Chapter 08 – Proprietorships, Partnerships, and Corporations
8-1
General Comments for Chapter 8
Proprietorships, Partnerships, and Corporations
Chapter 8 explains accounting for equity transactions. It describes the three primary forms of
business organizations (sole proprietorship, partnership, and corporation), along with advantages
and disadvantages of each. The chapter illustrates aspects of financial statement reporting
unique to each type of business organization. Finally, it covers common corporate equity topics,
such as par and stated value, issuing stock, common versus preferred stock, stock splits and
dividends, treasury stock, and the use of accounting information in making stock investment
decisions.
Detailed Outline of a Lesson Plan for Chapter 8
I. Demonstration Problem 8-1 illustrates reporting differences among proprietorships,
partnerships, and corporations.
A. Scenario 1. The statements for a proprietorship include two features you should
emphasize. First, the capital account combines the owner’s investments with
earnings that have been retained in the business. Second, proprietorship distributions
are called withdrawals.
B. Scenario 2. Point out that financial statements for a partnership are similar to those
for a proprietorship. Both forms combine capital acquisitions and retained earnings
into single accounts referred to as owners’ capital accounts. The only reporting
difference is that partnership statements present multiple capital accounts (one for
each partner). The amounts in the capital accounts represent the proportionate share
of each partner’s claim on assets.
C. Scenario 3. The financial statements for corporations reflect several differences from
those for proprietorships and partnerships. First, distributions are called dividends.
Next, capital acquisitions and retained earnings are reported in separate accounts.
The owners’ interest in the business is called common stock. You can easily explain
the idea of representing ownership interests with common stock certificates by
referring to them as a type of receipt that recognizes the owners’ contribution of
assets to the business.
II. Demonstration Problem 8-2 illustrates accounting for additional paid-in capital in
excess of par value. You should discuss par value, stated value, and no-par stock before
working the problem. Use the problem to illustrate how contributed capital is divided
into par value and additional paid-in capital in the accounting records. The problem also
illustrates cash dividends, stock dividends, and stock splits. Discuss these issues before
you work the problem.
The problem illustrates seven events. Students should record each event in a
financial statements model. Proceed through the problem step by step. Distribute a copy
Chapter 08 – Proprietorships, Partnerships, and Corporations
8-2
of the work paper to your students and have them work along with you. Explain how
each event affects the statements differently.
III. Introduce preferred stock. Define the terms cumulative and noncumulative with
respect to preferred stock dividends. Use Demonstration Problem 8-3 to illustrate
allocating dividends between common and preferred shareholders.
IV. Use Demonstration Problem 8-4 to illustrate the effects of treasury stock
transactions on financial statements. This problem requires recording five events in a
financial statements model. We again suggest you distribute a copy of the work paper to
students and have them work along with you as you demonstrate how each event affects
the financial statements.
V. Time considerations and homework assignments. Allow at least two hours of class
time to cover owners’ equity and the four demonstration problems. Use Problem 8-18 to
reinforce how financial statement presentation reflects business structure. Problem 8-20
requires students to record a variety of stock and dividend transactions. Use Exercise 8-
11 to reinforce computing cumulative preferred dividends. Treasury stock is covered in
Problems 8-19 and 8-21.
Demonstration Problems for Chapter 8
Demonstration Problem 8-1: Forms of Business Organization
Assume a business was started on January 1, 2014 when it acquired $60,000 cash from its
owner(s). During 2014 the company generated $29,000 of cash service revenue, incurred
$19,000 of cash expenses, and distributed $4,000 cash to the owner(s).
Required
Prepare an income statement, a statement of changes in equity, and a balance sheet for each of
the three alternative scenarios described below. The statement of changes in equity is called a
capital statement for proprietorships and partnerships. It is called a statement of changes in
stockholders’ equity for corporations.
1. Sally Russell formed the business as a sole proprietorship.
2. Carl Link and Bill Morgan established the business as a partnership. Link contributed 60
percent of the capital and Morgan contributed the remaining 40 percent. The partners
agreed to share profits and make withdrawals in proportion to their capital investments.
3. The business was established as a corporation. It issued 1,000 shares of no-par common
stock for $60 per share.
Demonstration Problem 8- 2: Equity Transactions
Chapter 08 – Proprietorships, Partnerships, and Corporations
8-4
4. Purchased 500 shares of Griffin stock (treasury stock) at a price of $10 per share.
5. Sold (reissued) 200 shares of the treasury stock at a price of $13 per share.
Required
Record the events in a financial statements model.
SOLUTIONS TO
DEMONSTRATION PROBLEMS
Demonstration Problem 8-1: Solution, Scenario 1
Financial Statements for Russell Sole Proprietorship
For 2014
Income Statement
Capital Statement
Service Rev.
$29,000
Beginning Capital Bal.
