Modul ke: Fakultas Program Studi Pengantar Akuntansi II Partnership 2 Reff. Warren Reeve and Fees. Nurul Hidayah, SE,Ak,MSi Hari Setiyawati, SE,Ak,MSi 13 FEB Akuntansi

Alternative Forms of Business Entities Disadvantages Limited life Unlimited liability Co-ownership of partnership property Mutual agency Joe and Marty’s A partnership is an association of two or more individuals.

Alternative Forms of Business Entities An important right of partners is to participate in the income of the partnership.

Alternative Forms of Business Entities Each partner must report their share of partnership income on their personal tax returns.

Alternative Forms of Business Entities A partnership is created by a contract, known as the partnership agreement or articles of partnership.

Alternative Forms of Business Entities A variant of the regular partnership is a limited partnership. This form of partnership allows partners that are not involved in the operations of the partnership to retain limited liability.

Limited Liability Corporations Combines the advantages of the corporate and partnership forms. Owners are termed “members” rather than “partners.” Members must create an operating agreement. LLC may elect to be treated as a partnership for tax purposes. Continued

Limited Liability Corporations Unless specified in the operating agreement, LLCs have a limited life. Members may elect operating the LLC as a “member managed” entity. LLC provides limited liability for the members. LLCs must file “articles of organization” with state governmental authorities.

Comparison of Alternate Entity Characteristics Ease of Formation ProprietorshipSimple CorporationComplex PartnershipSimple LLCModerate

Comparison of Alternate Entity Characteristics Legal Liability ProprietorshipNo limitation CorporationLimited liability PartnershipNo limitation LLCLimited liability

Comparison of Alternate Entity Characteristics Taxation ProprietorshipNontaxable entity CorporationTaxable entity PartnershipNontaxable entity LLCNontaxable entity by election

Comparison of Alternate Entity Characteristics Limitation on Life of Entity ProprietorshipYes CorporationNo PartnershipYes LLCYes

Comparison of Alternate Entity Characteristics Ease of Raising Capital ProprietorshipDifficult CorporationEasier PartnershipModerate LLCModerate

Equity Reporting for Alternative Entity Forms Proprietorships Proprietorships use a capital account to record investments by the owner of the business. Withdrawals by the owner are recorded in the owner’s drawing account.

Equity Reporting for Alternative Entity Forms Proprietorships Greene Landscapes Statement of Owner’s Equity For the year ended December 31, 2006 Duncan Greene, capital, Dec. 31, 2005$345,000 Net income$79,000 Less withdrawals 35,000 Increase in owner’s equity 44,000 Duncan Greene, capital, Dec. 31, 2006$389,000

Equity Reporting for Alternative Entity Forms Corporations Investments by stockholders in the business use capital stock accounts, such as Common Stock and Preferred Stock. Dividends to owners (stockholders) are recorded by a debit to Retained Earnings.

Equity Reporting for Alternative Entity Forms Corporations

Equity Reporting for Alternative Entity Forms Partnerships and Limited Liability Corporations Investments and withdrawals for partnerships is similar to proprietorships, except there is a capital and drawing account for each partner. Limited liability corporations are similar to a partnership except that each owner is referred to as “member.”

Equity Reporting for Alternative Entity Forms Partnerships

Forming a Partnership Forming a Partnership Joseph Stevens and Earl Foster agree to combine their hardware businesses in a partnership. They agree that the partnership is to assume the liabilities of the separate businesses. Apr.1Cash Accounts Receivable Merchandise Inventory Store Equipment Office Equipment Allowance for Doubtful Accounts Accounts Payable Joseph Stevens, Capital Stevens’ Transfer of Assets, Liability, and Equity

Forming a Partnership Forming a Partnership A similar entry would be made for the assets, liabilities, and equity of Earl Foster.

Forming a Partnership Forming a Partnership Assume that instead of forming a partnership, the two men formed a limited liability corporation. Apr.1Cash Accounts Receivable Merchandise Inventory Store Equipment Office Equipment Allowance for Doubtful Accounts Accounts Payable Joseph Stevens, Member Equity Stevens’ Transfer of Assets, Liability, and Equity

Dividing Income Dividing Income Services of Partners The partnership agreement of Jennifer Stone and Crystal Mills provides for Stone to have an annual salary allowance of $30,000 and Mills is to receive $24,000. Any net income is to be divided equally. The firm had a net income of $75,000. J. Stone C. Mills Total Salary allowance$30,000$24,000$54,000 Remaining income10,50010,50021,000 Division of net income$40,500$34,500$75,000

Dividing Income Dividing Income Services of Partners Dec.31Income Summary Jennifer Stone, Capital Crystal Mills, Capital

Dividing Income Dividing Income LLC Alternative Dec.31Income Summary Jennifer Stone, Member Equity Crystal Mills, Member Equity

Dividing Income Dividing Income Services of Partners and Investments The partnership agreement of Jennifer Stone and Crystal Mills provides for Stone to have an annual salary allowance of $30,000 and Mills is to receive $24,000. Interest of 12% is provided on each partner’s capital balance on January 1. Any net income is to be divided equally. The firm had a net income of $75,000.

