Clark 11e TB a Ch36

371

Chapter 36

Partnerships andLimited Liability Partnerships

TRUE/FALSE QUESTIONS

A1. An association cannot be a partnership without an express agreement.

ANSWER: F PAGE: 737 TYPE: NNAT: AACSB Analytic AICPA Legal

A2. The Uniform Commercial Code governs the operation of partnerships.


A3. A sharing of profits from the sale of the goodwill of a business creates apresumption that a partnership exists.


A4. A corporation can be a partner.

ANSWER: T PAGE: 739 TYPE: NNAT: AACSB Analytic AICPA Legal

A5. A partner may use and possess partnership property for any purpose.


A6. A partner owes a partnership and its partners a duty of gross negligenceand reckless conduct.


372 TEST BANK A—UNIT EIGHT: BUSINESS ORGANIZATIONS

A7. The extent of implied authority is generally broader for agents than forpartners.


A8. A partner cannot “wrongfully” dissociate from a partnership.

ANSWER: F PAGE: 746 TYPE: =NAT: AACSB Analytic AICPA Legal

A9. A partnership dissolves when a partner ceases to be associated with thecarrying on of partnership business.


A10. On a partner’s dissociation, his or her right to participate in themanagement and conduct of the business terminates.

ANSWER: T PAGE: 747 TYPE: NNAT: AACSB Analytic AICPA Legal

A11. A general partner is personally liable for partnership debts if its assetsare insufficient to pay its creditors.

ANSWER: T PAGE: 749 TYPE: =NAT: AACSB Analytic AICPA Legal

A12. In winding up a general partnership, creditors are paid before partnersreceive their capital contributions.


A13. In a limited liability partnership, a partner can be exempt from personalliability for partnership obligations.


A14. With a few exceptions, all of the rules that govern partnerships apply tolimited liability partnerships.


CHAPTER 36: PARTNERSHIPS AND LIMITED LIABILITY PARTNERSHIPS 373

A15. A limited liability partnership can be formed in virtually any state.


A16. In a limited partnership, the liability of a limited partner is limited to theamount of capital he or she has invested in the partnership.


A17. Only a limited partnership’s limited partners have a fiduciary obligationto the other partners.


A18. A limited partner who gives a general partner advice on matters relatingto the management of the partnership cannot be liable as a generalpartner.


A19. A general partner has the power to dissociate from a limited partnershipregardless of what the partnership agreement specifies.


A20. In a limited liability limited partnership, the liability of a generalpartner is limited to the amount of capital he or she has invested in thepartnership.



MULTIPLE CHOICE QUESTIONS

A1. Guy and Hanna do business as G-H Associates. If G-H is a partnership,it is governed by the Uniform Partnership Act

a. in the absence of an express agreement.b. in the absence of an implied agreement.c. only in the presence of an express agreement.d. under all circumstances.

ANSWER: A PAGE: 737 TYPE: NNAT: AACSB Reflective AICPA Legal

A2. Noah and Orin do business as Personnel Partners. In most states, forpurposes of suing and being sued, Personnel Partners would be treatedas

a. an aggregate of the individual partners.b. a natural person.c. an entity.d. a non-existent party.

ANSWER: C PAGE: 738 TYPE: NNAT: AACSB Reflective AICPA Legal

Fact Pattern 36-1A (Questions A3–A4 apply)Dean starts up E-Sites, an Internet service, and leases office space in abuilding owned by Fred. The lease requires Dean to pay Fred a base rental of$250, plus 10 percent of E-Sites’ profits, each month. The term is two years.Dean hires Gina to work at E-Sites’ tech support desk at an hourly wage of$9.00, plus a commission of 10 percent of the profits. The term is also two years.

A3. Refer to Fact Pattern 36-1A. Dean and Fred are

a. not partners, because Fred does not have an ownership interest ormanagement rights in E-Sites.

b. not partners, because the lease includes a “base rental.”c. not partners, because the rent includes only 10 percent of the

profits.d. partners in a partnership for two years.

ANSWER: A PAGE: 738 TYPE: +NAT: AACSB Reflective AICPA Legal


A4. Refer to Fact Pattern 36-1A. Dean and Gina are

a. not partners, because Gina does not have an ownership interest ormanagement rights in E-Sites.

b. not partners, because the pay includes an hourly wage.c. not partners, because the pay includes only 10 percent of the

profits.d. partners in a partnership for two years.

