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Chapter 12 - Accounting for Partnerships
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
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. All partners in a general partnership have unlimited liability. A limited partnership
4. Yes, partners can limit the right of a partner. Such an agreement is binding on
5. 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.
9. George's claim is not valid unless the previously agreed upon method of sharing net
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10. No. Kay is still liable to her former partners for her share of the losses.
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 12-1 (10 minutes)
a. The partnership will need to pay because it is a merchandising firm.
b. A public accounting firm is not in the merchandising business.
Quick Study 12-2 (10 minutes)
Quick Study 12-3 (15 minutes)
Stolton Bright Total
Net income............................................. 52,000
Salary allowances
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Chapter 12 - Accounting for Partnerships
Balance of income................................ 17,000
Balance allocated equally
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Chapter 12 - Accounting for Partnerships
Quick Study 12-4 (10 minutes)
Quick Study 12-5 (10 minutes)
Quick Study 12-6 (10 minutes)
Choi, Capital..............................................................................10,000
Quick Study 12-7 (30 minutes)
1.
Field Brown Snow Total
Initial investments.............. $131,250 $165,000 $153,750 $450,000
2. a)
May 31 Cash...........................................................................3,750
Field, Capital....................................................... 3,750
To record payment of deficiency.
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Chapter 12 - Accounting for Partnerships
b)
May 31 Brown, Capital..........................................................30,000
Snow, Capital............................................................18,750
Cash..................................................................... 48,750
To distribute remaining cash.
3. a)
b)
May 31 Brown, Capital..........................................................28,125
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Chapter 12 - Accounting for Partnerships
Quick Study 12-8 (15 minutes)
Total partnership return on equity = Net Income/Average equity
= $24,990 / ($150,000 + $200,000)/2
= $24,990 / $175,000 = 14.3%
EXERCISES
Exercise 12-1 (15 minutes)
Characteristic General Partnerships
1. Life Limited
2. Owners’ liability Unlimited
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Chapter 12 - Accounting for Partnerships
Exercise 12-2 (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
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.
c. Recommended Organization: Munson should consider setting up a
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Chapter 12 - Accounting for Partnerships
Exercise 12-3 (25 minutes)
1.
Jan. 1 Cash........................................................................... 17,500
2.
Jan. 1 Cash........................................................................... 31,250
A. Barber, Capital................................................ 31,250
To record initial capital investment of Barber.
Exercise 12-4 (30 minutes)
Kramer Knox Total
Plan (1) $160,000 x 1/2...............................................$80,000 $80,000 $160,000
Balance of income........................................ . .$ 0
Shares of each partner................................$84,000 $76,000
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Chapter 12 - Accounting for Partnerships
Exercise 12-5 (35 minutes)
Kramer Knox Total
1. Net income.................................................... $ 98,800
Salary allowances........................................$50,000 $ 40,000 90,000
Interest allowances
2. Net income.................................................... $ (16,800)
Salary allowances........................................$50,000 $ 40,000 90,000
Interest allowances
1a. 2015
Mar. 1 Cash........................................................................... 82,500
Land........................................................................... 60,000
Building.....................................................................100,000
Long-Term Note Payable................................... 92,500
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1b. 2015
Oct. 20 Eckert, Withdrawals................................................. 34,000
Kelley, Withdrawals.................................................. 20,000
Cash..................................................................... 54,000
To record partners’ withdrawals.
1c. 2015
Dec. 31 Eckert, Capital.......................................................... 34,000
Kelley, Capital........................................................... 20,000
2.
Capital account balances
Eckert
Kelley
58,250
31,750
Ending balances.................................
$106,750
$ 79,250
*Supporting calculations
Eckert
Kelley
Total
Net income...................................................................
$90,000
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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
25,000
Kelley.........................................................................
25,000
Total allocated equally................................................
50,000
Balance of income........................................................
_______
_______
$ 0
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