SIE Unit 5 Checkpoint exam

At the time of a limited partnership's dissolution, who is the last to be paid? A) General partners B) General lenders (creditors) C) Limited partners D) Secured lenders (creditors)

A) General partners When a limited partnership (LP) is dissolved, the general partners are paid last. LO 5.e

For a real estate DPP, which of the following is true? A) Income can be derived from rents received for the properties. B) Income will come from appreciation of the portfolio properties. C) Capital growth can be derived from rents received. D) Neither income nor capital growth would come from rents received.

A) Income can be derived from rents received for the properties. For real estate DPPs, both income and capital growth are possible. Income comes from the property rents received, and capital growth would come from the appreciation of the properties. LO 5.e

For hedge funds organized as private investment partnerships, which of the following is true? A) They will allow unlimited numbers of investors and allow small initial investments. B) They can limit the number of investors and typically have no minimum initial investment requirement. C) They will allow unlimited numbers of investors and require large or minimum initial investments. D) They can limit the number of investors and require large or minimum initial investments.

D) They can limit the number of investors and require large or minimum initial investments. Hedge funds organized as private investment partnerships typically limit the number of investors and require large minimum initial investments. This would be the opposite of a regulated investment company, such as an open- or closed-end fund company. LO 5.j

Regarding limited partnerships, which of the following are true? I. A general partner can be held personally liable for business losses and debts. II. A limited partner can be held personally liable for business losses and debts. III. A general partner business decisions are legally binding on the partnership. IV. A limited partner business decisions are legally binding on the partnership. A) I and IV B) I and III C) II and III D) II and IV

B) I and III General partners have unlimited liability, meaning that they can be held personally liable for the partnership's losses and debts. In their role to manage the partnership, they make decisions that are legally binding on the partnership. LO 5.d

Limited partnerships sold publicly via a prospectus offering would be expected to have A) a small group of investors, each contributing a large sum. B) a small group of investors, each contributing a small sum. C) a large group of investors, each contributing a large sum. D) a large group of investors, each contributing a small sum.

D) a large group of investors, each contributing a small sum. Unlike partnerships sold as private placements, those limited partnerships sold through a public offering via a prospectus would consist of a large group of investors (partners), each contributing a small investment sum to the partnership. LO 5.e

Limited partnerships A) must end on a predetermined vote with no exceptions. B) can either exist in perpetuity or be designated to end on a specific date. C) must exist in perpetuity. D) must end on a predetermined date or can be dissolved earlier by vote.

D) must end on a predetermined date or can be dissolved earlier by vote. Unlike with a corporate charter, which has corporate entities existing in perpetuity, limited partnerships are scheduled to end on a predetermined date. The exception to ending on that predetermined date would be when all partnership assets are sold earlier than anticipated and a vote to dissolve the partnership occurs. LO 5.e

Which of the following is true regarding general partners (GPs) in a limited partnership? A) They may borrow money from the partnership. B) They should participate in the day-to-day management of the partnership. C) Their management decisions are not legally binding on the partnership. D) They may compete with the partnership.

B) They should participate in the day-to-day management of the partnership. General partners have a fiduciary responsibility to manage the partnership in the best interest of the investors (partners). In doing so, they make decisions regarding all day-to-day management of the business. These decisions are, therefore, legally binding on the business. GPs may not, however, borrow money from or compete with the partnership. LO 5.e

For real estate program partners, tax credits will A) be applicable in all types of real estate programs. B) reduce tax liability dollar for dollar. C) reduce taxable income from rents received dollar for dollar. D) add to the appreciation of the real estate properties.

B) reduce tax liability dollar for dollar. Offered by the federal government for only certain types of real estate programs (not all), tax credits reduce tax liability dollar for dollar. In this light, credits are considered far greater benefits than deductions, which only reduce taxable income. LO 5.f

Which of the following is the best description of a limited partnership? A) An investment that allows only for income to flow through to the investors B) An investment that exempts individual investors from reporting gains or losses C) An investment that permits both gains and losses to pass through to the investors D) An investment that allows for losses only to pass through as write-offs to the investors

C) An investment that permits both gains and losses to pass through to the investors Limited partnerships (LPs) are investment opportunities that permit the economic consequences of a business to flow or pass through to investors (limited partners). These would include the consequences of both income received and losses incurred. LO 5.d

Limited partnerships sold through private placements involve A) a large group of investors, each contributing a large sum. B) a large group of investors, each contributing a small sum. C) a small group of investors, each contributing a large sum. D) a small group of investors, each contributing a small sum.

C) a small group of investors, each contributing a large sum. Limited partnerships sold through private placements generally consist of a small group of accredited investors, each contributing a large sum to the partnership. LO 5.e

Hedge funds attempt to A) mitigate all risks making them suitable for most investors. B) achieve modest returns and are, therefore, associated with being low-risk investments. C) achieve high returns and are, therefore, associated with high-risk investments. D) mitigate all risk using hedging as an investment strategy.

C) achieve high returns and are, therefore, associated with high-risk investments. While hedging is the practice of attempting to limit or mitigate risk, most hedge funds specify generating high returns as their primary investment objective. In attempting to achieve these returns, they tend to entail a substantial amount of risk for those who own shares. LO 5.j

Which of the following is true for exchange-traded funds (ETFs)? A) The Securities and Exchange Commission (SEC) has classified them as a type of open-end fund, and they have operating costs and expenses that are lower than most mutual funds. B) The SEC has classified them as mutual funds, and they have operating costs and expenses that are higher than most mutual funds. C) The SEC has classified them as a type of open-end fund, and they have operating costs and expenses that are higher than most mutual funds. D) The SEC has classified them as mutual funds, and they have operating costs and expenses that are lower than most mutual funds.

A) The Securities and Exchange Commission (SEC) has classified them as a type of open-end fund, and they have operating costs and expenses that are lower than most mutual funds. The SEC has classified ETFs as a type of open-end fund but not a mutual fund. ETFs traditionally have operating costs and expenses that are lower than most mutual funds because they do not have to purchase and sell holdings within the portfolio to accommodate investors purchasing shares or redeeming shares, as is the case with mutual funds. LO 5.k

Nolan Babbage owns several units of the Cray Leasing LP. He is frustrated by the lack of cash flow and begins consulting with the general partners on how best to market the partnership's services. Which of the following features of a limited partnership has he placed in jeopardy? A) The limited liability of a limited partner B) The right to sue the general partner C) The pass-through nature of a partnership D) The potential for profit

A) The limited liability of a limited partner A limited partner that takes on any level of active participation in the running of the partnership will likely lose their liability protection. In all other ways, they remain a limited partner. LO 5.e

Intangible drilling costs (IDCs) associated with oil and gas DPPs can generally A) be deducted completely in the first year of the program. B) be deducted up to a certain percentage in the earlier years of the program. C) not be deducted until the end of the programs life. D) not be deducted at all.

A) be deducted completely in the first year of the program. The deduction allowable for IDCs associated with oil and gas DPPs is one of the unique tax advantages of these programs. These costs can be deducted completely in the first year of the program instead of over the life of the program. LO 5.e

Your customer is a limited partner in a real estate partnership. This partner has the right to do all of the following except A) choose which properties the partnership should buy or sell. B) vote with the limited partners to remove the general partner. C) sue the general partner for damages resulting from any business decisions made. D) inspect and obtain copies of all partnership records.

A) choose which properties the partnership should buy or sell. All of these are rights of the LP, except choosing the assets to be purchased for the partnership. This is a function of the general partner (GP). LO 5.e