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Questions and Answers
What is a fundamental characteristic of a partnership concerning liability?
What is a fundamental characteristic of a partnership concerning liability?
What does the partnership agreement NOT typically outline?
What does the partnership agreement NOT typically outline?
Which statement best describes mutual agency in a partnership?
Which statement best describes mutual agency in a partnership?
What happens to a partnership when there is a change in ownership?
What happens to a partnership when there is a change in ownership?
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How is a partner's initial investment recorded upon formation of the partnership?
How is a partner's initial investment recorded upon formation of the partnership?
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In which type of partnership do general partners have limited liability?
In which type of partnership do general partners have limited liability?
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What is a primary way profits or losses are determined in a partnership?
What is a primary way profits or losses are determined in a partnership?
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Which of the following describes the division of profit in a partnership?
Which of the following describes the division of profit in a partnership?
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What is the primary characteristic of salaries and interest payments in a partnership?
What is the primary characteristic of salaries and interest payments in a partnership?
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Which statement accurately describes the nature of partners in a partnership?
Which statement accurately describes the nature of partners in a partnership?
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What does the statement of partners' equity primarily explain?
What does the statement of partners' equity primarily explain?
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How are partners' equity sections represented on a balance sheet?
How are partners' equity sections represented on a balance sheet?
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What happens to salaries and interest payments if the partnership incurs a loss?
What happens to salaries and interest payments if the partnership incurs a loss?
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Which of the following is NOT a characteristic of the formation of a partnership?
Which of the following is NOT a characteristic of the formation of a partnership?
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When accounting for the admission of a partner, which factor is most crucial?
When accounting for the admission of a partner, which factor is most crucial?
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Which action is necessary when a partner withdraws from a partnership?
Which action is necessary when a partner withdraws from a partnership?
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What is the total capital of the new partnership after Trent purchases a 25% share for $20,000?
What is the total capital of the new partnership after Trent purchases a 25% share for $20,000?
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How much is the new partner Trent's capital credit in the partnership after his admission?
How much is the new partner Trent's capital credit in the partnership after his admission?
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What bonus amount is allocated to the new partner Trent in Scenario 2?
What bonus amount is allocated to the new partner Trent in Scenario 2?
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How is the bonus allocated between old partners Peart and Huang?
How is the bonus allocated between old partners Peart and Huang?
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What types of withdrawal can a partner experience?
What types of withdrawal can a partner experience?
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What happens when a partner withdraws voluntarily?
What happens when a partner withdraws voluntarily?
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Which of the following statements about the allocation of profit or loss to partners is accurate?
Which of the following statements about the allocation of profit or loss to partners is accurate?
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How is the departing partner's equity treated in a voluntary withdrawal scenario?
How is the departing partner's equity treated in a voluntary withdrawal scenario?
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What happens to the partnership's net assets and total partners’ equity when a partner withdraws?
What happens to the partnership's net assets and total partners’ equity when a partner withdraws?
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How is the amount of bonus for a withdrawing partner calculated?
How is the amount of bonus for a withdrawing partner calculated?
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When is a bonus considered to be given to the departing partner?
When is a bonus considered to be given to the departing partner?
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What should be done if the payment made to the departing partner is less than their capital balance?
What should be done if the payment made to the departing partner is less than their capital balance?
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In a scenario where Terk retires and is paid $25,000, what is the bonus amount if his capital balance was $20,000?
In a scenario where Terk retires and is paid $25,000, what is the bonus amount if his capital balance was $20,000?
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How is the bonus allocated to remaining partners based on their profit ratios?
How is the bonus allocated to remaining partners based on their profit ratios?
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What might necessitate a bonus to the withdrawing partner?
What might necessitate a bonus to the withdrawing partner?
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If Roman and Sand are the remaining partners after Terk's withdrawal, how much will Roman's share of the bonus payment be from a $5,000 bonus?
If Roman and Sand are the remaining partners after Terk's withdrawal, how much will Roman's share of the bonus payment be from a $5,000 bonus?
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What occurs when a new partner is admitted to an existing partnership?
What occurs when a new partner is admitted to an existing partnership?
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How is the equity of existing partners affected during the purchase of a partner's interest?
How is the equity of existing partners affected during the purchase of a partner's interest?
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When a new partner invests assets into the partnership, what happens to the partnership's net assets?
When a new partner invests assets into the partnership, what happens to the partnership's net assets?
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When a new partner's investment differs from the capital equity acquired, what is this difference considered?
When a new partner's investment differs from the capital equity acquired, what is this difference considered?
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What condition necessitates a bonus to remaining partners when a partner withdraws?
What condition necessitates a bonus to remaining partners when a partner withdraws?
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What is the first step to determine the amount of bonus when admitting a new partner?
What is the first step to determine the amount of bonus when admitting a new partner?
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In the bonus calculation, how much bonus would Terk receive if he was paid $16,000 and his capital balance was $20,000?
In the bonus calculation, how much bonus would Terk receive if he was paid $16,000 and his capital balance was $20,000?
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What does the term 'capital credit' refer to in the context of admitting a new partner?
What does the term 'capital credit' refer to in the context of admitting a new partner?
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In an investment of assets scenario, what kind of transaction occurs?
In an investment of assets scenario, what kind of transaction occurs?
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If the total capital of the remaining partners after Terk's departure was $80,000, what would Roman's new capital balance be if he received a $2,400 bonus?
If the total capital of the remaining partners after Terk's departure was $80,000, what would Roman's new capital balance be if he received a $2,400 bonus?
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What can be inferred about existing partners' equity when a new partner is admitted through a purchase of interest?
What can be inferred about existing partners' equity when a new partner is admitted through a purchase of interest?
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How is the bonus allocated among the remaining partners Roman and Sand?
