CHAPTER 12
ACCOUNTING FOR PARTNERSHIPS AND
LIMITED LIABILITY COMPANIES
EYE OPENERS
1. Proprietorship: Ease of formation and
nontaxable entity.
Partnership: Expanded owner expertise and
capital, nontaxable entity, and ease of
formation.
Limited liability company: Limited liability to
owners, expanded access to capital,
nontaxable entity, and ease of formation.
2. The disadvantages of a partnership are that
its life is limited, each partner has unlimited
liability, one partner can bind the partnership
to contracts, and raising large amounts of
capital is more difficult for a partnership than
a
limited
liability company.
3. Yes. A partnership may incur losses in
excess of the total investment of all partners.
The
division of losses among the partners would
be made according to their agreement. In
addition, because of the unlimited liability of
each partner for partnership debts, a
particular partner may actually lose a greater
amount than his or her capital balance.
4. The partnership agreement (partnership) or
operating agreement (LLC) establishes the
income-sharing ratio among the partners
(members), amounts to be invested, and
buy-sell agreements between the partners
(members). In addition, for an LLC the
operating agreement specifies if the LLC is
owner-managed or manager-managed.
5. Equally.
6. No. Maholic would have to bear his share of
losses. In the absence of any agreement as
to division of net income or net loss, his
share would be one-third. In addition,
because of the unlimited liability of each
partner, Maholic may lose more than onethird of the losses if one partner is unable to
absorb his share of the losses.
7. The delivery equipment should be recorded
at $10,000, the valuation agreed upon by the
partners.
8. The accounts receivable should be recorded
by a debit of $150,000 to Accounts
Receivable and a credit of $15,000 to
145
Allowance
for
Doubtful Accounts.
9. Yes. Partnership net income is divided
according to the income-sharing ratio,
regardless of the amount of the withdrawals
by the partners. Therefore, it is very likely
that the partners’ monthly withdrawals from a
partnership will not exactly equal their shares
of net income.
10. a. Debit the partner’s drawing account and
credit Cash.
b. No. Payments to partners and the
division of net income are separate. The
amount of one does not affect the
amount of the other.
c. Debit the income summary account for
the amount of the net income and credit
the partners’ capital accounts for their
respective shares of the net income.
11. a. By purchase of an interest, the capital
interest of the new partner is obtained
from the old partner, and neither the total
assets nor the total equity of the
partnership is affected.
b. By investment, both the total assets and
the total equity of the partnership are
increased.
12. 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 partner in gains or losses attributable to
the period prior to admission to the
partnership. To illustrate, assume that A and
B share net income and net loss equally and
operate a partnership that owns land
recorded at and costing $20,000. C is
admitted to the partnership, and the three
partners share in income equally. The day
after C is admitted to the partnership, the
land is sold for $35,000 and, since the land
was not revalued, C receives one-third
distribution of the $15,000 gain. In this case,
C participates in the gain attributable to the
period prior to admission to the partnership.
13.
14.
A new partner who is expected to improve
the fortunes (income) of the partnership,
through such things as reputation or skill,
a. Losses and gains on realization are
divided among partners in the incomesharing ratio.
b. Cash is distributed to the partners
according to their ownership claims, as
indicated by the credit balances in their
capital accounts, after taking into
consideration the potential deficiencies
146
might be given equity in excess of the
amount invested to join the partnership.
15.
that may result from the inability to
collect from a deficient partner.
The statement of partners’ equity (for a
partnership) and statement of members’
equity (for an LLC) both show the material
changes in owner’s equity for each
ownership person or class for a specified
period.
PRACTICE EXERCISES
PE 12–1A
Cash...................................................................................
Inventory............................................................................
Land....................................................................................
Notes Payable..............................................................
Josh Beach, Capital....................................................
24,000
56,000
114,000
50,000
144,000
PE 12–1B
Cash...................................................................................
Accounts Receivable........................................................
Patent.................................................................................
Accounts Payable.......................................................
Allowance for Doubtful Accounts.............................
Jen Hall, Capital...........................................................
22,000
32,000
150,000
12,000
2,000
190,000
PE 12–2A
Distributed to Mooney:
Smithson
Annual salary...................................................
Interest.............................................................
Remaining income..........................................
Total distributed to Mooney...........................
1
$50,000 × 14%
$150,000 × 14%
3
($240,000 – $53,000 – $28,000) × 50%
2
$
—
7,0001
79,500
$86,500
Mooney
Total
$ 53,000
21,0002
79,5003
$153,500
$ 53,000
28,000
159,000
$240,000
PE 12–2B
Distributed to Hutchins:
Hutchins
Annual salary...................................................
Interest.............................................................
Deduct excess of allowances over income..
Total distributed to Hutchins.........................
$ 24,000
7,2001
(3,200)3
$ 28,000
Jenkins
$
—
9,6002
(1,600)4
$ 8,000
Total
$ 24,000
16,800
(4,800)
$ 36,000
1
$60,000 × 12%
$80,000 × 12%
3
($36,000 – $24,000 – $16,800) × 2/3
4
($36,000 – $24,000 – $16,800) × 1/3
2
PE 12–3A
a. Equipment....................................................................
Jordon Garmon, Capital........................................
Kali Miller, Capital..................................................
12,000
b. Cash..............................................................................
Brandon Tarr, Capital............................................
64,000
8,000
4,000
64,000
PE 12–3B
a. Land..............................................................................
Weston Perry, Capital............................................
Drew Akins, Capital...............................................
16,000
b. Drew Yancy, Capital....................................................
Jamarcus Webster, Capital...................................
16,500
8,000
8,000
16,500*
*($25,000 + $8,000) × 50%
PE 12–4A
Equity of Maples................................................................................
Baker contribution............................................................................
Total equity after admitting Baker...................................................
Baker’s equity interest......................................................................
Baker’s equity after admission........................................................
Baker’s contribution.........................................................................
Bonus paid to Baker.........................................................................
$ 65,000
25,000
$ 90,000
×
30%
$ 27,000
25,000
$ 2,000
PE 12–4B
Equity of Amory.................................................................................
Perez’s contribution..........................................................................
Total equity after admitting Perez...................................................
Perez’s equity interest......................................................................
Perez’s equity after admission........................................................
$ 340,000
550,000
$ 890,000
×
60%
$ 534,000
Perez’s contribution..........................................................................
Perez’s equity after admission........................................................
Bonus paid to Amory........................................................................
$ 550,000
534,000
$ 16,000
PE 12–5A
Penn’s equity prior to liquidation.........................................
Realization of asset sales......................................................
Book value of assets ($160,000 + $100,000 + $15,000)......
Loss on liquidation................................................................
Penn’s share of loss (50% × $25,000)..................................
Penn’s cash distribution.......................................................
$160,000
$250,000
275,000
$ 25,000
(12,500)
$147,500
PE 12–5B
Myers’s equity prior to liquidation.......................................
Realization of asset sales......................................................
Book value of assets ($22,000 + $30,000 + $6,000)............
Gain on liquidation.................................................................
Myers’s share of gain (50% × $7,000)...................................
Myers’s cash distribution......................................................
$22,000
$65,000
58,000
$ 7,000
3,500
$25,500
PE 12–6A
a. Min’s equity prior to liquidation......................................
Realization of asset sales................................................
Book value of assets........................................................
Loss on liquidation...........................................................
Min’s share of loss (50% × $260,000).............................
Min’s deficiency................................................................
*$120,000 + $200,000
$ 120,000
$ 60,000
320,000*
$260,000
(130,000)
$ (10,000)
b. $60,000. $200,000 – $130,000 share of loss – $10,000 Min deficiency, also
equals the amount realized from asset sales.
PE 12–6B
a. Murphy’s equity prior to liquidation...............................
Realization of asset sales................................................
Book value of assets........................................................
Loss on liquidation...........................................................
Murphy’s share of loss (50% × $75,000).........................
Murphy’s deficiency.........................................................
