Partnership Accounting

Question 1

How are capital contributions with a mortgage attached recorded in a partnership for financial statement purposes?

Answer 1

Calculating the capital balance when property contributed has a mortgage results in the FV of the Asset being netted against the Liability

Question 2

If no goodwill is recorded upon admission of a new partner - which method is used for recording the new partner’s interest?

Answer 2

The bonus method:

Old Partnership Equity+ New Partner Contribution
: New Partnership Equity
x New Partner %
: New Partner Equity AmountNew Partner Contribution - New Partner Equity Amount
: Bonus to Prior Partners using same allocation as P/L

Question 3

If goodwill is recorded upon admission of a new partner - how is the partner’s interest recorded?

Answer 3

Using the goodwill method:

New Contribution / New Equity % : Partnership Value

Implied Value of Partnership - Capital Accounts of all partners
: Goodwill to Old Partners

Under the Goodwill Method - the new Partner is paying an amount for a certain percentage stake in the partnership. For instance if they pay $1000 for a 25% stake - then it is assumed that the Partnership is worth $4 -000 ($1 -000/25%)

Question 4

At what value should assets contributed to a partnership be recorded? What value for liabilities assumed by the partnership?

Answer 4

Fair Value for assets contributed.

Present value of remaining cash flows for liabilities assumed.

Question 5

(L) Liquidation—Terminating the Affairs of a Business Procedure (4 steps)

Answer 5

1) Realization of assets—convert assets into cash
2) Division of loss or gain on realization, by charges or credits to partner’s capital
3) Payment of the liabilities
4) Payment of the partner’s interest

Question 6

(L) Purchase of an Interest (Payment to an existing Partner)

Answer 6

No cash transaction is to be entered on the books in the purchase of an interest.

Question 7

(L) Investment in a partnership by contribution to the firm’s capital may result in:

Answer 7

1) Recognition of either goodwill or bonus to the old partners.
Goodwill is placed on the books before admission of a new partner.
Bonus–part of the capital contributed is credited to the account of 2) Recognition to the incoming partner in the form of either goodwill or bonus.

Question 8

(L) Division of Profits (Interest on Capital) 3 Characteristics

Answer 8

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.

Question 9

(L) Purchase of an Interest (Payment to more than one partner) Purchase at more than book value

Answer 9

Where purchase is at more than book value, goodwill may or may not be recognized.

Question 10

(L) Division of Profits (Partner’s Salaries)

Answer 10

Treated as a division of profits. Allocation of partners’ “salaries” may exceed partnership income and create a loss to be allocated to all partners according to the partnership agreement.

Question 11

(L) Division of Profits (Partner’s Salaries): Method of Distribution

Answer 11

1) Allocate salaries, interest first

2) Distribute remaining profit (loss) per agreement

Question 12

(L) Order of distribution in liquidation

Answer 12

1) Outside creditors (secured first, then unsecured)
2) Partners for loan accounts (right of “offset” reserved, however)
3) Partners’ capital

Question 13

(L) MPL (Maximum Possible Loss) =

Answer 13

Total Assets - Cash (or Non-Cash assets) : So you write down the assets to zero

Question 14

(L) Method of Solving Bonus Computation Problems on the CPA Exam.

Answer 14

In solving such problems, a good approach is to write the particular problem in equation form with no attempt to quantify the elements of the equation. Then substitute known quantities in the equation and solve for B (Bonus).

Question 15

(L) Retirement of a Partner Adjustment of Asset Values to determine the fair equity of a retiring partner.

Answer 15

This may be necessary to:

1) Correct improper operating charges of prior periods (bad debts, accruals, depreciation and recognition of inventories).
2) Give recognition to the existence of goodwill.
3) Give recognition to changes in market values.

Question 16

(L) Cash Distribution Plan

Answer 16

Method of determining the amount(s) that can be distributed to.

Question 17

(L) Admission of a New Partner Characteristics (3)

Answer 17

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.

Question 18

(L) Distribution of Cash Procedure (4 Steps)

Answer 18

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 partners’ 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.

Question 19

(L) Causes of Dissolution of a Partnership

Answer 19

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.

Question 20

(L) Division of Profits (3 Characteristics)

Answer 20

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.