01 Partnership Flashcards by Leann Ganzon

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

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Partner’s ledger accounts

Capital
Drawings
Receivable/Payable to a Partner

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Formula for capital account of a partner

Original investment
+ Additional Investment
- Permanent Withdrawal
+ Share in Profits
- Share in Losses
- Drawings (closing)

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Formula for drawings account of a partner

Temporary Drawings
+ Share in Losses
- Share in Profits

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Represents net assets invested by a partner

Contributed Capital

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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

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Receivable/payable from/to a partner is a:
a. real account
b. nominal account

A. Real Account

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Two types of capital

Contributed capital

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How do you value contributions in a partnership?

Agreed value
Fair value
Book value

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Can there be accumulated depreciation in the new partnership books?

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Represents the capital credit of a partner

Agreed Capital

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Can opportunity cost be recorded as contribution?

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Which methods of realignment of capital are not allowed by PFRS?

Goodwill
Revaluation upwards - will depend

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In realignment of capital, if TCC > TAC, what are the methods?

Withdrawal
Revaluation downwards

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In realignment of capital, if TCC < TAC, what are the methods?

Additional investment
Revaluation upwards
Goodwill

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In realignment of capital, if TCC = TAC, what are the methods?

Bonus method with cash settlement
Bonus method without cash settlement

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Can industry be recorded as a contribution?

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Can there be allowance for bad debts in the new partnership books?

Yes

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How do you allocate profit to partners?

Profit ratio
Original capital
Equally

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Original capital is based on:
a. Contributed Capital
b. Agreed Capital
c. P/L Ratio

B. Agreed Capital

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Can you use selling price of property subsequently sold weeks after formation as an indication of FV?

Yes

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What is the life cycle of a partnership?

Formation
Operation
Dissolution
Liquidation

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How do you allocate loss to partners?

Loss ratio
Profit ratio
Original capital
Equally

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Can industrial partner have a share in the losses?

Yes if it is stipulated
If not, exempted

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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?

1. Profit ratio 2. 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?

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?

1. Close profit or loss to capital 2. Adjust capital for other agreed adjustments 3. 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

1. Personal creditor 2. Partnership creditor - if solvent 3. Capital deficiency

Order of priority of distribution of partnership assets in liquidation

1. external creditors 2. internal creditors 3. capital contribution 4. 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