Accounting Principles, Ninth Edition

Accounting Principles, Ninth Edition
Chapter 12 Accounting for Partnerships Accounting Principles, Ninth Edition

Study Objectives Identify the characteristics of the partnership form of business organization. Explain the accounting entries for the formation of a partnership. Identify the bases for dividing net income or net loss. Describe the form and content of partnership financial statements. Explain the effects of the entries to record the liquidation of a partnership. 1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements? Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases). Forward-looking Information Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image). Timeliness (no real time financial information)

Accounting for Partnerships
Partnership Form of Organization Basic Partnership Accounting Liquidation of a Partnership Characteristics Organizations with partnership characteristics Advantages / disadvantages Partnership agreement Forming a partnership Dividing net income / loss Financial statements No capital deficiency Capital deficiency Service Cost - Actuaries compute service cost as the present value of the new benefits earned by employees during the year. Future salary levels considered in calculation. Interest on Liability - Interest accrues each year on the PBO just as it does on any discounted debt. Actual Return on Plan Assets - Increase in pension funds from interest, dividends, and realized and unrealized changes in the fair market value of the plan assets. Amortization of Unrecognized Prior Service Cost - The cost of providing retroactive benefits is allocated to pension expense in the future, specifically to the remaining service-years of the affected employees. Gain or Loss - Volatility in pension expense can be caused by sudden and large changes in the market value of plan assets and by changes in the projected benefit obligation. Two items comprise the gain or loss: difference between the actual return and the expected return on plan assets and, amortization of the unrecognized net gain or loss from previous periods

Partnership Form of Organization
A partnership is an association of two or more persons to carry on as co-owners of a business for profit. Type of Business: Small retail, service, or manufacturing companies. Accountants, lawyers, and doctors. SO 1 Identify the characteristics of the partnership form of business organization.

Partnership Form of Organization
Discussion Question Q12-1: The characteristics of a partnership include the following: (a) association of individuals, (b) limited life, and (c) co-ownership of property. Explain each of these terms. See notes page for discussion Question 12-1 (textbook) ( a ) Association of individuals. A partnership is a voluntary association of two or more individuals based on as simple an act as a hand shake. Preferably, however, the agreement should be in writing. A partnership is a legal entity and an accounting entity, but it is not a taxable entity. (b) Limited life. A partnership does not have unlimited life. A partnership may be ended voluntarily or involuntarily. Thus, the life of a partnership is indefinite. Any change in the members of a partnership results in the dissolution of the partnership. (c) Co-ownership of property. Partnership assets are co-owned by all the partners. If the partnership is terminated, the assets do not legally revert to the original contributor. Each partner has a claim on total assets equal to his or her capital balance. This claim does not attach to specific assets the individual partner contributed to the firm. SO 1 Identify the characteristics of the partnership form of business organization.

Characteristics of Partnerships
Association of Individuals Legal entity. Accounting entity. Net income not taxed as a separate entity. Mutual Agency Act of any partner is binding on all other partners, so long as the act appears to be appropriate for the partnership. SO 1 Identify the characteristics of the partnership form of business organization.

Limited Life Dissolution occurs whenever a partner withdraws or a new partner is admitted. Dissolution does not mean the business ends. Unlimited Liability Each partner is personally and individually liable for all partnership liabilities. SO 1 Identify the characteristics of the partnership form of business organization.

Co-ownership of Property Each partner has a claim on total assets. This claim does not attach to specific assets. All net income or net loss is shared equally by the partners, unless otherwise stated in the partnership agreement. SO 1 Identify the characteristics of the partnership form of business organization.

Question All of the following are characteristics of partnerships except: co-ownership of property. mutual agency. limited life. limited liability. SO 1 Identify the characteristics of the partnership form of business organization.

Organizations with Partnership Characteristics
Special forms of business organizations are often used to provide protection from unlimited liability. Special partnership forms are: Limited Partnerships, Limited Liability Partnerships, and Limited Liability Companies. SO 1 Identify the characteristics of the partnership form of business organization.

