Multiple choice questions on Partnership FormationFull description
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Black Iron Investment Club - by Vexati0n
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1.
A par partn tner ersh ship ip diss dissol olut utio ion n dif diffe fers rs from from a liq liqui uida dati tion on in that that A. B. C. D.
2.
A simple partnership liquidation requires A. B.
C. D. 3.
paymen payments ts are are made made to cred credito itors rs befo before re part partner ners s recei receive ve valu value. e. period periodic ic payme payments nts to part partner ners s are are made made when when cash cash beco becomes mes availa available ble. . a partne partner r withdr withdraws aws from from the the busin business ess and and the the enterp enterpris rise e contin continues ues to to function. full full paymen payment t is made made to all outsid outside e credit creditors ors before before remain remaining ing cash cash is distributed to partners in a final lump sum payment.
period periodic ic payme payments nts to cred credito itors rs and and part partner ners s deter determin mined ed by by a safe safe payments schedule. partne partnersh rship ip asse assets ts to to be conv convert erted ed into into cash cash with with full full paymen payment t made made to to all outside creditors before remaining cash is distributed to partners in a lump sum payment. only only cre credi dito tors rs to to be paid paid in an an orde orderl rly y man manne ner. r. period periodic ic paymen payments ts to partne partners rs as cash cash beco becomes mes availa available ble. .
n a sim simpl ple e par partn tner ersh ship ip liqu liquid idat atio ion! n! the the las last t rem remai aini ning ng cash cash dist distri ribu buti tion on should be made according to the ratio of A. B. C. D.
the the indi indivi vidu dual al par partn tner er"s "s pro profi fit t and los loss s agre agreem emen ent. t. the indi individ vidual ual part partner ner#s #s capit capital al accou accounts nts! ! increa increased sed the partnership. the indi individ vidual ual part partner ner"s "s capit capital al accou accounts nts! ! increa increased sed loans to the partners and decreased by partner loans the indi individ vidual ual part partner ner"s "s capit capital al accou accounts nts! ! decrea decreased sed loans to the partners and increased by partner loans
by by partne partner r loans loans to by by to by by to
partne partnersh rship ip the partnership. partne partnersh rship ip the partnership.
$se the following information for questions %! & and '. (n )une 3*! 2*1'! the +arle! ,in! and -ates partnership had the following fiscal yearend balance sheet/ Cash Accounts receivable nventory 0lant assetsnet oan to +arle 6otal assets
6he percentages shown are the residual profit and loss sharing ratios. 6he partners dissolved the partnership on )uly 1! 2*1'!. and began the liquidation process. During )uly the following events occurred/ 8 8 8
%.
9eceivables of 03!*** were collected. 6he inventory was sold for 0%!***. All av available ca cash wa was di distributed on on )uly 31! e:cept for 02!*** that was set aside for contingent e:penses.
6he 6he boo; boo; valu value e of of the the part partne ners rshi hip p equ equit ity y i. i.e. e.! ! tota total l equ equit ity y of the the par partn tner ers5 s5 on )une 3*! 2*1' is A. B. C. D.
&.
6he 6he cas cash h ava avail ilab able le for for dis distr trib ibut utio ion n to to the the part partne ners rs on )uly )uly 31! 31! 2*1 2*1' ' is is A. B. C. D.
'.
0'*!***. 02
0 2!***. 0 %!***. 0 !***. 011!***.
=ow =ow muc much h cas cash h wou would ld ,in ,in rec recei eive ve from from the the cas cash h tha that t is is ava avail ilab able le for for distribution on )uly 31> A. B. C. D.
0 *. 0 '**. 01!***. 02!***.
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=ara! ves! and )ac; are in the process of liquidating their partnership. @ince it may ta;e several months to convert the other assets into cash! the partners agree to distribute all available cash immediately! e:cept for 01*!*** that is set aside for contingent e:penses. 6he balance sheet and residual profit and loss sharing percentages are as follows/
Cash (ther assets
0
%**!*** 2**!***
Accounts payable =ara! capital %*45 ves! capital 3*45 )ac;! capital 3*45
0
2**!*** 13&!*** 21'!*** %
6otal assets
0
'**!***
6otal liab.7equity
0
'**!***
=ow much cash should ves receive in the first distribution> A. B. C. D. .
