1. a. Proprietorship: Ease of formation and nontaxable entity.
2. The disadvantages of a partnership are that its life is limited, each partner has unlimited
3. Yes. A partnership may incur losses in excess of the total investment of all partners. The
4. The partnership agreement (partnership) or operating agreement (LLC) establishes the income
–
5. No. Maholic would have to bear his share of losses. In the absence of any agreement as to
6. Yes. Partnership net income is divided according to the income-sharing ratio, regardless of
7. a. Debit the partner’s drawing account and credit Cash.
DISCUSSION QUESTIONS
CHAPTER 12
ACCOUNTING FOR PARTNERSHIPS AND
LIMITED LIABILITY COMPANIES
12-1
CHAPTER 12 Accounting for Partnerships and Limited Liability Companies
DISCUSSION QUESTIONS (Continued)
9. It is important to state all partnership assets in terms of current prices at the time of the
admission of a new partner because failure to do so might result in participation by the new
10. A new partner who is expected to improve the fortunes (income) of the partnership, through
12-2
CHAPTER 12 Accounting for Partnerships and Limited Liability Companies
PE 12–1A
Cash
PE 12–1B
Cash
PE 12–2A
Distributed to Orr and Graham:
Total
Annual salary…………………
…
$28,000 $ 0 $28,000
36,000
GrahamOrr
PRACTICE EXERCISES
51,000
12-3
PE 12–2B
Distributed to Prado and Nicks:
Total
Annual salary…………………
…
$ 0 $38,000 $ 38,000
PE 12–3A
a. Land
PE 12–3B
a. Equipment
NicksPrado
45,000
9,000
12-4
CHAPTER 12 Accounting for Partnerships and Limited Liability Companies
PE 12–4A
Equity of Bellows…………………………………………………………………
…
$200,000
Rodriguez’s contribution………………………………………………………… 360,000
PE 12–4B
Equity of Hiro………………………………………………………………………
…
$ 75,000
…
…
PE 12–5A
Morgan’s equity prior to liquidation…………………………
$32,000
Realization of asset sales………………………………………
$120,000
PE 12–5B
Manning’s equity prior to liquidation…………………………
$240,000
Realization of asset sales………………………………………
$410,000
12-5
PE 12–6A
a. Barns’ equity prior to liquidation……………… $55,000
Realization of asset sales………………………
…
$ 40,000
PE 12–6B
a. Bonilla’s equity prior to liquidation…………… $ 185,000
Realization of asset sales………………………
…
$ 30,000
PE 12–7A
$12,375,000
75 employees
=2014: $165,000 per employeea.
12-6
CHAPTER 12 Accounting for Partnerships and Limited Liability Companies
PE 12–7B
$1,800,000
12 employee
s
a.
=2014: $150,000 per employee
12-7
CHAPTER 12 Accounting for Partnerships and Limited Liability Companies
Ex. 12–1
Cash 18,000
Ex. 12–2
Cash 60,000
Accounts Receivable 130,000
EXERCISES
12-8
CHAPTER 12 Accounting for Partnerships and Limited Liability Companies
Ex. 12–3
Murphy Drake
a. …………………………………………………… $175,000 $175,000
b. …………………………………………………… 262,500 87,500
c. …………………………………………………… 146,300 203,700
d. …………………………………………………… 170,000 180,000
e. …………………………………………………… 174,500 175,500
Details:Murphy Drake Total
12-9
CHAPTER 12 Accounting for Partnerships and Limited Liability Companies
Ex. 12–4
Murphy Drake
a. …………………………………………………………………
…
$63,000 $63,000
Details:Murphy Drake Total
Ex. 12–5
Megan Jon
West Sokolov Total
Salary allowances………………………………
…
$ 45,000 $ 35,000 $ 80,000
Remainder (net loss, $40,000 plus $80,000
12-10
…
…
…
…
CHAPTER 12 Accounting for Partnerships and Limited Liability Companies
Ex. 12–6
a. The partners can divide net income in any ratio that they wish. However, in the
absence of an agreement, net income is divided equally between the partners.
Ex. 12–7
a. Net income: $112,000
Neel Tate Total
Salary allowance………………
…
$45,000 $30,000 $ 75,000
b. (1) Income Summary
(2) Zachery Neel, Member Equity
c. If the net income of the LLC were less than the sum of the salary allowances,
45,000
112,000
12-11
CHAPTER 12 Accounting for Partnerships and Limited Liability Companies
Ex. 12–8
a.
