1.Which one of the following is a characteristic of a general partnership?

a. All partners must agree to legal agreements or they are nonbinding

b. Each general partner is personally liable for all of the partnership obligations
c. Each partner is entitled to reasonable remuneration for conducting partnership business.
d. Partnership income is separately taxed.

2. In a limited partnership, the entity ceases to legally exist when

a. an existing partner retires or dies.
b. a new partner enters the partnership
c. a limited partner transfers his/her interest
d. a general partner is no longer present

3. Partnership net income is defined as

a. the interest allocation to the partners, based on weighted average invested capital
b. partnership income after deducting partners salaries and interest
c. partnership income after deducting partners salaries
d. Partnership income before deducting salaries and interest.

4. which of the following is false regarding the measurement of partnership income?

a. Partnerships employ the same revenue and expense recognition criteria as corporations
b. Salaries to partners are deducted as expenses in measuring partnership income
c. Interest allocated to partners is not deducted as an expense in measuring partnership income.
d. Partnership do not report income tax expense.

5. A partnership’s income-sharing ratio

a. applies to partnership income after salaries and interest are deducted.
b. applies partnership income before salaries are deducted but after interest is deducted
c. applies to partnership income after salaries are deducted but before interest is deducted.
d. applies to partnership income before both salaries and interest are deducted.

6. Which of the following business entity form is (are) required to maintain their financial information
in accordance with Generally Accepted Accounting Principles?
a. Corporation
b. Corporation and Partnership
c. Partnership and Proprietorships
d. Corporation, Partnership, and Proprietorships

7. Which of the following is not a similarity that exist between proprietorship and partnerships?
a. Neither requires approval by a state to form
b. Both can use an accounting method that does not conform GAAP
c. Onwers put the company’s income on the owner’s individual tax return
d. All of the above are similarities of proprietorship and partnerships.

8. Which of the following is not an area where there are differences when comparing partnerships and
corporations?
a. The ease of formation
b. The level of owner legal liability

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 c. The ease of ownership transferability
d. All of the above are ease where partnerships and corporation differ

9. Which of the following is not a difference when comparing partnerships and corporations?
a. Corporation must conform to GAAP whereas partnerships are not required to conform GAAP
b. partnerships and corporations neither are required to attain state approval to form
c. Partners have unlimited liability while corporation shareholders generally do not have unlimited
liability
d. Corporations are required to pay income tax while partnership are not required to pay income taxes.

10. What theory of equity is applicable for partnership?

a. Proprietary theory
b. Entity theory
c. A mix of proprietary and entity theory
d. Partnership theory

11. Which of the following is not an example of the proprietary theory of equity?
a. Partners do not have claims to specific assets
b. Individual partners are liable for all debts of the partnership
c. A partner’s income tax includes the partner’s share of partnership net income, and the partnership
does not pay income taxes
d. Salaries of partners are viewed as distributions of income, not components of net income.

12. Which of the following is not an example of entity theory of equity?

a. Continuity of the partnership when admission or withdrawal of partners occurs
b. A partnership can enter into contacts
c. Assets contributed to the partnership retain the existing tax basis to the partner contributing
d. Partnership creditors have priority claim to partnership assets and the creditors of partners’ have
priority claim to the partner’s assets in the event of liquidation.

13. Which of the following statement is correct with regard to the creation of initial capital account
balances on a partnership’s financial records?
a. The capital accounts can be created for any peso amount agreed by all partners
b. The market value of non-cash assets must be considered when creating the initial capital balances
c. Each partner’s capital account must have a non-zero value assigned to it.
d. All of the above statement are correct.

14. Which of the following statements is not true with regard to assigning the carrying, value pf
noncash assets contributed to those assets at the date of a partnership’s formation?
a. Use of the noncash asset’s historical cost can result in the misstatement of the partner’s capital
accounts
b. Assigning the historical cost to noncash assets contributed to a partnership may require the
partnership agreement to address profit/loss distribution that will occur when the contributed asset is
sold
c. Assigning the historical cost to non cash assets contributed to a partnership will not cause partner
taxable income to differ from partner’ share of partnership income.
d. All of the above statement are correct

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 15. Which of the following statement is correct with regard to the contribution of assets and
associated liabilities to a partnership?
a. Liabilities associated with assets contributed to a partnership remain the liability of the contributing
partner
b. Liabilities associated with assets contributed to a partnership become the liability of the
partnership
c. Liabilities associated with assets contributed to a partnership become the liability of both the
contributing partner and the partnership.
d. Assets may not be contributed to a partnership if there is a liability associated with the asset.

16. When can the bonus method be applied?

a. When a partnership is formed
b. When a new partner is added to the partnership
c. When an existing partner retires from the partnership
d. The bonus method can be applied in all three of the above circumstances

17. The goodwill/revaluation method always result in which of the following?

a. A change in the peso value assigned to two or more partner’s capital accounts
b. A decrease in a partner’s capital account
c. An increase in a partner’s capital account
d. An increase in partner’s capital account and a decrease in at least one partner’s capital account.

