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Acct 411 selu 2020 Dean Final
Terms in this set (62)
A business owned by stockholders who share in its profits but are not personally responsible for its debts
Limit of Liability
What are the advantages of corporations
What is the disadvantage of corporations
A business in which two or more persons combine their assets and skills
rights and responsibilities
________________ and ___________________ should be detailed in the partnership agreement.
Uniform Partnership Act
act ordering common ownership interests, profit and loss sharing, and shared management responsibilities in a partnership
1. All partners are joint and severally liable (unlimited liability)
2. Any partner can commit partnership to agreements, contracts (mutual agency)
3. Share of income, losses flow through to partners
What are the characteristic of general partnerships?
yes they do
Do partnerships have a limited life?
1. Death, withdrawal, bankruptcy of an individual partner
2. Winding up the business
3. Admission of a new partner
When does dissolution of a partnership happen?
ease of formation, flexibility to allocate profit/losses as desired, taxed once.
What are the advantages of a partnership?
info return form 1065
What do partnerships get in tax returns?
1. Unlimited liability
2. Mutual agency
3. Passive activity rules: May limit flow-through of losses
List general partnership disadvantages
A unique government creation that looks like a corporation but is taxed like sole proprietorships and partnerships
Where do you apply to make a s corp?
1. <= 100 stockholders
2. One class of stock
3. Eligible shareholders (individuals, estates, certain tax-exempt entities,
certain trusts; no corporations)
Requirements to make a s corp?
a type of business that has one or more general partners and one or more limited partners
1. Contribute capital but do not materially participate in management of firm
2. Liability restricted to interest in partnership
3. Share of income, losses flow through to partners
Limited liability partnership
Similar to general partnership except liability limited to investment and any
damages due to own acts, omissions (and those of individuals under own
professional service organizations
what business sector is llps popular in?
Limited Liability Company (LLC)
A hybrid form of business enterprise that offers the limited liability of the corporation but the tax advantages of a partnership.
No, it doesn't.
Does a partnership need to have a formal, legal, or state approval?
1. Partners, date
2. Business purpose
3. Rights, responsibilities (powers and duties) of partners
4. Procedures governing the admission and withdrawal of partners (valuation, exist
5. Procedures for the allocation of profits and losses
6. Procedures for determining interest paid on investment, guaranteed payments
(salaries to be deducted from partnership income)
7. Allowable withdrawals of capital; required capital contributions
8. Procedures governing voluntary withdrawal, disability, death, divorce and
valuation of partner's interest in partnership
9. Matters requiring consent of all partners
10. Year-end (usually 12-31), basis of accounting
What are the requirements to form a general partnership agreement?
A relationship of trust and confidence, as between trustee and beneficiary, attorney and client, or principal and agent.
it becomes absorb into the partnership and shared among the partners
What become of property contributed by a partnership?
Acts of a general partner bind both the partnership and other partners
Entity is the individual owners:
1. Partners' salaries are viewed as distribution of income and are not deductible as
2. Unlimited liability of general partners (extends beyond interest in entity)
3. Partnership is not separate taxable entity:
Income not taxed at partnership level; instead flows through to partners
4. Absence of continuity of interest (limited life):
Original partnership dissolved upon admission or withdrawal of a partner
Entity is separate and distinct business unit possessing its own existence apart from individual owners:
1. Entity enters into contracts in its own name
2. Partnership claims contributed assets (individual partner contributing the asset no
longer has an undivided claim to contributed assets)
2. OCBOA: Other comprehensive bases of accounting
What are the accounting standards for partnerships?
Other comprehensive bases of accounting
bases of accounting that include cash basis, tax basis, regulatory basis, or contractual basis
1. Bonus method
2. Goodwill method
What are the two methods for a partner entering and exiting a partnership?
1. Requires approval of existing partners
2. Will have the rights and responsibilities of a partner
(Co-ownership of property, share of profits/losses, participate in management)
3. Not subject to personal liability for claims against partnership incurred before date of
admission (but can lose investment in partnership)
What are the steps take to admit a new partner?