*$70,000 + $30,000
$ 30,000
$ 25,000
100,000*
$ 75,000
(37,500)
$ (7,500)
b. $25,000. $70,000 – $37,500 share of loss – $7,500 Murphy deficiency, also
equals the amount realized from asset sales.
EXERCISES
Ex. 12–1
Cash........................................................................................
Accounts Receivable............................................................
Merchandise Inventory............................................................
Equipment...............................................................................
Allowance for Doubtful Accounts.......................................
Gwen Delk, Capital..........................................................
13,000
130,000
84,700
69,500
10,200
287,000
Ex. 12–2
Cash.......................................................................................
Accounts Receivable............................................................
Land........................................................................................
Equipment..............................................................................
Allowance for Doubtful Accounts.................................
Accounts Payable............................................................
Notes Payable..................................................................
Brandi Bonds, Capital.....................................................
40,000
75,000
250,000
21,000
6,000
22,500
65,000
292,500
Ex. 12–3
Hassell
Lawson
$100,000
150,000
96,800
90,000
102,000
$100,000
50,000
103,200
110,000
98,000
Hassell
Lawson
Total
a. Net income (1:1)...........................................
$100,000
$100,000
$200,000
b. Net income (3:1)...........................................
$150,000
$ 50,000
$200,000
c. Interest allowance........................................
Remaining income (2:3)...............................
Net income....................................................
$ 36,000
60,800
$ 96,800
$ 12,000
91,200
$103,200
$ 48,000
152,000
$200,000
d. Salary allowance..........................................
Remaining income (1:1)...............................
Net income....................................................
$ 50,000
40,000
$ 90,000
$ 70,000
40,000
$110,000
$120,000
80,000
$200,000
e. Interest allowance........................................
Salary allowance..........................................
Remaining income (1:1)...............................
Net income....................................................
$ 36,000
50,000
16,000
$102,000
$ 12,000
70,000
16,000
$ 98,000
$ 48,000
120,000
32,000
$200,000
a.
b.
c.
d.
e.
...........................................................................................
...........................................................................................
...........................................................................................
...........................................................................................
...........................................................................................
Details
Ex. 12–4
Hassell
Lawson
$190,000
285,000
168,800
180,000
192,000
$190,000
95,000
211,200
200,000
188,000
Hassell
Lawson
Total
a. Net income (1:1).................................................
$190,000
$190,000
$380,000
b. Net income (3:1).................................................
$285,000
$ 95,000
$380,000
c. Interest allowance..............................................
Remaining income (2:3)....................................
Net income..........................................................
$ 36,000
132,800
$168,800
$ 12,000
199,200
$211,200
$ 48,000
332,000
$380,000
d. Salary allowance................................................
Remaining income (1:1)....................................
Net income..........................................................
$ 50,000
130,000
$180,000
$ 70,000
130,000
$200,000
$120,000
260,000
$380,000
e. Interest allowance..............................................
Salary allowance................................................
Remaining income (1:1)....................................
Net income..........................................................
$ 36,000
50,000
106,000
$192,000
$ 12,000
70,000
106,000
$188,000
$ 48,000
120,000
212,000
$380,000
a.
b.
c.
d.
e.
...........................................................................................
...........................................................................................
...........................................................................................
...........................................................................................
...........................................................................................
Details
Ex. 12–5
Casey
Fisher
Salary allowances...........................................
Remainder (net loss, $20,000 plus $75,000
salary allowances) divided equally..........
Net loss............................................................
Logan
Baylor
Total
$ 40,000
$ 35,000
$ 75,000
(47,500)
$ (7,500)
(47,500)
$ (12,500)
(95,000)
$(20,000)
Ex. 12–6
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.
Therefore, Jasmine’s conclusion was correct, but for the wrong reasons. In
addition, note that the monthly drawings have no impact on the division of
income.
Ex. 12–7
a.
Net income: $188,000
Salary allowance.............................................
Remaining income..........................................
Net income.......................................................
Bowman
Mapes
Total
$ 75,000
31,800
$106,800
$60,000
21,200
$81,200
$135,000
53,000
$188,000
Bowman remaining income: ($188,000 – $135,000) × 3/5
Mapes remaining income: ($188,000 – $135,000) × 2/5
b.
(1)
Income Summary..................................................................
B. Bowman, Member Equity...........................................
S. Mapes, Member Equity...............................................
188,000
106,800
81,200
(2)
B. Bowman, Member Equity................................................
S. Mapes, Member Equity....................................................
B. Bowman, Drawing.......................................................
S. Mapes, Drawing...........................................................
75,000
60,000
75,000
60,000
Note: The reduction in members’ equity from withdrawals would be disclosed on
the statement of members’ equity but does not affect the allocation of net income
in part (a) of this exercise.
Ex. 12–8
a.
Salary allowance.......................
Interest allowance.....................
Remaining income (4:3:3)........
Net income.................................
WYXT
Partners
Lindsey
Wilson
Daily Sun
Newspaper,
LLC
Total
$ 24,0001
196,000
$220,000
$115,600
6,0002
147,000
$268,600
$ 14,4003
147,000
$161,400
$115,600
44,400
490,000
$650,000
1
12% × $200,000
12% × $50,000
3
12% × $120,000
2
b.
Dec. 31, 2010
Dec. 31, 2010
Income Summary.............................................. 650,000
WYXT Partners, Member Equity................
Lindsey Wilson, Member Equity................
Daily Sun Newspaper, LLC, Member
Equity......................................................
WYXT Partners, Member Equity...................... 24,000
Lindsey Wilson, Member Equity..................... 121,600
Daily Sun Newspaper, LLC, Member Equity
14,400
WYXT Partners, Drawing............................
Lindsey Wilson, Drawing...........................
Daily Sun Newspaper, LLC, Drawing........
220,000
268,600
161,400
24,000
121,600
14,400
c.
INTERMEDIA, LLC
Statement of Members’ Equity
For the Year Ended December 31, 2010
WYXT
Partners
Daily Sun
Lindsey Newspaper,
Wilson
LLC
Members’ equity, January 1, 2010......... $200,000 $ 50,000
Additional investment during the year
50,000
$250,000 $ 50,000
Net income for the year.......................... 220,000 268,600
Total
$120,000 $ 370,000
50,000
$120,000 $ 420,000
161,400
650,000
$470,000 $318,600
Withdrawals during the year..................
24,000 121,600
Members’ equity, December 31, 2010... $446,000 $197,000
$281,400 $1,070,000
14,400
160,000
$267,000 $ 910,000
Ex 12–9
a.
Jan. 31
Partner, Drawing..................................
Cash.................................................
30,000,000
Income Summary.................................
Partner, Capital...............................
400,000,000
Partner, Capital.....................................
Partner, Drawing.............................
360,000,000*
30,000,000
b.
Dec. 31
400,000,000
c.
Dec. 31
360,000,000
*12 months × £30 million
Ex. 12–10
a. and b.
Lia Wu, Capital................................................................
Kara Oliver, Capital....................................................
$150,000 × 1/3
50,000
50,000
Note: The sale to Oliver is not a transaction of the partnership; so, the sales
price is not considered in this journal entry.
Ex. 12–11
a. $1,922,000 ($940,000,000/489), rounded
b. $400,000 ($195,600,000/489)
c. A new partner might contribute more than $400,000 because of goodwill
attributable to the firm’s reputation, future income potential, and a strong
client base, etc.
Ex. 12–12
a.
b.
(1) Brad Hughes, Capital (20% × $120,000).................
Mitchell Isaacs, Capital (25% × $100,000)..............
Leah Craft, Capital..............................................
24,000
25,000
(2) Cash...........................................................................
Jayme Clark, Capital...........................................
50,000
Brad Hughes ($120,000 – $24,000).......................
Mitchell Isaacs ($100,000 – $25,000)....................
Leah Craft...............................................................
Jayme Clark............................................................
49,000
50,000
96,000
75,000
49,000
50,000
Ex. 12–13
a.
b.
Cash.................................................................................
