FAR - Partnership (Becker FAR 10) Flashcards Preview

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Flashcards in FAR - Partnership (Becker FAR 10) Deck (11):
1

What are the three methods to admit new partner to partnership?

(1) Exact

(2) Bonus (to partners or to new partner)

(3) Goodwill

2

(1) Exact method - Admit new partner

 

 

(2) Scenario: Here's condensed Balance sheet for Ralph and Betty Partnerhip. 60:40 profit loss ratio for Ralph and Betty (Ralph 0.60 and Betty is 0.40)

Cash                     $50,000
Other assets        $760,000
Betty's loan              45,000
                              = $1,305,000


A/P                        $140,000
Ralph, capital          826,000
Betty, capital           323,000
                             =   1,289,000

 

These assets above are measured at fair value. Ralph and Betty admits new parner Cal with 30% interest. Goodwill and bonus method will not be used to admit Cal as new partner. What amount shoudl Cal contribute in cash or other assets?

 

(1) % equity x (Add all old partners equity + new partner contribution) = Total equity

(2) % x Old partners total equity +  % x new partner equity = total equity

(3) $$$ old partners equity +  % new partner = total equity

(4) $$$ old partners equity = Total equity - (% x new partner)

(5) $$ old partner's equity / reduced % = Total equity

Example:  25% equity to new partner; old partners equity are $20,000 (partner A), $30,000 (partner b), $50,000 partner (C), and Partner D's contribution is unknown

0.25 x ($20,000 + $30,000 + $50,000 + D contribution) = Total equity

0.25 ($100,000 total old partners + D contrib.) = Total equity
$25,000 + 0.25 D-contribution = Total equity
$25,000 = Total equity - 0.25 D's equity
$25,000 = 0.75 equity
Equity = $25,000 / 0.75
Contribution by D = 33,333
 

(2) Scenario:
0.30 x [826,000 + 323,000 + Cal contribut) = Cal contribut
0.30 x [1,149,000 + Cal contribution] = Cal contribution
$344,700 +  0.30 Cal contribution = Cal contribution
$344,700 = Cal contribution - 0.30 contribution
$344,700 = 0.70 cal contribution

Cal contribution = $344,700 / 0.70
Cal contribution = $492,429

3

(1) Bonus method - to the partners AND journal entry


(2) Is old partners' old profit and loss ratio or old capital ratio used to allocate a bonus to the new partner?
 

(3) Scenario:  Conure and Parakeet are partners in a partnership with balances of $55,000 and $75,000 respectively. They agree to admit Robin as a partner. After the assets of partnership are revalued, Robin will have 12% interest in capital and profits (and losses), for an investment of $20,000.

 

What amount should be recorded as bonus to original partners?


What amount of bonus is allocated to orignal partner Conure and Parakeet?
     Conure         Parakeet

What are the Journal entries for this bonus to original partners?

(1) Existing partners-when new partner pays more than NBV $75,000 ($30,000 + $10,000 + $35,000 new partner). $75,000 total equity (old and new partners) x 1/3 % equity
to new partner
= $25,000 Contribution by new partner

$35,000 % equity
- 25,000
= $10,000 bonus to old partners so overall:

(1) Total all equity and new partner's contribution
(2) Total all equity x new % equity to partner
(3) Contribution (new partner) - (% x total all equity)

Journal entry:
Dr. Cash 35,000
       Cr. Old Partner A, Capital ($10,000 x 60%) 6000
       Cr. Old Partner B, Capital ($10,000 x 40%) 4000
      Cr. New Partner C, Capital (30,000 + 10,000 + 35,000 x 1/3) 25000

 

(2) Old partners' old profit and loss ratio (before new partner's ratio come in) to allocate bonus to new bonus.

 

(3) Scenario:

Bonus to Original Partners:

First: Add up all partners equity and new parterns contribution:

$55,000 conure equity
$75,000 parakeet equity
$20,000 Robin's contribution
150,000
x 0.12% interest to Robin
$18,000 excess

$20,000 Robin's contribution
- 18,000 excess
 $2,000 bonus to old partners

New partner's contribution > % equity to new partner = Bonus to old partners.

