partnership accounting (poa-pt2) notes

8/9/2019 Partnership Accounting (PoA-Pt2) Notes

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All examples are fromtextbook by LarsenACCT 501

Chapter 2

Accounting for Partnerships:rgani!ation an" peration


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Objectives of the Chapter

To learn the accounting and reportingfor limited liability partnerships (LLPs)

including:a. the organization,b. the income-sharing plans,c. the financial statements, and

d. the changes in ownership.To learn the accounting for limitedpartnerships


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Partnerships

The niform Partnership !ct defines apartnership as: "an association of twoor more persons to carry on, as co-owners, a business for profit".

Partnerships generally are associated

with the practice of law, medicine,public accounting and otherprofessions, and also with smallbusiness enterprises.


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Partnerships (contd.)

#eneral partnership: in which allpartners ha$e unlimited personal liabilityfor debts of the partnership.

Limited liability partnerships (LLPs):indi$idual partners of LLPs are

personally responsible for their ownactions and for the actions ofemployees under their super$ision.


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Partnerships (contd.)

The LLPs as a whole, li%e a generalpartnership, is responsible for theactions of all partners and employees.

&ince the LLPs are the pre$alent formof partnerships and the issues of

organization, income-sharing plans andchanges in ownership of LLPs aresimilar to those of general partnerships,LLPs are discussed in this chapter.


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Organization of a Limited Liability

Partnership (LLP) 'asic haracteristics of the LLP:. *ase of +ormation.

. Limited Life.

. utual !gency.

/. o-0wnership of Partnership !ssetsand *arnings.


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Major Differences beteen an LLP

and a Corporationharacteristics of a corporation:. &eparated legal entity from its owners:

it can buy, sell and own properties.. Limited liability for stoc%holders.

. ontinuous e1istence.

/. *ase of transfer of ownership.

2. *ase of capital generation.


8/102

Major Differences beteen an LLPand a Corporation (contd.)3. entralized authority and responsibility--

to the President, not to numerousowners.

4. Professional management

5. orporation ta1es (double ta1ation).

6. &eparation of ownership andmanagement: principal 7 agent conflicts.

8. #o$ernment regulations.


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!a"ation of LLP

!n LLP pays no income ta1.

LLP is only re9uired to file an annual

information return showing its re$enueand e1penses, the amount of its net

income and the di$ision of the net income

among the partners.


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!a"ation of LLP

The partners of LLP report their shares of

the ordinary net income from the

partnership and di$idends and charitablecontributions in their indi$idual income

ta1 returns, regardless of whether they

recei$ed more of less than this amount ofcash from the LLP.


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#s the LLP a $eparate %ntity &

Legal status: a partnership is an"association of persons" and is not a

separate entity while a corporation is aseparate entity from its owners.

*conomic substance: in terms of

managerial policy and businessobecti$es, LLPs are as much businessand accounting entities as arecorporations.


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#s the LLP a $eparate %ntity &(contd).

LLPs typically are guided by long-range plans not li%ely to be affected

by the admission or departure of asingle partner.

The accounting policies of LLPs

should reflect the fact that thepartnership is an accounting entityapart from its owners.


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!he Partnership Contract

! good business practice re9uiresthe partnership contract in writing.

The followings are a few importantpoints to be co$ered in a writtencontract for a LLP:


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!he Partnership Contract (contd.)

. The formation date and the plannedduration of the partnership; the namesof the partners, and the name and

business acti$ities of the partnership.. The assets to be in$ested by each

partner, the procedure for $aluingnoncash in$estments, and thepenalties for a partner


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. The authority, the rights and the dutiesof each partner.

/. The accounting period to be used, thenature of accounting records, financialstatements and audits by independent

public accountants.2. The net income (loss) sharing plans.


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3. The drawings allowed to each partner.

4. =nsurance on the li$es of partners

5. Pro$ision for arbitration of "isputes.6. Pro$ision for li#ui"ation of the

partnership at the end of the term

specified in the contract or at the deathor retirement of a partner.


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Ledger 'cconts for Partners

The following three types of accountsare used in LLPs for each partner:

.

apital accounts.. >rawing accounts.

. !ccounts for loans to and from

partners.


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Ledger 'cconts for Partners (contd.)

