1. CHAPTERS 12
Partnerships

2. Agenda Learning goals Vocabulary Characteristics of a partnership
Types of partnerships
What is partnership agreement
Accounting for partnership

3. Learning Goals
Describe the characteristics of the partnership form of business organization
Account for partnership transactions and allocate income
Prepare partnership financial statements
Prepare the entries to record the admission of a partner
Prepare the entries to record the withdrawal of a partner
Prepare the entries to record the liquidation of a partnership

4. Vocabulary Admission by investment Partnership agreement
Admission by purchase of an interest
Partnership dissolution
Partnership liquidation
Capital deficiency
Realization
Income ratio
Statement of partners’ capital
Limited liability partnership (LLP)
Withdrawal by payment from partners’ personal assets
Limited partnership (LP)
No capital deficiency
Withdrawal by payment from partnership assets.
Partnership

5. Characteristics of Partnerships
Association of individuals
Legal entity, usually based on a written agreement
Co-ownership of property
Division of income determined by partners
Limited life
Partnership dissolution: whoever a partner withdraws or a new partner is admitted, which means the partnership ends.
New partnership can be formed to continue business
Mutual agency
Each partner acts for (binds) the partnership
Unlimited liability of each partner for all liabilities

6. PARTNERSHIPS TYPES General Limited
All partners participate to some extent in the day-to-day management of the business.
All partners have unlimited liability
Limited
At least one general partner who controls the company's day-to-day operations and is personally liable for business debts,
Other partners called limited partners. Limited partners contribute capital to the business (investment money) but have minimal control over daily business decisions or operations.

7. PARTNERSHIPS TYPES Limited Liability Partnership
Common for lawyers, doctors and professional accountants
Means that each partner is only responsible for his or her own actions and decision the other partners can not be held financially accountable.

8. PARTNERSHIPS Pros Cons
Combining skills and resources of two or more people
Limited life
Ease of formation
Unlimited liability (in a general partnership)
Freedom from government restrictions and regulations
Mutual Agency
Ease of decision making 9

9. Partnership Agreement
Written contract between two or more parties to form a partnership
Contains basic information:
Name and location of firm
Purpose of the business
Date of inception
Specifies relationship of partners:
Names and capital contributions of partners
Rights and duties of partners
Basis for sharing net income or loss
Procedures to admission, withdrawal, death of partner, resolving disputes, liquidation of partnership

10. FORMING A PARTNERSHIP Values assigned must be agreed to by all.
A partner’s initial investment should be recorded at the FAIR MARKET VALUE (not book value) of the assets at the date of their transfer to the partnership.
Values assigned must be agreed to by all.
See page 617 for an example
Upon the formation of a partnership, this personal computer should be recorded at its FMV of $350 instead of current book value of $1,800. 11

11. Partnership Accounting
Partner’s initial investment is recorded at fair market value of assets contributed
After partnership formed, accounting for transactions is similar to other types of business organizations
Partnership net income/loss is shared equally
Unless partnership agreement indicates otherwise
Called the income ratio or profit and loss ratio
Partners’ share of net income or loss is recognized through closing entries

12. Partnership Accounting: Closing Entries
Four closing entries for partnership:
Close revenue accounts to income summary
Dr. Sale Revenue
Cr. Income Summary
Close expense accounts to income summary
Dr. Income Summary
Cr. Operating Expenses

13. Close income summary to partners’ capital accounts
If net income: Dr. Income summary (= total net income) Cr. Each partner’s capital account (= their share)
If net loss: Dr. Each partner’s capital account (= their share of loss) Cr. Income summary (= total net loss)
Close each partner’s drawings account to their respective capital accounts
Dr. Each partner’s capital account
Cr. Each partner’s drawing accounts

14. PARTNERSHIPS Closing Entries
At year end, a company would make the following entries
Date
Particulars
Debit
Credit
All Revenues ,000
Step 1
Income Summary ,000
Step 2
Income Summary ,000
All Expenses ,000
Income Summary ,000
Sara, Capital ,400
Step 3
Ray, Capital ,600
(as determined by the income ratio)
Sara, Capital ,000
Sara, Drawings ,000
Step 4
Ray, Capital ,000
Ray, Drawings ,000