 

What amount of bonus is allocated to orignal partner Conure and Parakeet?

Conure's bonus: $2,000 x 0.60 = $1,200

Parakeet's bonus: $2,000 x 0.40 = $800

 

What are the Journal entries?
Dr. Cash 20,000
      Cr. Conure (2,000 x 0.60)       1,200
      Cr. Parakeet (2,000 x 0.40)      800
      Cr. Robin                                  18,000
     ($55,000 + 75,000 + 20,000 = 150,000 x 0.12)  

4

(1) Bonus method - to new partner And journal entry

(2) When a bonus is credited to new bonus, are the old partners' captal accounts increased or decreased?
 

(3) Scenario:  Blue and Red are partners with  a profit /loss ratio of 6:4 respectively. On May 1, their respective capital accounts are as follows:

Blue   $30,000
Red    $20,000

On May 1, the partnership admits new partner Lychee. 45% interest is given to Lychee in capital and profit for an investiment contribution of $40,000. The new partnership began with total capital of $90,000.

What is the bonus amount given to Lychee?

What is the total capital account to Lychee?

How much should Blue and Red's capital account would be after admit Lychee?


What is the journal entry for this situation of admitting new partner with bonus to new partner?

(1) Existing partners-when new partner pays more than NBV

Example:  Old Partner A and Old Partner B has 60:40 profit and loss ratio. Old Partner A's capital is $30,000. Old Partner B's capital is $20,000.   New Partner C comes in and contributes $15,000 for 1/3 interest in new partnership.
 

How to do it:
(a) Total all equity and new partner's contribution
      $30,000 Old Partner A
        20,000 Old Partner B
       15,000 New Partner C
      55,000 total equity

(b) Total all equity x new % equity to partner

     $55,000 total equity
     x      1/3 interest to New Partner C
     $18,333 interest to New Partner C


(c) Contribution (new partner) - (% x total all equity)
     $18,333 interest to New partner
    - 15,000 New partner's contribution
        3,333 bonus to new partner C

Journal entry:
Dr. Cash                                                        15000
Dr. Old partner A, Capital ($3,333 x 60%) 1999
Dr. Old partner B, Capital ($3,333 x 40%) 1334
      Cr. New partner C, Capital                                 18,333
           (30,000 + 20,000 + 15,000 = 55,000 x 1/3) 

 

(2) Allocate new bonus to new partner = Decrease old partners' capital accounts. 

Exact method and Goodwill does not decrease old partners' accounts when allocate bonus to new partner.

 

(3) Scenario: 

What is bonus amount given to Lychee?

$30,000 Blue
$20,000 Red
+ 40,000 Lychee
$90,000 total equity
x 0.45 interest to new Partner, Lychee
$40,500 total interest to new partner


$40,500 % interest to new partner, Lychee
- 40,000 Lychee contribution
$500 bonus to Lychee because Lychee's contribution is less than his % of the total equity. 

What is the total capital acccount to Lychee?

$40,000 Lychee contribution
+   500 bonus to Lychee
$40,500 total capital amount to Lychee

How much should Blue and Red's capital account would be after admit Lychee?


Net assets       Blue 60%           Red 40%       Lychee (15%)
$50,000          30,000               20,000                 0
40,000                                                                  40,000
90,000             30,000               20,000            40,000
Alloc. bonus       (300)                  (200)                  500 bonus
$90,000          29,700                19,800               40,500

Blue's Capital after admit Lychee new parner = $29,700


Red's Capital after admit Lychee new parner = $19,800

Journal entry:

Dr. Cash                                                 $40,000
Dr. Blue, Capital ($500 bonus x 0.60)     300
Dr. Red, Capital ($500 bonus x 0.40)       200
      Cr. Lychee's Capital                                          $40,500
       ($30,000 Blue + $20,000 red + $40,000 Lych) x 0.45

5

(1) Goodwill Method - Admitting new partner and Journal Entries

(2) Scenario: David and Gary are patnership with capital accounts balances of $60,000 and $90,000, respectively. They agree to bring in new partner named Zed. Give Zed 1/3 interest in capital and profits, for an investment of $200,000 after revauling the assets of David and Gary.

