Fundamentals of accounting 18e Chp 12

Chapter 12

Accounting for Partnerships

QUESTIONS

1. Under the circumstances described, the death, bankruptcy, or legal inability of a partner to execute a contract ends a partnership. In addition, if a partnership is organized for the purpose of completing a specific business project, the partnership ends when the project is completed. If the business for which the partnership was organized cannot be completed, but goes on indefinitely, the partnership may be dissolved at the will of any one of its partners.

2. Mutual agency means that each partner is an agent of the partnership and can commit it to contracts that are within the normal scope of its business.

3. Yes, partners can limit the right of a partner. Such an agreement is binding on members of the partnership. It is also binding on outsiders who know of the agreement. However, it is not binding on outsiders who do not know of the agreement.

4. No, he does not have this right. A partnership is a voluntary association and partners have the right to select the people with whom they associate as partners.

5. If partners agree on the method of sharing incomes, but say nothing of losses, then any losses are shared in the same manner as income.

6. The allocation of net income to the partners is reported on the statement of partners' equity.

7. Unlimited liability means that the creditors of a partnership have the right to require each partner to be personally responsible for all debts of the partnership.

8. All partners in a general partnership have unlimited liability. A limited partnership includes both general and limited partners, and the limited partners have no personal liability for partnership debts. Also, the general partners assume the management duties of the partnership.

9. George's claim is not valid unless the previously agreed upon method of sharing net incomes and losses granted George an annual salary allowance of $25,000. Unless the partnership agreement says otherwise, partners have no claim to a salary allowance in payment for their services.

10. No. Kay is still liable to her former partners for her share of the losses.

©McGraw-Hill Companies, 2007

Solutions Manual, Chapter 12 651

11. At all times in the accounting history of a partnership (or any organization), assets must equal liabilities plus equity. When the assets are converted to cash, any gains or losses are allocated to the capital accounts of the partners; and when creditors' claims are paid, assets and liabilities are reduced by equal amounts. Therefore, when the remaining assets are in the form of cash, the amount of cash must equal the claims (equity) of the partners.

12. The remaining partners should share the decline in their equities in accordance with their income-and-loss-sharing ratio.

QUICK STUDIES

Quick Study 12-1 (10 minutes)

a. The partnership will need to pay because it is a merchandising firm. That is, if the vendor knows nothing to the contrary, the vendor can assume that Leon has the right, because of mutual agency, to bind the firm to contracts for the purchase of merchandise.

b. A public accounting firm is not in the merchandising business. Consequently, because the purchase of merchandise to be sold is not within the normal scope of the business of this firm, the vendor has no right to assume Leon is acting as the agent for the partnership. Hence, the partnership probably will not have to pay.


Stolton Bright Total

Net income............................................. 52,000Salary allowances

Stolton.................................................. $15,000Bright................................................... $20,000Total salary allowances...................... 35,000

Balance of income................................ 17,000Balance allocated equally

Stolton.................................................. 8,500 Bright.................................................... 8,500

Total allocated equally....................... 17,000 Balance of income................................ ______ ______ $ 0Shares of the partners.......................... $23,500 $28,500


Fundamental Accounting Principles, 18th Edition652


If Blake is allocated a $100,000 salary allowance and there remains $4,000 to be divided equally, giving Matthai $2,000, then this shows that the partnership must have earned net income of $104,000.


Since Mourlan is a limited partner, he is not personally liable for any unpaid debts of the partnership. Therefore, the partnership’s creditors cannot pursue Mourlan’s personal assets.


Choi, Capital..............................................................................10,000Amal, Capital..............................................................................10,000 Stein, Capital......................................................................... 20,000 To record admission of Stein by purchase.


Cash............................................................................................40,000 Kwon, Capital........................................................................ 40,000 To record admission of Kwon.