$ -0-
Assets
Expenses
19,000
Plus Invest. by Owner
60,000
Cash
$66,000
Net Income
$10,000
Plus Net Income
10,000
Equity
Less: Withdrawal
(4,000)
Russell, Capital
$66,000
Ending Capital Bal.
$66,000
Demonstration Problem 8-1: Solution, Scenario 2
Financial Statements for Link/Morgan Partnership
For 2014
Income Statement
Capital Statement
Balance Sheet, 12/31
Service Rev.
$29,000
Beginning Capital Bal.
$ -0-
Assets
Expenses
19,000
Plus Invest. by Owners
60,000
Cash
$66,000
Net Income
$10,000
Plus Net Income
10,000
Partners’ Capital
Less: Withdrawals
(4,000)
Link, Capital
$39,600
Ending Capital Bal.
$66,000
Morgan, Capital
26,400
Total Capital
$66,000
Chapter 08 – Proprietorships, Partnerships, and Corporations
8-5
Demonstration Problem 8-1: Solution, Scenario 3
Financial Statements for Corporation
For 2014
Income Statement
Statement of Changes in Stk. Equity
Service Rev.
$29,000
Beginning Common Stock
$ -0-
Assets
Expenses
19,000
Plus Common Stock Issued
60,000
Cash
$66,000
Net Income
$10,000
Ending Common Stock
60,000
Stk. Equity
Beg. Retained Earnings
-0-
Common Stock
$60,000
Plus Net Income
10,000
Ret. Earnings
6,000
Less: Dividends
(4,000)
Total Stk. Equity
$66,000
Ending Retained Earnings
6,000
Total Stockholders’ Equity
$66,000
Demonstration Problem 8- 2: Solution
Assets
=
Liabilities
+
Stockholders’ Equity
Event
Cash
=
Dividends
Payable
+
C. Stock
Par
Value
+
Additional
Paid-in
Capital
+
Retained
Earnings
Revenue
−
Expense
=
Net Income
Cash Flow
Beg.
Bal.
-0-
=
-0-
+
-0-
+
-0-
+
-0-
-0-
–
-0-
=
-0-
-0-
1
50,000
=
-0-
+
20,000
+
30,000
+
-0-
-0-
–
-0-
=
-0-
50,000 FA
2
35,000
=
-0-
+
-0-
+
-0-
+
35,000
35,000
–
-0-
=
35,000
35,000 OA
3
(25,000)
=
-0-
+
-0-
+
-0-
+
(25,000)
-0-
–
25,000
=
(25,000)
(25,000) OA
4
-0-
=
3,000
+
-0-
+
-0-
+
(3,000)
-0-
–
-0-
=
-0-
-0-
5
(3,000)
=
(3,000)
+
-0-
+
-0-
+
-0-
-0-
–
-0-
=
-0-
(3,000) FA
6
-0-
=
-0-
+
1,000
+
1,800
+
(2,800)
-0-
–
-0-
=
-0-
-0-
7
-0-
=
-0-
+
-0-
+
-0-
+
-0-
-0-
–
-0-
=
-0-
-0-
Totals
57,000
=
-0-
+
21,000
+
31,800
+
4,200
35,000
–
25,000
=
10,000
57,000 NC
Demonstration Problem 8- 3: Solution, part a.
Cumulative Preferred
Year
Total Dividends
To Common
To Preferred
Dividends in Arrears
2014
$ 10,000
-0-
10,000
30,000
2015
$ 20,000
-0-
20,000
50,000
2016
$ 60,000
-0-
60,000
30,000
2017
$120,000
50,000
70,000
-0-
2018
$100,000
60,000
40,000
-0-
Chapter 08 – Proprietorships, Partnerships, and Corporations
8-6
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Demonstration Problem 8- 3: Solution, part b.
Noncumulative Preferred
Year
Total Dividends
To Common
To Preferred
Dividends in Arrears
2014
$ 10,000
-0-
10,000
-0-
2015
$ 20,000
-0-
20,000
-0-
2016
$ 60,000
20,000
40,000
-0-
2017
$120,000
80,000
40,000
-0-
2018
$100,000
60,000
40,000
-0-
Demonstration Problem 8- 4: Solution
Assets
=
Stockholders’ Equity
Event
Cash
=
No–par
C. Stock
+
Retained
Earnings
+
Treasury
Stock
+
Paid-in
Capital
Tres. Stk
Revenue
−
Expense
=
Net Income
Cash Flow
Beg.
Bal.
