Question 1

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

Accepted Answer

The profit or loss allocation for a partnership is typically shown in the statement of changes in partner's equity. This statement reflects the distribution of the year's profit or loss among the partners according to the partnership agreement.

Question 2

Which statement relating to financial reports for a partnership is not true?
A) Partners' salaries are normally treated as an allocation of profit.
B) Income tax expense is deducted from the partnership profit at the end of the income statement.
C) Each individual partner's equity in the business is reported separately.
D) Interest on capital contributions is treated as an allocation of profits.

Accepted Answer

Income tax expense is not deducted from the partnership profit at the end of the income statement. Instead, each partner's share of the partnership's taxable income is calculated and reported on their individual tax returns. The other options are true statements relating to financial reports for a partnership.

Question 3

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

Accepted Answer

A partnership that is a reporting entity is required to produce all of these financial statements: an income statement to show its financial performance, a statement of changes in partners' equity to show the changes in the ownership interest, a balance sheet to present its financial position, and a statement of cash flows to show the cash inflows and outflows.

Question 4

Jemma and Sally are in partnership. Their capital balances at the end of the accounting period are $200 000 and $150 000 respectively. Jemma decides to make a permanent cash withdrawal from her capital account of $50 000. If it is assumed that they use the fixed capital balances method (method 2), what is the accounting entry to record this transaction?
A) Debit Jemma capital account $50 000; credit profit distribution account $50 000
B) Debit Jemma retained earnings account $50 000; credit profit distribution account $50 000
C) Debit Jemma capital account $50 000; credit bank account $50 000
D) Debit Jemma retained earnings account $50 000; credit bank account $50 000

Accepted Answer

When using the fixed capital balances method, any permanent withdrawals made by a partner are debited to their capital account and credited to the bank account. Therefore, the accounting entry for Jemma's permanent cash withdrawal would be: Debit Jemma capital account $50 000; credit bank account $50 000. Option A and B are incorrect as there is no profit distribution account involved in this transaction. Option D is incorrect as a permanent cash withdrawal would not be debited to retained earnings.

Question 5

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) income section of the income statement.
D) expense section of the income statement.

Accepted Answer

The equity section of a partnership's balance sheet is different from that of a sole trader because it includes the capital contributions and share of profits/losses of each partner. A sole trader's equity section only includes the owner's capital contribution and retained earnings. The assets and income/expense sections of the financial statements for a partnership and a sole trader are relatively similar.

Quiz 15: 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:

Which statement relating to financial reports for a partnership is not true?

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

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