Chapter 12 - Accounting for Partnerships 12-1 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 organized for the purpose of completing a specific business project, the partnership ends when the project is completed. If the business for which the partnership was organized cannot be completed, but goes on indefinitely, the partnership may be dissolved at the will of any one of its partners. 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. Yes, partners can limit the right of a partner. Such an agreement is binding on members of the partnership. It is also binding on outsiders who know of the agreement. However, it is not binding on outsiders who do not know of the agreement. 4. 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. 5. If partners agree on the method of sharing incomes, but say nothing of losses, then any losses are shared in the same manner as income. 6. The allocation of net income to the partners is reported on the statement of partners' equity. 7. 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. 8. All partners in a general partnership have unlimited liability. A limited partnership includes both general and limited partners, and the limited partners have no personal liability for partnership debts. Also, the general partners assume the management duties of the partnership. 9. George's claim is not valid unless the previously agreed upon method of sharing net incomes and losses granted George an annual salary allowance of $25,000. Unless the partnership agreement says otherwise, partners have no claim to a salary allowance in payment for their services.
Transcript
Chapter 12 - Accounting for Partnerships
12-1
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 organized for the purpose of completing a specific business project, the partnership ends when the project is completed. If the business for which the partnership was organized cannot be completed, but goes on indefinitely, the partnership may be dissolved at the will of any one of its partners.
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. Yes, partners can limit the right of a partner. Such an agreement is binding on members of the partnership. It is also binding on outsiders who know of the agreement. However, it is not binding on outsiders who do not know of the agreement.
4. 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.
5. If partners agree on the method of sharing incomes, but say nothing of losses, then any losses are shared in the same manner as income.
6. The allocation of net income to the partners is reported on the statement of partners' equity.
7. 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.
8. All partners in a general partnership have unlimited liability. A limited partnership includes both general and limited partners, and the limited partners have no personal liability for partnership debts. Also, the general partners assume the management duties of the partnership.
9. George's claim is not valid unless the previously agreed upon method of sharing net incomes and losses granted George an annual salary allowance of $25,000. Unless the partnership agreement says otherwise, partners have no claim to a salary allowance in payment for their services.
Chapter 12 - Accounting for Partnerships
12-2
10. No. Kay is still liable to her former partners for her share of the losses.
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 or losses are allocated to the capital accounts of the partners; and when creditors' claims are paid, assets and liabilities are reduced by equal amounts. Therefore, when the remaining assets are in the form of cash, the amount of cash must equal 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.
Chapter 12 - Accounting for Partnerships
12-3
QUICK STUDIES
Quick Study 12-1 (10 minutes) a. The partnership will need to pay because it is a merchandising firm.
That is, if the vendor knows nothing to the contrary, the vendor can assume that Davis has the right, because of mutual agency, to bind the firm to contracts for the purchase of merchandise.
b. A public accounting firm is not in the merchandising business.
Consequently, because the purchase of merchandise to be sold is not within the normal scope of the business of this firm, the vendor has no right to assume Davis is acting as the agent for the partnership. Hence, the partnership probably will not have to pay.
Quick Study 12-2 (10 minutes) Since Maxi is a limited partner, she is not personally liable for any unpaid debts of the partnership. Therefore, the partnership’s creditors cannot pursue Maxi’s personal assets. Quick Study 12-3 (15 minutes) Keeley Norton Total
Net income ............................................. $210,000
Total allocated equally ....................... 140,000
Balance of income ................................ _______ _______ $ 0
Shares of the partners .......................... $110,000 $100,000
Chapter 12 - Accounting for Partnerships
12-4
Quick Study 12-4 (10 minutes) If Jake is allocated a $60,000 salary allowance and there remains $2,000 to be divided equally, giving Ness $1,000, then this shows that the partnership must have earned net income of $62,000. Quick Study 12-5 (10 minutes) Cash ........................................................................................... 30,000 Holly, Capital ........................................................................ 30,000 To record admission of Holly.
Quick Study 12-6 (10 minutes) Bogg, Capital ............................................................................. 10,000 Heyer, Capital ............................................................................ 10,000 Mintz, Capital ........................................................................ 20,000 To record admission of Mintz by purchase.
Quick Study 12-7 (30 minutes) 1.
Red White Blue Total
Initial investments .............. $175,000 $220,000 $205,000 $600,000 Allocation of all losses ($600,000 - $60,000)/3 ....... (180,000) (180,000) (180,000) (540,000) Capital balances ................. $ (5,000) $ 40,000 $ 25,000 $ 60,000
2. a)
Aug. 31 Cash .......................................................................... 5,000 Red, Capital ........................................................ 5,000 To record payment of deficiency.
b)
Aug. 31 White, Capital ........................................................... 40,000 Blue, Capital ............................................................. 25,000 Cash .................................................................... 65,000 To distribute remaining cash.
Chapter 12 - Accounting for Partnerships
12-5
Quick Study 12-7 (Concluded) 3. a)
Aug. 31 White, Capital ........................................................... 2,500 Blue, Capital ............................................................. 2,500 Red, Capital ........................................................ 5,000 To transfer deficiency to other partners.
b)
Aug. 31 White, Capital ........................................................... 37,500 Blue, Capital ............................................................. 22,500 Cash .................................................................... 60,000 To distribute remaining cash.
