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Partnerships

Partnerships

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Partnerships

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  1. Partnerships Chapter 12

  2. Objective 1 Identify the characteristics of a partnership

  3. Partnership • Association of two or more persons who co-own a business for a profit • Combines • Capital • Talent • Experience

  4. Partnership Agreement • Contract between partners should specify • Name, location, and nature of business • Name, investment, and duties of each partner • How new partners are admitted • How profits and losses are divided up • Withdrawals of assets by the partners • How to settle up with a withdrawing partner • How to liquidate the partnership

  5. Characteristics of a Partnership • Limited life • Mutual agency • Unlimited liability • Co-ownership of property • No partnership income taxes • Partners’ capital accounts

  6. Types of Partnerships • General partnership – basic form • Limited partnership – two classes of partners

  7. Limited Liability Company (LLC) • Its own form of business organization • Owners are called members • Limited liability • Members can participate in management • Can elect not to pay business income tax

  8. S Corporations • Corporation taxed as a partnership • Limited liability of owners • No corporate income tax • Stockholders pay personal income tax on their share of income

  9. Objective 2 Account for partner investments

  10. The Partnership Start-Up • Record assets invested by partners at fair market values • Record liabilities assumed at fair market values • Each partner has his/her own capital and withdrawals account

  11. Example Jun 1 Cash 10,000 Inventory 40,000 Computer Equipment 450,000 Accounts Payable 80,000 Lane, Capital 420,000 To record Lane’s Investment Jun 1 Cash 5,000 Computer Software 100,000 Reed, Capital 105,000 To record Reed’s Investment

  12. Objective 3 Allocate profits and losses to the partners

  13. Sharing Profits and Losses • Stated fraction for each partner • Based on percent of capital balances of the partners • Based on each partner’s service • Combination

  14. Sharing Profits and Losses • If no partnership agreement, the law states earnings will be divided equally • If agreement specifies how to share profits, but not losses – losses are shared the same way as profits

  15. E12-16 b Net income $60,000 Cruz (2/3) x 60,000 40,000 Moore (1/3) x 60,000 20,000 Income Summary 60,000 Cruz, Capital 40,000 Moore, Capital 20,000

  16. E12-16 a When there is no written agreement, partners share profits and losses equally. Remember, a debit to Capital decreases it Net loss ($15,000) Cruz 10,000 Moore 5,000 Cruz, Capital 10,000 Moore, Capital 5,000 Income Summary 15,000

  17. E12-16 c $30,000 $20,000 50,000 24,000 36,000 60,000 7,500 7,500 0 $61,500 $63,500

  18. E12-16 c Dec 31 Income Summary 125,000 Hilton, Capital 61,500 Lee, Capital 63,500

  19. Partner Drawings • Reduces capital • Debit Drawing and credit Cash • At period end, close drawing to capital

  20. Objective 4 Account for the admission of a new partner

  21. Purchasing a Partner’s Interest • Equity is transferred from retiring partner to new partner • Debit retiring partner’s capital • Credit new partner’s capital • Partnership assets are not affected

  22. Purchasing A Partner’s Interest Fisher, Capital $170,000 Garcia, Capital 110,000 Total $280,000 Fisher, Capital 170,000 Holt, Capital 170,000 Notice, this is an agreement between two individuals. No new assets are acquired by the partnership

  23. Purchasing A Partner’s Interest Balances: Holt, Capital $170,000 Garcia, Capital 110,000 Total $280,000

  24. Investing in the Partnership • New partner contributes assets to the partnership in exchange for a share of the business

  25. Investing in the Partnership at Book Value • New partner invests assets equal to his/her interest in the new partnership • Debit assets • Credit new partner’s capital

  26. Investing in Partnership at Book Value Ingel, Capital $70,000 Jay, Capital 90,000 Total before admitting $160,000 Kaska investment 80,000 Total after admitting $240,000 1/3 interest = $80,000

  27. Investing in Partnership at Book Value Other Assets 80,000 Kaska, Capital 80,000

  28. Investing in Partnership at Book Value Balances Ingel, Capital $70,000 Jay, Capital 90,000 Kaska, Capital 80,000 $240,000

  29. Investing in the Partnership - Bonus to the Old Partners • New partner invests assets greater than his/her equity in the new partnership • Bonus increases old partner’s capital in profit-and-loss sharing ratio • Debit assets • Credit new partner’s capital for his/her share • Credit each old partners’ capital for his/her share of the bonus

