Partnerships and Limited Liability Corporations

8/14/2019 Partnerships and Limited Liability Corporations

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ChapterChapter1313

Partnerships and LimitedPartnerships and LimitedLiability CorporationsLiability CorporationsAccounting, 21st Edition

Warren Reeve Fess

PowerPoint Presentation by Douglas CloudProfessor Emeritus of Accounting

Pepperdine University

Copyright 2004 South-Western, a division

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1. Describe the basic characteristics ofproprietorships, corporations, partnerships,and limited liability corporation.

2. Describe and illustrate the equity reporting

for proprietorships, corporations,partnerships, and limited liabilitycorporations.

3. Describe and illustrate the accounting forforming a partnership.

ObjectivesObjectives


After studying thisAfter studying this

chapter, you shouldchapter, you should

be able to:be able to:

After studying thisAfter studying this

chapter, you shouldchapter, you should

be able to:be able to:


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4. Describe and illustrate the accountingfor dividing the net income and net lossof a partnership.



5. Describe and illustrate the accountingfor the dissolution of a partnership.

6. Describe and illustrate the accountingfor liquidation of a partnership.

7. Describe the lifecycle of a business,including the role of venture capitalists,initial public offerings, and

underwriters.


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Alternative Forms of Business EntitiesAlternative Forms of Business Entities


Advantages Ease in organizing Low cost of

organizingDisadvantages

Difficulty in raising

large amounts ofcapital

Unlimited liability

Joes

Review of Chapter 1

Review of Chapter 1

Aproprietorshipis

owned by one

individual.

Aproprietorshipis

owned by one

individual.


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A corporation isorganized under

state or federal

statutes as a separatelegal entity.

A corporation isorganized under

state or federal

statutes as a separatelegal entity.

Advantages The ability to obtain large

amounts of resources byissuing stocks

Limited liability for theowners

Disadvantages

Double taxation

More complexityand regulations

J & M, Inc.


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Alternative Forms of Business EntitiesAlternative Forms of Business EntitiesAlternative Forms of Business EntitiesAlternative Forms of Business Entities

J & M, Inc.

A business may organize

as anS Corporation. The

IRS allows income to pass

through the S Corporation

to the individual

stockholder without the

corporation having to paytax on the income.

A business may organize

as anS Corporation. The

IRS allows income to pass

through the S Corporation

to the individual

stockholder without the

corporation having to paytax on the income.


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Apartnership is anassociation of two

or more individuals.

Apartnership is anassociation of two

or more individuals.Advantages

More financial

resources than aproprietorship

Additional

management skills

Joe and Martys


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Disadvantages

Limited life

Unlimited liability

Co-ownership of

partnership property

Mutual agency

Joe and Martys

Apartnership is an

association of two


Apartnership is an

association of two



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An important right of

partners is toparticipate in

the income of the

partnership.

An important right of

partners is toparticipate in

the income of the

partnership.


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Each partner must

report their share of

partnership income

on their personal

tax returns.

Each partner must

report their share of

partnership incomeon their personal

tax returns.


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A partnership is created

by a contract, known asthepartnership

agreementorarticles of

partnership.

A partnership is created

by a contract, known as

thepartnership

agreementorarticles of

partnership.


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A variant of the

regular partnership

is a limited

partnership.

A variant of the

regular partnership

is a limited

partnership.This form of partnershipallows partners that are

not involved in the

operations of the

partnership to retain

limited liability.

This form of partnershipallows partners that are

not involved in the

operations of the

partnership to retain

limited liability.


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Limited Liability CorporationsLimited Liability CorporationsLimited Liability CorporationsLimited Liability Corporations

Combines the advantages of the corporate and

partnership forms.

Owners are termed members rather than

partners.

Members must create an operating agreement.

LLC may elect to be treated as a partnershipfor tax purposes.

ContinuedContinued


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Limited Liability CorporationsLimited Liability CorporationsLimited Liability CorporationsLimited Liability Corporations

Unless specified in the operating agreement,

LLCs have a limited life.