Quick Study 12-8 (15 minutes) Total partnership return on equity = Net Income/Average equity = $50,000 / ($300,000 + $400,000)/2 = $50,000 / $350,000 = 14.3%
Gilson partner return on equity = Partner net income/Average partner equity
EXERCISES Exercise 12-1 (20 minutes) a. Recommended Organization: Milan should consider setting up a limited
partnership. Given his real estate expertise he can manage the day-to-day activities of the partnership and serve as its general partner. He can raise the necessary capital by admitting limited partners.
Taxation: All partners will pay individual taxes on income distributed to them, but the partnership entity will not pay income tax.
Advantages: Advantages to Milan will be authority over the partnership that he will have as general partner and the ease of raising capital.
b. Recommended Organization: The two doctors should form a
partnership. A general partnership will have the disadvantage of unlimited liability so they probably want to consider a limited liability partnership. The partnership can borrow funds from the bank to obtain the initial needed capital for the business.
Taxation: The owners will pay individual taxes on income earned by the partnership but the partnership will not be taxed.
Advantages: The advantages of the partnership are ease of formation and owner authority.
c. Recommended Organization: Ross, Jenks, and Keim might first
consider organizing their business as a general partnership. However, a problem for these new graduates is that they do not have funds and with no past business experience will probably have trouble getting a business loan. Therefore, instead of a partnership, a better course of action is probably to incorporate. In this way they might be able to find investors to contribute capital for stock. They can structure the financing so that they remain the major stockholders in the company.
Taxation: As a corporation, any income will be subject to corporate income tax. Any dividends paid to the stockholders will also normally be taxed, but at a much lower level. Moreover, some lower income taxpayers could potentially pay little or no dividend tax. Any salaries that Ross, Jenks, and Keim pay themselves will be a tax-deductible expense for the business.
Advantages: Several key advantages to the corporate form include its limited liability and the potential to sell more stock if additional funds are needed.
Chapter 12 - Accounting for Partnerships
12-7
Exercise 12-2 (15 minutes)
Characteristic General Partnerships
1. Ease of formation Requires only an agreement
2. Transferability of ownership Difficult to transfer
3. Ability to raise large amounts of capital Low ability
4. Life Limited
5. Owners’ liability Unlimited
6. Legal status Not separate from partners
7. Tax status of income Taxed only once
8. Owners’ authority Mutual agency
Exercise 12-3 (25 minutes) 1. Jan. 1 Cash .......................................................................... 14,000 Equipment ................................................................ 66,000 Note Payable ...................................................... 20,000 A. Kroll, Capital .................................................. 60,000 To record initial capital investment of Kroll.
2. Jan. 1 Cash .......................................................................... 25,000 A. Rogers, Capital .............................................. 25,000 To record initial capital investment of Rogers.
Chapter 12 - Accounting for Partnerships
12-8
Exercise 12-4 (25 minutes) 1a. 2011 Mar. 1 Cash .......................................................................... 88,000 Land .......................................................................... 70,000 Building .................................................................... 100,000 Long-Term Notes Payable ................................ 80,000 Abbey, Capital .................................................... 88,000 Dames, Capital ................................................... 90,000 To record initial capital investments.
1b. 2011 Oct. 20 Abbey, Withdrawals ................................................. 32,000 Dames, Withdrawals ................................................ 25,000 Cash ..................................................................... 57,000 To record partners’ withdrawals.
1c. 2011 Dec. 31 Abbey, Capital .......................................................... 32,000 Dames, Capital .......................................................... 25,000 Abbey, Withdrawals ........................................... 32,000 Dames, Withdrawals .......................................... 25,000 To close withdrawals accounts.
Dec. 31 Income Summary ..................................................... 79,000 Abbey, Capital .................................................... 54,400 Dames, Capital .................................................... 24,600 To close Income Summary account.*
Net income ................................................................. $79,000 Salary allowance Abbey ........................................................................ $30,000 Total salary allowance ............................................... 30,000 Balance of income ..................................................... 49,000 Interest allowances Abbey (10% on $88,000) .......................................... 8,800 Dames (10% on $90,000) .......................................... $9,000 Total interest allowances........................................... 17,800 Balance of income ..................................................... 31,200 Balance allocated equally Abbey ........................................................................ 15,600 Dames ....................................................................... 15,600 Total allocated equally ............................................... 31,200 Balance of income ....................................................... _______ _______ $ 0 Shares of the partners ................................................. $54,400 $24,600
Chapter 12 - Accounting for Partnerships
12-9
Exercise 12-5 (30 minutes)
Cosmo Ellis Total
Plan (1) $165,000 x 1/2 ............................................... $82,500 $82,500 $165,000
Plan (2) ($50,000/$125,000) x $165,000 ..................... $66,000 $ 66,000
($75,000/$125,000) x $165,000 ..................... _______ $99,000 99,000
$66,000 $99,000 $165,000
Plan (3) Net income .................................................... $165,000
Balance of income ....................................... ______ _______ $ 0
Shares of each partner ................................ $ (4,100) $(11,600) Exercise 12-7 (10 minutes) Sept. 30 Mona, Capital ............................................................ 90,000 Seal, Capital ........................................................ 90,000 To record admission of Seal.
