UN2

ABC partnership shares profits and losses 20% to A, 30% to B, and 50% to C. If C retires from the partnership and receives a $10,000 bonus, the bonus reduces the capital balances of A and B by

40% to A and 60% to B.

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.

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

Dissolution

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

Periodic cash withdrawals from the partnership by individual partners are recorded initially as a credit to cash and a debit to a

Drawing account

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.

What are some partnership activities that are considered capital transactions?

Retirement of a partner. Allocation of partnership profits and losses. Admission of a new partner.

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

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.

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.

True or false: An advantage of a limited liability company (LLC) is that the number of owners is not restricted.

True

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

True

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

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.

Zoe is admitted to the Xavier-Yang partnership in exchange for a cash investment. Zoe's initial capital credit is greater that her cash contribution. Under the goodwill method of recording the new partner's investment,

Zoe's contribution of goodwill is recognized.

Included in the advantages of the partnership form of business organization are

a lower cost of formation compared to the corporate form. ease of formation. the ability to make any arrangement desired among the partners for income distribution and control of business decision making.

When a new partner is formally admitted to a partnership

a new partnership is formed. a legal dissolution of the previous partnership occurs.

A 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

bonus

The hybrid method gets its name from the fact that it contains elements of both the goodwill (revaluation) method and the

bonus method

In determining the amount to pay a partner upon withdrawal, the partnership employs current assessments for both land and goodwill, This payment therefore

can be accounted for using either the goodwill, bonus, or hybrid method.

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

capital

Because a Subchapter S corporation pays no income taxes, but passes its income through to the tax returns of the individual owners, it avoids _____ taxation of its income.

double

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

double

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

A partner receives an amount in excess of his/her capital balance upon withdrawing from the partnership. A possible reason for the excess payment is that the partnership agreement calls for a revaluation of the partnership to its

fair value

According to the Internal Revenue Code, partnership income

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

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

goodwill is recognized as an asset of the partnership to reflect the intangible contribution. the partner deemed to be contributing goodwill is given a capital credit to recognize the asset brought to the partnership.

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.

The articles of partnership document

is a negotiated agreement created by the partners. largely determines the accounting procedures followed for the partnership. represents a legal agreement that governs the operation of the partnership.

A limited partnership helps the individual partners protect their personal financial position through the avoidance of unlimited _____ from the partnership.

liability

A limited partnership helps the individual partners protect their personal financial position through the avoidance of unlimited from the partnership.

liability

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

limit the personal liability exposure of individual partners.

A limited liability partnership (LLP)

limits the partners' 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.

A Subchapter S Corporation

must have only one class of stock. is taxed in the same way as a partnership. provides limited liability to to its owners.

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

no asset is recorded; only partners' 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 whose liability may be limited to the amount they have invested in the partnership.

According to the Uniform Partnership Act, an obligation of a limited liability partnership arising from a contract is solely the obligation of the

partnership

Under the bonus method any excess payment to a withdrawing partner beyond his/her capital balance

reduces the capital balances of the remaining partners.

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

retained earnings

Select all that apply Partnerships often serve as a preferred organization form for businesses compared to the corporate form because

some state regulations prevent doctors and attorneys from forming corporations. partnerships are easier and less costly to form than corporations. tax benefits exist for partnerships relative to corporations.

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

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

taxation

A tax advantage of partnerships over the corporate business organizational 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.

Accounting techniques for recognizing a partner's contribution of a special valuable talent to a partnership include

the bonus method. the goodwill method.

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

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

True or false: When an individual is admitted to a partnership and receives a partnership capital percentage in exchange for a contribution that includes goodwill, the amount of goodwill recognized is determined algebraically.

true

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

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

A limited liability company (LLC)

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

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

Included in the advantages of the partnership form of business organization are

- a lower cost of formation compared to the corporate form. - the ability to make any arrangement desired among the partners for income distribution and control of business decision making. - ease of formation.

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

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

A limited partnership (LP)

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

A Subchapter S Corporation

- is taxed in the same way as a partnership. - must have only one class of stock. - provides limited liability to its owners.

A limited liability partnership (LLP)

- limits the partners' individual liabilities resulting from damages awarded by a court. - does not limit individual partner's liability arising from contractual obligations of the partnership. - is a popular organizational form for major public accounting firms.

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

- partnerships are easier and less costly to form than corporations. - some state regulations prevent doctors and attorneys from forming corporations. - tax benefits exist for partnerships relative to corporations.

Traditionally, the contribution of property by a partner to a partnership is recorded at _____ value.

Fair

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

According to the Internal Revenue Code, Partnership income

Flows through to the individual tax returns of the individual 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.

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.

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

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.

The basic format of a statement of partners' capital is

beginning capital balances + income allocations - drawings = ending capital balances

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

Capital

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.

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.

Often a partner may sell his partnership interest to another individual. Why must all partners agree to allow this new partner the right to participate in the management of the partnership?

Current partners may be reluctant to yield management decision making that is essential to the well-being of the partnership. To protect the current partners from unwanted intrusion by the new partner.

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.

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.

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

FV

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

In the Goldman, King, and Wilson textbook example where Goldman is admitted to the partnership with a 20% interest in exchange for a $20,000 cash investment in the partnership, under the bonus method

Goldman receives a bonus from King and Wilson.

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

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.

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.

How does partnership accounting differ from corporate accounting?

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

Partnership capital contributions often include

Intangible asset contributions. Cash. Tangible asset contributions.

At year end, a partner's drawing account

Is closed to the partner's capital account.

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.

Which of the following is not a reason for forming a partnership as opposed to a corporation for a new business?

Partnership income typically flows tax-free to the partners.

Which of the following is not a reason for forming a partnership as opposed to a corporation for a new business?

Partnerships can result in double-taxation. Partnership income typically flows tax-free to the 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.

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.

Individual C is admitted with a 30% interest to the AB partnership in exchange for $50,000 cash paid to partners A and B. Why might C receive a capital credit for less that the $50,000 cash payment?

The $50,000 was paid to the current partners, not the partnership. The ownership transfer was recorded by reclassifying partial capital balances to A without any asset revaluation. The partnership employed a book value approach where each partner transferred 30% of their interest to C.

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.

Upon a partner's withdrawal from a partnership, the goodwill method will credit each partner's capital account for their share of goodwill

according to their profit and loss sharing ratios.

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

In addition to tangible asset contributions, a new partner may bring other intangible value to a partnership including

an ongoing set of business clients. professional reputation. a special talent or skill set.