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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