Partnerships Flashcards
How do you record a contribution to the partnership by the partner
Debit: Assets
Credit: Partnership Account
How do you record a transfer of liability to the partnership
Debit: Partner’s Capital Account
Credit: Liability
A partner contributes PP&E with FV of $100,000 and a mortgage of $20,000 to the partnership. What are the journal entries needed
Debit: PP&E 100,000
Credit: Liabilities $20,000
Credit: Partner’s Capital Account $80,000
How are wages and interest considered in the partnership profit allocation
Wages are paid out before profit allocation is considered
Interest is based on net income before profit allocation
Profits to be distributed = Profits - Wages paid to partner - Interest on capital balance
What is interest on capital balance
When a partner is entitled to a specific amount of interest income based on their capital balance per year
Balance of 500,000 with interest of 10% = Interest of 50,000
What account is used for equity in a partnership
Partner’s Capital Account
What are shortfall and goodwill contributions
Goodwill: When a partner contributes more than their stake in the partnership
Shortfall: When a partner contributes less than their stake in the partnership
How do you record shortfall and goodwill contributions for new partners under the Bonus Method
Allocate extra capital to the other partners by reducing the initial contribution from the new partner’s account in the ratio that other partners engage in profits. Example: 4:3 rato for Partner A,B who have 100k each in their accounts
Partner C donates 120k for 1/3th of the partnership valued at 100,000. The excess capital donated gets distributed to Partner A and B’s account in the ratio of 4:3
Partner C donates 80k instead for 1/3r of the partnership valued at 100k. The difference in capital contributed will be taken from Partner A and B’s accounts according to the profit ratio
Debit: Cash
Credit: Partner C
Debit: Partner C
Credit: Partner A,B
How do you record shortfall and goodwill contributions for new partners under the Goodwill Method
Use new partners contribution for X amount of ownership to determine the Total Net Assets of the firm and write up the other partners accounts based on that contribution.
When doing a shortfall under this method you must deduct capital based on the profit margin from other Partner’s accounts to make up the proper ratio
Debit Cash
Credit: Partner C’s capital
Debit Goodwilll
Credit: Partner A,B capital
What is the goodwill method
We calculate the full value of the firm and calculate the full goodwill and adjust it to the partners to make the entire firm match the ratio of investment given (also using profit ratio)
What is the bonus method
We calculate the excess or shortfall contribution made and adjust it to the old partners balances based on their profit ratio
How do you record retiring a partner under the Goodwill Method
How do you record retiring a partner under the bonus method
