1. Copyright © 2007 Prentice-Hall. All rights reserved 1 PartnershipsPartnerships Chapter 12

2. Copyright © 2007 Prentice-Hall. All rights reserved 2 Objective 1 Identify the characteristics of a partnership

3. Copyright © 2007 Prentice-Hall. All rights reserved 3 PartnershipPartnership Association of two or more persons who co-own a business for a profit Combines –Capital –Talent –Experience

4. Copyright © 2007 Prentice-Hall. All rights reserved 4 Partnership Agreement Contract between partners should specify –Name, location, and nature of business –Name, investment, and duties of each partner –How new partners are admitted –How profits and losses are divided up –Withdrawals of assets by the partners –How to settle up with a withdrawing partner –How to liquidate the partnership

5. Copyright © 2007 Prentice-Hall. All rights reserved 5 Characteristics of a Partnership Limited life Mutual agency Unlimited liability Co-ownership of property No partnership income taxes Partners’ capital accounts

6. Copyright © 2007 Prentice-Hall. All rights reserved 6 Types of Partnerships General partnership – basic form Limited partnership – two classes of partners

7. Copyright © 2007 Prentice-Hall. All rights reserved 7 Limited Liability Company Its own form of business organization –Owners are called members –Limited liability –Members can participate in management –Can elect not to pay business income tax

8. Copyright © 2007 Prentice-Hall. All rights reserved 8 S Corporations Corporation taxed as a partnership –Limited liability of owners –No corporate income tax –Stockholders pay personal income tax on their share of income

9. Copyright © 2007 Prentice-Hall. All rights reserved 9 Objective 2 Account for partner investments

10. Copyright © 2007 Prentice-Hall. All rights reserved 10 The Partnership Start-Up Record assets invested by partners at fair market values Record liabilities assumed at fair market values Each partner has his/her own capital and withdrawals account

11. Copyright © 2007 Prentice-Hall. All rights reserved 11 E12-15E12-15 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Cash8,000 Accounts Receivable10,000 Furniture1,000 Building90,000 Note Payable10,000 Accounts Payable3,000 N. Fuentes, Capital96,000

12. Copyright © 2007 Prentice-Hall. All rights reserved 12 Objective 3 Allocate profits and losses to the partners

13. Copyright © 2007 Prentice-Hall. All rights reserved 13 Sharing Profits and Losses Stated fraction for each partner Based on percent of capital balances of the partners Based on each partner’s service Combination

14. Copyright © 2007 Prentice-Hall. All rights reserved 14 Sharing Profits and Losses If no partnership agreement, the law states earnings will be divided equally If agreement specifies how to share profits, but not losses – losses are shared the same way as profits

15. Copyright © 2007 Prentice-Hall. All rights reserved 15 E12-16 a Net loss($90,000) B. Fultz45,000 J. Hardie45,000 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT B. Fultz, Capital45,000 J. Hardie, Capital45,000 Income Summary90,000 When there is no written agreement, partners share profits and losses equally. Remember, a debit to Capital decreases it

16. Copyright © 2007 Prentice-Hall. All rights reserved 16 E12-16 b Net income$60,000 B. Fultz (40,000/120,000) x 60,00020,000 J. Hardie (80,000/120,000) x 60,000 40,000 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Income Summary60,000 B. Fultz, Capital20,000 J. Hardie, Capital40,000

17. Copyright © 2007 Prentice-Hall. All rights reserved 17 E12-16 c Net income to be distributed B. FultzJ. Hardie$100,000 Capital Bal. Service Remainder Total $20,000 $40,00040,000 12,00018,00010,000 5,000 0 $37,000$63,000 Capital Balance – same as part b. Service: Fultz (30,000 x 40%) and Hardie (30,000 x 60%) Remainder: equally

18. Copyright © 2007 Prentice-Hall. All rights reserved 18 E12-16 c GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Income Summary100,000 B. Fultz, Capital37,000 J. Hardie, Capital63,000

