Chapter 12. Accounting for Partnerships

Question 1

Is a partnership subjected to taxation?

Answer 1

No.

Question 2

What are the characteristics of a partnership?

Answer 2

Voluntary association.
Partnership agreement; binding. Shares name/contributions, rights/duties, income/loss, withdrawals, disputes, admissions, rights/duties when death occurs.
Limited life.
Taxation.
Mutual agency.
Unlimited liability; pay a partnerships debts.
Co-Ownership of Property.

Question 3

What is mutual agency?

Answer 3

Each person is a fully authorized agent of the partnership.

Question 4

What is a partnership?

Answer 4

An unincorporated association of two or more people to pursue a business for profit as co-owners.

Examples: professional practitioners, such as, physicians, lawyers, investors, and accountants.

Question 5

What are limited partnerships?

Answer 5

Individuals unwilling to accept risk of unlimited liability. Also known as a Ltd. or LP.

Question 6

What are the two classes of limited partnership?

Answer 6

General and limited.

Question 7

What is a general partner?

Answer 7

At least one person who assumes management duties and unlimited liability for the debts of the partnership.

Question 8

What are limited partners?

Answer 8

No personal liability beyond the amounts they invest in the partnership. No active role except as specified in the partnership agreement.

Question 9

What are limited liability partnerships?

Answer 9

This partnership is designed to protect innocent partners from malpractice or negligence claims resulting from the acts of another partner.

Question 10

What is an “S” corp?

Answer 10

Certain corporations with 100 or fewer stockholders can elect to be treated as a partnership for income tax purposes.

Question 11

What is a limited liability corporation?

Answer 11

Designed to help management comply with the dictates of the articles of organization and company regulations adopted by its members.

Question 12

What factors should be considered when choosing a business?

Answer 12

Taxes, liability risk, tax and fiscal year-end, ownership structure, estate planning, business risks, and earnings and property distributions.

Question 13

What are the basic partnership accounting rights?

Answer 13

Uses a capital and withdrawal account for each partner. Allocates net income or loss to partners according to the partnership agreement.

Question 14

When partners invest are their capital balances debited or credited?

Answer 14

Credited.

Question 15

How does a partner divide income or loss?

Answer 15

Profit not salary and when there is income or loss the money is allocated among partners to “salary allowances.”

Question 16

What is stated ratio?

Answer 16

“Income-and-loss-sharing ratio, the profit and loss ratio, p&l ratio. Gives each partner a fraction of the total.

Question 17

What is the allocation on capital balances method?

Answer 17

Assigns an amount based on the ratio of each partner’s relative capital balance.

Question 18

What is the allocation on services, capital, and stated ratio method?

Answer 18

Recognizes that service and capital contributions of partners often are not equal.

Question 19

What do Salary allowances make up for?

Answer 19

Differences in service contributions.

Question 20

What do Interest allowances make up for?

Answer 20

Unequal capital contributions.

Question 21

What is the statement of partners’ equity?

Answer 21

Shows EACH partner’s beginning capital balance, additional investments, allocated income or loss, withdrawals, and ending capital balance.

Question 22

What is a partnership based on?

Answer 22

A contract between individuals.

Question 23

What happens if a partner is admitted or withdrawals?

Answer 23

The present partnership ends, but the business can continue to operate as a new partnership consisting of the remaining partners.

Question 24

How is a partner admitted?

Answer 24

By purchasing an interest from one or more current partners or by investing cash or other assets in the partnership. The current partners must accept the purchaser.

Question 25

What is the purchase of partnership interest?

Answer 25

A personal transaction between one or more current partners and the new partner.

Question 26

Dean withdraws from a partnership with Rico and Lane. Dean takes $50,000 cash in settlement of his capital balance of $40,000. $___ will be _____ to the Cash account.

Answer 26

$50,000, credited.

Question 27

Perez invests $10,000 cash into a partnership. How is this recorded?

Answer 27

Debit: Cash
Credit: Perez, Capital

Question 28

Describe a proprietorship.

Answer 28

Only owner allowed; owner has unlimited liability.

Question 29

Describe a partnership.

Answer 29

More than one owner allowed; owners have unlimited liability.

Question 30

Describe an LLC.

Answer 30

One or more owners; owners have limited liability; no business tax.

Question 31

Describe a “C” corporation.

Answer 31

One or more owners; owners have limited liability; business is taxed.

Question 32

Martiniz receives 50% of all gains and losses. Net income was $70,000. To close the income summary account the partnership will ____ Capital for_____.

Answer 32

Credit Capital, $35,000.00

Question 33

Which of the following would not be shown on the statement of partners’ equity? Withdrawals, federal income tax, additional investments, beginning capital balance, and allocated income or loss.

Answer 33

Federal income tax.

Question 34

Hernandez withdraws with $40,000 in settlement of his capital balance of $30,0000 The remaining $10,000 will be _____ to the _____ partners’ capital accounts.

Answer 34

Debited, remaining.

Question 35

Each partner will use a capital account, withdrawal account, and be allocated net income according to the______

Answer 35

Partnership agreement.

Question 36

Thomas withdraws with five other partners an takes cash equal to his capital balance. Record the transaction.

Answer 36

Debit: Thomas, Capital
Credit: Cash

Question 37

What are the common methods to divide income or loss?

Answer 37

Ratio of capital balances, stated ratio basis, and salary/interest allowances.

Question 38

Guess withdraws from a partnership with three other partners. Guess agrees to take $25,000 in settlement of her capital balance of $30,000. This creates a _____ bonus that is paid to (remaining/withdrawing) _____ partners.

Answer 38

$5,000, remaining

Question 39

Drake and Potter invest $10,000 each. Drake withdraws $3,000 and Potter $5,0000. Net Income is $30,000. How much is Drake’s ending capital balance?

Answer 39

$22,000.

$30,000/2=$15,000
$10,000+$15,000= $25,000-$3,000=$22,000

Question 40

How is U.S. partnership different compared to other countries?

Answer 40

Legal systems and tax implications are different.

Question 41

In the absence of an agreement, the law says that partners share income or loss____

Answer 41

Equally.

Question 42

Wang and Wu are partners with equal balances of $50,000 each. They let Li invest $20,000 in their partnership for a 10% interest. The journal will reflect the bonus to Wang with a credit to _____ in the amount of _____.

Answer 42

Wang, Capital, $4,000

$50,000+$50,000=$100,000
$100,000+20,000=$120,000
$120,000x10%=$12,000
$20,000-$12,000=$8,000/2(wu/wang)=$4,000

Question 43

D and S are partners with equal capital balances of $60,000 each. They agree to let Smith invest $30,000 for 10% interest, including bonuses to the existing partners. The journal entry to reflect this will include?

Answer 43

Debit to Cash for $30,000 because…

$60,000+$60,000+$30,000=$150,000x10% =$15,000 will be credited.

Question 44

Silver withdraws from a partnership with two other partners. Silver agrees to take $20,000 cash in settlement of her capital balance of $15,000. ______ will be (debited/credited) _____ to Capital

Answer 44

$15,000, Debited

Question 45

Capone sells 1/2 of her partnership to Harris for $30,000. How would this be recorded?

Answer 45

Debit to Capital, because it is being reduced.