Total partnership return on equity = Net Income/Average equity = $25,000 / ($150,000 + $200,000)/2

= $25,000 / $175,000 = 14.3%

Howe partner return on equity = Partner net income/Average partner equity = $20,000 / ($100,000 + $140,000)/2

= $20,000 / $120,000 = 16.7%

Duley partner return on equity = Partner net income/Average partner equity = $5,000 / ($50,000 + $60,000)/2

= $5,000 / $55,000 = 9.1%



EXERCISES

Exercise 12-1 (15 minutes)

Characteristic General Partnerships

1. Life Limited

2. Owners’ liability Unlimited

3. Legal status Not separate from partners

4. Tax status of income Taxed only once

5. Owners’ authority Mutual agency

6. Ease of formation Requires only an agreement

7. Transferability of ownership Difficult to transfer

8. Ability to raise large amounts of capital Low ability




a. Recommended Organization : Sharif, Henry, and Korb might first consider organizing their business as a general partnership. However, a problem for these new graduates is that they do not have funds and with no past business experience will probably have trouble getting a business loan. Therefore, instead of a partnership, a better course of action is probably to incorporate. In this way they might be able to find investors to contribute capital for stock. They can structure the financing so that they remain the major stockholders in the company.

Taxation: As a corporation, any income will be subject to corporate income tax. Any dividends paid to the stockholders will also normally be taxed, but at a much lower level. Moreover, some lower income taxpayers could potentially pay little or no dividend tax. Any salaries that Sharif, Henry, and Korb pay themselves will be a tax-deductible expense for the business.

Advantages: Several key advantages to the corporate form include its limited liability and the potential to sell more stock if additional funds are needed.

b. Recommended Organization: The two doctors should form a partnership. A general partnership will have the disadvantage of unlimited liability so they probably want to consider a limited liability partnership. The partnership can borrow funds from the bank to obtain the initial needed capital for the business.

Taxation: The owners will pay individual taxes on income earned by the partnership but the partnership will not be taxed.

Advantages: The advantages of the partnership are ease of formation and owner authority.

c. Recommended Organization: Munson should consider setting up a limited partnership. Given his real estate expertise, he can manage the day-to-day activities of the partnership and serve as its general partner. He can raise the necessary capital by admitting limited partners.

Taxation: All partners will pay individual taxes on income distributed to them, but the partnership entity will not pay income tax.

Advantages: The advantages to Milan will be the authority over the partnership that he will have as general partner and the ease of raising capital.



Exercise 12-3 (25 minutes)1a. 2008Mar. 1 Cash........................................................................... 82,500

Land........................................................................... 60,000Building.....................................................................100,000 Long-Term Note Payable................................... 92,500 Eckert, Capital.................................................... 82,500 Kelley, Capital..................................................... 67,500 To record initial capital investments.

1b. 2008Oct. 20 Eckert, Withdrawals................................................. 34,000

Kelley, Withdrawals.................................................. 20,000 Cash..................................................................... 54,000 To record partners’ withdrawals.

1c. 2008Dec. 31 Eckert, Capital.......................................................... 34,000

Kelley, Capital........................................................... 20,000 Eckert, Withdrawals........................................... 34,000 Kelley, Withdrawals............................................ 20,000 To close withdrawals accounts.

Dec. 31 Income Summary..................................................... 90,000 Eckert, Capital.................................................... 58,250 Kelley, Capital..................................................... 31,750 To close Income Summary account.*

2.Capital account balances Eckert Kelley Initial investment.................................$ 82,500 $ 67,500 Withdrawals.........................................(34,000) (20,000) Share of income*................................. 58,250 31,750 Ending balances.................................$106,750 $ 79,250

*Supporting calculations Eckert Kelley Total Net income.................................................................... $90,000 Salary allowance Eckert...........................................................................$25,000 Total salary allowance................................................. 25,000 Balance of income....................................................... 65,000 Interest allowances Eckert (10% on $82,500)............................................8,250 Kelley (10% on $67,500)............................................$ 6,750 Total interest allowances............................................ 15,000 Balance of income....................................................... 50,000 Balance allocated equally Eckert..........................................................................25,000



Kelley...........................................................................25,000 Total allocated equally................................................. 50,000 Balance of income........................................................._______ _______ $ 0Shares of the partners...................................................$58,250 $31,750




Kramer Knox Total

Plan (1) $160,000 x 1/2...............................................$80,000 $80,000 $160,000

Plan (2) ($60,000/$140,000) x $160,000.....................$68,571 $ 68,571($80,000/$140,000) x $160,000..................... $91,429 91,429

