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ACCT 410, Fall 2013 Exam #2

Name ___________________________________

1. A partnership where all partners may participate in management of the company, but whose personal liability is limited to that resulting from their own actions or those who are acting under their direct supervision is a: a. limited partnership b. general partnership c. limited liability partnership d. mutual agency 2. Partnerships have alternative legal forms including all of the following except: a. General Partnership. b. Limited Partnership. c. Subchapter S Partnership. d. Limited Liability Partnership. 3. Which of the following is not a characteristic of the proprietary theory that influences accounting for partnerships? a. Partners' salaries are viewed as a distribution of income rather than a component of net income. b. A partnership is not viewed as a separate, distinct, taxable entity. c. A partnership is characterized by limited liability. d. Changes in the ownership structure of a partnership result in the dissolution of the partnership. 4. Which of the following best describes the use of interest on invested capital as a means of allocating profits? a. If interest on invested capital is used, it must be used for all partners. b. Interest is allocated only if there is partnership net profit. c. Invested capital balances are never affected by drawings of the partnerships. d. The partnership agreement should clearly establish how invested capital is to be determined in the calculation of interest. 5. Jolly is a partner in the HoHoHo Partnership. The articles of partnership states that Jollys share of partnership income include 10% of his weighted average capital. He may withdraw $12,000 before withdrawals are offset against his capital balance. His capital activity is as follows: Beginning balance, January 1 $20,000 Withdrawal, February 1 5,000 Contribution, May 1 10,000 Withdrawal, June 1 5,000 Withdrawal, August 1 5,000 Contribution, October 1 8,000 What is the weighted average balance of Jollys capital account? a. $27,417 b. $19,083 c. $21,500 d. $19,667

6. Which of the following statements is true concerning the treatment of salaries in partnership accounting? a. Partner salaries may be used to allocate profits and losses; they are not considered expenses of the partnership b. Partner salaries are equal to the annual partner draw. c. The salary of a partner is treated in the same manner as salaries of corporate employees. d. Partner salaries are directly closed to the capital account. 7. Partners active in a partnership business should have their share of partnership profits based on the following a. a combination of salaries plus interest based on average capital balances. b. a combination of salaries and percentage of net income after salaries and any other allocation basis. c. salaries only. d. percentage of net income after salaries is paid to inactive partners. 8. Able & Baker partnership has income of $110,000 and Partner A is to be allocated a bonus of 10% of income after the bonus, Partner A's bonus would be ____. a. $11,000 b. $10,000 c. $9,091 d. $9,000 9. Withdrawals from the partnership capital accounts are typically not used a. to reward partners for work performed in the business. b. to reduce the partners' capital account balances at the end of an accounting period. c. to record interest earned on a partner's capital balance. d. to record the partnership's payment of a partner's personal expense such as income tax. 10. A partnership agreement calls for allocation of profits and losses by salary allocations, a bonus allocation, interest on capital, with any remainder to be allocated by preset ratios. If a partnership has a loss to allocate, generally which of the following procedures would be applied? a. Any loss would be allocated equally to all partners. b. Any salary allocation criteria would not be used. c. The bonus criteria would not be used. d. The loss would be allocated using the profit and loss ratios, only. P, L, and O are partners with capital balances of $50,000, $30,000 and $20,000 and who share in the profit and loss of the PLO partnership 30%, 20%, and 50%, respectively, when they agree to admit C for a 20% interest. 11 If C is to contribute an amount equal to his book value share of the new partnership, how much should C contribute? a. $22,000 b. $20,000 c. $25,000 d. $18,000

12. Which of the following could be used as a basis to allocate profits among partners who are active in the management of the partnership? 1) Allocation of salaries. 2) The number of years with the partnership. 3) The amount of time each partner works. 4) The average capital invested. a. 1 and 2. b. 1 and 3. c. 1, 2, and 4. d. 1, 2, 3, and 4. Cleary, Wasser, and Nolan formed a partnership on January 1, 2010, with investments of $100,000, $150,000, and $200,000, respectively. For division of income, they agreed to (1) interest of 10% of the beginning capital balance each year, (2) annual compensation of $10,000 to Wasser, and (3) sharing the remainder of the income or loss in a ratio of 20% for Cleary, and 40% each for Wasser and Nolan. Net income was $150,000 in 2010 and $180,000 in 2011. Each partner withdrew $1,000 for personal use every month during 2010 and 2011. 13. What was Cleary's capital balance at the end of 2010? a. $100,000. b. $117,000. c. $119,000. d. $129,000. 14. What was Cleary's total share of net income for 2010? a. $63,000. b. $53,000. c. $58,000. d. $29,000. 15. What was the total capital balance for the partnership at December 31, 2010? a. $600,000 b. $564,000 c. $535,000 d. $523,000 16. What was Cleary's capital account balance at the end of 2011? a. $163,420. b. $151,420. c. $139,420. d. $100,000. 17. What was Cleary's total share of net income for 2011? a. $34,420. b. $75,540. c. $65,540. d. $61,420.

