01 Partnership Flashcards
Two or more persons bind themselves to contribute money, property, or industry to a common fund with the intention of dividing profits among themselves.
Partnership
Partner’s ledger accounts
Capital
Drawings
Receivable/Payable to a Partner
Formula for capital account of a partner
Original investment
+ Additional Investment
- Permanent Withdrawal
+ Share in Profits
- Share in Losses
- Drawings (closing)
Formula for drawings account of a partner
Temporary Drawings
+ Share in Losses
- Share in Profits
Represents net assets invested by a partner
Contributed Capital
Differentiate partnership, sole proprietorship, corporation:
a. Owners are called
b. Equity is called
c. Number of owners
d. Profits distributed to
e. Decision making made by
f. Owner’s liability
g. Separate taxation?
h. Life of business
a. partners - sole prop - shareholders
b. capital - capital - SHE
c. at least 2 - 1 - 1 to 15
d. partners - sole prop - shareholders via dividends
e. partners - sole prop - BOD and shareholders
f. unlimited - unlimited - limited
g. yes - yes - yes
h. limited - limited - unlimited
Receivable/payable from/to a partner is a:
a. real account
b. nominal account
A. Real Account
Two types of capital
Contributed capital
How do you value contributions in a partnership?
- Agreed value
- Fair value
- Book value
Can there be accumulated depreciation in the new partnership books?
No
Represents the capital credit of a partner
Agreed Capital
Can opportunity cost be recorded as contribution?
No
Which methods of realignment of capital are not allowed by PFRS?
Goodwill
Revaluation upwards - will depend
In realignment of capital, if TCC > TAC, what are the methods?
Withdrawal
Revaluation downwards
In realignment of capital, if TCC < TAC, what are the methods?
Additional investment
Revaluation upwards
Goodwill
In realignment of capital, if TCC = TAC, what are the methods?
Bonus method with cash settlement
Bonus method without cash settlement
Can industry be recorded as a contribution?
No
Can there be allowance for bad debts in the new partnership books?
Yes
How do you allocate profit to partners?
- Profit ratio
- Original capital
- Equally
Original capital is based on:
a. Contributed Capital
b. Agreed Capital
c. P/L Ratio
B. Agreed Capital
Can you use selling price of property subsequently sold weeks after formation as an indication of FV?
Yes
What is the life cycle of a partnership?
Formation
Operation
Dissolution
Liquidation
How do you allocate loss to partners?
- Loss ratio
- Profit ratio
- Original capital
- Equally
Can industrial partner have a share in the losses?
Yes if it is stipulated
If not, exempted
Salaries to partners not being a component of partnership income or an expense is indicative of _______________ theory.
Proprietary Theory
What is the share of the industrial partner in profits?
- Profit ratio
- Just and equitable - usually the lowest
If a partner is both an industrial partner and capitalist partner, how do you account for the share in P/L?
Account for share as capitalist and industrial partner separately
Salaries to partners treated a component of partnership income or an expense is indicative of _______________ theory.
Entity Theory
Differentiate withdrawals and drawings.
Withdrawals - permanent, made against capital balance
Drawings - temporary, made in anticipation of share in profits
When is bonus given to partners?
There is net income AND base is positive.
Compensation for services provided by partners
Salaries
Which of the following is time-proportioned?
a. Bonus
b. Interest
c. Salaries
B and C
Interest and Salaries
Compensation for good performance of partners
Bonus
Compensation for capital invested by partners
Interest
What is included in computing for weighted average capital?
Beginning Capital
Additional Investment
Withdrawal
Drawings - only when in excess of allowable amount
Will order of priority for BIS apply when there is net loss?
No
Change in relation of the partners caused by any partner ceasing to be associated in the carrying on as distinguished from the winding up of the business.
Dissolution
How do you compute ending capital before and after closing?
Beginning capital
+ Additional investment
- Withdrawal
= Ending capital before closing
- Drawings
+ Share in NI
- Share in NL
= Ending capital after closing
What are causes of dissolution of a partnership?
Retirement or withdrawal of a partner
Admission of new partner
Incapacity of a partner
Incorporation of a partnership
Death of a partner
What is the general accounting procedure for dissolution?
- Close profit or loss to capital
- Adjust capital for other agreed adjustments
- Record the dissolution
Admission of a new partner through a personal transaction between new and existing partners
Admission by purchase
Admission of a new partner through a transaction between new partner and the partnership
Admission by investment
What do you do with a retiring partner’s interest?
Sell to third parties
Sell to partners
Sell to partnership
After death of a partner, the partner becomes a _______________.
Creditor
Interest of a deceased partner is treated as an ____________.
Expense
Converting non-cash assets to cash.
Realization
Settlement of liabilities.
Liquidation
Order of priority of distribution of personal assets of a general partner in liquidation
- Personal creditor
- Partnership creditor - if solvent
- Capital deficiency
Order of priority of distribution of partnership assets in liquidation
- external creditors
- internal creditors
- capital contribution
- profits
Method of partnership liquidation where all non-cash assets are realized into cash and one-time cash distributions to the creditors and partners.
Lump-sum Liquidation
Method of partnership liquidation where cash distributions to partners are made once cash becomes available from the realization of non-cash assets.
Installment liquidation
Installment liquidation that incorporates assumed loss/theoretical loss/maximum possible loss.
Safe Payments Schedule
What is the assumed loss in SPS?
Remaining NCA
Contingent expense
Installment liquidation that considers loss absorption potential.
Cash Priority Program
Using a different kind of installment liquidation will lead to different distributions. (T/F)
False
How to solve for loss absorption potential?
Total interest or equity divided by Loss Ratio
When is CPP prepared?
Start of liquidation
How do you compute for cash available for distribution?
Cash, beg
+ Proceeds/Receipts
- Disb: External Liab
- Disb: Liquidation Exp
- Cash Withheld: Unpaid Liab
- Cash Withheld: Contingency
= CAFD
When is SPP prepared?
Every Period
All cash withheld are part of maximum assumed loss (T/F).
False - cash can also be withheld for liabilities
