Partnership Flashcards
Purchase of an Interest (Payment to an existing Partner)
No cash transaction is to be entered on the books in the purchase of an interest.
Distribution of Cash Procedure (4 steps)
1) Add the loan accounts to the partners’ capital accounts. 2) Determine the amount of loss which will extinguish the weakest partner’s capital balance. 3) Distribute the loss in (2) to all partners. After one partner is eliminated, repeat the same process with the remaining partners. 4) After all but one of the partner’s capital accounts are eliminated, cash distributions are determined by starting with the remaining partner’s final balance (which becomes the first cash distribution) and working backwards.
Order of distribution in liquidation
1) Outside creditors2) Partners for loan accounts (right of “offset” reserved, however)3) Partners’ capital
Retirement of a Partner Adjustment of Asset Values to determine the fair equity of a retiring partner.
This may be necessary to:1) Correct improper operating charges of prior periods (bad debts, accruals, depreciations and recognition of inventories).2) Give recognition to the existence of goodwill. 3) Give recognition to changes in market values.
Division of Profits (Interest on Capital) 3 Characteristics
1) Partner cannot claim interest on capital unless provided for in the partnership agreement. 2) Interest on capital should not be included in income statement as an expense.3) Interest paid on partners’ loans may be treated as a financial expense.
Partnership Agreement
Can be expressed (oral or written contract) or implied (actions). Should be in writing for protection of partners. The agreement governs the formation, operation, distribution of income or loss, and dissolution of the partnership.
MPL (Maximum Possible Loss) =
Total Assets - Cash (or Non-Cash assets)
Causes of Dissolution of a Partnership
Dissolution occurs when the existing partnership arrangement is altered for some reason. Liquidation may follow dissolution but often outsiders would be unaware of the end of one partnership and the start of another.
Division of Profits (3 Characteristics)
1) Profits can be shared in any way agreeable to the partners. 2) If the agreement is silent, the law assumes that profits and losses will be shared equally. 3) Amount of capital contributed has no effect on profit division unless specified in the agreement.
Division of Profits (Partner’s Salaries): Method of Distribution
1) Allocate salaries, interest first2) Distribute remaining profit (loss) per agreement.
Method of Solving Bonus Computation Problems on the CPA Exam
In solving such problems, a good approach is to write the particular problem in equation form with no attempt to quantify elements of the equation. The substitute known quantities in the equation and solve for B (Bonus).
Investment in a partnership by contribution to the firm’s capital may result in:
1) Recognition of either goodwill or bonus to the old partners. Goodwill will placed on the books before admission of a new partner. Bonus - part of the capital contributed is credited to the account2) Recognition to the incoming partner in the form of either goodwill or bonus.
Cash Distribution Plan
Method of determining the amount(s) that can be distributed to.
Admission of a New Partner Characteristics (3)
1) Admission or withdrawal of a partner generally dissolves the partnership and brings into being a new partnership. 2) New articles of partnership should be drawn up. 3) A new partner can purchase an interest or invest in the partnership.
Partnership
Association of two or more persons to carry on, as co-owners, a business for profit.
