Financial and Managerial Accounting

Business

Quiz 28 :

Forms of Business Organization

Quiz 28 :

Forms of Business Organization

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John Hansen owns Hansen Sporting Goods, a retail store organized as a sole proprietorship. He also owns a home that he purchased for $250,000 but that is worth $300,000 today. (Hansen has a $140,000 mortgage against this house.) Explain how this house and mortgage should be classified in the financial statements of Hansen Sporting Goods.
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1.
From the details given, we get to know that John Hansen is the sole proprietor of Hansen sporting goods. He also owns a house on which a mortgage is taken. Nothing in the question mentions that the house or the mortgage is related to the retail store of the sole proprietorship. However, we also know that sole proprietorship does not have a separate identity from that of the sole proprietor. Sole proprietor is said to have unlimited liability. He shall be liable to the extent of his personal assets also.
Thus, the house and the mortgage shall not find a place in the financial statements of the retail store. However, this shall be considered to the financial position as sole proprietor is no different from the sole proprietorship concern.

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Partnership Transaction E-Z Manufacturing Company is a partnership among Yolando Gonzales, Willie Todd, and Linda Walker. The partnership contract states that partnership profits will be split equally among the three partners. During the current year Gonzales withdrew $25,000, Todd withdrew $23,000, and Walker withdrew $35,000. Net income of E-Z Manufacturing Company amounted to $180,000. a. Calculate each partner's share of net income for the period. b. Describe the effects, if any, that partnership operations would have on the individual tax returns of the partners. c. Prepare a statement of partners' equity for the year. Assume that partners' capital accounts had beginning balances of $50,000, $60,000, and $40,000 for Gonzales, Todd, and Walker, respectively.
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a. Calculate partner's share of net income:
img As we are not provided with any details about expenses, the figure shown as net income is divided among the partners equally.
b. Partners would pay tax on their share of net income and not on the amount of assets withdrawn by them. The two figures might differ substantially. But the figure to be considered for the purpose of payment of income tax is the share allocated to the respective partners.
c.
A statement of partner's equity is prepared in order for the partners to know the changes in their capital accounts during the year and where do they stand at the end of the year.
To know the same, any net income and additional investments made are added to the opening balances of the partners and withdrawals are subtracted from the respective total to arrive at the closing balance.
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Sarah Miller is the proprietor of a small manufacturing business. She is considering the possibility of joining in partnership with Will Bracken, whom she considers to be thoroughly competent and congenial. Prepare a brief statement outlining the advantages and disadvantages of the potential partnership to Miller.
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Sarah Miller is a sole proprietor and wishes to join in a partnership. The following are the advantages and disadvantages that she would have by getting into the partnership:
Advantages:
1. More capital can be brought into the business, as there are more partners.
2. The borrowing capacity increases.
3. Loss can be shared between the partners as against the case of sole proprietorship where the sole proprietor has to bear losses all alone.
However, the following disadvantages also pop up at the same time:
1. There could be disagreement and resulting in friction between partners over various issues.
2. The liability of the partners is unlimited. Each partner is jointly and severally liable for the debts of the partnership.
3. The partner shall be liable for the acts of the other partners.
4. Profits or income is also to be shared.
Thus taking into consideration, the possible advantages and disadvantages, Sarah Miller should take a wise decision.