01%'!***. 01%!***. 01&3!***. 01&'!***
)ade! ahl! and ane are in the process of liquidating their partnership. ane has agreed to accept the inventory! which has a fair value of 0'*!***! as part of her settlement. A balance sheet and the residual profit and loss sharing percentages are as follows/
Cash nventory 0lant assets
0
1<!*** *!*** 23*!***
Accounts payable )ade! capital %*45 ahl! capital %*45 ane! capital 2*45
0
1%
6otal assets
0
&*!***
6otal liab.7equity
0
&*!***
f the partners then distribute the available cash! ane will receive A. B. C. D.
<.
023!***. 02
$nder the rule of offset! what is the proper disposition of a partnership loan that was made from a partner who has a debit balance> A. B. C. D.
6he loan is first paid to the debtor partner before cash payments are made to partners. 6he loan is written off as a partnership loss if the partner does not have the cash to cover the debit balance. 6he loan is charged off to the capital accounts of all the partners in their profit and loss sharing ratios. 6he loan is charged off to the capital account of the debtor partner.
1*. +hen a new partner is admitted into a partnership and the new partner receives a capital credit less than the tangible assets contributed! which of the following e:plains the difference> . 6he new partner#s bonus has been recognied. . 6he old partners received a bonus from the new partner. A. only B. only C. ither or D. Eeither nor 11. +hen a new partner is admitted into a partnership and the new partner receives a capital credit greater than the tangible assets contributed! which of the following e:plains the difference> . 6he old partners# bonus is being recognied. . 6he new partner#s bonus is being recognied. A. only B. only C. ither or D. Both and 12. +hen a new partner is admitted into a partnership and the capital of the old partners decreases! which of the following e:plains the reason for the decrease> . $ndervalued liabilities were written up to their fair values. . $ndervalued assets were written up to their fair values. A. only B. only
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C. Both and D. Eeither nor 13. +hen a partner retires from a partnership and the retiring partner is paid more than the capital balance in her account! which of the following e:plains the difference> . 6he retiring partner is receiving a bonus from the other partners. . 6he retiring partner#s bonus is being recognied. A. only B. only C. ither or D. Eeither nor 1%. +hen the old partners receive a bonus upon admission of a new partner into a partnership! the bonus is allocated to/ . all the partners in their profit and loss sharing ratio. . the e:isting partners in their profit and loss sharing ratio. A. only B. only C. ither or D. Eeither nor 1&. +hen a new partner is admitted into a partnership and the old partners# bonus is recognied! the bonus is allocated to/ . all the partners in their profitandlosssharing ratio. . the old partners in their profit and loss sharing ratio. A. only B. only C. ither or D. Eeither nor 1'1. n the 9@6 partnership! 9on#s capital is 0*!***! @tella#s is 0&!***! and 6iffany#s is 0&*!***. 6hey share income in a 3/2/1 ratio! respectively. 6iffany is retiring from the partnership. ach of the following questions is independent of the others. 1'. 9efer to the above information. 6iffany is paid 0'*!***! and no bonus is recorded. n the Fournal entry to record 6iffany#s withdrawal/ A. 6iffany! Capital will be credited for 0'*!***. B. 9on! Capital will be debited for 0&!***. C. @tella! Capital will be debited for 0%!***. D. Cash will be debited for 0'*!***. 1. 9efer to the above information. 6iffany is paid 0'*!***! and no bonus is recorded. +hat is the 9on#s capital balance after 6iffany withdraws from the partnership> A. 0%!*** B. 01!*** C. 0&!*** D. 0'!*** 1. 9efer to the above information. 6iffany is paid 0&'!***! and all implied bonus is recorded. +hat is the total amount of bonus recorded> A. 0* B. 0'!*** C. 03*!*** D. 03'!*** 1<2'. n the AD partnership! Allen#s capital is 01%*!*** and Daniel#s is 0%*!*** and they share income in a 3/1 ratio! respectively. 6hey decide to admit David to the partnership. ach of the following questions is independent of the others. 1<. 