Chapter 12 - Accounting for Partnerships
12-11
Exercise 12-8 (25 minutes) 1) Nov. 1 Cash ........................................................................... 90,000 Ash, Capital ......................................................... 90,000 To record admission of Ash
[($510,000 + $90,000) x 15%].
2) Nov. 1 Cash .......................................................................... 125,000 Ash, Capital ........................................................ 95,250 Elm, Capital ......................................................... 23,800 Oak, Capital ........................................................ 5,950 To record admission of Ash. Supporting computations $510,000 + $125,000 = $635,000 $635,000 x 15% = $95,250 $125,000 - $95,250 = $29,750 $29,750 x 80% = $23,800 $29,750 x 20% = $5,950
3) Nov. 1 Cash .......................................................................... 60,000 Elm, Capital ............................................................... 20,400 Oak, Capital .............................................................. 5,100 Ash, Capital ........................................................ 85,500 To record admission of Ash. Supporting computations $510,000 + $60,000 = $570,000 $570,000 x 15% = $85,500 $60,000 - $85,500 = $(25,500) $(25,500) x 80% = $(20,400) $(25,500) x 20% = $(5,100)
Chapter 12 - Accounting for Partnerships
12-12
Exercise 12-9 (15 minutes) 1. Jan. 31 Tulip, Capital ............................................................. 180,000 Cash .................................................................... 180,000 To record retirement of Tulip.
2. Jan. 31 Tulip, Capital ............................................................. 180,000 Holland, Capital* ....................................................... 12,500 Flowers, Capital** ..................................................... 7,500 Cash .................................................................... 200,000 To record retirement of Tulip.
* (5/8 x $20,000) **(3/8 x $20,000)
3. Jan. 31 Tulip, Capital ............................................................. 180,000 Holland, Capital* ................................................. 18,750 Flowers, Capital** ............................................... 11,250 Cash .................................................................... 150,000 To record retirement of Tulip.
* (5/8 x $30,000) **(3/8 x $30,000)
Chapter 12 - Accounting for Partnerships
12-13
Exercise 12-10 (30 minutes) a. Loss from selling assets
Total book value of assets ............................................. $116,000 Total liabilities (before liquidation)................................ $88,000 Total liabilities remaining after paying proceeds of asset sales to creditors ..........................
(24,000)
Cash proceeds from sale of assets ............................... (64,000)
Loss on sale of assets* .................................................. $ 52,000
* Alternative computation 1) $24,000 = $88,000 - Cash from assets’ sale (This implies cash from assets sale is $64,000) 2) Loss on sale of assets = Book value of assets - Cash received
= $116,000 - $64,000 = $52,000 b. Loss allocation
Tuttle Ritter Lee Total
Capital balances before loss liquidation
$ 1,200
$11,700
$ 15,100
$ 28,000
Allocation of loss
$52,000 x 1/10 ....................... (5,200)
$52,000 x 4/10 ....................... (20,800)
$52,000 x 5/10 ....................... ______ _______ (26,000) (52,000)
Capital balances after loss ..... $(4,000) $ (9,100) $(10,900) $(24,000)
c. Liability to be paid
Each partner should pay the amount of the debit (deficit) balance in his or her own capital account.
Chapter 12 - Accounting for Partnerships
12-14
Exercise 12-11 (30 minutes) a. Loss from selling assets
Total book value of assets ............................................. $116,000 Total liabilities before liquidation .................................. $88,000 Total liabilities remaining after paying proceeds of asset sales to creditors ............................................
(24,000)
Cash proceeds from sale of assets ............................... (64,000) Loss on sale of assets .................................................... $ 52,000
b. Loss and deficit allocation
Tuttle Ritter Lee Total
Capital balances before loss $ 1,200 $ 11,700 $ 15,100 $ 28,000 Allocation of loss $52,000 x 1/10 ....................... (5,200) $52,000 x 4/10 ....................... (20,800)
$52,000 x 5/10 ....................... ______ _______ (26,000) (52,000)
Capital balances after loss ..... (4,000) (9,100) (10,900) (24,000)
Allocation of Lee's deficit to Tuttle and Ritter
$10,900 x 1/5 ......................... (2,180) $10,900 x 4/5 ......................... ______ (8,720) 10,900 _______
Cash paid by each partner $(6,180) $(17,820) $ 0 $(24,000)
c. Liability to be paid
As a limited partner, Lee has no personal liability for the $24,000 liability. Therefore, Tuttle and Ritter must share the loss reflected in Lee's capital account deficit.
PROBLEM SET A Problem 12-1A (50 minutes) 1. Dec. 31 Income Summary ..................................................... 124,500 Kim Ries, Capital ............................................... 41,500 Tere Bax, Capital ............................................... 41,500 Josh Thomas, Capital ....................................... 41,500 To close Income Summary.
