Question

Partnership: The company is considering forming a partnership and wants to be sure it understands the key issues regarding partnership formation, income distribution, and liquidation. A. Explain the process and methods used to account for partnership formation. How do these methods impact the firm’s balance sheet? B. Illustrate how the company could split profits and losses. C. Describe what happens if the partnership doesn’t do well and the company has to dissolve it, or one of the partners becomes insolvent. D. Illustrate the dissolution process by creating a hypothetical cash distribution schedule. Ensure all information is entered accurately.

Answer 1

A

Except for the number of partners' equity accounts, accounting for a partnership is the same as accounting for a sole proprietor. Each partner has a separate capital account for investments and his/her share of net income or loss, and a separate withdrawal account. A withdrawal account is used to track the amount taken from the business for personal use. The net income or loss is added to the capital accounts in the closing process. The withdrawal account is also closed to the capital account in the closing process.

Asset contributions to partnerships

When a partnership is formed or a partner is added and contributes assets other than cash, the partnership establishes the net realizable or fair market value for the assets. For example, if the Walking Partners company adds a partner who contributes accounts receivable and equipment from an existing business, the partnership evaluates the collectibility of the accounts receivable and records them at their net realizable value. An existing valuation reserve account (usually called allowance for doubtful accounts) would not be transferred to the partnership as the partnership would establish its own reserve account. Similarly, any existing accumulated depreciation accounts are not assumed by the partnership. The partnership establishes and records the equipment at its current fair market value and then begins depreciating the equipment over its useful life to the partnership.

Income allocations

The partnership agreement should include how the net income or loss will be allocated to the partners. If the agreement is silent, the net income or loss is allocated equally to all partners. As partners are the owners of the business, they do not receive a salary but each has the right to withdraw assets up to the level of his/her capital account balance. Some partnership agreements refer to salaries or salary allowances for partners and interest on investments. These are not expenses of the business, they are part of the formula for splitting net income. Many partners use the components of the formula for splitting net income or loss to determine how much they will withdraw in cash from the business during the year, in anticipation of their share of net income. If the partnership uses the accrual basis of accounting, the partners pay federal income taxes on their share of net income, regardless of how much cash they actually withdraw from the partnership during the year.

B

Partners can agree any method of split the net income or net loss. usually the article of partnership will specify the method of sharing. I there is nothing stated about how sharing will be done, the law presumes equal distribution. If nothing is stated about losses, it is assumed that they will shared in the manner as profits.

In a partnership in which each partner has invested equal asset devotes an equal amount of time to running the business, equal sharing profit and loss is typical. However, the partners themselves decide exactly. how the sharing will occur, just because partners invest an amount of assets and time to time partnership, they do not necessarily had share net income  pr net loss equally. The share of net income or net loss received by each partner is referred to as her or his distributive share. In section we will study the five ways of arriving distribute partner's shares.

1. division of earning based on a fractional share to each partner.

2. division of earning based on the ratio of capital invested.

3. division of earning based on the salary allowances to partners.

4. division of earning based on interest allowances to partners.

5. division of earning based on a combination of salary and interest allowances to partners.

C.

Partners may determine that it is no longer possible to continue in business. This may
occur if the partners have unsettled disputes or the business is no longer profitable and
liquidation becomes necessary. Liquidation is the total process of going out of business,
or the legal process of converting assets to cash, paying all creditors, and making final
distribution of cash to the partners. This legal process also means that each partner is
liable to pay the creditors whether or not there is sufficient cash remaining. Although
many different circumstances occur in liquidation, only two are discussed here. In each
case, there are four steps to be followed.
1. Convert all noncash assets to cash and record the gain or loss on liquidation.
2. Distribute the gains or losses to the partners’ capital accounts according to the
profit-loss ratio.
3. Pay the liabilities.
4. Distribute the remaining cash according to the equities (capital balances) of the
partners.
A temporary account called Loss or Gain from Liquidation is opened to assemble the
gains or losses that may occur when selling the assets. It is credited for a gain and debited
for a loss. The conversion of noncash assets to cash is called realization. Partners will normally
share losses and gains from liquidation using their income and loss sharing ratio.

D.

Assets Sold for a Gain

all assets covert into the cash while its gain the profit on the sale of the assets
Assets Sold for a Loss
Many times a business cannot sell its other assets at the amount carried in the records.
Assets will deteriorate with age and therefore are not as marketable as when they were
new.

Hand over the assets

As per requirement of the partners will get the assets which they requires and its credit into the accounts of the partner.

distribution

distribute the profit or loss in the ratio of in which they share profit and loss and all things distribute all of them in all partners.