Certified Public Accountant CPA Questions + Answers Part 7

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QUESTION 11
With respect to the following matters, which is correct if a general partnership agreement is silent?

A. Apartnershipwillcontinueindefinitelyunlessamajorityofthepartnersvotestodissolvethepartnership.
B. Partnershiplossesareallocatedinthesameproportionaspartnershipprofits.
C. A partner may assign his interest in the partnership but only with the consent of the other partners.
D. A partner may sell the goodwill of the partnership without the consent of the other partners when the sale is in the best interest of the partnership.
Correct Answer: B
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. As a general principle of partnership law, as well as under the Revised Uniform Partnership Act, in the absence of an agreement otherwise partnership losses are allocated among partners in the same proportion as partnership profits.
Choice "a" is incorrect. A partnership will dissolve on the death, bankruptcy, incapacity, or other withdrawal of a partner, unless the partners vote to continue. Choice "c" is incorrect. A partner may assign his interest in the partnership at any time without consent of the partners since such an assignment does not make the assignee a partner; instead it merely gives the assignee the assignor's rights to distributions from the partnership. Choice "d" is incorrect. A sale of partnership good will is an extraordinary transaction that requires consent of the partners. A single partner has no authority to make such a sale on his own accord.
QUESTION 12
Which of the following statements is correct concerning liability when a partner in a general partnership commits a tort while engaged in partnership business?
A. Thepartnercommittingthetortistheonlypartyliable.
B. Thepartnershipistheonlypartyliable.
C. Each partner is jointly and severally liable.
D. Each partner is liable to pay an equal share of any judgment.
Correct Answer: C
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Each partner is jointly and severally liable for torts committed by any partner while in the course of partnership business.
Choice "a" is incorrect. All partners may be held liable for a tort committed by a partner in the course of partnership business.
Choice "b" is incorrect. Each partner is liable for torts committed by any partner while in the course of partnership business.
Choice "d" is incorrect. Each partner is liable for the full amount of damages incurred as a result of a partner's tort; the partners are not liable only for their pro rata share.

QUESTION 13
Lark, a partner in DSJ, a general partnership, wishes to withdraw from the partnership and sell Lark's interest to Ward. All of the other partners in DSJ have agreed to admit Ward as a partner and to hold Lark harmless for the past, present, and future liabilities of DSJ. As a result of Lark's withdrawal and Ward's admission to the partnership, Ward:
A. AcquiredonlytherighttoreceiveWard'sshareofDSJprofits.
B. HastherighttoparticipateinDSJ'smanagement.
C. Is personally liable for partnership liabilities arising before and after being admitted as a partner. D. Must contribute cash or property to DSJ to be admitted with the same rights as the other partners.
Correct Answer: B
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. The general rule is that the mere assignment of a partner's interest does not make the assignee a partner. One may become a partner only with the consent of all other partners. Here, all other partner's consented to Ward's becoming a partner. Thus, Ward is a partner with full rights to participate in management.
Choice "a" is incorrect. The general rule is that the mere assignment of a partner's interest does not make the assignee a partner. One may become a partner only with the consent of all other partners. Here, all other partner's consented to Ward's becoming a partner. Thus, Ward is a partner with full partner rights.
Choice "c" is incorrect. An incoming partner is not liable for debts that the partnership incurred before admission beyond the incoming partner's contribution, but is fully liable for debts incurred after becoming a partner.
Choice "d" is incorrect. A partnership is a consensual relationship; there is no requirement of a contribution to become a partner.
QUESTION 14
Unless the partnership agreement prohibits it, a partner in a general partnership may validly assign rights to:
A. Option A B. OptionB

C. Option C D. Option D
Correct Answer: C
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct.
Rules: A partner has no right to assign an interest in partnership property because a partner's rights in partnership property are limited to using the property for partnership purposes. However, a partner does have a right to assign her interest in partnership distributions. The assignee does not become a partner, but merely has a right to receive whatever distributions the assignor would have received. Choices "a", "b", and "d" are incorrect, per the above rules.
QUESTION 15
Cobb, Inc., a partner in TLC Partnership, assigns its partnership interest to Bean, who is not made a partner. After the assignment, Bean asserts the rights to:
A. ParticipateinthemanagementofTLC.
II. Cobb's share of TLC's partnership profits. Bean is correct as to which of these rights?
B. Ionly.
C. II only.
D. IandII.
E. NeitherInorII.
Correct Answer: B
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct.
Rule: The assignee of a partner's interest in the partnership does not thereby become a partner absent the unanimous consent of the other partners. Thus, the assignee has no right to participate in the management of the partnership and has only a right to receive the assignor's share of the partnership profits. Choices "a", "c", and "d" are incorrect, per the above rules.
QUESTION 16
A partner's interest in specific partnership property is:

