UN2

Two partners (X and Y) have equal balances in their capital accounts and have agreed to share profits and losses on a 55:45 basis, respectively. When partnership assets are liquidated, partner Y's capital account will be increased for

45% of gains on sales of partnership assets.

Two partners (L and M) have equal balances in their capital accounts and have agreed to share profits and losses on a 70:30 basis, respectively. When the partnership is liquidated, partner L's capital account will be reduced for

70% of liquidation expenses.

Partners A, B,and C share profits and losses in a ratio of 50%, 40%, 10%, respectively. Simulated losses result in A having a deficit capital balance. The amount of A's deficit that should be allocated to B's capital account in a proposed statement of liquidation is

80%. Reason: The correct answer is 80%, calculated as 40%/(40% + 10%).

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

Drawing account

What are some partnership activities that are considered capital transactions?

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

The earliest date at which some partnership cash can be distributed to partners is

the date of termination.

Angela, Barb, and Chris have decided to terminate their partnership. A $100,000 loss would reduce Angela's capital account balance to zero, an additional $50,000 loss would reduce Barb's capital account to zero, and a further $20,000 loss would reduce Chris's capital account to zero. As cash becomes available for distribution to partners,

the first $20,000 should be paid to Chris.

By creating a predistribution plan, an accountant can avoid creating several proposed schedules of liquidation over the life of a partnership liquidatio

True

The ending balances in individual partners' capital accounts determines the amount of partnership cash that will be distributed to each partner upon termination of the partnership.

True

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

True

When other partners are unable to recover any part of an insolvent partner's deficit capital balance, the insolvent partner's capital account should be closed by making

a credit to his/her capital account.

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

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

When a new partner is formally admitted to a partnership

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

When partnership assets are sold on a piecemeal basis over time and cash is distributed to partners after each sale of assets,

a new proposed schedule of liquidation should be prepared before each distribution of cash to partners.

At the time of partnership termination, Partner A is personally insolvent and has a negative capital balance. Partners B and C must absorb A's deficit through

a reduction in their capital accounts.

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

bonus

The maximum amount of loss that can be absorbed by an individual partner is calculated

by dividing the partner's capital balance by their profit and loss allocation.

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

capital

When other partners are unable to recover any part of an insolvent partner's deficit capital balance, the insolvent partner's capital account should be closed and the other partners' capital accounts should be

debited for each partner's share of the deficit.

The procedures involved in terminating and liquidating a partnership include

distributing partnership cash to individual partners after partnership liabilities and liquidation expenses have been paid.

In addition to accounting for the transactions that occur during a partnership liquidation, the partnership's accountant should work to ensure the _____ treatment of all parties involved in the liquidation.

equitable

After simulating a series of losses that reduces each partner's capital account to a zero balance, the partner whose capital account balance is reduced to zero last is the partner who will be

first to receive a cash distribution as partnership assets are sold.

According to the Internal Revenue Code, partnership income

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

During a partnership liquidation, credits are made to individual partners' capital accounts to recognize each partner's share of

gains on sales of partnership assets.

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.

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.

At the time of the termination of the ABCD partnership, Partner A and Partner B have negative capital balances, and Partner A is personally insolvent. After Partner A's deficit capital balance is written-off, the balance in Partner B's capital account

is a larger negative amount.

The articles of partnership document

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

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

liability

A limited liability partnership (LLP)

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

Distributing cash to partners over time during the liquidation process is referred to as a

liquidation made in installments.

A statement of partnership liquidation discloses

liquidation transactions already carried out.

Only those partners with a capital balance that is large enough to absorb all possible future _____ will receive cash in a preliminary distribution of partnership assets.

losses

During a partnership liquidation, debits are made to individual partners' capital accounts to recognize each partner's share of

losses on sales of partnership assets.

Dividing a partner's capital balance by their profit and loss allocation determines that partner's _____ loss that can be absorbed.

maximum

In preparing a proposed schedule of liquidation, the accountant assumes that liquidation expenses will be the

maximum amount in the range of probable future expenses

A Subchapter S Corporation

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

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

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

Preparation of a proposed schedule of liquidation is based on the assumption any partner with a deficit capital balance wil

not make any cash contribution to the partnership to cover their deficit.

Preparation of a proposed schedule of liquidation is based on the assumption any partner with a deficit capital balance will

not make any cash contribution to the partnership to cover their deficit.

A partnership's accountant determines that Partner A has a "maximum loss that can be absorbed" of $50,000. If the partnership incurs a loss of $50,000 in liquidating noncash assets, Partner A will

not receive any cash distribution from the partnership liquidation.

A limited partnership (LP)

often has investors that are not allowed to participate in the management of the partnership. 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.

At the time of partnership termination, Partner A is personally insolvent and has a negative capital balance. Partners B and C must absorb A's deficit

on the basis of their respective profit and loss ratios.

When a predistribution plan is used to determine distributions of cash to partners, distributions are made to partners on the basis of their original profit and loss percentages

only after all partners begin to receive cash based on the predistribution plan.

A statement of partnership liquidation reports updated balances in the partnership's assets, liabilities, and

partners' capital accounts.

Gains on sales of partnership assets are allocated to individual partners' capital accounts based on

partners' relative profit and loss ratios.

Liquidation expenses are allocated to individual partners' capital accounts on the basis of

partners' relative profit and loss ratios.

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

partnership

The ending balances in individual partners' capital accounts is the basis for allocating

partnership cash that remains after payment of partnership liabilities.

