If a Partnership Contract Provides for Interest at 10% Annually

question 14

Multiple Choice

If a partnership contract provides for interest at 10% annually on each partner's investment, the interest:

• A) Is an expense of the business.
• B) Is ignored when earnings are not sufficient to pay interest.
• C) Legally becomes a liability of the partnership.
• D) Must be paid in cash.
• E) Provides for the sharing of a portion of the partnership earnings in the capital ratio.

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Definitions:

Explicit Costs

Direct, out-of-pocket payments for expenses incurred in conducting business, such as wages and materials.

Nonexpenditure Costs

Costs not directly involving monetary payment but may include time, effort, or loss of opportunity.

Economic Cost

A payment that must be made to obtain and retain the services of a resource; the income a firm must provide to a resource supplier to attract the resource away from an alternative use; equal to the quantity of other products that cannot be produced when resources are instead used to make a particular product.

Contractual Obligation

A legal requirement that a party must adhere to as stipulated in a contract, enforceable by law.