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APPENDIX H
ACCOUNTING FOR PARTNERSHIPS
SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES
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True-False Statements
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Multiple Choice Questions
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Brief Exercises
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Completion Statements
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SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE
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Learning Objective 1
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Learning Objective 2
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Learning Objective 3
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Learning Objective 4
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TF
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MC
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
H-2
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Learning Objective 5
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Note: TF = True-False C = Completion Ma = Matching
MC = Multiple Choice Ex = Exercise SA = Short-Answer Essay
CHAPTER LEARNING OBJECTIVES
1. Identify the characteristics of the partnership form of business organization. The
principal characteristics of a partnership are (a) association of individuals, (b) mutual agency,
(c) limited life, (d) unlimited liability, and (e) co-ownership of property.
2. Explain the accounting entries for the formation of a partnership. When a partnership
is formed, each partner’s initial investment should be recorded at the fair value of the assets
at the date of their transfer to the partnership.
3. Identify the bases for dividing net income or net loss. Net income or net loss is divided
on the basis of the income ratio, which may be (a) a fixed ratio, (b) a ratio based on
beginning or average capital balances, (c) salaries to partners and the remainder on a fixed
ratio, (d) interest on partners’ capital and the reminder on a fixed ratio, and (e) salaries to
partners, interest on partners’ capital, and the remainder on a fixed ratio.
4. Describe the form and content of partnership financial statements. The financial
statements of a partnership are similar to those of a corporation. The principal differences
are (a) the division of net income is shown on the income statement, (b) the owners’ equity
statement is called a partners’ capital statement, and (c) each partner’s capital is reported on
the balance sheet.
5. Explain the effects of the entries to record the liquidation of a partnership. When a
partnership is liquidated, it is necessary to record the (a) sale of noncash assets, (b)
allocation of the gain or loss on realization, (c) payment of partnership liabilities, and (d)
distribution of cash to the partners on the basis of their capital balances.
TRUE-FALSE STATEMENTS
1. A partnership has a limited life, because any change in the relationship of the partners
dissolves the partnership.
2. Each partner is personally liable for all debts of the partnership.
3. A partnership agreement must be in writing.
Accounting for Partnerships
H-3
4. 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.
5. A partnership is easy to form and to dissolve.
6. Under the partnership form of business, large amounts of capital can be easily raised.
7. One of the major advantages of a partnership is the unlimited liability of the partners.
8. When a partner invests assets in a partnership, the assets are recorded at the partner’s
book value.
9. Income and losses are divided equally among the partners unless the partnership
agreement specifies otherwise.
10. If a partnership agreement does not specify how income and losses are to be distributed
they should be allocated based on relative capital account balances.
11. When a loss is closed into the partners’ capital accounts, Income Summary is credited.
12. When salary and interest allocations exceed net income, a net loss has occurred.
13. It is possible for a partner’s capital account to increase as a result of the allocation of a net
loss.
14. The salary, interest, and stated ratio method of allocation cannot be applied when a net
loss has occurred.
15. The financial statements of a partnership are similar to those of a corporation.
16. Liquidation of a partnership is the process of ending the business.
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
H-4
17. If liquidation of a partnership results in a capital deficiency in a partner’s account, the
partner must pay into the partnership the amount of the negative balance.
18. In a liquidation, one partner may have to make up the deficit in another partner’s account.
19. After selling all the assets and paying the liabilities in a liquidation of the partnership, the
partners share any remaining cash according to the stated ratios.
20. Gains and losses on sale of assets in liquidation are divided equally among partners.
Answers to True-False Statements
MULTIPLE CHOICE QUESTIONS
21. The ability of a partner to act on behalf of the partnership when engaging in business is
called
a. voluntary association.
b. mutual agency.
c. the partnership agreement.
d. unlimited liability.
22. Claim to the partners’ personal assets by creditors if the partnership cannot pay its debts
refers to
a. mutual agency.
b. dissolution.
c. liquidation.
d. unlimited liability.
23. Which of the following is not a characteristic of partnerships?
a. Voluntary association
b. Mutual agency
c. Limited liability
d. Limited life
Accounting for Partnerships
H-5
24. A partnership agreement should include
a. the purpose of the business.
b. the rights and duties of the partners.
c. the basis of allocating profits and losses.
d. All of these answer choices are correct.
25. Which of the following partnership characteristics is a disadvantage?
a. Voluntary association
b. Participation in partnership income
c. Unlimited liability
d. Co-ownership of partnership property.
26. Which of the following partnership characteristics is an advantage?
a. Limited life
b. Unlimited liability
c. Mutual agency
d. Voluntary association
27. Noncash assets invested into a partnership are recorded at
a. zero.
b. their carrying value.
c. their fair value.
d. their original cost.
