APPENDIX D
ACCOUNTING FOR PARTNERSHIPS
Related Assignment Materials
Student Learning Objectives
Questions
Quick
Studies*
Exercises*
Problems*
Beyond the
Numbers
Conceptual objectives:
C1. Identify characteristics of
partnerships and similar
organizations.
1, 2, 3, 4, 5,
8
D-1
D-1, D-2
D-1, D-2,
D-4, D-7,
D-8
Analytical objectives:
Al. Compute partner return on
equity and use it to evaluate
partnership performance.
D-8
D-12
Procedural objectives:
P1. Prepare entries for partnership
formation.
D-2
D-5
P2. Allocate and record income and
loss among partners.
6, 7
D-3, D-4
D-3, D-4,
D-5, D-6
D-1, D-2,
D-3
D-3, D-5,
D-6
P3. Account for the admission and
withdrawal of partners.
9, 12
D-5, D-6
D-7, D-8,
D-9
D-4
P4. Prepare entries for partnership
liquidation.
10, 11
D-7
D-10, D-11
D-5
*See additional information on next page that pertains to these quick studies, exercises and problems.
Additional Information on Related Assignment Material
Problems D-1A and D-3A can be completed using EXCEL. Problem D-2A, D-4A, and D-5A with Sage
50 or QuickBooks. The Serial Problem for Success Systems continues in this chapter.
Connect (Available on the instructor’s course–specific website) repeats all numerical Quick Studies, all
Exercises and Problems Set A. Connect provides new numbers each time the Quick Study, Exercise or
Problem is worked. It allows instructors to monitor, promote, and assess student learning. It can be used
in practice, homework, or exam mode.
Synopsis of Chapter Revisions
EcoScraps: NEW opener with new entrepreneurial assignment
New examples of LLC example using Starz
New T-accounts to enhance learning of partnership capital.
Chapter Outline
Notes
I. Partnership Form of Organization—An unincorporated association
of two or more people to pursue a business for profit as co-owners.
A. Characteristics of Partnerships
1. Voluntary association.
2. Partnership contract (called articles of co-partnership)—
should be in writing but may be expressed orally.
3. Limited life—death, bankruptcy, or expiration of the contract
period automatically ends a partnership.
4. Taxation—not subject to tax on income—partners report their
share of income on personal income tax return.
5. Mutual agency—each partner is an agent of the partnership
and can enter into and bind it to any contract within the
normal scope of its business.
6. Unlimited liability—each general partner is responsible for
payment of all the debts of the partnership if the other partners
are unable to pay a share.
7. General partnership—all partners have mutual agency and
unlimited liability
8. Co-ownership of property—assets are owned jointly by all
partners but claims on partnership assets are based on their
capital account and the partnership contract.
B. Organizations with Partnership Characteristics
1. Limited Partnership (LP or Ltd.) has two classes of partners,
general (at least one) and limited. The general partners assume
unlimited liability for the debts of the partnership. The limited
partners assume no personal liability beyond their invested
amounts and cannot take active role in managing the
company.
2. Limited Liability Partnership (LLP) is designed to protect
innocent partners from malpractice or negligence claims
resulting from the acts of another partner. Generally, all
partners are personally liability for other partnership debts.
3. “S” Corporation has 100 or fewer stockholders, is treated as a
partnership for income tax purposes but otherwise is
accounted for as a “C” corporation.
4. Limited Liability Company (LLC or LC) owners are called
members, are protected with the limited liability feature of
corporations and can assume an active management role. The
LLC has a limited life and is typically classified as a
partnership for tax purposes.
B. Choosing a Business Form
Factors to be considered include: taxes, liability risk, tax and fiscal
year-end, ownership structure, estate planning, business risks, and
earnings and property distributions.
Chapter Outline
Notes
II. Basic Partnership Accounting—Same as accounting for a
proprietorship except for transactions directly affecting partners’
equity. Use separate capital and withdrawal accounts for each partner.
Allocates net income or loss to partners according to the partnership
agreement.
A. Organizing a Partnership
Each partner‘s investment is recorded at an agreed upon value,
normally the market value of the assets and liabilities at their date
of contribution.
B. Dividing Income and Loss
1. Any agreed upon method of dividing income or loss is
allowed. If there is no agreement, the net income or loss is
divided equally.
2. Common methods of dividing partnership earnings use:
a. Stated ratio.
b. Allocation on capital balances.
c. Allocation on service, capital, and stated ratio—salary and
interest allowances, and a fixed ratio are specified—when
income exceed allowances, the remainder is allocated to
individual partners using a fixed ratio and added to their
individual planned allowance. But when allowances
exceed the income, the negative amount or shortage is
allocated using the ratio and applied against each partner’s
total allowance.
3. Salaries to partners and interest on partners’ investments are
not partnership expenses; they are allocations of net income.
4. Partners may agree to salary and interest allowances to reward
unequal contributions of services or capital.