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Analysis of Equity Shown below are the amounts from the stockholders' equity section of the balance sheets of Wasson Corporation for the years ended December 31, 2014 and 2015. img a. Calculate the amount of additional investment that the stockholders made during 2015. b. Assuming that the corporation declared and paid $15,000 in dividends during 2015, calculate the amount of net income earned by the corporation during 2015. c. Explain the significance of the $200,000 balance of retained earnings at December 31, 2015.
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What is meant by the term mutual agency ?
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Division of Partnership Income Guenther and Firmin, both of whom are CPAs, form a partnership, with Guenther investing $100,000 and Firmin, $80,000. They agree to share net income as follows: 1. Salary allowances of $80,000 to Guenther and $60,000 to Firmin. 2. Interest allowances at 15 percent of beginning capital account balances. 3. Any partnership earnings in excess of the amount required to cover the interest and salary allowances to be divided 60 percent to Guenther and 40 percent to Firmin. The partnership net income for the first year of operations amounted to $247,000 before interest and salary allowances. Show how this $247,000 will be divided between the two partners. Use a three-column schedule of the type illustrated in Exhibit C-9. List on separate lines the amounts of interest, salaries, and the residual amount divided. EXHIBIT C-9 Distribution of Partnership Net Income img
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A real estate development business is managed by two experienced developers and is financed by 50 investors from throughout the state. To allow maximum income tax benefits to the investors, the business is organized as a partnership. Explain why this type of business probably would be a limited partnership rather than a regular partnership.
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Analysis of Partnership Accounts Snack Shack is a fast-food restaurant that is operated as a partnership of three individuals. The three partners share profits equally. The following selected account balances are for the current year before any closing entries are made: img Instructions On the basis of this information, answer the following questions and show any necessary computations. a. How much must each of the three partners report on his individual income tax return related to this business? b. Prepare a Statement of Partners' Equity for the current year ended December 31. Assume that no partner has made an additional investment during the year. c. Assuming that each of the partners devotes the same amount of time to the business, why might Glen and Chow consider the profit-sharing agreement to be inequitable? d. Which factors should the partners consider when evaluating whether the profit from the partnership is adequate?
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What factors should be considered when comparing the net income figure of a partnership to that of a corporation of similar size?
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Stockholders' Equity Transactions The Top Hat, Inc., is a chain of magic shops that is organized as a corporation. During the month of June, the stockholders' equity accounts of The Top Hat were affected by the following events: img Instructions a. Prepare journal entries for each of the above events in the accounts of The Top Hat. Include the entries necessary to close the Income Summary and Dividends accounts. b. Prepare a statement of retained earnings for June. Assume that the balance of retained earnings on May 31 was $520,000.
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Minnie Reed is a partner in Computer Works, a retail store. During the current year, she withdraws $45,000 in cash from this business and takes for her personal use inventory costing $3,200. Her share of the partnership net income for the year amounts to $39,000. What amount must Reed report on her personal income tax return?
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Stockholders' Equity Transactions-More Challenging William Bost organized Frontier Western Wear, Inc., early in 2014. On January 15, the corporation issued to Bost and other investors 40,000 shares of capital stock at $20 per share. After the revenue and expense accounts (except Income Tax Expense) were closed into the Income Summary account at the end of 2014, the account showed a before-tax profit of $120,000. The income tax rate for the corporation is 40 percent. No dividends were declared during the year. On March 15, 2015, the board of directors declared a cash dividend of 50 cents per share, payable on April 15. Instructions a. Prepare the journal entries for 2014 to (1) record the issuance of the common stock, (2) record the income tax liability at December 31, and (3) close the Income Tax Expense account. b. Prepare the journal entries in 2015 for the declaration of the dividend on March 15 and payment of the dividend on April 15. c. Operations in 2015 resulted in an $18,000 net loss. Prepare the journal entries to close the Income Summary and Dividends accounts at December 31, 2015. d. Prepare the stockholders' equity section of the balance sheet at December 31, 2015. Include a separate supporting schedule showing your determination of retained earnings at that date.
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Distinguish between corporations and partnerships in terms of the following characteristics: a. Owners' liability for debts of the business. b. Transferability of ownership interest. c. Continuity of existence. d. Federal taxation on income.
