Partnerships
Chapter 12
Copyright © 2007 Prentice-Hall. All rights reserved
1
Objective 1
Identify the characteristics
of a partnership
Copyright © 2007 Prentice-Hall. All rights reserved
2
Partnership
• Association of two or more persons who
co-own a business for a profit
• Combines
– Capital
– Talent
– Experience
Copyright © 2007 Prentice-Hall. All rights reserved
3
Partnership Agreement
•
Contract between partners should specify
1.
2.
3.
4.
5.
6.
7.
Name, location, and nature of business
Name, investment, and duties of each partner
How new partners are admitted
How profits and losses are divided up
Withdrawals of assets by the partners
How to settle up with a withdrawing partner
How to liquidate the partnership
Copyright © 2007 Prentice-Hall. All rights reserved
4
Characteristics of a Partnership
•
•
•
•
•
•
Limited life
Mutual agency
Unlimited liability
Co-ownership of property
No partnership income taxes
Partners’ capital accounts
Copyright © 2007 Prentice-Hall. All rights reserved
5
Types of Partnerships
• General partnership – basic form
• Limited partnership – two classes of
partners
Copyright © 2007 Prentice-Hall. All rights reserved
6
Limited Liability Company (LLC)
• Its own form of business organization
– Owners are called members
– Limited liability
– Members can participate in management
– Can elect not to pay business income tax
Copyright © 2007 Prentice-Hall. All rights reserved
7
S Corporations
• Corporation taxed as a partnership
– Limited liability of owners
– No corporate income tax
– Stockholders pay personal income tax on
their share of income
Copyright © 2007 Prentice-Hall. All rights reserved
8
Objective 2
Account for partner investments
Copyright © 2007 Prentice-Hall. All rights reserved
9
The Partnership Start-Up
• Record assets invested by partners at fair
market values
• Record liabilities assumed at fair market
values
• Each partner has his/her own capital and
withdrawals account
Copyright © 2007 Prentice-Hall. All rights reserved
10
Example
GENERAL JOURNAL
DATE
DESCRIPTION
REF
Jun 1 Cash
Inventory
Computer Equipment
Accounts Payable
Lane, Capital
DEBIT
CREDIT
10,000
40,000
450,000
80,000
420,000
To record Lane’s Investment
Jun 1 Cash
Computer Software
Reed, Capital
5,000
100,000
105,000
To record Reed’s Investment
Copyright © 2007 Prentice-Hall. All rights reserved
11
Objective 3
Allocate profits and losses
to the partners
Copyright © 2007 Prentice-Hall. All rights reserved
12
Sharing Profits and Losses
• Stated fraction for each partner
• Based on percent of capital balances of
the partners
• Based on each partner’s service
• Combination
Copyright © 2007 Prentice-Hall. All rights reserved
13
Sharing Profits and Losses
• If no partnership agreement, the law states
earnings will be divided equally
• If agreement specifies how to share
profits, but not losses – losses are shared
the same way as profits
Copyright © 2007 Prentice-Hall. All rights reserved
14
E12-16 b
Net income
Cruz (2/3) x 60,000
Moore (1/3) x 60,000
$60,000
40,000
20,000
GENERAL JOURNAL
DATE
DESCRIPTION
REF
Income Summary
Cruz, Capital
Moore, Capital
Copyright © 2007 Prentice-Hall. All rights reserved
DEBIT
CREDIT
60,000
40,000
20,000
15
When there is no
written agreement,
partners share profits
losses equally.
Netand
loss
Remember, a debit to
Capital decreases it
Cruz
E12-16 a
($15,000)
10,000
5,000
Moore
GENERAL JOURNAL
DATE
DESCRIPTION
REF
Cruz, Capital
Moore, Capital
Income Summary
Copyright © 2007 Prentice-Hall. All rights reserved
DEBIT
CREDIT
10,000
5,000
15,000
16
E12-16 c
Capital Bal.
