ACCOUNTING FOR PARTN ERSHIPS

Copyright © 2014 by Nelson Education Ltd. 11-1

CHAPTER 11

ACCOUNTING FOR PARTN ERSHIPS

EYE OPENERS

1. Proprietorship: Ease of formation and nontax-

able entity.

Partnership: Expanded owner expertise and

capital, nontaxable entity, and ease of for- mation.

• 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 addi- tion, because of the unlimited liability of each partner for partnership debts, a particular part- ner may actually lose a greater amount than his or her capital balance.

• The partnership agreement establishes the

income-sharing ratio among the partners, amounts to be invested, and buy-sell agree- ments between the partners.

• Equally.
• 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 or her share of the losses.

• The delivery equipment should be recorded at

$10,000, the valuation agreed upon by the partners.

• 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.

• Yes. Partnership net income is divided accord-

ing 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.

• Debit the partner’s withdrawal account and

credit Cash.

• No. Payments to partners and the division

of net income are separate. The amount of cash paid out to partner C will be affected by the amount of C’s withdrawal, but the division of income will not be affected.

• Debit the income summary account for the

amount of the net income and credit the partners’ capital accounts for their respec- tive 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 partner- ship is affected.

• 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 ad- mission 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 in- come and net loss equally and operate a part- nership 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 distri- bution of the $15,000 gain. In this case, C par- ticipates 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 giv- en equity in excess of the amount invested to join the partnership.

• a. Losses and gains on sale of assets are

divided among partners in the income- sharing ratio.

• Distribution of cash is determined by the

credit balances in the partners’ capital ac- counts, after taking into consideration the potential deficiencies that may result from the inability to collect from a deficient part- ner.

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Chapter 11

Copyright © 2014 by Nelson Education Ltd. 11-2

PRACTICE EXERCISES

PE 11–1

Cash .............................................................................. 24,000 Inventory .......................................................................... 56,000 Land .............................................................................. 114,000 Notes Payable ............................................................. 50,000 Josh Beach, Capital ................................................... 144,000

Cash .............................................................................. 50,000 Inventory .......................................................................... 94,000 Craig Fox, Capital ....................................................... 144,000

PE 11–2

a. Distribution:

McDonald Ward Total

Annual salary ................................................. $ 60,000 $ 50,000 $110,000 Remaining income ......................................... 25,000 25,000 50,000 Total distributed ........................................... $85,000 $ 75,000 $160,000

• (1) Income Summary .................................................. 160,000

Jane McDonald, Capital .................................. 85,000 Dave Ward, Capital .......................................... 75,000

(2) Jane McDonald, Capital ........................................ 48,000 Dave Ward, Capital ............................................... 48,000 Jane McDonald, Withdrawals ......................... 48,000 Dave Ward, Withdrawals ................................. 48,000

PE 11–3

Smithson Mooney Total

Annual salary ................................................. $ — $ 53,000 $ 53,000 Interest ............................................................ 2,500 1 7,500 2

10,000

Remaining income ......................................... 132,750 44,250 3

177,000

Total distributed ........................................... $135,250 $104,750 $240,000

1

$50,000 × 5%

2

$150,000 × 5%

3

($240,000 – $53,000 – $10,000) × 25%

Chapter 11

Copyright © 2014 by Nelson Education Ltd. 11-3

PE 11–4

Smithson Mooney Total

Annual salary ................................................. $ — $ 53,000 $ 53,000 Interest ............................................................ 2,500 1 7,500 2

10,000

Sub-total ......................................................... 2,500 60,500 63,000 Remaining income ......................................... (1,500) (500) 3

(2,000)

Total distributed ........................................... $ 1,000 $ 60,000 $61,000

1

$50,000 × 5%

2

$150,000 × 5%

3

($61,000 – $53,000 – $10,000) × 25%

Income Summary ............................................................. 61,000 Brandon Smithson, Capital .................................. 1,000 Lakendra Mooney, Capital ................................... 60,000

PE 11–5

Smithson Mooney Total

Annual salary ................................................. $ — $ 53,000 $ 53,000 Interest ............................................................ 2,500 1 7,500 2

10,000

Sub-total ......................................................... 2,500 60,500 63,000 Remaining income ......................................... (54,750) (18,250) 3

(73,000)

Total distributed ........................................... $(52,250) $ 42,250 $(10,000)

1

$50,000 × 5%

2

$150,000 × 5%

3

($-10,000 – $53,000 – $10,000) × 25%

Brandon Smithson, Capital ............................................. 52,250 Lakendra Mooney, Capital ................................... 42,250 Income Summary .................................................. 10,000

PE 11–6

• Equipment ................................................................... 12,000

Jordon Garmon, Capital ....................................... 8,000 Kali Miller, Capital ................................................. 4,000

• Cash ............................................................................ 64,000

Brandon Tarr, Capital ........................................... 64,000

Chapter 11

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PE 11–7

Equity of Maples .............................................................................. $ 65,000 Baker contribution ........................................................................... 25,000 Total equity after admitting Baker .................................................. 90,000 Baker’s equity interest .................................................................... × 30% Baker’s equity after admission ....................................................... $ 27,000 Baker’s contribution ........................................................................ 25,000 Bonus paid to Baker ........................................................................ $ 2,000

PE 11–8

Jackie Landall .................................................................. 89,400 Cash ....................................................................... 85,000 Kitchener, Capital ................................................. 2,200* Page, Capital ......................................................... 2,200 *($89,400 – $85,000) x 1/2

PE 11–9

Penn’s equity prior to liquidation ........................................ $160,000

Sale of assets ........................................................................ $250,000 Book value of assets ($160,000 + $100,000 + $15,000) ...... 275,000 Loss on liquidation ............................................................... $ 25,000 Penn’s share of loss (50% × $25,000) ................................. (12,500) Penn’s cash distribution ...................................................... $147,500

PE 11–10

• Min’s equity prior to liquidation ..................................... $ 120,000

Sale of assets .................................................................. $ 60,000 Book value of assets ....................................................... 320,000* Loss on liquidation ......................................................... $260,000 Min’s share of loss (50% × $260,000) ............................ (130,000) Min’s deficiency .............................................................. $ (10,000)

*$120,000 + $200,000

• $60,000. $200,000 – $130,000 share of loss – $10,000 Min deficiency, also equals the

amount realized from asset sales.