ACC FPX 5610 Assessment 3

Partnership Accounting

Entering into partnership is both an opportunity and a challenge. One of the biggest advantages is the pooled investment of money and time, but the dangers are primarily in the form of potential differences of opinion in the division of the income, losses, and assets. To steer clear of such risks, partners should clearly define and know their own contributions and roles. Having a partnership agreement defined is crucial to ensure that every partner feels the setup is equitable and just. In the absence of an agreement, partnerships would typically share the profit and losses on a fifty-fifty basis, which may not be a fair reflection of what each partner brought to the partnership. Through forward planning, partners can protect themselves from conflict and unexpected loss.

ACC FPX 5610 Assessment 3:Income Allocation Schedule

We take the example of a partnership between two individuals who are co-owners of a gourmet ice cream shop. Partner 1 invests $150,000 to start and commits to work ten hours a week. Partner 2 invests $50,000 and will work forty hours a week. In order to determine how income is to be distributed on a just basis, an income allocation schedule is proposed. The calendar also considers a 10% interest allowance every year and provides compensation allowances at $25 per hour. If the partnership earns revenues of $100,000, the division can further be separated into the following components: interest, compensation, and remaining income shared based on the agreed proportions of the partners.

Partnership Loss Allocation Schedule

In case of loss in a partnership, Section 704 of the Internal Revenue Code limits the loss of a partner to deduct only to the extent of his or her “basis” in the partnership (Nitti, 2014). Loss allocation is typically based on the ratio of profit-sharing. For instance, when a gourmet ice cream shop loses $40,000, Partner 1, with an investment of $150,000, will be responsible for 75% of the loss, and Partner 2, with an investment of $50,000, will be responsible for 25% of the loss.

This table illustrates the apportionment of the loss in relation to each partner’s investment so that the losses are borne proportionally according to their money investment.

Selling a Business – Partnership Dissolution

Partnerships may end for various reasons, such as the death of a partner or by mutual consent to split up. Here, on expiration of business for ten years, the assets of the gourmet ice cream shop are worth $900,000. When profits and losses upon dissolution are divided equally between the partners.

If the assets are sold for $1,200,000 and liabilities of $200,000 are settled, the remaining $1,000,000 will be divided among partners according to their capital balances.

SEC Reporting Requirements

There is no requirement for partnerships to report in accordance with the requirements of the SEC. After a partnership is converted to a corporation, reporting is needed. Corporate accounting reports reflect vital information on the performance of the business during varying economic scenarios. Even though the quarterly reports are not audited, they give timely data on the business of the firm. According to IFRS 8, both segment assets and liabilities need to be disclosed, whereas according to U.S. GAAP, only segment assets need to be disclosed (Hoyle et al., 2017). If the ice cream shop is in Canada, it must comply with IAS 34, which demands complete financial statements like balance sheets, income statements, and cash flow statements.

Conclusion

Formation of a partnership needs careful attention to contributions, roles, and division of profits and losses. A well-drafted partnership agreement will avoid disputes and ensure that every partner is dealt with equally. Proper distribution of income and losses and clear procedures for dissolution of business and division of assets are essential to the success of the partnership.