ACCOUNTING FOR PARTNERSHIPS CHAPTER TWENTY-ONE ACCOUNTING FOR PARTNERSHIPS

PARTNERSHIP Def. - “..an association of two or more persons who carry on, as co-owners, a business for profit” Used for all types of enterprises More popular in service industry than merchandising businesses

PARTNERSHIP AGREEMENT Def. - a written agreement containing the provisions for operating a partnership. Essential provisions include: Date of the agreement Names of the partners Kind of business to be conducted Length of time the partnership is to run Name and location of the business Investment of each partner Basis on which profits and losses are to be shared Limitation of partners’ rights and activities Salary allowance to partners Division of assets upon dissolution of the partnership Signatures of the partners

CO-OWNERSHIP OF ASSETS combined into one enterprise CHARACTERISTICS CO-OWNERSHIP OF ASSETS All assets held by a partnership are co-owned by all partners. If one partner contributes an asset to the business, the asset is jointly owned by all partners. Advantages: Ability and expertise combined into one enterprise & easier to raise capital

Serious consequences if partners don’t act responsibly CHARACTERISTICS MUTUAL AGENCY Any partner can bind the other partners to a contract if he or she is acting within the general scope of the business. Disadvantage: Serious consequences if partners don’t act responsibly

CHARACTERISTICS LIMITED LIFE Partnership may be dissolved as the result of any change in the ownership. (e.g. death, bankruptcy, incapacity, withdrawal of a partner, addition of a new partner, or expiration of the time specified in the partnership agreement)

CHARACTERISTICS UNLIMITED LIABILITY Each partner is personally liable for ALL debts incurred by the partnership. Major Disadvantage: A partner could lose personal assets.

CHARACTERISTICS FEDERAL INCOME TAXES Partnership is not subject to federal income tax. But, partners must report their share of the partnership’s income on their income tax return.

INVESTMENTS Let’s look at the journal entry! EXAMPLE: Sam Mitchell and Lisa Jenkins begin the Mitchell & Jenkins partnership by investing $350,000 and $200,000, respectively. Let’s look at the journal entry!

Separate Capital and Drawing accounts are maintained for each partner. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 1 Cash 350,000 2 Sam Mitchell, Capital 350,000 3 S. Mitchell invested 4 $350,000 in cash 5 6 Cash 200,000 7 Lisa Jenkins, Capital 200,000 8 Separate Capital and Drawing accounts are maintained for each partner. L. Jenkins invested 9 $200,000 in cash 10 11

INVESTMENTS What if instead of $200,000 in cash, Lisa Jenkins had invested: Inventory valued at $47,500 on which $10,500 was owed Office Equipment valued at $40,000 Delivery Equipment valued at $92,000 on which $19,000 was owed on a note $50,000 in cash

GENERAL JOURNAL Each asset invested and liability assumed DATE DESCRIPTION DEBIT PR CREDIT 1 Cash 50,000 2 Inventory 47,500 3 Office Equipment 40,000 4 Delivery Equipment 92,000 5 Notes Payable 19,000 6 Accounts Payable 10,500 7 Lisa Jenkins, Capital 200,000 8 Each asset invested and liability assumed is recorded. The difference is credited to the Capital account. 9 10 11

COMBINING BUSINESSES On April 1, Donna Morning and Larry Knight form a partnership under the firm name of Morning & Knight Sports. They agree to invest their assets in the partnership. The partnership will also assume the liabilities shown on their balance sheets. Profits/losses are to be shared 50-50. In the case of dissolution, assets are to be distributed between partners in the ratio of their capital interests at the time of dissolution.

