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Conceptual Chapter Objectives . C1: Identify characteristics of partnerships and similar organizations. Analytical Chapter Objectives. A1: Compute partner return on equity and use it to evaluate partnership performance. Procedural Chapter Objectives. P1: Prepare entries for partnership formationP2: Allocate and record income and loss among partnersP3: Account for the admission and withdrawal of partnersP4: Prepare entries for partnership liquidation.
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1. Chapter 12 Accounting for Partnerships This chapter explains the partnership form of organization.
This chapter explains the partnership form of organization.
2. Conceptual Chapter Objectives C1: Identify characteristics of partnerships and similar organizations
In this chapter, you will learn the following conceptual objectives:
C1: Identify characteristics of partnerships and similar organizations
In this chapter, you will learn the following conceptual objectives:
C1: Identify characteristics of partnerships and similar organizations
3. Analytical Chapter Objectives A1: Compute partner return on equity and use it to evaluate partnership performance
In this chapter, you will learn the following analytical objectives:
A1: Compute partner return on equity and use it to evaluate partnership performance
In this chapter, you will learn the following analytical objectives:
A1: Compute partner return on equity and use it to evaluate partnership performance
4. Procedural Chapter Objectives P1: Prepare entries for partnership formation
P2: Allocate and record income and loss among partners
P3: Account for the admission and withdrawal of partners
P4: Prepare entries for partnership liquidation
In this chapter, you will learn the following procedural objectives:
P1: Prepare entries for partnership formation
P2: Allocate and record income and loss among partners
P3: Account for the admission and withdrawal of partners
P4: Prepare entries for partnership liquidation
In this chapter, you will learn the following procedural objectives:
P1: Prepare entries for partnership formation
P2: Allocate and record income and loss among partners
P3: Account for the admission and withdrawal of partners
P4: Prepare entries for partnership liquidation
5. Partnership Form of Organization Probably, the first thing new partners should do is prepare a partnership agreement. Without such an agreement, the Uniform Partnership Act will govern many of the key financial questions faced by the partners. A partnership has a limited life. Unless provision is made to the contrary, a partnership ceases to exist upon the death of a partner, the withdrawal of a partner or the admission of a new partner. In a general partnership, each partner has unlimited liability for the acts of all other partners. Income or loss of the partnership flows through to the individual partners. Income or loss from the partnership is taxed as any other income received by an individual. Lets look at three special types of partnerships.Probably, the first thing new partners should do is prepare a partnership agreement. Without such an agreement, the Uniform Partnership Act will govern many of the key financial questions faced by the partners. A partnership has a limited life. Unless provision is made to the contrary, a partnership ceases to exist upon the death of a partner, the withdrawal of a partner or the admission of a new partner. In a general partnership, each partner has unlimited liability for the acts of all other partners. Income or loss of the partnership flows through to the individual partners. Income or loss from the partnership is taxed as any other income received by an individual.
6. Organizations with Partnership Characteristics Part One In a limited partnership, one partner is designated as the general partner. The general partner assumes management duties for the entire partnership. Normally, the general partner has unlimited liability and the other partners have no personal liability beyond the amounts invested in the partnership. Part Two Partners may form a limited liability partnership, or L L P. An LLP protects innocent partners from malpractice or negligence claims brought against an offending partner. In most states, individual partners are personally liable for the debts of the partnership. Part Three Partners may wish to consider forming a limited liability corporation, or L L C. In an LLC, individual owners have limited liability, but the corporation typically has a limited life defined in the agreement.Part OneIn a limited partnership, one partner is designated as the general partner. The general partner assumes management duties for the entire partnership. Normally, the general partner has unlimited liability and the other partners have no personal liability beyond the amounts invested in the partnership.
