Chapter 12—Accounting for Partnerships and Limited Liability
Companies Key
1. There are only four legal structures to form and operate a business.
2. In a general partnership, each partner is individually liable to creditors for debts incurred by the partnership,
to the extent of the partner’s capital balance.
3. A partnership is a legal entity separate from its owners.
4. A partnership is subject to federal income taxes.
5. A disadvantage of partnerships is the mutual agency of all partners.
6. A partnership requires only an agreement between two or more persons to organize.
7. Each partner may withdraw the assets he or she contributed to the partnership at any time.
8. When compared to a corporation, one of the major disadvantages of the partnership is its limited life.
9. When compared to a corporation, one of the major advantages of a partnerships is its relative ease of
formation.
10. An advantage of the partnership form of business is that each partner’s potential loss is limited to that
partner’s investment in the partnership.
11. A Limited Liability Company is a business entity form designed to overcome some of the disadvantages of
the partnership form.
12. For tax purposes, a Limited Liability Company may elect to be treated as a partnership.
13. The Limited Liability Company may elect to be manager managed rather than member managed which
means that only authorized members may legally bind the corporation.
14. Each partner has a separate capital and withdrawal account.
15. The chart of accounts for a partnership, with the exception of drawing and capital accounts, does not differ
from the chart of accounts for a sole proprietorship.
16. The equity reporting for a Limited Liability Company is similar to that of a partnership but the changes in
capital are shown on a statement of members’ equity.
17. When a partner invests noncash assets in a partnership, the assets are recorded at the partner’s book value.
18. Accounts receivable contributed to the partnership are recorded at their face value.
19. A new partner contributes accounts receivable to a partnership which appear in the ledger of his sole
proprietorship at $20,500 and there was an allowance for doubtful accounts of $750. If $600 of the accounts
receivables are completely worthless, the partnership accounts receivable should be debited for $19,900.
20. One reason that distributions of income and loss are prepared is to obtain the information to record a closing
entry.
21. If nothing is stated, partnership income is divided in proportion to the individual partner’s capital balance.
22. The salary allocation to partners used in dividing net income would also appear as salary expense on the
partnership income statement.
23. If the articles of partnership provide for annual salary allowances of $36,000 and $18,000 to X and Y
respectively and net income is $30,000, X’s share of net income is $20,000.
24. If the net income of a partnership is less than the total of the allowances provided by the partnership
agreement, the difference must be divided among the partners in the income-sharing ratio.
25. The amount that a partner withdraws as a monthly salary allowance does not affect the division of net
income.
26. A devotes full time and B devotes one-half time to their partnership. If the partnership agreement is silent
concerning the division of net income, A will receive a $20,000 share of a net income of $30,000.
27. In the distribution of income, the net income is less than the salary and interest allowances granted; the
remaining balance will be a negative amount that must be divided among the partners as though it were a loss.
28. Details of the division of partnership income should normally be disclosed in the financial statements.
29. Whenever a partnership is dissolved, the assets are liquidated.
30. When a partnership dissolves, a new partnership is formed and a new partnership agreement should be
prepared.
31. Many partnerships provide for the admission of new partners or withdrawals of present partners by
amending existing partnership agreements, so that the firm may continue to operate without executing a new
agreement.
32. A person may be admitted to a partnership only with the consent of all the current partners.
33. Partnership’s asset accounts should be changed from cost to fair market value when a new partner is
admitted to a firm or an existing partner withdraws and dies.
34. In admitting a new partner, where the company chooses to use the purchase of an interest method, the
capital interest of the new partner is obtained from the current partners and both the total assets and total capital
are increased.
35. When a new partner purchases the entire interest of an old partner, the new partner’s capital account should
be credited for the amount he or she paid to the old partner.
36. If a new partner is given a 20% interest in the firm then the new partner will receive a 20% interest in
earnings.
37. When a new partner is admitted by making an investment in the partnership, the old partners’ capital
accounts are always credited.
38. When a new partner is admitted by making an investment of assets in the partnership and the new partner
has to pay a premium for admission, a bonus is divided among the old partners’ capital accounts.
39. Sarno has a capital balance of $42,000 after adjusting the assets to fair market value. Minton contributes
$22,000 to receive a 30% interest in the new partnership. The bonus paid by Minton is $2,800.
