F10: Partnerships Flashcards
A new partner may be admitted what two ways?
1- By purchase of a existing partnership OR
2- By investing additional capital into the partnership
What journal entries are required when there’s a purchase or sale of existing partnership interest?
None!
Contribution assets are reported at what?
Fair Value
Liabilities assumed are recorded at what?
Their present value
With a formation of a partnership, what is the GAAP Rule for assets?
Use FV of asset contributed
With a formation of a partnership, what is the TAX Rule for assets?
Use NBV of assets contributed
What 3 ways can there be a creation of new partnership interest with investment of additional capital?
1- Exact method
2- Bonus method
3- Goodwill method
Exact Method definition
Purchase price is equal to book value of capital account purchased
Are goodwill or bonuses recorded under the exact method?
No
Bonus Method definition
Purchase price is more/less than book value of capital account purchased
Under the bonus method, when will bonuses be credited to the existing partners?
When new partner pays more than NBV
Under the bonus method, when will bonuses be credited to the new partners?
When new partner pays less than NBV
Are partnership assets affected under the bonus method?
No
B = Bonus is a way to remember what?
Balance in total capital accounts controls the capital account allocation
Goodwill Method: goodwill is recognized based upon what?
The total value of the partnership implied by the new partner’s contribution
G = Goodwill is a way to remember what?
Going in investment (dollars) controls capital account allocation and goodwill calculation
What is deducted from total profit to arrive at amount of profit and loss?
all interest, salaries, and bonuses
2 Methods used for withdrawal of a partner
1- Bonus Method
2- Goodwill Method
What is the amount of the bonus for withdrawal of a partner?
The difference between the balance of the withdrawing partner’s capital account and the amount that person is paid
How is the bonus allocated?
Among the remaining partners’ accounts in accordance with their remaining profit and loss ratios
2 Steps for Bonus Method withdrawal of a partner
1- Revalue the assets to reflect fair value
2- Pay off withdrawing partner
Under the goodwill method, the partners may elect to record what?
The implied goodwill in the partnership based on the payment to the withdrawing partner
The amount of the implied goodwill is allocated to who?
ALL partners in accordance with their P&L ratios
3 Steps for Goodwill Method withdrawal of a partner
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
What is a liquidation?
The process of winding up affairs of a partnership after dissolution
What is the order regarding distribution of assets?
1- Creditors
2- Partners
What is the general procedure during a liquidation? (steps)
- Convert all noncash assets into cash
- All liabilities are paid
- Remainder is distributed to partners (if any)
What is a capital deficiency?
A debit balance in a partner’s capital account- shows that the partnership has a claim against the partner
What if a partner with a capital deficiency has a loan account with the partnership?
The partnership has a legal right to offset and use the loan account to satisfy the deficiency
If a deficiency still exists, what happens?
The remaining partners must absorb it
What is the objective of a partnership liquidation schedule?
To distribute cash, as it becomes available, to the partners
