Advanced Accounting Exam 2 (not on my birthday this time lol ^.^)

interest on capital balances

-the partners divide some or all of the $100,000 [profit] among themselves based on the relative balances they have maintained in their capital accounts -this method recognizes the contribution of partners' capital investments to the partnership's profit-generating capacity and requires the allocation of profits based on a fixed rate multiplied by the partner's account balance.

preselected ratio

-usually the result of negotiations between the partners -ratios for profit distributions may be based on the percentage of total partnership capital, time, and effort invested in the entity, or a variety of other factors

new partner's proportion of the value of the partnership's net book value

= (Prior capital of existing partners + investment of new partner) x Percentage of capital to new partner

profit distribution plans

Four major profit distribution methods used by partnerships: 1) Preselected ratio 2) Interest on capital balances 3) Salaries to partners 4) Bonuses to partners -these distributions should not be included on the partnership's income statement regardless of how the profit is distributed -are recorded directly into the partner's capital accounts, not treated as expense items

The partnership creditors should seek recovery of their claims

From the partnership, including additional contributions from F and S. Explanation: After the settlement of accounts, partners are required to make additional contributions to the partnership to satisfy partnership obligations.

(Matching 6) Partner who actively participates in the partnership management and who is personally liable for the partnership's debts.

General partner

The partnership creditors

Have first claim to the partnership assets before any partner's personal creditors have rights to those assets. Explanation: Partnership creditors have first claim to partnership assets

(Matching 5) Cost not deducted to determine the partnership's net income for the period.

Interest on capital accounts

(Matching 2) Partner who cannot actively participate in the management of the partnership.

Limited partner

salary

a fixed amount of company profits allocated to a given partner

transferable interest

a partner's share of the profits and losses of the partnership and the right to receive distributions, including any liquidating distribution

entity concept

a partnership can sue or be sued and its property belngs to the partnership, not to any individual partner

bonus

a portion of profits allocated to a partner based on a predetermined performance formula

partners' accounts

capital, drawing, and loan accounts

statement of partnership authority

describes the partnership and identifies the specific authority of partners to transact specific types of business on behalf of the partnership -filed with the secretary of state -a notice of any limitations on the rights of specific partners to enter into specific types of transactions

lump-sum liquidation [of a partnership]

one in which all assets are converted into cash within a very short time, creditors are paid, and a single, lump-sum payment is made to the partners for their capital interests

admission of a new partner

required to be subject to the unanimous approval of the existing partners

buyout price

the estimated amount if (1) the assets were sold for a price equal to the higher of the liquidation value of the value based on the sale of the entire business as a going concern without the disassociated partner and (2) the partnership was wound up at that time with payment of all the partnership's creditors and termination of the business

disassociation

the retirement or withdrawal of a partner from a partnership

dissolution (of a partnership)

the termination of a partnership Events that cause dissolution and winding up: - In an at-will partnership, a partner's express notice to leave the partnership. - An event that makes it unlawful to carry on a substantial part of the partnership business. - A judicial determination. - In a partnership for a definite term or specific undertaking: a) When after a partner's death or wrongful disassociation, at least half of the remaining partners decide to wind up the partnership business. b) When all of the partners agree to wind up the business. c) When the term or specific undertaking has expired or been completed.

book value of a partnership

the total amount of partnership capital, which is just another name for the partnership's net assets (total assets minus total liabilities)

installment liquidation

typically requires several months to complete and includes periodic, or installment, payments to the partners during the liquidation period because they require funds for personal purposes

*bonus method*

used to record the admission of a new partner records an increase in the partnership's total capital only for the capital amount the new partner invests, in accordance with GAAP

statement of partners' capital

usually prepared to present the changes in the partners' capital accounts for the period

(Matching 11) Item that occurs when the new partner's investment equals his or her capital credit and an increase occurs in the existing partners' capital balances.

Existing partners' goodwill recognized

(Matching 13) Recognition of an intangible asset upon a new partner's admission to the partnership that results in increases in the existing partners' capital balances.

