Which of the following type of organization is classified as a partnership, or similar to a partnership, for tax purposes?

(I.) Limited Liability Company

(II.) Limited Liability Partnership

(III.) Subchapter S Corporation

A) II only.

B) II and III.

C) I and II.

D) I and III.

E) I, II, and III.

Answer: E

Learning Objective: 14-01

Topic: Alternative legal forms of partnership

Difficulty: 2 Medium

Blooms: Remember

AACSB: Reflective Thinking

AICPA: BB Legal

AICPA: FN Measurement

[QUESTION]

41. Which of the following statements is correct regarding the admission of a new partner?

A) A new partner must purchase a partnership interest directly from the business.

B) The right of co-ownership in the business property can be transferred to a new partner without the consent of other existing partners.

C) The right to participate in management of the business cannot be conveyed without the consent of other existing partners.

D) The right to share in profits and losses can be sold to a new partner without the consent of other existing partners.

E) A new partner always pays book value.

Answer: C

Learning Objective: 14-03

Learning Objective: 14-08

Topic: Capital account―Initial investment

Topic: New partner―Transfer of interest

Difficulty: 2 Medium

Blooms: Understand

AACSB: Reflective Thinking

AICPA: BB Legal

AICPA: FN Measurement

[QUESTION]

42. 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 reduce the basic investment that has been made in the business.

E) To record the partnership’s payment of a partner’s personal expense such as income tax.

Answer: C

Learning Objective: 14-04

Topic: Capital investment or withdrawal after formation

Difficulty: 2 Medium

Blooms: Understand

AACSB: Reflective Thinking

AICPA: BB Legal

AICPA: FN Measurement

[QUESTION]

43. The partnership contract for Hanes and Jones LLP provides that Hanes is to receive a bonus of 20% of net income (after the bonus) and that the remaining net income is to be divided equally. If the partnership income before the bonus for the year is $57,600, Hanes’ share of this pre-bonus income is:

A) $28,800.

B) $33,600.

C) $34,560.

D) $35,520.

E) $38,400.

Answer: B

Learning Objective: 14-06

Topic: Net income allocation―Interest-salary-bonus

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Legal

AICPA: FN Measurement

Feedback: Bonus = .20 (NI − Bonus) = .20 ($57,600 − Bonus) = $11,520 − .20 Bonus

1.2 Bonus = $11,520. Bonus = $9,600. Net income $57,600 − Bonus $9,600 = $48,000 remaining net income to divide equally = $24,000 to each partner.

Hanes receives $24,000 + $9,600 = $33,600.

[QUESTION]

44. The partners of Apple, Bere, and Carroll LLP share net income and losses in a 5:3:2 ratio, respectively. The capital account balances on January 1, 2018, were as follows:

The carrying amounts of the assets and liabilities of the partnership are the same as their current fair values. Dorr will be admitted to the partnership with a 20% capital interest and a 20% share of net income and losses in exchange for a cash investment. The amount of cash that Dorr should invest in the partnership is:

A) $25,000.

B) $30,000.

C) $37,500.

D) $75,000.

E) $90,000.

Answer: C

Learning Objective: 14-09

Topic: New partner―Partnership valuation

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Legal

AICPA: FN Measurement

Feedback: $150,000 = 80% of the partnership value after Dorr is admitted.

$150,000 ÷ .80 = $187,500 total value of the partnership after Dorr is admitted.

$187,500 total value – $150,000 existing value = $37,500 investment

[QUESTION]

45. The appropriate format of the December 31, 2017 closing entry for John & Hope Limited Liability Partnership, whose two partners had withdrawn their salaries from the partnership during the year, is:

Answer: D

Learning Objective: 14-05

Topic: Net income allocation―Income or loss

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Legal

AICPA: FN Measurement

[QUESTION]

46. When Danny withdrew from John, Daniel, Harry, and Danny, LLP, he was paid $80,000, although his capital account balance was only $60,000. The four partners shared net income and losses equally, and no revaluation will take place. The journal entry to record the effect on John’s capital due to Danny’s withdrawal would include:

A) $ 6,667 debit to John, Capital.

B) $ 6,667 credit to John, Capital.

C) $20,000 debit to John, Capital.

D) $ 5,000 debit to John, Capital.

E) $ 5,000 credit to John, Capital.