Travis Harris, Capital.....................................................
Keelyn Kidd, Capital......................................................
Felix Flores, Capital...................................................
Travis Harris...........................................................
Keelyn Kidd............................................................
Felix Flores.............................................................
45,000
7,500
7,500
60,000
52,500
82,500
60,000
Ex. 12–14
a. Medical Equipment...........................................................
Douglass, Member Equity..........................................
Finn, Member Equity...................................................
1
2
25,000
10,0001
15,0002
$25,000 × 2/5 = $10,000
$25,000 × 3/5 = $15,000
b. (1) Cash..............................................................................
Douglass, Member Equity.....................................
Finn, Member Equity..............................................
Koster, Member Equity..........................................
310,000
22,000
33,000
255,000
Supporting calculations for the bonus:
Equity of Douglass........................................
Equity of Finn.................................................
Contribution by Koster..................................
Total equity after admitting Koster..............
Koster’s equity interest after admission.....
Koster’s equity after admission...................
$250,000
290,000
310,000
$850,000
×
30%
$255,000
Contribution by Koster..................................
Koster’s equity after admission...................
Bonus paid to Douglass and Finn...............
$310,000
255,000
$ 55,000
Douglass: $55,000 × 2/5 = $22,000
Finn: $55,000 × 3/5 = $33,000
b. (2) Cash..............................................................................
Douglass, Member Equity..........................................
Finn, Member Equity...................................................
Koster, Member Equity..........................................
Supporting calculations for the bonus:
Equity of Douglass........................................
Equity of Finn.................................................
Contribution by Koster..................................
Total equity after admitting Koster..............
Koster’s equity interest after admission.....
Koster’s equity after admission...................
Contribution by Koster..................................
Bonus paid to Koster....................................
Douglass: $15,000 × 2/5 = $6,000
Finn: $15,000 × 3/5 = $9,000
$250,000
290,000
160,000
$700,000
×
25%
$175,000
160,000
$ 15,000
160,000
6,000
9,000
175,000
Ex. 12–15
a. J. Taylor, Capital..........................................................
K. Garcia, Capital.........................................................
Equipment.........................................................
4,000
4,000
b. (1) Cash........................................................................
J. Taylor, Capital....................................................
K. Garcia, Capital...................................................
L. Harris, Capital...............................................
50,000
3,100
3,100
8,000
56,200
Supporting calculations for the bonus:
Equity of Taylor......................................................................
Equity of Garcia......................................................................
Contribution by Harris...........................................................
Total equity after admitting Harris.......................................
Harris’s equity interest after admission..............................
Harris’s equity after admission.............................................
Contribution by Harris...........................................................
Bonus paid to Harris..............................................................
$ 96,000
135,000
50,000
$281,000
×
20%
$ 56,200
50,000
$ 6,200
The bonus to Harris is debited equally between Taylor’s and Garcia’s
capital accounts.
b. (2) Cash........................................................................
J. Taylor, Capital...............................................
K. Garcia, Capital..............................................
L. Harris, Capital...............................................
125,000
9,100
9,100
106,800
Supporting calculations for the bonus:
Equity of Taylor......................................................................
Equity of Garcia......................................................................
Contribution by Harris...........................................................
Total equity after admitting Harris.......................................
Harris’s equity interest after admission..............................
Harris’s equity after admission.............................................
Contribution by Harris...........................................................
Harris’s equity after admission.............................................
Bonus paid to Taylor and Garcia..........................................
$ 96,000
135,000
125,000
$356,000
×
30%
$106,800
$125,000
106,800
$ 18,200
The bonus to Taylor and Garcia is credited equally between Taylor’s and
Garcia’s capital accounts.
Ex. 12–16
ANGEL INVESTOR ASSOCIATES
Statement of Partnership Equity
For the Year Ended December 31, 2010
Jen
Teresa
Jaime
Wilson, McDonald, Holden,
Capital
Capital
Capital
Partnership capital, January 1, 2010......... $ 45,000
Admission of Jaime Holden.......................
—
Salary allowance......................................... 30,000
Remaining income...................................... 46,800
Less: Partner withdrawals......................... (38,400)
Partnership capital, December 31, 2010... $ 83,400
Total
Partnership
Capital
$ 55,000
$100,000
— $ 25,000
25,000
30,000
57,200 26,000 130,000
(28,600) (13,000) (80,000)
$ 83,600 $ 38,000 $205,000
Admission of Jaime Holden:
Equity of initial partners prior to admission..................
Contribution by Holden....................................................
Total....................................................................................
Holden’s equity interest after admission.......................
Holden’s equity after admission.....................................
Contribution by Holden....................................................
No bonus...........................................................................
$100,000
25,000
$125,000
×
20%
$ 25,000
25,000
$
0
Net income distribution:
The income-sharing ratio is equal to the proportion of the capital balances after
admitting Holden according to the partnership agreement:
$45,000
Jen Wilson: $125,000 = 36%
$55,000
Teresa McDonald: $125,000 = 44%
$25,000
Jaime Holden: $125,000 = 20%
These ratios can be multiplied by the $130,000 remaining income ($160,000 –
$30,000 salary allowance to Wilson) to distribute the earnings to the respective
partner capital accounts.
Withdrawals:
Half of the remaining income is distributed to the three partners. Wilson need not
take the salary allowance as a withdrawal but may allow it to accumulate in the
member equity account.
Ex. 12–17
a.
Merchandise Inventory..................................................
Allowance for Doubtful Accounts...........................
Luke Gilbert, Capital.................................................
Marissa Cohen, Capital............................................
Tyrone Cobb, Capital...............................................
1
2
b.
5,800
7,8001
5,2002
5,2002
($24,000 – $5,800) × 3/7
($24,000 – $5,800) × 2/7
Luke Gilbert, Capital......................................................
Cash...........................................................................
Notes Payable...........................................................
1
24,000
252,8001
52,800
200,000
$245,000 + $7,800
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 2010, the income-sharing ratio is as
follows:
$90,000
Nevada Properties, LLC: $300,000 = 30%
$210,000
Star Holdings, LLC: $300,000 = 70%
Or a 3:7 ratio
b. Following the same procedure as in (a):
$100,000
Nevada Properties, LLC: $400,000 = 25%
$220,000
Star Holdings, LLC: $400,000 = 55%
$80,000
Randy Reed: $400,000 = 20%
c. Randy Reed provided a $290,000 cash contribution to the business. The
amount credited to his member equity account is this amount less a $20,000
bonus paid to the other two members, or $270,000.
Ex. 12–18
Concluded
d. The positive entries to Nevada Properties and Star Holdings are the result of a
bonus paid by Randy Reed.
e. Randy Reed acquired a 20% interest in the business, computed as follows:
Randy Reed’s contribution..................................
Nevada Properties, LLC, member equity...........
Star Holdings, LLC, member equity...................
Total.......................................................................
$ 290,000
540,000
520,000
$1,350,000
Reed’s ownership interest after admission
($270,000 ÷ $1,350,000)........................................
20%
Ex. 12–19
a.
Cash balance...................................................
Sum of capital accounts.................................
Loss from sale of noncash assets................
$ 16,000
20,000
$ 4,000
Capital balances before realization...............
b. Division of loss on sale of noncash assets
Balances...........................................................
c. Cash distributed to partners..........................
Final balances.................................................
Pryor
Lester
$ 12,000
2,000*
$ 10,000
10,000
$
0
$8,000
2,000*
$6,000
6,000
$
0
*$4,000/2
Ex. 12–20
Bradley
Capital balances before realization...............
Division of gain on sale of noncash assets
[($76,000 – $61,000)/2]...............................
Capital balances after realization..................
Cash distributed to partners..................
Final balances.................................................
Barak
$ 26,000
$35,000
7,500
$ 33,500
33,500
$
0
7,500
$42,500
42,500
$
0
Total
$61,000
Ex. 12–21
a.
Deficiency
b.
$72,500 ($28,000 + $62,500 – $18,000)
c.
