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Solution manual fundamentals of accounting by cabrera chapter 02 SM

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Chapter Partnership as a Form of Business Organization Review Questions A partnership may have a greater ability to attract capital because it is characterized by unlimited liability The individual partners are jointly and severally liable Unlike a corporation, unsatisfied partnership creditors may gain access to the net personal assets of the individual partners Under the proprietary theory, the partnership is not viewed as a separate, distinct entity, but rather as a conduit through which the individual partners operate This would explain why the partnership is not a separate taxable entity and why the partnership income is instead taxed at the individual partner level The proprietary theory also explains why the basis of assets contributed to a partnership remains the same as when held by the individual partners Because the partnership is not viewed as a separate entity, the assets contributed have theoretically not been transferred to an outside independent party, and therefore the basis is unchanged If the articles of partnership not specifically address the allocation of profits, the profits will be divided equally among the partners This may cause an inequitable division of profits if one partner is contributing services to the business A partnership would not include partner salaries or income taxes as expenses in the determination of income These expenses are included in the income of a corporation and would have to be adjusted in order to compare the businesses Another name for the partnership agreement is the articles of partnership Eight items that it should specify are: a b c d e f Name, location, and nature of the business Names, capital investments, and duties of each partner Method of sharing profits and losses by the partners Withdrawals allowed to the partners Procedures for settling disputes between the partners Procedures for admitting new partners 2 Chapter g Procedures for settling up with a partner who withdraws from the business h Procedures for dissolving the partnership Mutual agency describes a partner’s ability to obligate the business to a contract If the business cannot pay a debt, the partners must Unlimited liability describes the personal obligation of the partners A partnership pays no income tax on its business income Partners pay income tax as individuals on their shares of partnership income The great advantage of a partnership is that it combines the capital, talents, and experience of two or more persons Also, a partnership pays no business income tax A disadvantage is that as partners enter and leave the business, the partnership must be dissolved and reformed Drawing up a new partnership agreement of each new partnership may be expensive and time consuming However, the principal disadvantages of a partnership are mutual agency and the unlimited personal liability of partners for business debts A dishonest or unwise partner can cause trouble – even the financial ruin of the other partners Multiple Choice Questions A C D C D C D C C 10 C ... obligation of the partners A partnership pays no income tax on its business income Partners pay income tax as individuals on their shares of partnership income The great advantage of a partnership... partnership agreement of each new partnership may be expensive and time consuming However, the principal disadvantages of a partnership are mutual agency and the unlimited personal liability of partners... income The great advantage of a partnership is that it combines the capital, talents, and experience of two or more persons Also, a partnership pays no business income tax A disadvantage is that as

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