Accounting for Accounting for

Partnerships and

Partnerships and

Limited Liability Limited Liability

CompaniesCompanies

Chapter 12Chapter 12

Learning Learning Objective

ObjectiveDescribe the characteristics of

Describe the characteristics of

proprietorships, partnerships,

proprietorships, partnerships,

and limited liability companies

and limited liability companies

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Four Most Common Legal Forms of Four Most Common Legal Forms of Business Business o __________________________________________________________o __________________________________________________________o __________________________________________________________o __________________________________________________________

ProprietorshipProprietorship

o A _________________ is a company ________ A _________________ is a company ________ by a single individual .by a single individual . _________________ _________________ __________________________________ __________________________________ __________________________________

________________________________

o Characteristics of proprietorships include Characteristics of proprietorships include the following:the following: _________________ _________________ _________________ _________________ __________________________________ _________________ _________________ __________________________________

PartnershipsPartnerships

o A ________ is an association of two or moreA ________ is an association of two or more ________ who ________ and ________ a ________ who ________ and ________ a

business for profit. Characteristics of a business for profit. Characteristics of a ________ include the following:________ include the following: Moderately complex to form Moderately complex to form

• _____________________________________________________ _____________________________________________________ _____________________________________________________ _____________________________________________________ _____________________________________________________ _____________________________________________________ _____________________________________________________ _____________________________________________________ _____________________________________________________ _____________________________________________________

PartnershipsPartnerships

________________________________________________________________________________________________ ________________________________________________________________________________________________ ________________________________________________________________________________________________ ________________________________________________________________________________________________ ________________________________________________________________________________________________

PartnershipsPartnerships

o In addition to the characteristics listed on In addition to the characteristics listed on the previous slides, some unique aspects the previous slides, some unique aspects of partnerships are:of partnerships are: ________________________________________________________________________________________________ ________________________________________________________________________________________________ ________________________________________________________________________________________________

Limited Liability CompaniesLimited Liability Companies

o A __________ __________ __________ (LLC) is a A __________ __________ __________ (LLC) is a __________ of legal entity that provides __________ of legal entity that provides __________ __________ to its __________ , but is __________ __________ to its __________ , but is treated as a __________ for __________ treated as a __________ for __________ purposes. Characteristics include:purposes. Characteristics include: ________________________________________________________________________________________________ ________________________________________________________________________________________________ ________________________________________________________________________________________________ ________________________________________________________________________________________________ ________________________________________________________________________________________________

Learning Learning Objective

ObjectiveDescribe and illustrate the

Describe and illustrate the

accounting for forming a partnership

accounting for forming a partnership

and for dividing the net income and

and for dividing the net income and net loss of a partnership

net loss of a partnership

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__________ a Partnership__________ a Partnership

o Joseph Stevens and Earl Foster, owners of Joseph Stevens and Earl Foster, owners of competing hardware stores, agree to competing hardware stores, agree to combine their businesses in a partnership. combine their businesses in a partnership. Stevens agrees to contribute the Stevens agrees to contribute the following:following:

Forming a PartnershipForming a Partnershipo The entry to record the _______ and _______ The entry to record the _______ and _______

contributed by Stevens is as follows:contributed by Stevens is as follows:

o The _______ assets are normally recorded at The _______ assets are normally recorded at _______ _______ _______ ._______ _______ _______ .

Forming a PartnershipForming a Partnership

o If a _______ _______ company is formed, the If a _______ _______ company is formed, the following entry is made:following entry is made:

_______ _______ —Services of Partners_______ _______ —Services of Partners

o The partnership agreement of Jennifer The partnership agreement of Jennifer Stone and Crystal Mills provides for Stone Stone and Crystal Mills provides for Stone to receive a monthly salary allowance of to receive a monthly salary allowance of $5,000 ($60,000 annually) and Mills to $5,000 ($60,000 annually) and Mills to receive $4,000 a month ($48,000 receive $4,000 a month ($48,000 annually). If there is any remaining net annually). If there is any remaining net income, it is to be _______ _______ . income, it is to be _______ _______ . Income and losses of the partnership would have been divided _______ if _______ _______ agreement existed or if the _______ agreement did _______ _______ how the division was to occur.

J. Stone C. Mills TotalAnnual salary allowance $ $ $

12 x _______ _______ _______ _______

Dividing Income—Services of PartnersDividing Income—Services of Partners

o The firm had net income of $150,000 for The firm had net income of $150,000 for the year. Stone _______ the net income as the year. Stone _______ the net income as calculated below.calculated below.