C. Partnership Financial Statements
Similar to a proprietorship except:
1. The statement of partners’ equity usually shows changes for
each partner‘s capital account, including the allocation of
income.
2. The balance sheet generally lists a separate capital account for
each partner.
Chapter Outline
Notes
III. Admission and Withdrawal of Partners
A. Admission of a Partner—two means:
1. Purchase of partnership interest.
a. The purchase is a personal transaction between one or
more current partners and the new partner.
b. Purchaser does not become a partner until accepted by the
current partners.
c. Involves a reallocation of current partners’ capital to
reflect the transaction.
2. Investing assets in a partnership.
a. The transaction is between the new partner and the
partnership. Invested assets become partnership property.
b. New partner’s equity recorded for assets invested may be
equal to, less than, or greater than investment.
c. When the recorded new partner’s equity differs from
investment, there is a bonus to new or old partner’s equity.
d. Bonuses to old partners are allocated based on their
income and loss sharing agreement.
B. Withdrawal of a Partner—two means:
1. Withdrawing partner sells his or her interest to another person
who pays cash or other assets to the withdrawing partner.
2. Cash or other assets of the partnership can be distributed to the
withdrawing partner in settlement of his or her interest.
a. Withdrawing partner may accept assets equal to, less than,
or greater than his/her equity.
b. When the withdrawing partner’s equity differs from assets
withdrawn, there is a bonus to remaining or withdrawing
partner’s equity.
c. Bonuses to remaining partners are allocated based on their
income and loss sharing agreement.
C. Death of a Partner
1. Dissolves a partnership.
2. Deceased partner’s estate is entitled to receive his or her
equity. Contract usually calls for closing of the books and
determining current value of assets and liabilities to update
equity.
3. Settlement of the deceased partner’s equity can involve selling
the equity to remaining partners or to an outsider, or it can
involve withdrawing assets.
Chapter Outline
Notes
IV. Liquidation of a Partnership
A. Involves four basic steps:
1. Noncash assets are sold for cash and a gain or loss on
liquidation is recorded.
2. Gain or loss on liquidation is allocated to partners using their
income-and-loss ratio.
3. Pay or settle liabilities.
4. Distribute any remaining cash to partners according to their
capital account balances.
B. Allocating gains or losses on liquidation may result in:
1. No capital deficiencies—all partners’ have a zero or credit
balance in their capital accounts the totals or which are
equivalent to final distribution of cash.
2. Capital deficiencies—when at least one partner has a debit
balance in his/her capital account.
a. Partners with a capital deficiency must, if possible, cover
the deficit by paying cash into the partnership.
b. When a partner is cannot pay the deficiency, the
remaining partners with credit balances absorb the unpaid
deficit according to their income-and-loss ratio. Inability
to cover deficiency does not relieve partner of liability.
V. Global View—Compares U.S. GAAP to IFRS
A. Both systems include broad and similar guidance for partnership
accounting.
B. Different legal and tax systems can impact partnership
agreements.
VI. Decision Analysis—Partner Return on Equity
A. Evaluates partnership success compared with other opportunities.
B. Computed separately for each partner.
C. Computed by dividing partner’s share of net income by that
partner’s average partner equity.
ALTERNATE DEMONSTRATION PROBLEM
APPENDIX D
Sand, Mell, and Rand are partners who share incomes and losses in a 1:4:5
ratio. After lengthy disagreements among the partners and several
unprofitable periods, the partners decided to liquidate the partnership.
Before the liquidation, the partnership balance sheet showed Cash $10,000,
total “other assets”, $106,000; total liabilities, $88,000; Sand, Capital,
$1,200; Mell, Capital, $11,700; and Rand, Capital, $15,100. The “other
assets” were sold for $ 85,000.
Determine the following:
1. The gain (or loss) realized on the sale of the assets.
2. The balances in the partners’ capital accounts after the distribution of
this gain or loss to the capital accounts.
3. Assume that if any capital deficits exist, they are not made-up. How
much cash will each of the partners receive in the final liquidation?
SOLUTION: ALTERNATE DEMONSTRATION PROBLEM
APPENDIX D
1.
Proceeds from sale
$85,000
Cost of other assets
106,000
Loss on sale
21,000
2.
Sands
Mell
Rand
Capital account balance prior to
distribution of loss on sale of
assets
$1,200
$11,700
$15,100
Distribution of loss
(1/10 to Sands, 4/10 to Mell,
and 5/10 to Rand)
(2,100
)
(8,400
)
(10,500
)
Capital account balance after
distribution of loss on sale of
assets
$ (900
)
$ 3,300
$ 4,600
3.
Sands
Mell
Rand
Capital account balance after
distribution of loss on sale of
assets
$ (900
)
$3,300
$4,600
Distribution of deficit in Sands
account (4/9 to Mell, and
5/9 to Sands)
900
(400
)
(500
)
Amount of cash each partner
receives in final liquidation
none
$2,900
$4,100