The original in$estment from partner isrecorded as:

!ssets (based on current fair $alue)???

Liabilities ??? apital-Partner ! ???

>rawings from Partners are recorded as:

>rawing @Partner ! ???ash ???


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!t the end of each accounting period,the income summary ledger account istransferred to the capital accounts in

accordance with income sharing planspecified in the contract.

!lso, the debit balances in the drawing

accounts are closed to the partner


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Loans $ecei%ablefrom Partners: thisaccount is debited when a partnerrecei$es cash from the LLP with the

intention to repay this amount.Loans Payableto Partners: thisaccount is credited when a partner

ma%es a cash payment to the LLP thatis considered a loan rather than anin$estment.


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=f a substantial unsecured loan hasbeen made to a partner and repaymentappears doubtful, it is appropriate to

offset the recei$able against thepartner


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alation of #nvestments by Partners

#ains or losses from disposal ofnoncash assets in$ested by thepartners is measured as:

The disposal price @ the current fair$alue of the assets when in$ested

adusted for any depreciation or amortization to the date

of disposal.These gains (losses) are di$ided basedon the income sharing plan of the LLP.


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#ncome*$haring Plans for LLP

Partners can agree on any type of incomesharing plan regardless of the amount oftheir respecti$e capital in$estment.

The niform Partnership !ct states that ifpartners fail to specify a plan for sharing

net incomeAloss, it is assumed that theyintend to share e9ually.


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#ncome*$haring Plans for LLP(contd.) The following are a few possible plans of

income-sharing:. *9ually.. =n the ratio of partners< capital account

balance on a specific date or in the ratioof a$erage capital account balance in theyear.

. !llowing interest on partner


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#ncome*$haring Plans for LLP(contd.)/. !llowing salaries to partners and di$iding

the remaining net incomeAloss in aspecified ratio.

2. 'onus to managing partner based onincome.

3. !llowing salaries to partners, allowing

interest on capital account balances, anddi$iding the remaining net incomeAloss ina specified ratio.


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#ncome*$haring Plans for LLP*%"amples!lb 7 'ay LLP had a net income of?88,888 for the year ended AA66, thefirst year of operation.The partnership contract pro$ides that eachpartner may withdraw ?2,888 cash on thelast day of each month. 'oth partners did

so during 666.!ll other withdrawals, in$estments and netincomeAloss are entered directly in thecapital account.


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#ncome*$haring Plans for LLP*%"amples (contd.)!lb in$ested ?/,888,888 on AA66 and anadditional ?88,888 on /A. 'ay in$ested?588,888 on AA and withdrew ?28,888 on

4A.These transactions and e$ents aresummarized in the following ledger

accounts:


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#ncome*$haring Plans for LLP*%"amples (contd.)

!lb, apital 'ay, apital /88,888BA 4A..28,888 588,888..A 88,888B/A

!lb, >rawing 'ay, >rawing

Can.->ec.38,888 Can.->ec. 38,888

=ncome &ummary 88,888BA


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#ncome*$haring Plans for LLP*%"amples (contd.)=f the entire net income is shared e9ually, the following entryis recorded:

=ncome &ummary 88,888!lb, apital 28,888'ay, apital 28,888

!t the end of 666, the drawing accounts are to be closed to=ncome &ummary as follows: !lb, apital

38,888 'ay, apital

38,888 !lb,>rawing38,888'ay,>rawing 38,888

$h i l f


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#ncome*$haring Plans for LLP*%"amples (contd.)The entire incomeAloss can be shared atany specified ratio specified in the contract.

LLP can apply one sharing ration to netincome but another ratio to net loss.

LLP can apply one sharing ratio to net

income e9ual or less than a specific amountbut another ratio to net income greater thanthat amount.


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#ncome*$haring Plans for LLP*%"amples (contd.)The entire incomeAloss of LLP can also beshared by the ratio of partners< capitalaccount balances such as:

by the original capital in$estments,by the capital account balance at the,beginning of each year,

by the balances at the end of each year(before the distribution of net incomeAloss), andby the a$erage balances during the year.


