F10: Partnerships

Question 1

A new partner may be admitted what two ways?

Answer 1

1- By purchase of a existing partnership OR

2- By investing additional capital into the partnership

Question 2

What journal entries are required when there’s a purchase or sale of existing partnership interest?

Answer 2

None!

Question 3

Contribution assets are reported at what?

Answer 3

Fair Value

Question 4

Liabilities assumed are recorded at what?

Answer 4

Their present value

Question 5

With a formation of a partnership, what is the GAAP Rule for assets?

Answer 5

Use FV of asset contributed

Question 6

With a formation of a partnership, what is the TAX Rule for assets?

Answer 6

Use NBV of assets contributed

Question 7

What 3 ways can there be a creation of new partnership interest with investment of additional capital?

Answer 7

1- Exact method
2- Bonus method
3- Goodwill method

Question 8

Exact Method definition

Answer 8

Purchase price is equal to book value of capital account purchased

Question 9

Are goodwill or bonuses recorded under the exact method?

Answer 9

No

Question 10

Bonus Method definition

Answer 10

Purchase price is more/less than book value of capital account purchased

Question 11

Under the bonus method, when will bonuses be credited to the existing partners?

Answer 11

When new partner pays more than NBV

Question 12

Under the bonus method, when will bonuses be credited to the new partners?

Answer 12

When new partner pays less than NBV

Question 13

Are partnership assets affected under the bonus method?

Answer 13

No

Question 14

B = Bonus is a way to remember what?

Answer 14

Balance in total capital accounts controls the capital account allocation

Question 15

Goodwill Method: goodwill is recognized based upon what?

Answer 15

The total value of the partnership implied by the new partner’s contribution

Question 16

G = Goodwill is a way to remember what?

Answer 16

Going in investment (dollars) controls capital account allocation and goodwill calculation

Question 17

What is deducted from total profit to arrive at amount of profit and loss?

Answer 17

all interest, salaries, and bonuses

Question 18

2 Methods used for withdrawal of a partner

Answer 18

1- Bonus Method

2- Goodwill Method

Question 19

What is the amount of the bonus for withdrawal of a partner?

Answer 19

The difference between the balance of the withdrawing partner’s capital account and the amount that person is paid

Question 20

How is the bonus allocated?

Answer 20

Among the remaining partners’ accounts in accordance with their remaining profit and loss ratios

Question 21

2 Steps for Bonus Method withdrawal of a partner

Answer 21

1- Revalue the assets to reflect fair value

2- Pay off withdrawing partner

Question 22

Under the goodwill method, the partners may elect to record what?

Answer 22

The implied goodwill in the partnership based on the payment to the withdrawing partner

Question 23

The amount of the implied goodwill is allocated to who?

Answer 23

ALL partners in accordance with their P&L ratios

Question 24

3 Steps for Goodwill Method withdrawal of a partner

Answer 24

1- Revalue the assets to reflect fair value
2- **Record goodwill to make withdrawing partner’s capital account equal to the payoff
3- Pay off withdrawing partner

Question 25

What is a liquidation?

Answer 25

The process of winding up affairs of a partnership after dissolution

Question 26

What is the order regarding distribution of assets?

Answer 26

1- Creditors

2- Partners

Question 27

What is the general procedure during a liquidation? (steps)

Answer 27

• Convert all noncash assets into cash
• All liabilities are paid
• Remainder is distributed to partners (if any)

Question 28

What is a capital deficiency?

Answer 28

A debit balance in a partner’s capital account- shows that the partnership has a claim against the partner

Question 29

What if a partner with a capital deficiency has a loan account with the partnership?

Answer 29

The partnership has a legal right to offset and use the loan account to satisfy the deficiency

Question 30

If a deficiency still exists, what happens?

Answer 30

The remaining partners must absorb it

Question 31

What is the objective of a partnership liquidation schedule?

Answer 31

To distribute cash, as it becomes available, to the partners