Cash..................................................................................
Shen, Capital..............................................................
Matthews
Capital balances after realization.......
Receipt of partner deficiency..............
Capital balances after eliminating
deficiency........................................
18,000
18,000
Williams
Shen
$ 28,000
$ 62,500
$(18,000) Dr.
18,000
$ 28,000
$ 62,500
$
0
Ex. 12–22
a.
Cash should be distributed as indicated in the following tabulation:
Capital invested.................................
Net income.........................................
Capital balances and cash
distribution.....................................
b.
Houston
Alsup
Cross
Total
$ 250
+ 130
$ 380
+ 130
$ —
+ 130
$ 630
+ 390
$ 380
$ 510
$ 130
$1,020
Cross has a capital deficiency of $30, as indicated in the following tabulation:
Capital invested.................................
Net loss..............................................
Capital balances................................
Houston
Alsup
Cross
Total
$ 250
– 30
$ 220
$ 380
– 30
$ 350
$ —
– 30
$ 30 Dr.
$ 630
– 90
$ 540
Ex. 12–23
Capital balances after realization..............
Distribution of partner deficiency.............
Capital balances after deficiency
distribution............................................
1
2
$24,000 × 2/3
$24,000 × 1/3
Hilliard
Downey
$(24,000)
24,000
$ 90,000
(16,000)1
$ 64,000
(8,000)2
$
$ 74,000
$ 56,000
0
Petrov
Ex. 12–24
DOVER, GOLL, AND CHAMBERLAND
Statement of Partnership Liquidation
For the Period Ending July 1–29, 2010
Capital
Cash
Balances before realization..............
Sale of assets and division
of loss.............................................
Balances after realization.................
Payment of liabilities.........................
Balances after payment of
liabilities.........................................
Cash distributed to partners............
Final balances....................................
+
Noncash
Assets = Liabilities +
Dover
(3/6)
+
Goll
(2/6)
Chamberland
+
(1/6)
$ 55,000
$ 92,000
$ 40,000
$ 35,000
$ 50,000
$ 22,000
+ 74,000
$129,000
– 40,000
– 92,000
$
0
—
—
$ 40,000
– 40,000
– 9,000
$ 26,000
—
– 6,000
$ 44,000
—
– 3,000
$ 19,000
—
$ 89,000
– 89,000
$
0
$
$
$ 26,000
– 26,000
$
0
$ 44,000
– 44,000
$
0
$ 19,000
– 19,000
$
0
0
—
$
0
—
0
$
0
Ex. 12–25
a.
CAPITOL SALES, LLC
Statement of LLC Liquidation
For the Period May 1–31, 2010
Member Equity
Cash
Balances before realization..............
Sale of assets and division
of gain.............................................
Balances after realization.................
Payment of liabilities.........................
Balances after payment of
liabilities.........................................
Distribution of cash to members.....
Final balances....................................
$
Noncash
+ Assets = Liabilities +
Gordon
Hightower
(2/5)
+
(2/5)
+
Mills
(1/5)
8,000
$ 94,000
$ 30,000
$ 15,000
$ 35,000
$ 22,000
+ 116,500
$ 124,500
– 30,000
– 94,000
$
0
—
—
$ 30,000
– 30,000
+ 9,000
$ 24,000
—
+ 9,000
$ 44,000
—
+ 4,500
$ 26,500
—
$ 94,500
– 94,500
$
0
$
$
$ 24,000
– 24,000
$
0
$ 44,000
– 44,000
$
0
$ 26,500
– 26,500
$
0
0
—
$
0
—
0
$
0
b.
Gordon, Member Equity..................................................
Hightower, Member Equity.............................................
Mills, Member Equity.......................................................
Cash.............................................................................
24,000
44,000
26,500
94,500
Ex. 12–26
a.
(1)
(2)
Income Summary.............................................................
Hossam Abdel-Raja, Capital......................................
Aly Meyer, Capital.....................................................
124,000
Hossam Abdel-Raja, Capital............................................
Aly Meyer, Capital............................................................
Hossam Abdel-Raja, Drawing....................................
Aly Meyer, Drawing.....................................................
48,000
39,000
62,000
62,000
48,000
39,000
b.
ABDEL-RAJA AND MEYER
Statement of Partners’ Equity
For the Year Ended December 31, 2010
Capital, January 1, 2010.................................
Additional investment during the year.........
Net income for the year..................................
Withdrawals during the year..........................
Capital, December 31, 2010............................
Hossam
Abdel-Raja
Aly
Meyer
Total
$ 90,000
10,000
$100,000
62,000
$162,000
48,000
$114,000
$ 65,000
—
$ 65,000
62,000
$127,000
39,000
$ 88,000
$155,000
10,000
$165,000
124,000
$289,000
87,000
$202,000
Ex. 12–27
a. Revenue per professional staff, 2007:
$9,850,000,000
32,483
= $303,200 rounded
Revenue per professional staff, 2006:
$8,770,000,000
29,614
= $296,100 rounded
b. The revenues increased between the two years from $8,770 million to $9,850
million, or 12.3% [($9,850 – $8,770)/$8,770]. Revenue growth has been strong,
mostly resulting from Sarbanes-Oxley work. The number of employees has
grown at a slightly slower rate, from 29,614 to 32,483, or 9.7% [(32,483 –
29,614)/29,614]. As a result, the revenue per professional staff employee has
increased by approximately $7,000, from $296,100 to $303,200. This slight
increase in efficiency is likely due to the firm learning how to efficiently
provide the services introduced by the Sarbanes-Oxley Act of 2002.
Ex. 12–28
a. Revenue per employee, 2008:
$33,750,000
= $135,000
250
Revenue per employee, 2009:
$38,500,000
= $110,000
350
b. Revenues increased between the two years; however, the number of
employees has increased at a faster rate. Thus, the revenue per employee
declined from $135,000 in 2008 to $110,000 in 2009. This indicates that the
efficiency of the firm has declined in the two years. This is likely the result of
the expansion. That is, the large increase in the employment base is the likely
result of the expansion into the four new cities. These new employees may
need to be trained and thus are not as efficient in their jobs as the more
experienced employees in the existing cities. Often, a business will suffer
productivity losses in the midst of significant expansion because of the
inexperience of the new employees.
PROBLEMS
Prob. 12–1A
1.
June 1 Cash........................................................................
Merchandise Inventory..........................................
Kevin Schmidt, Capital....................................
12,000
32,000
1 Cash........................................................................
Accounts Receivable.............................................
Merchandise Inventory..........................................
Equipment...............................................................
Allowance for Doubtful Accounts..................
Accounts Payable.............................................
Notes Payable...................................................
David Cohen, Capital.......................................
13,000
14,900
28,600
35,000
44,000
1,000
6,500
4,000
80,000
2.
SCHMIDT AND COHEN
Balance Sheet
June 1, 2009
Assets
Current assets:
Cash............................................................
Accounts receivable..................................
Less allowance for doubtful accounts....
Merchandise inventory.............................
Total current assets.............................
Plant assets:
Equipment..................................................
Total assets.....................................................
$ 25,000
$ 14,900
1,000
13,900
60,600
$ 99,500
35,000
$134,500
Liabilities
Current liabilities:
Accounts payable......................................
Notes payable............................................
Total liabilities.................................................
Partners’ Equity
Kevin Schmidt, capital....................................
David Cohen, capital.......................................
Total partners’ equity......................................
Total liabilities and partners’ equity.............
$ 6,500
4,000
$ 10,500
$ 44,000
80,000
124,000
$134,500
Prob. 12–1A
Concluded
3.
May 31 Income Summary...................................................
Kevin Schmidt, Capital....................................
David Cohen, Capital.......................................
84,000
31 Kevin Schmidt, Capital..........................................
David Cohen, Capital.............................................
Kevin Schmidt, Drawing..................................
David Cohen, Drawing.....................................
30,000
25,000
47,200*
36,800*
30,000
25,000
*Computations:
Interest allowance...........................................
