Monday, February 3, 2014

Lesson 1 P2: Partnership - Notes

Partnership Formation and Operation
Distribute:
1. Interest
2. Salaries
3. Bonus (only when there is excess/profit)
4. Residual

Partnership Dissolution
A. Admission of a New Partner
     1. Purchase of Interest = assets and liabilities will not change
                                          = reclassify old partner's account
                                          = excess and deficiency within and among parties involved
     2. Admission by Investment of Additional Assets
             a. Bonus Method = given to old/new partner for excess/deficiency in percentage contribution
             b. Goodwill Method = not used in practice; recognized in acquisition of business only

B. Withdrawal of a Partner = payment excess/deficiency means bonus to retiring/remaining partners

C. Incorporation of Partnership
     1. Retain Books = close capital accounts, open a share capital account
     2. New Books = close old books, open a new book

Partnership Liquidation
A. Lump Sum Distributions
     1. Sell Non-cash Assets (NCA)
     2. Satisfy Creditors
     3. Distribute residue to partners
*right of offset doctrine = offset loans to/from partnership and capital balances

B. Installment Distribution = Cash Priority Program or Schedule of Safe Payments

Partners                                     A                              B                                C
Balance before realization         30K                           20K                           10K
Divided by: P/L ratio                 50%                           25%                          25%
Loss Absorption Capacity         60K                            80K                           40K
Priority 1                                                                (20K)                                
Difference                               60K               =          60K                 ;         40K
Priority 2                                (20K)                         (20K)                               
Difference                               40K               =          40K                =         40K

Priority 1 = 20K*25% = 5K
*The first 5K realization must go to B.

Priority 2 = 20K*25% + 20K*50% = 5K + 10K = 15K
*The next 15K realization will be divided among A and B
*The total realization in excess of 5K until 20K will be divided by A and B according to their P/L ratio

Last Priority
*Anything in excess of 20K (5K+15K) will be divided among the partners according to their P/L

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