18. Which of the following statements is correct with regard to drawing accounts that may be used by
a partnership?
a. Drawing accounts are closed to the partner’s capital accounts at the end of the accounting period.
b. Drawing accounts establish the amount that may be taken from the partnership by a partner in a given
time period
c. Drawing accounts are similar to Retained Earnings in a corporation
d. Drawing accounts appear on the balance sheet as a contra-equity account.

19. Which of the following interest component calculation bases is least susceptible to manipulation
when allocating profits and losses to partners?
a. Beginning capital account balance
b. Average of beginning and ending capital account balances
c. Weighted average capital account balance
d. Ending capital account balance

20. Which component of the partnership profit and loss allocation compensates partners for the
routine time and effort expended in the business.
a. Interest on capital balance
b. Bonus
c. Salary
d. Residual Interest

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 21. Which component of the partnership profit and loss allocation is most commonly offered to the
partner who manages the business?
a. Interest on capital balance
b. Bonus
c. Salary
d. Residual Interest

22. Which of the following statement is true with regard to partnership residual profit and loss ratios?
a. A partner’s residual profit ratio must be the same as the loss ratio
b. Residual profit and loss ratios can be changed by agreement
c. The residual profit and loss ratio must always be applied
d. All of the above are true statements

23. Which of the following should be done when the partnership profit and loss ratios are changed?
a. The book and market value and assets and liabilities should be evaluated
b. The capital accounts should be modified to reflect the new profit and loss ratios
c. The creditors should be informed that the profit and loss ratios have been changed
d. The partners must draft new articles of partnership.

24. Which of the following occurs every time a new partner is admitted to a partnership or on existing
partner leaves the partnership?
a. Dissolution
b. Termination
c. Dissolution and termination
d. None of the above occurs

25. Which of the following forms of new partner admission will result in a change in the partnership’s
net assets?
a. Purchase of an ownership interest directly form the partnership
b. Purchase of an ownership interest directly form an existing partner.
c. Either of the above
d. Neither of the above

26. When a new partner joins a partnership by investing assets into the partnership, what method
may be used to record the admission of the new partner?
a. Revaluation of existing assets
b. Recognition of goodwill|
c. Application of the bonus method
d. Any of the three or a combination may be applied

27. Which method of recording the admission of a new partner into a partnership potentially result in
the existing partners’ capital accounts changing in value?
a. Bonus method
b. Goodwill method
c. Either bonus method or goodwill/revaluation method
d. Existing partners’ capital accounts never change when a new partner is admitted into a partnership.

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 28. A partnership is formed with three equal partners. However, each partner ivests a different
amount of net assets. Which of the following statement is true?
a. Under the bonus method, all partners will have equal initial capital balances.
b. under the goodwill method, all partners will have a different initial capital balance
c. Because the investment are unequal, setting each partner’s capital balance equal to the amount
invested cannot be used.
d. The capital balances will be equal no matter which method – bonus, goodwill, or fair value of
investment is used

29. Which of the following is true regarding the admission of a new partner by purchase of an existing
partnership interest?
a. Using the transfer of capital interests approach, total partnership capital increases.
b. Using the transfer of capital interests approach, partnership capital of existing partner does not
change
c. Using the revaluation or total adjustments in asset/implied goodwill approach, recognized adjustment
in asset/goodwill equals the new partner’s investment divided by his/her capital percentage.
d. using the revaluation or total adjustments in assets/implied goodwill approach the recognized
adjustment is asset/goodwill is shared among only the existing partners.

30. Which of the following statement is false concerning a comparison of the bonus and goodwill
methods of recording admission of a new partner by investment of new capital?
a. The goodwill method will typically result in a larger total partnership capital then the bonus method
b. When the investment by the new partner exceeds that partner’s share of the firm’s total capital, the
existing partner will receive either a bonus or goodwill, depending on whether the bonus or goodwill
method is used
c. Both the bonus and goodwill methods deal with the presence of unrecorded assets, as indicated by
the amount invested by the new partner.
d. While the bonus method recognizes a new basis of asset valuation when a new partner invests
assets in the partnership, the goodwill does not.

31. Which of the following will occur when the existing partners contribute goodwill and a new
partner is admitted to the partnership?
a. The existing partner’s capital accounts will be decreased
b. The existing partner will receive cash from the partnership
c. The partnership’s total assets will be increased.
d. The new partner will be required to reduce his/her profit and loss sharing ratio.

32. Which of the following statements is false with regard to the goodwill recognized for new partner
entering a partnership?
a. The new partner’s capital account balance will exceed the amount invested.
b. The existing partner’s capital accounts will remain unchanged
c. The amount invested by the new partner will be less than his/her proportion of the partnership’s book
value before goodwill is recognized.
d. The three partners will have equal capital account balances when the transaction is completed

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