$68,571 $91,429 $160,000

Plan (3) Net income.................................................... $160,000Salary allowances........................................$50,000 $40,000 90,000Interest allowances

($60,000 x 10%)...........................................6,000 6,000($80,000 x 10%)........................................... 8,000 8,000

Total salary and interest.............................. 104,000 Balance of income........................................ 56,000

Balance allocated equally($56,000)/2.....................................................28,000 28,000 56,000Balance of income........................................ . . $ 0Shares of each partner................................$84,000 $76,000




Kramer Knox Total

1. Net income.................................................... $ 98,800Salary allowances........................................$50,000 $ 40,000 90,000Interest allowances

($60,000 x 10%)...........................................6,000 6,000($80,000 x 10%)........................................... 8,000 8,000

Total salaries and interest........................... 104,000 Balance of income........................................ (5,200)Remainder equally($5,200)/2.......................................................(2,600) (2,600) (5,200 )

Balance of income........................................_______ _______ $ 0

Shares each partner.....................................$53,400 $ 45,400

2. Net income.................................................... $ (16,800)Salary allowances........................................$50,000 $ 40,000 90,000Interest allowances

($60,000 x 10%)...........................................6,000 6,000($80,000 x 10%)........................................... 8,000 8,000

Total salaries and interest........................... 104,000 Balance of income........................................ (120,800)Remainder equally$(120,800)/2...................................................(60,400) (60,400) 120,800Balance of income........................................_______ _______ $ 0Shares of each partner................................$ (4,400 ) $(12,400 )


Sept. 30 Mandy, Capital..........................................................100,000 Brittney, Capital.................................................. 100,000 To record admission of Brittney.




1.Nov. 1 Cash...........................................................................90,000

Madison, Capital................................................. 90,000 To record admission of Madison [($510,000 + $90,000) x 15%].

2.Nov. 1 Cash...........................................................................120,000

Madison, Capital................................................. 94,500 Main, Capital....................................................... 20,400 First, Capital........................................................ 5,100 To record admission of Madison.

Supporting computations $510,000 + $120,000 = $630,000

$630,000 x 15% = $94,500 $120,000 - $94,500 = $25,500 $25,500 x 80% = $20,400

$25,500 x 20% = $5,100

3.Nov. 1 Cash...........................................................................80,000

Main, Capital.............................................................6,800First, Capital..............................................................1,700 Madison, Capital................................................. 88,500 To record admission of Madison.

Supporting computations $510,000 + $80,000 = $590,000 $590,000 x 15% = $88,500 $80,000 - $88,500 = $(8,500) $(8,500) x 80% = $(6,800) $(8,500) x 20% = $(1,700)




1.Jan. 31 Tulip, Capital.............................................................60,000

Cash..................................................................... 60,000 To record retirement of Tulip.


Holland, Capital*.......................................................12,500Flowers, Capital**.....................................................7,500 Cash..................................................................... 80,000 To record retirement of Tulip.

* (5/8 x $20,000)**(3/8 x $20,000)


Holland, Capital*................................................. 18,750 Flowers, Capital**............................................... 11,250 Cash..................................................................... 30,000 To record retirement of Tulip.

* (5/8 x $30,000)**(3/8 x $30,000)




1.

Red White Blue Total Initial investments.............. $180,000 $240,000 $210,000 $630,000 Allocation of all losses ($630,000 - $60,000)/3....... (190,000 ) (190,000 ) (190,000 ) (570,000 ) Capital balances................. $ (10,000 ) $ 50,000 $ 20,000 $ 60,000

2. a)Aug. 31 Cash...........................................................................10,000

Red, Capital......................................................... 10,000 To record payment of deficiency.

b)Aug. 31 White, Capital............................................................50,000

Blue, Capital..............................................................20,000 Cash..................................................................... 70,000 To distribute remaining cash.