Total
Salary allowance……………
…
$ 55,000 $ 55,000
b. 2014
Dec. 31 Income Summary
WLKT Partners, Member Equity
360,000
126,000
Observer
Partners
WLKT
Sanders
Madison
LLC
Newspaper,
12-12
CHAPTER 12 Accounting for Partnerships and Limited Liability Companies
Ex. 12–8 (Concluded)
c.
Observer
WLKT Madison Newspaper,
Partners Sanders LLC Total
Members’ equity,
January 1, 2014 $200,000 $ 40,000 $160,000 $400,000
Additional investment
d. An income-sharing agreement provides flexibility and fairness. Without an
income-sharing agreement, each member would be credited with an equal
MARVEL MEDIA, LLC
Statement of Members’ Equity
For the Year Ended December 31, 2014
12-13
CHAPTER 12 Accounting for Partnerships and Limited Liability Companies
Ex. 12–9
a. Jan. 31 Partner, Drawing 50,000,000
Cash 50,000,000
d. Partner drawings are not the same as a salary. The drawings represent a
distribution of the profits of the partnership that has been credited to the
Ex. 12–10
a. and b.
May Cheng, Capital 69,000
Ex. 12–11
a. (1) Aaron Garner, Capital (20% × $180,000) 36,000
12-14
CHAPTER 12 Accounting for Partnerships and Limited Liability Companies
Ex. 12–12
a. Cash 70,000
Alex Jensen, Capital 4,000
c. Tangible assets should be adjusted to current market prices so that the new
partner does not share in any gains or losses from changes in market prices
Ex. 12–13
a. Bonus received by Solano:
Cody Jenkins, capital……………………………
…
$ 72,000
Jun Ito, capital……………………………………… 38,000
…
…
…
…
b. Cash 30,000
c. Apparently, Jenkins and Ito value the expertise offered by Solano. Solano is able
to use the computer to design and render landscape designs. It is likely that this
12-15
CHAPTER 12 Accounting for Partnerships and Limited Liability Companies
Ex. 12–14
a. Medical Equipment 40,000
b. (1) Cash 228,000
Supporting calculations for the bonus:
Abrams, member equity ($154,000 + $16,000)…
…
$170,000
…
…
…
(2) Cash 124,000
Supporting calculations for the bonus:
Abrams, member equity……………………………
…
$170,000
Lipscomb, member equity…………………………
…
232,000
…
12-16
CHAPTER 12 Accounting for Partnerships and Limited Liability Companies
Ex. 12–15
a. G. Ferris, Capital 9,000
Supporting calculations for the bonus:
G. Ferris, capital ($133,000 – $9,000)…
…
$124,000
(2) Cash 112,000
Supporting calculations for the bonus:
G. Ferris, capital……………………………
…
$124,000
12-17
CHAPTER 12 Accounting for Partnerships and Limited Liability Companies
Ex. 12–16
Total
Partner-
ship
Capital
Partnership capital,
January 1, 2014 $180,000 $300,000
Admission of Randy Campbell:
Equit
y
of initial partners prior to admission……………………
…
$300,000
Net income distribution:
The income-sharing ratio is equal to the proportion of the capital balances
after admitting Campbell according to the partnership agreement:
Campbell,
Capital
$120,000
Overton,
Capital
Testerman,
Capital
ANGEL INVESTOR ASSOCIATES
Statement of Partnership Equity
For the Year Ended December 31, 2014
Dennis RandyBen
12-18
CHAPTER 12 Accounting for Partnerships and Limited Liability Companies
Ex. 12–16 (Concluded)
Withdrawals:
Half of the remaining income is distributed to the three partners. Overton
Ex. 12–17
a. Merchandise Inventory 24,000
** ($24,000 – $3,000) × 2/7
b. Nick Rawls, Capital* 274,000
Ex. 12–18
a. The income-sharing ratio is determined by dividing the net income
for each member by the total net income. Thus, in 2014, the income-
sharing ratio is as follows:
$57,000
12-19
CHAPTER 12 Accounting for Partnerships and Limited Liability Companies
Ex. 12–18 (Concluded)
b. Following the same procedure as in (a):
$62,500
c. Thomas Dunn provided a $230,000 cash contribution to the business.
e. Thomas Dunn acquired a 22% interest in the business on January 1,
2015, computed as follows:
f. Withdrawals need not be the same as the income credited to the
12-20