Transcript Financial and Managerial Accounting Wild/Shaw/Chiappetta Fourth Edition McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc.

Financial and Managerial
Accounting
Wild/Shaw/Chiappetta
Fourth Edition
McGraw-Hill/Irwin
Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
Appendix D
Accounting for Partnerships
Conceptual Chapter Objectives
C1: Identify characteristics of
partnerships and similar
organizations.
APPD-3
Analytical Chapter Objectives
A1: Compute partner return on equity and use
it to evaluate partnership performance.
APPD-4
Procedural Chapter Objectives
P1: Prepare entries for partnership
formation.
P2: Allocate and record income and loss
among partners.
P3: Account for the admission and
withdrawal of partners.
P4: Prepare entries for partnership
liquidation.
APPD-5
Partnership Form of
Organization
C1
Voluntary
Association
Partnership
Agreement
Limited
Life
Taxation
Mutual
Agency
CoOwnership
of Property
Unlimited
Liability
APPD-6
C1
Organizations with Partnership
Characteristics
Limited
Partnerships
(LP)
•General partners
assume management
duties and unlimited
liability for partnership
debts.
•Limited partners
have no personal
liability beyond
invested amounts.
Limited
Liability
Partnerships
(LLP)
•Protects innocent
partners from
malpractice or
negligence claims.
•Most states hold all
partners personally
liable for partnership
debts.
Limited
Liability
Corporations
(LLC)
•Owners have same
limited liability feature
as owners of a
corporation.
•A limited liability
corporation typically
has a limited life.
APPD-7
C1
Choosing a Business Form
Proprietorship Partnership
LLP
LLC S Corp. Corporation
Business entity
yes
yes
yes
yes
yes
yes
Legal entity
no
no
no
yes
yes
yes
Limited liability
no
no
limited* yes
yes
yes
Business taxed
no
no
no
no
no
yes
One owner allowed
yes
no
no
yes
yes
yes
*A partner's personal liability for LLP debts is lim ited. Most LLPs carry insurance to protect
against m alpractice.
Many factors should be considered when
choosing the proper business form.
APPD-8
P1
Organizing a Partnership
Partners can invest both assets and liabilities in the
partnership.
Assets and liabilities are recorded at an agreedupon value, normally fair market value.
Asset contributions increase the partner’s capital
account.
Withdrawals from the partnership decrease the
partner’s capital account.
APPD-9
P1
Organizing a Partnership
On 2/15/11, Smith and Jones form a
partnership. Smith contributes $80,000
cash. Jones contributes land valued at
$40,000.
Feb. 15 Cash
Land
80,000
40,000
Smith, Capital
Jones, Capital
80,000
40,000
To record initial investment in partnership
APPD-10
P2
Dividing Income or Loss
Partners are not employees of the partnership but are its
owners. This means there are no salaries reported as
expense on the income statement. Profits or losses of
the partnership are divided on some agreed upon ratio.
Three frequently used methods to divide
income or loss are allocation on:
1. Stated ratios.
2. Capital balances.
3. Services, capital and stated ratios.
APPD-11
P2
Allocation Based on
Stated Ratios
Smith and Jones agree to divide profits or
losses ¾ for Smith and ¼ for Jones. For
2011, the partnership reported net income
of $60,000.
Dec. 31 Income Summary
Smith, Capital
Jones, Capital
60,000
45,000
15,000
To record division of 2009 net income.
$60,000 × ¾ = $45,000
APPD-12
P2
Allocation Based on
Capital Balances
Smith’s capital balance, before division of profits or
losses is $80,000 and Jones’s capital balance is
$40,000. The partnership agreement calls for
income or loss to be allocated based on the
relative capital balances. Net income for 2011 is
$60,000.
Smith, Capital
Jones, Capital
Totals
Balance
$ 80,000
40,000
$ 120,000
Ratio
66.67%
33.33%
100.00%
Income
$ 60,000
60,000
Allocation
$ 40,000
20,000
$ 60,000
APPD-13
P2
Allocation Based on
Capital Balances
Smith’s capital balance, before division of profits or
losses is $80,000 and Jones’s capital balance is
$40,000. The partnership agreement calls for
income or loss to be allocated based on the
relative capital balances. Net income for 2011 is
$60,000.
Dec. 31 Income Summary
Smith, Capital
Jones, Capital
Dr.
60,000
Cr.
40,000
20,000
To record division of 2011 net income.
APPD-14
P2
Allocation Based on Services,
Capital, and Stated Ratios



