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Flashcards in Partnership Accounting Deck (15):

Partnership - asset transfers

Assets transferred into a partnership are recorded at fair market value.


Partnership assumes liability for assets transferred in

The partners equity amount in the partnership is the FMV of the assets transferred in less any liabilities assumed by the partnership.


Articles of corporation

written agreement specifying the manner in which partnership income (loss) is to be distributed.


Partnership dissolution

changes in the legal relationship of a partnership
- a new partner
- partner retires, dies


Outcomes of new partner

new partner invests assets into the partnership and receives a capital account:
1. equal to his purchase prise (asset investmen)
2. Greater than his purchase price - bonus
3. less than his purchase price - new partner gives a bonus to the old partner


Bonus method (bonus to old partners)

the excess of the new partner contribution over his capital account gets divided to theh old partners based on their Profit and loss ratio


Bonus method (bonus to the new partner)

when the capital received exceeds the asset contribution, the amount of the excess is the new partner's bonus.
This bonus will be reduced from the old partners capital based on their P&L ratios.


Goodwill method - partnership dissolution

Assume that goodwill (an intangible asset) is attributable to the old partners.
Goodwill is always determined by the new partner (or partner leaving)

new partner 20%(total capital X)=20,000
new parnter's assets 20,000 for 20% capital will give the total of what the new partner believes to be the worth of the company vs. the old capital + new partner contribution. the difference between these two is the goodwill.
Good will is distributed to the old partners based on P&L ratios, the new partner has nothing to do with the goodwill.
new partner:
Dr. cash
Cr. new partners capital account.


Partner death or withdrawal

Also considered a dissolution
-there is no new capital to be recorded
now only dealing with the capital accounts of the old partners.
-either bonus or goodwill method can be used.
*the withdrawing partners capital account must be adjusted to the amount that the withdrawing partner is expected to receive.


Partner withdrawal - bonus method

The bonus to the withdrawing partner comes from the other partners and a new P&L ratio is established to distribute the bonus liability between the old partners, based on the total percentages for the old partners


Partner withdrawal - goodwill method

All of the partners share the goodwill.
partner leaving gets $600 and has 40% P&L ration calculate total goodwill
$600=.40(x) x=15,000 of which $600 is the partner leaving. Distribute the other $9,000 among the old partners based on their P&L ratios.

- the goodwill method will not affect the original partner's capital accounts, infact it will increase them.


Partnership liquidation

Sell of non-cash assets which will result in
gain: increase the partners capital accounts
loss: decrease the partners capital accounts for the loss

After gain or loss is distributed
If there's a partner with a deficit in capital account you have to reduce the partner with a deficit.
Take the deficit in the partner and reduce the captial of the partners with positive capital accounts. - by creating a new P&L ratio
If all partners have a positive capital account- pay off debts and left over will be to pay off the partners.


Incorporation of partnership

assets at FMV
C/S is issued at par
If FMV of assets exceed the C/S at par the amount is a Credit to APIC (plug)


How much does the new partner have to contribute either in cash or assets to become a partner in an old partnership?

Take the total of the old partners capital ex. $580,000
if new partner is coming in with 20% interest set the formula as the old partners capital being 80%
x= 725,000

725,000-580,000= 145,000
new partner must invest 145,000 to have a 20% interest in the old partnership.


Goodwill method

does not affect the old partners equity accounts, infact they are increased.