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Stockholders' Equity Section The two cases described below are independent of each other. Each case provides the information necessary to prepare the stockholders' equity section of a corporate balance sheet. a. Early in 2013, Wesson Corporation was formed with the issuance of 50,000 shares of capital stock at $5 per share. The corporation reported a net loss of $32,000 for 2013, and a net loss of $12,000 in 2014. In 2015 the corporation reported net income of $90,000 and declared a dividend of 50 cents per share. b. Amber Industries was organized early in 2011 with the issuance of 100,000 shares of capital stock at $10 per share. During the first five years of its existence, the corporation earned a total of $900,000 and paid dividends of 25 cents per share each year on the common stock. Instructions Prepare the stockholders' equity section of the corporate balance sheet for each company for the year ending December 31, 2015.
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Explain the meaning of the term double taxation as it applies to corporate profits.
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Comparison of Proprietorship with Corporation S X Co. is a retail store owned solely by Joe Saunder. During the month of November, the equity accounts were affected by the following events: img Instructions a. Assuming that the business is organized as a sole proprietorship: 1. Prepare the journal entries to record the above events in the accounts of S X. 2. Prepare the closing entries for the month of November. Assume that after closing all of the revenue and expense accounts the Income Summary account has a credit balance of $5,000. Hint: Record the investment in a separate capital account and the withdrawals (salary) in a separate drawing account. Close the drawing account into the capital account as part of the closing entries. b. Assuming that the business is organized as a corporation: 1. Prepare the journal entries to record the above events in the accounts of S X. Assume that the distribution of earnings on November 30 was payment of a dividend that was declared on November 20. 2. Prepare the closing entries for the month of November. Assume that after closing all of the revenue credit and expense accounts (except Income Tax Expense) the Income Summary account has a credit balance of $2,000. Before preparing the closing entries, prepare the entries to accrue income tax expense for the month and to close the Income Tax Expense account to the Income Summary account. Assume that the corporate income tax rate is 30 percent. c. Explain the causes of the differences in net income between S X as a sole proprietorship and S X as a corporation. d. Describe the effects of the business operations on Saunder's individual income tax return, assuming that the business is organized as ( 1 ) a sole proprietorship and ( 2 ) a corporation.
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What factors should be considered in drawing up an agreement as to the way in which income shall be shared by two or more partners?
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The partnership of Avery and Kirk was formed on July 1, when George Avery and Dinah Kirk agreed to invest equal amounts and to share profits and losses equally. The investment by Avery consists of $30,000 cash and an inventory of merchandise valued at $56,000. Kirk also is to contribute a total of $86,000. However, it is agreed (hat her contribution will consist of the transfer of both the assets of her business and its liabilities (listed below). A list of the agreed values of the various items as well as their carrying values on Kirk's records follows. Kirk also contributes enough cash to bring her capital account to $86,000. img Instructions a. Draft entries (in general journal form) to record the investments of Avery and Kirk in the new partnership, b. Prepare the beginning balance, sheet of the partnership (in report form) at the close of business July 1, reflecting the above transfers to the firm. c. On the following June 30 after one year of operation, the Income Summary account showed a credit balance of $74,000, and the Drawing account for each partner showed a debit balance of $31,000. Prepare journal entries to close the Income Summary account and the Drawing accounts at June 30.
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Partner John French has a choice to make. He has been offered by his partners a choice between no salary allowance and a one-third share in the partnership income or a salary of $16,000 per year and a one-quarter share of residual profits. Write a brief memorandum explaining the factors he should consider in reaching a decision.
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Sharing Partnership Net Income: Various Methods A comedy club called Comedy Today was organized as a partnership with Abbott investing $80,000 and Martin investing $120,000. During the first year, net income amounted to $110,000. Instructions a. Determine how the $110,000 net income would be divided under each of the following three independent assumptions as to the agreement for sharing profits and losses. Use schedules of the type illustrated in this chapter to show all steps in the division of net income between the partners. 1. Net income is to be divided in a fixed ratio: 35 percent to Abbott and 65 percent to Martin. 2. Interest at 15 percent to be allowed on beginning capital investments and balance to be divided equally. 3. Salaries of $36,000 to Abbott and $56,000 to Martin; interest at 15 percent to be allowed on beginning capital investments; balance to be divided equally. b. Prepare the journal entry to close the Income Summary account, using the division of net income developed in part a(3).
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