COMBINING BUSINESSES Let’s look at the journal entry Morning Sports Balance Sheet March 31, 20-- Assets Liabilities Cash $ 6,344 Notes Payable $ 4,600 Accts. Receivable $ 5,524 Accounts Payable 9,082 Less Allow for Total Liabilities $ 13,682 Bad debts 430 5,094 Let’s look at the journal entry to record Donna Morning’s investment in the new partnership. Merchandise Inv 24,574 Store Equipment $3,840 Owner’s Equity Less Accum Depr 1,000 2,840 Morning, Capital 25,170 Total Assets $38,852 Total Liab & O.E. $38,852

GENERAL JOURNAL Any uncollectible accounts should DATE DESCRIPTION DEBIT PR CREDIT 1 Cash 6,344 2 Accounts Receivable 5,524 3 4 Any uncollectible accounts should be written off before forming the partnership…. Morning Sports had no accounts considered uncollectible. 5 6 7 8 9 10 11

the Merchandise Inventory account reflects current market values. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 1 Cash 6,344 2 Accounts Receivable 5,524 3 Merchandise Inventory 24,574 4 5 Since Donna uses FIFO, the Merchandise Inventory account reflects current market values. 6 7 8 9 10 11

GENERAL JOURNAL Assets are recorded at their DATE DESCRIPTION DEBIT PR CREDIT 1 Cash 6,344 2 Accounts Receivable 5,524 3 Merchandise Inventory 24,574 4 Store Equipment 3,600 5 6 Assets are recorded at their fair market values (not book values) at the time of investment. 7 8 9 10 11

GENERAL JOURNAL The allowance account and the liabilities DATE DESCRIPTION DEBIT PR CREDIT 1 Cash 6,344 2 Accounts Receivable 5,524 3 Merchandise Inventory 24,574 4 Store Equipment 3,600 5 Allowance for Bad Debts 430 6 Notes Payable 4,600 7 Accounts Payable 9,082 8 The allowance account and the liabilities are recorded at the values shown on Morning Sports’ Balance Sheet. 9 10 11

GENERAL JOURNAL Capital account is credited for the DATE DESCRIPTION DEBIT PR CREDIT 1 Cash 6,344 2 Accounts Receivable 5,524 3 Merchandise Inventory 24,574 4 Store Equipment 3,600 5 Allowance for Bad Debts 430 6 Notes Payable 4,600 7 Accounts Payable 9,082 8 D. Morning, Capital 25,930 9 Capital account is credited for the difference between assets invested and liabilities assumed. 10 11

liabilities are brought into COMBINING BUSINESSES Knight Athletics Balance Sheet March 31, 20-- Assets Liabilities Cash $ 3,544 Notes Payable $ 6,000 Accts. Receivable $ 5,280 Accounts Payable 13,238 Less Allow for Total Liabilities $ 19,238 Bad debts 720 4,560 Knight’s assets and liabilities are brought into the new partnership. Merchandise Inv 29,692 Supplies 720 Office Equipment $ 4,320 Less Accum Depr 1,100 3,220 Store Equipment $ 4,800 Owner’s Equity Less Accum Depr 1,200 3,600 Knight, Capital 25,644 $44,902 $44,902 Total Assets Total Liab & O.E.

GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 1 Cash 3,544 2 Accounts Receivable 5,280 3 Merchandise Inventory 29,692 4 Supplies 286 5 Office Equipment 3,850 6 Store Equipment 4,200 7 Allowance for Bad Debts 720 8 Notes Payable 6,000 9 Accounts Payable 13,238 10 L. Knight, Capital 26,894 11

ALLOCATING PROFIT/LOSS Example: The partnership of Mitchell and Jenkins earned net income of $190,800 for the year. S. Mitchell L. Jenkins $95,400 $95,400 If Mitchell and Jenkins had not specified how the income was to be split, it would be split evenly.

PARTNERSHIP CLOSING ENTRIES FOUR ENTRIES: Close all revenues to Income Summary Close all expenses to Income Summary Close Income Summary by allocating each partner’s share of net income or loss to the individual capital accounts Close each partner’s drawing account to the individual capital accounts. Entries #1 & 2 are the same as for sole proprietorships. Entries #3 & 4 are different for partnerships.

GENERAL JOURNAL Instead of all the net income being DATE DESCRIPTION DEBIT PR CREDIT 1 Closing Entry #3 2 Income Summary 190,800 3 S. Mitchell, Capital 95,400 4 L. Jenkins, Capital 95,400 5 Instead of all the net income being credited to one capital account… it is allocated to each partner’s capital account. 6 7 8 9 10 11

GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 1 Closing Entry #3 2 Income Summary 190,800 3 S. Mitchell, Capital 95,400 4 L. Jenkins, Capital 95,400 5 6 S. Mitchell, Capital 36,000 7 S. Mitchell, Drawing 36,000 8 9 L. Jenkins, Capital 48,000 10 L. Jenkins, Drawing 48,000 11

ALLOCATING PROFIT/LOSS Example: The partnership of Mitchell and Jenkins earned net income of $190,800 for the year. S. Mitchell L. Jenkins Mitchell and Jenkins did specify how the income was to be split... after salary allowances, the remaining net income was to be split 60-40.