A. Option A B. OptionB C. Option C D. Option D
Correct Answer: D
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. No - No.
Rule: A partner's interest in specific partnership property is neither assignable to the partner's individual creditors nor is it subject to attachment by the partner's individual creditors. Choices "a", "b", and "c" are incorrect, per the above rule.
QUESTION 17
If no provisions are made in an agreement, a general partnership allocates profits and losses based on the:
A. Valueofactualcontributionsmadebyeachpartner.
B. Numberofpartners.
C. Number of hours each partner worked in the partnership during the year. D. Number of years each partner belonged to the partnership.
Correct Answer: B
Section: Business Environment and Concepts (Volume A) Explanation

Explanation/Reference:
Explanation:
Choice "b" is correct. Absent an agreement to the contrary, all partners have equal rights to share in the profits of the partnership. Choices "a", "c", and "d" are incorrect, per the above Explanation: .
QUESTION 18
Under the Uniform Partnership Act, which of the following statements is(are) correct regarding the effect of the assignment of an interest in a general partnership?
A. Theassigneeispersonallyresponsiblefortheassigningpartner'sshareofpastandfuturepartnershipdebts.
II. The assignee is entitled to the assigning partner's interest in partnership profits and surplus on dissolution of the partnership.
B. Ionly.
C. II only.
D. Both I and II.
E. NeitherInorII.
Correct Answer: B
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. A partner may assign his or her interest in the partnership. The effect of such an assignment is to transfer the partner's right to receive the partner's share of profits or surplus only. Such an assignment does not cause dissolution or make the assignee a new partner. The assignor is still regarded as a partner and is liable for past and future partnership debts. The assignee, since he is not a partner, is not liable for past and future partnership debts. Choice "a" is incorrect. The assignee of an interest in a general partnership is not personally responsible for the assigning partner's share of past and future partnership debts but is entitled to the assigning partner's interest in partnership profits and surplus on dissolution of the partnership. Choice "c" is incorrect. The assignee of an interest in a general partnership is entitled to the assigning partner's interest in partnership profits and surplus on dissolution of the partnership but is not personally responsible for the assigning partner's share of past and future partnership debts. Choice "d" is incorrect. The assignee of an interest in a general partnership is entitled to the assigning partner's interest in partnership profits and surplus on dissolution of the partnership but is not personally responsible for the assigning partner's share of past and future partnership debts.
QUESTION 19
Smith and James were partners in S and J Partnership. The partnership agreement stated that all profits and losses were allocated 60 percent to Smith and 40 percent to James. The partners decided to terminate and wind up the partnership. The following was the balance sheet for S and J on the day of the windup:

Of the total accounts receivable, $10,000 was collected and the remainder was written off as bad debt. All liabilities of S and J were paid by the partnership. The property and equipment are sold for $32,000. Under the Uniform Partnership Act, what amount of cash was distributed to Smith?
A. $25,200 B. $26,000 C. $30,000 D. $34,800
Correct Answer: A
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. Upon termination of the partnership creditors are paid first. After payment of creditors, each partner is deemed to have an account that is charged or credited an amount equal to the partner's contribution plus or minus the partner's share of any profits or losses. The agreement between Smith and James was that profits and losses would be allocated 60% to Smith and 40% to James. The partnership had $82,000 in assets ($40,000 in cash, $10,000 from accounts receivable, and $32,000 from property and equipment). The partnership had $90,000 in liabilities and capital. Of the $82,000 in assets, $24,000 is paid first to creditors. This leaves a balance of $58,000. Smith contributed $30,000 in capital and James contributed $36,000 in capital. With $66,000 owed in capital and only $58,000 available, there is a deficit of $8,000. By agreement, Smith is responsible for 60% of the $8,000 deficit or $4,800.
Smith would be credited an amount equal to his capital ($30,000) minus his share of the loss ($4,800) or $25,200. Only choice "a" reflects this amount. Choices "b", "c", and "d" are incorrect, per the above calculation.
QUESTION 20
Leslie, Kelly, and Blair wanted to form a business. Which of the following business entities does not require the filing of organization documents with the state? A. Limitedpartnership.

