ACCT 401 Final - Ch 15, 16 & GVV
Common Levers used to persuade someone to act ethically
Seek advice Build a coalition Reframe the issue Identify authoritative support Be a problem solver, a source of actionable alternatives Identify risks of escalation Address impact of change Address benefits of proposed solution
The CPA's code of professional conduct prevents them from reporting ethical dilemmas to:
The SEC
On May 1, 20x1, Cathy and Mort formed a partnership and agreed to share profits and losses n the ratio of 3:7, respectively. Cathy contributed a parcel of land that cost her $10,000. Mort contributed $40,000 cash. The land was sold for $18,000 immediately after formation of the partnership. What amount should be recorded in Cathy's capital account on formation of the partnership?
$18,000 Fair value of the land at the date of formation
Partnership Facts
- Easy to form - Provide more access to capital than a sole proprietor has (risk sharing) - Separate entity for accounting purposes - Conduit in the eyes of the IRS - Can use cash or accrual - May or may not follow GAAP - Financials typically for internal use - Not typically audited
Partner's Accounts
The partnership may maintain several accounts for each partners in its accounting records ○ Capital Account § Initial investment of a partner, any subsequent capital contributions, profit or loss distributions, and any withdrawals of capital by the partner are ultimately recorded in the partner's capital account § The balance in the capital account represents the partner's share of the net assets of the partnership § Each partner has one capital account - hope it has a credit balance □ If negative (deficit) - hopefully something in partnership agreement with what to do ® Deficiency is usually eliminated by additional capital contributions ® Other partners have to pay for shortfall is original partner can't ○ Drawing Account § A separate drawing account often is used to record the periodic withdrawals and is then closed to the partner's capital account at the end of the period § Temporary account □ Everything goes through draw □ Net number goes into capital account at end of the period ○ Loan Account § The partnership may look to its present partners for additional financing § Any loans should be accompanied by proper loan documentation such as promissory note § A loan from a partner is shown as a payable on the partnership's books, the same as any other loan § Have to carry interest
Partnership Liquidations
UPA of '97 includes 7 sections which deal with the dissolution ○ Creditors have first claim to the partnership's assets ○ After the creditors are fully satisfied, any remaining assets are distributed to the partners based on the balances in their capital accounts
Expected for Standard Practice
Everybody does it; it is a requirement to remain competitive; it is really expected of me (us, the company)
Which of the following is NOT a characteristic of a partnership? A. The partners have limited liability B. Each partner is an agent of the partnership for transactions to carry on in the ordinary course of the partnership business C. All partners are liable jointly and severally for all obligations of the partnership unless otherwise provided by law D. Corporations or other partnerships can be co-owners of a partnership
A. The partners have limited liability
Identify authoritative support
Draw upon a company's policies, procedures, and codes of conduct, as well as those of the profession for the parties involved in developing you plan to report and resolve the issue.
Account closed to the capital account at year-end
Drawing account
Common Reasons and Rationalizations
Expected for Standard Practice Materiality Locus of Responsibility Locus of Loyalty
A partnership is formed by two individuals who were previously sole proprietors. Property other than cash that is part of the initial investment in the partnership is recorded for financial accounting purposes at the:
Fair value of the property at the date of the investment
T/F Naming the primary stakeholders is one of the five questions you need to answer surrounding GVV analysis
False
T/F The four financial statements typically prepared to meet the information needs of the partners are the income statement, statement of retained earnings, balance sheet, and statement of cash flows.
False
T/F One of the practical guides used to assist the accountant in determining the safe installment payments to the partners would be to distribute cash to the partners before all liabilities and actual and potential liquidation expenses have been paid or provided for by reserving the necessary cash.
False A practical guide used to assist the accountant in determining the safe installment payments to the partners would be to distribute NO cash to the partners UNTIL all liabilities and actual and potential liquidation expenses have been paid or provided for by reserving the necessary cash.
T/F During an installment liquidation of a partnership, no cash is distributed to the partners until all assets have been liquidated and all liabilities have been paid.
False An installment liquidation typically requires several months to complete, in order to obtain the largest possible amount from the realization of the assets. Consequently, periodic, or installment, payments are made to the partners during the liquidation because they require funds for personal purposes.
T/F GAAP standards provide for increases in the value of non financial assets or recognition of new goodwill solely due to a change in partnership membership.
False Net asset revaluations performed using the appropriate accounting standards are in accordance with GAAP. However, there are no GAAP standards that provide for increases in the value of nonfinancial assets or recognition of new goodwill, solely due to a change in partnership membership.
T/F GVV stands for Giving Values to Voice
False Stands for Giving Voice to Values
T/F When a partner retires from a partnership, he or she is personally liable for any partnership debts incurred after the retirement date.
False The retiring partner is still personally responsible for any partnership debts accumulated before the withdrawal date. He or she is NOT liable for any debts incurred by the partnership after the retirement date.
