Chapter 12-1 ACCOUNTING FOR PARTNERSHIPS Accounting Principles, Eighth Edition CHAPTER 12.

23
Chapter 12-1 ACCOUNTING FOR ACCOUNTING FOR PARTNERSHIPS PARTNERSHIPS Accounting Principles, Eighth Edition CHAPTER CHAPTER 12 12

Transcript of Chapter 12-1 ACCOUNTING FOR PARTNERSHIPS Accounting Principles, Eighth Edition CHAPTER 12.

Page 1: Chapter 12-1 ACCOUNTING FOR PARTNERSHIPS Accounting Principles, Eighth Edition CHAPTER 12.

Chapter 12-1

ACCOUNTING FOR ACCOUNTING FOR PARTNERSHIPSPARTNERSHIPS

Accounting Principles, Eighth Edition

CHAPTERCHAPTER 1212CHAPTERCHAPTER 1212

Page 2: Chapter 12-1 ACCOUNTING FOR PARTNERSHIPS Accounting Principles, Eighth Edition CHAPTER 12.

Chapter 12-2

Accounting for PartnershipsAccounting for PartnershipsAccounting for PartnershipsAccounting for Partnerships

Partnership Partnership

Form of Form of

OrganizationOrganization

Partnership Partnership

Form of Form of

OrganizationOrganization

Basic Basic

Partnership Partnership

AccountingAccounting

Basic Basic

Partnership Partnership

AccountingAccounting

Liquidation of a Liquidation of a

PartnershipPartnershipLiquidation of a Liquidation of a

PartnershipPartnership

CharacteristicsCharacteristics

Organizations Organizations with partnership with partnership characteristicscharacteristics

Advantages / Advantages / disadvantagesdisadvantages

Partnership Partnership agreementagreement

Forming a Forming a partnershippartnership

Dividing net Dividing net income / lossincome / loss

Financial Financial statementsstatements

No capital No capital deficiencydeficiency

Capital Capital deficiencydeficiency

Page 3: Chapter 12-1 ACCOUNTING FOR PARTNERSHIPS Accounting Principles, Eighth Edition CHAPTER 12.

Chapter 12-3

A partnership is an association of two or more persons to carry on as co-owners of a business for profit.

Partnership Form of OrganizationPartnership Form of OrganizationPartnership Form of OrganizationPartnership Form of Organization

LO 1 Identify the characteristics of the LO 1 Identify the characteristics of the partnership form of business partnership form of business organization.organization.

Common partnerships:

Small retail, service, or manufacturing companies.

Accountants, lawyers, and doctors.

Advantages Combining skills and resources of two or more individuals Ease of formation Freedom from governmental regulations and restrictions Ease of decision making

Advantages Combining skills and resources of two or more individuals Ease of formation Freedom from governmental regulations and restrictions Ease of decision making

Advantages Combining skills and resources of two or more individuals Ease of formation Freedom from governmental regulations and restrictions Ease of decision making

Page 4: Chapter 12-1 ACCOUNTING FOR PARTNERSHIPS Accounting Principles, Eighth Edition CHAPTER 12.

Chapter 12-4

Characteristics of PartnershipsCharacteristics of PartnershipsCharacteristics of PartnershipsCharacteristics of Partnerships

Page 5: Chapter 12-1 ACCOUNTING FOR PARTNERSHIPS Accounting Principles, Eighth Edition CHAPTER 12.

Chapter 12-5

Characteristics of PartnershipsCharacteristics of PartnershipsCharacteristics of PartnershipsCharacteristics of Partnerships

LO 1 Identify the characteristics of the LO 1 Identify the characteristics of the partnership form of business partnership form of business organization.organization.

Association of Individuals

Legal entity. (i.e., property can be owned in the name of the partnership)

Net income not taxed as a separate entity.

Mutual Agency

Act of any partner is binding on all other partners.