3. a)Aug. 31 White, Capital............................................................5,000

Blue, Capital..............................................................5,000 Red, Capital......................................................... 10,000 To transfer deficiency to other partners.

b)Aug. 31 White, Capital............................................................45,000

Blue, Capital..............................................................15,000 Cash..................................................................... 60,000 To distribute remaining cash.




a. Loss from selling assets

Total book value of assets............................................. $126,000Total liabilities (before liquidation)................................$78,000Total liabilities remaining after paying proceeds of asset sales to creditors.......................... (28,000 )Cash proceeds from sale of assets............................... (50,000 )Loss on sale of assets*................................................... $ 76,000

* Alternative computation1) $28,000 = $78,000 - Cash from assets’ sale (This implies cash from assets sale is $50,000)2) Loss on sale of assets = Book value of assets - Cash received

= $126,000 - $50,000 = $76,000

b. Loss allocation

Turner Roth Lowe TotalCapital balances before loss liquidation $ 2,500 $ 14,000 $ 31,500 $ 48,000

Allocation of loss $76,000 x 1/10........................ (7,600) $76,000 x 4/10........................ (30,400) $76,000 x 5/10........................ ______ _______ (38,000 ) (76,000 )Capital balances after loss..... $(5,100 ) $(16,400 ) $ (6,500 ) $(28,000 )

c. Liability to be paid

Each partner should pay the amount of the debit (deficit) balance in his or her own capital account.




a. Loss from selling assets

Total book value of assets............................................. $126,000Total liabilities before liquidation..................................$78,000Total liabilities remaining after paying proceeds of asset sales to creditors............................................ (28,000)Cash proceeds from sale of assets............................... (50,000 )Loss on sale of assets.................................................... $ 76,000

b. Loss and deficit allocation

Turner Roth Lowe TotalCapital balances before loss $ 2,500 $ 14,000 $ 31,500 $ 48,000Allocation of loss $76,000 x 1/10........................ (7,600) $76,000 x 4/10........................ (30,400) $76,000 x 5/10........................ ______ _______ (38,000 ) (76,000 )Capital balances after loss..... (5,100) (16,400) (6,500) $ (28,000 )

Allocation of Lowe's deficit to Turner and Roth $6,500 x 1/5............................ (1,300) $6,500 x 4/5............................ ______ (5,200 ) 6,500 _________

Cash paid by each partner $(6,400 ) $(21,600 ) $ 0 $(28,000)

c. Liability to be paid

As a limited partner, Lowe has no personal liability for the $28,000 liability. Therefore, Turner and Roth must share the loss reflected in Lowe's capital account deficit as shown above.


Hunt Sports Enterprises LP: Return on equity: $468,032 / [($947,000 + $1,365,032)/2] = 40.5%

Soccer LP: Partner return on equity: $22,134 / [($189,000 + $211,134)/2] = 11.1%

Football LP: Partner return on equity: $445,898 / [($758,000 + $1,153,898)/2] = 46.6%



PROBLEM SET A

Problem 12-1A (50 minutes)1.Dec. 31 Income Summary.....................................................249,000

Kim Ries, Capital................................................ 83,000 Tere Bax, Capital................................................ 83,000 Josh Thomas, Capital........................................ 83,000 To close Income Summary.

2.Dec. 31 Income Summary.....................................................249,000

Kim Ries, Capital................................................ 62,250 Tere Bax, Capital................................................ 87,150 Josh Thomas, Capital........................................ 99,600 To close Income Summary*.

*Supporting computations

($80,000/$320,000) x $249,000 = $62,250 ($112,000/$320,000) x $249,000 = $87,150 ($128,000/$320,000) x $249,000 = $99,600

3.Dec. 31 Income Summary.....................................................249,000

Kim Ries, Capital................................................ 79,000 Tere Bax, Capital................................................ 72,200 Josh Thomas, Capital........................................ 97,800 To close Income Summary*.

*Supporting calculations Ries Bax Thomas TotalNet income.................................................. $249,000Salary allowances Ries...........................................................$66,000 Bax............................................................ $56,000 Thomas.................................................... $80,000Total salaries.............................................. 202,000 Balance after salary allowances............... 47,000Interest allowances Ries (10% on $80,000)............................8,000 Bax (10% on $112,000)........................... 11,200 Thomas (10% on $128,000).................... 12,800Total interest.............................................. 32,000 Bal. after interest and salaries.................. 15,000Balance allocated equally.........................5,000 5,000 5,000Total allocated equally.............................. 15,000 Balance of income.....................................______ ______ ______ $ 0Shares of the partners...............................$79,000 $72,200 $97,800