A single plan drawn up at the beginning of a liquidation that serves as a guide to all future distributions of cash to partners is known as a _____ plan.

predistribution

The document prepared by accountants at the start of a liquidation that will serve as a guide for all future payments of cash during the partnership liquidation is known as a

predistribution plan.

Gains and losses incurred from the sale of assets during a partnership liquidation are

recorded directly in partners' capital accounts rather than being recognized as gains and losses in net income.

The amount that can be distributed to an individual partner during the liquidation process while ensuring that partner has a safe capital balance can be referred to as a _____ payment.

safe

When making distributions of cash to partners during the liquidation process, the accountant must ensure that each partner has a _____ capital balance, which is the minimum amount that a partner must retain in their capital account to be able to absorb future losses.

safe

A safe payment is the amount that can be distributed to an individual partner during the liquidation process while ensuring that the partner's capital account maintains a

safe balance.

The procedures involved in terminating and liquidating a partnership include

selling partnership assets to convert them into cash.

A "liquidation made in installments" results in

several distributions of cash to partners during the liquidation process.

Select all that apply Partnerships often serve as a preferred organization form for businesses compared to the corporate form because

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

At the beginning of a liquidation, a loan made by the partnership to an individual partner would be

subtracted from that partner's capital account.

A partner's safe capital balance is the amount

that must remain in that partner's capital account to absorb any future losses.

When a partner has a negative capital balance, but is personally solvent,

that partner makes a capital contribution to the partnership.

Cash can be safely distributed to an individual partner in a preliminary distribution of partnership assets only if

that partner's capital balance is large enough to absorb all possible future losses.

A partner with a negative capital balance should make a contribution to the partnership in an amount equal to

that partner's negative capital balance.

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

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

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

the bonus method. the goodwill method.

A safe payment is the amount that can be distributed to an individual partner during the liquidation process while ensuring that future liquidation transactions cannot result in

the partner having a deficit capital balance.

Any partnership cash remaining after the payment of partnership liabilities and liquidation expenses is distributed to individual partners based upon

the partners' ending capital account balances.

Some amount of partnership cash can be safely distributed to partners at the date of partnership termination if

the partnership is solvent.

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.

Once all partners have begun to receive cash based on a predistribution plan, additional amounts of cash generated from the liquidation of noncash assets can be distributed to partners based on

their original profit and loss ratios.

Gains and losses on the sale of assets during a partnership liquidation are recorded directly in partners' capital accounts

to keep track of changes in partners' capital balances.

A proposed schedule of liquidation is based on the assumption that all future partnership transactions will result in _____ losses.

total

In preparing a proposed schedule of liquidation, the accountant assumes that all future partnership transactions will result in

total losses.

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

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

The partner with the smallest "maximum loss that can be absorbed" is the partner

who is least likely to receive any cash from liquidation of the partnership.

A limited liability company (LLC)

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

A predistribution plan indicates

- the order in which partners receive cash as it becomes available from the sale of noncash assets. - the amount (or percentage) each partner receives in each distribution of cash that becomes available from the sale of noncash assets.

The procedures involved in terminating and liquidating a partnership include

- using cash from the sale of partnership assets to pay any expenses incurred in the liquidation process. - using cash from the sale of partnership assets to pay off partnership liabilities.

In addition to accounting for the transactions that transpire during a partnership liquidation, the partnership's accountant

- should work to make sure that all parties involved in the liquidation are treated equitably. - might be asked to make recommendations regarding the distribution of partnership funds.

Partners might decide to terminate their partnership because they

- believe profits have become inadequate to justify their continued investment. - no longer wish to work together.

Partners' relative profit and loss ratios are used as the basis for allocating

- gains on sales of assets to partners' capital accounts. - liquidation expenses to partners' capital accounts.

One reason why partners might decide to terminate their partnership is that

- partners disagree over how the partnership should continue to operate. - the partnership is not successful enough to adequately compensate partners for their time and capital investment.

The parties most interested in the financial information produced during a partnership liquidation are the partnership's

- partners. - creditors.

A statement of partnership liquidation should include several columns of information that show changes in

- partnership cash. - partnership liabilities. - individual partners' capital accounts

A statement of partnership liquidation discloses

- partnership liabilities remaining to be paid. - assets still held by the partnership. - current capital balances.

Traditionally, the contribution of property by a partner to a partnership is recorded at _____ value.

Fair

The proposed schedule of liquidation developed at the start of the liquidation can be used to determine the amount of cash to distribute to individual partners when partnership assets are sold on a piecemeal basis and cash is distributed to partners in installments.

False

In preparing a proposed schedule of liquidation, the deficit in a partner's capital account resulting from simulated losses should be allocated to the other partners' capital accounts

based on their relative profit and loss ratios.

The basic format of a statement of partners' capital is

beginning capital balances + income allocations - drawings = ending capital balances

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?

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

A statement of partnership liquidation reports updated balances in the partnership's assets, liabilities, and capital accounts

at periodic intervals.

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

FV

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.

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

At the beginning of a liquidation, a loan made by an individual partner to the partnership would be

added to that partner's capital account.

A partnership has four partners, two of whom have negative capital balances and one of these is personally insolvent. When the personally insolvent partner's deficit capital balance is written off

all of the other partners absorb the loss.

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.

The predistribution plan should indicate that, as cash become available for distribution in a partnership liquidation, the first recipient(s) of cash

are the partnership's creditors.