Chapter 12 accounting for partnerships and limited liability companies SOLUTION

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CHAPTER 12 ACCOUNTING FOR PARTNERSHIPS AND

LIMITED LIABILITY COMPANIES

DISCUSSION QUESTIONS

1. a. Proprietorship: Ease of formation and nontaxable entity.

b. Partnership: Expanded owner expertise and capital, nontaxable entity, and ease of formation.

c. Limited liability company: Limited liability to owners, expanded access to capital, nontaxable entity, and ease of formation.

2. The disadvantages of a partnership are that its life is limited, each partner has unlimited liabil-ity, one partner can bind the partnership to contracts, and raising large amounts of capital is more difficult for a partnership than a limited liability company.

3. Yes. A partnership may incur losses in excess of the total investment of all partners. The division of losses among the partners would be made according to their agreement. In addi-tion, because of the unlimited liability of each partner for partnership debts, a particular part-ner may actually lose a greater amount than his or her capital balance.

4. The partnership agreement (partnership) or operating agreement (LLC) establishes the income-sharing ratio among the partners (members), amounts to be invested, and buy-sell agreements between the partners (mem-bers). In addition, for an LLC the operating agreement specifies if the LLC is owner-managed or manager-managed.

5. No. Maholic would have to bear his share of losses. In the absence of any agreement as to division of net income or net loss, his share would be one-third. In addition, because of the unlimited liability of each partner, Maholic may lose more than one-third of the losses if one partner is unable to absorb his share of the losses.

6. Yes. Partnership net income is divided accord-ing to the income-sharing ratio, regardless of the amount of the withdrawals by the partners. Therefore, it is very likely that the partners’ monthly withdrawals from a partnership will not exactly equal their shares of net income.

7. a. Debit the partner’s drawing account and credit Cash.

b. No. Payments to partners and the division of net income are separate. The amount of one does not affect the amount of the oth-er.

c. Debit the income summary account for the amount of the net income and credit the partners’ capital accounts for their respec-tive shares of the net income.

8. a. By purchase of an interest, the capital in-terest of the new partner is obtained from the old partner, and neither the total as-sets nor the total equity of the partnership is affected.

b. By investment, both the total assets and the total equity of the partnership are increased.

9. It is important to state all partnership assets in terms of current prices at the time of the ad-mission of a new partner because failure to do so might result in participation by the new partner in gains or losses attributable to the period prior to admission to the partnership. To illustrate, assume that A and B share net in-come and net loss equally and operate a part-nership that owns land recorded at and costing $20,000. C is admitted to the partnership, and the three partners share in income equally. The day after C is admitted to the partnership, the land is sold for $35,000 and, since the land was not revalued, C receives a one-third dis-tribution of the $15,000 gain. In this case, C participates in the gain attributable to the pe-riod prior to admission to the partnership.

10. A new partner who is expected to improve the fortunes (income) of the partnership, through such things as reputation or skill, might be giv-en equity in excess of the amount invested to join the partnership.



PRACTICE EXERCISES

PE 12–1A

Cash ................................................................................. 61,000 Accounts Receivable ...................................................... 78,000 Patent ............................................................................... 240,000 Accounts Payable ...................................................... 15,000 Allowance for Doubtful Accounts ............................ 4,000 Brittany Adams, Capital ............................................ 360,000

PE 12–1B

Cash ................................................................................. 28,000 Inventory .......................................................................... 51,000 Land.................................................................................. 135,000 Notes Payable ............................................................ 50,000 Kevin LaRoche, Capital ............................................. 164,000

PE 12–2A

Distributed to Paulson and O’Brien: Paulson O’Brien Total

Annual salary.................................................... $26,000 $ — $26,000 Interest .............................................................. 2,5001 6,0002 8,500 Deduct excess of allowances over income.... (1,000)3 (500)4 (1,500) Total distributed to partners ........................... $27,500 $5,500 $33,000 1$50,000 × 5% 2$120,000 × 5% 3($33,000 – $26,000 – $8,500) × 2/3 4($33,000 – $26,000 – $8,500) × 1/3 Paulson: $27,500



PE 12–2B

Distributed to Conyers and Stevens: Conyers Stevens Total

Annual salary.................................................. $ — $ 45,000 $ 45,000 Interest ............................................................ 4,0001 12,8002 16,800 Remaining income ......................................... 69,100 69,1003 138,200 Total distributed to partners ......................... $73,100 $126,900 $200,000 1$50,000 × 8% 2$160,000 × 8% 3($200,000 – $45,000 – $16,800) × 50% Stevens: $126,900

PE 12–3A

a. Land ............................................................................ 26,000 Zach Rich, Capital ................................................ 13,000* Kyle Bryan, Capital............................................... 13,000

*($110,000 – $84,000) × 50% b. Kyle Bryan, Capital .................................................... 19,000 Antoine Dodd, Capital .......................................... 19,000*

*($25,000 + $13,000) × 50%

PE 12–3B

a. Equipment .................................................................. 24,000 Justin Lionel, Capital ........................................... 16,000* Courtney Morehouse, Capital.............................. 8,000

*($57,000 – $33,000) × 2/3 b. Cash ............................................................................ 75,000 Naseef Asad, Capital ............................................ 75,000



PE 12–4A

Equity of Sharpe.............................................................................. $300,000 Rojas’ contribution.......................................................................... 250,000 Total equity after admitting Rojas.................................................. $550,000 Rojas’ equity interest ...................................................................... × 60% Rojas’ equity after admission ........................................................ $330,000 Rojas’ contribution.......................................................................... $250,000 Rojas’ equity after admission ........................................................ 330,000 Bonus paid to Sharpe ..................................................................... $ 80,000

PE 12–4B

Equity of Joshi ................................................................................ $ 80,000 Costas’ contribution ....................................................................... 40,000 Total equity after admitting Costas ............................................... $120,000 Costas’ equity interest.................................................................... × 40% Costas’ equity after admission ...................................................... $ 48,000 Costas’ contribution ....................................................................... 40,000 Bonus paid to Costas ..................................................................... $ 8,000

PE 12–5A

Fowler’s equity prior to liquidation..................................... $26,000 Realization of asset sales.................................................... $86,000 Book value of assets ($26,000 + $40,000 + $12,000) ......... 78,000 Gain on liquidation............................................................... $ 8,000 Fowler’s share of gain (50% × $8,000)................................ 4,000 Fowler’s cash distribution................................................... $30,000

PE 12–5B

Quinn’s equity prior to liquidation...................................... $200,000 Realization of asset sales.................................................... $240,000 Book value of assets ($200,000 + $120,000 + $30,000) ..... 350,000 Loss on liquidation .............................................................. $110,000 Quinn’s share of loss (50% × $110,000) ............................. (55,000) Quinn’s cash distribution .................................................... $145,000



PE 12–6A

a. Haines’ equity prior to liquidation................................ $ 45,000

Realization of asset sales ............................................. $ 30,000 Book value of assets..................................................... 125,000* Loss on liquidation........................................................ $ (95,000) Haines’ share of loss (50% × $95,000) ......................... (47,500) Haines’ deficiency ......................................................... $ (2,500) *$80,000 + $45,000 b. $30,000. ($80,000 – $47,500 share of loss – $2,500 Haines deficiency, also equals

the amount realized from asset sales).

PE 12–6B

a. Chow’s equity prior to liquidation................................ $ 85,000 Realization of asset sales ............................................. $ 45,000 Book value of assets..................................................... 250,000* Loss on liquidation........................................................ $(205,000) Chow’s share of loss (50% × $205,000) ....................... (102,500) Chow’s deficiency ......................................................... $ (17,500) *$85,000 + $165,000 b. $45,000. ($165,000 – $102,500 share of loss – $17,500 Chow deficiency, also

equals the amount realized from asset sales).

PE 12–7A

a. 2012: employee per $140,000employees 90

0$12,600,00=

2013: employee per $150,000employees 96

0$14,400,00=

b. Aaron and Rogers, CPAs grew revenues by $1,800,000 ($14,400,000 – $12,600,000), or 14.3% ($1,800,000/$12,600,000). The number of employees expanded by 6, or 6.7% (6/90). The growth in revenue was more than the growth in number of employees; thus, the revenue per employee improved between the two years. The firm is more efficient in generating revenues from its staff re-sources between the two years.



