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Partnership Formation and Operation

Multiple Choice
Identify the choice that best completes the statement or answers the question.

1. Which of the following is an advantage of a partnership when compared to a corporation?

a. The partnership is more likely have a net income.
b. The partnership is relatively inexpensive to organize.
c. The partnership involves fewer people to operate.
d. The partnership usually hires professional managers.

2. Which of the following is a disadvantage of a partnership when compared to a corporation?

a. The partnership is more likely to have a net loss.
b. The partnership is easier to organize.
c. The partnership is less expensive to organize.
d. The partnership has limited life.

3. The characteristic of a partnership that gives the authority to any partner to legally bind the partnership
and all other partners to business contracts is called
a. unlimited liability
b. ease of formation
c. mutual agency
d. dissolution

4. When a limited partnership is formed

a. the partnership activities are limited
b. all partners have limited liability
c. some of the partners have limited liability
d. none of the partners have limited liability

5. Accounting for the day-to-day activities for a partnership or Limited Liability Company is
a. the same as the accounting for any other form of business
b. the same as the accounting for a sole proprietorship only
c. is not the same as the accounting for any other form of business
d. the same as the accounting for a corporation only

6. When a partnership is formed, assets contributed by the partners should be recorded on the partnership
books at their
a. book values on the partners' books prior to their being contributed to the
partnership
b. fair market value at the time of the contribution
c. original costs to the partner contributing them
d. assessed values for property purposes

7. Partnership income and losses are usually divided on the basis of interest, salaries, and stated ratios
because
a. partners seldom contribute time and resources equally
b. this method reflects the amount of time devoted to the partnership by the partners
c. it is simpler than following the legal rules
d. it prevents arguments among the partners

8. Details of the division of net income for a partnership should be disclosed

a. in the asset section of the balance sheet
b. in the partners’ subsidiary ledger
c. in the statement of cash flows
d. in the income statement

9. As part of the initial investment, a partner contributes equipment that had originally cost 100,000 and on
which accumulated depreciation of 75,000 has been recorded. If similar equipment would cost 150,000
to replace and the partners agree on a valuation of 40,000 for the contributed equipment, what amount
should be debited to the equipment account?
a. 40,000
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b. 150,000
c. 100,000
d. 75,000

10. Jack and Jill share income and losses in a 2:1 ratio after allowing for salaries to Jack of 24,000 and
30,000 to Jill. Net income for the partnership is 48,000. Income should be divided as follows:
a. Jack, 24,000; Jill, 24,000
b. Jack, 21,000; Jill, 27,000
c. Jack, 32,000; Jill, 16,000
d. Jack, 20,000; Jill, 28,000

11. Fred and Ethel share income equally. During the current year the partnership net income was 40,000.
Fred made withdrawals of 12,000 and Ethel made withdrawals of 17,000. At the beginning of the year,
the capital account balances were: Fred capital, 42,000; Ethel capital, 58,000. Fred's capital account
balance at the end of the year is
a. 76,500
b. 64,500
c. 62,000
d. 50,000

12. X and Y have original investments of 50,000 and 100,000 respectively in a partnership. The articles of
partnership include the following provisions regarding the division of net income: interest on original
investment at 10%, salary allowances of 27,000 and 18,000 respectively, and the remainder equally.
How much of the net income of 50,000 is allocated to X?
a. 33,333
b. 23,000
c. 25,000
d. 27,000

13. Deng and Dang are partners who share income in the ratio of 3:2. Their capital balances are 40,000
and 60,000 respectively. Income Summary has a credit balance of 20,000. What is Deng's capital
balance after closing Income Summary to Capital?
a. 30,000
b. 52,000
c. 28,000
d. 32,000

14. Jan Barnes contributed equipment, inventory, and 42,000 cash to the partnership. The equipment had a
book value of 25,000 and market value of 28,000. The inventory has a book value of 50,000, but only
had a market value of 15,000. due to obsolescence. The partnership also assumed a 12,000 note
payable owed by Jan that was originally used to purchase the equipment.

What amount should Jan’s capital account be recorded?

a. 85,000
b. 73,000
c. 117,000
d. 105,000

15. Jack and Jill share income and losses in a 2:1 ratio after allowing for salaries to Jack of 24,000 and
30,000 to Jill. Net income for the partnership is 66,000. Income should be divided as follows:
a. Jack, 24,000; Jill, 30,000
b. Jack, 24,000; Jill, 34,000
c. Jack, 30,000; Jill, 36,000
d. Jack, 32,000; Jill, 34,000
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16. Fred and Ethel share income equally. During the current year the partnership net income was 40,000.
Fred made withdrawals of 12,000 and Ethel made withdrawals of 17,000. At the beginning of the year,
the capital account balances were: Fred capital, 42,000; Ethel capital, 58,000. Ethel's capital account
balance at the end of the year is
a. 76,500
b. 61,000
c. 62,000
d. 50,000

17. The articles of partnership for A B Partnership provide for a salary allowance of 5,000 per month for
partner B, with the balance of net income to be divided equally. If B made an additional investment of
10,000 during the year and withdrew 4,000 per month, and net income for the year was 80,000, by what
amount did B's capital increase during the year?
a. 80,000
b. 12,000
c. 60,000
d. 32,000

Exercise/Other

18. Jane and Joan form a partnership by combining the assets of their separate businesses. Jane
contributes accounts receivable with a face amount of 50,000 and equipment with a cost of 190,000 and
accumulated depreciation of 100,000. The partners agree that the equipment is to be priced at 85,000,
that 3,500 of the accounts receivable are completely worthless and are not to be accepted by the
partnership, and that 1,500 is a reasonable allowance for the uncollectibility of the remaining accounts
receivable. Joan contributes cash of 30,000 and merchandise inventory of 59,500. The partners agree
that the merchandise inventory is to be priced at 61,000. Journalize the entries to record in the
partnership accounts (a) Jane’s investment and (b) Joan's investment.

19. Ray Samson contributed equipment, inventory, and 38,000 cash to a partnership. The equipment had a
book value of 25,000 and a market value of 28,000. The inventory had a book value of 60,000, but only
had a market value of 20,000, due to obsolescence. The partnership also assumed a 15,000 note
payable owed by Samson that was used originally to purchase the equipment.

Provide the journal entry for Samson’s contribution to the partnership.

20. Stacy Kings and Chester Pennel formed a partnership dividing income as follows:

1. Annual salary allowance to Kings of 38,000

2. Interest of 8% on each partner’s capital balance on January 1
3. Any remaining net income divided equally.

Kings and Pennel had 25,000 and 140,000 respectively in their January 1 capital balances. Net income
for the year was 220,000.

How much net income should be distributed to Kings?