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#ncome*$haring Plans for LLP*%"amples (contd.) The assumption of the sharing based on

the capital ratio is that the capitalin$estment is the sole determinant of the

income of LLP. Thus, another common practice in

income sharing of LLP is to di$ide only aportion of net income in the capital ratioand to di$ide the remainder e9ually or insome other specified ratio.


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#nterest on Partner+s Capital accontbalances ith ,emaining Divided in $pecified

,atio! method to carry out the abo$e sharingscheme is to allow interest on partners< capitalbalance at 2D, for e1ample, and di$iding theremainder at a specified ratio.

This method is the same as di$iding only aportion of net income in the ratio of partnerset#ncome Divided in $pecific ratio 0ne partner may contribute more ser$ices

to the LLP than the other. =f the income-sharing is based solely on the

amount of ser$ices pro$ided by eachpartner, the following problems arise: ) the success of a LLP is not determined

solely by the ser$ices pro$ided by partners.

) in the case of net loss, the partnerrenders more ser$ices will absorb a largerportion of the loss.


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$alary 'lloance ith ,emaining >et#ncome Divided in $pecific ratio (contd.) 0ne solution to a$oid these problems as

well as recognize the une9ual ser$ices ofpartners is to pro$ide salaries to partnersbased on their ser$ices to the LLP.

The remaining net income is to be sharede9ually or in a specified ratio.

*1ample: assume the contract pro$ides foran annual salary of ?88,888 to !lb and?38,888 to 'ay with remaining net incomedi$ided e9ually.


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$alary 'lloance ith ,emaining >et#ncome Divided in $pecific ratio (contd.)

'lb -ay Combined

$alaries /6443444 /843444 /6843444

>et income (/:443444*/6843444) divided e;ally

143444 143444 6043444

!otals /6143444 /6:43444 /:443444

The salaries are paid monthly during theyear. The net income of ?/8,888(?88,888-88,888-38,888) for 666 is

di$ided as follows:


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$alary 'lloance ith ,emaining >et#ncome Divided in $pecific ratio (contd.)

onthly Cournal *ntries:

&alaries *1pense ,apital @!lb

5, apital-'ay

2,888!lb, >rawing 5, 'ay,

>rawing 2,888ash ,

=ncome &ummary /8,888!lb, apital 48,888

'ay, apital 48,888


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-ons to Managing Partner -asedon #ncome

! partnership contract may pro$idebonus to the managing partners e9ualto a specified D of income.

The contract should state whether theD is based on the income prior to thebonus or after the bonus.

*1ample (D is based on the incomeafter the bonus):


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-ons to Managing Partner -asedon #ncome (contd.)

!ssume that the net income is?88,888 and the contract pro$ided fora bonus of 2D of income after the

bonus to Partner !lb. The remainder ofnet income is to be di$ided e9ually. Thebonus to !lb is computed as follows:

8.2 1 (?88,888-') F ' FG?42,888 F .2 1 ' FG ' F ?38,888

Eote: The concept of a bonus is notapplicable to a net loss.


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$alaries to Partners ith #nterest onCapital 'cconts

any LLPs di$ide income or loss byallowing salaries to partners and alsointerest on their capital account balances.

!ny resultant net income or loss is di$idede9ually or in some other ratio. *1ample: assume the following:

. !nnual salaries of ?88,888 to !lb and?38,888 to 'ay, recognized as operatinge1pense.


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$alaries to Partners ith #nterest onCapital 'cconts (contd.)

. =nterest on a$erage capital accountbalances, as computed on page 6(?4,28 for !lb and ?3,28 for 'ay).

. The remaining net income or lossdi$ided e9ually.

/.

!ssuming income of ?88,888 fir 666before annual salaries, the ?/8,888net income is di$ided as follows:


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$alaries to Partners ith #nterest onCapital 'cconts ?%"ample (contd.)

'lb -ay Combined

#nterest on average capitalaccont balances

'lb /012344454.62 /163724 /163724-ay /112344454.62 /6683724 6683724

$btotal /6913244

,eslting deficiency(/6913244*/6043444)divided e;ally

(7:3124) (7:3124) (013244)

!otal /013244 /=73244 /6043444


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@inancial $tatements of an LLP ?#ncome $tatement>et sales /:34443444

Cost of goods on sold 639443444

Aross margin on sales /637443444

PartnersB salaries e"pense /6843444

Other operating e"penses =443444 634843444

>et income / 6043444

Division of net income

Partner 'lb / 013244

Partner -ay =73244

!otal /6043444


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@inancial $tatements of an LLP ?#ncome $tatement (contd.) Eotes to the =A&:

. *1planations of the di$ision of net

income may be included in thepartnership


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@inancial $tatements of an LLP ?#ncome $tatement (contd.) Eotes to the =A& (contd.)