Members may elect operating the LLC as a

member managed entity.

LLC provides limited liability for the members.

LLCs must file articles of organization withstate governmental authorities.


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Comparison of Alternate

Entity Characteristics



Ease of FormationEase of Formation

Proprietorship SimpleCorporation Complex

Partnership Simple

LLC Moderate


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Legal LiabilityLegal Liability

Proprietorship No limitationCorporation Limited liability

Partnership No limitation

LLC Limited liability


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TaxationTaxation

Proprietorship Nontaxable entityCorporation Taxable entity

Partnership Nontaxable entity

LLC Nontaxable entity by election


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Limitation on Life of EntityLimitation on Life of Entity

Proprietorship YesCorporation No

Partnership Yes

LLC Yes


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Ease of Raising CapitalEase of Raising Capital

Proprietorship DifficultCorporation Easier

Partnership Moderate

LLC Moderate


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Equity Reporting forEquity Reporting for

Alternative Entity FormsAlternative Entity Forms



ProprietorshipsProprietorships

Proprietorships use a capital account to

record investments by the owner of the

business.

Withdrawals by the owner are recordedin the owners drawing account.


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ProprietorshipsProprietorships

Greene Landscapes

Statement of Owners Equity

For the year ended December 31, 2006Duncan Greene, capital, Dec. 31, 2005 $345,000

Net income $79,000

Less withdrawals 35,000

Increase in owners equity 44,000

Duncan Greene, capital, Dec. 31, 2006 $389,000


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CorporationsCorporations

Investments by stockholders in the

business use capital stock accounts,such as Common Stockand Preferred

Stock.

Dividends to owners (stockholders) are

recorded by a debit toRetained

Earnings.


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CorporationsCorporations


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Partnerships and Limited Liability CorporationsPartnerships and Limited Liability Corporations

Investments and withdrawals for

partnerships is similar to proprietorships,except there is a capital and drawing

account for each partner.

Limited liability corporations are similarto a partnership except that each owner is

referred to as member.


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Equity Reporting for AlternativeEquity Reporting for Alternative

Entity FormsEntity Forms

Equity Reporting for AlternativeEquity Reporting for Alternative

Entity FormsEntity Forms

PartnershipsPartnerships


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Forming a PartnershipForming a PartnershipForming a PartnershipForming a Partnership

Joseph Stevens and Earl Foster agree to combinetheir hardware businesses in a partnership. They

agree that the partnership is to assume the

liabilities of the separate businesses.

Joseph Stevens and Earl Foster agree to combine

their hardware businesses in a partnership. They

agree that the partnership is to assume the

liabilities of the separate businesses.

Apr. 1 Cash 7 200 00

Accounts Receivable 16 300 00

Merchandise Inventory 28 700 00

Store Equipment 5 400 00Office Equipment 1 500 00

Allowance for Doubtful Accounts 1 500 00

Accounts Payable 2 600 00

Joseph Stevens, Capital 55 000 00

Stevens Transfer of Assets, Liability, and Equity


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A similar entry would be madefor the assets, liabilities, and

equity of Earl Foster.

A similar entry would be madefor the assets, liabilities, and

equity of Earl Foster.


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Assume that instead of forming a partnership, thetwo men formed a limited liability corporation.

Assume that instead of forming a partnership, thetwo men formed a limited liability corporation.

Apr. 1 Cash 7 200 00

Accounts Receivable 16 300 00

Merchandise Inventory 28 700 00

Store Equipment 5 400 00

Office Equipment 1 500 00Allowance for Doubtful Accounts 1 500 00

Accounts Payable 2 600 00

Joseph Stevens, Member Equity 55 000 00

Stevens Transfer of Assets, Liability, and Equity


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Dividing IncomeDividing IncomeDividing IncomeDividing Income

Services of PartnersServices of Partners

The partnership agreement of Jennifer Stone and

Crystal Mills provides for Stone to have an annual

salary allowance of $30,000 and Mills is to receive$24,000. Any net income is to be divided equally.

The firm had a net income of $75,000.