Dividing Income Dividing Income Services of Partners and Investments J. Stone C. Mills Total Salary allowance$30,000$24,000$54,000 Interest allowance9,6007,20016,800 Division of net income$41,700$33,300$75,000 $80,000 x 12% $60,000 x 12% Remaining income2,1002,1004,200

Dividing Income Dividing Income Services of Partners Dec.31Income Summary Jennifer Stone, Capital Crystal Mills, Capital

Dividing Income Dividing Income LLC Alternative Dec.31Income Summary Jennifer Stone, Member Equity Crystal Mills, Member Equity

Dividing Income Dividing Income Allowances Exceed Net Income Assume the same facts as before except that the net income is only $50,000. J. Stone C. Mills Total Salary allowance$30,000$24,000$54,000 Interest allowance 9,600 7,200 16,800 Total$39,600$31,200$70,800 Division of net income$29,200$20,800$50,000 Deduct excess equally10,40010,40020,800

Partnership Dissolution Admitting a Partner 1.Purchasing an interest from one or more of the current partners. 2.Contributing assets to the partnership. A person may be admitted to a partnership only with the consent of all partners by:

Partnership Dissolution Purchasing an Interest in a Partnership Partners Tom Andrews and Nathan Bell have capital balances of $50,000 each. On June 1, each sells one-fifth of his equity to Joe Canter for $10,000 in cash.

Partnership Dissolution Purchasing an Interest in a Partnership June1Tom Andrews, Capital Nathan Bell, Capital Joe Canter, Capital For a LLC, members’ equity accounts would have been used rather than capital accounts.

Partnership Dissolution Contributing Assets to a Partnership Partners Donald Lewis and Gerald Morton have capital balances of $35,000 and $25,000, respectively. On June 1, Sharon Nelson joins the partnership by permission and makes an investment of $20,000 cash.

Partnership Dissolution Contributing Assets to a Partnership June1Cash Sharon Nelson, Capital For a LLC, Sharon Nelson, Member Equity would have been credited.

Partnership Dissolution Revaluation of Assets Partners Donald Lewis and Gerald Morton have capital balances of $35,000 and $25,000, respectively. The balance in Merchandise Inventory is $14,000 and the current replacement value is $17,000. The partners share net income equally.

Partnership Dissolution June1Merchandise Inventory Donald Lewis, Capital Gerald Morton, Capital Because the LLC alternative follows a pattern of replacing “Capital” with “Member Equity,” the LLC entry will not be shown again. Revaluation of Assets

Partnership Dissolution Partner Bonuses On March 1, the partnership of Marsha Jenkins and Helen Kramer admit Alex Diaz as a new partner. The assets of the old partnership are adjusted to a fair market values and the resulting capital balances for Jenkins and Kramer are $30,000 and $24,000, respectively.

Partnership Dissolution Partner Bonuses Jenkins and Kramer agree to admit Diaz as a partner for $31,000. In return, Diaz will receive a one-third equity in the partnership and will share income and losses equally with Jenkins and Kramer.

Partnership Dissolution Partner Bonuses from New Partner Equity of Jenkins$20,000 Equity of Kramer24,000 Diaz’s Contribution 31,000 Total equity after admitting Diaz$75,000 Diaz’s interest (1/3 x $75,000)$25,000 Diaz’s contribution$31,000 Diaz’s equity after admission 25,000 Bonus paid to Jenkins and Kramer$ 6,000

Partnership Dissolution Partner Bonuses Mar.1Cash Alex Diaz, Capital Marsha Jenkins, Capital Helen Kramer, Capital $6000 ÷ 2

Partnership Dissolution Partner Bonuses After adjusting the market values, the capital balance of Janice Cowen is $580,000 and the capital balance of Steve Dodd is $40,000. Ellen Chua receives a one-fourth interest in the partnership for a contribution of $30,000. Before admitting Chua, Cowen and Dodd shared net income using a 2 to 1 ratio.

Partnership Dissolution Partner Bonuses to New Partner Equity of Cowen$ 80,000 Equity of Dodd40,000 Chua’s Contribution 30,000 Total equity after admitting Chua$150,000 Chua’s interest (1/4 x $150,000)$ 37,500 Chua’s contribution$30,000 Chua’s equity after admission 37,500 Bonus paid to Chua$ 7,500

Partnership Dissolution Partner Bonuses Mar.1Cash Janice Cowen, Capital Steve Dodd, Capital Ellen Chua, Capital /3 x $7,50 0 2/3 x $7,50 0

Liquidating Partnerships When a partnership goes out of business, the winding-up process is called the liquidation of a partnership.

Liquidating Partnerships The sale of the assets is called realization.

