Chapter 15 – PARTNERSHIPS: FORMATION, OPERATION, AND CHANGES IN MEMBERSHIP
CHAPTER 15
PARTNERSHIPS: FORMATION, OPERATION, AND
CHANGES IN MEMBERSHIP
OVERVIEW OF CHAPTER
Chapter 15 is the first of two chapters on the accounting and financial reporting for
partnerships. Chapter 15 discusses the Uniform Partnership Act of 1914 as serving for many
years as the model for defining the rights and responsibilities of the partners to each other and to
the creditors of the partnership. In 1997 the National Conference of Commissioners on Uniform
State Laws (NCCUSL) approved the final model as the Uniform Partnership Act of 1997 (UPA
1997). The chapter also covers the major characteristics of partnerships. Limited Partnerships
(LP), Limited Liability Partnerships (LLP) and Limited Liability Limited Partnerships (LLLP)
are discussed and contrasted.
In this chapter the accounting for the formation of a partnership is discussed and
illustrated. The importance of using fair market values for assets and present values for liabilities
is emphasized. Accounting for the operations of a partnership is relatively straightforward. An
important point is to differentiate between additional capital contributions and loan agreements.
The allocation of the periodic profit or loss to the partners must follow the partnership’s
Articles of Partnership. Consistent with the UPA, if no agreement regarding profit and loss has
been made, each partner will share equally in any profits or losses. Partnerships enjoy significant
flexibility when determining how profits or losses are distributed. A variety of alternatives are
fully illustrated in the chapter.
A dissociation of a partner represents a change in the composition of the partners forming
the partnership. Admission of new partners creates a source of additional capital. Some
partnerships use the admission of a new partner as an opportunity to revalue the net assets or to
recognize unrecorded goodwill. Other partnerships may choose the bonus method to account for
the admission of a new partner. The bonus method leads to a realignment of partners’ capital
balances. The concept of proportionate book value is important when accounting for changes in
membership of the partnership.
Appendix 15A presents tax aspects of partnerships. Appendix 15B briefly discusses joint
ventures.
Chapter 15 – PARTNERSHIPS: FORMATION, OPERATION, AND CHANGES IN MEMBERSHIP
15-2
LEARNING OBJECTIVES
When students finish studying this chapter, they should be able to:
LO 15-1 Understand and explain the nature and regulation of partnerships.
LO 15-2 Understand and explain the differences among different types of partnerships.
LO 15-3 Make calculations and journal entries for the formation of partnerships.
LO 15-4 Make calculations and journal entries for the operation of partnerships.
LO 15-5 Make calculations and journal entries for the allocation of partnership profit or loss.
LO 15-6 Make calculations and journal entries to account for changes in partnership
ownership.
SYNOPSIS OF CHAPTER 15
Partnerships: Formation, Operation, and Changes in Membership
The Evolution of PricewaterhouseCoopers (PwC)
LO 15-1 Understand and explain the nature and regulation of partnerships.
The Nature of the Partnership Entity
Legal Regulation of Partnerships
Definition of a Partnership
Formation of a Partnership
Other Major Characteristics of Partnerships
LO 15-2 Understand and explain the differences among different types of partnerships.
Accounting and Financial Reporting Requirements for Partnerships
International Financial Reporting Standards for Small and Medium-Size Entities
and Joint Ventures
LO 15-3 Make calculations and journal entries for the formation of partnerships.
Accounting for the Formation of a Partnership
Illustration of Accounting for Partnership Formation
LO 15-4 Make calculations and journal entries for the operation of partnerships.
Accounting for the Operations of a Partnership
Partners’ Accounts
LO 15-5 Make calculations and journal entries for the allocation of partnership profit or loss.
Allocating Profit or Loss to Partners
Chapter 15 – PARTNERSHIPS: FORMATION, OPERATION, AND CHANGES IN MEMBERSHIP
15-3
Illustrations of Profit Allocation
Multiple Profit Allocation Bases
Special Profit Allocation Methods
Partnership Financial Statements
LO 15-6 Make calculations and journal entries to account for changes in partnership
ownership.
Changes in Membership
General Concepts to Account for a Change in Membership in the Partnership
New Partner Purchases Partnership Interest Directly from an Existing Partner
New Partner Invests in Partnership
Determining a New Partner’s Investment Cost
Disassociation of a Partner from the Partnership
Appendix 15A: Tax Aspects of a Partnership
Tax Basis of Asset Investments
Appendix 15B: Joint Ventures
NOTES ON POWERPOINT SLIDES
We have attempted to provide PowerPoint slides that will be useful to a broad set of users. Since
instructors often have different styles and preferences, we have attempted to include slides that
will accommodate different approaches and that can be adapted to classes with different levels of
preparation. For example, some instructors prefer to introduce the material before students have
read the chapter. We have tried to facilitate these types of introductory discussions by including
slides that replicate key points from the chapter. Other instructors expect students to have read
the chapter and attempted homework problems before coming to class. As a result, they may not
find it useful to review all of the topics in the chapter or to include slides that simply review
many of the details they expect students to study before class. However, instructors following
this approach often like to use sample exercises and problems built into the slides that allow
them to have extended discussions or to facilitate group interaction in class.
