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FAIS 3 > Ch 14 Partnerships > Flashcards

Ch 14 Partnerships Flashcards

0
Q

What is the wide size range of business activities the partnership form serves?

A

Small local operations to worldwide enterprises

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1
Q

What does the IRS project the number of partnership income tax returns will be compared to corporate returns by 2016?

A

4.7 million partnership returns

Compared to 8.1 corporate income tax returns

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2
Q

Why do individual proprietors join together to form a partnership? 4 reasons

A

1 reduce expenses
2 expand services
3 add increased expertise
4 tax benefits

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3
Q

Partnership is a common means by which friends and relatives can…

A

Easily create and organize a business endeavor

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4
Q

Historically, why have doctors, lawyers and other professionals formed partnerships?

A

legal prohibitions against incorporation of their practices

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5
Q

Most common motive to form a partnership (instead of a corporation)

A

Ease of formation

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6
Q

What is necessary to create a legally binding partnership?

A

Only an oral agreement

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7
Q

Depending on specific state laws, incorporation requires filing a…

A

Formal application and completing various other forms and

Documents

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8
Q

Partnership revenue and expense items (as defined by tax laws), where must they be assigned?

A

Must be directly assigned each year to individual partners who
Pay income tax

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9
Q

Passing income balances through to partners, avoids what?

A

Double taxation of profits earned by business

And then passed through to owners

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10
Q

How is a corporation’s income taxes twice?

A

1 when earned

2 when paid as dividend

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11
Q

A partnership’s income is taxed only at the time the…

A

Business initially earns it

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12
Q

Historically, what is the second tax advantage (after flow through income) associated with partnerships?

A

Operating losses can reduce personal taxable income directly

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13
Q

Corporations: operating losses, disadvantage

A

Corporation is viewed as legally separate from its owners

So losses can’t be passed through to owners

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14
Q

Corporations: operating losses, 2 advantages

A

1 carry back net operating losses 2 years to reduce previously
Taxed income

2 carry forward remaining losses 20 years to reduce future
Taxable income

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15
Q

Newly formed corporation VS. Newly formed partnership: operating losses

A

If corporation is newly formed or hasn’t been profitable, operating
Losses provide no immediate benefit to corporation/owners

Losses provide immediate benefit to partnership

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16
Q

Limitation of tax advantage of deducting partnership losses: passive activity limitation

A

Passive activity losses serve only to offset passive activity profits

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17
Q

For tax purposes, ownership of a partnership is labeled as passive activity unless…

A

The partner materially participates in the actual business activities

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18
Q

In most cases, passive activity partnership losses can’t be used to reduce…

A

Earned income (ex. Salaries)

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19
Q

Unless a taxpayer has significant passive activity income (ex. From rents), losses reported by partnership create…

A

Little or no tax advantage unless partner materially participates
In actual business activity

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20
Q

Most significant disadvantage of partnership

A

Unlimited liability each partner incurs

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21
Q

Unlimited liability specified by partnership law?

A

Any partner can be held personally liable for all debts of business

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22
Q

Mutual agency

A

Right each partner has to incur liabilities in name of partnership

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23
Q

Consequence of mutual agency: partners acting within normal scope of business have the power to…

A

Obligate the company for any amount

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24
Q

What happens if the partnership fails to pay any debts incurred in mutual agency?

A

Creditors can seek satisfactory remuneration from any partner
They choose

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25
Q

Uniform Partnership Act (UPA) (1914, revised 1997), where and how has it been adopted?

A

By all states in some form

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26
Q

Uniform Partnership Act, establishes uniform standards in what 3 main areas?

A

1 nature of partnership
2 relationship of partners to outside parties
3 dissolution of partnership

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27
Q

Uniform Partnership Act (UPA): Section 6’s legal definition of a partnership

A

Association of 2 or more persons to carry on business as

co-owners for profit

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28
Q

Because of the possible owner liability, partnerships often experience difficulty in attracting…

A

Large amounts of capital

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29
Q

2 main Purposes of alternative legal forms of partnership

A

1 limit owners’ personal liability

2 provide tax benefits of partnership

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30
Q

S corporation

A

Has legal characteristics of corporation

Taxed as partnership, where profits are only taxable to individual
Owners

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31
Q

What are the 2 main advantages of an S corporation?

