chapter twenty-one accounting for partnerships. partnership def. - “..an association of two or...
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CHAPTER TWENTY-ONE
ACCOUNTING FOR PARTNERSHIPS
PARTNERSHIP
Def. - “..an association of two or more persons who carry on, as co-owners, a business for profit”
o Used for all types of enterprises
• More popular in service industry than merchandising businesses
PARTNERSHIP AGREEMENT Def. - a written agreement containing the provisions for
operating a partnership.o Essential provisions include:
• Date of the agreement
• Names of the partners
• Kind of business to be conducted
• Length of time the partnership is to run
• Name and location of the business
• Investment of each partner
• Basis on which profits and losses are to be shared
• Limitation of partners’ rights and activities
• Salary allowance to partners
• Division of assets upon dissolution of the partnership
• Signatures of the partners
CHARACTERISTICS
CO-OWNERSHIP OF ASSETS
All assets held by a partnership are co-owned by all partners. If one partner contributes an asset to the business, the asset is jointly owned by all partners.
Advantages:Ability and expertise
combined into one enterprise & easier to raise capital
CHARACTERISTICS
MUTUAL AGENCYAny partner can bind the other partners to a contract if he or she is acting within the general scope of the business.
Disadvantage:Serious consequences if
partners don’t act responsibly
CHARACTERISTICS
LIMITED LIFE
Partnership may be dissolved as the result of any change in the ownership. (e.g. death, bankruptcy, incapacity, withdrawal of a partner, addition of a new partner, or expiration of the time specified in the partnership agreement)
CHARACTERISTICS
UNLIMITED LIABILITY
Each partner is personally liable for ALL debts incurred by the partnership.
Major Disadvantage:A partner could lose
personal assets.
CHARACTERISTICS
FEDERAL INCOME TAXES
Partnership is not subject to federal income tax. But, partners must report their share of the partnership’s income on their income tax return.
INVESTMENTS
EXAMPLE: Sam Mitchell and Lisa Jenkins begin the Mitchell & Jenkins partnership by investing $350,000 and $200,000, respectively.
Let’s look at thejournal entry!
GENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
Cash 350,000
Sam Mitchell, Capital 350,000
S. Mitchell invested
$350,000 in cash
Cash
Lisa Jenkins, Capital
L. Jenkins invested
$200,000 in cash
200,000
200,000
Separate Capital and Drawing accountsare maintained for each partner.
INVESTMENTS
What if instead of $200,000 in cash, Lisa Jenkins had invested:
o Inventory valued at $47,500
• on which $10,500 was owed
o Office Equipment valued at $40,000
o Delivery Equipment valued at $92,000
• on which $19,000 was owed on a note
o $50,000 in cash
GENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
Cash 50,000
47,500Inventory
Lisa Jenkins, Capital
19,000
200,000
Each asset invested and liability assumedis recorded. The difference is credited
to the Capital account.
Office Equipment 40,000
Delivery Equipment 92,000
Notes Payable
Accounts Payable 10,500
COMBINING BUSINESSES• On April 1, Donna Morning and Larry Knight form a partnership under the firm name of Morning & Knight Sports.
• They agree to invest their assets in the partnership. The partnership will also assume the liabilities shown on their balance sheets.
• Profits/losses are to be shared 50-50.
• In the case of dissolution, assets are to be distributed between partners in the ratio of their capital interests at the time of dissolution.
COMBINING BUSINESSESMorning SportsBalance SheetMarch 31, 20--
Assets LiabilitiesCash $ 6,344Accts. Receivable $ 5,524Less Allow forBad debts 430 5,094Merchandise Inv 24,574Store Equipment $3,840Less Accum Depr 1,000 2,840Total Assets $38,852
Notes Payable $ 4,600Accounts Payable 9,082Total Liabilities $ 13,682
Owner’s EquityMorning, Capital 25,170
$38,852Total Liab & O.E.
Let’s look at the journal entryto record Donna Morning’s
investment in the new partnership.
GENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
Cash 6,344
5,524Accounts Receivable
Any uncollectible accounts shouldbe written off before forming
the partnership….Morning Sports had no
accounts considered uncollectible.
GENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
Cash 6,344
5,524Accounts Receivable
Merchandise Inventory 24,574
Since Donna uses FIFO,the Merchandise Inventory account
reflects current market values.
GENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
Cash 6,344
5,524Accounts Receivable
Merchandise Inventory 24,574
Store Equipment 3,600
Assets are recorded at theirfair market values (not book values)
at the time of investment.
GENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
Cash 6,344
5,524Accounts Receivable
Accounts Payable
430
9,082
Merchandise Inventory 24,574
Store Equipment 3,600
Allowance for Bad Debts
Notes Payable 4,600
The allowance account and the liabilitiesare recorded at the values shown
on Morning Sports’ Balance Sheet.
GENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
Cash 6,344
5,524Accounts Receivable
Accounts Payable
430
9,082
Merchandise Inventory 24,574
Store Equipment 3,600
Allowance for Bad Debts
Notes Payable 4,600
Capital account is credited for thedifference between assets
invested and liabilities assumed.
D. Morning, Capital 25,930
COMBINING BUSINESSESKnight Athletics
Balance SheetMarch 31, 20--
Assets LiabilitiesCash $ 3,544Accts. Receivable $ 5,280Less Allow forBad debts 720 4,560Merchandise Inv 29,692Supplies
$ 4,320Less Accum Depr 1,100 3,220
Total Assets $44,902
Notes Payable $ 6,000Accounts Payable 13,238Total Liabilities $ 19,238
Owner’s EquityKnight, Capital 25,644
$44,902Total Liab & O.E.
720Office Equipment
Store Equipment $ 4,800Less Accum Depr 1,200 3,600
Knight’s assets andliabilities are brought into
the new partnership.
GENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
Cash 3,544
5,280Accounts Receivable
Accounts Payable
3,850
720
Merchandise Inventory 29,692
Store Equipment
286
Allowance for Bad Debts
Notes Payable
4,200
L. Knight, Capital
6,000
Supplies
Office Equipment
13,238
26,894
ALLOCATING PROFIT/LOSS
Example: The partnership of Mitchell and Jenkins earned net income of $190,800 for the year.
S. Mitchell L. Jenkins
$95,400 $95,400
If Mitchell and Jenkins had notspecified how the income was to be
split, it would be split evenly.
PARTNERSHIP CLOSING ENTRIES
FOUR ENTRIES:
Entries #1 & 2 are the same as for sole proprietorships.Entries #3 & 4 are different for partnerships.
1. Close all revenues to Income Summary
2. Close all expenses to Income Summary
3. Close Income Summary by allocating each partner’s share of net income or loss to the individual capital accounts
4. Close each partner’s drawing account to the individual capital accounts.
GENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
Income Summary 190,800
95,400S. Mitchell, Capital
Instead of all the net income beingcredited to one capital account…it is allocated to each partner’s
capital account.
95,400L. Jenkins, Capital
Closing Entry #3
GENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
Income Summary 190,800
95,400S. Mitchell, Capital
95,400L. Jenkins, Capital
S. Mitchell, Capital
S. Mitchell, Drawing
36,000
36,000
L. Jenkins, Capital
L. Jenkins, Drawing
48,000
48,000
Closing Entry #3
ALLOCATING PROFIT/LOSS
Example: The partnership of Mitchell and Jenkins earned net income of $190,800 for the year.
S. Mitchell L. Jenkins
Mitchell and Jenkins did specifyhow the income was to be split...
after salary allowances, the remainingnet income was to be split 60-40.
ALLOCATING PROFIT/LOSS
Example: The partnership of Mitchell and Jenkins earned net income of $190,800 for the year.
S. Mitchell L. Jenkins
$36,000 $48,000
Salary allowances total $84,000.Remaining Net Income is $106,800
($190,800-$84,000).
Salary allowances
ALLOCATING PROFIT/LOSS
Example: The partnership of Mitchell and Jenkins earned net income of $190,800 for the year.
S. Mitchell L. Jenkins
$36,000 $48,000
$106,800 x 60% = $64,080
Salary allowances64,080
ALLOCATING PROFIT/LOSS
Example: The partnership of Mitchell and Jenkins earned net income of $190,800 for the year.
S. Mitchell L. Jenkins
$36,000 $48,000
$106,800 x 40% = $42,720
Salary allowances64,080 42,720Remaining Income
ALLOCATING PROFIT/LOSS
Example: The partnership of Mitchell and Jenkins earned net income of $190,800 for the year.