(true even when partners act beyond the scope of their authority, so long as the act appears to be appropriate for the partnership)

Page 6: Chapter 12-1 ACCOUNTING FOR PARTNERSHIPS Accounting Principles, Eighth Edition CHAPTER 12.

Chapter 12-6

Characteristics of PartnershipsCharacteristics of PartnershipsCharacteristics of PartnershipsCharacteristics of Partnerships

LO 1 Identify the characteristics of the LO 1 Identify the characteristics of the partnership form of business partnership form of business organization.organization.

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.

• if insufficient assets claims then attach to the personal resources of any partner,

Page 7: Chapter 12-1 ACCOUNTING FOR PARTNERSHIPS Accounting Principles, Eighth Edition CHAPTER 12.

Chapter 12-7

Characteristics of PartnershipsCharacteristics of PartnershipsCharacteristics of PartnershipsCharacteristics of Partnerships

LO 1 Identify the characteristics of the LO 1 Identify the characteristics of the partnership form of business partnership form of business organization.organization.

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.

Page 8: Chapter 12-1 ACCOUNTING FOR PARTNERSHIPS Accounting Principles, Eighth Edition CHAPTER 12.

Chapter 12-8

Partner’s initial investment should be recorded at the fair market value of the assets at the date of their transfer to the partnership.

Forming a PartnershipForming a PartnershipForming a PartnershipForming a Partnership

LO 2 Explain the accounting entries for the formation of a LO 2 Explain the accounting entries for the formation of a partnership.partnership.

E12-2 Meissner, Cohen, and Hughes are forming a partnership. Meissner is transferring $50,000 of cash to the partnership. Cohen is transferring land worth $15,000 and a small building worth $80,000. Hughes transfers cash of $9,000, accounts receivable of $32,000 and equipment worth $19,000. The partnership expects to collect $29,000 of the accounts receivable.

Instructions: Prepare the journal entries to record each of the partners’ investments.

Page 9: Chapter 12-1 ACCOUNTING FOR PARTNERSHIPS Accounting Principles, Eighth Edition CHAPTER 12.

Chapter 12-9

E12-2E12-2 Meissner is transferring $50,000 of cash to the partnership. Prepare the entry.

Meissner, Capital

50,000

Cash 50,000

Cohen is transferring land worth $15,000 and a small building worth $80,000. Prepare the entry.

Cohen, Capital

95,000

Land 15,000

Building 80,000

Forming a PartnershipForming a PartnershipForming a PartnershipForming a Partnership

LO 2 Explain the accounting entries for the formation of a LO 2 Explain the accounting entries for the formation of a partnership.partnership.

Page 10: Chapter 12-1 ACCOUNTING FOR PARTNERSHIPS Accounting Principles, Eighth Edition CHAPTER 12.

Chapter 12-10

E12-2E12-2 Hughes transfers cash of $9,000, accounts receivable of $32,000 and equipment worth $19,000. The partnership expects to collect $29,000 of the accounts receivable. Prepare the entry.

Hughes, Capital

57,000

Cash 9,000

Accounts receivable 32,000

Equipment 19,000

Allowance for doubtful accounts

3,000

Forming a PartnershipForming a PartnershipForming a PartnershipForming a Partnership

LO 2 Explain the accounting entries for the formation of a LO 2 Explain the accounting entries for the formation of a partnership.partnership.

Page 11: Chapter 12-1 ACCOUNTING FOR PARTNERSHIPS Accounting Principles, Eighth Edition CHAPTER 12.

Chapter 12-11

Partners equally share net income or net loss unless the partnership contract indicates otherwise.

Dividing Net Income or Net LossDividing Net Income or Net LossDividing Net Income or Net LossDividing Net Income or Net Loss

LO 3 Identify the bases for dividing net income or net loss.LO 3 Identify the bases for dividing net income or net loss.

NOTE: The first 2 entries are the same as a proprietorship, while the last 2 entries are different because:•there are 2 or more owners’ capital and drawing accounts•it is necessary to divide net income or loss among the partners.

