1. FA3 Cameron Morrill I. H. Asper School of Business University of Manitoba

2. The instructor Cameron Morrill, Ph. D. Tel.: (204) 474-8435 Fax:(204) 474-7545 E-mail: Cameron_Morrill@UManitoba.CA Office hours: Mondays, 9:00 AM – 11:45 AM

3. Lesson 1. Partnership accounting 0.Study group contact sheet 1.Nature of a partnership 2.Partnership contribution and profit distribution 3.Financial statement preparation 4.Admission of a new partner 5.Retirement of a partner 6.Liquidation of a partnership

4. 1. Nature of a partnership Governed by provincial partnership acts Limited life Mutual agency Unlimited liability Not taxed as separate entities

5. 2. Partnership contribution and profit distribution Partners contribute cash or other assets (valued at fair market value at time of contribution) to the partnership Profit is distributed to partners in accordance with the partnership agreement (no agreement = equal shares), which can include provisions for interest payments and salaries to partners, as well as a profit and loss ratio Hilton: Problem 1

6. 3. Financial statement preparation Include a balance sheet, income statement and cash flow statement UNIQUE TO PARTNERSHIPS Balance sheet: Owners’ equity contains separate account for each partner’s capital (contribution plus retained earnings) Statement of partners’ capitals Hilton: Interest and salaries paid to partners should not be included in income statement Hilton, Problem 4

7. 4. Admission of a new partner 1.New partner purchases all or part of the interest(s) of existing partner(s); no new assets to the partnership A.Transfer portion of existing book value to new partner (most common in practice) B.Recognize goodwill based on price paid, and transfer revised book value Hilton, problem 7 (proposal B)

8. 4. Admission of a new partner 2.New partner invests in the business by contributing cash or other assets (firm assets increase) A.New partner given proportionate interest in book value; assets invested above BV “bonused” the existing partners (most common in practice) B.Asset revaluation based on new investment, with any loss or gain divided among existing partners Hilton, problem 7 (proposal A)

9. 5. Retirement of a partner Assume partner’s interest is bought out by the partnership. Bonus method. Difference between BV of old partner’s capital account and payment received “bonused” to/from remaining partners. Asset revaluation based on payment, with any loss or gain divided among all partners Hilton, problem 6 (part A)

10. 6. Liquidation of a partnership 1.Realization of assets (conversion to cash) 2.Allocation of gains and losses to partners according to profit-and-loss-sharing ratio 3.Payment to creditors 4.Payment of loans from partners 5.Distribution of remaining assets to partners Hilton, problem 10