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Unformatted text preview: 13-1CHAPTER 13Accounting for PartnershipsANSWERS TO QUESTIONS1.(a)Association of individuals. A partnership is a voluntary association of two or moreindividuals based on as simple an act as a handshake. Preferably, however, theagreement should bein writing. A partnership is both a legal entity and an accounting entity, but it is not ataxable entity.(b)Limited life. A partnership does not have unlimited life. A partnership may be endedvoluntarily or involuntarily. Thus, the life of a partnership is indefinite. Any change inthe members of a partnership results in the dissolution of the partnership.(c)Co-ownership of property. Partnership assets are co-owned by all the partners. If thepartnership is terminated, the assets do not legally revert to the original contributor.Each partner has a claim on total assets equal to his or her capital balance. This claimdoes not attach to specific assets the individual partner contributed to the firm.2.(a)Mutual agency. This characteristic means that the act of any partner is binding on allother part-ners when engaging in partnership business. This is true even when thepartners act beyond the scope of their authority, so long as the act appears to be ap-propriate for the partnership.(b)Unlimited liability. Each partner is personally and individually liable for all partnershipliabili-ties. Creditors’ claims attach first to partnership assets and then to personal re-sources of any partner, irrespective of that partner’s equity in the partnership.3.The advantages of a partnership are: (1) combining skills and resources of two or moreindividuals, (2) ease of formation, (3) freedom from governmental regulations and restric-tions, and (4) ease of decision making. Disadvantages are: (1) mutual agency, (2) limitedlife, and (3) unlimited liability.4.The capital balance should be $112,000, comprised of land $75,000, and equipment$57,000, less debt $20.000.5.When the partnership agreement does not specify the division of net income or net loss,net income and net loss should be divided equally.6.Factors to be considered in discussing how income and loss should be divided are: (1) afixed ratio is easy to apply and it may be an equitable basis in some circumstances; (2)capital balance ratios when the funds invested in the partnership are considered the mostcritical factor; and (3) salaryallowance and/or interest allowance coupled with a fixed ratio. This last approach givesspecific recognition to differences that may exist among partners by providing salary allow-ances for time worked and interest allowances for capital invested.7.The net income of $24,000 should be divided equally—$12,000 to Doreen Shaffer and$12,000 to Quincy Jones.13-28.(a)Account debited: Income Summary; accounts credited: Robben Ford, Capital and GregAllman, Capital....
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This note was uploaded on 03/13/2012 for the course ACCOUNTING 100 taught by Professor Boyle during the Fall '11 term at Seton Hill.
- Fall '11