ACCT 1040 Partnerships Quiz Chapter 4

Q1. At the end of last year, Partner A had a capital balance of $60,000 and Partner B had a capital balance of $40,000. Profits for the year were $100,000. The partners’ drawings account was $40,000 for A, and $20,000 for B. According to the partnership agreement, the following profit sharing rules apply:

• Each partner receives 10% “interest” on the capital balance at the start of the year
• Partner A receives a salary of $20,000
• Partner B receives a salary of $40,000
• Any remainder is split equally.

The balance in partner A’s capital account at the end of the year is: $61,000 $79,000 $140,000 $200,000

• $79,000
• $200,000
• $61,000
• $140,000

Explanation:

Ending Balance = Capital Balance + Interest + Salary + Remaining Profit – Drawings

Partner A = $60,000 + 6,000 + 20,000 + 15,000 – 40,000 = $61,000

Partner B = $40,000 + 4,000 + 40,000 + 15,000 – 20,000 = $79,000

Q2. The equity of a partnership of $150,000 is equally shared by Partners A, B and C. A new partner wants to join the partnership and will pay $45,000 for 25% of the partnership because this partner brings a valuable customer list. The entry to record the transaction includes a:

• Debit to the existing partner’s capital accounts of $5,000
• Credit to the new partner’s capital account of $45,000
• Debit to the existing partners’ capital accounts of $1,667
• Credit to the existing partners’ capital accounts of $1,667

Explanation: When new partnership agreements are negotiated, the partners usually come to an understanding of what the business is really worth, relative to its stated book value. Sometimes new partners add value to the business, perhaps by bringing with him a client list, or an area of expertise that the partnership is looking for. This new partner then contributes less monetary value to gain a portion of the partnership. The difference between the new partner’s share of capital and monetary contribution must be paid by the existing partners. In this case, 25% of the partnership is worth $50,000 ($150,000 + $50,000 / 4), but the new partner contributed $45,000. The difference between the contribution and the share is treated as a “bonus” to the new partner and deducted from the existing partners’ capital accounts.

Q3. A Limited Liability Partnership (LLP) is a common form of business for:

• Retailers
• Professional services firms
• Banks
• Manufacturers

Explanation: Unlike a limited partnership, the limited partners in an LLP usually participate in managing the business. LLPs are primarily used in professional partnerships to protect one partner from another partner’s negligence.

Q4. A disadvantage of a partnership which means that each partner can authorize contracts and transactions on behalf of the partnership, provided the activity is within the scope of the partnership’s business.

• Unlimited liability
• Mutual agency
• Ease of formation
• Limited life

Explanation: Mutual agency means that each partner can authorize contracts and transactions on behalf of the partnership, provided the activity is within the scope of the partnership’s business.

Q5. Which of the following statements is/are true about partnerships?

i – There can be two or more people in a partnership

ii – All of the partners must be involved in the day-to-day operation of the business

iii – Some partners may have expertise in a certain technical field

iv – Some partners may have a higher ability to raise capital

• i only
• i , iii, and iv only
• i and ii only
• all of i, ii, iii, and iv

Explanation: Under limited partnership, a limited partner is only responsible for providing the capital to finance the business but is not involved in day-to-day operations.

Q6. BG Partners is made up of two partners (Eagle and Falcon). This year, the partnership earned $200,000. It was agreed that Eagle will receive 75% of the profits while Falcon will receive the remaining 25%. As a result:

• Eagle’s capital account will increase by $150,000 and Falcon’s will decrease by $50,000
• Eagle’s capital account will decrease by $150,000 and Falcon’s will increase by $50,000
• Eagle’s capital account will decrease by $150,000 and Falcon’s will decrease by $50,000
• Eagle’s capital account will increase by $150,000 and Falcon’s will increase by $50,000

Q7. Which of the following are advantages of a partnership?

i – Ease of formation

ii – Limited liability for all partners

iii – Potential to raise more capital than a proprietorship

iv – Multiple skills provided by each partner

• i and iv only
• i, iii, and iv
• i, ii, and iii only
• iii and iv only

Explanation: In a partnership, at least one partner must have unlimited liability. Therefore, (ii) is false.

Q8. The equity of a partnership of $150,000 is equally shared by Partners A, B and C. Partner A dies. Which of the following is true of the partnership’s options when a partner dies?

• The remaining partners inherit the deceased partners’ capital so the business can continue to operate as before
• None of the available options.
• The remaining partners can delete the deceased partner from the existing partnership agreement and divide that partner’s capital
• The remaining partners can either liquidate the business or form a new partnership

Q9. Which of the following are legitimate ways of distributing partnership profits?

i – Agreed-upon ratio

ii – Agreed-upon salaries plus share of the remainder

iii – Equally

iv – In accordance with capital contribution

• ii and iii only
• all of i, ii, iii and iv
• i and iii only
• i, ii, iii only

Explanation: Profit and loss ratios can take many forms including, but not limited to, the following: by dividing equally among all partners; according to an agreed-upon ratio, such as 2:1, or 60% to 40%; according to the capital contribution of each partner; or according to agreed-upon salary and interest allocations, plus a share of the remainder.

Q10. On January 1, 2020, Drake Graham and Louis Vera decide to form the partnership Graham & Vera. Below is a summary of the amounts contributed by each partner.

Drake Graham

• Cash $10,000
• Accounts Receivable $12,000
• Allowance for Doubtful Accounts $600
• Machinery $23,500
• Accumulated Depreciation – Machinery $8,500
• Accounts Payable $13,000
• Notes Payable $2,000

Louis Vera

• Cash $18,000
• Building $40,000
• Notes Payable $6,000

An independent appraiser determined that the allowance for doubtful accounts should be $1,000 and the market value of the equipment $12,000. All other assets are recorded at the values presented. Assume the journal entries are already set up. How much capital are credited to the account of Graham and Vera?

• Graham $20,000, Vera $56,000
• Graham $20,000, Vera $52,000
• Graham $18,000, Vera $56,000
• Graham $18,000, Vera $52,000

Explanation: Assets are recorded in the partnership’s books at their market value and that their accumulated depreciation is not carried over when the partnership is formed. After deducting all liabilities from assets, the difference is the capital to be carried over to the partnership amounting to $18,000 for Graham and $52,000 for Vera. Graham = $12,000 – $1,000 + $12,000 – $13,000 – $2,000 = $18,000 Vera = $18,000 – $40,000 – $6,000 = $52,000