When a Partnership Is Insolvent and a Partner Has a Deficit

question 1

Multiple Choice

When a partnership is insolvent and a partner has a deficit capital balance, that partner is legally required to:

• A) declare personal bankruptcy.
• B) initiate legal proceedings against the partnership.
• C) contribute cash to the partnership.
• D) deliver a note payable to the partnership with specific payment terms.
• E) None of the above. The partner has no legal responsibility to cover the capital deficit balance.

---

Definitions:

Variable Costs

Costs that vary directly and proportionally with the level of production or sales volume, such as raw materials and direct labor costs.

Fixed Costs

Charges that stay the same, no matter the production or sales figures, such as rental fees, employee salaries, and insurance premiums.

Variable Utilities Cost

Expenses for utilities such as electricity and gas that vary in proportion to a company’s level of operation or production activity.

High-low Method

A technique used in managerial accounting to estimate fixed and variable costs associated with production.