B. Jointventure.
C. Limitedliabilitycompany. D. Subchapter S corporation.
Correct Answer: B
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. A joint venture is like a partnership. A partnership or joint venture can be formed without filing any documents with the state. Choice "a" is incorrect. Formation of a limited partnership requires the filing of a certificate of limited partnership with the state.
Choice "c" is incorrect. A limited liability company may be formed only by filing articles of organization with the state.
Choice "d" is incorrect. A corporation, including a Subchapter S corporation, may be formed only by filing articles of incorporation with the state.
QUESTION 21
Under the Revised Uniform Partnership Act, which of the following have the right to inspect partnership books and records?
A. Employees.
B. Formerpartners.
C. Inactive partners.
D. Transferees of partners' interests.
Correct Answer: C
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Every partner in a partnership - whether active or inactive - has the right to inspect the partnership's books and records.
Choice "a" is incorrect. Only a partner has a right to inspect the partnership's books and records; an employee of the partnership has no such right.
Choice "b" is incorrect. Only current partners have a right to inspect the partnership's books and records; former partners do not have such a right.
Choice "d" is incorrect. Only partners have a right to inspect a partnership's books and records. A transferee of a partner's interest has only the partner's right to distributions.
QUESTION 22
Berry, Drake, and Flanigan are partners in a general partnership. The partners made capital contributions as follows: Berry, $150,000; Drake, $100,000; and Flanigan, $50,000. Drake made a loan of $50,000 to the partnership. The partnership agreement specifies that Flanigan will receive a 50% share of profits, and

Drake and Berry each will receive a 25% share of profits. Under the Revised Uniform Partnership Act and in the absence of any partnership agreement to the contrary, which of the following statements is correct regarding the sharing of losses?
A. Thepartnerswillshareequallyinanypartnershiplosses.
B. Thepartnerswillshareinlossesonaproratabasisaccordingtothecapitalcontributions.
C. The partners will share in losses on a pro rata basis according to the capital contributions and loans made to the partnership. D. The partners will share in losses according to the allocation of profits specified in the partnership agreement.
Correct Answer: D
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Under the Revised Uniform Partnership Act, unless agreed otherwise, partners share losses in the same manner that they share profits. Choice "a" is incorrect. Under the Revised Uniform Partnership Act, unless agreed otherwise, partners share losses in the same manner that they share profits. Here, the partners agreed to share profits in a
2:1:1 ratio. Thus, losses will be shared in that manner rather than equally. Choice "b" is incorrect. Under the Revised Uniform Partnership Act, unless agreed otherwise, partners share losses in the same manner that they share profits. They are not shared in accordance with the partners' capital contributions.
Choice "c" is incorrect. Under the Revised Uniform Partnership Act, unless agreed otherwise, partners share losses in the same manner that they share profits. They are not shared in accordance with the partners' capital contributions or loans.
QUESTION 23
Fil and Breed are 50% partners in F&B Cars, a used-car dealership. F&B maintains an average used- car inventory worth $150,000. On January 5, National Bank obtained a $30,000 judgement against Fil and Fil's child on a loan that Fil had cosigned and on which Fil's child had defaulted. National sued F&B to be allowed to attach $30,000 worth of cars as part of Fil's interest in F&B's inventory. Will National prevail in its suit?
A. No,becausethejudgementwasnotagainstthepartnership.
B. No,becauseattachmentofthecarswoulddissolvethepartnershipbyoperationoflaw. C. Yes, because National had a valid judgement against Fil.
D. Yes, because Fil's interest in the partnership inventory is an asset owned by Fil.
Correct Answer: A
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:

Choice "a" is correct. A partner has no right to possess partnership property except for partnership purposes. Thus, a personal creditor of a partner has no right to attach items of partnership property to satisfy a partner's personal debt.
Choice "b" is incorrect. There is no such rule. If the partnership were liable for the individual partner's debt, the cars could be attached and the partnership would not be dissolved. Choice "c" is incorrect. A partner has no right to possess partnership property except for partnership purposes. Thus, a personal creditor of a partner has no right to attach items of partnership property to satisfy a partner's personal debt.
Choice "d" is incorrect. A partner has no right to possess partnership property except for partnership purposes. Thus, a personal creditor of a partner has no right to attach items of partnership property to satisfy a partner's personal debt.
Limited Liability Partnership
QUESTION 24
Which of the following partners of a limited liability partnership (LLP) may avoid personal liability when a partner commits a negligent act?
A. Allthepartners.
B. Thesupervisorofthenegligentpartner.
C. All the partners other than the negligent partner.
D. All the partners other than the supervisor of, and, the negligent partner.
Correct Answer: D
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. LLP partners are liable only for their own negligence and the negligence of anyone who commits a wrongful act under the partner's direct control.
Choices "a", "b", and "c" are incorrect, per the above.
Limited Partnership
QUESTION 25
Green Trees, LP is a limited partnership. Dave is a limited partner. Seeds Today, InC. is a creditor of the limited partnership. Upon dissolution of the partnership, the assets of Green Trees, LP will be distributed to pay:
A. Seeds T oday, Inc., first.
B. Davefirst.
C. Seeds Today, Inc. and Dave.
D. The general partners first.