ALLOCATING PROFIT/LOSS Example: The partnership of Mitchell and Jenkins earned net income of $190,800 for the year. S. Mitchell L. Jenkins $36,000 Salary allowances $48,000 Salary allowances total $84,000. Remaining Net Income is $106,800 ($190,800-$84,000).

ALLOCATING PROFIT/LOSS Example: The partnership of Mitchell and Jenkins earned net income of $190,800 for the year. S. Mitchell L. Jenkins $36,000 Salary allowances $48,000 64,080 $106,800 x 60% = $64,080

ALLOCATING PROFIT/LOSS Example: The partnership of Mitchell and Jenkins earned net income of $190,800 for the year. S. Mitchell L. Jenkins $36,000 Salary allowances $48,000 64,080 Remaining Income 42,720 $106,800 x 40% = $42,720

ALLOCATING PROFIT/LOSS Example: The partnership of Mitchell and Jenkins earned net income of $190,800 for the year. S. Mitchell L. Jenkins $36,000 Salary allowances $48,000 64,080 Remaining Income 42,720 $100,080 $90,720

Closing entry is made for the total allocated to each GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 1 Income Summary 190,800 2 S. Mitchell, Capital 100,080 3 L. Jenkins, Capital 90,720 4 5 Closing entry is made for the total allocated to each partner. 6 7 8 9 10 11

GENERAL JOURNAL Close each owner’s drawing account DATE DESCRIPTION DEBIT PR CREDIT 1 Income Summary 190,800 2 S. Mitchell, Capital 100,080 3 L. Jenkins, Capital 90,720 4 5 S. Mitchell, Capital 36,000 6 S. Mitchell, Drawing 36,000 7 8 L. Jenkins, Capital 48,000 9 L. Jenkins, Drawing 48,000 10 11

ALLOCATING PROFIT/LOSS Example: Let’s look at the allocation if the partnership of Mitchell and Jenkins earned net income of $44,000 for the year. S. Mitchell L. Jenkins $36,000 Salary allowances $48,000 The salary allowances alone total more than the Net Income!

ALLOCATING PROFIT/LOSS Example: Let’s look at the allocation if the partnership of Mitchell and Jenkins earned net income of $44,000 for the year. S. Mitchell L. Jenkins $36,000 Salary allowances $48,000 $84,000 Salary Allow. - 44,000 Net Income $40,000 Excess to be absorbed by partners

ALLOCATING PROFIT/LOSS Example: Let’s look at the allocation if the partnership of Mitchell and Jenkins earned net income of $44,000 for the year. S. Mitchell L. Jenkins $36,000 Salary allowances $48,000 (24,000) $40,000 x 60%

ALLOCATING PROFIT/LOSS Example: Let’s look at the allocation if the partnership of Mitchell and Jenkins earned net income of $44,000 for the year. S. Mitchell L. Jenkins $36,000 Salary allowances $48,000 (24,000) (16,000) $40,000 x 40%

ALLOCATING PROFIT/LOSS Example: Let’s look at the allocation if the partnership of Mitchell and Jenkins earned net income of $44,000 for the year. S. Mitchell L. Jenkins $36,000 Salary allowances $48,000 (24,000) (16,000) $12,000 $32,000 $12,000 + $32,000 = $44,000 Net Income

Entries to close the drawing the same as the previous example. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 1 Income Summary 44,000 2 S. Mitchell, Capital 12,000 3 L. Jenkins, Capital 32,000 4 5 Entries to close the drawing accounts would be the same as the previous example. 6 7 8 9 10 11

ALLOCATING PROFIT/LOSS Example: B. K. Kelly and S. B. Arthur form a partnership on January 1 of the current year. Kelly will devote full time to operating the business, invest $50,000, and draw a salary of $35,000 per year. Arthur will devote about 10 hours per week, invest $150,000, and draw a salary of $10,000 per year. The partners will be allowed interest of 10% on capital balances on January 1 of each year and the balance of the earnings will be divided equally. Let’s allocate the first year Net Income of $80,000.

