Chapter 12 Partnerships Accounting 102

The partnership of Abbott and Brown split profits 1/4 to Abbott and 3/4 to Brown. There is no provision for losses. The partnership has a net loss of $200,000. What is Browns share of the loss?

$150,000

which characteristic identifies a limited liability company?

1. Members can actively participate in the management of the business. 2. Members have limited personal liability. 3. The partnership can elect not to pay business income tax.

What are the three steps involved in a liquidation of a partnership

1. Sell the assets. Allocate the gain or loss to the partners capital account based on the profit and loss sharing ratio. 2. Pay all partnership liabilities. 3. Pay the remaining cash if any to the partners based on their capital balances. NOT their profit sharing loss agreements.

How can partnership profits and losses be allocated

1. Sharing the profit/losses based on stated ratio for ex. 50/50 2. Sharing based on each partners capital balance 3. Sharing on each partners service 4. Sharing based on a combination of stated ratios capital balances and services. 5. If no agreement shared equally

2 classes of partners

1. general partner 2. 1 or more limited partners

partnership characteristics

1. limited life 2. mutual agency 3. unlimited liability 4. co-ownership of property 5. no partnership income tax

general partners

1. usually in charge of making mgmt. decision 2. last to share in profits or losses of the partnership carry the burden of unlimited personal liability for the debts of the partnership a partner who has unlimited personal liability in the partnership

At what value does a partnership record partners contributions

At current market value because the partnership is receiving the assets and assuming the liabilities at current market value.

Abbott and Brown form a partnership. Abbott contributes $10,000.00 cash and $40,000.00 in merchandise inventory. Brown contributes $5000.00 in cash and land with a current market value of $30,000. (cost of $15,000). which of the following is correct?

Brown Capital is credited for $35,000.

Charles pays $30,000 to Steven to acquire Steven's $15,000 interest in a partnership. The journal entry to record this transaction is

Debit Steven's capital $15000.00 Credit Charles Capital $15000.00

If each partner contributes cash-

Debit cash and assets at market value Credit partner capital account

How does liquidation of a partnership differ from dissolution

Dissolution is the ending of a partnership... liquidation is going out of business all accounts are zeroed out.

what is the purpose of a partnership agreement? what should it include?

It outlines the rules of the partnership. It should include 1. Name, location and nature of business. 2. Name capital contribution and duties of each partner 3. Produces for admitting a new partner 4. Method of sharing profits or losses among the partners. 5. Procedure for withdrawal of assets by the partners. 6. Procedures for withdrawal of a partner from the partnership. 7. Procedures for liquidating the partnership selling the assets paying the liabilities and giving any remaining cash to the partners.

What happens to the partnership at the death of a partner

It's dissolves the partnership. The partnership ceases to exist and the deceased partners estate will have ownership of the partners equity in the partnership.

limited partnership (LP)

Partnership with at least 2 classes of partners; one or more general partners and one or more limited partners

Partnership balance sheet

Reports a separate capital account for each partner

What causes a partnership to dissolve?

Someone can withdraw, or a new partner is added, the addition of a new partner dissolves the old partnership, or someone dies

Which financial statement shows the changes in each partners capital changes in each partners capital account for a specific period of time?

Statement of Partners Equity

What is the effect on the existing partners capital accounts if a bonus is paid to a new partner upon admission into the partnership

The existing partners accounts are debited (reduced) for the bonus .. the existing partners share this decrease in capital as though it were a loss

UPA

Uniform partnership act- establishes standards and rules of a partnership if no written agreement.

When does capital deficiency occur

When a partners capital account has a debit balance.

Describe a limited liability company

a LLC is its own form of business organization, it is neither a corporation nor a partnership.

Partnership

a business with two or more owners that is not organized as a corporation

s corporation

a corporation with 100 or fewer stockholders that can elect to be taxed in the same way as a partnership

limited liability company (LLC)

a form of business organization that is neither a partnership nor a corporation but combines the advantages of both

general partnership

a form of partnership in which each partner is a co owner of the business with all the privileges and risk of ownership

limited liability partnership (LLP)

a form of partnership in which each partner is protected from the malpractice or negligence of the partners

limited partner

a partner who has limited personal liability in the partnership ONLY LOSE WHAT THEY INVEST

Is the net income of a partnership taxed? Who pays the tax?

a partnership pays no business income tax but the individual partners must pay personal income tax. For ex. Bright and Martin earned net income of $200,000 they don't pay business income tax but pay personal income tax each on the $100000 they earned.

capital deficiency

a partnerships claim against a partner. occurs when a partners capitals account has a debit

Partnership withdrawals

decrease partnership capital

Limited partners

do not participate in mgmt. they primarily provide investment capital they do not share unlimited liability for the debts of the partnership

dissolution

ending of a partnership

What does a mutual agency mean in respect to a partnership debt?

every partner can bind the business to a contract within the scope of the business... if a partner agrees to pay a debt than the company owes the liability.

mutual agency

every partner can bind the business to a contract within the scope of the partnerships regular business operations

How does the limited partnership differ from a general partnership?

general partner takes primary responsibility and usually operates the business. takes most of the risk . they are last to receive the share of the profit but gets all the excess income after the limited partner get their share of the income. the limited partner is usually the investor that doesn't participate in the day to day business... they have no personal liability for the debts and usually the first to claim the profit to a certain point.

Describe a limited liability partnership

in a LLP it is designed to protect partners from malpractice or negligence of another partners actions. each partner is not liable for the malpractice of another partner.

S corporation

is limited to 100 shareholders has all the legal characteristics of a cooperation but the profit and losses pass directly through to the share holders as in a partnershipthe ownership is limited to US citizen ONLY cannot be owned by other companies

which characteristic identifies a general partnership?

no business income tax

statement of partners equity

summary of the changes in each partners capital account for a specific period of time

Partnership agreement

the contract between partners that specifies such items as the name location and nature of the business; the name, capital contribution, and duties of each partner and the method of sharing profits and losses among the partners

liquidation

the process of going out of business by selling the entity's assets, paying its liabilities and distributing any remaining cash to the owners based on their equity balances

unlimited personal liability

when a partnership (or sole proprietorship) cannot pay its debts with business assets, the partner (or proprietor) must use personal assets to meet the debt