A

1 form avoids double taxation

2 owners don’t face unlimited liability

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32
Q

How can a business qualify as an S corporation? 3

A 
1 one class of stock
2 shareholders limited to 100
3 restrictions on types of owners
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33
Q

S-Corp: restrictions on types of owners

A

All owners must be individuals, estates, certain tax-exempt

Entities or certain trusts

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34
Q

What is the most significant problem with the S-Corp form of business?

A

Growth potential is limited because restriction on number and
Type of owners

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35
Q

Limited partnership (LP)

A

Type of investment designed primarily for individuals who want
The tax benefits of partnership

But who don’t work in a partnership or have unlimited liability

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36
Q

Limited partners

A

Can invest money as owners, but not allowed to participate in
Company’s management

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37
Q

Limited partners: loss on money invested in business

A

Restricted to amount they’ve contributed

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38
Q

How are creditors of a limited partnership protected?

A

1 or more general partners have responsibility for all obligations
Created in name of business

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39
Q

Why are many partnerships originally formed?

A

As tax shelters to create immediate losses (reducing taxable

Income for partners) with profits spread to the future

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40
Q

Tax laws limit the deduction of passive activity losses and this significantly reduced…

A

The formation of limited partnerships

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41
Q

Limited liability partnership (LLP) 2 things

A

1 Has most characteristics of general partnership

2 Except it significantly reduces partners’ liability

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42
Q

What are partners liable for in a limited liability partnership?

A

Their investment in the business and contractual debts of the
business

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43
Q

Limited liability partnerships: liability resulting from damages

A

Partners only responsible for their own acts or omissions

And acts and omissions of those under supervision

Ex. A partner in Houston office won’t be held liable for a poor audit from the San Fransisco Audit team,

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44
Q

Limited liability partnerships have become…

A

Very popular with professional service organizations with multiple
Offices

Ex. All big four are LLPs

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45
Q

Limited liability company’s (LLCs)

A

Classified as partnership for tax purposes

Depending on state laws, owners risk only their own investments

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46
Q

Advantage of an LLC over an S Corp

A

Number of owners is not restricted

So growth is easier to accomplish

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47
Q

What 2 questions should be raised as to the need for an entirely separate study of partnership accounting?

A

1 does an association of 2 or more persons require accounting
Procedures significantly different from corporations?

2 Does proper accounting depend on legal form of an organization?

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48
Q

What 4 accounts are accounting procedures normally standardized for regardless of legal form of business?

A

1 assets
2 liabilities
3 revenues
4 expenses

49
Q

Partnership accounting does exhibit unique aspects that warrant study, but they lie primarily in the…

A

Handling of partners’ capital accounts

50
Q

Stockholder equity accounts of a corporation do not correspond directly with…

A

Capital balances on partnership’s financial records

51
Q

The various equity accounts reported by an incorporated enterprise display…

A

A greater range of info than partnership capital accounts

52
Q

Government regulation has had an enormous effect on accounting for corporate equity transactions in that…

A

Extensive disclosure is required to protect stockholder’s and
Outside parties

53
Q

How do partnerships provide only a limited amount of equity disclosure?

A 
Primarily in form of individual capital accounts that are accumulated
For every parter/class of partners
54
Q

Partners individual capital account balances, what do they measure?

A

Each partner’s/groups’ interest in book value of net assets of
business

55
Q

The equity section of a partnership balance sheet is composed solely of capital accounts that can be affected by different events 4

A

1 contributions from partners
2 distributions to partners
3 earnings
4 other equity transactions

56
Q

Articles of partnership

A

Legal covenant (either oral or written)

Forms central governance of partnership’s operation

57
Q

Articles of partnership, what do they provide rather than laws or official rules?

A

Much of underlying basis of partnership accounting

Spell out guidelines for financial arrangements and various
Capital transactions

58
Q

How are the articles of partnership created?

A

Negotiated agreement partners create

59
Q

Differences caused by articles of partnerships between businesses?

