1. Accounting for Partnerships and Limited Liability Companies
Chapter 12
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2. Learning Objective 1
Describe the characteristics of proprietorships, partnerships, and limited liability companies.

3. A proprietorship is a company owned by a single individual.
LO 1
Proprietorships
A proprietorship is a company owned by a single individual.
Characteristics of proprietorships include the following:
Simple to form
No limitation on legal liability
Not taxable
Limited life
Limited ability to raise capital (funds)

4. No limitation on legal liability Not taxable Limited life
LO 1
Partnerships
A partnership is an association of two or more persons who own and manage a business for profit. Characteristics of a partnership include the following:
No limitation on legal liability
Not taxable
Limited life
Limited ability to raise capital (funds)

5. The remaining partners are considered limited partners.
LO 1
Partnerships
A limited partnership is a unique legal form that provides partners who are not involved in the operations of the partnership with limited liability.
There must be at least one general partner who operates the partnership.
The remaining partners are considered limited partners.

6. Limited Liability Companies
LO 1
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. Characteristics include:
Moderately complex to form
Limited legal liability
Not taxable
Unlimited life
Moderate ability to raise capital (funds)

7. Learning Objectives
Describe the characteristics of proprietorships, partnerships, and limited liability companies.
Describe and illustrate the accounting for forming a partnership and for dividing the net income and net loss of a partnership.

8. LO 2
Forming a Partnership
Joseph Stevens and Earl Foster, owners of competing hardware stores, agree to combine their businesses in a partnership. Stevens agrees to contribute the following:

9. The noncash assets are normally recorded at current market value.
LO 2
Forming a Partnership
The entry to record the assets and liabilities contributed by Stevens is as follows:
The noncash assets are normally recorded at current market value.

10. If a limited liability company is formed, the following entry is made:
Forming a Partnership
If a limited liability company is formed, the following entry is made:

11. Dividing Income—Services of Partners
LO 2
Dividing Income—Services of Partners
The partnership agreement of Jennifer Stone and Crystal Mills provides for Stone to receive a monthly salary allowance of $5,000 ($60,000 annually) and Mills to receive $4,000 a month ($48,000 annually). If there is any remaining net income, it is to be divided equally.
Income and losses of the partnership would have been divided equally if no partnership agreement existed or if the partnership agreement did not specify how the division was to occur.

12. LO 2
Dividing Income—Services of Partners
The firm had net income of $150,000 for the year. Stone shared the net income as calculated below.
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

13. Interest of 12% on each partner’s capital balance as of January 1
LO 2
Dividing Income—Services of Partners and Investments
The partnership agreement for Stone and Mills divides income as follows:
Partner salary allowances: $5,000 monthly for Stone and $4,000 monthly for Mills
Interest of 12% on each partner’s capital balance as of January 1
Any remaining income divided equally

14. LO 2
Dividing Income—Services of Partners and Investments
Remaining income 4, , ,400
Net income $83,400 $66,600 $150,000
J. Stone C. Mills Total
Salary allowance $60,000 $48,000 $108,000
Interest allowance 19,200
14,400
33,600

15. LO 2
Dividing Income—Allowances Exceed Net Income
Assume the same salary and interest allowances as in the preceding example, but that the net income is only $100,000. In this case, the total of the allowances exceeds the net income by $41,600 ($100,000 - $141,600).

16. The division of the partnership net income is determined as follows:
Dividing Income—Allowances Exceed Net Income
The division of the partnership net income is determined as follows:
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 allowances over income 20, , ,600
Net income $58,400 $41,600 $100,000

17. LO 2
Dividing Income—Allowances Exceed Net Income

18. Learning Objective 3
Describe the characteristics of proprietorships, partnerships, and limited liability companies.
Describe and illustrate the accounting for forming a partnership and for dividing the net income and net loss of a partnership.
Describe and illustrate the accounting for partner admission and withdrawal.

19. A person may be admitted to a partnership by either of the following:
Admitting a Partner
A person may be admitted to a partnership by either of the following:
Purchasing an interest from one or more of the existing partners
Contributing assets to the partnership

20. Purchasing an Interest from Existing Partners
LO 3
Purchasing an Interest from Existing Partners
On June 1, Tom Andrews and Nathan Bell each sell one-fifth of their partnership equity of Bring It Consulting to Joe Canter for $10,000 in cash. On June 1, the partnership has net assets of $100,000, and both existing partners have capital balances of $50,000 each.

21. LO 3
Purchasing an Interest from Existing Partners
The only entry required in the partnership accounts is as follows:
For a limited liability company, the following entry is required:

22. Contributing Assets to a Partnership
LO 3
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.

23. Contributing Assets to a Partnership
LO 3
Contributing Assets to a Partnership
The entry to record this transaction is as follows:
For a limited liability company, the following entry is required:

24. LO 3
Revaluation of Assets
If the partnership’s asset accounts do not reflect approximate current market values when a new partner is admitted, the accounts should be adjusted (increased or decreased) before the new partner is admitted.
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.

25. Revaluation of Assets LO 3
The entry to record this transaction is as follows:
For a limited liability company, the following entry is required:

26. LO 3
Partner Bonuses
Jenkins and Kramer have capital balances of $20,000 and $24,000, respectively. They agree to admit Diaz to the partnership 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. Diaz is paying Jenkins and Kramer a $6,000 bonus to join the partnership.