Problem 12-2A (45 minutes)

Preliminary calculationsPlan (a) & Plan (c) Percentages based on initial investments

Watts = $42,000/$105,000 = 40%Lyon = $63,000/$105,000 = 60%

Plan (b) Percentages based on timeWatts = 0.5/1.5 = 33 1/3%Lyon = 1.0/1.5 = 66 2/3%

Plan (c) & Plan (d) Salary allowanceLyon= 12 x $6,000 = $72,000

Plan (d) Interest allowancesWatts = 10% x $42,000 = $ 4,200Lyon= 10% x $63,000 = $ 6,300

Income (Loss) Year 1Sharing Plan Calculations Watts Lyon

(a) 40% x $36,000 loss...................................................$(14,400)60% x $36,000 loss................................................... $(21,600)

(b) 33 1/3% x $36,000 loss.............................................$(12,000)66 2/3% x $36,000 loss............................................. $(24,000)

(c) Salary allowance...................................................... $ 72,000

40% x ($36,000 loss + $72,000 salary)....................$(43,200)60% x ($36,000 loss + $72,000 salary)....................________ (64,800 )Totals.........................................................................$(43,200) $ 7,200

(d) Salary allowance...................................................... $ 72,000Interest allowances..................................................$ 4,200 6,300

50% x ($36,000 loss + $72,000 salary + $10,500 interest)...................................... (59,250) (59,250)Totals.........................................................................$(55,050) $ 19,050



Problem 12-2A (Concluded)

Income (Loss) Year 2 Sharing Plan Calculations Watts Lyon

(a) 40% x $90,000 income..............................................$36,00060% x $90,000 income.............................................. $54,000

(b) 33 1/3% x $90,000 income........................................$30,00066 2/3% x $90,000 income........................................ $60,000

(c) Salary allowance...................................................... $72,00040% x ($90,000 income - $72,000 salary)...................$ 7,20060% x ($90,000 income - $72,000 salary)..................._______ 10,800 Totals.........................................................................$ 7,200 $82,800

(d) Salary allowance...................................................... $72,000Interest allowances..................................................$ 4,200 6,30050% x ($90,000 income - $72,000 salary - $10,500 interest)....................................... 3,750 3,750Totals.........................................................................$ 7,950 $82,050

Income (Loss) Year 3 Sharing Plan Calculations Watts Lyon

(a) 40% x $150,000 income............................................$60,00060% x $150,000 income............................................ $ 90,000

(b) 33 1/3% x $150,000 income......................................$50,00066 2/3% x $150,000 income...................................... $100,000

(c) Salary allowance...................................................... $ 72,00040% x ($150,000 income - $72,000 salary).............$31,20060% x ($150,000 income - $72,000 salary)............._______ 46,800 Totals.........................................................................$31,200 $118,800

(d) Salary allowance...................................................... $ 72,000Interest allowances..................................................$ 4,200 6,30050% x ($150,000 income - $72,000 salary - $10,500 interest)....................................... 33,750 33,750Totals.........................................................................$37,950 $112,050




Part 1

a)Feb. 1 Benson, Capital........................................................138,000

North, Capital...................................................... 138,000 To record admission of North.

b)Feb. 1 Benson, Capital........................................................138,000

Schmidt, Capital................................................. 138,000 To record admission of Schmidt.

c)Feb. 1 Benson, Capital........................................................138,000

Cash..................................................................... 138,000 To record withdrawal of Benson with no bonus.

d)Feb. 1 Benson, Capital........................................................138,000

Meir, Capital*............................................................. 28,500Lau, Capital**............................................................ 47,500 Cash..................................................................... 214,000

To record withdrawal of Benson with bonus.* ($214,000 - $138,000) x 3/8**($214,000 - $138,000) x 5/8

e)Feb. 1 Benson, Capital........................................................138,000

Accumulated Depreciation—Equipment................ 23,200 Meir, Capital*....................................................... 22,950 Lau, Capital**...................................................... 38,250 Equipment........................................................... 70,000 Cash..................................................................... 30,000 To record withdrawal of Benson with bonus to old partners.* [$138,000 - ($70,000 - $23,200 + $30,000)] x 3/8.**[$138,000 - ($70,000 - $23,200 + $30,000)] x 5/8.




