1. 12 Accounting for Partnerships and Limited Liability Companies
Accounting Using Excel for Success
PowerPoint Presentation by:
Douglas Cloud, Professor Emeritus Accounting, Pepperdine University
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protected website for classroom use. 12
Accounting for Partnerships and Limited Liability Companies
Student Version

2. 1
Describe the characteristics of proprietorships, partnerships, and limited liability companies.
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3. A proprietorship is a company owned by a single individual.1
Proprietorship
A proprietorship is a company owned by a single individual.
Lawyers
Architects
Realtors
Physicians

4. Characteristics of a Proprietorship1
Characteristics of a Proprietorship
Simple to form
No limitation on legal liability
Not taxable
Limited life
Limited ability to raise capital (funds)

5. 1
Partnership
A partnership is an association of two or more individuals who own and manage a company for profit.
Less widely used than proprietorships.

6. Characteristics of a Partnership1
Characteristics of a Partnership
Moderate to form
No limitation on legal liability
Not taxable
Limited life
Limited ability to raise capital (funds)
(continued)

7. Characteristics of a Partnership (continued)1
Characteristics of a Partnership (continued)
Co-ownership of partnership property
Mutual agency
Participation in income

8. Limited Liability Companies1
Limited Liability Companies
A limited liability company (LLC) is a form of legal entity that provides limited liability to its owners, but is treated as a partnership for tax purposes.

9. Characteristics of a Limited Liability Partnership1
Characteristics of a Limited Liability Partnership
Moderate to form
Limited legal liability
Not taxable
Unlimited life
Moderate ability to raise capital (funds)

10. 2
Describe and illustrate the accounting for forming a partnership and for dividing the net income and net loss of a partnership.
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11. 2
Forming a Partnership
Joseph Stevens and Earl Foster agree to combine their hardware businesses in a partnership. Each is to contribute certain amounts of cash and other assets. They also agree that the partnership is to assume the liabilities of the separate businesses.

12. 2
The entry to record the assets and liabilities contributed by Stevens is as follows:

13. Dividing Income—Services of Partners2
Dividing Income—Services of Partners
The partnership agreement of Jennifer Stone and Crystal Mills provides for Stone to receive a monthly allowance of $5,000 ($60,000 annually) and Mills is to receive $4,000 a month ($48,000 annually). If there is any remaining net income, it is to be divided equally. The firm had a net income of $150,000 for the year.

14. 2 Division of Net Income J. Stone C. Mills Total
Annual salary allowance $60,000 $48,000 $108,000
Remaining income 21,000 21,000 42,000
Division of net income $81,000 $69,000 $150,000

15. Dividing Income—Services of Partners and Investments2
Dividing Income—Services of Partners and Investments
The partnership agreement for Stone and Mills divides income as follows:
Monthly salary allowance of $5,000 for Stone and $4,000 for Mills.
Interest of 12% on each partner’s capital balance on January 1.
If there is any remaining net income, it is to be divided equally between the partners.

16. The remaining income is divided equally.2
The remaining income is divided equally.
J. Stone C. Mills Total
Salary allowance $60,000 $48,000 $108,000
Interest allowance 19,200 14,400 33,600
Remaining income 4,200 4,200 8,400
Net income $83,400 $66,600 $150,000

17. Dividing Income—Allowances Exceed Net Income2
Dividing Income—Allowances Exceed Net Income
Assume the same facts as before except that the net income is only $100,000. In this case, the total of the allowance exceeds the net income by $41,600 ($100,000 – $141,600).

18. This amount exceeds net income by $41,600.2
Net income of $100,000 is divided.
J. Stone C. Mills Total
Salary allowance $60,000 $48,000 $108,000
Interest allowance 19, , ,600
Total $79,200 $62,400 $141,600
This amount exceeds net income by $41,600.

19. Net income of $100,000 is divided.2
Net income of $100,000 is divided.
J. Stone C. Mills Total
Salary allowance $60,000 $48,000 $108,000
Interest allowance 19, , ,600
Total $79,200 $62,400 $141,600
Deduct excess of allowance over income 20, ,800 <41,600>
Net income $58,400 $41,600 $100,000

20. 3
Describe and illustrate the accounting for partner admission and withdrawal.
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21. Purchasing an Interest in a Partnership3
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.

22. The only entry required in the partnership accounts is as follows:3
The only entry required in the partnership accounts is as follows:
For a limited liability company, the following entry is required:
Tom Andrews, Member Equity 10,000
Nathan Bell, Member Equity 10,000
Joe Canter, Member Equity 20,000

23. Contributing Assets to a Partnership3
Contributing Assets to a Partnership
Partners Tom Andrews and Nathan Bell each have capital balances of $50,000. On June 1, Joe Canter contributes $20,000 cash to Bring It Consulting for ownership equity of $20,000.