S. Mitchell L. Jenkins
$36,000 $48,000Salary allowances64,080 42,720Remaining Income
$100,080 $90,720
GENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
Income Summary 190,800
100,080S. Mitchell, Capital
90,720L. Jenkins, Capital
Closing entry is made for the total allocated to each
partner.
GENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
Income Summary 190,800
100,080S. Mitchell, Capital
90,720L. Jenkins, Capital
S. Mitchell, Capital
S. Mitchell, Drawing
36,000
36,000
L. Jenkins, Capital
L. Jenkins, Drawing
48,000
48,000
Close eachowner’s drawing
account
ALLOCATING PROFIT/LOSS
Example: Let’s look at the allocation if the partnership of Mitchell and Jenkins earned net
income of $44,000 for the year. S. Mitchell L. Jenkins
$36,000 $48,000Salary allowances
The salary allowancesalone total more
than the Net Income!
ALLOCATING PROFIT/LOSS
S. Mitchell L. Jenkins
$36,000 $48,000Salary allowances
$84,000 Salary Allow. - 44,000$40,000
Net IncomeExcess to be absorbed by partners
Example: Let’s look at the allocation if the partnership of Mitchell and Jenkins earned net
income of $44,000 for the year.
ALLOCATING PROFIT/LOSS
S. Mitchell L. Jenkins
$36,000 $48,000Salary allowances
$40,000 x 60%
(24,000)
Example: Let’s look at the allocation if the partnership of Mitchell and Jenkins earned net
income of $44,000 for the year.
ALLOCATING PROFIT/LOSS
S. Mitchell L. Jenkins
$36,000 $48,000Salary allowances
$40,000 x 40%
(24,000) (16,000)
Example: Let’s look at the allocation if the partnership of Mitchell and Jenkins earned net
income of $44,000 for the year.
ALLOCATING PROFIT/LOSS
S. Mitchell L. Jenkins
$36,000 $48,000Salary allowances
(24,000) (16,000)$12,000 $32,000
$12,000 + $32,000 =$44,000 Net Income
Example: Let’s look at the allocation if the partnership of Mitchell and Jenkins earned net
income of $44,000 for the year.
GENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
Income Summary 44,000
12,000S. Mitchell, Capital
32,000L. Jenkins, Capital
Entries to close the drawingaccounts would be
the same as the previous example.
ALLOCATING PROFIT/LOSSExample: B. K. Kelly and S. B. Arthur form a partnership on January 1 of the current year. Kelly will devote full time to operating the business, invest $50,000, and draw a salary of $35,000 per year. Arthur will devote about 10 hours per week, invest $150,000, and draw a salary of $10,000 per year. The partners will be allowed interest of 10% on capital balances on January 1 of each year and the balance of the earnings will be divided equally.
Let’s allocate the first yearNet Income of $80,000.
ALLOCATING PROFIT/LOSS
Kelly had a capital balanceof $50,000 on January 1.
$50,000 x 10%
B. K. Kelly S. B. ArthurSalary Allow.$35,000 $10,000
Interest Allow.5,000
ALLOCATING PROFIT/LOSS
Arthur had a capital balanceof $150,000 on January 1.
$150,000 x 10%
B. K. Kelly S. B. ArthurSalary Allow.$35,000 $10,000
Interest Allow.5,000 15,000
ALLOCATING PROFIT/LOSS
Kelly has allowances of $40,000 so farArthur has $25,000 so far…
$80,000 - $65,000 = $15,000 remainingSplit evenly = $7,500 each
B. K. Kelly S. B. ArthurSalary Allow.$35,000 $10,000
Interest Allow.5,000 15,000Remaining Income7,500 7,500
ALLOCATING PROFIT/LOSS
B. K. Kelly S. B. ArthurSalary Allow.$35,000 $10,000
Interest Allow.5,000 15,000Remaining Income7,500 7,500
$47,500 $32,500
What if the partnership hada loss of $20,000 in the first year?
ALLOCATING PROFIT/LOSS
B. K. Kelly S. B. ArthurSalary Allow.$35,000 $10,000
Interest Allow.5,000 15,000
Salary and Interest allowanceswould still be given, totaling $65,000.