Correct Answer: A
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct.
Rule: Upon dissolution, the assets of a limited partnership are first used to pay off the outside creditors. Limited partners such as Dave are next in line.
Choices "b", "c", and "d" are incorrect, per the above rule.
QUESTION 26
A limited partnership must have:
A. Onegeneralpartnerandtwolimitedpartners.
B. Allmustbegeneralpartnersandonelimitedpartner. C. One general partner and one limited partner.
D. Alllimitedpartners.
Correct Answer: C
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct.
Rule: A limited partnership must have at least one general partner and one limited partner. Choices "a", "b", and "d" are incorrect, per the above rule. Be careful of answers that include the word "all."
QUESTION 27
Juan is a limited partner in Pet Food and Fun, Limited Partnership. Juan visited Chow, Inc., a local supplier of dog food claiming to be a "partner" in the partnership and negotiated a distribution contract between the supplier and limited partnership on behalf of the partnership.
As a result of these actions, Juan:
A. Haslimitedliabilityasalimitedpartnerinreferencetoallcreditors.
B. HaslimitedliabilityasalimitedpartnertoallcreditorsexceptChow,Inc. C. Has full personal liability to all creditors.
D. None of the above.

Correct Answer: B
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct.
Rule: A limited partner will be considered a general partner with full personal liability only to those that the limited partner transacts with as if he were a general partner. Limited partners have no right to participate in management, such as negotiating contracts on behalf of the limited partnership. The limited partner will retain his status and limited liability to all others that the limited partner has not transacted with on behalf of the partnership.
Choices "a", "c", and "d" are incorrect, per the above rule.
QUESTION 28
Doug was the sole general partner in Heavy Foot, Limited Partnership. While driving to work one morning, Doug died in a car accident. The limited partnership:
A. ContinuestoexistasitwasbeforeDoug'sdeath.
B. DissolvesbyoperationoflawasaresultofDoug'sdeath.
C. Dissolves only by attaining a judicial decree.
D. Converts to a general partnership and all former limited partners become general partners.
Correct Answer: B
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct.
Rule: The death of a general partner will by operation of law, dissolve the limited partnership. Because the dissolution is by operation of law, there is no requirement to attain a judicial decree. Remaining limited partners do not automatically become general partners as a result of the death of the general partner.
Choices "a", "c", and "d" are incorrect, per the above rule.
QUESTION 29
Which of the following statements is correct with respect to the differences and similarities between a corporation and a limited partnership?
A. Stockholdersmaybeentitledtovoteoncorporatemattersbutlimitedpartnersareprohibitedfromvotingonanypartnershipmatters.
B. Stockofacorporationmaybesubjecttotheregistrationrequirementsofthefederalsecuritieslawsbutlimitedpartnershipinterestsareautomaticallyexempt from those requirements.
C. Directors owe fiduciary duties to the corporation and limited partners owe such duties to the partnership.

D. Acorporationandalimitedpartnershipmaybecreatedonlyunderastatestatuteandeachmustfileacopyofitsorganizationaldocumentwiththeproper governmental body.
Correct Answer: D
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Both a limited partnership and a corporation:
1. Can only be created by statute, and
2. Each must file a copy of its certificate with the proper state agency. Choice "a" is incorrect. There are instances in which limited partners do vote on certain partnership matters (e.g., approve new general or limited partners). Choice "b" is incorrect. Limited partnership interests are not automatically exempt from the federal securities laws.
Choice "c" is incorrect. Limited partners do not owe a fiduciary duty to the limited partnership.
QUESTION 30
Aarons Group, Limited Partnership, was formed by three brothers, Aaron, Barry, and Sam. Aaron is the general partner and devotes more than 60 hours per week to the business. Barry and Sam are limited partners who work for different companies having no relationship to the limited partnership. The partners' capital contributions are as follows: Aaron invested 20%. Barry and Sam invested 40% each. During the formation of the limited partnership, the brothers signed an agreement that addresses how the brothers will split profits and losses. At year-end, the limited partnership enjoyed large profits due to high demand for the business' product line.
The profits will be divided:
A. Inproportiontoeachpartner'scapitalcontribution.
B. Accordingtotheagreement.
C. Equally.
D. By determining by the amount of time and labor each partner devoted to the operation of the partnership.
Correct Answer: B
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct.
Rule: Partners in a limited partnership can agree as to how they will split profits and losses, with losses shared up to the amount of the limited partners' capital. Profits and losses are shared on the basis of percentages of capital contributions only in the absence of an agreement otherwise. Choices "a", "c", and "d" are incorrect, per the above rule.