PE 12–7B

a. 2012: employee per $180,000employees 20

$3,600,000=

2013: employee per $200,000employees 16

$3,200,000=

b. TechSystems, Architects reduced revenues by $400,000 ($3,600,000 – $3,200,000), or 11.1% ($400,000/$3,600,000). The number of employees declined by 4, or 20% (4/20). The decline in revenue was less than the decline in number of employees; thus, the revenue per employee improved between the two years. The firm is more efficient in generating revenues from its staff resources be-tween the two years.



EXERCISES

Ex. 12–1

Cash ..................................................................................... 15,000 Accounts Receivable .......................................................... 153,000 Merchandise Inventory ....................................................... 91,450 Equipment............................................................................ 62,500 Allowance for Doubtful Accounts ................................ 11,400 Amber Moss, Capital ..................................................... 310,550

Ex. 12–2

Cash ..................................................................................... 50,000 Accounts Receivable .......................................................... 100,000 Land...................................................................................... 284,000 Equipment............................................................................ 19,000 Allowance for Doubtful Accounts ................................ 7,000 Accounts Payable .......................................................... 22,500 Notes Payable ................................................................ 80,000 Jessica Kimble, Capital ................................................. 343,500



Ex. 12–3

Wyatt Truett

a. ........................................................................................ $ 210,000 $210,000 b. ........................................................................................ 315,000 105,000 c. ........................................................................................ 180,320 239,680 d. ........................................................................................ 200,000 220,000 e. ........................................................................................ 208,800 211,200 Details

Wyatt Truett Total

a. Net income (1:1) .......................................... $210,000 $210,000 $420,000

b. Net income (3:1) .......................................... $315,000 $105,000 $420,000

c. Interest allowance....................................... $ 26,400 $ 8,800 $ 35,200 Remaining income (2:3) ............................. 153,920 230,880 384,800 Net income .................................................. $180,320 $239,680 $420,000

d. Salary allowance......................................... $ 50,000 $ 70,000 $120,000 Remaining income (1:1) ............................. 150,000 150,000 300,000 Net income .................................................. $200,000 $220,000 $420,000

e. Interest allowance....................................... $ 26,400 $ 8,800 $ 35,200 Salary allowance......................................... 50,000 70,000 120,000 Remaining income (1:1) ............................. 132,400 132,400 264,800 Net income .................................................. $208,800 $211,200 $420,000



Ex. 12–4

Wyatt Truett

a. ........................................................................................ $ 80,000 $80,000 b. ........................................................................................ 120,000 40,000 c. ........................................................................................ 76,320 83,680 d. ........................................................................................ 70,000 90,000 e. ........................................................................................ 78,800 81,200 Details

Wyatt Truett Total

a. Net income (1:1)............................................... $80,000 $80,000 $160,000

b. Net income (3:1)............................................... $120,000 $40,000 $160,000

c. Interest allowance ........................................... $26,400 $ 8,800 $ 35,200 Remaining income (2:3) .................................. 49,920 74,880 124,800 Net income ....................................................... $76,320 $83,680 $160,000

d. Salary allowance.............................................. $50,000 $70,000 $120,000 Remaining income (1:1) .................................. 20,000 20,000 40,000 Net income ....................................................... $70,000 $90,000 $160,000

e. Interest allowance ........................................... $26,400 $ 8,800 $ 35,200 Salary allowance.............................................. 50,000 70,000 120,000 Remaining income (1:1) .................................. 2,400 2,400 4,800 Net income ....................................................... $78,800 $81,200 $160,000

Ex. 12–5

Ashley Michael Adams Rovell Total

Salary allowances .......................................... $ 45,000 $ 35,000 $ 80,000 Remainder (net loss, $30,000 plus $80,000 salary allowances) divided equally ......... (55,000) (55,000) (110,000) Net loss ........................................................... $(10,000) $(20,000) $ (30,000)



Ex. 12–6

a. The partners can divide net income in any ratio that they wish. However, in the absence of an agreement, net income is divided equally between the partners. Therefore, Mary’s conclusion was correct, but for the wrong reasons. In addition, note that the monthly drawings have no impact on the division of income. These drawings are not the same as a salary allowance, which is part of a formal income-sharing agreement.

b. An income-sharing agreement could be designed to credit each partner’s capital

account for his or her respective contributions. For example, an income-sharing agreement could be designed to credit Mary’s capital account for interest on her capital contribution, while a salary allowance could be designed to credit Emily for the greater effort she puts into the partnership. After deducting for these items, the remaining income could be divided equally.

Ex. 12–7

a. Net income: $152,000 Richards Clark Total

Salary allowance...................................... $60,000 $50,000 $110,000 Remaining income................................... 25,200 16,800 42,000 Net income ............................................... $85,200 $66,800 $152,000

Richards remaining income: ($152,000 – $110,000) × 3/5 Clark remaining income: ($152,000 – $110,000) × 2/5

b. (1)

Income Summary.......................................................... 152,000 Joshua Richards, Member Equity.......................... 85,200 Taylor Clark, Member Equity.................................. 66,800 (2)

Joshua Richards, Member Equity ............................... 60,000 Taylor Clark, Member Equity ....................................... 50,000 Joshua Richards, Drawing ..................................... 60,000 Taylor Clark, Drawing ............................................. 50,000 Note: The reduction in members’ equity from withdrawals would be disclosed on

the statement of members’ equity but does not affect the allocation of net in-come in part (a) of this exercise.



Ex. 12–7 (Concluded)

c. If the net income of the LLC were less than the sum of the salary allowances, both members would still be credited with their salary allowances. From this amount, each partner would deduct his or her share of the excess of the total salary allowance over the net income. Thus, the difference between the net in-come and total salary allowances would be allocated to each partner as a deduc-tion, according to the income-sharing ratio.

Ex. 12–8

a. Daily Sentinel WLKT Amanda Newspaper, Partners Nelson LLC Total

Salary allowance.................. $ 88,700 $ 88,700 Interest allowance ............... $ 25,0001 5,0002 $ 14,0003 44,000 Remaining income (4:3:3) ... 234,920 176,190 176,190 587,300 Net income ........................... $259,920 $269,890 $190,190 $720,000 110% × $250,000 210% × $50,000 310% × $140,000

b.

Dec. 31, 2012 Income Summary...................................... 720,000 WLKT Partners, Member Equity......... 259,920 Amanda Nelson, Member Equity........ 269,890 Daily Sentinel Newspaper, LLC,

Member Equity ............................... 190,190 Dec. 31, 2012 WLKT Partners, Member Equity .............. 25,000 Amanda Nelson, Member Equity ............. 93,700* Daily Sentinel Newspaper, LLC, Member Equity..................................... 14,000 WLKT Partners, Drawing .................... 25,000 Amanda Nelson, Drawing ................... 93,700 Daily Sentinel Newspaper, LLC, Drawing........................................... 14,000 *$88,700 + $5,000




c. MACRO MEDIA, LLC Statement of Members’ Equity

For the Year Ended December 31, 2012

Daily Sentinel WLKT Amanda Newspaper, Partners Nelson LLC Total

Members’ equity, January 1, 2012 $250,000 $ 50,000 $140,000 $ 440,000 Additional investment during the year ..................................... 50,000 50,000 $300,000 $ 50,000 $140,000 $ 490,000 Net income for the year................... 259,920 269,890 190,190 720,000 $559,920 $319,890 $330,190 $1,210,000 Withdrawals during the year........... 25,000 93,700 14,000 132,700 Members’ equity, December 31, 2012..................... $534,920 $226,190 $316,190 $1,077,300

d. An income-sharing agreement provides flexibility and fairness. Without an income-sharing agreement, each member would be credited with an equal pro-portion of the total earnings, or one-third each. However, the members have very different contributions to the LLC. WLKT is a large contributor of capital (funds), while Amanda Nelson is providing ongoing effort and expertise. These separate contributions should be acknowledged in the income-sharing formula. Thus, the agreement credits member equity for both interest on capital and a salary allow-ance for Nelson. Any remaining income is credited to capital according to a ne-gotiated allocation, which in this case is not equal.