Existing partners' goodwill recognized

schedule of safe payments to partners

- one of two methods for ensuring fairness and equality in making cash distributions in an installment liquidation - a new scedule must be prepared each time cash becomes available for distribution to the partners

cash distribution plan

- one of two methods for ensuring fairness and equality in making cash distributions in an installment liquidation - is *prepared only once* at the beginning of the liquidation process

loss absorption potential (LAP)

- the maximum loss thst the partnership can realize before that partner's capital account balance is extinguised - equals partner's capital account balance divided by partner's loss share

goodwill recognition method (sometimes called the revaluation method)

-Increase the book values of existing net assets to their market values. -*Recognize previously unrecorded goodwill.* -Increase the existing partners' capital accounts for their respective shares of the increase in the book values of the net assets and the recorded goodwill. -The partnership's total resulting capital reflects the existing capital balances plus the amount of asset revaluation plus the new partner's investment.

*revaluation method* (sometimes called the goodwill recognition method)

-Increase the book values of existing net assets to their market values. -*Record [previously] unrecognized goodwill.* -Increase the existing partners' capital accounts for their respective shares of the increase in the book values of the net assets and the recorded goodwill. -The partnership's total resulting capital reflects the existing capital balances plus the amount of asset revaluation plus the new partner's investment.

statement of partnership realization and liquidation

-May be prepared to guide and summarize the partnership liquidation process. -Often called a "statement of liquidation." -It presents in worksheet form the effects of the liquidation on the partnership's balance sheet accounts.

partners' disassociation

-a partner can no longer act on the firm's behalf -a partner is disassociated from a partnership when: (a) he/she gives notice to the partnership of his/her express will to withdraw as a partner (b) the firm expels him/her from the firm in accordance with the partnership agreement, typically for violating some part of the partnership agreement or his/her continuance becomes unlawful (c) one of several judicial determinations occurs (d) the partnerbecomes a debtor in bankruptcy (e) the partner dies

In a partnership liquidation, the *final cash distribution* to the partners should be made in accordance with the

Balances of the partners' capital accounts.

(Matching 1) Item that occurs when the new partner's investment exceeds the new partner's capital credit.

Bonus to existing partners

(Matching 12) Item that occurs when the new partner's capital credit exceeds his or her investment and a decrease occurs in the existing partners' capital balances.

Bonus to new partner

(Matching 9) Account that increases for the fair value of noncash assets invested by a partner.

Capital account

(Matching 14) Account closed to the capital account at year-end.

Drawing account

(Matching 8) Account that increases when a partner takes assets out of the partnership in anticipation of partnership net income.

Drawing account

(Matching 7) Item that occurs when the new partner's capital credit exceeds his or her investment and no change occurs in the existing partners' capital balances.

New partner's goodwill recognized

(Matching 10) Related-party transaction that must be disclosed in the notes to the financial statements.

Note payable to a partner

(Matching 15) Deduction of interest expense on this payable to determine the partnership's net income.

Note payable to a partner

(Matching 3) A allocation of partnership profits and losses when nothing is stated in the partnership agreement.

Partnership income or loss shared equally

(Matching 4) Item that occurs when the new partner's investment equals the new partner's capital credit and no change occurs in the existing partners' capital balances.

Recognition of neither bonus nor goodwill

In accounting for partnership liquidation, cash payments to partners after all creditors' claims have been satisfied but *before the final cash distribution* should be according to

Safe payments computations. Explanation: The safe payments computations include consideration of the partners' loss absorption potential and the priority of intervening cash distributions before the last cash distribution.

Uniform Partnership Act of 1997 (UPA 1997)

The act covers: -Relations of partners to one another. -Relations of partners to persons dealing with the partnership. -Dissolution and winding up of the partnership.

definition of a partnership

This definition encompasses 3 distinct factors: 1) *Association of 2 or more persons* - the "persons" are usually individuals; however, they also may be corporations or other partnerships. 2) *To carry on as co-owners* - each partner has the apparent authority, unless restricted by the partnership agreement, to act as an agent of the partnership for transactions in the ordinary course of business of the kind carried on by the partnership. (transactions may bind the partnership to the 3rd party) 3) *Business for profit* - a partnership may be formed to perform any legal business, trade, profession, or other service. However, the partnership must attempt to make a profit; therefore, not-for-profit entities such as fraternal groups may not be organized as partnerships.