19. Copyright © 2007 Prentice-Hall. All rights reserved 19 Partner Drawings Reduces capital Debit Drawing and credit Cash At period end, close drawing to capital

20. Copyright © 2007 Prentice-Hall. All rights reserved 20 Objective 4 Account for the admission of a new partner

21. Copyright © 2007 Prentice-Hall. All rights reserved 21 Purchasing a Partner’s Interest Equity is transferred from retiring partner to new partner –Debit retiring partner’s capital – Credit new partner’s capital Partnership assets are not affected

22. Copyright © 2007 Prentice-Hall. All rights reserved 22 Purchasing A Partner’s Interest E12-19 a G. Rose, Capital$100,000 C. Novak, Capital50,000 Total$150,000 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT C. Novak, Capital50,000 H. Hollis, Capital50,000 Notice, this is an agreement between two individuals. No new assets are acquired by the partnership

23. Copyright © 2007 Prentice-Hall. All rights reserved 23 E12-19 a Balances: G. Rose, Capital$100,000 H. Hollis, Capital50,000 Total$150,000

24. Copyright © 2007 Prentice-Hall. All rights reserved 24 Investing in the Partnership New partner contributes assets to the partnership in exchange for a share of the business

25. Copyright © 2007 Prentice-Hall. All rights reserved 25 Investing in the Partnership at Book Value New partner invests assets equal to his/her interest in the new partnership –Debit assets –Credit new partner’s capital

26. Copyright © 2007 Prentice-Hall. All rights reserved 26 Investing in Partnership at Book Value E12-19 b G. Rose, Capital$100,000 C. Novak, Capital50,000 Total before admitting$150,000 Hollis investment50,000 Total after admitting$200,000 ¼ interest = $50,000

27. Copyright © 2007 Prentice-Hall. All rights reserved 27 E12-19 b GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Cash50,000 H. Hollis, Capital50,000

28. Copyright © 2007 Prentice-Hall. All rights reserved 28 E12-19 b Balances G. Rose, Capital$100,000 C. Novak, Capital50,000 Hollis investment50,000 $200,000

29. Copyright © 2007 Prentice-Hall. All rights reserved 29 Investing in the Partnership - Bonus to the Old Partners New partner invests assets greater than his/her equity in the new partnership Bonus increases old partner’s capital in profit-and-loss sharing ratio –Debit assets –Credit new partner’s capital for his/her share –Credit each old partners’ capital for his/her share of the bonus

30. Copyright © 2007 Prentice-Hall. All rights reserved 30 Investing in Partnership Bonus to Existing Partners E12-19 c. G. Rose, Capital$100,000 C. Novak, Capital50,000 Total before admitting$150,000 Hollis investment90,000 Total after admitting$240,000 ¼ interest = $60,000 Bonus of $30,000 paid to existing partners Hollis contributed $90,000. The credit to her capital account is $60,000. The extra $30,000 is considered a bonus to the existing partners

31. Copyright © 2007 Prentice-Hall. All rights reserved 31 E12-19 c Distribution of bonus: G. Rose, Capital (30,000 x 1/2)$15,000 C. Novak, Capital (30,000 x 1/2)15,000

32. Copyright © 2007 Prentice-Hall. All rights reserved 32 E12-19 c GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Cash90,000 H. Hollis, Capital60,000 G. Rose, Capital15,000 C. Novak, Capital15,000

33. Copyright © 2007 Prentice-Hall. All rights reserved 33 E12-19 c Balances: G. Rose, Capital$115,000 C. Novak, Capital65,000 Hollis investment60,000 $240,000

34. Copyright © 2007 Prentice-Hall. All rights reserved 34 Investing in the Partnership - Bonus to New Partners New partner invests assets less than his/her equity in the new partnership Bonus decreases old partner’s capital in profit-and-loss sharing ratio –Debit assets –Debit each old partners’ capital for his/her share of the bonus to the new partner –Credit new partner’s capital for his/her share