  30. Investing in Partnership Bonus to Existing Partners Fry contributed $90,000. The credit to her capital account is $60,000. The extra $30,000 is considered a bonus to the existing partners Kaga, Capital $70,000 Opper, Capital 80,000 Total before admitting $150,000 Fry investment 90,000 Total after admitting $240,000 ¼ interest = $60,000 Bonus of $30,000 paid to existing partners

  31. Investing in Partnership Bonus to Existing Partners Distribution of bonus: Kaga, Capital (30,000 x 1/2) $15,000 Opper, Capital (30,000 x 1/2) 15,000

  32. Investing in Partnership Bonus to Existing Partners Cash 90,000 Fry, Capital 60,000 Kaga, Capital 15,000 Opper, Capital 15,000

  33. Investing in Partnership Bonus to Existing Partners Balances: Kaga, Capital $85,000 Opper, Capital 95,000 Fry, Capital 60,000 $240,000

  34. Investing in the Partnership - Bonus to New Partners • New partner invests assets less than his/her equity in the new partnership • Bonus decreases old partner’s capital in profit-and-loss sharing ratio • Debit assets • Debit each old partners’ capital for his/her share of the bonus to the new partner • Credit new partner’s capital for his/her share

  35. Investing in the Partnership - Bonus to New Partners Jones contributed $100,000. The credit to his capital account is $160,000. The extra $60,000 is considered a bonus to the new partners and will be donated by the other partners Page, Capital $230,000 Franco, Capital 150,000 Total before admitting $380,000 Jones investment 100,000 Total after admitting $480,000 1/3 interest = $160,000 Bonus of $60,000 paid to new partner

  36. Investing in the Partnership - Bonus to New Partners Distribution of bonus: Page, Capital (60,000 x 2/3) $40,000 Franco, Capital (60,000 x 1/2) 20,000

  37. Investing in the Partnership - Bonus to New Partners Cash 100,000 Page, Capital 40,000 Franco, Capital 20,000 Jones, Capital 160,000

  38. Investing in the Partnership - Bonus to New Partners Balances: Page, Capital $190,000 Franco, Capital 130,000 Jones, Capital 160,000 $480,000

  39. Objective 5 Account for a partner’s withdrawal from the firm

  40. Withdrawal of a Partner • Assets may be revalued • Any gain or loss is allocated among the partners based on their profit- and-loss ratios

  41. Partner Sells Interest to Existing Partner • Transfer equity from the withdrawing partner to the purchaser • No assets flows through the partnership • Debit withdrawing partner’s capital • Credit purchaser’s capital

  42. Withdrawal at Book Value • Partner takes assets with value equal to his capital account (equal to book value) • Debit withdrawing partner’s capital • Credit assets taken

  43. Withdrawal at Less Than Book Value • Remaining partners share the difference (bonus) based on their profit-and loss-sharing ratio. • Debit withdrawing partner’s capital • Credit assets and remaining partners’ capital based on agreed upon ratios

  44. Withdrawal at More Than Book Value • Bonus to the withdrawing partner reduces the remaining partners’ capital balances based on their profit-and-loss ratio • Debit withdrawing partner’s capital • Debit remaining partners’ capital • Credit assets

  45. Example Distribute gain on land to partners based on profit-loss ratio Green (50,000 x 1/4) $12,500 Henry (50,000 x 1/2) 25,000 Jackson (50,000 x 1/4) 12,500

  46. Example Jul 31 Land 50,000 Green, Capital 12,500 Henry, Capital 25,000 Jackson, Capital 12,500

  47. Example Distribute loss on inventory to partners based on profit-loss ratio Green (6,000 x 1/4) $1,500 Henry (6,000 x 1/2) 3,000 Jackson (6,000 x 1/4) 1,500

  48. Example Jul 31 Green, Capital 1,500 Henry, Capital 3,000 Jackson, Capital 1,500 Inventory 6,000

  49. Example Jackson, Capital Green, Capital Henry, Capital 50,000 40,000 20,000 12,500 25,000 12,500 1,500 3,000 1,500 61,000 62,000 31,000 Jackson is getting $40,000 cash so he receives a bonus of $9,000 ($40,000 - $31,000)

  50. Example Distribute bonus to withdrawing partner based on profit-loss ratio Green (9,000 x 1/2) $4,500 Henry (9,000 x 1/2) 4,500