Smith and Jones have a partnership
agreement with the following conditions:
Smith receives $15,000 and Jones
receives $10,000 as annual salaries.
Each partner is allowed an annual
interest allowance of 5% on the
beginning-of-year capital balance.
Any remaining balance of income or loss
is allocated equally.
Net income for 2011 is $60,000.
APPD-15
P2
Allocation Based on Services,
Capital, and Stated Ratios
Net income
Salaries
Interest
Equal allocation
Income to each partner
Income Distribution
Smith
Jones
Remainder
$
60,000
$
15,000
$
10,000
35,000
4,000
2,000
29,000
14,500
14,500
33,500
26,500
$80,000 × 5% = $4,000
$29,000 × ½ = $14,500
APPD-16
P2
Partnership Financial
Statements
Assume that during 2011, Smith withdrew $5,000 cash
from the partnership and Jones withdrew $1,000.
Smith and Jones Partnership
Statement of Partners' Equity
For the Year Ended December 31, 2011
Smith
Jones
Total
Beginning capital balances
$
$
$
Investments by owners
80,000
40,000
120,000
Net income
Salary allowances
$ 15,000
$ 10,000
Interest allowances
4,000
2,000
Balance allocated
14,500
14,500
Total net income
33,500
26,500
60,000
Less partners' withdrawals
(5,000)
(1,000)
(6,000)
Ending capital balances
$ 108,500
$ 65,500
174,000
APPD-17
P2
Allocation Based on Services,
Capital, and Stated Ratios



Smith and Jones have a partnership
agreement with the following conditions:
Smith receives $15,000 and Jones
receives $10,000 as annual salaries.
Each partner is allowed an annual
interest allowance of 5% on the
beginning-of-year capital balance.
Any remaining balance of income or loss
is allocated equally.
Net income for 2011 is $30,000.
APPD-18
P2
Allocation on Services,
Capital, and Stated Ratios
Net income
Salaries
Interest
Equal allocation
Income to each partner
Income Distribution
Smith
Jones
Remainder
$
30,000
$
15,000
$
10,000
5,000
4,000
2,000
(1,000)
(500)
(500)
18,500
11,500
($1,000) × ½ = $500
APPD-19
P3



Admission and Withdrawal
of a Partner
When the makeup of the partnership
changes, the partnership is dissolved.
A new partnership may be immediately
formed.
New partner acquires partnership interest
by:
1. Purchasing it from the other partners, or
2. Investing assets in the partnership.
APPD-20
P3
Admission of a Partner
Purchase of Partnership Interest

A new partner can purchase
partnership interest directly
from the existing partners.


The cash goes to the partners,
not to the partnership.
To become a partner, the new
partner must be accepted by
the current partners.
APPD-21
Purchase of
Partnership Interest
P3
On January 2, 2011, Jones agrees to sell
Johnson $10,000 of her partnership interest for
$25,000 cash. Smith agrees with this.
arrangement.
Capital balances before new partner
Allocation to new partner
Capital balances after new partner
Jan 2
Smith
Jones
Johnson
Total
$ 108,500 $ 65,500 $
$ 174,000
(10,000)
10,000
$ 108,500 $ 55,500 $ 10,000 $ 174,000
Jones, Capital
10,000
Johnson, Capital
10,000
To record admission of new partner
APPD-22
P3
Investing Assets
in a Partnership



The new partner can gain
partnership interest by
contributing assets to the
partnership.
The new assets will increase
the partnership’s net assets.
After admission, both assets
and equity will increase.
APPD-23
Investing Assets
in a Partnership
P3
On January 2, 2011, Smith and Jones agree to
accept Johnson as a partner upon his
investment of $30,000 cash in the partnership.
Capital balances before new partner
Allocation to new partner
Capital balances after new partner
Jan 2
Smith
Jones
Johnson
Total
$ 108,500 $ 65,500 $
$ 174,000
30,000
30,000
$ 108,500 $ 65,500 $ 30,000 $ 204,000
Cash
30,000
Johnson, Capital
30,000
To record admission of new partner
APPD-24
P3
Bonus to Old or New Partners
Bonus to Old
Partners
When the current value of a
partnership is greater than the
recorded amounts of equity, the old
partners usually require a new partner
to pay a bonus when joining.
Bonus to New
Partners
The partnership may grant a bonus to
a new partner if the business is in
need of cash or if the new partner has
exceptional talents.
APPD-25
P3
Bonus to Old Partners
On January 2, 2011, Smith and Jones agree to
accept Johnson as a partner upon his investment of
$60,000 cash in the partnership. Johnson is to
receive a 20% ownership interest in the new
partnership. Any bonus is attributable to the existing
partners and is shared equally.
Equity of Smith and Jones
Investment by Johnson
Total partnership equity
Johnson's ownership percent
Johnson's equity balance
$174,000
60,000
234,000
20%
$ 46,800
APPD-26
P3
Bonus to Old Partners
On January 2, 2011, Smith and Jones agree to
accept Johnson as a partner upon his investment of
$60,000 cash in the partnership. Johnson is to
receive a 20% ownership interest in the new
partnership. Any bonus is attributable to the existing
partners and is shared equally.
Dr.
Cr.
Jan 2
Cash
60,000
Johnson, Capital
46,800
Smith, Capital
6,600
Jones, Capital
6,600
To record admission of new partner
$60,000 - $46,800 = $13,200 × ½ = $6,600
APPD-27
P3
Bonus to New Partner
On January 2, 2011, Smith and Jones agree to
accept Johnson as a partner upon his investment of
$60,000 cash in the partnership. Johnson is to
receive a 30% ownership interest in the new
partnership. Any bonus is attributable to the new
partner and is shared equally by the existing
partners.
Equity of Smith and Jones
Investment by Johnson
Total partnership equity
Johnson's ownership percent
Johnson's equity balance
$174,000
60,000
234,000
30%
$ 70,200
APPD-28
P3
Bonus to New Partner
On January 2, 2011, Smith and Jones agree to accept
Johnson as a partner upon his investment of $60,000
cash in the partnership. Johnson is to receive a 30%
ownership interest in the new partnership. Any
bonus is attributable to the new partner and is
shared equally by the existing partners.
Jan 2
Cash
Smith, Capital
Johnson, Capital
Johnson, Capital
Dr.
60,000
5,100
5,100
Cr.
70,200
To record admission of new partner
$70,200 - $60,000 = $10,200 × ½ = $5,100
APPD-29
P3
Withdrawal of a Partner
A partner can withdraw
in two ways:


