F-1 Prepared by Coby Harmon University of California, Santa Barbara Westmont College W ILEY IFRS EDITION

F-2 APPENDIX PREVIEW Financial Accounting IFRS 3rd Edition Weygandt ● Kimmel ● Kieso In this appendix, we discuss reasons why businesses select the partnership form of organization. We also explain the major issues in accounting for partnerships.

F-3 F LEARNING OBJECTIVES After studying this chapter, you should be able to: 1.Identify the characteristics of the partnership form of business organization. 2.Explain the accounting entries for the formation of a partnership. 3.Identify the bases for dividing net income or net loss. 4.Describe the form and content of partnership financial statements. 5.Explain the effects of the entries to record the liquidation of a partnership. APPENDIX Accounting for Partnerships

F-4 Partnership: An association of two or more persons to carry on as co-owners of a business for profit. Type of Business:  Small retail, service, or manufacturing companies.  Accountants, lawyers, and doctors. Partnership Form of Organization Learning Objective 1 Identify the characteristics of the partnership form of business organization. LO 1

F-5 ASSOCIATION OF INDIVIDUALS  Legal entity.  Accounting entity.  Net income not taxed as a separate entity. MUTUAL AGENCY  Act of any partner is binding on all other partners, so long as the act appears to be appropriate for the partnership. Characteristics of Partnerships LO 1

F-6 LIMITED LIFE  Dissolution occurs whenever a partner withdraws or a new partner is admitted.  Dissolution does not mean the business ends. UNLIMITED LIABILITY  Each partner is personally and individually liable for all partnership liabilities. Characteristics of Partnerships LO 1

F-7 CO-OWNERSHIP OF PROPERTY  Each partner has a claim on total assets.  This claim does not attach to specific assets.  All net income or net loss is shared equally by the partners, unless otherwise stated in the partnership agreement. Characteristics of Partnerships LO 1

F-8 Special partnership forms are: 1. LIMITED PARTNERSHIPS, 2. LIMITED LIABILITY PARTNERSHIPS, 3. LIMITED LIABILITY COMPANIES, and 4. “S” CORPORATIONS. Organizations with Partnership Characteristics LO 1 Illustration F-2 Advantages and disadvantages of a partnership

F-9 Should specify relationships among the partners: 1. Names and capital contributions of partners. 2. Rights and duties of partners. 3. Basis for sharing net income or net loss. 4. Provision for withdrawals of assets. 5. Procedures for submitting disputes to arbitration. 6. Procedures for the withdrawal or addition of a partner. 7. Rights and duties of surviving partners in the event of a partner’s death. The Partnership Agreement LO 1

F-10 Illustration: A. Rolfe and T. Shea combine their proprietorships to start a partnership named U.K. Software. The firm will specialize in developing financial modeling software packages. Rolfe and Shea have the following assets prior to the formation of the partnership. Forming a Partnership Basic Partnership Accounting Learning Objective 2 Explain the accounting entries for the formation of a partnership. Illustration F-3 Book and fair values of assets invested LO 2

F-11 Prepare the entry to record the investment of A. Rolfe. Cash8,000 Equipment4,000 A. Rolfe, Capital12,000 Forming a Partnership LO 2 Illustration F-3 Book and fair values of assets invested

F-12 Cash9,000 Accounts Receivable4,000 Allowance for Doubtful Accounts1,000 T. Shea, Capital12,000 Prepare the entry to record the investment of T. Shea. Forming a Partnership LO 2 Illustration F-3 Book and fair values of assets invested

F-13 Partners equally share net income or net loss unless the partnership contract indicates otherwise. CLOSING ENTRIES: 1.Debit each revenue account for its balance, and credit Income Summary for total revenues. Debit Income Summary for total expenses, and credit each expense account for its balance. 2.Debit Income Summary for its balance, and credit each partner’s capital account for his or her share of net income. Or, credit Income Summary, and debit each partner’s capital account for his or her share of net loss. 3.Debit each partner’s capital account for the balance in that partner’s drawing account, and credit each partner’s drawing account for the same amount. Dividing Net Income or Net Loss LO 3 Learning Objective 3 Identify the bases for dividing net income or net loss.

