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:

Sales Volume

The quantity of units sold within a given period, a key factor in assessing a company's performance and profitability.

Mixed Cost

A cost that contains both variable and fixed cost components.

High-low Method

A method in cost accounting that identifies the fixed and variable elements of a cost by examining the lowest and highest levels of activity.

Inspection Cost

The expenses involved in ensuring products or services meet a company's standards of quality, including the costs of labor and equipment used in the inspection process.