1. © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater Partnerships Chapter 17

2. Learning Objective 1 Journalizing the entry for formation of a partnership © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-1

3. Partnership Defined as: “an association of two or more persons to carry on as co-owners of a business for profit” by Uniform Partnership Act Examples: ◦ Service businesses ◦ Professional practitioners ◦ Convenience stores © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-1

4. Formation of Partnerships Very easy to form Two or more people agree Agreements can be oral/written Should be in writing for legal reasons Articles of partnership – written contract that spells out details of the agreement among the partners © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-1

5. Articles of Partnership Contains: ◦ Name/address of partners, date of agreement ◦ Rights/responsibilities ◦ Amount each partner is investing ◦ Manner partner profits/losses will be shared ◦ Provisions for one or more partners quitting ◦ Admission of new partners ◦ Asset distribution if business is terminated ◦ Maintenance of accounting records © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-1

6. Characteristics of Partnerships Limited Life – Partnership is dissolved by admission, withdrawal, or death of a partner Mutual Agency – Act of a single partner is binding on all members of the partnership © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-1

7. Characteristics of Partnerships Two Types of Partners ◦ General – individually liable to cover the obligations of the partnership with their personal assets. ◦ Limited - have liability only up to the amount they invest in the partnership. © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-1

8. Characteristics of Partnerships Unlimited Liability – Partners may be personally liable for the debts of the partnership Co-ownership of Property – Each partner owns a share of the assets Taxation ◦ Partnership does not pay taxes ◦ Partners pay taxes on their share of net income © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-1

9. Formation of Partnerships Record assets invested by partners at fair market value Each partner has his/her own capital and withdrawals account Try Exercise 17-1 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-1

10. Exercise 17-1 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-1

11. Learning Objective 2 Calculating a partner’s share of net income based on fractional ratio, beginning capital investment, and salary and interest allowances © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-2

12. Division of Net Income/Loss Salary allowance – mechanism for dividing earnings of partnership based on personal services provided by the partners (not an expense) Interest allowance – mechanism for dividing earning of partnership based on percent of capital balances of the partners (not an expense) If no partnership agreement, the law states earnings will be divided equally © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-2

13. Division of Net Income/Loss- Problem 17B-1 Situation 1 - Share income equally $7,600/2 = $3,800 Mia - $3,800 Matt - $3,800 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-2

14. Division of Net Income/Loss- Problem 17B-1 Situation 2: Beginning investment: Mia$4,800 Matt3,200 Total$8,000 Mia's ratio: 4,800/8,000 = 60% Matt’s ratio: 3,200/8,000 = 40% © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater Mia's share of net income = $7,600 x 60% = $4,560 Matt’s share of net income = $7,600 x 40% = $3,040 LO-2

15. Division of Net Income/Loss- Problem 17B-1 Situation 3: Net Income $7,600 Matt Matt Salary allowance $2,480 $2,800 (5,280) $2,320 Interest 576 384 (960) $1,360 Divide remainder equally 680 680 (1,360) $3,736 $3,864 $0 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-2

16. Division of Net Income/Loss- Problem 17B-1(b) Situation 3: Net Income $5,600 Matt Matt Salary allowance$2,480$2,800(5,280) $320 Interest576384(960) ($640) Divide remainder equally(320)(320)640 $2,736$2,864$0 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-2

17. Learning Objective 3 Preparing a statement of partners’ equity © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-3

18. Partnership Financial Statement Statement of Partners’ Equity reports Beginning capital balances + Net income allocated to each partner - Withdrawals by each partner Ending capital balances © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-3

19. Partnership Financial Statement From data in Problem 17B-1(b) © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater Note: Withdrawal amounts are assumed. LO-3

20. Learning Objective 4 Journalizing entries to record admitting a new partner, withdrawal of a partner, and bonuses to partners © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-4

21. Admission of a New Partner Two ways to join a partnership: Purchase an equity interest from one or more of the existing partners Make an investment in the business © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-4

22. Buying an Equity Interest from an Original Partner All partners must agree to equity exchange. The old partnership is dissolved and a new one is created. Record transfer of equity amounts to new partner. © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-4

23. Investing in an Existing Partnership New partner invests assets into business. Partners sometimes want to have a certain percentage of interest in a business. ◦ If two partners have a total equity of $7,000, a third partner would have to invest $3,500 to have a one-third interest in the partnership. © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-4

24. Recording a Bonus When new partner pays more or less than equity interest If new partner pays more – old partners share bonus in profit and loss ratio If new partner pays less – new partner receives bonus © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-4

25. Recording Permanent Withdrawal of a Partner Adjust assets to their current fair market value Allocate any over- or under-valued assets to partners Then record withdrawal of partner © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-4

26. Recording Permanent Withdrawal of a Partner When a partner takes assets of less value than book equity: Remaining partners share the capital that withdrawing partner does not take © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-4

27. Recording Permanent Withdrawal of a Partner When a partner takes assets of greater value than book equity: Increase withdrawing partner’s capital Reduce remaining partners’ capital © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-4

28. Problem 17B-3 (Situation 1) © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-4

29. Problem 17B-3 (Situation 2) © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-4

30. Problem 17B-3 (Situation 3) © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-4

31. Problem 17B-3 (Situation 4) © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-4

32. Learning Objective 5 Journalizing entries involved in the liquidation process and preparing a statement of liquidation © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-5

33. Liquidation of a Partnership When the business is completely ended by converting assets into cash and paying off obligations and equity © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-5

34. Liquidation of a Partnership 1.Sell assets, recognize any loss or gain 2.Divide loss or gain among partners based on profit/loss ratio 3.Pay off creditors 4.Distribute remaining cash to partners based on their capital balances © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-5

35. Problem 17B-4 (Situation 1) © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater Selling assets at a gain: 1. Sell assets, recognize any loss or gain LO-5

36. Problem 17B-4 (Situation 1) © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater Selling assets at a gain: 2. Divide loss or gain among partners based on profit/loss ratio LO-5

37. Problem 17B-4 (Situation 1) © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater Selling assets at a gain: 3. Pay off creditors LO-5

38. Problem 17B-4 (Situation 1) © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-5

39. Problem 17B-4 (Situation 1) © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater Selling assets at a gain: 4. Distribute remaining cash to partners based on their capital balances LO-5

40. Problem 17B-4 (Situation 2) © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater Selling assets at a loss: 1. Sell assets, recognize any loss or gain LO-5

41. Problem 17B-4 (Situation 2) © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater Selling assets at a loss: 2. Divide loss or gain among partners based on profit/loss ratio LO-5

42. Problem 17B-4 (Situation 2) © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater Selling assets at a loss: 3. Pay off creditors LO-5

43. Problem 17B-4 (Situation 2) © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-5

44. Problem 17B-4 (Situation 2) © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater Selling assets at a loss: 4. Distribute remaining cash to partners based on their capital balances LO-5

45. Problem 17B-4 (Situation 3) © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater 1. Sell assets, recognize any loss or gain LO-5

46. Problem 17B-4 (Situation 3) © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater 2. Divide loss or gain among partners based on profit/loss ratio LO-5

47. Problem 17B-4 (Situation 3) © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater 3. Pay off creditors LO-5

48. Problem 17B-4 (Situation 3) © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-5

49. Problem 17B-4 (Situation 3) © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater 4. Distribute Jones’ deficit to other partners LO-5

50. Problem 17B-4 (Situation 3) © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater 5. Distribute remaining cash to partners based on their capital balances LO-5

51. © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater End of Chapter 17