40. When a partner withdraws from the partnership, the partnership dissolves.
41. If not enough partnership cash or other assets are available to pay the withdrawing partner, a liability may
be created for the amount owed the withdrawing partner.
42. When a partner withdraws from the partnership by selling his or her interest back to the partnership, the
remaining partners must pay the withdrawing partner a specified amount from their personal assets.
43. X sells to A one-half of a partnership capital interest that totals $70,000 for $40,000. A’s capital account in
the partnership should be credited for $40,000.
44. When a new partner is admitted to a partnership, all partnership assets should be revised to reflect current
prices.
45. If a new partner is to be admitted to a partnership and a bonus is attributed to the old partnership, the bonus
should be divided between the capital accounts of the original partners according to their capital balances.
46. When a new partner is admitted to a partnership, bonuses attributable to either the old partnership or to the
incoming partner may be recognized in accordance with the agreement among the partners.
47. Dissolution is the term which solely means to liquidate the partnership.
48. In a partnership liquidation, gains and losses on the sale of partnership assets are divided among the
partners’ capital accounts on the basis of their capital balances.
49. If the share of losses on realization of the sale of noncash assets exceed the balance in a partner’s capital
account, the resulting balance is called a deficiency.
50. In a partnership liquidation, if a partner has a debit capital balance in his or her capital account, he or she is
responsible for contributing personal assets sufficient to eliminate the deficit.
51. The process of winding up the affairs of a partnership is referred to as realization.
52. The distribution of cash, as the final process in winding up the affairs of a partnership, is based on the
income-sharing ratio.
53. If a partner’s capital balance is a debit after it has absorbed its share of the loss on realization, the balance is
referred to as a deficiency.
54. In the liquidating process, any uncollected cash becomes a loss to the partnership and is divided among the
remaining partners’ capital balances based on their income-sharing ratio.
55. After all noncash assets have been converted to cash and all liabilities paid, A, B, and C have capital
balances of $10,000 (debit), $5,000 (debit), and $25,000 (credit). The cash available for distribution to the
partners is $10,000.
56. The statement of members’ equity is used for equity reporting of a partnership.
57. The partner capital accounts may change due to capital additions, net income, or withdrawals.
58. Revenue per employee may be used to measure partnership (LLC) efficiency.
59. Which of the following is characteristic of a general partnership?
60. Which of the following is not a characteristic of a general partnership?
61. Which of the following is an advantage of a general partnership when compared to a corporation?
62. Which of the following is a disadvantage of a partnership when compared to a corporation?
63. An advantage of the partnership form of business organization is
64. 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
65. When a limited partnership is formed
66. Which of the following below is not one of the four major forms of business entities that are discussed in
this chapter?
67. Which of the following below is not a characteristic of a Limited Liability Company?
68. The operating agreement for a Limited Liability Company is sometimes called:
69. When a partnership is formed, assets contributed by the partners should be recorded on the partnership
books at their
70. As part of the initial investment, a partner contributes equipment that had originally cost $125,000 and on
which accumulated depreciation of $100,000 has been recorded. If similar equipment would cost $150,000 to
replace and the partners agree on a valuation of $38,000 for the contributed equipment, what amount should be
debited to the equipment account?
71. As part of the initial investment, Omar contributes accounts receivable that had a balance of $22,500 in the
accounts of a sole proprietorship. Of this amount, $2,000 is completely worthless. For the remaining accounts,
the partnership will establish a provision for possible future uncollectible accounts of $1,500. The amount
debited to Accounts Receivable for the new partnership is
D. $20,500
72. Radley and Smithers share income and losses in a 2:1 ratio after allowing for salaries to Radley of $48,000
and $60,000 to Smithers. Net income for the partnership is $96,000. Income should be divided as follows:
73. Franco and Elisa share income equally. During the current year the partnership net income was
$40,000. Franco made withdrawals of $12,000 and Elisa made withdrawals of $17,000. At the beginning of
the year, the capital account balances were: Franco capital, $40,000; Elisa capital, $58,000. Franco’s capital
account balance at the end of the year is
74. Franco and Elisa share income equally. During the current year the partnership net income was
$40,000. Franco made withdrawals of $12,000 and Elisa made withdrawals of $17,000. At the beginning of
the year, the capital account balances were: Franco capital, $42,000; Elisa capital, $58,000. Elisa’s capital
account balance at the end of the year is
75. Partnership income and losses are usually divided on the basis of interest, salaries, and stated ratios
because
76. A ratio of 3:2:1 is the same as
77. Compton and Danson form a partnership in which Compton contributes $70,000 in assets and agrees to
devote half time to the partnership. Danson contributed $50,000 in assets and agrees to devote full time to the
partnership. If no additional information is available, how will Compton and Danson share in the division of
income?