Overstate equity (by overstating retained earnings)
If overstate assets, and liabilities are OK, then:
Overstate equity (by overstating retained earnings)
If assets are OK, and understate liabilities, then:
- recorded sales too early
- Classify customer deposits as current revenues
- Treat consignment sales as normal sales
- Duplicate bill
- Totally fictitious/fake sales
- Misclassify the proceeds from the sale of assets or proceeds from debt or equity
How sales are overstated?
Don't record sales returns or reduce related accounts receivable (AR)
Record sales returns in a later period
How are sales returns understated?
overstated ending inventory, don't record all purchases.
How are CoGS understated?
- Over count, use too high a count
- Use too high a cost per unit
- Multiply wrong
- Include obsolete, defective inventory in inventory
How is ending inventory overstated?
- Not record purchases, expenses and related liabilities:
- Record liability in following period:
- Not adjust accrued expenses (payables) to proper balances:
- Not record expected losses and related liabilities
How are expenses understated?
What are some typical accrued expenses that could be understated?
lawsuits, litigation, contractual claims, asset retirement, tax audits, worker's comp, insurance audits, environmental cleanup costs
What are some typical expected losses?
When is the allocation of profits and losses?
value of labor
List the 4 typical allocation methods
special allocation procedures
a collection of profits per year or non-operating gains or losses
doing through the profit and losses agreement with a set ratio
following the order of priority set by the partnership.
What are the options for dealing with deficiencies and losses?
- purchase an interest from a current partner
- contribute assets directly to the partnership
- assigning interest
List the methods of acquiring a partnership interest?
- more of a creditor does not mgmt
- assigns all or a portion of a partner's interesting profits, losses to assignee
- does not provide the right to participate in management or review transactions and records
- does not require approval of existing partners
What is special about assigning an interest when acquiring a partnership interest?
an action that presumes to be arms-length transactions reflecting current value of the partnership
- existing assets should be revalued
- previously unrecorded intangible assets exist that are traceable to the original partners
- intangible assets are being transferred in that are traceable to the new partner
Changes in ownership may indicate what in partnership
Suggests partnership assets are at fair value
1. Acquire % interest at = book value of partnership net assets
Suggests fair value of partnership assets understated:
1. Partnership assets have unrecorded appreciation
2. Unrecorded goodwill, intangible assets exist
Acquire % interest at > book value of partnership net assets
Suggests fair value of partnership assets overstated
1. Partnership assets have unrecorded depreciation, impairment
2. Contribution by new partner includes an intangible asset (goodwill)
Acquire % interest at < book value of partnership net assets
1. Existing asset book values not adjusted unless otherwise allowed by GAAP
2. Increases not recognized until realized through subsequent transactions
3. Decreases may be recognized (i.e. impairment, lower of cost or market)
Admission by a contribution made to the partnership: Bonus method follows the book value approach:
1. Adjust for asset appreciation, implied goodwill traceable to original partners
2. Allocate to original partners using original profit sharing ratios
Methodology for determining value of goodwill If entities FV > BV:
1. Implied goodwill traceable to new partner
Methodology for determining value of goodwill
If FV < BV:
1. Creditors other than partners
2. Partner loans, amounts due for other than capital and profits (subject to right of offset)
3. Partners capital (subject to right of offset)
4. Partner's profits (subject to right of offset)
What is the typical priority ranking of payoffs for a partnerships?
Of a partnership is one in which all assets are converted into cash within a very short time, creditors are paid, and single, lump-sum payment is made to the partners for their capital interests.
Typically requries several months to complete and includes periodic, or installment, payments to the partners during the liquidation period.
Installment liquidation is the most common
Which liquidation method is the most common?
What case scenario is for liability for debit capital balances?
1. Partners should contribute additional assets to partnership to eliminate debit capital balances
2. If partner unable to eliminate debit capital balances, it will be viewed as a loss and allocated to remaining partners
What should a partner do for liab for debit capital balances?
don't overpay a partner
What should you never do in partnership liquidation?
1. Can serve as a guideline to calculate future distributions
2. Simulate a series of losses, each of which large enough to eliminate, one at a time, all of the partners claims to the property (start with partner with lowest MLA)
3. As each capital account wiped out, the allocation ratios change: Remaining partner's ownership/Remaining total ownership
4. Use schedule in reverse to see who can get how much
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