copyright © 2007 prentice-hall. all rights reserved 1 partnershipspartnerships chapter 12

Copyright © 2007 Prentice-Hall. All rights reserved 1

PartnershipsPartnershipsPartnershipsPartnerships

Chapter 12


Objective 1Objective 1Objective 1Objective 1

Identify the characteristics

of a partnership


PartnershipPartnershipPartnershipPartnership

• Association of two or more persons who co-own a business for a profit

• Combines– Capital– Talent – Experience


Partnership AgreementPartnership AgreementPartnership AgreementPartnership Agreement

• Contract between partners should specify– Name, location, and nature of business– Name, investment, and duties of each partner– How new partners are admitted– How profits and losses are divided up– Withdrawals of assets by the partners– How to settle up with a withdrawing partner– How to liquidate the partnership


Characteristics of a PartnershipCharacteristics of a PartnershipCharacteristics of a PartnershipCharacteristics of a Partnership

• Limited life

• Mutual agency

• Unlimited liability

• Co-ownership of property

• No partnership income taxes

• Partners’ capital accounts


Types of PartnershipsTypes of PartnershipsTypes of PartnershipsTypes of Partnerships

• General partnership – basic form

• Limited partnership – two classes of partners


Limited Liability CompanyLimited Liability CompanyLimited Liability CompanyLimited Liability Company

• Its own form of business organization– Owners are called members– Limited liability– Members can participate in management– Can elect not to pay business income tax


S CorporationsS CorporationsS CorporationsS Corporations

• Corporation taxed as a partnership– Limited liability of owners– No corporate income tax– Stockholders pay personal income tax on

their share of income



Account for partner investments


The Partnership Start-UpThe Partnership Start-UpThe Partnership Start-UpThe Partnership Start-Up

• Record assets invested by partners at fair market values

• Record liabilities assumed at fair market values

• Each partner has his/her own capital and withdrawals account


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GENERAL JOURNALDATE DESCRIPTION REF DEBIT CREDIT

Cash 8,000

Accounts Receivable 10,000

Furniture 1,000

Building 90,000

Note Payable 10,000

Accounts Payable 3,000

N. Fuentes, Capital 96,000



Allocate profits and losses

to the partners


Sharing Profits and LossesSharing Profits and LossesSharing Profits and LossesSharing Profits and Losses

• Stated fraction for each partner

• Based on percent of capital balances of the partners

• Based on each partner’s service

• Combination


Sharing Profits and LossesSharing Profits and LossesSharing Profits and LossesSharing Profits and Losses

• If no partnership agreement, the law states earnings will be divided equally

• If agreement specifies how to share profits, but not losses – losses are shared the same way as profits


E12-16 aE12-16 aE12-16 aE12-16 a

Net loss

($90,000)

B. Fultz

45,000

J. Hardie

45,000


B. Fultz, Capital 45,000

J. Hardie, Capital 45,000

Income Summary 90,000

When there is no written agreement,

partners share profits and losses equally.

Remember, a debit to Capital decreases it


E12-16 bE12-16 bE12-16 bE12-16 b

Net income

$60,000

B. Fultz (40,000/120,000) x 60,000

20,000

J. Hardie (80,000/120,000) x 60,000

40,000






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Net income to be distributed

B. Fultz J. Hardie $100,000

Capital Bal.

Service

Remainder

Total

$20,000 $40,000 40,000

12,000 18,000 10,000

5,000 5,000 0

$37,000 $63,000

Capital Balance – same as part b.

Service: Fultz (30,000 x 40%) and Hardie (30,000 x 60%)Remainder: equally


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Partner DrawingsPartner Drawings

• Reduces capital• Debit Drawing and credit Cash• At period end, close drawing to capital



Account for the admission of a new partner


Purchasing a Partner’s InterestPurchasing a Partner’s InterestPurchasing a Partner’s InterestPurchasing a Partner’s Interest

• Equity is transferred from retiring partner to new partner– Debit retiring partner’s capital– Credit new partner’s capital

• Partnership assets are not affected


Purchasing A Partner’s InterestPurchasing A Partner’s InterestE12-19 aE12-19 a

Purchasing A Partner’s InterestPurchasing A Partner’s InterestE12-19 aE12-19 a

G. Rose, Capital

$100,000

C. Novak, Capital

50,000

Total

$150,000


C. Novak, Capital 50,000

H. Hollis, Capital 50,000

Notice, this is an agreement between two individuals. No new assets are acquired by the partnership


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Balances:

G. Rose, Capital $100,000


Total $150,000


Investing in the PartnershipInvesting in the PartnershipInvesting in the PartnershipInvesting in the Partnership

• New partner contributes assets to the partnership in exchange for a share of the business


Investing in the Partnership Investing in the Partnership at Book Valueat Book Value

Investing in the Partnership Investing in the Partnership at Book Valueat Book Value

• New partner invests assets equal to his/her interest in the new partnership– Debit assets– Credit new partner’s capital


