A client of yours is considering investing in a partnership and has been analyzing the financial statements of the partnership. Their analysis has resulted in the following observations that that they are hoping you could address: 1. The balance sheet does not set forth the capital stock account at par value, which would define some level of minimum legal liability. 2. The balance sheet does not include any accrual for either state or federal income taxes even though the partnership reported pretax income. 3. In analyzing the income statement, your client noted that no salaries to partners were listed as an expense even though they know that existing partners received a salary from the partnership. 4. Interest on a partner’s capital balance is used as a means of allocating profits; however, no such interest appears on the income statement. Provide a response to each of your client’s observations regarding the partnership’s financial statements.
Partnership Accounting
A partnership is a kind of arrangement between two or more people whereby they agree to manage the business operations and share its profits and losses in an agreed ratio between them. The agreement that is drafted and signed by the partners of the firm is termed as partnership deed and contains various important clauses agreed between the partners such as profit/loss sharing, interest on capital, remuneration allocation of each partner, drawings, admission of a new partner, etc.
Partner Admission and Withdrawal
A partnership is a kind of arrangement between two or more people whereby they agree to manage the business operations and share its profits and losses in an agreed ratio between them. The agreement that is drafted and signed by the partners of the firm is termed as a partnership deed and contains various important clauses agreed between the partners such as profit/loss sharing, interest on capital, remuneration allocation of each partner, drawings of a partner, etc.
A client of yours is considering investing in a partnership and has been analyzing the financial statements of the partnership. Their analysis has resulted in the following observations that that they are hoping you could address:
1. The
2. The balance sheet does not include any accrual for either state or federal income taxes even though the partnership reported pretax income.
3. In analyzing the income statement, your client noted that no salaries to partners were listed as an expense even though they know that existing partners received a salary from the partnership.
4. Interest on a partner’s capital balance is used as a means of allocating profits; however, no such interest appears on the income statement.
Provide a response to each of your client’s observations regarding the partnership’s financial statements.
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