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

2. Characteristics of Partnerships SO 1 Identify the characteristics of the partnership form of business organization. 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.

3. Characteristics of Partnerships 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.

4. SO 1 Identify the characteristics of the partnership form of business organization. Special forms of business organizations are often used to provide protection from unlimited liability. Special partnership forms are: 1. Limited Partnerships, 2. Limited Liability Partnerships, and 3. Limited Liability Companies. Organizations with Partnership Characteristics

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

6. SO 1 Identify the characteristics of the partnership form of business organization. Organizations with Partnership Characteristics 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. “Ltd.,” or “LP”

7. SO 1 Identify the characteristics of the partnership form of business organization. Organizations with Partnership Characteristics 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. “LLP”

8. SO 1 Identify the characteristics of the partnership form of business organization. Organizations with Partnership Characteristics 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. “LLC”

9. 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. Partnership Agreement SO 1 Identify the characteristics of the partnership form of business organization.

10. 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. Forming a Partnership SO 2 Explain the accounting entries for the formation of a partnership. Illustration 12-3

11. Illustration: Prepare the entry to record the investment of A. Rolfe. Office equipment4,000 Cash8,000 Prepare the entry to record the investment of T. Shea. Forming a Partnership SO 2 Explain the accounting entries for the formation of a partnership. A. Rolfe, Capital12,000 Accounts receivable4,000 Cash9,000 Allowance for doubtful accounts1,000 T. Shea, Capital12,000

12. Partners equally share net income or net loss unless the partnership contract indicates otherwise. Dividing Net Income or Net Loss 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.

13. Income Ratios Dividing Net Income or Net Loss SO 3 Identify the bases for dividing net income or net loss. 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.

14. Division of Net Income $57,000 Partner 1Partner 2Total Salary15,00012,00027,000 Remaining $30,000 Partner # 1 60%18,000 Partner #2 40%12,000 Total Income Dist30,000 Total Division of Income 33,00024,00057,000

15. Closing Entry Income Summary 57,000 Partner #1 Capital33,000 Partner #2 Capital24,000

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

17. Partnership Financial Statements Partners Capital Statement Partner 1Partner 2Total Capital, Beg28,00024,00052,000 Add Invest 2,000 Add Net Income 12,400 9,600 22,000 Less Draw(Salaries) (7,000) (5,000) (12,000) Capital End35,40028,60064,000

18. Establishing a Partnership Jennifer DeVine and Stanley Farrin decide to organize the ALL-Star partnership. DeVine invests $15,000 cash and Farrin contributes $10,000 cash and equipment that has a book value of $3,500. Prepare the entry to establish a partnership. The equipment has a market value of $5,000.

19. Sharing the Income/Loss Gist-Bradley Bond Co. reports net income of $70,000. The income ratios are Gist 60% and Bradley 40%. Prepare an entry to distribute net income. BE 12-1, BE 12-2, BE 12-4, BE 12-5, DO IT 12-1, 12-2

20. Liquidating a Partnership Sell all the assets. Pay all liabilities Distribute any remaining assets Read 538-539

21. Liquidating a Partnership BE 12-6, E 12-8, E12-9

22. Assignments E 12-2 Book Page 557 (Example Page 533) E 12- 4 Book Page 557 (Example Page 536) E 12- 8 Book Page 558 (Example Page 541)