Chapter 12 Accounting for PartnershipsOPEN CH 12 OUTLINE

Chapter 12 Accounting for Partnerships-OPEN CH 12 OUTLINE Chapter 12 -1 Accounting Principles, Ninth Edition

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. Chapter 12 -2 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. Chapter 12 -3 SO 1 Identify the characteristics of the partnership form of business organization.

Characteristics of Partnerships 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. Chapter 12 -4 SO 1 Identify the characteristics of the partnership form of business organization.

Characteristics of Partnerships 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. Chapter 12 -5 SO 1 Identify the characteristics of the partnership form of business organization.

Characteristics of Partnerships Question All of the following are characteristics of partnerships except: a. co-ownership of property. b. mutual agency. c. limited life. d. limited liability. Chapter 12 -6 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: 1. Limited Partnerships, 2. Limited Liability Partnerships, and 3. Limited Liability Companies. Chapter 12 -7 SO 1 Identify the characteristics of the partnership form of business organization.

Organizations with Partnership Characteristics Regular Partnership Major Advantages Simple and inexpensive to create and operate. Chapter 12 -8 Major Disadvantages Owners (partners) personally liable for business debts. SO 1 Identify the characteristics of the partnership form of business organization.

Organizations with Partnership Characteristics Major Advantages “Ltd. , ” or “LP” 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. Chapter 12 -9 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.

Organizations with Partnership Characteristics “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. Chapter 12 -10 SO 1 Identify the characteristics of the partnership form of business organization.

Organizations with Partnership Characteristics “LLC” Major Advantages Owners have limited personal liability for business debts even if they participate in management. Chapter 12 -11 Major Disadvantages More expensive to create than regular partnership. 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 (ratios) 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. Chapter 12 -12 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.

Liquidation of a Partnership #21 in outline 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: 1. Sell noncash assets for cash and recognize a gain or loss on realization. 2. Allocate gain/loss on realization to the partners based on their income ratios. 3. Pay partnership liabilities in cash. 4. Distribute remaining cash to partners on the basis of their capital balances. Chapter 12 -13 SO 5 Explain the effects of the entries to record the liquidation of a partnership.

Liquidation of a Partnership Question The first step in the liquidation of a partnership is to: a. allocate gain/loss on realization to the partners. b. distribute remaining cash to partners. c. pay partnership liabilities. d. sell noncash assets and recognize a gain or loss on realization. Chapter 12 -14 SO 5 Explain the effects of the entries to record the liquidation of a partnership.

Book vs Market Value l Book value is the price paid for a particular asset. l l This price never changes so long as you own the asset. Fair Market value is the current price at which you can sell an asset. l Chapter 12 -15 ______is used to record partner investments of noncash assets in a partnership.

Forming a Partnership Question When a partner invests noncash assets in a partnership, the assets should be recorded at their: a. book value. b. carrying value. c. fair market value. d. original cost. Chapter 12 -16 SO 2 Explain the accounting entries for the formation of a partnership.

Journalize entries in forming a partnership. Jennifer De. Vine and Stanley Farrin decide to organize the ALL-Star partnership. De. Vine invests $15, 000 cash, and Farrin contributes $10, 000 cash and equipment having a book value of $3, 500. Prepare the entry to record Farrin's investment in the partnership, assuming the equipment has a fair market value of $5, 000. Chapter 12 -17

Illustration: Prepare the entry to record the investment of A. Rolfe. Prepare the entry to record the investment of T. Shea. Chapter 12 -18 SO 2 Explain the accounting entries for the formation of a partnership.

REVIEW 1. 2. Chapter 12 -19 John & Mike form a partnership. John invests $25, 000 in cash and also has equipment with a $5500 book value. Mike invested $30, 000 in cash and also has accounts receivable with a $2700 book value. Create the journal entry for John assuming the equipment has a $7700 market value. Create the journal for Mike assuming the A/R has a market value of $2700

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 1. purchasing the interest of one or more existing partners or 2. investing assets in the partnership. Chapter 12 -20 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: Chapter 12 -21 SO 6 Explain the effects of the entries when a new partner is admitted.