ALLOCATING PROFIT/LOSS B. K. Kelly S. B. Arthur $35,000 $10,000 Salary Allow. 5,000 Interest Allow. Kelly had a capital balance of $50,000 on January 1. $50,000 x 10%

ALLOCATING PROFIT/LOSS B. K. Kelly S. B. Arthur $35,000 $10,000 Salary Allow. 5,000 15,000 Interest Allow. Arthur had a capital balance of $150,000 on January 1. $150,000 x 10%

ALLOCATING PROFIT/LOSS B. K. Kelly S. B. Arthur $35,000 $10,000 Salary Allow. 5,000 15,000 Interest Allow. 7,500 7,500 Remaining Income Kelly has allowances of $40,000 so far Arthur has $25,000 so far… $80,000 - $65,000 = $15,000 remaining Split evenly = $7,500 each

ALLOCATING PROFIT/LOSS B. K. Kelly S. B. Arthur $35,000 $10,000 Salary Allow. 5,000 15,000 Interest Allow. 7,500 7,500 Remaining Income $47,500 $32,500 What if the partnership had a loss of $20,000 in the first year?

ALLOCATING PROFIT/LOSS B. K. Kelly S. B. Arthur $35,000 $10,000 Salary Allow. 5,000 15,000 Interest Allow. Salary and Interest allowances would still be given, totaling $65,000.

ALLOCATING PROFIT/LOSS B. K. Kelly S. B. Arthur $35,000 $10,000 Salary Allow. 5,000 15,000 Interest Allow. (42,500) (42,500) $(2,500) $(17,500) The allowances plus the loss leave $85,000 to be absorbed equally.

GENERAL JOURNAL Capital accounts are reduced this year. DATE DESCRIPTION DEBIT PR CREDIT 1 B. K. Kelly, Capital 2,500 2 S. B. Arthur, Capital 17,500 3 Income Summary 20,000 4 5 Capital accounts are reduced this year. 6 7 8 9 10 11

PARTNERSHIP FINANCIAL STATEMENTS The allocation of net income and its impact on the capital balances should be disclosed in the financial statements.

FINANCIAL STATEMENTS Distribution of income is shown at Kelly and Arthur Income Statement (Partial) For Year Ended December 31, 20-- Distribution of income is shown at the bottom of the Income Statement. Net Income $80,000 Kelly Arthur Total Allocation of net income: Salary allowances $35,000 $10,000 $45,000 Interest allowances 5,000 15,000 20,000 Remaining income 7,500 7,500 15,000 Allocation of net income $47,500 $32,500 $80,000

Statement of Partners’ Equity For Year Ended December 31, 20-- FINANCIAL STATEMENTS Replaces Statement of Owner’s Equity Kelly and Arthur Statement of Partners’ Equity For Year Ended December 31, 20-- Kelly Arthur Total Capital, January 1, 20-- $50,000 $150,000 $200,000 Additional Investments during year 10,000 10,000 $50,000 $160,000 $210,000 Net Income for the year 47,500 32,500 80,000 $97,500 $192,500 $290,000 Withdrawals (salaries during the year) 35,000 10,000 45,000 Capital, December 31, 20-- $62,500 $182,500 $245,000

Balance Sheet (Partial) FINANCIAL STATEMENTS Kelly and Arthur Balance Sheet (Partial) December 31, 20-- Partners’ Equity B. K. Kelly, capital $ 62,500 S. B. Arthur, capital 182,500 Total partners’ equity $245,000 Owner’s Equity is now Partners’ Equity

DISSOLUTION Any change in the members of the partnership results in dissolution. Does not imply that business operations will halt New Partnership agreement is created Can be caused by: Admitting a new partner Death or withdrawal of a partner Bankruptcy

ADMITTING A NEW PARTNER A new partner may buy into the business in three ways: by purchasing an interest directly from existing partners by making a cash investment in the business by contributing assets from an existing business

ADMITTING A NEW PARTNER Example: Morning and Knight admit Sunny Noon as a new partner as of July 1, 20--, when Morning and Knight have capital interests of $30,000 and $20,000, respectively. Noon pays $12,000 to Morning for one-third of her interest and $12,000 to Knight for one-half of his interest. The payments go to the partners directly, not the business.