Ex. 12–9

a. Jan. 31 Partner, Drawing.................................. 40,000,000 Cash ................................................ 40,000,000

b. Dec. 31 Income Summary................................. 600,000,000 Partner, Capital............................... 600,000,000

c. Dec. 31 Partner, Capital .................................... 480,000,000* Partner, Drawing ............................ 480,000,000 *12 months × £40 million

d. Partner drawings are not the same as a salary. The drawings represent a distri-bution of the profits of the partnership that has been credited to the partners’ capital accounts. In this case, the drawings occur during the year prior to the final accounting for profit distribution. Thus, the drawings could end up greater than the final partner net income. If this were the case, the partner would be li-able to the partnership for returning the excess drawings over the income earned for the year.



Ex. 12–10

a. and b.

Lily Yuan, Capital .......................................................... 60,000 Rachel Burnett, Capital............................................ 60,000 $180,000 × 1/3.

Note: The sale to Burnett is not a transaction of the partnership so the sales price is not considered in this journal entry.

Ex. 12–11

a. (1) Jonathan Faber, Capital (20% × $150,000)............ 30,000 Faheem Ahmad, Capital (25% × $110,000)............ 27,500

Lauren Wells, Capital ........................................ 57,500

(2) Cash ......................................................................... 70,000 Rachel Lee, Capital............................................ 70,000

b. Jonathan Faber ($150,000 – $30,000)........................... 120,000 Faheem Ahmad ($110,000 – $27,500)........................... 82,500 Lauren Wells .................................................................. 57,500 Rachel Lee...................................................................... 70,000

Ex. 12–12

a. Cash................................................................................ 50,000 Brandon Newman, Capital ............................................ 7,500 Latrell Osbourne, Capital .............................................. 7,500

Juan Rivas, Capital .................................................. 65,000

b. Brandon Newman .......................................................... 67,500 Latrell Osbourne............................................................ 117,500 Juan Rivas...................................................................... 65,000

c. Tangible assets should be adjusted to current market prices so that the new partner does not share in any gains or losses from changes in market prices prior to the new partner being admitted. For example, if the market price of land doubled prior to admitting a new partner, the existing partners should realize the increase in the value of the land in their capital accounts prior to the new part-ner’s admission. Otherwise, the new partner would share in the increase in the market value of the land.



Ex. 12–13

a. Bonus received by Lane: Andrew Hall, Capital...................................................... $ 54,000 Brian Li, Capital ............................................................. 71,000 Lane’s contribution ....................................................... 35,000 Total partners’ capital after admitting Lane ................ $160,000 Lane’s equity interest after admission ........................ × 30% Kristin Lane, Capital...................................................... $ 48,000 Lane’s contribution ....................................................... 35,000 Bonus paid to Lane ....................................................... $ 13,000

b. Cash................................................................................ 35,000 Andrew Hall, Capital...................................................... 6,500 Brian Li, Capital ............................................................. 6,500 Kristin Lane, Capital................................................. 48,000 c. Apparently, Hall and Li value the expertise offered by Lane. Lane is able to use

the computer to design and render landscape designs. It is likely that this type of skill is very useful for both selling and implementing landscape ideas. Her skills can help the partnership sell ideas to clients by providing computer renderings of the designs. In this way, a client can see the design on the computer before agreeing to work. In addition, the computer-aided landscapes provide materials plans, labor estimates, and other cost estimates for a particular design. Thus, the partners may be better able to control their costs by using Lane’s skills. Overall, they value her skills sufficiently to provide a partner bonus upon her admittance to the partnership.



Ex. 12–14

a. Medical Equipment........................................................ 35,000 Drew, Member Equity............................................... 14,0001 Moore, Member Equity............................................. 21,0002 1$35,000 × 2/5 = $14,000 2$35,000 × 3/5 = $21,000 b. (1) Cash ......................................................................... 285,000 Drew, Member Equity ........................................ 16,800 Moore, Member Equity ...................................... 25,200 Mann, Member Equity ....................................... 243,000

Supporting calculations for the bonus: Drew, Member Equity ($201,000 + $14,000) .......... $215,000 Moore, Member Equity ($289,000 + $21,000) ........ 310,000 Contribution by Mann............................................. 285,000 Total equity after admitting Mann.......................... $810,000 Mann’s equity interest after admission................. × 30% Mann, Member Equity............................................. $243,000 Contribution by Mann............................................. $285,000 Mann’s equity after admission .............................. 243,000 Bonus paid to Drew and Moore ............................. $ 42,000 Drew: $42,000 × 2/5 = $16,800 Moore: $42,000 × 3/5 = $25,200 (2) Cash ......................................................................... 155,000 Drew, Member Equity ............................................. 6,0001 Moore, Member Equity ........................................... 9,0002 Mann, Member Equity ....................................... 170,000 1$15,000 × 2/5 = $6,000 2$15,000 × 3/5 = $9,000

Supporting calculations for the bonus: Drew, Member Equity ............................................. $215,000 Moore, Member Equity ........................................... 310,000 Contribution by Mann............................................. 155,000 Total equity after admitting Mann.......................... $680,000 Mann’s equity interest after admission................. × 25% Mann, Member Equity............................................. $170,000 Contribution by Mann............................................. 155,000 Bonus paid to Mann................................................ $ 15,000



Ex. 12–15

a. J. Witt, Capital........................................................... 6,000 K. Torres, Capital...................................................... 6,000 Equipment............................................................ 12,000 b. (1) Cash .................................................................... 45,000 J. Witt, Capital .................................................... 5,5001 K. Torres, Capital ............................................... 5,500 L. Jenkins, Capital....................................... 56,000 1$11,000 × ½ = $5,500 Supporting calculations for the bonus: J. Witt, Capital ($106,000 – $6,000) ................................... $100,000 K. Torres, Capital ($141,000 – $6,000) .............................. 135,000 Contribution by Jenkins.................................................... 45,000 Total equity after admitting Jenkins................................. $280,000 Jenkins’ equity interest after admission.......................... × 20% L. Jenkins, Capital ............................................................. $ 56,000 Contribution by Jenkins.................................................... 45,000 Bonus paid to Jenkins....................................................... $ 11,000 The bonus to Jenkins is debited equally between Witt’s and Torres’ capi-

tal accounts. b. (2) Cash .................................................................... 135,000 J. Witt, Capital ............................................. 12,0001 K. Torres, Capital ........................................ 12,000 L. Jenkins, Capital....................................... 111,000 1$24,000 × ½ = $12,000 Supporting calculations for the bonus: J. Witt, Capital .................................................................... $100,000 K. Torres, Capital ............................................................... 135,000 Contribution by Jenkins.................................................... 135,000 Total equity after admitting Jenkins................................. $370,000 Jenkins’ equity interest after admission.......................... × 30% L. Jenkins, Capital ............................................................. $111,000

Contribution by Jenkins.................................................... $135,000 L. Jenkins, Capital ............................................................. 111,000 Bonus paid to Witt and Torres.......................................... $ 24,000 The bonus to Witt and Torres is credited equally between Witt’s and

Torres’ capital accounts.



Ex. 12–16

ANGEL INVESTOR ASSOCIATES Statement of Partnership Equity


Total Scott Michael Lance Partner- Wilson, Goforth, McGinnis, ship Capital Capital Capital Capital

Partnership capital, January 1, 2012 $120,000 $ 80,000 $200,000 Admission of Lance McGinnis .......... — — $ 50,000 50,000 Salary allowance ................................ 45,000 45,000 Remaining income ............................. 98,400 65,600 41,000 205,000 Less: Partner withdrawals................. (71,700)1 (32,800)2 (20,500)3 (125,000) Partnership capital,

December 31, 2012 ...................... $191,700 $112,800 $ 70,500 $375,000 1($45,000 + $98,400)/2 2$65,600/2 3$41,000/2 Admission of Lance McGinnis: Equity of initial partners prior to admission ................. $200,000 Contribution by McGinnis .............................................. 50,000 Total.................................................................................. $250,000 McGinnis’ equity interest after admission .................... × 20% McGinnis’ equity after admission .................................. $ 50,000 Contribution by McGinnis .............................................. 50,000 No bonus.......................................................................... $ 0 Net income distribution:

The income-sharing ratio is equal to the proportion of the capital balances after ad-mitting McGinnis according to the partnership agreement:

Scott Wilson: 000,250$000,120$ = 48%

Michael Goforth: 000,250$

000,80$ = 32%

Lance McGinnis: 000,250$

000,50$ = 20%

These ratios can be multiplied by the $205,000 remaining income after the salary al-lowance to Wilson ($250,000 – $45,000). These amounts are credited to the respec-tive partner capital accounts. For example, Scott Wilson: $98,400 = $205,000 × 48%.