ALLOCATING PROFIT/LOSS
B. K. Kelly S. B. ArthurSalary Allow.$35,000 $10,000
Interest Allow.5,000 15,000
The allowances plus the lossleave $85,000 to be absorbed
equally.
(42,500) (42,500)$(2,500) $(17,500)
GENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
Income Summary
2,500
17,500
B. K. Kelly, Capital
20,000
S. B. Arthur, Capital
Capital accounts arereduced this year.
PARTNERSHIP FINANCIAL STATEMENTS
The allocation of net income and its impact on the capital balances should be disclosed in the financial statements.
FINANCIAL STATEMENTSKelly and Arthur
Income Statement (Partial)
For Year Ended December 31, 20--Net Income $80,000
Kelly Arthur Total
Allocation of net income:
Salary allowances
Interest allowances
Remaining income
Allocation of net income $47,500 $32,500 $80,000
$35,000 $10,000 $45,000
5,000
7,500
15,000
7,500
20,000
15,000
Distribution of income is shown atthe bottom of the Income Statement.
FINANCIAL STATEMENTSKelly and Arthur
Statement of Partners’ Equity
For Year Ended December 31, 20--Kelly Arthur Total
Capital, January 1, 20--
Net Income for the year
Withdrawals (salaries during the year)
Capital, December 31, 20-- $62,500 $182,500 $245,000
$50,000 $150,000 $200,000
35,000
10,000
10,000 45,000
Additional Investments during year 10,000
$50,000 $160,000 $210,000
47,500 32,500 80,000
$97,500 $192,500 $290,000
Replaces Statement of
Owner’sEquity
FINANCIAL STATEMENTSKelly and Arthur
Balance Sheet (Partial)
December 31, 20--
B. K. Kelly, capital
Total partners’ equity
$ 62,500
182,500S. B. Arthur, capital
$245,000
Partners’ Equity
Owner’s Equity is nowPartners’ Equity
DISSOLUTION
Any change in the members of the partnership results in dissolution.o Does not imply that business operations will
halto New Partnership agreement is createdo Can be caused by:
• Admitting a new partner
• Death or withdrawal of a partner
• Bankruptcy
ADMITTING A NEW PARTNER
A new partner may buy into the business in three ways:o by purchasing an interest directly from existing
partnerso by making a cash investment in the businesso by contributing assets from an existing business
ADMITTING A NEW PARTNER
Example: Morning and Knight admit Sunny Noon as a new partner as of July 1, 20--, when Morning and Knight have capital interests of $30,000 and $20,000, respectively. Noon pays $12,000 to Morning for one-third of her interest and $12,000 to Knight for one-half of his interest.
The payments go to the partnersdirectly, not the business.
ADMITTING A NEW PARTNER
Example: Morning and Knight admit Sunny Noon as a new partner as of July 1, 20--, when Morning and Knight have capital interests of $30,000 and $20,000, respectively. Noon pays $12,000 to Morning for one-third of her interest and $12,000 to Knight for one-half of his interest.
Morning, Capital x 1/3
$30,000 x 1/3
Noon buys $10,000 ofMorning’s equity.
ADMITTING A NEW PARTNER
Example: Morning and Knight admit Sunny Noon as a new partner as of July 1, 20--, when Morning and Knight have capital interests of $30,000 and $20,000, respectively. Noon pays $12,000 to Morning for one-third of her interest and $12,000 to Knight for one-half of his interest.
Knight, Capital x 1/2
$20,000 x 1/2
Noon buys $10,000 ofKnight’s equity.
GENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
Donna Morning, Capital 10,000
Donna’s Capital account is reducedby the amount sold to Sunny Noon.
20--July 1
GENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
Donna Morning, Capital 10,000
10,000Larry Knight, Capital
20,000Sunny Noon, Capital
Larry’s Capital accountis reduced by the 1/2 interest
he sold to Sunny.A Capital account is created for Sunny.
20--July 1
GENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
Donna Morning, Capital 10,000
10,000Larry Knight, Capital
20,000Sunny Noon, Capital
The $12,000 paid to eachpartner is not recorded
on the partnership books.
20--July 1
GENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
Cash 25,000
25,000Sunny Noon, Capital
If Sunny had paid $25,000directly to the partnership…..