ADMITTING A NEW PARTNER Example: Morning and Knight admit Sunny Noon as a new partner as of July 1, 20--, when Morning and Knight have capital interests of $30,000 and $20,000, respectively. Noon pays $12,000 to Morning for one-third of her interest and $12,000 to Knight for one-half of his interest. Morning, Capital x 1/3 $30,000 x 1/3 Noon buys $10,000 of Morning’s equity.

ADMITTING A NEW PARTNER Example: Morning and Knight admit Sunny Noon as a new partner as of July 1, 20--, when Morning and Knight have capital interests of $30,000 and $20,000, respectively. Noon pays $12,000 to Morning for one-third of her interest and $12,000 to Knight for one-half of his interest. Knight, Capital x 1/2 $20,000 x 1/2 Noon buys $10,000 of Knight’s equity.

Donna’s Capital account is reduced by the amount sold to Sunny Noon. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 20-- 1 July 1 Donna Morning, Capital 10,000 2 3 4 5 Donna’s Capital account is reduced by the amount sold to Sunny Noon. 6 7 8 9 10 11

GENERAL JOURNAL Larry’s Capital account is reduced by the 1/2 interest DATE DESCRIPTION DEBIT PR CREDIT 20-- 1 July 1 Donna Morning, Capital 10,000 2 Larry Knight, Capital 10,000 3 Sunny Noon, Capital 20,000 4 5 Larry’s Capital account is reduced by the 1/2 interest he sold to Sunny. A Capital account is created for Sunny. 6 7 8 9 10 11

partner is not recorded on the partnership books. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 20-- 1 July 1 Donna Morning, Capital 10,000 2 Larry Knight, Capital 10,000 3 Sunny Noon, Capital 20,000 4 5 The $12,000 paid to each partner is not recorded on the partnership books. 6 7 8 9 10 11

directly to the partnership….. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 20-- 1 July 1 Cash 25,000 2 Sunny Noon, Capital 25,000 3 4 5 If Sunny had paid $25,000 directly to the partnership….. 6 7 8 9 10 11

ADMITTING A NEW PARTNER Sunny Noon’s Golf Balance Sheet June 30, 20-- Assets Liabilities Cash $ 5,000 Notes Payable $ 9,048 Accts. Receivable $ 14,290 Accounts Payable 7,550 Less Allow for Total Liabilities $16,598 Bad debts 1,078 13,212 Merchandise Inv 27,290 Owner’s Equity Noon, Capital 28,904 If Sunny has a business that the new partnership will take over... Total Assets $45,502 Total Liab & O.E. $45,502

GENERAL JOURNAL No adjustment necessary since Noon has no knowledge DATE DESCRIPTION DEBIT PR CREDIT 20-- 1 July 1 Cash 5,000 2 Accounts Receivable 14,290 3 4 5 No adjustment necessary since Noon has no knowledge of any uncollectible accounts. 6 7 8 9 10 11

No adjustment necessary GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 20-- 1 July 1 Cash 5,000 2 Accounts Receivable 14,290 3 Merchandise Inventory 27,290 4 5 6 No adjustment necessary since Noon has been using the FIFO method. 7 8 9 10 11

GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 20-- 1 July 1 Cash 5,000 2 Accounts Receivable 14,290 3 Merchandise Inventory 27,290 4 Allowance for Bad Debts 1,078 5 Notes Payable 9,048 6 Accounts Payable 7,550 7 Sunny Noon, Capital 28,904 8 9 10 11

WITHDRAWAL OF A PARTNER A partner may retire and withdraw assets equal to, less than, or greater than the amount of his or her interest in the partnership. determined after all profits and losses are allocated and books are closed

WITHDRAWAL OF A PARTNER Example: Many years later Sunny Noon decides to retire. The partners have agreed to the withdrawal of cash equal to the amount of Noon’s equity in the assets of the partnership. Capital account balances: Donna Morning $55,000 Sunny Noon 40,000 20,000 Larry Knight Sunny Noon will take home $40,000 cash.