F-14 Illustration: AB Company has net income of £32,000 for The partners, L. Arbor and D. Barnett, share net income and net loss equally. Drawings for the year were Arbor £8,000 and Barnett £6,000. The last two closing entries are: Dividing Net Income or Net Loss LO 3

F-15 Assume that the beginning capital balance is £47,000 for Arbor and £36,000 for Barnett. The capital and drawing accounts will show the following after posting the closing entries. Dividing Net Income or Net Loss LO 3 Illustration F-4 Partners’ capital and drawing accounts after closing

F-16 INCOME RATIOS Partnership agreement should specify the basis for sharing net income or net loss. Typical income ratios:  Fixed ratio.  Ratio based on capital balances.  Salaries to partners and remainder on a fixed ratio.  Interest on partners’ capital balances and the remainder on a fixed ratio.  Salaries to partners, interest on partners’ capital, and the remainder on a fixed ratio. Dividing Net Income or Net Loss LO 3

F-17 Illustration: Sara King and Ray Lee are copartners in Kingslee Company. The partnership agreement provides for (1) salary allowances of €8,400 to King and €6,000 to Lee, (2) interest allowances of 10% on capital balances at the beginning of the year, and (3) dividing the remainder equally. Capital balances on January 1 were King €28,000, and Lee €24,000. In 2017, partnership net income is €22,000. Prepare a schedule showing the distribution of net income. Dividing Net Income or Net Loss LO 3

F-18 Dividing Net Income or Net Loss LO 3 Illustration F-5 Income statement with division of net income

F-19 Journalize the allocation of net income in each of the situations above. Sara King, Capital12,400 Income Summary22,000Dec. 31 Ray Lee, Capital9,600 Dividing Net Income or Net Loss LO 3

F-20 Illustration: Assume Kingslee’s net income is only €18,000. Dividing Net Income or Net Loss LO 3 Illustration F-6 Division of net income—income deficiency

F-21 Partnership Financial Statements LO 4 Learning Objective 4 Describe the form and content of partnership financial statements. Illustration F-7 Partners’ capital statement

F-22 The income statement for a partnership is identical to the income statement for a proprietorship, except for the division of net income. Partnership Financial Statements LO 4 Illustration F-8 Equity section of a partnership statement of financial position

F-23 Ends both the legal and economic life of the entity. In liquidation, sale of non-cash assets for cash is called realization. To liquidate, it is necessary to: 1.Sell non-cash assets for cash and recognize a gain or loss on realization. 2.Allocate gain/loss on realization to the partners based on their income ratios. 3.Pay partnership liabilities in cash. 4.Distribute remaining cash to partners on the basis of their capital balances. Liquidation of a Partnership Learning Objective 5 Explain the effects of the entries to record the liquidation of a partnership. LO 5

F-24 Illustration: Ace Company is liquidated when its ledger shows the assets, liabilities, and equity accounts are reported as follows: Liquidation of a Partnership LO 5 Illustration F-9 Account balances prior to liquidation

F-25 Illustration: Ace Company agree to liquidate the partnership on the following terms. (1) The non-cash assets of the partnership will be sold to Jackson Enterprises for €75,000 cash. (2) The partnership will pay its partnership liabilities. The income ratios of the partners are 3:2:1, respectively. Step 1 - Record the realization of noncash assets. Cash 75,000 Accumulated Depreciation—Equipment 8,000 Accounts Receivable 15,000 Inventory 18,000 Equipment 35,000 Gain on Realization 15,000 Liquidation of a Partnership LO 5 No Capital Deficiency

F-26 Step 2 – Allocate the gain to the partners. Gain on Realization 15,000 R. Arnet, Capital (€15,000 x 3/6) 7,500 P. Carey, Capital (€15,000 x 2/6) 5,000 W. Eaton, Capital (€15,000 x 1/6) 2,500 Liquidation of a Partnership LO 5 Illustration: Ace Company agree to liquidate the partnership on the following terms. (1) The non-cash assets of the partnership will be sold to Jackson Enterprises for €75,000 cash. (2) The partnership will pay its partnership liabilities. The income ratios of the partners are 3:2:1, respectively. No Capital Deficiency

