ACC FPX 5610 Assessment 2 Partnership Accounting

Student Name

Capella University

ACC-FPX5610 Advanced Accounting, Budget Planning, and Control

Prof. Name

Date

Partnership Accounting

Entering into a partnership offers various benefits and risks. By clearly defining each partner’s contributions, investments, and income, all parties can assess the fairness of the partnership agreement. Properly anticipating and defining various scenarios helps protect each partner against potential asset divisions and losses. In the absence of a formal partnership agreement, assets and profits would be divided equally.

Income Allocation Schedule

For a retail gourmet ice cream shop, Partner 1 will make an initial investment of $150,000 and work ten hours per week. Partner 2 will invest $50,000 and work forty hours per week. To allocate partnership income, the agreement uses a 10% interest allowance per year and salary allowances at $25.00 per hour, assuming total partnership income of $100,000.

Allocation of Partnership Net Income

Partnership Loss Allocation Schedule

According to Section 704, a partner can only use a loss allocated to them up to their “basis” in the partnership interest (Nitti, 2014). In the event of a loss, the allocation will follow the profit-sharing ratio. For example, if the retail gourmet ice cream shop incurs a $40,000 loss, the initial contributions are considered. Partner 1 contributed $150,000, while Partner 2 contributed $50,000.

| Partner 1 Contribution | $150,000 / $200,000 = 75% | | Partner 2 Contribution | $50,000 / $200,000 = 25% |

Costs are allocated according to the sales amount, with operating expenses deducted from gross profit. After adding interest and deducting salaries, if a loss remains, it is divided according to the income distribution ratio. In this case, if the net loss is $40,000, Partner 1 would absorb $30,000, and Partner 2 would take on $10,000 (Rogers, n.d.).

Selling a Business – Partnership Dissolution

Partnerships may dissolve for various reasons, such as a partner’s death or a mutual decision to part ways. For instance, if the ice cream shop’s assets amount to $900,000 after ten years, any profit or loss will be split equally.

Balance Sheet at Time of Sale

If the assets are sold for $1,200,000 and liabilities are settled for $200,000, $1,000,000 will be available for distribution among the partners.

Ice Cream Shop – Liquidation Schedule

SEC Reporting Requirements

Partnerships are not required to meet SEC segment reporting requirements. However, if a partnership converts to a corporation, it will need to adhere to these requirements. Financial statements can provide insights into the business’s activities in various economic environments. Quarterly financial statements do not need to be audited as annual reports do. The International Financial Reporting Standard (IFRS) and Generally Accepted Accounting Principles (GAAP) differ in this respect. IFRS 8 mandates disclosure of segment assets and liabilities by operating segment if provided to the chief operating decision maker, while U.S. GAAP requires disclosure of segment assets but not liabilities (Hoyle et al., 2017). If the ice cream shop becomes a corporation with a location in Canada, it must comply with IAS 34, including a balance sheet, statement of comprehensive income, statement of changes in equity, and statement of cash flows.

Conclusion

Entering into a partnership is a significant decision. Properly drafted agreements can help prevent misunderstandings and disputes, whether the business is successful or not. Addressing asset division, loss allocation, and decision-making responsibilities are crucial components of a partnership agreement. Clearly defining roles and responsibilities can enhance the partnership’s success and reduce potential conflicts.

References

Hoyle, J. B., Schaefer, T., & Doupnik, T. (2017). Advanced Accounting (13th ed.). McGraw-Hill.

Nitti, T. (2014). Allocation of Partnership Liabilities. Retrieved January 14, 2019, from https://www.forbes.com/sites/anthonynitti/2014/02/11/tax-geektuesday-allocation-of-partnership-liabilities/#551033652a89

ACC FPX 5610 Assessment 2 Partnership Accounting

Rogers, K. (n.d.). Dividing a Partnership With a Net Loss. Small Business – Chron.com. Retrieved January 19, 2019, from http://smallbusiness.chron.com/dividing-partnership-net-loss-76279.html