Chapter 14 Smartbook

In addition to tangible asset contributions, a new partner may bring other intangible value to a partnership including

- an ongoing set of business clients. - professional reputation. - a special talent or skill set.

In accounting for a partner withdrawal from a partnership, the goodwill (revaluation method) credits

- each partners' capital account for their share of recognized goodwill. - each partners' capital account for their share of asset revaluations.

Under the goodwill method for recognizing a partner's intangible contribution

- goodwill is recognized as an asset of the partnership to reflect the intangible contribution. - the partner deemed to be contributing goodwill is given a capital credit to recognize the asset brought to the partnership.

Among common methods to account for the withdrawal of a partner from a partnership include the

- hybrid (revaluation/bonus) method. - goodwill method. - bonus method.

Partnership capital contributions often include

- intangible asset contributions. - cash. - tangible asset contributions.

Accounting methods for formally recording the admission of a new partner include

- revaluing existing partnership assets to fair value and recognizing goodwill. - revaluing existing partnership assets to fair value without recognizing goodwill - retaining the partnership book value through the bonus method.

A Subchapter S Corporation

- is taxed in the same way as a partnership. - must have only one class of stock. - provides limited liability to its owners.

When a new partner is admitted to a partnership as a result of a cash transaction between individual parties,

- the new partner's admission has no impact on partnership tangible assets and liabilities. - the transfer of ownership may be recorded by a capital reclassification from the current partners to the new partner.

ABC partnership shares profits and losses 20% to A, 30% to B, and 50% to C. If C retires from the partnership and receives a $10,000 bonus, the bonus reduces the capital balances of A and B by

40% to A and 60% to B.

Because a Subchapter S corporation pays no income taxes, but passes its income through to the tax returns of the individual owners, it avoids _____ taxation of its income.

double

When partners make cash contributions to a partnership, a credit to each individual partner's _____ account records the contribution.

capital

The articles of partnership document

- is a negotiated agreement created by the partners. - represents a legal agreement that governs the operation of the partnership. - largely determines the accounting procedures followed for the partnership.

Included in the advantages of the partnership form of business organization are

- a lower cost of formation compared to the corporate form. - the ability to make any arrangement desired among the partners for income distribution and control of business decision making. - ease of formation.

Ways in which an individual can gain admission into a partnership include

- contributing tangible assets directly to the partnership. - contributing intangible assets directly to the partnership. - buying an ownership interest directly from one or more existing partners.

What are some partnership activities that are considered capital transactions?

- Allocation of partnership profits and losses. - Retirement of a partner. - Admission of a new partner.

In the Goldman, King, and Wilson textbook example where Goldman is admitted to the partnership with a 20% interest in exchange for a $20,000 cash investment in the partnership, under the bonus method

Goldman receives a bonus from King and Wilson.

Which of the following is not a reason for forming a partnership as opposed to a corporation for a new business?

Partnership income typically flows tax-free to the partners.

A partner brings valuable expertise to a partnership. The partnership records no asset for this expertise, but the contributing partner nonetheless receives an additional capital credit. By crediting this partners capital account, the partnership has employed the _____ method.

bonus

Corporations pay income taxes. Additionally their owners also often pay taxes when the corporation's income is paid as dividends. In contrast, because partnership income is passed though to the individual partners tax returns, the partnership is said to avoid _____ taxation of the profit earned by the business.

double

Periodic cash withdrawals from the partnership by individual partners are recorded initially as a credit to cash and a debit to a

drawing account.

A partner contributes a building to her partnership that has appreciated in value. The the partnership's valuation basis for the building should be

fair value.

A partner brings valuable website design talent to a partnership. The partnership records goodwill to recognize this talent, and the contributing partner receives an additional capital credit. To account for the contribution of talent, the partnership has employed the _____ method.

goodwill

At year end, a partner's drawing account

is closed to the partner's capital account.

If the articles of partnership are silent with regard to partnership income distribution to the individual partners, then

partnership income is allocated equally among all partners.

Under the bonus method any excess payment to a withdrawing partner beyond his/her capital balance

reduces the capital balances of the remaining partners.

Alternative legal forms of partnerships have been provided in many state laws that both limit the liability of individual partners while maintaining the _____ benefits of the partnership form of business organization.

taxation

A new partner exchanges a $20,000 cash payment to the partnership business for a 10% partnership ownership interest. Under the bonus method

- no revaluation of existing partnership assets takes place. - the capital balance of the new partner will equal 10% of partnership net assets including the $20,000 cash payment.

A limited partnership (LP)

- has general partners who are designated to assume responsibility for all partnership debts. - has investors whose liability may be limited to the amount they have invested in the partnership. - often has investors that are not allowed to participate in the management of the partnership.

Assume all periodic partnership revenues and expenses have been closed to an Income Summary account. Final closing entries are then needed to

- close the partners' drawing accounts to their individual capital accounts. - close the Income Summary account by distributing the total profit or loss to the individual partners' capital accounts.

True or false: An advantage of a limited liability company (LLC) is that the number of owners is not restricted.

True

True or false: When an individual is admitted to a partnership and receives a partnership capital percentage in exchange for a contribution that includes goodwill, the amount of goodwill recognized is determined algebraically.

True

True or false: Upon a partner's withdrawal from a partnership, the resulting distribution will unlikely equal the balance in the partner's capital account.