Withdrawals: Half of the remaining income is distributed to the three partners. Wilson need not take the salary allowance as a withdrawal but may allow it to accumulate in the member equity account.

Ex. 12–17

a. Merchandise Inventory ................................................ 32,000 Allowance for Doubtful Accounts ......................... 4,000 David Winner, Capital ............................................. 12,0001

Alexis Richards, Capital ......................................... 8,0002 Marcus Williams, Capital........................................ 8,0002

1($32,000 – $4,000) × 3/7 2($32,000 – $4,000) × 2/7 b. David Winner, Capital .................................................. 222,0001

Cash ......................................................................... 72,000 Notes Payable ......................................................... 150,000

1$210,000 + $12,000

Ex. 12–18

a. The income-sharing ratio is determined by dividing the net income for each member by the total net income. Thus, in 2012, the income-sharing ratio is as fol-lows:

Idaho Properties, LLC: 000,320$000,128$ = 40%

Silver Holdings, LLC: 000,320$000,192$ = 60%

Or a 2:3 ratio




b. Following the same procedure as in (a):

Idaho Properties, LLC: 000,450$

000,90$ = 20%

Silver Holdings, LLC:

000,450$000,225$ = 50%

Justin Thomas:

000,450$000,135$ = 30%

Or a 2:5:3 ratio

c. Justin Thomas provided a $270,000 cash contribution to the business. The

amount credited to his member equity account is this amount less a $20,000 bo-nus paid to the other two members, or $250,000.

d. The positive entries to Idaho Properties and Silver Holdings are the result of a

bonus paid by Justin Thomas. e. Justin Thomas acquired a 16% interest in the business on January 1, 2013, com-

puted as follows: Justin Thomas’, member equity......................... $ 250,000 Idaho Properties, LLC, member equity.............. 688,000 Silver Holdings, LLC, member equity ................ 624,500 Total...................................................................... $1,562,500 Thomas’ ownership interest after admission

($250,000 ÷ $1,562,500) ....................................... 16% f. Withdrawals need not be the same as the income credited to the members’ eq-

uity accounts. Withdrawals will be less than the amounts credited when the members wish to retain capital in the business to support business growth, or otherwise strengthen the business.



Ex. 12–19

a.

Cash balance ................................................. $16,000 Sum of capital accounts ............................... 22,000 Loss from sale of noncash assets ............... $ 6,000 b. and c. Lyle Fisher

Capital balances before realization.............. $15,000 $7,000 Division of loss on sale of noncash assets 3,000* 3,000*

Balances......................................................... $12,000 $4,000 Cash distributed to partners......................... 12,000 4,000 Final balances................................................ $ 0 $ 0

*$6,000/2

Ex. 12–20

Mason Kumar Total

Capital balances before realization .............. $34,000 $36,000 $70,000 Division of gain on sale of noncash assets [($82,000 – $70,000)/2] .............................. 6,000 6,000 Capital balances after realization.................. $40,000 $42,000 Cash distributed to partners ......................... 40,000 42,000 Final balances ................................................ $ 0 $ 0

Ex. 12–21

a. Deficiency b. $79,500 ($32,000 + $62,500 – $15,000) c. Cash ............................................................................... 15,000

Ma, Capital ................................................................ 15,000 Support for entry: Gifford Lawrence Ma

Capital balances after realization....... $32,000 $62,500 $(15,000) Dr. Receipt of partner deficiency ............. 15,000 Capital balances after eliminating

deficiency........................................ $32,000 $62,500 $ 0



Ex. 12–22

a. Cash should be distributed as indicated in the following tabulation:

Deacon Raines Francis Total

Capital invested................................ $ 300 $ 450 $ — $ 750 Net income........................................ + 350 + 350 + 350 +1,050* Capital balances and cash

distribution.................................... $ 650 $ 800 $ 350 $1,800 *$1,800 – $300 – $450 b. Francis has a capital deficiency of $50, as indicated in the following tabulation:

Deacon Raines Francis Total

Capital invested................................ $ 300 $ 450 $ — $ 750 Net loss ............................................. – 50 – 50 – 50 – 150* Capital balances............................... $ 250 $ 400 $ 50 Dr. $ 600

*$600 – $750

Ex. 12–23

Arnold Peters Suzuki

Capital balances after realization.............. $(18,000) $ 75,000 $55,000 Distribution of partner deficiency............. 18,000 (12,000)1 (6,000)2

Capital balances after deficiency distribution........................................... $ 0 $ 63,000 $49,000

1$18,000 × 2/3 2$18,000 × 1/3



Ex. 12–24

JESSUP, KING, AND OLIVER Statement of Partnership Liquidation For the Period Ending July 1–29, 2012

Capital Noncash Jessup King Oliver

Cash + Assets = Liabilities + (3/6) + (2/6) + (1/6)

Balances before realization............. $ 62,000 $108,000 $ 35,000 $ 70,000 $ 43,000 $ 22,000 Sale of assets and division

of loss............................................ + 90,000 –108,000 — – 9,000 – 6,000 – 3,000 Balances after realization ................ $152,000 $ 0 $ 35,000 $ 61,000 $ 37,000 $ 19,000 Payment of liabilities........................ – 35,000 — – 35,000 — — — Balances after payment of

liabilities........................................ $117,000 $ 0 $ 0 $ 61,000 $ 37,000 $ 19,000 Cash distributed to partners ........... –117,000 — — – 61,000 – 37,000 – 19,000 Final balances .................................. $ 0 $ 0 $ 0 $ 0 $ 0 $ 0



Ex. 12–25

a. EVERGREEN SALES, LLC

Statement of LLC Liquidation For the Period May 1–31, 2012

Member Equity Noncash Hall Lang Das

Cash + Assets = Liabilities + (2/5) + (2/5) + (1/5) Balances before realization............. $ 13,000 $ 107,000 $ 25,000 $ 37,000 $ 40,000 $ 18,000 Sale of assets and division

of gain ........................................... + 123,000 – 107,000 — + 6,400 + 6,400 + 3,200 Balances after realization ................ $ 136,000 $ 0 $ 25,000 $ 43,400 $ 46,400 $ 21,200 Payment of liabilities........................ – 25,000 — – 25,000 — — — Balances after payment of

liabilities........................................ $ 111,000 $ 0 $ 0 $ 43,400 $ 46,400 $ 21,200 Distribution of cash to members .... – 111,000 — — – 43,400 – 46,400 – 21,200 Final balances .................................. $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 b. Hall, Member Equity ..................................................... 43,400 Lang, Member Equity ................................................... 46,400 Das, Member Equity ..................................................... 21,200 Cash ......................................................................... 111,000 c. The income- and loss-sharing ratio is only used to distribute the gain or loss on the realization of asset sales. It is

not used for the final distribution. The final distribution is based upon the credit balances in the member equity accounts after all gains and losses on realization have been divided and any partner deficiencies have been paid or allocated.



Ex. 12–26

a. (1) Income Summary.................................................... 92,000 Gary Menendez, Capital .................................... 46,000 Melissa Breeden, Capital .................................. 46,000

(2) Gary Menendez, Capital ......................................... 44,000 Melissa Breeden, Capital........................................ 35,000 Gary Menendez, Drawing.................................. 44,000 Melissa Breeden, Drawing ................................ 35,000 b.

MENENDEZ AND BREEDEN Statement of Partners’ Equity

For the Year Ended December 31, 2012 Gary Melissa Menendez Breeden Total

Capital, January 1, 2012................................. $ 75,000 $ 55,000 $130,000 Additional investment during the year ......... 12,000 — 12,000 $ 87,000 $ 55,000 $142,000 Net income for the year ................................. 46,000 46,000 92,000 $133,000 $101,000 $234,000 Withdrawals during the year ......................... 44,000 35,000 79,000 Capital, December 31, 2012 ........................... $ 89,000 $ 66,000 $155,000



Ex. 12–27

a.

