Adv Accounting - Chap 14 - Exam 1 - Questions

By what methods can a new partner gain admittance into a partnership?

A new partner can join a partnership by acquiring part or all of the interest of one or more of the present partners. This transaction is carried out with the individual partners directly and not with the partnership. A new partner may also enter through a contribution to the business. In such cases, the investment is made to the partnership rather than to the individuals.

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

Advantages - Avoid double taxation, ease of formation, and can make unusual and disproportionate allocations Disadvantages - Unlimited Liability and Mutual Agency

Under what circumstance might goodwill be allocated to a new partner entering a partnership

Allocating goodwill to an entering partner may be necessary for several reasons. One of the most common is that the partner is bringing to the partnership an attribute that is not an asset in the traditional accounting sense. For example, a new partner with an excellent business reputation might be credited with goodwill at the time of entrance. Other factors such as an established clientele or a professional expertise can justify attributing goodwill to the new partner. The partnership might make this same concession to an entering partner if cash is urgently needed by the business and a larger share of the capital has to be offered as an enticement to generate the new investment.

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

Book values in most cases measure historical cost expenditures which often have undergone years of allocation and changes in value. For this reason, book value will frequently fail to mirror or even resemble the actual worth of a business. In addition, the goodwill that is assumed to be present in a business as a going concern is not a factor that is always reflected within book values. Therefore, distributing partnership property to a withdrawing partner based on book value would not necessarily be fair. Hence, the Articles of Partnership should spell out a method by which an equitable settlement can be achieved

Describe the difference between a Subchapter S-corp and a Subchapter C-corp

S-Corp: enjoys limited legal liability and easily transferrable ownership, while taxed like a partnership. (Owners only taxed once at the time that it is earned by the corp) but to qualify, must have only one type of stock, less than 100 owners. Corporations that don't meet these guidelines are automatically C-corps which are taxed when income is earned and also when dividends are issued

What is a partnership dissolution? Does dissolution automatically necessitate the cessation of business and the liquidation of partnership assets?

The dissolution of a partnership is the breakup or cessation of the partnership. Many reasons can exist for a partnership to dissolve. One partner may withdraw, retire, or die. A new partner may be admitted to the partnership. The original partnership terminates whenever the identity of the individuals serving as partners has changed. Dissolution, however, does not necessarily lead to the liquidation of the business. In most cases, but not all, a new partnership is formed which takes over the business. Such dissolutions are no more than changes in the composition of the ownership and should not affect operations.

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

At the end of each fiscal year, when revenues and expenses are closed out, some assignment must be made of the resulting income figure because a partnership will have two or more capital accounts rather than a single retained earnings balance. This allocation to the capital accounts is based on the agreement established by the partners preferably as a part of the Articles of Partnership.

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

Equal division among partners is presumed.

What are the advantages and Disadvantages for a General Partnership, Limited Liability Partnership, or a Limited Liability Company?

General Partnership: Adv- ease of formation, income only taxed once. Disadv - Unlimited Liability Limited Liability Partnership (LLP): Adv- ease of formation, investment is only liability (not responsible for actions of other partners) Limited liability Company: Adv - No double-taxation and liability is only limited to investment of partners. Some state law may wave number of owner restriction Disadv: Only be created in certain situations and certain states.

A New Partner enters a partnership, and goodwill is calculated and credited to the original partners. How is the specific amount of goodwill assigned to these partners?

Goodwill recognized in a capital transaction is allocated to the original partners based on the profit and loss ratio. The amount is assumed to represent unrealized gains in the value of the business. To determine the amount of goodwill, the implied value of the business as a whole must be calculated based on the price paid for a portion by the new partner. The difference between this implied value and the total capital is assumed to be goodwill or some other adjustment to asset value.

If a partner is contributing attributes to a partnership such as an established clientele or a particular expertise, what two methods can be used to record the contribution?

In forming a partnership, one or more of the partners may be contributing some factor (such as an e stablished clientele or an expertise) which is not viewed normally as an asset in the traditional accounting sense. In effect, the partner will be receiving a larger capital balance than the identifiable contributions would warrant. The bonus method of recording this transaction is to value and record only the identifiable assets such as land and buildings. The capital accounts are then aligned to recognize the proportionate interest assigned to each partner's investment. If, for example, the capital balances are to be equal, they are set at identical amounts that correspond in total to the value of the identifiable assets. As an alternative, the amounts contributed along with the established capital percentages can be used to determine mathematically the implied total value of the business and the presence of any goodwill brought into the business. This goodwill is recognized at the time that the partnership is created so that the amount can be credited to the appropriate partner

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

In selling an interest in a partnership, three rights are conveyed to the new owner: a. The right of co-ownership of the business property; b. The right to a specified allocation of profits and losses generated by the partnership's business; and c. The right to participate in the management of the business. No problem exists in selling or assigning the first two of these rights. However, the right to participate in management decisions can only be transferred with the consent of all partners.

What is an articles of partnership agreement, and what information should this document contain?

Legal agreement that should states prerequisites of a partnership. defines: 1. Rights and Responsibilities 2. Name and address of each partner 3. Business Location 4. Initial investment and valuation method 5. Profit and loss sharing method 6. Periodic withdrawal allowance 7. Procedure for admitting new partners 8. Method for arbitrating partnership disputes 9. Method for settling a partner's share in the business upon withdrawal, retirement, or death

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

Measures the amount of assets that a particular partner takes from the business during the current period. Often, only regularly allowed distributions are recorded in the drawing account with larger, more sporadic withdrawals recorded as direct reductions to the partner's capital balance.

What Provisions in a partnership agreement can be used to established an equitable allocation of income among all partners?

The allocation process can be based on any number of factors. The actual assignment of income should be designed to give fair and equitable treatment to each of the partners. Often, an interest factor is used to reward the capital investment of the partners. A salary allowance is utilized as a means of recognizing the amount of time worked by an individual or a certain degree of business expertise. The allocation process can be further refined by a ratio that is either divided evenly among the partners or weighted in favor of one or more members.

How does partnership accounting differ form corporate accounting?

The partner's claim on the net assets of the partnership

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

The partner's claim on the net assets of the partnership

What valuation should be recorded for noncash assets transferred to ta partnership by one of the partners?

To give fair recognition to noncash contributions, all assets donated by the partners (such as land or inventory) should be recorded by the partnership at their fair values at the date of investment. However, for taxation purposes, the partner's book value is retained