Her capital account is closed out. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 1 Sunny Noon, Capital 40,000 2 3 4 5 Her capital account is closed out. 6 7 8 9 10 11

The other capital accounts GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 1 Sunny Noon, Capital 40,000 2 Cash 40,000 3 4 5 The other capital accounts are not affected. 6 7 8 9 10 11

GENERAL JOURNAL What if Sunny agrees to only $30,000 cash? DATE DESCRIPTION DEBIT PR CREDIT 1 Sunny Noon, Capital 40,000 2 Cash 40,000 3 4 5 What if Sunny agrees to only $30,000 cash? 6 7 8 9 10 11

Sunny’s capital account GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 1 Sunny Noon, Capital 40,000 2 3 4 5 Sunny’s capital account is closed out. 6 7 8 9 10 11

GENERAL JOURNAL But Cash received is less than the capital balance… DATE DESCRIPTION DEBIT PR CREDIT 1 Sunny Noon, Capital 40,000 2 Cash 30,000 3 4 But Cash received is less than the capital balance… difference is split between two remaining partners. 5 6 7 8 9 10 11

She received 55% of the $10,000 difference. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 1 Sunny Noon, Capital 40,000 2 Cash 30,000 3 Donna Morning, Capital 5,500 4 5 6 Remaining capital = $100,000 ($55,000 + $45,000) Morning has 55% interest She received 55% of the $10,000 difference. 7 8 9 10 11

Larry receives 45% of the difference. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 1 Sunny Noon, Capital 40,000 2 Cash 30,000 3 Donna Morning, Capital 5,500 4 Larry Knight, Capital 4,500 5 6 Larry receives 45% of the difference. 7 8 9 10 11

($5,000 more than her capital balance) GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 1 Sunny Noon, Capital 40,000 2 Cash 30,000 3 Donna Morning, Capital 5,500 4 Larry Knight, Capital 4,500 5 6 If Noon received $45,000 cash ($5,000 more than her capital balance) 7 8 9 10 11

GENERAL JOURNAL The remaining partners contribute DATE DESCRIPTION DEBIT PR CREDIT 1 Sunny Noon, Capital 40,000 2 Donna Morning, Capital 2,750 3 Larry Knight, Capital 2,250 4 Cash 45,000 5 6 The remaining partners contribute their capital to make the $5,000 difference. 7 8 9 10 11

Sunny sells her interest in the business to Donna. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 1 Sunny Noon, Capital 40,000 2 Donna Morning, Capital 2,750 3 Larry Knight, Capital 2,250 4 Cash 45,000 5 6 One last alternative….. Sunny sells her interest in the business to Donna. 7 8 9 10 11

GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 1 Sunny Noon, Capital 40,000 2 Donna Morning, Capital 40,000 3 4 5 6 7 8 9 10 11

LIQUIDATION OF A PARTNERSHIP Assets are sold Liabilities are paid Remaining cash and assets are distributed to the partners

LIQUIDATION OF A PARTNERSHIP Example: After many years of operations the partnership is to be liquidated. After closing entries the following accounts remain: Cash $ 10,000 Non-Cash Assets are sold for $370,000. Inventory 120,000 Other Assets 220,000 80,000 Liabilities D. Morning, Capital 95,000 120,000 L. Knight, Capital S. Noon, Capital 55,000

GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 1 Cash 370,000 2 Inventory 120,000 3 Other Assets 220,000 4 Gain on Sale of Assets 30,000 5 6 7 8 9 10 11

GENERAL JOURNAL Gain is shared equally by the partners. DATE DESCRIPTION DEBIT PR CREDIT Gain is shared equally by the partners. 1 Cash 370,000 2 Inventory 120,000 3 Other Assets 220,000 4 Gain on Sale of Assets 30,000 5 6 Gain on Sale of Assets 30,000 7 D. Morning, Capital 10,000 8 L. Knight, Capital 10,000 9 S. Noon, Capital 10,000 10 11

LIQUIDATION OF A PARTNERSHIP Example: After many years of operations the partnership is to be liquidated. After closing entries the following accounts remain: Cash $380,000 Inventory Other Assets Cash is now $380,000 ($10,000 + $370,000), Inventory and Other Assets are now zero.

