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Exam 12: Accounting for Partnerships

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Question 1

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Certain corporations with 100 or fewer stockholders can elect to be treated as a partnership for income tax purposes. These corporations are called Subchapter S or simply S corporations.

A) True
B) False

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Question 2

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The income or loss of a partnership is allocated to the partners according to the partnership agreement, and it is included in determining the taxable income for each partner's tax return.

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B) False

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Question 3

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The following information is available on PDC Enterprises, a partnership, for the most recent fiscal year: $\begin{array} { l r } \text { Total partnership capital at beginning of the year } & \$ 1,080,000 \\\text { Partnership net income for the year } & \$ 1,250,000 \\\text { Withdrawals by partners during the year } & \$ 320,000 \\\text { Additional investments by partners during the year } & \$ 70,000\end{array}$ There are three partners in TGR Enterprises: Pearson, Darling and Cathay. At the end of the year, the partners' capital accounts were in the ratio of 2:2:1, respectively. Compute the ending capital balances of Cathay.

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?

Zheng invested $100,000 and Murray invested $200,000 in a partnership. They agreed to share incomes and losses by allowing a $60,000 per year salary allowance to Zheng and a $40,000 per year salary allowance to Murray, plus an interest allowance on the partners' beginning-year capital investments at 10%, with the balance to be shared equally. Assuming net income for the current year is $105,000, the journal entry to allocate net income is:

Farmer and Taylor formed a partnership with capital contributions of $200,000 and $250,000, respectively. Their partnership agreement calls for Farmer to receive a $70,000 per year salary. The remaining income or loss is to be divided equally. Assuming net loss for the current year is $15,000, the journal entry to allocate the net loss is:

Partners can invest assets but not liabilities into a partnership.

The following information is available regarding Grace Smit's capital account in Enterprise Consulting Group, a general partnership, for a recent year: $\begin{array}{ll}\text { Beginning of the ye ar balance } & \$ 22,000 \\\text { Share of partnership income } & \$ 8,500 \\\text { Withdrawals made during the year } & \$ 6,000\end{array}$ What is Smit's partner return on equity during the year in question?

Cox, North, and Lee form a partnership. Cox contributes $180,000, North contributes $150,000, and Lee contributes $270,000. Their partnership agreement calls for a 5% interest allowance on the partner's capital balances with the remaining income or loss to be allocated equally. If the partnership reports income of $174,000 for its first year, what amount of income is credited to Lee's capital account?

Cinema Products LP is organized as a limited partnership that sells movie props. Information related to capital balances is given below. Compute the partner return on equity for each limited partner. How would each partner evaluate the success of the partnership? What would you recommend the partners do with respect to additional investments or withdrawals? $\begin{array} { l r r r } & \text { Turner } & \text { Kelly } & \text { Total } \\\text { Capital balance, beginning of year } & 890,000 & 570,000 & 1,460,000 \\\text { Net income for current year } & 85,000 & 65,000 & 150,000 \\\text { Withdrawals for current year } & 40,000 & 25,000 & 65,000\end{array}$

A partnership agreement:

When a partner is added to a partnership:

Christie and Jergens formed a partnership with capital contributions of $300,000 and $400,000, respectively. Their partnership agreement calls for Christie to receive a $60,000 per year salary. Also, each partner is to receive an interest allowance equal to 10% of a partner's beginning capital investments. The remaining income or loss is to be divided equally. If the net income for the current year is $135,000, then Christie and Jergens's respective shares are:

Farmer and Taylor formed a partnership with capital contributions of $200,000 and $250,000, respectively. Their partnership agreement calls for Farmer to receive a $70,000 per year salary. The remaining income or loss is to be divided equally. If the net income for the current year is $135,000, then Farmer and Taylor's respective shares are:

A partnership is an incorporated association of two or more people to pursue a business for profit as co-owners.

In a limited partnership the general partner has unlimited liability.

Feldt is a partner in Feldt & Dodson Company. Feldt'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.

If a company wants to protect its three investors against personal liability risk, which of the following business forms would not be a suitable option?

When partners invest in a partnership, their capital accounts are debited for the amount invested.

Olivia Greer is a partner in Made for You. An analysis of Greer's capital account indicates that during the most recent year, she withdrew $30,000 from the partnership. Her share of the partnership's net loss was $16,000 and she made an additional equity contribution of $10,000. Her capital account ended the year at $150,000. What was her capital balance at the beginning of the year?