A

Partners’ rights and responsibilities differ from business to business

60
Q

Firms often hire accountants in an advisory capacity to participating in creating the articles of partnership to ensure…

A

Equitable treatment of all parties

61
Q

Articles of partnership, provisions that must be reached:

1) name and address of…

A

Each partner

62
Q

Articles of partnership, provisions that must be reached:

2) Business…

A

Location

63
Q

Articles of partnership, provisions that must be reached:

3) description of nature…

A

Of business

64
Q

Articles of partnership, provisions that must be reached:

4) rights and responsibilities of…

A

Each partner

65
Q

Articles of partnership, provisions that must be reached:

5) initial contribution to be made by…

A

Each partner and method to be used for valuation

66
Q

Articles of partnership, provisions that must be reached:

6) specific method by which profits and losses are…

A

To be allocated

67
Q

Articles of partnership, provisions that must be reached:

7) periodic withdrawal of…

A

Assets by each partner

68
Q

Articles of partnership, provisions that must be reached:

8) procedure for admitting…

A

New partners

69
Q

Articles of partnership, provisions that must be reached:

9) method for arbitrating…

A

Partnership disputes

70
Q

Articles of partnership, provisions that must be reached:

10) life insurance provisions enabling remaining partners to…

A

Acquire interest of any deceased partner

71
Q

Articles of partnership, provisions that must be reached:

11) method for settling partner’s share in business upon…

A

Withdrawal, retirement or death

72
Q

If carter invests 50k and green invests 20k in cash what is the journal entry to record starting a partnership?

A

Cash. 70,000
Carter, Capital. 50,000
Green, Capital. 20,000

73
Q

According to the concept of unlimited liability, a partnership does not exist as…

A

An entity apart from its owners

74
Q

Each item transferred to a partnership is initially recorded for external reporting purposes at…

2) for tax purposes, what should be kept track of?

A

Current value

2) basis of transferred asset

75
Q

What are 2 examples of how a partnership can be viewed legitimately as an entity apart from its owners?

A

Partnership maintains legal ownership of its assets

And can initiate lawsuits

76
Q

Accounting practice traditionally has held that the contribution of assets (and liabilities) to a partnership is an exchange between…

A

2 separately identifiable parties that should be recorded based on
Fair values

77
Q

3 purposes appropriate valuation of each capital balance serves over the life of the partnership

A

1 totals in individual capital accounts influence assignments of
Profits/losses to partners
2 capital account balance usually factor in determining final
distribution by partner at time of withdrawal/retirement
3 ending capital balances indicate allocation of any assets that
Remain following liquidation of partnership

78
Q

After a partner contributes assets such as inventory, land or a building, the partner…

A

Holds no further right to these individual assets

They belong to the partnership

79
Q

A capital balance of a partner represents what?

A

An ownership interest in the business as a whole

Not a claim to any specific asset

80
Q

Intangible contributions to a partnership

A

Formal accounting recognition of such special contributions

May be appropriately included in provision of partnership agreement

81
Q

2 options of methods that can be used to record an intangible contribution?

A

1 bonus method

2 goodwill method

82
Q

What do the bonus method and goodwill method each do?

2) what will happen depending on the method selected?

A

Achieve the desired result of establishing equal capital account balances

2) significant variation in recorded figures

83
Q

Bonus method

A 
Assumes specialization (such as artistic abilities) does Not 
constitute a recordable partnership asset with measurable cost

Recognizes only assets transferred to business (such as cash,
Patents or inventory)

84
Q

Goodwill method

A

Based on assumption an implied value can be calculated

And recorded for any intangible contribution made by partner

85
Q

Partnership goodwill: how does it differ from goodwill recognized using the equity method?

A

Partnership goodwill has no historical cost

The business recognizes asset of goodwill even though no funds
Have been spent

86
Q

The value attributed to goodwill is based solely on…

A

Negotiated agreement between the partners

87
Q

Partnership goodwill should be viewed with a strong degree of…

A

Professional skepticism

88
Q

Subsequent to forming a partnership, what are 2 common reasons owners may choose to contribute additional capital amounts during the life of the business?

A

1 stimulate expansion of business

2 overcome working capital shortages

89
Q

Articles of partnerships-withdrawals:

To protect the interests of the other partners, the articles of partnerships should clearly specify…

A

The amount and timing of such withdrawals

Articles of partnership may require prior approval of other partners

90
Q

Articles of partnership often allow withdrawals on a…

A

Regular periodic basis

91
Q

What is the journal entry to record a withdrawal from the partnership of James of $1,200?

A

James, Drawing. 1200

Cash. 1200

92
Q

Allocation of income

A

At the end of each fiscal period, partnership revenues and
Expenses are closed out

Accompanies by allocation of resulting net income/loss to
Partners’ capital account

93
Q

If no arrangement exists from the articles of partnership of how income is allocated, what does state partnership law normally hold?

