College Accounting, 12e (Slater)
Chapter 17 Partnership
17.1 Learning Objective 17-1
1) Many associations such as medical centers and law firms could organize as a:
A) sole proprietorship.
B) corporation.
C) partnership.
D) All of the above.
2) The accounting procedures are the same for sole proprietorships as for partnerships with the exception
of:
A) the asset section includes more than one cash account.
B) the liability section.
C) the revenue section.
D) the capital section is now divided per the number of partners.
3) Articles of partnership:
A) are required to form a partnership by federal law.
B) are a formal written agreement that states the partners’ relationship.
C) may be an oral agreement.
D) Both B and C are correct.
4) The partnership dissolves when a partner leaves. This characteristic is called:
A) mutual agency.
B) limited life.
C) limited liability.
D) unlimited life.
5) The actions of one partner are binding on all of the other partners. This characteristic is called:
A) mutual agency.
B) exclusive agency.
C) unlimited life.
D) limited liability.
6) When the obligations of a partnership cannot be met, each partner is liable for the obligation. This
characteristic is called:
A) limited life.
B) unlimited liability.
C) limited liability.
D) mutual agreement.
7) A general partner is:
A) personally liable for all of the debts of the partnership.
B) liable for only the amount of his/her investment.
C) a partner that is liable for the amount of taxes paid each period.
D) None of these answers are correct.
8) Which of the following is true of a partnership?
A) Actions of one partner are binding on all the other partners.
B) Each partner is individually liable for partnership debts.
C) All of the owners always share income and losses equally.
D) Both A and B are correct.
9) David and Daniel formed a partnership. David invested $10,000, cash; Daniel invested $5,000 cash and
equipment valued at $6,000. The proper entry to record this is to:
A) debit Cash $15,000; debit Equipment $6,000; credit Capital $21,000.
B) debit Cash $15,000; debit Equipment $6,000; credit Accounts Payable $21,000.
C) debit Cash $15,000; debit Equipment $6,000; credit David’s Capital $10,000; and credit Daniel’s Capital
$10,000.
D) debit Cash $15,000; debit Equipment $6,000; credit David’s Capital $10,000; and credit Daniel’s Capital
$11,000.
10) Tricia and Jennifer formed a partnership. Tricia invested $10,000 cash; Jennifer invested $5,000 cash,
equipment valued at $6,000, and $1,000 accounts payable. The proper entry to record this is:
A) debit Cash 15,000; debit Equipment 6,000; credit Accounts Payable $1,000; credit Tricia’s Capital
$10,000; and credit Jennifer’s Capital $10,000.
B) debit Cash 15,000; debit Equipment 6,000; debit Accounts Payable $1,000; credit Tricia’s Capital
$10,000; and credit Jennifer’s Capital $10,000.
C) debit Cash $15,000; debit Equipment $6,000; credit Tricia’s Capital $10,000; and credit Jennifer’s Capital
$10,000.
D) debit Cash $15,000; debit Equipment $6,000; credit Tricia’s Capital $10,000; and credit Jennifer’s Capital
$11,000.
11) Partner A invested furniture that was recorded at a value below the fair market value. This error
would cause:
A) the period’s net income to be overstated.
B) the period end capital to be overstated.
C) the period end assets to be overstated.
D) the period end assets to be understated.
12) In comparison with the proprietorship form of business organization, forming a partnership offers
which of the following advantages?
A) Limited life
B) Legal liability of each partner for all of the debts
C) Combination of ability and experience of the partners
D) Simple transfer of interest in the partnership to outsiders
13) When two proprietors decide to combine their businesses and form a partnership, GAAP usually
requires that non-cash assets be taken over at their:
A) residual value on the date of the partnership.
B) book value on the date of the partnership.
C) fair market value on the date of the partnership.
D) historical cost on the date of the partnership.
14) Which of the following is not generally written into the articles of partnership agreement?
A) Rights and responsibilities of each partner
B) Provisions for admission of new partners
C) Amount that each partner is investing
D) All are written into the agreement.
15) Since all partners are bound together in the agreement and each acts on the behalf of the partnership,
________ has been established.
A) limited life
B) limited risk
C) mutual agency
D) unlimited liability
16) Using its book value, Partner C invested equipment which had been valued over the past year using
straight-line when declining balance was appropriate. This error would cause:
A) future period’s net income to be understated.
B) future period’s net income to be overstated.
C) this period end assets to be understated.
D) None of these are correct.
17) All assets held by a partnership are:
A) co-owned by all partners.
B) owned by the partner(s) who purchased the assets.