J. Stone C. Mills TotalAnnual salary allowance $60,000 $48,000

$108,000Remaining incomeDivision of net income $$ $ $ $ $

Dividing Income—Services of PartnersDividing Income—Services of Partners

o The firm had net income of $150,000 for The firm had net income of $150,000 for the year. Stone shared the net income as the year. Stone shared the net income as calculated below.calculated below.

Learning Learning Objective

ObjectiveDescribe and illustrate the

Describe and illustrate the

accounting for partner admission

accounting for partner admission and withdrawaland withdrawal

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Admitting a PartnerAdmitting a Partner

o A person may be _______ to a partnership A person may be _______ to a partnership by either of the following:by either of the following: __________________________________________ __________________________________________ __________________________________________ __________________________________________

Purchasing an _________ from ________ Purchasing an _________ from ________ PartnersPartnerso On June 1, Tom Andrews and Nathan Bell On June 1, Tom Andrews and Nathan Bell

each _________ one-fifth of their each _________ one-fifth of their partnership equity of Bring It Consulting to partnership equity of Bring It Consulting to Joe Canter for $10,000 in cash. On June 1, Joe Canter for $10,000 in cash. On June 1, the partnership has net assets of the partnership has net assets of $100,000, and both existing partners have $100,000, and both existing partners have capital balances of $50,000 each.capital balances of $50,000 each.

Purchasing an Interest from Existing Purchasing an Interest from Existing PartnersPartnerso The only entry required in the partnership The only entry required in the partnership

accounts is as follows:accounts is as follows:

o For a limited liability company, the For a limited liability company, the following entry is required:following entry is required:

Contributing _________ to a PartnershipContributing _________ to a Partnership

o Partners Tom Andrews and Nathan Bell Partners Tom Andrews and Nathan Bell each have capital balances of $50,000. On each have capital balances of $50,000. On June 1, Joe Canter _________ $20,000 cash June 1, Joe Canter _________ $20,000 cash to Bring It Consulting for ownership equity to Bring It Consulting for ownership equity of $20,000.of $20,000.

Contributing Assets to a PartnershipContributing Assets to a Partnership

o The entry to record this transaction is as The entry to record this transaction is as follows:follows:

o For a limited liability company, the For a limited liability company, the following entry is required:following entry is required:

Revaluation of Assets Revaluation of Assets

o If the partnership’s asset accounts If the partnership’s asset accounts _________ _________ _________ approximate _________ _________ _________ approximate current market values when a new partner current market values when a new partner is admitted, the accounts should be is admitted, the accounts should be adjusted (increased or decreased) before adjusted (increased or decreased) before the new partner is admitted.the new partner is admitted.

Revaluation of AssetsRevaluation of Assets

o Partners Andrews and Bell each have Partners Andrews and Bell each have capital balances of $50,000. The balance capital balances of $50,000. The balance in Merchandise Inventory is $14,000, and in Merchandise Inventory is $14,000, and the current replacement value is $17,000. the current replacement value is $17,000. The partners share net income equally.The partners share net income equally.

Revaluation of AssetsRevaluation of Assets

o The entry to record this transaction is as The entry to record this transaction is as follows:follows:

o For a limited liability company, the For a limited liability company, the following entry is required:following entry is required:

Partner BonusesPartner Bonuses

Withdrawal of a PartnerWithdrawal of a Partner

o A partner may _________ or _________ from A partner may _________ or _________ from a partnership. In such cases, the a partnership. In such cases, the withdrawing partner’s _________ is withdrawing partner’s _________ is normally sold to the:normally sold to the: __________________________________________________________________________ __________________________________________________________________________

_________ of a Partner_________ of a Partner

o If the existing partners purchase the If the existing partners purchase the _________ _________ interest, the _________ _________ _________ interest, the _________ and _________ of the partnership interest is and _________ of the partnership interest is between the partners as _________ . The between the partners as _________ . The only entry is:only entry is: ______________________________________________ ______________________________________________ ______________________________________________ ______________________________________________

Withdrawal of a PartnerWithdrawal of a Partner

o If the partnership purchases the _________ If the partnership purchases the _________ _________ interest, the _________ and the _________ interest, the _________ and the _________ _________ of the partnership are _________ _________ of the partnership are reduced by the _________ _________.reduced by the _________ _________.

Death of a PartnerDeath of a Partner

o When a partner _________ , the partnership When a partner _________ , the partnership accounts should be _________ as of the accounts should be _________ as of the date of _________. The _________ _________ date of _________. The _________ _________ for the current period should then be for the current period should then be determined and _________ among the determined and _________ among the partners’ _________ accounts.partners’ _________ accounts.

