Chapter 12. Accounting for Partnerships Flashcards Preview

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Flashcards in Chapter 12. Accounting for Partnerships Deck (45):

Is a partnership subjected to taxation?



What are the characteristics of a partnership?

Voluntary association.
Partnership agreement; binding. Shares name/contributions, rights/duties, income/loss, withdrawals, disputes, admissions, rights/duties when death occurs.
Limited life.
Mutual agency.
Unlimited liability; pay a partnerships debts.
Co-Ownership of Property.


What is mutual agency?

Each person is a fully authorized agent of the partnership.


What is a partnership?

An unincorporated association of two or more people to pursue a business for profit as co-owners.

Examples: professional practitioners, such as, physicians, lawyers, investors, and accountants.


What are limited partnerships?

Individuals unwilling to accept risk of unlimited liability. Also known as a Ltd. or LP.


What are the two classes of limited partnership?

General and limited.


What is a general partner?

At least one person who assumes management duties and unlimited liability for the debts of the partnership.


What are limited partners?

No personal liability beyond the amounts they invest in the partnership. No active role except as specified in the partnership agreement.


What are limited liability partnerships?

This partnership is designed to protect innocent partners from malpractice or negligence claims resulting from the acts of another partner.


What is an "S" corp?

Certain corporations with 100 or fewer stockholders can elect to be treated as a partnership for income tax purposes.


What is a limited liability corporation?

Designed to help management comply with the dictates of the articles of organization and company regulations adopted by its members.


What factors should be considered when choosing a business?

Taxes, liability risk, tax and fiscal year-end, ownership structure, estate planning, business risks, and earnings and property distributions.


What are the basic partnership accounting rights?

Uses a capital and withdrawal account for each partner. Allocates net income or loss to partners according to the partnership agreement.


When partners invest are their capital balances debited or credited?



How does a partner divide income or loss?

Profit not salary and when there is income or loss the money is allocated among partners to "salary allowances."


What is stated ratio?

"Income-and-loss-sharing ratio, the profit and loss ratio, p&l ratio. Gives each partner a fraction of the total.


What is the allocation on capital balances method?

Assigns an amount based on the ratio of each partner's relative capital balance.


What is the allocation on services, capital, and stated ratio method?

Recognizes that service and capital contributions of partners often are not equal.


What do Salary allowances make up for?

Differences in service contributions.


What do Interest allowances make up for?

Unequal capital contributions.


What is the statement of partners' equity?

Shows EACH partner's beginning capital balance, additional investments, allocated income or loss, withdrawals, and ending capital balance.


What is a partnership based on?

A contract between individuals.


What happens if a partner is admitted or withdrawals?

The present partnership ends, but the business can continue to operate as a new partnership consisting of the remaining partners.


How is a partner admitted?

By purchasing an interest from one or more current partners or by investing cash or other assets in the partnership. The current partners must accept the purchaser.


What is the purchase of partnership interest?

A personal transaction between one or more current partners and the new partner.


Dean withdraws from a partnership with Rico and Lane. Dean takes $50,000 cash in settlement of his capital balance of $40,000. $___ will be _____ to the Cash account.

$50,000, credited.


Perez invests $10,000 cash into a partnership. How is this recorded?

Debit: Cash
Credit: Perez, Capital


Describe a proprietorship.

Only owner allowed; owner has unlimited liability.


Describe a partnership.

More than one owner allowed; owners have unlimited liability.


Describe an LLC.

One or more owners; owners have limited liability; no business tax.


Describe a "C" corporation.

One or more owners; owners have limited liability; business is taxed.


Martiniz receives 50% of all gains and losses. Net income was $70,000. To close the income summary account the partnership will ____ Capital for_____.

Credit Capital, $35,000.00


Which of the following would not be shown on the statement of partners' equity? Withdrawals, federal income tax, additional investments, beginning capital balance, and allocated income or loss.

Federal income tax.


Hernandez withdraws with $40,000 in settlement of his capital balance of $30,0000 The remaining $10,000 will be _____ to the _____ partners' capital accounts.

Debited, remaining.


Each partner will use a capital account, withdrawal account, and be allocated net income according to the______

Partnership agreement.


Thomas withdraws with five other partners an takes cash equal to his capital balance. Record the transaction.

Debit: Thomas, Capital
Credit: Cash


What are the common methods to divide income or loss?

Ratio of capital balances, stated ratio basis, and salary/interest allowances.


Guess withdraws from a partnership with three other partners. Guess agrees to take $25,000 in settlement of her capital balance of $30,000. This creates a _____ bonus that is paid to (remaining/withdrawing) _____ partners.

$5,000, remaining


Drake and Potter invest $10,000 each. Drake withdraws $3,000 and Potter $5,0000. Net Income is $30,000. How much is Drake's ending capital balance?


$10,000+$15,000= $25,000-$3,000=$22,000


How is U.S. partnership different compared to other countries?

Legal systems and tax implications are different.


In the absence of an agreement, the law says that partners share income or loss____



Wang and Wu are partners with equal balances of $50,000 each. They let Li invest $20,000 in their partnership for a 10% interest. The journal will reflect the bonus to Wang with a credit to _____ in the amount of _____.

Wang, Capital, $4,000



D and S are partners with equal capital balances of $60,000 each. They agree to let Smith invest $30,000 for 10% interest, including bonuses to the existing partners. The journal entry to reflect this will include?

Debit to Cash for $30,000 because...

$60,000+$60,000+$30,000=$150,000x10% =$15,000 will be credited.


Silver withdraws from a partnership with two other partners. Silver agrees to take $20,000 cash in settlement of her capital balance of $15,000. ______ will be (debited/credited) _____ to Capital

$15,000, Debited


Capone sells 1/2 of her partnership to Harris for $30,000. How would this be recorded?

Debit to Capital, because it is being reduced.