FAR Module 20D

Question 1

T/F

There are no authoritative pronouncements concerning the accounting for partnerships; thus all of the principles relating to this topic have evolved through accounting practice

Answer 1

TRUE

Question 2

A partner’s capital account is equal to what?

Answer 2

The FMV of any property contributed - Liabilities Assumed

Question 3

A partner’s capital account is also known as what?

Answer 3

Their interest in the partnership

Question 4

All assets contributed are recorded by a partnership at what?

Answer 4

Their FMV

Question 5

All liabilities assumed are recorded by a partnership at what?

Answer 5

Their Present Values

Question 6

Since a partner is not an employee (therefore they do not receive wages), when a partner receives money what is the Debit?

Answer 6

Debit their Capital Account, it will be titled something like the “Drawing” or “Withdrawal” account

Question 7

How is the allocation of partnership income/loss decided?

Answer 7

There should be a written agreement. If there is no predetermined agreement, divide the P/L equally

Question 8

Define Partnership Dissolution

Answer 8

This is changes in ownership. It can be due to admission of a new partner, or the death/withdrawal of a partner. This is not the same as partnership liquidation!

Question 9

Partnership Dissolution can be dealt with using what two methods?

Answer 9

The Bonus Method

The Goodwill Method

Question 10

Under the Bonus Method, in what situation will the previously established partners receive a bonus?

Answer 10

If the new partner contributed more cash value than their interest (capital) account, the extra cash is a bonus to the other partners.

Question 11

Under the Bonus Method, in what situation will the newly admitted partner receive a bonus?

Answer 11

If the new partner contributes less cash value than their interest (capital) account, they receive a bonus for the difference

Question 12

Under the Goodwill Method, who receives the Goodwill?

Answer 12

Only the previously established partners receive a portion of the Goodwill because it is due to their success/reputation that any Goodwill exists. The new partner does not receive any Goodwill!

Question 13

How do you calculate Goodwill?

Answer 13

Implied Capital - Actual Capital = Goodwill

Question 14

On the exam, how do you know which method to use (Bonus vs. Goodwill)?

Answer 14

If they use the Goodwill Method they will tell you. Otherwise, always use the Bonus Method.

Question 15

Define Partnership Liquidation

Answer 15

This is the winding up of the partnership business. The partnership sells all of its noncash assets, pays its liabilities, and makes a final liquidating distribution to the remaining partners.

Question 16

What are the four basic steps to a partnership liquidation?

Answer 16

1) Any operating P/L is computed and allocated to the partners’ capital accounts on the basis of their P&L Ratio
2) All noncash assets are sold and converted to cash. The G/L is allocated to the partners’ capital accounts on the basis of their P&L Ratio
3) Any creditors’ claims, including liquidation expenses or anticipated future claims, are satisfied through the payment or reserve of cash
4) The remaining unreserved cash is distributed to the remaining partners in accordance with the balance in their capital accounts. This is not necessarily the P&L Ratio!

Question 17

What is a Right of Offset

Answer 17

When a loan exists between a partnership and a partner, the capital account and the loans are combined to give a net amount

Question 18

What do you do when a deficit exists in a partner’s capital account in partnership liquidation?

Answer 18

The amount of deficit is allocated to the remaining solvent partners’ capital accounts on the basis of their relative P&L ratio. Note that if the partner with the deficit is personally solvent, he has a liability to the remaining partners for the amount of the deficit.

Question 19

Unidentifiable assets are also known as

Answer 19

Goodwill, which is not recognized under the Bonus Method - don’t let them trick you!