Partnership Accounting
Intangible contribution Goodwill method
one partner contributes 80,000 cash for 50% stake. Divide the 80,000 by 50% to get the implied value to be 160,000. the second partner contributes land worth 40,000. the 80,000 cash and 40,000 land equals 120,000. 160,000 implied minus the 120,000 assets contributed equals 40,000 of goodwill attributed to the second partner.
Causes of Dissolution
Act of the Parties Operation of Law Judicial Decree
Factors Increasing Basis
Additional contributions of individual assets The partner's share (based on profit and loss ratios) of increases in partnership liabilities resulting from: assuming partners' personal liabilities direct liabilities of the partnership The partner's share of partnership taxable income The partner's share of separately identified items of income not included in tax income (loss)
Selling an interest to partnership
Bonus or Goodwill Method may be employed Bonus Method will only recognize net asset write-downs (versus write-ups) If Goodwill Method is used generally only net unrecorded appreciation and/or goodwill traceable to the selling partner is recognized net asset write-downs should be recognized to the extent that they are traceable to the whole entity
More about goodwill method
Both net asset write-downs and write-ups are recorded New partner's initial capital balance equals the percent interest in the capital of the new partnership Goodwill may be traceable to the original partners and/or the new partner
Intangible contributions Bonus method
Cash (partner a) 80,000 Land (partner b) 40,000 Capital-partner a 60,000 Capital-partner b 60,000
If the partners each contribute cash
Cash xx Capital-partner a xx Capital-partner b xx
Allocation of Profit Deficiencies and Losses --- The Rules
Completely satisfy all provisions of the profit and loss agreement Use the profit and loss ratios to absorb any deficiency or additional loss caused by such action or Satisfy each of the provisions to whatever extent is possible. for example, the allocation of salaries would be satisfied to whatever extent possible before the allocation of interest is begun, etc
Drawing Account
Debit for periodic withdrawals Credit to close account at year end
Capital Account
Debit: withdrawals in excess of a specific amount, closing of net debit balance in drawing account, partners share of partnership losses. Credit: Initial and subsequent investments and partners share of profits
Factors Decreasing Basis
Distribution of partnership assets The portion of the partner's additional personal liabilities assumed by the partnership The partner's share of partnership tax losses The partner's share of separately identified items of loss not included in taxable income (loss)
UNIQUE FEATURES
Ease of Formation Potential Noncontinuity of Existence Difficulty of Disposing of Interest Unlimited Liability Mutual Agency Sharing of Profits/Losses Nontaxable Status Co-ownership of Assets and Liabilities
Retirement or Death of partner
Partner has right to be paid the amount in their equity account Procedure to be followed should be spelled out in partnership agreement, can be: Between partners themselves or Between partner and partnership Issue of when income to be calculated Whole year Pro rata
FEDERAL INCOME TAX LAW
Partnership reports income/loss, However partners pay taxes Partners transfer assets to partnership without gain/loss to form a partner basis Basis is used to determine gain/loss if partner withdraws for any reason from the partnership
Partnership agreements
Partnerships can exist in the absence of a written partnership agreement. Uniform Partnership Act (UPA) establishes standards and rules for partnerships. Written agreement of partners will supercede the UPA.
Purchase of an existing interest
Purchase of an interest from one or more of a partnership's existing partners is a: PERSONAL TRANSACTION between .... incoming partner and .... selling partner(s). ONLY entry required on the partnership's books is to TRANSFER an amount: From the selling partner's Capital Account. To the incoming partner's Capital Account.
Goodwill method
Record the tangible assets contributed. (FMV) Record the contributed intangible asset as the difference between the contributed tangible assets and the implied value of the partnership.
Revised UPA Provisions (1997)
Relation of Partners to One Another Relation of Partners to Persons Dealing With Partnership Dissociation (Withdrawal of Partner) Dissolution (Winding Up the Partnership's Activities and Terminating the Partnership Existence)
Allocation of profits and loss
Specified Numerical Ratio Capital Investments of the Partners Services Rendered to Partnership by Partner Combination of the Above --- Limited only by Creativity of the Partners Agreement Silent --- Divide Equally
Installment liquidation guidelines
The "right of offset" doctrine is employed All liabilities, possible losses, and liquidation expenses are anticipated Prior to a distribution, all remaining non-cash assets are assumed to be worthless No cash distributions are made to partners until creditors have been paid in full (100%) With respect to potential debit capital balances, all partners are assumed to be personally insolvent Actual distributions are based on a schedule of safe payments or a predistribution plan
Bonus method formula for admitting a new partner
Total Capital of New Partnership is equal to: + Book value of the previous partnership - Write-downs in the value of the previous partnership's net assets + Value of the consideration paid to the partnership by the incoming partner
Goodwill method method
Total Capital of New Partnership is equal to: + The book value of the previous partnership + Unrecognized appreciation or depreciation on the recorded net assets of the previous partnership + Unrecognized goodwill traceable to the previous partnership + The value of the consideration, both tangible and intangible, received from the new incoming partner
Liquidation guidelines
UPA establishes rules governing the priority in which partnership assets are distributed Creditors Partner Loans Partnership Capital Unbreakable Rules Distribute all gains/losses before distributing cash Profit/loss ratio governs the way all gains/losses are distributed (Exception: Partnership Agreement has a provision to the contrary)
ADMISSION OF NEW PARTNER
Unanimous Agreement Liability of New Partner Revaluation of Assets and Liabilities Ways of Joining Purchase a Share from Existing Partners Investment of Assets Into Partnership
Types of Liquidation
Lump Sum Liquidation ... all Lump sum -assets are in a distributable form and all outside creditors are satisfied before distributions are made to partners Installment Liquidation ... payments may be made to partners in installments as cash becomes available rather than in a final lump sum. Caution must be exercised to insure that no premature distributions are made A Predistribution Plan ... developed in advance of actual distributions which serves as a guideline for the order and amount of future distributions
Articles of a partnership
-Profit/Loss sharing -Initial contributions -Withdrawal limits -Rights and responsibilities -methods of a) admitting new partners b) dispute settlements c) valuing individual contributions
More Bonus Method
New partner's initial capital balance equals the percent interest in the capital of the new partnership Bonus may be either to old partners or the new partner Bonus is allocated based on profit/loss percentages, not interest in capital percentages
WAYS OF FORMULATING
Expressed Agreement Law of Estoppels Failure to Form a Corporation
Allocation of Income
First, interest of beginning capital balance. Second, allocated compensation. Third, Bonuses. Fourth, remaining income.
More liquidation guidelines
If debit capital balances are not eliminated, they are allocated to the other partners with credit capital balances All attempts should be made to avoid premature liquidation payments to partners Estimate Liquidation Expenses at Inception of Liquidation Process and Add to Liabilities
MAJOR ACCOUNTS
Loans Drawing Capital
Bonus method for admission of a new partner
New partnership capital equals the old partner's capital plus the new partners asset investment
Goodwill method formula
New partnership capital is greater than the old partners' capital plus new partners asset investment.