QUESTION: 121

In 1992, Anchor, Chain, and Hook created ABC Associates, a general partnership. The partners orally agreed that they would work full time for the partnership and would distribute profits based on their capital contributions.

Anchor contributed $5,000; Chain $10,000; and Hook $15,000. For the year ended December 31, 1993, ABC Associates had profits of $60,000 that were distributed to the partners. During 1994, ABC Associates was operating at a loss. In September 1994, the partnership dissolved.
In October 1994, Hook contracted in writing with XYZ Co. to purchase a car for the partnership. Hook had previously purchased cars from XYZ Co. for use by ABC Associates partners. ABC Associates did not honor the contract with XYZ Co. and XYZ Co. sued the partnership and the individual partners.

The ABC Associates oral partnership agreement was valid.
The ABC Associates oral partnership agreement was invalid because the partnership lasted for more than one year.

Answer(s): A

Explanation:

Choice "a" is correct. A partnership agreement does not have to be in writing to be valid. If the partners want to enforce an agreement to be partners for more than one year, that agreement must be in writing, but merely having the partnership last for more than one year does not make an oral partnership agreement invalid.

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QUESTION: 122

In 1992, Anchor, Chain, and Hook created ABC Associates, a general partnership. The partners orally agreed that they would work full time for the partnership and would distribute profits based on their capital contributions. Anchor contributed $5,000; Chain $10,000; and Hook $15,000. For the year ended December 31, 1993, ABC Associates had profits of $60,000 that were distributed to the partners. During 1994, ABC Associates was operating at a loss. In September 1994, the partnership dissolved.
In October 1994, Hook contracted in writing with XYZ Co. to purchase a car for the partnership. Hook had previously purchased cars from XYZ Co. for use by ABC Associates partners. ABC Associates did not honor the contract with XYZ Co. and XYZ Co. sued the partnership and the individual partners..

Anchor, Chain, and Hook jointly owning and conducting a business for profit establishes a partnership relationship.
Anchor, Chain, and Hook jointly owning income producing property establishes a partnership relationship.

Answer(s): A

Explanation:

Choice "a" is correct. A partnership is defined as an association of two or more persons who agree to carry on as co-owners a business for profit. Merely owning income-producing property jointly is not sufficient.

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QUESTION: 123

In 1992, Anchor, Chain, and Hook created ABC Associates, a general partnership. The partners orally agreed that they would work full time for the partnership and would distribute profits based on their capital contributions. Anchor contributed $5,000; Chain $10,000; and Hook $15,000. For the year ended December 31, 1993, ABC Associates had profits of $60,000 that were distributed to the partners. During 1994, ABC Associates was operating at a loss. In September 1994, the partnership dissolved.
In October 1994, Hook contracted in writing with XYZ Co. to purchase a car for the partnership. Hook had previously purchased cars from XYZ Co. for use by ABC Associates partners. ABC Associates did not honor the contract with XYZ Co. and XYZ Co. sued the partnership and the individual partners.

Anchor's share of ABC Associates' 1993 profits was $20,000.
Hook's share of ABC Associates' 1993 profits was $30,000.

Answer(s): B

Explanation:

Choice "b" is correct. Unless otherwise agreed, partners share profits equally. Here, the partners agreed to share profits on the basis of their contributions, which were in a ratio of 1:2:3 respectively for Anchor, Chain, and Hook. Thus, Anchor's share of the 1993 profits was $10,000, Chain's share was $20,000, and Hook's share was $30,000.

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QUESTION: 124

In 1992, Anchor, Chain, and Hook created ABC Associates, a general partnership. The partners orally agreed that they would work full time for the partnership and would distribute profits based on their capital contributions. Anchor contributed $5,000; Chain $10,000; and Hook $15,000.
For the year ended December 31, 1993, ABC Associates had profits of $60,000 that were distributed to the partners. During 1994, ABC Associates was operating at a loss. In September 1994, the partnership dissolved. In October 1994, Hook contracted in writing with XYZ Co. to purchase a car for the partnership. Hook had previously purchased cars from XYZ Co. for use by ABC Associates partners. ABC Associates did not honor the contract with XYZ Co. and XYZ Co. sued the partnership and the individual partners.

Anchor's capital account would be reduced by 1/3 of any 1994 losses.
Hook's capital account would be reduced by 1/2 of any 1994 losses.

Answer(s): B

Explanation:

Choice "b" is correct. If the partnership agreement is silent on how losses will be shared, they are shared in the same manner as profits. Here, the partners agreed to share profits on the basis of their contributions, which were in a ratio of 1:2:3 respectively for Anchor, Chain, and Hook. Thus, Anchor is liable for one-sixth of the loss, Chain is liable for 1/3 of the loss, and Hook is liable for 1/2 of the loss.

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