QUESTION 31
Lisa is a limited partner in a limited partnership. Jen, one of the other limited partners, is seeking to sell her interest in the partnership to Karen and allow Karen to become a new limited partner. Which of the following statements is true?
A. Lisamayengageinthemanagementofthelimitedpartnershipwithoutlosingherlimitedliability.
B. JenmaytransferherinterestandmakeKarenanewlimitedpartnerwithouttheapprovaloftheotherpartners. C. Jen may withdraw from the limited partnership without giving notice to the partnership.
D. Lisa has a right to vote on the transferring of interest to and admission of Karen as a limited partner.
Correct Answer: D
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Limited partners have the right to vote on the transfer of interest and admission of a new partner. Admission of a new partner requires unanimous consent. Choice "a" is incorrect. A limited partner who acts as a general partner loses her limited liability status to those she acted as a general partner towards.
Choice "b" is incorrect. Partners can freely transfer their interests in profits and losses to third parties, but the third party cannot become a limited partner without the unanimous consent of the other partners.
Choice "c" is incorrect. Limited partners must give 6 months notice of withdrawal in absence of an agreement to the contrary.
QUESTION 32
Which of the following statements is correct with respect to a limited partnership?
A. Alimitedpartnermaynotbeanunsecuredcreditorofthelimitedpartnership. B. Ageneralpartnermaynotalsobealimitedpartneratthesametime.
C. A general partner may be a secured creditor of the limited partnership.
D. A limited partnership can be formed with limited liability for all partners.
Correct Answer: C
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. In a limited partnership, a general partner may be a secured creditor of the limited partnership.

Choice "a" is incorrect. In a limited partnership, a limited partner may be an unsecured creditor of the limited partnership.
Choice "b" is incorrect. In a limited partnership, a general partner may also be a limited partner at the same time.
Choice "d" is incorrect. In a limited partnership, only the limited partners will have limited liability. A limited partnership must have at least one general partner and general partners have unlimited liability.
(The word "all" makes this option wrong.)
QUESTION 33
In general, which of the following statements is correct with respect to a limited partnership?

A. Alimitedpartnerhastherighttoobtainfromthegeneralpartner(s)financialinformationandtaxreturnsofthelimitedpartnership. B. Alimitedpartnershipcanbeformedwithlimitedliabilityforallpartners.
C. A limited partner may not also be a general partner at the same time.
D. A limited partner may hire employees on behalf of the partnership.
Correct Answer: A
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. A limited partner has rights similar to those of a corporate shareholder; he must be allowed to review financial and tax information of the limited partnership. Choice "b" is incorrect. A limited partnership must have one or more general partners, whose liability is unlimited.
Choice "c" is incorrect. One may be both a general and a limited partner simultaneously. Such a person has all of the rights and liabilities of both a limited partner and a general partner. Choice "d" is incorrect. A limited partner has no management authority, rather he is a passive investor, like a corporate shareholder.
QUESTION 34
In general, which of the following statements is correct with respect to a limited partnership?
A. Alimitedpartnerwillbepersonallyliableforpartnershipdebtsincurredintheordinarycourseofthepartnership'sbusiness.
B. Alimitedpartnerisunabletoparticipateinthemanagementofthepartnershipinthesamemannerasgeneralpartnersandstillretainlimitedliability. C. A limited partner's death or incompetency will cause the partnership to dissolve.

D. A limited partner is an agent of the partnership and has the authority to bind the partnership to contracts.
Correct Answer: B
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. While the general rule is that a limited partner has no liability on partnership debts except to the extent of his agreed-upon contribution, the limited partner will lose this limited liability if he takes part in control of the business, which generally means a limited partner may not manage the business on a day-to-day basis as a general partner could. Choice "a" is incorrect. Limited partners are not personally liable for partnership debts; their liability generally is limited to their contributions.
Choice "c" is incorrect. Death or incapacity of a general partner will cause a dissolution, but the same is not true of a limited partner.
Choice "d" is incorrect. A limited partner is more like a shareholder in a corporation than like a general partner. Limited partners are not agents of their partnerships and have no authority to bind their partnership on contracts.
QUESTION 35
White, Grey, and Fox formed a limited partnership. White is the general partner and Grey and Fox are the limited partners. Each agreed to contribute $200,000. Grey and Fox each contributed $200,000 in cash while White contributed $150,000 in cash and $50,000 worth of services already rendered. After two years, the partnership is insolvent. The fair market value of the assets of the partnership is $150,000 and the liabilities total $275,000. The partners have made no withdrawals. If Fox is insolvent and White and Grey each has a net worth in excess of $300,000, what is White's maximum potential liability in the event of a dissolution of the partnership?
A. $62,500 B. $112,500 C. $125,000 D. $175,000
Correct Answer: C
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Rule: The liability of a limited partner for partnership debts is limited to the extent of the capital, which he has contributed or has agreed to contribute. A general partner, however, is liable for all partnership debts and liabilities.
Choice "c" is correct. In this case, both Grey and Fox are limited partners and, thus, their respective maximum liability for partnership debts may not exceed their contributions ($200,000 each). Because White is a general partner, however, he will be personally liable for the excess of any debt remaining after assets have been applied upon a dissolution. Therefore, White will be liable for $125,000 (the difference between the fair market value of assets ($150,000) and partnership

