CHAPTER 12: ACCOUNTING FOR PARTNERSHIPS AND LIMITED
LIABILITY COMPANIES
1.
There are only four legal structures to form and operate a business.
a.
True
b.
False
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.
a.
True
b.
False
3.
A partnership is a legal entity separate from its owners.
a.
True
b.
False
Chapter 12: Accounting for Partnerships and Limited Liability Companies
4.
A partnership is subject to federal income taxes.
a.
True
b.
False
5.
A disadvantage of partnerships is the mutual agency of all partners.
a.
True
b.
False
6.
A partnership requires only an agreement between two or more persons to organize.
a.
True
b.
False
Chapter 12: Accounting for Partnerships and Limited Liability Companies
7.
Each partner may withdraw the assets he or she contributed to the partnership at any time.
a.
True
b.
False
8.
When compared to a corporation, one of the major disadvantages of the partnership is its limited life.
a.
True
b.
False
9.
When compared to a corporation, one of the major advantages of a partnership is its relative ease of formation.
a.
True
b.
False
Chapter 12: Accounting for Partnerships and Limited Liability Companies
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.
a.
True
b.
False
11.
A limited liability company is a business entity form designed to overcome some of the disadvantages of
the
partnership form.
a.
True
b.
False
12.
For tax purposes, a limited liability company may elect to be treated as a partnership.
a.
True
b.
False
Chapter 12: Accounting for Partnerships and Limited Liability Companies
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.
a.
True
b.
False
14.
Each partner has a separate capital and withdrawal account.
a.
True
b.
False
15.
When a partner invests noncash assets in a partnership, the assets are recorded at the partner’s book value.
a.
True
b.
False
Chapter 12: Accounting for Partnerships and Limited Liability Companies
16.
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 is
completely worthless, the partnership accounts receivable should be debited for $19,900.
a.
True
b.
False
17.
One reason that distributions of income and loss are prepared is to obtain the information to record a closing entry.
a.
True
b.
False
18.
If the partnership agreement does not otherwise state, partnership income is divided in proportion to the
individual
partner’s capital balance.
a.
True
b.
False
Chapter 12: Accounting for Partnerships and Limited Liability Companies
19.
The salary allocation to partners used in dividing net income would also appear as salary expense on the
partnership
income statement.
a.
True
b.
False
20.
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.
a.
True
b.
False
21.
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.
a.
True
b.
False
Chapter 12: Accounting for Partnerships and Limited Liability Companies
22.
The amount that a partner withdraws as a monthly salary allowance does not affect the division of net income.
a.
True
b.
False
23.
Partner A devotes full time and partner B devotes one-half time to their partnership. If the partnership
agreement
is silent concerning the division of net income, Partner A will receive a $20,000 share of a net income
of $30,000.
a.
True
b.
False
24.
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.
a.
True
b.
False
Chapter 12: Accounting for Partnerships and Limited Liability Companies
25.
Details of the division of partnership income should normally be disclosed in the financial statements.
a.
True
b.
False
26.
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.
a.
True
b.
False
27.
A 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 or dies.
a.
True
b.
False
Chapter 12: Accounting for Partnerships and Limited Liability Companies
28.
In admitting a new partner who purchases an interest, the capital interest of the new partner is obtained from the
current partners and both the total assets and total capital are increased.
a.
True
b.
False
29.
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.
a.
True
b.
False
30.
If a new partner is given a 20% interest in the firm, the new partner will receive a 20% interest in earnings.
a.
True
b.
False
Chapter 12: Accounting for Partnerships and Limited Liability Companies
31.
When a new partner is admitted by making an investment in the partnership, the old partners’ capital accounts
are
always credited.
a.
True
b.
False
32.
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.
a.
True
b.
False
33.
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.
a.
True
b.
False
Chapter 12: Accounting for Partnerships and Limited Liability Companies
34.
When a partner withdraws from the partnership, the partnership dissolves.
a.
True
b.
False
35.
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.
a.
True
b.
False
36.
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.
a.
True
b.
False
Chapter 12: Accounting for Partnerships and Limited Liability Companies
37.
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.
a.
True
b.
False
38.
When a new partner is admitted to a partnership, all partnership assets should be revised to reflect current values.
a.
True
b.
False
39.
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.
a.
True
b.
False
Chapter 12: Accounting for Partnerships and Limited Liability Companies
40.
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.
a.
True
b.
False
41.
Dissolution is the term which solely means to liquidate the partnership.
a.
True
b.
False
42.
In 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.
a.
True
b.
False
Chapter 12: Accounting for Partnerships and Limited Liability Companies
43.
If the share of losses on realization of the sale of noncash assets exceeds the balance in a partner’s capital
account,
the resulting balance is called a deficiency.
a.
True
b.
False
44.
In 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.
a.
True
b.
False
45.
The process of winding up the affairs of a partnership is referred to as realization.
a.
True
b.
False
Chapter 12: Accounting for Partnerships and Limited Liability Companies
46.
The distribution of cash, as the final process in winding up the affairs of a partnership, is based on the
income-sharing ratio.
a.
True
b.
False
47.
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.
a.
True
b.
False
48.
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.
a.
True
b.
False
Chapter 12: Accounting for Partnerships and Limited Liability Companies
49.
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.
a.
True
b.
False
50.
The statement of members’ equity is used for equity reporting of a partnership.
a.
True
b.
False
51.
The partner capital accounts may change due to capital additions, net income, or withdrawals.
a.
True
b.
False
Chapter 12: Accounting for Partnerships and Limited Liability Companies
52.
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.
a.
True
b.
False
53.
The chart of accounts for a partnership, with the exception of additional drawing and capital accounts, does not differ
from the chart of accounts for a sole proprietorship.
a.
True
b.
False
54.
Revenue per employee may be used to measure partnership (LLC) efficiency.
a.
True
b.
False
Chapter 12: Accounting for Partnerships and Limited Liability Companies
55.
Which of the following is a characteristic of a general partnership?
a.
The partners have co-ownership of partnership property.
b.
The partnership is subject to federal income tax.
c.
The partnership has an unlimited life.
d.
The partners have limited liability.
56.
Which of the following is not a characteristic of a general partnership?
a.
the partnership is created by a contract
b.
mutual agency
c.
partners share equally in net income or net losses unless an agreement states differently
d.
dissolution occurs only when all partners agree
57.
Which of the following is an advantage of a general partnership when compared to a corporation?
a.
A partnership is more likely to have a positive net income.
b.
The partnership is relatively inexpensive to organize.
c.
Creditors to a partnership cannot attach personal assets of partners.
d.
The partnership usually hires professional managers.
Chapter 12: Accounting for Partnerships and Limited Liability Companies
58.
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.
59.
An advantage of the partnership form of business organization is
a.
unlimited liability
b.
mutual agency
c.
ease of formation
d.
limited life
60.
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