. The partners are ta1ed for their

shares of partnership income,including their salaries (thisinformation can be disclosed).


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$tatement of Partner+s Capital

! statement of partner


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$tatement of Partner+s Capital

PartnerAlb

Partner'ay

Combine"

Partners( originalin%estments) beginning ofyear

*+00)000 *,00)000 *1)200)000

A""itional in%estment-.ith"ra.al/ of capital

100)000 -50)000/ *1)250

'alances before salaries)net income) an" "ra.ing

*500)000 *50)000 *1)250)000

A"": alaries 100)000 0)000 10)000

&et income +)500 32)500 1+0)000

ubtotals *+)500 *302)500 *1+0)000

Less: 4ra.ings 100)000 0)000 10)000


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$tatement of Partner+s Capital (contd.)

Eote: Partners< capital at end of year is

reported as owners< e9uity in theAA666, balance sheet of thepartnership as illustrated on page24.


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Condensed -alance $heet $tatement

Cash /243444 !rade accontspayable

/7043444

!rade acconts

receivable

043444 Long*term debt :143444

#nventories :843444 !otal Liabilities /8643444

Plant assets(net)

632243444 PartnersB capital

Partner 'lb /2013244

Partner -ay 9073244 63:=43444

!otal assets /734443444 !otalliabilities

partnersB

/734443444

Assets Liabilities 6 Partners( Capital


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$tatement of Cash @los

! statement of cash flows is prepared fora partnership as it is for a corporation.

! statement of cash flows for !lb 7 'ay

LLP under the indirect method is asfollows:


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$tatement of Cash @los (contd.)

Cash flos from operating activities

>et income /6043444

'djstments to reconcile net income to netcash provided by operating actives

PartnersB salaries e"pense /6843444

Depreciation e"pense 743444

#ncrease in trade acconts receivable (043444)

#ncrease in inventories (:843444)#ncrease in trade acconts payable 7043444 743444

>et cash provided by operatingactivities

/6843444

Cash flos from investing activities


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$tatement of Cash @los (contd.)

Cash flos from financing activities

PartnersB investments /63:443444

PartnerBs ithdraal (243444)

PartnersB draings (6843444)>et cash provided by financing activities 634=43444

>et increase in cash (cash at end of year) / 243444

%"hibit # "oncas# investin$ and financin$ activity%

Capital lease obligation incrred forplant assets

/ :143444

C ti f P t hi > t # f P i


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Correction of Partnership >et #ncome of PriorPeriod ? Changes in #ncome $haring Plan

Hhen prior period adustments occurred,the change in the prior periodincomeAloss should be di$ided based on

the income sharing plan of theyear inwhich the error occurred, not thecurrent years


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Changes in Onership of LLPs

+rom a legal point of $iew, a LLP isdissol$ed when:

. !dmit a new partner,

. the retirement or death of a partner,. the ban%ruptcy of the firm or of any

partner,/.

the e1piration of a time period stated inthe contract, or2. the mutual agreement of the partners to

end their association.


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Changes in Onership of LLPs (contd.)

Thus, the term dissolution is usedfor e$ents ranging from a minorchange of ownership not affecting

operations of the LLP to a decisionby the partners to terminate the LLP.


62/102

Changes in Onership of LLPs (contd.)

!ccountants are more concernedwith the economic substance of ane$ent than with the legal form of an

e$ent. The change in partnership should

be recorded after e$aluate all thecircumstances of the indi$idualcase.

'd i i f > P t A l


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'dmission of a >e Partner ?AeneralPrinciples to @ollo Hhen a new partner is admitted to a

LLP, the e1isting assets should bere$alued and the e1cess should

increase the capital of the e1istingpartners.

This e1cess can beallocated basedon the income sharing plan.