9efer to the information provided above. +hat amount will David have to invest to give him onefifth percent interest in the capital of the partnership if no bonus or bonus is recorded> A. 0'*!*** B. 03'!*** C. 0&*!*** D. 0%&!*** 2*. 9efer to the information provided above. Assume that David invests 0&*!*** for a one fourth interest. Bonus is to be recorded. 6he Fournal to record David#s admission into the partnership will include/ A. a credit to cash for 0&*!***. B. a debit to bonus for 0!&**. C. a credit to David! Capital for 0'*!***. D. a credit to David! Capital for 0&*!***. 21. 9efer to the information provided above. Allen and Daniel agree that some of the inventory is obsolete. 6he inventory account is decreased before David is admitted. David invests 0%*!*** for a onefifth interest. +hat is the amount of inventory written down> A. 0%!*** B. 02*!***
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C. 01&!*** D. 01*!*** 22. 9efer to the information provided above. Allen and Daniel agree that some of the inventory is obsolete. 6he inventory account is decreased before David is admitted. David invests 0%*!*** for a onefifth interest. +hat are the capital balances of Allen and Daniel after David is admitted into the partnership>
A. B. C. D.
(ption (ption (ption (ption
A B C D
23. 9efer to the information provided above. David directly purchases a onefifth interest by paying Allen 03%!*** and Daniel 01*!***. 6he land account is increased before David is admitted. By what amount is the land account increased> A. 0%*!*** B. 01*!*** C. 03'!*** D. 02*!*** 2%. 9efer to the information provided above. David directly purchases a onefifth interest by paying Allen 03%!*** and Daniel 01*!***. 6he land account is increased before David is admitted. +hat are the capital balances of Allen and Daniel after David is admitted into the partnership>
A. B. C. D.
(ption (ption (ption (ption
A B C D
2&. 9efer to the information provided above. David invests 0%*!*** for a onefifth interest in the total capital of 022*!***. 6he Fournal to record David#s admission into the partnership will include/ A. a credit to Cash for 0%*!***. B. a debit to Allen! Capital for 03!***. C. a credit to David! Capital for 0%*!***. D. a credit to Daniel! Capital for 01!***. 2'. 9efer to the information provided above. David invests 0%*!*** for a onefifth interest in the total capital of 022*!***. +hat are the capital balances of Allen and Daniel after David is admitted into the partnership>
A. B. C. D.
(ption (ption (ption (ption
A B C D
2. +hich of the following observations is true of an @ corporation> A. t elects to be ta:ed in the same manner as a corporation. B. t does not have the burden of double ta:ation of corporate income. C. ts shareholders have personal liability for the corporation#s obligations. D. ts primary income source should be passive investments. 2. f A is the total capital of a partnership before the admission of a new partner! B is the total capital of the partnership after the admission of the new partner! C is the amount of the new partner#s investment! and D is the amount of capital credited to the new partner! then there is/ A. bonus to the new partner if B G A H C5 and D I C. B. bonus to the old partners if B J A H C and D G C.
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C. a bonus to the new partner if B J A H C and D G C. D. no bonus if B G A H C5 and D G C. 2<n the liquidation process! if a capital account shows a deficiency A. the partner with a deficiency has an obligation to pay the partnership the amount of the deficiency. B. it can be written off to a KossK account. C. it is disregarded until after the partnership boo;s are closed. D. it can be written off to a KLainK account. 3*. Before distributing any remaining cash to the partners in a partnership liquidation it is necessary to do each of the following! e:cept A. sell noncash assets. B. recognise a gain or loss on realisation of assets C. record bonus. D. pay partnership liabilities 31. n A. B. C. D.
the final step of the liquidation process! remaining cash is distributed to partners on an equal basis. on the basis of the profit7loss sharing ratios. on the basis of the final capital balances. regardless of capital deficiencies.
