01a Partnership Formation Admission of a Partnerxx PDF

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PRACTICAL ACCOUNTING 2THEORY & PRACTICEADVANCE ACCOUNTINGPARTNERSHIP – FORMATION & ADMISSIONQUIZZERAdvance AccountingPartnership Formation & Admission of a Partner Page 4a. Bonus as an "expense" in computing the bonus amount. Here, bonus is computed based on...

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PRACTICAL ACCOUNTING 2 THEORY & PRACTICE ADVANCE ACCOUNTING PARTNERSHIP – FORMATION & ADMISSION QUIZZER

Partnership Formation & Admission of a Partner Partnership I.

Introduction A partnership is defined as an association of two or more persons who contributes money, property or industry to a common fund with the intention of dividing the profits among themselves. Accounting for partnerships should comply with the legal requirements as set forth by the Partnership Law as Well as complying with the partnership agreement itself.

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Partnership Formation and Capital Accounts All assets contributed to the partnership are recorded by the partnership at their agreed values (or fair market values, in the absence of agreed values). All liabilities that the partnership assumes are recorded at their net present values. Thus, if a partner contributes a noncash asset to the partnership (e.g., land or equipment) subject to mortgage, the contributing partner's capital account is credited for the agreed value (or fair values) of the noncash asset less the mortgage assumed by the partnership. The capital account is an equity account similar to the shareholders' equity accounts in a corporation. It is used to account for permanent withdrawals and additional contributions. Other important accounts include a drawing account and loans to or from partners. The drawing account is used to account for net income or loss and personal or normal withdrawals, i.e., share against net income. It is closed at the end of the period into the capital account. Loan accounts are set up for amounts intended as loans, rather than as additional capital investments. In liquidation proceedings, a loan to or from a partner is in essence treated as an increase or decrease in a partner's capital account.

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Division of Profits and Losses As a rule profits and losses are allocated based on agreement. Methods Various methods Exist for the division of partnership profits and losses including the following: 1. Equally, 2. Arbitrary ratio, 3. Capital contribution ratio: a. Original Capital or initial investment b. Beginning Capital of each year c. Average Capital d. Ending Capital of each year 4. Interest on capital balance and/or loan balances and the balance on agreed ratio, 5. Salaries to partners and the balance on agreed ratio, 6. Bonus to partners and the balance on agreed ratio,

Partnership Formation & Admission of a Partner - Lecture

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Advance Accounting a. Bonus as an "expense" in computing the bonus amount. Here, bonus is computed based on net income after bonus. b. Bonus as a distribution of profit. Here, the bonus is computed based on net income before deducting the bonus. 7. Interest on capitals and/or loan balances, salaries to partners, and bonus to partner and the balance on agreed ratio. The method of division to be used in any given situation is generally the method specified in the partnership agreement. This agreement must always be consulted first, since it is legally binding on the partners. If no profit and loss sharing arrangement is specified in the partnership agreement, the partnership requires that profits and losses be shared according to capital contribution. Capital contribution should be interpreted to be original capital/beginning capital of each year in the absence of original capital; similarly, if the agreement specifies how profits are to be shared but is silent as to losses, losses are to be shared in the same manner as profits. Notice that the profit and loss sharing ratio is totally independent of the partners' ownership interests. Thus, two partners may have ownership interests of 70% and 30% but share profits and losses equally. IV.

Dissolution A. Admission of a New Partner A new partner may be admitted to the partnership by purchasing the interest of one or more of the existing partners or by contributing cash or other assets (i.e., investment of additional capital). These two situations are discussed below. 1. Purchase of Interest - When a new partner enters the partnership by purchasing the interest of an existing partner, the price paid for that interest is irrelevant to the partnership accounting records because it is a private or personal transaction between the buyer and seller. The assets and liabilities of the partnership are not affected. The capital account of the new partner is recorded by merely reclassifying the capital account of the old partner. 2. Admission by Investment of Additional Assets - A new partner may be granted an interest in the partnership in exchange for contributed assets and/or goodwill (e.g., business expertise, an established clientele, etc.). The admission of the new partner and contribution of assets may be recorded on the basis of the bonus method. Bonus method This method is based upon the historical cost principle. Admittance of a new partner involves debiting cash or other assets for the FMV of the assets contributed and crediting the new partner's capital for the agreed (i.e., purchased) percentage of total capital. Total capital equals the book value of the net assets prior to admittance of the new partner, plus the FMV of the assets contributed by the new partner. A difference between the FMV of the assets contributed

