Which of the Following Statements Is Not a Requirement of the Substantial

question 206

Multiple Choice

Which of the following statements is not a requirement of the substantial economic effect test?

• A) Income, gains, losses, and deductions must be allocated to the partners in accordance with their capital contributions.
• B) An allocation of income must increase the partner's capital account balance, and an allocation of deduction must decrease the partner's capital account balance.
• C) A partner with a negative capital account balance must "restore" that capital account, generally by contributing cash to the partnership.
• D) On liquidation of the partner's interest in the partnership, the partner must receive assets that have a fair market value equal to that partner's (positive) capital account balance.
• E) All of the above statements are requirements of the substantial economic effect test.

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Definitions:

Units-Of-Activity Method

A method of depreciation that provides for depreciation expense based on each unit of activity of a fixed asset.

Depreciable Cost

The total cost of a tangible asset minus its estimated salvage value, representing the amount subject to depreciation over the asset's useful life.

Estimated Output

The anticipated quantity of products or services that a business expects to produce over a certain period.

Initial Cost

The original cost of acquiring an asset, including the cost of purchase and other expenses necessary to get the asset ready for its intended use.