Question

Part I      QUESTIONS

1. The characteristics of a partnership include the following: (a) association of individuals, (b) limited life, and (c) co-ownership of property. Explain each of these terms.

2.   Kevin Mathis is confused about the partnership characteristics of (a) mutual agency and (b) unlimited liability. Explain these two characteristics for Kevin.

3. Lance Kosinski and Matt Morrisen are considering a business venture. They ask you to explain the advantages and disadvantages of the partnership form of organization.

4. Newland and Palermo form a partnership. Newland contributes land with a book value of $50,000 and a fair value of $60,000. Newland also contributes equipment with a book value of $52,000 and a fair value of $57,000. The partnership assumes a $20,000 mortgage on the land. What should be the balance in Newland’s capital account upon formation of the partnership?

5. Are the financial statements of a partnership similar to those of a proprietorship? Discuss.

  

Answer 1

Part 1

A. association of individual

A partnership is an unincorporated association of two or more individuals to carry on a business for profit. Many small businesses, including retail, service, and professional practitioners, are organized as partnerships.
A partnership agreement may be oral or written. However, to avoid misunderstandings, the partnership agreement should be in writing. The agreement should identify the partners; their respective business‐related duties and responsibilities; how income will be shared; the criteria for additional investments and withdrawals; and the guidelines for adding partners, the withdrawal of a partner, and liquidation of the partnership. For income tax purposes, the partnership files an information return only. Each partner shares in the net income or loss of the partnership and includes this amount on his/her own tax return

B. Limited life

The life of a partnership may be established as a certain number of years by the agreement. If no such agreement is made, the death, inability to carry out specific responsibilities, bankruptcy, or the desire of a partner to withdraw automatically terminates the partnership. Every time a partner withdraws or is added, a new partnership agreement is required if the business will continue to operate as a partnership. With proper provisions, the partnership's business may continue and the termination or withdrawal of the partnership will be a documentation issue that does not impact ongoing operations of the partnership

C. Coownership of property

Partner of the firm of the co owner of the property of partnership firm they have all the right on the property as per their partnership deed and equal right in absence of any deed

PART 2

A. Mutual Agency

In a partnership, the partners are agents for the partnership. As such, one partner may legally bind the partnership to a contract or agreement that appears to be in line with the partnership's operations. As most partnerships create unlimited liability for its partners, it is important to know something about potential partners before beginning a partnership. Although partners may limit a partner's ability to enter into contracts on the company's behalf, this limit only applies if the third party entering into the contract is aware of the limitation. It is the partners' responsibility to notify third parties that a particular partner is limited in his or her ability to enter into contracts.

B. Unlimited Liability

Partners may be called on to use their personal assets to satisfy partnership debts when the partnership cannot meet its obligations. If one partner does not have sufficient assets to meet his/her share of the partnership's debt, the other partners can be held individually liable by the creditor requiring payment. A partnership in which all partners are individually liable is called a general partnership. A limited partnership has two classes of partners and is often used when investors will not be actively involved in the business and do not want to risk their personal assets. A limited partnership must include at least one general partner who maintains unlimited liability. The liability of other partners is limited to the amount of their investments. Therefore, they are called limited partners. A limited partnership usually has LLP in its name.

PART 3

Advantages of partnership firm

1. Easy FormationLike sole proprietorship, partnership form of organisation can be formed without legal formalities.

2. Large Resources:

The partnership form of organisation enjoys large resources than a sole proprietorship so that the scale of operation can be enlarged to get the benefit of large-scale economies.

3. Flexibility:

The business is, abundantly mobile, flexible, and elastic being free from legal restriction on its activities. The partners can introduce any change they consider desirable to meet the changed circumstances.

4. Combined Skill and Balanced Judgement:The partnership form of organisation enjoys the benefit of the ability, experience, and talents of the partners. This is the distinctive advantage partnership enjoys over the sole proprietor because everything is done by mutual consultation.

Disadvantage of partnership firm

1. Lack of Harmony:

There is always likelihood of lack of harmony amongst the partners. Difference of opinion very often results in disharmony and lack of management, when differences arise, each partner tries to blame the other partner about his dishonest dealings and working against the interest of the firm. This is bound to result in disruption and ultimate dissolution of the firm.

2. Limited Resources:

The limit that more than twenty cannot be member of partnership form of business organisation, limits the amount of capital that can be raised. Actually, in order to secure harmony amongst the members of the firm, the number has to be kept much smaller than allowed by the law. This further limits the resources with the result that the large scale business cannot be run by partnership form of organisation.

3. Instability:

The partnership form of organisation may come to an abrupt end on the death, lunacy or insolvency of the partner. The partnership may also be closed if a single partner expresses his desire to dissolve the partnership or to get it dissolved by the order of court on account of wrongful act of one or more other partners. The lack of trust among the partners may lead to dissolution of the firm.

4. Lack of Public Faith:

As the partnership concern is not subject to any regulation and no legal formation and functioning, the people have less faith in such organisation coupled with the fact that every now and then people listen to the dissolution of such partnership concerns. Moreover, people are note aware of the exact position of the business of the partnership, the reason is that the accounts of partnership concerns are not published.

capital in the partners account is to be recognised on the basis of book value hence the fair value given in the question is to be ignore so value of capital will be land 50000 plus equipment 52000 total 102000/-

PART 4 are financial statements in partnership is similar to proprietorship

Major Difference Of The Financial Statement between Sole ProprietorshipAnd Partnership. More than one capital account. ... The income statement of the Partnership shows a schedule on how the net profit/loss is distributed to the partners. Balance Sheet show only one capital account which belongs to the single owner.