7. Choosing a Business Form This table identifies the major advantages and disadvantages of all the forms of business we have discussed. Obviously, the choice of the proper form of business is important to the success of any operation. It is a good idea to review this table when studying for your next exam.This table identifies the major advantages and disadvantages of all the forms of business we have discussed. Obviously, the choice of the proper form of business is important to the success of any operation. It is a good idea to review this table when studying for your next exam.
8. Organizing a Partnership When a partnership is formed, each partner may contribute both assets and liabilities to the partnership. Contributed assets increase partners capital and liabilities decrease partners capital. Assets are normally recorded at fair market value and liabilities are recorded at the amount payable. Each partner may be entitled to withdraw cash or other assets from the partnership. A withdrawal reduces the partners capital account.When a partnership is formed, each partner may contribute both assets and liabilities to the partnership. Contributed assets increase partners capital and liabilities decrease partners capital.
9. Organizing a Partnership On 2/15/08, Smith and Jones form a partnership. Smith contributes $80,000 cash. Jones contributes land valued at $40,000. Part One
In our example, Smith and Jones decide to form a partnership. Smith contributes eighty thousand dollars cash and Jones contributes land with a fair market value of forty thousand dollars. Lets look at the journal entry required at inception of the partnership. Part Two On the books of the partnership, we will debit the asset account cash for eighty thousand dollars and land for forty thousand dollars. We will credit Smiths capital account for eighty thousand dollars and credit Jones capital account for forty thousand dollars. Each partner receives credit for the fair market value of the net assets contributed to the partnership.Part One
In our example, Smith and Jones decide to form a partnership. Smith contributes eighty thousand dollars cash and Jones contributes land with a fair market value of forty thousand dollars. Lets look at the journal entry required at inception of the partnership.
10. Dividing Income or Loss Three frequently used methods to divide income or loss are allocation on:
Stated ratios.
Capital balances.
Services, capital and stated ratios. Part One Partners are not considered employees of the partnership but are owners. There is no salary expense reported on the income statement for distributions to partners. Profits and losses of the partnership are divided among the partners in some agreed upon ratio. Part Two Very often partners agree to divide profit and losses on the basis of some stated ratio, on the capital balance of each partner, or on some combination of these amounts.Part OnePartners are not considered employees of the partnership but are owners. There is no salary expense reported on the income statement for distributions to partners. Profits and losses of the partnership are divided among the partners in some agreed upon ratio.
11. Allocation Based on Stated Ratios Part One In the partnership agreement of Smith and Jones, there is a stipulation that profits and losses are to be divided three-fourths to Smith and one-fourth to Jones. What would be the journal entry to record the division of profits of sixty thousand dollars earned in 2008? Part Two Assuming we have closed all revenue and expense accounts to the income summary, we will debit the income summary for sixty thousand dollars. This will reduce the balance in the income summary to zero. Next, we credit Smith, Capital for forty-five thousand dollars (three-fourths of sixty thousand dollars of income), and credit Jones, Capital for fifteen thousand dollars (one-fourth of sixty thousand net income).Part OneIn the partnership agreement of Smith and Jones, there is a stipulation that profits and losses are to be divided three-fourths to Smith and one-fourth to Jones. What would be the journal entry to record the division of profits of sixty thousand dollars earned in 2008?
12. Allocation Based on Capital Balances Part One Now lets assume that the partnership agreement between Smith and Jones states that profits and losses are to be divided on the basis of capital balances prior to the division. At December thirty first, 2008, Smith has a capital balance of eighty thousand dollars and Jones shows a balance of forty thousand dollars. Lets see how we will divide the sixty thousand dollars of income reported for 2008. Part Two The partnership has total capital of one hundred twenty thousand dollars. Smiths capital balance of eighty thousand dollars is two-thirds of the total and Jones balance represents one-third. We will divide the income two-thirds to Smith and one-third to Jones, so Smith will be credited with forty thousand dollars and Jones will be credited with twenty thousand dollars.Part OneNow lets assume that the partnership agreement between Smith and Jones states that profits and losses are to be divided on the basis of capital balances prior to the division. At December thirty first, 2008, Smith has a capital balance of eighty thousand dollars and Jones shows a balance of forty thousand dollars. Lets see how we will divide the sixty thousand dollars of income reported for 2008.
