Partnerships- Formations and Operations

Question 1

What are the advantages to partnerships?

Answer 1

flexibility- lots of different ways to set up relationships between partners
single taxation: partnership does not pay taxes, income taxes, and deductions are passed to partners where they are taxed on the partners’ returns

Question 2

Disadvantages of partnerships

Answer 2

unlimited liability for partners, mutual agency

Question 3

What does the partnership agreement typically address?

Answer 3

accounting policies, limitations on partners’ ability to transact on behalf of the partnership, allocation of profit and loss

Question 4

Owner’s equity in a partnership

Answer 4

has partners’ capital accounts which replace common stock and other shareholders’ accounts

Question 5

What do capital accounts include?

Answer 5

partners’ initial contributions, additional capital contributions, withdrawals, allocation of income, adjustments for ownership changes

Question 6

What two methods can intangible contributions be accounted for?

Answer 6

bonus method and goodwill method

Question 7

bonus method

Answer 7

the bonus method recognizes net assets transferred to the partnership, but the initial capital account balances are determined via an independent process. Only identifiable assets are valued and recorded. The capital account balances are then aligned to indicate the percentage of the actual contributions made my each partner

Question 8

goodwill method

Answer 8

the amount contributed and the corresponding percentage of the initial capital balances are used to calculate the value of the business and the presence of goodwill. Goodwill is then recorded as an intangible asset

Question 9

legal dissolution

Answer 9

a change in the partners, admission of a new partner or withdrawal of a partner

Question 10

liquidations

Answer 10

both the partnership and the business cease to exist

Question 11

New partner buy all or a portion of the interest owned by one or more of the present partners

Answer 11

1. the bonus method: the capital account balances can simply be reclassified to reflect the identity of the new ownership
2. goodwill method: all accounts may be adjusted to fair market value with the price paid being used as the basis for calculating any goodwill

Question 12

A new partner can be admitted by direct contribution to the partnership business

Answer 12

the bonus: records the identifiable assets being contributed at fair market value. The new partner’s capital is set equal to a prearranged percentage of amount. The remaining capital balances are then aligned based on profit or loss percentages

goodwill: approach initially adjusts all assets and liabilities of the partnership to fair market value and records goodwill based on the amount being paid.

Question 13

How do you report changes made to partner capital?

Answer 13

Beginning capital
Add: investments made during the accounting/ net income
subtract: net loss
drawings
gives: ending capital balance

Question 14

withdrawal of a partner

Answer 14

BONUS: amount paid in excess of the partner’s capital accounts

goodwill- books are first adjusted to FMV, with a proportionate increase in partner’s account. Withdrawing partner is paid based on balance in their capital account