'd i i f > P t A l


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'dmission of a >e Partner ?AeneralPrinciples to @ollo (contd.) Hhen the in$estment amount of a new

partner is greater than the capitalcredited to the new partner, the e1cess

is bonus to thee1istingpartners. Cournal entry:

!sset 48,888

apital, new 38,888 apital, e1isting 8,888 (also see e1ample on p4)

'dmission of a >e Partner Aeneral


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'dmission of a >e Partner*AeneralPrinciples to @ollo (contd.) Hhen the in$estment amount of a new

partner is less than the capital credited tothe new partner, the e1cess is bonus tothe new partneror goodwill to thepartnership

Cournal entry (the e1cess is bonus to thenewpartner) (also see p44 for e1ample) :

!ssets (in$ested by the new partner) 48,888apital, e1isting 8,888

apital, new 58,888

'dmission of a >e Partner Aeneral


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'dmission of a >e Partner*AeneralPrinciples to @ollo (contd.) Cournal entry (the e1cess is goodwill to

the partnership)(also see p58 and p- fore1amples):

!ssets (in$ested by the new partner) 68,888#oodwill 8,888

Liabilities 8,888

apital, new 58,888Eote: This can only be done when the new

partner is in$esting hisAher proprietorship.


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'dmission of a >e Partner*%"amples

Ac#uisition of an 7nterest by Paymentto ne of 8ore partners:

!ssume that Lane and ull, partners of

Lane 7 ull LLP share net incomee9ually and that each has a capitalbalance of ?38,888.

Eash (with the consent of ull)ac9uireshalf of Lane


68/102

'dmission of a >e Partner*%"amples(contd.)

The C.*. to record this change in ownershipfollows:Lane, apital (?38,888 I A) 8,888

Eash, apital 8,888

Eote: the cash paid by Eash to Lane isirrele$ant for this ournal entry.

'dmission of a >e Partner


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=n$estment in Partnership by Eew Partner:!ssume that Hol% and Jary, partners of Hol%7Jary LLP, share net incomeAloss e9ually andeach has a capital balance of ?38,888.!ssume also that the carrying amounts ofpartnership assets are e9ual to current fair

$alues.Hol% and Jary agree to admit Kell to thepartnership by in$estment of Kell


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The fair $alue of Kell


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'onus to *1isting Partners:!ssume that in ain 7 >u%e LLP, the two

partners share net incomeAloss e9uallyand ha$e capital account balances of?/2,888 each.

The carrying amounts of the partnershipnet assets appro1imate current fair$alues.

'dmission of a >e Partner


72/102


'onus to *1isting Partners (contd.):The partnership agree admit *c% to a one-third interest in capital and one-third share innet incomeAloss for a cash in$estment of?38,888.Thus, the net assets of the new firm amount

to ?28,888 (?/2,888?/2,88?38,888).The following entry should be recorded for theadmission of the new partner:

'dmission of a >e Partner ith


73/102

'dmission of a >e Partner*ith-ons to %"isting Partners

ash 38,888ain, apital (?8,888 I A) 2,888>u%e, apital (?8,888 I A) 2,888

*c%, apital (?28,888 I A) 28,888To record in$estment by *c% for a one9thir" interest incapital, with bonus of ?8,888 di$ided e9ually betweenain and >u%e.

Eote: the capital credit to the new partner isless than the in$estment amount. The e1cessis credited to the bonus of e1isting partners.

'dmission of a >e Partner ith


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'dmission of a >e Partner*ithgoodill to e"isting partners

The one-third share interest in capital (netassets) to the new partner can also beachie$ed by the following ournal entry -not

recommen"e"/:Cas# '0,000(ood)ill *+120,000 +0,000- .0,000

Cain, Capital *+.0,000 / 12- 15,000

ue, Capital *+10,000 / 12- 15,0003c, Capital '0,000

To record investment by 3c for a onet#ird interest in capital, )it# creditoffsettin$ $ood)ill of +.0,000 divided e4ually bet)een Cain and ue!

'dmission of a >e Partner @airness of


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'dmission of a >e Partner*@airness of'sset alation

!ssume that the net assets of ain7>u%eLLP carried at ?68,888, were estimated toha$e a current fair $alue f ?8,888 at the

time of admission of *c% as a partner. The LLP re9uired *c% to in$est ?38,888 for a

one-third interest in partnership net assets.

