sm_13 21e - CHAPTER 13 Accounting for Partnerships and...

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CHAPTER 13 Accounting for Partnerships and Limited Liability Corporations CLASS DISCUSSION QUESTIONS 1. Proprietorship: Ease of formation. Corporation: Limited liability to owners and ease of raising large amounts of equity capit- al. Partnership: Expanded owner expertise and capital and ease of formation. Limited liability corporation: Limited liability to owners. 2. The disadvantages of a partnership are its life is limited, each partner has unlimited liab- ility, one partner can bind the partnership to contracts, and raising large amounts of capit- al is more difficult for a partnership than a corporation. 3. Yes. A partnership may incur losses in ex- cess of the total investment of all partners. The division of losses among the partners would be made according to their agree- ment. In addition, because of the unlimited li- ability of each partner for partnership debts, a particular partner may actually lose a greater amount than his or her capital bal- ance. 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 (members). 5. Equally. 6. No. He 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, be- cause of the unlimited liability of each part- ner, DiPano may lose more than one-third of the losses if one partner is unable to absorb his share of the losses. 7. The statement of stockholders’ equity dis- closes the material changes in each stock- holders’ equity account, such as common stock, paid-in excess of par value, retained earnings, and treasury stock, for a specified period. 8. The statement of partners’ equity (for a part- nership) and statement of members’ equity (for a LLC) both show the material changes in owner’s equity for each ownership person or class for a specified period. 9. The delivery equipment should be recorded at $15,000, the valuation agreed upon by the partners. 10. The accounts receivable should be recorded by a debit of $200,000 to Accounts Receiv- able and a credit of $20,000 to Allowance for Doubtful Accounts. 11. Yes. Partnership net income is divided ac- cording to the income-sharing ratio, regard- less of the amount of the withdrawals by the partners. Therefore, it is very likely that the partners’ monthly withdrawals from a part- nership will not exactly equal their shares of net income. 12. a. Debit the partner’s drawing account and credit Cash. b. Debit the income summary account for the amount of the net income and credit the partners’ capital accounts for their re- spective shares of the net income.
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This note was uploaded on 06/10/2011 for the course ACCT 210 taught by Professor Me during the Spring '11 term at Abu Dhabi University.

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sm_13 21e - CHAPTER 13 Accounting for Partnerships and...

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