Crystal Mills provides for Stone to have an annual

salary allowance of $30,000 and Mills is to receive$24,000. Any net income is to be divided equally.

The firm had a net income of $75,000.

J. Stone C. Mills TotalSalary allowance $30,000 $24,000 $54,000

Remaining income 10,500 10,500 21,000

Division of net income $40,500 $34,500 $75,000


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Services of Partners and InvestmentsServices of Partners and Investments


Crystal Mills provides for Stone to have an

annual salary allowance of $30,000 and Mills is

to receive $24,000. Interest of 12% is provided

on each partners capital balance on January 1.

Any net income is to be divided equally. Thefirm had a net income of $75,000.


Crystal Mills provides for Stone to have an

annual salary allowance of $30,000 and Mills is

to receive $24,000. Interest of 12% is provided

on each partners capital balance on January 1.

Any net income is to be divided equally. Thefirm had a net income of $75,000.


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Services of PartnersServices of Partners

Dec. 31 Income Summary 75 000 00

Jennifer Stone, Capital 41 700 00Crystal Mills, Capital 33 300 00


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LLC AlternativeLLC Alternative

Dec. 31 Income Summary 75 000 00

Jennifer Stone, Member Equity 41 700 00Crystal Mills, Member Equity 33 300 00


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Allowances Exceed Net IncomeAllowances Exceed Net Income

Assume the same facts as before except that

the net income is only $50,000.

Assume the same facts as before except that

the net income is only $50,000.

J. Stone C. Mills TotalSalary allowance $30,000 $24,000 $54,000

Interest allowance 9,600 7,200 16,800

Total $39,600 $31,200 $70,800

Division of net income $29,200 $20,800 $50,000

Deduct excess equally 10,400 10,400 20,800


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Partnership DissolutionPartnership DissolutionPartnership DissolutionPartnership Dissolution

Admitting a PartnerAdmitting a Partner

1. Purchasing an interest from one or more of

the current partners.

2. Contributing assets to the partnership.

A person may be admitted to a partnership

only with the consent of all partners by:


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Purchasing an Interest in a PartnershipPurchasing an Interest in a Partnership

June 1 Tom Andrews, Capital 10 000 00

Nathan Bell, Capital 10 000 00Joe Canter, Capital 20 000 00

For a LLC, members equity accounts would

have been used rather than capital accounts.

For a LLC, members equity accounts would

have been used rather than capital accounts.


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Contributing Assets to a PartnershipContributing Assets to a Partnership

Partners Donald Lewis and Gerald Morton

have capital balances of $35,000 and$25,000, respectively. On June 1, Sharon

Nelson joins the partnership by

permission and makes an investment of$20,000 cash.


have capital balances of $35,000 and$25,000, respectively. On June 1, Sharon

Nelson joins the partnership by

permission and makes an investment of$20,000 cash.


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Contributing Assets to a PartnershipContributing Assets to a Partnership

June 1 Cash 20 000 00

Sharon Nelson, Capital 20 000 00

For a LLC,Sharon Nelson, Member Equity

would have been credited.

For a LLC,Sharon Nelson, Member Equity

would have been credited.


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Revaluation of AssetsRevaluation of Assets


have capital balances of $35,000 and$25,000, respectively. The balance in

Merchandise Inventory is $14,000 and

the current replacement value is $17,000.The partners share net income equally.


have capital balances of $35,000 and$25,000, respectively. The balance in

Merchandise Inventory is $14,000 and

the current replacement value is $17,000.The partners share net income equally.


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June 1 Merchandise Inventory 3 000 00

Donald Lewis, Capital 1 500 00Gerald Morton, Capital 1 500 00

Because the LLC alternative follows a pattern

of replacing Capital with Member Equity,

the LLC entry will not be shown again.

Because the LLC alternative follows a pattern

of replacing Capital with Member Equity,

the LLC entry will not be shown again.

Revaluation of AssetsRevaluation of Assets


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Partner BonusesPartner Bonuses

Jenkins and Kramer agree to admit Diaz

as a partner for $31,000. In return, Diazwill receive a one-third equity in the

partnership and will share income and

losses equally with Jenkins and Kramer.