liabilities ($275,000) at dissolution).
Choices "a", "b", and "d" are incorrect, per the above rule.
QUESTION 36
Harry, Betty, and Jim decide to form a hair salon business. Betty and Jim agree to equally manage the business and have agreed to accept full personal liability for obligations of the business. Harry contributes money to help them get started. Harry does not want any personal liability but does want access to the books and records and to share in the profits. They have all agreed that unanimous consent is needed to transfer their ownership interests. Assume any necessary filings have been made. What type of business entity best reflects the terms of their agreement? The three have formed:
A. Alimitedpartnership.
B. Alimitedliabilitycompany. C. A general partnership.
D. A corporation.
Correct Answer: A
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. A limited partnership best reflects the terms of the parties' agreement. A limited partnership has one or more general partners and one or more limited partners. The general partners are personally liable for partnership obligations and run the business (such as Betty and Jim agreed). A limited partner does not have personal liability for partnership obligations and does not take part in management; however, limited partners have a right to inspect partnership books and records relevant to their interest. Thus, a limited partnership has the attributes that Harry agreed to. Finally, all partners must unanimously consent to a transfer of an ownership interest in a limited partnership, as the parties agreed here. Thus, a limited partnership best reflects the agreement of the parties. Choice "b" is incorrect. Members of a limited liability company are not personally liable for the company's debt. (They may agree otherwise, but this is not a general attribute of a limited liability company.) Because the facts say Betty and Jim each agreed to have full personal liability, a limited liability company does not best reflect the parties' agreement. Choice "c" is incorrect. All partners are personally liable for all obligations of a general partnership. Because the facts say Harry did not accept personal liability, the agreement does not reflect a general partnership.
Choice "d" is incorrect. Corporate shareholders generally are not liable for the corporation's obligations. (They may agree otherwise, but this is not a basic attribute of a corporation.) As the facts say Betty and Jim share full personal liability, the agreement does not reflect a corporation.
QUESTION 37
White, Grey, and Fox formed a limited partnership. White is the general partner and Grey and Fox are the limited partners. Each agreed to contribute $200,000. Grey and Fox each contributed $200,000 in cash while White contributed $150,000 in cash and $50,000 worth of services already rendered. After two years, the partnership is insolvent. The fair market value of the assets of the partnership is $150,000 and the liabilities total $275,000. The partners have made no withdrawals. Unless otherwise provided in the certificate of limited partnership, which of the following is correct if Fox assigns her interest in the partnership to Barr and only White consents to Barr's admission as a limited partner?
A. BarrwillnotbecomeasubstitutedlimitedpartnerunlessGreyalsoconsents.

B. Barrwillhavetherighttoinspectthepartnership'sbooks.
C. The partnership will be dissolved.
D. Barr will become a substituted limited partner because White, as general partner, consented.
Correct Answer: A
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. In the absence of an agreement between all partners, the assignment of a partner's interest does not make the assignee a substitute partner; it merely transfers the assignor's rights to distributions to the assignee.
Choice "b" is incorrect. Absent an agreement among the partners otherwise, an assignment of an interest in a partnership is merely an assignment of the assignor's rights to receive distributions from the partnership and does not give the assignee any right to inspect the partnership's books. Choice "c" is incorrect. Absent an agreement among the partners otherwise, an assignment of an interest in a partnership is merely an assignment of the assignor's rights to receive distributions from the partnership; it does not make the assignee a new partner. Since there is no change in who is a partner, there is no dissolution.
Choice "d" is incorrect. All partners must agree to make someone a partner, not just the general partner.
QUESTION 38
Under the Revised Uniform Limited Partnership Act and in the absence of a contrary agreement by the partners, which of the following events is most likely to dissolve a limited partnership?
A. Amajorityvoteinfavorbythepartners.
B. Atwo-thirdsvoteinfavorbythepartners.
C. A withdrawal of a majority of the limited partners. D. Withdrawal of the only general partner.
Correct Answer: D
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Absent a contrary agreement of the partners, a limited partnership can be dissolved by written consent of all the general partners, withdrawal or death of a general partner, or judicial decree.
Thus, withdrawal of the only general partner would cause dissolution. (There has to be at least one general partner in a limited partnership.)
Choice "a" is incorrect. It takes unanimous written consent of all general partners to dissolve the limited partnership, not majority vote.
Choice "b" is incorrect. It takes unanimous written consent of all general partners to dissolve the limited partnership, not two-thirds vote.