32. 6he liquidation of a partnership is a process containing the following steps/ 1. 0ay partnership liabilities. 2. Allocate the gain or loss on realisation of assets to the partners in their profit ratios. 3. @ell noncash assets for cash and recognise a gain or loss on realisation. %. Distribute the remaining cash to the partners on the basis of their final capital balances. dentify A. 3! 2! B. 3! 2! C. 1! 3! D. 1! %!
the %! 1! 2! 3!
proper sequencing of the steps in the liquidation process. 1. %. %. 2.
33. f 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 at the start of the dissolution. C. the other partners will absorb the capital deficiency on the basis of their respective profit7loss sharing ratios. D. neither the creditors nor the other partners will have to absorb the capital deficiency. 3%. n A. B. C. D.
the liquidation of a partnership! any partner who has a capital deficiency has a personal debt to the partnership for the amount of the deficiency. is automatically terminated as a partner. will receive a cash distribution on the basis of his or her profitsharing ratio. is not obligated to ma;e up the capital deficiency.
3&. +hen a partner withdraws from the firm! which of the following reflects the correct partnership effects> 0ayment from 0ayment from 0artners# 0ersonal Assets 0artnership Assets A. 6otal net assets decreased decreased B. 6otal capital decreased decreased C. 6otal net assets unchanged decreased D. 6otal capital unchanged unchanged 3'. f 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 capital balances A. equally. B. on the basis of their profit ratios. C. on the basis of their capital balances prior to the liquidation. D. on the basis of their original investments. 3. Ba;er Foins the partnership of ube; and Musial by paying 03*!*** in cash. f the net assets of the partnership are still the same amount after Ba;er has been admitted as a partner! then Ba;er A. must have been admitted by investment of assets. B. must have been admitted by purchase of a partner#s interest. C. must have received a bonus upon being admitted. D. could have been admitted by an investment of assets or by a purchase of a partner#s interest.
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3. Lray invests 02*!*** in cash admission by investment5 in the MiDas partnership to acquire a onequarter interest. n this case A. the accounting will be the same as a purchase of an interest. B. the total net assets of the new partnership are unchanged from the previous partnership. C. the total capital of the new partnership is greater than the total capital of the old partnership. D. Lray#s capital will be 02*!***. 3<. A bonus to a new partner will A. increase the capital balances of e:isting partners based on their profit ratios before the admission of the new partner. B. increase the capital balances of e:isting partners based on their profit ratios after the admission of the new partner. C. decrease the capital balances of e:isting partners based on their profit ratios before the admission of the new partner. D. decrease the capital balances of e:isting partners based on their capital balances before the admission of the new partner. %*. 6he disadvantages of the partnership form of business organiation! compared to corporations! include A5 the legal requirements for formation. B5 unlimited liability for the partners. C5 the requirement for the partnership to pay income ta:es. D5 the e:tent of governmental regulation. 5 the comple:ity of operations. %1. 6he advantages of the partnership form of business organiation! compared to corporations! include A5 single ta:ation. B5 ease of raising capital. C5 mutual agency. D5 imited liability. 5 difficulty of formation. %2. 6he A5 B5 C5 D5 5
dissolution of a partnership occurs only when the partnership sells its assets and permanently closes its boo;s. only when a partner leaves the partnership. at the end of each year! when income is allocated to the partners. only when a new partner is admitted to the partnership. when there is any change in the individuals who ma;e up the partnership.