Regular Partnership Major Advantages Simple and inexpensive to create and operate. Major Disadvantages Owners (partners) personally liable for business debts. SO 1 Identify the characteristics of the partnership form of business organization.

“Ltd.,” or “LP” Major Advantages Limited partners have limited personal liability for business debts as long as they do not participate in management. General partners can raise cash without involving outside investors in management of business. Major Disadvantages General partners personally liable for business debts. More expensive to create than regular partnership. Suitable for companies that invest in real estate. SO 1 Identify the characteristics of the partnership form of business organization.

“LLP” Major Advantages Mostly of interest to partners in old-line professions such as law, medicine, and accounting. Owners (partners) are not personally liable for the malpractice of other partners. Major Disadvantages Unlike a limited liability company, partners remain personally liable for many types of obligations owed to business creditors, lenders, and landlords. Often limited to a short list of professions. SO 1 Identify the characteristics of the partnership form of business organization.

“LLC” Major Advantages Owners have limited personal liability for business debts even if they participate in management. Major Disadvantages More expensive to create than regular partnership. SO 1 Identify the characteristics of the partnership form of business organization.

Partnership Characteristics
Discussion Question Q12-3: Brent Houghton and Dick Kreibach are considering a business venture. They ask you to explain the advantages and disadvantages of the partnership form of organization. See notes page for discussion Question 12-3 (textbook) The advantages of a partnership are: combining skills and resources of two or more individuals, ease of formation, freedom from governmental regulations and restrictions, and ease of decision making. Disadvantages are: mutual agency, limited life, and unlimited liability. SO 1 Identify the characteristics of the partnership form of business organization.

Partnership Characteristics
Question Under which of the following business organization forms do limited partners have little, if any, active role in the management of the business? Limited liability partnership. Limited partnership. Limited liability companies. None of the above. SO 1 Identify the characteristics of the partnership form of business organization.

Partnership Agreement
Should specify relationships among the partners: 1. Names and capital contributions of partners. 2. Rights and duties of partners. 3. Basis for sharing net income or net loss. 4. Provision for withdrawals of assets. 5. Procedures for submitting disputes to arbitration. 6. Procedures for the withdrawal or addition of a partner. 7. Rights and duties of surviving partners in the event of a partner’s death. SO 1 Identify the characteristics of the partnership form of business organization.

Question Forming a Partnership
When a partner invests noncash assets in a partnership, the assets should be recorded at their: book value. carrying value. fair market value. original cost. SO 2 Explain the accounting entries for the formation of a partnership.

Forming a Partnership Illustration: Assume that A. Rolfe and T. Shea combine their proprietorships to start a partnership named U.S. Software. Rolfe and Shea have the following assets prior to the formation of the partnership. Illustration 12-3 SO 2 Explain the accounting entries for the formation of a partnership.

Forming a Partnership Illustration: Prepare the entry to record the investment of A. Rolfe. Cash 8,000 Office equipment 4,000 A. Rolfe, Capital 12,000 Prepare the entry to record the investment of T. Shea. Cash 9,000 Accounts receivable 4,000 Allowance for doubtful accounts 1,000 T. Shea, Capital 12,000 SO 2 Explain the accounting entries for the formation of a partnership.

Dividing Net Income or Net Loss
Partners equally share net income or net loss unless the partnership contract indicates otherwise. Closing Entries: Close all Revenue and Expense accounts to Income Summary. Close Income Summary to each partner’s Capital account for his or her share of net income or loss. Close each partners Drawing account to his or her respective Capital account. SO 3 Identify the bases for dividing net income or net loss.

Income Ratios Partnership agreement should specify the basis for sharing net income or net loss. Typical income ratios: Fixed ratio. Ratio based on capital balances. Salaries to partners and remainder on a fixed ratio. Interest on partners’ capital balances and the remainder on a fixed ratio. Salaries to partners, interest on partners’ capital, and the remainder on a fixed ratio. SO 3 Identify the bases for dividing net income or net loss.