Formation of a Partnership
Formal written agreement suggested Agreement should cover all major eventualities: - profit sharing - adding a new partner - retiring a partner - capital contributions Non-cash assets (FV) and liabilities (PV of remaining CF's) contributed by partners An item contributed by a partner becomes partnership property Both assets and liabilities may be brought into a partnership Partners need to agree on split of capital (typically proportionate to total contributed)
Partner who actively participates in the partnership management and who is personally liable for the partnership's debts
General partner
T/F Truth vs Justice is one of the four categories that ethical dilemmas typically fall into.
False Four categories are: Truth vs Loyalty Justice vs Mercy
In forming a partnership, Allan contributed 60 percent of the net assets, while Brown contributed 40 percent. However, Brown has special expertise in the business undertaken by the partnership. In recognition of this fact, the partnership agreement specifies that Brown is entitled to an additional 10 percent of the net assets of the business. Under the agreement, Allan's capital share is:
50%
Which of the following is NOT a characteristic of a lump-sim liquidation? A. To speed up liquidation, accounts receivable may be sold to a factor B. All assets are converted to cash over an extended period of time C. A single, lump-sum payment is made to the partners for their capital interests D. Liquidating distributions to the partners are to be made in cash
B. All assets are converted to cash over an extended period of time
Item that occurs when the new partner's capital credit exceeds the new partner's investment and a decrease occurs in the old partners' capital balances
Bonus to new partner
Item that occurs when the new partner's investment exceeds the new partner's capital credit
Bonus to old partners
Which of the following is NOT a characteristic of a cash distribution plan? A. It makes use of the concept of loss absorption power B. It gives the partners an idea of the installment payments each will receive as cash becomes available to the partnership C. It is a pro forma projection of the application of cash as it becomes available D. It takes precedence over the statement of realization and liquidation in determining actual installment distributions
D. It takes precedence over the statement of realization and liquidation in determining actual installment distributions
Legal description of the withdrawal of a partner
Dissociation
T/F DEF Partnership decides to incorporate. The new corporation's name will be DEF Corporation. The partners open a new set of books for the corporation. In the process of closing out the partnership's existing books, an entry to record the receipt of stock by the partners in exchange for the partnership's net assets would include a credit to Investment in DEF Corporation Stock for the amount of the prior partners' combined capital balances.
False The entry made on the partnership's existing books to record the receipt of stock in DEF Corporation in exchange for the partnership's net assets would include a DEBIT to the account Investment in DEF Corporation Stock for the amount of the prior partners' combined capital balances. The rest of the entry would require debits to any liability accounts to bring them to zero and credits to any asset accounts to bring them to zero. A second and final entry would debit each partner's capital account for its balance and credit the account Investment in DEF Corporation Stock to record the distribution of the new stock to the partners and complete the close-out of the partnership's books.
Address benefits of proposed solution
In addition to covering the consequences surrounding the existing issue, it is important to identify and discuss the benefits to the company, the individuals involved, and other stakeholders
Four financial statements prepared for partners
Income Statement Balance Sheet (have capital accounts instead of R/E) Statement of Cash Flows Statement of Partner's Capital (shows activity for the period)
Cost not deducted to determine the partnership's income for the period
Interest on capital accounts
Item that occurs when the new partner's capital credit exceeds the new partner's investment and no change occurs in the old partners' capital balances
New partner's goodwill recognized
Deduction of interest expense on this payable to determine the partnership's net income
Not payable to a partner
Related-party transactions that must be disclosed in the notes to the financial statements
Note payable to a partner
Item that occurs when the new partner's investment equals the new partner's capital credit and an increase occurs in the old partners' capital balances
Old partners' goodwill recognized
Recognition of an intangible asset upon a new partner's admission to the partnership that results in increases in the old partners' capital balances
Old partners' goodwill recognized
The allocation of partnership profits and losses when nothing is stated in the partnership agreement
Partnership income or loss shared equally
Item that occurs when the new partner's investment equals the new partner's capital credit and no change occurs in the old partners' capital balances
Recognition of neither bonus nor goodwill
Uniform Partnership Act (UPA) of 1997 definition of a partnership
The association of two or more persons to carry on as co-owners of a business for profit forms a partnership... This encompasses three distinct factors: 1. association of two or more persons 2. to carry on as co-owners 3. business for profit
Reframe the issue
The type of dilemma and resulting expected reasons and rationalizations surrounding a dilemma often frame an issue in a certain way. Reframing the issue toward potential long-term ramifications can help counter that reasoning.
