Appendix D
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
2. Mutual agency means that each partner is an agent of the partnership and can
3. All partners in a general partnership have unlimited liability. A limited partnership
includes both general and limited partners, and the limited partners have no
4. 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
5. No, he does not have this right. A partnership is a voluntary association and
6. If partners agree on the method of sharing incomes, but say nothing of losses, then
7. The allocation of net income to the partners is reported on the statement of partners’
equity.
8. 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.
9. George’s claim is not valid unless the previously agreed upon method of sharing net
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
12. The remaining partners should share the decline in their equities in accordance with
their income-and-loss-sharing ratio.
QUICK STUDIES
Quick Study D-1 (10 minutes)
a. The partnership will need to pay because it is a merchandising firm.
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
Quick Study D-2 (10 minutes)
Since Carley is a limited partner, she is not personally liable for any unpaid
Quick Study D-3 (15 minutes)
Stolton Bright Total
Net income……………..…………………..….. 52,000
Salary allowances
Stolton……..……………………………….….. $15,000
Bright……..…………………….…………..…. $20,000
Total salary allowances…………………. 35,000
Quick Study D-4 (10 minutes)
If Blake is allocated a $100,000 salary allowance and there remains $4,000
partnership must have earned net income of $104,000.
Quick Study D-5 (10 minutes)
Cash……………………………………………..…………………..…………....40,000
Quick Study D-6 (10 minutes)
Choi, Capital……….…………………..…………….…….…………….……10,000
Quick Study D-7 (30 minutes)
1.
Field Brown Snow Total
Initial investments…........... $131,250 $165,000 $153,750 $450,000
2. a)
May 31 Cash…………………….…………….…………………..……..…3,750
b)
May 31 Brown, Capital……………………………….…………….…..30,000
To distribute remaining cash.
3. a)
May 31 Brown, Capital……………………………….…………….…..1,875
Snow, Capital……………………………………….…….…….1,875
Field, Capital……..…………………..………….……….. 3,750
To transfer deficiency to other partners.
b)
May 31 Brown, Capital……………………………….…………….…..28,125
Quick Study D-8 (15 minutes)
Total partnership return on equity = Net Income/Average equity
Howe partner return on equity = Partner net income/Average partner equity
= $20,040 / ($100,000 + $140,000)/2
Duley partner return on equity = Partner net income/Average partner equity
EXERCISES
Exercise D-1 (15 minutes)
Characteristic General Partnerships
1. Life Limited
2. Owners’ liability Unlimited
7. Transferability of ownership Difficult to transfer
8. Ability to raise large amounts of capital Low ability
Exercise D-2 (20 minutes)
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
Taxation: As a corporation, any income will be subject to corporate
income tax. Any dividends paid to the stockholders will also normally
Advantages: Several key advantages to the corporate form include its
b. Recommended Organization: The two doctors should form a
partnership. A general partnership will have the disadvantage of
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
Taxation: All partners will pay individual taxes on income distributed to
them, but the partnership entity will not pay income tax.
Advantages: Advantages to Munson will be authority over the
Exercise D-3 (25 minutes)
1.
Jan. 1 Cash………………………………………………………………... 17,500
Equipment……..………………………………..………….…… 82,500
2.
Jan. 1 Cash………………………………………………………………... 31,250
Exercise D-4 (30 minutes)
Kramer Knox Total
Plan (1) $160,000 x 1/2……….…….……….….…………….$80,000 $80,000 $160,000
Plan (3) Net income……………..………………….…………. $160,000
Salary allowances………….……….………….….$50,000 $40,000 90,000
Interest allowances
Balance allocated equally
($56,000)/2…………………………………….…….…28,000 28,000 56,000
Balance of income……………..……………..…… . . $ 0
Shares of each partner…..………….…………..$84,000 $76,000
Exercise D-5 (35 minutes)
Kramer Knox Total
1. Net income……………..…………………….………. $ 98,800
Salary allowances…………………….……….…..$50,000 $ 40,000 90,000
Interest allowances
Remainder equally
($5,200)/2………………………………….….………..(2,600) (2,600) (5 ,200 )
2. Net income……………..…………………….………. $ (16,800)
Salary allowances…………………….……….…..$50,000 $ 40,000 90,000
Interest allowances
Remainder equally
$(120,800)/2………………….…………..….………..(60,400) (60,400) 120,800