78. Xavier and Yolonda 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 15%, salary allowances of $22,000 and $20,000 respectively, and the remainder equally. How
much of the net income of $90,000 is allocated to Xavier?
79. Xavier and Yolonda 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 $40,000 is allocated to Xavier?
80. Xavier and Yolonda 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 loss of $6,000 is allocated to Xavier?
81. If there is no written agreement as to the way income will be divided among partners
82. Partner A has a capital balance of $40,000 and devotes full time to the partnership. Partner B has a capital
balance of $50,000 and devotes half time to the partnership. If no other information is available regarding
distributions, in what ratio is net income to be divided?
83. Details of the division of net income for a partnership should be disclosed
84. Pia and Ramona are partners who share income in the ratio of 3:2. Their capital balances are $90,000 and
$130,000 respectively. Income Summary has a credit balance of $40,000. What is Pia’s capital balance after
closing Income Summary to Capital?
85. Pia and Ramona are partners who share income in the ratio of 3:2. Their capital balances are $90,000 and
$130,000 respectively. Income Summary has a credit balance of $40,000. What is Ramona’s capital balance
after closing Income Summary to Capital?
86. Use the following information to answer the following questions.
Izabelle and Marta are forming a partnership. Izabelle will invest a piece of equipment with a book value of
$7,500 and a fair market value of $20,000. Marta will invest a building with a book value of $40,000 and a fair
market value of $58,000.
What amount will be recorded to the building account?
87. Use the following information to answer the following questions.
Izabelle and Marta are forming a partnership. Izabelle will invest a piece of equipment with a book value of
$7,500 and a fair market value of $20,000. Marta will invest a building with a book value of $40,000 and a fair
market value of $58,000.
What amount will be recorded to Izabelle’s capital account?
88. Use the following information to answer the following questions.
Izabelle and Marta are forming a partnership. Izabelle will invest a piece of equipment with a book value of
$7,500 and a fair market value of $20,000. Marta will invest a building with a book value of $40,000 and a fair
market value of $58,000.
What amount will be recorded to Marta’s capital account ?
89. Robert Johnson 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
Robert that was originally used to purchase the equipment.
What amount should Robert’s capital account be recorded?
90. Henry Jones contributed equipment, inventory, and $44,000 cash to the partnership. The equipment had a
book value of $35,000 and market value of $28,000. The inventory has a book value of $25,000, but only had a
market value of $12,000. due to obsolescence. The partnership also assumed a $15,000 note payable owed by
Henry that was originally used to purchase the equipment.
What amount should Henry’s capital account be recorded?
91. Ofelia and Teresa share income and losses in a 2:1 ratio after allowing for salaries to Ofelia of $48,000 and
$60,000 to Teresa. Net income for the partnership is $132,000. Income should be divided as follows:
92. Carla and Eliza share income equally. During the current year the partnership net income was
$40,000. Carla made withdrawals of $12,000 and Eliza made withdrawals of $17,000. At the beginning of the
year, the capital account balances were: Carla capital, $42,000; Eliza capital, $55,000. Eliza’s capital account
balance at the end of the year is
93. Xavier and Yolanda 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 20%, salary allowances of $27,000 and $18,000 respectively, and the remainder equally. How
much of the net income of $91,000 is allocated to Yolanda?
94. Xavier and Yolanda 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 20%, salary allowances of $34,000 and $26,000 respectively, and the remainder equally. How
much of the net income of $100,000 is allocated to Yolanda?
95. Xavier and Yolanda 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 20%, salary allowances of $34,000 and $26,000 respectively, and the remainder equally. How
much of the net income of $100,000 is allocated to Xavier?
96. Xavier and Yolanda 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 $38,000 and $28,000 respectively, and the remainder equally. How
much of the net income of $75,000 is allocated to Yolanda?
97. Xavier and Yolanda 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 $38,000 and $28,000 respectively, and the remainder equally. How
much of the net income of $75,000 is allocated to Xavier?