Service
Remainder
Total
Hilton
Lee
$30,000
24,000
7,500
$61,500
$20,000
36,000
7,500
$63,500
Copyright © 2007 Prentice-Hall. All rights reserved
Net income to
be distributed
$125,000
50,000
60,000
0
17
E12-16 c
GENERAL JOURNAL
DATE
DESCRIPTION
REF
Dec 31 Income Summary
Hilton, Capital
Lee, Capital
Copyright © 2007 Prentice-Hall. All rights reserved
DEBIT
CREDIT
125,000
61,500
63,500
18
Partner Drawings
• Reduces capital
• Debit Drawing and credit Cash
• At period end, close drawing to capital
Copyright © 2007 Prentice-Hall. All rights reserved
19
Objective 4
Account for the admission of a
new partner
Copyright © 2007 Prentice-Hall. All rights reserved
20
Purchasing a Partner’s Interest
• Equity is transferred from retiring partner
to new partner
– Debit retiring partner’s capital
– Credit new partner’s capital
• Partnership assets are not affected
Copyright © 2007 Prentice-Hall. All rights reserved
21
Purchasing A Partner’s Interest
Fisher, Capital
Garcia, Capital
Total
$170,000
110,000
$280,000
GENERAL JOURNAL
DATE
DESCRIPTION
REF
Fisher, Capital
Holt, Capital
DEBIT
CREDIT
170,000
170,000
Notice, this is an agreement between
two individuals. No new assets are
acquired by the partnership
Copyright © 2007 Prentice-Hall. All rights reserved
22
Purchasing A Partner’s Interest
Balances:
Holt, Capital
Garcia, Capital
Total
Copyright © 2007 Prentice-Hall. All rights reserved
$170,000
110,000
$280,000
23
Investing in the Partnership
• New partner contributes assets to the
partnership in exchange for a share of the
business
Copyright © 2007 Prentice-Hall. All rights reserved
24
Investing in the Partnership
at Book Value
• New partner invests assets equal to
his/her interest in the new partnership
– Debit assets
– Credit new partner’s capital
Copyright © 2007 Prentice-Hall. All rights reserved
25
Investing in Partnership at Book Value
Ingel, Capital
Jay, Capital
Total before admitting
Kaska investment
Total after admitting
$70,000
90,000
$160,000
80,000
$240,000
1/3 interest = $80,000
Copyright © 2007 Prentice-Hall. All rights reserved
26
Investing in Partnership at Book Value
GENERAL JOURNAL
DATE
DESCRIPTION
REF
Other Assets
Kaska, Capital
Copyright © 2007 Prentice-Hall. All rights reserved
DEBIT
CREDIT
80,000
80,000
27
Investing in Partnership at Book Value
Balances
Ingel, Capital
Jay, Capital
Kaska, Capital
Copyright © 2007 Prentice-Hall. All rights reserved
$70,000
90,000
80,000
$240,000
28
Investing in the Partnership Bonus to the Old Partners
• New partner invests assets greater than
his/her equity in the new partnership
• Bonus increases old partner’s capital in
profit-and-loss sharing ratio
– Debit assets
– Credit new partner’s capital for his/her share
– Credit each old partners’ capital for his/her
share of the bonus
Copyright © 2007 Prentice-Hall. All rights reserved
29
Investing in Partnership Bonus to Existing
Fry contributed $90,000. The credit to her
Partners
capital account is $60,000. The extra
$30,000 is considered a bonus to the existing
Capital
$70,000
partners
Kaga,
Opper, Capital
Total before admitting
Fry investment
Total after admitting
80,000
$150,000
90,000
$240,000
¼ interest = $60,000
Bonus of $30,000 paid to existing partners
Copyright © 2007 Prentice-Hall. All rights reserved
30
Investing in Partnership Bonus to Existing
Partners
Distribution of bonus:
Kaga, Capital (30,000 x 1/2)
Opper, Capital (30,000 x 1/2)
Copyright © 2007 Prentice-Hall. All rights reserved
$15,000
15,000
31
Investing in Partnership Bonus to Existing
Partners
GENERAL JOURNAL
DATE
DESCRIPTION
REF
Cash
Fry, Capital
Kaga, Capital
Opper, Capital
Copyright © 2007 Prentice-Hall. All rights reserved
DEBIT
CREDIT
90,000
60,000
15,000
15,000
32
Investing in Partnership Bonus to Existing
Partners
Balances:
Kaga, Capital
Opper, Capital
Fry, Capital
Copyright © 2007 Prentice-Hall. All rights reserved
$85,000
95,000
60,000
$240,000
33
Investing in the Partnership Bonus to New Partners
• New partner invests assets less than
his/her equity in the new partnership
• Bonus decreases old partner’s capital in
profit-and-loss sharing ratio
– Debit assets
– Debit each old partners’ capital for his/her
share of the bonus to the new partner
– Credit new partner’s capital for his/her share
Copyright © 2007 Prentice-Hall. All rights reserved
34
Investing in the Partnership Jones contributed $100,000. The credit to
Bonus
to New
Partners
his
capital account
is $160,000.