Choice "c" is incorrect. Death or withdrawal of a limited partner does not cause dissolution. Only death or withdrawal of a general partner causes dissolution.
Limited Liability Company
QUESTION 39
Eller, Fort and Owens are members of Venture Associates, LLC. Trent Corp. brought a breach of contract suit against Venture for a contract executed by Eller as an agent of the LLC. If Trent prevails, Trent will generally be able to collect the judgment from:
A. TheLLC'sassetsonly.
B. ThepersonalassetsofEller,FortandOwensjointly.
C. Eller's personal assets only after LLC assets are exhausted. D. Eller's personal assets only.
Correct Answer: A
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct.
Rule: Members of an LLC are not personally liable for the LLC's obligations. Moreover, an agent is not liable on a contract the agent enters into on behalf of a disclosed principal. Here, the contract was entered into by Eller on behalf of Venture, an LLC, and Eller disclosed that he was acting only as an agent of Venture. Thus, Trent Corp. can collect from the LLC'S assets only. Choices "b", "c", and "d" are incorrect, per the above rule.
QUESTION 40
Tim, Peter, and Rick want to form a limited liability company. What document must they file with the state?
A. Operating Agreement. B. ArticlesofIncorporation. C. Bylaws.
D. Articles of Organization.
Correct Answer: D
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:

Choice "d" is correct. The Articles of Organization must be filed with the secretary of state. Choice "a" is incorrect. An operating agreement is an agreement between the members containing provisions relating to management, profit sharing, transferring interests, etC. and does not need to be filed with the state. Choices "b" and "c" are incorrect. Articles of incorporation and bylaws are documents relating to corporations, and they are not required to be filed with the state.
QUESTION 41
The articles of organization for a limited liability company must contain everything, except the following:
A. ThenameoftheentitythatincludessomeindicationitisaLLC.
B. Thenameandaddressoftheregisteredagent.
C. Number of shares authorized and issued.
D. If the company is to be manager managed, a statement to that effect.
Correct Answer: C
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Limited liability companies do not issue "shares" held by shareholders like in a corporation. Instead, members (the owners) are said to have "interests" in the LLC. Choices "a", "b", and "d" are incorrect. These are all required to be included in the articles of organization.
QUESTION 42
Unless there is an agreement to the contrary, the voting power of members in a limited liability company is determined by:
A. Eachmember'ssalary.
B. Eachmember'sshareofprofits.
C. When the member was admitted to the company. D. Each member's capital contribution.
Correct Answer: D
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct.
Rule: Absent an agreement otherwise, all members generally participate in management, and their voting strength is determined in proportion to ownership interest. This is calculated by comparing each member's capital contribution to that of the other members. Choices "a", "b", and "c" are incorrect, per the above

rule.
QUESTION 43
Heather, Erika, and Shelby are members in HES LLC. Heather works 40 hours per week and Erika and Shelby work 20 hours per week. Heather contributed $30,000 to the LLC and Erika and Shelby contributed $60,000 each. Erika and Shelby have each originated 45% of the LLC's business and Heather has originated the other 10%. Absent an agreement to the contrary among the owners, who controls the management of the HES LLC?
A. Heather,becausesheworksthemost.
B. ErikaandShelbyequallybecausetheycontributedthemost.
C. Heather, Erika, and Shelby in proportion to their ownership interests. D. Erika and Shelby, because they originate most of the work.
Correct Answer: C
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct.
Rule: Absent an agreement to the contrary, the members' voting strength is proportionate to their contributions. Choices "a", "b", and "d" are incorrect, per the above rule.
QUESTION 44
Heather, Erika, and Shelby are members in HES LLC. Heather dies. Absent an agreement to the contrary, what is the result?
A. TheLLCmustdissolve.
B. TheLLCceasestoexist.
C. The LLC is dissolved unless the other members consent to continue. D. The LLC continues as though nothing happened.
Correct Answer: C
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Absent an agreement to the contrary, if a member of an LLC dies, the LLC is dissolved unless the other members consent to continue. Choice "a" is incorrect, because the LLC does not have to dissolve upon the death of a member. Choice "b" is incorrect, because the LLC does not cease to exist