'dmission of a >e Partner @airness of


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'dmission of a >e Partner*@airness of'sset alation

!n alternati$e recording of the abo$e e$entis:

!ssets 8,888ash38,888

ain, apital 2,888

>u%e, apital2,888 *c%,apital 38,888

'dmission of a >e Partner*ith


77/102

'dmission of a >e Partner*ith-ons to >e Partner

*1cess capital recorded as bonusto EewPartner:

!ssume +arr and #old, partners of +arr 7 #old,

LLP, share net incomeAloss e9ually and ha$ecapital account balances of ?2,888 each.

The partnership offer Mart a one-third interest incapital and one-third share of net incomeAlossfor an in$estment of ?8,888.

A N(?2,88818,888) F ?8,888



78/102


*1cess capital for Mart FG ?8,888-8,888F8,888

This e$ent should be ournalized as follows

when the e1cess of capital to the newpartner is recorded as bonus to the newpartner:

ash 8,888+arr, apital (?8,888 I A) 2,888#old, apital (?8,888 I A) 2,888

Mart, apital 8,888To record admission of art, )it# bonus of +10,000 from 6arr and (old!



79/102


The abo$e treatment assumes that the netassets of the LLP were $alued properly priorto the admission of Mart.

=f not, the net assets should be written down(debit the capital accounts) to the fair $alueprior to the abo$e ournal entry.



80/102

'dmission of a >e Partner*ithAoodill to >e Partner

*1cess capital recorded as goo".illto EewPartner (see P- for an e1ample):

!ssume that the new partner Mart is theowner of a successful proprietorship that Martin$ests in the partnership rather than ma%ingan in$estment in cash.

sing the same data as in the precedinge1ample, and the identifiable tangible andintangible net assets of the proprietorshipowned by Mart are worth ?8,888.



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'dmission of a >e Partner*ithAoodill to >e Partner (contd.)

>ue to Mart


82/102

'dmission of a >e Partner*ithAoodill to >e Partner (contd.)

=dentifiable Tangible and=ntangible Eet !ssets 8,888#oodwill (?2,888 - ?8,888) 2,888

Mart, apital 2,888

To record admission of art $ood)ill is attributable to

superior earnin$s of sin$le proprietors#ip invested by art!

,etirement of a Partner* Comptation


83/102

,etirement of a Partner* Comptationof the $ettlement Price

!t retirement of a partner, the assets of thepartnership should be re$alued at the currentfair.

The gain or loss should be allocated to allpartners based on their income-sharing plan(i.e., debit assets and credit capital accounts).

!fter the allocation, the capital balance of theretiring partner is adusted to the basis ofcurrent fair $alues of partnership


84/102

,etirement of a Partner -ons to,etiring Partner

The partners may agree to settle by payment ofthis amount (the adusted capital balance of theretiring partner), or on a different amount.

=f the payment is greater than the adustedcapital balance of the retiring partner, thee1cess payment is considered as a bonus to

the retiring partner (see p55 for an e1ample).#eneral Cournal entry: apital @ retiring ???

apital @ continuing ???ash ???

,etirement of a Partner* -ons to


85/102

,etirement of a Partner -ons toContining Partners

=f the payment is less than the adusted capitalbalance of the retiring partner, the difference isconsidered as a bonus to the continuing partners.

#eneral Cournal *ntry: apital @ retiring ???

ash

??? apital,continuing ???

!lso see p6 and *-4 for an e1ample.



86/102

,etirement of a Partner -ons to,etiring Partner (e"ample)

!ssume that partner Lund is to retire fromCorb, Oent 7 Lund LLP. *ach partner has acapital balance of ?38,888, and net income

and losses are shared e9ually. The contract pro$ides that a retiring partner

is to recei$e the balance of the retiring

partner capital account plus a share of anyinternally generated goodwill.



87/102


!t the time of Lund


88/102


Lund, apital 38,888Corb, apital (?8,888 I A) 2,888Oent, apital (?8,888 I A) 2,888

ash 48,888To record payment to retiring partner Lund, including abonus of ?8,888.



