Advanced Financial Accounting Exam 2 Questions & Answers

Legal Characteristics of Partnerships - ANSWERS1) Defined as "an association of two or more persons to carry on business as co-owners for profit." 2) Are common especially in the legal, medical, and accounting professions. Professionals in service professions often choose the partnership as the legal form for doing business. 3) Have never grown to the huge size of large corporations primarily because of the unlimited personal liability assumed by each partner. *KEY DISADVANTAGE Legal Characteristics of Partnerships continued.. - ANSWERS4) The most distinctive aspect of partnership accounting centers on the maintenance of separate equity (capital) accounts for each partner. 5) Typically the basis for changes to each partners capital account will be found in a written articles of partnership agreement, or if no written articles exist, the Uniform Partnership Act. The Articles of Partnership - ANSWERSDescribe how initial investments, income allocation, withdrawals of profits by partners, admission of new partners, and withdrawal of partners will affect partners' capital accounts. Subchapter S Corporations - ANSWERS1) Have nearly all the legal characteristics of corporations including limited liability of owners. 2) Have profits that pass through to owners similar to partnerships. 3) Ownership is by law limited to 100 stockholders. 4) The stockholders must be individuals, estates, trusts and certain tax-exempt entities. Limited Partnerships (LPs) - ANSWERSHas at least one "limited" partner who may not participate in management in any way but whose personal losses for partnership debt are limited to the amount invested. The limited partnership must also have at least one general partner with unlimited liability. Limited Liability Companies (LLCs) - ANSWERS1) All owners are liable only for their own acts and omissions, and the acts and omissions of those under their direct supervision. 2) Owners of these entities do not have unlimited personal liability for the negligent or fraudulent acts of other partners not under their control. Partnership Legal Form Advantages - ANSWERS1) Flexibility in defining relationships 2) Allows a firm to broaden the breadth and depth of knowledge residing within the firm 3) Allows for sharing work burdens across multiple people as well as sharing administrative support 4) Erase of formation and dissolution relative to a corporation 5) Easy to implement any desired control format 6) Taxed on a "flow through" basis Partnership Legal Form Disadvantages - ANSWERS1) Unlimited personal liability incurred by each partner 2) Mutual agency (right to sign contracts in the name of the partnership) 3) Denied some tax deductions that are allowed to corporations. Deductions for pension, health, and payroll related expenses may not be fully available to partnerships. Partnerships Liquidate for a Variety of Reasons Including: - ANSWERS1) Personality disputes among partners 2) Retirement of key partner 3) Death of key partner 4) Changing business environment 5) Other better opportunities 6) Low profits 7) Bankruptcy The Sequence of Events in a Liquidation Is: - ANSWERS1) Convert all non-cash assets into cash. 2) Allocate gains or losses from converting non-cash assets into cash to capital accounts. 3) Pay liabilities and liquidation expenses from accumulated cash. This must be taken care of before any cash goes to partners. 4) Distribute remaining cash to partners in the amount of their capital balances.