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← Unit 3: Partnerships and Corporations

BAT4M · Unit 3 test review

Partnerships and Corporations: Test Review

Everything for the Unit 3 test on one page: the key facts from all 9 lessons, the mistakes that cost the most marks, and a practice test that points you back to the lessons you need.

Key facts

Partnerships: Types and Formation

  • Key characteristics of a partnership: association of individuals, mutual agency, unlimited liability (general partners), limited life, co-ownership of property, and a partnership agreement.
  • A limited partnership needs at least one general partner (manages, unlimited liability); limited partners' liability is limited to their investment and they generally cannot take part in management.
  • Non-cash assets invested by a partner are recorded at fair value on the date of investment; liabilities assumed are credited to the liability account.
  • Partner's capital credit = fair value of assets invested minus liabilities assumed by the partnership.
  • Each partner has a separate capital account and a separate drawings account.

Dividing Partnership Income

  • Divide income in this order: (1) salary allowances, (2) interest on capital, (3) remainder in the income ratio.
  • Salary allowances and interest are given in full even if they exceed net income; the resulting deficit is shared in the income ratio.
  • Salary allowances and interest on capital are not expenses and are not cash payments; cash taken by partners is debited to drawings.
  • Capital ratio share = net income × partner's capital ÷ total capital.
  • The partners' shares must total exactly the net income (or net loss) being divided.
  • Closing: Income Summary is closed to each partner's capital by share; each drawings account is closed to its own partner's capital.

Admitting and Withdrawing Partners

  • Purchase of an interest is a personal transaction: debit the selling partner's capital, credit the new partner's capital, at book value; total capital does not change.
  • Investment in the partnership increases total assets and total capital.
  • New partner's capital = (old total capital + new investment) × new partner's share; bonus = investment − new partner's capital.
  • A bonus (to old or new partners, or on withdrawal) is shared among the old or remaining partners in their income ratio.
  • Withdrawal paid from partnership assets: debit the retiring partner's capital for book value; pay more = bonus to retiring partner (debit remaining partners); pay less = bonus to remaining partners (credit them).

Liquidation and the Statement of Partners' Equity

  • Liquidation steps: (1) sell non-cash assets, (2) share the gain or loss on realization in the income ratio, (3) pay liabilities, (4) distribute remaining cash by capital balances.
  • Gain or loss on realization = cash received − book value of non-cash assets sold.
  • A capital deficiency (debit balance) is either paid in by that partner or absorbed by the other partners in their income ratio.
  • Statement of partners' equity, per partner: beginning capital + investments ± share of net income or loss − drawings = ending capital.
  • The balance sheet's equity section lists each partner's ending capital and the total partners' equity.

Corporations and Classes of Shares

  • A corporation is a separate legal entity with limited liability for shareholders, continuous life and transferable shares.
  • Public corporations trade on a stock exchange and report under IFRS; private corporations may use ASPE; not-for-profit corporations have no shareholders.
  • Shareholders elect the board of directors; the board appoints officers and is the only body that declares dividends.
  • Preferred shares have priority for dividends and on liquidation but usually no vote; cumulative preferred builds dividends in arrears.
  • Authorized is the maximum allowed; issued is what has been sold; outstanding is what shareholders still hold.
  • CBCA and OBCA shares have no par value, so the whole amount received is credited to the share account.

Issuing, Subscribing and Repurchasing Shares

  • No-par shares: debit the asset received, credit the share account (Common Shares or Preferred Shares) for the full amount.
  • Shares issued for non-cash assets are recorded at fair value, using whichever of the asset or the shares can be valued more reliably.
  • Subscriptions: Dr Subscriptions Receivable, Cr Common Shares Subscribed; collect instalments; when fully paid, Dr Common Shares Subscribed, Cr Common Shares.
  • Average issue price a repurchase removes shares at this average.
  • Pay less than average: credit Contributed Surplus. Pay more: debit Contributed Surplus (up to its balance), then Retained Earnings.
  • Repurchases never create a gain or loss on the income statement.

Cash Dividends and Preferred Shareholders

  • Declaration date: Dr Retained Earnings (or Cash Dividends), Cr Dividends Payable. The liability starts here.
  • Record date: no journal entry; it only fixes which shareholders are paid.
  • Payment date: Dr Dividends Payable, Cr Cash.
  • Preferred is paid first: non-cumulative gets only the current year; cumulative gets all arrears plus the current year.
  • Dividends in arrears are not a liability; they are disclosed in the notes until declared.
  • A dividend needs retained earnings, cash, a board declaration, and must pass the solvency test.

