Learning Objective 4
Make calculations and journal
entries for the operation of
partnerships.
10-1
Accounting for Operations of a Partnership
•
Partners’ accounts
■
Capital accounts
●
●
Used to record the initial investment of a partner, any
subsequent capital contributions, profit or loss
distributions, and any withdrawals of capital by the
partner
Deficiencies are usually eliminated by additional
capital contributions
Capital
Investment
Contributions
% Loss
% Profit
10-2
Accounting for Operations of a Partnership
•
Partners’ accounts
■
Drawing accounts
●
●
■
Used to record periodic withdrawals and is then
closed to the partner’s capital account at the end of
the period
Noncash drawings are valued at their market values
at the date of the withdrawal
Loan accounts
●
●
A loan from a partner is shown as a payable on the
partnership’s books
Unless all partners agree otherwise, the partnership
is obligated to pay interest on the loan
10-3
Practice Quiz Question #3
Which of the following would result in
a reduction to a partner’s capital
account?
a. The initial investment.
b. The allocation of a profit.
c. Additional capital contributions.
d. A withdrawal.
e. A loan to a partner.
10-4
Practice Quiz Question #3 Solution
Which of the following would result in
a reduction to a partner’s capital
account?
a. The initial investment.
b. The allocation of a profit.
c. Additional capital contributions.
d. A withdrawal.
e. A loan to a partner.
10-5
Learning Objective 5
Make calculations and journal
entries for the allocation of
partnership profit or loss.
10-6
Income Allocation Example
Assume that in its first year of operation, B&S
partnership earns $162,000 of income.
What journal entry would B&S make to allocate
the profits between the two partners?
Profit & Loss Summary 162,000
Capital, Brian
81,000
Capital, Spencer
81,000
10-7
Sharing Profits and Losses
• Partners can share profits and losses in
any way they choose.
• Possible ways include
■
ratios.
■
salary allowances and ratios.
■
imputed interest on capital, salary
allowances, and ratios.
■
capital balances only.
■
performance methods.
10-8
Group Exercise 1: Allocating Profit and Loss,
No Restrictions
The partnership of Alex and James has the following provisions:
• Alex and James receive salary allowances of $37,000 and $18,000,
respectively.
• Interest is imputed at 10% on the average capital investment.
• Any remaining profit or loss is shared between Alex and James in
a 3:2 ratio, respectively.
• Average Capital investments: Alex, $ 50,000; James, 130,000
REQUIRED
1. Prepare a schedule showing how the profit would be divided,
assuming the partnership profit or loss is:
a. $ 102,000
b. $ 57,000
c. $(34,000)
2. What journal entry should be made to allocate the profit or loss
for each of the three cases listed above?
10-9
Group Exercise 1: Solution for part a
ALLOCATED TO
Alex
James
Total Profit
Salary
Interest on Capital
Residual Profit
Allocate Profit
37,000
5,000
18,000
13,000
17,400
59,400
11,600
42,600
Income Summary 102,000
Capital, Alex
Capital, James
Total
102,000)
(55,000)
(18,000)
29,000
(29,000)
0
59,400
42,600
10-10
Group Exercise 1: Allocating Profit and Loss,
No Restrictions
The partnership of Alex and James has the following provisions:
• Alex and James receive salary allowances of $37,000 and $18,000,
respectively.
• Interest is imputed at 10% on the average capital investment.
• Any remaining profit or loss is shared between Alex and James in
a 3:2 ratio, respectively.
• Average Capital investments: Alex, $ 50,000; James, 130,000
REQUIRED
1. Prepare a schedule showing how the profit would be divided,
assuming the partnership profit or loss is:
a. $ 102,000
b. $ 57,000
c. $(34,000)
2. What journal entry should be made to allocate the profit or loss
for each of the three cases listed above?