Revenue per professional staff, 2009: 760,139

000,000,100,26$ = $187,000 rounded

Revenue per professional staff, 2008:

100,133000,000,400,27$ = $206,000 rounded

b. The revenues declined between the two years from $27.4 billion to $26.1 billion, or 4.7% [($26.1 – $27.4)/$27.4]. Revenues have declined, mostly due to the world-wide recession during this period. The number of employees has grown, from 133,100 to 139,760, or 5% [(139,760 – 133,100)/133,100]. As a result, the revenue per professional staff employee has declined by approximately $19,000, from $206,000 to $187,000. This decline in efficiency is due to the world recession experienced during this period of time. It is interesting that Deloitte expanded staff during this period, even while revenues declined. Deloitte is likely staffing for an anticipated recovery. There is some risk, because there is a near-term loss of efficiency from this strategy.

Ex. 12–28

a.

Revenue per employee, 2013: 160

000,000,20$ = $125,000

Revenue per employee, 2012: 200

000,400,22$ = $112,000 b. Revenues decreased between the two years; however, the number of employees

has decreased at a faster rate. Thus, the revenue per employee increased from $112,000 in 2012 to $125,000 in 2013. This indicates that the efficiency of the firm has increased in the two years, even though revenues declined. This is likely the result of the termination of two contracts. That is, the large decrease in the employment base is the likely result of the reduction in business. Thus, the business was able to reduce the workforce faster than the revenue base. This suggests that the contracts were not very efficient from a revenue per employee perspective, and thus were good candidates for termination.



PROBLEMS

Prob. 12–1A

1.

Aug. 1 Cash..................................................................... 15,600 Merchandise Inventory....................................... 62,400 Wardell Cole, Capital..................................... 78,000

1 Cash..................................................................... 30,300 Accounts Receivable.......................................... 23,700 Equipment ........................................................... 57,900 Allowance for Doubtful Accounts ................ 1,900 Accounts Payable.......................................... 20,000 Notes Payable................................................ 30,000 Marva Landers, Capital ................................. 60,000 2.

COLE AND LANDERS Balance Sheet August 1, 2012

Assets Current assets:

Cash .................................................................... $45,900 Accounts receivable .......................................... $23,700 Less allowance for doubtful accounts............. 1,900 21,800 Merchandise inventory...................................... 62,400

Total current assets ..................................... $130,100 Plant assets:

Equipment .......................................................... 57,900 Total assets ............................................................. $188,000

Liabilities Current liabilities:

Accounts payable .............................................. $20,000 Notes payable..................................................... 30,000

Total liabilities ......................................................... $ 50,000

Partners’ Equity Wardell Cole, capital ............................................... $78,000 Marva Landers, capital............................................ 60,000 Total partners’ equity.............................................. 138,000 Total liabilities and partners’ equity ...................... $188,000



Prob. 12–1A (Concluded)

3. July 31 Income Summary................................................ 100,500 Wardell Cole, Capital..................................... 47,200* Marva Landers, Capital ................................. 53,300*

31 Wardell Cole, Capital .......................................... 25,000 Marva Landers, Capital....................................... 30,400 Wardell Cole, Drawing................................... 25,000 Marva Landers, Drawing ............................... 30,400

*Computations:

Cole Landers Total

Interest allowance.............................................. $ 7,8001 $ 6,0002 $ 13,800 Salary allowance................................................ 22,500 30,400 52,900 Remaining income (1:1) .................................... 16,900 16,900 33,800 Net income ......................................................... $47,200 $53,300 $100,500 110% × $78,000 210% × $60,000



Prob. 12–2A

(1) (2) $108,000 $150,000 Plan Dyer Salinas Dyer Salinas

a. .................................................... $54,000 $54,000 $ 75,000 $ 75,000 b. .................................................... 81,000 27,000 112,500 37,500 c. .................................................... 36,000 72,000 50,000 100,000 d. .................................................... 58,800 49,200 79,800 70,200 e. .................................................... 42,800 65,200 63,800 86,200 f. .................................................... 41,600 66,400 58,400 91,600 Details

$108,000 $150,000 Dyer Salinas Dyer Salinas

a. Net income (1:1) ........................ $54,000 $54,000 $ 75,000 $ 75,000

b. Net income (3:1) ........................ $81,000 $27,000 $112,500 $ 37,500

c. Net income (1:2) ........................ $36,000 $72,000 $ 50,000 $100,000

d. Interest allowance ..................... $14,400 $ 4,800 $ 14,400 $ 4,800 Remaining Income (1:1)............ 44,400 44,400 65,400 65,400 Net income................................. $58,800 $49,200 $ 79,800 $ 70,200

e. Interest allowance ..................... $14,400 $ 4,800 $ 14,400 $ 4,800 Salary allowance ....................... 32,000 64,000 32,000 64,000 Excess of allowances over

income (1:1) ........................... (3,600) (3,600) Remaining income (1:1)............ 17,400 17,400 Net income................................. $42,800 $65,200 $ 63,800 $ 86,200

f. Interest allowance ..................... $14,400 $ 4,800 $ 14,400 $ 4,800 Salary allowance ....................... 32,000 64,000 32,000 64,000 Bonus allowance....................... 2,4001 10,8002

Excess of allowances over income (1:1) ........................... (4,800) (4,800)

Remaining income (1:1)............ 12,000 12,000 Net income................................. $41,600 $66,400 $ 58,400 $ 91,600

120% × [$108,000 – ($32,000 + $64,000)] 220% × [$150,000 – ($32,000 + $64,000)]



Prob. 12–3A

1. DURANT AND ADKINS

Income Statement For the Year Ended December 31, 2012

Professional fees........................................................... $364,500 Operating expenses: Salary expense ......................................................... $146,000 Depreciation expense—building............................. 14,500 Property tax expense............................................... 9,000 Heating and lighting expense ................................. 7,200 Supplies expense..................................................... 5,200 Depreciation expense—office equipment .............. 4,500 Miscellaneous expense ........................................... 3,100 Total operating expenses................................... 189,500 Net income ..................................................................... $175,000

Aiden Jasmine Durant Adkins Total Division of net income: Salary allowance ................................. $40,000 $50,000 $ 90,000 Interest allowance ............................... 10,000* 5,000** 15,000 Remaining income .............................. 35,000 35,000 70,000 Net income ................................................ $85,000 $90,000 $175,000 *$100,000 × 10% **($60,000 – $10,000) × 10% 2.

DURANT AND ADKINS Statement of Partners’ Equity


Aiden Jasmine Durant Adkins Total

Capital, January 1, 2012........................... $100,000 $ 50,000 $150,000 Additional investment during the year ... — 10,000 10,000 $100,000 $ 60,000 $160,000 Net income for the year............................ 85,000 90,000 175,000 $185,000 $150,000 $335,000 Withdrawals during the year.................... 45,000 65,000 110,000 Capital, December 31, 2012 ..................... $140,000 $ 85,000 $225,000




3. DURANT AND ADKINS

Balance Sheet December 31, 2012

Assets Current assets: Cash ..................................................... $ 42,000 Accounts receivable ........................... 42,300 Supplies ............................................... 1,500 Total current assets....................... $ 85,800 Plant and equipment: Land ..................................................... $100,000 Building................................................ $108,100 Less accumulated depreciation ... 62,500 45,600

Office equipment ...................................... $ 46,000 Less accumulated depreciation......... 19,400 26,600 Total plant assets........................... 172,200 Total assets............................................... $258,000

Liabilities Current liabilities: Accounts payable ............................... $ 29,800 Salaries payable .................................. 3,200 Total liabilities........................................... $ 33,000

Partners’ Equity

Aiden Durant, capital................................ $140,000 Jasmine Adkins, capital ........................... 85,000 Total partners’ equity ............................... 225,000 Total liabilities and partners’ equity ....... $258,000



Prob. 12–4A

1. Apr. 30 Asset Revaluations......................................... 2,800 Accounts Receivable ................................ 2,400 Allowance for Doubtful Accounts............ 400* *[($38,400 – $2,400) × 5%] – $1,400

30 Merchandise Inventory................................... 4,200 Asset Revaluations ................................... 4,200* *$63,200 – $59,000 30 Accumulated Depreciation—Equipment....... 51,700 Equipment.................................................. 23,100*

