Chapter 12
ACCOUNTING FOR PARTNERSHIPS
True /False Questions
1. A partnership has an unlimited life.
2. A partnership is an unincorporated association of two or more people to pursue a business
for profit as co-owners.
3. Mutual agency means each partner can commit or bind the partnership to any contract
within the scope of the partnership business.
4. Accounting procedures for all items are the same for both C corporations and S
corporations in all aspects.
5. Partners in a partnership are taxed on the amounts they withdraw from the partnership, not
the partnership income.
6. Limited liability partnerships are designed to protect innocent partners from malpractice or
negligence claims resulting from the acts of another partner.
7. A partnership cannot use salary allowances or interest allowances to allocate income and
losses to the partners because these items are not reported on the partnership income
statement.
8. In a limited partnership the general partner has unlimited liability.
9. Partner return on equity can be used by each partner to help decide whether additional
investment or withdrawal of resources is best for that partner.
10. Benson is a partner in B&D Company. Benson’s share of the partnership income is
$18,600 and her average partnership equity is $155,000. Her partner return on equity equals
8.33.
11. When partners invest in a partnership, their capital accounts are credited for the amount
invested.
12. Partners’ withdrawals are credited to their separate withdrawals accounts.
13. Partners can invest both assets and liabilities into a partnership.
14. The withdrawals account of each partner is closed to retained earnings at the end of the
accounting period.
15. In closing the accounts at the end of a period, the partners’ capital accounts are credited
for their share of the partnership loss or debited for their share of the partnership net income.
16. In the absence of a partnership agreement, the law says that income of a partnership will
be shared equally by the partners.
17. Salary allowances are reported as salaries expense on a partnership income statement.
18. The statement of changes in partners’ equity shows the beginning balance in retained
earnings, plus investments, less withdrawals, plus the income (or less the loss) and the ending
balance in retained earnings.
19. The equity section of the balance sheet of a partnership can report the separate capital
account balances of each partner.
20. If partners devote their time and services to their partnership, their salaries are expenses
on the income statement.
21. If the partners agree on a formula to share income and say nothing about losses, then the
losses are shared equally.
22. Assume that the S & B partnership agreement gave Steely 60% and Breck 40% of
partnership income and losses. The partnership lost $27,000 in the current period. This
implies that Steely’s share of the loss equals $16,200, and Breck’s share equals $10,800.
23. When a partner leaves a partnership, the present partnership ends.
24. To buy into an existing partnership, the new partner must contribute cash to the
partnership.
25. When a partner leaves a partnership, the present partnership ends, but the business can
still continue to operate.
26. Assets invested by a partner into a partnership remain the property of the individual
partner.
27. Admitting a partner by accepting assets is a personal transaction between one or more
current partners and the new partner.
28. When the current value of a partnership is greater than the recorded amounts of equity, the
current partners usually require any new partner to pay a bonus for the privilege of joining.
29. When a partner leaves a partnership, the withdrawing partner is entitled to a bonus if the
recorded equity is overstated.
30. When a partnership is liquidated, its business is ended.
31. A capital deficiency exists when all partners have a credit balance in their capital
accounts.
32. A capital deficiency can arise from liquidation losses, excessive withdrawals before
liquidation, or recurring losses in prior periods.
33. If a partner is unable to cover a deficiency and the other partners absorb the deficiency,
then the partner with the deficiency is thus relieved of all liability.
34. If at the time of partnership liquidation, a partner has a $5,000 capital deficiency and pays
the partnership $5,000 out of personal assets to cover the deficiency, then that partner is
entitled to share in the final distribution of cash.
35. An unincorporated association of two or more persons to carry on a business for profit as
co-owners is a:
A. Partnership.
B. Proprietorship.
C. Contractual company.
D. Mutual agency.
E. Voluntary organization.
36. Disadvantages of a partnership include:
A. Limited life.
B. Mutual agency.
C. Unlimited liability.
D. Co-ownership of property.
E. All of the choices are disadvantages.
37. A partnership agreement:
A. Is not binding unless it is in writing.
B. Is the same as a limited liability partnership.
C. Is binding even if it is not in writing.
D. Does not generally address the issue of the rights and duties of the partners.
E. Is also called the articles of incorporation.
38. Mutual agency means
A. Creditors can apply their claims to partners’ personal assets.
B. Partners are taxed on partnership withdrawals.
C. All partners must agree before the partnership can act.
D. The partnership has a limited life.
E. A partner can commit or bind the partnership in any contract within the scope of the
partnership business.
39. A partnership that has two classes of partners, general and limited, where the limited
partners have no personal liability beyond the amounts they invest in the partnership, and no
active role in the partnership, except as specified in the partnership agreement is a:
A. Mutual agency partnership.
B. Limited partnership.
C. Limited liability partnership.
D. General partnership.
E. Limited liability company.
40. A partnership designed to protect innocent partners from malpractice or negligence claims
resulting from acts of another partner is a:
A. Partnership.
B. Limited partnership.
C. Limited liability partnership.
D. General partnership.
E. Limited liability company.
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41. 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. The partner’s authority must be derived from the partnership agreement.
B. 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.
C. Only a partner with a majority interest in a partnership has the authority to represent the
partnership to third parties.
D. 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.
E. A partner may be able to legally bind the partnership to actions even if the other partners
are unaware of his actions.