Investing in Partnership at Book ValueInvesting in Partnership at Book ValueE12-19 bE12-19 b

Investing in Partnership at Book ValueInvesting in Partnership at Book ValueE12-19 bE12-19 b



Total before admitting $150,000

Hollis investment 50,000

Total after admitting $200,000

¼ interest = $50,000


E12-19 bE12-19 bE12-19 bE12-19 b


Cash 50,000



E12-19 bE12-19 bE12-19 bE12-19 b

Balances




$200,000


Investing in the Partnership - Investing in the Partnership - Bonus to the Old PartnersBonus to the Old Partners

Investing in the Partnership - Investing in the Partnership - Bonus to the Old PartnersBonus to the Old Partners

• New partner invests assets greater than his/her equity in the new partnership

• Bonus increases old partner’s capital in profit-and-loss sharing ratio– Debit assets– Credit new partner’s capital for his/her share– Credit each old partners’ capital for his/her

share of the bonus


Investing in Partnership Bonus to Existing Investing in Partnership Bonus to Existing PartnersPartners

E12-19 c.E12-19 c.

Investing in Partnership Bonus to Existing Investing in Partnership Bonus to Existing PartnersPartners

E12-19 c.E12-19 c.G. Rose, Capital $100,000C. Novak, Capital 50,000 Total before admitting $150,000Hollis investment 90,000 Total after admitting $240,000

¼ interest = $60,000Bonus of $30,000 paid to existing partners

Hollis contributed $90,000. The credit to her capital account is $60,000. The extra $30,000 is considered a bonus to the existing partners


E12-19 cE12-19 cE12-19 cE12-19 c

Distribution of bonus:

G. Rose, Capital (30,000 x 1/2)

$15,000

C. Novak, Capital (30,000 x 1/2)

15,000


E12-19 cE12-19 cE12-19 cE12-19 c


Cash 90,000


G. Rose, Capital 15,000C. Novak, Capital 15,000


E12-19 cE12-19 cE12-19 cE12-19 c

Balances:




$240,000


Investing in the Partnership - Investing in the Partnership - Bonus to New PartnersBonus to New Partners

Investing in the Partnership - Investing in the Partnership - Bonus to New PartnersBonus to New Partners

• New partner invests assets less than his/her equity in the new partnership

• Bonus decreases old partner’s capital in profit-and-loss sharing ratio– Debit assets– Debit each old partners’ capital for his/her

share of the bonus to the new partner– Credit new partner’s capital for his/her share



Account for a partner’s withdrawal from the firm


Withdrawal of a PartnerWithdrawal of a PartnerWithdrawal of a PartnerWithdrawal of a Partner

• Assets may be revalued

• Any gain or loss is allocated among the partners based on their profit- and-loss ratios


Partner Sells Interest to Existing Partner Sells Interest to Existing PartnerPartner

Partner Sells Interest to Existing Partner Sells Interest to Existing PartnerPartner

• Transfer equity from the withdrawing partner to the purchaser

• No assets flows through the partnership

• Debit withdrawing partner’s capital

• Credit purchaser’s capital


Withdrawal at Book ValueWithdrawal at Book ValueWithdrawal at Book ValueWithdrawal at Book Value

• Partner takes assets with value equal to his capital account (equal to book value)


• Credit assets taken


Withdrawal at Withdrawal at Less Than Book ValueLess Than Book Value

Withdrawal at Withdrawal at Less Than Book ValueLess Than Book Value

• Remaining partners share the difference (bonus) based on their profit-and loss-sharing ratio.


• Credit assets and remaining partners’ capital


Withdrawal at Withdrawal at More Than Book ValueMore Than Book Value

Withdrawal at Withdrawal at More Than Book ValueMore Than Book Value

• Bonus to the withdrawing partner reduces the remaining partners’ capital balances based on their profit-and-loss ratio


• Debit remaining partners’ capital

• Credit assets


E12-21E12-21E12-21E12-21

Distribute gain on land to partners based on profit-loss ratio

Sam (32,000 x 4/10) $12,800

Bob (32,000 x 3/10) 9,600

Tim (32,000 x 3/10) 9,600


E12-21E12-21E12-21E12-21


May31 Land 32,000

Sam, Capital 12,800

Bob, Capital 9,600

Tim, Capital 9,600


E12-21E12-21E12-21E12-21

Distribute loss on inventory to partners based on profit-loss ratio

Sam (12,000 x 4/10) $4,800

Bob (12,000 x 3/10) 3,600

Tim (12,000 x 3/10) 3,600


E12-21E12-21E12-21E12-21


May31 Sam, Capital 4,800

Bob, Capital 3,600

Tim, Capital 3,600

Inventory 12,000


E12-21E12-21E12-21E12-21

Sam, Capital Tim, CapitalBob, Capital36,000 22,00051,00012,800 9,600 9,600

44,000 57,000 28,0004,800 3,600 3,600

Sam receives a bonus of $16,000 ($60,000 - $44,000)