Goodwill to original partners should be?

Journal entries on this goodwill transaction are?

 

(1) Implied Value

Total partner's accounts (old partners' + new partner contribution)
= Goodwill

Example:  Adam and Bo has 60:40 profit and losses allocation. Adam and Bo's capital accounts are $30,000 and $10,000 respecively.  Cal is admitted as new partner and he invests $35,000 for 1/3 interest.  Partnership decides to use goodwill

Implied value (35,000 x 3 people = $105,000)   $105,000
Total partner's capital accounts                             (75,000)
   (30,000 + 40,000 + 35,000)                              $30,000 GW

Journal Entries:
Dr. Cash        $35,000
Dr. Goodwill     30,000
      Cr.   Adam, Capital (0.60 x 30,000 GW)   18,000
      Cr.   Bo, Capital (0.40 x 30,000 GW)         12,000
      Cr.   Cal, Capital                                         35,000

 

(2) Scenario: 
 

Goodwill:

$200,000 x 3 people = $600,000 implied value

$600,000 implied value
- 350,000 (60,000 + 90,000 + 200,000) total partners

$150,000  goodwill


Journal Entries:

Dr. Cash         $200,000
Dr. Goodwill   $150,000
      Cr. David, capital ($150,000 x 0.60)    90,000
      Cr. Gary, capital ($150,000 x 0.40)      60,000
      Cr. Zed, capital                                   200,000

6

CPA Exam pass key (just flip to read and study)

(1) It is important to distinguish the tax and GAAP rules relating to the formation of a partnership:

• GAAP Rule = Use FV of asset contributed

• Tax Rule = Use NBV of assets contributed

(2) Problems that deal with the exact method will always ask, "How much should the new partner contribute in order to have an x% interest in the new partnership?"

and will not include references to goodwill or bonuses in the transaction.

(3) Under the bonus method, the bonus will be credited to the following partner:

• Existing partners-when new partner pays more than NBV

• New partner-when new partner pays less than NBV

7

What are the differences in admitting new partner under Exact, Bonus, and Goodwill?

The following summary will help you remember the differences among the above approaches:

EXACT METHOD

• The incoming partner's capital account is their actual contribution. (You must calculate.)

• No adjustment to the existing partner's capital accounts is required.

 

BONUS METHOD

• Balance in total capital accounts controls the computation. • The incoming partner's capital account is their percentage of the partnership total NBV (after their contribution).

• Adjust the existing partner's capital accounts to balance.

GOODWILL METHOD

• Going in investment (dollars) controls the computation.

• The incoming partner's capital account is their actual contribution.

• Goodwill (implied) is determined based upon the incoming partner's contribution, and shared by the existing partners.

8

(1) When create a partnership or incorprate a partnership (that is convert partnership to corporation), all assets are revalued at ___ values and liabilites are revalued at their ____ values or their new ____ values.

(2) What is the value of an asset contributed to a partnerhip when it has a carry value, fair value, and a mortgage assigned to it?

(3) Scenario: On Jan 2, Sammy bought out sole proprietary company called Jones Cleaning for $450,000 and commenced operations for Sammy's Cleaning, a sole properitorship. The assets had a carrying amount of $375,000 and market value of $360,000. Sammy's cash basis financial statements for year ended Dec. 31, Sammy reported revenues in excess of $70,000. Sammy's drawings during the year was $30,000. In Sammy's financial statements, what amount should be reported as Sammy-Capital?