98. Xavier and Yolanda 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 loss of $6,000 is allocated to Yolanda?
99. Tomas and Saturn are partners who share income in the ratio of 3:1. Their capital balances are $40,000 and
$60,000 respectively. Income Summary has a credit balance of $20,000. What is Tomas’s capital balance
after closing Income Summary to Capital?
100. Tomas and Saturn are partners who share income in the ratio of 3:1. Their capital balances are $80,000
and $120,000 respectively. Income Summary has a credit balance of $30,000. What is Tomas’ capital balance
after closing Income Summary to Capital?
101. Tomas and Saturn are partners who share income in the ratio of 3:1. Their capital balances are $80,000
and $120,000 respectively. Income Summary has a credit balance of $30,000. What is Saturn’s capital
balance after closing Income Summary to Capital?
102. Tomas and Saturn are partners who share income in the ratio of 3:1. Their capital balances are $40,000
and $60,000 respectively. Income Summary has a credit balance of $20,000. What is Saturn’s capital balance
after closing Income Summary to Capital?
103. Franco and Jason share income and losses in a 2:1 ratio after allowing for salaries to Franco of $15,000 and
$30,000 to Jason. If the partnership suffers a $15,000 loss, by how much would Jason’s capital account
increase?
104. Lambert invests $20,000 for a 1/3 interest in a partnership in which the other partners have capital totaling
$34,000 before admitting Lambert. After distribution of the bonus, what is Lambert’s capital?
106. Nick is admitted to an existing partnership by investing cash. Nick agrees to pay a bonus for his
ownership interest because of the past success of the partnership. When Nick’s investment in the partnership is
recorded
107. Bobbi and Stuart are partners. The partnership capital of Bobbi is $40,000 and Stuart is $70,000. Bobbi
sells his interest in the partnership to John for $50,000. The journal entry to record the admission of John as a
new partner would include
108. When a partner dies, the capital account balances of the remaining partners
109. A partner withdraws from a partnership by selling her interest to another person who currently is not
associated with the firm. As a results of this transaction, the capital account balance of the other partners in the
partnership
110. Samuel and Darci are partners. The partnership capital for Samuel is $50,000 and for Darci is
$60,000. Josh is admitted as a new partner by investing $50,000 cash. Josh is given a 20% interest in return
for his investment. The amount of the bonus to the old partners is
111. Abby and Bailey are partners who share income in the ratio of 2:1 and have capital balances of $60,000
and $30,000 respectively. With the consent of Bailey, Sandra buys one half of Abby’s interest for
$35,000. For what amount will Abby’s capital account be debited to record admission of Sandra to the
partnership?
112. A new partner may be admitted to a partnership by
113. A change in the ownership of a partnership results in the
114. When a new partner is admitted to a partnership, there should be a(n)
115. When a new partner is admitted to a partnership, there should be a(n)
116. When an additional partner is admitted to a partnership by contribution of assets to the partnership
117. When a new partner is admitted to a partnership
118. The Calvin-Dogwood Partnership owns inventory that was purchased for $90,000, has a current
replacement cost of $85,900, and is priced to sell for $125,000. At what amount should the inventory be
recorded in the accounts of the new partnership if Alexis is to be admitted?
119. Immediately prior to the admission of Abbott, the Smith-Jones Partnership assets had been adjusted to
current market prices, and the capital balances of Smith and Jones were $40,000 and $60,000 respectively. If
the parties agree that the business is worth $120,000, what is the amount of bonus that should be recognized in
the accounts at the admission of Abbott?
120. Benson and Orton are partners who share income in the ratio of 2:3 and have capital balances of $60,000
and $40,000 respectively. Ramsey is admitted to the partnership and is given a 40% interest by investing
$20,000. What is Benson’s capital balance after admitting Ramsey?
121. Benson and Orton are partners who share income in the ratio of 2:3 and have capital balances of $60,000
and $40,000 respectively. Ramsey is admitted to the partnership and is given a 10% interest by investing
$20,000. What is Orton’s capital balance after admitting Ramsey?
122. Benton and Orton are partners who share income in the ratio of 1:3 and have capital balances of $70,000
and $30,000 respectively. Ramsey is admitted to the partnership and is given a 40% interest by investing
$20,000. What is Benton’s capital balance after admitting Ramsey?