If instructors elect to spend two class periods on the same subject, they might find a combination
of both styles to be useful by first introducing foundational material before students have read
the chapter and studied the topic, followed by an extended discussion the next class period after
students have read the chapter and attempted homework problems.
We have tried to develop slides that can facilitate a flexible approach to allow instructors to
select the slides that best match their objectives and style for class discussions. This is the reason
we are including over 100 slides for some chapters in the text. We do not expect all instructors
to use all slides, but the slide files should help support different teaching approaches and allow
instructors to select the subset of slides that best matches their specific discussion objectives.
Chapter 15 – PARTNERSHIPS: FORMATION, OPERATION, AND CHANGES IN MEMBERSHIP
15-4
The slides are organized by learning objective. We have included a slide at the beginning of
each learning objective to show where the new material begins. Instructors may or may not want
to use these learning objective slides in class. We provide them primarily as a way of organizing
the material. We also include short multiple-choice questions at the end of most learning
objectives. Some instructors find it useful to pause periodically during class to assess students’
level of understanding. For this reason, we include several “practice quiz questions” that can be
used throughout class discussions to engage students, help them focus on key points, or to
facilitate group interaction. Finally, we provide longer exercises and problems that many
instructors find useful in assessing understanding and encouraging group learning.
LO 15-1 Understand and explain the nature and regulation of partnerships.
• Slides 3-10 introduce basic concepts related to partnerships as well as the
fundamentals of the regulation of partnerships.
LO 15-2 Understand and explain the differences among different types of partnerships.
• Slides 14-17 summarize the differences between different types of partnerships.
LO 15-3 Make calculations and journal entries for the formation of partnerships.
• Slide21 introduces the accounting for partnerships.
• Slides 22-26 present a basic examples of the accounting for the formation of a
partnership.
• Slides 27-29 are a detailed problem demonstrating to students the formation of a
partnership through the combination of two other partnerships.
• Slides 30-33 provide the solution to the problem.
LO 15-4 Make calculations and journal entries for the operation of partnerships.
• Slides 35-36 briefly summarize the accounting for normal partnership operations.
LO 15-5 Make calculations and journal entries for the allocation of partnership profit or loss.
• Slides 40-41 provide an overview of the four major profit distribution methods.
• Slides 42-50 walk students through examples demonstrating the allocation of
partnership profits and losses using different methods.
• Slides 51-58 explain and walk through the process of using multiple profit allocation
bases.
• Slides 59-70 provide group exercises to practice the application of the profit
distribution methods.
LO 15-6 Make calculations and journal entries to account for changes in partnership
ownership.
• Slide 74 explains how a new partner can purchase partnership interest directly from
an existing partner.
• Slides 75-77 explain three possible situations which may occur when a new partner
invests in a partnership.
Chapter 15 – PARTNERSHIPS: FORMATION, OPERATION, AND CHANGES IN MEMBERSHIP
15-5
• Slides 78-112 provide detailed examples of the three possible cases that may occur
when a new partner invests in a partnership, and how to account for them using the
revaluation, bonus, and goodwill methods.
• Slides 119-128 provide several group problems demonstrating different methods of
accounting for the admission of a new partner.
• Slides 129-132 explain how to determine a new partner’s investment cost with the
example given.
• Slides 133-135 explain important legal aspects of the admission and withdrawal of a
partner.
• Slides 139-140 provide a group exercise on the retirement of a partner. It is important
to explain that the repayment of Sandy’s loan is made through a separate cash
payment. The calculations on slide 140 relate only to the entry to record Sandy’s
retirement and the payment related to her capital account.
Chapter 15 – PARTNERSHIPS: FORMATION, OPERATION, AND CHANGES IN MEMBERSHIP
15-6
TEACHING IDEAS
1. The instructor could invite a partner of a local CPA firm to class to discuss the pros and
cons of the partnership form of doing business. What are the best aspects of a
partnership? What are the worst aspects of a partnership?
2. Select three students from the class to debate the issues of accounting at the time of
dissolution and the investment of a new partner in the partnership for more than the
proportionate book value of the investment. Assign the three alternatives as follows: (a)
recognize goodwill, (b) revalue assets, and (c) use the bonus method. The students must
be able to discuss the positive aspects of the method assigned and be able to provide a
counterpoint to any negative aspects of the specific method. After the debate ends, the
remaining students could then “vote” on the method to be used.
3. The students could be asked to obtain a copy of the Uniform Partnership Act (UPA). A
copy is available in virtually all Business Law I textbooks. Students could be asked a
specific question requiring research in the UPA. For example, students could be asked to
determine the liability of an entering partner for partnership liabilities incurred prior to
the admission date of the new partner. Students will find the answer to this question in
Section 17 of the UPA. This assignment will show the students the necessity of
understanding the UPA before entering or advising on partnerships. In addition, students
will see how the accounting responsibilities for partnerships relate to the legal
requirements of a partnership and its partners.