resulting in a $13,000 profit for the year. George maintains a capital balance of $10,000 during the year, but Richard's capital investment varies during the year. His capital account shows a debit of $2,500 and a credit of $1,500 during the year. Which of the following statements are true about Richard's capital account during the year?
The credit of $1,500 represents Richard's additional capital contribution. The debit of $2,500 represents Richard's drawings.
Which of the following are features of partnerships as per the UPA 1997, Section 202?
The partners carry on the business as co-owners. The partnership business is carried out for profit. A partnership is an association of two or more people.
What are some of the reasons that a partnership may choose to use the cash-basis method or the modified cash-basis method of accounting?
These methods provide continuous current cash position information. These methods have simplified record-keeping requirements.
In partnership profit distribution, a salary is
a fixed amount of profits allocated to a given partner.
The "entity concept" means
a partnership is a separate business entity, distinct from its partners. a partnership can sue or be sued.
In partnership profit distribution, a bonus is
a portion of profits allocated to a partner based on a predetermined performance formula.
In forming a partnership,
an entity distinct from its partners comes into existence. contributed assets are recorded at their fair values. an item contributed by a partner becomes partnership property.
Each partner in an LLLP is liable for ______.
business obligations
A partnership allows several individuals to ______ in a particular business venture.
combine their talents and skills
If an entity does not have a formal partnership agreement, Section 401 of the UPA 1997 indicates that all partners should share profits and losses
equally.
A partner in a limited liability partnership
has limited legal liability.
A partner is disassociated from a partnership when he or she
is expelled from the firm in accordance with the partnership agreement. becomes a debtor in bankruptcy. gives notice to the partnership of his or her express will to withdraw as a partner.
The allocation of profits based on capital balances is
not an expense of the partnership. a method for distributing profits.
The general partners in a limited liability limited partnership are
not personally liable for partnership obligations. responsible for the management of the partnership
To distribute a partnership's income based on interest on capital balances means the partners divide profits among themselves according to the
relative balances they have maintained in their capital accounts.
A partnership agreement should include:
the name of the partnership and the names of the partners. the duration of the partnership agreement. a description of the business to be conducted by the partnership.
According to the proprietary concept of owner's equity,
the proprietor invests capital and personal services in pursuit of income.
When a partnership uses an accounting method that is proximate to GAAP with some adjustments and the financial statements are presented to external users, the statements should clearly identify ______.
the specific accounting methods used
Ratios for profit distribution may be based on the percentage of ______.
total partnership capital, time, and effort invested
Accounting for an investment in a limited partnership is based on an evaluation of the
operational control of the partner.
A partner's capital account has a debit balance when the
partner's share of losses and withdrawals exceeds his or her capital contribution and share of profits.
The partnership is obligated to pay interest on any loan to an individual partner unless all
partners agree otherwise.
Which of the following is a true statement regarding a partner's transferable interest in a partnership?
A partner's right to receive distributions is transferable.
Which of the following statements are true of partnerships?
A partnership can obtain more equity capital than a single individual can. A partnership is easy to form. A partnership allows risks to be shared in rapidly growing businesses.
Identify the method in which the accountant allocates the earnings of the partnership to the partners' capital accounts.
Allocating as per the formula given in the partnership agreement
On January 1, 20X1, David and Harry formed DH Partnership. DH Partnership earned a profit of $60,000 during the year. Both agreed to receive 10% interest on the weighted-average capital balances. The David's weighted-average capital balance at year-end is $50,000 and Harry's is $80,000. The total interest on capital is equal to $13,000. The partnership agreement provides for total salaries for David and Harry of $6,000 each. Any remainder is to be distributed in the profit and loss-sharing ratio of 30:70. What is the amount of profit distributed to both the partners after the interest and salary distribution?
David's share = $10,500; Harry's share = $24,500. Amount available after interest and salary = $60,000 - $13,000 - $12,000 ($6,000 salary each) = $35,000; Profit distributed to David = $35,000 × 30/100 = $10,500; Profit distributed to Harry = $35,000 × 70/100 = $24,500.
Harley is a partner in HAB Partnership. On March 31, 20X5, he withdraws $2,000 cash from the partnership. Which of the following journal entries records the cash withdrawal by Harley?
Debit Harley, Drawing for $2,000; Credit Cash for $2,000
During 20X1, Nelson and Evans contributed $200,000 and $300,000, respectively, to form NE Partnership. Their ratio for profit distributions is based on partner's capital contributions. Revenues and expenses are closed to an income summary account. During the year, NE Partnership earned $250,000 of revenue and incurred $125,000 in expenses. Which of the following journal entries will distribute profit at year-end in accordance with the partnership agreement?
Debit Income Summary for $125,000; Credit Nelson, Capital for $50,000; Credit Evans, Capital for $75,000 Profit sharing ratio= $200,000:$300,000 = 2:3; Profit to be distributed = $250,000 - $125,000 = $125,000; Nelson's share = $125,000 × 2/5 = $50,000; Ryan's share = $125,000 × 3/5 = $75,000.
