Partnership Agreement Issues [AICPA Adapted]A partnership involves an association between...

Partnership Agreement Issues [AICPA Adapted]

A partnership involves an association between two or more persons to carry on a business as co-owners for profit. Items 1 through 10 relate to partnership agreements.

The statement of facts for Parts A and B are followed by numbered sentences that state legal conclusions relating to those facts. Determine whether each legal conclusion is correct or not and mark it with the letter Y for yes, correct, or N for no, not correct.

Part A

Adams, Webster, and Coke were partners in the construction business. Coke decided to retire and found Black, who agreed to purchase his interest. Black was willing to pay Coke $20,000 and promised to assume Coke’s share of all firm obligations.

Required (Use Y for yes and N for no)

1. Unless the partners agree to admit Black as a partner, she could not become a member of the firm.

2. The retirement of Coke would cause a dissolution of the firm.

3. The firm’s creditors are third-party beneficiaries of Black’s promise to Coke.

4. Coke would be released from all liability for the firm’s debts if Black purchased his interest and promised to pay Coke’s share of firm debts.

5. If the other partners refused to accept Black as a partner, Coke could retire, thereby causing a dissolution.

Part B

Carson, Crocket, and Kitt were partners in the importing business. They needed additional capital to expand and located an investor named White, who agreed to purchase a one-quarter interest in the partnership by contributing $50,000 in capital to the partnership. Before White became a partner, several large creditors had previously loaned money to the partnership. The partnership subsequently failed, and the creditors are now attempting to assert personal liability against White.

Required (Use Y for yes and N for no)

6. White is personally liable on all of the firm’s debts contracted subsequent to his entry into the firm.

7. Creditors of the partnership prior to the admission of a new partner automatically continue to be creditors of the partnership after the admission of the new partner.

8. Creditors of the partnership that existed prior to White’s entry can assert rights against his capital contribution.

9. White has personal liability for firm debts existing prior to his entry into the firm.

10. White must remain in the partnership for at least one year to be subject to personal liability.