2. Dec. 31 Income Summary ..................................................... 124,500 Kim Ries, Capital ............................................... 31,125 Tere Bax, Capital ............................................... 43,575 Josh Thomas, Capital ....................................... 49,800 To close Income Summary*. *Supporting computations
($40,000/$160,000) x $124,500 = $31,125 ($56,000/$160,000) x $124,500 = $43,575 ($64,000/$160,000) x $124,500 = $49,800
3. Dec. 31 Income Summary ..................................................... 124,500 Kim Ries, Capital ............................................... 39,500 Tere Bax, Capital ............................................... 36,100 Josh Thomas, Capital ....................................... 48,900 To close Income Summary*.
*Supporting calculations Ries Bax Thomas Total
Net income ................................................ $124,500 Salary allowances Ries ......................................................... $33,000 Bax.......................................................... $28,000 Thomas .................................................. $40,000 Total salaries ............................................ 101,000 Balance after salary allowances .............. 23,500 Interest allowances Ries (10% on $40,000) ........................... 4,000 Bax (10% on $56,000) ............................ 5,600 Thomas (10% on $64,000) ..................... 6,400 Total interest ............................................. 16,000 Bal. after interest and salaries ................. 7,500 Balance allocated equally ........................ 2,500 2,500 2,500 Total allocated equally ............................. 7,500 Balance of income .................................... ______ ______ ______ $ 0 Shares of the partners.............................. $39,500 $36,100 $48,900
Chapter 12 - Accounting for Partnerships
12-16
Problem 12-2A (45 minutes)
Preliminary calculations Plan (a) & Plan (c) Percentages based on initial investments Baker = $21,000/$52,500 = 40% Farney = $31,500/$52,500 = 60% Plan (b) Percentages based on time Baker = 0.5/1.5 = 33 1/3% Farney = 1.0/1.5 = 66 2/3% Plan (c) & Plan (d) Salary allowance Farney = 12 x $3,000 = $36,000 Plan (d) Interest allowances Baker = 10% x $21,000 = $ 2,100 Farney = 10% x $31,500 = $ 3,150
Income (Loss) Year 1 Sharing Plan Calculations Baker Farney
(a) 40% x $18,000 loss ................................................... $ (7,200)
60% x $18,000 loss ................................................... $(10,800)
(b) 33 1/3% x $18,000 loss ............................................. $ (6,000) 66 2/3% x $18,000 loss ............................................. $(12,000)
Part 3 Dec. 31 Income Summary ..................................................... 104,500 Will Beck, Capital ............................................... 37,375 Ron Beck, Capital ............................................... 22,125 Barb Beck, Capital .............................................. 45,000 To close Income Summary.
Dec. 31 Will Beck, Capital ..................................................... 17,000
Ron Beck, Capital ..................................................... 24,000 Barb Beck, Capital .................................................... 32,000 Will Beck, Withdrawals ...................................... 17,000 Ron Beck, Withdrawals ...................................... 24,000 Barb Beck, Withdrawals .................................... 32,000 To close withdrawals accounts.
Chapter 12 - Accounting for Partnerships
12-20
Problem 12-4A (50 minutes)
Part 1
a) Feb. 1 Zarcus, Capital ......................................................... 69,000 Getz, Capital ....................................................... 69,000 To record admission of Getz.
b) Feb. 1 Zarcus, Capital ......................................................... 69,000 Swanson, Capital ............................................... 69,000 To record admission of Swanson.
c) Feb. 1 Zarcus, Capital ......................................................... 69,000 Cash .................................................................... 69,000 To record withdrawal of Zarcus with no bonus.
d) Feb. 1 Zarcus, Capital ......................................................... 69,000 Goering, Capital* ...................................................... 14,250 Schmit, Capital** ...................................................... 23,750 Cash .................................................................... 107,000 To record withdrawal of Zarcus with bonus.
* ($107,000 - $69,000) x 3/8 **($107,000 - $69,000) x 5/8
e) Feb. 1 Zarcus, Capital ......................................................... 69,000 Accumulated Depreciation—Equipment ............... 11,600 Goering, Capital* ................................................ 11,475 Schmit, Capital** ................................................ 19,125 Equipment .......................................................... 35,000 Cash .................................................................... 15,000 To record withdrawal of Zarcus with bonus to
old partners. * [$69,000 - ($35,000 - $11,600 + $15,000)] x 3/8. **[$69,000 - ($35,000 - $11,600 + $15,000)] x 5/8.
Chapter 12 - Accounting for Partnerships
12-21
Problem 12-4A (Concluded)
Part 2
a)
Feb. 1 Cash .......................................................................... 100,000 Ford, Capital*...................................................... 100,000 To record admission of Ford.
*Supporting calculations $84,000 + $69,000 + $147,000 = $300,000 ($300,000 + $100,000) x 25% = $100,000 Thus, no bonus is received or paid.
b)
Feb. 1 Cash .......................................................................... 74,000 Goering, Capital ($19,500* x 3/10) ........................... 5,850 Zarcus, Capital ($19,500* x 2/10) ............................ 3,900 Schmit, Capital ($19,500* x 5/10) ............................ 9,750 Ford, Capital ....................................................... 93,500 To record Ford’s admission and bonus.