Stock Dividends, Stock Splits and Shareholders' Equity

  • Small stock dividend, declaration: Dr Retained Earnings (or Stock Dividends), Cr Common Stock Dividends Distributable, usually at market value.
  • Stock dividend, distribution: Dr Common Stock Dividends Distributable, Cr Common Shares.
  • Stock split and reverse split (consolidation): no journal entry, only a memorandum entry recording the new number of shares.
  • Cash dividend lowers total equity and assets; stock dividend and split leave total equity unchanged.
  • Book value per common share

Financial Statements for a Corporation

  • Corporate income statement: income before income tax minus income tax expense equals net income.
  • Closing retained earnings = opening retained earnings + net income (or − net loss) − dividends declared.
  • Equity section: share capital by class (with authorized and issued numbers), contributed surplus, then retained earnings.
  • Dividends appear on the statement of retained earnings, never on the income statement.
  • EPS
  • Book value per common share

Where marks get lost

  • Recording a contributed asset at the partner's original cost or old book value instead of its fair value on the day it is invested. (Partnerships: Types and Formation)
  • Bringing a partner's old accumulated amortization into the partnership's books; the partnership records only the fair value as the new cost. (Partnerships: Types and Formation)
  • Crediting the partner's capital for the full value of assets contributed without subtracting liabilities the partnership assumes. (Partnerships: Types and Formation)
  • Using one combined capital or drawings account for all the partners, so nobody can tell what each partner owns. (Partnerships: Types and Formation)
  • Assuming every partner in a limited partnership has limited liability; at least one general partner always has unlimited liability. (Partnerships: Types and Formation)
  • Recording partners' salary allowances as Salaries Expense on the income statement; they are part of dividing net income, not expenses. (Dividing Partnership Income)
  • Stopping the allowances when net income runs out, instead of giving them in full and sharing the deficit in the income ratio. (Dividing Partnership Income)
  • Sharing the remainder equally when the agreement gives a different ratio, or using the capital ratio for the remainder when it says the income ratio. (Dividing Partnership Income)
  • Closing Income Summary to drawings, or closing one partner's drawings to the other partner's capital. (Dividing Partnership Income)
  • Not checking that the partners' shares add up to exactly the net income; a table that does not total contains an error. (Dividing Partnership Income)
  • Debiting Cash when a new partner buys an existing partner's interest; the money goes to the selling partner personally, so the partnership records only a capital transfer. (Admitting and Withdrawing Partners)
  • Recording the price paid in a purchase admission instead of the book value of the interest transferred. (Admitting and Withdrawing Partners)
  • Calculating the new partner's share on the old total capital instead of the total capital after the new investment. (Admitting and Withdrawing Partners)
  • Sharing a bonus in the capital ratio or equally when the agreement's income ratio should be used. (Admitting and Withdrawing Partners)
  • On a withdrawal, splitting the bonus using the original three-partner ratio including the retiring partner, instead of the remaining partners' ratio between themselves. (Admitting and Withdrawing Partners)
  • Distributing the final cash in the income ratio instead of according to the partners' capital balances. (Liquidation and the Statement of Partners' Equity)
  • Paying the partners before the creditors; liabilities are always paid before any cash goes to partners. (Liquidation and the Statement of Partners' Equity)
  • Forgetting to remove accumulated amortization when selling equipment, so the gain or loss on realization is wrong. (Liquidation and the Statement of Partners' Equity)
  • Ignoring a partner's debit (deficiency) balance and distributing all cash to the others without first absorbing it in their income ratio. (Liquidation and the Statement of Partners' Equity)
  • Listing drawings or salary allowances in the balance sheet's equity section; only each partner's ending capital appears there. (Liquidation and the Statement of Partners' Equity)
  • Saying shareholders own the corporation's assets. The corporation owns its assets; shareholders own shares in the corporation. (Corporations and Classes of Shares)