35. Copyright © 2007 Prentice-Hall. All rights reserved 35 Objective 5 Account for a partner’s withdrawal from the firm

36. Copyright © 2007 Prentice-Hall. All rights reserved 36 Withdrawal of a Partner Assets may be revalued Any gain or loss is allocated among the partners based on their profit- and-loss ratios

37. Copyright © 2007 Prentice-Hall. All rights reserved 37 Partner Sells Interest to Existing Partner Transfer equity from the withdrawing partner to the purchaser No assets flows through the partnership Debit withdrawing partner’s capital Credit purchaser’s capital

38. Copyright © 2007 Prentice-Hall. All rights reserved 38 Withdrawal at Book Value Partner takes assets with value equal to his capital account (equal to book value) Debit withdrawing partner’s capital Credit assets taken

39. Copyright © 2007 Prentice-Hall. All rights reserved 39 Withdrawal at Less Than Book Value Remaining partners share the difference (bonus) based on their profit-and loss- sharing ratio. Debit withdrawing partner’s capital Credit assets and remaining partners’ capital

40. Copyright © 2007 Prentice-Hall. All rights reserved 40 Withdrawal at More Than Book Value Bonus to the withdrawing partner reduces the remaining partners’ capital balances based on their profit-and-loss ratio Debit withdrawing partner’s capital Debit remaining partners’ capital Credit assets

41. Copyright © 2007 Prentice-Hall. All rights reserved 41 E12-21E12-21 Distribute gain on land to partners based on profit-loss ratio Sam (32,000 x 4/10)$12,800 Bob (32,000 x 3/10)9,600 Tim (32,000 x 3/10)9,600

42. Copyright © 2007 Prentice-Hall. All rights reserved 42 E12-21E12-21 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT May31Land32,000 Sam, Capital12,800 Bob, Capital9,600 Tim, Capital9,600

43. Copyright © 2007 Prentice-Hall. All rights reserved 43 E12-21E12-21 Distribute loss on inventory to partners based on profit-loss ratio Sam (12,000 x 4/10)$4,800 Bob (12,000 x 3/10)3,600 Tim (12,000 x 3/10)3,600

44. Copyright © 2007 Prentice-Hall. All rights reserved 44 E12-21E12-21 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT May31Sam, Capital4,800 Bob, Capital3,600 Tim, Capital3,600 Inventory12,000

45. Copyright © 2007 Prentice-Hall. All rights reserved 45 E12-21E12-21 Sam, Capital Tim, CapitalBob, Capital 36,00022,00051,000 12,8009,600 44,00057,000 28,000 4,800 3,600 Sam receives a bonus of $16,000 ($60,000 - $44,000)

46. Copyright © 2007 Prentice-Hall. All rights reserved 46 E12-21E12-21 Distribute bonus to withdrawing partner based on profit-loss ratio Bob (16,000 x 3/6)$8,000 Tim (16,000 x 3/6)8,000

47. Copyright © 2007 Prentice-Hall. All rights reserved 47 E12-21E12-21 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT May31Sam, Capital44,000 Bob, Capital8,000 Tim, Capital8,000 Cash60,000

48. Copyright © 2007 Prentice-Hall. All rights reserved 48 Objective 6 Account for the liquidation of a partnership

49. Copyright © 2007 Prentice-Hall. All rights reserved 49 Death of a Partner Dissolves partnership Settlement with the deceased partner’s estate - based on partnership agreement Or, a remaining partner may buy the deceased partner’s equity

50. Copyright © 2007 Prentice-Hall. All rights reserved 50 Liquidation of a Partnership Adjust and close books Sell the noncash assets, allocate gains and losses to the partners based on their profit-and-loss-sharing ratio Pay all the liabilities Distribute the remaining cash based on the partners’ capital balances

