ACCT 3731 - Advanced Accounting: Exam 4 (Final)

9. When a partner sells an ownership interest in a partnership, what rights are conveyed to the new owner?

1) right to co-ownership of business property 2) right to specified allocation of profit and losses 3) right to assist in management (only with consent of existing partners)

9. By what methods can a new member gain admittance into a partnership?

Acquiring all or part of a current partner's interest. or through a contribution to the partnership

9. Goodwill Method:

Amount contributed and capital percentages are mathematically used to determine the business' total value and goodwill is credited to the appropriate partner

9. A new partner enters a partnership and goodwill is calculated and credited to original partners. How is the specific amount of goodwill assigned to these partners?

Based on the profit and loss ratio. Assumed to recognize unrealized gains on business value. Implied value is calculated based on the amount being paid for the percentage. Implied value-total capital = goodwill

10: After liquidating all property and paying partnership obligations, what is the basis for allocating remaining cash among the partners?

Based solely on their ending capital account balances unless they have agreed otherwise. If a partner has a deficit balance, additional contribution should be made to offset

9. If a partner is contributing attributes to a partnership (est clientele/expertise), what 2 methods can be used to record the contribution?

Bonus and Goodwill

9: When a partner withdraws from a partnership, why is the final distribution often based on the appraised value rather than book value of capital account?

Book value measures historical cost that has undergone years of allocation/changes in value, so it doesn't resemble actual value. In addition goodwill might not be reflected in book value. Partnership articles should spell out equitable settlement method.

9. What is a partnership dissolution?

Breakup of partnership. A partner may withdraw, retire, die. New partner may be admitted. Original partnership terminates, when members change. Doesn't necessarily mean liquidation of business. Usually a new partnership is formed to take over.

9. What provisions in a partnership agreement can be used to establish an equitable allocation of income among all partners?

Can be based on many factors (should be fair). Interest factor rewards capital investment of partners, salary allowance recognized time worked by individuals, or a ratio can be used.

10: What is the difference between dissolution of a partnership and the liquidation of partnership property?

Dissolution = cessation of partnership (usually to transfer property to new partnership). Liquidation = actual business activities must cease. Property is sold, cash is distributed to creditors and partners.

10: Why are liquidation gains and losses usually recorded as direct adjustments to the partner's capital accounts?

During liquidation, monitoring partner capital account balance is most important. It indicates cash received or owed by partners. So recording gains and losses directly enhances the informational value of the accounts. Net income is less important since operations have ceased

9: What are the advantages of operating a business as a partnership rather than corp? Disadvantages?

Ease of formation, avoidance of double taxation, losses can reduce income tax or be deferred.

9. If no agreement exists in a partnership as to the allocation of income, what method is appropriate?

Equal division among partners is presumed. If profit allocation is defines, but losses aren't, it is presumed to be the same as profits.

10: Why would the members of a partnership elect to terminate business operations and liquidate all non-cash assets?

Failed to generate significant profits, enter different lines of work, death/retirement/withdrawal of partner, bankruptcy of individual or partner

10.2: Which of the following statements is true concerning the accounting for a partnership going through liquidation?

Gains and losses are reported directly as increases and decreases in the appropriate capital account.

9. What is the purpose of a drawing account in a partnership's financial records?

It measures the amount of assets that a particular partner takes from the business during the current period. Usually regularly allowed amounts are recorded here and larger amount are recorded in the capital account.

9. What is an articles of partnership agreement and what info does it contain?

Legal agreement as prerequisite to formation of partnership. Defines right and resp. a) name/address, b) business location, c)description of business, d) rights and responsibilities, e) initial investment/valuation, f) allocation of profits and losses, g) withdrawals, h) new partners, i) dispute arbitration, j) withdrawal/retirement/death

10: According to the Uniform Partnership Act, what events should occur if a partner incurs a negative capital balance during the liquidation process?

Legally, any partner who incurs a negative capital balance is obligated to make an additional contribution to offset it

9. Under what circumstances might goodwill be allocated to a new partner entering a partnership?

New partner brings a nontraditional accounting asset (business reputation, etc). Or if cash is urgently needed and a larger share has to be offered as enticement for the investment

10: What is the purpose of a schedule of liquidation? What info does it convey?

Provides the financial data for the liquidation as it has progressed to date. Balance of all remaining assets, the liability total, and the capital account of each partner. Also allocation of gains, losses, and expenses should be evident

9. Bonus Method:

Record only the identifiable assets (land, etc). The capital accounts are then realign to reflect the partner's proportional share of the investment

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

The balance in each partner's capital account measures the partner's interest in the book value of the business' net assets. This figure arises from contributions, earnings, drawings, and other capital transactions.

9. At what point in the accounting process does the allocation of partnership become significant?

The end of year when revenues and expenses are closed out. The allocation is based on the agreement established in the articles of partnership

10.3: During a liquidation, if a partner's capital account balance drops below zero, what *should* happen?

The partner with a deficit contributes enough assets to offset the deficit balance.

9: What valuation should be recorded for non-cash assets transferred to a partnership by one of the partners?

To give fair recognition, all non-cash assets should be recorded at fair value. For taxation purposes, book value is retained

10: How do loans from partners affect the distribution of assets in a partnership liquidation? What alternatives can affect the handling of such loans?

UPA = loans from partners rank ahead of capital accounts. This is a problem if the partner is insolvent. In practice, loan is merged with partner's capital account to minimize the chance of a negative balance occurring. Many result in less money, but partners are better protected

10: What is the purpose of a proposed schedule of liquidation, and how is it developed?

Used by an accountant to determine the allocation of any cash balances generated during early liquidation. Often there is enough cash the pay all (as well as potential) liquidation expenses. Additional cash should be immediately distributed to partners. Based on assumed losses to produce safe capital balances

9.2: 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 appropriately 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.

9.3: 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 in writing, and forms the central governance for a partnership's operations.

10: How are safe capital balances computed when preliminary distributions of cash are to be made during a partnership liquidation?

A safe capital balance is what exceed all possible needs of a partnership during liquidation, therefore it can be received immediately with no danger. Calculated by projecting maximum losses. All non-cash assets are assumed to have no resale value, liquidation expenses are set at max, and all partners are considered insolvent. Any capital that remains can be distributed

10.1: If a partnership is liquidated, how is the final allocation of business assets made to the partners?

According to the final capital account balances.

9.1: 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 c. Partnerships avoid the double taxation of income that is found in corporation d. In some cases, losses may be used to offset gains for tax purposes

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