Question 1

Gemma and Audrey are in partnership. Their capital balances at the end of the accounting period are $200 000 and $150 000 respectively. Gemma decides to make a permanent cash withdrawal from her capital account of $75 000. Assuming the fixed capital balances method (method 2) is used, the accounting entry to record this transaction is:
A) DR Gemma capital account $75 000; CR Profit distribution account $75 000
B) DR Gemma capital account $75 000; CR Bank account $75 000
C) DR Gemma retained earnings account $75 000; CR Profit distribution account $75 000
D) DR Gemma retained earnings account $75 000; CR Bank account $75 000

Accepted Answer

The fixed capital balances method (method 2) means that the capital balances of each partner are maintained at a fixed amount, regardless of any withdrawals or additional contributions. Therefore, Gemma's withdrawal of $75,000 would be recorded as a decrease in her capital account and a decrease in the partnership's total capital. The accounting entry would be to debit Gemma's capital account for $75,000 and credit the partnership's bank account for $75,000. Option B correctly reflects this entry.

Question 2

When the final financial statements are prepared the profit or loss allocation for a partnership is normally shown in the:
A) statement of changes in partner's equity.
B) profit or loss allocation statement.
C) profit distribution statement.
D) cash distribution statement.

Accepted Answer

The profit or loss allocation for a partnership is shown in the statement of changes in partner's equity as it reflects any changes in the partner's capital accounts due to profits or losses. The other options listed are not commonly used for this purpose in partnership accounting.

Question 3

A partnership that is a reporting entity must produce which of these financial statements?
i. Income statement
ii. Balance sheet
iii. Statement of cash flows
iv. Statement of changes in partners' equity
A) i, ii, iii
B) i, iii
C) i, ii, iii, iv
D) None of these statements

Accepted Answer

A partnership that is a reporting entity is required to produce all four financial statements (income statement, balance sheet, statement of cash flows, and statement of changes in partners' equity) in accordance with generally accepted accounting principles (GAAP). Therefore, choice C is the correct answer.

Question 4

The part of the financial statements of a partnership that differs most from that of a sole trader is the:
A) assets section of the balance sheet.
B) equity section of the balance sheet.
C) expense section of the income statement.
D) income section of the income statement.

Accepted Answer

The equity section of the balance sheet in a partnership includes the capital accounts of each partner, which shows the investment made by each partner and their share of profits or losses. This section is significantly different from that of a sole trader as a partnership involves multiple owners, each with their own capital accounts, while a sole trader only has one owner and one capital account. The other options may also have some differences between a partnership and sole trader, but they are not as significant as the difference in the equity section.

Question 5

Which of the following statements relating to financial reports for a partnership is incorrect?
A) Partners' salaries are normally treated as an allocation of profit.
B) Each individual partner's equity in the business is reported separately.
C) Interest on capital contributions is treated as an allocation of profits.
D) Income tax expense is deducted from the partnership profit at the end of the income statement.

Accepted Answer

Income tax expense is not deducted from partnership profit at the end of the income statement, as partnerships are pass-through entities, meaning that the profits or losses are allocated to the individual partners who then pay taxes on their share of the income. Therefore, income tax is not shown as an expense on the income statement of a partnership.

Quiz 8: Partnerships: Formation, Operation and Reporting

When the final financial statements are prepared the profit or loss allocation for a partnership is normally shown in the:

A partnership that is a reporting entity must produce which of these financial statements? i. Income statement ii. Balance sheet iii. Statement of cash flows iv. Statement of changes in partners' equity

The part of the financial statements of a partnership that differs most from that of a sole trader is the:

Which of the following statements relating to financial reports for a partnership is incorrect?