Salary allowance.............................................
Remaining income (1:1).................................
Net income.......................................................
1
2
10% × $44,000
10% × $80,000
Schmidt
Cohen
Total
$ 4,4001
36,000
6,800
$ 47,200
$ 8,0002
22,000
6,800
$ 36,800
$ 12,400
58,000
13,600
$ 84,000
Prob. 12–2A
(1)
$150,000
Drury
Wilkins
Plan
a.
b.
c.
d.
e.
f.
....................................................
....................................................
....................................................
....................................................
....................................................
....................................................
$ 75,000
60,000
100,000
89,000
83,000
92,900
$ 75,000
90,000
50,000
61,000
67,000
57,100
(2)
$66,000
Drury
Wilkins
$ 33,000
26,400
44,000
38,600
41,000
42,500
$ 33,000
39,600
22,000
27,400
25,000
23,500
Details
$150,000
$66,000
Drury
Wilkins
Drury
Wilkins
a.
Net income (1:1).........................
$ 75,000
$ 75,000
$ 33,000
$ 33,000
b.
Net income (2:3).........................
$ 60,000
$ 90,000
$ 26,400
$ 39,600
c.
Net income (2:1).........................
$100,000
$ 50,000
$ 44,000
$ 22,000
d.
Interest allowance......................
Remaining income (3:2).............
Net income..................................
$
2,000
87,000
$ 89,000
$
3,000
58,000
$ 61,000
$
2,000
36,600
$ 38,600
$
e.
Interest allowance......................
Salary allowance........................
Remaining income (1:1).............
Net income..................................
$
2,000
34,000
47,000
$ 83,000
$
3,000
17,000
47,000
$ 67,000
$
2,000
34,000
5,000
$ 41,000
$
f.
Interest allowance......................
Salary allowance........................
Bonus allowance........................
Remaining income (1:1).............
Net income..................................
$
$
$
$
1
2
20% × ($150,000 – $51,000)
20% × ($66,000 – $51,000)
2,000
34,000
19,8001
37,100
$ 92,900
3,000
17,000
37,100
$ 57,100
2,000
34,000
3,0002
3,500
$ 42,500
3,000
24,400
$ 27,400
3,000
17,000
5,000
$ 25,000
3,000
17,000
3,500
$ 23,500
Prob. 12–3A
1.
MOSHREF AND WEEKLEY
Income Statement
For the Year Ended December 31, 2010
Professional fees..................................................................
Operating expenses:
Salary expense................................................................
Depreciation expense—building...................................
Property tax expense......................................................
Heating and lighting expense........................................
Supplies expense............................................................
Depreciation expense—office equipment.....................
Miscellaneous expense..................................................
Total operating expenses..........................................
Net income.............................................................................
$312,300
75,000
3,500
11,200
3,400
6,700
2,100
Amid
Moshref
Alex
Weekley
Division of net income:
Salary allowance.........................................
Interest allowance.......................................
Remaining income......................................
Net income........................................................
$ 60,000
15,000*
(9,400)
$ 65,600
$562,200
414,200
$148,000
Total
$ 75,000
$ 135,000
16,800**
31,800
(9,400)
(18,800)
$ 82,400
$ 148,000
*$125,000 × 12%
**($160,000 – $20,000) × 12%
2.
MOSHREF AND WEEKLEY
Statement of Partners’ Equity
For the Year Ended December 31, 2010
Capital, January 1, 2010...................................
Additional investment during the year...........
Net income for the year...................................
Withdrawals during the year...........................
Capital, December 31, 2010.............................
Amid
Moshref
Alex
Weekley
$ 125,000
—
$ 125,000
65,600
$ 190,600
50,000
$ 140,600
$ 140,000
20,000
$ 160,000
82,400
$ 242,400
60,000
$ 182,400
Total
$ 265,000
20,000
$ 285,000
148,000
$ 433,000
110,000
$ 323,000
Prob. 12–3A
Concluded
3.
MOSHREF AND WEEKLEY
Balance Sheet
December 31, 2010
Assets
Current assets:
Cash..............................................................
Accounts receivable...................................
Supplies.......................................................
Total current assets..............................
Plant assets:
Land..............................................................
Building........................................................
Less accumulated depreciation...........
Office equipment.........................................
Less accumulated depreciation...........
Total plant assets.............................
Total assets.......................................................
$ 24,200
41,300
6,700
$ 72,200
$120,000
$160,000
52,300
$ 53,000
21,300
107,700
31,700
259,400
$331,600
Liabilities
Current liabilities:
Accounts payable.......................................
Salaries payable..........................................
Total liabilities...................................................
$
3,400
5,200
$
8,600
Partners’ Equity
Amid Moshref, capital......................................
Alex Weekley, capital.......................................
Total partners’ equity.......................................
Total liabilities and partners’ equity...............
$140,600
182,400
323,000
$331,600
Prob. 12–4A
1.
May 31
Asset Revaluations........................................
Accounts Receivable...............................
Allowance for Doubtful Accounts..........
2,470
2,000
470*
*[($21,400 – $2,000) × 5%] – $500
31
31
31
2.
June 1
1
Merchandise Inventory..................................
Asset Revaluations..................................
5,270
Accumulated Depreciation—Equipment.....
Equipment.................................................
Asset Revaluations..................................
25,700
Asset Revaluations........................................
Jordan Cates, Capital..............................
LaToya Orr, Capital..................................
23,500
LaToya Orr, Capital........................................
Caleb Webster, Capital............................
30,000
Cash................................................................
Caleb Webster, Capital............................
35,000
5,270
5,000
20,700
11,750
11,750
30,000
35,000
Prob. 12–4A
Concluded
3.
CATES, ORR, AND WEBSTER
Balance Sheet
June 1, 2010
Assets
Current assets:
Cash..............................................................
Accounts receivable...................................
Less allowance for doubtful accounts.....
Merchandise inventory...............................
Prepaid insurance.......................................
Total current assets..............................
Plant assets:
Equipment....................................................
Total assets.......................................................
$44,4001
$19,400
970
18,430
63,870
3,500
$130,200
90,000
$220,200
Liabilities
Current liabilities:
Accounts payable.......................................
Notes payable..............................................
Total liabilities...................................................
$14,700
12,000
$ 26,700
Partners’ Equity
Jordan Cates, capital.......................................
LaToya Orr, capital...........................................
Caleb Webster, capital.....................................
Total partners’ capital......................................
Total liabilities and partners’ capital..............
1
$9,400 + $35,000
$75,000 + $11,750
3
$60,000 + $11,750 – $30,000
2
$86,7502
41,7503
65,000
193,500
$220,200
Prob. 12–5A
1.
HARKEN, SEDLACEK, AND ELDRIDGE
Statement of Partnership Liquidation
For the Period September 10–30, 2010
Capital
Cash
Balances before realization...............
Sale of assets and division of loss...
Balances after realization..................
Payment of liabilities..........................
Balances after payment of liabilities
Receipt of deficiency..........................
Balances..............................................
Cash distributed to partners..............
Final balances.....................................
2. a.
$
+
$
–
$
+
$
–
$
7,800
32,600
40,400
8,000
32,400
1,500
33,900
33,900
0
Noncash
+ Assets = Liabilities +
$ 61,400
– 61,400
$
0
—
$
0
—
$
0
—
$
0
Kris Harken, Capital...................................................
Amy Eldridge, Capital................................................
Brett Sedlacek, Capital.........................................
$
$
–
$
$
$
8,000
—
8,000
8,000
0
—
0
—
0
Harken
(25%)
$ 31,000
– 7,200
$ 23,800
—
$ 23,800
—
$ 23,800
– 23,800
$
0
Sedlacek
Eldridge
+ (25%)
+
(50%)
$ 5,700
– 7,200
$ (1,500)
—
$ (1,500)
+ 1,500
$
0
—
$
0
$ 24,500
– 14,400
$ 10,100
—
$ 10,100
—
$ 10,100
– 10,100
$
0
500
1,000
1,500
The $1,500 deficiency of Sedlacek would be divided between the other partners, Harken and Eldridge, in
their income-sharing ratio (1:2 respectively). Therefore, Harken would absorb 1/3 of the $1,500 deficiency,
or $500, and Eldridge would absorb 2/3 of the $1,500 deficiency, or $1,000.
b. Kris Harken, Capital...................................................
