Chapter 14: Partnerships: Formation and Operations

How does partnership accounting differ from corporate accounting?

The differences between partnership accounting and corporate accounting lie in obtaining capital. For a corporation, stockholders equity is determined by earned capital and contributed capital. The earned capital and contributed capital are the divisions of stockholders' equity in a corporation. On the other hand, each partner has an individual capital account under partnership and these accounts are not differentiated according to their sources.

What information do the capital accounts found in partnership accounting convey?

There is a limited amount of any equity disclosure in partnerships because it is individualized in the formation of capital accounts for every partner. These account balances determine the level of interest the group has in the book value of the net assets of the business in question. Each balance can be affected by different events like earnings, withdrawals, and deposits.

The capital balance for Messalina is $210,000 and for Romulus is $140,000. These two partners share profits and losses 60 percent (Messalina) and 40 percent (Romulus). Claudius invests $100,000 in cash in the partnership for a 20 percent ownership. The bonus method will be used. What are the capital balances for Messalina, Romulus, and Claudius after this investment is recorded? a. $216,000, $144,000, $90,000 b. $218,000, $142,000, $88,000 c. $222,000, $148,000, $80,000 d. $240,000, $160,000, $100,000

a. $216,000, $144,000, $90,000

Which of the following is not a reason for the popularity of partnerships as a legal form for businesses? a. Partnerships may be formed merely by an oral agreement. b. Partnerships can more easily generate significant amounts of capital. d. Partnerships avoid the double taxation of income that is found in corporations. c. In some cases, losses may be used to offset gains for tax purposes.

b. Partnerships can more easily generate significant amounts of capital.

How does partnership accounting differ from corporate accounting? a. The matching principle is not considered appropriate for partnership accounting. b. Revenues are recognized at a different time by a partnership than is appropriate for a corporation. c. Individual capital accounts replace the contributed capital and retained earnings balances found in corporate accounting. d. Partnerships report all assets at fair value as of the latest balance sheet date.

c. Individual capital accounts replace the contributed capital and retained earnings balances found in corporate accounting.

Describe the differences between a Subchapter S corporation and a Subchapter C corporation.

A Subchapter S corporation is formed as a corporation and has all legal aspects of corporation but it is taxed the same as a partnership as long as it meets certain requirements. This formation pays no income taxes even though any gains or losses are passed on to the individual owner's taxable income. A Subchapter S corporation does not face double taxation and the members have limited liability. Also, since it is taxed like a partnership, the transfer of ownership is much easier. However, growth potential is severely limited because the business can only have one stock class and a limited amount of 100 shareholders.

What are the advantages of operating a business as a partnership rather than as a corporation? What are the disadvantages?

The advantages of forming a partnership involves less hassle in formation that a corporation. Only a fixed oral agreement is necessary for the formation of a partnership whereas a corporation requires massive amounts of paperwork to be filled. The disadvantages of a partnership are that each partner is allowed unlimited liability, which the law states any partner is liable for all debts incurred.

Bishop has a capital balance of $120,000 in a local partnership, and Cotton has a $90,000 balance. These two partners share profits and losses by a ratio of 60 percent to Bishop and 40 percent to Cotton. Lovett invests $60,000 in cash in the partnership for a 20 percent ownership. The goodwill method will be used. What is Cotton's capital balance after this new investment? a. $99,600 b. $102,000 c. $112,000 d. $126,000

b. $102,000

The capital balance for Maxwell is $110,000 and for Russell is $40,000. These two partners share profits and losses 70 percent (Maxwell) and 30 percent (Russell). Evan invests $50,000 in cash into the partnership for a 30 percent ownership. The bonus method will be used. What is Russell's capital balance after Evan's investment? a. $35,000 b. $37,000 c. $40,000 d. $43,000

b. $37,000

Pat,JeanLou,andDianearepartnerswithcapitalbalancesof$50,000,$30,000,and$20,000,respec- tively. These three partners share profits and losses equally. For an investment of $50,000 cash (paid to the business), MaryAnn will be admitted as a partner with a one-fourth interest in capital and profits. Based on this information, which of the following best justifies the amount of MaryAnn's investment? a. MaryAnn will receive a bonus from the other partners upon her admission to the partnership. b. Assets of the partnership were overvalued immediately prior to MaryAnn's investment. c. The book value of the partnership's net assets was less than the fair value immediately prior to MaryAnn's investment. d. MaryAnn is apparently bringing goodwill into the partnership, and her capital account will be credited for the appropriate amount.

d. MaryAnn is apparently bringing goodwill into the partnership, and her capital account will be credited for the appropriate amount.

Which of the following best describes the articles of partnership agreement? a. The purpose of the partnership and partners' rights and responsibilities are required elements of the articles of partnership. b. The articles of partnership are a legal covenant and must be expressed in writing to be valid. c. The articles of partnership are an agreement that limits partners' liability to partnership assets. d. The articles of partnership are a legal covenant that may be expressed orally or in writing, and forms the central governance for a partnership's operations.

d. The articles of partnership are a legal covenant that may be expressed orally or in writing, and forms the central governance for a partnership's operations.