* Supporting calculations ($300,000 + $74,000) x 25% = $93,500 $74,000 - $93,500 = $(19,500) Thus, a bonus is paid to new partner.
c)
Feb. 1 Cash .......................................................................... 131,000 Goering, Capital ($23,250* x 3/10) .................... 6,975 Zarcus, Capital ($23,250* x 2/10) ...................... 4,650 Schmit, Capital ($23,250* x 5/10) ...................... 11,625 Ford, Capital ....................................................... 107,750 To record admission of Ford and bonus
to old partners.
* Supporting calculations
($300,000 + $131,000) x 25% = $107,750 $131,000 - $107,750 = $23,250 Thus, a bonus is received by old partners.
Chapter 12 - Accounting for Partnerships
12-22
Problem 12-5A (75 minutes) Note: All entries in this problem are dated May 31.
Inventory ............................................................. 268,600 Gain on Sale of Inventory ................................. 31,400
(b) Gain on Sale of Inventory ....................................... 31,400 Quick, Capital ($31,400 x 3/6) ........................... 15,700 Drake, Capital ($31,400 x 2/6) ........................... 10,467 Sage, Capital ($31,400 x 1/6) ............................. 5,233
(d) Quick, Capital ($46,500+ $15,700) ............................... 62,200 Drake, Capital ($106,250 + $10,467)............................ 116,717 Sage, Capital ($83,500 + $5,233) ............................. 88,733 Cash* ................................................................... 267,650 *$90,400 + $300,000 - $122,750
2.
(a) Cash .......................................................................... 250,000 Loss on Sale of Inventory ....................................... 18,600 Inventory ............................................................. 268,600
(b) Quick, Capital ($18,600 x 3/6) ................................. 9,300 Drake, Capital ($18,600 x 2/6) ................................. 6,200 Sage, Capital ($18,600 x 1/6) ................................... 3,100 Loss on Sale of Inventory ................................. 18,600
(d) Quick, Capital ($46,500 - $9,300) ............................ 37,200 Drake, Capital ($106,250 - $6,200) .......................... 100,050 Sage, Capital ($83,500 - $3,100) .............................. 80,400 Cash .................................................................... 217,650 *$90,400 + $250,000 - $122,750
Chapter 12 - Accounting for Partnerships
12-23
Problem 12-5A (Concluded) 3.
(a) Cash .......................................................................... 160,000 Loss on Sale of Inventory ....................................... 108,600 Inventory ............................................................. 268,600
(b) Quick, Capital ($108,600 x 3/6) ............................... 54,300 Drake, Capital ($108,600 x 2/6) ............................... 36,200 Sage, Capital ($108,600 x 1/6) ................................. 18,100 Loss on Sale of Inventory ................................. 108,600 Cash .......................................................................... 7,800 Quick, Capital ($46,500 - $54,300) .................... 7,800
(a) Cash .......................................................................... 125,000 Loss on Sale of Inventory ....................................... 143,600 Inventory ............................................................. 268,600
(b) Quick, Capital ($143,600 x 3/6) ............................... 71,800 Drake, Capital ($143,600 x 2/6) ............................... 47,867 Sage, Capital ($143,600 x 1/6) ................................. 23,933 Loss on Sale of Inventory ................................. 143,600 Drake, Capital ($25,300 x 2/3) ................................. 16,867 Sage, Capital ($25,300 x 1/3) ................................... 8,433 Quick, Capital ($46,500-$71,800) .......................... 25,300
PROBLEM SET B Problem 12-1B (50 minutes) 1. Dec. 31 Income Summary ..................................................... 135,000 Matt Albin, Capital ............................................. 45,000 Ryan Peters, Capital .......................................... 45,000 Seth Ramsey, Capital ........................................ 45,000 To close Income Summary.
2. Dec. 31 Income Summary ..................................................... 135,000 Matt Albin, Capital ............................................. 67,500 Ryan Peters, Capital .......................................... 40,500 Seth Ramsey, Capital ........................................ 27,000 To close Income Summary*.
*Supporting computations ($82,000/$164,000) x $135,000 = $67,500 ($49,200/$164,000) x $135,000 = $40,500 ($32,800/$164,000) x $135,000 = $27,000
3. Dec. 31 Income Summary ..................................................... 135,000 Matt Albin, Capital ............................................. 59,400 Ryan Peters, Capital .......................................... 44,120 Seth Ramsey, Capital ........................................ 31,480 To close Income Summary*.