Amy Eldridge, Capital................................................
Cash.......................................................................
23,300*
9,100**
32,400
*$23,800 – $500
**$10,100 – $1,000
Prob. 12–6A
1. a.
MCADAMS, COOPER, AND ZHANG
Statement of Partnership Liquidation
For Period June 3–29, 2010
Capital
Cash
Balances before realization..............
Sale of assets and division
of gain.............................................
Balances after realization.................
Payment of liabilities.........................
Balances after payment
of liabilities.....................................
Cash distributed to partners............
Final balances....................................
+
Noncash
McAdams
Cooper
Assets = Liabilities +
(1/5)
+
(2/5)
+
Zhang
(2/5)
$ 29,000
$ 242,000
$ 55,000
$ 14,000
$ 84,000
$ 118,000
+ 290,000
$ 319,000
– 55,000
– 242,000
$
0
—
—
$ 55,000
– 55,000
+ 9,600
$ 23,600
—
+ 19,200
$ 103,200
—
+ 19,200
$ 137,200
—
$ 264,000
– 264,000
$
0
$
$
$ 23,600
– 23,600
$
0
$ 103,200
– 103,200
$
0
$ 137,200
– 137,200
$
0
0
—
$
0
—
0
$
0
Prob. 12–6A
Concluded
1. b.
MCADAMS, COOPER, AND ZHANG
Statement of Partnership Liquidation
For Period June 3–29, 2010
Capital
Cash
Balances before realization...............
Sale of assets and division of loss...
Balances after realization..................
Payment of liabilities..........................
Balances after payment of liabilities
Receipt of deficiency..........................
Balances..............................................
Cash distributed to partners..............
Final balances.....................................
2. a.
$
+
$
–
$
+
$
–
$
29,000
132,000
161,000
55,000
106,000
8,000
114,000
114,000
0
Noncash
McAdams
Cooper
+ Assets = Liabilities +
(1/5)
+
(2/5)
$ 242,000
– 242,000
$
0
—
$
0
—
$
0
—
$
0
Cooper, Capital...........................................................
Zhang, Capital............................................................
McAdams, Capital.................................................
$ 55,000
—
$ 55,000
– 55,000
$
0
—
$
0
—
$
0
$ 14,000
– 22,000
$ (8,000)
—
$ (8,000)
+ 8,000
$
0
—
$
0
$ 84,000
– 44,000
$ 40,000
—
$ 40,000
—
$ 40,000
– 40,000
$
0
+
Zhang
(2/5)
$ 118,000
– 44,000
$ 74,000
—
$ 74,000
—
$ 74,000
– 74,000
$
0
4,000
4,000
8,000
The $8,000 deficiency of McAdams would be divided between the other partners, Cooper and Zhang, in
their income-sharing ratio (1:1 respectively). Therefore, Cooper would absorb 1/2 of the $8,000 deficiency,
or $4,000, and Zhang would absorb 1/2 of the $8,000 deficiency, or $4,000.
b. Cooper, Capital...........................................................
Zhang, Capital............................................................
Cash.......................................................................
36,000*
70,000**
106,000
*$40,000 – $4,000
**$74,000 – $4,000
Prob. 12–1B
1.
Aug. 1
1
Cash.......................................................................
Merchandise Inventory........................................
Jarius Walker, Capital.....................................
18,200
48,800
Cash.......................................................................
Accounts Receivable...........................................
Equipment.............................................................
Allowance for Doubtful Accounts.................
Accounts Payable...........................................
Notes Payable..................................................
Rae King, Capital.............................................
22,600
24,100
55,100
67,000
1,800
15,000
25,000
60,000
2.
WALKER AND KING
Balance Sheet
August 1, 2010
Assets
Current assets:
Cash......................................................................
Accounts receivable...........................................
Less allowance for doubtful accounts..............
Merchandise inventory.......................................
Total current assets.......................................
Plant assets:
Equipment............................................................
Total assets...............................................................
$ 40,800
$ 24,100
1,800
22,300
48,800
$ 111,900
55,100
$ 167,000
Liabilities
Current liabilities:
Accounts payable...............................................
Notes payable......................................................
Total liabilities...........................................................
Partners’ Equity
Jarius Walker, capital...............................................
Rae King, capital.......................................................
Total partners’ equity...............................................
Total liabilities and partners’ equity.......................
$ 15,000
25,000
$ 40,000
$ 67,000
60,000
127,000
$ 167,000
Prob. 12–1B
Concluded
3.
July 31
31
Income Summary..................................................
Jarius Walker, Capital.....................................
Rae King, Capital.............................................
80,000
Jarius Walker, Capital..........................................
Rae King, Capital..................................................
Jarius Walker, Drawing..................................
Rae King, Drawing..........................................
22,500
30,400
36,400*
43,600*
22,500
30,400
*Computations:
Walker
Interest allowance...............................................
Salary allowance.................................................
Remaining income (1:1)......................................
Net income...........................................................
1
2
10% × $67,000
10% × $60,000
King
Total
6,7001 $ 6,0002 $ 12,700
22,500
30,400
52,900
7,200
7,200
14,400
$ 36,400 $ 43,600 $ 80,000
$
Prob. 12–2B
(1)
$105,000
(2)
$180,000
Plan
Larson
Alvarez
Larson
Alvarez
a.
b.
c.
d.
e.
f.
$52,500
78,750
35,000
58,500
42,500
41,600
$52,500
26,250
70,000
46,500
62,500
63,400
$90,000
135,000
60,000
96,000
80,000
71,600
$90,000
45,000
120,000
84,000
100,000
108,400
......................................................
......................................................
......................................................
......................................................
......................................................
......................................................
Details
$105,000
Larson
$180,000
Alvarez
Larson
Alvarez
a.
Net income (1:1)......................... $ 52,500
$ 52,500
$ 90,000
$ 90,000
b.
Net income (3:1)......................... $ 78,750
$ 26,250
$ 135,000
$ 45,000
c.
Net income (1:2)......................... $ 35,000
$ 70,000
$ 60,000
$ 120,000
d.
Interest allowance...................... $ 18,000
Remaining Income (1:1).............
40,500
Net income.................................. $ 58,500
$
6,000
40,500
$ 46,500
$ 18,000
78,000
$ 96,000
$
e.
Interest allowance...................... $ 18,000
Salary allowance........................
32,000
Excess of allowances over
income (1:1).............................
(7,500)
(7,500)
Remaining income (1:1).............
Net income.................................. $ 42,500
$
6,000
64,000
$ 18,000
32,000
$
$ 62,500
30,000
$ 80,000
30,000
$ 100,000
Interest allowance...................... $ 18,000
Salary allowance........................
32,000
Bonus allowance........................
Excess of allowances over
income (1:1).............................
(8,400)
(8,400)
Remaining income (1:1).............
Net income.................................. $ 41,600
$
f.
6,000 $ 18,000
64,000
32,000
1,8001
$ 63,400
21,600
$ 71,600
6,000
78,000
$ 84,000
$
6,000
64,000
6,000
64,000
16,8002
21,600
$ 108,400
1
2
20% × ($105,000 – $96,000)
20% × ($180,000 – $96,000)
Prob. 12–3B
1.
YAMADA AND FORTE
Income Statement
For the Year Ended December 31, 2010
Professional fees....................................................................
Operating expenses:
Salary expense................................................................
Depreciation expense—building...................................
Property tax expense......................................................
Heating and lighting expense........................................
Supplies expense............................................................
Depreciation expense—office equipment....................
Miscellaneous expense..................................................
Total operating expenses...........................................
Net income..............................................................................