Asset Revaluations ................................... 28,600 *$141,900 – $165,000 30 Asset Revaluations......................................... 30,000 Tosio Kato, Capital .................................... 15,000 Angela Gordon, Capital............................. 15,000 2. May 1 Angela Gordon, Capital .................................. 60,000 Tricia McCay, Capital ................................ 60,000 1 Cash................................................................. 35,000 Tricia McCay, Capital ................................ 35,000




3. KATO, GORDON, AND McCAY

Balance Sheet May 1, 2012

Assets Current assets: Cash ..................................................... $ 41,0001 Accounts receivable ........................... $36,000 Less allowance for doubtful accounts 1,800 34,200 Merchandise inventory ....................... 63,200 Prepaid insurance ............................... 2,200 Total current assets....................... $140,600 Plant assets: Equipment............................................ 141,900 Total assets............................................... $282,500

Liabilities Current liabilities: Accounts payable ............................... $ 9,500 Notes payable...................................... 40,000 Total liabilities........................................... $ 49,500

Partners’ Equity

Tosio Kato, capital.................................... $105,0002

Angela Gordon, capital ............................ 33,0003

Tricia McCay, capital ................................ 95,000 Total partners’ equity ............................... 233,000 Total liabilities and partners’ equity ....... $282,500 1$6,000 + $35,000 2$90,000 + $15,000 3$78,000 + $15,000 – $60,000



Prob. 12–5A

1. ADAMS, COOPER, AND RUIZ Statement of Partnership Liquidation

For Period July 3–29, 2012

Capital Noncash Adams Cooper Ruiz

Cash + Assets = Liabilities + (50%) + (25%) + (25%)

Balances before realization............. $ 8,800 $ 68,800 $ 18,000 $ 22,400 $ 5,300 $ 31,900 Sale of assets and division of loss. + 33,200 – 68,800 — – 17,800 – 8,900 – 8,900 Balances after realization ................ $ 42,000 $ 0 $ 18,000 $ 4,600 $ (3,600) $ 23,000 Payment of liabilities........................ – 18,000 — – 18,000 — — — Balances after payment of liabilities $ 24,000 $ 0 $ 0 $ 4,600 $ (3,600) $ 23,000 Receipt of deficiency ....................... + 3,600 — — — + 3,600 — Balances ........................................... $ 27,600 $ 0 $ 0 $ 4,600 $ 0 $ 23,000 Cash distributed to partners ........... – 27,600 — — – 4,600 — – 23,000 Final balances .................................. $ 0 $ 0 $ 0 $ 0 $ 0 $ 0

2. a. Rebecca Adams, Capital.......................................... 2,400 Ricardo Ruiz, Capital ............................................... 1,200 Austin Cooper, Capital ....................................... 3,600 The $3,600 deficiency of Cooper would be divided between the other partners, Adams and Ruiz, in their

income-sharing ratio (2:1, respectively). Therefore, Adams would absorb 2/3 of the $3,600 deficiency, or $2,400, and Ruiz would absorb 1/3 of the $3,600 deficiency, or $1,200.

b. Rebecca Adams, Capital.......................................... 2,200*

Ricardo Ruiz, Capital ............................................... 21,800** Cash..................................................................... 24,000 *$4,600 – $2,400 **$23,000 – $1,200



Prob. 12–6A

1. a. SAMS, PRICE, AND LADD

Statement of Partnership Liquidation For Period October 1–30, 2012

Capital Noncash Sams Price Ladd


Balances before realization............. $ 26,000 $ 155,000 $ 38,000 $ 54,000 $ 77,000 $ 12,000 Sale of assets and division

of gain ........................................... + 212,000 – 155,000 — + 22,800 + 22,800 + 11,400 Balances after realization ................ $ 238,000 $ 0 $ 38,000 $ 76,800 $ 99,800 $ 23,400 Payment of liabilities........................ – 38,000 — – 38,000 — — — Balances after payment

of liabilities ................................... $ 200,000 $ 0 $ 0 $ 76,800 $ 99,800 $ 23,400 Cash distributed to partners ........... – 200,000 — — – 76,800 – 99,800 – 23,400 Final balances .................................. $ 0 $ 0 $ 0 $ 0 $ 0 $ 0




1. b. SAMS, PRICE, AND LADD Statement of Partnership Liquidation

For Period October 1–30, 2012

Capital Noncash Sams Price Ladd


Balances before realization............... $ 26,000 $ 155,000 $ 38,000 $ 54,000 $ 77,000 $ 12,000 Sale of assets and division of loss... + 70,000 – 155,000 — – 34,000 – 34,000 – 17,000 Balances after realization .................. $ 96,000 $ 0 $ 38,000 $ 20,000 $ 43,000 $ (5,000) Payment of liabilities.......................... – 38,000 — – 38,000 — — — Balances after payment of liabilities $ 58,000 $ 0 $ 0 $ 20,000 $ 43,000 $ (5,000) Receipt of deficiency ......................... + 5,000 — — — — + 5,000 Balances ............................................. $ 63,000 $ 0 $ 0 $ 20,000 $ 43,000 $ 0 Cash distributed to partners ............. – 63,000 — — – 20,000 – 43,000 — Final balances .................................... $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 2. a. Sams, Capital............................................................ 2,500 Price, Capital ............................................................ 2,500 Ladd, Capital ....................................................... 5,000 The $5,000 deficiency of Ladd would be divided between the other partners, Sams and Price, in their income-

sharing ratio (1:1, respectively). Therefore, Sams would absorb 1/2 of the $5,000 deficiency, or $2,500, and Price would absorb 1/2 of the $5,000 deficiency, or $2,500.

b. Sams, Capital............................................................ 17,500*

Price, Capital ............................................................ 40,500** Cash..................................................................... 58,000 *$20,000 – $2,500 **$43,000 – $2,500



Prob. 12–1B

1.

June 1 Cash ...................................................................... 16,000 Merchandise Inventory ........................................ 42,000 Anne Harber, Capital ...................................... 58,000

1 Cash ...................................................................... 14,000 Accounts Receivable ........................................... 19,400 Merchandise Inventory ........................................ 25,900 Equipment............................................................. 34,000 Allowance for Doubtful Accounts ................. 1,300 Accounts Payable........................................... 7,000 Notes Payable ................................................. 5,000 Heather Lamb, Capital .................................... 80,000 2.

HARBER AND LAMB Balance Sheet June 1, 2011

Assets Current assets: Cash ........................................................... $30,000 Accounts receivable ................................. $19,400 Less allowance for doubtful accounts.... 1,300 18,100 Merchandise inventory............................. 67,900 Total current assets ............................ $116,000 Plant assets: Equipment ................................................. 34,000 Total assets .................................................... $150,000

Liabilities Current liabilities: Accounts payable ..................................... $ 7,000 Notes payable............................................ 5,000 Total liabilities ................................................ $ 12,000

Partners’ Equity Anne Harber, capital ...................................... $58,000 Heather Lamb, capital .................................... 80,000 Total partners’ equity..................................... 138,000 Total liabilities and partners’ equity ............. $150,000



Prob. 12–1B (Concluded)

3. May 31 Income Summary ................................................. 102,000 Anne Harber, Capital ...................................... 56,900* Heather Lamb, Capital .................................... 45,100*

31 Anne Harber, Capital............................................ 40,000 Heather Lamb, Capital ......................................... 25,000 Anne Harber, Drawing .................................... 40,000 Heather Lamb, Drawing.................................. 25,000 *Computations:

Harber Lamb Total

Interest allowance .......................................... $ 5,8001 $ 8,0002 $ 13,800 Salary allowance ............................................ 36,000 22,000 58,000 Remaining income (1:1)................................. 15,100 15,100 30,200 Net income...................................................... $56,900 $45,100 $102,000 110% × $58,000 210% × $80,000



Prob. 12–2B

(1) (2) $210,000 $84,000

Plan Snyder Wise Snyder Wise

a. ................................................... $105,000 $105,000 $42,000 $42,000 b. ................................................... 90,000 120,000 36,000 48,000 c. ................................................... 140,000 70,000 56,000 28,000 d. ................................................... 124,800 85,200 49,200 34,800 e. ................................................... 113,000 97,000 50,000 34,000 f. ................................................... 128,900 81,100 53,300 30,700 Details