How is the bonus allocated among the remaining partners Roman and Sand?
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What would be the total payment made to Terk if his capital balance was $20,000 and he received a $4,000 bonus?
What would be the total payment made to Terk if his capital balance was $20,000 and he received a $4,000 bonus?
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If the remaining partners decide to increase their capital contributions after Terk’s departure, how does this impact the bonus calculation?
If the remaining partners decide to increase their capital contributions after Terk’s departure, how does this impact the bonus calculation?
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If Terk's retirement payment represented a 20% decrease from his capital balance, what was his total capital balance before retirement?
If Terk's retirement payment represented a 20% decrease from his capital balance, what was his total capital balance before retirement?
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What does a declining earnings record imply for bonus calculations when a partner leaves?
What does a declining earnings record imply for bonus calculations when a partner leaves?
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Study Notes
Chapter 12: Accounting for Partnerships
- This chapter covers accounting for partnerships, including the formation, admission of new partners, retirement of existing partners, dissolution, and the distribution of income among partners. Also included is the preparation of the partnership equity section of the balance sheet.
Learning Goals
- Explain the differences between limited and general partnerships.
- Record transactions relating to partnerships, including formation, admission of a new partner, retirement of a current partner, and dissolution.
- Record the distribution of income among partners.
- Prepare the partnership equity section of the balance sheet.
Accounting for Partnerships
- Partnership form of organization
- Characteristics
- Advantages and disadvantages
- Partnership agreement
- Basic partnership accounting
- Forming a partnership
- Dividing partnership profit or loss
- Partnership financial statements
- Admission and withdrawal of partners
- Liquidation of a partnership
- With or without a capital deficiency
Chapter 12: Success Criteria
- Describe the characteristics of the partnership form of business organization.
- Account for the formation of a partnership.
- Allocate and record profit or loss to partners.
- Prepare partnership financial statements.
- Account for the admission of a partner.
- Account for the withdrawal of a partner.
- Account for the liquidation of a partnership.
Textbook Reading
- Read the Introduction Case on page 495 titled "Joining Forces for Success".
- The next readings and homework assignments page numbers may vary, refer to your allocated textbook (pages 496 – 499).
Characteristics of Partnerships
- Association of Individuals
- Usually based on a written agreement
- A legal and accounting entity, but not taxed
- Co-ownership of Property
- Assets are jointly owned by partners
- Division of profit
- Partners determine how profit or loss is to be divided
- Otherwise shared equally
- Partners determine how profit or loss is to be divided
- Limited life
- Partnership ends when there's a change in ownership
- New partnership can be formed to continue business
- Mutual Agency
- Each partner acts for (binds) the partnership
- Unlimited liability
- Each partner is liable for all partnership liabilities
- Special types of partnerships created to limit liability
- Limited partnership (LP)
- Limited liability partnership (LLP)
Partnership Agreement
- Written contract between two or more parties to form a partnership
- Contains basic information:
- Name and location of firm
- Purpose of the business
- Date of inception (formation)
- Specifies relationship of partners:
- Names and capital contributions of partners
- Rights and duties of partners
- Basis for sharing profit or loss
- Procedures for admission, withdrawal, death of partner, resolving disputes, liquidation of partnership
Basic Partnership Accounting: Forming a Partnership
- Partner's initial investment is recorded at fair value of assets contributed
- As at date of transfer into the partnership
- Values assigned are agreed to by all partners
- After the partnership is formed, accounting for transactions is similar to other types of business organizations
Textbook Questions
- Read textbook pages 500 – 501. Then complete BE12-3.
- Use textbook pages 509 - 511 to complete BE12-12 and BE12-12b
BE12-7, BE12-8, BE12-9
- Work on these problems in groups of 3 and prepare a presentation to the class
BE12-10
- Work on this question and prepare class presentation.
Partnership for Financial Statements: Statement of Partners' Equity
- The equity statement for a partnership is the statement of partners' equity
- Explains changes in each partner's individual capital account and total partnership equity during the year
Partnership for Financial Statements: Balance Sheet
- Capital balances of each partner are shown on the balance sheet in a section called "partners' equity".
Withdrawal of a Partner
- Voluntary withdrawal: A partner sells their ownership in the firm
- Involuntary withdrawal: A partner reaches mandatory retirement age, dies, or is expelled.
- Withdrawal may be accomplished by payment from:
- Remaining partners' personal assets
- Partnership assets
Withdrawal of a Partner: Payment from Partners' Personal Assets
- A personal transaction between partners
- Partnership assets are not involved
- Total capital of partnership does not change
- Departing partner's equity is eliminated
- Remaining partners' equity increased by the same amount as they paid the departing party.
Withdrawal of a Partner: Payment from Partnership Assets
- Transaction between the withdrawing partner and the partnership
- Partnership pays assets in exchange for the withdrawing partner's interest in the partnership
- Net assets and total partners' equity in the partnership will decrease.
Withdrawal of a Partner: Determining Amount of Bonus
- Determine the amount of the bonus = Payment from partnership to departing partner ± departing partner's capital balance
- If payment > capital balance, bonus to departing partner
- If payment < capital balance, bonus to remaining partners
- Allocate payment of bonus to remaining partners based on their profit ratios.
- Amount allocated to each remaining partner = bonus × profit ratio for each partner
Textbook Questions
- Use page 513 “Payment from Partner's Personal Assets" to complete BE12-13
- Use textbook pages 513 – 516 to complete BE12-14 and BE12-14a
- Refer to additional textbook questions designated in the slides for further assignments.
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Description
This quiz evaluates your understanding of accounting for partnerships, highlighting key concepts such as formation, admission and retirement of partners, and income distribution. You'll also be tested on preparing the equity section of the balance sheet specific to partnerships.
