Accounting - Chapter 12

Liquidation Process

1. Sell the partnership assets aka Realization 2. Distribute any gains or losses from realization to the partners based on their income-sharing ratio 3. Pay the claims of creditors, using cash from the step 1, Realization. 4. Distribute any remaining cash to the partners based on the balances in their capital accounts.

Limited Liability Company (LLC)

A business form consisting of one or more persons or entities filing an operating agreement with a state to conduct business with limited liability to the owners, yet treated as a partnership for tax purposes. Limited Legal Liability. Member's personal assets are legally protected against creditor claims. ***Owners are called MEMBERS in a LLC! Not taxable. Income passes through the LLC and is taxed on the individual members' tax returns. Unlimited life. Continuity of life for the LLC, even when a member withdraws.

Proprietorship

A company owned by a single individual. The owner is personally liable for any debts or legal claims against the business. Thus, creditors can take the personal assets of the owner if the business debts exceed the owner's investment in the company. Not taxable. When the owner dies, the proprietorship dies.

Revenue Per Employee

A measure of the efficiency of the business in generating revenues, which is computed as revenue divided by number of employees.

Statement of Members' Equity

A summary of the changes in each member's equity in a limited liability corporation that has occurred during a specific period of time.

Statement of Partnership Equity

A summary of the changes in each partner's capital in a partnership that has occurred during a specific period of time.

Statement of Partnership Liquidation

A summary of the liquidation process whereby cash is distributed to the partners based on the balances in their capital accounts.

The new partner receives a bonus when the ownership interest received by the new partner is...

GREATER than the amount paid.

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 is.....

NOT AFFECTED. The capital (equity) of the new partner is recorded by transferring capital (equity) from the existing partners.

Dividing Income - Allowances Exceed Net Income

Occurs when the net income is LESS THAN the total of the allowances. The negative amount is divided among the partners as though it were a net loss.

Manager-Managed LLC

Only authorized members may legally bind the LLC. In a manager-managed LLC, members may share in the income of the LLC without concern for managing the company.

Deficiency

The debit balance in the retained earnings account.

Partnership Agreement

The formal written contract creating a partnership. Includes matters such as amounts to be invested, limits on withdrawals, distributions of income and losses, and admission and withdrawal of partners.

Realization

The sale of assets when a partnership is being liquidated.

Liquidation

The winding-up process when a partnership goes out of business.

The liabilities that are assumed by a partner or member are

credited.

The assets contributed by a partner or member are

debited.

Partnership

An unincorporated business form consisting of two or more persons conducting business as co-owners for profit. No limitation on legal liability. Partners are personally liable for any debts or legal claims against the partnership. Creditors CAN take personal assets. Not taxable. Limited Life. New agreement must be formed if a partner dies, or a new partner is added.

Dividing Income - Services of Partners

Based on the services provided by each partner to the partnership/LLC (salary allowances) split extra income equally BASED ON SALARY ALLOWANCES!!!

Dividing Income - Services of Partners and Investments

Divides income based upon salary allowances AND based upon interest on capital balances of each parter. Partners with more invested in the partnership are rewarded by receiving more of the partnership income.

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. The capital (equity) of the new partner is recorded as the amount of assets contributed to the partnership by the new partner.

Operating Agreement

Includes matters such as amounts to be invested, limits on withdrawals, distributions of income and losses, and admission and withdrawal of members in a LLC.

Member-Managed LLC

Individual members may legally bind the LLC.

Existing partners receive a bonus when the ownership interest received by the new partner is...

LESS than the amount paid.