1. Chapter 12-1 Chapter 12 Accounting Principles, Ninth Edition Accounting for Partnerships

2. Chapter 12-2 A partnership is an association of two or more persons to carry on as co-owners of a business for profit. Partnership Form of Organization SO 1 Identify the characteristics of the partnership form of business organization. Type of Business used for Partnership: Small retail, service, or manufacturing companies. Accountants, lawyers, and doctors.

3. Chapter 12-3  Partnership company is one of the easiest company to be formed.  It can be formed by verbal agreement or a simple act as a handshake or a written agreement. See notes page for discussion Partnership Form of Organization SO 1 Identify the characteristics of the partnership form of business organization.

4. Chapter 12-4 Characteristics of Partnerships Characteristics of Partnerships Include: (a) association of individuals (b) mutual agency (c) limited life (d) unlimited liability, and (e) co-ownership of property.

5. Chapter 12-5 Characteristics of Partnerships (a) Association of Individuals Legal entity : It can own property (land) an can be sue or be sued. Accounting entity: It is separate and distinct from its owners (partners), for financial reporting purposes. Net income not taxed as a separate entity. Otherwise, Partner’s share is taxable at personal tax rate.

6. Chapter 12-6 Characteristics of Partnerships SO 1 Identify the characteristics of the partnership form of business organization. (b) Mutual Agency Mutual Agency means that each partner acts on behalf of the partnership when engaging in partnership business. An act of any partner is binding on all other partners, so long as the act appears to be appropriate for the partnership.

7. Chapter 12-7 Characteristics of Partnerships (c) Limited Life Dissolution (end) occurs whenever a partner withdraws or a new partner is admitted or by the death or incapacity of a partner. Dissolution does not mean the business ends.

8. Chapter 12-8 Characteristics of Partnerships (d) Unlimited Liability Each partner is personally and individually liable for all partnership liabilities. Creditors’ claims attach first to partnership assets. If the assets are insufficient, the claims then attach to the personal resources of any partner, irrespective of that partner’s capital equity in the company.

9. Chapter 12-9 Characteristics of Partnerships SO 1 Identify the characteristics of the partnership form of business organization. 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.

10. Chapter 12-10 All of the following are characteristics of partnerships except: a. co-ownership of property. b. mutual agency. c. limited life. d. limited liability. Question Characteristics of Partnerships SO 1 Identify the characteristics of the partnership form of business organization.

11. Chapter 12-11 SO 1 Identify the characteristics of the partnership form of business organization. Special forms of business organizations are often used to provide protection from unlimited liability. Special partnership forms are: 1. Limited Partnerships, 2. Limited Liability Partnerships, and 3. Limited Liability Companies. Organizations with Partnership Characteristics

12. Chapter 12-12 SO 1 Identify the characteristics of the partnership form of business organization. Organizations with Partnership Characteristics Major Advantages Simple and inexpensive to create and operate. Major Disadvantages Owners (partners) personally liable for business debts. Regular Partnership

13. Chapter 12-13 SO 1 Identify the characteristics of the partnership form of business organization. Organizations with Partnership Characteristics Major Advantages Limited partners have limited personal liability for business debts as long as they do not participate in management. General partners can raise cash without involving outside investors in management of business. Major Disadvantages General partners personally liable for business debts. More expensive to create than regular partnership. Suitable for companies that invest in real estate. “Ltd.,” or “LP”

14. Chapter 12-14 SO 1 Identify the characteristics of the partnership form of business organization. Organizations with Partnership Characteristics Major Advantages Mostly of interest to partners in old-line professions such as law, medicine, and accounting. Owners (partners) are not personally liable for the malpractice of other partners. Major Disadvantages Unlike a limited liability company, partners remain personally liable for many types of obligations owed to business creditors, lenders, and landlords. Often limited to a short list of professions. “LLP”

15. Chapter 12-15 SO 1 Identify the characteristics of the partnership form of business organization. Organizations with Partnership Characteristics Major Advantages Owners have limited personal liability for business debts even if they participate in management. Major Disadvantages More expensive to create than regular partnership. “LLC”

16. Chapter 12-16 Q12-3: Brent Houghton and Dick Kreibach are considering a business venture. They ask you to explain the advantages and disadvantages of the partnership form of organization. See notes page for discussion Discussion Question Partnership Characteristics SO 1 Identify the characteristics of the partnership form of business organization.