Discussion Question Q12-7: Blue and Grey are discussing how income and losses should be divided in a partnership they plan to form. What factors should be considered in determining the division of net income or net loss? See notes page for discussion Question 12-7 (textbook) Factors to be considered in determining how income and loss should be divided are: a fixed ratio is easy to apply and it may be an equitable basis in some circumstances; capital balance ratios when the funds invested in the partnership are conside3red the most critical factor; and salary allowance and / or interest allowances coupled with a fixed ratio. This last approach gives specific recognition to differences that may exist among partners by providing salary allowances for time worked and interest allowances for capital invested. SO 3 Identify the bases for dividing net income or net loss.

Question Which of the following statements is correct? Salaries to partners and interest on partners' capital are expenses of the partnership. Salaries to partners are an expense of the partnership but not interest on partners' capital. Interest on partners' capital are expenses of the partnership but not salaries to partners. Neither salaries to partners nor interest on partners' capital are expenses of the partnership. SO 3 Identify the bases for dividing net income or net loss.

Illustration: Assume that King and Lee are co-partners in the Kingslee Company. The partnership agreement provides for: (1) salary allowances of $8,400 to King and $6,000 to Lee, (2) interest allowances of 10% on capital balances at the beginning of the year, and (3) the remainder equally. Capital balances on January 1 were King $28,000, and Lee $24,000. In 2010, partnership net income is $22,000. The division of net income is as follows. Instructions (a) Prepare a schedule showing the distribution of net income. (b) Journalize the allocation of net income. SO 3 Identify the bases for dividing net income or net loss.

Illustration: (a) Prepare a schedule showing the distribution of net income. Illustration 12-5 SO 3 Identify the bases for dividing net income or net loss.

Illustration: (b) Journalize the allocation of income. Dec. 31 Income summary 22,000 Sara King, Capital 12,400 Ray Lee, Capital 9,600 SO 3 Identify the bases for dividing net income or net loss.

Illustration: Prepare a schedule showing the distribution of net income assuming net income is only $18,000. Illustration 12-5 SO 3 Identify the bases for dividing net income or net loss.

Partnership Financial Statements
Illustration 12-7 As in a proprietorship, partners’ capital may change due to (1) additional investment, (2) drawing, and (3) net income or net loss. SO 4 Describe the form and content of partnership financial statements.

Partnership Financial Statements
Illustration 12-8 The balance sheet for a partnership is the same as for a proprietorship except for the owner’s equity section. SO 4 Describe the form and content of partnership financial statements.

Liquidation of a Partnership
Question The first step in the liquidation of a partnership is to: allocate gain/loss on realization to the partners. distribute remaining cash to partners. pay partnership liabilities. sell noncash assets and recognize a gain or loss on realization. SO 5 Explain the effects of the entries to record the liquidation of a partnership.

Ends both the legal and economic life of the entity. In liquidation, sale of noncash assets for cash is called realization. To liquidate, it is necessary to: Sell noncash assets for cash and recognize a gain or loss on realization. Allocate gain/loss on realization to the partners based on their income ratios. Pay partnership liabilities in cash. Distribute remaining cash to partners on the basis of their capital balances. SO 5 Explain the effects of the entries to record the liquidation of a partnership.

No Capital Deficiency Liquidation of a Partnership Illustration: Assume that Ace Company is liquidated when its ledger shows the following assets, liabilities, and owners’ equity accounts. Illustration 12-9 SO 5 Explain the effects of the entries to record the liquidation of a partnership.

No Capital Deficiency Liquidation of a Partnership Illustration: Prepare a cash payments schedule. Illustration 12-11 SO 5 Explain the effects of the entries to record the liquidation of a partnership.

No Capital Deficiency Liquidation of a Partnership Illustration: The partners of Ace Company agree to liquidate the partnership on the following terms: The partnership will sell its noncash assets to Jackson Enterprises for $75,000 cash. The partnership will pay its partnership liabilities. The income ratios of the partners are 3 : 2 : 1, respectively. SO 5 Explain the effects of the entries to record the liquidation of a partnership.