-0-
=
-0-
+
-0-
+
-0-
+
-0-
-0-
–
-0-
=
-0-
-0-
1
36,000
=
36,000
+
-0-
+
-0-
+
-0-
-0-
–
-0-
=
-0-
36,000 FA
2
12,000
=
-0-
+
12,000
+
-0-
+
-0-
12,000
–
-0-
=
12,000
12,000 OA
3
(8,000)
=
-0-
+
(8,000)
+
-0-
+
-0-
-0-
–
8,000
=
(8,000)
(8,000) OA
4
(5,000)
=
-0-
+
-0-
+
(5,000)
+
-0-
-0-
–
-0-
=
-0-
(5,000) FA
5
2,600
=
-0-
+
+
2,000
+
600
-0-
–
-0-
=
-0-
2,600 FA
Totals
37,600
=
36,000
+
4,000
+
(3,000)
+
600
12,000
–
8,000
=
4,000
37,600 NC
WORK PAPERS FOR
DEMONSTRATION PROBLEMS
Demonstration Problem 8-1: Work Paper, Scenario 1
Financial Statements for Russell Sole Proprietorship
For 2014
Income Statement
Capital Statement
Service Rev.
Beginning Capital Bal.
Assets
Expenses
Plus Invest. by Owner
Cash
Net Income
Plus Net Income
Equity
Less: Withdrawal
Russell, Capital
Ending Capital Bal.
Chapter 08 – Proprietorships, Partnerships, and Corporations
8-7
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Demonstration Problem 8-1: Work Paper, Scenario 2
Financial Statements for Link/Morgan Partnership
For 2014
Income Statement
Capital Statement
Balance Sheet
Service Rev.
Beginning Capital Bal.
Assets
Expenses
Plus Invest. by Owners
Cash
Net Income
Plus Net Income
Partners’ Capital
Less: Withdrawals
Link, Capital
Ending Capital Bal.
Morgan, Capital
Total Capital
Demonstration Problem 8-1: Work Paper, Scenario 3
Financial Statements for Corporation
For 2014
Income Statement
Statement of Changes in Stk. Equity
Service Rev.
Beginning Common Stock
Assets
Expenses
Plus Common Stock Issued
Cash
Net Income
Ending Common Stock
Stk. Equity
Beg. Retained Earnings
Common Stock
Plus Net Income
Ret. Earnings
Less: Dividends
Total Stk. Equity
Ending Retained Earnings
Total Stockholders’ Equity
Demonstration Problem 8- 2: Work Paper
Assets
=
Liabilities
+
Stockholders’ Equity
Event
Cash
=
Dividends
Payable
+
C. Stock
Par
Value
+
Additional
Paid-in
Capital
+
Retained
Earnings
Revenue
−
Expense
=
Net Income
Cash Flow
Beg.
Bal.
=
+
+
+
–
=
1
=
+
+
+
–
=
2
=
+
+
+
–
=
3
=
+
+
+
–
=
4
=
+
+
+
–
=
5
=
+
+
+
–
=
6
=
+
+
+
–
=
Chapter 08 – Proprietorships, Partnerships, and Corporations
8-8
7
=
+
+
+
–
=
Totals
57,000
=
-0-
+
21,000
+
31,800
+
4,200
35,000
–
25,000
=
10,000
57,000 NC
Demonstration Problem 8- 3: Work Paper, part a.
Cumulative Preferred
Year
Total Dividends
To Common
To Preferred
Dividends in Arrears
2014
$ 10,000
2015
$ 20,000
2016
$ 60,000
2017
$120,000
2018
$100,000
Demonstration Problem 8- 3: Work Paper, part b.
Noncumulative Preferred
Year
Total Dividends
To Common
To Preferred
Dividends in Arrears
2014
$ 10,000
2015
$ 20,000
2016
$ 60,000
2017
$120,000
2018
$100,000
Demonstration Problem 8- 4: Work Paper
Assets
=
Stockholders’ Equity
Event
Cash
=
No–par
C. Stock
+
Retained
Earnings
+
Treasury
Stock
+
Paid-in
Capital
Tres. Stk
Revenue
−
Expense
=
Net Income
Cash Flow
Beg.
Bal.
=
+
+
+
–
=
1
=
+
+
+
–
=
2
=
+
+
+
–
=
3
=
+
+
+
–
=
4
=
+
+
+
–
=
5
=
+
+
+
–
=
Totals
37,600
=
36,000
+
4,000
+
(3,000)
+
600
12,000
–
8,000
=
4,000
37,600 NC
Quiz Questions for Chapter 8
Chapter 08 – Proprietorships, Partnerships, and Corporations
1. The ZZ Corporation had the following shares of stock outstanding at December 31, 2014: Common Stock,
$50 par value, 40,000 shares outstanding; and Preferred Stock, 6 percent, $100 par value, cumulative, 10,000
shares outstanding. Dividends for 2012 and 2013 were in arrears. On December 31, 2014, ZZ declared total
cash dividends of $250,000. The total amounts payable to preferred stockholders and common stockholders,
respectively, are:
a. $60,000 / $190,000.
b. $120,000 / $130,000.
c. $125,000 / $125,000.
d. $180,000 / $70,000.