Trur

Common approaches to recognizing intangible factors that a new partner may bring to a partnership include the _____ and _____ methods.

bonus goodwill

When a new partner is formally admitted to a partnership

- a new partnership is formed. - a legal dissolution of the previous partnership occurs.

Individual C is admitted with a 30% interest to the AB partnership in exchange for $50,000 cash paid to partners A and B. Why might C receive a capital credit for less that the $50,000 cash payment?

- The ownership transfer was recorded by reclassifying partial capital balances to A without any asset revaluation. - The $50,000 was paid to the current partners, not the partnership. - The partnership employed a book value approach where each partner transferred 30% of their interest to C.

Often a partner may sell his partnership interest to another individual. Why must all partners agree to allow this new partner the right to participate in the management of the partnership?

- To protect the current partners from unwanted intrusion by the new partner. - Current partners may be reluctant to yield management decision making that is essential to the well-being of the partnership.

A tax advantage of partnerships over the corporate business organizational form is

- a partner's share of partnership operating losses can be used to offset income on the partner's individual tax return. - the avoidance of double taxation.

A limited liability partnership (LLP)

- limits the partners' individual liabilities resulting from damages awarded by a court. - does not limit individual partner's liability arising from contractual obligations of the partnership. - is a popular organizational form for major public accounting firms.

Partnerships often serve as a preferred organization form for businesses compared to the corporate form because

- partnerships are easier and less costly to form than corporations. - some state regulations prevent doctors and attorneys from forming corporations. - tax benefits exist for partnerships relative to corporations.

Accounting for a partnership's owners' equity tends to be much less complex than for a corporation because

- partnerships tend to be smaller and have less complex equity transactions than corporations. - government regulations require greater disclosures for corporations to protect the investing public and others

Accounting techniques for recognizing a partner's contribution of a special valuable talent to a partnership include

- the bonus method. - the goodwill method.

Under the hybrid method of accounting for a partner's withdrawal from a partnership

- the partnership's net assets are revalued to current fair values. - a bonus from the remaining partners to the withdrawing partner may occur. - any asset revaluations are allocated to all partners based on their profit and loss percentages.

Typically included in an articles of partnership agreement are

- the procedures for admitting a new partner. - the rights and responsibilities of each partner. - how to distribute the profits and losses of the partnership.

Included in rights that a partner can convey in a transfer of ownership are

- the rights to share in the profits and losses of the partnership. - the right of co-ownership of the partnership business property - the right to participate in the management of the business if agreed upon by by all other partners.

Compared to a corporation's balance sheet, the owners' equity section of a partnership

- typically provides a much more limited range of information. - does not usually distinguish between contributed and earned capital. - typically consists of solely partner's capital accounts.

A limited liability company (LLC)

- with respect to partner liability is similar to a Subchapter S corporation. - is classified as a partnership for tax purposes. - in many states limits a partner's risk to the amount he or she has invested in the partnership.

If an individual partner's allocation of annual partnership profits exceeds his or her annual partnership withdrawals, what net effect should be reflected in the that partner's capital account?

An increase.

Zoe is admitted to the Xavier-Yang partnership in exchange for a cash investment. Zoe's initial capital credit is greater that her cash contribution. Under the goodwill method of recording the new partner's investment,

Zoe's contribution of goodwill is recognized.

Under the goodwill method to record a new partner's admission to a partnership, recognition of goodwill to the original partners is equitably allocated

according to the profit and loss percentages.

Upon a partner's withdrawal from a partnership, the goodwill method will credit each partner's capital account for their share of goodwill

according to their profit and loss sharing ratios.

The hybrid method gets its name from the fact that it contains elements of both the goodwill (revaluation) method and the _____ method.

bonus

In determining the amount to pay a partner upon withdrawal, the partnership employs current assessments for both land and goodwill, This payment therefore

can be accounted for using either the goodwill, bonus, or hybrid method.

When partners make cash contributions to a partnership, a credit to each individual partner's_____ account records the contribution.

capital

Similar to initial partner contributions to begin a partnership, subsequent partner contributions to support ongoing operations or expansion should be credited to the contributing partner's capital account at _____ value.

current

Any change in the set of specific individuals that comprise a partnership automatically leads to a legal _____.

dissolution

Despite the notion that a partnership is an extension of its individual partners, a noncash asset contributed to the partnership should be recorded at its contribution-date _____ value.

fair

A partner receives an amount in excess of his/her capital balance upon withdrawing from the partnership. A possible reason for the excess payment is that the partnership agreement calls for a revaluation of the partnership to its _____ _____.

fair value

According to the Internal Revenue Code, partnership income

flows through to the individual tax returns of the individual partners.

Assume the articles of partnership specify that profits are to be allocated 60% to partner A and 40% to partner B. If, however the articles of partnership are silent concerning the allocation of a partnership loss, then any loss is allocated

in the same manner as partnership profits.

A limited partnership helps the individual partners protect their personal financial position through the avoidance of unlimited _____ from the partnership.

liability

The emergence of several alternative partnership forms derives from the desire to avoid double taxation and

limit the personal liability exposure of individual partners.

Under the bonus method for recognizing a partner's intangible contribution

no asset is recorded; only partners' capital accounts are affected.

According to the Uniform Partnership Act, an obligation of a limited liability partnership arising from a contract is solely the obligation of the _____.

partnership