Partnership Formation & Admission of a Partner

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Partnership Formation & Admission of a Partner and the interest granted to the new partner results in the recognition of a bonus. a. No bonus recognized - When an incoming partner's capital account (ownership interest) is to be equal to his purchase price, the partnership books merely debit cash or other assets and credit capital. b. Bonus granted to the old partners - When the FMV of the assets contributed by an incoming partner exceeds the amount of ownership interest to be credited to his capital account, the old partners recognize a bonus equal to this excess. This bonus is allocated on the basis of the same ratio used for income allocation (unless otherwise specified in the partnership agreement). Recording involves crediting the old partners' capital accounts by the allocated amounts. c. Bonus granted to new partner - An incoming partner may contribute assets having a FMV smaller than the partnership interest granted to that new partner. Similarly, the new partner may not contribute any assets at all. The incoming partner is therefore presumed to contribute an intangible asset, such as managerial expertise or personal business reputation. In this case, a bonus is granted to the new partner, and the capital accounts of the old partners are reduced on the basis of their profit and loss ratio. Goodwill method. In PFRS No. 3, goodwill represents the excess of the cost of the business combination over the fair value of the identifiable net assets obtained. Therefore, the standard provides that goodwill attaches only to a business as a whole and is recognized only when a business is acquired. This provision of PFRS No. 3 outlawed the use of the goodwill method in partnership accounting particularly admission and retirement of a partner because there is no business involved. The term "business" is defined in the Appendix A of PFRS No. 3 as: An integrated set of activities and assets conducted and managed for the purpose of providing: {a) a return to investor; or [b) Lower costs or other economic benefits directly and proportionately to policyholders or participants. A business generally consists of inputs, processes applied to those inputs, and resulting outputs that are, or will be, used to generate revenues. If goodwill is present in a transferred set of activities and assets, the transferred set shall be presumed to be a business. Refer to Appendix of this chapter for further discussion and illustration. Note to the Examinees: According to PFRS No. 3, goodwill represents the excess of the cost of the business combination over the fair value of the identifiable net assets obtained. Therefore, the standard provides that goodwill attaches only to a business as a whole and is recognized only when a business is acquired. This provision of PFRS No. 3 outlawed the use of the goodwill method in partnership particularly admission and retirement of a partner because there is no business involved.

Partnership Formation & Admission of a Partner - Lecture

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Advance Accounting MCQ - Theory 1. Which of the following is not a characteristic of most partnership? a. Limited liability c. Mutual agency b. Limited life d. Ease of formation

Punzalan 2014

2.

Which of the following is not a characteristic of the proprietary theory that influences accounting for partnerships? a. Partners' salaries are viewed as a distribution of income rather than a component of net income. b. A partnership is not viewed as separate entity, distinct, taxable entity. c. A partnership is characterized by limited liability, d. Changes in the ownership structure of a partnership result in the dissolution of the partnership. Punzalan 2014

3.

Which of the following statements is correct with respect to a limited partnership? a. A limited partner may not be an unsecured creditor of the limited partnership. b. A general partner may not also be limited partner at the same time. c. A general partner may be a secured creditor of the limited partnership. d. A limited partnership can be formed with limited liability for all partners. Punzalan 2014

4.

An advantage of the partnership as a form of business organization would be a. Partners do not pay income taxes on their share in. partnership income. b. A partnership is bound by the act of the partners. c. A partnership is created by mere agreements of the partners. Punzalan 2014 d. A partnership may be terminated by the death or withdrawal of a partner.

5.

When property other than cash is invested in a partnership, at what amount should the noncash property be credited to the contributing partner's capital account? a. Fair value at the date of contribution. b. Contributing partner's original cost. c. Assessed valuation for property tax purposes. d. Contributing partner's tax basis. Punzalan 2014

6.