Part 2

a)Feb. 1 Cash...........................................................................200,000

Rhodes, Capital*................................................. 200,000 To record admission of Rhodes.

*Supporting calculations $168,000 + $138,000 + $294,000 = $600,000 ($600,000 + $200,000) x 25% = $200,000 Thus, no bonus is received or paid.

b)Feb. 1 Cash...........................................................................145,000

Meir, Capital ($41,250* x 3/10)................................. 12,375Benson, Capital ($41,250* x 2/10)........................... 8,250Lau, Capital ($41,250* x 5/10).................................. 20,625 Rhodes, Capital.................................................. 186,250 To record Rhode’s admission and bonus.

* Supporting calculations($600,000 + $145,000) x 25% = $186,250$145,000 - $186,250 = $(41,250)Thus, a bonus is paid to new partner.

c)Feb. 1 Cash...........................................................................262,000

Meir, Capital ($46,500* x 3/10)........................... 13,950 Benson, Capital ($46,500* x 2/10)..................... 9,300 Lau, Capital ($46,500* x 5/10)............................ 23,250 Rhodes, Capital.................................................. 215,500 To record admission of Rhodes and bonus to old partners.

* Supporting calculations($600,000 + $262,000) x 25% = $215,500$262,000 - $215,500 = $46,500Thus, old partners receive a bonus.




Note: All entries in this problem are dated May 31.1.

(a) Cash...........................................................................600,000 Inventory............................................................. 537,200 Gain on Sale of Inventory.................................. 62,800

(b) Gain on Sale of Inventory........................................62,800 Kendra, Capital ($62,800 x 3/6).......................... 31,400 Cogley, Capital ($62,800 x 2/6).......................... 20,933 Mei, Capital ($62,800 x 1/6)................................ 10,467

(c) Accounts Payable....................................................245,500 Cash..................................................................... 245,500

(d) Kendra, Capital ($93,000+ $31,400)..........................124,400Cogley, Capital ($212,500 + $20,933)........................233,433Mei, Capital ($167,000 + $10,467)............................177,467 Cash..................................................................... 535,300

2.(a) Cash...........................................................................500,000

Loss on Sale of Inventory........................................37,200 Inventory............................................................. 537,200

(b) Kendra, Capital ($37,200 x 3/6)................................18,600Cogley, Capital ($37,200 x 2/6)................................12,400Mei, Capital ($37,200 x 1/6)...................................... 6,200 Loss on Sale of Inventory.................................. 37,200


(d) Kendra, Capital ($93,000 - $18,600)........................74,400Cogley, Capital ($212,500 - $12,400).......................200,100Mei, Capital ($167,000 - $6,200)...............................160,800 Cash..................................................................... 435,300




3.(a) Cash...........................................................................320,000


(b) Kendra, Capital ($217,200 x 3/6)..............................108,600Cogley, Capital ($217,200 x 2/6).............................. 72,400Mei, Capital ($217,200 x 1/6).................................... 36,200 Loss on Sale of Inventory.................................. 217,200

Cash........................................................................... 15,600 Kendra, Capital ($93,000 - $108,600)................ 15,600


(d) Cogley, Capital ($212,500 - $72,400).......................140,100Mei, Capital ($167,000 - $36,200).............................130,800 Cash..................................................................... 270,900

4.(a) Cash...........................................................................250,000


(b) Kendra, Capital ($287,200 x 3/6)..............................143,600Cogley, Capital ($287,200 x 2/6).............................. 95,733Mei, Capital ($287,200 x 1/6).................................... 47,867 Loss on Sale of Inventory.................................. 287,200

Cogley, Capital ($50,600 x 2/3)................................ 33,733Mei, Capital ($50,600 x 1/3)...................................... 16,867 Kendra, Capital ($93,000 - $143,600).................. 50,600


(d) Cogley, Capital*........................................................ 83,034Mei, Capital**.............................................................102,266 Cash..................................................................... 185,300

*$212,500 - $95,733 - $33,733 **$167,000 - $47,867 - $16,867



Fundamentals of accounting 18e Chp 12

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