405 exam 3

an individual gains admittance to a partnership in one of two ways:

-purchase ownership from existing owner -contribute assets directly to partnership

what is a pre-distribution plan?

A guide for the cash distributions to partners during a liquidation.

___________________ revalue these accounts to FV and record GW

Goodwill method

at the end of period, partnership revenues and expenses are closed out, accompanied by an _______________ to partner's capital accounts. based on articles or state law (equal distribution)

allocation of resulting NI or loss

-intangible contributions 2 options:

bonus method goodwill method

closing process has 2 JEs:

distribute NI close out drawing accounts

__________________- actual business active cease, selling of partnership assets

liquidation

____________________ often are expected because the need for immediate sale usually holds a high priority in a liquidation. plus PPE, may have restricted uses. primary concern is keeping track of changes in each partner's capital balance

losses

occurs when one or more partners has a __________________ capital balance to the partnership is unable to generate enough cash to satisfy all of its creditors

negative (debit)

_________________ are sold for cash, and gains and losses on sales are allocated to capital accounts based on P&L

noncash assets

a final distribution will _________________ BV of partner's capital account

not necessarily equal

if partnership is insolvent, each partner faces possibility of having to satisfy all remaining obligations _________________

personally

bonus method - only requires assets _______________ transferred to business (cash, patents, inventory, etc.)

physically

first available money is given to last partner in schedule with a _______________ balance

positive

many partner compensation plans recognize contributions to...

revenue growth time spent with firm mgmt skill development

partner brings expertise to partnership. Ex

skill set, customer list marketing, accounting

_____________________ keeps everyone updated and organized by disclosing transaction dates, assets still available, liabilities remaining, current cash, and current capital balances. Easy to use since liquidation can take a long time to complete

statement of liquidation

what is a partnership dissolution? does dissolution automatically necessitate the cessation of business and the liquidation of partnership assets?

the dissolution of a partnership is the breakup or cessation of the partnership. many reasons can exist for a partnership to dissolve. one partner may withdraw, retire, or die. a new partner may be admitted to the partnership. the original partnership terminates whenever the identity of the individuals serving as partners has changed dissolution, however, does not necessarily lead to the liquidation of the business. in most cases, but not all, a new partnership is formed which takes over the business. such dissolutions are no more than changes in the composition of the ownership and should not affect operations

is important bc each capital balance serves important capacities over the life of partnership: assignment of P and L, determines final distribution at time of withdrawal or retirement, and ending capital balance indicate allocation to be made of any assets remaining after liquidation

valuation

Uniform partnership Act specifies that __________________ have first priority to assets held by partnership at dissolution. partners are also worried because they face unlimited liability and possible huge monetary losses

creditors

any alteration in specific individuals composing a partnership automatically leads to legal ________________ in many instances, breakup is merely a prerequisite to formation of a new partnership

dissolution

Bonus- if bonus is recorded, amount can be attributed to _______________ involved: withdrawing or remaining partners

either of the parties

how does a partnership accounting differ form corporate accounting?

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

these special contributions ________________ as a provision of any partnership

may be included

by what methods can a new partner gain admittance into a partnership?

a new partner can join a partnership by acquiring part or all of the interest of one or more of the present partners. this transaction is carried out with the individual partners directly and not with the partnership. a new partnership may also enter through a contribution to the business. in such cases, the investment is made to the partnership rather than to the individuals

what is the purpose of a statement of liquidation? what is information does it convey to its readers?

a statement of liquidation summarizes the financial effect of the liquidation process as it has progressed to date. information to be presented includes the balance of all remaining assets, the liability total, and the capital account of each partner. in addition, the allocation of all gains and losses incurred in the liquidation process as well as the payment of liquidation expenses should reflect in the statement

if a partnership is liquidated, how is the final allocation of business assets made to the partners?

according to the final capital account balances

GW- revaluation of partnership and GW bal. is allocated ________________ as unrecorded gains

among all partners

_____________ - a legal covenant that is oral or written and forms central governance for partnership's operation. it contains guidelines for various capital accounts and financial arrangements. it is negotiated by the partners

articles of partnership

which of the following is NOT a reason for the popularity of partnerships as a legal form for business? a.) partnerships may be formed merely by an oral agreement b.) partnerships can more easily generate significant amounts of capital c.) partnerships avoid the double taxation of income that is found in corporations d.) in some cases, losses may be used to offset gains for tax purposes

b.) partnerships cane more easily generate significant amounts of capital

any partnership _______________________ after paying liabilities and liquidation is distributed to partners on basis of respective capital balances

cash remaining

Initial transaction is the contribution of the partners to start the business. JE:

cash xx Jane, cap xx doe, cap xx

bonus method - establishment of specific capital balances is viewed as independent process based solely on partners' agreement. initial equity figures results from negotiation, they _____________ correspond directly with individual investments

do not need to

BM and goodwill method each est. _______________ despite differences in partner contributions, but the balances vary between methods

equal capital account balances

if inventory, land, equipment, or building is also invested, partners use _______________

fair value

bonus method allocates ________________ whereas GW capitalizes _____________

invested capital -implied value of the intangible skills

capital balance is only recording historical transactions and rarely represents _________________ inherent in business. payment is based on value of partner's interest as ascertained by negotiating/appraisal

true value

___________________ - shows changes made during year in individual capital accounts as well as totals

statement of partnerships

during a liquidation, if partner's capital account balance drops below zero, what should happen?