During 20X1, Baker and Carter formed BC Partnership and earned $125,000 of revenue and incurred $80,000 in expenses. The revenue and expenses are closed to an income summary account. Identify the journal entry needed to close the revenue and expense accounts at the end of the year.
Debit Revenue for $125,000; Credit Expenses for $80,000; Credit Income Summary for $45,000 Amount to be credited in the income summary = $125,000 - $80,000 = $45,000.
Which of the following statements are true regarding the items included in a partnership agreement?
The partnership agreement includes the initial capital contribution of each partner. The partnership agreement includes procedures used for admission of new partners. The partnership agreement includes accounting methods to use.
On January 1, 20X1, Sarah and Laura formed SL Partnership. Both partners made capital contributions of $120,000. During the year, Laura's drawings account shows a withdrawal of $20,000 on June 1 and a withdrawal of $25,000 on September 30, and her capital account indicates an additional capital contribution of $40,000 on August 1. Assume that drawings are closed to the capital account and that drawings during the year are included in the calculation of average capital balances as of the date of withdrawal and now when they are closed to capital accounts. What is Laura's weighted-average capital balance for 20X1?
$118,750 Balance of $120,000 used for 5 months (Jan 1-May 31) = $120,000 × 5 = $600,000; Balance of $100,000 used for 2 months (Jun 1-Jul 31) = $100,000 × 2 = $200,000; Balance of $140,000 used for 2 months (Aug 1-Sep29) = $140,000 × 2 = $280,000; Balance of $115,000 used for 3 months (Sep 30-Dec 31) = $115,000 × 3 = $345,000; Weighted-average = ($600,000 + $200,000 + $280,000 + $345,000) ÷ 12 = $118,750.
Sandra, a sole proprietor, is an interior designer and has the following account balances on December 31, 20X0: Cash $2,500, Inventory $9,000, Equipment $25,000, Accumulated depreciation $5,000, Liabilities $14,000. In preparation for the formation of a partnership with a friend in which Sandra will contribute all of her net assets to the partnership, Sandra's business is audited, and its net assets are appraised. The audit and appraisal disclose that $1,000 of liabilities have not been recorded, inventory has a market value of $12,000, and the equipment has a fair value of $24,000. Assuming Sandra revalues her assets and liabilities based on the audit and the appraisal, what is Sandra's capital after revaluation?
$23,500 Sandra's capital= $2,500 + $12,000 + $24,000 - $15,000 = $23,500.
On January 1, 20X1, Maria and Kevin formed MK Partnership. MK Partnership earned a profit of $50,000 during the year. Both agreed to 10 percent interest on the weighted-average capital balances. Maria's weighted-average capital balance at year-end was $100,000 and Kevin's was $50,000. The partnership agreement provides Maria a $3,000 salary and Kevin a $6,000 salary. Any remainder is to be distributed in the profit and loss-sharing ratio of 30:70. What is the amount of profit available to be distributed to the partners after interest and salary distribution?
$26,000 Total interest on capital = 10% × ($100,000 + $50,000) = $15,000; Total salary = $3,000 + $6,000 = $9,000; Amount available after interest and salary = $50,000 - $15,000 - $9,000 = $26,000.
Henry, a sole proprietor and a general physician, has the following account balances on December 31, 20X0: Cash $1,500, Inventory $5,000, Equipment $15,000, Accumulated depreciation $3,000, Liabilities $12,000. What is Henry's capital balance?
$6,500 Henry's capital= $1,500 + $5,000 + $15,000 - $3,000 - $12,000 = $6,500.
On January 1, 20X1, Edward and Garcia formed EG Partnership. Both agreed to allocate profits first based on 10 percent of the weighted-average capital balances and then to allocate any remaining profit based on a 40:60 ratio. The weighted-average capital balance at the year-end for Edward was $120,000 and Garcia's was $80,000, resulting in a first profit allocation of $12,000 and $8,000 respectively. Calculate the partners' share in the distribution of the $40,000 profit on December 31, 20X1. (Hint: after the first profit allocation, the remaining profit to be allocated is $20,000.)
Edward's share = $20,000; Garcia's share = $20,000 Edward's share in the remaining profit = $20,000 × (4/10) = $8,000; Garcia's share in the remaining profit = $20,000 × (6/10) = $12,000; Edward's total share = $12,000 + $8,000 = $20,000; Garcia's total share = $8,000 + $12,000 = $20,000.
True or false: Not-for-profit entities may be organized as partnerships.
False
True or false: The partnership must maintain only one account for each partner in its accounting records.
False
During 20X1, Grace and Ryan contributed $120,000 and $180,000, respectively, to form RG Partnership. RG Partnership earned $150,000 of revenue and incurred $25,000 as expenses. What is the share of profit credited to each partner's capital account if the ratio for profit distributions is based on each partner's capital contributions?
Grace's share in the profit = $50,000; Ryan's share in the profit = $75,000. Profit to be distributed among partners = $150,000 - $25,000 = $125,000; Profit-sharing ratio = $120,000:$180,000 = 2:3; Profit credited to Grace = $125,000 × 2/5 = $50,000; Profit credited to Ryan = $125,000 × 3/5 = $75,000.