20--July 1
ADMITTING A NEW PARTNERSunny Noon’s Golf
Balance SheetJune 30, 20--
Assets LiabilitiesCash $ 5,000Accts. Receivable $ 14,290Less Allow forBad debts 1,078 13,212Merchandise Inv 27,290
Total Assets $45,502
Notes Payable $ 9,048Accounts Payable 7,550Total Liabilities $16,598
Owner’s EquityNoon, Capital 28,904
$45,502Total Liab & O.E.
If Sunny has a business that thenew partnership will take over...
GENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
Cash 5,000
Accounts Receivable
No adjustment necessarysince Noon has no knowledgeof any uncollectible accounts.
20--July 1
14,290
GENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
Cash 5,000
Accounts Receivable
No adjustment necessarysince Noon has been
using the FIFO method.
20--July 1
14,290
Merchandise Inventory 27,290
GENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
Cash 5,000
Accounts Receivable
20--July 1
14,290
Merchandise Inventory 27,290
Allowance for Bad Debts 1,078
Notes Payable 9,048
Accounts Payable 7,550
Sunny Noon, Capital 28,904
WITHDRAWAL OF A PARTNER
A partner may retire and withdraw assets equal to, less than, or greater than the amount of his or her interest in the partnership.o determined after all profits and losses are
allocatedo and books are closed
WITHDRAWAL OF A PARTNER
Example: Many years later Sunny Noon decides to retire. The partners have agreed to the withdrawal of cash equal to the amount of Noon’s equity in the assets of the partnership.
Donna Morning
20,000Sunny Noon will take home
$40,000 cash.
Capital account balances:$55,000
Sunny Noon 40,000Larry Knight
GENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
Sunny Noon, Capital 40,000
Her capital account is closed out.
GENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
Sunny Noon, Capital 40,000
The other capital accountsare not affected.
Cash 40,000
GENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
Sunny Noon, Capital 40,000
What if Sunny agreesto only $30,000 cash?
Cash 40,000
GENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
Sunny Noon, Capital 40,000
Sunny’s capital accountis closed out.
GENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
Sunny Noon, Capital 40,000
But Cash received is lessthan the capital balance…
difference is split between tworemaining partners.
Cash 30,000
GENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
Sunny Noon, Capital 40,000
Cash 30,000
Donna Morning, Capital 5,500
Remaining capital = $100,000($55,000 + $45,000)
Morning has 55% interestShe received 55% of the $10,000 difference.
GENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
Sunny Noon, Capital 40,000
Cash 30,000
Donna Morning, Capital
Larry Knight, Capital
5,500
4,500
Larry receives 45% of the difference.
GENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
Sunny Noon, Capital 40,000
Cash 30,000
Donna Morning, Capital
Larry Knight, Capital
5,500
4,500
If Noon received $45,000 cash($5,000 more than her capital balance)
GENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
Sunny Noon, Capital 40,000
Cash 45,000
Donna Morning, Capital
Larry Knight, Capital
2,750
2,250
The remaining partners contributetheir capital to make the $5,000 difference.
GENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
Sunny Noon, Capital 40,000
Cash 45,000
Donna Morning, Capital
Larry Knight, Capital
2,750
2,250
One last alternative…..Sunny sells her interest
in the business to Donna.
GENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
Sunny Noon, Capital 40,000
Donna Morning, Capital 40,000
LIQUIDATION OF A PARTNERSHIP
Assets are sold Liabilities are paid Remaining cash and assets are
distributed to the partners
LIQUIDATION OF A PARTNERSHIP
Example: After many years of operations the partnership is to be liquidated. After closing entries the following accounts remain:
Cash
220,000
$ 10,000Inventory 120,000Other AssetsLiabilities 80,000D. Morning, Capital 95,000L. Knight, Capital 120,000S. Noon, Capital 55,000
Non-CashAssets are
sold for$370,000.
GENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
Cash 370,000
Inventory 120,000
Other Assets 220,000
Gain on Sale of Assets 30,000
GENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
Cash 370,000
Inventory 120,000
Other Assets 220,000
Gain on Sale of Assets 30,000
Gain on Sale of Assets 30,000
D. Morning, Capital 10,000
L. Knight, Capital 10,000
S. Noon, Capital 10,000
Gain is shared equallyby the partners.