Use the following information to answer the next four questions. The Kramer Company was started when it
issued 200 shares of $5 par value common stock at a market price of $20 per share. The company repurchased 10
shares at a market price of $15 per share. Later the company reissued 5 shares at a market price of $20 per share.
At the end of the first year of operations the company’s equity included $1,200 of retained earnings in addition to its
contributed capital.
2. The original issue of 200 shares of stock would
a. increase cash by $4,000 / increase common stock by $4,000.
b. increase cash by $4,000 / increase common stock and paid-in capital in excess of par value by $1,000 and
$3,000, respectively.
c. decrease cash by $4,000 / increase common stock by $4,000.
d. increase cash by $1,000 / increase common stock by $1,000.
3. The entry to record the purchase of the 10 shares of the company’s own stock would
a. decrease assets / decrease equity.
b. decrease assets / increase equity.
c. decrease assets / increase treasury stock.
d. both a and c.
4. What effect would reissuing the 5 shares have on the company’s paid-in capital from treasury stock transac-
tions account?
a. No effect.
b. Increase additional paid-in capital by $100.
c. Increase additional paid-in capital by $25.
d. Decrease additional paid-in capital by $75.
5. The total amount of stockholders’ equity at the end of the first year would be
a. $5,150.
b. $5,200.
c. $1,200.
d. none of the above.
6. Which of the following is an advantage of the corporate form of business organization?
a. double taxation.
b. amount of regulation.
c. limited liability.
d. entrenched management.
8-10
7. Jan Irving started a proprietorship on January 1, 2014 with a $1,000 cash contribution to the business. During
the first year of operations the company generated $5,000 of cash revenue and incurred $2,000 of cash ex-
penses. Also, Jan withdrew $500 from the business. At the end of 2014 the balance in the Jan Irving, Capital
account was
a. $1,000.
b. $3,000.
c. $3,500.
d. $4,000.
8. ABC Company is authorized to issue 100,000 shares of common stock. The company issued 60,000 shares
of common stock and later repurchased 15,000 shares of its own common stock. How many shares are out-
standing?
a. 60,000.
b. 45,000.
c. 100,000.
d. 40,000.
9. An 8 percent stock dividend on 12,000 shares of outstanding common stock with a par value of $20 per share
and a market value of $60 a share will have what effect on the accounting equation?
a. Increase common stock by $57,600.
b. Increase cash by $38,400.
c. Decrease retained earnings by $19,200.
d. Decrease retained earnings by $57,600.
10. Which of the following statements concerning a two-for-one stock split is true?
a. The number of shares outstanding will decrease.
b. The market price of the stock would be expected to increase.
c. The company’s assets will decrease.
d. The amount of stockholders’ equity is not affected.
11. EFG Company paid cash to purchase treasury stock. Which of the following reflects how this event affects
the company’s financial statements?
Assets
=
Liab.
+
Equity
Rev.
−
Exp.
=
Net Inc.
Cash Flow
a.
−
NA
−
NA
NA
NA
− FA
b.
+ −
NA
NA
NA
NA
NA
− OA
c.
−
NA
−
NA
+
−
− FA
d.
+ −
NA
NA
NA
+
−
− OA
12. ZGAR Company distributed a stock dividend. Which of the following reflects how this event affects the
company’s financial statements?
Assets
=
Liab.
+
Equity
Rev.
−
Exp.
=
Net Inc.
Cash Flow
a.
−
NA
−
NA
NA
NA
NA
b.
NA
NA
+ −
NA
NA
NA
NA
c.
−
NA
−
NA
+
−
− FA
d.
NA
NA
+ −
NA
NA
NA
− FA
Solutions to Quiz Questions
Chapter 08 – Proprietorships, Partnerships, and Corporations
8-11
Question
Answer
1
D
2
B
3
D
4
C
5
A
6
C
7
C
8
B
9
D
10
D
11
A
12
B
Summary Outline of a Lesson Plan for Chapter 8
I. Use Demonstration Problem 8-1 to illustrate reporting differences among
proprietorships, partnerships, and corporations.
II. Demonstration Problem 8-2 illustrates accounting for additional paid-in capital in
excess of par value.
III. Introduce preferred stock. Use Demonstration Problem 8-3 to illustrate allocating
dividends between common and preferred shareholders.
IV. Use Demonstration Problem 8-4 to illustrate the effects of treasury stock
transactions on financial statements.
V. Time considerations and homework assignments. Allow approximately two hours of
class time to cover the four demonstration problems. Use Problem 8-18 to reinforce how
financial statement presentation reflects business structure. Problem 8-20 requires
students to record a variety of stock and dividend transactions. Use Exercise 8-11 to
reinforce computing cumulative preferred dividends. Treasury stock is covered in
Problems 8-19 and 8-21.