Chap012 - Chapter 12 Accounting for Partnerships Conceptual...

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Unformatted text preview: Chapter 12 Accounting for Partnerships Conceptual Chapter Objectives C1: Identify characteristics of partnerships and similar organizations Analytical Chapter Objectives A1: Compute partner return on equity and use it to evaluate partnership performance Procedural Chapter Objectives P1: Prepare entries for partnership formation P2: Allocate and record income and loss among partners P3: Account for the admission and withdrawal of partners P4: Prepare entries for partnership liquidation Partnership Form of Organization Partnership Agreement Voluntary Association Limited Life Taxation Unlimited Liability Mutual Agency Co- Ownership of Property C1 Organizations with Partnership Characteristics Limited Partnerships (LP) General partners assume management duties and unlimited liability for partnership debts. Limited partners have no personal liability beyond invested amounts. Limited Liability Partnerships (LLP) Protects innocent partners from malpractice or negligence claims. Most states hold all partners personally liable for partnership debts. Limited Liability Corporation s (LLC) Owners have same limited liability feature as owners of a corporation. A limited liability corporation typically has a limited life. C1 Choosing a Business Form Proprietorship Partnership LLP LLC S Corp. Corporation Business entity yes yes yes yes yes yes Legal entity no no no yes yes yes Limited liability no no limited* yes yes yes Business taxed no no no no no yes One owner allowed yes no no yes yes yes *A partner's personal liability for LLP debts is limited. Most LLPs carry insurance to protect against malpractice. Many factors should be considered when choosing the proper business form. C1 Organizing a Partnership Partners can invest both assets and liabilities in the partnership. Assets and liabilities are recorded at an agreed- upon value, normally fair market value. Asset contributions increase the partners capital account. Withdrawals from the partnership decrease the partners capital account. P1 Organizing a Partnership On 2/15/08, Smith and Jones form a partnership. Smith contributes $80,000 cash. Jones contributes land valued at $40,000. Feb. 15 Cash 80,000 Land 40,000 Smith, Capital 80,000 Jones, Capital 40,000 To record initial investment in partners P1 Dividing Income or Loss Three frequently used methods to divide income or loss are allocation on: 1. Stated ratios. 2. Capital balances. 3. Services, capital and stated ratios. Partners are not employees of the partnership but are its owners. This means there are no salaries reported as expense on the income statement. Profits or losses of the partnership are divided on some agreed upon ratio....
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Chap012 - Chapter 12 Accounting for Partnerships Conceptual...

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