18. What was the total capital balance for the partnership at December 31, 2011?? a. $852,000 b. $780,000 c. $708,000 d. $744,000 19. What was the amount of interest attributed to Cleary for 2012? a. $15,142 b. $13,942 c. $12,942 d. $14,142 20. Callie is admitted to the Adams & Beal Partnership under the bonus method. Callie contributes cash of $20,000 and non-cash assets with a market value of $30,000 and book value of $15,000 in exchange for a 20% ownership interest in the new partnership. Prior to the admission of Callie, the capital of the existing partnership was $130,000 and an appraisal showed the partnership net assets were fairly stated. What will be Callie's initial capital balance? a. $36,000 b. $50,000 c. $35,000 d. $30,000 21. Callie is admitted to the Adams & Beal Partnership under the bonus method. Callie contributes cash of $20,000 and non-cash assets with a market value of $30,000 and book value of $15,000 in exchange for a 20% ownership interest in the new partnership. Prior to the admission of Callie, the capital of the existing partnership was $130,000 and an appraisal showed the partnership net assets were fairly stated. Adams & Beal shared profits and losses at a ratio of 80/20, respectively. Which of the following bonus amounts would be recorded? a. $14,000 to Callie capital b. $2,800 increase to Beal capital c. $2,800 decrease to Beal capital d. $7,000 increase to Adams capital 22. Assume that the capital of an existing partnership is $130,000 and that existing assets are overvalued by $10,000. If an incoming partner acquires a 25% interest in the partnership for $37,000, goodwill traceable to the incoming partner is ____. a. $2,250 b. $4,750 c. $3,000 d. $5,000

23. The fair market value of a partnership can be implied by a. adding the incoming partner's market value of consideration to the book value of the existing partnership. b. the tax basis of the old partner's assets added to the incoming partner's consideration. c. The incoming partner's market value of consideration divided by the incoming partner's percentage share in profit and loss. d. The incoming partner's market value of consideration divided by the incoming partner's percentage ownership share in the new partnership. 24. Callie is admitted to the Adams & Beal Partnership under the goodwill method. Callie contributes cash of $20,000 and non-cash assets with a market value of $30,000 and book value of $15,000 in exchange for a 20% ownership interest in the new partnership. Prior to the admission of Callie, the capital of the existing partnership was $130,000 and an appraisal showed the partnership net assets were fairly stated. What will be Callie's initial capital balance? a. $36,000 b. $50,000 c. $35,000 d. $45,000 25. Assume that the capital of an existing partnership is $90,000 and all existing assets reflect fair market values. If an incoming partner acquires a 40% interest in the partnership for $55,000, the goodwill traceable to the incoming partner is a. $15,000 b. $5,000 c. $3,000 d. $2,000 26. When a new partner buys an ownership interest in a partnership directly from an existing partner for more than the balance in that partners capital account, under the more common method of accounting for those transactions, a. the partnership recognizes a gain. b. the partner who sold his or her interest makes exit payments to the other partners. c. the transaction is comparable to the sale of corporate shares of stock in the secondary market. d. the new partner must pay the remaining previous partners a premium to be admitted.

27. Verst, Brown and Sullivan have a partnership. Pertinent information is as follows: Verst Brown Sullivan Capital balance 50,000 120,000 30,000 Profit and loss percentage 25% 50% 25% Sullivan sells his partnership interest to Verst for $35,000. What is the balance in Versts capital account after the sale? a. b. c. d. 80,000 58,750 85,000 65,000

28. Using the same information as above, Sullivan instead retires and the partnership pays him $35,000. What is the balance in Versts capital account after the sale assuming this transaction was accounted for using the bonus method? a. b. c. d. 50,000 51,667 45,000 48,333

29. Assume that a partnership had assets with a book value of $240,000 and a market value of $195,000, outside liabilities of $70,000, loans payable to partner Able of $20,000, and capital balances for partners Able, Baker, and Chapman of $70,000, $30,000, and $50,000. How much would Able receive upon liquidation of the partnership assuming profits and losses are allocated equally? a. $70,000 b. $90,000 c. $75,000 d. $55,000 30. Allen, Branden & Caylin are in the process of liquidating their partnership. They have the following capital balances and profit and loss percentages: Capital Balance 5,000 credit 18,000 credit 6,000 credit Profit/Loss % 20% 50% 30%

Allen Branden Caylin

The partnership balance sheet shows cash of $5,000, non-cash assets of $14,000, and no liabilities. Assuming no liquidation expenses, what safe payment could be made before the sale of any assets? a. $5,000 split between Branden & Caylin by a ratio of 5/8 and 3/8, respectively. b. $5,000 to Branden only c. $1,000 to Allen, $2,500 to Branden, and $1,500 to Caylin d. $18,000 to Branden only

ACCT 410, Fall 2013 Exam #2 Answer Sheet

Name _________________________________

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19.

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20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30.

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