CHAPTER 12 Accounting for Partnerships and Limited Liability
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CHAPTER 12 ACCOUNTING FOR PARTNERSHIPS AND LIMITED LIABILITY COMPANIES QUESTION INFORMATION Number EO12-1 EO12-2 EO12-3 EO12-4 EO12-5 EO12-6 EO12-7 EO12-8 EO12-9 EO12-10 EO12-11 EO12-12 EO12-13 EO12-14 EO12-15 PE12-1A Objective 12-1 12-1 12-1 12-1 12-1 12-2 12-3 12-3 12-3 12-3 12-3 12-3 12-3 12-4 12-5 12-2 PE12-1B 12-2 PE12-2A 12-2 PE12-2B 12-2 PE12-3A 12-3 PE12-3B 12-3 PE12-4A PE12-4B PE12-5A 12-3 12-3 12-4 PE12-5B 12-4 PE12-6A 12-4 PE12-6B 12-4 Ex12-1 12-2 Ex12-2 12-2 Ex12-3 12-2 Ex12-4 12-2 Ex12-5 12-2 Description Journalize partner's original investment Journalize partner's original investment Dividing partnership net income Dividing partnership net loss Revalue assets and contribute assets to a partnership Revalue assets and contribute assets to a partnership Partner bonus Partner bonus Liquidating partnerships-gain Liquidating partnerships-gain Liquidating partnerships-deficiency Liquidating partnerships-deficiency Record partner's original investment Record partner's original investment Dividing partnership income Dividing partnership income Dividing partnership net loss Difficulty Easy Easy Easy Easy Easy Easy Easy Easy Easy Easy Easy Easy Easy Easy Easy Easy Time 5 min 5 min 5 min 5 min 5 min 5 min 5 min 5 min 5 min 5 min 5 min 5 min 5 min 5 min 5 min 5 min AACSB Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic AICPA FN-Measurement FN-Measurement FN-Measurement FN-Measurement FN-Measurement FN-Measurement FN-Measurement FN-Measurement FN-Measurement FN-Measurement FN-Measurement FN-Measurement FN-Measurement FN-Measurement FN-Measurement FN-Measurement Easy 5 min Analytic FN-Measurement Easy 5 min Analytic FN-Measurement Easy 5 min Analytic FN-Measurement Easy 5 min Analytic FN-Measurement Easy 5 min Analytic FN-Measurement Easy Easy Easy 5 min 5 min 5 min Analytic Analytic Analytic FN-Measurement FN-Measurement FN-Measurement Easy 5 min Analytic FN-Measurement Easy 5 min Analytic FN-Measurement Easy 5 min Analytic FN-Measurement Easy 10 min Analytic FN-Measurement Easy 10 min Analytic FN-Measurement Easy 15 min Analytic FN-Measurement Easy 15 min Analytic FN-Measurement Easy 5 min Analytic FN-Measurement 679 SS GL Number Ex12-6 Objective 12-2 Ex12-7 Ex12-8 12-2 12-2, 12-5 Ex12-9 12-2, 12-3 Ex12-10 12-3 Ex12-11 12-3 Ex12-12 12-3 Ex12-13 12-3 Ex12-14 12-3 Ex12-15 12-3 Ex12-16 12-2, 12-3, 12-5 Ex12-17 Ex12-18 12-3 12-2, 12-3, 12-5 Ex12-19 12-4 Ex12-20 12-4 Ex12-21 12-4 Ex12-22 12-4 Ex12-23 12-4 Ex12-24 12-4 Ex12-25 12-4 Ex12-26 12-2, 12-5 Ex12-27 FAI Ex12-28 FAI Pr12-1A 12-2 Pr12-2A 12-2 Pr12-3A 12-2, 12-5 Description Negotiating incomesharing ratio Dividing LLC income Dividing LLC net income and statement of member's equity Partner income and withdrawal journal entries Admitting new partners Admitting new partners Admitting new partners who buy an interest and contribute assets Admitting new partner who contributes assets Admitting new LLC member Admitting new partner with bonus Partner bonuses, statement of partners' equity Withdrawal of partner Statement of members' equity, admitting new member Distribution of cash upon liquidation Distribution of cash upon liquidation Liquidating partnerships-capital deficiency Distribution of cash upon liquidation Liquidating partnerships-capital deficiency Statement of partnership equity Statement of LLC liquidation Partnership entries and statement of partners' equity Financial analysis and interpretation Financial analysis and interpretation Entries and balance sheet for partnership Dividing partnership income Financial statements for partnership Difficulty Moderate Time 10 min AACSB Analytic AICPA FN-Measurement Easy Moderate 10 min 15 min Analytic Analytic FN-Measurement FN-Measurement Moderate 15 min Analytic FN-Measurement Easy 5 min Analytic FN-Measurement Moderate 15 min Analytic FN-Measurement Easy 10 min Analytic FN-Measurement Easy 10 min Analytic FN-Measurement Moderate 15 min Analytic FN-Measurement Moderate 15 min Analytic FN-Measurement Moderate 20 min Analytic FN-Measurement Moderate Difficult 15 min 20 min Analytic Analytic FN-Measurement FN-Measurement Easy 5 min Analytic FN-Measurement Easy 5 min Analytic FN-Measurement Easy 15 min Analytic FN-Measurement Easy 10 min Analytic FN-Measurement Easy 5 min Analytic FN-Measurement Moderate 15 min Analytic FN-Measurement Exl Moderate 15 min Analytic FN-Measurement Exl Moderate 15 min Analytic FN-Measurement Exl Easy 10 min Analytic FN-Measurement Easy 10 min Analytic FN-Measurement Moderate 1 hr Analytic FN-Measurement Moderate 1 hr Analytic FN-Measurement Difficult 1 1/2 hr Analytic FN-Measurement 680 SS GL Exl Exl Exl KA Number Pr12-4A Objective 12-3 Description Admitting new partner Difficulty Difficult AACSB Analytic AICPA FN-Measurement SS Moderate Time 1 1/2 hr 1 hr Pr12-5A 12-4 Pr12-6A 12-4 Pr12-1B 12-2 Pr12-2B 12-2 Pr12-3B 12-2, 12-5 Pr12-4B 12-3 Statement of partnership liquidation Statement of partnership liquidation Entries and balance sheet for partnership Dividing partnership income Financial statements for partnership Admitting new partner Analytic FN-Measurement Exl Moderate 1 hr Analytic FN-Measurement Exl Moderate 1 hr Analytic FN-Measurement Exl Moderate 1 hr Analytic FN-Measurement Difficult Analytic FN-Measurement Analytic FN-Measurement Moderate 1 1/2 hr 1 1/2 hr 1 hr Pr12-5B 12-4 Pr12-6B 12-4 SA12-1 12-1 SA12-2 12-2 SA12-3 FAI SA12-4 FAI SA12-5 12-1 Statement of partnership liquidation Statement of partnership liquidation Partnership agreement Dividing partnership income Revenue per employee Revenue per employee Partnership agreement Analytic FN-Measurement Exl Moderate 1 hr Analytic FN-Measurement Exl Easy 10 min Ethics BB-Industry Easy 10 min Analytic FN-Measurement Moderate 20 min Analytic FN-Measurement Moderate 20 min Analytic FN-Measurement Easy 10 min Analytic FN-Measurement Difficult 681 GL KA KA Exl KA 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 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 buysell agreements between the partners (members). In addition, for an LLC the operating agreement specifies if the LLC is ownermanaged 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 one-third 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 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. 682 11. 12. 13. 14. 15. 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. 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. 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. A new partner who is expected to improve the fortunes (income) of the partnership, through such things as reputation or skill, might be given equity in excess of the amount invested to join the partnership. a. Losses and gains on realization are divided among partners in the income-sharing 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 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 ............................................................ Conway Shelton, Capital ........................................... 58,000 45,000 68,000 20,000 151,000 PE 12–1B Cash ................................................................................. Accounts Receivable ...................................................... Patent ............................................................................... Accounts Payable ...................................................... Allowance for Doubtful Accounts ............................ Ashley Wells, Capital ................................................. 15,000 22,000 280,000 8,000 1,000 308,000 PE 12–2A Distributed to Adkins: Annual salary................................................................................... Interest (12% × $120,000) ................................................................ Remaining income .......................................................................... Total distributed to Adkins ............................................................. $ 49,000 14,400 55,900* $119,300 *[$180,000 – $49,000 – $14,400 – (12% × $40,000)] × 50% PE 12–2B Distributed to Lodge: Annual salary................................................................................... Interest (10% × $100,000) ................................................................ Deduct excess of allowances over income ................................... Total distributed to Lodge .............................................................. *[$60,000 – $54,000 – $10,000 – (10% × $200,000)] × 2/3 683 $ 54,000 10,000 (16,000)* $ 48,000 PE 12–3A a. Equipment .................................................................. Stuart Townley, Capital ........................................ Ayesha Starr, Capital ........................................... 15,000 b. Cash ............................................................................ Devin Morris, Capital ............................................ 28,000 10,000 5,000 28,000 PE 12–3B a. Land ............................................................................ Leon Browne, Capital ........................................... Craig Little, Capital ............................................... 25,000 b. Craig Little, Capital .................................................... Lane Tway, Capital ............................................... 15,250 12,500 12,500 15,250* *($18,000 + $12,500) × 50% PE 12–4A Equity of Masterson ........................................................................ Nutley contribution ......................................................................... Total equity after admitting Nutley ................................................ Nutley’s equity interest ................................................................... Nutley’s equity after admission ..................................................... Nutley’s contribution ...................................................................... Bonus paid to Nutley ...................................................................... $ 90,000 50,000 $ 140,000 × 40% $ 56,000 50,000 $ 6,000 PE 12–4B Equity of Porter ............................................................................... Billings’s contribution .................................................................... Total equity after admitting Billings .............................................. Billings’s equity interest ................................................................. Billings’s equity after admission ................................................... $ 420,000 200,000 $ 620,000 × 30% $ 186,000 Billings’s contribution .................................................................... Billings’s equity after admission ................................................... Bonus paid to Porter ....................................................................... $ 200,000 186,000 $ 14,000 684 PE 12–5A Chow’s equity prior to liquidation ...................................... Realization of asset sales .................................................... Book value of assets ($18,000 + $25,000 + $1,000) ........... Gain on liquidation ............................................................... Chow’s share of gain (50% × $2,000).................................. Chow’s cash distribution ..................................................... $ 18,000 $ 46,000 44,000 $ 2,000 1,000 $ 19,000 PE 12–5B Dickens’s equity prior to liquidation .................................. Realization of asset sales .................................................... Book value of assets ($55,000 + $45,000 + $10,000) ......... Loss on liquidation .............................................................. Dickens’s share of loss (50% × $35,000) ............................ Dickens’s cash distribution ................................................. $ 55,000 $ 75,000 110,000 $ 35,000 (17,500) $ 37,500 PE 12–6A a. Martin’s equity prior to liquidation ................................ Realization of asset sales .............................................. Book value of assets ...................................................... Loss on liquidation ......................................................... Martin’s share of loss (50% × $23,000) ......................... Martin’s deficiency.......................................................... $ 8,000 $ 5,000 28,000 $ 23,000 (11,500) $ (3,500) b. $5,000. $20,000 – $11,500 share of loss – $3,500 Martin deficiency, also equals the amount realized from asset sales. PE 12–6B a. Mee’s equity prior to liquidation .................................... Realization of asset sales .............................................. Book value of assets ...................................................... Loss on liquidation ......................................................... Mee’s share of loss (50% x $110,000) ........................... Mee’s deficiency ............................................................. $ 40,000 $ 50,000 160,000 $110,000 (55,000) $ (15,000) b. $50,000. $120,000 – $55,000 share of loss – $15,000 Mee deficiency, also equal to the amount realized from asset sales. 685 EXERCISES Ex. 12–1 Cash ..................................................................................... Accounts Receivable .......................................................... Merchandise Inventory ....................................................... Equipment............................................................................ Allowance for Doubtful Accounts ................................ Lamar Kline, Capital ...................................................... 10,000 118,000 74,300 67,000 8,100 261,200 Ex. 12–2 Cash ................................................................................. Accounts Receivable ...................................................... Land.................................................................................. Equipment........................................................................ Allowance for Doubtful Accounts ............................ Accounts Payable ...................................................... Notes Payable ............................................................ Ron Maples, Capital ................................................... 686 30,000 65,000 165,000 10,000 5,000 18,000 45,000 202,000 Ex. 12–3 Haley Manos $ 75,000 112,500 68,400 67,500 73,500 $75,000 37,500 81,600 82,500 76,500 Haley Manos Total a. Net income (1:1) .......................................... $ 75,000 $ 75,000 $150,000 b. Net income (3:1) .......................................... $112,500 $ 37,500 $150,000 c. Interest allowance ....................................... Remaining income (2:3) ............................. Net income .................................................. $ 18,000 50,400 $ 68,400 $ 6,000 75,600 $ 81,600 $ 24,000 126,000 $150,000 d. Salary allowance ......................................... Remaining income (1:1) ............................. Net income .................................................. $ 45,000 22,500 $ 67,500 $ 60,000 22,500 $ 82,500 $105,000 45,000 $150,000 e. Interest allowance ....................................... Salary allowance ......................................... Remaining income (1:1) ............................. Net income .................................................. $ 18,000 45,000 10,500 $ 73,500 $ 6,000 60,000 10,500 $ 76,500 $ 24,000 105,000 21,000 $150,000 a. b. c. d. e. ........................................................................................ ........................................................................................ ........................................................................................ ........................................................................................ ........................................................................................ Details 687 Ex. 12–4 Haley Manos $120,000 180,000 104,400 112,500 118,500 $120,000 60,000 135,600 127,500 121,500 Haley Manos Total a. Net income (1:1) ................................................ $120,000 $120,000 $240,000 b. Net income (3:1) ................................................ $180,000 $ 60,000 $240,000 c. Interest allowance ............................................. Remaining income (2:3) ................................... Net income ........................................................ $ 18,000 86,400 $104,400 $ 6,000 129,600 $135,600 $ 24,000 216,000 $240,000 d. Salary allowance ............................................... Remaining income (1:1) ................................... Net income ........................................................ $ 45,000 67,500 $112,500 $ 60,000 67,500 $127,500 $105,000 135,000 $240,000 e. Interest allowance ............................................. Salary allowance ............................................... Remaining income (1:1) ................................... Net income ........................................................ $ 18,000 45,000 55,500 $118,500 $ $ 24,000 105,000 111,000 $240,000 a. b. c. d. e. ........................................................................................ ........................................................................................ ........................................................................................ ........................................................................................ ........................................................................................ Details 6,000 60,000 55,500 $121,500 Ex. 12–5 Salary allowances .......................................... Remainder (net loss, $25,000 plus $75,000 salary allowances) divided equally ......... Net loss ........................................................... 688 Curt Kelly Greg Kaufman $ 45,000 $ 30,000 $ 75,000 (50,000) $ (5,000) (50,000) $ (20,000) (100,000) $ (25,000) Total 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, Jan’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: $132,000 Salary allowance ............................................ Remaining income ......................................... Net income ...................................................... Gardner Ross Total $58,000 19,200 $77,200 $42,000 12,800 $54,800 $100,000 32,000 $132,000 Gardner remaining income: ($132,000 – $100,000) × 3/5 Ross remaining income: ($132,000 – $100,000) × 2/5 b. (1) Income Summary ................................................................ L. Gardner, Member Equity ........................................... L. Ross, Member Equity ................................................ 132,000 77,200 54,800 (2) L. Gardner, Member Equity ................................................ L. Ross, Member Equity...................................................... L. Gardner, Drawing....................................................... L. Ross, Drawing ............................................................ 58,000 42,000 58,000 42,000 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. 689 Ex. 12–8 a. KXT Radio Partners Salary allowance ...................... Interest allowance .................... Remaining income (4:3:3)........ Net income ................................ $ 19,200 158,000 $177,200 1 Daily Sun Rachel Newspaper, Sizemore LLC $139,800 3,2002 118,500 $261,500 $ 12,800 118,500 $131,300 3 Total $139,800 35,200 395,000 $570,000 1 8% × $240,000 8% × $40,000 3 8% × $160,000 2 b. Dec. 31, 2008 Dec. 31, 2008 Income Summary............................................. 570,000 KXT Radio Partners, Member Equity ........ Rachel Sizemore, Member Equity ............. Daily Sun Newspaper, LLC, Member Equity ..................................................... KXT Radio Partners, Member Equity ............. 19,200 Rachel Sizemore, Member Equity .................. 143,000 Daily Sun Newspaper, LLC, Member Equity . 12,800 KXT Radio Partners, Drawing ................... Rachel Sizemore, Drawing ........................ Daily Sun Newspaper, LLC, Drawing........ 177,200 261,500 131,300 19,200 143,000 12,800 c. MEDIA PROPERTIES, LLC Statement of Members’ Equity For the Year Ended December 31, 2008 KXT Daily Sun Radio Rachel Newspaper, Partners Sizemore LLC Members’ equity, January 1, 2008 ...... Additional investment during the year Net income for the year ....................... Withdrawals during the year ............... Members’ equity, December 31, 2008 . $240,000 $ 40,000 50,000 $290,000 $ 40,000 177,200 261,500 $467,200 $301,500 19,200 143,000 $448,000 $158,500 690 Total $160,000 $ 440,000 50,000 $160,000 $ 490,000 131,300 570,000 $291,300 $1,060,000 12,800 175,000 $278,500 $ 885,000 Ex 12–9 a. Jan. 31 Partner, Drawing .................................. Cash ................................................ 25,000,000 Income Summary................................. Partner, Capital............................... 350,000,000 Partner, Capital .................................... Partner, Drawing ............................ 300,000,000* 25,000,000 b. Dec. 31 350,000,000 c. Dec. 31 300,000,000 *12 months × £25,000,000 Ex. 12–10 a. and b. Charles Shivers, Capital ............................................... Theresa Pepin, Capital ............................................. $120,000 × 1/3 40,000 40,000 Note: The sale to Shivers is not a transaction of the partnership; so, the sales price is not considered in this journal entry. Ex. 12–11 a. $1,172,000 ($2,450,000,000/2,090), rounded b. $172,000 ($360,000,000/2,090), rounded c. A new partner might contribute more than $172,000 because of goodwill attributable to the firm’s reputation, future income potential, and a strong client base, etc. 691 Ex. 12–12 a. b. (1) Kris Perry, Capital (20% × $100,000) ..................... Melvin Newman, Capital (25% × $90,000) ............. Paul Lester, Capital ........................................... 20,000 22,500 (2) Cash ......................................................................... Steve Hurd, Capital............................................ 40,000 Kris Perry ............................................................ Melvin Newman .................................................. Paul Lester .......................................................... Steve Hurd .......................................................... 42,500 40,000 80,000 67,500 42,500 40,000 Ex. 12–13 a. b. Cash .............................................................................. Mike Heil, Capital .......................................................... Alan Delong, Capital .................................................... Felix Estavez, Capital ............................................... 50,000 6,000 6,000 Mike Heil.............................................................. Alan Delong ........................................................ Felix Estavez ....................................................... 69,000 79,000 62,000 692 62,000 Ex. 12–14 a. Medical Equipment ......................................................... Dobbs, Member Equity .............................................. Fox, Member Equity .................................................. 20,000 8,0001 12,0002 2/5 = $8,000 $20,000 3/5 = $12,000 1$20,000 2 b. 1. Cash ............................................................................ Dobbs, Member Equity ........................................ Fox, Member Equity ............................................. Kopp, Member Equity .......................................... 310,000 9,400 14,100 286,500 Supporting calculations for the bonus: Equity of Dobbs ......................................... Equity of Fox .............................................. Contribution by Kopp ................................ Total equity after admitting Kopp ............ Kopp’s equity interest after admission ... Kopp’s equity after admission ................. $308,000 337,000 310,000 $955,000 × 30% $286,500 Contribution by Kopp ................................ Kopp’s equity after admission ................. Bonus paid to Dobbs and Fox .................. $310,000 286,500 $ 23,500 Dobbs: $23,500 2/5 = $9,400 Fox: $23,500 3/5 = $14,100 b. 2. Cash ............................................................................ Dobbs, Member Equity .............................................. Fox, Member Equity .................................................. Kopp, Member Equity .......................................... Supporting calculations for the bonus: Equity of Dobbs ......................................... Equity of Fox .............................................. Contribution by Kopp ................................ Total equity after admitting Kopp ............ Kopp’s equity interest after admission ... Kopp’s equity after admission ................. Contribution by Kopp ................................ Bonus paid to Kopp .................................. Dobbs: $30,000 2/5 = $12,000 Fox: $30,000 3/5 = $18,000 693 $308,000 337,000 175,000 $820,000 × 25% $205,000 175,000 $ 30,000 175,000 12,000 18,000 205,000 Ex. 12–15 a. J. Trifilio, Capital ........................................................ K. Graham, Capital ..................................................... Equipment........................................................ 3,000 3,000 b. 1. Cash ....................................................................... J. Trifilio, Capital................................................... K. Graham, Capital ............................................... L. Holden, Capital ............................................ 50,000 3,400 3,400 6,000 56,800 Supporting calculations for the bonus: Equity of Trifilio .................................................................... Equity of Graham.................................................................. Contribution by Holden ........................................................ Total equity after admitting Holden .................................... Holden’s equity interest after admission............................ Holden’s equity after admission ......................................... Contribution by Holden ........................................................ Bonus paid to Holden .......................................................... $ 87,000 147,000 50,000 $284,000 × 20% $ 56,800 50,000 $ 6,800 The bonus to Holden is debited equally between Trifilio’s and Graham’s capital accounts. b. 2. Cash ....................................................................... J. Trifilio, Capital ............................................. K. Graham, Capital .......................................... L. Holden, Capital ............................................ 125,000 8,650 8,650 107,700 Supporting calculations for the bonus: Equity of Trifilio .................................................................... Equity of Graham.................................................................. Contribution by Holden ........................................................ Total equity after admitting Holden .................................... Holden’s equity interest after admission............................ Holden’s equity after admission ......................................... Contribution by Holden ........................................................ Holden’s equity after admission ......................................... Bonus paid to Trifilio and Graham ...................................... $ 87,000 147,000 125,000 $359,000 × 30% $107,700 $125,000 107,700 $ 17,300 The bonus to Trifilio and Graham is credited equally between Trifilio’s and Graham’s capital accounts. 694 Ex. 12–16 ANGEL INVESTOR ASSOCIATES Statement of Partnership Equity For the Year Ended December 31, 2008 Jan Lisa Sarah Strous, Lankford, Rogers, Capital Capital Capital Total Partnership Capital Partnership Capital, January 1, 2008 ........ $ 36,000 $ 84,000 $120,000 Admission of Sarah Rogers ...................... — — $ 30,000 30,000 Salary allowance ........................................ 25,000 25,000 Remaining income ..................................... 27,600 64,400 23,000 115,000 Less: Partner withdrawals ......................... (13,800) (32,200) (11,500) (57,500) Partnership Capital, December 31, 2008 .. $ 74,800 $116,200 $ 41,500 $232,500 Admission of Sarah Rogers: Equity of initial partners prior to admission ................. Contribution by Rogers .................................................. Total.................................................................................. Rogers’s equity interest after admission ...................... Rogers’s equity after admission .................................... Contribution by Rogers .................................................. No bonus .......................................................................... $120,000 30,000 $150,000 × 20% $ 30,000 30,000 $ 0 Net income distribution: The income-sharing ratio is equal to the proportion of the capital balances after admitting Rogers according to the partnership agreement: Jan Strous: $36,000 = 24% $150,000 Lisa Lankford: $84,000 = 56% $150,000 Sarah Rogers: $30,000 = 20% $150,000 These ratios can be multiplied by the $115,000 remaining income ($140,000 – $25,000 salary allowance to Strous) to distribute the earnings to the respective partner capital accounts. Withdrawals: Half of the remaining income is distributed to the three partners. Strous need not take the salary allowance as a withdrawal but may allow it to accumulate in the member equity account. 695 Ex. 12–17 a. Merchandise Inventory ................................................ Allowance for Doubtful Accounts ......................... Glenn Powell, Capital ............................................. Tammie Sawyer, Capital ......................................... Joe Patel, Capital .................................................... 1 2 b. 6,200 10,2001 6,8002 6,8002 $23,800 × 3/7 $23,800 × 2/7 Glenn Powell, Capital ................................................... Cash ......................................................................... Notes Payable ......................................................... 1 30,000 270,2001 105,200 165,000 $260,000 + $10,200 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 2007, the income-sharing ratio is as follows: Utah Properties, LLC: Aztec Holdings, Ltd.: $70,000 = 25% $280,000 $210,000 = 75% $280,000 Or a 1:3 ratio b. Following the same procedure as in (a): Utah Properties, LLC: Aztec Holdings, Ltd.: Cleveland Porter: c. $78,400 = 20% $392,000 $254,800 = 65% $392,000 $58,800 = 15% $392,000 Cleveland Porter provided a $287,500 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 $267,500. 696 Ex. 12–18 Concluded d. The positive entries to Utah Properties and Aztec Holdings are the result of a bonus paid by Cleveland Porter. e. Cleveland Porter acquired a 20% interest in the business, computed as follows: Cleveland Porter’s contribution ......................... Utah Properties, LLC, member equity ............... Aztec Holdings, Ltd., member equity................. Total ...................................................................... $ 287,500 530,000 520,000 $1,337,500 Porter’s ownership interest after admission ($267,500 ÷ $1,337,500) ....................................... 20.00% Ex. 12–19 a. Cash balance ................................................. Sum of capital accounts ............................... Loss from sale of noncash assets ............... Capital balances before realization .............. b. Division of loss on sale of noncash assets Balances ......................................................... c. Cash distributed to partners......................... Final balances ................................................ $ 24,000 35,000 $ 11,000 Pitt Leon $ 15,000 5,5001 $ 9,500 9,500 $ 0 $ 20,000 5,5001 $ 14,500 14,500 $ 0 Boling Bishop $ 43,000 $ 57,000 12,000 $ 31,000 31,000 $ 0 12,000 $ 45,000 45,000 $ 0 1$11,000/2 Ex. 12–20 Capital balances before realization .................... Division of loss on sale of noncash assets [($100,000 – $76,000)/2].................................... Capital balances after realization........................ Cash distributed to partners ............................... Final balances ...................................................... 697 Ex. 12–21 a. Deficiency b. $64,000 ($21,000 + $57,500 – $14,500) c. Cash ............................................................................... Shelby, Capital.......................................................... Capital balances after realization ....... Receipt of partner deficiency ............. Capital balances after eliminating deficiency........................................ 