ACCT 410: CH 13

Snickers and Opie are partners with capital balances of $90,000 and $50,000, respectively. They agree to admit Sparky as a partner with a 25% interest upon payment of $60,000. Assuming that the partners wish to recognize an intangible asset, what amount of goodwill should be reported?

$10,000 90,000 + 50,000 + 60,000 = 200,000 200,000 x 25% = 50,000 60,000 - 50,000 = 10,000

Partners A and B report average capital balances of $320,000 and $200,000 for the year. The partnership agreement provides for interest at the rate of 10% on the average capital balance and an equal division of the remaining profit of $8,000 for the year. By what amount should B's capital account change for the year?

$24,000 increase Interest + Share Profit 20,000* + 4,000* *200,000 x 20% = 20,000 *8,000 / 2 = 4,000

The changes to the Capital Account include the following elements:

1. Capital contributions 2. Drawings 3. Allocation of partnership profit (loss)

in recording the formation of the partnership, when partners are assigned balances that do not equal their capital contributions, the partners must answer the following two questions:

1. Does the disproportionate capital contribution by one or more partners provide evidence that the newly formed partnership possesses an unrecognized intangible asset? 2. Then, if the answer to question one is "yes," do the partners wish to recognize the intangible asset on the books of the partnership (If either answer is "no," then the partnership will apply the bonus method to allocate total partnership capital into the partners' individual capital accounts. If the answer to both questions is "yes," then the goodwill method will be applied)

Liquidation of a partnership:

1. It may be difficult to estimate the liquidation expenses, thereby limiting the amount of cash that can be safely distributed 2. There may be unreported liabilities that were not properly accrued as of the balance sheet date. The liquidation administrator must, therefore, be conservative in estimating the amount of cash that can safely be disbursed 3. It is not uncommon to assume that no cash will be realized from the sale of assets

the accounting for a liquidation of a partnership is a four-step process:

1. Sell the assets and record the gain (loss) as increases (decreases) to the partners' Capital Accounts in their profit-sharing ration, and subtract any receivables due from partners from their respective Capital Accounts 2. Pay in full the debts of the partnership 3. Eliminate any deficit Capital Account with a cash contribution from the partner (or by offsetting payables, if any, against the deficit balance). If the partner is insolvent, allocate the deficit to the remaining partners in their profit-sharing ratio (repeat this process if the allocation results in other Capital Accounts becoming negative) 4. Distribute the remaining cash to the partners for the remaining amount reported in their Capital Accounts

Accounting issues at four stages of the partnership life cycle:

1. formation 2. operation 3. realignment 4. liquidation

Partnership agreements also typically contain the following general provisions:

1. partnership entity 2. partners as agents of the partnership 3. partnership is liable for actions of partners 4. joint and several liability of partners 5. partner capital accounts 6. transfer of partnership interest

In any partnership critically important factor affecting the resulting accounting is whether the partnership entity is

1. paying or receiving cash or other net assets as part of the realignment transaction 2. the new or retiring partners are engaging in transactions directly with individual partners

Partnerships are not necessarily required to issue financial statements that are prepared in conformity with GAAP, provided:

1. that the partners agree to the use of non-GAAP accounting policies 2. the providers of non-partner capital to the parttnership (e.g., banks) agree to accept non-GAAP-basis financial statements

important differences between the stock-exchange analogy and partnership accounting are:

1. the partners must approve the transfer of any partnership interests to a new partner 2. the fact that the partnerships will sometime look to the value of the exchanges involving incoming/outgoing individual partners and decide to record previously understood intangible assets based on the exchange value

partnership entity:

1. the partnership is a legal entity separate from its partners 2. assets purchased and liabilities incurred are assets and liabilities of the partnership and are not owned or owed by the partners themselves

Which of the following business forms are distinct legal entities separate from their owners? 1. Sole proprietorships 2. Partnerships 3.. Corporations

2 & 3

Partnership is liable for actions of partners:

A partnership is liable for loss as a result of a wrongful act or omission of a partner acting in the ordinary course of business of the partnership or with authority of the partnership