13. Allocation Based on Capital Balances Here is the journal entry to close the income summary account and increase the capital accounts of Smith and Jones.Here is the journal entry to close the income summary account and increase the capital accounts of Smith and Jones.
14. Allocation Based on Services, Capital, and Stated Ratios Smith and Jones have a partnership agreement with the following conditions:
Smith receives $15,000 and Jones receives $10,000 as annual salaries.
Each partner is allowed an annual interest allowance of 5% on the beginning-of-year capital balance.
Any remaining balance of income or loss is allocated equally.
Net income for 2008 is $60,000. Now, lets look at a more complex, and realistic way that partners may decide to divide profits and losses. First, Smith is entitled to receive fifteen thousand dollars per year in the form of a salary allowance and Jones has an allowance of ten thousand dollars. Recall that Smith has a beginning capital balance of eighty thousand dollars and Jones has a beginning capital balance of forty thousand dollars. Next, both Smith and Jones are to be paid interest at five percent on the beginning of the period capital balances. Finally, any remaining amount of income or loss is to be divided equally between the two partners. Lets see how Smith and Jones will divide the sixty thousand dollars of income reported in 2008.Now, lets look at a more complex, and realistic way that partners may decide to divide profits and losses.
15. Allocation Based on Services, Capital, and Stated Ratios Part One We begin with the sixty thousand dollars of income to divide between the two partners. Part Two
Next, we provide an allowance for salary of fifteen thousand to Smith and ten thousand to Jones. After this allowance, we have thirty-five thousand dollars remaining to be divided. Part Three Next, we provide the interest on beginning capital. Smith will receive credit for four thousand dollars: eighty thousand times five percent, and Jones will receive credit for two thousand dollars. After this division, we have twenty-nine thousand dollars remaining to be divided. Part Four Finally, we divide the twenty-nine thousand dollars evenly between Smith and Jones. Each partner will receive credit for fourteen thousand, five hundred dollars. Now, we can see that Smith will receive credit for thirty-three thousand, five hundred dollars and Jones will be credited with twenty-six thousand, five hundred dollars.Part OneWe begin with the sixty thousand dollars of income to divide between the two partners.
16. Partnership Financial Statements Part One During 2008, Smith withdrew five thousand dollars cash from the partnership and Jones withdrew one thousand dollars. Lets see what the ending capital balance is for each partner. Part Two Smith started with a capital balance of eighty thousand dollars and received credit for thirty-three thousand, five hundred dollars of income and withdrew five thousand dollars cash. So, the ending balance in Smiths capital account is one hundred eight thousand, five hundred dollars. You can see the similar analysis we prepared for Jones. At the end of 2008, total capital of the partnership was one hundred seventy-four thousand dollars.Part OneDuring 2008, Smith withdrew five thousand dollars cash from the partnership and Jones withdrew one thousand dollars. Lets see what the ending capital balance is for each partner.
17. Allocation Based on Services, Capital, and Stated Ratios Smith and Jones have a partnership agreement with the following conditions:
Smith receives $15,000 and Jones receives $10,000 as annual salaries.
Each partner is allowed an annual interest allowance of 5% on the beginning-of-year capital balance.
Any remaining balance of income or loss is allocated equally.
Net income for 2008 is $30,000. In this example, lets keep all the division of income and loss provisions of the partnership agreement the same, but assume that the partnership reported thirty thousand dollars of income in 2008, rather than the sixty thousand dollars we used previously. How do you think we will divide the thirty thousand dollars?In this example, lets keep all the division of income and loss provisions of the partnership agreement the same, but assume that the partnership reported thirty thousand dollars of income in 2008, rather than the sixty thousand dollars we used previously. How do you think we will divide the thirty thousand dollars?
