Partnerships – Formation,
and Operations
Chapter 15
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
15 - 1
Initial Investment in a Partnership
Ashley and Becker each invest $20,000
cash in a new partnership.
Cash
20,000
Ashley, Capital
20,000
To record Ashley’s original investment of cash
Cash
20,000
Becker, Capital
20,000
To record Becker’s original investment of cash
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15 - 2
Noncash Investments
C. Cola and R. Crown enter into a partnership.
C. Cola R. Crown
Fair Value Fair Value
Cash
$
—
Land (cost to C. Cola, $5,000)
10,000
Building (cost to C. Cola, $30,000)
40,000
Inventory (cost to R. Crown, $28,000)
—
Total
$50,000
$ 7,000
—
—
35,000
$42,000
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15 - 3
Noncash Investments
Land
10,000
Building
40,000
C. Cola, Capital
50,000
To record C. Cola’s original investment
of land and building at fair value
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15 - 4
Noncash Investments
Cash
7,000
Inventory
35,000
R. Crown, Capital
42,000
To record R. Crown’s original investment
of cash and inventory items at fair value
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15 - 5
Bonus or Goodwill
on Initial Investment
The partnership agreement specifies
equal capital interests.
C. Cola, Capital
4,000
R. Crown, Capital
4,000
To establish equal capital interests of $46,000 by
recording a $4,000 bonus from C. Cola to R. Crown
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15 - 6
Bonus or Goodwill
on Initial Investment
Goodwill
8,000
R. Crown, Capital
8,000
To establish equal capital interests of $50,000
by recognizing R. Crown’s investment
of an $8,000 unidentifiable asset
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15 - 7
Drawings
Regular withdrawals are called
drawings, drawing allowances,
or sometimes salary allowances.
Debit Drawing and credit Cash.
At period end, credit Drawing
and debit each partner’s Capital.
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15 - 8
Loans and Advances
Loans and advances to the partnership
and accrued interest are regarded as
liabilities of the partnership.
Loans and advances to partners are
regarded as assets of the partnership.
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15 - 9
Partnership Operations
Ratcliffe and Yancey are partners sharing
profits in a 60:40 ratio, respectively.
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Partnership Operations
Equity Accounts, 2003
Partnership net income 2003
Ratcliffe capital January 1, 2003
Ratcliffe additional investment 2003
Ratcliffe drawing 2003
Yancey capital January 1, 2003
Yancey drawing 2003
Yancey withdrawal 2003
$34,500
40,000
5,000
6,000
35,000
9,000
3,000
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Format for a Statement
of Partners’ Capital
Ratcliffe and Yancey Statement of Partners’ Capital
For the Year Ended 12/31/2003
60%
40%
Ratcliffe Yancey Total
Capital balances 1/1/03
$40,000 $35,000 $75,000
Add: Additional investments 5,000
—
5,000
Deduct: Withdrawals
— – 3,000 – 3,000
Deduct: Drawings
– 6,000 – 9,000 –15,000
Net contributed capital
39,000 23,000 62,000
Add: Net income for 2003
20,700 13,800 34,500
Capital balances 12/31/03
$59,700 $36,800 $96,500
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Closing Entries
December 31, 2003
Revenue and Expense Summary 34,500
Ratcliffe, Capital
20,700
Yancey, Capital
13,800
To divide net income for the year 60% to Ratcliffe
and 40% to Yancey
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Closing Entries
December 31, 2003
Ratcliffe, Capital
6,000
Yancey, Capital
9,000
Ratcliffe, Drawing
6,000
Yancey, Drawing
9,000
To close partner drawing accounts to capital accounts
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Learning Objective 3
Grasp the diverse nature of profit
and loss sharing agreements
and their computation.
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Profit and Loss Sharing
Agreements
Equal division of partnership income is required in
the absence of a profit and loss sharing agreement.
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Service Considerations in
Profit and Loss Sharing Agreements
A partner who devotes time to the partnership
business while other partners work elsewhere
may receive a salary allowance.
Salary allowances are also used to
compensate for differences in the fair
value of the talents of partners.