Sampson and Stevens form a partnership. Sampson contributes land with a book value of $50, 000 and a fair value of $65, 000. Sampson also contributes equipment with a book value of $52, 000 and a fair value of $57, 000. The partnership assumes a $20, 000 mortgage on the Sampson’s land. What should be the balance in Sampson's capital account upon formation of the partnership? . Chapter 12 -22

Dividing Net Income or Net Loss Partners equally share net income or net loss unless the partnership contract indicates otherwise. Closing Entries: REMEMBER Closing Entries (CH 4) Close Income Summary (Net income/loss) to each partner’s Capital account for his or her share of net income or loss NET INCOME ENTRY: Income Summary XXX, Capital Debit XXXX   Credit XXXX NET LOSS ENTRY: XXX, Capital XXXX Income Summary Chapter 12 -23 XXXX

Net income/loss Review l l l Chapter 12 -24 Held. Bond Corp has a net income of $70, 000. The ratios to divide income/losses are Held 60% and Bond 40% How much income does each partner receive? Journalize the CLOSING entry to distribute the net income

YOUR TURN l l l Chapter 12 -25 JJHANK Corp has a net income of $90, 000. The ratios to divide income/losses are JJ 60% and HANK 40% How much income does each partner receive? Journalize the CLOSING entry to distribute the net income

Dividing Net Income or Net Loss w/ salaries & interest included 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. 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) Chapter 12 -26 Journalize the allocation (CLOSING) of net income. SO 3 Identify the bases for dividing net income or net loss.

Dividing Net Income 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. 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. Step 1 Step 2 Step 3 Chapter 12 -27 SO 3 Identify the bases for dividing net income or net loss.

Illustration: (b) Journalize the allocation (CLOSING) of income. HINT: Remember closing entries Dec. 31 Chapter 12 -28 SO 3 Identify the bases for dividing net income or net loss.

l Assume that A & B are co-partners. The partnership agreement provides for: (1) salary allowances of $9, 600 to A and $4, 000 to B, (2) interest allowances of 20% on capital balances at the beginning of the year, and (3) the remainder equally. Capital balances on January 1 were A $15, 000, and B $10, 000. Partnership net income is $34, 000. l Prepare a schedule showing the distribution of net income. Journalize the allocation of net income. SET UP CHART LIKE THIS Salaries A $$ B $$ TOTAL $$ Interest on capital $$ $$ Total Salaries & Interest Chapter 12 -29 Remainder Totals $$ $$ $$

Partners A, B & C have Capital balances of 30, 000 each. Net income is $20, 000, and income is shared 5: 3: 2. Show Allocation of net income to all 3 partners & journalize CLOSING ENTRY. NOTE: 5: 3: 2 is a ratio: 50% for A, 30% for B and 20% for C A B C TOTAL Salaries $0 $0 $0 Interest on capital $0 $0 $0 Total Salaries & Interest Chapter 12 -30 $0

Net income is $32, 600, and income is shared 5: 3: 2. Show Allocation of net income to all 3 partners & journalize CLOSING ENTRY. Salaries A $0 B $0 C $0 TOTAL $0 Interest on capital $0 $0 $0 Total Salaries & Interest Chapter 12 -31 $0

What happens if your Net Income doesn’t cover the Ratio? Joe & Sam Co report net income of $28, 000. Salaries are $15, 000 for Joe & $10, 000 for Sam. Interest allowances on capital are $7, 000 for Joe and $5, 000 for Sam. The remainder of net income/loss is shared equally. SET UP CHART Show the distribution of income for each partner Joe Sam Chapter 12 -32 Total

Partners Abel and Cain have capital balances in a partnership of $40, 000 and $60, 000, respectively. They agree to share profits and losses as follows: If income for the year was $50, 000, what will be the distribution of income to ABEL? (HINT: SET UP YOUR CHART) A) $23, 000 B) $27, 000 C) $20, 000 D) $10, 000 Chapter 12 -33