AICPA AICPA Certifications CPA-TEST Questions & Answers

• Question 721:

  Downs, Frey, and Vick formed the DFV general partnership to act as manufacturers' representatives. The partners agreed Downs would receive 40% of any partnership profits and Frey and Vick would each receive 30% of such profits. It was also agreed that the partnership would not terminate for five years. After the fourth year, the partners agreed to terminate the partnership. At that time, the partners' capital accounts were as follows: Downs, $20,000; Frey, $15,000; and Vick, $10,000. There also were undistributed losses of $30,000. Which of the following statements about the form of the DFV partnership agreement is correct?

  A. It must be in writing because the partnership was to last for longer than one year.

  B. It must be in writing because partnership profits would not be equally divided.

  C. It could be oral because the partners had explicitly agreed to do business together.

  D. It could be oral because the partnership did not deal in real estate.

  Correct Answer: A

  Explanation: Choice "a" is correct. Under the statute of frauds, an agreement, which by its terms cannot be performed within a year, must be evidenced by a writing containing the material terms and signed by the parties to be charged. Absent a writing, the partnership will be treated as a partnership at will. Choice "b" is incorrect. There is no requirement that partnership agreements be in writing merely because profits will be divided unequally. Choice "c" is incorrect. The statute of frauds requires contracts that cannot by their terms be performed within one year to be evidenced by a writing containing the material terms and signed by the parties to be charged. Choice "d" is incorrect. Whether or not a partnership is to deal in real estate is irrelevant to whether the partnership agreement must be in writing.

• Question 722:

  Rivers and Lee want to form a partnership. For the partnership agreement to be enforceable, it must be in writing if:

  A. Rivers and Lee reside in different states.

  B. The agreement cannot be completed within one year from the date on which it will be entered into.

  C. Either Rivers or Lee is to contribute more than $500 in capital.

  D. The partnership intends to buy and sell real estate.

  Correct Answer: B

  Explanation:

  Choice "b" is correct. A transaction which cannot be completed within a year must be in writing to be

  enforceable.

  Choice "a" is incorrect. Residence of the prospective partners is not relevant.

  Choice "c" is incorrect. The statute of frauds $500 threshold applies to the sale of goods only.

  Choice "d" is incorrect. Transactions in land are within the statute of frauds, but the possibility that a

  partnership may engage in a real estate transaction is not a transaction in land.

• Question 723:

  Heather, Erika, and Shelby are members in ABC LLC. Heather works 40 hours per week and Erika and Shelby work 20 hours per week. Heather contributed $30,000 to the LLC and Erika and Shelby contributed

  $60,000 each. Erika and Shelby have each originated 45% of the LLC's business and Heather has

  originated the other 10%.

  If ABC were a general partnership, who controls management?

  A. Heather, because she works the most.

  B. Erika and Shelby equally because they contributed the most.

  C. Heather, Erika, and Shelby equally because of state law.

  D. Erika and Shelby, because they originate most of the work.

  Correct Answer: C

  Explanation:

  Choice "c" is correct.

  Rule: Absent an agreement to the contrary, partners have equal management authority.

  Choices "a", "b", and "d" are incorrect, per the above rule.

• Question 724:

  Eller, Fort, and Owens do business as Venture Associates, a general partnership. ABC Corp. brought a breach of contract suit against Venture and Eller individually. ABC won the suit and filed a judgment against both Venture and Eller. ABC will generally be able to collect the judgment from:

  A. Partnership assets only.

  B. The personal assets of Eller, Fort, and Owens only.

  C. Eller's personal assets only after partnership assets are exhausted.

  D. Eller's personal assets only.

  Correct Answer: C

  Explanation:

  Choice "c" is correct. When a judgment is obtained against both a partnership and an individual general partner, the plaintiff must proceed against the partnership assets first and then the assets of any individual general partner. The partnership assets must be exhausted before any general partner's individual assets can be attached. Choices "a", "b", and "d" are incorrect, per the above rule.

• Question 725:

  On dissolution of a general partnership, distributions will be made on account of:

  I. Partners' capital accounts.

  II. Amounts owed partners with respect to profits.

  III. Amounts owed partners for loans to the partnership.

  In the following order:

  A. III, I, and II.

  B. I, II, and III.

  C. II, III, and I.

  D. III, II, and I.

  Correct Answer: A

  Explanation:

  Choice "a" is correct.

  Rule: On dissolution of a general partnership the "order of distribution" would be as follows:

  III.

  General partner loans.

  I.

  Partners' capital accounts.

  II. General partners' profits.

  Choices "b", "c", and "d" are incorrect, per the above rule.

• Question 726:

  Which of the following is not necessary to create an express partnership?