  • Mixing up authorized and outstanding shares, for example using the 10,000 authorized preferred shares to calculate a dividend when only 2,000 are outstanding. (Corporations and Classes of Shares)
  • Thinking preferred shareholders are guaranteed a dividend every year. No shareholder is owed a dividend until the board declares one; cumulative only means missed amounts must be caught up before common gets paid. (Corporations and Classes of Shares)
  • Believing directors and shareholders are the same people. They can overlap in a small private company, but they are different roles: shareholders elect the directors. (Corporations and Classes of Shares)
  • Using par value or "contributed surplus in excess of par" for a Canadian share issue. CBCA and OBCA shares have no par value. (Corporations and Classes of Shares)
  • Crediting Cash instead of Common Shares Subscribed when a subscription is signed. No cash moves when the contract is signed; the corporation records a receivable. (Issuing, Subscribing and Repurchasing Shares)
  • Crediting Common Shares before the subscription is fully paid. Shares are issued only when the last instalment is collected. (Issuing, Subscribing and Repurchasing Shares)
  • Removing repurchased shares at the price paid instead of the average issue price, which leaves the wrong balance in Common Shares. (Issuing, Subscribing and Repurchasing Shares)
  • Recording a repurchase above average as a loss on the income statement, or debiting Retained Earnings before using up the available contributed surplus. (Issuing, Subscribing and Repurchasing Shares)
  • Recording a share issue for land at the seller's asking price or the vendor's original cost instead of fair value. (Issuing, Subscribing and Repurchasing Shares)
  • Making a journal entry on the date of record. The liability was already recorded at declaration; the record date only fixes who gets paid. (Cash Dividends and Preferred Shareholders)
  • Recording dividends in arrears as a liability. Nothing is owed until the board declares a dividend, so arrears go in the notes only. (Cash Dividends and Preferred Shareholders)
  • Debiting Dividends Expense. Dividends are distributions of profit to owners, so they reduce retained earnings and never appear on the income statement. (Cash Dividends and Preferred Shareholders)
  • Forgetting the arrears for cumulative preferred shares, or adding arrears for non-cumulative shares, when splitting a dividend. (Cash Dividends and Preferred Shareholders)
  • Calculating the preferred dividend on authorized shares instead of outstanding shares. (Cash Dividends and Preferred Shareholders)
  • Crediting a liability for a declared stock dividend. Stock Dividends Distributable is a share capital (equity) account, because no asset will be paid out. (Stock Dividends, Stock Splits and Shareholders' Equity)
  • Making a journal entry for a stock split. A split only changes the number of shares; a memorandum entry is enough. (Stock Dividends, Stock Splits and Shareholders' Equity)
  • Saying a stock dividend reduces total equity. It moves an amount from retained earnings to share capital, so total equity is unchanged. (Stock Dividends, Stock Splits and Shareholders' Equity)
  • Valuing a small stock dividend at the shares' average issue price instead of their market value on the declaration date. (Stock Dividends, Stock Splits and Shareholders' Equity)
  • Thinking a split or stock dividend makes shareholders richer. Their percentage ownership and the company's total value are unchanged; only the number of slices changes. (Stock Dividends, Stock Splits and Shareholders' Equity)
  • Putting dividends on the income statement as an expense. They are deducted on the statement of retained earnings. (Financial Statements for a Corporation)
  • Leaving out income tax expense, or putting it above income from operations, on a corporation's income statement. (Financial Statements for a Corporation)
  • Listing all equity as one Capital line. A corporation must show each class of share capital separately, with authorized and issued numbers, then contributed surplus, then retained earnings. (Financial Statements for a Corporation)
  • Treating retained earnings as cash available to pay a dividend. Retained earnings is a source of financing already invested in assets; the company may have very little cash. (Financial Statements for a Corporation)
  • Using the closing share count in EPS when shares were issued during the year, instead of the weighted average, or forgetting to subtract preferred dividends. (Financial Statements for a Corporation)

Practice test

27 questions from across the unit. Each one shows the lesson it comes from.