Partnership capital and drawings accounts are similar to the corporate a. Paid in capital, retained earnings, and dividends accounts. b. Retained earnings account. c. Paid in capital and retained earnings accounts. d. Preferred and common stock accounts.

Partnership Formation & Admission of a Partner MCQ Theoy

Punzalan 2014

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Partnership Formation & Admission of a Partner 7.

The Flat and Iron partnership agreement provides for Flat to receive a 20% bonus on profits before bonus. Remaining profits and losses are divided between Flat and Iron in the ratio of 2:3, respectively. Which partner has a greater advantage when the partnership has a profit or when it has a loss? Profit Loss a. Flat Iron b. Flat Flat

Profit Loss c. Iron Flat d. Iron Iron

Punzalan 2014

8.

If the partnership agreement does not specify how income is to be allocated, profits and loss should be allocated a. Equally. b. In proportion to the weighted average of capital invested during the period. c. Equitably so that partners are compensated for the time and effort expended on behalf of the partnership. d. In accordance with their capital contribution. Punzalan 2014

9.

Which of the following is not a component of the formula used to distribute income? a. Salary allocation to those partners working. b. After all other allocation, the remainder divided according to the profit and loss sharing ratio. c. Interest on the average capital investments, d. Interest on notes to partners. Punzalan 2014

10. Which of the following is not considered a legitimate expense of a partnership? a. Interest paid to partners based on the amount of invested capital. b. Depreciation on assets contributed to the partnership by partners. c. Salaries for management hired to run the business. d. Supplies used in the partners' offices. Punzalan 2014 11. The fact that salaries paid to partners are not a component of partnership income is indicative of a. A departure from generally accepted accounting principles. b. Being characteristic of the entity theory. c. Being characteristic of the proprietary theory. d. Why partnerships are characterized by unlimited liability. Punzalan 2014

Partnership Formation & Admission of a Partner MCQ Theory

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Advance Accounting 12. If a new partner acquires a partnership interest directly from the partners rather than from the partnership itself, a. No entry is required. b. The partnership assets should be revalued. c. The existing partners' capital accounts should be reduced and the new partner's account increased. d. The partnership has undergone a quasi-reorganization. Punzalan 2014 13. Which of the following results in dissolution of a partnership? a. The contribution of additional assets to the partnership by an existing partner. b. The receipt of a draw by an existing partner. c. The winding up of the partnership and the distribution of remaining assets to the partners. d. The withdrawal of a partner from a partnership. Punzalan 2014 14. When a new partner is admitted to a partnership, an original partner's capital account may be adjusted for a. A proportionate share of the incoming partner's investment. b. His or her share of previously unrecorded intangible assets traceable to the original partners. c. His or her share of previously unrecorded intangible assets traceable to the incoming partner. d. None of the above. Punzalan 2014 15. Which of the following best characterizes the bonus method of recording a new partner's investment in a partnership? a. Net assets of the previous partnership are not revalued. b. The new partner's initial capital balance is equal to his or her investment. c. Assuming that recorded assets are properly valued, the book value of the new partnership is equal to the book value of the previous partnership and the investment of the new partner. Punzalan 2014 d. The bonus always results in an increase to the previous partners capital balances. 16. If goodwill is traceable to the previous partners, it is a. Allocated among the previous partners according to their interest in capital. b. Allocated among the previous partners only if there are not other assets to be revalued. c. Allocated among the previous partners according to their original profit and loss sharing percentages. d. Not possible for goodwill to also be traceable to the incoming partner. Punzalan 2014

