Ch 9 Partnerships: Formation and Operation

Under the goodwill method to record a new partner's admission to a partnership, a recognition of goodwill to the original partners is equitably allocated

According to the profit and loss percentage

Under the goodwill method to record a new partner's admission to a partnership, a recognition of goodwill to the original partners is equitably allocated

According to the profit and loss percentages

As partner brings valuable expertise to a partnership. The partnership records no asset for this expertise, but the contributing partner nonetheless receives an additional capital credit. By crediting this partners capital account, the partnership has employed the ----- method

Bonus

Common approaches to recognizing intangible factors that a new partner may bring to a partnership include the ----- and -------- methods.

Bonus and Goodwill

The statement of partner's capital effectively replaces the statement ------ ------ for a corporation

retained earnings

Alternative legal forms of partnerships have been provided in many state laws that both limit the liability of the individual partners while maintaining the --- benefits of the partnership form of business organization.

tax

When partners make cash contributions to a partnership, a credit to each individual partner's ------ account records the contribution.

Capital

Ways in which individual can gain admission into a partnership include

Buying an ownership interest directly from one or more existing powers. Contributing tangible assets directly to the partnership. Contributing intangible assets directly to the partnership.

Assume all periodic partnership revenues and expenses have been closed to an Income Summary account. Final closing entries are then needed to

Close the partner's drawing accounts to their individual capital accounts Close the income summary account by distributing the total profit or loss to the individual partner's capital accounts.

Corporations pay income taxes. Additionally, their owners also often pay taxes when the corporations income is paid as dividends. In contrast, because partnership income is passed through to the individual partners tax returns, the partnership is said to avoid ----- taxation of the profit earned by the business.

Double

Compared to a corporation's balance sheet, the owner's equity section of a partnership

Typically provides a much more limited range of information. Does not usually distinguish between contributed and earned capital Typically consists of solely partner's capital accounts.

A limited liability partnership (LLP)

Limits the partner's individual liabilities resulting from damages awarded by a court. Is a popular organizational form for major public accounting firms. Does not limit individual partner's liability arising from contractual obligations of the partnership.

True or false: Upon a partner's withdrawal from a partnership, the resulting distribution will unlikely equal the balance in the partner's capital account.

True

Any change in the set of specific individuals that comprise a partnership automatically leads to a legal

Dissolution

A new partner exchanges a $20,000 cash payment to the partnership business for a 10% partnership ownership interest. Under the bonus method

The capital balance of the new partner will equal 10% of partnership net assets including the $20,000 cash payment. No revaluation of existing partnership assets takes place.

Accounting methods for formally recording the admission of a new partner include

Retaining the partnership book value through the bonus method. Revaluing existing partnership assets to fair value without recognizing goodwill Revaluing existing partnership assets to fair value and recognizing goodwill.

Potential future effects of the valuation of property contributed

Settlement of a partner's interest upon partner retirement. Capital account balances often affect partnership profit and loss distribution. Settlement of a partner's interest upon partnership liquidation

In accounting for a partner withdrawal from a partnership, the goodwill (revaluation method) credits

Each partner's capital account for their share of asset revaluations. Each partner's capital account for their share of recognized goodwill.

Despite the notion that a partnership is an extension of its individual partners, a noncash asset contributed to the partnership should be recorded at its contribution-date ---- value.

Fair

Similar to initial partner contributions to begin a partnership, subsequent partner contributions to support ongoing operations or expansion should be credited to the contributing partner's capital account at ---- value.

Fair

According to the Internal Revenue Code, Partnership income

Flows through to the individual tax returns of the individual partners.

A partner brings valuable website design talent to a partnership. The partnership records goodwill to recognized this talent, and the contributing partner receives an additional capital credit. To account for the contribution of talent, the partnership has employed the ------ method.

Goodwill

Among common methods to account for the withdrawal of a partner from a partnership include the

Hybrid (revaluation/bonus) method Goodwill method Bonus method

True or false: The Uniform Partnership Act was created in part to provide consistent standards and application of partnership law across state lines.

True

A limited liability company (LLC)

In many states limits a partners' risk to the amount he or she has invested in the partnership Is classified as a partnership for tax purposes. With respect to partner liability is similar to a Subchapter S corporation.

The legal term stating that each partner possesses the right to incur liabilities on behalf of the partnership in the normal course of business is

Mutual Agency

Under the bonus method for recognizing a partner's intangible contribution

No asset is recorded; only partner's capital accounts are affected.

A limited partnership (LP)

Often has investors that are not allowed to participate in the management of the partnership. Has general partners who are designated to assume responsibility for all partnership debts. Has investors who liability may be limited to the amount they have invested in the partnership.

If the articles of partnership are silent with regard to partnership income distribution of the individual partners, then

Partnership income is allocated equally among all partners.

A Subchapter S Corporation

Provides limited liability to its owners. Must have only one class of stock Is taxed in the same way as a partnership.

The articles of partnership document

Represents a legal agreement that governs the operation of the partnership. Is a negotiated agreement created by the partners. Largely determines the accounting procedures followed by the partnership.

Partnerships often serve as a preferred organization form for businesses compared to the corporate form because

Tax benefits exists for partnerships relative to corporations. Some state regulations prevent doctors and attorneys from forming corporations. Partnerships are easier and less costly to form than corporations.

A tax advantage of partnerships over the corporate business organization form is

The avoidance of double taxation. A partner's share of partnership operating losses can be used to offset income on the partner's individual tax return.

If an individual partner contributes property to a partnership

The partner no longer has an individual claim to the property

Under a hybrid method of accounting for a partner's withdrawal from a partnership

The partnership's net assets are revalued to current fair values. Any asset revaluations are allocated to all partners based on their profit and loss percentages A bonus from the remaining partners to the withdrawing partner my occur.

Included in rights that a partner can convey in transfer of ownership are

The right of co-ownership of the partnership business property. The right to participate in the management of the business if agreed upon by all other partners. The rights to share in the profits and losses of the partnership.

If an individual partner's allocation of annual partnership profits exceeds his or her annual partnership withdrawals, what net effect should be reflected in the partner's capital account?

an increase

A partner contributes a building to her partnership that has appreciated in value. The partnership's valuation basis for the building should be

fair value

Partnership capital contributions often include

Intangible asset contributions. Cash. Tangible asset contributions.

Under the hybrid method of recording a new partner's admission to a partnership

A bonus may be recorded to align partners' capital accounts Identifiable assets are revalued to fair value Asset revaluations are credited to the original partners.

The emergence of several alternative partnership forms derives from the desire to avoid double taxation and

Limit the personal liability exposure of individual partners.

How does partnership accounting differ from corporate accounting?

Individual capital accounts replace the contributed capital and retained earnings balances found in corporate accounting.

At year end, a partner's drawing account

Is closed to the partner's capital account.

Assume the articles of partnership specify that profits are to be allocated 60% to partner A and 40% to partner B. If, however the articles of partnership are silent concerning the allocation of a partnership loss, then any loss is allocated

In the same manner as partnership profits.