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  1. FA3 Cameron Morrill I. H. Asper School of Business University of Manitoba

  2. The lecturer Cameron Morrill, Ph.D., C.G.A. Tel.: (204) 474-8435 Fax: (204) 474-7545 E-mail: Cameron_Morrill@UManitoba.CA Office hours: Tuesdays and Thursdays 10:00 AM – 11:45 AM

  3. Lesson 1. Partnership equity accounting • Nature of a partnership • Partnership contribution and profit distribution • Financial statement preparation • Admission of a new partner • Retirement of a partner • Liquidation of a partnership

  4. 1. Nature of a partnership • Governed by provincial partnership acts • Limited life • Mutual agency • Unlimited liability • Not taxed as separate entities

  5. 2. Partnership contribution and profit distribution • Partners contribute cash or other assets (valued at fair market value at time of contribution) to the partnership • Profit is distributed to partners in accordance with the partnership agreement (no agreement = equal shares), which can include provisions for interest payments and salaries to partners, as well as a profit and loss ratio • Hilton: Problem 1

  6. 3. Financial statement preparation • Include a balance sheet, income statement and cash flow statement UNIQUE TO PARTNERSHIPS • Balance sheet: Owners’ equity contains separate account for each partner’s capital (contribution plus retained earnings) • Statement of partners’ capitals • Hilton: Interest and salaries paid to partners should not be included in income statement • Hilton, Problem 4

  7. 4. Admission of a new partner • New partner purchases all or part of the interest(s) of existing partner(s); no new assets to the partnership • Transfer portion of existing book value to new partner (most common in practice) • Asset revaluation based on price paid, and transfer revised book value Example: Admission of new partner (revised version of 7b)

  8. 4. Admission of a new partner 2. New partner invests in the business by contributing cash or other assets (firm assets increase) • New partner given proportionate interest in book value; assets invested above BV “bonused” the existing partners (most common in practice) • Asset revaluation based on new investment, with any loss or gain divided among existing partners Hilton, problem 7 (proposal A)

  9. 5. Retirement of a partner Assume partner’s interest is bought out by the partnership. • Bonus method. Difference between BV of old partner’s capital account and payment received “bonused” to/from remaining partners. • Asset revaluation based on payment, with any loss or gain divided among all partners Example: Retirement of partner

  10. 6. Liquidation of a partnership • Realization of assets (conversion to cash) • Allocation of gains and losses to partners according to profit-and-loss-sharing ratio • Payment to creditors • Payment of loans from partners • Distribution of remaining assets to partners Hilton, problem 10