the partner with a deficit contributes enough assets to offset the deficit balance

if a partner is contributing attributes to a partnership such as an established clientele or a particular expertise, what two methods can be used to record the contribution? describe each method

-the BM of recording this transaction is to value and record only the identifiable assets such as land and buildings. the capital accounts are then aligned to recognize the proportionate interest being assigned to each partner's investment -as an alternative, the amounts contributed along with the established capital percentages can be used to determine mathematically the implied total value of the business and the presence of any GW brought into the business. GW is recognized at the time that the partnership is created so that the amount can be credited to the appropriate partner

a new partner enters a partnership and goodwill is calculated and credited to the original partners. how is the specific amount of goodwill assigned to these partners?

GW recognized in a capital transaction is allocated to the original partners based on the profit and loss ratio. the amount is assumed to represent unrealized gains in the value of the business. to determine the amount of goodwill, the implied value of the business as a whole must be calculated based on the price being paid for a portion by the new partner. the difference between this implied value and the total capital is assumed to be goodwill or some other adjustments to asset value

also there are withdrawals as a reward for ownership or as compensation for work performed. these distributions, are recorded initially in separate ___________________ that is closed into individual partner capital accounts at year end

drawing account (expense)

After liquidating all property and paying partnership obligations, what is the basis for allocating remaining cash among the partners?

final distributions made to the various partners are based solely on their ending capital account balances unless the partners have agreed otherwise. if any partner has a deficit balance, that partner should make an additional contribution to the partnership to offset the negative capital balance. in some situations, a question may arise as to whether compensation for a deficit will ever be forthcoming from the responsible party. the remaining partners may choose to allocate the available cash immediately based on the assumption that the deficit balance eventually will prove to be a total loss

GW method -based on assumption that ________________ can be calculated mathematically and recorded for any intangible contribution made by partner

implied value

death, retirement, or just leaving changes composition of partnership. any change in membership _________________ partnership, although operations continue. partner may sell interest to outsider with approval to existing partners or business can distribute cash/assets as a means of setting a partners right of co-ownership

legally dissolves

what valuation should be recorded for noncash assets transferred to a partnership by one of the partners?

to give fair recognition to noncash contributions, all assets donated by the partners (such as land or inventory) should be recorded by the partnership at their fair values at the date of investment. however, for taxation purposes, the partner's book value is retained

___________________ - retain BV of all partnership assets and liabilites

Bonus Method

for partnerships, a unique aspect exists in the handling of _____________. equity section of BS of partnership is composed of just capital accounts that are affected by contributions, distributions, earnings, and other equity activities

Partner's capital balances

_______________ incurred during liquidation are paid from partnerships available cash. liquidations exps. are allocated to partners' capital accounts based on P&L

Partnership Liabilities

according to the uniform partnership act, what events should occur if a partner incurs a negative capital balance during the liquidation process?

form a legal viewpoint, any partner who incurs a negative (or deficit) capital balance is obligated to make an additional contribution to offset that amount

which of the following statements is true concerning the accounting for a partnership going through liquidation?

gains and losses are reported directly as increases and decreases in the appropriate capital account

_______________________- cessation of partnership, does not typically affect operations or sale of assets, change in composition of partners

Dissolution

after forming partnership, owner may choose to contribute additional capital. record _____________ as increment to capital account

FV

under what circumstance might GW be allocated to a new partner entering a partnership?

allocating goodwill to an entering partner may be necessary for several reasons. one of the most common is that the partner is bringing to the partnership an attribute that is not an asset in the traditional accounting sense

What is the difference between the dissolution of a partnership and the liquidation of partnership property?

a dissolution refers to the cessation of a partnership. in many cases, this process is simply a preliminary step in the transfer of business property to a newly formed partnership. therefore, a dissolution does not necessarily affect the operations of the business or the sale of assets. in a liquidation, actual business activities cease. partnership property is sold with the remaining cash distributed to creditors and to any partners with positive capital balance. dissolution refers to changes in the composition of a partnership whereas liquidation is the selling of a partnership's assets

how is a pre-distribution plan created for a partnership liquidation?

a pre-distribution plan is produced based on an assumed series of losses. each loss is calculated to eliminate in turn the capital balance of one of the partners. in this manner, the accountant can determine the vulnerability to losses exhibited by each capital account. when the last balance is eliminated, the accountant will have established a series of losses that exactly offsets each balance. the pre-distribution plan is then developed by measuring the effects that are created if the losses do not occur. in effect, the accountant works backwards through the assumed losses to create a pattern of available cash, the pre-distribution plan

which of the following best describes the articles of partnership agreement?

are legal covenant that may be expressed orally or in writing, and forms the central governance for a partnership's operations