F-27 Step 3 – Creditors are paid in full. Notes Payable 15,000 Accounts Payable 16,000 Cash 31,000 Liquidation of a Partnership LO 5 Illustration: Ace Company agree to liquidate the partnership on the following terms. (1) The non-cash assets of the partnership will be sold to Jackson Enterprises for €75,000 cash. (2) The partnership will pay its partnership liabilities. The income ratios of the partners are 3:2:1, respectively. No Capital Deficiency

F-28 Step 4 – Record distribution of cash to the partners. R. Arnet, Capital 22,500 P. Carey, Capital 22,800 W. Eaton, Capital 3,700 Cash 49,000 Illustration F-10 Ledger balances before distribution of cash Caution: Cash should not be distributed to partners on the basis of their income-sharing ratios. Liquidation of a Partnership LO 5 No Capital Deficiency

F-29 Some accountants prepare a SCHEDULE OF CASH PAYMENTS to determine the distribution of cash to the partners. Illustration F-11 Schedule of cash payments, no capital deficiency Liquidation of a Partnership LO 5 No Capital Deficiency

F-30 Illustration: Ace Company is on the brink of bankruptcy. The partners decide to liquidate by having a “going-out-of-business” sale. Merchandise is sold at substantial discounts, and the equipment is sold at auction. Cash proceeds from these sales and collections from customers total only €42,000. Step 1 - Record the realization of non-cash assets. Cash 42,000 Accumulated Depreciation—Equipment 8,000 Loss on Realization 18,000 Accounts Receivable 15,000 Inventory 18,000 Equipment 35,000 Liquidation of a Partnership LO 5 Capital Deficiency

F-31 Step 2 – Allocate the loss to the partners. R. Arnet, Capital (€18,000 x 3/6) 9,000 P. Carey, Capital (€18,000 x 2/6) 6,000 W. Eaton, Capital (€18,000 x 1/6) 3,000 Loss on Realization 18,000 Liquidation of a Partnership LO 5 Capital Deficiency Illustration: Ace Company is on the brink of bankruptcy. The partners decide to liquidate by having a “going-out-of-business” sale. Merchandise is sold at substantial discounts, and the equipment is sold at auction. Cash proceeds from these sales and collections from customers total only €42,000.

F-32 Step 3 – Creditors are paid in full. Notes Payable 15,000 Accounts Payable 16,000 Cash 31,000 Liquidation of a Partnership LO 5 Capital Deficiency Illustration: Ace Company is on the brink of bankruptcy. The partners decide to liquidate by having a “going-out-of-business” sale. Merchandise is sold at substantial discounts, and the equipment is sold at auction. Cash proceeds from these sales and collections from customers total only €42,000.

F-33 Illustration F-12 Ledger balances before distribution of cash Step 4 – Record distribution of cash to the partners. The distribution of cash to the partners will vary depending on how Eaton’s deficiency is settled. Deficiency PAYMENT OF DEFICIENCY Cash 1,800 W. Eaton, Capital 1,800 Liquidation of a Partnership LO 5 Capital Deficiency

F-34 PAYMENT OF DEFICIENCY Step 4 – Record distribution of cash to the partners. R. Arnet, Capital 6,000 P. Carey, Capital 11,800 Cash 17,800 Liquidation of a Partnership LO 5 Capital Deficiency Illustration F-13 Ledger balances after paying capital deficiency

F-35 The distribution of cash to the partners will vary depending on how Eaton’s deficiency is settled. NON-PAYMENT OF DEFICIENCY R. Arnet, Capital (€1,800 x 3/5) 1,080 P. Carey, Capital (€1,800 x 2/5) 720 W. Eaton, Capital 1,800 Liquidation of a Partnership LO 5 Capital Deficiency Illustration F-12 Ledger balances before distribution of cash Step 4 – Record distribution of cash to the partners. Deficiency

F-36 Illustration F-14 Ledger balances after nonpayment of capital deficiency NON-PAYMENT OF DEFICIENCY Step 4 – Record distribution of cash to the partners. R. Arnet, Capital 4,920 P. Carey, Capital 11,080 Cash 16,000 Liquidation of a Partnership LO 5 Capital Deficiency

F-37 “Copyright © 2016 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.” Copyright