14,500 14,500 Mawby White Shelby $ 21,000 $ 57,500 $(14,500) Dr. 14,500 $ 21,000 $ 57,500 $ 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. Seth Kerr Driver Total $ 225 + 200 $ 150 + 200 $ — + 200 $ 375 + 600 $ 425 $ 350 $ 200 $ 975 Driver has a capital deficiency of $40, as indicated in the following tabulation: Capital invested ................................ Net loss ............................................. Capital balances ............................... Seth Kerr $ 225 – 40 $ 185 $ 150 – 40 $ 110 Driver Total $ — – 40 $ 40 Dr. $ 375 – 120 $ 255 Ex. 12–23 Heinz Capital balances after realization.............. Distribution of partner deficiency ............. Capital balances after deficiency distribution ........................................... 1$18,000 2$18,000 × 2/3 × 1/3 698 Dicer Ho $(18,000) 18,000 $ 70,000 (12,000)1 $ 45,000 (6,000)2 $ $ 58,000 $ 39,000 0 Ex. 12–24 DILLS, GORDON, AND CHAVEZ Statement of Partnership Liquidation For the Period Ending July 1–29, 2008 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 + Dills (3/6) Gordon + (2/6) + Chavez (1/6) $ 42,000 $ 90,000 $ 45,000 $ 32,000 $ 40,000 $ 15,000 + 66,000 $108,000 – 45,000 – 90,000 $ 0 — — $ 45,000 – 45,000 – 12,000 $ 20,000 — – 8,000 $ 32,000 — – 4,000 $ 11,000 — $ 63,000 – 63,000 $ 0 $ $ $ 20,000 – 20,000 $ 0 $ 32,000 – 32,000 $ 0 $ 11,000 – 11,000 $ 0 0 — $ 0 699 0 — $ 0 Ex. 12–25 a. CITY SIGNS, LLC Statement of LLC Liquidation For the Period March 1–31, 2008 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 + Gilley (2/5) + Hughes (2/5) + Moussa (1/5) $ 14,000 $ 126,000 $ 35,000 $ 19,000 $ 54,000 $ 32,000 + 146,000 $ 160,000 – 35,000 – 126,000 $ 0 — — $ 35,000 – 35,000 + 8,000 $ 27,000 — + 8,000 $ 62,000 — + 4,000 $ 36,000 — $ 125,000 – 125,000 $ 0 $ 0 $ 0 $ $ 27,000 – 27,000 $ 0 $ 62,000 – 62,000 $ 0 $ 36,000 – 36,000 $ 0 — $ 0 — 0 b. Gilley, Member Equity ................................................... Hughes, Member Equity ................................................ Moussa, Member Equity ................................................ Cash ........................................................................... 700 27,000 62,000 36,000 125,000 Ex. 12–26 a. (1) (2) Income Summary ......................................................... Dal Polivka, Capital ................................................. Amanda Pratt, Capital............................................. 180,000 Dal Polivka, Capital ...................................................... Amanda Pratt, Capital .................................................. Dal Polivka, Drawing............................................... Amanda Pratt, Drawing .......................................... 65,000 76,000 90,000 90,000 65,000 76,000 b. POLIVKA AND PRATT Statement of Partners’ Equity For the Year Ended December 31, 2008 Capital, January 1, 2008................................. Additional investment during the year ......... Net income for the year ................................. Withdrawals during the year ......................... Capital, December 31, 2008 ........................... 701 Dal Polivka Amanda Pratt Total $105,000 15,000 $120,000 90,000 $210,000 65,000 $145,000 $135,000 — $135,000 90,000 $225,000 76,000 $149,000 $240,000 15,000 $255,000 180,000 $435,000 141,000 $294,000 Ex. 12–27 a. Revenue per professional staff, 2004: $6,876,000,000 = $301,000 22,841 Revenue per professional staff, 2005: $ 7,814,000 = $296,000 26,401 b. The revenues increased between the two years from $6,876 million to $7,814 million, or 13.6% [($7,814 – $6,876)/$6,876]. Revenue growth has been strong, mostly resulting from Sarbanes-Oxley work. However, the number of employees has grown at a faster rate, from 22,841 to 26,401, or 15.6% [(26,401 – 22,841)/22,841]. As a result, the revenue per professional staff employee has dropped from $301,000 to $296,000. This slight loss in efficiency is probably to be expected. Public accounting firms have had difficulty finding employees for the emerging Sarbanes-Oxley work. From 2004 to 2005, they have aggressively hired employees to bring the workforce in line with the demand for work. Prior to this time, the firm was relying heavily on overtime. Ex. 12–28 a. Revenue per employee, 2007: $32,500,000 = $125,000 260 Revenue per employee, 2008: $38,000,000 = $100,000 380 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 $125,000 in 2007 to $100,000 in 2008. 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. 702 PROBLEMS Prob. 12–1A 1. May 1 1 Cash ..................................................................... Merchandise Inventory ....................................... Crystal Polles, Capital ................................... 16,500 43,500 Cash ..................................................................... Accounts Receivable .......................................... Equipment ........................................................... Allowance for Doubtful Accounts ................ Accounts Payable.......................................... Notes Payable ................................................ Doug Kovac, Capital...................................... 13,000 19,100 53,300 60,000 1,400 14,000 20,000 50,000 2. POLLES AND KOVAC Balance Sheet May 1, 2007 Assets Current assets: Cash .................................................................... Accounts receivable .......................................... Less allowance for doubtful accounts ............. Merchandise inventory ...................................... Total current assets ..................................... Plant assets: Equipment .......................................................... Total assets ............................................................. Liabilities Current liabilities: Accounts payable .............................................. Notes payable..................................................... Total liabilities ......................................................... Partners’ Equity Crystal Polles, capital ............................................. Doug Kovac, capital ................................................ Total partners’ equity .............................................. Total liabilities and partners’ equity ...................... 703 $ 29,500 $ 19,100 1,400 17,700 43,500 $ 90,700 53,300 $ 144,000 $ 14,000 20,000 $ 34,000 $ 60,000 50,000 110,000 $ 144,000 Prob. 12–1A Concluded 3. Apr. 30 30 Income Summary ................................................ Crystal Polles, Capital ................................... Doug Kovac, Capital...................................... 74,000 Crystal Polles, Capital ........................................ Doug Kovac, Capital ........................................... Crystal Polles, Drawing................................. Doug Kovac, Drawing ................................... 22,000 28,000 35,000* 39,000* 22,000 28,000 *Computations: Polles Interest allowance .............................................. Salary allowance ................................................ Remaining income (1:1) .................................... Net income ......................................................... 110% 210% × $60,000 × $50,000 704 Kovac Total 6,0001 $ 5,0002 $ 11,000 20,000 25,000 45,000 9,000 9,000 18,000 $ 35,000 $ 39,000 $ 74,000 $ Prob. 12–2A (1) $114,000 Plan a. b. c. d. e. f. .................................................... .................................................... .................................................... .................................................... .................................................... .................................................... (2) $210,000 Lange Lopez Lange Lopez $57,000 85,500 38,000 66,600 49,100 48,200 $57,000 28,500 76,000 47,400 64,900 65,800 $105,000 157,500 70,000 114,600 97,100 86,600 $105,000 52,500 140,000 95,400 112,900 123,400 Details $114,000 Lange $210,000 Lopez Lange Lopez a. Net income (1:1) ........................ $ 57,000 $ 57,000 $ 105,000 $ 105,000 b. Net income (3:1) ........................ $ 85,500 $ 28,500 $ 157,500 $ 52,500 c. Net income (1:2) ........................ $ 38,000 $ 76,000 $ 70,000 $ 140,000 d. Interest allowance ..................... $ 28,800 Remaining Income (1:1) ............ 