1. 11-112-1 Accounting Principles Using Excel for Success PowerPoint Presentation by: Douglas Cloud, Professor Emeritus Accounting, Pepperdine University © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. Accounting for Partnerships and Limited Liability Companies 12 Student Version

2. 11-212-2 Describe the characteristics of proprietorships, partnerships, and limited liability companies. 1 12-2

3. 11-312-3 A proprietorship is a company owned by a single individual. Proprietorship Lawyers Architects Realtors Physicians 1

4. 11-412-4 Characteristics of a Proprietorship 1.Simple to form 2.No limitation on legal liability 3.Not taxable 4.Limited life 5.Limited ability to raise capital (funds) 1

5. 11-512-5 A partnership is an association of two or more individuals who own and manage a company for profit. Partnership Less widely used than proprietorships. 1

6. 11-612-6 Characteristics of a Partnership 1.Moderate to form 2.No limitation on legal liability 3.Not taxable 4.Limited life 5.Limited ability to raise capital (funds) (continued) 1

7. 11-712-7 Characteristics of a Partnership (continued) 6.Co-ownership of partnership property 7.Mutual agency 8.Participation in income 1

8. 11-812-8 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. 1

9. 11-912-9 Characteristics of a Limited Liability Partnership 1.Moderate to form 2.Limited legal liability 3.Not taxable 4.Unlimited life 5.Moderate ability to raise capital (funds) 1

10. 11-1012-10 Describe and illustrate the accounting for forming a partnership and for dividing the net income and net loss of a partnership. 2 12-10

11. 11-1112-11 Forming a Partnership Joseph Stevens and Earl Foster agree to combine their hardware businesses in a partnership. Each is to contribute certain amounts of cash and other assets. They also agree that the partnership is to assume the liabilities of the separate businesses. 2

12. 11-1212-12 The entry to record the assets and liabilities contributed by Stevens is as follows: 2

13. 11-1312-13 The partnership agreement of Jennifer Stone and Crystal Mills provides for Stone to receive a monthly allowance of $5,000 ($60,000 annually) and Mills is to receive $4,000 a month ($48,000 annually). If there is any remaining net income, it is to be divided equally. The firm had a net income of $150,000 for the year. Dividing Income— Services of Partners 2

14. 11-1412-14 Division of Net Income 2 J. Stone C. Mills Total Annual salary allowance$60,000$48,000$108,000 Remaining income21,00021,00042,000 Division of net income$81,000$69,000$150,000

15. 11-1512-15 Dividing Income—Services of Partners and Investments The partnership agreement for Stone and Mills divides income as follows: 1.Monthly salary allowance of $5,000 for Stone and $4,000 for Mills. 2.Interest of 12% on each partner’s capital balance on January 1. 3.If there is any remaining net income, it is to be divided equally between the partners. 2

16. 11-1612-16 Salary allowance$60,000$48,000$108,000 Interest allowance19,20014,40033,600 Remaining income4,2004,2008,400 The remaining income is divided equally. J. Stone C. Mills Total Net income$83,400$66,600$150,000 2

17. 11-1712-17 Assume the same facts as before except that the net income is only $100,000. In this case, the total of the allowance exceeds the net income by $41,600 ($100,000 – $141,600). Dividing Income—Allowances Exceed Net Income 2

18. 11-1812-18 J. Stone C. Mills Total Salary allowance$60,000$48,000$108,000 Interest allowance 19,200 14,400 33,600 Total$79,200$62,400$141,600 Net income of $100,000 is divided. This amount exceeds net income by $41,600. 2

19. 11-1912-19 J. Stone C. Mills Total Salary allowance$60,000$48,000$108,000 Interest allowance 19,200 14,400 33,600 Total$79,200$62,400$141,600 Deduct excess of allowance over income 20,800 20,800 Net income$58,400$41,600$100,000 Net income of $100,000 is divided. 2

20. 11-2012-20 Describe and illustrate the accounting for partner admission and withdrawal. 3 12-20

21. 11-2112-21 Partners Tom Andrews and Nathan Bell have capital balances of $50,000 each. On June 1, each sells one-fifth of his equity to Joe Canter for $10,000 in cash. Purchasing an Interest in a Partnership 3

22. 11-2212-22 The only entry required in the partnership accounts is as follows: 3 For a limited liability company, the following entry is required: Tom Andrews, Member Equity10,000 Nathan Bell, Member Equity10,000 Joe Canter, Member Equity20,000