10-11
Group Exercise 1: Solution for part b
ALLOCATED TO
Alex
James
Total Profit
Salary
Interest on Capital
Residual Profit
Allocate Profit
37,000) 18,000)
5,000) 13,000)
(9,600) (6,400)
32,400) 24,600)
Income Summary 57,000
Capital, Alex
Capital, James
Total
57,000)
(55,000)
(18,000)
(16,000)
16,000)
0)
32,400
24,600
10-12
Group Exercise 1: Solution for part c
ALLOCATED TO
Alex
James
Total Profit
Salary
Interest on Capital
Residual Profit
Allocate Profit
37,000) 18,000)
5,000) 13,000)
(64,200) (42,800)
(22,200) (11,800)
Capital, Alex
22,200
Capital, James
11,800
Income Summary
Total
(34,000)
(55,000)
(18,000)
(107,000)
107,000)
0)
34,000
10-13
Methods to Share Profits and Losses: “To the
Extent Possible” Limitations
• When a “limit” provision exists:
■
The next lower level method of sharing can be
reached if and only if there is still unallocated
profit remaining after dealing with the current
level.
10-14
Group Exercise 2: Allocating Profit and Loss—
“Limit”
Assume the same information provided in Group Exercise 1,
except that the partnership agreement stipulates the following
order of priority:
1.Salary allowances (only to the extent available)
2.Imputed interest on average capital investments (only to the
extent available).
3.Any remaining profit in a 3:2 ratio. (No mention is made
regarding losses.)
REQUIRED:
The requirements are the same as for Group Exercise 1 (i.e.,
calculate the allocations and prepare journal entries).
a.
$ 102,000
b.
$ 57,000
c.
$ (34,000)
10-15
Group Exercise 2: Solution for part a
ALLOCATED TO
Alex
James
Total Profit
Salary
Interest on Capital
Residual Profit
Allocate Profit
37,000) 18,000)
5,000) 13,000)
17,400) 11,600)
59,400) 42,600)
Income Summary 102,000
Capital, Alex
Capital, James
Total
102,000)
(55,000)
(18,000)
29,000)
(29,000)
0)
59,400
42,600
10-16
Group Exercise 2: Solution for part b
ALLOCATED TO
Alex
James
Total Profit
Salary
Interest on Capital *
Residual Profit
Allocate Profit
37,000)
18,000)
556)
1,444)
0)
37,556)
0)
19,444)
Total
57,000)
(55,000)
2,000)
(2,000)
0)
0)
0)
* $2,000 x (5,000 ÷ $18,000) = 556
$2,000 x ($13,000 ÷ $18,000) = 1,444
Income Summary 57,000
Capital, Alex
Capital, James
37,556
19,444
10-17
Group Exercise 2: Solution for part c
In this case, the partnership agreement is
vague. An argument can be made for allocating
the loss equally pursuant the UPA 1997 because
the partnership agreement is silent with respect
to losses.
Alternatively, we could presume that losses were
intended to be shared in the residual profitsharing ratio.
In these cases, the accountant should seek
clarification from each partner.
10-18
Practice Quiz Question #4
Matt and Chad created a partnership (M&C)
on 12/31/X8 (sharing profits 50/50). Matt
contributed equipment from his sole
proprietorship having a carrying value of
$4,000 and a fair value of $8,000. In 20X9,
M&C had profits of $96,000 and borrowed
$20,000 from a bank. In 2009, Matt withdrew
$35,000 cash. Matt’s Y/E capital balance is
a. $11,000.
b. $17,000.
c. $21,000.
d. $56,000.
10-19
Practice Quiz Question #4 Solution
Matt and Chad created a partnership (M&C)
on 12/31/X8 (sharing profits 50/50). Matt
contributed equipment from his sole
proprietorship having a carrying value of
$4,000 and a fair value of $8,000. In 20X9,
M&C had profits of $96,000 and borrowed
$20,000 from a bank. In 2009, Matt withdrew
$35,000 cash. Matt’s Y/E capital balance is
a. $11,000.
b. $17,000.
c. $21,000 ($8,000 + $96,000/2 - $35,000)
d. $56,000.
10-20