24. 3
The entry to record this transaction is as follows:
For a limited liability company, the following entry is required:

25. 3
Revaluation of Assets
Partners Andrews and Bell each have capital balances of $50,000. The balance in Merchandise Inventory is $14,000 and the current replacement value is $17,000. The partners share net income equally.

26. 3
The entry to record this transaction is as follows:
For a limited liability company, the following entry is required:

27. 3
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 current market values and the resulting capital balances for Jenkins and Kramer are $20,000 and $24,000, respectively.

28. 3
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.

29. 3 Equity of Jenkins $20,000 Equity of Kramer 24,000
Diaz’s Contribution 31,000
Total equity after admitting Diaz $75,000
Diaz’s interest (1/3 × $75,000) $25,000
Diaz’s contribution $31,000
Diaz’s equity after admission 25,000
Bonus paid to Jenkins and Kramer $ 6,000

30. Paying the New Partner a Bonus3
Paying the New Partner a Bonus
After adjusting the market values, the capital balance of Janice Cowen is $80,000 and the capital balance of Steve Dodd is $40,000. Ellen Chou receives a one-fourth interest in the partnership for a contribution of $30,000. Before admitting Chou, Cowen and Dodd shared net income using a 2:1 ratio.

31. 3 The bonus is computed as follows: Equity of Cowen $ 80,000
Equity of Dodd 40,000
Chou’s Contribution ,000
Total equity after admitting Chou $150,000
Chou’s equity interest after admission × 25%
Chou’s equity after admission $ 37,500
Chou’s contribution 30,000
Bonus paid to Chou $ 7,500

32. Describe and illustrate the accounting for liquidating a partnership.4
Describe and illustrate the accounting for liquidating a partnership.
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33. Liquidating Partnerships4
Liquidating Partnerships
When a partnership goes out of business, the winding-up process is called the liquidation of a partnership.

34. 4
Liquidation Process
Farley, Green, 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 Assets 64,000
Liabilities $ 9,000
Jean Farley, Capital 22,000
Brad Green, Capital 22,000
Alice Hall, Capital 22,000
Total $75,000 $75,000

35. 4
Gain on Realization
Between April 10 and April 30, Farley, Green, and Hall sell all noncash assets for $72,000. Thus, a gain of $8,000 ($72,000 – $64,000) is realized.

36. 4
Statement of Partnership Liquidation: Gain on Realization
Exhibit 5

37. 4
Sale of assets (Step 1):
For a limited liability company, the following entry is required:

38. 4
Division of the gain (Step 2):
For a limited liability company, the following entry is required:

39. 4
Payment of liabilities (Step 3):
For a limited liability company, the following entry is required:

40. 4
Distribution of cash to partners (Step 4):
For a limited liability company, the following entry is required:

41. 4
Statement of Partnership Liquidation: Loss on Realization
Exhibit 6

42. Loss on Realization—Capital Deficiency4
Loss on Realization—Capital Deficiency
Farley, Green, and Hall sell all of the noncash assets for $10,000. A loss of $54,000 ($64,000 – $10,000) is realized. The share of the loss allocated to Farley, $27,000 (50% of $54,000), exceeds the $22,000 balance in her capital account. Farley contributes $5,000 to the partnership.

43. 4
Statement of Partnership Liquidation: Loss on Realization—Capital Deficiency
Exhibit 7

44. Partner Does Not Pay Deficiency4
Partner Does Not Pay Deficiency
If Farley does not pay her deficiency, the deficiency would be allocated to Green and Hall based on their income-sharing ratio of 3:2. The remaining cash would be distributed to Green and Hall as shown below:
Capital Balances Before (Deficiency)
Allocated (Deficiency)
Capital Balance After Deficiency and Cash Distributed to Partners
Farley $ (5,000) $5,000 $
Green 5,800 (3,000)* 2,800
Hall 11,200 (2,000)** 9,200
Total $12,000 $12,000
*$3,000 = [$5,000 × (3/5)] or ($5,000 × 60%)
**$2,000 = [$5,000 × (2/5)] or ($5,000 × 40%)

45. Prepare the statement of partnership equity.5
Prepare the statement of partnership equity.
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46. Statement of Partnership Equity5
Statement of Partnership Equity
The change in the owners’ capital accounts for a period of time is reported in a statement of partnership equity.

47. 5
Exhibit 8
Statement of Partnership Equity