18. Allocation on Services, Capital, and Stated Ratios As you can see, each partner is given an allowance for the stated salary and interest on the beginning capital balance. However, after these allowances we have a negative one thousand dollars to distribute equally between the two partners. Each partners distribution is reduced by five hundred dollars. The thirty thousand dollars is divided eighteen thousand, five hundred for Smith and eleven thousand, five hundred for Jones. We hope you did a good job on this distribution. Now, lets change the subject and discuss admission of a new partner to the partnership and withdrawal of an existing partner from the partnership.As you can see, each partner is given an allowance for the stated salary and interest on the beginning capital balance. However, after these allowances we have a negative one thousand dollars to distribute equally between the two partners. Each partners distribution is reduced by five hundred dollars.
19. Admission and Withdrawal of Partners When the makeup of the partnership changes, the partnership is dissolved.
A new partnership may be immediately formed.
New partner acquires partnership interest by:
Purchasing it from the other partners, or
Investing assets in the partnership. We can admit a new partner into the partnership in one of two ways. First, the new partner may purchase a partnership interest from one or more of the existing partners as individuals. In other words, the new partner purchases capital from an existing partner. Second, the new partner may be admitted to the partnership by making a new investment in the partnership.We can admit a new partner into the partnership in one of two ways. First, the new partner may purchase a partnership interest from one or more of the existing partners as individuals. In other words, the new partner purchases capital from an existing partner. Second, the new partner may be admitted to the partnership by making a new investment in the partnership.
20. Admission of a Partner A new partner can purchase partnership interest directly from the existing partners.
The cash goes to the partners, not to the partnership.
To become a partner, the new partner must be accepted by the current partners. If a new partner is to purchase a portion of the partnership interest of an existing partner, all other partners must agree to the sale. Any cash involved is paid directly to the existing partner who is reducing his or her partnership interest. No cash flows into the partnership. From an accounting standpoint, we are shifting part of an existing partners capital to a new partner. Lets look at an example.If a new partner is to purchase a portion of the partnership interest of an existing partner, all other partners must agree to the sale. Any cash involved is paid directly to the existing partner who is reducing his or her partnership interest. No cash flows into the partnership. From an accounting standpoint, we are shifting part of an existing partners capital to a new partner. Lets look at an example.
21. On January 2, 2009, Jones agrees to sell Johnson $10,000 of her partnership interest for $25,000 cash. Smith agrees with this. arrangement. Purchase of Partnership Interest Part One
Jones agrees to sell Johnson ten thousand dollars of her partnership interest for twenty-five thousand dollars cash. Smith agrees to the admission of Johnson as a new partner. Part Two Prior to the transaction between Jones and Johnson, Jones has a capital balance of sixty-five thousand, five hundred dollars. Ten thousand dollars of this capital balance will be transferred to Johnson. Lets look at the journal entry required. Part Three On the date of transfer, we will debit, or reduce, Jones, Capital for ten thousand dollars and credit, or increase, Johnsons capital account for the same amount. Johnson will pay Jones twenty-five thousand dollars cash, but this is a private transaction between the two and not recorded on the books of the partnership.Part One
Jones agrees to sell Johnson ten thousand dollars of her partnership interest for twenty-five thousand dollars cash. Smith agrees to the admission of Johnson as a new partner.
22. Investing Assets in a Partnership The new partner can gain partnership interest by contributing assets to the partnership.
The new assets will increase the partnerships net assets.
After admission, both assets and equity will increase. Now lets look at the admission of a new partner to the partnership through an investment into the partnership. The new investment will increase both the assets and equity of the expanded partnership. Lets look at an example of this type of transaction.Now lets look at the admission of a new partner to the partnership through an investment into the partnership. The new investment will increase both the assets and equity of the expanded partnership. Lets look at an example of this type of transaction.