(4) Scenario: Adam and Ray partnership is going to be incorporated. it has Fair values of $240,000 and $20,000 for its assets and liabilites. Following below is their condensed balance sheet:

Current Assets   $250,000
Equipment (net)      30,000
     total assets      $280,000
Liablitiies                  20,000
Adam, capital         160,000
Ray, capital             100,000
Total Liab.&equity  $280,000

When incorporated, 1000 shares were issued $5.00. What is the new corproation's APIC?

(5) Scenario: On May 1, Alan, Betty, and Cal formed a partnerhip by combining their separate business propreitorships. Alan contributed $50,000 cash. Betty contributed property with $36,000 carry amount amount, $40,000 original cost, and $90,000 fair value. The partnership accepted resonsibility for the $25,000 mortgage attached to the property. Cal contributed equipment with a $30,000 carry amount, a $75,000 original cost, and $55,000 fair value. The partnership agreement specifies that profits and loses are to be shared equally but is silent regarding capital contributions. Which prner has the largest May 1st capital account balance?

(1) When create a partnership or incorprate a partnership (that is convert partnership to corporation), all assets are revalued at FAIR values and liabilites are revalued at their FAIR values or their new PRESENT values.

(2) Asset contributed wtih a mortgage valued at:  Fair value $$ - Mortgage (or any liabilities assigned) $$

(3) Scenario: 
$360,000  FV capital contributed
+ 70,000    Revenues over expenses
- 30,000    Drawings
$400,000 Sammy-Capital

(4) APIC:
Assets - Liabilities = Common stock + APIC

$240,000 - 200,000 = $5,000 + APIC
$220,000 = $5,000 + APIC
APIC = $215,000

 

(5) Largest capital account balance

Alan: $50,000 cash only
Betty: $90,000 fair value property - $25,000 mortgage = $65,000
Cal: $55,000

Answer: 
Betty has the largest one.

9

(1) What are the items that need to be distributed first before distributing the Profit/loss ratio to the partners?

(2) Scenario:  During current year, Yeager and Helsinki maintained their capital balances in their partnerships of $180,000 and $150,000 respectively. The partners receive 10% interest on average capital balances and residual profit or loss is divided equally. Partnership profit before interest was $6,000.

(a) By what amount should Helsinki's capital account change for the year?


(b) ​By what amount should Yeager's capital account change for the year?

 

(3) Scenario:  Robin and Whitney formed a partnership on Year 1.  The partnership agreement provides for annual salary allowances for $75,000 for Robin and Whitney's salary allowance is $55,000. The partners share profits equally and losses in 60/40 ratio. The partnership had earnings of $85,000 for year 2 before allowance to partners. What amount of these earnings should be credited to each partner's capital account?

(4) Scenario: The partnership agreement of Allan, Brian, and Cal, provides for th eyear-end allocation of net income in the following order:
* First, Adam gets 10% of net income up to $100,000 and 20% over $100,000
* Second, Brian and Cal each get 5% of the remaining income over $150,000
* The balance of income is to be allocated equally among the three partners.

The partnership's net income was $300,000 before any allocations to partners. What amount should be allocated to Adam, Brian, and Cal?

(5) Scenario:  Boris and Engles partnersip was formed on Jan 2, year 1. Under the partnership agreement, each partner has an equal initial capital balance accouted for under the goodwill method. Partnership net income or loss is allocated 60% to Boris and 40% to Eng. to form the partnership, Boris contributed assets that costed $30,000 with fair value of $60,000 on Jan 2 while Engles' contribution is $20,000 in cash. Drawings for the partners during the year totoaled $3,000 by Boris and $9,000 by Engles. Boris-Engles year end net income was $55,000.

Engle's initial capital balance in Boris-Engles is closet to?

Boris' share of net income is?

The Ending balance for Engle and Boris is?

 

(1) All payments for Interest on capital accounts, Salaries (like salary allowance / guaranteed payments), Bonuses are deducted against the profits / earnings before distributing the Profit and Loss ratio.

Allocate the Interest, Salaries, and Bonuses as positive $$ amounts to each Partner's capital account (column).  On the profit / earnings column, these allocations would be listed as negative amount.