  A. Execution of a written partnership agreement.

  B. Agreement to share ownership of the partnership.

  C. Intention to conduct a business for profit.

  D. Intention to create a relationship recognized as a partnership.

  Correct Answer: A

  Explanation: Choice "a" is correct. A written partnership agreement, while certainly desirable, is not usually necessary to form a valid partnership; partnership agreements are not normally subject to the statute of frauds. Choice "b" is incorrect. A partnership is an association of two or more persons who agree to carry on as co-owners of a business for profit. Thus, an agreement to share ownership of the partnership is a requirement for creating an express partnership. Choice "c" is incorrect. A partnership is an association of two or more persons who agree to carry on as co-owners of a business for profit. Thus, an intent to carry on a business for a profit is a requirement for creating an express partnership. Choice "d" is incorrect. A partnership is an association of two or more persons who agree to carry on as co-owners of a business for profit. The intent to create a business relationship recognized as a partnership is a requirement for creating an express partnership.

• Question 727:

  In a general partnership, the authorization of all partners is required for an individual partner to bind the partnership in a business transaction to:

  A. Purchase inventory.

  B. Hire employees.

  C. Sell goodwill.

  D. Sign advertising contracts.

  Correct Answer: C

  Explanation: Choice "c" is correct. All partners have apparent authority to enter into transactions apparently within the regular scope of the partnership business. No such authority exists, however, for transactions outside the regular scope of business. The sale of a business's goodwill is extraordinary and is outside the ordinary scope of business. Thus, a partner must get authorization from all other partners to make the sale. Choice "a" is incorrect. All partners have apparent authority to enter into transactions apparently within the regular scope of the partnership business. Purchasing inventory is within the regular scope of business, so a partner need not get permission from the other partners to bind the partnership. Choice "b" is incorrect. All partners have apparent authority to enter into transactions apparently within the regular scope of the partnership business. Hiring employees is within the regular scope of a business, so a partner need not get permission from the other partners to bind the partnership. Choice "d" is incorrect. All partners have apparent authority to enter into transactions apparently within the regular scope of the partnership business. Entering into advertising contracts is within the regular course of business, and so a partner need not get permission from the other partners to bind the partnership.

• Question 728:

  Locke and Vorst were general partners in a kitchen equipment business. On behalf of the partnership, Locke contracted to purchase 15 stoves from Gage. Unknown to Gage, Locke was not authorized by the partnership agreement to make such contracts. Vorst refused to allow the partnership to accept delivery of the stoves and Gage sought to enforce the contract. Gage will:

  A. Lose, because Locke's action was not authorized by the partnership agreement.

  B. Lose, because Locke was not an agent of the partnership.

  C. Win, because Locke had express authority to bind the partnership.

  D. Win, because Locke had apparent authority to bind the partnership.

  Correct Answer: D

  Explanation:

  Choice "d" is correct. Every partner is an agent of the partnership and has apparent authority to bind the

  partnership to contracts that appear to carry on in the usual way the business of the partnership. It would

  be usual for a partner in a kitchen equipment business to have authority to purchase stoves. Thus, Gage

  will win because of Locke's apparent authority.

  Choice "a" is incorrect. Every partner is an agent for his partnership and has apparent authority to bind the

  partnership to contracts that appear to carry on in the usual way the business of the partnership.

  Choice "b" is incorrect. Every partner is an agent of the partnership.

  Choice "c" is incorrect. Locke did not have express authority to purchase the stoves. The facts state that

  Locke was not authorized to purchase the stoves and thus lacked express authority.

• Question 729:

  The partners of College Assoc., a general partnership, decided to dissolve the partnership and agreed that none of the partners would continue to use the partnership name. Under the Revised Uniform Partnership

  Act, which of the following events will occur on dissolution of the partnership?

  

  A. Option A

  B. Option B

  C. Option C

  D. Option D

  Correct Answer: C

  Explanation:

  Choice "c" is correct. "No - Yes."

  Rule: Upon the dissolution of the partnership, each of the partners continues to have liability for partnership

  debts. Upon dissolution of the partnership each of the partners will continue to have apparent authority.

  The apparent authority of a partner can only be negated upon proper notice to third parties.

  Choices "a", "b", and "d" are incorrect, per the above rule.

• Question 730:

  Which of the following requirements must be met to have a valid partnership exist?

  I. Co-ownership of all property used in a business.

  II.

  Co-ownership of a business for profit.

  A.

  I only.

  B.

  II only.

  C.

  Both I and II.

  D.

  Neither I nor II.

  Correct Answer: B

  Explanation:

  Choice "b" is correct.

  Rule: A partnership is defined as an association of two or more persons who agree to carry on as

  coowners a business for profit. Thus, II is necessary. However, there is no requirement that all property

  used in the business be co-owned; it may be owned by individual partners. Thus I is not necessary.

  Choices "a", "c", and "d" are incorrect, per the above rule.