23. 11-2312-23 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. 3

24. 11-2412-24 The entry to record this transaction is as follows: For a limited liability company, the following entry is required: 3

25. 11-2512-25 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. 3 Revaluation of Assets

26. 11-2612-26 The entry to record this transaction is as follows: For a limited liability company, the following entry is required: 3

27. 11-2712-27 On March 1, the partnership of Marsha Jenkins and Helen Kramer admit Alex Diaz as a new partner. The assets of the old partnership are adjusted to current market values and the resulting capital balances for Jenkins and Kramer are $20,000 and $24,000, respectively. Partner Bonuses 3

28. 11-2812-28 Jenkins and Kramer agree to admit Diaz as a partner 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. 3

29. 11-2912-29 Equity of Jenkins$20,000 Equity of Kramer24,000 Diaz’s Contribution 31,000 Total equity after admitting Diaz$75,000 Diaz’s interest (1/3 × $75,000)$25,000 Diaz’s contribution$31,000 Diaz’s equity after admission 25,000 Bonus paid to Jenkins and Kramer$ 6,000 3

30. 11-3012-30 After adjusting the market values, the capital balance of Janice Cowen is $80,000 and the capital balance of Steve Dodd is $40,000. Ellen Chou receives a one-fourth interest in the partnership for a contribution of $30,000. Before admitting Chou, Cowen and Dodd shared net income using a 2:1 ratio. Paying the New Partner a Bonus 3

31. 11-3112-31 Equity of Cowen$ 80,000 Equity of Dodd40,000 Chou’s Contribution 30,000 Total equity after admitting Chou$150,000 Chou’s equity interest after admission × 25% Chou’s equity after admission$ 37,500 Chou’s contribution 30,000 Bonus paid to Chou$ 7,500 The bonus is computed as follows: 3

32. 11-3212-32 Describe and illustrate the accounting for liquidating a partnership. 4 12-32

33. 11-3312-33 When a partnership goes out of business, the winding-up process is called the liquidation of a partnership. Liquidating Partnerships 4

34. 11-3412-34 Cash$11,000 Noncash Assets64,000 Liabilities$ 9,000 Jean Farley, Capital22,000 Brad Green, Capital22,000 Alice Hall, Capital 22,000 Total$75,000$75,000 Liquidation Process Farley, Green, and Hall share income and losses in a ratio of 5:3:2. On April 9, after discontinuing operations, the firm had the following trial balance. 4

35. 11-3512-35 Between April 10 and April 30, Farley, Green, and Hall sell all noncash assets for $72,000. Thus, a gain of $8,000 ($72,000 – $64,000) is realized. Gain on Realization 4

36. 11-3612-36 4 Statement of Partnership Liquidation: Gain on Realization Exhibit 5

37. 11-3712-37 Sale of assets (Step 1): 4 For a limited liability company, the following entry is required:

38. 11-3812-38 Division of the gain (Step 2): 4 For a limited liability company, the following entry is required:

39. 11-3912-39 Payment of liabilities (Step 3): 4 For a limited liability company, the following entry is required:

40. 11-4012-40 Distribution of cash to partners (Step 4): 4 For a limited liability company, the following entry is required:

41. 11-4112-41 4 Statement of Partnership Liquidation: Loss on Realization Exhibit 6

42. 11-4212-42 Loss on Realization— Capital 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. 4

43. 11-4312-43 4 Statement of Partnership Liquidation: Loss on Realization—Capital Deficiency Exhibit 7

44. 11-4412-44 Partner Does Not Pay Deficiency If Farley does not pay her deficiency, the deficiency would be allocated to Green and Hall based on their income- sharing ratio of 3:2. The remaining cash would be distributed to Green and Hall as shown below: Capital Balances Before (Deficiency) Allocated (Deficiency) Capital Balance After Deficiency and Cash Distributed to Partners Farley$ (5,000)$5,000$ 0 Green5,800(3,000) * 2,800 Hall 11,200(2,000) ** 9,200 Total$12,000$12,000 *$3,000 = [$5,000 × (3/5)] or ($5,000 × 60%) **$2,000 = [$5,000 × (2/5)] or ($5,000 × 40%) 4

45. 11-4512-45 Prepare the statement of partnership equity. 5 12-45

46. 11-4612-46 Statement of Partnership Equity The change in the owners’ capital accounts for a period of time is reported in a statement of partnership equity. 5

47. 11-4712-47 Statement of Partnership Equity 5 Exhibit 8

48. 11-4812-48