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Exam 12: Accounting for Partnerships

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Question 21

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Cox, North, and Lee form a partnership. Cox contributes $180,000, North contributes $150,000, and Lee contributes $270,000. Their partnership agreement calls for the income or loss division to be based on the ratio of capital invested - If the partnership reports income of $150,000 for its first year, what amount of income is credited to Cox's capital account?

A) $36,000.
B) $45,000.
C) $64,286.
D) $60,000.
E) $50,000.

F) C) and E)
G) B) and D)

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Question 22

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Mutual agency implies that each partner in a partnership is a fully authorized agent of the partnership. Which of the following statements is correct regarding the authority of a partner to bind the partnership in dealings with third parties?

A) Only a partner with a majority interest in a partnership has the authority to represent the partnership to third parties.
B) A partner has authority to deal with third parties on the behalf of the other partners only if he has written permission to do so.
C) The partner's authority must be derived from the partnership agreement.
D) The partner's authority may be effectively limited by a formal resolution of the other partners, even if third parties are not aware of that limitation.
E) A partner may be able to legally bind the partnership to actions even if the other partners are unaware of his actions.

F) A) and E)
G) All of the above

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Question 23

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The owners of a limited liability company (LLC), who are called members, are protected with the same limited liability feature as owners of corporations.

Match each of the following terms with the appropriate definitions. A. S corporation B. Mutual agency C. Partnership D. Unlimited liability of partners E. Partnership contract F. C corporation G. General partner H. Limited liability partnership I. Statement of partners' equity J. Limited partnership _____ 1. A financial statement that shows total capital balances at the beginning of the period, any additional investment by partners, the income or loss of the period, the partners' withdrawals, and the ending capital balances. 2. A partnership that has two classes of partners, limited partners and general partners. Limited partners have no personal liability beyond the amount they invest in the partnership, and have no active role except as specified in the partnership agreement. _____ 3. A partnership that protects innocent partners from malpractice or negligence claims resulting from the acts of another partner. 4. The legal relationship among general partners that makes each of them personally responsible for paying the debts of the partnership if the partnership cannot pay. _____ 5. The agreement between partners that sets terms under which the affairs of the partnership are conducted. _____ 6. An unincorporated association of two or more persons to pursue a business for profit as co-owners. _____ 7. A partner who assumes unlimited liability for the debts of the partnership. _____ 8. The legal relationship among partners whereby each partner can commit or bind the partnership to any contract within the scope of the partnership's business. _____ 9. A corporation that does not qualify for nor elect to be treated as a partnership for income tax purposes and therefore is subject to income taxes. _____ 10. A corporation with 100 or fewer stockholders that can elect to be treated as a partnership for income tax purposes but retain the same limited liability as other corporations.

Peters and Chong are partners and share equally in income or loss. Peters' current capital balance is $140,000 and Chong's is $130,000. Peters and Chong agree to accept Aaron with a 30% interest in the partnership. Aaron invests $98,000 in the partnership. The amount credited to Aaron's capital account is:

Bloom and Plant organize a partnership on January 1. Bloom's initial investment consists of $800 cash, $1,700 equipment and a $500 note payable reflecting a bank loan for the new business. Plant's initial investment is cash of $2,000. These amounts are the values agreed on by both partners. The journal entry to record Bloom's investment is:

Palmer withdraws from the FAP Partnership. The remaining partners agree to buy out her share for her capital balance of $65,000. Prepare the journal entry to record the withdrawal from the partnership.

The Redtail Partnership agrees to dissolve. The cash balance after selling all assets and paying all liabilities is $60,000. The final capital account balances are: Paulson, $35,000; Gray, $29,000; and Chang, ($4,000). Chang is unable to pay the capital deficiency. Prepare the journal entries to record the transactions required to dissolve this partnership.

Farmer and Taylor formed a partnership with capital contributions of $200,000 and $250,000, respectively. Their partnership agreement calls for Farmer to receive a $70,000 per year salary. The remaining income or loss is to be divided equally. -If the net income for the current year is $135,000, then Farmer and Taylor's respective shares are:

Carter Pearson is a partner in Event Promoters. His beginning partnership capital balance for the current year is $55,000, and his ending partnership capital balance for the current year is $62,000. His share of this year's partnership income was $6,250. What is his partner return on equity?

Salary allowances are reported as salaries expense on a partnership income statement.

Identify and discuss the key characteristics of partnerships. Also, identify other organizations that possess partnership characteristics.

On May 1, Gosworth and Jordan formed a partnership. Gosworth contributed cash of $100,000 and equipment valued at $142,000. Jordan contributed land valued at $130,000 and a building valued at $250,000. The partnership also assumed responsibility for Jordan's $120,000 long-term note payable associated with the land and building. The partners agreed to share income as follows: Gosworth is to receive a salary allowance of $38,000, both are to receive an annual interest allowance of 8% of their beginning-year capital investments, and any remaining income or loss is to be shared equally. During the year, Gosworth withdrew $40,000 and Jordan withdrew $42,000 cash. After the adjusting and closing entries are made to the revenue and expense accounts at the end of the year, the Income Summary account had a credit balance of $140,000. Prepare the journal entries to record (a) the partners' initial capital investments, (b) their cash withdrawals, and (c) closing of both the Withdrawals and Income Summary accounts.

Design Services is organized as a limited partnership, with Miko Toori as one of its partners. Miko's capital account began the year with a balance of $35,000. During the year, Miko's share of the partnership income was $7,500, and Miko received $4,000 in distributions from the partnership. What is Miko's partner return on equity?

At least one partner having a debit balance in his/her capital account at the point of the final distribution of cash is known as a ________.

Maxwell and Smart are forming a partnership. Maxwell is investing a building that has a market value of $180,000. However, the building carries a $56,000 mortgage that will be assumed by the partnership. Smart is investing $120,000 cash. The balance of Maxwell's Capital account will be:

Lemon and Parks are partners. On October 1, Lemon's capital balance is $75,000, and Parks' capital balance is $125,000. With the partnership's approval, Parks sells ½ of his partnership interest to Tambling for $70,000. Prepare the journal entry to record this transaction in the partnership records.

Farmer and Taylor formed a partnership with capital contributions of $200,000 and $250,000, respectively. Their partnership agreement calls for Farmer to receive a $70,000 per year salary. The remaining income or loss is to be divided equally. -Assuming net income for the current year is $135,000, the journal entry to allocate net income is:

A partnership in which all partners have mutual agency and unlimited liability is called:

Masco, Short, and Henderson who are partners in the MSH Company share income and loss in a 2:2:1 ratio. They plan to liquidate their partnership. At liquidation, their balance sheet appears as follows. Prepare journal entries for (a) the sale of land and equipment sold as a package for $500,000, (b) the allocation of the gain or loss, (c) the payment of the liabilities, and (d) the distribution of cash to the individual partners. MSH Company Balance Sheet January 31 $\begin{array} {| l | l | l | l| } \hline\text { Assets } & & \text { Liabilities and Equity } & \\\hline \text { Cash } & \$ 200,000 & \text { Accounts Payable } & \$ 221,500 \\\hline \text { Eqquipment } & 200,000 & \text { Masco, Capital } & 210,000 \\\hline \text { Land } & 350,000 & \text { Short, Capital } & 178,000 \\\hline\end{array}$ $\begin{array} { l | l | l | l } \hline \text { Land } & 350,000 & \text { Short, Capital } & 178,000 \\\hline & & \text { Henderson, Capital } & 140,500 \\\hline \text { Total assets } & \$ 750,000 & \text { Total liabilities and equity } & \$ 750,000 \\\hline\end{array}$