23. On January 2, 2009, Smith and Jones agree to accept Johnson as a partner upon his investment of $30,000 cash in the partnership. Investing Assets in a Partnership Part One Smith and Jones agree to admit Johnson into the partnership if Johnson is willing to contribute thirty thousand dollars cash. Of course, we would have to draft a new partnership agreement as to the division of profits and losses and other important matters. Part Two Here is how the partnership capital will appear after the admission of Johnson. Can you prepare the journal entry to reflect the admission of Johnson? Part Three At the date of admission, we will debit the cash account for thirty thousand dollars and credit, or increase, Johnsons capital account for the same amount. We now need to look more closely at this type of partner admission because we may have to handle some unusual situations.Part OneSmith and Jones agree to admit Johnson into the partnership if Johnson is willing to contribute thirty thousand dollars cash. Of course, we would have to draft a new partnership agreement as to the division of profits and losses and other important matters.
24. Bonus to Old or New Partners Part One When a new partner is admitted through an investment in the partnership, there may be a bonus involved. If the current value of the partnership capital is greater than the recorded amount of equity, the existing partners usually require the new partner to pay a bonus when joining the firm. Part Two In some cases, a bonus may be granted to the new partner because the existing partnership is in need of additional cash or investment capital. Lets see how these situations are handled.Part OneWhen a new partner is admitted through an investment in the partnership, there may be a bonus involved. If the current value of the partnership capital is greater than the recorded amount of equity, the existing partners usually require the new partner to pay a bonus when joining the firm.
25. Bonus to Old Partners On January 2, 2009, Smith and Jones agree to accept Johnson as a partner upon his investment of $60,000 cash in the partnership. Johnson is to receive a 20% ownership interest in the new partnership. Any bonus is attributable to the existing partners and is shared equally. Part One Smith and Jones agree to accept Johnson as a new partner if Johnson is willing to invest sixty thousand dollars in the partnership and receive a twenty percent ownership interest. Any bonus is attributable to Smith and Jones and will be divided equally. Part Two The total equity before admitting Johnson is one hundred seventy-four thousand dollars. After Johnson is admitted, the total capital will be two hundred thirty-four thousand dollars. If Johnson is given credit for twenty percent of the total capital, his capital account will have a balance of forty-six thousand, eight hundred dollars. Lets prepare the journal entry to admit Johnson.Part OneSmith and Jones agree to accept Johnson as a new partner if Johnson is willing to invest sixty thousand dollars in the partnership and receive a twenty percent ownership interest. Any bonus is attributable to Smith and Jones and will be divided equally.
26. Bonus to Old Partners On January 2, 2009, Smith and Jones agree to accept Johnson as a partner upon his investment of $60,000 cash in the partnership. Johnson is to receive a 20% ownership interest in the new partnership. Any bonus is attributable to the existing partners and is shared equally. We know that Johnson will pay sixty thousand dollars cash into the partnership and receive a capital account balance of forty-six thousand, six hundred dollars. The difference is thirteen thousand, two hundred dollars and is attributable to the existing partners, Smith and Jones. Both Smith and Jones will be given credit for half of the thirteen thousand, two hundred dollars, or sixty-six hundred dollars each.We know that Johnson will pay sixty thousand dollars cash into the partnership and receive a capital account balance of forty-six thousand, six hundred dollars. The difference is thirteen thousand, two hundred dollars and is attributable to the existing partners, Smith and Jones. Both Smith and Jones will be given credit for half of the thirteen thousand, two hundred dollars, or sixty-six hundred dollars each.