15. Partnership Accounting: Income Ratios
Typical ratios used to share income or loss:
Fixed ratio: a proportion (2:1), percentage (67%) or fraction (2/3)
Capital balances at beginning or end of year or on average capital balances during the year
Salaries to partners and the remainder in a fixed ratio
Interest on partners’ capital balances, remainder in a fixed ratio
Salaries to partners, interest on partners’ capital balances, remainder in a fixed ratio
Salaries and interest are allocated first even if greater than net income or partnership incurred a loss for the year

16. Salaries, Interest, and Remainder in Fixed Ratio Examples
Sara King and Ray Lee are partners in the Kingslee Company. The partnership agreement specifies (1) Salary allowance of $8,400 for King and $6,000 for Lee (2) interest allowance of 5% on capital balances at the beginning of the year (3) the remainder to be distributed equally.

18. To record distribution of income or loss
To distribute net income: Income Summary 22,000 S. King, Capital 12,300 R. Lee, Capital 9,700 To distribute net loss: S. King, Capital 7,700 R. Lee, Capital 10,300 Income Summary 18,000

19. Practice questions
BE12-17
E12-13

20. Agenda
Financial Statement for Partnership
Adding new partner

21. Partnership Financial Statement
The financial statement of a partnership are similar to those of a proprietorship
Income statement for a partnership is identical to the income statement for a proprietorship. The division of the partnership net income or loss is often disclosed as a separate schedule called statement of partners’ capital

24. ADMISSION OF A PARTNER
The admission of a new partner results in the legal dissolution of the existing partnership and the beginning of a new one.
A new partner may be admitted either by:
Buying out an existing partner interest (admission by purchase of an interest), or
Investing assets in the partnership (admission by investment).

25. PROCEDURES IN ADDING PARTNERS
Admission of Partner through:
Partnership Assets
1. Buying out an existing partners interests
This is a personal transaction between an existing partner and the new partner.
Any money exchanged is the personal property of the participants and not the property of the partnership.

26. PROCEDURES IN ADDING PARTNERS
July 1, L. Carson agrees to pay $8,000 each to two partners, D. Arbour and D. Baker, for one-third of their interest in the ABC partnership. Tt the time of Carson’s admission, each partner has a $30,000 capital balance. Both partners therefore, give up $10,000 (1/3*30,000) of their capital. July 1 D.Arbour, Capital 10,000 D. Baker, Capital 10,000 L. Carson, Capital 20,000

27. PROCEDURES IN ADDING PARTNERS
2. Investment of Assets in Partnership
Hello
Partnership Assets
When a partner is admitted by investment, both total net assets and total partnership capital change.
When a new partner’s investment differs from the business equity acquired by him, the difference is a bonus to either
the new partner or
the old partners

28. Admission by investment
Carson invests $30,000 in cash in the ABC partnership for 1/3 capital interest. Since currently each partner hold 30,000 capital in the partnership this is an easy transaction July 1 Cash 30,000 L. Carson, Capital 30,000

29. Admission by investment is complicated when the new partner’s investment is not the same as the capital equity acquired.
When those amounts are not the same, the difference is considered a bonus either to:
The existing partners
The new partner

30. Bonus to Old Partners
Bart-Simpson partnership, owned by Sam Bart and Hal Simpson, has a total capital of $120,000. Bart has a capital balance of $72,000; Simpson has a capital balance of $48,000. Lisa Trent acquired 25% ownership interest in the partnership by making a cash investment of $80,000 on November 1. The procedure for determining Trent’s capital credit and the bonus to the old partners is a s follows: Total capital of existing partnership $120,000 Investment by new partner, Trent 80,000 Total capital of new partnership $200,000 New partner’s credit (200,000*25%) 50,000 Amount of bonus to old partners 30,000 (80,000-30,000)

31. Bonus to Old Partners
Allocate the bonus to the old partners based on their income ratio: To Bart (30,000*60%) 18,000 To Simpson (30,000*40%) 12,000 The entry to record the admission of Trent on November 1 Cash 80,000 S. Bart, Capital 18,000 H. Simpson, Capital 12,000 L. Trent, Capital 50,000

