ACC FPX 5610 Assessment 2 Partnership Accounting

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 a partnership has both benefits and risks. By clearly understanding and defining individual contributions, investments, and income, each partner can assess the fairness of the agreement. Anticipating and outlining various scenarios can help protect partners from asset division issues and losses. Without a partnership agreement, profits and losses are typically divided 50-50.

Income Allocation Schedule

For a retail gourmet ice cream shop, Partner 1 will invest $150,000 initially and work ten hours a week, while Partner 2 will invest $50,000 and work forty hours a week. To determine the partnership income, an income allocation schedule will be recommended, using a 10% interest allowance annually and salary allowances set at $25 per hour, assuming the partnership income is $100,000.

Partnership Loss Allocation Schedule

Under Section 704, a partner in a partnership may only use a loss allocated to that partner to the extent of the partner’s “basis” in the partnership interest (Nitti, 2014). In case of a loss, each partner’s share is based on the profit-sharing ratio. For instance, if the retail gourmet ice cream shop experiences a $40,000 loss, the initial contributions will be taken into account. Partner 1 invested $150,000 and Partner 2 invested $50,000. Therefore, Partner 1 is responsible for 75% of the loss, and Partner 2 for 25%.

Selling a Business – Partnership Dissolution

A partnership may dissolve for various reasons, such as a partner passing away or both partners deciding to pursue different directions. In this example, the ice cream shop assumes that in ten years, the partnership’s assets are valued at $900,000. Any loss or profit will be allocated on a 50-50 basis.

If the partnership’s assets are sold for $1,200,000 and liabilities are settled for $200,000, the remaining $1,000,000 will be allocated between the partners.

Ice Cream Shop – Liquidation Schedule

SEC Reporting Requirements

Partnerships do not need to meet the SEC’s segment reporting requirements. However, if the business becomes a corporation, reporting will be mandatory. Financial statement users will gain access to information about the business’s activities in different economic conditions. Quarterly financial statements, unlike annual reports, do not require audits. While IFRS 8 mandates disclosure of segment assets and liabilities, U.S. GAAP only requires segment asset disclosure (Hoyle et al., 2017). Should the ice cream shop incorporate and operate in Canada, it must comply with IAS 34, including the preparation of balance sheets, comprehensive income statements, equity change statements, and cash flow statements.

Conclusion

Entering a partnership is a significant decision. Clearly defining roles and responsibilities within an agreement can help prevent misunderstandings and conflicts. Allocating assets, dividing losses, and outlining decision-making processes are essential elements of a partnership agreement. These provisions help ensure the partnership’s success and avoid potential disputes.

References

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

Nitti, T. (2014). Allocation of Partnership Liabilities. Forbes. Retrieved January 14, 2019, from https://www.forbes.com/sites/anthonynitti/2014/02/11/tax-geek-tuesday-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