Exam #3 Flashcards
(54 cards)
What are the pros of a partnership entity?
- Easy to form.
- Lack of formality.
- Single taxation.
What are the cons of a partnership entity?
- Unlimited liability (general partnerships).
- Difficulty in disposing of interests.
- Mutual agency.
Most states have adopted the Uniform Act of 1997 as their model act. What does this cover?
- Relations of partners to one another.
- Relations of partners to persons dealing with the partnership.
- Dissolution and winding up of a partnership.
Partnership formation/agreement should include the following:
- Name of partnership and names of partners.
- Type of business to be conducted and duration.
- Initial capital contributions.
- Complete specification of profit or loss distribution.
- Procedures used for partnership changes.
- Other aspects of operations.
Which of the following is not one of the advantages of general partnerships?
Unlimited liability
What are the four types of partnerships?
- General Partnerships
- Limited Partnerships
- Limited Liability Partnerships (LLP)
- Limited Liability Limited Partnerships (LLLP)
What is a General Partnership
- All partners have unlimited
liability. - Creditors can go after the
personal assets of any or all of
the partners.
What is a Limited Partnership?
- At least one general partner and
one+ limited partners. - General partner →
management responsibility &
personally liable for partnership
obligations.
= Limited partners →liable only
to the extent of their capital
contribution, no management
authority.
What is a Limited Liability Partnership (LLP)?
- Each partner has some degree
of liability shield. - No general or limited partners.
- Partners are not personally liable
for a partnership obligation. - Includes virtually all large public
accounting firms.
What is a Limited Liability Limited Partnership (LLLP)
- Each partner is liable only for
the business obligations of the
partnership, not for malpractice
or other wrongdoing of the other
partners. - Advantage: general partners (though responsible for
management) have no personal
liability for obligations.
True or False:
Limited liability limited partnerships must have at least one general partner.
True!
True or False:
ASC 820 requires contributed assets to be valued at fair value.
True!
What are capital accounts? (the equation)
Initial investment + subsequent capital contributions + profit(loss) distributions - withdrawals of capital.
Capital accounts are defined as…
Deficiencies are usually
eliminated by additional
capital contributions.
What are drawing accounts used for?
They are used to record periodic
withdrawals.
At the end of the period, where are drawing accounts closed to?
To the partner’s capital account.
Loan accounts are shown as payables on where?
On the partnership’s books.
True or False: Unless otherwise agreed, loans shouldn’t accrue interest.
False! Loans should bear interest, and interest expense should be
recorded.
What results in a reduction to a partnership’s capital account?
A withdrawal.
What are the four major profit distribution methods used by partnerships?
- Preselected ratio
- Interest on capital balances
- Salaries to partners
- Bonuses to partners
Method #1: Preselected Ratio
Usually the result of negotiations between partners.
Method #2: Interest on Capital Balances
The partners divide some or all of the income earned among themselves based on the relative balances they have
maintained in their capital accounts.
Method #3: Salary
A fixed amount of company profits to a given partner.
Method #4: Bonus
A portion of profits allocated to a partner based on a predetermined performance formula.