Page 12: Chapter 12-1 ACCOUNTING FOR PARTNERSHIPS Accounting Principles, Eighth Edition CHAPTER 12.

Chapter 12-12

Income Ratios

Dividing Net Income or Net LossDividing Net Income or Net LossDividing Net Income or Net LossDividing Net Income or Net Loss

LO 3 Identify the bases for dividing net income or net loss.LO 3 Identify the bases for dividing net income or net loss.

Partnership agreement should specify the basis for sharing net income or net loss. Typical income ratios:

Fixed ratio.

Ratio based on capital balances.

Salaries to partners and remainder on a fixed ratio.

Interest on partners’ capital balances and the remainder on a fixed ratio.

Salaries to partners, interest on partners’ capital, and the remainder on a fixed ratio.

?

Page 13: Chapter 12-1 ACCOUNTING FOR PARTNERSHIPS Accounting Principles, Eighth Edition CHAPTER 12.

Chapter 12-13

ExerciseExercise F. Adams and G. Penny have capital balances on January 1 of $50,000 and $40,000, respectively. The partnership income-sharing agreement provides for:

(1) annual salaries of $20,000 for Adams and $12,000 for Penny,

(2) interest at 10% on beginning capital balances, and

(3) remaining income or loss to be shared 60% by Adams and 40% by Penny.

Instructions

(a) Prepare a schedule showing the distribution of net income, assuming net income is (1) $55,000 and (2) $30,000.

(b) Journalize the allocation of net income in each of the situations above.

Dividing Net Income or Net LossDividing Net Income or Net LossDividing Net Income or Net LossDividing Net Income or Net Loss

LO 3 Identify the bases for dividing net income or net loss.LO 3 Identify the bases for dividing net income or net loss.

Page 14: Chapter 12-1 ACCOUNTING FOR PARTNERSHIPS Accounting Principles, Eighth Edition CHAPTER 12.

Chapter 12-14

“Scratch Paper”ExerciseExercise F. Adams and G. Penny have capital balances on January 1 of

$50,000 and $40,000, respectively. The partnership income-sharing agreement provides for

(1) annual salaries of $20,000 for Adams and $12,000 for Penny,

(2) interest at 10% on beginning capital balances, and

(3) remaining income or loss to be shared 60% by Adams and 40% by Penny.

(4) Prepare a schedule showing the distribution of net income, assuming net income is (1) $55,000 and (2) $30,000.

Adams Penny1) Salary2) Interest3) Income 55k-(1+2)

Page 15: Chapter 12-1 ACCOUNTING FOR PARTNERSHIPS Accounting Principles, Eighth Edition CHAPTER 12.

Chapter 12-15

Dividing Net Income or Net LossDividing Net Income or Net LossDividing Net Income or Net LossDividing Net Income or Net Loss

LO 3 Identify the bases for dividing net income or net loss.LO 3 Identify the bases for dividing net income or net loss.

ExerciseExercise Prepare a schedule showing the distribution of net income, assuming net income is (1) $55,000 and (2) $30,000.(1)

Page 16: Chapter 12-1 ACCOUNTING FOR PARTNERSHIPS Accounting Principles, Eighth Edition CHAPTER 12.

Chapter 12-16

Dividing Net Income or Net LossDividing Net Income or Net LossDividing Net Income or Net LossDividing Net Income or Net Loss

LO 3 Identify the bases for dividing net income or net loss.LO 3 Identify the bases for dividing net income or net loss.

ExerciseExercise Prepare a schedule showing the distribution of net income, assuming net income is (1) $55,000 and (2) $30,000.(2)

Page 17: Chapter 12-1 ACCOUNTING FOR PARTNERSHIPS Accounting Principles, Eighth Edition CHAPTER 12.

Chapter 12-17

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

LO 5 Explain the effects of the entries to LO 5 Explain the effects of the entries to record the liquidation of a partnership.record the liquidation of a partnership.

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.

