Partnership Accounting and Personal Financial Statements

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

Which Personal Financial Statements are required?

Answer 5

Required: Statement of Financial Condition (Statement of Changes in Net Worth is optional)

Question 6

How are assets and liabilities valued in a Personal Financial Statement?

Answer 6

Estimated current value

Question 7

How are estimated taxes that would be paid if all assets were converted into cash and all liabilities paid presented on a Personal Financial Statement?

Answer 7

Presented on Statement of Financial Condition between Liabilities and Net Worth

Question 8

What is the general presentation on a statement of financial condition?

Answer 8

Assets
- Liabilities
- Estimated taxes on assets sold
: Net Worth

Question 9

How is life insurance presented on a Personal Financial Statement?

Answer 9

Only shown if there is cash surrender value

It is shown net of loans against the policy

Question 10

How are business interests shown on a Personal Financial Statement?

Answer 10

Business Interests that constitute a large percentage of total assets should be separated from other investments

Question 11

What is the discreet view in an Interim Financial Statement?

Answer 11

Interim period is a separate accounting period - not GAAP

Same accounting principles used for annual reporting should be used.

Question 12

What is the integral view in an Interim Financial Statement?

Answer 12

Interim period is a part of the annual period - GAAP

Gross profit method may be used to estimate COGS and inventory

Temporary declines in inventory aren’t recognized

Question 13

How are discontinued operations & extraordinary items reported in Interim Financial Statements?

Answer 13

Aren’t prorated

Fully recognized in Interim Period as incurred

If it occurs in Q3 - it’s recognized in Q3

Question 14

How are cumulative gains and losses reported in Interim Financials?

Answer 14

Reported as if they occurred in the first quarter

Question 15

How is inventory valuation handled in Interim Financials?

Answer 15

If inventory experiences a decline in value during an interim period - the loss is recognized in the interim period

If the loss is expected to be only temporary - no loss is recognized

Question 16

What is one of the primary problems with interim reporting?

Answer 16

The matching principle gets messed up - Expenses incurred in one period may benefit future periods

Question 17

For whom is Segment Reporting required?

Answer 17

Publicly traded companies

Question 18

What factors cause a segment to be significant and therefore to be reported separately?

Answer 18

Revenue of segment is 10% or more of total

Profit is 10% or more of total

Segment assets are 10% or more of total

75% Test - All segment revenues must equal 75% of total external revenues

Question 19

What is the disclosure requirement regarding sales of 10% or more for one customer?

Answer 19

If 10% or more of enterprise revenue comes from one customer - the segment making the sales must be disclosed