Partner Capital Accounts:

Each partner has a Capital Account to represent his or her interest in the partnership

Transfer of partnership interest:

Each partner has the right to sell his or her partnership interest. The purchaser of such an interest does not have the right to participate in the management of the partnership, however, without the consent of the remaining partners

What is NOT true with respect to the dissolution of a partnership:

If a partner's Capital Account becomes negative as a result of the sale of assets, the partner is relieved of all liability with respect to the partnership

Assume that two individuals agree to form a partnership. Partner A is contributing an operating business that reports net assets of $25,000. Partner B is contributing cash of $35,000. The partners agree that the initial capital of the partnership should be shared equally. What will be the initial balance of the Capital Accounts of the partners assuming that the partners wish to employ the Bonus Method?

Partner A: Partner B:

Assume that two individuals agree to form a partnership. Partner A is contributing an operating business that reports net assets of $25,000. Partner B is contributing cash of $35,000. The partners agree that the initial capital of the partnership should be shared equally. What will be the initial balance of the Capital Accounts of the partners assuming that the partners wish to employ the Goodwill Method

Partner A: $30,000 Partner B: $30,000

Assume that there are three partners in a partnership, A, B, and C. Partner C provides services to the partnership and is entitled to a salary of $60,000. Assume that the partnership revenues less expenses (other than salary to Partner C), amount is $300,000. Finally, assume that the Partnership Agreement provides for a sharing ratio of 40%/40%/20% for Partners A, B, and C, respectively. How much profit should be allocated to each partner?

Partner A: $96,000 Partner B: $96,000 Partner C: $108,000 300,000 - 60,000 = 240,000 Partner A & B: 240,000 x 40% = 96,000 Partner C: 240,000 x 20% = 48,000 + 60,000 salary = 108,000

Revaluation of net assets prior to partnership realignment:

Partnership net assets can only be written down to net realizable value and cannot be increased if market value exceeds their book value

Recognition of partnership profit or loss:

The net of revenues less expenses is always allocated to the partners in proportion to their relative Partner Capital Accounts

For the partnership to recognize previously unrecognized intangible assets during a partnership realignment:

The same two questions in a partnership formation must be answered. If the answer to one is "no," then the partnership will simply reallocate (transfer) the selling partner's capital interest into the new partner's individual Capital Accounts. If the answer to both questions is "yes," then the partnership will apply the goodwill method to allocate the total partnership capital into the partner's individual Capital Accounts

the partnership agreement does not include

a requirement that all financial statements will be prepared in accordance with GAAP

Joint and several liability of partners:

all partners are jointly and severally liable for all obligations of the partnership

Limited liability partnership (LLP)

all partners have a form of limited liability, similar to that of the shareholders of a corporation. However, unlike corporate shareholders, the partners have the right to manage the business directly rather than through a board of directors

the goal of the partnership formation process is to

allocate the total partnership capital among the partners forming the partnership

Sharing Ratio

allocation of profits/losses to the partners' Capital Accounts

Define partnership

an association of two or more individuals to co-own and operate a business

the partners are personally liable for the debts of the partnership if the assets

are not sufficient to repay all of the obligations

Partners as agents of the partnership:

each partner can act for the partnership

At what amount should noncash property that is contributed to a partnership be credited to the contributing partner's capital account?

fair value of the contributing partners assets

Bonus method

only records the identifiable net assets contributed by the partners in the partnership's total net assets

The formation, ongoing operation, and ultimate dissolution of the partnership are governed by a

partnership agreement

a common practice when admitting a new partner to a partnership is to

revalue the partnership net assets to fair value

When partnership net assets are revalued in anticipation of a realignment transaction, the resulting gains and losses accrue only to the partners who have an ownership interest in the entity during the period in which

the net assets changed in value

Goodwill method

the total partnership net assets include the identifiable net assets contributed by the partners, plus an additional amount assigned to goodwill

If net assets are measured at fair value on both sides of the realignment transaction,

then the parties to the realignment have the best possible chance of allocating partner Capital Accounts in a fair and unbiased manner