$210,000 $84,000 Snyder Wise Snyder Wise

a. Net income (1:1) ........................ $105,000 $105,000 $42,000 $42,000

b. Net income (3:4) ........................ $ 90,000 $120,000 $36,000 $48,000

c. Net income (2:1) ........................ $140,000 $ 70,000 $56,000 $28,000

d. Interest allowance ..................... $ 3,000 $ 4,000 $ 3,000 $ 4,000 Remaining income (3:2)............ 121,800 81,200 46,200 30,800 Net income................................. $124,800 $ 85,200 $49,200 $34,800

e. Interest allowance ..................... $ 3,000 $ 4,000 $ 3,000 $ 4,000 Salary allowance ....................... 34,000 17,000 34,000 17,000 Remaining income (1:1)............ 76,000 76,000 13,000 13,000 Net income................................. $113,000 $ 97,000 $50,000 $34,000

f. Interest allowance ..................... $ 3,000 $ 4,000 $ 3,000 $ 4,000 Salary allowance ....................... 34,000 17,000 34,000 17,000 Bonus allowance....................... 31,8001 6,6002

Remaining income (1:1)............ 60,100 60,100 9,700 9,700 Net income................................. $128,900 $ 81,100 $53,300 $30,700 120% × [$210,000 – ($34,000 + $17,000)] 220% × [$84,000 – ($34,000 + $17,000)]



Prob. 12–3B

1. DING AND HOFFMAN

Income Statement For the Year Ended December 31, 2012

Professional fees.......................................................... $583,200 Operating expenses:

Salary expense ........................................................ $315,700 Depreciation expense—building............................ 75,000 Heating and lighting expense ................................ 11,900 Depreciation expense—office equipment ............. 6,700 Property tax expense.............................................. 3,500 Supplies expense.................................................... 3,400 Miscellaneous expense .......................................... 2,000

Total operating expenses.................................. 418,200 Net income .................................................................... $165,000 Jin Paul Ding Hoffman Total

Division of net income: Salary allowance ................................. $60,000 $75,000 $135,000 Interest allowance ............................... 15,600* 18,000** 33,600 Remaining income .............................. (1,800) (1,800) (3,600)

Net income ................................................ $73,800 $91,200 $165,000 *$130,000 × 12% **($170,000 – $20,000) × 12%

2.

DING AND HOFFMAN Statement of Partners’ Equity


Jin Paul Ding Hoffman Total

Capital, January 1, 2012........................... $130,000 $150,000 $280,000 Additional investment during the year ... — 20,000 20,000 $130,000 $170,000 $300,000 Net income for the year............................ 73,800 91,200 165,000 $203,800 $261,200 $465,000 Withdrawals during the year.................... 50,000 60,000 110,000 Capital, December 31, 2012 ..................... $153,800 $201,200 $355,000




3. DING AND HOFFMAN

Balance Sheet December 31, 2012


Cash ..................................................... $ 26,900 Accounts receivable ........................... 41,300 Supplies ............................................... 6,700

Total current assets....................... $ 74,900 Plant assets:

Land ..................................................... $140,000 Building................................................ $160,000

Less accumulated depreciation ... 52,000 108,000 Office equipment................................. $ 62,000

Less accumulated depreciation ... 21,300 40,700 Total plant assets ..................... 288,700

Total assets............................................... $363,600

Liabilities Current liabilities:

Accounts payable ............................... $ 3,400 Salaries payable .................................. 5,200

Total liabilities........................................... $ 8,600

Partners’ Equity

Jin Ding, capital ........................................ $153,800 Paul Hoffman, capital ............................... 201,200 Total partners’ equity ............................... 355,000 Total liabilities and partners’ equity ....... $363,600



Prob. 12–4B

1. May 31 Asset Revaluations ...................................... 3,800 Accounts Receivable .............................. 3,400 Allowance for Doubtful Accounts.......... 400* *[($21,400 – $3,400) × 5%] – $500

31 Merchandise Inventory ................................ 5,700 Asset Revaluations ................................. 5,700* *$64,300 – $58,600

31 Accumulated Depreciation—Equipment .... 25,700 Equipment ............................................... 9,000 Asset Revaluations ................................. 16,700

31 Asset Revaluations ...................................... 18,600 Anthony Simpson, Capital ..................... 9,300 Shawna Ryder, Capital ........................... 9,300

2. June 1 Shawna Ryder, Capital................................. 32,000

Blaine Evans, Capital.............................. 32,000

1 Cash............................................................... 40,000 Blaine Evans, Capital.............................. 40,000




3. SIMPSON, RYDER, AND EVANS

Balance Sheet June 1, 2012


Cash ......................................................... $54,4001 Accounts receivable ............................... $18,000 Less allowance for doubtful accounts .. 900 17,100 Merchandise inventory ........................... 64,300 Prepaid insurance ................................... 3,500

Total current assets........................... $139,300 Plant assets:

Equipment................................................ 88,000 Total assets................................................... $227,300

Liabilities

Current liabilities: Accounts payable ................................... $14,700 Notes payable.......................................... 12,000

Total liabilities............................................... $ 26,700

Partners’ Equity

Anthony Simpson, capital............................ $89,3002

Shawna Ryder, capital ................................. 39,3003

Blaine Evans, capital.................................... 72,000 Total partners’ capital .................................. 200,600 Total liabilities and partners’ capital........... $227,300

1$14,400 + $40,000 2$80,000 + $9,300 3$62,000 + $9,300 – $32,000



Prob. 12–5B

1. CAMPBELL, THAYER, AND TIPTON Statement of Partnership Liquidation For the Period September 10–30, 2012

Capital Noncash Campbell Thayer Tipton

Cash + Assets = Liabilities + (25%) + (25%) + (50%)

Balances before realization............... $ 17,700 $ 64,200 $ 9,000 $ 38,000 $ 6,400 $ 28,500 Sale of assets and division of loss... + 35,000 – 64,200 — – 7,300 – 7,300 – 14,600 Balances after realization .................. $ 52,700 $ 0 $ 9,000 $ 30,700 $ (900) $ 13,900 Payment of liabilities.......................... – 9,000 — – 9,000 — — — Balances after payment of liabilities $ 43,700 $ 0 $ 0 $ 30,700 $ (900) $ 13,900 Receipt of deficiency ......................... + 900 — — — + 900 — Balances ............................................. $ 44,600 $ 0 $ 0 $ 30,700 $ 0 $ 13,900 Cash distributed to partners ............. – 44,600 — — – 30,700 — – 13,900 Final balances .................................... $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 2. a. Randy Campbell, Capital ......................................... 300 Linda Tipton, Capital................................................ 600 Ken Thayer, Capital ............................................ 900

The $900 deficiency of Thayer would be divided between the other partners, Campbell and Tipton, in their income-sharing ratio (1:2 respectively). Therefore, Campbell would absorb 1/3 of the $900 deficiency, or $300, and Tipton would absorb 2/3 of the $900 deficiency, or $600.

b. Randy Campbell, Capital ......................................... 30,400*

Linda Tipton, Capital................................................ 13,300** Cash..................................................................... 43,700

*$30,700 – $300 **$13,900 – $600



Prob. 12–6B

1. a. LYON, MALONE, AND CHEN

Statement of Partnership Liquidation For Period June 3–29, 2012

Capital Noncash Lyon Malone Chen


Balances before realization............. $ 19,000 $ 218,000 $ 45,000 $ 12,000 $ 76,000 $ 104,000 Sale of assets and division

of gain ........................................... + 272,000 – 218,000 — + 10,800 + 21,600 + 21,600 Balances after realization ................ $ 291,000 $ 0 $ 45,000 $ 22,800 $ 97,600 $ 125,600 Payment of liabilities........................ – 45,000 — – 45,000 — — — Balances after payment

of liabilities ................................... $ 246,000 $ 0 $ 0 $ 22,800 $ 97,600 $ 125,600 Cash distributed to partners ........... – 246,000 — — – 22,800 – 97,600 – 125,600 Final balances .................................. $ 0 $ 0 $ 0 $ 0 $ 0 $ 0