Dan
Yamada
Division of net income:
Salary allowance.........................................
Interest allowance.......................................
Remaining income......................................
Net income........................................................
*$120,000 × 10%
**($75,000 – $10,000) × 10%
$ 40,000
12,000*
20,750
$ 72,750
$340,300
$146,800
14,500
9,000
7,200
5,200
4,500
3,100
190,300
$150,000
Courtney
Forte
Total
$ 50,000
$ 90,000
6,500**
18,500
20,750
41,500
$ 77,250
$ 150,000
2.
YAMADA AND FORTE
Statement of Partners’ Equity
For the Year Ended December 31, 2010
Capital, January 1, 2010...................................
Additional investment during the year...........
Net income for the year...................................
Withdrawals during the year...........................
Capital, December 31, 2010.............................
Dan
Yamada
Courtney
Forte
Total
$ 120,000
—
$ 120,000
72,750
$ 192,750
45,000
$ 147,750
$ 65,000
10,000
$ 75,000
77,250
$ 152,250
65,000
$ 87,250
$ 185,000
10,000
$ 195,000
150,000
$ 345,000
110,000
$ 235,000
Prob. 12–3B
Concluded
3.
YAMADA AND FORTE
Balance Sheet
December 31, 2010
Assets
Current assets:
Cash..............................................................
Accounts receivable...................................
Supplies.......................................................
Total current assets..............................
Plant and equipment:
Land..............................................................
Building........................................................
$ 128,100
Less accumulated depreciation...........
62,500
Office equipment.........................................
Less accumulated depreciation...........
Total plant assets.............................
Total assets.......................................................
$ 32,000
42,300
1,500
$ 75,800
$ 75,000
65,600
$ 46,000
19,400
26,600
167,200
$ 243,000
Liabilities
Current liabilities:
Accounts payable.......................................
Salaries payable..........................................
Total liabilities...................................................
$
4,800
3,200
$
8,000
Partners’ Equity
Dan Yamada, capital........................................
Courtney Forte, capital....................................
Total partners’ equity.......................................
Total liabilities and partners’ equity...............
$ 147,750
87,250
235,000
$ 243,000
Prob. 12–4B
1. Apr. 30 Asset Revaluations.............................................
Accounts Receivable....................................
Allowance for Doubtful Accounts..................
*[($38,400 – $2,800) × 5%] – $1,400
3,180
30 Merchandise Inventory.......................................
Asset Revaluations.....................................
6,480
30 Accumulated Depreciation—Equipment............
Equipment.........................................................
Asset Revaluations.......................................
**
$194,000 – $165,000
51,700
29,000**
30 Asset Revaluations.............................................
Sadhil Rao, Capital.......................................
Lauren Sails, Capital...................................
84,000
1 Lauren Sails, Capital..........................................
Paige Hancock, Capital................................
55,000
1 Cash...................................................................
Paige Hancock, Capital................................
30,000
2. May
2,800
380*
6,480
80,700
42,000
42,000
55,000
30,000
Prob. 12–4B
Concluded
3.
RAO, SAILS, AND HANCOCK
Balance Sheet
May 1, 2010
Assets
Current assets:
Cash..............................................................
Accounts receivable...................................
Less allowance for doubtful accounts.....
Merchandise inventory...............................
Prepaid insurance.......................................
Total current assets..............................
Plant assets:
Equipment....................................................
Total assets.......................................................
$ 37,5001
$ 35,600
1,780
33,820
65,480
2,200
$139,000
194,000
$333,000
Liabilities
Current liabilities:
Accounts payable.......................................
Notes payable..............................................
Total liabilities...................................................
$
9,000
10,000
$ 19,000
Partners’ Equity
Sadhil Rao, capital............................................
Lauren Sails, capital.........................................
Paige Hancock, capital....................................
Total partners’ equity.......................................
Total liabilities and partners’ equity...............
1
$7,500 + $30,000
$110,000 + $42,000
3
$90,000 + $42,000 – $55,000
2
$152,0002
77,0003
85,000
314,000
$333,000
Prob. 12–5B
1.
LACY, OLIVER, AND DIAZ
Statement of Partnership Liquidation
For Period July 3–29, 2010
Capital
Cash
Balances before realization..............
Sale of assets and division of loss..
Balances after realization.................
Payment of liabilities.........................
Balances after payment of liabilities
Receipt of deficiency........................
Balances.............................................
Cash distributed to partners............
Final balances....................................
2. a.
$
+
$
–
$
+
$
–
$
5,800
33,200
39,000
15,000
24,000
4,500
28,500
28,500
0
Noncash
+ Assets = Liabilities +
$ 82,400
– 82,400
$
0
—
$
0
—
$
0
—
$
0
Whitney Lacy, Capital................................................
Alberto Diaz, Capital..................................................
Eli Oliver, Capital..................................................
$ 15,000
—
$ 15,000
– 15,000
$
0
—
$
0
—
$
0
Lacy
(50%)
$ 28,200
– 24,600
$ 3,600
—
$ 3,600
—
$ 3,600
– 3,600
$
0
+
Oliver
(25%)
$ 7,800
– 12,300
$ (4,500)
—
$ (4,500)
+ 4,500
$
0
—
$
0
+
Diaz
(25%)
$ 37,200
– 12,300
$ 24,900
—
$ 24,900
—
$ 24,900
– 24,900
$
0
3,000
1,500
4,500
The $4,500 deficiency of Oliver would be divided between the other partners, Lacy and Diaz, in their
income-sharing ratio (2:1, respectively). Therefore, Lacy would absorb 2/3 of the $4,500 deficiency, or
$3,000, and Diaz would absorb 1/3 of the $4,500 deficiency, or $1,500.
b. Whitney Lacy, Capital................................................
Alberto Diaz, Capital..................................................
600*
23,400**
Cash.......................................................................
*$3,600 – $3,000
**$24,900 – $1,500
24,000
Prob. 12–6B
1. a.
ORSON, DORR, AND KILLOUGH
Statement of Partnership Liquidation
For Period October 1–30, 2010
Capital
Cash
Balances before realization..............
Sale of assets and division
of gain.............................................
Balances after realization.................
Payment of liabilities.........................
Balances after payment
of liabilities.....................................
Cash distributed to partners............
Final balances....................................
$
Noncash
+ Assets = Liabilities +
Orson
(2/5)
+
Dorr
(2/5)
Killough
+
(1/5)
9,000
$ 155,000
$ 42,000
$ 48,000
$ 63,000
$ 11,000
+ 195,000
$ 204,000
– 42,000
– 155,000
$
0
—
—
$ 42,000
– 42,000
+ 16,000
$ 64,000
—
+ 16,000
$ 79,000
—
+ 8,000
$ 19,000
—
$ 162,000
– 162,000
$
0
$
0
$
0
$
$ 64,000
– 64,000
$
0
$ 79,000
– 79,000
$
0
$ 19,000
– 19,000
$
0
—
$
0
—
0
Prob. 12–6B
Concluded
1. b.
ORSON, DORR, AND KILLOUGH
Statement of Partnership Liquidation
For Period October 1–30, 2010
Capital
Cash
Balances before realization...............
Sale of assets and division of loss...
Balances after realization..................
Payment of liabilities..........................
Balances after payment of liabilities
Receipt of deficiency..........................
Balances..............................................
Cash distributed to partners..............
Final balances.....................................
2. a.
$
+
$
–
$
+
$
–
$
9,000
85,000
94,000
42,000
52,000
3,000
55,000
55,000
0
Noncash
+ Assets = Liabilities +
$ 155,000
– 155,000
$
0
—
$
0
—
$
0
—
$
0
Orson, Capital.............................................................
Dorr, Capital................................................................
Killough, Capital...................................................