51. Copyright © 2007 Prentice-Hall. All rights reserved 51 E12-24E12-24 Cash Noncash Assets Liabilitie s Dodd, Capital Gage, Capital Hamm, Capital $6,000$126,000$77,000$12,000$37,000$6,000 140,000(126,000) GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Cash140,000 Noncash Assets126,000 Gain on Sale of Assets14,000 Sell off the noncash assets

52. Copyright © 2007 Prentice-Hall. All rights reserved 52 E12-24E12-24 Distribute Gain on Sale of Assets: Dodd ($14,000 x 20%)$2,800 Gage ($14,000 x 30%)4,200 Hamm ($14,000 x 50%)7,000 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Gain on Sale of Assets14,000 Dodd, Capital2,800 Gage, Capital4,200 Hamm, Capital7,000 Distribute gain based on profit and loss ratio

53. Copyright © 2007 Prentice-Hall. All rights reserved 53 E12-24E12-24 Cash Noncash Assets Liabilitie s Dodd, Capital Gage, Capital Hamm, Capital $6,000$126,000$77,000$12,000$37,000$6,000 140,000(126,000)2,8004,2007,000 $146,0000$77,000$14,800$41,200$13,000 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Liabilities77,000 Cash77,000 Pay off the liabilities

54. Copyright © 2007 Prentice-Hall. All rights reserved 54 E12-24E12-24 Cash Noncash Assets Liabilitie s Dodd, Capital Gage, Capital Hamm, Capital $6,000$126,000$77,000$12,000$37,000$6,000 140,000(126,000)2,8004,2007,000 $146,0000$77,000$14,800$41,200$13,000 (77,000) $69,00000$14,800$41,200$13,000 $69,000 Distribute the cash to the partners and close out their accounts as well

55. Copyright © 2007 Prentice-Hall. All rights reserved 55 E12-24E12-24 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Dodd, Capital14,800 Gage, Capital41,200 Hamm, Capital13,000 Cash69,000

56. Copyright © 2007 Prentice-Hall. All rights reserved 56 E12-24E12-24 Cash Noncash Assets Liabilitie s Dodd, Capital Gage, Capital Hamm, Capital $6,000$126,000$77,000$12,000$37,000$6,000 140,000(126,000)2,8004,2007,000 $146,0000$77,000$14,800$41,200$13,000 (77,000) $69,00000$14,800$41,200$13,000 (69,000)(14,800)(41,200)(13,000) 000000

57. Copyright © 2007 Prentice-Hall. All rights reserved 57 E12-22E12-22 1. Cash$80,000 Ray, capital$33,000 Scott, capital28,000 Van, capital19,000 80,000 Each partner receives cash equal to his capital balance because cash equals total partnership capital

58. Copyright © 2007 Prentice-Hall. All rights reserved 58 E12-22E12-22 2. Cash$50,000 Ray, capital$33,000 Scott, capital28,000 Van, capital19,00080,000 Loss$30,000 Each partner gets $10,000 ($30,000 / 3) less than his capital balance

59. Copyright © 2007 Prentice-Hall. All rights reserved 59 E12-22E12-22 2. Ray$23,000 Scott18,000 Van9,000 $50,000

60. Copyright © 2007 Prentice-Hall. All rights reserved 60 Objective 7 Prepare partnership financial statements

61. Copyright © 2007 Prentice-Hall. All rights reserved 61 Financial Statements Much like those of a proprietorship Income statement - section showing division of net income to the partners Balance sheet - capital of each partner in owners’ equity section Statement of Owners’ Equity shows changes to each partner’s capital account

62. Copyright © 2007 Prentice-Hall. All rights reserved 62 S12-13S12-13 Bush and Carter Income Statement Year Ended September 30, 2007 Service revenue$145,000 Total expenses 85,000 Net income$60,000 Allocation of net income: To Bush ($60,000 .60) $36,000 To Carter ($60,000 .40) 24,000$60,000

63. Copyright © 2007 Prentice-Hall. All rights reserved 63 End of Chapter 12