LIQUIDATION OF A PARTNERSHIP
Example: After many years of operations the partnership is to be liquidated. After closing entries the following accounts remain:
Cash
0
$380,0000
Other AssetsInventory
Cash is now $380,000 ($10,000 + $370,000),Inventory and Other Assets are now zero.
LIQUIDATION OF A PARTNERSHIP
Example: After many years of operations the partnership is to be liquidated. After closing entries the following accounts remain:
Cash
0
$380,000Inventory 0Other AssetsLiabilities 80,000D. Morning, Capital 105,000 95,000+10,000
LIQUIDATION OF A PARTNERSHIP
Example: After many years of operations the partnership is to be liquidated. After closing entries the following accounts remain:
Cash
0
$380,000Inventory 0Other AssetsLiabilities 80,000D. Morning, Capital 105,000L. Knight, Capital 130,000 120,000+10,000
LIQUIDATION OF A PARTNERSHIP
Example: After many years of operations the partnership is to be liquidated. After closing entries the following accounts remain:
Cash
0
$380,000Inventory 0Other AssetsLiabilities 80,000D. Morning, Capital 105,000L. Knight, Capital 130,000S. Noon, Capital 65,000 55,000+10,000
Liabilitiesare paid
off.
GENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
Liabilities 80,000
Cash 80,000
LIQUIDATION OF A PARTNERSHIP
Example: After many years of operations the partnership is to be liquidated. After closing entries the following accounts remain:
Cash
0
$300,000Inventory 0Other AssetsLiabilities 0D. Morning, Capital 105,000L. Knight, Capital 130,000S. Noon, Capital 65,000
Remaining Cash = Capital account balancesCash is distributed to partners.
GENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
D. Morning, Capital 105,000
Cash 300,000
L. Knight, Capital 130,000
S. Noon, Capital 65,000
LIQUIDATION OF A PARTNERSHIP
Example: After many years of operations the partnership is to be liquidated. After closing entries the following accounts remain:
Cash
0
$ 0Inventory 0Other AssetsLiabilities 0D. Morning, Capital 0L. Knight, Capital 0S. Noon, Capital 0
Partnership is liquidated!
LIQUIDATION OF A PARTNERSHIP
Example: After many years of operations the partnership is to be liquidated. After closing entries the following accounts remain:
Cash
220,000
$ 10,000Inventory 120,000Other AssetsLiabilities 80,000D. Morning, Capital 95,000L. Knight, Capital 120,000S. Noon, Capital 55,000
If theseAssets hadbeen soldfor only$295,000
GENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
Cash 295,000
Inventory 120,000
Other Assets 220,000
Loss on Sale of Assets 45,000
There is a $45,000 loss to beallocated to the partners.
GENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
Cash 295,000
Inventory 120,000
Other Assets 220,000
Loss on Sale of Assets 45,000
D. Morning, Capital 15,000
L. Knight, Capital 15,000
S. Noon, Capital 15,000
Loss on Sale of Assets 45,000
LIQUIDATION OF A PARTNERSHIP
Example: After many years of operations the partnership is to be liquidated. After closing entries the following accounts remain:
Cash
0
$ 305,000Inventory 0Other AssetsLiabilities 80,000D. Morning, Capital 80,000L. Knight, Capital 105,000S. Noon, Capital 40,000
Liabilitiesare paid
off.
GENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
Liabilities 80,000
Cash 80,000
LIQUIDATION OF A PARTNERSHIP
Example: After many years of operations the partnership is to be liquidated. After closing entries the following accounts remain:
Cash
0
$ 225,000Inventory 0Other AssetsLiabilities 0D. Morning, Capital 80,000L. Knight, Capital 105,000S. Noon, Capital 40,000
Cash ispaid
topartners.
GENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
D. Morning, Capital 80,000
Cash 225,000
L. Knight, Capital 105,000
S. Noon, Capital 40,000
LIQUIDATION OF A PARTNERSHIP
Example: After many years of operations the partnership is to be liquidated. After closing entries the following accounts remain:
Cash
0
$ 0Inventory 0Other AssetsLiabilities 0D. Morning, Capital 0L. Knight, Capital 0S. Noon, Capital 0
Partnership is liquidated!