No Capital Deficiency Liquidation of a Partnership Illustration: (1) Ace sells the noncash assets (accounts receivable, inventory, and equipment) for $75,000. The book value of these assets is $60,000 ($15,000 + $18,000 + $35,000 - $8,000). Prepare the entry to record the sale of the noncash assets. (1) Cash 75,000 Accumulated depreciation 8,000 Accounts receivable 15,000 Inventory 18,000 Equipment 35,000 Gain on realization 15,000 SO 5 Explain the effects of the entries to record the liquidation of a partnership.

No Capital Deficiency Liquidation of a Partnership Illustration: (2) Prepare the entry to record the allocation of the gain on liquidation to the partners. (2) Gain on realization 15,000 R. Arnet, Capital ($15,000 x 3/6) 7,500 P. Carey, Capital ($15,000 x 2/6) 5,000 W. Eaton, Capital ($15,000 x 1/6) 2,500 SO 5 Explain the effects of the entries to record the liquidation of a partnership.

No Capital Deficiency Liquidation of a Partnership Illustration: (3) Prepare the entry to record the payment in full to the creditors. (3) Notes payable 15,000 Accounts payable 16,000 Cash 31,000 SO 5 Explain the effects of the entries to record the liquidation of a partnership.

No Capital Deficiency Liquidation of a Partnership Illustration: (4) Record the distribution of cash. R. Arnet, Capital 22,500 P. Carey, Capital 22,800 W. Eaton, Capital 3,700 Cash 49,000 SO 5 Explain the effects of the entries to record the liquidation of a partnership.

Question If a partner with a capital deficiency is unable to pay the amount owed to the partnership, the deficiency is allocated to the partners with credit balances: equally. on the basis of their income ratios. on the basis of their capital balances. on the basis of their original investments. SO 5 Explain the effects of the entries to record the liquidation of a partnership.

Capital Deficiency Liquidation of a Partnership Illustration: Assume that Ace Company is on the brink of bankruptcy. They sell merchandise at substantial discounts, and sell the equipment at auction. Cash proceeds from these sales and collections from customers totals $42,000. (1) Prepare the entry for the realization of noncash assets. (1) Cash 42,000 Accumulated depreciation 8,000 Loss on realization 18,000 Accounts receivable 15,000 Inventory 18,000 Equipment 35,000 SO 5 Explain the effects of the entries to record the liquidation of a partnership.

Capital Deficiency Liquidation of a Partnership Illustration: (2) Ace allocates the loss on realization to the partners on the basis of their income ratios. The entry is: (2) R. Arnet, Capital ($18,000 x 3/6) 9,000 P. Carey, Capital ($18,000 x 2/6) 6,000 W. Eaton, Capital ($18,000 x 1/6) 3,000 Gain on realization 18,000 SO 5 Explain the effects of the entries to record the liquidation of a partnership.

Capital Deficiency Liquidation of a Partnership Illustration: (3) Prepare the entry to record the payment in full to the creditors. (3) Notes payable 15,000 Accounts payable 16,000 Cash 31,000 SO 5 Explain the effects of the entries to record the liquidation of a partnership.

Capital Deficiency Liquidation of a Partnership Payment of Deficiency (a) Cash 1,800 W. Eaton, Capital 1,800 R. Arnet, Capital 6,000 P. Carey, Capital 11,800 Cash 17,800 SO 5 Explain the effects of the entries to record the liquidation of a partnership.

Capital Deficiency Liquidation of a Partnership E (b) Nonpayment of Deficiency (b) R. Arnet, Capital 1,080 P. Carey, Capital 720 Farley, Capital 1,800 R. Arnet, Capital 4,920 P. Carey, Capital 11,080 Cash 16,000 SO 5 Explain the effects of the entries to record the liquidation of a partnership.