The extra
$60,000 is considered a bonus to the new
Page, Capital
partners and will be donated by the$230,000
other
Franco,partners
Capital
150,000
Total before admitting
Jones investment
Total after admitting
$380,000
100,000
$480,000
1/3 interest = $160,000
Bonus of $60,000 paid to new partner
Copyright © 2007 Prentice-Hall. All rights reserved
35
Investing in the Partnership Bonus to New Partners
Distribution of bonus:
Page, Capital (60,000 x 2/3)
Franco, Capital (60,000 x 1/2)
Copyright © 2007 Prentice-Hall. All rights reserved
$40,000
20,000
36
Investing in the Partnership Bonus to New Partners
GENERAL JOURNAL
DATE
DESCRIPTION
REF
Cash
Page, Capital
Franco, Capital
Jones, Capital
Copyright © 2007 Prentice-Hall. All rights reserved
DEBIT
CREDIT
100,000
40,000
20,000
160,000
37
Investing in the Partnership Bonus to New Partners
Balances:
Page, Capital
Franco, Capital
Jones, Capital
Copyright © 2007 Prentice-Hall. All rights reserved
$190,000
130,000
160,000
$480,000
38
Objective 5
Account for a partner’s withdrawal
from the firm
Copyright © 2007 Prentice-Hall. All rights reserved
39
Withdrawal of a Partner
• Assets may be revalued
• Any gain or loss is allocated among the
partners based on their profit- and-loss
ratios
Copyright © 2007 Prentice-Hall. All rights reserved
40
Partner Sells Interest to Existing
Partner
• Transfer equity from the withdrawing
partner to the purchaser
• No assets flows through the partnership
• Debit withdrawing partner’s capital
• Credit purchaser’s capital
Copyright © 2007 Prentice-Hall. All rights reserved
41
Withdrawal at Book Value
• Partner takes assets with value equal to
his capital account (equal to book value)
• Debit withdrawing partner’s capital
• Credit assets taken
Copyright © 2007 Prentice-Hall. All rights reserved
42
Withdrawal at
Less Than Book Value
• Remaining partners share the difference
(bonus) based on their profit-and losssharing ratio.
• Debit withdrawing partner’s capital
• Credit assets and remaining partners’
capital based on agreed upon ratios
Copyright © 2007 Prentice-Hall. All rights reserved
43
Withdrawal at
More Than Book Value
• Bonus to the withdrawing partner reduces
the remaining partners’ capital balances
based on their profit-and-loss ratio
• Debit withdrawing partner’s capital
• Debit remaining partners’ capital
• Credit assets
Copyright © 2007 Prentice-Hall. All rights reserved
44
Example
Distribute gain on land to partners based on
profit-loss ratio
Green (50,000 x 1/4)
$12,500
Henry (50,000 x 1/2)
25,000
Jackson (50,000 x 1/4)
12,500
Copyright © 2007 Prentice-Hall. All rights reserved
45
Example
GENERAL JOURNAL
DATE
DESCRIPTION
REF
Jul 31 Land
Green, Capital
Henry, Capital
Jackson, Capital
Copyright © 2007 Prentice-Hall. All rights reserved
DEBIT
CREDIT
50,000
12,500
25,000
12,500
46
Example
Distribute loss on inventory to partners
based on profit-loss ratio
Green (6,000 x 1/4)
$1,500
Henry (6,000 x 1/2)
3,000
Jackson (6,000 x 1/4)
1,500
Copyright © 2007 Prentice-Hall. All rights reserved
47
Example
GENERAL JOURNAL
DATE
DESCRIPTION
REF
Jul 31 Green, Capital
Henry, Capital
Jackson, Capital
Inventory
Copyright © 2007 Prentice-Hall. All rights reserved
DEBIT
CREDIT
1,500
3,000
1,500
6,000
48
Example
Green, Capital
50,000
12,500
1,500
61,000
Henry, Capital Jackson, Capital
40,000
20,000
25,000
12,500
3,000
1,500
62,000
31,000
Jackson is getting $40,000 cash so he
receives a bonus of $9,000 ($40,000 - $31,000)
Copyright © 2007 Prentice-Hall. All rights reserved
49
Example
Distribute bonus to withdrawing partner
based on profit-loss ratio
Green (9,000 x 1/2)
$4,500
Henry (9,000 x 1/2)
4,500
Copyright © 2007 Prentice-Hall. All rights reserved
50
Example
GENERAL JOURNAL
DATE
DESCRIPTION
REF
Jul 31 Green, Capital
Henry, Capital
Jackson, Capital
Cash
Copyright © 2007 Prentice-Hall. All rights reserved
DEBIT
CREDIT
4,500
4,500
31,000
40,000
51
Objective 6
Account for the liquidation of a
partnership
Copyright © 2007 Prentice-Hall. All rights reserved
52