C) owned by the partners based on investment percentage.
D) owned by the partnership.
18) Laura’s investment in a new partnership includes $1,000 cash and $5,000 equipment. The new
partnership is assuming $500 of Laura’s accounts payable. The partnership entry should be to:
A) debit Laura, Capital $5,500; debit Accounts Payable $500; credit Cash $1,000; credit Equipment $5,000.
B) debit Cash $1,000; debit Equipment $5,000; credit Laura Capital, $6,000.
C) debit Cash $1,000; debit Equipment $5,000; credit Accounts Payable $500; credit Laura, Capital, $5,500.
D) debit Laura, Investment $5,500; credit Capital $5,500.
19) Nathan Long is entering into a partnership with Terri. Nathan is investing $2,000 cash and equipment
currently on Nathan’s books at $6,000 and accumulated depreciation of $1,000. The equipment has a fair
market value of $4,000. The entry to record Nathan’s investment should include be to:
A) debit Cash $2,000; debit Equipment $6,000; credit Accumulated Depreciation $1,000; credit Long,
Capital $7,000.
B) debit Cash $2,000; debit Equipment $6,000; credit Accumulated Depreciation $2,000; credit Long,
Capital $6,000.
C) debit Long, Capital $6,000; debit Accumulated Depreciation $2,000; credit Cash $2,000; credit
Equipment $6,000.
D) debit Cash $2,000; debit Equipment $4,000; credit Long, Capital $6,000.
20) A partnership cannot be formed with an oral agreement.
21) The Securities and Exchange Commission Act defines a partnership as “an association of two or more
persons to carry on as co-owners of a business for profit.”
22) A partnership is defined by the Uniform Partnership Act.
23) Unlimited liability means that the act of a single partner is binding on all the other partners.
24) If Blake invests $10,000 cash in a partnership, Cash is debited and Blake, Capital is credited, $10,000.
25) Prepare the journal entry to record the partners’ investment in the company.
Palmer invests $1,000 cash and equipment on his books at $6,500 with accumulated depreciation of
$1,500. The fair market value of the equipment is $7,000. Evans is investing $7,000 cash and $700 accounts
payable.
26) Prepare the journal entry to record the partners’ investment in the company.
Todd and Dillon combine their two businesses and enter into a partnership. Todd invests $5,000 cash and
equipment on his books at $6,500 with accumulated depreciation of $1,500. The fair market value of the
equipment is $5,000. Dillon is investing $8,000 cash and $700 accounts payable.
27) Norm and Sam agreed on October 1, 2012 to enter into a partnership. Norm contributes $75,000 and
Sam contributes $50,000. Journalize their initial investments.
28) Discuss (a) the purpose of the articles of partnership, and (b) indicate the items that should be
included.
29) Discuss the following characteristics of partnerships:
a) Limited life
b) Mutual agency
c) Unlimited liability
17.2 Learning Objective 17-2
1) Salary and interest allowances for partners are:
A) expenses on the income statement.
B) liabilities on the balance sheet.
C) a means of dividing net income or loss between the partners.
D) None of these answers are correct.
2) Which method of allocation of profits and losses is based on a percent of initial investment of the
partners?
A) Salary allowance
B) Salary expense
C) Profit and loss ratio
D) Interest allowance
3) The agreed-upon ratio for dividing earnings or losses of a partnership is called:
A) interest allowance.
B) salary allowance.
C) profit and loss ratio.
D) profit and loss allowance.
4) Mary and Jeff entered into a partnership agreement. However, the agreement did not state how income
and losses would be divided. The law states that income will be divided:
A) equally.
B) according to investments.
C) according to abilities.
D) None of these answers are correct.
5) Applying the interest allowance method, compute Julie and Jennifer’s share of net income if Julie
invested $40,000 and Jennifer invested $24,000 at an 8% interest rate, with the remainder to be divided
equally. Net income was $10,000.
A) Julie $3,200; Jennifer $1,920
B) Julie $6,250; Jennifer $3,750
C) Julie $5,640; Jennifer $4,360
D) None of these answers is correct.
6) What is the closing entry to allocate net income of $48,000 to Sara, Ellen, and Mary? Respective capital
balances are $30,000, $40,000, and $30,000. No agreement was made for division of income.
A) Debit Income Summary $48,000; credit Sara, Capital $16,000; credit Ellen, Capital $16,000; credit Mary,
Capital $16,000
B) Debit Income Summary $48,000; credit Sara, Capital $14,400; credit Ellen, Capital $19,200; credit Mary,
Capital $14,400
C) Debit Salary Expense $48,000; credit Salaries Payable $48,000
D) Net income cannot be allocated.