1. b. LYON, MALONE, AND CHEN Statement of Partnership Liquidation

For Period June 3–29, 2012

Capital Noncash Lyon Malone Chen


Balances before realization............... $ 19,000 $ 218,000 $ 45,000 $ 12,000 $ 76,000 $ 104,000 Sale of assets and division of loss... + 105,000 – 218,000 — – 22,600 – 45,200 – 45,200 Balances after realization .................. $ 124,000 $ 0 $ 45,000 $ (10,600) $ 30,800 $ 58,800 Payment of liabilities.......................... – 45,000 — – 45,000 — — — Balances after payment of liabilities $ 79,000 $ 0 $ 0 $ (10,600) $ 30,800 $ 58,800 Receipt of deficiency ......................... + 10,600 — — + 10,600 — — Balances ............................................. $ 89,600 $ 0 $ 0 $ 0 $ 30,800 $ 58,800 Cash distributed to partners ............. – 89,600 — — — – 30,800 – 58,800 Final balances .................................... $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 2. a. Malone, Capital......................................................... 5,300 Chen, Capital ............................................................ 5,300 Lyon, Capital ....................................................... 10,600

The $10,600 deficiency of Lyon would be divided between the other partners, Malone and Chen, in their income-sharing ratio (1:1, respectively). Therefore, Malone would absorb 1/2 of the $10,600 deficiency, or $5,300, and Chen would absorb 1/2 of the $10,600 deficiency, or $5,300.

b. Malone, Capital......................................................... 25,500* Chen, Capital ............................................................ 53,500** Cash..................................................................... 79,000

*$30,800 – $5,300 **$58,800 – $5,300



CASES & PROJECTS

CP 12–1

This scenario highlights one of the problems that arises in partnerships: attempting to align contribution with income division. Often, disagreements are based on hon-est differences of opinion. However, in this scenario, there is evidence that Graham was acting unethically. Graham apparently made no mention of his plans to “scale back” once the partnership was consummated. As a result, Maples agreed to an equal division of income based on the assumption that Graham’s past efforts would project into the future, while in fact, Graham had no intention of this. As a result, Maples is now providing more effort, while receiving the same income as Graham. This is clearly not sustainable in the long term. Graham does not appear to be con-cerned about this inequity. Thus, the evidence points to some duplicity on Graham’s part. Essentially, he knows that he is riding on Maples’ effort and had planned it that way. Maples could respond to this situation by either withdrawing from the partnership or changing the partnership agreement. One possible change would be to provide a partner salary based on the amount of patient billings. This salary would be highly associated with the amount of revenue brought into the partnership, thus avoiding disputes associated with unequal contributions to the firm.

CP 12–2

A good solution to this problem would be to divide income in three steps:

1. Provide interest on each partner’s capital balance. 2. Provide a monthly salary for each partner. 3. Divide the remainder according to a partnership formula. With this approach, the return on capital and effort will be separately calculated in the income division formula before applying the percentage formula. Thus, Graves will receive a large interest distribution based on the large capital balance, while Moss should receive a large salary distribution based on the larger service contribu-tion. The return on capital and salary allowances should be based on prevailing mar-ket rates. If both partners are pleased with their return on capital and effort, then the remaining income could be divided equally among them.



CP 12–3

a. Revenue Revenue per per Professional Partner* Staff** Deloitte & Touche ................................................ $3,723,296 $334,175 Ernst & Young...................................................... 3,502,979 406,519 PricewaterhouseCoopers ................................... 3,447,680 342,896 KPMG.................................................................... 3,123,762 342,852 *Revenue per partner is determined by dividing the total revenue by the number

of partners for each firm, adjusting the revenues for the fact that they are ex-pressed in millions in the table. For example, revenue per partner is determined for Deloitte & Touche as follows:

Deloitte & Touche revenue per partner:

2,9490,000$10,980,00 = $3,723,296

**Likewise, the revenue per professional staff is determined by dividing the total

revenue by the number of professional staff, adjusting the revenues for the fact that they are expressed in millions in the table. For example, revenue per pro-fessional staff is determined for Deloitte & Touche as follows:

Deloitte & Touche revenue per professional staff:

32,8570,000$10,980,00 = $334,175

b. The amount of revenue earned per partner can be compared across the four

firms by setting each firm’s revenue per partner as a percent of the highest reve-nue per partner firm, as follows:

Revenue Percent of per Deloitte & Partner Touche Deloitte & Touche ................................................ $3,723,296 100% Ernst & Young...................................................... 3,502,979 94%1 PricewaterhouseCoopers ................................... 3,447,680 93% KPMG.................................................................... 3,123,762 84% 1 $3,502,979/$3,723,296 As can be seen, Deloitte & Touche has the highest revenue per partner relative

to the other three firms, while KPMG has the lowest. KPMG’s revenue per partner is 84% of Deloitte & Touche. These data suggest that Deloitte & Touche has a somewhat smaller partner base supporting its revenues than do the other three firms.



CP 12–3 (Concluded)

The amount of revenue earned per professional staff can be compared across the four firms by setting each firm’s revenue per professional staff as a percent of the highest revenue per professional staff firm, as follows:

Revenue per Percent of Professional Ernst & Staff Young Deloitte & Touche ................................................ $334,175 82%1 Ernst & Young...................................................... 406,519 100% PricewaterhouseCoopers ................................... 342,896 84% KPMG.................................................................... 342,852 84% 1$334,175/$406,519 As can be seen, Ernst & Young has the highest revenue per professional staff of

the four firms. PricewaterhouseCoopers, for example, has revenue per profes-sional staff equal to 84% of Ernst & Young. Ernst & Young appears to be the most efficient firm in the use of professional staff compared to the other three firms.

Taken together, both tables indicate that Deloitte & Touche provides more reve-

nue per partner (and possibly more profit per partner) than the other three firms but does not have the operating efficiency of Ernst & Young in terms of the use of professional staff. In contrast, Ernst & Young appears to have the most effi-cient use of professional staff of all the firms, but provides less revenue per partner (and possibly less profit per partner) than does Deloitte & Touche.

CP 12–4

When developing an LLC (or partnership), the operating (or partnership) agreement is a critical part of establishing a business. Each party must consider the various incentives of each individual in the LLC. For example, in this case, one party, Karen Pratt, is providing all of the funding, while the other two parties are providing expertise and talent. This type of arrangement can create some natural conflicts be-cause the interests of an investor might not be exactly the same as those operating the LLC. Specifically, you would want to advise Pratt that not all matters should be settled by majority vote. Such a provision would allow the two noninvesting members to vote as a block to the detriment of Pratt. For example, the salaries for the two working members could be set by their vote, so that little profit would be left to be distributed. This would essentially keep Pratt’s return limited to the 10% preferred return. Pratt should insist that salary allowances require unanimous approval of all members.



CP 12–4 (Concluded)

A second issue is the division of partnership income. The suggested agreement is for all the partners to share the remaining income, after the 10% preferred return, equally. Pratt should be counseled to consider all aspects of the LLC contribution to determine if this division is equitable. There are many considerations including the amount of investment, risk of the venture, degree of expertise of noninvesting part-ners, and degree of exclusivity of noninvesting members’ effort contribution (unique skills or business connections, for example). Often, the simple assumption of equal division is not appropriate.

In addition, it is sometimes best to require even working members to have an in-vestment in the LLC, even if it is small, so that they are sensitive to the perspective of financial loss.

CP 12–5

a. Chrysler Group LLC produces and sells Chrysler, Jeep, and Dodge vehicles. b. A transaction selling a majority interest of Chrysler from DaimlerChrysler to Cer-

berus Capital Management to form Chrysler LLC was announced on May 14, 2007, and completed on August 3, 2007. Since this time, Chrysler LLC went into Chapter 11 bankruptcy and emerged in late 2009 as Chrysler Group LLC. The new entity has an alliance with Fiat.

c. Chrysler Group LLC has gone through significant changes during the recession of 2009. The U.S. government provided bailout funds that were turned into an equity interest in the firm. As of the end of 2009, Chrysler Group LLC was 20% owned by Fiat, 55% by the United Auto Workers union, 8% owned by the U.S. government, and 2% by the Canadian government.

d. Chrysler Group LLC is not a public company. Its major owners, Fiat, UAW, U.S. and Canadian governments, and private equity funds hold their ownership inter-ests privately. The LLC form is well suited to Chrysler Group because there are a few large private owners to the firm.

Chapter 12 accounting for partnerships and limited liability companies SOLUTION

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