Death of a Partner
• Dissolves partnership
• Settlement with the deceased partner’s
estate - based on partnership agreement
• Or, a remaining partner may buy the
deceased partner’s equity
Copyright © 2007 Prentice-Hall. All rights reserved
53
Liquidation of a Partnership
• Adjust and close books
• Sell the noncash assets, allocate gains
and losses to the partners based on their
profit-and-loss-sharing ratio
• Pay all the liabilities
• Distribute the remaining cash based on
the partners’ capital balances
Copyright © 2007 Prentice-Hall. All rights reserved
54
E12-24
Sell off the noncash assets
Noncash
Dodd, Gage, Hamm,
Assets Liabilitie Capital Capital Capital
Cash
s
$6,000 $126,000
$77,000 $12,000 $37,000 $6,000
140,000 (126,000)
GENERAL JOURNAL
DATE
DESCRIPTION
REF
Cash
Noncash Assets
Gain on Sale of Assets
Copyright © 2007 Prentice-Hall. All rights reserved
DEBIT
CREDIT
140,000
126,000
14,000
55
Distribute gain based on profit and loss ratio
E12-24
Distribute Gain on Sale of Assets:
Dodd ($14,000 x 20%)
Gage ($14,000 x 30%)
Hamm ($14,000 x 50%)
$2,800
4,200
7,000
GENERAL JOURNAL
DATE
DESCRIPTION
REF
Gain on Sale of Assets
Dodd, Capital
Gage, Capital
Hamm, Capital
Copyright © 2007 Prentice-Hall. All rights reserved
DEBIT
CREDIT
14,000
2,800
4,200
7,000
56
Pay off the liabilities
E12-24
Noncash
Dodd, Gage, Hamm,
Assets Liabilitie Capital Capital Capital
Cash
s
$6,000 $126,000
$77,000 $12,000 $37,000 $6,000
140,000 (126,000)
2,800
4,200
7,000
$146,000
0
$77,000 $14,800 $41,200 $13,000
GENERAL JOURNAL
DATE
DESCRIPTION
REF
Liabilities
Cash
DEBIT
CREDIT
77,000
77,000
Copyright © 2007 Prentice-Hall. All rights reserved
57
Distribute the cash to the partners and close out
their accounts as well
E12-24
Noncash
Dodd, Gage, Hamm,
Assets Liabilitie Capital Capital Capital
Cash
s
$6,000 $126,000
$77,000 $12,000 $37,000 $6,000
140,000 (126,000)
2,800
4,200
7,000
$146,000
0
(77,000)
$69,000
$77,000 $14,800 $41,200 $13,000
(77,000)
0
0 $14,800 $41,200 $13,000
$69,000
Copyright © 2007 Prentice-Hall. All rights reserved
58
E12-24
GENERAL JOURNAL
DATE
DESCRIPTION
REF
Dodd, Capital
Gage, Capital
Hamm, Capital
Cash
Copyright © 2007 Prentice-Hall. All rights reserved
DEBIT
CREDIT
14,800
41,200
13,000
69,000
59
E12-24
Noncash
Dodd, Gage, Hamm,
Assets Liabilitie Capital Capital Capital
Cash
s
$6,000 $126,000
$77,000 $12,000 $37,000 $6,000
140,000 (126,000)
2,800
4,200
7,000
$146,000
0
(77,000)
$69,000
$77,000 $14,800 $41,200 $13,000
(77,000)
0
0 $14,800 $41,200 $13,000
(69,000)
0
(14,800) (41,200) (13,000)
0
0
0
Copyright © 2007 Prentice-Hall. All rights reserved
0
0
60
E12-22
1. Cash
Ray, capital
Scott, capital
Van, capital
$80,000
$33,000
28,000
19,000
80,000
Each partner receives cash equal to his capital
balance because cash equals total partnership
capital
Copyright © 2007 Prentice-Hall. All rights reserved
61
E12-22
2. Cash
Ray, capital
Scott, capital
Van, capital
Loss
$50,000
$33,000
28,000
19,000
80,000
$30,000
Each partner gets $10,000 ($30,000 / 3)
less than his capital balance
Copyright © 2007 Prentice-Hall. All rights reserved
62
E12-22
2. Ray
Scott
Van
$23,000
18,000
9,000
$50,000
Copyright © 2007 Prentice-Hall. All rights reserved
63
Objective 7
Prepare partnership financial
statements
Copyright © 2007 Prentice-Hall. All rights reserved
64
Financial Statements
• Much like those of a proprietorship
• Income statement - section showing
division of net income to the partners
• Balance sheet - capital of each partner in
owners’ equity section
• Statement of Owners’ Equity shows
changes to each partner’s capital account
Copyright © 2007 Prentice-Hall. All rights reserved
65
S12-13
Bush and Carter
Income Statement
Year Ended September 30, 2007
Service revenue
Total expenses
Net income
Allocation of net income:
To Bush ($60,000  .60)
To Carter ($60,000  .40)
$145,000
85,000
$60,000
$36,000
24,000
Copyright © 2007 Prentice-Hall. All rights reserved
$60,000
66
End of Chapter 12
Copyright © 2007 Prentice-Hall. All rights reserved
67