Assessment 4 Instructions: Partnerships

 

Complete two exercises in accounting for the equity of a pass-through entity, such as an LLC, limited partnership, or general partnership structure.

Introduction

The partnership form of business ownership is quite popular. One reason is that partnerships are easy to create the double taxation inherent in corporate ownership can be avoided. However, the unlimited liability normally restricts the growth potential for most partnerships. As a result, most partnerships remain small in relation to their larger corporate brothers.

During the formation and operation stages of a partnership’s life, several issues require closer study because of their impact on the financial status of individual partners. Initially, there is the issue of allocating the initial contributions of each partner in relation to their ownership and liability share. During ongoing operations, the issue of allocating annual income and losses sustained by the business must be handled. Lastly, the issues of taking on new partners and the withdrawal of current partners will affect the financial stability of the partnership.

A business unit can exist indefinitely through the periodic admission of new partners. However, sometimes the termination of business activities and liquidation of property can take occur, and there are many potential reasons for this. Several important financial issues surface during these times in the life of a partnership.

Preparation

The following resources are required to complete the assessment.

• Assessment 4 Problems [DOCX].
• Assessment 4 Problem Templates [DOCX].

Complete the problems in the Assessment 4 Problems document using the related template, both of which are linked in the Required Resources for this assessment. All financial information and applicable instructions are provided.

Problem 1: Partnership Operations

• Calculate partnership capital balances.
• Calculate needed partner investment.
• Calculate goodwill resulting from admission of a new partner.
• Calculate bonus resulting from admission of a new partner.

Problem 2: Partnership Liquidation Schedule

• Prepare a partnership liquidation schedule.

Competencies Measured

By successfully completing this assessment, you will demonstrate your proficiency in the course competencies through the following assessment scoring guide criteria:

• Competency 3: Evaluate partnership accounting issues.

  Calculate needed partner investment.
  Calculate goodwill resulting from admission of a new partner.
  Calculate bonus resulting from admission of a new partner.
  Calculate partnership capital balances.
  Prepare a partnership liquidation schedule.

• Competency 5: Communicate in a manner that is professional and consistent with expectations for professionals in the field of accounting.

  Communicate results from accounting calculations accurately and clearly.

Assessment

4

Problem Template

Partnership Operations

Reporting a change in the composition of a partnership. Calculate your answers here.

a. Exact amount of investment.

b. Implied value of partnership.

c. P’s investment.

d. Total capital after investment.

e. N’s capital balance.

Partnership Liquidation Schedule

Produce a schedule of liquidation

Edmonds

,

Beatty

, and

Elder

Schedule of Partnership Liquidation Final Balances

Updated balances

Updated balances

Next

Updated balances

Noncash assets sold

Updated balances

Updated balances

Cash	Noncash Assets	Liabilities	Edmonds, Capital (60%)	Beatty, Capital (20%)	Elder, Capital (20%)
	Beginning balances	$105,600	$389,400	$77,000	$222,200	$61,600	$134,200
Distribution of $8,800 (cash in excess of liabilities and estimated liquidation expenses) in accordance with pre-distribution plan
					Updated balances
	Noncash assets sold
All liabilities are paid
Distribution of $105,600 (cash in excess of liabilities and estimated liquidation expenses) in accordance with pre-distribution plan. First distribution
	Next
Paid liquidation expenses
Final distribution based on ending capital account balances
Ending balance

Beginning balances

Assumed Loss (Explain here, if applicable)

Edmonds, Capital	Beatty, Capital	Elder, Capital
	Assumed Loss (Explain here, if applicable)
Step One balances
Step Two balances

Predistribution Plan: Show your predistribution plan.

Schedule 2

	Partner		Capital balance/Loss allocation		Maximum loss that can be absorbed
	Edmonds
Beatty
	Elder

Schedule 3

Partner

Capital balance/Loss allocation

Maximum loss that can be absorbed

Edmonds

Elder

4

Assessment 4: Partnerships

Problem

1

Following is the current balance sheet for a local partnership of attorneys:

Cash

and current assets

$66,000

Liabilities

$

88,000

Land .

396,000

L, capital

44,000

Building and equipment (net)

2

20,000

M, capital

88,000

N, capital

198,000

O, capital

264,000

Totals

$682,000

Totals $682,000

The following questions represent independent situations:

a. P is going to invest enough money in this partnership to receive a 25 percent interest. No goodwill or bonus is to be recorded. How much should P invest?

b. P contributes $79,200 in cash to the business to receive a 10 percent interest in the partnership. Goodwill is to be recorded. Profits and losses have previously been split according to the following percentages: L, 30 percent; M, 10 percent; N, 40 percent; and O, 20 percent. After P makes this investment, what are the individual capital balances?

c. P contributes $92,400 in cash to the business to receive a 20 percent interest in the part- nership. Goodwill is to be recorded. The four original partners share all profits and losses equally. After P makes this investment, what are the individual capital balances?

d. P contributes $121,000 in cash to the business to receive a 20 percent interest in the partnership. No goodwill or other asset revaluation is to be recorded. Profits and losses have previously been split according to the following percentages: L, 10 percent; M, 30 percent; N, 20 percent; and O, 40 percent. After P makes this investment, what are the individual capital balances?

e. N retires from the partnership and, as per the original partnership agreement, is to receive cash equal to 125 percent of her final capital balance. No goodwill or other asset revaluation is to be recognized. All partners share profits and losses equally. After the withdrawal, what are the individual capital balances of the remaining partners?

Problem 2

The partnership of Edmonds, Beatty, and Elder has elected to cease all operations and liquidate its business property. A balance sheet drawn up at this time shows the following account balances:

Liabilities

Cash	$105,600	$77,000
Noncash assets	389,400	Frick, capital (60%)	222,200
Wilson, capital (20%)	61,600
Clarke, capital (20%)	134,200
Total assets	$495,000	Total liabilities and capital	$495,000

The following transactions occur in liquidating this business:

· Distributed safe capital balances immediately to the partners. Liquidation expenses of $19,800 are estimated as a basis for this computation.

· Sold noncash assets with a book value of $176,000 for $105,600.

· Paid all liabilities.

· Distributed safe capital balances again.

· Sold remaining noncash assets for $96,800.

· Paid liquidation expenses of $15,400.

· Distributed remaining cash to the partners and closed the financial records of the business permanently.

Produce a final schedule of liquidation for this partnership.

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