37,800 Net income ................................. $ 66,600 $ 9,600 37,800 $ 47,400 $ 28,800 85,800 $ 114,600 $ e. Interest allowance ..................... $ 28,800 Salary allowance ....................... 35,000 Excess of allowances over income (1:1) ........................... (14,700) Remaining income (1:1) ............ Net income ................................. $ 49,100 $ $ 28,800 35,000 $ 33,300 $ 97,100 33,300 $ 112,900 Interest allowance ..................... $ 28,800 Salary allowance ....................... 35,000 Bonus allowance ....................... Excess of allowances over income (1:1) ........................... (15,600) Remaining income (1:1) ............ Net income ................................. $ 48,200 $ f. 120% 220% × ($114,000 – $105,000) × ($210,000 – $105,000) 705 9,600 70,000 9,600 85,800 $ 95,400 9,600 70,000 (14,700) $ 64,900 9,600 $ 28,800 70,000 35,000 1,8001 $ 9,600 70,000 21,0002 (15,600) $ 65,800 22,800 $ 86,600 22,800 $ 123,400 Prob. 12–3A 1. SATO AND KOENING Income Statement For the Year Ended December 31, 2008 Professional fees.................................................................. Expenses: Salary expense .............................................................. Depreciation expense—building .................................. Property tax expense .................................................... Heating and lighting expense ...................................... Supplies expense .......................................................... Depreciation expense—office equipment ................... Miscellaneous expense ................................................ Total expenses........................................................... Net income ............................................................................ Peter Sato Division of net income: Salary allowance ........................................ Interest allowance ...................................... Remaining income ..................................... Net income ....................................................... *$95,000 × 10% **($65,000 – $8,000) × 10% $ 40,000 9,500* 12,400 $ 61,900 $297,450 $132,300 10,500 7,000 6,300 2,850 2,800 5,700 167,450 $130,000 May Koening Total $ 50,000 $ 90,000 5,700** 15,200 12,400 24,800 $ 68,100 $ 130,000 2. SATO AND KOENING Statement of Partners’ Equity For the Year Ended December 31, 2008 Capital, January 1, 2008.................................. Additional investment during the year .......... Net income for the year .................................. Withdrawals during the year .......................... Capital, December 31, 2008 ............................ 706 Peter Sato May Koening Total $ 95,000 — $ 95,000 61,900 $ 156,900 50,000 $ 106,900 $ 57,000 8,000 $ 65,000 68,100 $ 133,100 70,000 $ 63,100 $ 152,000 8,000 $ 160,000 130,000 $ 290,000 120,000 $ 170,000 Prob. 12–3A Concluded 3. SATO AND KOENING Balance Sheet December 31, 2008 Assets Current assets: Cash ............................................................ Accounts receivable .................................. Supplies ...................................................... Total current assets ............................. Plant and equipment: Land ............................................................ Building ...................................................... $ 130,000 Less accumulated depreciation .......... 69,200 Office equipment........................................ Less accumulated depreciation .......... Total plant assets ............................ Total assets ..................................................... $ 30,000 38,900 1,900 $ 70,800 $ 25,000 60,800 $ 39,000 21,500 17,500 103,300 $ 174,100 Liabilities Current liabilities: Accounts payable ...................................... Salaries payable ......................................... Total liabilities ................................................. $ 2,100 2,000 $ 4,100 Partners’ Equity Peter Sato, capital ........................................... May Koening, capital....................................... Total partners’ equity ...................................... Total liabilities and partners’ equity .............. 707 $ 106,900 63,100 170,000 $ 174,100 Prob. 12–4A 1. Apr. 30 Asset Revaluations ......................................... Accounts Receivable ................................ Allowance for Doubtful Accounts ............ *[($34,000 – $2,400) 5%] – $900 3,080 30 Asset Revaluations ......................................... Merchandise Inventory ............................. 3,000 30 Accumulated Depreciation—Equipment....... Equipment ....................................................... Asset Revaluations ................................... **$240,080 – $180,000 80,000 60,080** 2. May 2,400 680* 3,000 140,080 30 Asset Revaluations ......................................... Prad Kumar, Capital .................................. Carol Grigg, Capital ................................... 134,000 1 Carol Grigg, Capital ........................................ Sara Culver, Capital................................... 55,000 1 Cash ................................................................. Sara Culver, Capital................................... 25,000 708 67,000 67,000 55,000 25,000 Prob. 12–4A Concluded 3. KUMAR, GRIGG, AND CULVER Balance Sheet May 1, 2008 Assets Current assets: Cash ............................................................ Accounts receivable .................................. Less allowance for doubtful accounts ..... Merchandise inventory .............................. Prepaid insurance ...................................... Total current assets ............................. Plant assets: Equipment .................................................. Total assets ..................................................... $ 31,800 $ 31,600 1,580 Liabilities Current liabilities: Accounts payable ...................................... Notes payable............................................. Total liabilities ................................................. 30,020 60,000 2,100 $123,920 240,080 $364,000 $ 12,000 20,000 $ 32,000 Partners’ Equity Prad Kumar, capital......................................... Carol Grigg, capital ......................................... Sara Culver, capital ......................................... Total partners’ equity ...................................... Total liabilities and partners’ equity .............. 1$100,000 2$73,000 + $67,000 + $67,000 – $55,000 709 $167,0001 85,0002 80,000 332,000 $364,000 Prob. 12–5A 1. DANIELS, BURTON, AND RAMARIZ Statement of Partnership Liquidation For Period July 3–29, 2008 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. Noncash + Assets = Liabilities + Daniels Burton (50%) + (25%) $ 9,500 $ 84,000 $ 30,000 $ 27,000 $ + $ – $ + $ – $ 54,000 63,500 30,000 33,500 3,000 36,500 36,500 0 – 84,000 $ 0 — $ 0 — $ 0 — $ 0 — 30,000 30,000 0 — 0 — 0 – 15,000 $ 12,000 — $ 12,000 — $ 12,000 – 12,000 $ 0 – 7,500 $ (3,000) — $ (3,000) + 3,000 $ 0 — $ 0 $ – $ $ $ 4,500 Ramariz + (25%) $ 32,000 – 7,500 $ 24,500 — $ 24,500 — $ 24,500 – 24,500 $ 0 The $3,000 deficiency of Burton would be divided between the other partners, Daniels and Ramariz, in their income-sharing ratio (2:1, respectively). Therefore, Daniels would absorb 2/3 of the $3,000 deficiency, or $2,000, and Ramariz would absorb 1/3 of the $3,000 deficiency, or $1,000. 710 Prob. 12–6A 1. ALLEN, DEE, AND ITO Statement of Partnership Liquidation For Period October 1–30, 2008 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 + Allen (2/5) + Dee (2/5) + Ito (1/5) $ 13,000 $ 179,000 $ 50,000 $ 55,000 $ 75,000 $ 12,000 + 224,000 $ 237,000 – 50,000 – 179,000 $ 0 — — $ 50,000 – 50,000 + 18,000 $ 73,000 — + 18,000 $ 93,000 — + 9,000 $ 21,000 — $ 187,000 – 187,000 $ 0 $ 0 $ 0 $ $ 73,000 – 73,000 $ 0 $ 93,000 – 93,000 $ 0 $ 21,000 – 21,000 $ 0 — $ 711 0 — 0 Prob. 12–6A Concluded 2. ALLEN, DEE, AND ITO Statement of Partnership Liquidation For Period October 1–30, 2008 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 .................................. + Noncash Assets = Liabilities + Allen (2/5) + Dee (2/5) + Ito (1/5) $ 13,000 $ 179,000 $ 50,000 $ 55,000 $ 75,000 $ 12,000 + 109,000 $ 122,000 – 50,000 – 179,000 $ 0 — — $ 50,000 – 50,000 – 28,000 $ 27,000 — – 28,000 $ 47,000 — – 14,000 $ (2,000) — $ 72,000 + 2,000 $ 74,000 – 74,000 $ 0 $ $ $ 27,000 — $ 27,000 – 27,000 $ 0 $ 47,000 — $ 47,000 – 47,000 $ 0 $ (2,000) + 2,000 $ 0 — $ 0 0 — $ 0 $ — $ 0 — 0 712 0 — $ 0 Prob. 12–1B 1. Nov. 1 Cash ...................................................................... Merchandise Inventory ........................................ E. Hoffman, Capital ......................................... 9,000 16,000 1 Cash ...................................................................... Accounts Receivable ........................................... Merchandise Inventory ........................................ Equipment............................................................. Allowance for Doubtful Accounts ................. Accounts Payable ........................................... Notes Payable ................................................. Mark Torres, Capital ....................................... 10,600 22,000 31,000 38,000 25,000 900 7,300 3,400 90,000 2. HOFFMAN AND TORRES Balance Sheet November 1, 2007 Assets Current assets: Cash ........................................................... Accounts receivable ................................. Less allowance for doubtful accounts .... Merchandise inventory ............................. Total current assets ............................ Plant assets: Equipment ................................................. Total assets .................................................... $ 19,600 $ 22,000 900 Liabilities Current liabilities: Accounts payable ..................................... Notes payable............................................ Total liabilities ................................................ Partners’ Equity E. Hoffman, capital ......................................... Mark Torres, capital ....................................... Total partners’ equity ..................................... Total liabilities and partners’ equity ............. 713 21,100 47,000 $ 87,700 38,000 $125,700 $ 7,300 3,400 $ 10,700 $ 25,000 90,000 115,000 $125,700 Prob. 12–1B Concluded 3. Oct. 31 Income Summary ................................................. E. Hoffman, Capital ......................................... Mark Torres, Capital ....................................... 95,500 31 E. Hoffman, Capital .............................................. Mark Torres, Capital ............................................. E. Hoffman, Drawing ....................................... Mark Torres, Drawing ..................................... 20,000 12,000 58,000* 37,500* 20,000 12,000 *Computations: Interest allowance .......................................... Salary allowance ............................................ Remaining income (1:1) ................................. Net income ...................................................... 110% 210% × $250,000 × $90,000 714 Hoffman Torres Total $ 2,5001 48,000 7,500 $ 58,000 $ 9,0002 21,000 7,500 $ 37,500 $ 11,500 69,000 15,000 $ 95,500 Prob. 12–2B (1) $135,000 LaRue Small Plan a. b. c. d. e. f. ................................................... ................................................... ................................................... ................................................... ................................................... ................................................... $ 67,500 54,000 90,000 80,200 74,600 83,600 $ 67,500 81,000 45,000 54,800 60,400 51,400 (2) $60,000 LaRue Small $ 30,000 24,000 40,000 35,200 37,100 38,600 $ 30,000 36,000 20,000 24,800 22,900 21,400 Details $135,000 $60,000 LaRue Small LaRue Small a. Net income (1:1) ........................ $ 67,500 $ 67,500 $ 30,000 $ 30,000 b. Net income (2:3) ........................ $ 54,000 $ 81,000 $ 24,000 $ 36,000 c. Net income (2:1) ........................ $ 90,000 $ 45,000 $ 40,000 $ 20,000 d. Interest allowance ..................... Remaining income (3:2) ............ Net income ................................. $ 1,600 78,600 $ 80,200 $ 2,400 52,400 $ 54,800 $ 1,600 33,600 $ 35,200 $ e. Interest allowance ..................... Salary allowance ....................... Remaining income (1:1) ............ Net income ................................. $ 1,600 30,000 43,000 $ 74,600 $ 2,400 15,000 43,000 $ 60,400 $ 1,600 30,000 5,500 $ 37,100 $ f. Interest allowance ..................... Salary allowance ....................... Bonus allowance ....................... Remaining income (1:1) ............ Net income ................................. $ $ $ $ 120% 220% 1,600 30,000 18,0001 34,000 $ 83,600 × ($135,000 – $45,000) × ($60,000 – $45,000) 715 2,400 15,000 34,000 $ 51,400 1,600 30,000 3,0002 4,000 $ 38,600 2,400 22,400 $ 24,800 2,400 15,000 5,500 $ 22,900 2,400 15,000 4,000 $ 21,400 Prob. 12–3B 1. WARRICK AND MURPHY Income Statement For the Year Ended December 31, 2008 Professional fees................................................................. Expenses: Salary expense ............................................................... Depreciation expense—building .................................. Property tax expense..................................................... Heating and lighting expense ....................................... Supplies expense........................................................... Depreciation expense—office equipment .................... Miscellaneous expense ................................................. Total expenses.......................................................... Net income ........................................................................... $465,000 $305,800 6,800 2,400 9,400 2,100 4,200 4,300 335,000 $130,000 Dan Warrick Division of net income: Salary allowance ........................................ Interest allowance ...................................... Remaining income ..................................... Net income ....................................................... $ 40,000 11,400* 7,100 $ 58,500 Ron Murphy Total $ 50,000 $ 90,000 14,400** 25,800 7,100 14,200 $ 71,500 $ 130,000 *$95,000 12% **($140,000 – $20,000) 12% 2. WARRICK AND MURPHY Statement of Partners’ Equity For the Year Ended December 31, 2008 Capital, January 1, 2008.................................. Additional investment during the year .......... Net income for the year .................................. Withdrawals during the year .......................... Capital, December 31, 2008 ............................ 716 Dan Warrick Ron Murphy $ 95,000 — $ 95,000 58,500 $ 153,500 45,000 $ 108,500 $ 120,000 20,000 $ 140,000 71,500 $ 211,500 50,000 $ 161,500 Total $ 215,000 20,000 $ 235,000 130,000 $ 365,000 95,000 $ 270,000 Prob. 12–3B Concluded 3. WARRICK AND MURPHY Balance Sheet December 31, 2008 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 ..................................................... $ 12,500 31,800 1,400 $ 45,700 $140,000 $110,000 46,900 63,100 $ 46,000 19,200 26,800 229,900 $275,600 Liabilities Current liabilities: Accounts payable ...................................... Salaries payable ......................................... Total liabilities ................................................. $ 1,600 4,000 $ 5,600 Partners’ Equity Dan Warrick, capital ........................................ Ron Murphy, capital ........................................ Total partners’ equity ...................................... Total liabilities and partners’ equity .............. 717 $108,500 161,500 270,000 $275,600 Prob. 12–4B 1. May 31 Asset Revaluations ................................... Accounts Receivable ........................... Allowance for Doubtful Accounts ....... 3,300 2,500 800* *[($26,500 – $2,500) 5%] – $400 31 31 31 2. June 1 1 Merchandise Inventory ............................. Asset Revaluations .............................. 9,000 Accumulated Depreciation—Equipment . Equipment ............................................ Asset Revaluations .............................. 34,200 Asset Revaluations ................................... Adrian Knox, Capital ............................ Lisa Oaks, Capital ................................ 