LIQUIDATION OF A PARTNERSHIP Example: After many years of operations the partnership is to be liquidated. After closing entries the following accounts remain: Cash $380,000 Inventory Other Assets 95,000+10,000 80,000 Liabilities D. Morning, Capital 105,000

LIQUIDATION OF A PARTNERSHIP Example: After many years of operations the partnership is to be liquidated. After closing entries the following accounts remain: Cash $380,000 Inventory Other Assets 80,000 Liabilities 120,000+10,000 D. Morning, Capital 105,000 130,000 L. Knight, Capital

LIQUIDATION OF A PARTNERSHIP Example: After many years of operations the partnership is to be liquidated. After closing entries the following accounts remain: Cash $380,000 Liabilities are paid off. Inventory Other Assets 80,000 Liabilities D. Morning, Capital 105,000 55,000+10,000 130,000 L. Knight, Capital S. Noon, Capital 65,000

GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 1 Liabilities 80,000 2 Cash 80,000 3 4 5 6 7 8 9 10 11

LIQUIDATION OF A PARTNERSHIP Example: After many years of operations the partnership is to be liquidated. After closing entries the following accounts remain: Cash $300,000 Inventory Other Assets Liabilities D. Morning, Capital 105,000 130,000 L. Knight, Capital S. Noon, Capital 65,000 Remaining Cash = Capital account balances Cash is distributed to partners.

GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 1 D. Morning, Capital 105,000 2 L. Knight, Capital 130,000 3 S. Noon, Capital 65,000 4 Cash 300,000 5 6 7 8 9 10 11

LIQUIDATION OF A PARTNERSHIP Example: After many years of operations the partnership is to be liquidated. After closing entries the following accounts remain: Cash $ 0 Inventory Other Assets Liabilities D. Morning, Capital L. Knight, Capital S. Noon, Capital Partnership is liquidated!

LIQUIDATION OF A PARTNERSHIP Example: After many years of operations the partnership is to be liquidated. After closing entries the following accounts remain: Cash $ 10,000 If these Assets had been sold for only $295,000 Inventory 120,000 Other Assets 220,000 80,000 Liabilities D. Morning, Capital 95,000 120,000 L. Knight, Capital S. Noon, Capital 55,000

allocated to the partners. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 1 Cash 295,000 2 Loss on Sale of Assets 45,000 3 Inventory 120,000 4 Other Assets 220,000 5 There is a $45,000 loss to be allocated to the partners. 6 7 8 9 10 11

GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 1 Cash 295,000 2 Loss on Sale of Assets 45,000 3 Inventory 120,000 4 Other Assets 220,000 5 6 D. Morning, Capital 15,000 7 L. Knight, Capital 15,000 8 S. Noon, Capital 15,000 9 Loss on Sale of Assets 45,000 10 11

LIQUIDATION OF A PARTNERSHIP Example: After many years of operations the partnership is to be liquidated. After closing entries the following accounts remain: Cash $ 305,000 Liabilities are paid off. Inventory Other Assets 80,000 Liabilities D. Morning, Capital 80,000 105,000 L. Knight, Capital S. Noon, Capital 40,000

GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 1 Liabilities 80,000 2 Cash 80,000 3 4 5 6 7 8 9 10 11

LIQUIDATION OF A PARTNERSHIP Example: After many years of operations the partnership is to be liquidated. After closing entries the following accounts remain: Cash $ 225,000 Cash is paid to partners. Inventory Other Assets Liabilities D. Morning, Capital 80,000 105,000 L. Knight, Capital S. Noon, Capital 40,000

GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 1 D. Morning, Capital 80,000 2 L. Knight, Capital 105,000 3 S. Noon, Capital 40,000 4 Cash 225,000 5 6 7 8 9 10 11

LIQUIDATION OF A PARTNERSHIP Example: After many years of operations the partnership is to be liquidated. After closing entries the following accounts remain: Cash $ 0 Inventory Other Assets Liabilities D. Morning, Capital L. Knight, Capital S. Noon, Capital Partnership is liquidated!