Partnerships

Question 1

Partnerships Accounts

Answer 1

• Capital accounts:
  ○ Credit - Investment of assets by partners, partners share of net income
  ○ Debit - Disinvestment by partner, Partners share of net loss, close of drawings into capital account
  
  • Drawings accounts
    ○ Credit (decrease) - drawings closed into capital account
    Debit (increase) - withdrawal of assets by partner

Question 2

Admission of Partner

Answer 2

Balances are dependent upon the capital accounts of the respective partners, not on the total net assets of the partnership

Question 3

Liquidation Steps

Answer 3

• Sale of assets with recognition of gains or losses in partners’ capital account
  
  • Payment of liabilities
  • If partners account is negative, either a) absorb deficit by other partners or b) additional asset contribution to partner
    Final distribution to partners

Question 4

Goodwill Method

Answer 4

• D Cash
  
  • D Other assets (at Fair Value)
  • D Goodwill
    ○ C Partner 1 Capital Account
    ○ C Partner 2 Capital Account
    Calculate the implied amount after admission of new partner

Question 5

Sole Proprietorship - Capital Account

Answer 5

• Not a taxable entity
  
  • Business income (or loss) is passed through the owner, so there is no requirement for provision for income taxes
  • Taxes paid by owner on the proprietors personal tax return
  • Capital account is valued at the net assets acquired
  • Draws are not expenses - they are not a part of Net income
  • Proprietors Draw
    ○ Distribution of owners’ equity to an owner, not an expense incurred to generate income
    Does not affect income, just as a proprietors contribution of additional resources into the company would not affect income