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Salary Allowance in Profit
Sharing Agreements
Bob, Gary, and Pete are partners.
The partnership agreement provides that
Bob and Gary receive salary allowances
of $12,000 each, with the remaining
income allocated equally.
Partnership net income is $60,000 for 2003
and $12,000 for 2004.
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Income Allocation Schedule: 2003
Bob
Net income
$60,000
Salary allowances
to Bob and Gary (24,000) $12,000
Remainder to divide 36,000
Divided equally
(36,000) 12,000
Remainder to divide
0
Net income allocation
$24,000
Gary
Pete
$12,000
12,000
$12,000
$24,000
$12,000
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Income Allocation Schedule: 2004
Bob
Gary
Net income
$12,000
Salary allowances
to Bob and Gary (24,000) $12,000 $12,000
Remainder to divide (12,000)
Divided equally
12,000
(4,000) (4,000)
Remainder to divide
0
Net income allocation
$ 8,000 $ 8,000
Pete
$(4,000)
$(4,000)
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Journal Entries
December 31, 2003
Revenue and Expense Summary 60,000
Bob, Capital
Gary, Capital
Pete, Capital
Partnership income allocation for 2003
24,000
24,000
12,000
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Journal Entries
December 31, 2004
Revenue and Expense Summary 12,000
Pete, Capital
4,000
Bob, Capital
Gary, Capital
Partnership income allocation for 2004
8,000
8,000
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Bonus and Salary Allowances
The partnership agreement provides that Bob
receive a bonus of 10% of partnership net income.
Bob and Gary receive salary allowances
of $10,000 and $8,000, respectively, and
the remaining income is allocated equally.
Partnership net income is $60,000
for 2003 and $12,000 for 2004.
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Income Allocation Schedule: 2003
Bob
Net income
$60,000
Bonus to Bob
(6,000) $ 6,000
Remainder to divide 54,000
Salary allowances
to Bob and Gary (18,000) 10,000
Remainder to divide 36,000
Divided equally
(36,000) 12,000
Remainder to divide
0
Net income allocation
$28,000
Gary
Pete
$ 8,000
12,000
$12,000
$20,000
$12,000
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Income Allocation Schedule: 2004
Bob
Gary
Net income
$12,000
Bonus to Bob
(1,200) $ 1,200
Remainder to divide 10,800
Salary allowances
to Bob and Gary (18,000) 10,000 $8,000
Remainder to divide (7,200)
Divided equally
7,200
(2,400) (2,400)
Remainder to divide
0
Net income allocation
$ 8,800 $5,600
Pete
$(2,400)
$(2,400)
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Income Allocated in Relation
to Partnership Capital
Ace
Capital balances 1/1/2003
Investment April 1
Withdrawal July 1
Investment September 1
Withdrawal October 1
Investment December 28
Capital balances 12/31/2003
$20,000
2,000
—
3,000
—
—
$25,000
Butch
$20,000
—
(5,000)
—
(4,000)
8,000
$19,000
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Comparison of Capital Bases
Ace
Butch
Total
Beginning
Capital
Investment
$20,000
20,000
$40,000
Ending
Capital
Investment
$25,000
19,000
$44,000
Weighted
Average
Capital
Investment
$22,500
16,500
$39,000
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Alternatives
Net income of $100,000 is divided
on the basis of capital balances.
Beginning Capital Balances
Ace ($100,000 × 20/40)
$ 50,000
Butch ($100,000 × 20/40)
50,000
Total income
$100,000
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Alternatives
Ending Capital Balances
Ace ($100,000 × 25/44)
$ 56,818.18
Butch ($100,000 × 19/44)
43,181.82
Total income
$100,000.00
Average Capital Balances
Ace ($100,000 × 22.5/39)
$ 57,692.31
Butch ($100,000 × 16.5/39)
42,307.69
Total income
$100,000.00
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Interest Allowances
on Partnership Capital
An agreement may provide for interest
allowances on partnership capital in
order to encourage capital investments,
as well as salary allowances.
Remaining profits are then divided
equally or in any other ratio specified
in the profit sharing agreement.
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