(2) Scenario: 
1st) Distribute the Interest to each partner: 10% x the capital balances.

Item           Yeager     Helsinki       Profit
Capital     180,000     150,000       6,000
Interest      18,000       15,000    (33,000) < (18K+15K)
                  198,000      165,000   (27,000)
Loss alloc.  (13,500)     (13,500)     27,000
                   184,500      151,500         0

Net change:   Yeager       Helsinki
Interest            18,000       15,000
Loss Alloc.       (13,500)     (13,500)
Net change     4,500          1,500

(a) By what amount should Helsinki's capital account change for the year?

Helsinki amount changed by = $1,500

(b) 
​By what amount should Yeager's capital account change for the year?

Yeager amount changed by = $4,500

(3) Scenario: 
                  60%           40%

Item         Robin        Whitney         Profit
                                                       85,000
Salary    75,000        55,000      (130,000)
                                                      (45,000)
Alloc.      (27000)       (18000)       45,000
Net         48000          37000            0

Robin's end capital amount = $48,000
Whitney's end capital amount = $37,000

 

(4) Scenario:
             Adam     Brian     Cal    Net income
NI                                               300,000
Alloc.   10,000                           (10,000) <<100Kx0.10
            40,000                         (40,000) <<200Kx0.20
                                                    250,000
Alloc                5,000   5,000      (10,000)*
                                                       240,000
Alloc.  80,000   80,000 80,000  (240,00)
 (1/3)   130,000    85,000  85,000     0

*250,000 - 150,000 = 100,000 x 0.05 to Brian and Cal. 
= 5,000 to brian + 5,000 to Cal = 10,000 total

(5) Scenario:  

(a) Initial capital balance for Engles

First:
determine goodwill

$60,000 Boris' contrib x 2 partners = $120,000

Implied value:  $120,000
- Total contri.:     (80,000)
Goodwill              40,000

Or:
$20,000 Engles contri x 2 partners = $40,000

Implied value = $40,000
-Total contrib = $80,000
Goodwill        = $40,000

Item            Net assets     Boris (60%)    Engles (40%)
Boris contri.      60                60
Engles contri.   20                                          20
                          80                60                     20
GW to Engles
b/ce of equal
intial capital      40                                          40

Initial cap. bal.   120              60                     60

Initial Capital balance for Engles = $60,000
The reason is $60K because of this "intial" starting equal capital balance between the partners where Boris and Engle's starting capital amount should be equal.

Hence Boris' capital = $60,000
And Engle's capital = $60,000 ($20,000 + 40K GW)

(b) Boris share of net income?

Item            Net assets     Boris (60%)    Engles (40%)
Boris contri.      60                60
Engles contri.   20                                          20
                          80                60                     20
GW to Engles
b/ce of equal
intial capital      40                                          40

Initial cap. bal.   120              60                     60
Net inc               55               33                      22

Boris' share of net income = $33,000
Engle's share of net income = $22,000

(c) Ending capital accounts for Boris and Engles

Item            Net assets     Boris (60%)    Engles (40%)
Boris contri.      60                60
Engles contri.   20                                          20
                          80                60                     20
GW to Engles
b/ce of equal
intial capital      40                                          40

Initial cap. bal.   120              60                     60
Net inc               55               33                      22
(Draw)                (12)               (3)                      (9)
End bal              163             90                      73

Boris' ending capital = $90,000
Engles' ending capital = $73,000

Important notes:

*Allocate Net income or Profit = "+" number
*Allocate Net loss or loss = "-" negative number
*Draws = always losses

10

Scenario: Weighted Average interest allocation to partners.

Partnership agreement for A&J ptnership provides a 10% interest per year to be credited to each parter, Allan and Jane on the basis of Weighted average capital balances. A summary of Jane's capital account for the year ended Dec. 31 is as follows:

Balance, Jan 1                      $150,000
Additional invest, Aug 1          60,000
Withdrawal, Sept 1.,                 (15,000)
Balance Dec. 31                   195,000

What amount of interest is credited to Jane's capital account?