27. Bonus to New Partner On January 2, 2009, Smith and Jones agree to accept Johnson as a partner upon his investment of $60,000 cash in the partnership. Johnson is to receive a 30% ownership interest in the new partnership. Any bonus is attributable to the new partner and is shared equally by the existing partners. Part One Now lets look at a situation where any bonus implied by the admission of a new partner is attributable to the new partner. Smith and Jones agree to admit Johnson into the partnership through the payment of sixty thousand dollars. Johnson is to receive a thirty percent ownership interest in the new partnership. Part Two The total capital after admitting Johnson will be two hundred thirty-four thousand dollars and Johnson will receive credit for thirty percent of this amount, or seventy thousand, two hundred dollars. Lets prepare the entry to admit Johnson into the partnership.Part OneNow lets look at a situation where any bonus implied by the admission of a new partner is attributable to the new partner. Smith and Jones agree to admit Johnson into the partnership through the payment of sixty thousand dollars. Johnson is to receive a thirty percent ownership interest in the new partnership.
28. Bonus to New Partner On January 2, 2009, Smith and Jones agree to accept Johnson as a partner upon his investment of $60,000 cash in the partnership. Johnson is to receive a 30% ownership interest in the new partnership. Any bonus is attributable to the new partner and is shared equally by the existing partners. Partnership assets will increase by sixty thousand dollars cash and Johnsons capital account will be credited for seventy thousand, two hundred dollars. The excess of ten thousand, two hundred dollars is attributable to the new partner, Johnson. So, we must reduce the capital accounts of Smith and Jones by fifty-one hundred dollars each. Now we need to spend some time discussing the withdrawal of an existing partner.Partnership assets will increase by sixty thousand dollars cash and Johnsons capital account will be credited for seventy thousand, two hundred dollars. The excess of ten thousand, two hundred dollars is attributable to the new partner, Johnson. So, we must reduce the capital accounts of Smith and Jones by fifty-one hundred dollars each.
29. Withdrawal of a Partner A partner can withdraw in two ways:
The partner can sell his/her partnership interest to another person.
The partnership can distribute cash and/or other assets to the withdrawing partner. A partner can withdraw from a partnership in one of two ways. First, the partner can sell his or her partnership interest for cash to another person. Any remaining partners must agree to the sale. Second, the partnership could distribute cash to the withdrawing partner in payment of his or her partnership interest. Lets look at a quick example of the withdrawal of a partner.A partner can withdraw from a partnership in one of two ways. First, the partner can sell his or her partnership interest for cash to another person. Any remaining partners must agree to the sale. Second, the partnership could distribute cash to the withdrawing partner in payment of his or her partnership interest.
30. Withdrawal of a Partner Part One Jones wishes to withdraw from the partnership of Smith, Jones and Johnson. Jones has a capital balance of sixty-five thousand, five hundred dollars, but is willing to accept fifty thousand dollars cash for her ownership interest. The bonus implied by this transaction is attributable to the remaining partners, Smith and Johnson, equally. Part Two We will eliminate the capital account balance of Jones with a debit of sixty-five thousand, five hundred dollars and credit the cash account for fifty thousand dollars. The difference of fifteen thousand, five hundred dollars is a bonus divided equally between Smith and Johnson in the amount of seven thousand, seven hundred fifty dollars. The last subject we need to cover in the chapter is the liquidation of a partnership. All members of the partnership wish to withdraw and end the partnership.Part OneJones wishes to withdraw from the partnership of Smith, Jones and Johnson. Jones has a capital balance of sixty-five thousand, five hundred dollars, but is willing to accept fifty thousand dollars cash for her ownership interest. The bonus implied by this transaction is attributable to the remaining partners, Smith and Johnson, equally.
31. Liquidation of a Partnership There are four steps involved in the liquidation of a partnership. First, all noncash assets are sold for cash and any resulting gains or losses are recorded.
Second, any gains or losses recognized in the first step are allocated to the partners using their profit and loss sharing ratio. Third, all liabilities are paid in full or otherwise settled. Finally, remaining cash is distributed to the partners based upon the balances in their respective capital accounts.
Lets prepare the liquidation of the Smith, Jones and Johnson partnership.There are four steps involved in the liquidation of a partnership.