Jenkins and Kramer agree to admit Diaz

as a partner for $31,000. In return, Diazwill receive a one-third equity in the

partnership and will share income and

losses equally with Jenkins and Kramer.


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Partner Bonuses from New PartnerPartner Bonuses from New Partner

Equity of Jenkins $20,000

Equity of Kramer 24,000

Diazs Contribution 31,000Total equity after admitting Diaz $75,000

Diazs interest (1/3 x $75,000) $25,000

Diazs contribution $31,000Diazs equity after admission 25,000

Bonus paid to Jenkins and Kramer $ 6,000


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Mar. 1 Cash 31 000 00

Alex Diaz, Capital 25 000 00

Marsha Jenkins, Capital 3 000 00

Helen Kramer, Capital 3 000 00

$6000 2


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After adjusting the market values, the

capital balance of Janice Cowen is$580,000 and the capital balance of Steve

Dodd is $40,000. Ellen Chua receives a

one-fourth interest in the partnership for a

contribution of $30,000. Before admitting

Chua, Cowen and Dodd shared net

income using a 2 to 1 ratio.

After adjusting the market values, the

capital balance of Janice Cowen is$580,000 and the capital balance of Steve

Dodd is $40,000. Ellen Chua receives a

one-fourth interest in the partnership for a

contribution of $30,000. Before admittingChua, Cowen and Dodd shared net

income using a 2 to 1 ratio.


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Partner Bonuses to New PartnerPartner Bonuses to New Partner

Equity of Cowen $ 80,000

Equity of Dodd 40,000

Chuas Contribution 30,000Total equity after admitting Chua $150,000

Chuas interest (1/4 x $150,000) $ 37,500

Chuas contribution $30,000Chuas equity after admission 37,500

Bonus paid to Chua $ 7,500


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Mar. 1 Cash 30 000 00

Janice Cowen, Capital 5 000 00

Steve Dodd, Capital 2 500 00

Ellen Chua, Capital 37 500 00

1/3 x$7,50

0

2/3 x

$7,500


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Liquidating PartnershipsLiquidating PartnershipsLiquidating PartnershipsLiquidating Partnerships

The sale of the assets is

calledrealization

.

The sale of the assets is

called realization.


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Farley, Greene, and Hall share income and losses ina ratio of 5:3:2. On April 9, after discontinuing

operations, the firm had the following trial balance.

Farley, Greene, and Hall share income and losses ina ratio of 5:3:2. On April 9, after discontinuing

operations, the firm had the following trial balance.

Cash $11,000Noncash Assets 64,000

Liabilities $ 9,000

Jean Farley, Capital 22,000

Brad Greene, Capital 22,000Alice Hall, Capital 22,000

Total $75,000 $75,000


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Between April 10 and April 30, 2006,

Farley, Greene, and Hall sell all

noncash assets for $72,000.




Gain on RealizationGain on Realization


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Balance before realization $11,000 $64,000 $9,000

Left side of statement

NoncashCash Assets Liabilities

Sale of assets and division

of gain +72,000 -64,000


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Right side of statement

Farley Greene HallCapital Capital Capital


of gain +4,000 +2,400 +1,600

$8,000

gain x .50

$8,000

gain x .50$8,000

gain x .30

$8,000

gain x .30$8,000

gain x .20

$8,000

gain x .20


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of gain +72,000 64,000 Balance after realization $83,000 $0 $9,000


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of gain +4,000 +2,400 +1,600Balance after realization $26,000 $24,400 $23,600


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The partnerships liabilities arepaid, $9,000.

The partnerships liabilities arepaid, $9,000.



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of gain +72,000 64,000 Balance after realization $83,000 $ 0 $9,000

Payment of liabilities 9,000 9,000


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Balance after payment $74,000 $ 0 $ 0


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The remaining cash, $74,000,is paid to each partner in

accordance with the partners

capital balance.



capital balance.