Dates            Capital account       Months      Wgt'd Avg
Bal., Jan 1         $150,000        x    7 mos. =   1,050,000
Add'l invst.                 
Aug. 1                   60,000
  Subtotal 8/1       210,000     x   1  mo.       =    210,000
W/draw                 (15,000)                             
Bal., 9/1 to 12/31   $195,000  x 4 mos.        =     780,000
                                                                    =   $2,040,000

Then: $2,040,000 / 12 mos (to average out) = $170,000

Then:
$170,000
x 0.10 interest rate on capital balance (w. ave)
 = $17,000 interest credited to Jane's account

11

(1) Rules on Liquidation on partnershp

 

(2) The Partner with the highest Capital balance should be paid off first before paying any remaining cash the the partner with the least capital balance. True or false.

(3) Scenario: 
Ray and Bones are going to liquidate their partnership. The following is their condensed balance sheet.

Cash                               $50,000
Other assets                 755,000
Bones, loan                     30,000
                                      835,000
Accounts payable       $202,000
Ray, Capital                   255,000
Bones, capital               358,000
                                     $835,000

Profit and loss ratio is 60:40 for Ray and Bones, respectively. If the other assets were sol for $400,000, what amount of available cash should be distributed to Ray and Bones?

 

(4) Scenario: The following is the condensed balance sheet for Sammy and Jane who share profits and losses in the ratio of 60:40 respectively:

Other assets      $650,000
Sammy, loan         20,000
                              670,000

Accounts Payable  $140,000
Sammy, captial         295,000
Jane, capital             235,000
                                 670,000

The partners decides to liquidate the partnership. If other assets were sold for $550,000, what amount of available cash paid to Sammy and Jane?

(1) Rules on liquidating partnership: Sell all assets to cash to payoff creditors first before paying off a loan/debt to the partner.

When sell all assets into cash, allocate gain or loss to each partner based on their profit and loss ratio. 
 

Then, use the cash + cash sale proceeds to pay off Creditors' Accounts Payable and Notes payable

Then Allocate the Partner's loan, to the respective partners' capital to be reduced

Then finally determine remaining amount of cash to be paid to patner for liquidation.

(2) True

 

(3) Scenario: 
Cash balance:  
     $50,000
+  $400,000 cash sale proceeds
-   $202,000 accounts payable
     248,000 ending cash balance

Ray, capital  (60%)
$255,000
  (213,000) loss from other assets sale (0.60 x $335,000 loss)
$42,000 ending balance, Ray

Bones, capital (40%)
$358,000
(142,000) loss from other assets sale (0.40 x $335,000 loss)
216,000
(30,000)  Bones, Loan
$186,000 ending balance, Bones

Available cash to pay to Ray: $42,000 
(This because $42,000 < $248,000 ending cash balance)

Available cash to pay to Bones: $186,000
(This because $186,000 < $248,000 ending cash balance)

Also: Bones has the higher capital balance, he's paid first:

$186,000 - 248,000 cash ending balance = $62,000

Then,   $62,000 remaining cash balance
            - 42,000 end capital, Ray
             $20,000 cash remaining

(4) Scenario: 
Cash balance:
$485,000 (sold on the other assets)
(140,000) Acounts payable from creditor
345,000 cash available 

Allocate sale on other assets:
$550,000 cash
-  650,000
(100,000) loss

Sammy, capital balance
$295,000
(60,000)   0.60 x 100,000 loss
$235,000
(20,000)  Sammy, loan
$215,000 ending capital Balance, Sammy

Jane, Capital Balance
$235,000
(40,000)    0.40 x 100,000 loss
195,000, ending capital  balance, Jane

$550,000 cash balance
Ending balance, Sammy = $215,000 (cash received)
Ending balance, Jane = $195,000  (cash received)

 

215,000 + 195,000 = $410,000 < $550,000 cash balance

 

Decks in FAR CPA Review - (Becker, Roger, Wiley CPA Excel, NINJA) Class (61):