89/102


This bonus method illustrated abo$e isappropriate whene$er the settlemente1ceeds the capital account balance of the

retiring partner.The agreement for settlement may not usethe term goodwill.



90/102

,etirement of a Partner -ons toContining Partner (e"ample)

!ssume that the three partners, Eoll, erzand Par% share net incomeAloss e9ually.

*ach has a capital balance of ?38,888. Eoll retires from the partnership and

recei$es ?28,888.

The ournal entry to record Eoll


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,etirement of a Partner -ons toContining Partner (e"ample)

Eoll, apital 38,888ash 28,888erz, apital (?8,888 I A) 2,888

Par%, apital(?8,888 I A)

2,888To record retirement of 8artner "oll for an amount less t#an

carryin$ amount of "oll9s e4uity, )it# a bonus to

continuin$ partners!

Limited Partnerships


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Limited Partnerships

The legal pro$isions go$erning limitedpartnerships are pro$ided by the niformLimited Partnership !ct.

The important features of a limitedpartnership are the following:

. There must be at least one general partner.

. Limited partners ha$e no obligation forunpaid liabilities of the limited partnership;only general partners ha$e such liability.

Limited Partnerships (contd )


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Limited Partnerships (contd.)

. Limited partners ha$e no participation inthe management of the partnership.

/. Limited partners may in$est only cash orother assets in a limited partnership; theymay not pro$ide ser$ices as theirin$estment.

2. The surname of a limited partner may notappear in the name of the partnership.



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3. The formation of a limited partnershipis e$idenced by a certificate filed withthe county recorder of the principalplace of business of the limitedpartnership.



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embership in a limited partnership isoffered to limited partners in unitssubect tothe &ecurities !ct of 6.

Thus, unless e1empt by the pro$isions of that!ct, a limited partnership must file aregistration statement for the offered unitswith the &* and file reports with the &*.

'cconting for Limited Partnerships


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'cconting for Limited Partnerships

The accounting for limited partnershipsparallels that accounting for LLPs.

Mowe$er, limited partners do not ha$e periodic

drawings debited to >rawing ledger account. =n &taff !ccounting 'ulletin /8, the &*

re9uires the e9uity section of a limited

partnership balance sheet specify amounts foreach ownership class (i.e., the general partner$ersus the limited partners).

@inancial $tatements for Limited


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a c a $tate e ts o tedPartnerships

!ssume that Hesley andall formed andallompany, a limited partnership that wase1empt from the registration re9uirements of

the &ecurities !ct of 6 on AA666. Hesley andall, the general partner,

ac9uired 8 units at ?,888 a unit, and 8limited partners ac9uired a total of 248 unitsat ?,888.

The certificate for andall ompany pro$ided



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Partnerships (contd.) The certificate for andall ompany

pro$ided that limited partners mightwithdraw their net e9uity only on A

of each year. andall was authorized to withdrew

?288 a month at his discretion, but he

had no drawings during 666.



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Partnerships (contd.) andall ompany had a net income of

?68,888 for 666 and on AA66, twolimited partners withdrew their entire

e9uity interest of /8 units. The following condensed financial

statements incorporate the foregoing

assumptions and comply with thepro$isions of &taff !ccounting 'ulletin/8:


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$tatement of Partners+ Capital for ear


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p%nded 67E:6E6===

Fnits 'mont Fnits 'mont Fnits 'mont

#nitial investments3beginning of year

:4 /:43444 214 /2143444 844 /8443444

'dd >et income 03244 923244 =43444

$btotals :4 /:03244 214 /8223244 844 /8=43444

Less ,edemption of

nits

04 083444 04 083444

PartnersB capital3end of year

:4 /:03244 2:4 /84=3244 284 /8003444

Aeneral Partner Limited Partners Combined

-alance $heet 67E:6E==


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-alance $heet3 67E:6E==

Crrent assets /7043444 Crrent liabilities /6443444

Other assets 1843444 Long*term debt 7283444

!otal Liabilities /:283444

PartnersB capital(/63624G per nitbased on 284 nitsotstanding)

Aeneral partner /:03244Limited partners 84=3244 8003444

!otal /6 444 444 !otal liabilities /6 444 444

Assets Liabilities 6 Partners( Capital

partnership accounting (poa-pt2) notes

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