$ 42,000
—
$ 42,000
– 42,000
$
0
—
$
0
—
$
0
Orson
(2/5)
$ 48,000
– 28,000
$ 20,000
—
$ 20,000
—
$ 20,000
– 20,000
$
0
+
Dorr
(2/5)
$ 63,000
– 28,000
$ 35,000
—
$ 35,000
—
$ 35,000
– 35,000
$
0
Killough
+
(1/5)
$ 11,000
– 14,000
$ (3,000)
—
$ (3,000)
+ 3,000
$
0
—
$
0
1,500
1,500
3,000
The $3,000 deficiency of Killough would be divided between the other partners, Orson and Dorr, in their
income-sharing ratio (1:1, respectively). Therefore, Orson would absorb 1/2 of the $3,000 deficiency, or
$1,500, and Dorr would absorb 1/2 of the $3,000 deficiency, or $1,500.
b. Orson, Capital.............................................................
Dorr, Capital................................................................
Cash.......................................................................
18,500*
33,500**
52,000
*$20,000 – $1,500
**$35,000 – $1,500
SPECIAL ACTIVITIES
Activity 12–1
This scenario highlights one of the problems that arises in partnerships:
attempting to align contribution with income division. Often, disagreements are
based on honest differences of opinion. However, in this scenario, there is
evidence that Hayes was acting unethically. Hayes apparently made no mention
of his plans to “scale back” once the partnership was consummated. As a result,
Edwards agreed to an equal division of income based on the assumption that
Hayes’s past efforts would project into the future, while in fact, Hayes had no
intention of this. As a result, Edwards is now providing more effort, while
receiving the same income as Hayes. This is clearly not sustainable in the long
term. Hayes does not appear to be concerned about this inequity. Thus, the
evidence points to some duplicity on Hayes’s part. Essentially, he knows that he
is riding on Edwards’s effort and had planned it that way.
Edwards could respond to this situation by either withdrawing from the
partnership or changing the partnership agreement. One possible change would
be to provide a partner salary based on the amount of patient billings. This salary
would be highly associated with the amount of revenue brought into the
partnership, thus avoiding disputes associated with unequal contributions to the
firm.
Activity 12–2
A good solution to this problem would be to divide income in three steps:
1. Provide interest on each partner’s capital balance.
2. Provide a monthly salary for each partner.
3. Divide the remainder according to a partnership formula.
With this approach, the return on capital and effort will be separately calculated in
the income division formula before applying the percentage formula. Thus,
Becker
will receive a large interest distribution based on the large capital balance, while
Morrow should receive a large salary distribution based on the larger service
contribution. The return on capital and salary allowances should be based on
prevailing market rates. If both partners are pleased with their return on capital
and effort, then the remaining income could be divided equally among them.
Activity 12–3
a.
Deloitte & Touche.................................................
Ernst & Young.......................................................
PricewaterhouseCoopers....................................
KPMG.....................................................................
Revenue
per
Partner
Revenue per
Professional
Staff
$3,571,429
3,287,391
3,470,014
3,123,615
$331,371
374,307
331,130
353,271
*Revenue per partner is determined by dividing the total revenue by the
number of partners for each firm, adjusting the revenues for the fact that
they are expressed in millions in the table. Revenue per partner is
determined as follows:
Deloitte & Touche revenue per partner:
$9,850,000 ,000
2,758
= $3,571,429
**Likewise, the revenue per professional staff is determined by dividing the
total revenue by the number of professional staff, adjusting the revenues for
the fact that they are expressed in millions in the table. Revenue per
professional staff is determined as follows:
Deloitte & Touche revenue per professional staff:
$9,850,000 ,000
29,725
= $331,371
b. The amount of revenue earned per partner can be compared across the four
firms by setting each firm’s revenue per partner as a percent of the highest
revenue per partner firm, as follows:
Deloitte & Touche.................................................
Ernst & Young.......................................................
PricewaterhouseCoopers....................................
KPMG.....................................................................
Revenue
per
Partner
Percent of
Deloitte &
Touche
$3,571,429
3,287,391
3,470,014
3,123,615
100%
92%
97%
87%
As can be seen, Deloitte & Touche has the highest revenue per partner
relative to the other three firms, while KPMG has the lowest. KPMG’s revenue
per partner is 87% of Deloitte & Touche. This data suggest that Deloitte &
Touche has a somewhat smaller partner base supporting its revenues than do
the other three firms.
Activity 12–3 Concluded
The amount of revenue earned per professional staff can be compared across
the four firms by setting each firm’s revenue per professional staff as a
percent of the highest revenue per professional staff firm, as follows:
Revenue per
Professional
Staff
Deloitte & Touche.................................................
Ernst & Young.......................................................
PricewaterhouseCoopers....................................
KPMG.....................................................................
$331,371
374,307
331,130
353,271
Percent of
Ernst &
Young
89%
100%
88%
94%
As can be seen, Ernst & Young has the highest revenue per professional staff
of the four firms. PWC, for example, has revenue per professional staff equal
to 88% of Ernst & Young. Ernst & Young appears to be the most efficient firm
in the use of professional staff compared to the other three firms.
Taken together, both tables indicate that Deloitte & Touche provides more
revenue per partner (and possibly more profit per partner) than the other
three firms but does not have the operating efficiency of Ernst & Young in
terms of the use of professional staff. In contrast, Ernst & Young appears to
have the most efficient use of professional staff of all the firms, but provides
less revenue per partner (and possibly less profit per partner) than does
Deloitte & Touche.
Activity 12–4
When developing an LLC (or partnership), the operating (or partnership)
agreement is a critical part of establishing a business. Each party must consider
the
various
incentives of each individual in the LLC. For example, in this case, one party,
Kelly Herron, is providing all of the funding, while the other two parties are
providing
expertise and talent. This type of arrangement can create some natural conflicts
because the interests of an investor might not be exactly the same as those
operating the LLC. Specifically, you would want to advise Herron that not all
matters should be settled by majority vote. Such a provision would allow the two
noninvesting
members to vote as a block to the detriment of Herron. For example, the salaries
for the two working members could be set by their vote, so that little profit would
be left to be distributed. This would essentially keep Herron’s return limited to the
10%
preferred return. Herron should insist that salary allowances require unanimous
approval of all members.
A second issue is the division of partnership income. The suggested agreement
is for all the partners to share the remaining income, after the 10% preferred
return, equally. Herron should be counseled to consider all aspects of the LLC
contribution to determine if this division is equitable. There are many
considerations including the amount of investment, risk of the venture, degree of
expertise of noninvesting partners, and degree of exclusivity of noninvesting
members’ effort contribution (unique skills or business connections, for
example). Often, the simple assumption of equal division is not appropriate.
In addition, it is sometimes best to require even working members to have an
investment in the LLC, even if it is small, so that they are sensitive to the
perspective of financial loss.
Activity 12–5
a.
Chrysler LLC produces and sells Chrysler, Jeep, and Dodge vehicles and owns
Chrysler Financial Services, LLC, which provides financing services.
b.
A transaction selling a majority interest of Chrysler from
DaimlerChrysler to Cerberus Capital Management to form Chrysler LLC
was announced on May 14, 2007, and completed on August 3, 2007.
c.
Chrysler LLC is 100% owned by Chrysler Holdings LLC. Chrysler
Holdings LLC is 80.1% owned by CG Investor LLC, which is a
subsidiary of Cerberus Capital Management. Daimler AG holds 19.9% of
Chrysler Holdings LLC. Cerberus Capital Management is an investment
firm that specializes in special situation and turnaround equity
investments. Daimler AG was called DaimlerChrysler prior to this
transaction. DaimlerChrysler owned 100% of Chrysler prior to this
transaction. The ownership structure is fairly typical of complex
transactions wherein there are multiple layers of LLCs. Thus, for
example, in this case a holding company LLC owns an operating
company LLC, which in turn owns a financing subsidiary LLC. Such
complex structures allows risk and ownership interests to be more
flexibly and finely managed.
d.
Neither Chrysler LLC, nor its holding company, are public companies.
That is, the shares of Chrysler LLC are privately held by Chrysler
Holdings LLC, which in turn are privately held by Cerberus Capital
Management and Daimler AG.