42. David and Jeannie formed This & That as a limited liability company. Unless the member
owners elect to be treated otherwise, the Internal Revenue Service will tax the LLC as:
A. An S corporation.
B. A C corporation.
C. A non-taxable entity.
D. A joint venture.
E. A partnership.
43. A partnership in which all partners have mutual agency and unlimited liability is called:
A. Limited partnership.
B. Limited liability partnership.
C. General partnership.
D. S corporation.
E. Limited liability company.
44. Renee Jackson is a partner in Sports Promoters. Her beginning partnership capital balance
for the current year is $55,000, and her ending partnership capital balance for the current year
is $62,000. Her share of this year’s partnership income was $5,250. What is her partner return
on equity?
A. 8.47%
B. 8.97%
C. 9.54%
D. 10.47%
E. 10.60%
45. Web Services is organized as a limited partnership, with David White as one of its
partners. David’s capital account began the year with a balance of $45,000. During the year,
David’s share of the partnership income was $7,500, and David received $4,000 in
distributions from the partnership. What is David’s partner return on equity?
A. 7.8%
B. 8.9%
C. 15.4%
D. 16.0%
E. 16.7%
46. The following information is available regarding John Smith’s capital account in
Technology Consulting Group, a general partnership, for a recent year:
Beginning of the year balance
$22,000
His share of partnership income
$ 8,500
Withdrawals made during the year
$ 6,000
What is Smith’s partner return on equity during the year in question?
A. 36.6%
B. 34.7%
C. 10.8%
D. 11.4%
E. 55.7%
47. Partnership accounting:
A. Uses a capital account for each partner.
B. Uses a withdrawals account for each partner.
C. Allocates net income to each partner according to the partnership agreement.
D. Allocates net loss to each partner according to the partnership agreement.
E. All of the choices are correct.
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48. Partnership accounting:
A. Is the same as accounting for a sole proprietorship.
B. Is the same as accounting for a corporation.
C. Is the same as accounting for a sole proprietorship, except that separate capital and
withdrawal accounts are kept for each partner.
D. Is the same as accounting for an S corporation.
E. Is the same as accounting for a corporation, except that retained earnings is used to keep
track of partners’ withdrawals.
49. Partners’ withdrawals of assets are:
A. Credited to their withdrawals accounts.
B. Debited to their withdrawals accounts.
C. Credited to their retained earnings.
D. Debited to their retained earnings.
E. Debited to their asset accounts.
50. The withdrawals account of each partner is:
A. Closed to that partner’s capital account with a credit.
B. Closed to that partner’s capital account with a debit.
C. A permanent account that is not closed.
D. Credited with that partner’s share of net income.
E. Debited with that partner’s share of net loss.
51. B. Tanner contributed $14,000 in cash plus office equipment valued at $7,000 to the JT
Partnership. The journal entry to record the transaction for the partnership is:
A. Debit Cash $14,000; debit Office Equipment $7,000; credit B. Tanner, Capital $21,000.
B. Debit Cash $14,000; debit Office Equipment $7,000; credit JT Partnership, Capital
$21,000
C. Debit JT Partnership $21,000; credit B. Tanner, Capital $21,000.
D. Debit B. Tanner, Capital $21,000; credit JT Partnership, Capital $21,000.
E. Debit Cash $14,000; debit Office Equipment $7,000; credit Common Stock $21,000
52. Chen and Wright are forming a partnership. Chen will invest a building that currently is
being used by another business owned by Chen. The building has a market value of $90,000.
Also, the partnership will assume responsibility for a $30,000 note secured by a mortgage on
that building. Wright will invest $50,000 cash. For the partnership, the amounts to be
recorded for the building and for Chen’s Capital account are:
A. Building, $90,000 and Chen, Capital, $90,000.
B. Building, $60,000 and Chen, Capital, $60,000.
C. Building, $60,000 and Chen, Capital, $50,000.
D. Building, $90,000 and Chen, Capital, $60,000.
E. Building, $60,000 and Chen, Capital, $90,000.
53. Collins and Farina are forming a partnership. Collins is investing a building that has a
market value of $80,000. However, the building carries a $56,000 mortgage that will be
assumed by the partnership. Farina is investing $20,000 cash. The balance of Collins’ Capital
account will be:
A. $80,000.
B. $24,000.
C. $56,000.
D. $44,000.
E. $60,000.
54. Trump and Hawthorne have decided to form a partnership. Trump is going to contribute a
depreciable asset to the partnership as his equity contribution to the partnership. The
following information regarding the asset to be contributed by Trump is available:
Historical cost of the asset $76,000
Accumulated depreciation on the asset $40,000
Note payable secured by the asset* $18,000
Agreed-upon market value of the asset $45,000
*will be assumed by the partnership
Based on this information, Trump’s beginning equity balance in the partnership will be:
A. $76,000
B. $36,000
C. $18,000
D. $27,000
E. $45,000
55. In the absence of a partnership agreement, the law says that income (and loss) should be
allocated based on:
A. A fractional basis.
B. The ratio of capital investments.
C. Salary allowances.
D. Equal shares.
E. Interest allowances.
56. In a partnership agreement, if the partners agreed to an interest allowance of 10% annually
on each partner’s investment, the interest allowance:
A. Is ignored when earnings are not sufficient to pay interest.
B. Can make up for unequal capital contributions.
C. Is an expense of the business.
D. Must be paid because the partnership contract has unlimited life.
E. Legally becomes a liability of the general partner.