Admission of a Partner Results in the legal dissolution of the existing partnership and the beginning of a new one. New partner may be admitted either by purchasing the interest of one or more existing partners or investing assets in the partnership. SO 6 Explain the effects of the entries when a new partner is admitted.

Purchase of a Partner’s Interest
APPENDIX Illustration: Assume that L. Carson agrees to pay $10,000 each to C. Ames and D. Barker for 33 1/3% of their interest in the Ames-Barker partnership. At the time of admission of Carson, each partner has a $30,000 capital balance. Both partners, therefore, give up $10,000 of their capital equity. The entry to record the admission of Carson is: C. Ames, Capital ,000 D. Barker, Capital ,000 L. Carson, Capital ,000 The cash paid by Carson goes directly to the individual partners and not to the partnership. Net assets remain unchanged. SO 6 Explain the effects of the entries when a new partner is admitted.

Investment of Assets in a Partnership
Illustration: Assume that L. Carson agrees to invest $30,000 in cash in the Ames-barker partnership for a 33 1/3% capital interest. At the time of admission of Carson, each partner has a $30,000 capital balance. The entry to record the admission of Carson is: Cash ,000 L. Carson, Capital ,000 Note that both net assets and total capital have increased by $30,000. SO 6 Explain the effects of the entries when a new partner is admitted.

Withdrawal of a Partner
APPENDIX A partner may withdraw from a partnership voluntarily, by selling his or her equity in the firm. Or, he or she may withdraw involuntarily, by reaching mandatory retirement age or by dying. The withdrawal of a partner, like the admission of a partner, legally dissolves the partnership. SO 7 Describe the effects of the entries when a partner withdraws from the firm.

Withdrawal of a Partner
APPENDIX 3. Death of a Partner SO 7 Describe the effects of the entries when a partner withdraws from the firm.

Payment From Partners’ Personal Assets
Illustration: Assume that partners Morz, Nead, and Odom have capital balances of $25,000, $15,000, and $10,000, respectively. Morz and Nead agree to buy out Odom’s interest. Each of them agrees to pay Odom $8,000 in exchange for one-half of Odom’s total interest of $10,000. The entry to record the withdrawal is: Odom, Capital ,000 Morz, Capital ,000 Nead, Capital ,000 Note, net assets and total capital remain the same at $50,000. The $16,000 paid to Odom by the remaining partners isn’t recorded by the partnership. SO 7 Describe the effects of the entries when a partner withdraws from the firm.

Payment From Partnership Assets
APPENDIX Illustration: Assume that the following capital balances exist in the RST partnership: Roman $50,000, Sand $30,000, and Terk $20,000. The partners share income in the ratio of 3:2:1, respectively. Terk retires from the partnership and receives a cash payment of $25,000 from the firm. Note: A bonus is paid to the retiring partner since the cash paid to the retiring partner is more than his/her capital balance ($25,000 – $20,000 = $5,000). SO 7 Describe the effects of the entries when a partner withdraws from the firm.

Payment From Partnership Assets
APPENDIX Illustration: Assume that the following capital balances exist in the RST partnership: Roman $50,000, Sand $30,000, and Terk $20,000. The partners share income in the ratio of 3:2:1, respectively. Terk retires from the partnership and receives a cash payment of $25,000 from the firm. Journal entry to record the withdrawal of Terk: Terk, Capital ,000 Roman, Capital ,000 Sand, Capital ,000 Cash ,000 SO 7 Describe the effects of the entries when a partner withdraws from the firm.

Copyright “Copyright © 2009 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.”

Accounting Principles, Ninth Edition

Similar presentations

Presentation on theme: "Accounting Principles, Ninth Edition"— Presentation transcript:

Similar presentations

About project

Feedback

Log in

Auth with social network:

Accounting Principles, Ninth Edition

Similar presentations

Presentation on theme: "Accounting Principles, Ninth Edition"— Presentation transcript:

Similar presentations

About project

Feedback