37,900 Lias Oaks, Capital...................................... Todd Aguero, Capital ........................... 30,000 Cash............................................................ Todd Aguero, Capital ........................... 40,000 718 9,000 2,000 32,200 18,950 18,950 30,000 40,000 Prob. 12–4B Concluded 3. KNOX, OAKS, AND AGUERO Balance Sheet June 1, 2008 Assets Current assets: Cash ............................................................ Accounts receivable .................................. Less allowance for doubtful accounts ..... Merchandise inventory .............................. Prepaid insurance ...................................... Total current assets ............................. Plant assets: Equipment .................................................. Total assets ..................................................... $ 52,300 $ 24,000 1,200 22,800 98,000 4,200 $177,300 124,000 $301,300 Liabilities Current liabilities: Accounts payable ...................................... Notes payable............................................. Total liabilities ................................................. $ 34,400 30,000 $ 64,400 Partners’ Equity Adrian Knox, capital........................................ Lisa Oaks, capital ............................................ Todd Aguero, capital....................................... Total partners’ capital ..................................... Total liabilities and partners’ capital ............. 1$85,000 2$74,000 + $18,950 + $18,950 – $30,000 719 $103,9501 62,9502 70,000 236,900 $301,300 Prob. 12–5B 1. NICHOLS, NEWBY, AND PATEL Statement of Partnership Liquidation For the Period September 10–30, 2008 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. Noncash + Assets = Liabilities + Nichols Newby (25%) + (25%) $ 4,300 $ 73,700 $ 12,000 $ 32,200 $ 5,400 + $ – $ + $ – $ 47,300 51,600 12,000 39,600 1,200 40,800 40,800 0 – 73,700 $ 0 — $ 0 — $ 0 — $ 0 — $ 12,000 – 12,000 $ 0 — $ 0 — $ 0 – 6,600 $ 25,600 — $ 25,600 — $ 25,600 – 25,600 $ 0 – 6,600 $ (1,200) — $ (1,200) + 1,200 $ 0 — $ 0 + Patel (50%) $ 28,400 – 13,200 $ 15,200 — $ 15,200 — $ 15,200 – 15,200 $ 0 The $1,200 deficiency of Newby would be divided between the other partners, Nichols and Patel, in their incomesharing ratio (1:2 respectively). Therefore, Nichols would absorb 1/3 of the $1,200 deficiency, or $400.00, and Patel would absorb 2/3 of the $1,200 deficiency, or $800.00. 720 Prob. 12–6B 1. STREET, RHODES, AND FLYNN Statement of Partnership Liquidation For Period June 3–29, 2008 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 + Street (1/5) + Rhodes (2/5) + Flynn (2/5) $ 43,000 $ 234,000 $ 60,000 $ 16,000 $ 78,000 $ 123,000 + 300,000 $ 343,000 – 60,000 – 234,000 $ 0 — — $ 60,000 – 60,000 + 13,200 $ 29,200 — + 26,400 $ 104,400 — + 26,400 $ 149,400 — $ 283,000 – 283,000 $ 0 $ $ $ 29,200 – 29,200 $ 0 $ 104,400 – 104,400 $ 0 $ 149,400 – 149,400 $ 0 0 — $ 0 721 0 — $ 0 Prob. 12–6B Concluded 2. STREET, RHODES, AND FLYNN Statement of Partnership Liquidation For Period June 3–29, 2008 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 .................................. + Noncash Assets = Liabilities + Street (1/5) + Rhodes (2/5) + Flynn (2/5) $ 43,000 $ 234,000 $ 60,000 $ 16,000 $ 78,000 $ 123,000 + 106,000 $ 149,000 – 60,000 – 234,000 $ 0 — — $ 60,000 – 60,000 – 25,600 $ (9,600) — – 51,200 $ 26,800 — – 51,200 $ 71,800 — $ 89,000 + 9,600 $ 98,600 – 98,600 $ 0 $ 0 $ 0 $ $ (9,600) + 9,600 $ 0 — $ 0 $ 26,800 — $ 26,800 – 26,800 $ 0 $ 71,800 — $ 71,800 – 71,800 $ 0 — $ — — $ 0 — 0 722 0 $ 0 SPECIAL ACTIVITIES SA 12–1 This scenario highlights one of the problems that arises in partnerships: attempting to align contribution with income division. Often, disagreements are based upon honest differences of opinion. However, in this scenario, there is evidence that Tate was acting unethically. Tate apparently made no mention of his plans to “scale back” once the partnership was consummated. As a result, Crowe agreed to an equal division of income based on the assumption that Tate’s past efforts would project into the future, while in fact, Tate had no intention of this. As a result, Crowe is now providing more effort, while receiving the same income as Tate. This is clearly not sustainable in the long term. Tate does not appear to be concerned about this inequity. Thus, the evidence points to some duplicity on Tate’s part. Essentially, he knows that he is riding on Crowe’s effort and had planned it that way. Crowe 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 contribution to the firm. SA 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, Wise will receive a large interest distribution based on the large capital balance, while Sanchez 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. 723 SA 12–3 a. Deloitte & Touche ................................................ Ernst & Young...................................................... PricewaterhouseCoopers ................................... KPMG .................................................................... Revenue per Partner Revenue per Professional Staff $2,677,570 2,755,500 2,358,636 2,596,215 $339,170 334,223 244,649 346,789 *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: $6,876,000 ,000 = $2,677,570 2,568 **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: $6,876,000 ,000 = $339,170 20,273 b. The amount earned per partner is not significantly different between the four firms. Ernst & Young has the highest revenue per partner, while PricewaterhouseCoopers (PWC) has the lowest. PWC’s revenue per partner is about 14% below the highest revenue per partner firm, Ernst & Young [$2,755,500 – $2,358,636)/$2,755,500]. The revenue per professional staff is significantly lower for PWC. PWC revenue per professional staff member is 29% below the highest revenue per professional firm, KPMG LLP [($346,789 – $244,649)/$346,789]. Indeed, PWC appears to be somewhat of an outlier in its revenue earned per professional staff. Together these data indicate that PWC may not be operating its firm as efficiently as the other three firms. The mix of services offered by the firms does not appear to impact these numbers. It is interesting to note that only Deloitte & Touche is significantly more involved in management advisory services (MAS) than the other three firms. The other three firms have sold their MAS operations in order to better conform to the Sarbanes-Oxley Act, which prohibited audit clients from using MAS services from the same firm. Deloitte & Touche has decided not to sell its consulting practice. 724 SA 12–4 a. A key distinction between a partnership and a corporation is that all of the partners (owners) are not only investors but also work in the partnership. The partners provide both capital and “sweat equity.” This is a key distinction that provides insight about the performance of the firm. The expected income from the partnership is given as the country average, or $260,000. The following is what each partner actually earned from the partnership. Allocation of partnership income ($44,000,000 ÷ 200 partners) = $220,000 per partner Note that the partners’ earnings are less than what might be expected from the expected, or average, income. Thus, the partnership has performed below the partners’ expectations. b. The income statement indicates some large litigation losses. These losses appear to be the major reason for the partnership’s poor performance. Without the losses, the partnership net income allocation would have been $295,000 [($44,000,000 + $15,000,000) ÷ 200]. The $295,000 exceeds the market-based compensation of $260,000 per year. In addition, the staff professional salaries of $80,000 per year ($120,00 ($75,000). This would also have led to a smaller income to the partners than might have been expected. 725 SA 12–5 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, Dave Lester, 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 Lester 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 Lester. 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 Lester’s return limited to the 10% preferred return. Lester 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. Lester 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. 726