28. A partner invests into a partnership a building with a $80,000 carrying value and a $90,000
fair market value. As a result of the investment, the partner’s capital account will be
credited for
a. $90,000
b. $80,000
c. $10,000.
d. $170,000
29 A partner invests into a partnership accounts receivable that had a balance of $40,000.
The related allowance for doubtful accounts is $3,200. As a result, the partner’s capital
account will be credited for
a. $40,000.
b. $36,800.
c. $43,200.
d. Can not be calculated.
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
H-6
30. Leon and Betty are forming a partnership. Leon will invest a truck with a book value of
$18,000 and a fair value of $28,000. Betty will invest a building with a book value of
$60,000 and a fair value of $180,000 with a mortgage of $30,000.
At what amount should the building be recorded?
a. $60,000.
b. $54,000.
c. $180,000.
d. $90,000.
31. Leon and Betty are forming a partnership. Leon will invest a truck with a book value of
$18,000 and a fair value of $28,000. Betty will invest a building with a book value of
$60,000 and a fair value of $180,000 with a mortgage of $30,000.
What amount should be recorded in Betty’s capital account?
a. $30,000.
b. $150,000.
c. $180,000.
d. $210,000.
32. Leon and Betty are forming a partnership. Leon will invest a truck with a book value of
$18,000 and a fair value of $28,000. Betty will invest a building with a book value of
$60,000 and a fair value of $180,000 with a mortgage of $30,000.
What amount should be recorded in Leon’ capital account?
a. $60,000.
b. $46,000.
c. $18,000.
d. $28,000.
33. Dent and Risch decide to organize a partnership. Dent invests $25,000 cash, and Risch
contributes $15,000 cash and equipment having a book value of $6,000. Choose the entry
to record Risch’s investment in the partnership assuming the equipment has a fair value of
$11,000.
a. Cash ................................................................. 15,000
Equipment ........................................................ 6,000
Risch, Capital ........................................ 21,000
b. Equipment ........................................................ 6,000
Risch, Capital ........................................ 6,000
c. Cash ................................................................. 15,000
Risch, Capital ........................................ 15,000
d. Cash ................................................................. 15,000
Equipment ........................................................ 11,000
Risch, Capital ........................................ 26,000
Accounting for Partnerships
H-7
34. The division of partnership profits on the basis of salaries, interest and a stated ratio is
usually necessary because
a. this reflects the amount of time devoted to the partnership by the partners.
b. partners seldom contribute time, effort, and resources equally.
c. most states require this method of distribution.
d. this prevents arguments among the partners.
35. At the beginning of the year partners Noah and Jona have capital balances in a
partnership of $50,000 and $75,000 respectively. They agree to share profits and losses
as follows:
Noah Jona
As salaries $25,000 $27,500
As interest on capital at the beginning of the year 10% 10%
Remaining profits or losses 50% 50%
If income for the year was $125,000, what will be the distribution of income to Noah?
a. $60,000.
b. $65,000.
c. $62,500.
d. $30,000.
36. At the beginning of the year partners Noah and Jona have capital balances in a
partnership of $50,000 and $75,000 respectively. They agree to share profits and losses
as follows:
Noah Jona
As salaries $25,000 $27,500
As interest on capital at the beginning of the year 10% 10%
Remaining profits or losses 50% 50%
If income for the year was $125,000, what will be the distribution of income to Jona?
a. $60,000.
b. $65,000.
c. $62,500.
d. $35,000.
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
H-8
37. At the beginning of the year partners Noah and Jona have capital balances in a
partnership of $50,000 and $75,000 respectively. They agree to share profits and losses
as follows:
Noah Jona
As salaries $25,000 $27,500
As interest on capital at the beginning of the year 10% 10%
Remaining profits or losses 50% 50%
If income for the year was $62,500, what will be the distribution of income to Noah?
a. $28,750.
b. $30,000.
c. $25,000.
d. $17,500.
38. At the beginning of the year partners Noah and Jona have capital balances in a
partnership of $120,000 and $90,000 respectively. They agree to share profits and losses
as follows:
Noah Jona
As salaries $33,000 $18,000
As interest on capital at the beginning of the year 5% 5%
Remaining profits or losses 50% 50%
If income for the year was $75,000, what will be the distribution to Jona?
a. $18,000
b. $37,500.
c. $45,750.
d. $29,250.
39. At the beginning of the year partners Noah and Jona have capital balances in a
partnership of $120,000 and $90,000 respectively. They agree to share profits and losses
as follows:
Noah Jona
As salaries $33,000 $18,000
As interest on capital at the beginning of the year 8% 8%
Remaining profits or losses 50% 50%
If income for the year was $75,000, what will be the distribution to Noah?
a. $28,800
b. $46,200
c. $42,600
d. $33,000.
Accounting for Partnerships
H-9
40. The financial statements of a partnership are similar to those of a corporation but have
some important differences. Which of the following statements is not true?
a. The owners’ equity statement for a partnership is called the partners’ capital.
b. The income statement for the partnership is identical to the income statement for a
corporation with no needed additions.
c. The balance sheet is the same except for the owner’s equity section.
d The capital balances of each partner are shown in the balance sheet.