The partner can sell
his/her partnership
interest to another
person.
The partnership can
distribute cash and/or
other assets to the
withdrawing partner.
APPD-30
P3
Withdrawal of a Partner
Jones has a capital balance of $65,500. She decides to
withdraw from the partnership of Smith, Jones, and
Johnson for $50,000 cash. Any bonus is attributable to
the remaining partners and is divided equally.
Jan 2
Jones, Capital
Cash
Smith, Capital
Johnson, Capital
Dr.
65,500
Cr.
50,000
7,750
7,750
To record withdrawal of partner
$65,500 - $50,000 = $15,500 × ½ = $7,750
APPD-31
P3
Death of a Partner



A partner’s death dissolves a
partnership.
A deceased partner’s estate is entitled
to receive the equity.
This usually requires closing the books
to determine the net income or loss at
the date of death and also recording
market values for assets and liabilities.
APPD-32
P4
Liquidation of a Partnership
When a partnership is liquidated, its business ends and
four concluding steps are required:
 Record the sale of noncash assets for cash and any
gain or loss from their liquidation.
 Allocate any gain or loss from liquidation of the assets
in step 1 to the partners using their income-and-loss
sharing ratio.
 Pay or settle all partner liabilities.
 Distribute any remaining cash to partners based on
their capital balances.
APPD-33
P4
No Capital Deficiency
No capital deficiency means that all partners have a zero or credit
balance in their capital accounts.
Smith, Jones, and Johnson agree to dissolve their partnership.
They sell all of their assets for a net gain of $10,000. Profits and
losses are shared as follows: Smith, ½; Jones, ¼; and Johnson, ¼.
Beginning capital balances
Allocation of $10,000 net gain
Capital balances for dissolution
Dec 2
Smith
Jones
Johnson
Total
$ 108,500 $ 65,500 $ 30,000 $ 204,000
5,000
2,500
2,500
10,000
$ 113,500 $ 68,000 $ 32,500 $ 214,000
Smith, Capital
Jones, Capital
Johnson, Captial
Cash
Dr.
113,500
68,000
32,500
To liquidate partnership
Cr.
214,000
APPD-34
P4
Capital Deficiency
Capital deficiency means that at least one partner
has a debit balance in his/her capital account. A
partner with a deficit must, if possible, cover the
deficit by paying cash into the partnership.
Smith, Jones, and Johnson agree to dissolve their partnership.
They sell all of their assets for a net loss of $10,000. Profits and
losses are shared as follows: Smith, ½; Jones, ¼; and Johnson, ¼.
Beginning capital balances
Allocation of $10,000 net loss
Subtotal
Contribution by Johnson
Capital balances for dissolution
Smith
Jones
Johnson
Total
$ 25,000 $ 10,000 $ 2,000 $ 37,000
(5,000)
(2,500)
(2,500) (10,000)
20,000
7,500
(500)
27,000
500
500
$ 20,000 $ 7,500 $
$ 27,500
APPD-35
P4
Capital Deficiency
Beginning capital balances
Allocation of $10,000 net loss
Subtotal
Contribution by Johnson
Capital balances for dissolution
Dec 2
Cash
Smith
Jones
Johnson
Total
$ 25,000 $ 10,000 $ 2,000 $ 37,000
(5,000)
(2,500)
(2,500) (10,000)
20,000
7,500
(500)
27,000
500
500
$ 20,000 $ 7,500 $
$ 27,500
500
Any partner’s
unpaid
deficiency
Johnson,
Capital
500 is
To make-up deficiency
absorbed by the remaining partners
Dec 2
Smith, Capital
20,000
with credit
balances in 7,500
accordance
Jones, Capital
Cash
27,500
with the
partnership
agreement.
To liquidate partnership
APPD-36
A1
Partner Return on Equity
Partner return
=
on equity
Partner net income
Average partner equity
Boston Celtics
Total
LP I
LP II
Celtics LP
Balance, Beginning of year $
85 $
122 $
(307) $
270
Net income (loss) for year
216
44
61
111
Cash distribution
(48)
(48)
Balance, End of year
$
253 $
166 $
(246) $
333
Partner return on equity
128.6%
30.6%
NA
36.8%
APPD-37
End of Appendix D
APPD-38