 In this presentation, we will take a look at multiple choice questions related to partnerships. First question. Mutual agency means A. Unlimited liability B. Partners are taxed on their personal form 1040 C. All partners must agree before partnership can make a decision for the partnership D. The partnership has a limited life E. Any partner can commit or bind the entire partnership in contracts that are business related. Okay, let's go through this again and see if we can eliminate some options. We have Mutual agency means A. Unlimited liability. No. I mean, and again, when we think of Mutual agency, remember we're on the partnership chapter. We're probably thinking, okay, Mutual agency must have something to do with partnerships in this context, and it could have other meanings in other areas, you know, agency issues, but in this context, we're in the partnership chapter, so we're going to say it probably has something to do with partnerships. A general partnership has unlimited liability, but not necessarily as a result of Mutual agency that could exaggerate the problem. That could make the problem worse and some, but it's not that, so I'm going to cross that out. We're going to say B says partners are taxed on their personal form 1040. Again, in a partnership that's typically true, it's a flow through entity, but has nothing to do with the agency issue. So we've got to keep those kind of things straight. That's going to be a partnership characteristic, but not what we're looking for. C says all partners must agree before the partnership can make a decision for the partnership. Now, we might think that a lot of people when we talk about partnerships think that that's probably, you know, true, not necessarily, but I'm going to keep that for now, kind of like it's all a democratic thing. You got every partner needs to get in and vote before they make a decision. And you would think that, well, we'll go back to that in a second. And D says the partnership has a limited life. It does once again, but it has nothing to do, that has nothing to do with Mutual agency. So a characteristic of partnerships has nothing to do with Mutual agency. So I'm going to cross that out. E says any partner can commit or bind the entire partnership in contracts that are business related. And that sounds pretty good too. So I'm going to leave C and E and note between the two. We're kind of looking at the two that are more detailed answers, which sometimes is the case when we're talking about definition type questions. Like if you have a bunch of short answers and you've got one or two that are pretty long and detailed and look like very specific as if they're trying to eliminate any options that are untrue, then maybe that long specific answer is the right one. So we're left with C and E. And we got the question, Mutual agency means either C, all partners must agree before the partnership can make a decision for the partnership or E. Any partner can commit or bind the entire partnership in contracts that are business related. So note those are kind of opposite to each other. A is basically saying all the partners must have a committee and some kind of democratic everybody votes on it and makes a unanimous agreement on something and E's basically saying any partner can make a decision without discussing it with anybody else. And of those two, E's actually correct what can happen. And it doesn't mean that means what does happen in a partnership. It might be a partnership in which if there's only two partners, you might have two people that have to get together on every decision. But note that if you're making decisions on a daily basis, like there's not enough we need to buy more milk or something to serve our coffee shop or something like that. Then clearly you don't need two people to make that decision. One person can make that. I mean an employee can make that decision. You don't need two people. So the real question is how big of a decision do you need it to be before you have a committee between the partners? And if you have more partners, of course, then it's a problem to have everybody get together to make every little decision. It's just a point of what decisions you need to have people get together. And any kind of partnership is kind of that way. So E's going to be the correct answer then. So question and answer once again. Mutual agency means E, any partner can commit or bind the entire partnership in contracts that are business related. Next question. The draws account, accounts are, A, let's read that again. The draws accounts are, A, closed to each partner's capital account with a credit. B, closed each partner's capital account with a debit. C, is not closed. D, increased by partner's share of net income. Or E, decreased by partner's share of net income. Okay, so we'll go through this again, see if we can use the process of elimination. The draws accounts are, A, closed to each partner's capital account with a credit. Now note that the draws is basically those, that means, that's how much has been taken out of the company or the business, the partnership. Hopefully what happens is the partnership is generating revenue and then increasing capital accounts of the partners. And then the partners are drawing out money for their personal use. Basically they're kind of like the revenue of running the partnership. And so the draws is just tracking the amount that's been taken out by the partners. And so it is a temporary account and typically will be closed out. So A, it is closed out. We might get confused if it's a debit or credit though. So I'm gonna keep A sounds pretty good. B says closed each partner's capital account with a debit. So again, these two, if we see something like this happening, we could say, these two are very similar, but difference between debit and credit. If I go through word for word, pretty much same thing, difference, debit or credit. That means that one of those two could quite possibly be the answer. C says is not closed and that's not true, it is closed. And then D says increased by partner's share of net income. And E says decreased by partner's share of net income. And again, we've got those two things that are very similar there. We got, well, here's the same exact thing, except one says increase or decrease. So either one of these two are right or one of these two are right. Meaning that either the net income is closed out to the draws account or the draws account are closed out to the capital account. And the net income is not closed out to the draws account. It's closed out to the capital accounts, so these two are not right. So it's between A and B. So once again, the draws accounts are either A closed to each partner's capital account with a credit. Or checklist each partner's capital account with a debit. Now if we think about the journal entry, if we think about a trial, we need to know what their normal balance is to answer this question typically. So if we think about a trial balance, we can have the capital account which has a credit balance. So capital has a credit balance and the draws then are bringing down total capital and actually have a debit normal balance. So to bring the draws down to zero, we would have to make it go down doing the opposite thing to it, credit draws and debit the capital account. So we've got to credit the draws and debit the capital account. What that will do is bring draws to zero and it will bring the capital account down which makes sense capital account representing what is owed to the owner and whatever is owed to the owner should go down by the amount that the owner took out for their personal use. So closed to each partner's capital account with a credit or closed to each partner's capital account with a debit. So I think what they want here is a closed to each partner's capital account with a credit meaning we're closing the draws account out with a credit. But that's a little confusing because obviously we will have a debit as well to the capital account. So the draws account will be closed with a credit. So that's going to be the final answer here. In any case, the draws accounts are a closed to each partner's capital account with a credit.