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.
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
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.
b. A public accounting firm is not in the merchandising business.
Consequently, because the purchase of merchandise to be sold is not
Quick Study 12-2 (15 minutes)
Stolton
Bright
Total
Net income ……………………………………...
52,000
Salary allowances
Stolton ………………………………………....
$15,000
Bright …………………………………………...
$20,000
Total salary allowances ………………...
35,000
Balance of income …………………………..
17,000
Balance allocated equally
Stolton ………………………………………....
8,500
Bright …………………………………………...
8,500
Total allocated equally …………………..
17,000
Balance of income …………………………..
______
______
$ 0
Shares of the partners ……………………..
$23,500
$28,500
Quick Study 12-3 (10 minutes)
If Blake is allocated a $100,000 salary allowance and there remains $4,000
Quick Study 12-4 (10 minutes)
Since Carley is a limited partner, she is not personally liable for any unpaid
Quick Study 12-5 (10 minutes)
Choi, Capital …………………………………………………………………...
10,000
Amal, Capital …………………………..……………………………………...
10,000
Stein, Capital …………………………..………………………………....
20,000
To record admission of Stein by purchase.
Quick Study 12-6 (10 minutes)
Cash …………………………..…………………………………………………..
40,000
Kwon, Capital …………………………..………………………………...
40,000
To record admission of Kwon.
Quick Study 12-7 (30 minutes)
1.
Field
Brown
Snow
Total
Initial investments …………..
$131,250
$165,000
$153,750
$450,000
Allocation of all losses
($450,000 – $45,000)/3 …….
(135,000)
(135,000)
(135,000)
(405,000)
Capital balances ……………..
$ (3,750)
$ 30,000
$ 18,750
$ 45,000
2. a)
May 31
Cash …………………………………………………………..……
3,750
Field, Capital ………………………………………….……
3,750
To record payment of deficiency.
b)
May 31
Brown, Capital …………………………………………….……
30,000
Snow, Capital ……………………………………………………
18,750
Cash ……………………………………………………....
48,750
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
Snow, Capital ……………………………………………………
16,875
Cash ……………………………………………………....
45,000
To distribute remaining cash.
Quick Study 12-8 (15 minutes)
Total partnership return on equity = Net Income/Average equity
= $25,025 / ($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
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
Exercise 12-2 (20 minutes)
a. Recommended Organization: Sharif, Henry, and Korb might first
consider organizing their business as a general partnership. However, a
Taxation: As a corporation, any income will be subject to corporate
Advantages: Several key advantages to the corporate form include its
b. Recommended Organization: The two doctors should form a
Taxation: The owners will pay individual taxes on income earned by the
c. Recommended Organization: Munson should consider setting up a
He can raise the necessary capital by admitting limited partners.
Taxation: All partners will pay individual taxes on income distributed to
Exercise 12-3 (25 minutes)
1a. 2013
Mar. 1
Cash ………………………………………………………………..
82,500
Land ………………………………………………………………..
60,000
Building …………………………………………………………..
100,000
Long-Term Note Payable …………………………….
92,500
Eckert, Capital …………………………………………….
82,500
Kelley, Capital …………………………………………….
67,500
To record initial capital investments.
1b. 2013
Oct. 20
Eckert, Withdrawals ……………………………………….…
34,000
Kelley, Withdrawals ………………………………………..…
20,000
Cash ……………………………………………………………
54,000
To record partners’ withdrawals.
1c. 2013
Dec. 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 …………………………..
_______
_______
$ 0
Shares of the partners …………………………..
$58,250
$31,750
Exercise 12-4 (25 minutes)
1.
Jan. 1
Cash ………………………………………………………………..
17,500
Equipment ……………………………………………………….
82,500
Note Payable ……………………………………………...
25,000
A. Moss, Capital ………………………………………….
75,000
To record initial capital investment of Moss.
2.
Jan. 1
Cash ………………………………………………………………..
31,250
A. Barber, Capital ……………………………………….
31,250
To record initial capital investment of Barber.
Exercise 12-5 (30 minutes)
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 …………………………………………….
$160,000
Salary allowances …………………………..
$50,000
$40,000
90,000
Interest 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
56,000
Balance of income …………………………..
.
.
$ 0
Shares of each partner …………….…………….
$84,000
$76,000
Exercise 12-6 (35 minutes)
Kramer
Knox
Total
1.
Net income …………………………………………….
$ 98,800
Salary allowances …………………………..
$50,000
$ 40,000
90,000
Interest 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
90,000
Interest 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)
120,800
Balance of income ……………………..……
_______
_______
$ 0
Shares of each partner ……………….………….
$ (4,400)
$(12,400)
Exercise 12-7 (25 minutes)
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
Frist, 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 ………………………………………………..…..
6,800
Frist, 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)
Exercise 12-8 (15 minutes)
1.
Jan. 31
Tulip, Capital ………………………………………………..…..
60,000
Cash ……………………………………………………….
60,000
To record retirement of Tulip.
2.
Jan. 31
Tulip, Capital ………………………………………………..…..
60,000
Hunter, Capital* ………………………………………………..
12,500
Folgers, Capital** ……………………………………………..
7,500
Cash ……………………………………………………….
80,000
To record retirement of Tulip.
* (5/8 x $20,000)
**(3/8 x $20,000)
3.
Jan. 31
Tulip, Capital ………………………………………………..…..
60,000
Hunter, Capital* …………………………..………….…..
18,750
Folgers, Capital** ………………………………………..
11,250
Cash ……………………………………………………….
30,000
To record retirement of Tulip.
* (5/8 x $30,000)
**(3/8 x $30,000)
Exercise 12-9 (10 minutes)
Sept. 30
Mandy, Capital …………………………………………….……
100,000
Brittney, Capital ……………………………………..……
100,000
To record admission of Brittney.
Exercise 12-10 (30 minutes)
a. Loss from selling assets
Total book value of assets ………………………………………
$126,000
Total liabilities (before liquidation)……………………..……
$78,000
Total 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 computation
1) $28,000 = $78,000 – Cash from asset sale
(This implies $50,000 cash from asset sale)
2) Loss on sale of assets = Book value of assets – Cash received
= $126,000 – $50,000 = $76,000
b. Loss allocation
Turner
Roth
Lowe
Total
Capital 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
Exercise 12-11 (30 minutes)
a. Loss from selling assets
Total book value of assets …………………………………..….
$126,000
Total liabilities before liquidation …………………………..
$78,000
Total 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
Total
Capital balances before loss
$ 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)
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
Exercise 12-12 (20 minutes)
Rugged Sports Enterprises LP:
Return on equity: $467,681 / [($947,000 + $1,365,032)/2] = 40.5%