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Business Entities—Partnerships and Corporations

Assume Target Corporation is involved in a major lawsuit and the probable damages are estimated to be $2,000,000.

A. Describe the effects damage estimates would have on the financial statements of a corporation and a partnership.

B. How do disclosure requirements differ from a corporation to a partnership and what information is required?

C. Are the shareholders at risk for any personal liability with the company set up as a corporation? Defend your response.

D. If Target Corporation was set up as a partnership, would the partners be at risk for personal liability? Defend your response.

Answer 1

A. As per your question if Target corporation is involved in any law suit than the amount of that damage is shown as contingent liability in the fote note i.e below balance sheet just because contingent liability means we cannot determine whether that expenses is fixed or whether we have to pay more to our lawyer in future. If you can estimate the total amount of future as well than the journal entry for this is

Legal expenses -debit , Prepaid liabilities - credit

B. There is no such difference in both the cases as per GAAP contingent liability is shown as fote note

C.Yes, but there are exceptions as well. The share holder for limited liability company is not held for any debts made by company but in partnership firm partners are liable to pay debt as in partnership firm partners are shareholders.

D.Yes. According to partnership Act In unlimited partnership every partner is liable to pay the liablilities of firm and also will be held responsible for other partners carelessness in firm