E12-21E12-21E12-21E12-21

Distribute bonus to withdrawing partner based on profit-loss ratio

Bob (16,000 x 3/6)

$8,000

Tim (16,000 x 3/6)

8,000


E12-21E12-21E12-21E12-21


May31 Sam, Capital 44,000

Bob, Capital 8,000

Tim, Capital 8,000

Cash 60,000



Account for the liquidation of a partnership


Death of a PartnerDeath of a PartnerDeath of a PartnerDeath of a Partner

• Dissolves partnership

• Settlement with the deceased partner’s estate - based on partnership agreement

• Or, a remaining partner may buy the deceased partner’s equity


Liquidation of a PartnershipLiquidation of a PartnershipLiquidation of a PartnershipLiquidation of a Partnership

• Adjust and close books

• Sell the noncash assets, allocate gains and losses to the partners based on their profit-and-loss-sharing ratio

• Pay all the liabilities

• Distribute the remaining cash based on the partners’ capital balances


E12-24E12-24E12-24E12-24

Cash

Noncash Assets Liabilitie

s

Dodd, Capital

Gage, Capital

Hamm, Capital

$6,000 $126,000 $77,000 $12,000 $37,000 $6,000

140,000 (126,000)GENERAL JOURNAL

DATE DESCRIPTION REF DEBIT CREDIT

Cash 140,000

Noncash Assets 126,000

Gain on Sale of Assets 14,000

Sell off the noncash assets


E12-24E12-24E12-24E12-24

Distribute Gain on Sale of Assets:

Dodd ($14,000 x 20%)

$2,800

Gage ($14,000 x 30%)

4,200

Hamm ($14,000 x 50%)

7,000


Gain on Sale of Assets 14,000

Dodd, Capital 2,800

Gage, Capital 4,200

Hamm, Capital 7,000

Distribute gain based on profit and loss ratio


E12-24E12-24E12-24E12-24

Cash


s

Dodd, Capital

Gage, Capital

Hamm, Capital

$6,000 $126,000 $77,000 $12,000 $37,000 $6,000

140,000 (126,000) 2,800 4,200 7,000

$146,000 0 $77,000 $14,800 $41,200 $13,000GENERAL JOURNAL

DATE DESCRIPTION REF DEBIT CREDIT

Liabilities 77,000

Cash 77,000

Pay off the liabilities


E12-24E12-24E12-24E12-24

Cash


s

Dodd, Capital

Gage, Capital

Hamm, Capital

$6,000 $126,000 $77,000 $12,000 $37,000 $6,000

140,000 (126,000) 2,800 4,200 7,000

$146,000 0 $77,000 $14,800 $41,200 $13,000

(77,000) (77,000)

$69,000 0 0 $14,800 $41,200 $13,000

$69,000

Distribute the cash to the partners and close out their accounts as well


E12-24E12-24E12-24E12-24


Dodd, Capital 14,800

Gage, Capital 41,200

Hamm, Capital 13,000

Cash 69,000


E12-24E12-24E12-24E12-24

Cash


s

Dodd, Capital

Gage, Capital

Hamm, Capital

$6,000 $126,000 $77,000 $12,000 $37,000 $6,000

140,000 (126,000) 2,800 4,200 7,000

$146,000 0 $77,000 $14,800 $41,200 $13,000

(77,000) (77,000)

$69,000 0 0 $14,800 $41,200 $13,000

(69,000) (14,800) (41,200) (13,000)

0 0 0 0 0 0


E12-22E12-22E12-22E12-22

1. Cash $80,000

Ray, capital $33,000

Scott, capital 28,000

Van, capital 19,000

80,000

Each partner receives cash equal to his capital balance because cash equals total partnership capital


E12-22E12-22E12-22E12-22

2. Cash $50,000 Ray, capital $33,000 Scott, capital 28,000 Van, capital 19,000 80,000

Loss $30,000

Each partner gets $10,000 ($30,000 / 3) less than his capital balance


E12-22E12-22E12-22E12-22

2. Ray $23,000

Scott 18,000

Van 9,000

$50,000



Prepare partnership financial statements


Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements

• Much like those of a proprietorship

• Income statement - section showing division of net income to the partners

• Balance sheet - capital of each partner in owners’ equity section

• Statement of Owners’ Equity shows changes to each partner’s capital account


S12-13S12-13S12-13S12-13

Bush and Carter

Income Statement

Year Ended September 30, 2007

Service revenue $145,000

Total expenses 85,000

Net income $60,000

Allocation of net income:

To Bush ($60,000 .60) $36,000

To Carter ($60,000 .40) 24,000 $60,000


End of Chapter 12End of Chapter 12End of Chapter 12End of Chapter 12

copyright © 2007 prentice-hall. all rights reserved 1 partnershipspartnerships chapter 12

Documents

capital slide

partnership slide

new partner slide

share of income slide

business income tax

withdrawals account

classes of partners

losses losses