*Supporting calculations Albin Peters Ramsey Total
Net income ................................................ $135,000 Salary allowances Albin ....................................................... $48,000 Peters ..................................................... $36,000 Ramsey .................................................. $25,000 Total salaries ............................................ 109,000 Balance after salary allowances .............. 26,000 Interest allowances Albin (10% on $82,000) .......................... 8,200 Peters (10% on $49,200) ........................ 4,920 Ramsey (10% on $32,800) ..................... 3,280 Total interest ............................................. 16,400 Bal. after interest and salaries ................. 9,600 Balance allocated equally ........................ 3,200 3,200 3,200 Total allocated equally ............................. 9,600 Balance of income .................................... ______ ______ ______ $ 0 Shares of the partners.............................. $59,400 $44,120 $31,480
Chapter 12 - Accounting for Partnerships
12-25
Problem 12-2B (45 minutes)
Preliminary calculations Plan (a) & Plan (c) Percentages based on initial investments Karto = $52,000/$130,000 = 40% Black = $78,000/$130,000 = 60% Plan (b) Percentages based on time Karto = 0.333/1.333 = 25% Black = 1.000/1.333 = 75% Plan (c) & Plan (d) Salary allowance Black = 12 x $2,000 = $24,000 Plan (d) Interest allowances Karto = 10% x $52,000 = $5,200 Black = 10% x $78,000 = $7,800
Income (Loss) Year 1 Sharing Plan Calculations Karto Black
(a) 40% x $18,000 loss ................................................... $ (7,200)
60% x $18,000 loss ................................................... $(10,800)
(b) 25% x $18,000 loss ................................................... $ (4,500) 75% x $18,000 loss ................................................... $(13,500)
(c) Salary allowance ...................................................... $ 24,000 40% x ($18,000 loss + $24,000 salary) .................... $(16,800) 60% x ($18,000 loss + $24,000 salary) .................... _______ (25,200) Totals ......................................................................... $(16,800) $ (1,200)
(d) Salary allowance ...................................................... $ 24,000 Interest allowances .................................................. $ 5,200 7,800 50% x ($18,000 loss + $24,000 salary +
Income (Loss) Year 2 Sharing Plan Calculations Karto Black
(a) 40% x $38,000 income ............................................. $15,200
60% x $38,000 income ............................................. $22,800
(b) 25% x $38,000 income ............................................. $ 9,500 75% x $38,000 income ............................................. $28,500
(c) Salary allowance ...................................................... $24,000 40% x ($38,000 income - $24,000 salary) .............. $ 5,600 60% x ($38,000 income - $24,000 salary) ............... ______ 8,400 Totals ......................................................................... $ 5,600 $32,400
(d) Salary allowance ...................................................... $24,000 Interest allowances .................................................. $ 5,200 7,800 50% x ($38,000 income - $24,000 salary -
Income (Loss) Year 3 Sharing Plan Calculations Karto Black
(a) 40% x $94,000 income ............................................. $37,600
60% x $94,000 income ............................................. $56,400
(b) 25% x $94,000 income ............................................. $23,500 75% x $94,000 income ............................................. $70,500
(c) Salary allowance ...................................................... $24,000 40% x ($94,000 income - $24,000 salary) ............... $28,000 60% x ($94,000 income - $24,000 salary) ............... _______ 42,000 Totals ......................................................................... $28,000 $66,000
(d) Salary allowance ...................................................... $24,000 Interest allowances .................................................. $ 5,200 7,800 50% x ($94,000 income - $24,000 salary -
Part 3 Dec. 31 Income Summary ..................................................... 43,800 Cook, Capital ...................................................... 8,640 Xi, Capital ........................................................... 7,960 Schwartz, Capital ............................................... 27,200 To close Income Summary.
Dec. 31 Cook, Capital ............................................................ 9,000
Xi, Capital ................................................................. 19,000 Schwartz, Capital ..................................................... 12,000 Cook, Withdrawals ............................................ 9,000 Xi, Withdrawals .................................................. 19,000 Schwartz, Withdrawals ...................................... 12,000 To close withdrawals accounts.
Chapter 12 - Accounting for Partnerships
12-29
Problem 12-4B (50 minutes)
Part 1
a) Apr. 30 Gibbs, Capital ........................................................... 303,000 Brady, Capital ..................................................... 303,000 To record admission of Brady.
b) Apr. 30 Gibbs, Capital ........................................................... 303,000 Cannon, Capital................................................... 303,000 To record admission of Cannon.
c) Apr. 30 Gibbs, Capital ........................................................... 303,000 Cash .................................................................... 303,000 To record withdrawal of Gibbs with no bonus.
d) Apr. 30 Gibbs, Capital ........................................................... 303,000 Mier, Capital* ........................................................... 25,600 Hill, Capital**....................................................... 102,400 Cash .................................................................... 175,000 To record Gibbs’s withdrawal and the
bonus to old partners.
* ($303,000 - $175,000) x 1/5 **($303,000- $175,000) x 4/5
e) Apr. 30 Gibbs, Capital ........................................................... 303,000 Accum. Deprec.—Manufacturing Equipment ........ 168,000 Mier, Capital* ...................................................... 20,400 Hill, Capital**....................................................... 81,600 Manufacturing Equipment ................................ 269,000 Cash .................................................................... 100,000 To record withdrawal of Gibbs with
bonus to old partners.
* [$303,000 - ($269,000 - $168,000 + $100,000)] x 1/5 **[$303,000 - ($269,000 - $168,000 + $100,000)] x 4/5
Chapter 12 - Accounting for Partnerships
12-30
Problem 12-4B (Concluded)
Part 2
a)
Apr. 30 Cash .......................................................................... 150,000 Brise, Capital*..................................................... 150,000 To record admission of Brise..
Apr. 30 Cash .......................................................................... 98,000 Gibbs, Capital ($41,600* x 5/10) ................................ 20,800 Mier, Capital ($41,600* x 1/10) ................................... 4,160 Hill, Capital ($41,600* x 4/10) ..................................... 16,640 Brise, Capital ...................................................... 139,600 To record Brise’s admission and bonus.