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Partners cash distributed 74,000 Final balances $ 0 $ 0 $ 0


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of gain +4,000 +2,400 +1,600Balance after realization $26,000 $24,400 $23,600

Payment of liabilities

Balance after payment $26,000 $24,400 $23,600

Partners cash distributed 26,000 24,400 23,600Final balances $ 0 $ 0 $ 0


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Sale of AssetsSale of Assets

Apr. 30 Cash 72 000 00

Noncash Assets 64 000 00

Gain on Realization 8 000 00


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Division of GainDivision of Gain

Apr. 30 Gain on Realization 8 000 00

Jean Farley, Capital 4 000 00

Brad Greene, Capital 2 400 00

Alice Hall, Capital 1 600 00


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Payment of LiabilitiesPayment of Liabilities

Apr. 30 Liabilities 9 000 00

Cash 9 000 00


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Distribution of Cash to PartnersDistribution of Cash to Partners

Apr. 30 Jean Farley, Capital 26 000 00



Cash 74 000 00


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Farley, Greene, and Hall sell allnoncash assets for $44,000.

Loss on RealizationLoss on RealizationLoss on RealizationLoss on Realization


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of loss +44,000 64,000

i id i hi


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of loss 10,000 6,000 4,000

$20,000

loss x .50

$20,000

loss x .50$20,000

loss x .30

$20,000

loss x .30$20,000

loss x .20

$20,000

loss x .20

i id i hi


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of loss +44,000 64,000 Balance after realization $55,000 $0 $9,000


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i id i hiLi id i P hi


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The liabilities of thepartnership are paid, $9,000.The liabilities of thepartnership are paid, $9,000.




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of loss +44,000 64,000 Balance after realization $55,000 $ 0 $9,000


Li id i P hiLi id i P hi


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Li id i P hiLi id i P hi


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capital balance.

The remaining cash, $46,000,

is paid to each partner in


capital balance.


Li id i P hiLi id ti P t hi


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Partners cash distributed 46,000 Final balances $ 0 $ 0 $ 0

Li id i P hiLi id ti P t hi


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of loss 10,000 6,000 4,000Balance after realization $12,000 $16,000 $18,000

Payment of liabilities

Balance after payment $12,000 $16,000 $18,000

Partners cash distributed 12,000 16,000 18,000Final balances $ 0 $ 0 $ 0

i id i hi

Li id ti P t hiLi id ti P t hi


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Sale of AssetsSale of Assets

Apr. 30 Cash 44 000 00

Loss on Realization 20 000 00

Noncash Assets 64 000 00

i id i hi



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Division of LossDivision of Loss



Loss on Realization 20 000 00


Li id i P hi



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Payment of LiabilitiesPayment of Liabilities

Apr. 30 Liabilities 9 000 00

Cash 9 000 00




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Distribution to PartnersDistribution to Partners




Cash 46 000 00

if l f iLif l f B i


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Lifecycle of a BusinessLifecycle of a BusinessLifecycle of a BusinessLifecycle of a Business

Business Stage Principal AdvantageDellas Delights,

Proprietorship

Jeff Jacobi, Proprietor

Form easily: Jacobi forms a

business by obtaining a

local business license and

opening a bank account.

Dellas Delights,

PartnershipJacobi and Lange,

Partners

Expand capital and

expertise: Jacobi admits anew partner that contributes

capital and expertise.

Continued

Lif l f B iLif l f B i


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Lifecycle of a BusinessLifecycle of a BusinessLifecycle of a BusinessLifecycle of a Business

Business Stage Principal Advantage

Dellas Delights, LLC Limit legal liability: The

partnership is changed to an

LLC to limit legal liability

of owners.

Dellas Delights, Inc.Simplify raising capital:The LLC is changed to a

corporation to raise capital

from the public.Continued


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A venture capitalistis anindividual or firm that

provides equity financing

for a new company.

A venture capitalistis anindividual or firm that

provides equity financing

for a new company.


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The EndThe End

Chapter 13Chapter 13

Partnerships and Limited Liability Corporations

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