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Accounting II - Chapter 12
Terms in this set (36)
What is a partnership?
An unincorporated association of two or more persons to pursue a business for a profit as co-owners.
What are the 2 forms of partnerships recognized by Canadian Law?
General and Limited.
What is a general partnership?
A general partnership in which all partners have mutual agency and unlimited liability for partnership debts.
What is a partnership contract?
The agreement between partners that set forth the terms under which the affairs of the partnership will be conducted.
What do partnership agreements normally include?
Names and contributions, rights and duties, sharing of income and loses, withdrawal provisions, dispute procedures, procedures for admission and withdraw of new partners, and rights and duties of surviving partners in the event of a partner's death.
Is the life of a partnership limited?
Is a partnership subject to taxes on its income?
What is a mutual agency?
The legal relationship among the partners whereby each partner is an agent of the partnership and is able to bind the partnership to contracts within the apparent scope of the partnership's business.
What is unlimited liability?
The legal relationship among general partners that makes each of them responsible for paying all the debts of the partnership if the other partners are unable to pay their shares.
What are the advantages of partnerships?
Ease of formation, low start-up costs, access to more capital sources, broader base of management talent, increased effectiveness from pooling talent, and less bureaucracy than corporations.
Disadvantages of partnerships?
Unlimited liability for general partnerships creating personal obligations, hard to find suitable partners, possible development of conflict among partners, divided authority, partners can legally bind each other without prior approval, and lack of continuity (or limited life).
What is a limited partnership?
A partnership that has 2 classes of partners: limited partners and general partners.
What is a general partner?
A partner who assumes unlimited liability for the debts of the partnership; also, the general partner in a limited partnership is responsible for its management. Must be at least one of these.
What is a limited partner?
Partners who have no personal liability for debts of the partnership beyond the amounts they have invested in the partnership. Managed by the general partners.
What is a limited liability partnership?
A partnership in which each partner is not personally liable for malpractice or negligence claims unless the partner was responsible for providing the service that resulted in the claim.
Because ownership rights in a partnership are divided among partners, partnerships accounting:
Uses a capital account for each partner, uses a withdrawals account for each partner, and allocates net income or loss to partners according to the partnership agreement.
After a partnership if formed, what are the differences between it and a proprietorship?
1. Partner's withdrawals of assets are debited to their individual withdrawals accounts (as opposed to one withdrawals account for a sole proprietorship.)
2. In closing the accounts at the end of the period, each partner's capital account is credited or debited for his or her share of net income or loss (as opposed to one capital account in sp.)
3. The withdrawals account for each partner is closed to the partners capital account (as opposed to one withdrawals account and one capital account for a sp.)
In a partnership, what do you record if a partner withdrawals cash?
DR: Olivia Tang, Withdrawals ... x
CR: Cash .......................................x
What are the 3 methods for dividing net income and loss?
1. A stated fractional basis
2. the ratio of capital investments
3. Salary and interest allowances and any remainder in a fixed ratio
How do you allocate when income exceeds the allowance, when allowances exceed income and when there is a net loss?
Salaries allowances, interest allowances, balance of net income not yet allocated, balance of net income.
What happens when a partner is added or a partner withdrawals?
The partnership is ended. Still, the business can continue to operate as a new partnership among the remaining partners.
What are the 2 ways in which a partner is admitted to a partnership?
1. A new partner can purchase an interest from one or more current partners.
2. A new partner can invest cash or other assets in the partnership.
If David sells 10,000 of his partnership to a new partner Chris, what do you record?
DR: David, Capital 10000
Cr: Chris, Capital 10000
If Chris Invests 28000 cash into the partnership, you record:
DR: Cash 28000
CR: Chris, Capital 28000
When does a new partner usually have to pay a bonus to enter a partnership?
When the market value of net assets exceeds their book value.
When do existing partners give a bonus to the new partner?
When additional cash is needed or the new partner has exceptional talents.
What are the 2 ways in which a partner withdrawals from a partnership?
1. The withdrawing partner can sell his or her interest to anther person who pays for it in cash or other assets.
2. When cash or other assets of the partnership are given to the withdrawing partner in settlement of his or her equity interest.
What do you record if no bonus is paid?
DR: D, Capital
What do you record if there is a bonus to remaining partners?
DR: D, Capital
What do you record if there is a bonus to withdrawing partners?
DR: D Capital
Why might you pay a bonus to the withdrawing partner?
1. If the recorded equity of the partnership is overstated
2. If the remaining partners want to remove a partner, which may require giving assets of greater value than the withdrawing partner's recorded equity.
What happens if a partner dies?
A partner's death dissolves a partnership if the partnership agreement does not provide otherwise.
What is partnership liquidation?
The dissolution of a partnership by: 1. selling non-cash assets for cash
2. Allocating the gain or loss according to the partners income-and-loss ratio
3. Paying liabilities
4. Distributing remaining cash to partners based on capital balances.
What does no capital deficiency mean?
All partners have credit balances in their capital accounts before final distribution of cash.
What is capital deficiency?
At least one partner has a debit balance in his or her capital account before the final distribution of cash.
What can cause capital deficiency?
Liquidation losses, excessive withdrawals from liquidation, or reoccurring losses in prior periods.
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