Learning Learning Objective

ObjectiveDescribe and illustrate the

Describe and illustrate the

accounting for liquidating a

accounting for liquidating a partnershippartnership

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Liquidating PartnershipsLiquidating Partnerships

o When a partnership goes _________ of When a partnership goes _________ of _________ , the winding-up process is called _________ , the winding-up process is called the _________the _________ of the partnership.of the partnership. Although Although _________ refers to the _________ of refers to the _________ of

liabilities, it includes the _________ winding-up liabilities, it includes the _________ winding-up process.process.

When the partnership goes _________ of When the partnership goes _________ of _________ and the _________ operations are _________ and the _________ operations are _________ , the accounts should be _________ _________ , the accounts should be _________ and closed.and closed.

_________ Partnerships_________ Partnerships

o In liquidation, _________ is _________ to In liquidation, _________ is _________ to _________ partner based on his or her final _________ partner based on his or her final _________ _________ ._________ _________ .

Liquidating PartnershipsLiquidating Partnerships

o Farley, Green, and Hall decide to liquidate Farley, Green, and Hall decide to liquidate their partnership. On April 9, after their partnership. On April 9, after discontinuing business operations and discontinuing business operations and closing the accounts, the following trial closing the accounts, the following trial balance is prepared: balance is prepared:

Gain on RealizationGain on Realization

o Farley, Green, and Hall share income and Farley, Green, and Hall share income and losses in a ratio of 5:3:2 (50%, 30%, 20%). losses in a ratio of 5:3:2 (50%, 30%, 20%).

o All noncash assets are sold in a single All noncash assets are sold in a single transaction for $72,000, resulting in a gain of transaction for $72,000, resulting in a gain of $8,000. Partner capital accounts are credited $8,000. Partner capital accounts are credited $4,000, $2,400, and $1,600 to $4,000, $2,400, and $1,600 to Farley, Green, and Hall, respectively.Farley, Green, and Hall, respectively.

o Creditors are paid $9,000, and the remaining Creditors are paid $9,000, and the remaining cash of $74,000 is distributed to the partners.cash of $74,000 is distributed to the partners.

o A ____________________________, which A ____________________________, which summarizes the liquidation process, is shown summarizes the liquidation process, is shown in in Exhibit 5Exhibit 5..

Sale of _________ (Step 1)

Gain on _________ Gain on _________

_______ of _____ (Step 2)

Gain on RealizationGain on Realization

_______ of _______ (Step 3)

Gain on RealizationGain on Realization

_______ of _______ to Partners (Step 4)

Gain on RealizationGain on Realization

Loss on Realization—_______ _______ Loss on Realization—_______ _______

o The share of a loss on _______ may be The share of a loss on _______ may be _______ than the balance in a partner’s _______ than the balance in a partner’s _______ account. The resulting _______ _______ account. The resulting _______ _______ in the _______ account is called a _______ in the _______ account is called a ______________ ..

Partner Does Not Pay DeficiencyPartner Does Not Pay Deficiency

o If Farley does not pay her _______ , the If Farley does not pay her _______ , the _______ would be _______ to Green and Hall _______ would be _______ to Green and Hall based on their ______-_______ _______ of based on their ______-_______ _______ of 3:2. The remaining cash would be 3:2. The remaining cash would be distributed to Green and Hall.distributed to Green and Hall.

Learning Learning Objective

ObjectivePrepare the statement of

Prepare the statement of partnership equity

partnership equity

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Statement of _______ _______ Statement of _______ _______

o The changes in the partners’ capital The changes in the partners’ capital accounts for a period of time are reported accounts for a period of time are reported in a _______ of _______ _______ .in a _______ of _______ _______ .

o The _______ of _______ _______ for an LLC is The _______ of _______ _______ for an LLC is similar to that of a _______ . It reports the similar to that of a _______ . It reports the _______ in _______ _______ for a period._______ in _______ _______ for a period.

Learning Learning Objective

ObjectiveAnalyze and interpret employee

Analyze and interpret employee efficiencyefficiency

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Revenue per Employee Revenue per Employee

o _______ _______ _______ is a measure of the _______ _______ _______ is a measure of the _______ of the _______ in _______ _______ ._______ of the _______ in _______ _______ .

Revenue per Employee =

Accounting for Accounting for

Partnerships and

Partnerships and

Limited Liability Limited Liability

CompaniesCompanies

The EndThe End