Transcript Chapter 13 Partnerships: Characteristics, Formation, and Accounting for Activities

Chapter 13
Partnerships:
Characteristics, Formation,
and Accounting for Activities
Characteristics of a Partnership
• Often governed by the Uniform Partnership Act
(UPA)
• Voluntary association of individuals with a
fiduciary relationship
• Mutual agency - each partner is an agent for other
partners and the partnership
• Legal liability - general or limited partnerships
• Underlying equity theories - proprietary theory is
a major influence
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Characteristics of a Partner, continued
• Articles of partnership - a written partnership
agreement is advisable
• Acceptable accounting principles - GAAP or
OCBOA
• Not a taxable entity - a conduit to the individual
partners
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Accounts Used for a Partner’s Capital
Investment
• Drawing account
– a temporary account
– periodically closed to capital accounts
• Capital account
– a permanent account
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The Drawing Account Illustrated
Drawing Account
Debit
Credit
Periodic withdrawals Closing of balance to
of partnership assets partner’s capital
up to a specified
account
amount
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The Capital Account Illustrated
Capital Account
Debit
Credit
Withdrawals in excess
of a specified amount
Initial and subsequent
investments of capital
Closing of a net debit
balance in the
partner’s drawing
account
Partner’s share of
partnership profits
Partner’s share of
partnership losses
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Division of Profits
• According to a ratio/percentage - assumed
to be equal if not otherwise stated, and/or
• According to capital investments of the
partners - important to define how capital
is measured and/or
• According to the labor/service rendered by
partners - typically involving a salary
and/or bonus
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Basic Schedule for Allocating Profits
A
Interest on Capital $5,000
Salary
25,000
Bonus
Subtotal
$30,000
Remaining Profit
11,200
Profit Allocation $41,200
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Partner
B
C
Total
$2,000
$7,000
$35,000
5,000
65,000
10,000
10,000
$45,000 $7,000 $82,000
11,200
5,600
28,000
$56,200 $12,600 $110,000
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Allocation of Profit Deficiencies and
Losses
• Completely satisfy all provisions of the
profit and loss agreement and use the profit
and loss ratios to absorb any deficiency or
additional loss caused by such action or
• Satisfy each of the provisions to whatever
extent is possible.
– for example, the allocation of salaries would be
satisfied to whatever extent possible before the
allocation of interest is begun
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Basic Schedule for Allocating
Deficiencies and Losses
Partner
A
B
Interest on Capital
$ 5,000
Salary
25,000 $35,000
Bonus
Subtotal
$30,000 $35,000
Deferring vs. Remaining Profit (36,800) (36,800)
Profit Allocation
$(6,800) $(1,800)
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C
Total
$ 2,000 $ 7,000
5,000
65,000
$ 7,000 $ 72,000
(18,400) (92,000)
$(11,400) $(20,000)
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Tax Basis of a Partner’s Interest
Partner
Assumptions:
A
Tax basis of assets to be contributed $100,000
Tax basis of liabilities
40,000
Profit and loss percentages
30%
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B
$120,000
70,000
70%
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Tax Basis of a Partner’s Interest,
continued
Basis Calculation:
A
+ Tax basis of assets contributed
$100,000
+ Tax basis of other partner's liabilities assumed
21,000
- Tax basis of liabilities assumed by other partners (28,000)
= Tax basis of partner's interest
$93,000
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B
$120,000
28,000
(21,000)
$127,000
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Subsequent Changes in a Partner’s
Tax Basis
Factors Increasing Basis:
• Additional contributions of individual assets
• The partner’s share (based on profit and loss ratios) of
increases in partnership liabilities resulting from:
– assuming partners’ personal liabilities
– direct liabilities of the partnership
• The partner’s share of partnership taxable income
• The partner’s share of separately identified items of
income not included in tax income (loss)
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Subsequent Changes in a Partner’s
Tax Basis, continued
Factors Decreasing Basis:
• Distribution of partnership assets
• The portion of the partner’s additional personal liabilities
assumed by the partnership
• The partner’s share of partnership tax losses
• The partner’s share of separately identified items of loss
not included in taxable income (loss)
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Alternative Organizational Forms
• Subchapter S Corporations
• Limited Liability Corporations
• Limited Liability Partnerships
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