Answer: A

Feedback: $80,000 – $60,000 = $20,000 3 = $6,667

Learning Objective: 14-10

Topic: Withdrawal of partner―Bonus method

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Legal

AICPA: FN Measurement

[QUESTION]

47. Max, Jones and Waters shared profits and losses 20%, 40%, and 40% respectively and their partnership capital balance is $10,000, $30,000 and $50,000 respectively. Max has decided to withdraw from the partnership. An appraisal of the business and its property estimates the fair value to be $200,000. Land with a book value of $30,000 has a fair value of $45,000. Max has agreed to receive $20,000 in exchange for her partnership interest after revaluation. At what amount should land be recorded on the partnership books?

A) $ 20,000.

B) $ 30,000.

C) $ 45,000.

D) $ 50,000.

E) $200,000.

Answer: C

Learning Objective: 14-10

Topic: Withdrawal of partner―Goodwill method

Difficulty: 1 Easy

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Legal

AICPA: FN Measurement

Feedback: Land will be recorded at the fair value of $45,000

REFERENCE: 14-03

The capital account balances for Donald & Hanes LLP on January 1, 2018, were as follows:

Donald and Hanes shared net income and losses in the ratio of 3:2, respectively. The partners agreed to admit May to the partnership with a 35% interest in partnership capital and net income. May invested $100,000 cash, and no goodwill was recognized.

[QUESTION]

REFER TO: 14-03

48. What is the balance of May’s capital account after the new partnership is created?

A) $ 84,000.

B) $100,000.

C) $140,000.

D) $176,000.

E) $200,000.

Answer: C

Learning Objective: 14-09

Topic: New partner―Bonus to new partner

Difficulty: 1 Easy

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Legal

AICPA: FN Measurement

Feedback: Donald $200,000 + Hanes $100,000 + Cash $100,000 = $400,000 × .35 = $140,000 to May

[QUESTION]

REFER TO: 14-03

49. What is the balance of Donald’s capital account after the new partnership is created?

A) $ 84,000.

B) $100,000.

C) $140,000.

D) $176,000.

E) $200,000.

Answer: D

Learning Objective: 14-09

Topic: New partner―Bonus to new partner

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Legal

AICPA: FN Measurement

Feedback: Bonus to May $40,000 × .60 = $24,000 from Donald’s $200,000 = $176,000 New capital balance

[QUESTION]

REFER TO: 14-03

50. What is the balance of Hanes’s capital account after the new partnership is created?

A) $ 84,000.

B) $100,000.

C) $140,000.

D) $176,000.

E) $200,000.

Answer: A

Learning Objective: 14-09

Topic: New partner―Bonus to new partner

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Legal

AICPA: FN Measurement

Feedback: Bonus to May $40,000 × .40 = $16,000 from Hanes’ $100,000 = $84,000 New capital balance

[QUESTION]

REFER TO: 14-03

51. What is the new total balance of the partnership accounts?

A) $ 84,000.

B) $140,000.

C) $176,000.

D) $200,000.

E) $400,000.

Answer: E

Learning Objective: 14-09

Topic: New partner―Bonus to new partner

Difficulty: 1 Easy

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Legal

AICPA: FN Measurement

Feedback: Donald $176,000 + Hanes $84,000 + May $140,000 = Total partnership capital $400,000

[QUESTION]

52. 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, 3, and 4.

E) 1, 2, 3, and 4.

Answer: E

Learning Objective: 14-05

Topic: Net income allocation―Income or loss

Difficulty: 1 Easy

Blooms: Remember

AACSB: Reflective Thinking

AICPA: BB Legal

AICPA: FN Measurement

REFERENCE: 14-04

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.

[QUESTION]

REFER TO: 14-04

53. 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

E) $10,000

Answer: C

Learning Objective: 14-09

Topic: New partner―Partnership valuation

Difficulty: 1 Easy

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Legal

AICPA: FN Measurement

Feedback: $50,000 + $30,000 + $20,000 = $100,000 = 80% of the partnership value after C is admitted. $100,000 ÷ .80 = $125,000 total capital of the partnership after C is admitted. $125,000 total value – $100,000 existing capital = $25,000 Cash C should contribute.

[QUESTION]

REFER TO: 14-04

54. C contributes $38,000 to the partnership and the bonus method is used. What amount will be credited for C’s beginning capital balance?

A) $20,000

B) $25,000

C) $27,600

D) $32,600

E) $38,000

Answer: C

Learning Objective: 14-09

Topic: New partner―Bonus to original partners

Difficulty: 1 Easy