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

28. Withdrawal of a Partner
If the existing partners purchase the withdrawing partner’s interest, the purchase and sale of the partnership interest is between the partners as individuals. The only entry is:
To debit the capital account of the partner withdrawing, and
To credit the capital account of the partner or partners buying the additional interest.

29. Withdrawal or Death of a Partner
If the partnership purchases the withdrawing partner’s interest, the assets and the owners’ equity of the partnership are reduced by the purchase price.
When a partner dies, the partnership accounts should be closed as of the date of death. The net income for the current period should then be determined and divided among the partners’ capital accounts.

30. Learning Objectives
Describe the characteristics of proprietorships, partnerships, and limited liability companies.
Describe and illustrate the accounting for forming a partnership and for dividing the net income and net loss of a partnership.
Describe and illustrate the accounting for partner admission and withdrawal.
Describe and illustrate the accounting for liquidating a partnership.

31. Liquidating Partnerships
LO 4
Liquidating Partnerships
When a partnership goes out of business, the winding-up process is called the liquidation of the partnership.
Although liquidation refers to the payment of liabilities, it includes the entire winding-up process.
When the partnership goes out of business and the normal operations are discontinued, the accounts should be adjusted and closed.

32. Liquidating Partnerships
LO 4
Liquidating Partnerships
Farley, Green, and Hall decide to liquidate their partnership. On April 9, after discontinuing business operations and closing the accounts, the following trial balance is prepared:

33. LO 4
Gain on Realization
Farley, Green, and Hall share income and losses in a ratio of 5:3:2 (50%, 30%, 20%).
All noncash assets are sold in a single transaction for $72,000, resulting in a gain of $8,000. Partner capital accounts are credited $4,000, $2,400, and $1,600 to Farley, Green, and Hall, respectively.
Creditors are paid $9,000, and the remaining cash of $74,000 is distributed to the partners.
A statement of partnership liquidation summarizes the liquidation process.

34. LO 4
Gain on Realization
Sale of Assets (Step 1)

35. Division of Gain (Step 2)
LO 4
Gain on Realization
Division of Gain (Step 2)

36. Payment of Liabilities (Step 3)
LO 4
Gain on Realization
Payment of Liabilities (Step 3)

37. Distribution of Cash to Partners (Step 4)
LO 4
Gain on Realization
Distribution of Cash to Partners (Step 4)

38. LO 4
Loss on Realization
Farley, Green, and Hall sell all noncash assets for $44,000. A loss of $20,000 ($64,000 – $44,000) is realized. The loss is distributed to Farley, Green, and Hall in the income-sharing ratio of 5:3:2.

39. LO 4
Loss on Realization
Sale of Assets (Step 1)

40. Division of Loss (Step 2)
Liquidating Partnerships
Division of Loss (Step 2)

41. Payment of Liabilities (Step 3)
LO 4
Liquidating Partnerships
Payment of Liabilities (Step 3)

42. Distribution of Cash to Partners (Step 4)
LO 4
Liquidating Partnerships
Distribution of Cash to Partners (Step 4)

43. Loss on Realization—Capital Deficiency
The share of a loss on realization may be greater than the balance in a partner’s capital account. The resulting debit balance in the capital account is called a 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.

44. LO 4
Loss on Realization—Capital Deficiency
Sale of Assets (Step 1)

45. Division of Loss (Step 2)
Loss on Realization—Capital Deficiency
Division of Loss (Step 2)

46. Payment of Liabilities (Step 3)
LO 4
Loss on Realization—Capital Deficiency
Payment of Liabilities (Step 3)

47. Receipt of Deficiency (Step 4)
LO 4
Liquidating Partnerships
Receipt of Deficiency (Step 4)

48. Distribution of Cash to Partners (Step 4)
LO 4
Liquidating Partnerships
Distribution of Cash to Partners (Step 4)

49. Learning Objective 5
Describe the characteristics of proprietorships, partnerships, and limited liability companies.
Describe and illustrate the accounting for forming a partnership and for dividing the net income and net loss of a partnership.
Describe and illustrate the accounting for partner admission and withdrawal.
Describe and illustrate the accounting for liquidating a partnership.
Prepare the statement of partnership equity.

50. Statement of Partnership Equity
LO 5
Statement of Partnership Equity
The changes in the partners’ capital accounts for a period of time are reported in a statement of partnership equity.
The statement of members’ equity for an LLC is similar to that of a partnership. It reports the changes in member equity for a period.

51. Learning Objectives
Describe the characteristics of proprietorships, partnerships, and limited liability companies.
Describe and illustrate the accounting for forming a partnership and for dividing the net income and net loss of a partnership.
Describe and illustrate the accounting for partner admission and withdrawal.
Describe and illustrate the accounting for liquidating a partnership.
Prepare the statement of partnership equity.
Analyze and interpret employee efficiency.

52. LO 6
Revenue per Employee
Revenue per employee is a measure of the efficiency of the business in generating revenues.
Revenue per Employee =
Revenue
Number of Employees

53. Revenue per Employee LO 6 2013 2012 = =
Revenues $220,000,000 $180,000,000
Number of employees 1,600 1,500
Revenue per employee, 2013 =
$220,000,000
1,600
= $137,500
Revenue per employee, 2012 =
$180,000,000
1,500
= $120,000

54. Accounting for Partnerships and Limited Liability Companies
The End