Page 18: Chapter 12-1 ACCOUNTING FOR PARTNERSHIPS Accounting Principles, Eighth Edition CHAPTER 12.

Chapter 12-18

Admission of a PartnerAdmission of a PartnerAdmission of a PartnerAdmission of a Partner

LO 6 Explain the effects of the entries when a LO 6 Explain the effects of the entries when a new partner is admitted.new partner is admitted.

Illustration 12A-1

Page 19: Chapter 12-1 ACCOUNTING FOR PARTNERSHIPS Accounting Principles, Eighth Edition CHAPTER 12.

Chapter 12-19

Purchase of a Partner’s InterestPurchase of a Partner’s InterestPurchase of a Partner’s InterestPurchase of a Partner’s Interest

LO 6 Explain the effects of the entries when a LO 6 Explain the effects of the entries when a new partner is admitted.new partner is admitted.

Assume that L. Carson agrees to pay $10,000 each to C. Ames and D. Barker for 33 1/3% of their interest in the Ames-Barker partnership. At the time of admission of Carson, each partner has a $30,000 capital balance. Both partners, therefore, give up $10,000 of their capital equity. The entry to record the admission of Carson is:

L. Carson, Capital 20,000D. Barker, Capital 10,000C. Ames, Capital 10,000

The cash paid by Carson goes directly to the individual partners and not to the partnership. Net assets remain unchanged at $60,000.

Page 20: Chapter 12-1 ACCOUNTING FOR PARTNERSHIPS Accounting Principles, Eighth Edition CHAPTER 12.

Chapter 12-20

Investment of Assets in a Investment of Assets in a PartnershipPartnershipInvestment of Assets in a Investment of Assets in a PartnershipPartnership

LO 6 Explain the effects of the entries when a LO 6 Explain the effects of the entries when a new partner is admitted.new partner is admitted.

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:

L. Carson, Capital 30,000

Cash 30,000

Note that both net assets and total capital have increased by $30,000.

Page 21: Chapter 12-1 ACCOUNTING FOR PARTNERSHIPS Accounting Principles, Eighth Edition CHAPTER 12.

Chapter 12-21

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

LO 7 Describe the effects of the entries when LO 7 Describe the effects of the entries when a partner withdraws from the firm.a partner withdraws from the firm.

A partner may withdraw from a partnership voluntarily, by selling his or her equity in the firm.

Or, he or she may withdraw involuntarily, by reaching mandatory retirement age or by dying.

The withdrawal of a partner, like the admission of a partner, legally dissolves the partnership.

Page 22: Chapter 12-1 ACCOUNTING FOR PARTNERSHIPS Accounting Principles, Eighth Edition CHAPTER 12.

Chapter 12-22

Withdrawal of a PartnerWithdrawal of a PartnerWithdrawal of a PartnerWithdrawal of a PartnerIllustration 12A-6

LO 7 Describe the effects of the entries when LO 7 Describe the effects of the entries when a partner withdraws from the firm.a partner withdraws from the firm.

Page 23: Chapter 12-1 ACCOUNTING FOR PARTNERSHIPS Accounting Principles, Eighth Edition CHAPTER 12.

Chapter 12-23

Payment From Partners’ Personal Payment From Partners’ Personal AssetsAssetsPayment From Partners’ Personal Payment From Partners’ Personal AssetsAssets

Assume that partners Morz, Nead, and Odom have capital balances of $25,000, $15,000, and $10,000, respectively. Morz and Nead agree to buy out Odom’s interest. Each of them agrees to pay Odom $8,000 in exchange for one-half of Odom’s total interest of $10,000. The entry to record the withdrawal is:

Nead, Capital 5,000 Morz, Capital 5,000Odom, Capital 10,000

Note that net assets and total capital remain the same at $50,000. The $16,000 paid to Odom by the remaining partners isn’t recorded by the partnership.

LO 7 Describe the effects of the entries when LO 7 Describe the effects of the entries when a partner withdraws from the firm.a partner withdraws from the firm.