AICPA Exam CPA-Business Topic 2 Question 90 Discussion

Actual exam question for AICPA's CPA-Business exam

Question #: 90
Topic #: 2

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?

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

BProfits are to be divided equally among the partners.

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

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

Show Suggested Answer

Suggested Answer: C

Choice 'c' is correct. A shortcut computation for operating leverage is the ratio of fixed costs to variable costs. If total cost is $100,000 and variable cost is 40% of total costs (or $40,000), then fixed costs must be 60% (or $60,000). Operating leverage is then calculated as follows:

$60,000/$40,000 = 1.5

Choice 'a' is incorrect. .4 is obtained by dividing $100,000 into the variable cost of $40,000.

Choice 'b' is incorrect. .6 is obtained by dividing total costs into fixed costs.

Choice 'd' is incorrect. 2.5 is obtained by dividing total costs by variable costs.

by Filiberto at Jun 19, 2024, 06:33 AM

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Michell

1 hours ago

But what about Beal's obligation to contribute more capital in case of losses?

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Tatum

9 days ago

I agree with Erick, it's only fair that way.

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Erick

10 days ago

I think profits should be divided based on capital contributions.

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