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CSS Financial and Cost Accounting P-1 QUESTION #1200
Question 1
A partnership decides to incorporate into a private company. What happens to the partners' equity accounts?
  • They are closed and converted into common stock.✔️
  • They are retained in the company's balance sheet.
  • They are written off as expenses.
  • They are transferred into the retained earnings account.
Correct Answer Explanation
When a partnership incorporates, the legal entity changes. The partners' equity accounts are closed out, and the total equity is converted into the new company's share capital (common stock). Each partner's equity balance is typically used to determine the number of shares they receive in the new corporation.