A

All partners receive equal allocation of income/loss from business

94
Q

Allocation pattern can be extremely important to the success of an organization because it can help…

A

Emphasize and reward outstanding performance

95
Q

From an accounting perspective, the assignment of income and the setting of withdrawal limits are…

A

2 separate decisions

96
Q

What is the journal entry to close out the drawing accounts regarded by payments made to 2 partners?

A

Tinker, Capital. 10000
Evers, Capital. 10000
Tinker, Drawing. 10000
Evers, Drawing. 10000

97
Q

How is net income allocated between 3 partners based on provisions of partnership agreement: journal entry

A

Income summary. 60000
Tinker, Capital (30%). 18000
Evers, Capital (40%). 24000
Chance, Capital (30%). 18000

98
Q

Statement of partners capital

A

Statement of retained earnings usually reported by corporation
Is replaced by statement of partners’ capital

Outlines current year changes of capital accounts

99
Q

Any alteration in the specific individuals composing a partnership automatically leads to…

A

Legal dissolution

100
Q

If dissolution of partnership takes place, actual operations of business would probably…

A

Continue up impeded by this alteration in ownership

101
Q

Liquidation of partnership, what 3 things occur?

A

1 partnership sells properties

2 pays debts

3 distributes remaining assets to individual partners

102
Q

2 ways an individual can gain admittance to a partnership

A

1 purchasing an ownership interest from a current partner

2 contributing assets directly to business

103
Q

Dissolution-admission of a new partner, in recording this transaction what 2 options does the accountant have?

A

1 retain book value of all partnership assets and liabilities
(Bonus method)

2 revalue accounts to present fair values (goodwill method)

104
Q

For recording dissolution to acquire a new partner, the decision as to the theoretical preference between bonus and goodwill method hinges on what one single question?

A

Should the dissolved partnership and newly formed partnership
Be viewed as 2 separate reporting entities?

105
Q

Dissolution- admission of a new partner:

If new partnership is merely an extension of the old…

A

No basis exists for restatement

106
Q

Dissolution- admission of a new partner:

If the combination of business represents a legitimate transfer of property from one partnership to another…

A

Revaluation of all accounts and recognition of goodwill can be
justified

107
Q

Problem with partnership goodwill, 2 things

A

1 Recognition is not based on historical cost

2 no objective verification of capital amount can be made

108
Q

Hybrid method (between bonus method and goodwill method)

A

Revalues all partnership assets and liabilities to fair value without
Making any corresponding recognition of goodwill

109
Q

One it more partners can choose to sell their portion of business to outside party.

When is this type of transaction more common?

A

More common in operation that rely primarily on monetary

Capital (rather than business expertise of partners)

110
Q

In making transfer of ownership, what 3 rights can a partner only convey?

A

1 right of co-ownership in business property

2 right to share in profits and losses as specified in articles of
Partnership

3 right to participate in management of business

111
Q

Right of co-ownership in the business property

A

Justifies the partner’s periodic drawings from the business

And distribution settlement paid at liquidation or time of partner’s
Withdrawal

112
Q

The right to participate in management of business

A

Can be done only with consent of all partners

Essential to future earning power of enterprise and maintenance
Of business assets

113
Q

The right of co ownership in the business property and right to share in profits and losses as specified in articles of partnership, when can these 2 rights be assigned?

A

At any time partner decides to leave

114
Q

If a partner decides to leave the partnership and sell his interest to someone who is not yet a partner, when does the new owner become a partner?

A

Not until the other existing partners allow the new owner to
Participate in management of the business

115
Q

Relationship of capital accounts often does not correspond with…

2) capital balances are…

A

Partners’ profit and loss ratio

2) historical cost figures

116
Q

Capital balances, what do they result from?

A

Contributions and withdrawals made throughout life of business

And from allocation of partnership income

117
Q

The book value method is similar to…

A

The bonus method

118
Q

What is another name for the Goodwill Method?

A

Revaluation method

119
Q

Bonus credited to new partner

A

Difference between amount contributed and capital allotted is
Viewed as bonus

120
Q

The implied value of a partnership as a whole cant be determined directly from the amount…

A

Distributed to a withdrawing partner

FAIS 3 (17 decks)

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