32. No Capital Deficiency Part One Smith, Jones and Johnson agree to liquidate their partnership. All of the assets are sold for a gain of ten thousand dollars. The partners share income and loss one-half for Smith, one-quarter for Jones, and one-quarter for Johnson. Part Two We allocate the ten thousand dollar gain; five thousand to Smith, and twenty-five hundred each to Jones and Johnson. Just prior to liquidation, Smith has a capital balance of one hundred thirteen thousand, five hundred dollars, Jones has a balance of sixty-eight thousand, and Johnson has a balance of thirty-two thousand, five hundred. The partnership now has cash of two hundred fourteen thousand dollars to distribute to the partners. Lets make the journal entry. Part Three We debit, or eliminate, the capital balances of Smith, Jones, and Johnson, and credit cash for two hundred fourteen thousand dollars. The partnership is now liquidated. There are no remaining assets, liabilities or equities.Part OneSmith, Jones and Johnson agree to liquidate their partnership. All of the assets are sold for a gain of ten thousand dollars. The partners share income and loss one-half for Smith, one-quarter for Jones, and one-quarter for Johnson.
33. Capital Deficiency Part One In the process of liquidation, a capital deficiency means that one or more of the partners has a debit (or negative) balance in his or her capital account. The partner with a deficit must contribute additional cash to the partnership before liquidation. Part Two Lets liquidate the Smith, Jones, and Johnson partnership but assume that the assets were all sold for a loss of ten thousand dollars and that the beginning capital balances are different. Lets start with the allocation of the loss. Part Three
The ten thousand dollar loss is allocated five thousand to Smith, and twenty-five hundred to each of Jones and Johnson. Smith has a beginning capital balance of twenty-five thousand, Jones has a balance of ten thousand, and Johnson has a balance of only two thousand dollars. The allocation of the loss forced Johnson into a capital deficiency. Johnson must pay an additional five hundred dollars cash to the partnership to bring his capital balance to zero. The cash is divided twenty thousand to Smith and seventy-five hundred to Jones. The partnership has been liquidated.Part OneIn the process of liquidation, a capital deficiency means that one or more of the partners has a debit (or negative) balance in his or her capital account. The partner with a deficit must contribute additional cash to the partnership before liquidation.
34. Capital Deficiency If Johnson were unable to pay the required five hundred dollars, the remaining partnership would absorb the deficiency as dictated by the partnership agreement, demonstrating once again how important the partnership agreement is.If Johnson were unable to pay the required five hundred dollars, the remaining partnership would absorb the deficiency as dictated by the partnership agreement, demonstrating once again how important the partnership agreement is.
35. Death of a Partner A partners death dissolves a partnership.
A deceased partners estate is entitled to receive the equity.
This usually requires closing the books to determine the net income or loss at the date of death and also recording market values for assets and liabilities. A partners death dissolves a partnership. A deceased partners estate is entitled to receive his or her equity. The partnership contract should contain provisions for settlement when this occurs. Usually this involves closing the books at the date of death to determine net income or loss and also determining and recording the current market values for assets and liabilities. Once these amounts are known, a settlement can be agreed to between the parties. A partners death dissolves a partnership. A deceased partners estate is entitled to receive his or her equity. The partnership contract should contain provisions for settlement when this occurs. Usually this involves closing the books at the date of death to determine net income or loss and also determining and recording the current market values for assets and liabilities. Once these amounts are known, a settlement can be agreed to between the parties.
36. Partner Return on Equity We can calculate the return on partners equity by dividing partner net income by the average partner capital balance. This is an interesting table because it shows the return on partner capital for the Boston Celtics. Notice that we have two limited partnerships labeled LP one and LP two, and the Celtics limited partnership.We can calculate the return on partners equity by dividing partner net income by the average partner capital balance. This is an interesting table because it shows the return on partner capital for the Boston Celtics. Notice that we have two limited partnerships labeled LP one and LP two, and the Celtics limited partnership.
37. End of Chapter 12