Apr. 30 Cash .......................................................................... 213,000 Gibbs, Capital ($50,400* x 5/10) ........................... 25,200 Mier, Capital ($50,400* x 1/10) .............................. 5,040 Hill, Capital ($50,400* x 4/10) ................................ 20,160 Brise, Capital ....................................................... 162,600 To record admission of Brise and bonus
Equipment ........................................................... 308,600 Gain on Sale of Equipment ................................ 16,400
(b) Gain on Sale of Equipment ..................................... 16,400 Asure, Capital ($16,400 x 2/5) ............................ 6,560 Ramirez, Capital ($16,400 x 1/5) ........................ 3,280 Soney, Capital ($16,400 x 2/5) ............................ 6,560
(d) Asure, Capital ($150,200 + $6,560) ......................... 156,760 Ramirez, Capital ($97,900 + $3,280) ....................... 101,180 Soney, Capital ($63,500 + $6,560)........................... 70,060 Cash* .................................................................... 328,000 *$174,300 + $325,000 - $171,300
2.
(a) Cash .......................................................................... 265,000 Loss on Sale of Equipment ..................................... 43,600 Equipment ........................................................... 308,600
(b) Asure, Capital ($43,600 x 2/5) ................................. 17,440 Ramirez, Capital ($43,600 x 1/5) ............................. 8,720 Soney, Capital ($43,600 x 2/5) ................................. 17,440 Loss on Sale of Equipment ................................ 43,600
Loss on Sale of Equipment ..................................... 208,600 Equipment .......................................................... 308,600
(b) Asure, Capital ($208,600 x 2/5) ............................... 83,440 Ramirez, Capital ($208,600 x 1/5) ........................... 41,720 Soney, Capital ($208,600 x 2/5) ............................... 83,440 Loss on Sale of Equipment ............................... 208,600 Cash .......................................................................... 19,940 Soney, Capital ($63,500 - $83,440) ................... 19,940
(a) Cash .......................................................................... 75,000 Loss on Sale of Equipment ..................................... 233,600 Equipment .......................................................... 308,600
(b) Asure, Capital ($233,600 x 2/5) ............................... 93,440 Ramirez, Capital ($233,600 x 1/5) ........................... 46,720 Soney, Capital ($233,600 x 2/5) ............................... 93,440 Loss on Sale of Equipment ............................... 233,600 Asure, Capital ($29,940 x 2/3) ................................. 19,960 Ramirez, Capital ($29,940 x 1/3) ............................. 9,980 Soney, Capital ($63,500 - $93,440) ................... 29,940
a. If Business Solutions continues to earn profits, at a 1:1 ownership, she will have to share profits equally with her new partner. On the other hand, at a 4:1 ownership, she will only have to share one-fifth of the profits with her partner. However, if the business experiences losses, Santana will be better off if the partner is admitted at the 1:1 level – as Santana would absorb less of the loss.
b. At the 1:1 ownership, her partner will have more of a say in how the business is run, whereas at the 4:1 level, the partner will have less of a voice in the business.
c. If the partner invests in the business equal to their partnership interest, there will be more total equity in the business if the partner invests at the 1:1 level.
d. It would likely be easier to attract a partner if there is a lower amount of investment required by the new partner at the 4:1 level. On the other hand, a partner may wish to be more of an equal partner and might wish to invest at the 1:1 level.
2a. Jan. 1 Cash .......................................................................... 80,360 New Partner, Capital ........................................... 80,360
To admit a new partner at a 1:1 ownership interest
2b. Jan. 1 Cash .......................................................................... 20,090 New Partner, Capital ........................................... 20,090
To admit a new partner at a 4:1 ownership interest ($80,360 x 1/4 = $20,090).
3. Jan. 1 Cash .......................................................................... 20,090 New Partner, Capital ........................................... 20,090
To admit a new partner at a 4:1 ownership interest.
4. Total capital before admission of partner ......................... $ 80,360 Partner investment .............................................................. 20,090 Total capital after admission of partner ............................ $100,450 New partner’s equity percentage ($20,090 / $100,450) ..... 20%
Chapter 12 - Accounting for Partnerships
12-34
Reporting in Action — BTN 12-1 1. The history states that Mike Lazaridis and Douglas Fregin (friends since
grade school) founded Research In Motion (while both were college
students) in 1984. RIM was originally set up as an electronics
consulting business.
2. At least two differences would be immediately apparent between
Research In Motion’s corporate income statement and a partnership
income statement. First, in a general partnership, income flows
through to the partners to be reported on their individual tax returns.
Therefore, the income statement for a partnership would not show a
line item for income taxes as Research In Motion’s does in Appendix A.
Second, a corporate income statement shows earnings per share
figures, whereas a partnership income statement would not report
earnings per share given that no stock is outstanding in a partnership.
Other, less obvious, differences also exist.
3. Specifically, the balance sheet for a partnership would not have the
following accounts as reported in the Research In Motion’s balance
sheet reproduced in Appendix A:
Income taxes payable
Deferred income tax asset & Deferred income tax liability
Capital stock—preferred shares and common shares
Treasury stock
Retained earnings
Additional paid-in capital We would also expect a separate Capital account to be reported for
each partner in the equity section of the balance sheet.
