Chuck,Howard,and Ben Decide to Start a Business Venture,developing and Distributing

question 143

Multiple Choice

Chuck,Howard,and Ben decide to start a business venture,developing and distributing educational software.For tax reasons,they do not incorporate.Each contributes $10 000,and Howard also contributes a truck and his programming expertise.They agree that all three will be actively involved in the day-to-day management of the business.To determine their rights and obligations,they enter into a one-page agreement that provides only that each of Chuck,Howard,and Ben will receive 33.3% of the profits but also states specifically they are not to be viewed as partners.Based on these facts,which of the following statements is true?

• A)Chuck,Howard,and Ben will not be considered partners because of their express intention in their agreement.
• B)Chuck,Howard,and Ben will be considered partners in the eyes of the law,because they share profits and are involved in the management of the business.
• C)Chuck,Howard,and Ben will be considered partners,but someone claiming against the partnership will only be able to collect 33.3% from any one partner because of the agreement.
• D)Chuck,Howard,and Ben are not partners because they do not share profits in proportion to their capital contributions.
• E)Chuck,Howard,and Ben are not partners because to be partners they must be professionals,such as dentists,lawyers,or doctors.

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Definitions:

Time Period Assumption

An accounting principle that states a business operation can be divided into discrete time periods, such as months, quarters, or years for reporting purposes.

GAAP

Generally Accepted Accounting Principles, which are a set of rules and guidelines that companies must follow when preparing their financial statements in the U.S.

Accrual-Basis Accounting

An accounting method where revenue is recorded when earned and expenses are recorded when incurred, regardless of cash flow.

Unearned Revenue

Income received by a business for goods or services yet to be provided, often recorded as a liability on the balance sheet until the revenue is earned.