AFA Final 13

Which of the following business forms are distinct legal entities separate from their owners? Corporations Partnerships Sole Proprietorships

1&2

The partnership agreement does not include one of the following:

<A requirement that all financial statements will be prepared in the accordance with GAAP> Partnerships are not required to use GAAP. If a partnership is not publicly traded, it can adopt whatever accounting policies that the partners agree to use, including the use of accrual accounting, cash basis accounting, or some hybrid approach.

At what amount should noncash property that is contributed to a partnership be credited to the contributing partner's capital account?

<Fair value of the contributing partner assets> Assets contributed and liabilities assumed are initially recorded at fair value based on valuations performed upon formation of the partnership.

Which of the following is not true with respect to the dissolution of a partnership?

<If a partner's Capital Account becomes negative as a result of the sales of assets, the partner is relieved of all liability with respect to the partnership> If a partner's Capital Account becomes negative as a result of the sales of assets, the partner must make a cash contribution to the partnership in an amount sufficient to bring the Capital Account to a zero balance.

Assume that there are three partners in a partnership, A, B, and C. Partner C provides services to the partnership and is entitled to a salary of $90,000. Assume that the partnership revenues less expenses (other than salary to Partner C) amount is $480,000. Finally, assume that the Partnership Agreement provides for a sharing ratio of 40:40:20 for Partners A, B, and C, respectively. How much profit should be allocated to each partner?

<Partner A=$156,000 Partner B=$156,000 Partner C=$168,000> The salary paid to Partner C is deducted from the $480,000 excess of revenues over expenses, leaving $390,000 to be allocated to the partners in the sharing ratio of 40:40:20.

Assume that two individuals agree to form a partnership. Partner A is contributing an operating business that reports net assets of $30,000. Partner B is contributing cash of $45,000. The partners agree that the initial capital of the partnership should be shared equally. What will be the initial balance of the Capital Accounts of the partners assuming that the partners wish to employ the Goodwill Method?

<Partner A=45,000 Partner B=45,000> Since the partners are agreeing to an equal division of partner capital, Partner B is receiving a 50% interest for a contribution of $45,000, implying a value of the partnership of $90,000 and the recognition of $15,000 of goodwill. Total partnership capital, therefore, equals $90,000 with an equal split agreed to by the partners.

Which of the following is true with respect to the recognition of partnership profit or loss?

<Salary paid to a partner is not treated as an expense> The Uniform Partnership Act of 1997 states that "a partner is not entitled to remuneration for services performed for the partnership" (UPA, §401h).

Which of the following is true with respect to the revaluation of net assets prior to partnership realignment?

<When partnership net assets are revalued in anticipation of a realignment transactions, the resulting gains and losses accrue only to the partners who have an ownership interest in the entity during the period in which the net assets changed in value> A common practice when admitting a new partner to a partnership is to revalue the partnership net assets to fair value, with the resulting gains and losses accruing to the existing partners. This practice provides the most transparency of the relative values contributed by the existing partners and the newly admitted partners.

Which of the following is true with respect to the liquidation of a partnership?

<here may be unreported liabilities that were not properly accrued as of the balance sheet date. The liquidation administrator must, therefore, be conservative in estimating the amount of cash that can be safely disbursed.> In the liquidation of a partnership, it is often difficult to estimate liquidation expenses, not all liabilities may be reported, and sales of assets may not yield any cash. The liquidation administrator must, therefore, be conservative in estimating the amount of cash that can be safely disbursed.

Assume that two individuals agree to form a partnership. Partner A is contributing an operating business that reports net assets of $35,000. Partner B is contributing cash of $45,000. The partners agree that the initial capital of the partnership should be shared equally. what will be the initial balance of the Capital Accounts of the partners assuming that the partners wish to employ the Bonus Method?

Partner A=40,000 Partner B=40,000

Partners A and B report average capital balances of $256,000 and $160,000, respectively, for the year. The partnership agreement provides for interest at the rate of 10% on the average capital balance and an equal division of the remaining profit of $6,400 for the year. By what amount should B's capital account change for the year?

Partner B's capital increases by $19,200

Partners A and B are partners with capital balances of $117,000 and $65,000, respectively. They agree to admit Partner C as a partner with a 25% interest upon payment of $78,000. Assuming that the partners wish to recognize an intangible asset, what amount of goodwill should be reported? Goodwill Method

The $78,000 capital contribution with an ownership interest of 25% implies a value for the partnership of $78,000/25% = $312.000. The total capital after the contribution is $117,000 + $65,000 + $78,000 = $260,000, thus implying a goodwill asset of <$52,000>

Partners A and B are partners with capital balances of $117,000 and $65,000, respectively. They agree to admit Partner C as a partner with a 25% interest upon payment of $78,000. Assume that the partners do not wish to recognize an intangible asset. What total amount should be recorded as a bonus to Partners A and B? Bonus Method

The total capital after the contribution is $117,000 + $65,000 + $78,000 = $260,000 and a 25% interest is $65,000. Since Partner C is investing $78,000. The bonus to Partners A and B is $78,000 - $65,000 = <$13,000.>