Yankee has been operating a pizza parlor as a sole proprietor for several years. On December 31, 20X2, the business has the following account balances: Cash $10,000 Inventory 30,000 Equipment 50,000 Accumulated Depreciation 10,000 Liabilities 10,000 Yankee, Capital 70,000 Yankee would like to raise some additional capital, as he is interested in eventually buying a building for the pizza parlor. He offers Doodle an interest in the business, and the two agree to form a partnership. An audit and appraisal of Yankee's business disclose that all assets and liabilities are valued appropriately on the books of the business. Yankee and Doodle prepare and sign articles of co partnership that include all significant operating policies. Doodle will contribute $30,000 cash for a 30 percent capital interest. The Yankee Doodle Partnership will acquire all of Yankee's business and assume its debts. The entry to record the initial capital contribution on the books of the partnership would include:
A debit to Inventory for $30,000
Yankee has been operating a pizza parlor as a sole proprietor for several years. On December 31, 20X2, the business has the following account balances: Cash $10,000 Inventory 30,000 Equipment 50,000 Accumulated Depreciation 10,000 Liabilities 10,000 Yankee, Capital 70,000 Yankee would like to raise some additional capital, as he is interested in eventually buying a building for the pizza parlor. He offers Doodle an interest in the business, and the two agree to form a partnership. An audit and appraisal of Yankee's business disclose that all assets and liabilities are valued appropriately on the books of the business. Yankee and Doodle prepare and sign articles of co partnership that include all significant operating policies. Doodle will contribute $30,000 cash for a 30 percent capital interest. The Yankee Doodle Partnership will acquire all of Yankee's business and assume its debts. On June 1, 20X8, Yankee withdraws $2,000 cash from the business in anticipation of his profit allocation at the end of the year. The entry to record this withdrawal on the books of Yankee Doodle Partnership would include:
A debit to Yankee, Drawing for $2,000
Changes in Membership
Both GAAP and non-GAAP New partners are often a primary source of additional capital or needed business expertise Unanimous approval of the present partners typically required New partners not personally liable for prior acts/debts ○ Partnership can be sued and can lose all money put in ○ Capital at risk no matter what May be admitted by ○ Directly buy a part of a partner's interest ○ Investing additional capital in the partnership § = new partner's share of BV § < New partner's share of BV § > new partner's share of book value
Account that increases for the fair value of non-cash assets invested by a partner
Capital Account
Legal description of the dissolving of a partnership
Dissolution
Dissolution
Dissolving of a partnership ○ In a partnership at will, a partner's express notice to leave the partnership ○ In a partnership for a definite term or specific undertaking a) When after a partner's death or wrongful dissociation, 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
Account that increases when a partner takes assets out of the partnership in anticipation of partnership net income
Drawing Account
Locus of Loyalty
It is best for the company, my employees, my boss even if it hurts customers, or vendors, or...
Be a problem solver, a source of actionable alternatives
It is better to identify and propose a better way to accomplish something than to complain about how something is done.
Materiality
It is not material; it doesn't hurt anyone
Locus of Responsibility
It is not my job (or yours) to worry about it; I am only doing what I was told to do so don't rock the boat
Partner who cannot actively participate in the management of the partnership
Limited partner
Seek Advice
Recognize that you are not alone and there are plenty of people available to help both within and outside the organization
Build a Coalition
Recognize that you do not necessarily have to tackle or resolve the issue by yourself. Seek others in the organization to help you report or resolve the issue
An example of a lever is:
Saying "what would your mom think!" Saying "Hey, I'm new and probably am just not understanding, but isn't what you are doing illegal?" Saying "The long term consequences of your actions are going to result in all of us losing our jobs and here's how..."
On July 1, 20x1, James and Short formed a partnership. James contributed cash. Short, previously a sole proprietor, contributed property other than cash, including realty subject to a mortgage, which the partnership assumed. Short's capital account at July 1, 20x1, should be recorded at:
The fair value of the property less the mortgage payable at July 1, 20x1
An individual partner's loss absorption power is defined as:
The maximum loss that can be realized by the partnership before that partner's capital account balance is extinguished
Dissociation of a partner
The partnership typically purchases the UPA Says - The buyout price is the estimated amount if the net assets of the partnership had been sold at a price equal to the greater of the liquidation value or the value based on a sale of the entire business as a going concern without the dissociated partner
T/F Expenses of liquidation are allocated to partners' capital accounts in the profit and loss distribution ratio
True
T/F If I was going to blow the whistle internally, I might report my ethical issue to the board of directors of my company.
True
T/F The Loss Absorption Power (LAP) of an individual partner is defined as the maximum loss that the partnership can realize before that partner's capital account balance is extinguished.
True
T/F The key to determining a new partner's investment cost is to determine the amount of capital that will be retained by the prior partners for their percentage share in the total resulting capital of the partnership after admitting the new partner.
True
T/F The retirement or withdrawal of a partner from a partnership does not require termination of the business.
True
T/F When we encounter values conflicts in the workplace, we often face barriers that appear in the form of "reasons and rationalizations" for pursuing a particular course of action
True
Dissociation
Withdrawal of a partner ○ A partner's death ○ Voluntary withdrawal ○ Judicial determination
Allocating profit or loss
A pre-selected ratio (50, 50 or 40, 60 split) Interest on capital balances ○ Reward partners for leaving money in the business Salaries to partners Bonuses to partners
Identify risks of escalation
Address how issues like the one you are trying to resolve often times grow into much larger issues, or result in other poor decisions being made
Address impact of change
Address the potential costs to the party or parties whose actions you are trying to change
If a new partner pays more than book value for his investment in a partnership, which of the following is NOT an option in accounting for his admission on the books of the partnership? A. Assign a bonus to the prior partners B. Record unrecognized goodwill and allocate it to the prior partners C. Record no revaluations, bonus nor goodwill D. Revalue net assets up to market and allocate to prior partners
C. Record no revaluations, bonus nor goodwill