Liquidating Partnerships Farley, Greene, and Hall share income and losses in a ratio of 5:3:2. On April 9, after discontinuing operations, the firm had the following trial balance. Cash$11,000 Noncash Assets64,000 Liabilities$ 9,000 Jean Farley, Capital22,000 Brad Greene, Capital22,000 Alice Hall, Capital 22,000 Total$75,000$75,000

Liquidating Partnerships Between April 10 and April 30, 2006, Farley, Greene, and Hall sell all noncash assets for $72,000. Gain on Realization

Liquidating Partnerships Balance before realization$11,000$64,000$9,000 Left side of statement Noncash Cash Assets Liabilities Sale of assets and division of gain+72,000-64,000—

Liquidating Partnerships Balance before realization$22,000$22,000$22,000 Right side of statement Farley Greene Hall Capital Capital Capital Sale of assets and division of gain+4,000+2,400+1,600 $8,000 gain x.50 $8,000 gain x.30 $8,000 gain x.20

Liquidating Partnerships Balance before realization$11,000$64,000$9,000 Left side of statement Noncash Cash Assets Liabilities Sale of assets and division of gain+72,000–64,000 — Balance after realization$83,000$0$9,000

Liquidating Partnerships Balance before realization$22,000$22,000$22,000 Right side of statement Farley Greene Hall Capital Capital Capital Sale of assets and division of gain +4,000 +2,400 +1,600 Balance after realization$26,000$24,400$23,600

Liquidating Partnerships The partnership’s liabilities are paid, $9,000. Gain on Realization

Liquidating Partnerships Left side of statement Noncash Cash Assets Liabilities Balance before realization$11,000$64,000$9,000 Sale of assets and division of gain+72,000–64,000 — Balance after realization$83,000$ 0$9,000 Payment of liabilities–9,000—–9,000

Liquidating Partnerships Left side of statement Noncash Cash Assets Liabilities Balance before realization$11,000$64,000$9,000 Sale of assets and division of gain+72,000–64,000 — Balance after realization$83,000$ 0$9,000 Payment of liabilities –9,000 —–9,000 Balance after payment $74,000$ 0$ 0

Liquidating Partnerships The remaining cash, $74,000, is paid to each partner in accordance with the partner’s capital balance. Gain on Realization

Liquidating Partnerships Left side of statement Noncash Cash Assets Liabilities Balance before realization$11,000$64,000$9,000 Sale of assets and division of gain+72,000–64,000 — Balance after realization$83,000$ 0$9,000 Payment of liabilities –9,000 —–9,000 Balance after payment $74,000$ 0$ 0 Partners’ cash distributed–74,000 — — Final balances$ 0$ 0$ 0

Liquidating Partnerships Right side of statement Balance before realization$22,000$22,000$22,000 Farley Greene Hall Capital Capital Capital Sale of assets and division of gain +4,000 +2,400 +1,600 Balance after realization$26,000$24,400$23,600 Payment of liabilities — — — Balance after payment$26,000$24,400$23,600 Partners’ cash distributed–26,000–24,400–23,600 Final balances$ 0$ 0$ 0

Liquidating Partnerships Sale of Assets Apr.30Cash Noncash Assets Gain on Realization

Liquidating Partnerships Division of Gain Apr.30Gain on Realization Jean Farley, Capital Brad Greene, Capital Alice Hall, Capital

Liquidating Partnerships Payment of Liabilities Apr.30Liabilities Cash

Liquidating Partnerships Distribution of Cash to Partners Apr.30Jean Farley, Capital Brad Greene, Capital Alice Hall, Capital Cash

Liquidating Partnerships Between April 10 and April 30, 2006, Farley, Greene, and Hall sell all noncash assets for $44,000. Loss on Realization

Liquidating Partnerships Balance before realization$11,000$64,000$9,000 Left side of statement Noncash Cash Assets Liabilities Sale of assets and division of loss+44,000–64,000—

Liquidating Partnerships Balance before realization$22,000$22,000$22,000 Right side of statement Farley Greene Hall Capital Capital Capital Sale of assets and division of loss–10,000–6,000–4,000 $20,000 loss x.50 $20,000 loss x.30 $20,000 loss x.20

Liquidating Partnerships Balance before realization$11,000$64,000$9,000 Left side of statement Noncash Cash Assets Liabilities Sale of assets and division of loss+44,000–64,000 — Balance after realization$55,000$0$9,000

Liquidating Partnerships Balance before realization$22,000$22,000$22,000 Right side of statement Farley Greene Hall Capital Capital Capital Sale of assets and division of loss –10,000 –6,000 –4,000 Balance after realization$12,000$16,000$18,000

Liquidating Partnerships The liabilities of the partnership are paid, $9,000. Loss on Realization

Liquidating Partnerships Left side of statement Noncash Cash Assets Liabilities Balance before realization$11,000$64,000$9,000 Sale of assets and division of loss+44,000–64,000 — Balance after realization$55,000$ 0$9,000 Payment of liabilities–9,000—–9,000

Liquidating Partnerships Left side of statement Noncash Cash Assets Liabilities Balance before realization$11,000$64,000$9,000 Sale of assets and division of loss+44,000–64,000 — Balance after realization$55,000$ 0$9,000 Payment of liabilities –9,000 —–9,000 Balance after payment $46,000$ 0$ 0

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