ANSWER: A PAGE: 738 TYPE: =NAT: AACSB Reflective AICPA Legal

A5. Sabin and Tyler agree while talking on the phone to form a partnership.Their partnership agreement is legally binding

a. only if a third person knows of the agreement.b. only if the agreement is reduced to writing.c. only if the parties exchange valid consideration.d. without more.

ANSWER: D PAGE: 739 TYPE: =NAT: AACSB Reflective AICPA Legal

A6. Rona and Stiv do business as Treasure Island Traders. In acting on thefirm’s behalf in a deal with Unlimited Potential, Inc., Rona makes anhonest error in overestimating the profit. To her firm, Rona is

a. liable for breach of the duty of care.b. liable for breach of the duty of economic sense.c. liable for breach of the duty of loyalty.d. not liable.

ANSWER: D PAGE: 742 TYPE: NNAT: AACSB Reflective AICPA Legal

A7. Mabel and Nicol do business as One World Realty. In acting on the firm’sbehalf in a deal with Property Acquisition Company, Mabel fails toaccount for the profit. To her firm, Mabel is

a. liable for breach of the duty of care.b. liable for breach of the duty of economic sense.c. liable for breach of the duty of loyalty.d. not liable.

ANSWER: C PAGE: 742 TYPE: NNAT: AACSB Reflective AICPA Legal


A8. Erte, a partner in Fluoride Dental Associates, applies for a loan withGreat State Bank allegedly on Fluoride’s behalf but without theauthorization of the other partners. Great State knows that Erte is notauthorized to take out the loan. Erte’s default on the loan results in

a. Erte and Fluoride’s joint liability for the amount.b. Erte’s sole liability for the amount.c. Fluoride’s sole liability for the amount.d. neither Erte’s nor Fluoride’s liability.

ANSWER: B PAGE: 743 TYPE: =NAT: AACSB Reflective AICPA Legal

Fact Pattern 36-2A (Questions A9–A10 apply)Hal, Ira, and Jill are partners in Kappa Accessories, a computer peripheralsfirm.

A9. Refer to Fact Pattern 36-2A. Hal signs a contract with Lycra Chips, aretail component supplier, allegedly on Kappa’s behalf. The contract isbinding on

a. Hal, Ira, Jill, and Kappa.b. Hal only.c. Kappa only.d. no one.


A10. Refer to Fact Pattern 36-2A. Ira dissociates from Kappa. Jill signs a con-tract with Micro Drives, a wholesale component supplier, allegedly onKappa’s behalf. Micro knows of Ira’s dissociation. The contract is bindingon

a. Hal, Jill, and Kappa only.b. Jill only.c. Kappa only.d. no one.



A11. Fay is admitted to Global Associates, an existing partnership. Apartnership debt incurred before the date of her admission comes due.Fay is

a. not liable for the debt.b. only liable for the debt up to the amount of his capital

contribution.c. personally liable only to the extent the other partners do not pay.d. personally liable to the full extent of the debt.


A12. Clu, Dolf, and Elton do business as Fertile Valley Farm. Clu’srelationship to the firm ends, but it continues to do business. This is

a. dissociation.b. dissolution.c. winding up.d. wrongful.

ANSWER: A PAGE: 746 TYPE: NNAT: AACSB Reflective AICPA Legal

A13. Kelly, Lars, and Mona agree to be partners in Neighborhood DeliveryService (NDS), splitting the profits equally. Kelly contributes 67 percentof the capital. When NDS is dissolved, its liabilities are greater than itsassets. The losses are paid by

a. all of the partners in proportion to their capital contributions.b. all of the partners in proportion to their shares of the profits.c. Kelly because she contributed most of the capital.d. Lars and Mona because they contributed the least of the capital.


A14. Jim and Kyle are partners in J&K Sales, which exports technical equip-ment under a three-year partnership agreement. The U.S. governmentdeclares that the equipment can no longer be exported. J&K

a. dissolves as soon as the stated term expires.b. dissolves as soon as the partners agree to dissolve it.c. dissolves immediately unless the partners change its business.d. does not dissolve.

ANSWER: C PAGE: 749 TYPE: =NAT: AACSB Reflective AICPA Legal


A15. Jay is considering forms of business organization for Jay’s Designs, anarchitectural firm. An advantage of a limited liability partnership isthat partners can avoid personal liability for

a. any partnership obligation.b. only other partners’ wrongdoing.c. only partnership obligations that exceed capital contributions.d. only partnership obligations that fall within capital contributions.


