Partnerships Chapter 17 2004 Prentice Hall Business Publishing
Partnerships Chapter 17 © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9 e by Slater 17 - 1
Learning Objective 1 Journalizing the entry formation of a partnership. © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9 e by Slater 17 - 2
Learning Unit 17 -1 (Partnership Characteristics) An informal agreement Easy to form A binding legal agreement The Uniform Partnership Act provides the legal background. © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9 e by Slater 17 - 3
Learning Unit 17 -1 (Partnership Characteristics) Partnership agreements should be in writing to avoid future conflicts and misunderstanding. © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9 e by Slater 17 - 4
Learning Unit 17 -1 (Partnership Characteristics) Limited life Mutual agency Unlimited liability Co-ownership of property Taxation © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9 e by Slater 17 - 5
Learning Unit 17 -1 (Partnership Characteristics) On June 1, 20 xx, Jane Reedy and Bill Burr enter into a partnership. Reedy invests $9, 000 cash plus store equipment worth $25, 000 with accumulated depreciation of $5, 000. The current appraised value of the equipment is $28, 000. © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9 e by Slater 17 - 6
Learning Unit 17 -1 (Partnership Characteristics) Reedy also invested Accounts Receivable of $2, 000 with an Allowance for Doubtful Accounts of $500. The partnership will take on the responsibility for a $6, 000 note issued by Reedy. Burr invests $20, 000 cash. What are the journal entries? © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9 e by Slater 17 - 7
Learning Unit 17 -1 (Partnership Characteristics) June 1, 20 xx Cash 9, 000 Accounts Receivable 2, 000 Equipment 28, 000 Allowance for Doubtful Accounts Note Payable J. Reedy, Capital 500 6, 000 32, 500 June 1, 20 xx Cash B. Burr, Capital 20, 000 © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9 e by Slater 17 - 8
Learning Objective 2 Calculating a partner’s share of net income based on fractional ratio, beginning capital investment, and salary and interest allowances. © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9 e by Slater 17 - 9
Learning Unit 17 -2 (Division of Net Income or Net Loss) How do partners share profit and losses? Equally Salary allowance Interest allowance Ratio based on investment Capital contribution © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9 e by Slater 17 - 10
Learning Unit 17 -2 (Division of Net Income or Net Loss) Dot Alexander, John Sullivan, and Sheldon Brown invested $8, 000, $6, 000, and $4, 000 respectively, in a partnership. The partnership had a net income of $24, 300 in the first year. © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9 e by Slater 17 - 11
Learning Unit 17 -2 (Division of Net Income or Net Loss) Partners could not agree on how to share net income of $24, 300 ÷ 3 = $8, 100 to each partner December 31, 20 xx Income Summary Alexander, Capital Sullivan, Capital Brown, Capital 24, 300 8, 100 © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9 e by Slater 17 - 12
Learning Unit 17 -2 (Division of Net Income or Net Loss) Partners share net income in the ratio of their beginning capital investments. Alexander $ 8, 000 ÷ 18, 000 × 24, 300 = $10, 800 Sullivan 6, 000 ÷ 18, 000 × 24, 300 = $ 8, 100 Brown 4, 000 ÷ 18, 000 × 24, 300 = $ 5, 400 Total $18, 000 $24, 300 © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9 e by Slater 17 - 13
Learning Unit 17 -2 (Division of Net Income or Net Loss) a. Annual salary allowance of $6, 000 to Alexander, $6, 000 to Sullivan, and $9, 000 to Brown. b. Ten percent interest on each partner’s capital investment. c. Remaining net income or net loss shared equally. © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9 e by Slater 17 - 14
Learning Unit 17 -2 (Division of Net Income or Net Loss) a. Salary allowance b. Interest on capital. 10 × $8, 000. 10 × $6, 000. 10 × $4, 000 Total interest allowance Total salary and interest c. Net income $24, 300 Less 22, 800 Equals $ 1, 500 ÷ 3 Share of net income Alexander Sullivan Brown $6, 000 $9, 000 Total $21, 000 800 600 400 $6, 800 $6, 600 $9, 400 1, 800 $22, 800 500 $7, 300 500 $7, 100 500 $9, 900 $24, 300 © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9 e by Slater 17 - 15
Learning Objective 3 Preparing a statement of partners’ equity. © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9 e by Slater 17 - 16
Learning Unit 17 -2 (Division of Net Income or Net Loss) A partnership statement of owner’s equity is much like that of a proprietorship. The statement of owner’s equity shows additional investments by partner. It also shows drawings by partner. © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9 e by Slater 17 - 17
Learning Unit 17 -2 (Division of Net Income or Net Loss) Alexander, Sullivan, and Brown Statement of Partners’ Equity For Year Ended December 31, 20 xx Alexander Capital balances, Jan. 1, 20 xx $ 8, 000 Add: Net income for 20 xx 7, 300 Totals $15, 300 Less: Withdrawals 4, 000 Capital balances, Dec. 31, 20 xx $11, 300 Sullivan $ 6, 000 7, 100 $13, 100 5, 000 $ 8, 100 Brown $ 4, 000 9, 900 $13, 900 8, 000 $ 5, 900 © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9 e by Slater 17 - 18
Learning Objective 4 Journalizing entries to record admitting a new partner, withdrawal of a partner, and bonuses to partners. © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9 e by Slater 17 - 19
Learning Unit 17 -3 (Recording Admissions and Withdrawing) There are two ways to join a partnership. 1. Purchase an equity interest from one or more of the existing partners. 2. Make an investment into the business. © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9 e by Slater 17 - 20
Learning Unit 17 -3 (Recording Admissions and Withdrawing) Jones and Ryan Assets Cash Other assets Total assets $ 5, 000 7, 000 $12, 000 Partners’ Equity Jones, Capital $ 6, 000 Ryan, Capital 6, 000 Total equities $12, 000 © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9 e by Slater 17 - 21
Learning Unit 17 -3 (Recording Admissions and Withdrawing) Assume that Ryan sells his interest to Mr. Mix. April 3, 20 xx Ryan, Capital Mix, Capital 6, 000 © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9 e by Slater 17 - 22
Learning Unit 17 -3 (Recording Admissions and Withdrawing) Cash is paid to the partnership. Bonus is to the old partners when more is paid than the interest acquired. Bonus is to the new partner when less is paid than the interest acquired. New partner’s capital account is set up. © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9 e by Slater 17 - 23
Learning Unit 17 -3 (Recording Admissions and Withdrawing) Assets are adjusted to fair market value. Any gain or loss in the revaluation is shared according to the partners’ profit and loss ratio. A partner may withdraw according to an agreement that results in the partner leaving with more or less than book value. © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9 e by Slater 17 - 24
Learning Objective 5 Journalizing entries involved in the liquidation process and preparing a statement of liquidation. © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9 e by Slater 17 - 25
Learning Unit 17 -4 (The Liquidation of a Partnership) Assets are sold for cash. Any loss or gain is divided among the partners. Creditors are paid off. Any remaining cash is distributed to the partners. © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9 e by Slater 17 - 26
End of Chapter 17 © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9 e by Slater 17 - 27
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