Horngren’s Accounting, Volume 2, 11th Canadian Edition by Tracie Miller-Nobles Solution manual
Chapter 12
Partnerships
Questions
1. Nine items that the partnership agreement should specify are (only five are required):
1. Name, location, and nature of the business.
2. Names, capital investments, and duties of each partner.
3. Method of sharing profits and losses by the partners.
4. Cash/other asset withdrawals allowed to the partners.
5. Procedures for settling disputes among the partners.
6. Procedures for admitting new partners.
7. Procedures for settling up with a partner who withdraws from the business.
8. Procedures for liquidating the partnership.
9. Procedures for removing a partner who will not withdraw or retire from the partnership voluntarily.
2. Mutual agency describes a partner’s ability to obligate the business to a contract.
3. If the partnership cannot pay a debt, the partners must. Unlimited liability describes this personal obligation of the partners.
4. A partnership pays no income tax on its business income. Partners pay income tax as individuals on their shares of partnership income.
5. The great advantage of a partnership is that it combines the capital, talents, and experience of two or more persons. Also, a partnership pays no business income tax.
A disadvantage is that as partners enter and leave the business, the partnership must be dissolved and reformed. Drawing up a new partnership agreement for each new partnership may be expensive and time consuming. However, the principal disadvantages of a partnership are mutual agency and the unlimited personal liability of partners for business debts. A dishonest or unwise partner can cause trouble—even the financial ruin of the other partners.
6. An LLP is designed to protect innocent partners from negligence damages that result from another partner’s actions. This means that each partner’s personal liability for other partners’ negligence is limited to a certain dollar amount, although liability for a partner's own negligence is still unlimited.
7. A partnership balance sheet reports partner capital for each partner. A partnership statement of owners’ equity shows the changes in partner capital for each of the partners. A partnership income statement includes a section showing the division of net income to the partners. Otherwise, partnership financial statements are much like those of a proprietorship.
8. This person would be a limited partner, so named because his or her personal obligation for the partnership’s liabilities is limited to the amount he or she invested in the business.
9. Partners share losses in the same ratio that they share profits if the partnership agreement does not discuss sharing the losses. If the agreement specifies no profit-and-loss-sharing ratio, the partners share profits and losses equally.
10. The current market value of the assets contributed to a partnership determines the amount of the credit to the partner’s capital account.
11. Partner withdrawals of cash for personal use do not affect the sharing of profits and losses by the partners. Their shares of profits and losses are based on the profit-and-loss-sharing ratio, which is determined separately from their cash withdrawals.
12. The partnership debits the withdrawing partner’s capital account and credits the new partner’s capital account. The dollar amount of this entry is the withdrawing partner’s capital balance, not the amount of cash paid. This is basically a name change on the capital account.
13. Malcolm obtains the right to share in the profits and losses of the partnership. Malcolm must gain Conners’s approval before becoming a partner.
14. Partnership capital before Kaur is admitted
($150,000 + $150,000) $300,000
Kaur’s investment in the partnership 100,000
Partnership capital after Kaur is admitted $400,000
Partnerships
Questions
1. Nine items that the partnership agreement should specify are (only five are required):
1. Name, location, and nature of the business.
2. Names, capital investments, and duties of each partner.
3. Method of sharing profits and losses by the partners.
4. Cash/other asset withdrawals allowed to the partners.
5. Procedures for settling disputes among the partners.
6. Procedures for admitting new partners.
7. Procedures for settling up with a partner who withdraws from the business.
8. Procedures for liquidating the partnership.
9. Procedures for removing a partner who will not withdraw or retire from the partnership voluntarily.
2. Mutual agency describes a partner’s ability to obligate the business to a contract.
3. If the partnership cannot pay a debt, the partners must. Unlimited liability describes this personal obligation of the partners.
4. A partnership pays no income tax on its business income. Partners pay income tax as individuals on their shares of partnership income.
5. The great advantage of a partnership is that it combines the capital, talents, and experience of two or more persons. Also, a partnership pays no business income tax.
A disadvantage is that as partners enter and leave the business, the partnership must be dissolved and reformed. Drawing up a new partnership agreement for each new partnership may be expensive and time consuming. However, the principal disadvantages of a partnership are mutual agency and the unlimited personal liability of partners for business debts. A dishonest or unwise partner can cause trouble—even the financial ruin of the other partners.
6. An LLP is designed to protect innocent partners from negligence damages that result from another partner’s actions. This means that each partner’s personal liability for other partners’ negligence is limited to a certain dollar amount, although liability for a partner's own negligence is still unlimited.
7. A partnership balance sheet reports partner capital for each partner. A partnership statement of owners’ equity shows the changes in partner capital for each of the partners. A partnership income statement includes a section showing the division of net income to the partners. Otherwise, partnership financial statements are much like those of a proprietorship.
8. This person would be a limited partner, so named because his or her personal obligation for the partnership’s liabilities is limited to the amount he or she invested in the business.
9. Partners share losses in the same ratio that they share profits if the partnership agreement does not discuss sharing the losses. If the agreement specifies no profit-and-loss-sharing ratio, the partners share profits and losses equally.
10. The current market value of the assets contributed to a partnership determines the amount of the credit to the partner’s capital account.
11. Partner withdrawals of cash for personal use do not affect the sharing of profits and losses by the partners. Their shares of profits and losses are based on the profit-and-loss-sharing ratio, which is determined separately from their cash withdrawals.
12. The partnership debits the withdrawing partner’s capital account and credits the new partner’s capital account. The dollar amount of this entry is the withdrawing partner’s capital balance, not the amount of cash paid. This is basically a name change on the capital account.
13. Malcolm obtains the right to share in the profits and losses of the partnership. Malcolm must gain Conners’s approval before becoming a partner.
14. Partnership capital before Kaur is admitted
($150,000 + $150,000) $300,000
Kaur’s investment in the partnership 100,000
Partnership capital after Kaur is admitted $400,000
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