Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
12-1
CHAPTER 12
REPORTING AND ANALYZING PARTNERSHIPS
Related Assignment Materials
Student Learning Objectives
Questions
Quick
Studies*
Exercises*
Problems*
Beyond the
Numbers
Conceptual objectives:
C1. Identify characteristics of
1, 2, 3, 4, 5,
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12-1, 12-2
12-1, 12-2,
Analytical objectives:
Al. Compute partner return on
equity and use it to evaluate
partnership performance.
12-9
12-13
Procedural objectives:
P1. Prepare entries for partnership
formation.
12-2, 12-3
12-3, 12-4
12-1
12-5
P2. Allocate and record income and
loss among partners.
6, 7
12-4, 12-5
12-5, 12-6,
12-7
12-2, 12-3,
12-4
12-3, 12-5,
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P3. Account for the admission and
withdrawal of partners.
9, 12
12-6, 12-7
12-7, 12-8,
12-9, 12-10
12-5, SP
organizations.
12-8
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
12-2
Additional Information on Related Assignment Material
Connect
Available on the instructor’s course-specific website) repeats all numerical Quick Studies, all Exercises and
Problems Set A. Connect also provides algorithmic versions for Quick Study, Exercises and Problems. It allows
instructors to monitor, promote, and assess student learning. It can be used in practice, homework, or exam mode.
Connect Insight
The first and only analytics tool of its kind, Connect Insight is a series of visual data displays that are each framed
The Serial Problem for Success Systems continues in this chapter.
General Ledger
Assignable within Connect, General Ledger (GL) problems offer students the ability to see how transactions post
Excel Simulations
Assignable within Connect, Excel Simulations allow students to practice their Excel skills—such as basic formulas
and formatting—within the context of accounting. These questions feature animated, narrated Help and Show Me
tutorials (when enabled). Excel Simulations are auto-graded and provide instant feedback to the student.
Synopsis of Chapter Revision
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
12-3
Chapter Outline
Notes
I. Partnership Formation—An unincorporated association of two or
more people to pursue a business for profit as co-owners.
A. Characteristics of Partnerships
1. Voluntary association.
3. Limited life—death, bankruptcy, or expiration of the contract
period automatically ends a partnership.
5. Mutual agency—each partner is an agent of the partnership
6. Unlimited liability—each general partner is responsible for
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
2. Limited Liability Partnership (LLP) is designed to protect
3. S Corporation has 100 or fewer stockholders, is treated as a
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 typically is 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.
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
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Chapter Outline
Notes
II. Accounting for Partnership Formation—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
B. Dividing Partnership Income and Loss
1. Any agreed upon method of dividing income or loss is
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
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
2. The balance sheet generally lists a separate capital account for
each partner.
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
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Chapter Outline
Notes
III. Admission of a Partner
A. Admission of a Partner—two means:
1. Purchase of partnership interest.
a. The purchase is a personal transaction between one or
2. Investing assets in a partnership.
a. The transaction is between the new partner and the
partnership. Invested assets become partnership property.
income and loss sharing agreement.
B. Withdrawal of a Partner—two means:
2. Cash or other assets of the partnership can be distributed to the
withdrawing partner in settlement of his or her interest.
income and loss sharing agreement.
a. Withdrawing partner may accept assets equal to, less than,
or greater than his/her equity.
C. Death of a Partner
1. Dissolves a partnership.
2. Deceased partner’s estate is entitled to receive his or her
3. Settlement of the deceased partner’s equity can involve selling
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
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Chapter Outline
Notes
IV. Liquidation of a Partnership
A. Involves four basic steps:
2. Gain or loss on liquidation is allocated to partners using their
income-and-loss ratio.
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
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
V. 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.
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
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Chapter 12 Alternate Demonstration Problem
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.
3. Assume that if any capital deficits exist, they are not made-up. How
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
12-8
Chapter 12 Alternate Demonstration Problem: Solution
1.
Proceeds from sale
$85,000
2.
Sands
Mell
Rand
)
)
)
)
Capital account balance prior to
distribution of loss on sale of
$1,200
$11,700
$15,100
3.
Sands
Mell
Rand
)
$4,600
account (4/9 to Mell, and
)
)
$4,100
Capital account balance after
distribution of loss on sale of
106,000