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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