Accounting, Warren, Reeve, Duchac CH 12 - solutions
CHAPTER 12
ACCOUNTING FOR PARTNERSHIPS AND LIMITED LIABILITY COMPANIES
DISCUSSION QUESTIONS
1. a. Proprietorship: Ease of formation and nontaxable entity.
b. Partnership: Expanded owner expertise and capital, nontaxable entity, and moderate complexity of formation.
c. Limited liability company: Limited liability to owners, expanded access to capital, nontaxable entity, and moderate complexity of formation.
2. The disadvantages of a partnership are that its life is limited, each partner has unlimited liability, one partner can bind the partnership to contracts, and raising large amounts of capital is more difficult for a partnership than a limited liability company.
3. Yes. A partnership may incur losses in excess of the total investment of all partners. The division of losses among the partners is made according to their agreement. In addition, because of the unlimited liability of each partner for partnership debts, a particular partner may actually lose a greater amount than his or her capital balance.
4. The partnership agreement (partnership) or operating agreement (LLC) establishes the income- sharing ratio among the partners (members), amounts to be invested, and admission and withdrawal of partners (members). In addition, for an LLC the operating agreement specifies if the LLC is owner-managed or manager-managed.
5. No. Maholic would have to bear his share of losses. In the absence of any agreement as to division of net income or net loss, his share would be one-third. In addition, because of the unlimited liability of each partner, Maholic may have to bear more than one-third of the losses if one partner is unable to absorb his share of the losses.
6. Yes. Partnership net income is divided according to the income-sharing ratio, regardless of the amount of the withdrawals by the partners. Therefore, it is very likely that the partners’ monthly withdrawals from a partnership will not exactly equal their shares of net
ACCOUNTING FOR PARTNERSHIPS AND LIMITED LIABILITY COMPANIES
DISCUSSION QUESTIONS
1. a. Proprietorship: Ease of formation and nontaxable entity.
b. Partnership: Expanded owner expertise and capital, nontaxable entity, and moderate complexity of formation.
c. Limited liability company: Limited liability to owners, expanded access to capital, nontaxable entity, and moderate complexity of formation.
2. The disadvantages of a partnership are that its life is limited, each partner has unlimited liability, one partner can bind the partnership to contracts, and raising large amounts of capital is more difficult for a partnership than a limited liability company.
3. Yes. A partnership may incur losses in excess of the total investment of all partners. The division of losses among the partners is made according to their agreement. In addition, because of the unlimited liability of each partner for partnership debts, a particular partner may actually lose a greater amount than his or her capital balance.
4. The partnership agreement (partnership) or operating agreement (LLC) establishes the income- sharing ratio among the partners (members), amounts to be invested, and admission and withdrawal of partners (members). In addition, for an LLC the operating agreement specifies if the LLC is owner-managed or manager-managed.
5. No. Maholic would have to bear his share of losses. In the absence of any agreement as to division of net income or net loss, his share would be one-third. In addition, because of the unlimited liability of each partner, Maholic may have to bear more than one-third of the losses if one partner is unable to absorb his share of the losses.
6. Yes. Partnership net income is divided according to the income-sharing ratio, regardless of the amount of the withdrawals by the partners. Therefore, it is very likely that the partners’ monthly withdrawals from a partnership will not exactly equal their shares of net