ANNOUNCEMENT S: BELLRINGER: What are three of the ways income can be divided (allocated) between partners? 1.Stated Ratio What happens if there is no partnership agreement? 1.Plan to attend a review session. 2.The study guide and practice financial statement problem will be posted on D2L. 4. If your name is on the following list, please use your phone now to send Sid an RSVP

If your name appears on this list, please stay. Madeleine AndersonMyia Shaw Cara CollierLogan Stanly Maeson ConlinSharon Stuart Emily DaughdrillBroderick Tears Brock FrancisSaad Hutar Briana Henry Joseph KremerEdwar C. Kaitlynn McCormickQi C. Christopher MejiaCourtney W. Meghan MillerQuinshawn C. Matthew PowersMitchell B. Eugheni CuzminAshley G. Benez HolmesRyan H. Wade ArringtonScarborough Pundor Derrick BarkerTimothy Vongrassamy Marquavious BellAbby Ward Michael BowenVeronica Wasilewski Chelsea CarterCaleb Wilson Brittany ChurchesDerek Zalac Rachel Eddings Ella Faulkenberry Brandon Lowery Areon McCraven Mickee McGuire Ashley McIndoo Peyton Pence

Agenda: Income Allocation Notes 1.Stated Ratios 2.Capital Balances 3.Service, Capital, Stated Ratios General Limited

Allocation on Capital Balances In their partnership agreement, Zayn and Perez agree to allocate profits and losses on the basis of their beginning capital balances. P 2 3 rd Closing Entry: Close ___ to ____.

Allocation on Services, Capital, and Stated Ratios Zayn and Perez have a partnership agreement with the following conditions: Zayn and Perez have a partnership agreement with the following conditions: 1.Zayn receives a $36,000 annual salary allowance and Perez receives an allowance of $24, Each partner is allowed an annual interest allowance of 10% on their beginning capital balance. 3.Any remaining balance of income or loss is allocated equally. Net income is $70,000. P 2

Allocation on Services, Capital, and Stated Ratios $30,000 × 10% = $3,000 $10,000 × 10% = $1,000 $30,000 × 10% = $3,000 $10,000 × 10% = $1,000 P 2 $6,000 × ½ = $3,000

Allocation on Services, Capital, and Stated Ratios Now let’s assume that net income is only $50,000. P 2 ($14,000) × ½ = ($7,000)

Partnership Financial Statements During 2013, Zayn withdrew $20,000 cash from the partnership and Perez withdrew $12,000. Net income for the year is $70,000. P 2

E12-3 (Page 522) Complete on Notebook Paper on Overhead (Answer is on the Next Slide)

Distribute Chapter 12 Handout:

E12:4-5

What if Net Income is less than what is needed to cover salaries and interest?

What if there is a Net Loss?

1Income Summary98,800 Kramer, Capital53,400 Knox, Capital45,400 2Kramer, Capital4,400 Knox, Capital12,400 Income Summary16,800

Admission and Withdrawal of Partners  When the makeup of the partnership changes, the existing partnership is dissolved.  A new partnership may be immediately formed.  New partner acquires partnership interest by: 1.Purchasing it from the other partners, or 2.Investing assets in the partnership. P 3

Purchase of Partnership Interest A new partner can purchase partnership interest directly from the existing partners. The cash goes to the partners, not to the partnership. To become a partner, the new partner must be accepted by the current partners. P 3

Purchase of Partnership Interest On January 4 th, Hector Perez sells one-half of his partnership interest to Tyrell Rasheed for $18,000. Perez gives up a $13,000 recorded interest in the partnership. P 3

Investing Assets in a Partnership The new partner can gain partnership interest by contributing assets to the partnership. The new assets will increase the partnership’s net assets. After admission, both assets and equity will increase. P 3

Investing Assets in a Partnership On January 4 th, Tyrell Rasheed is admitted to the partnership with a payment of $22,000 cash. P 3

Bonus to Old or New Partners Bonus to Old Partners When the current value of a partnership is greater than the recorded amounts of equity, the old partners usually require a new partner to pay a bonus when joining. Bonus to New Partners The partnership may grant a bonus to a new partner if the business is in need of cash or if the new partner has exceptional talents. P 3

Bonus to Old Partners On January 4 th, Zayn and Perez agree to accept Rasheed as a partner upon his investment of $42,000 cash in the partnership. Rasheed is to receive a 25% ownership interest in the new partnership. Any bonus is attributable to the existing partners and is shared equally. P 3

Bonus to Old Partners $42,000 - $30,000 = $12,000 × ½ = $6,000 P 3 On January 4 th, Zayn and Perez agree to accept Rasheed as a partner upon his investment of $42,000 cash in the partnership. Rasheed is to receive a 25% ownership interest in the new partnership. Any bonus is attributable to the existing partners and is shared equally.

Bonus to New Partner On January 4 th, Zayn and Perez agree to accept Rasheed as a partner upon his investment of $18,000 cash in the partnership. Rasheed is to receive a 25% ownership interest in the new partnership. Any bonus is attributable to Rasheed’s excellent business skills. P 3

Bonus to New Partner P 3 $18,000 - $24,000 = $(6,000) × ½ = $(3,000) On January 4 th, Zayn and Perez agree to accept Rasheed as a partner upon his investment of $18,000 cash in the partnership. Rasheed is to receive a 25% ownership interest in the new partnership. Any bonus is attributable to Rasheed’s excellent business skills.

Course Surveys?

