Test Prep Test Prep Certifications BUSINESS-ENVIRONMENT-AND-CONCEPTS Questions & Answers

• Question 501:

  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:

  I. Participate in the management of TLC.

  II.

  Cobb's share of TLC's partnership profits. Bean is correct as to which of these rights?

  A.

  I only.

  B.

  II only.

  C.

  I and II.

  D. Neither I nor II.

  Correct Answer: B

  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 502:

  Unless the partnership agreement prohibits it, a partner in a general partnership may validly assign rights to:

  

  A. Option A

  B. Option B

  C. Option C

  D. Option D

  Correct Answer: C

  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 503:

  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. Acquired only the right to receive Ward's share of DSJ profits.

  B. Has the right to participate in DSJ's management.

  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

  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 504:

  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. The partner committing the tort is the only party liable.

  B. The partnership is the only party liable.

  C. Each partner is jointly and severally liable.

  D. Each partner is liable to pay an equal share of any judgment.

  Correct Answer: C

  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 505:

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

  A. A partnership will continue indefinitely unless a majority of the partners votes to dissolve the partnership.

  B. Partnership losses are allocated in the same proportion as partnership profits.

  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

  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 506:

  Gillie, Taft, and Dall are partners in an architectural firm. The partnership agreement is silent about the payment of salaries and the division of profits and losses. Gillie works full-time in the firm, and Taft and Dall each work half time. Taft invested $120,000 in the firm, and Gillie and Dall invested $60,000 each. Dall is responsible for bringing in 50% of the business, and Gillie and Taft 25% each. How should profits of $120,000 for the year be divided?

  A. Gillie $60,000, Taft $30,000, Dall $30,000.

  B. Gillie $40,000, Taft $40,000, Dall $40,000.

  C. Gillie $30,000, Taft $60,000, Dall $30,000.

  D. Gillie $30,000, Taft $30,000, Dall $60,000.

  Correct Answer: B

  Choice "b" is correct. $40,000 - $40,000 - $40,000 (equally).

  Rule: In the absence of an agreement to the contrary, the profits will be shared equally regardless of

  investment of money or time.

  Choices "a", "c", and "d" are incorrect, per the above rule.

• Question 507:

  Lewis, Clark, and Beal entered into a written agreement to form a partnership. The agreement required that the partners make the following capital contributions: Lewis, $40,000, Clark, $30,000, and Beal, $10,000. It was also agreed that in the event the partnership experienced losses in excess of available capital, Beal would contribute additional capital to the extent of the losses. The partnership agreement was otherwise silent about division of profits and losses. Which of the following statements is correct?

  A. Profits are to be divided among the partners in proportion to their relative capital contributions.

  B. Profits are to be divided equally among the partners.

  C. Losses will be allocated in a manner different from the allocation of profits because the partners contributed different amounts of capital.

  D. Beal's obligation to contribute additional capital would have an effect on the allocation of profit or loss to Beal.

  Correct Answer: B

  Choice "b" is correct.

  Rule: Regardless of the contributions and obligations of the partners, unless the partnership agreement

  specifically states otherwise, all partners are entitled to an equal share of the profits.

  Choices "a", "c", and "d" are incorrect, per the above rule.

• Question 508:

  Downs, Frey, and Vick formed the DFV general partnership to act as manufacturers' representatives. The partners agreed Downs would receive 40% of any partnership profits and Frey and Vick would each receive 30% of such profits. It was also agreed that the partnership would not terminate for five years. After the fourth year, the partners agreed to terminate the partnership. At that time, the partners' capital accounts were as follows: Downs, $20,000; Frey, $15,000; and Vick, $10,000. There also were undistributed losses of $30,000. Vick's share of the undistributed losses will be:

  A. $0

  B. $1,000

  C. $9,000

  D. $10,000

  Correct Answer: C

  Rule: Where the partnership agreement is silent, losses are shared in the same proportion as profits.

  Choice "c" is correct. Vick was entitled to 30% of the profits and so will be responsible for 30% of the

  undistributed $30,000 loss, or $9,000.

  Choices "a", "b", and "d" are incorrect, per the above rule.

• Question 509:

  Downs, Frey, and Vick formed the DFV general partnership to act as manufacturers' representatives. The partners agreed Downs would receive 40% of any partnership profits and Frey and Vick would each receive 30% of such profits. It was also agreed that the partnership would not terminate for five years. After the fourth year, the partners agreed to terminate the partnership. At that time, the partners' capital accounts were as follows: Downs, $20,000; Frey, $15,000; and Vick, $10,000. There also were undistributed losses of $30,000. Which of the following statements about the form of the DFV partnership agreement is correct?

  A. It must be in writing because the partnership was to last for longer than one year.

  B. It must be in writing because partnership profits would not be equally divided.

  C. It could be oral because the partners had explicitly agreed to do business together.

  D. It could be oral because the partnership did not deal in real estate.

  Correct Answer: A

  Choice "a" is correct. Under the statute of frauds, an agreement, which by its terms cannot be performed within a year, must be evidenced by a writing containing the material terms and signed by the parties to be charged. Absent a writing, the partnership will be treated as a partnership at will. Choice "b" is incorrect. There is no requirement that partnership agreements be in writing merely because profits will be divided unequally. Choice "c" is incorrect. The statute of frauds requires contracts that cannot by their terms be performed within one year to be evidenced by a writing containing the material terms and signed by the parties to be charged. Choice "d" is incorrect. Whether or not a partnership is to deal in real estate is irrelevant to whether the partnership agreement must be in writing.

• Question 510:

  Which of the following statements is correct regarding the division of profits in a general partnership when the written partnership agreement only provides that losses be divided equally among the partners?

  Profits are to be divided:

  A. Based on the partners' ratio of contribution to the partnership.

  B. Based on the partners' participation in day-to-day management.

  C. Equally among the partners.

  D. Proportionately among the partners.

  Correct Answer: C

  Choice "c" is correct.

  Rule: When the partnership agreement is silent as to how profits are to be divided, they are divided

  equally. Note also that when the agreement is silent, losses are treated similar to profits, there is no

  reverse rule that profits are treated like losses.

  Choices "a", "b", and "d" are incorrect, per the above rule.