1. Which of the following is not a reason for the popularity of partnerships as a legal form for businesses?
a. Partnerships may be formed merely by an oral agreement.
b. Partnerships can more easily generate significant amounts of capital.
c. Partnerships avoid the double taxation of income that is found in corporations.
d. In some cases, losses may be used to offset gains for tax purposes.
2. How does partnership accounting differ from corporate accounting?
a. The matching principle is not considered appropriate for partnership accounting.
b. Revenues are recognized at a different time by a partnership than is appropriate for a corporation.
c. Individual capital accounts replace the contributed capital and retained earnings balances found in corporate accounting.
d. Partnerships report all assets at fair value as of the latest balance sheet date.
3. Which of the following best describes the articles of partnership agreement?
a. The purpose of the partnership and partners’ rights and responsibilities are required elements of the articles of partnership.
b. The articles of partnership are a legal covenant and must be expressed in writing to be valid.
c. The articles of partnership are an agreement that limits partners’ liability to partnership assets.
d. The articles of partnership are a legal covenant that may be expressed orally or in writing, and forms the central governance for a partnership’s operations.
4. Pat, Jean Lou, and Diane are partners with capital balances of $50,000, $30,000, and $20,000, respectively. These three partners share profits and losses equally. For an investment of $50,000 cash (paid to the business), MaryAnn will be admitted as a partner with a one-fourth interest in capital and profits. Based on this information, which of the following best justifies the amount of MaryAnn’s investment?
a. MaryAnn will receive a bonus from the other partners upon her admission to the partnership.
b. Assets of the partnership were overvalued immediately prior to MaryAnn’s investment.
c. The book value of the partnership’s net assets was less than the fair value immediately prior to MaryAnn’s investment.
d. MaryAnn is apparently bringing goodwill into the partnership, and her capital account will be credited for the appropriate amount.
5. A partnership has the following capital balances:
Danville is going to invest $70,000 into the business to acquire a 30 percent ownership interest. Goodwill is to be recorded. What will be Danville’s beginning capital balance?
6. A partnership has the following capital balances:
Oscar is going to pay a total of $200,000 to these three partners to acquire a 25 percent ownership interest from each. Goodwill is to be recorded. What is Jethro’s capital balance after the transaction?