immediately. Choice "d" is incorrect, because the LLC does not continue unless the members consent to continue.
QUESTION 45
Heather, Erika, and Shelby are members in HES LLC. Heather works 40 hours per week and Erika and Shelby work 20 hours per week. Heather contributed $30,000 to the LLC and Erika and Shelby contributed $60,000 each. Erika and Shelby have each originated 45% of the LLC's business and Heather has originated the other 10%. Absent an agreement to the contrary, how will the LLC's $120,000 profits be divided among the members?
A. Option A B. OptionB C. Option C D. Option D
Correct Answer: D
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Rule: Absent an agreement to the contrary, the LLC's profits will be divided among the members in proportion to their contributions. Here, Heather's, Erika's and Shelby's contributions were $30,000, $60,000, and $60,000, respectively. Thus, the profits will be divided in a 1:2:2 ratio (20% of $120,000 to Heather; 40% of $120,000 to Erika; and $120,000 to Shelby).
Choice "d" is correct.
Heather Erika Shelby
D. $24,000 $48,000 $48,000
Choices "a", "b", and "c" are incorrect, per the above rule.
QUESTION 46
A member of a limited liability company may generally do all of the following, except:
A. Transferhismembershipinthecompanywithouttheconsentoftheothermembers.

B. Participateinthemanagementofthecompanyabsentanagreementtothecontrary. C. Have limited liability.
D. Order office supplies for the company.
Correct Answer: A
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. The transfer of a member interest requires the consent of the other members. Members may not assign their interest without the other members' consent. Choice "b" is incorrect. Unless the members have agreed to operate as a manager managed limited liability company, all members have the power to participate in management. Choice "c" is incorrect. Members in a limited liability company all have limited personal liability. Choice "d" is incorrect. Unless otherwise agreed, members have the right to manage the every day operations of a limited liability company. This can include the ordering of office supplies.
QUESTION 47
Jeb, a member in J & S LLC, sold his interest in the LLC to Chris without obtaining the other members' consent. Absent an agreement to the contrary, Chris:
A. MayparticipateinthemanagementofJ&S.
II. May receive Jeb's share of J & S's profits.
III. Is not entitled to anything since Jeb did not obtain the other members' consent.
B. Ionly.
C. I and II only.
D. II only.
E. IIIonly.
Correct Answer: C
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Absent an agreement to the contrary, if a member in the LLC sells his interest in an LLC without obtaining the other members' consent, the assignee is only entitled to receive the assignor's share of profits.
Choices "a", "b", and "d" are incorrect, because, absent an agreement to the contrary, although a member of an LLC is allowed to assign his interest in profits and losses, an assignee of a membership interest may not participate in the management of the LLC.
QUESTION 48

Which of the following parties generally has the most management rights?
A. Minorityshareholderinacorporationlistedonanationalstockexchange. B. Limitedpartnerinageneralpartnership.
C. Member of a limited liability company.
D. Limited partner in a limited partnership.
Correct Answer: C
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Unless the articles or operating agreement provides otherwise, all members of the LLC have a right to participate in management. A member of a limited liability company has the most management rights of any of the parties listed. A minority shareholder in a corporation has no management rights (and neither does a majority shareholder). A limited partner has no day-to-day management rights but may have some rights in extraordinary circumstances. It is unclear what a limited partner in a general partnership would even be; the existence of a limited partner would make a partnership a limited partnership and not a general partnership. Choice "a" is incorrect. Stockholders have very limited rights to run the corporation. They generally only have the right to elect directors and to vote on fundamental changes in the corporation. Such fundamental changes would include dissolutions, amendments to the articles, mergers, consolidations, compulsory share exchanges, and sale of substantially all of the corporation's assets. Choice "b" is incorrect. There are no limited partners in a general partnership. There are only general partners. Since there are no limited partners, there are no management rights for limited partners. Choice "d" is incorrect. Limited partners in a limited partnership have very limited rights to participate in the management of the business. In fact, if they do participate in management, they face potential liability to those who thought they were a general partner (i.e., if a limited partner becomes involved in day-to-day management is some way (participating in control), she may be treated as a general partner and lose her limited liability).
Corporation
QUESTION 49
Case Corp. is incorporated in State A. Under the Revised Model Business Corporation Act, which of the following activities engaged in by Case requires that Case obtain a certificate of authority to do business in State B?
A. MaintainingbankaccountsinStateB.
B. CollectingcorporatedebtsinStateB.
C. Hiring employees who are residents of state B.
D. Maintaining an office in State B to conduct intrastate business.
Correct Answer: D
Section: Business Environment and Concepts (Volume A) Explanation

Explanation/Reference:
Explanation:
Choice "d" is correct. A domestic corporation is one created under the laws of a given state. A foreign corporation is a corporation created under the laws of another state. A foreign corporation must obtain a certificate of authority from each state in which it does intrastate business. Choices "a", "b", and "c" are incorrect because maintaining a bank account, collecting debts, and hiring employees who live within a state are not considered to be "doing business" within the state.