17. Chapter 12-17 Under which of the following business organization forms do limited partners have little, if any, active role in the management of the business? a. Limited liability partnership. b. Limited partnership. c. Limited liability companies. d. None of the above. Question Partnership Characteristics SO 1 Identify the characteristics of the partnership form of business organization.

18. Chapter 12-18

19. Chapter 12-19 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. Partnership Agreement SO 1 Identify the characteristics of the partnership form of business organization.

20. Chapter 12-20 In the formation of a partnership, each partner’s initial investment in a partnership should be recorded at the fair market value of the assets at the date of their transfer to the partnership. Forming a Partnership

21. Chapter 12-21 When a partner invests noncash assets in a partnership, the assets should be recorded at their: a.book value. b.carrying value. c.fair market value. d.original cost. Question Forming a Partnership SO 2 Explain the accounting entries for the formation of a partnership.

22. Chapter 12-22 Illustration: Assume that A. Rolfe and T. Shea combine their proprietorships to start a partnership named U.S. Software. Rolfe and Shea have the following assets prior to the formation of the partnership. Forming a Partnership SO 2 Explain the accounting entries for the formation of a partnership. Illustration 12-3

23. Chapter 12-23 Illustration: Prepare the entry to record the investment of A. Rolfe. Office equipment4,000 Cash8,000 Prepare the entry to record the investment of T. Shea. Forming a Partnership SO 2 Explain the accounting entries for the formation of a partnership. A. Rolfe, Capital12,000 Accounts receivable4,000 Cash9,000 Allowance for doubtful accounts1,000 T. Shea, Capital12,000

24. Chapter 12-24

25. Chapter 12-25 Partners equally share net income or net loss unless the partnership contract indicates otherwise. Dividing Net Income or Net Loss Closing Entries: Close all Revenue and Expense accounts to Income Summary. Close Income Summary to each partner’s Capital account for his or her share of net income or loss. Close each partners Drawing account to his or her respective Capital account. SO 3 Identify the bases for dividing net income or net loss.

26. Chapter 12-26 Income Ratios Dividing Net Income or Net Loss SO 3 Identify the bases for dividing net income or net loss. 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.

27. Chapter 12-27 Q12-7: Blue and Grey are discussing how income and losses should be divided in a partnership they plan to form. What factors should be considered in determining the division of net income or net loss? See notes page for discussion Discussion Question Dividing Net Income or Net Loss SO 3 Identify the bases for dividing net income or net loss.

28. Chapter 12-28 Which of the following statements is correct? a.Salaries to partners and interest on partners' capital are expenses of the partnership. b.Salaries to partners are an expense of the partnership but not interest on partners' capital. c.Interest on partners' capital are expenses of the partnership but not salaries to partners. d.Neither salaries to partners nor interest on partners' capital are expenses of the partnership. Question Dividing Net Income or Net Loss SO 3 Identify the bases for dividing net income or net loss.

29. Chapter 12-29 Illustration: Illustration: Assume that King and Lee are co-partners in the 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) the remainder equally. Capital balances on January 1 were King $28,000, and Lee $24,000. In 2010, partnership net income is $22,000. The division of net income is as follows. Instructions (a) Prepare a schedule showing the distribution of net income. (b) Journalize the allocation of net income. Dividing Net Income or Net Loss SO 3 Identify the bases for dividing net income or net loss.

30. Chapter 12-30 Dividing Net Income or Net Loss SO 3 Identify the bases for dividing net income or net loss. Illustration: Illustration: (a) Prepare a schedule showing the distribution of net income. Illustration 12-5

31. Chapter 12-31 Dividing Net Income or Net Loss SO 3 Identify the bases for dividing net income or net loss. Sara King, Capital12,400 Income summary22,000Dec. 31 Ray Lee, Capital9,600 Illustration: Illustration: (b) Journalize the allocation of income.

32. Chapter 12-32 Dividing Net Income or Net Loss SO 3 Identify the bases for dividing net income or net loss. Illustration: Illustration: Prepare a schedule showing the distribution of net income assuming net income is only $18,000. Illustration 12-5

33. Chapter 12-33 SO 4 Describe the form and content of partnership financial statements. Illustration 12-7 As in a proprietorship, partners ’ capital may change due to (1) additional investment, (2) drawing, and (3) net income or net loss. Partnership Financial Statements

34. Chapter 12-34 The balance sheet for a partnership is the same as for a proprietorship except for the owner’s equity section. Partnership Financial Statements SO 4 Describe the form and content of partnership financial statements. Illustration 12-8