B. Woods Chapter 15 - Chapter 15 PARTNERSHIPS - FORMATION,...

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10 Chapter 15 PARTNERSHIPS - FORMATION, OPERATIONS, AND CHANGES IN OWNERSHIP INTERESTS Answers to Questions 1 Noncash investments of partners should be recorded at their fair values in order to provide equitable treatment to the individual partners. The recording of noncash assets at less than fair value will result in allocating the amount of understatement between the partners in their relative profit and loss sharing ratios as the undervalued assets are used for partnership business or when they are sold by the partnership. 2 Conceptually, there is no difference between the drawings and the withdrawals of partners since both represent disinvestments of resources from the partnership entity. From a practical viewpoint, the distinction between withdrawals and drawings may be important because allowable drawings are not usually deducted in determining the amount of partnership capital to be used for purposes of dividing profits among the partners. Since withdrawals are deducted, the distinction can affect the division of profits and losses. 3 In the absence of an agreement for dividing profits, an equal division among the partners is required by the Uniform Partnership Act. The agreement also applies to losses. And it applies irrespective of the relative investments by the partners. 4 Salary and interest allowances are included in some partnership agreements in order to reward partners for the time and effort that they devote to partnership business (salary allowances) and for capital investments (interest allowances) that they make in the business. 5 Salary allowances to partners are not expenses of a partnership. Rather, they are a means of recognizing the efforts of individual partners in the division of partnership income. 6 When profits are divided in the ratio of capital balances, capital balances should be computed on the basis of weighted average capital balances in the absence of evidence that another interpretation of capital balances is intended by the partners. 7 An individual partner may have a loss from his share of partnership operating activities even though the partnership has income. This situation results if priority allocations to other partners exceed partnership net income. For example, if net income for the A and B Partnership is $5,000
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11 Partnerships - Formation, Operations, and Changes in Ownership Interests and profits are divided equally after a salary allowance of $8,000 to A, A will have partnership income of $6,500 and B will have a partnership loss of $1,500. 8 Partnership dissolution under the Uniform Partnership Act is the change in the relation of the partners caused by any partner ceasing to be associated in the carrying on of the business, as distinguished from the winding up of the business. Thus, the assignment of a partnership interest to a third party by one of the partners does not, by itself, dissolve the partnership because the assignee does not become a partner unless accepted as a partner by the continuing partners. 9
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B. Woods Chapter 15 - Chapter 15 PARTNERSHIPS - FORMATION,...

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