Chapter 14: Review Questions: Multiple Choice: 1. Chen and Wright are forming a partnership. Chen will invest a building that currently is being used by another business owned by Chen. The building has a fair market value of $35,000. Also, the partnership will assume responsibility for a $15,000 note secured by a mortgage on the building. Wright will invest $10,000 cash. On the books of the partnership, the amount to be recorded for the building and the credit to Chen’s capital account are: a) $35,000 and $35,000. b) $20,000 and $20,000. c) $20,000 and $10,000. d) $35,000 and $20,000. e) $20,000 and $15,000. 2. Which of the following statements is true? a) Partners are employees of the partnership. b) Salaries to partners are expenses on the income statement. c) Salary allowances should reflect the relative value of services provided by partners. d) Salary allowances are expenses. e) Interest allowances are expenses. 3. A capital deficiency means that: a) The partnership has a loss. b) The partnership has more liabilities than assets. c) At least one partner has a debit balance in his/her capital account. d) At least one partner has a credit balance in his/her capital account. e) The partnership has been sold at a loss. 4. When a partner is unable to pay a capital deficiency: a) The partner must take out a loan to cover the deficient balance. b) The deficiency is absorbed by the remaining partners. c) The partnership ends. d) The deficient partner has a personal liability to pay the deficiency. e) Both B and D. 5. Disadvantages of a partnership include: a) Limited life. b) Mutual agency. c) Unlimited liability. d) Both A and C. e) All of the above. 6. A partnership agreement is: a) The legal relationship among the partners whereby each partner is an agent of the partnership and is able to bind the partnership to contracts within the apparent scope of the partnership’s business. b) The agreement between partners that sets forth the terms under which the affairs of the partnership will be conducted. c) The legal relationship among general partners of a partnership that makes each general partner responsible for paying all the debts of the partnership if the other partners are unable to pay their shares. d) The agreement that protects all the partners of a partnership from unlimited liability for the partnership debts. e) An unincorporated association of two or more persons to carry on a business for profit as co-owners. 7. Collins and Farina are forming a partnership. Collins is investing a building that has a fair market value of $80,000. However, the building is subject to a $56,000 mortgage. Farina is investing $20,000 cash. The balance in Collins’ capital account will be: a) $80,000. b) $24,000. c) $56,000. d) $44,000. e) $60,000. 8. A partner can withdraw from a partnership by: a) Selling his/her interest to another person who pays for it in cash. b) Selling his/her interest to another person who pays for it with assets. c) Receiving cash or other assets of the partnership in the amount of his/her interest. d) Both A and B. e) All of the above. 9. A bonus may be paid: a) By a new partner when the current value of a partnership is greater than the recorded amounts of equity. b) To a partner who provides services in excess of the salary allowance. c) To a new partner with exceptional talents. d) Both A and C. e) All of the above. 10. The legal relationship among the partners whereby each partner is an agent of the partnership and is able to bind the partnership to contracts within the apparent scope of the partnership’s business is: a) Unlimited liability. b) A partnership contract. c) Mutual agency. d) Preemptive right. Long Answer: Problem: Summer and Tyler formed a partnership on December 31, 2005. Summers contributed $25,000 cash and accounts receivable with a fair market value of $11,000. Tyler’s investment consisted of: cash, $5,000; inventory $18,000; and supplies $1,000 – all at fair market values. Net income for 2006 and 2007 was $30,000 and $58,000 respectively. Distribute net income for each year, assuming profits are divided as follows: A) Based on the partners’ failure to sign an agreement. B) Based on a 1:3 ratio. C) Based on the ratio of the partners’ original investments. D) The partners are allowed 12% of the original investments, salaries to Summers of $14,000 and Tyler of $11,000, and the remainder to be divided equally. Prepare the journal entry to record the allocation of 2006 net income under alternative (D) above. Theory: Discuss the characteristics of partnerships and similar organizations.