Partnerships Flashcards
What happens when a partnership is liquidated?
- The non cash assets are sold.
- Any gain or loss is allocated to the partners
- The liabilities are paid.
The remaining cash are usually distributed based on the partners’ updated capital accounts. Also any partner’s unpaid loan from the partnership will reduce the cash paid to that partner.
What is a capital account?
This is simply an equity account that represents the cash and assets contributed to a partnership by a partner in exchange for ownership interest. The partner’s account is adjusted at every accounting period by the partner’s share of partnership profits (losses), separately stated items, contributions and distributions and changes in partnership liabilities.
What happens in the formation of a partnership?
When forming a partnership, each partner’s capital account is credited for the FV of the assets the partner contributes. If a non cash asset is subject to a liability assumed by partnership, the asset’s FV is reduced by the PV of the liability.
What are the methods for admitting a new partner to a partnership?
The method for admitting a new partner is called the BEG method.
B= Bonus
E= Exact
G= Goodwill
When do you use the BEG method?
Bonus - this is used when the purchase price (ie. contribution) is different than the book value of the capital account purchased.
Exact - this is used when the purchase price is equal to the book value of the capital account purchased.
Goodwill - This is based on the total value of the partnership implied by the new partner’s contribution.
How do you treat the BEG method for admitting a new partner.
Bonus - If purchase price is more than book value of capital purchased, bonus to old partners; if less, bonus to new partner.
Also uses old partnership profit ratios to allocate bonus.
Exact - There’s no goodwill or bonus
Old partner’s capital accounts are unchanged.
Goodwill - Recognize an intangible asset (goodwill)
Difference allocated to old partners according to their old profit ratios.
What is the partnership agreement?
This is a legal document that outlines the terms and conditions of how a partnership will operate. It typically includes the partners’ P/L ratios and salary and interest allowances.
How do you calculate the allocation of partnership net income/loss to partners?
Partnership net income/loss to be allocated - Special allocations (eg. bonuses) and allowances (eg. salary and interest) granted to individual partners = Remaining net income/loss to be allocated to partners
What happens when the exact method is used?
When the exact method is used to account for the admission of a new partner, the old partners’ capital accounts do not change; however, their percent of ownership decreases. Typically the value of the new partnership (P/S) is based on the old partners’ new percent of ownership.
