15.1 Describe the Advantages and Disadvantages of Organizing as a Partnership
- There are many advantages and disadvantages of partnership as a form of business entity and they should be carefully considered.
- The most significant advantage of partnerships is the exemption from tax at the business level. Partners are taxed on their share of the profit or loss at their individual tax rates.
- Mutual agency and unlimited liability should be weighed against the tax benefits of partnership.
- There are other entity forms that have many of the characteristics of standard partnerships. These other entity forms often share the legal liability protection of corporations, and the tax and personal benefits of a partnership.
15.2 Describe How a Partnership Is Created, Including the Associated Journal Entries
- Partners must consider several factors when developing their partnership agreement, such as the contributions and authority of each partner and a means to resolve disputes.
- Non-cash assets such as equipment and prepaid expenses should be recorded at current market values.
- Partners are sometimes given an ownership interest based on their expertise or experience instead of any contributed assets.
- Liabilities assumed by the partnership should be recorded at their current value.
15.3 Compute and Allocate Partners’ Share of Income and Loss
- There are several different approaches to sharing the income or loss of a partnership, including fixed ratios, capital account balances, and combinations of the two.
15.4 Prepare Journal Entries to Record the Admission and Withdrawal of a Partner
- There are two different methods for admitting a new partner to a partnership—direct investment to the partnership (affects partnership assets) and transaction among partners (does not affect partnership assets).
- There are two different methods for a partner to withdraw from a partnership—direct payment from the partnership and direct payment from the partners.
15.5 Discuss and Record Entries for the Dissolution of a Partnership
- There are times, such as following bankruptcy, death, or retirement, when a partnership ceases operation.
- The following four accounting steps must be taken, in order, to dissolve a partnership: sell noncash assets; allocate any gain or loss on the sale based on the income-sharing ratio in the partnership agreement; pay off liabilities; distribute any remaining cash to partners based on their capital account balances.