oguz ozsarac_purchase_ch12_to_ch17

oguz ozsarac_purchase_ch12_to_ch17 - CHAPTER 12 ACCOUNTING...

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657 CHAPTER 12 ACCOUNTING FOR PARTNERSHIPS AND LIMITED LIABILITY COMPANIES EYE OPENERS 1. Proprietorship: Ease of formation and nontax- able entity. Partnership: Expanded owner expertise and capital, nontaxable entity, and ease of for- mation. Limited liability company: Limited liability to owners, expanded access to capital, nontaxa- ble entity, and ease of formation. 2. The disadvantages of a partnership are that its life is limited, each partner has unlimited liabil- ity, one partner can bind the partnership to contracts, and raising large amounts of capital is more difficult for a partnership than a limited liability company. 3. Yes. A partnership may incur losses in excess of the total investment of all partners. The division of losses among the partners would be made according to their agreement. In addi- tion, because of the unlimited liability of each partner for partnership debts, a particular part- ner may actually lose a greater amount than his or her capital balance. 4. The partnership agreement (partnership) or operating agreement (LLC) establishes the income-sharing ratio among the partners (members), amounts to be invested, and buy- sell agreements between the partners (mem- bers). In addition, for an LLC the operating agreement specifies if the LLC is owner- managed or manager-managed. 5. Equally. 6. No. Maholic would have to bear his share of losses. In the absence of any agreement as to division of net income or net loss, his share would be one-third. In addition, because of the unlimited liability of each partner, Maholic may lose more than one-third of the losses if one partner is unable to absorb his share of the losses. 7. The delivery equipment should be recorded at $10,000, the valuation agreed upon by the partners. 8. The accounts receivable should be recorded by a debit of $150,000 to Accounts Receivable and a credit of $15,000 to Allowance for Doubtful Accounts. 9. Yes. Partnership net income is divided accord- ing to the income-sharing ratio, regardless of the amount of the withdrawals by the partners. Therefore, it is very likely that the partners’ monthly withdrawals from a partnership will not exactly equal their shares of net income. 10. a. Debit the partner’s drawing account and credit Cash. b. No. Payments to partners and the division of net income are separate. The amount of one does not affect the amount of the oth- er. c. Debit the income summary account for the amount of the net income and credit the partners’ capital accounts for their respec- tive shares of the net income. 11. a. By purchase of an interest, the capital interest of the new partner is obtained from the old partner, and neither the total assets nor the total equity of the partner- ship is affected. b. By investment, both the total assets and the total equity of the partnership are increased.
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This note was uploaded on 01/26/2011 for the course ACCOUNTING 12 taught by Professor Evans during the Spring '10 term at Everglades.

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oguz ozsarac_purchase_ch12_to_ch17 - CHAPTER 12 ACCOUNTING...

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