Partnership Formation & Admission of a Partner MCQ Theoy

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Partnership Formation & Admission of a Partner 17. The goodwill and the bonus methods are two means of adjusting for differences between the net book value and the fair market value of partnership when new partners are admitted. Which of the following statements about these methods is correct? a. The bonus method does not revalue assets to market values. b. The bonus method revalues assets to market values. c. Both methods result in the same balances in the partner capital accounts. d. Both methods result in the same total value of partner capital account, but the individual capital account vary. Punzalan 2014 18. The following is the priority sequence in which liquidation proceeds will be distributed for a partnership: a. Partnership drawings, partnership liabilities, partnership loans, partnership capital balances b. Partnership liabilities, partnership loans, partnership capital balances. c. Partnership liabilities, partnership loans, partnership drawings, partnership capital balances. Punzalan 2014 d. Partnership liabilities, partnership capital balances, partnership loans. 19. The doctrine of marshaling of assets a. Is applicable only if the partnership is insolvent. b. Allows partners to first contribute personal assets to unsatisfied partnership creditors. c. Is applicable if either the partnership is insolvent or individual partners are insolvent. d. Amount owed to personal creditors and to the partnership for debit capital balances are shared proportionately from the personal assets of the partners. Punzalan 2014 20. In the liquidation of a partnership it is necessary to (1.) distribute cash to the partners; (2.) sell non-cash assets; (3.) allocate any gain or loss on realization to the partners; and (4.) pay liabilities. These steps should be performed in the following order: a. (2),(3),(4),(1) b. (2), (3), (1), (4) c. (3), (2), (1), (4) d. (3), (2), (4), (T) Punzalan 2014

Partnership Formation & Admission of a Partner MCQ Theory

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Advance Accounting 21. In the AA-BB partnership, AA and BB had a capital ratio of 3:1 and a profit and loss ratio of 2:1, respectively. The bonus method was used to record CC's admittance as a new partner. What ratio would be used to allocate, to AA and BB, the excess of CC's contribution over the amount credited to CC's capital account? a. AA and BB's new relative ratio. b. AA and BB's new relative profit and loss ratio. c. AA and BB's old capital ratio. d. AA and BB's old profit and loss ratio. Dayag 2013 22. The FF and II partnership agreement provides for FF to receive a 20% bonus on profits before the bonus. Remaining profits and losses are divided between FF and II in the ratio of 2 to 3, respectively. Which partner has a greater advantage when the partnership has a profit or when it has a loss? Profit Loss a. FF II b. FF FF c. II FF d. II II Dayag 2013

Partnership Formation & Admission of a Partner MCQ Theoy

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Partnership Formation & Admission of a Partner MCQ - Problems FORMATION No Bonus, No Revaluation Cash Contributed by Partner 23. As of July 1, 2012, FF and GG decided to form a partnership. Their balance sheets on this date are: FF GG Cash P 15,000 P 37,500 Accounts receivable 540,000 225,000 Merchandise Inventory 202,500 Machinery and equipment 150,000 270,000 Total P705,000 P735,000 Accounts Payable P135,000 P240,000 FF, capital 570,000 GG, capital 495,000 Total P705,000 P735,000 The partners agreed that the machinery and equipment of FF is under depreciated by P15,000 and that of GG by P45.000. Allowance for doubtful accounts is to be set up amounting to P120,000 for FF and P45,000 for GG. The partnership agreement provides for a profit and loss ratio and capital interest of 60% to FF and 40% to GG. How much cash must FF invest to bring the partners' capital balances proportionate to their profit and loss ratio? a. 142,500 c. 172,500 b. 52,500 d. 102,500 Dayag 2013 24. Mary admits Jane as a partner in the business. Balance sheet accounts of Mary just before the admission of Jane show: Cash, P26,000, Accounts receivable, PI20,000, Merchandise inventory, PI80,000, and Accounts payable, P62,000. It' was agreed that for purposes of establishing Mary's interest, the following adjustments be made: 1.) an allowance for doubtful accounts of 3% of accounts receivable is to be established; 2.) merchandise inventory is to be adjusted upward by P25,000; and 3.) prepaid expenses of P3,600 and accrued liabilities of P4,000 are to be recognized. If Jane is to invest sufficient cash to obtain 2/5 interest in the partnership, how much would Jane contribute to the new partnership? a. 176,000 c. 95,000 b. 190,000 d. 113,980 Punzalan 2014

Partnership Formation & Admission of a Partner MCQ Problems

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Advance Accounting 25. Red, White, and Blue form a partnership on May 1,2013. They agree that Red will contribute office equipment with a total fair value of P40,000; White will contribute delivery equipment with a fair value of P80,000; and Blue will contribute cash. If Blue wants a one third interest in the capital and profits, he should contribute cash of: a. P 40,000 c. P60,000 b. P120,000 d. P180,000 Guerrero 2013 Noncash Contribution 26. On December 1, 2012, EE and FF formed a partnership, agreeing...