Break Here On November 24th

Last Lecture Agenda: Withdraw of Partner Death of Partner Liquidating a Partnership (closing the business) 1.Review Session (remember the yellow problem) 2.Final Exam – Review Materials have been posted 3.Course Survey – return to my office if you did not do so in the last class

Withdrawal of a Partner A partner can withdraw in two ways: 1. The partner can sell his/ her partnership interest to another person. 2. The partnership can distribute cash and/or other assets to the withdrawing partner. A partner can withdraw in two ways: 1. The partner can sell his/ her partnership interest to another person. 2. The partnership can distribute cash and/or other assets to the withdrawing partner. P 3

Withdrawal of a Partner At the date of the withdrawal of Perez, the partners have the following capital balances: Perez - $38,000, Zayn - $84,000, and Rasheed - $38,000. The partners share income and loss equally. Perez is to receive $38,000 cash upon withdrawal from the partnership. No Bonus P 3

Withdrawal of a Partner At the date of the withdrawal of Perez, the partners have the following capital balances: Perez - $38,000, Zayn - $84,000, and Rasheed - $38,000. The partners share income and loss equally. Perez is to receive $34,000 cash upon withdrawal from the partnership. Bonus to Remaining Partners P 3 Capital balance $ 38,000 Cash settlement 34,000 Bonus 4,000 Times50% Bonus to each partner $ 2,000

Withdrawal of a Partner At the date of the withdrawal of Perez, the partners have the following capital balances: Perez - $38,000, Zayn - $84,000, and Rasheed - $38,000. The partners share income and loss equally. Perez is to receive $40,000 cash upon withdrawal from the partnership. Bonus to Withdrawing Partner P 3 Capital balance $ 38,000 Cash settlement 40,000 Deficiency 2,000 Times50% To each partner $ 1,000

Death of a Partner A partner’s death dissolves a partnership. A deceased partner’s estate is entitled to receive his or her equity. The partnership agreement should contain provisions for settlement. These provisions usually require: 1.Closing the books to determine income or loss since the end of the previous period, and 2.Determining and recording current market values for both assets and liabilities. Settlement of the deceased partner’s estate can involve selling the equity to remaining partners or to an outsider, or it can involve withdrawal of assets. A partner’s death dissolves a partnership. A deceased partner’s estate is entitled to receive his or her equity. The partnership agreement should contain provisions for settlement. These provisions usually require: 1.Closing the books to determine income or loss since the end of the previous period, and 2.Determining and recording current market values for both assets and liabilities. Settlement of the deceased partner’s estate can involve selling the equity to remaining partners or to an outsider, or it can involve withdrawal of assets. P 3

Liquidation of a Partnership A partnership dissolution requires four steps: 1.Noncash assets are sold for cash and a gain or loss on liquidations is recorded. 2.Gain or loss on liquidation is allocated to partners using their income-and-loss ratio. 3.Liabilities are paid or settled. 4.Any remaining cash is distributed to partners based on their capital balances. A partnership dissolution requires four steps: 1.Noncash assets are sold for cash and a gain or loss on liquidations is recorded. 2.Gain or loss on liquidation is allocated to partners using their income-and-loss ratio. 3.Liabilities are paid or settled. 4.Any remaining cash is distributed to partners based on their capital balances. P 3

No Capital Deficiency No capital deficiency means that all partners have a zero or credit balance in their capital accounts. Zayn, Perez, and Rasheed agree to dissolve their partnership. The only outstanding liability is an account payable of $20,000. Prior to dissolution the partnership has the following balance sheet: P 4

No Capital Deficiency BOARDS begins the dissolution process by selling the land for $46,000 cash. The gain on the sale of the land is distributed equally among the partners. After the sale of the land the company pays the account payable. P 4

No Capital Deficiency After the sale of land for a gain and the payment of the company’s accounts payable, BOARDS has the following balance sheet: P 4

Capital Deficiency Capital deficiency means that at least one partner has a debit balance in his or her capital account at the point of final cash distribution. This can arise from liquidation losses, excessive withdrawals before liquidation, or recurring losses in prior periods. A partner with a capital deficiency must, if possible, cover the deficit by paying cash into the partnership. P 4

Capital Deficiency Zayn, Perez, and Rasheed agree to dissolve their partnership. Prior to the final distribution of cash to the partners, Zayn has a capital balance of $19,000, Perez $8,000, and Rasheed $(3,000). Rasheed owes the partnership $3,000 and is able to pay the amount. P 4

Partner Cannot Pay Deficiency Let’s use the information from our previous example of a capital deficiency and assume partners divide profit and losses equally. P 4

Global View Partnership accounting according to U. S. GAAP is similar, but not identical, to that under IFRS. 1.Both U. S. GAAP and IFRS include broad and similar guidance for partnership accounting. Partnership organization is similar worldwide, however, different legal systems dictate different implications and motivations for how a partnership is effectively set up. 2.The account for partnership admission, withdrawal, and liquidation is likewise similar worldwide. However, different legal systems impact partnership agreements and their implication to the parties. Partnership accounting according to U. S. GAAP is similar, but not identical, to that under IFRS. 1.Both U. S. GAAP and IFRS include broad and similar guidance for partnership accounting. Partnership organization is similar worldwide, however, different legal systems dictate different implications and motivations for how a partnership is effectively set up. 2.The account for partnership admission, withdrawal, and liquidation is likewise similar worldwide. However, different legal systems impact partnership agreements and their implication to the parties.

End of Chapter 12

Insert 2015 Exam Here:

Practice Problem and Solution

Your Journey…

Each of you has come so far… You speak and understand the “Language of Business” much better than you did four months ago… It has been an honor to take this journey with you this semester.