Partnerships 17

Partnership Characteristics OBJECTIVE 1: Identify the principal characteristics, advantages, and disadvantages of the partnership form of business.

Partnership Characteristics Define partnership and discuss the following topics: Voluntary association Partnership agreement Limited life

Partnership Characteristics Define partnership and discuss the following topics: (cont.) Mutual agency Unlimited liability (except for limited partners) Co-ownership of partnership property Participation in partnership income

Partnership Characteristics The partnership form of business has several advantages: The ease with which it can be formed, changed, and dissolved The ability to pool capital and individual talents Avoidance of the corporation’s tax burden The freedom and flexibility of partners’ actions

Partnership Characteristics The partnership form of business has the following disadvantages: Limited life Mutual agency Unlimited liability Difficulty of raising large amounts of capital Difficulty of transferring ownership interest

Partnership Characteristics Other forms of association: Limited partnerships Joint ventures

Accounting for Partners’ Equity OBJECTIVE 2: Record partners’ investments of cash and other assets when a partnership is formed.

Accounting for Partners’ Equity Separate Capital and Withdrawals accounts are maintained for each partner.

Accounting for Partners’ Equity Journalize an investment by a partner. Assets are recorded at their fair market value. Liabilities assumed by the partnership are deducted from the value of the assets to arrive at the partner’s investment.

Accounting for Partners’ Equity

Distribution of Partnership Income and Losses OBJECTIVE 3: Compute and record the income or losses that partners share based on stated ratios, capital balance ratios, and partners’ salaries and interest.

Exhibit 1: Partial Income Statement for Adcock and Villa

Distribution of Partnership Income and Losses Illustrate the distribution of partnership income and losses, using the following methods: Based on a stated ratio Based on a capital balance ratio Beginning capital balances Average capital balances Based on salaries, interest, and a stated ratio

Distribution of Partnership Income and Losses Journalize the distribution of income and losses.

Distribution of Partnership Income and Losses

Distribution of Partnership Income and Losses

Distribution of Partnership Income and Losses

Distribution of Partnership Income and Losses

Distribution of Partnership Income and Losses

Dissolution of a Partnership OBJECTIVE 4: Record a person’s admission to or withdrawal from a partnership.

Figure 1: Alternative Ways for a Partner to Withdraw

Dissolution of a Partnership Causes of partnership dissolution Admission of new partner Withdrawal of a partner Death of a partner

Dissolution of a Partnership An individual can be admitted to a partnership in one of two ways: Purchasing an interest from one or more partners Investing assets in the partnership, possibly resulting in a bonus

Dissolution of a Partnership A partner can withdraw from a partnership in the following ways: Selling his or her interest to new or existing partners Withdrawing partnership assets (equal to, greater than, or less than his or her capital interest)

Dissolution of a Partnership Death of a partner When a partner dies, the partnership automatically is dissolved. The partnership agreement should spell out the procedures to be followed in this case.

Dissolution of a Partnership Death of a partner (cont.) Normally, to ascertain the capital balance of each partner on the date of the death, the books are closed, and financial statements are prepared.

Liquidation of a Partnership OBJECTIVE 5: Compute and record the distribution of assets to partners when they liquidate their partnership.

Exhibit 2: Statement of Liquidation Showing Gain on Sale of Assets

Exhibit 3: Statement of Liquidation Showing Loss on Sale of Assets

Liquidation of a Partnership Liquidation of a partnership involves three steps: The sale of partnership assets (with gains or losses distributed among the partners according to their stated ratio) The payment of liabilities

Liquidation of a Partnership Liquidation of a partnership involves three steps: (cont.) The distribution of remaining cash to the partners (which is not according to their stated ratios)

Liquidation of a Partnership Deficit in a partner’s Capital account When a partner has a deficit balance in a Capital account, that partner must contribute personal assets equal to the deficit. When a partner does not have enough personal assets to cover a capital deficit, the solvent partners must absorb the deficit according to their stated ratios.