Chapter 12 Accounting for PartnershipsOPEN CH 12 OUTLINE

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

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

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

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

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.

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.

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

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

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

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

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

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 Characteristics Question Under which of the following business organization forms do limited partners

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? a. Limited liability partnership. b. Limited partnership. c. Limited liability companies. d. None of the above. Chapter 12 -12 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

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

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

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 Fair Market value 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

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

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. Cash   Equipment    Stanley Farrin, Capital Chapter 12 -17 10, 000 5, 000  15, 000

Illustration: Prepare the entry to record the investment of A. Rolfe. Cash 8, 000

Illustration: Prepare the entry to record the investment of A. Rolfe. Cash 8, 000 Office equipment A. Rolfe, Capital 4, 000 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 Chapter 12 -18 12, 000 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

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

REVIEW ANSWERS JOHN Cash 25, 000 Office equipment John, Capital 7, 700 32, 700

REVIEW ANSWERS JOHN Cash 25, 000 Office equipment John, Capital 7, 700 32, 700 MIKE Cash 30, 000 Accounts receivable 2, 700 Mike, Capital Chapter 12 -20 32, 700 SO 2 Explain the accounting entries for the formation of a partnership.

Admission of a Partner Results in the legal dissolution of the existing partnership and

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 -21 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

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 30, 000 L. Carson, Capital 30, 000 Note that both net assets and total capital have increased by $30, 000. Chapter 12 -22 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

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? Sampson’s capital account balance should be $102, 000, comprised of land $65, 000, and equipment $57, 000, less debt $20, 000. Chapter 12 -23

Dividing Net Income or Net Loss Partners equally share net income or net loss

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 -24 XXXX

Net income/loss Review l l l Chapter 12 -25 Held. Bond Corp has a

Net income/loss Review l l l Chapter 12 -25 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 entry to distribute the net income

Net income/loss Review Answer l l Chapter 12 -26 The income division is: Held

Net income/loss Review Answer l l Chapter 12 -26 The income division is: Held $42, 000 ($70, 000 X 60%) and Bond $28, 000 ($70, 000 X 40%). The journal entry is: Income Summary  70, 000 Held, Capital  42, 000 Bond, Capital  28, 000

YOUR TURN l l l JJHANK Corp has a net income of $90, 000.

YOUR TURN l l l 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 entry to distribute the net income The journal entry is: debit credit Income Summary  90, 000 JJ, Capital  54, 000 HANK, Capital  36, 000 Chapter 12 -27

Dividing Net Income or Net Loss w/ salaries & interest included Illustration: Assume that

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. In 2014, 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 -28 Journalize the allocation 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

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. In 2014, 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 -29 SO 3 Identify the bases for dividing net income or net loss.

Illustration: (b) Journalize the allocation of income. HINT: Remember closing entries Dec. 31 Income

Illustration: (b) Journalize the allocation of income. HINT: Remember closing entries Dec. 31 Income summary 22, 000 Sara King, Capital 12, 400 Ray Lee, Capital 9, 600 Close Income Summary to each partner’s Capital account for his or her share of net income or loss. Chapter 12 -30 SO 3 Identify the bases for dividing net income or net loss.

YOUR TURN l l Assume that A & B are co-partners. The partnership agreement

YOUR TURN l 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. In 2014, partnership net income is $34, 000. Prepare a schedule showing the distribution of net income. Journalize the allocation of net income. Chapter 12 -31

Solution $9, 600 B $4, 000 TOTAL $13, 600 Interest on capital $3, 000

Solution $9, 600 B $4, 000 TOTAL $13, 600 Interest on capital $3, 000 $2, 000 $5, 000 Salaries A Total Salaries & Interest $12, 600 $6, 000 $18, 600 Remainder Totals Chapter 12 -32 $7, 700 $20, 300 $7, 700 $13, 700 $15, 400 $34, 000

What happens if your Net Income doesn’t cover the Ratio? Joe & Sam Co

What happens if your Net Income doesn’t cover the Ratio? Joe & Sam Co report net income of $28, 000. Interest allowances on capital are $7, 000 for Joe and $5, 000 for Sam. Salaries are $15, 000 for Joe & $10, 000 for Sam. The remainder of net income is shared equally. Show the distribution of income for each partner Joe Sam Chapter 12 -33 Salary allowance Interest allowance Remaining deficiency, ($9, 000):   [($25, 000 + $12, 000) – $28, 000] Joe (-$9, 000 X 50%) Sam (-$9, 000 X 50%) Total remainder Total division of net income (Capital only increases by this amount b/c of the deficiency in NI) $15, 000   7, 000  (4, 500) $17, 500 Total $10, 000   5, 000 (4, 500) $10, 500 $25, 000  12, 000 (9, 000) $28, 000