7) What is the closing entry to allocate net income $24,000 to Eric, Von, and Derek? Their respective
capital balances are $20,000, $40,000, and $60,000. Net income is shared in a ratio of their capital balances.
A) Debit Income Summary $24,000; credit Eric, Capital $4,000; credit Von, Capital
$8,000; credit Derek, Capital $12,000
B) Debit Income Summary $24,000; credit Eric, Capital $8,000; credit Von, Capital $8,000; credit Derek,
Capital $8,000
C) Debit Salary Expense $24,000; credit Salaries Payable $24,000
D) Net income cannot be allocated.
8) The journal entry to close a net income to the partners is to:
A) debit Income Summary; credit the capital accounts.
B) credit Income Summary; debit the capital accounts.
C) credit Net Loss; debit the capital accounts.
D) debit Net Loss; credit the capital accounts.
9) The average capital balances of partners Bridget and Emily are $3,000 and $6,000, respectively. Bridget
and Emily work full time in the business. The business earned net income of $12,000 for the period. The
partners have agreed to share earnings based upon the percentage of original investment. Bridget‘s share
of the net income is:
A) $4,000.
B) $6,000.
C) $8,000.
D) indeterminable.
10) The net income earned by the Cooper, Cross, and Crane partnership is $18,000. Their respective
average capital balances are $20,000, $20,000, and $40,000. What is the closing entry to allocate the net
income if no agreement was made for division of income?
A) Debit Income Summary $18,000; credit Cooper, Capital $6,000; credit Cross, Capital $6,000; credit
Crane, Capital $6,000
B) Debit Income Summary $18,000; credit Cooper, Capital $4,500; credit Cross, Capital $4,500; credit
Crane, Capital $9,000
C) Cannot allocate net income.
D) Debit Cooper, Capital $6,000; debit Cross, Capital $6,000; debit Crane, Capital $6,000; credit Income
Summary $18,000
11) Allison and Josh are partners in a business. Allison‘s capital is $60,000 and Josh’s capital is $100,000.
Profits for the year are $80,000. They agree to share profits and losses as follows:
Allison
Josh
Salaries
$20,000
$40,000
Interest on capital
10%
10%
Remaining profits and losses
3/5
2/5
Allison’s share of the profits before paying salaries and interest on capital is:
A) $48,000.
B) $22,000.
C) $28,000.
D) $28,400.
12) Allison and Josh are partners in a business. Allison’s capital is $60,000 and Josh’s capital is $100,000.
Profits for the year are $80,000. They agree to share profits and losses as follows:
Allison
Josh
Salaries
$20,000
$40,000
Interest on capital
10%
10%
Remaining profits and losses
3/5
2/5
Josh’s share of the profit is:
A) $32,000.
B) $44,000.
C) ($8,000).
D) None of the above.
13) Applying the interest allowance method, compute Taylor and Timmy’s share of net income if Taylor
invested $200,000 and Timmy invested $800,000 at a 6% interest rate, with the remainder to be divided
equally. Net income was $75,000.
A) Taylor, $15,000; Timmy, $60,000
B) Taylor, $37,500; Timmy, $37,500
C) Taylor, $19,500; Timmy, $55,500
D) None of these answers is correct.
14) The basis on which profits and losses are shared is governed by:
A) the SEC.
B) the IRS.
C) the partnership agreement.
D) the partners, and must be shared equally.
15) The different partners are taxed on:
A) the gross revenue of the partnership.
B) the amount they withdraw from the partnership.
C) the total amount of the net profit of the partnership.
D) the partners’ share of the net profit of the partnership.
16) The two types of allowances that may be considered before the division of profits and losses are:
A) interest and salary allowances.
B) interest and bonus allowances.
C) salary and bonus allowances.
D) bonus and liquidation allowances.
17) The income/loss agreement was ignored when closing the income summary and all income was
distributed evenly. This error would cause:
A) the total owner’s equity to be overstated.
B) the total owner’s equity to be understated.
C) the total owner’s equity to be unaffected.
D) the ending assets to be overstated.
18) Applying the ratio based on investment method, compute Taylor and Timmy’s share of net income if
Taylor invested $200,000 and Timmy invested $800,000. Net income was $75,000.
A) Taylor, $15,000; Timmy, $60,000
B) Taylor, $37,500; Timmy, $37,500
C) Taylor, $19,500; Timmy, $55,500
D) None of these answers is correct.
19) Partner B invested inventory using the retail selling price for valuation. This error would cause:
A) the period’s net income to be overstated.