%3. 6he partnership of Clapton! @eidel! and 6homas was insolvent and will be unable to pay 03*!*** in liabilities currently due. +hat recourse was available to the partnership#s creditors> A5 they must present equal claims to the three partners as individuals. B5 they must try obtain a payment from the partner with the largest capital account balance. C5 they cannot see; remuneration from the partners as individuals. D5 they may see; remuneration from any partner they choose. 5 they must present their claims to the three partners in the order of the partners# capital account balances. For Question 45-46. Cleary! +asser! and Eolan formed a partnership on )anuary 1! 2**! with
investments of 01**!***! 01&*!***! and 02**!***! respectively. Nor division of income! they agreed to 15 interest of 1*4 of the beginning capital balance each year! 25 annual compensation of 01*!*** to +asser! and 35 sharing the remainder of the income or loss in a ratio of 2*4 for Cleary! and %*4 each for +asser and Eolan. Eet income was 01&*!*** in 2** and 01*!*** in 2**. ach partner withdrew 01!*** for personal use every month during 2** and 2**. %%. +hat was +asser#s share of income for 2**> A5 0'3!***. B5 0&3!***. C5 0&!***. D5 02 A5 0'3!***. B5 0&3!***. C5 0&!***. D5 02
regarding the admission of a new partner> interest directly from the business. property can be transferred to a new partners. the business can be conveyed without the
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consent of other e:isting partners. D5 6he right to share in profits and losses can be sold to a new partner without the consent of other e:isting partners. 5 A new partner always pays boo; value. %. +ithdrawals from the partnership accounts are typically not used A5 to record compensation for wor; performed in the business. B5 to reduce the partners# capital account balances at the end of an accounting period. C5 to record interest earned on a partner"s capital balance. D5 to reduce the basic investment that has been made in the business.to record a reward for ownership in the partnership. %. 6he partnership contract for =anes and )ones 0 provides that =anes is to receive a bonus of 2*4 of net income after the bonus5 and that the remaining net income is to be divided equally. f the partnership income before the bonus for the year is 0&!'**! =anes" share of this prebonus income is/ A5 02!**. B5 033!'**. C5 03%!&'*. D5 0%3!2**. 5 0&!'**.
%<. )ell and Dell were partners with capital balances of 0'** and 0** and an income sharing ratio of 2/3. 6hey admitted Oell to a 3*4 interest in the partnership! and the total amount of goodwill credited to the original partners was 0**. +hat amount did Oell contribute to the business> A5 0&'*. B5 0&*. C5 0'**. D5 0&<*. 5 0'3*. For Questions 51-62. A partnership began its first year of operations with the following
capital balances/ -oung! Capital/ 01%3!*** aton! Capital/ 01*%!*** 6hurman! Capital/ 01%3!*** 6he Articles of 0artnership stipulated that profits and losses be assigned in the following manner/ -oung was to be awarded an annual salary of 02'!*** with 013!*** salary assigned to 6hurman. ach partner was to be attributed with interest equal to 1*4 of the capital balance as of the first day of the year. 6he remainder was to be assigned on a &/2/3 basis! respectively. ach partner was allowed to withdraw up to 013!*** per year. Assume that the net loss for the first year of operations was 02'!*** with net income of 0&2!*** in the second year. Assume further that each partner withdrew the ma:imum amount from the business each year. &*. +hat was -oung#s share of income or loss for the first year> A5 03!<** loss. B5 011!** loss. C5 01*!%** loss. D5 02%!** loss. 5 0 A5 03!<** loss. B5 011!** loss. C5 01*!%** loss. D5 02%!** loss. 5 0 A5 03!<** loss. B5 011!** loss. C5 01*!%** loss. D5 02%!** loss. 5 0
&3. +hat was the balance in -oung#s Capital account at the end of the first year> A5 012*!<**. B5 011!3**. C5 012'!1**. D5 0*!'**. 5 0111!&**. &%. +hat was the balance in aton#s Capital account at the end of the first year>
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A5 B5 C5 D5 5
012*!<**. 011!3**. 012'!1**. 0*!'**. 0111!&**.
&&. +hat was the balance in 6hurman#s Capital account at the end of the first year> A5 012*!<**. B5 011!3**. C5 012'!1**. D5 0*!'**. 5 0111!&**. &'. +hat was -oung#s share of income or loss for the second year> A5 01!1'* income. B5 0%!1'* income. C5 01 A5 01!1'* income. B5 0%!1'* income. C5 01 A5 01!1'* income. B5 0%!1'* income. C5 01 A5 0133!3*. B5 0%!'*. C5 01*&!'<*. D5 0132!'*. 5 01!'*. '*. +hat was the balance in aton#s Capital account at the end of the second year> A5 0133!3*. B5 0%!'*. C5 01*&!'<*. D5 0132!'*. 5 01!'*. '1. +hat was the balance in 6hurman#s Capital account at the end of the second year> A5 0133!3*. B5 0%!'*. C5 01*&!'<*. D5 0132!'*. 5 01!'*.