41. A liquidation differs from a dissolution in that in a liquidation
a. partners are merely added.
b. partners simply withdraw.
c. cash is distributed on the basis of the income ratios.
d. the business will not continue.
42. In a liquidation, the liabilities of a partnership should be paid
a. before any sales of assets.
b. before distribution of gains and losses on the disposal of assets.
c. before the completion of the accounting cycle for the final operating period.
d. before the distribution of cash to partners.
43. All of the following are true for a liquidation except that
a. the business will continue.
b. there may be an adjustment of partners’ capital accounts.
c. all liabilities must be paid prior to any distribution of cash to partners.
d. a sale or realization of assets is involved.
44. In a partnership liquidation
a. liabilities should be paid before partners.
b. the partners’ accounts are settled on the basis of their stated ratios.
c. gains and losses on the realization of assets are allocated to the partners on the basis
of their current capital balances.
d. the last journal entry credits the partners’ capital accounts.
45. LeAnn, Bernice, and Carla are partners, sharing income 2:1:2. After selling all of the assets
for cash, dividing gains and losses on realization, and paying liabilities, the balances in the
capital accounts are as follows: LeAnn, $15,000 Cr; Bernice, $15,000 Cr; and Carla,
$45,000 Cr. How much cash should be distributed to LeAnn?
a. $9,000.
b. $30,000.
c. $15,000.
d. $25,000.
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
H-10
Answers to Multiple Choice Questions
BRIEF EXERCISES
Be. 46
Randy and John decide to organize a partnership. Randy invests $15,000 cash, and John
contributes $10,000 and equipment having a book value of $3,500 and a fair value of $7,000
Instructions
Prepare the entry to record each partner’s investment.
Be. 47
Poncho and Chico decide to merge their proprietorships into a partnership called Ranger
Company. The balance sheet of Ranger Company shows:
Account Receivable $15,000
Less: Allowance for doubtful accounts (1,500) $13,500
Equipment $20,000
Less: Accumulated depreciation (10,000) $10,000
The partners agree that the net realizable value of the receivables is $12,500 and that the fair
value of the equipment is $13,000.
Instructions
Indicate how the four accounts should appear in the opening balance sheet of the partnership.
Accounting for Partnerships
H-11
Solution 47 (5 min.) RANGER COMPANY
Be. 48
Ali & Tyson Co. reports net income of $50,000. The income ratios are Ali 60% and Tyson 40%.
Instructions
Indicate the division of net income to each partner, and prepare the entry to distribute the net
income.
Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Problem Solving, IMA: Reporting
Solution 48 (4-6 min.) Division of Net Income
Be. 49
Frank and Jesse Co. reports net income of $40,000. Partner salary allowances are Frank $20,000
and Jesse $10,000. Indicate the division of net income to each partner, assuming the income
ratios are Frank 70% and Jesse 30%.
Instructions
Indicate the division of net income to each partner, and prepare the entry to distribute the net
income.
Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Problem Solving, IMA: Reporting
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
H-12
Solution 49 (5-8 min.) Division of Net Income
Be. 50
The Fran & Mary Co. reports net income of $30,000. Interest allowances are Fran $3,000 and
Mary $5,000; partner salary allowances are Fran $18,000 and Mary $10,000 and the remainder is
shared equally.
Instructions
Indicate the division of net income to each partner, and prepare the entry to distribute the net
income.
Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Problem Solving, IMA: Reporting
Solution 50 (5-8 min.) Division of Net Income
Accounting for Partnerships
H-13
Be. 51
After liquidating noncash assets and paying creditors, account balances in the Yahn Co. are Cash
$36,000, Jude, Capital (Cr.) $11,000, Paul, Capital (Cr,) $8,000, J. D., Capital (Cr.) $10,000 and
Alice, Capital (Cr.) $7,000. The partners share income equally.
Instructions
Journalize the final distribution of cash to the partners.
Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA
Solution 51 (5-8 min.)
COMPLETION STATEMENTS
52. An association of two or more person to carry on as co-owners of a business for profit is
called a ______________.
53. A change in partners due to withdrawal or admission, which does not necessarily
terminate the business is called a _____________.
54. A _______________ _______________ is a written contract expressing the voluntary
agreement of two or more individuals in a partnership.
55. A partnership in which one or more general partners have unlimited liability and one or
more partners have limited liability for the obligations of the firm is called a
______________ ______________ partnership.
56. A ______________ partner has unlimited liability for the debits of a firm.
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
H-14
57. A corporation that has 75 or fewer stockholders and is taxed like a partnership is called a
(an) _________.
58. The _______________ _______________ is the basis for dividing net income and net
loss in a partnership.
59. The owners’ equity statement for a partnership is called the ______________
_________________ statement.
60. A partnership ____________________ is an event that ends both the legal and economic
life of a partnership.
61. In the liquidation of a partnerships and all partners have credit balances after allocation of
gain or loss it is said that there is no _______________ _______________.
Answers to Completion Statements