A16. Jack and Kyra are partners in Law Firm, LLP, a limited liabilitypartnership. Jack supervises Kyra, who negligently fails to appear incourt on behalf of Milo, a client. Liability to Milo rests with

a. Jack and Kyra.b. Jack only.c. Kyra only.d. neither Jack nor Kyra.

ANSWER: A PAGE: 750 TYPE: +NAT: AACSB Reflective AICPA Legal

A17. Fern and Gray want to form a limited partnership to manage tworestaurants: Café Latte and Delite Deli. In most states, a limitedpartnership will be created when

a. a certificate of limited partnership is filed.b. a partnership agreement is executed.c. the business for which the firm is formed actually begins.d. the partners make their capital contributions.


A18. Lucy is a limited partner in Metro Contractors, a limited partnership,which cannot pay its debts. Lucy is personally liable for the debts

a. in proportion to the number of partners in the firm.b. to no extent.c. to the extent of her capital contribution.d. to the full extent.



A19. Venture Capital, LP, is a limited partnership. A Venture limited partnerloses his or her limited liability if he or she

a. acts as the firm’s manager.b. has full awareness of the firm’s business activities.c. invests in the firm’s competitor.d. votes on the firm’s sale or dissolution.


A20. Energy Unlimited, LP, is a limited partnership to which its partners, in-cluding Fink, have contributed capital. Energy’s creditors includeGraves Engineering, Inc. On Energy’s dissolution, its assets will bedistributed to pay

a. Fink and Graves proportionately.b. Fink first.c. Graves first.d. neither Fink nor Graves.


ESSAY QUESTIONS

A1. Sally and Tom decide to go into business, selling discounted merchandisethrough their Web site “e-Buy.” They sign a partnership agreement thatrequires Sally to contribute $12,000 and Tom to contribute $8,000 incapital to start the firm. The agreement also states that only Sally willhave the authority to bind the partnership in deals with third parties,but the agreement says nothing about the management of the firm or adivision of profits. Without Sally’s knowledge, Tom tells UnitedComputer Products, Inc., that he represents the firm and signs acontract with United to buy hard drives for resale on e-Buy. In the firstyear, e-Buy makes a profit of $50,000. What are the partners’ rights withrespect to the management of the firm? Is the partnership bound to thecontract with United? Do the partners split the first year’s profits? If so,how much is each entitled to?

ANSWER: The partners’ rights with respect to the management ofthe partnership business and the profits of the firm is a split of eachequally. The partnership is bound to the contract with United. Becausethe agreement is silent on the subject of the firm’s management, eachpartner has an equal right to manage the business. For the same reason,each partner has a right to an equal share of the profits, even though


their capital contributions were not equal. The apparent authority of apartner to bind a partnership in dealing with third parties cannot belimited by an agreement between the partners of which third parties areunaware. Every partner is an agent of the partnership and may bind thefirm to contracts with third parties. Only if the third party is aware thata partner’s authority is limited will the liability of the firm also belimited to the same extent.

PAGES: 740–741 & 743 TYPE: =NAT: AACSB Reflective AICPA Decision Modeling

A2. International Exports, L.P., is a limited partnership, with $100,000 in de-clared but unpaid profits. International’s creditors include FriendlyCredit Corporation for $5,000 and Gwen, one of International’s limitedpartners, also for $5,000. When Harry, one of International’s generalpartners, decides to retire, the other general partners vote to liquidateand dissolve the firm. The limited partners, who are not asked theiropinions, want International to continue in business and file a suitagainst the general partners to compel this result. Can the court orderInternational to continue? If not, what is the priority of the distributionof International’s assets on its dissolution?

ANSWER: A court cannot order a partnership to continue inbusiness if all of its general partners do not consent. Thus, the court inthis problem could not order International to continue even if all of itslimited partners outnumbered its general partners and wanted the firmto continue. The priority of the distribution of a limited partnership’sassets on its dissolution is: first, creditors, including partner-creditors,for outstanding debts; second, partners and former partners for unpaiddistributions of declared profit; third, partners for their capitalcontributions; and fourth, partners for the remaining assets, whichwould be undeclared profit, in proportion to their shares of distributions.Here, this would mean that on International’s dissolution, Friendly andGwen would be paid first. All of the partners would then receive theirshares of the remaining $100,000 in declared but unpaid profit and nextthe amounts of their capital contributions. Any remaining assets wouldbe divided among the partners according to their shares of the profit.

PAGES: 753–755 TYPE: =NAT: AACSB Reflective AICPA Decision Modeling

Clark 11e TB a Ch36

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