Chapter 4 Practice Questions
Rina Dhillon
Practice Questions
- A partnership capital account is opened for each partner to:
| a. | keep track of the partners’ share of profits | |
| b. | keep track of the partners’ original and subsequent contributions | |
| c. | keep track of the partners’ drawings from the partnership | |
| d. | all of the options given |
2. If two sole proprietors come together to form a partnership, with each contributing assets and liabilities from their previous businesses, these are brought into the partnership at:
| a. | value as recorded in the books of the original businesses | |
| b. | current market value | |
| c. | discounted cash flow value | |
| d. | independent valuation of non-cash assets and liabilities |
3. If A and B form a partnership, the investment in the partnership will be recorded with:
| a. | credits to each partner’s capital account | |
| b. | debit to cash | |
| c. | credit to contributed capital | |
| d. | debits to any liabilities brought into the partnership |
4. E&R Partnership agrees to share profits 40 per cent to E and 60 per cent to R. How will losses be shared?
| a. | 40% E, 60% R | |
| b. | By E&R initial capital contribution | |
| c. | 50% E, 50% R | |
| d. | Losses are not shared in partnerships |
5. XYZ partnership shares profits and losses in a 5:4:3 ratio respectively. This means:
| a. | partner X receives 1/5 of the profits | |
| b. | partner Y receives 1/4 of the profits | |
| c. | partner Z receives 1/3 of the profits | |
| d. | partner X receives 5/12 of the profits |
6. When Peter joined with partner Mary, Peter contributed a printing press with a current market value of $75000, accounts receivable of $25000. The partnership also agrees to take over his $10000 of accounts payable. The amount credited to Peter’s capital account would be:
| a. | $75000 | |
| b. | $90000 | |
| c. | $100000 | |
| d. | $110000 |
7. Procter and Gamble are partners. They have agreed to share profits based on a formula where the first $100 000 is based on service and Procter is to receive $60 000 and Gamble $40 000. The next $100 000 is based on capital contributed where Procter invested $350 000 and Gamble $150 000. Any remaining profits are shared equally.
If profits before distributions were $400 000 how much will Gamble receive?
| a. | $200 000 | |
| b. | $170 000 | |
| c. | $160 000 | |
| d. | $120 000 |
8. All of the following are reasons that a company may buy back shares, except:
| a. | if it needs the shares for its employees’ share bonus program | |
| b. | if it desires to make an investment in its own shares | |
| c. | to buy out the ownership of shareholders | |
| d. | to increase the reported amount of earnings per share |
9. When a company declares a cash dividend:
| a. | cash decreases | |
| b. | liabilities decrease | |
| c. | equity decreases | |
| d. | no entry is necessary |
10. The shareholders’ equity section of the 30 June 2022 balance sheet for Shah Interiors before its recent share dividend:
| Ordinary shares, 100 000 shares | $600000 | |
| Retained earnings | 725000 | |
| Total shareholders’ equity | $1 325000 | |
Shah declared a 10% share dividend when the market price per share was $8.00. After the share dividend, the components of Shah’s shareholders’ equity section were:
| a. | Ordinary shares $600000; Retained earnings $725000 | |
| b. | Ordinary shares $650000; Retained earnings $805000 | |
| c. | Ordinary shares $710000; Retained earnings $805000 | |
| d. | Ordinary shares $680000; Retained earnings $645000 |
11. On 15 July 2022, Tech Systems Limited paid a cash dividend that had been declared prior to the end of its 30 June 2022 financial year. The entry to pay the dividends includes a debit to:
| a. | cash and a credit to dividends payable | |
| b. | dividends payable and a credit to cash | |
| c. | retained earnings and a credit to dividends payable | |
| d. | dividends payable and a credit to retained earnings |
12. A liability for cash dividends is created at the:
| a. | end of each financial year | |
| b. | date of declaration | |
| c. | date of record | |
| d. | date of payment |
13. In which of the following organisation forms is the owners’ legal responsibility for the debt of the business limited to the amount they invested in the business?
| a. | Sole proprietorship | |
| b. | Company | |
| c. | Partnership | |
| d. | Cooperative |
14. Dhillon Company issues 1000 shares. $10 per share is payable on application and $6 per share on allotment. When the application money is received, cash trust is debited, and the credit is made to:
| a. | issued shares | |
| b. | application | |
| c. | Ordinary share capital | |
| d. | retained earnings |
15. When a company issues a share dividend:
| a. | cash decreases | |
| b. | equity remains the same | |
| c. | equity decreases | |
| d. | retained earnings increases |
16. The number of shares issued is important because it determines the amount of _______ that will be paid.
| a. | cash | |
| b. | retained earnings | |
| c. | dividends | |
| d. | profit |
17. The financial statements of a partnership are different from that of a sole trader because of:
| a. | more government regulation | |
| b. | accounting for inventory at the lower of cost and net realisable value. | |
| c. | more complex business transactions | |
| d. | separate capital accounts for each partner. |
18. Which of the following statements is true regarding a company’s buy-back of shares?
| a. | The cost of re-purchased shares is a reduction in shareholders’ equity | |
| b. | Dividends must still be paid on re-purchased shares because they are still issued | |
| c. | Re-purchased shares are reported as an asset because it is considered an investment in the company’s own shares | |
| d. | Re-purchased shares are still entitled to a vote at annual general meetings |
19. Which of the following is not characteristic of a company?
| a. | Companies are organised as a separate legal taxable entity | |
| b. | Ownership is divided into share | |
| c. | Companies are usually able to obtain large amounts of resources by issuing shares | |
| d. | A company’s resources are limited to their individual shareholders’ resources |
20. Issued shares represent the:
| a. | number of previously issued shares that have been repurchased by the company | |
| b. | number of shares that the company will distribute to owners | |
| c. | number of shares that are currently held by shareholders | |
| d. | maximum number of shares that can be sold by the company |
Solutions: (1) d; (2) b; (3) a; (4) c; (5) d; (6) b; (7) b; (8) b; (9) c; (10) d; (11) b; (12) b; (13) b; (14) b; (15) b; (16) c; (17) d; (18) a; (19) d; (20) c