Joe Smith Owns a Book Store as the Sole Proprietor

question 118

Multiple Choice

Joe Smith owns a book store as the sole proprietor. He is also a partner in a hotel, which borrowed $100,000 from the bank. Which of the following statements is true?

• A) Because of the concept of limited liability, he can lose only what he has invested in the hotel.
• B) The book store assets will only be available to the bank if the book store is operated by Smith in conjunction with the hotel.
• C) The bank can look to the assets of the book store to pay off a debt.
• D) The bank can only go after the assets of the book store if Smith was the actual person who negotiated the loan with the bank.
• E) Although the bank can go after Smith's personal assets, they cannot go after the assets of the book store because the book store is a separate legal entity from Smith.

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Definitions:

Nonrecurring Items

Expenses or incomes that appear infrequently or irregularly on the financial statements, not expected to recur in the foreseeable future.

Revenue Recognition

An accounting process detailing how and when revenue is earned and reported, influencing financial statements.

Bond Interest Earned

The income received by bondholders for their investment, typically paid semi-annually.

Interest Expense

The cost incurred by an entity for borrowed funds, payable over a specific period, typically shown on the income statement.