32. Bonus to New Partner
Assume Lisa Trent invests $20,000 in cash for a 25% ownership interest in Bart-Simpson partnership on November 1. New capital of the new partnership: Total capital of existing partnership $120,000 Investment by new partner, Trent 20,000 Total capital of new partnership $140,000 New partner’s credit (140,000*25%) 35,000 Amount of bonus (20, ) 15,000

33. Bonus to New Partner
Nov. 1 Cash 20,000 S. Bart, capital 9,000 H. Simpson, Capital 6,000 L. Trent, Capital 35,000

34. Practice Questions
BE 128-10
E12-46

35. Agenda
Calculating and accounting for withdrawing a partner

36. Withdrawal of a Partner
Partnership Withdrawal
Payment from Partners’ assets
Payment from partnership assets

37. Payment from Partners’ Personal Assets
The withdraw of a partner when payment made form partners’ personal assets
Is the direct opposite of admitting a new partner who purchases a partner’s interest
Is a personal transaction between he partners

38. Payment from Partners’ Personal Assets
Javad Dargahi, dong Kim and Robert Viau have capital balance of $25,000, $15,000, $10,000. The partnership equity totals $50,000. Dargahi and Him agree to buy out Vianu’s interest. Each agree to pay Viau $8,000 in exchange for ½ of Viau’s total interest of $10,000 on February 1. Feb. 1 Viau, Capital 10,000 J. Dargahi, Capital 5,000 D. Kim, Capital 5,000

39. Payment from Partnership Assets
Transaction that involves partnership.
Both partnership net assets and total capital are decreased.
This is the reverse of admitting a partner through the investment of assets in partnership.
Following the same example from payment from partners. But assume that they offered his exact position $10,000
Feb 1. R. Viau, Captial ,000
Cash 10,000

40. Payment from Partnership Assets
When a payment is made from partners` personal assets, the total net assets and the total capital of the partnership DO NOT CHANGE
In contrast when payment is made from the partnership assets, both the total net assets and the total capital decrease.

41. Payment from Partnership Assets
In our example we assumed that the payment for a partner`s withdrawal paid from partnership was = to his holding in the partnership. This is very rare.
When the difference between the amount paid and the withdrawing partner`s capital balance is considered a bonus either:
To the departing partner
To remaining partner

42. Bonus to Departing Partner
A bonus may be paid to a departing partner in any of these situation:
The fair market value of partnership assets is more than their net book value
There is unrecorded goodwill resulting from the partnership`s superior earnings record
The remaining partners are anxious to remove the partner from the firm.

43. Bonus to Departing Partner
RST partnership: Fred Roman, $50,000; Dee Sand, $30,000; and Betty Terk, $20,000. The partners share income in the ratio of 3:2:1. Terk retires from the partnership on March 1 and receives a cash payment of $25,000 from the firm.
Determine the amount of the bonus ($25,000-20,000) ,000
Allocate payment from the bonus to the remaining partners based on their income ratios:
From Roman ($5,000* 3é5) $3,000
From and ($5,000 * 2é5) $2,000

44. Bonus to Departing Partner
Mar. 1 B. Terk, Capital 20,000 F. Roman, Capital 3,000 D. Sand, Capital 2,000 Cash 25,000

45. Bonus to Remaining Partners
The departing partner may give a bonus to the remaining partners in the following situations:
Recorded assets are overvalued
The partnership has a poor earning record
The partner is anxious to leave the partnership

46. Bonus to Remaining Partners
Same example only this time assume that Terk paid 16,000 for her $20,000 equity when she withdraws from the partnership on March 1.
Determine the amount of bonus: (16,000-20,000) $4,000
Allocate the payment of the bonus to the remaining partners based on their income ratio
To Roman ($4,000*3/5) $2,400
To Sand ($4,000*2/5) $1,600

47. Bonus to Remaining Partners
Mar. 1 B. Terk, Captial 20,000
F.Roman, Captial 2,400
D.Sand, Captial 1,600
Cash 16,000

48. Death of a Partner
Usually states in the partnership agreement what the remaining partners can do.
Equity of the partner needs to be calculated by:
Calculating the net income or loss
Closing the books
Preparing the financial statement.
Can be recorded is either:
Payment from the partner’s personal assets
Payment from the partnership assets.

49. Practice Questions
BE 12-11, 12
E12-7, 8
P 12-9A