B) the period’s net income to be understated.
C) the ending assets to be overstated.
D) Both A and C are correct.
20) Applying the profit and loss ratio method, compute Taylor and Timmy’s share of net income if Taylor
invested $200,000 and Timmy invested $800,000 and the profit and loss ratio is 3:2. Net income was
$75,000.
A) Taylor, $15,000; Timmy, $60,000
B) Taylor, $37,500; Timmy, $37,500
C) Taylor, $45,000; Timmy, $30,000
D) None of these answers is correct.
21) Kate and Joe formed a partnership in 2012. Joe invested $60,000 and Kate invested $30,000. The
partnership had $150,000 in income during 2012. There is no agreement as to how income is divided. Kate
and Joe’s share is:
A) Kate gets $100,000 and Joe gets $50,000.
B) Kate gets $50,000 and Joe gets $100,000.
C) Kate gets $75,000 and Joe gets $75,000.
D) some other division.
22) Partners are required to report their share of earnings on their personal tax return.
23) Before calculating salary and interest allowances, it is necessary to determine whether net income will
cover these expenses.
24) The profit and loss ratio is required to be equally divided between and among the partners.
25) A loss occurs when net income is not large enough to cover salary and interest allowances for the
partners.
26) An interest allowance is based on a partner’s individual initial investment of capital.
27) A profit and loss ratio may not be based on capital contributions.
28) An interest allowance is based on the beginning capital balance of each partner.
29) The partnership of Smith and Jones, who have average capital balances of $11,000 and $19,000,
respectively, earned $90,000 net income. Under each of the following independent situations, calculate
the distribution of the $90,000.
a) No agreement was established.
b) Share based on their average capital balances.
30) John and Brad have average capital balances of $25,000 and $10,000, respectively. The partners have
agreed to allow $20,000 salary allowances. The partners will share income and losses in a 1:2 ratio. How
much will each partner’s capital account change if net income is $70,000?
17.3 Learning Objective 17-3
1) Partners Brian, Josh, and Chad have capital balances of $7,000, $3,000, and $90,000, respectively. The
losses for the year are $12,000. What will Josh’s capital balance be if the three partners share profits and
losses at a 2:2:6 ratio?
A) $600 credit balance
B) $1,000 debit balance
C) $2,400 debit balance
D) $4,000 debit balance
2) Partners Brian, Josh, and Chad have average capital balances of $7,000, $3,000, and $90,000,
respectively. Net income for the year is $12,000. Salary allowances are $14,000 for Brian and $5,000 for
Josh. Chad gets 10% interest on his capital balance with the remainder being divided at a 1:1:2 ratio. What
is Brian’s capital balance after distributing the net income?
A) $17,000 credit balance
B) $3,000 debit balance
C) $10,000 debit balance
D) $7,000 debit balance
3) Partners Jessica and Jill receive salary allowances of $5,000 and $10,000, respectively. They share
income and losses in a 3:1 ratio. If the partnership suffers a $21,000 loss, by how much would Jessica’s
capital decrease?
A) $15,750
B) $10,750
C) $16,000
D) $22,000
4) Janie and Larry are partners, with beginning capital balances of $60,000 and $40,000 respectively.
During the year, Janie withdrew $10,000 and Larry withdrew $15,000. The year’s net income of $30,000
was distributed $10,000 to Janie and $20,000 to Larry. Calculate the ending balances in the capital
accounts.
A) Janie, $60,000; Larry, $45,000
B) Janie, $60,000; Larry, $40,000
C) Janie, $80,000; Larry, $75,000
D) Janie, $80,000; Larry, $45,000
5) A cash withdrawal of a partner was recorded the same as paying payroll. This error would cause:
A) the period’s net income to be understated.
B) the period’s net income to be overstated.
C) the period end assets to be overstated.
D) the period end assets to be understated.
6) A statement of partner‘s equity is the same as a statement of owner’s equity except for:
A) there is a capital account for all partners.
B) net income is assigned to one partner.
C) no additional investment by partners are shown on the statement.
D) There is no difference in the statements.
7) Mary sold Jill her equity in the Mary and Jill partnership for $13,000. If both Mary and Jill had a $10,000
capital balance, the entry to record this transaction would be to:
A) debit Cash $13,000; credit Jill, Capital $13,000.
B) debit Mary, Capital $10,000; credit Jill, Capital $10,000.
C) debit Cash $13,000; credit Mary, Capital $13,000.
D) debit Jill, Capital $10,000; credit Mary, Capital $10,000.
8) Partnerships are subject to federal income tax.