IRSC-ACG2011 // Chapter 12 - Accounting for Partnerships and Limited Liability Companies
Four steps in the liquidation process:
1. Sell the partnership assets. 2. Distribute any gains or losses from realization to the partners based on their income-sharing ratio. 3. Pay the claims of creditors, using the cash from the step 1 realization. 4. Distribute the remaining cash to the partners based on the balances in their capital accounts.
Any net adjustment (increase or decrease) in asset values is divided among the:
Capital accounts of the existing partners.
Noncash assets are recorded at values agreed upon by the partners, these values are normally based on:
Current Market Values
The only entry on the partnership's records is to: (When an Existing Partner Purchases)
Debit the capital account of the partner withdrawing, and to credit the capital account of the partner or partners buying the additional interest.
The share of a loss on realization my be greater than the balance in a partner's capital account. The resulting debit balance in the capital account is called a:
Deficiency
If the _______ purchase the withdrawing partner's interest, the purchase and sale of the partnership interest is between the partners as individuals.
Existing Partners
A partner may retire or withdraw from a partnership, in such cases, the withdrawing partner's interest is normally sold to the:
Existing partners or partnership
The equity reporting for an LLC is similar to that of a partnership. Instead of a statement of partnership capital:
A statement of members' equity is prepared.
The most common proprietorships are:
Lawyers, Architects, Realtors, and Physicians
A company owned by a single individual:
Proprietorship
_______ is a measure of the efficiency of the business in generating revenues.
Revenue per Employee
Before a new partner is admitted:
The balances of a partnership's asset accounts should be stated as current values.
The new partner receives a bonus when:
The ownership interest received by the new partner is greater than the amount paid.
If the deficient partner does not pay the partnership the deficiency:
There will not be sufficient partnership cash to pay the remaining partners in full.
The admission of the new partner is recorded by:
Transferring owners' equity amounts from the capital accounts of the selling partners to the capital account of the new partner.
Generally, the higher the revenue per employee, the more efficient the company is in:
Generating revenue from its employees.
Before the purchase, the asset accounts should be:
Adjusted to current values.
Many partnerships provide for:
Admitting new partners, or partner withdrawals
Any uncollected deficiency becomes a loss to the partnership and is:
divided amount the remaining partners' capital balances based on their income-sharing ratio.
A person may be admitted to a partnership by either:
Purchasing an interest from one or more of the existing partners, or contributing assets to the partnership
Selling the partnership assets is called:
Realization
A deficiency:
Represents a claim of the partnership against the partner.
Revenue Per Employee =
Revenue / Number of Employees
A measure used to assess the performance of a service-oriented business is:
Revenue per Employee
If any liabilities are assumed by the partnership, the _______ is credited.
Partnership Liability Account
Four most common legal forms for organizing and operating a business:
Proprietorship, Corporation, Partnership, Limited Liability Company (LLC)
After the income is divided and any assets revalued: (When a partner dies)
An entry is recorded to close the deceased partner's capital account.
A form of legal entitiy that provides limited liability to its owners, but is treated as a partnership for tax purposes:
Limited Liablity Company (LLC)
When a partnership goes out of business, it sells the assets, pays the creditors, and distributes the remaining cash or other assets to the partners, this process is called:
Liquidation
Only authorized members may legally bind the LLC, members may share in the income of the LLC without concern for managing the company:
Manager-Managed LLC
Individual members may legally bind the LLC, like partners bind in a partnership:
Member-Managed LLC
Characteristics of an LLC include:
Moderately complex to form, limited legal liability, not taxable, unlimited life, moderate ability to raise capital (funds).
Characteristics of a partnership include:
Moderately complex to form, no limitation on legal liability, not taxable, limited life, limited ability to raise capital (funds), Co-ownership of partnership property, mutual agency, participation in income.
Allowances that reflect differences in partners' abilities and time devoted to the partnership:
Partner Salary Allowances
An association of two or more persons who own and manage a business for profit:
Partnership
If the _______ purchases the withdrawing partner's interest, the assets and the owners' equity of the partnership are reduced by the purchase price.
Partnership
A _______ may divide income based upon salary allowances, and also based upon interest on capital balances of each partner.
Partnership Agreement
Includes matters such as amounts to be invested, limits on withdrawals, distributions of income and losses, and admission and withdrawal of partners:
Partnership Agreement
The assets contributed by a partner are debited to the:
Partnership Asset Account
The division of income may be reported at the bottom of the:
Partnership Income Statement
Many partnerships and LLCs operate as:
Service-Oriented Enterprises
This method allows partners with more invested in the partnership to be rewarded by receiving more of the partnership income:
Services of Partners and Investments
A method of dividing income that is based on the services provided by each partner to the partnership:
Services of partners
Common methods of dividing partnership income are based on:
Services of the partners, services and investments of the partners
Characteristics of proprietorships include:
Simple to form, no limitation on legal liability, not taxable, limited life, limited ability to raise capital (funds).
The _____________ reports the changes in member equity for a period.
Statement of Members' Equity
The changes in partner capital accounts for a period of time are reported in a:
Statement of Partnership Equity
A _______________ summarizes the liquidation process.
Statement of Partnership Liquidation
When the partnership goes out of business and the normal operations are discontinued, the accounts should be adjusted and closed, the only accounts remaining open will be:
The asset, contra asset, liability, and owners' equity accounts.
Liquidating refers to the payment of liabilities and includes:
The entire winding-up process
Bonuses are usually paid because of higher than normal profits that:
The new or existing partners are expected to contribute in the future.
Failure to adjust the partnership accounts for current values before admission of a new partner may result in:
The new partner sharing in asset gains or losses that arose in prior periods.
Existing partners receive a bonus when
The ownership interest received by the new partner is less than the amount paid.
When a partner dies:
The partnership accounts should be closed as of the date of the death.
When a new partner is admitted by contributing assets to the partnership:
The total assets and the total owners' equity of the partnership are increased, and the capital (equity) of the new partner is recorded as the amount of assets contributed to the partnership by the new partner.
When a new partner is admitted by purchasing an interest from one or more of the existing partners:
The total assets and the total owners' equity of the partnership are not affected, but the capital (equity) of the new partner is recorded by transferring capital (equity) from the existing partners.
Reporting changes in partnership capital accounts is similar to that for a proprietorship, the primary difference is:
There is a capital account for each partner.