  1. Partnerships: Types and Formation
    1
    Without asking his partner, a partner in a catering business signs a $7,000 contract to rent a commercial kitchen. The partnership is bound by the contract because of:
  2. Partnerships: Types and Formation
    2
    A partner contributes accounts receivable of $10,000, of which $700 are expected to be uncollectible. How are they recorded?
  3. Partnerships: Types and Formation
    3
    Which is a disadvantage of the partnership form compared with a corporation?
  4. Dividing Partnership Income
    4
    Put the steps for dividing partnership income in the correct order.
    1. 1Close Income Summary to each partner's capital account
    2. 2Check that the partners' shares total the net income
    3. 3Share the remainder (or deficit) in the income ratio
    4. 4Allocate each partner's salary allowance
    5. 5Allocate interest on each partner's capital
  5. Dividing Partnership Income
    5
    Same agreement as the previous question (salaries $20,000 and $15,000; 5% interest on $40,000 and $20,000; remainder equally), but net income is only $30,000. What is B's total share? Answer to the nearest dollar.
    $
  6. Dividing Partnership Income
    6
    Match each income-sharing basis to what it rewards.
    Salary allowances
    Interest on capital
    Fixed income ratio
    Equal sharing with no agreement
  7. Admitting and Withdrawing Partners
    7
    W buys X's entire partnership interest (book value $45,000) by paying X $52,000 personally. Which entry does the partnership make?
  8. Admitting and Withdrawing Partners
    8
    A, B and C have capital balances of $40,000, $40,000 and $20,000 and share income 2:2:1. C retires and is paid $26,000 from partnership cash. What is A's capital balance afterwards? Answer to the nearest dollar.
    $
  9. Admitting and Withdrawing Partners
    9
    When a new partner invests less than the capital credit he receives, what is the difference called under the bonus method?
  10. Liquidation and the Statement of Partners' Equity
    10
    Put the steps of liquidating a partnership in order.
    1. 1Allocate the gain or loss on realization in the income ratio
    2. 2Distribute the remaining cash according to capital balances
    3. 3Pay the liabilities
    4. 4Sell the non-cash assets
  11. Liquidation and the Statement of Partners' Equity
    11
    A partnership sells its non-cash assets for more than their book value. The gain is:
  12. Liquidation and the Statement of Partners' Equity
    12
    What is the name for a debit balance in a partner's capital account during liquidation?
  13. Corporations and Classes of Shares
    13
    Which feature of a corporation most directly explains why investors who will never work in the business are willing to buy its shares?
  14. Corporations and Classes of Shares
    14
    Put these in order of who is paid first if a corporation is liquidated (dissolved and its assets sold).
    1. 1Preferred shareholders
    2. 2Creditors
    3. 3Common shareholders
  15. Corporations and Classes of Shares
    15
    Canadian corporations incorporated under the CBCA or OBCA issue shares with no ____ value. Fill in the blank.
  16. Issuing, Subscribing and Repurchasing Shares
    16
    A CBCA corporation issues 10,000 common shares for $18 cash each. Which entry is correct?
  17. Issuing, Subscribing and Repurchasing Shares
    17
    Put the entries for a share subscription in the order they are recorded.
    1. 1Dr Cash; Cr Subscriptions Receivable (down payment)
    2. 2Dr Common Shares Subscribed; Cr Common Shares
    3. 3Dr Cash; Cr Subscriptions Receivable (final instalment)
    4. 4Dr Subscriptions Receivable; Cr Common Shares Subscribed
  18. Issuing, Subscribing and Repurchasing Shares
    18
    When a corporation repurchases shares for more than their average issue price and has no contributed surplus from earlier repurchases, which account is debited for the excess?
  19. Cash Dividends and Preferred Shareholders
    19
    On which date does a corporation first record a liability for a cash dividend?
  20. Cash Dividends and Preferred Shareholders
    20
    Put the dividend dates in the order they occur.
    1. 1Date of record
    2. 2Date of declaration
    3. 3Date of payment
  21. Cash Dividends and Preferred Shareholders
    21
    Name the legal test that stops directors from declaring a dividend that would leave the corporation unable to pay its debts as they come due.
  22. Stock Dividends, Stock Splits and Shareholders' Equity
    22
    Which transaction reduces total shareholders' equity?
  23. Stock Dividends, Stock Splits and Shareholders' Equity
    23
    Between declaring and distributing a stock dividend, a corporation prepares a balance sheet. Where does Common Stock Dividends Distributable appear?
  24. Stock Dividends, Stock Splits and Shareholders' Equity
    24
    Before a 10% stock dividend, Priya owns 500 of a company's 50,000 shares (1%). What does she own afterward?
  25. Financial Statements for a Corporation
    25
    A corporation's opening retained earnings were $412,000. Net income was $95,000, and the board declared dividends of $30,000. What is closing retained earnings, to the nearest dollar?
    $
  26. Financial Statements for a Corporation
    26
    Where do dividends declared appear in a corporation's financial statements?
  27. Financial Statements for a Corporation
    27
    Which line appears on a corporation's income statement but not on a sole proprietorship's?

Endless drill

Fresh numbers every time, for the calculation questions in this unit.

Endless drillnew numbers every time

Generating a problem…

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