Chapter 12 - Accounting for Partnerships
12-35
Comparative Analysis — BTN 12-2
1. Apple was incorporated on January 3, 1977, and Research In Motion
was founded in 1984.
2. Apple achieved about $1,000,000,000 in sales in 1984. Research In
Motion achieved $1,000,000,000 in sales in 2005.
3. Research In Motion was initially publicly traded on the Toronto Stock
Exchange on October 28, 1987, and on the NASDAQ on February 4,
1999. Apple’s initial public offering occurred on December 12, 1980.
Chapter 12 - Accounting for Partnerships
12-36
Ethics Challenge — BTN 12-3 1. Income allocation per original agreement
*(.10 x 41,000) **(.30 x 41,000) ***(.60 x 41,000)
2. Income allocation per Clark’s proposal
Maben Orlando Clark Total
Per patient charges ......... $ 5,000
(.10 x 50,000)
$15,000
(.30 x 50,000)
$30,000
(.60 x 50,000)
$50,000
3. The ethical concern here is that Clark has proposed a change to the
partnership agreement that appears to be only self-serving. It is true that Clark is the group’s largest producer and, therefore, is entitled to the largest income. However, Clark’s proposal does not recognize that a good portion of Clark’s income is due to the patient referrals by the other partners. If patients are not referred for surgery, then Clark’s income will assuredly decline. The original agreement gives some credit through the salary allowance to Maben and Orlando for the referrals.
A potentially fair compromise would be to study the referral patterns of
Maben and Orlando. Through analysis, a dollar value can be assigned to the average amount of production generated monthly for Clark through the referrals from the other partners. Note that this controversy is not likely to subside until facts are gathered to support the fairest allocation of the partnership income.
Chapter 12 - Accounting for Partnerships
12-37
Communicating in Practice — BTN 12-4
--- STUDY NOTES --- ORGANIZATIONS WITH PARTNERSHIP CHARACTERISTICS
I. Limited Partnerships II. Limited Liability Partnerships III. S Corporations IV. Limited Liability Companies I. Limited Partnerships
These organizations are identified in its name with the words "Limited Partnership," or "Ltd.," or "L.P."
A limited partnership has two classes of partners, general and limited. At least one partner must be a general partner who assumes management duties and unlimited liability for the debts of the partnership. The limited partners have no personal liability beyond the amounts they invest in the partnership.
A limited partnership is managed by the general partner(s). Limited partners have no active role except as specified in the partnership agreement.
A limited partnership agreement often specifies unique procedures for allocating incomes and losses between general and limited partners.
The same basic accounting procedures are used for both limited and general partnerships.
II. Limited Liability Partnerships
This is identified in its name with the words "Limited Liability Partnership" or by "LLP."
This type of partnership is designed to protect innocent partners from malpractice or negligence claims resulting from the acts of another partner. When a partner provides service resulting in a malpractice claim, that partner has personal liability for the claim. The remaining partners who were not responsible for the actions resulting in the claim are not personally liable for it.
Most states hold all partners personally liable for other partnership debts.
Accounting for a limited liability partnership is the same as for a general partnership.
Chapter 12 - Accounting for Partnerships
12-38
Communicating in Practice (Concluded)
Continued
III. S Corporations
Certain corporations with 100 or fewer stockholders can elect to be treated like a partnership for income tax purposes. These corporations are called Sub-Chapter S or simply "S" corporations. This distinguishes them from other corporations, called Sub-Chapter C or simply "C" corporations.
"S" corporations provide stockholders with the same limited liability feature as "C" corporations. The advantage to an "S" corporation is it doesn't pay income taxes. If stockholders work for an "S" corporation, their salaries are treated as expenses of the corporation.
The remaining income or loss of the corporation is allocated to stockholders for inclusion on their personal tax returns. Except for "C" corporations having to account for income tax expenses and liabilities, the accounting procedures are the same for both "S" and "C" corporations.
IV. Limited Liability Companies
A new form of business organization is the limited liability company. The names of these businesses usually include the words "Limited Liability Company" or an abbreviation such as "LLC" or "LC."
This form of business has certain features like a corporation and others like a limited partnership. The owners, who are called members, are protected with the same limited liability feature in corporations. While limited partners cannot actively participate in the management of a limited partnership, the members of a limited liability company can assume an active management role.
A limited liability company usually has a limited life.
For income tax purposes, the IRS usually classifies a limited liability company as a partnership.
Chapter 12 - Accounting for Partnerships
12-39
Taking It to the Net — BTN 12-5 1. The account titles given in the equity section of America First Tax
Exempt Investors, L.P are:
General Partner
Beneficial Unit Certificate Holders
Unallocated deficit of variable interest entities
2. There are 21,842,928 units with a value of $130,482,881 at December 31,
2009.
3. The largest asset held by America First is Buildings and Improvements
with a gross value (before accumulated depreciation) of $100,255,779.
Instructor note: Because of accumulated depreciation, some might answer Net
Real Estate Assets (including Land) of $91,790,893, which would be fine.
